Stock Dividend Distribution. Moss Corporation has a single class of common stock

Question

Stock Dividend Distribution. Moss Corporation has a single class of common stock outstanding. Tillie owns 1,000 shares, which she purchased in 2011 for $100,000. Moss declares a stock dividend payable in 8% preferred stock having a $100 par value. Each shareholder receives one share of preferred stock for ten shares of common stock. On the distribution date--December 10, 2015-- the common stock was worth $180 per share and the preferred was worth $100 per share. On April 1, 2015 Tillie sells half of her preferred stock for $5,000.

a. How much income must Tillie recognize when she receives the stock dividend?

b. How much gain or loss must Tillie recognize when she sells the preferred stock? (Ignore the implications of Sec. 306.)

c. What is Tillie's basis in her remaining common and preferred shares after the sale? When does her holding period for the shares begin?

Explanation / Answer

A./

Tillie recognizes no income when she receives the preferred stock. Tillie's basis in her common and preferred stock is:

     Basis for 100 preferred shares:

$100,000 * $ 10,000 / $190,000

= $ 5,263.16

     Basis for 1,000 common shares:

$100,000 * $180,000 / $190,000

= $94,736.84

B./

Tillie must recognize a long-term capital gain of $2,368.42 ($5,000 - $2,631.58) on the sale of one-half of the preferred stock.

C./

Tillie's basis in her common stock is $94,736.84. Tillie's basis in her remaining preferred stock is $2,631.58. Her holding period begins in 2011 when she purchased the common stock.

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