Monica is a preferred stockholder with a basis of $9,000 in her 100 shares in Small Appliances Inc. She has one-half her stock redeemed for $6,000 in a transaction that qualifies as sale. Small Appliances’ balance sheet prior to the redemption reads in part:
Common stock, authorized, issued and outstanding, 10,000 shares, par $1 $10,000
Paid-in-capital, common stock 40,000
Preferred stock, authorized, issued and outstanding, 1,000 shares, par $5 5,000
Paid-in-capital, preferred stock 20,000
Earnings and profits 76,000
a. What is Monica’s gain and its character?
b. What is her adjusted basis in the remaining shares?
c. What adjustments are to be made to the equity accounts?
d. What difference does it make if, instead of cash, Monica receives property with a basis of $4,000?