Z owns a rental building (its only asset) with a gross fair market value of $5,000 subject to the non-recourse mortgage of $2,000. Z's adjusted basis for this building is $1,500. All of Z's stock is owned by C, whose basis for his stock in Z is $500. Z had 1,000 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by Z on $3,500 gained is $1,250 and on $3,000 gained is $1,000. Z sells the building, subject to the mortage, to D in the current year for $3,000 in cash. Z then liquidates, distributing all of the cash (remaining after paying its taxes) to C in cancellation of C's stock in the current year.

a Z's gain on the sale of the building is $1,500

b Z's E&P goes over to purchaser D, if D is a corporation.

c Section 331 treats C as selling its stock to Z.

d None of the above

Which is the correct answer and why?