Reference no: EM132164873

A and B organized X 15 years ago, each contributing $10,000 and each receiving 100 shares of common stock. Five years ago in June X declared a one-for-one dividend payable in pure preferred stock (paying a 6 percent cumulative dividend on its par value, which equaled its then $100 of FMV). The value of the common stock after the distribution was $400 per share. In that year, X had accumulated E&P of $13,000 and current E&P of $3,000. In the current year, X has accumulated E&P of $28,000 and current E&P of $2,000. What are the tax consequences of the disposition described in each situation below?

a. In December of the current year, A sells all of A's preferred stock to C for $9,000; in June of the next year, A sells all of A's common stock to D for $50,000.

Alternatives:
(i) The sale to D took place in June of the current year. Also, what if C were A's son?
(ii) Same as (i) above except that A sells the preferred back to X.
(iii) X has a S Corporation five years ago, with a $20,000 AAA in addition to the $13,000 accumulated E&P but no current E&P.

b. B, who is A's son, took over as X's CEO five years ago. A gave 100 common shares of X to B four years ago. A dies on December 1 of the current year when the preferred stock is worth $9,000. No election is made under § 2032. In March of the next year, A's executor sells the preferred for $10,000.

c. In December of the current year, X redeems all of A's preferred stock in exchange for $9,000. In the next year, X redeems all of B's preferred stock for $9,000; X's available E&P next year is $1000, before reduction for distribution.