Palmetto Corporation has a single class of common stock outstanding. Terry owns
ID: 2498740 • Letter: P
Question
Palmetto Corporation has a single class of common stock outstanding. Terry owns 1,000 shares, which she purchased in 2007 for $100,000. Palmetto 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, 2011—the common stock was worth $180 per share, and the preferred stock was worth $100 per share. On April 1, 2011, Terry sells half of her preferred stock for $5,000.
How much income must Terry recognize when she receives the stock dividend?
How much gain or loss must Terry recognize when she sells the preferred stock? (Ignore the implications of Sec. 306.)
What is Terry’s basis in her remaining common and preferred shares after the sale? When does her holding period for the preferred shares begin?
Explanation / Answer
The correct answers are as follows;
A. Common stocks held by Terry 1000
Stock dividend paid = one share of preferred stock ten shares of common stock
Preference shares received by Terry = 1000/10
= 100 preference shares
Price of 1 preference shares = $100
Price of 100 preference shares = $10000
Therefore income recognized by Terry = $10000
B. Price paid by Terry for purchase of stock = $10000
Price of 100 preference shares = $10000
Gain/loss made by selling preference shares = $0
Hence, no gain/loss
C. basis in her remaining common and preferred shares after the sale = $5000+$(180×1000)
=$185000
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