Question

PC:4-54 (Similar to) wuestion Help Linda owns all 100 shares of Nebula Corporation stock. Her stock basis is $70,000 On December 1 of the current year, Nebula distributes 50 shares of preferred stock to Linda in a nontxable distribution in the year of the distribution Nobula's total E&P $160,000, the preferred shares are worth $100,000, and the common shares are worth $400.000 Read the requirements Requirement a. What are the tax consequences to Linda and to Nebula if Linda sells her preferred stock to Bob for $239,000 on January 10 of the following year? In that year, Nebula's current E&P is $64,000 (in addition to the $160,000 balance from the prior year) Begin by computing the tax consequences to Linda Dividend Return of capital Capital gain

Answer 1

Purchase price of stock Preferred stock value Common stock value Basis of preferred stock $ 70,000.00 $1,00,000.00 $4,00,000.00 $ 14,000.00 =70000*100000/(100000+400000) The sale price of the preferred shares was $239,000, but since this stock is Section 306 stock, the distribution must be qualified as a dividend to the extent of the E&P at the time of the stock dividend. The E&P at the time of the stock dividend was $160,000, which is the amount that the shareholder must recognize as a dividend. The distributions exceeding the E&P at the time of the stock dividend are treated as a return of capital to the extent of the stock basis of the shareholder, $14,000. The $146,000 remaining of the distributions exceeding the stock basis are taxed as a capital gain.