Rose owns all of the Gardenia Corporation common stock with a basis of $400,000
ID: 2656177 • Letter: R
Question
Rose owns all of the Gardenia Corporation common stock with a basis of $400,000 and a value of $900,000. Rose’s grandchildren own nonvoting preferred stock with a basis and value of $540,000 that pays a 6% annual dividend. Rose would like to transfer her ownership of Gardenia to her grandchildren but retain a guaranteed income from Gardenia. What would be the most tax effective method of making this transfer?
A. Rose sells her common stock to her grandchildren. They pay for the stock on the installment method over 20 years with a 6% interest on the unpaid balance.Explanation / Answer
A) Selling the common stock will attract a capital gain tax. Hence selling would not be an ideal situation.
B) This is not transferring but just a conversion of equity to debt
Ans is D) Rose exchanges 60% of her common stock with her grandchildren for all of their preferred stock. The grandchildren then have control and Rose retains 40% of the common stock
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