What are the tax consequences to Ramon

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Problem - Ramon and Sophie are the sole shareholders of Gull Corporation. Ramon and Sophie each have a basis of $100,000 in their 2,000 shares of Gull common stock. When its E & P was $700,000, Gull Corporation issued a preferred stock dividend on the common shares of Ramon and Sophie, giving each 1,000 shares of preferred stock with a par value of $100 per share. At the time of the stock dividend, fair market value of one share of common stock was $150 and fair market value of one share of preferred stock was $75.

Required -

a. What are the tax consequences of the distribution to Ramon and Sophie?

b. What are the tax consequences to Ramon if he later sells his preferred stock to Anthony for $75,000? Anthony is not related to Ramon.

c. What are the tax consequences if, instead of Ramon selling the preferred stock to Anthony, Gull Corporation redeems the stock from Ramon for $75,000? Assume that Gull's E & P at the time of the redemption is $650,000.

Reference no: EM132646783

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