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LO
LO.7 What are the tax consequences to Euclid from the following independent events?
b. Assume instead that Euclid received a nontaxable preferred stock dividend of 20 shares. The preferred stock has a fair market value of $5,000, and the common stock, on which the preferred is distributed, has a fair market value of $75,000.
Expert Solution
Computation of Basis of Common and Preferred Stock:
Fair Market Value of Preferred Stock = $5,000
Fair Market Value of Common Stock = $75,000
Total Fair Market Value = $5,000+ $75,000 = $80,000
Basis of Preferred Stock = [($5,000 / $80,000) * $50,000] = $3,125
Basis of Common Stock = [($75,000 / $80,000) * $50,000] = $46,875
So, After the receipt of stock dividend, the basis of preferred stock is $3,125 and the basis of common stock is $46,875.
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