In year 1, Ellis Corporation distributed Section 306 stock with a value of $15,000 to its sole
Question:
In year 1, Ellis Corporation distributed Section 306 stock with a value of $15,000 to its sole shareholder, Marco. Marco allocated $10,000 of basis from his common stock to the Section 306 stock. At the time of the distribution, Ellis had earnings and profits of $18,000.
In year 3, Marco sold the Section 306 stock to an unrelated third party for $20,000. At the time of the sale, Ellis had earnings and profits of $25,000. Which of the following statements accurately describes Marco's tax consequences from the sale of the Section 306 stock?
a. Marco recognizes $15,000 of dividend income and $5,000 nontaxable return of capital. His remaining $5,000 basis in the Section 306 stock is reallocated back to his common stock.
b. Marco recognizes $10,000 of dividend income on the sale of the Section 306 stock.
c. Marco recognizes $20,000 of dividend income. His $10,000 basis in the Section 306 stock is reallocated back to his common stock.
d. Marco recognizes $10,000 of a capital gain on the sale of the Section 306 stock.
