LO.3, 6 Big Corporation currently owns 25% of Small, Inc. Big acquired this stock two years ago by exchanging $375,000 of its preferred stock with Allie, one of the original owners of Small. Big had tried to acquire the assets of Small, but management was not in favor of the acquisition. In the current year, Big enters into a transaction with Small shareholders in which it acquires $712,500 of Smalls voting stock and $200,000 of preferred stock. Big now owns 95% of the Small common stock and 100% of its preferred stock.

a.Diagram the current-year corporate reorganization.

b.Identify the tax issues in the proposed transaction.