C and D organized Z Corporation 10 years ago, each distributing $40,000 and each
ID: 2452745 • Letter: C
Question
C and D organized Z Corporation 10 years ago, each distributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one dividend payable in pure preferred with a $400 fair market value. The value of the common stock after the distribution was $1,600 per share. In that year, fiver years ago, Z had accumulated E&P of $52,000 and current of $12,000. In the current year, Z has accumulted E&P of $112,000 and current E&P of $8,000. In December of the current year, C sells all of his preferred stock to E for $36,000. In June of that same year, C had previously sold all of his common stock to F for $200,000. E is C's son.
Assumpiton: same facts that above, except in the current year Z redeems all of C's preferred stock in exchange for $36,000.
a 306 applies to this transaction. The entire $36,000 is ordinary income.
b 306 applies to this transaction. Of the redemption proceeds, $32,000 is ordinary income.
d None of the above.
Which is the right answer and why?
Explanation / Answer
306 applies to this transaction. The entire $36,000 is ordinary income.
General rule
If a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))—
(1) Dispositions other than redemptions
If such disposition is not a redemption (within the meaning of section 317 (b))—
(A) The amount realized shall be treated as ordinary income.
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