C and D organized Z Corporation 10 years ago, each distributing $40,000 and each receiving 400 shares of common stock. Five years ago, in June, Z declared a one dividend payable in pure preferred with a $400 fair market value. The value of the common stock after the distribution was $1,600 per share. In that year, fiver years ago, Z had accumulated E&P of $52,000 and current of $12,000. In the current year, Z has accumulted E&P of $112,000 and current E&P of $8,000. In December of the current year, C sells all of his preferred stock to E for $36,000. In June of that same year, C had previously sold all of his common stock to F for $200,000. E is C's son.

Assumpiton: same facts that above, except in the current year Z redeems all of C's preferred stock in exchange for $36,000.

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

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

d None of the above.

Which is the right answer and why?