Chapter 4

Question 1

What is the general idea of Section 305

Answer 1

Only Stock Distributions not taxed:

• Pro-rata common on common
• Pro-rata preferred on common if;
  - no preferred already outstanding or newly issued preferred is subordinate to current outstanding preferred.

ALMOST EVERYTHING ELSE IS TAXED

Question 2

What is the general idea of Section 306

Answer 2

Look back to when 306 stock was distributed, instead of getting the 306 stock in a nontaxable stock distribution, the shh received cash equal in value to the
306 stock at that time.

Shhs amount realized on the sale of 306 stock is taxed as a dividend.