C and D organized Z corporation 10 years ago, each contributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one for one dividend payable in pure preferred with a $400 fair market value. The value of the common stock after the distribution was $1600 per share. In that year, five years ago, Z had accumulated E&P of $52,000 and current E&P of $12,000. In the current year, Z has accumulated E&P of $112,000 and current E&P of $8000.In the current year, Z redeems all of Cs preferred stock in exchange for $36,000.

a. section 306 applies to this transaction. The entire $36,000 is ordinary income.

b. section 306 applies to this transaction. Of the redemption proceeds, $32,000 is ordinary income.

c. section 306 does not apply because of the complete termination of the preferred stock interest.

d. None of the above.

please explain why you choose this answer