Question

# Kelly owns 100 shares of Boston Corporation common stock which was purchased on March 20, 2000,...

Kelly owns 100 shares of Boston Corporation common stock which was purchased on March 20, 2000, for \$30,000. On August 8 of the current year, she receives a distribution of 100 stock rights. Each stock right has a \$15 FMV and the FMV of the Boston common stock is \$60 per share. With each stock right, she may acquire on share of Boston common stock for \$115.

 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?

Part A

Kathryn must recognize \$0 of gross income

A distribution of stock right does not result into the gross income that recognized.

Part B

Total basis = (total FMV/ (FMV of stock + FMV stock right) ) = ( (100*\$15)/ (100*\$15 + 100*\$60) )= 0.2

Basis of each stock right = total basis *Amount paid / 100 shares

Therefore,

 ( total basis / number of shares ) * purchase price = basis of rights ( 0.2 / 100 ) * 30000 = \$60

Part C

 Stock rights Selling price 9000 Less: stock right basis (100*60) 6000 Realized gain (loss) 3000

Part D

The basis of the 100 shares she receives is \$17500. The holding period should start on September 9.

6000+(100*115)=\$17500

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