Question

Tara owns common stock in Taupe, Inc., with an adjusted basis of $250,000. She receives a preferred stock dividend which is nontaxable. What effect does the preferred stock dividend have on Tara's adjusted basis of the common stock?

A) Tara's adjusted basis increases by the value of the preferred stock dividend.
B) Tara's adjusted basis decreases by the value of the preferred stock dividend.
C) Tara's adjusted basis remains unchanged.
D) Tara's adjusted basis is reset to zero.

Answer 1

Tara's adjusted basis for her common stock in Taupe, Inc. remains unchanged after receiving a nontaxable preferred stock dividend. The original adjusted basis of $250,000 for her common stock does not increase or decrease due to the nontaxable nature of the dividend.

Step-by-step explanation:

The question pertains to how Tara's adjusted basis for her common stock in Taupe, Inc. might change after receiving a nontaxable preferred stock dividend. Generally, when an investor receives a stock dividend, the basis of their original investment needs to be adjusted. In the case of a nontaxable dividend, the basis does not increase by the value of the dividend received; rather, the cost is spread across the shares.

In Tara's situation, the correct answer is C) Tara's adjusted basis remains unchanged. The nontaxable preferred stock dividend has no effect on the adjusted basis of Tara's common stock. Her basis in the new preferred stock would typically be established separately, and the common stock's basis remains at its original amount of $250,000.