On January 30, Juan receives a nontaxable distribution of stock rights from Platinum Corporation. Each right entitles the holder to purchase one share of stock for $40. One right is issued for every share of stock owned. Juan owns 100 shares of stock purchased two years ago for $4,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Juan's stock in Platinum is worth $5,000 (or $50 per share). On December 1, Juan sells all 100 stock rights for $12 per right. How much gain does Juan recognize on the sale?
A) $1,200
B) $533
C) $400
D) $0
E) None of these.

Question

Quizplus · Accepted Answer

Juan recognizes a gain of $533 on the sale of the stock rights. The gain is calculated by subtracting the basis allocated to the rights from the proceeds of the sale. Since the rights had value when received, a portion of the stock's basis must be allocated to them. The basis allocation is based on the relative fair market values of the rights and the stock at the time of distribution. The calculation involves determining the basis of the rights and subtracting it from the sale proceeds ($1,200).

On January 30, Juan Receives a Nontaxable Distribution of Stock