“Preferred Stock Bailouts” Please respond to the following:
- Section 306 of the IRC was enacted by Congress to prevent tax avoidance by distributing certain stock to a shareholder in a nontaxable stock dividend. Section 306 prevents shareholders from using a preferred stock bailout to convert ordinary income into a capital gain. Analyze the key provisions of Section 306 of the IRC, and outline a tax- planning strategy geared toward redeeming preferred stock with sale or exchange treatment as an alternative to Section 306.
- From your analysis of Section 306 in the e-Activity, differentiate between the tax treatment of earnings and profit on the distributing corporation of both a sale of Section 306 stock and redemption of Section 306 stock. Suggest the most important reasons for this differentiation in tax treatment.