As of January 1 of the Current Year, Grouse Corporation

question 18

Essay

As of January 1 of the current year, Grouse Corporation has E & P of $600,000. Fumiko owns 320 shares of Grouse's common stock basis of $45,000). On that date, Grouse Corporation declares and distributes a nontaxable preferred stock dividend of which Fumiko receives 100 shares. Immediately after the stock dividend, the fair market value of one share of Grouse common stock is $500, and the fair market value of one share of Grouse preferred stock is $200. Two months later, Fumiko sells the 100 shares of preferred stock to an unrelated individual for
$20,000.

b. What is the effect on Grouse Corporation's E & P as a result of the sale of the preferred stock?