Moss Corporation has a single class of common stock outstanding. Tillie owns 1,000 shares, which she purchased

Question:

Moss Corporation has a single class of common stock outstanding. Tillie owns 1,000 shares, which she purchased five years ago for $100,000. Moss declares a stock dividend payable in 8% preferred stock having a $100 par value. Each shareholder receives one share of preferred stock for ten shares of common stock. On the distribution date—December 16 of the current year—the common stock was worth $180 per share, and the preferred stock was worth $100 per share. On April 1 of the current year, Tillie sells half of her preferred stock for $5,000.

a. How much income must Tillie recognize when she receives the stock dividend?

b. How much gain or loss must Tillie recognize when she sells the preferred stock? (Ignore the implications of Sec. 306.)

c. What is Tillie’s basis in her remaining common and preferred shares after the sale? When does her holding period for the preferred shares begin?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...