Question 12

As of January 1 of the current year, Flywheel, Inc. has E & P of $25,000. Groucho owns all 320 shares of its common stock (basis: $45,000). On that date, Flywheel declares and distributes a nontaxable preferred stock dividend. Groucho receives 100 shares. Immediately after, the FMV of one share of common stock is $500 and the FMV of one share of preferred stock is $200. Three years later, Groucho sells the 100 shares of preferred stock to an unrelated individual for $24,000.

a.	Assuming Groucho is in the 33% tax bracket, what are his income tax consequences resulting from the sale of the preferred stock?
b.	What is the effect on Flywheels E & P as a result of the sale of the preferred stock?
c.	Assume Groucho sells the preferred stock back to Flywheel at a time when its E &P is $15,000. What are his income tax consequences?