Problem

Ramon and Sophie are the sole shareholders of Gull Corporation. Ramon and Sophie each have a basis of $100,000 in their 2,000 shares of Gull common stock. When its E & P was $700,000, Gull Corporation issued a preferred stock dividend on the common shares of Ramon and Sophie, giving each 1,000 shares of preferred stock with a par value of $100 per share. At the time of the stock dividend, fair market value of one share of common stock was $150, and fair market value of one share of preferred stock was $75.

If an amount is zero, enter "0".

a. What are the tax consequences of the distribution to Ramon and Sophie?

What is the basis for the preferred stock and common stock for each shareholder?

b. What are the tax consequences to Ramon if he later sells his preferred stock to Anthony for $75,000? Anthony is not related to Ramon.