Peony Owns All of the Garden Corporation Common Stock with a Basis

question 63

Multiple Choice

Peony owns all of the Garden Corporation common stock with a basis of $400,000 and a value of $900,000. Her grandchildren own nonvoting preferred stock with a basis and value of $540,000 that pays a 6% annual dividend. Peony would like to transfer her ownership of Garden to her grandchildren but retain a guaranteed income from Garden. What would be the most tax effective method of making this transfer?

• A) Peony sells her common stock to her grandchildren. They pay for the stock on the installment method over 20 years with a 6% interest on the unpaid balance.
• B) Garden redeems all of Peony's common stock and issues her a 20-year bond for $900,000 that pays 6% interest.
• C) Garden redeems Peony's common stock and issues her preferred stock with a 6% yearly dividend rate. Garden exchanges the grandchildren's preferred stock for common stock.
• D) Peony exchanges 60% of her common stock with her grandchildren for all of their preferred stock. The grandchildren then have control and Peony retains 40% of the common stock.

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Definitions:

Dizygotic Twins

Also known as fraternal twins, born from two separate eggs fertilized by two different sperm, sharing about 50% of their DNA.

Ethnic Groups

Categories of people who identify with each other based on shared cultural, ancestral, or national characteristics.

Monozygotic Twins

Identical twins that develop from a single fertilized egg, sharing the same genetic material.

Fraternal Twins

Twins that are born from two separate eggs fertilized by two different sperm, resulting in siblings that are genetically distinct from one another.