Let's now apply the concepts of stock distribution to Sunchaser Shakery.
In January, Emily bought one share of Sunchaser Shakery Corporation stock for $300.
a new class of preferred stock for each share of common stock held.
share had a fair market value of $450 and $150 respectively.
what is Emily's basis in each share?
So the first thing to notice here is that we have a non-taxable stock distribution.
and that's it's paid on common stock.
In other words, the reason she got this distribution is because she owns common stock.
common stock versus receiving a distribution in common stock.
she actually received a different class of shares.
So it's not paid in common stock, it was paid on it.
Meaning the reason that she got it is because she owns common shares. A little confusing.
the two requirements for this distribution to be non-taxable.
common stock and she received one share of preferred stock.
Everything's in proportion to her current ownership interest in the Sunchaser stock.
identical to what she already owned.
but she is receiving preferred.
the total number of shares and allocating it across the basis and her existing shares.
because what she receives is not identical to what she already owns.
assign basis to the new preferred share that she received.
and spread it around between the two types of stock that she now owns.
on the fair market value of both shares that she owns.
I'm sorry, the fair market value of the preferred shares that she has.
So 450 out of 600.
For the preferred, we're going to do the rest of it.
total fair market value of everything she now owns.
So she now has a basis of $75 in this preferred share that she received.
The reason we have to do this is because she received the share as a distribution.
In other words, she didn't buy it.
So there is no known basis.
There's no cost basis available.
on that without having some basis value.
So that's why this is important.
when does the holding period begin for the preferred stock?
Well, the holding period here will be tacked.
the holding period of the referenced stock.
In other words, it's a non-taxable transaction, so it's tacked.
time because she she's only held the shares since January.
Nicholas owns 100 shares a Sunchaser Shakery Corporation common stock.
and the right to purchase 50 additional shares.
The value of the stock and rights were $2,000 and $1,000 respectively.
and Nicholas was not given an option to receive cash instead of stock or rights.
does Nicholas include in gross income?
So the easiest way to tackle this problem is to look at the three items he receives.
The first item he receives is a cash dividend.
so presumably it's paid out of E&P.
and therefore it should be included in his gross income.
The next part is that we have a stock distribution of 50 additional shares.
and the problem seems to suggest that.
these 50 additional shares of common stock is because he owns common stock.
Thus it's paid on common stock.
Thus this would be a non-taxable stock distribution.
and their taxability is determined just as they were above.
And again, we know he's receiving these because he owns common stock.
Thus they are paid on common stock.
only $3,000 is included in Nicholas' gross income.
of stock rights from Sunchaser Shakery Corporation.
Each right entitles the holder to purchase one share of stock for $40.
One right is issued for every share of stock owned.
purchased several years ago for $4,000.
and Nicholas' stock is worth $5,000.
On December 1, Nicholas sells all 100 stock rights for $12 per right.
if any, does Nicholas recognize?
how much gain does he recognize on the subsequent sale of these stock rights?
That should be a pretty simple thing for us to determine, so let's take a look.
which in this case would be $1,200.
That is 100 stock rights times $12 per right.
we would just simply factor in the adjusted basis.
an adjusted basis for these stock rights because he did not purchase them.
He was issued them by the corporation.
we need to allocate some basis to these stock rights.
Well, it depends on the value of the right.
then we know we need to allocate a portion of the stock basis to the rights.
that's exactly what's going on.
and we know that the value of his stock at the date of distribution is $5,000.
allocate some portion of the stock basis to these rights.
the shareholder would simply take a zero basis in the stock rights.
the rights will be based on the fair market value at distribution.
In other words, that's how we're going to do the allocation.
the rights and the stock, so let's do just that.
the rights at the time of the distribution, which is $1,000.
Factoring in the fair market value of the stock as well.
so that leaves us with $667 of basis assigned to the rights.
we can actually go back now and answer the original question we were asked.
likely recognize on this transaction is $533.