As of January 1 of 2020, Claus Corporation has an E & P of $600,000. Gifford owns 320 shares of Claus’s common stock (the basis of $45,000). On that date, Claus Corporation declares and distributes a nontaxable preferred stock dividend of which Gifford receives 100 shares. Immediately after the stock dividend, the fair market value of one share of Claus common stock is $500, and the fair market value of one share of Claus preferred stock is $200. Two months later, Gifford sells the 100 shares of preferred stock to an unrelated individual for $20,000.

A. Assuming Gifford is in the 32% tax bracket, what are his income tax consequences resulting from the sale of the preferred stock?

B. What is the effect on Claus Corporation’s E & P as a result of the sale of the preferred stock?