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:

Legal Recognition

The formal acknowledgment by a legal authority that validates the status, rights, or legitimacy of an entity, action, or agreement.

Unilateral Contract

A contract in which only one party makes an enforceable promise to do or refrain from doing something if the other party performs some act.

Binding Contract

An agreement between parties that is legally enforceable by law, containing all essential elements of a contract.

Unilateral Contract

A contract in which only one party makes a promise or undertakes a performance, while the other party accepts by performing the specified act.