Sherry owns 1,000 shares of Taupe Corporation stock with a basisof $15

QUESTION

Sherry owns 1,000 shares of Taupe Corporation stock with a basisof $15,000 and a fair market value of $20,000. She receivesnontaxable stock rights to purchase additional shares. The rightshave a fair market value of $2,000.a. What are the basis of the stock and thebasis of th
Responsedetails: Basis is important because its used to determine how muchgain or loss you report when you sell your stock, and may used forother purposes as well. In the easiest case your basis is simply the amount you paid forthe stock plus the brokerage commission. But there are differentrules for finding the basis and holding period of stock acquired indifferent ways. Also, various events that occur after you own thestock may cause your basis to change. For example, a stock splitdoesnt change the total basis of your stock, but it changesthe basis per share. So your basis foryour stock at any point in time is equal to: o Your initial basis (the basisimmediately after you acquired the stock) o Plus or minus any adjustmentsin your basis. The tax law refers to this number as your adjusted basis. Ifthere have not been any adjustments, then your adjusted basis isthe same as your initial basis. Basis of StockRight: If the tax status is non-taxable, the general rules foraccounting for non-taxable stock rights are as follows: 1. if the market value of the stock rightsis more than 15% of the market value of shares on the date ofdistribution, part of your cost basis for the shares must beallocated to the stock rights in the

same proportion as therelative market values, 2. If the market value of the stock rightsis less than 15% of the market value of the shares on the date ofdistribution, you are not required to allocate any part of yourcost basis to the rights, although you may do so if you soelect. Holding period forStock Rights: Your holding period is the same as the purchase date of the taxlot of the companys shares from which the rights werederived (if the tax status is non-taxable). Recognized gain or loss if the stock rights are sold: If the stock rights are sold then the recognized gain or loss isequal to the sale value of the right So the profit on sale of right = $2000 Recognized gain or loss if the stock rights are allowed tolapse: If the stock rights are lapsed then the loss is equal to theright value So the loss = $ 2000

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