The Rho Corporation was incorporated in 2005 by Tyee and Danette. Tyee received 5,000 shares of common stock for his $100,000 contribution, and Danette received 10,000 shares of common stock for her $200,000 contribution. In 2007, both Tyee and Danette acquired $50,000 of Rho bonds paying 3% interest.
In the current year, Rho's common stock is valued at $900,000. SheenCo would like to acquire a 25% interest in Rho by purchasing common stock from Rho. Tyee and Danette see this as a good time to restructure Rho's capital. They would like to own bonds paying 5% interest, instead of 3%, and each would like to receive $120,000 of preferred stock (par of $100 per share) in exchange for some of his or her common stock. What income tax advice would you give to Rho?