Bobcat Corporation Redeems All of Zed's 4,000 Shares and Distributes

question 40

Multiple Choice

Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and of Van are $75,000. How does Zed treat this transaction for tax purposes?

• A) No gain is recognized by Zed in this reorganization.
• B) Zed reports a $50,000 recognized dividend.
• C) Zed reports a $50,000 recognized capital gain.
• D) Zed reports a $40,000 recognized dividend and a $10,000 capital gain.
• E) Not enough information is available to determine proper treatment.

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Definitions:

Zero-Coupon Bonds

Bonds that do not pay interest during their lifetime but are issued at a discount to their face value, thus generating profit at maturity.

Yield

The income return on an investment, such as the interest or dividends received, expressed as a percentage of the investment's cost or current market value.

Minimum Number

The lowest quantity or amount that is allowed, required, or desired.

Coupon Rate

The percentage rate of interest a bond yields annually, based on its nominal value.