Grace owns 100% of Red Corporation and 100% of White Corporation.Both corporations have significant amounts of E & P.Grace sells 20 shares of Red Corporation stock (basis of $5,000)to White Corporation for $50,000.Grace has dividend income of $50,000 on the transaction.

Question

Quizplus · Accepted Answer

Sections 302 and 304 would cause the entire $50,000 to be a taxable dividend.Before the sale,Grace owned 100% of Red Corporation.She also owns 100% of Red after the sale because of her constructive ownership of all the shares transferred to White Corporation.The not essentially equivalent to a dividend provisions of § 302(b)(1)and the substantially disproportionate redemption provisions of § 302(b)(2)are not met; thus,the $50,000 is a taxable dividend.

Grace Owns 100% of Red Corporation and 100% of White