Rose has a $20,000 basis in the 60% of the parent corporation stock that she owns. parent corporation owns a 70% interest in child corporation. parent and child have current and accumulated e& p balances of $25,000 and $40,000, respectively. in return for $15,000, rose sells 10% of the parent corporation stock to child corporation. what is the impact of the transaction on rose?

The answer is: Rose will be taxed as receiving a $15,000 dividend distribution.

Explanation:

Since Parent Corporation owns 70% of Child Corporation, for tax purposes they are considered as one single firm. Rose is the main stockholder of Parent Co. so for tax purposes she is also a stockholder in Child Co. When Child Co. gives her $15,000 in exchange for Parent Co. stock, this would be considered as a dividend distribution rather a stock sale.

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