Currently,Brown Corporation (E & P of $800,000)has 1,000 shares of common stock outstanding.Pat owns 200 shares.His wife,Abby,owns 200 shares,his daughter,Kate,owns 200 shares,and his father,Harold,owns 400 shares.Two years ago,Pat contributed $25,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock.In the current year,Brown Corporation redeems Pat's preferred stock for $40,000,its fair market value.With respect to the distribution in redemption of the preferred stock:

Question

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As a result of the stock attribution rules,Pat owns 100% of the stock in Brown Corporation before and after the redemption.Thus,the distribution does not satisfy any of the qualifying stock redemption provisions.Instead,the entire distribution is taxed as dividend income.The $25,000 basis in the preferred stock redeemed attaches to the basis of Pat's common stock.

Currently,Brown Corporation (E & P of $800,000)has 1,000 Shares of Common