Lynch owns 100 shares of the common stock in IBT Corporation, which represents 100% of the stock. The corporation distributes 50 preferred shares to Lynch as a nontaxable stock dividend on the common shares. Lynchs basis in the common shares is $10,000. The FMV of the common stock is $30,000. The FMV of the preferred stock is $20,000. At the time of the distribution, the E&P of the corporation was $80,000. Six weeks after the distribution, Lynch sells the preferred stock to a third party for $100,000.

a. What is Lynchs basis in the preferred shares?

b. What are the tax consequences to Lynch on the sale of the preferred stock?