B owns 30 shares of MNO Corporation preferred stock that he received as a nontaxable stock dividend two years ago when the corporation had a deficit of $7,000 in E&P.Currently, MNO has substantial E&P.Assuming B sold the preferred stock to an unrelated third party, he is assured of sale treatment.

Question

Quizplus · Accepted Answer

If B received the preferred stock as a nontaxable stock dividend when the corporation had a deficit in E&P, the basis of the stock would be zero. When B sells the stock, any amount received in excess of zero would be treated as a capital gain. Since B is selling the stock to an unrelated third party, the sale would qualify for sale treatment.

B Owns 30 Shares of MNO Corporation Preferred Stock That