Dahlia owns $100,000 in Crimson Topaz preferred stock. The annual dividend rate on the preferred is 4%. She exchanges this preferred stock for $60,000 in Crimson Topaz bonds paying 4% annual interest and $40,000 in common stock. How is this transaction treated for tax purposes?
a. All of this transaction is taxable.
b. The transaction is not currently taxable as it qualifies as a "Type E" reorganization.
c. Only the exchange of the preferred stock for the common stock is taxable, because of the reduction in preferential treatment upon liquidation.
d. Only the exchange of the preferred stock for the bond is taxable.
e. None of the above.
d
RATIONALE: The exchange of preferred stock for common stock qualifies as a "Type E" reorganization but the preferred stock for bonds does not qualify for tax-free treatment under ยง368(a)(1)(E).
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