Question

Floral Corporation has a single class of common stock outstanding. Tammy owns 1,000 ?shares, which she purchased in 20112011 for $160,000. Floral declares a stock dividend payable in 8?% preferred stock having a $230 par value. Each shareholder receives oneone share of preferred stock for tenten shares of common stock. On the distribution date—December ?10, 2015—the common stock was worth $437 per? share, and the preferred stock was worth $230 per share. On April? 1, 2015?, Tammy sells halfhalf of her preferred stock for $10,500.

Requirements

a.	How much income must Tammy recognize when she receives the stock? dividend?
b.	How much gain or loss must Tammy recognize when she sells the preferred? stock? (Ignore the implications of Sec.? 306.)
c.	What is Tammy's basis in her remaining common and preferred shares after the? sale? When does her holding period for the preferred shares? begin?

Answer 1

Solution 4

1. No income is to be recognized on receipt of stock dividend.
2. Gain / loss on sale of half of preferred stock is as under:-

Tammy’s adjusted basis (using market price)

= Common Stock + Preferred stock

= (1000 Shares X $437) + (100 Shares X $230)

= $ 460,000

Cost of 50 Preferred Stock

= Common Stock at purchase price X 50 Preferred Stock at Market Price / Total Adjusted Basis

= 160,000 X (23,000/2) / 460,000

= $4,000

Hence, Gain on Sale is = $10,500 (sale price) - $4,000 (Cost)

            Gain of Sale = $ 6,500

3) Tammy’s basis in Common Stock =

= Common Stock at purchase price X 1000 Common Stock at Market Price / Total Adjusted Basis

= 160,000 X (437*1000) / 460,000

= $152,000

Tammy’s basis in remaining 50 Preferred Stock =

= Common Stock at purchase price X 50 Preferred Stock at Market Price / Total Adjusted Basis

= 160,000 X (23,000/2) / 460,000

= $4,000

The holding period for preferred stock will be same as common stock i.e. from 2011