Bat Corporation distributes stock rights with a $20,000 FMV to its common stock shareholders. The $20,000 value of the stock rights at the time of distribution is less than 15% of the value of the underlying stock. Which of the following statements is true?
A)A shareholder must allocate basis to the rights based on the relative FMVs of the stock and the rights.
B)A shareholder cannot allocate any basis to the rights.
C)The basis in the rights is zero unless a shareholder makes a valid election to allocate basis to the rights.
D)The holding period for the rights begins on the day the rights are distributed in all cases.

Question

Quizplus · Accepted Answer

If the FMV of the stock rights at the time of distribution is less than 15% of the value of the underlying stock, the shareholder's basis in the stock rights is zero unless they make a valid election to allocate basis to the rights. This is because the distribution is considered a nontaxable event and the stock rights are essentially considered a gift. However, if the shareholder chooses to allocate basis to the rights, they must do so based on the relative FMVs of the stock and the rights. The holding period for the rights would begin on the day after the distribution only if the shareholder made a valid election to allocate basis to the rights.

Bat Corporation Distributes Stock Rights with a $20,000 FMV to Its