Question

. Blue Corporation has 100 shares of common stock issued, of which 50 shares are owned by Carmine Blue, and 50 shares are owned by his wife, Violet Blue. Blue Corporation distributes to each of them 50 shares of a newly-created issue of preferred stock. The preferred shares distributed have an aggregate value of $100,000, and the remaining value of the corporation (that is, the aggregate value of the common stock outstanding) is $100,000. The newly-issued preferred shares are convertible, and any number of shares of preferred stock may be converted into an equal number of shares of common stock, without limit, at any time, at the option of the preferred shareholder.

Describe the tax issues raised by the issuance of the preferred stock, as well as the future sale or redemption of the preferred stock?

Answer 1