Connie sold 400 shares of § 306 stock (basis of $20,000) in Blackbird Corporation to Larry (an unrelated individual) for $50,000. When the § 306 stock was issued to Connie, the stock had a value of $50,000, and Blackbird had E & P of $500,000. At the time the § 306 stock is sold, Blackbird's E & P is $550,000. At the time of the sale, Connie owned 900 shares of common stock (basis of $210,000) in Blackbird. With respect to the sale of the § 306 stock by Connie:

Question

Quizplus · Accepted Answer

When Connie sold the § 306 stock, she had a $30,000 built-in gain ((selling price of $50,000 minus basis of $20,000)). This gain is treated as ordinary income under § 306 because the stock was sold to an unrelated individual. The answer choices B, C, and D are incorrect because they do not accurately reflect the tax consequences of the sale. Option B is incorrect because Blackbird's E & P is not affected by the sale of the § 306 stock. Option C is incorrect because Connie's gain is ordinary income, not a capital gain. Option D is incorrect because the sale of the § 306 stock does not affect the basis of Connie's common stock in Blackbird.

Connie Sold 400 Shares of § 306 Stock (Basis of $20,000)