Federal Tax Research 10th Edition by Steven Gill, Gerald Whittenburg, Roby Sawyers, Debra Sanders, William Raabe

Exercise 35

Zarco, a very profitable corporation, was owned by Julio, Tilly, and Martinez. Julio and Martinez purchased all of Tilly's Zarco Corporation stock for $50,000 and a $100,000 promissory demand note guaranteed by Zarco. Tilly demanded payment on the note, and Zarco, rather than Julio and Martinez, paid the note. What are the tax consequences of this transaction