What are the potential tax issues that need to be resolved?
What key words might I utilize in an online search for authority to resolve these tax issues?

Emma Outyet organized a corporation equally with one other shareholder, each receiving 500 shares of common stock. (The other shareholder soon after sold his portion of ownership to the taxpayer's two children). To increase the company's working capital and qualify for an RFC loan, Emma bought 1,000 shares of preferred stock, at a par value of $25 per share, which the company (in accordance with the original understanding) redeemed when the loan was paid. The Common Stock remained owned 50% by Emma and 50% by her children.

Emma treated the preferred stock redemption transaction for income tax purposes as a sale of preferred stock, resulting in no gain to him since the stock's basis was $25,000. The Commissioner of Internal Revenue determined that the redemption of all of the preferred stock was essentially equivalent to a dividend and reportable as ordinary income.

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The potential tax issues that need to be resolved in this scenario are 1 Classification of the prefe... View the full answer