Stanley Steamer purchased 1,000 shares of Patrick Corporation common stock at $6

Question

Stanley Steamer purchased 1,000 shares of Patrick Corporation common stock at $6 per share in 2011. On September 26, 2015, he received 1,000 nontaxable stock rights entitling him to buy 200 additional shares of Patrick Corporation common stock at $10 per share. On the day that the rights were issued, the fair market value of the stock was $12.50 per share ex-rights and that of the rights was $2.50 each. Stanley sold 500 of the rights for $1,100 on October 24, 2015, and let the other 500 rights expire.

(a.) What is the gain or loss that Stanley should report in 2015?

b.) What gain or loss should Stanley report if the value of the rights were $1.25 instead of $2.50?

(Please take your time to find the 100% correct answer.)

Explanation / Answer

Allocation of part of the basis to the rights is required becausethe value of the rights is greater than 15 percent of the value of thestock ($2.50 is 20% of $12.50). The amount allocated to the rights isas follows

{2,500/(12500+2500)}*6000=$1000

This gives a basis of $1 per right. If 500 rights are sold for $1,100, there is a $600gain and it would be long-term capital gain. There is no gain or loss on the expirationof the remaining 500 rights since no basis is allocated to rights unless the rights areexercised or sold

b) since the value of rights are only 10% of stock (1.25 of 12.5= 10%) NOTHING NEEDS TO BE ALLOCATED TO THE RIGHTS. All of the $1100 in sales proceeds is a long term capital gain if the taxpayers elect to allocate to the rights then $545 would be allocated this way :

{1250/(12500+1250)}*6000= $545

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.