The holding period for the preferred stock starts in March, Year 6, when it was received in the nontaxable distribution. Hence the correct option is 2.
Distribution Date:
Joan received the preferred stock as a nontaxable distribution on March 1, Year 6. This is the key date for determining the holding period.
Nontaxable Distribution:
The nontaxable nature of the distribution implies that the preferred stock is considered acquired at the same cost basis as the common stock that was exchanged for it. Since Joan bought the common stock in January, Year 6, the cost basis for the preferred stock also becomes January, Year 6, even though it wasn't physically received until March.
Fair Market Value:
The fair market values of the common and preferred stock on March 1st are irrelevant for determining the holding period. They only play a role in calculating capital gains or losses when the stock is sold.
Therefore, since the preferred stock was received through a nontaxable distribution and carries the same cost basis as the exchanged common stock (January, Year 6), its holding period also begins in March, Year 6. Hence the correct option is 2.
Complete ques:
In January, Year 6, Joan Hill bought one share of Orban Corp. stock for $300. On March 1, Year 6, Orban distributed one share of preferred stock for each share of common stock held. This distribution was nontaxable. On March 1, Year 6, Joan's one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. The holding period for the preferred stock starts in
- January, Year 6.
- March, Year 6.
- September, Year 6.
- December, Year 6.