General Inertia Corporation Made a Pro Rata Distribution of $50,000

Multiple Choice

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara,Inc.in partial liquidation of the company on December 31,year 1.Tiara,Inc.owns 500 shares (50%) of General Inertia.The distribution was in exchange for 250 shares of Tiara's stock in the company.After the partial liquidation,Tiara continued to own 50% of the remaining stock in General Inertia.At the time of the distribution,the shares had a fair market value of $200 per share.Tiara's income tax basis in the shares was $100 per share.General Inertia had total E&P of $800,000 at the time of the distribution.What amount of dividend or capital gain does Tiara recognize as a result of the transaction?

A) Tiara does not recognize any dividend income or capital gain.
B) Tiara recognizes capital gain of $50,000.
C) Tiara recognizes dividend income of $50,000.
D) Tiara recognizes capital gain of $25,000.