Question

Kelly owns 500 shares of Boston Corporation common stock which was purchased on March 20, 2000, for $70,000. On August 8 of the current year, she receives a distribution of 500 stock rights. Each stock right has a $10 FMV and the FMV of the Boston common stock is $40 per share. With each stock right, she may acquire on share of Boston common stock for $110.

a. How much gross income must Kelly recognize?
b. What is the basis of each stock right​ received?
c. If she sells the 100 stock rights for $9,000​, what is her​ gain?
d. If she exercises the 100 stock rights on September 8​, what is the basis of the 100 shares she receives and when does the holding period for those shares​ start?

Answer 1

a. How much gross income must Kelly recognize?

$0, the distribution will not increase her gross income.

b. What is the basis of each stock right​ received?

{[(500 x $10)/ (500 x $10 + 500 x $40)] x $70,000} / 500 shares= $14,000 / 500 = $28

c. If she sells the 100 stock rights for $9,000​, what is her​ gain?

gain = $9,000 - (100 x $28) = $6,200

d. If she exercises the 100 stock rights on September 8​, what is the basis of the 100 shares she receives and when does the holding period for those shares​ start?

basis = $2,800 + (100 x $110) = $13,800