C and D organized Z Corporation 10 years ago, each contributing $40,000 and each receiving 400 shares of common stock.

C and D organized Z Corporation 10 years ago, each contributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one for 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, five years ago, Z had accumulated E&P of $52,000 and current E&P of $12,000. In the current year, Z has accumulated 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 Cs son.

a) There is a complete termination of C’s interest so that the preferred stock is excepted fro the 306 rules.

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

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

d) None of the above

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