Erin Brinson founded BCD Corporation in 1993 with a contribution of \($50,000\) cash.

The entity has always been a C corporation and Erin has not made any other capital contributions nor has BCD made any distributions. When she retired in 2023, Erin transferred ownership of BCD to her son, Evan, and two other employees. Evan now owns 60% of BCD stock and the two other employees each own 20%. The transaction was consummated by BCD redeeming 90% of Erin’s shares for a \($2,000,000\) note payable over the next 15 years and Evan and the two other employees’ buying the remaining 10%

for notes totaling \($250,000\) payable over the next 15 years. All notes bear market rates with interest and principal payable twice a year on a regular basis. Erin owned the building in which BCD operates. As part of this transaction, Erin agreed to a new 5-year lease to BCD at market rental rates. How should the transfers of stock in BCD be taxed? Must Erin take measures to qualify for the most favorable tax treatment?

A partial list of research sources is:

• Sec. 302(b)

• Reg. Sec. 1.302

• Rev. Rul. 77-467, 1977-2 CB 92

• Hurst, 124 TC 16 (2005)