Fred Is the Sole Shareholder of Puce Corporation, Having a Basis

Essay

Fred is the sole shareholder of Puce Corporation, having a basis of $90,000 in 1,000 shares of Puce common stock. Last year, Puce (E & P of $500,000) issued a dividend of 2,000 shares of preferred stock to Fred. On the date of distribution, the fair market values per share of the common and preferred stocks were $160 and $20, respectively. In the current year, Puce (E & P of $720,000) redeems all of Fred's preferred stock for its fair market value of $40,000.