Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis. Bass distributes a nontaxable preferred stock dividend. When the preferred stock is distributed, it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000. The basis of the preferred stock is
A)$0.
B)$20,000.
C)$60,000.
D)$80,000.

Question

Quizplus · Accepted Answer

According to IRC section 305, the basis of the common stock is allocated between the common and preferred stock received. Therefore, Tia's basis in the preferred stock is equal to the FMV of the preferred stock (i.e., $60,000). The basis of her common stock shares is then adjusted to $20,000 ((($80,000 basis / $260,000 total FMV) * $180,000 FMV of common stock) - $60,000 FMV of preferred stock).

Tia Owns 2,000 Shares of Bass Corporation Common Stock with an $80,000