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?
A)$1,300.
B)$5819-
C)$500.
D)$0.
E)None of the above.

Question

Quizplus · Accepted Answer

Jose received the stock rights as a nontaxable distribution, so the cost basis for each right is $0. When he sells the rights for $13 each, he has a gain of $13 - $0 = $13 per right. Since he received 100 rights in the distribution, his total gain is $13 x 100 = $1,300.

Jose Receives a Nontaxable Distribution of Stock Rights During the Year