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Question - A corporation with common stock outstanding declares a nontaxable dividend payable in rights to subscribe to common stock on June 30 of the current year. Each right entitles the holder to purchase one share of stock for $85. One right is issued for every share of stock owned. Thomas owns 100 shares of stock purchased 10 years ago for $4,300. At the time of the distribution of the rights, the market value of the common stock is $128 per share and the market value of the rights is $17 per right. Thomas receives 100 rights. On September 30, he exercises 75 of the rights and sells the remaining 25 rights for $20 per right.
Required -
a. Assuming that Thomas does not allocate his original stock basis to the rights, what is his basis in the new stock?
b. When does his holding period begin for the new stock?
c. What are the tax consequences of the sale of the rights?
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