Fran owns all 100 shares of Star Corporation stock. Her stock basis is $60,000. On December 1 of the current year, Star distributes 50 shares of preferred stock to Fran in a nontaxable distribution. In the year of the distribution, Star’s total E&P is $100,000, the preferred shares are worth $150,000, and the common shares are worth $300,000.
a. What are the tax consequences to Fran and to Star if Fran sells her preferred stock to Ken for $200,000 on January 10 of the following year? In that year, Star’s current E&P is $75,000 (in addition to the $100,000 balance from the prior year).
b. How would your answer to Part a change if Fran sells her preferred stock to Ken for $110,000 instead of $200,000?
c. How would your answer to Part a change if Star redeems Fran’s preferred stock for $200,000 on January 10 of the following year?