Bobcat Corporation redeems all of Zeb's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash.Zeb's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000.At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and Van's are $75,000.How does Zeb treat this transaction for tax purposes?
A)No gain is recognized by Zeb in this reorganization.
B)Zeb reports a $50,000 recognized dividend.
C)Zeb reports a $50,000 recognized capital gain.
D)Zeb reports a $40,000 recognized dividend and a $10,000 capital gain.
E)Not enough information is available to determine proper treatment.

Question

Quizplus · Accepted Answer

Zeb receives $50,000 cash and stock worth $250,000 for his shares with a basis of $100,000. The cash is treated as a dividend to the extent of Bobcat's E&P ($200,000), so $40,000 is a dividend, and the remaining $10,000 is a capital gain.

Bobcat Corporation Redeems All of Zeb's 4,000 Shares and Distributes