LO.3 Ramon and Sophie are the sole shareholders of Gull Corporation. Ramon and Sophie each have a basis of $75,000 in their 500 shares of Gull common stock. When its E & P was $500,000, Gull Corporation issued a preferred stock dividend on the common shares of Ramon and Sophie, giving each 500 shares of preferred stock with a par value of $200 per share. Fair market value of one share of common was $300, and fair market value of one share of preferred was $200.

a. What are the tax consequences of the distribution to Ramon and Sophie?

b. What are the tax consequences to Ramon if he later sells his preferred stock to Anthony for $100,000? Anthony is not related to Ramon.

c. What are the tax consequences if, instead of Ramon selling the preferred stock to Anthony, Gull Corporation redeems the stock from Ramon for $100,000? Assume that Gull’s E & P at the time of the redemption is $550,000.