Which of the following is an incorrect statement regarding the tax consequences of a § 306 stock sale?
A) No loss is recognized on the sale.
B) The shareholder generally recognizes ordinary income equal to the fair market value of the preferred stock on the date of the stock dividend.
C) The issuing corporation reduces its E & P by the amount of sales proceeds.
D) Any ordinary income recognized by the shareholder qualifies for the 15% (or 0%) maximum tax rate that applies to dividend income.
E) None of the above.

Question

Quizplus · Accepted Answer

The issuing corporation does not reduce its Earnings and Profits (E & P) by the amount of sales proceeds from a § 306 stock sale. Instead, E & P is reduced by the amount of the distribution when the § 306 stock was originally issued.

Which of the Following Is an Incorrect Statement Regarding the Tax