Question

Trusty Corporation has a single class of common stock outstanding. Jim owns 200 shares, which he purchased for $50 per share two years ago. On April 10 of the current year, Trusty distributes to its common shareholders one right to purchase for $60 one common share for each common share owned. At the time of the distribution, each common share is worth $75, and each right is worth $15. On September 10, Jim sells 100 rights for $2,000 and exercises the remaining 100 rights. On November 10, he sells for $80 each 60 of the shares acquired through exercise of the rights. Read the requirements. Requirement a. What are the amount and character of income Jim recognizes upon receiving the rights? (Enter a "0" for a zero amount. If the amount is zero, select "n/a" in the character column.) Jim X Х i Amount of income Character of income Requirements a. What are the amount and character of income Jim recognizes upon receiving the rights? b. What are the amount and character of gain or loss Jim recognizes upon selling the rights? c. What are the amount and character of gain or loss Jim recognizes upon exercising the rights? d. What are the amount and character of gain or loss Jim recognizes upon selling the newly acquired common shares? e. What basis does Jim take in his remaining shares? Print Done

Answer 1

Answer-

a

The distribution of stock rights is a nontaxable event unless it produces a change in the proportionate interest of the shareholder in the distributing corporation. Since this exception does not apply to this case, the stock rights are nontaxable.

b

To calculate the gain that the shareholder must recognize upon the sale of their 100 rights on September 10^th, we must first calculate the shareholders total basis. The basis of stock rights with a value of less than 15% are zero, unless the shareholder decides to allocate some of the stock basis to the rights. But with the value of the rights being $15 per right, and common stock being valued at $75 per share, the value of the rights are greater than 15%, and therefore a basis must be allocated. Calculate the shareholders basis in common stock by multiplying the purchase price of the stock by the quotient of the value of common stock per share divided by the sum of the value of the rights and the common stock per share.

Comm. Stock Value Purch. price of stock x- Basis for Comm. Stock (Rights Value+Comm. Stock Value)

Basis for Common stock.

$75 $10,000 x =$8,333.33 ($15+$75)

Calculate the shareholders basis in the rights by multiplying the purchase price of the stock by the quotient of the value of common stock per share divided by the sum of the value of the rights and the common stock per share.

Purch. price of stockx Rights Value Basis for Rights (Rights Value+Comm. Stock Value)

Basis for Rights

$15 $10,000 x =$1,666.67 ($15+$75)

With a basis of $1,666.67 for the rights, the shareholder’s basis in sale of half of the rights is calculated by dividing the total basis for the rights in half.

basis for rights –Basis in rights sold 2

Basis in rights sold

$1,666.67 2 $833.33 2

The sale price of the 100 rights sold was $2,000. The gain that must be recognized by the shareholder selling the rights is the difference between the sale price and their basis in the rights.

Sale Price - Basis in rights=Recognized Gain

Recognized Long-Term Capital Gain.

$2,000.00 - $833.33=$1,166.67

c

There is no gain recognized on exercising the rights, but the basis of the rights is added to the basis of the stock purchased with the rights. Calculate the basis of the stock purchased with the rights by adding the basis in the rights to the purchase price of the 100 shares of stock at $60 per share

Purch. price of stock + Basis for rights=Basis for Stock Purchased

Basis for stock purchased with rights.

$6,000.00+ $833.33=$6,833.33

d

With a basis of $68.33 per share of stock purchased with the rights, the recognized gain on the sale of 60 of the newly acquired shares is calculated by subtracting the product of the number of shares sold multiplied by the basis per share from the product of the number of shares sold multiplied by the purchase price.

(sale price per sharex #shares) -(basis per share x #shares) = Recognized Gain

Recognized Short-Term Capital Gain

($80 x 60) -($68.33x60) = $700.20

e

After the 100 shares purchased by exercising his rights, and the 60 shares of stock sold, the shareholder’s has 40 shares of stock purchased with rights at a basis of $68.33 each. To calculate the shareholder’s basis in their remaining shares of stock, add the basis in common stock calculated above to the product of the shares remaining from the purchase of additional shares multiplied by the basis per share.

Common Stock Basis+(basis per sharex #shares)=Basis in stock remaining

Basis in stock remaining.

$8,333.33+($68.33x 40)=$11,066.53