Dahlia owns $100,000 in Crimson Topaz preferred stock. The annual dividend rate on the preferred is 4%. She exchanges this preferred stock for $60,000 in Crimson Topaz bonds paying 4% annual interest and $40,000 in common stock. How is this transaction treated for tax purposes?

Question

Quizplus · Accepted Answer

The exchange of preferred stock for bonds is taxable because it involves exchanging equity for debt, which is considered a taxable event. The exchange of preferred stock for common stock is generally not taxable if it qualifies as a reorganization.

Dahlia Owns $100,000 in Crimson Topaz Preferred Stock