Question

Heather owns 400 shares of Diego Corporation common stock for which she paid $4,000. She receives a nontaxable stock dividend for 20 shares of preferred stock on her common stock. The fair market values on the date of distribution of the preferred stock dividend are $20 a share for common stock and $100 a share for preferred stock. What is Heather's basis in the common and preferred shares?

Answer 1

Heather's basis in the common shares is $10 per share, and her basis in the preferred shares is $100 per share.

Step-by-step explanation:

Heather's basis in the common shares is determined by the amount she paid for the shares. She paid $4,000 for 400 shares, so her basis in the common shares is $10 per share ($4,000 ÷ 400 shares).

For the preferred shares received as a nontaxable stock dividend, Heather's basis is equal to the fair market value of the shares on the date of distribution. Since the fair market value of the preferred shares is $100 per share, her basis in the preferred shares is $100 per share.

To summarize, Heather's basis in the common shares is $10 per share, and her basis in the preferred shares is $100 per share.