Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

C and D organized Z Corporation 10 years ago, each distributing $40,000 and each

ID: 2452728 • 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.

a There is a complete termination of C's interest so that the preferred stock is expected from the 306 rules.

b The 306 rules apply to C's sale of the preferred. Of the $36,000 sale price, $32,000 is treated as ordinary income.

c 306 applies to C's sale of the preferred. All $36,000 is treated as ordinary income.

d None of the above

Which is the right answer and why?

Explanation / Answer

D) None of the above because The amount realized shall be treated as ordinary income.