John owns 70% of the May Corporation stock and 60% of the June Corporation stock. John sells one-half of his interest in May Corporation to June Corporation for $45,000. The E&P accounts of May and June are $25,000 and $35,000, respectively. The result would be that
A)John has sold his stock and reports a capital gain or loss.
B)John has sold his stock and reports a capital gain but no loss.
C)the transaction is treated as a contribution to May's capital and a redemption of June stock.
D)the sale is recast as a dividend paid to John, first by June and then by May.

Question

Quizplus · Accepted Answer

This transaction is recast as a dividend because John, owning significant portions of both corporations, essentially moves value from one entity he controls to another. The IRS often treats such transactions as dividends to prevent individuals from avoiding dividend taxation through inter-corporate transfers.

John Owns 70% of the May Corporation Stock and 60