As of January 1 of the Current Year, Grouse Corporation

question 100

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.
a. Assuming Fumiko is in the 33% tax bracket, what are his income tax consequences resulting from the sale of the preferred stock?
b. What is the effect on Grouse Corporation's E & P as a result of the sale of the preferred stock?

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Definitions:

Real GDP

Gross Domestic Product adjusted for inflation, measuring the value of all goods and services produced by an economy in a specific period, using constant prices.

Inflation

A comprehensive increase in the cost of goods and services and a depreciation in money's worth.

Home-grown Tomatoes

Tomatoes that are cultivated in personal gardens or small-scale farms, typically for personal consumption rather than commercial sale.

GDP

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.