Kevin buys one share of Mink, Inc., common stock for $100. On February 3 of the current year, the corporation makes a nontaxable distribution of one share of preferred stock to all holders of record of common stock. On the distribution date, the common stock is trading at $250 and the preferred stock is trading at $50. After the distribution, Kevin's bases in the two shares of stock are:

Common Preferred
A)$50.00 $50.00
B)$100.00 $- 0 -
C)$83.33 $16.67
D)$250.00 $50.00
E)$80.00 $20.00

Question

Kevin buys one share of Mink, Inc., common stock for $100. On February 3 of the current year, the corporation makes a nontaxable distribution of one share of preferred stock to all holders of record of common stock. On the distribution date, the common stock is trading at $250 and the preferred stock is trading at $50. After the distribution, Kevin's bases in the two shares of stock are:
​
Common Preferred
A)$50.00 $50.00
B)$100.00 $- 0 -
C)$83.33 $16.67
D)$250.00 $50.00
E)$80.00 $20.00

Quizplus · Accepted Answer

The nontaxable distribution of one share of preferred stock has a fair market value of $50, therefore Kevin's basis in the common stock decreases by $50 to $50. Kevin's new basis in both shares of stock is now $100 ($50 for the common stock and $50 for the preferred stock). The total fair market value of both shares of stock is $300 ($250 for the common stock and $50 for the preferred stock), so Kevin's basis is allocated proportionally based on the fair market value of each share. Therefore, Kevin's adjusted basis in the preferred stock is $16.67 ($50 x $50/$300) and his adjusted basis in the common stock is $83.33 ($250 x $50/$300).

Kevin Buys One Share of Mink, Inc