Jose receives a nontaxable distribution of stock rights during the year from Gold Corporation on January 30. Each right entitles the holder to purchase one share of stock for $50. One right is issued for every share of stock owned. Jose owns 100 shares of stock purchased two years ago for $5,000. At the date of distribution, the rights are worth $1,000 (100 rights at $10 per right) and Jose's stock in Gold is worth $6,000 (or $60 per share). On December 1, Jose sells all stock rights for $13 per right. How much gain does Jose recognize on the sale?

Question

Quizplus · Accepted Answer

First, we need to determine the basis of the stock rights. Since the distribution is nontaxable, we allocate the basis of the 100 shares of stock between the stock and the stock rights.

Basis of 100 shares of stock = $5,000 
Fair market value of 100 shares of stock at the date of distribution = $6,000 
Basis allocated to stock = ($5,000 / $11,000) x $6,000 = $2,727.27 
Basis allocated to stock rights = ($6,000 / $11,000) x $6,000 = $3,272.73

The gain on the sale of the stock rights is calculated as follows:

Proceeds from sale of 100 stock rights = 100 x $13 = $1,300 
Adjusted basis of 100 stock rights = 100 x $32.73 = $3,273 
Gain on sale of 100 stock rights = $1,300 - $3,273 = -$1,973

Since the gain is negative, Jose recognizes no gain on the sale. Therefore, the correct answer is B) $586.

Jose Receives a Nontaxable Distribution of Stock Rights During the Year