Question

At the beginning of the year, Mr. Olsen paid $15 per share for 620 shares of Carmel common stock. He received cash distributions totaling $840. His Form 1099 reported that $700 was a qualified dividend and $140 was a nontaxable distribution. Compute his basis in his 620 shares at year-end.

Answer 1

Mr. Olsen's year-end basis in his 620 shares of Carmel common stock is $9,160, after adjusting his initial investment of $9,300 by a nontaxable distribution of $140.

Step-by-step explanation:

To calculate Mr. Olsen's basis in his 620 shares of Carmel common stock at year-end, we must first consider the initial investment and then adjust for any distributions. Initially, Mr. Olsen paid $15 per share for 620 shares, which equals $9,300 (15 x 620). He received a total of $840 in cash distributions, of which $700 was a qualified dividend and $140 was a nontaxable distribution.

The qualified dividend of $700 does not adjust the basis of the stock, as it is a return on investment and is generally taxable. However, the nontaxable distribution of $140 reduces the basis of the stock, because it is a return of capital. Therefore, we deduct $140 from the initial investment, leading to a new basis calculation of $9,300 - $140 = $9,160.

Mr. Olsen's basis in his 620 shares at year-end is therefore $9,160.