Perch Corporation Has Made Paint and Paint Brushes for the Past

Perch Corporation has made paint and paint brushes for the past ten years. Perch Corporation is owned equally by Arnold, an individual, and Acorn Corporation. Perch Corporation has $100,000 of accumulated and current E&P. Both Arnold and Acorn Corporation have a basis in their stock of $10,000. Perch Corporation discontinues the paint brush operation and distributes assets worth
$10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock. Due to the distribution, Arnold and Acorn Corporation must report:

A) $$\begin{array} { | l | l | } \hline \text { Arnold } & \text { Acorn Corporation } \\\hline \$ 10,000 \text { dividend } & \$ 10,000 \text { dividend } \\\hline\end{array}$$
B) $\begin{array}{|l|l|}\hline \text { Arnold } & \text { Acorn Corporation } \\\hline \$ 10,000 \text { dividend } & \$ 8,000 \text { capital gain }\\\hline\end{array}$
C)
$\begin{array}{|l|l|}\hline \text { Arnold } & \text { Acorn Corporation } \\\hline \$ 8,000 \text { capital gain } & \$ 8,000 \text { capital gain }\\\hline\end{array}$
D)
$\begin{array}{|l|l|}\hline \text { Arnold } & \text { Acorn Corporation } \\\hline \$ 8,000 \text { capital gain } & \$ 10,000 \text { dividend }\\\hline\end{array}$

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