Fill in the BLANK with answer key below:

X Corporation has $100,000 of accumulated earnings and profits when it makes a pro rata distribution to each of its ten shareholders.Each shareholder receives $20,000 in new common voting stock and $10,000 in callable preferred stock in exchange for the shareholder's old common stock worth $30,000.Assume that the callable preferred stock is not nonqualified preferred stock.

1. This stock-for-stock exchange qualifies as a Type .
2. The shareholders do not recognize gain on the exchange under Section .
3. Each shareholder takes an exchanged basis in their new common shares and preferred stock under Section .
4. of the exchanged basis is allocable to the preferred shares.
5. If X calls (ie, redeems) the preferred stock at a time when it still has $100,000 of accumulated earnings and profits, the transaction will be treated as .
6. Any basis the shareholders had allocated to their preferred shares reduce the amount of income they must recognize.
7. Should a shareholder have sold the preferred stock for $10,000 prior to X having called it, the shareholder would recognize .
8. If, alternatively, X had a deficit in earnings and profits at the time it distributed the new common and preferred shares, then a redemption of the preferred shares would be taxed according to and a sale would be treated the same .

ANSWER KEY

E

F

G

355(a)

354(a)(1)

356(a)

358(a)(1)

362(a)

311(d)

None

A third

Two thirds

an exchange under Section 302

a dividend under Section 306

will not

will

Section 331

Section 302

as it was above

as any other sale of stock