Joe owns 100% of Green Corporation (E & P of $500,000)and 100% of Navy Corporation (E & P of $400,000).Joe sells 100 shares in Green (basis of $15,000)to Navy for $40,000,its fair market value.Joe purchased the stock in Green six years ago.Joe has:

Question

Quizplus · Accepted Answer

Sections 302 and 304 would cause the entire $40,000 to be dividend income.If a taxpayer has at least a 50% ownership in two corporations and transfers stock in one corporation to the other for money or property,the exchange is treated as a redemption of the stock of the acquiring corporation.The redemption is tested under § 302 for sale or exchange treatment or dividend treatment.Before the sale,Joe owned 100% of Green Corporation.He owns 100% after the sale because of his constructive ownership of all the shares transferred to Navy Corporation.The not essentially equivalent redemption provisions of § 302(b)(1)and the disproportionate redemption provisions of § 302(b)(2)are not met; thus,the $40,000 is dividend income.

Joe Owns 100% of Green Corporation (E & P of $500,000)and