Problem 6-38 (LO. 1, 2, 6) Teal Corporation, with E & P of $2,000,000, distributes property with a basis of $150,000 and a fair market value of $400,000 to Grace. She owns 15% of the outstanding Teal shares. a. If the distribution is a nonqualified stock redemption, Teal Corporation would have a gain property distribution. Grace would have dividend income of $ of $ 250,000 on the 400,000 Feedback Check My Work Under 317(b), a stock redemption occurs when a corporation acquires its stock from a shareholder in exchange for cash or other property. Although a sale of stock to an outsider invariably results in sale or exchange treatment, only a qualifying stock redemption is treated as a sale for tax purposes. Nonqualified stock redemptions are denied sale or exchange treatment because they are deemed to have the same effect as dividend distributions. b. If Grace is a corporation and the distribution is a nonqualified stock redemption, then it would have dividend income of 400,000, and $ Corporation would have a gain 175,000 X is subject to tax because of the dividends received deduction of $ 250,000 Teal