Question

Charla received preferred stock as a nontaxable common stock dividend in 2018 from Marisa Corporation. The...

Charla received preferred stock as a nontaxable common stock dividend in 2018 from Marisa Corporation. The value of the preferred stock when received by Charla was 20,000 and the value of the common stock was 30,000. Charla acquired the common stock in 2017 for 60,000 and Marisa Co. E&P was 100,000 on the date of distribution of the preferred stock. Six months after the receipt the preferred stock, Charla sold ALL of her stock to an unrelated third party for 80,000. The ordinary income for Charla as result of the sale of all of the stock (preferred and common) is:

30,000

80,000

40,000

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Answer #1

Option IV is correct .

Explanation :

Proceeds from sale of common stock and preferred stock = $ 80,000

Cost basis of common and preferred stock = $ 60,000 + $ 20,000 = $ 80,000

Net gain from sale of stock ( common and preferred) = sales proceeds - cost basis of stock

Net gain from sale of stock = $ 80,000 - $ 80,000 = $ 0

Including the above, holding period of such stocks are for more than 12 months ( as common stock acquired on 2017) , so it is a long term capital gain. Long term capital gain doesn't included in ordinary income .

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