Question

F owns all 100 shares of S Corp. F’s stock basis is $60,000. On December 1, 2017, S distributes 50 shares of preferred stock to F in a nontaxable distribution. The preferred shares are worth $150,000. The common shares are worth $300,000. In 2017, S’s earning profits is $100,000. On January 10, 2018, F sells her preferred stock to K for $200,000. In 2018, S’s earnings and profits are $175,000. What are the 2018 tax consequences to F and S?

Answer 1

Instead of dividend is referred to as a preferred stock bailout, a shareholder planned to use preferred stock to withdraw earnings from a corporation as a capital gain.Section 306 destroy certain stock if it is distributed in the form of a non - taxable dividend to a shareholder, which prevent shareholders from realizing any tax benefits and also denies capital gain treatments. after redemption of section 306 stock, rather than treating it as capital gain, some or all of the income will be treated as a dividend. The capital gains tax rate applies to both capital and dividends.