Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed'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 of Van are $75,000. How does Zed treat this transaction for tax purposes?
A) No gain is recognized by Zed in this reorganization.
B) Zed reports a $50,000 recognized dividend.
C) Zed reports a $50,000 recognized capital gain.
D) Zed 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

Zed receives $50,000 cash, which is considered "boot" in a reorganization. The boot is treated as a dividend to the extent of Bobcat's accumulated earnings and profits ($200,000), so $40,000 is a dividend. The remaining $10,000 is a capital gain, as it exceeds the basis of the stock exchanged.

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