Corporation A plans to issue stock rights to its common shareholders. Shareholders will receive one stock right for each share of common stock owned, and each stock right will entitle the holder to purchase one share of common stock from Corporation A at a price equal to 110% of the expected fair market value on the date the stock rights will be issued. The stock rights may be exercised at any time beginning on the first anniversary of the date of issuance through the fifth anniversary date, when they expire. The stock rights are freely transferrable; that is, they may be sold or given away. The issuance of the stock rights will not be taxable, and it is expected that the fair market value of each stock right will be approximately 25% of the value of a share of common stock on the date of issuance.

1. If a shareholder holds a stock right past the expiration date, so that it expires and becomes worthless, does the shareholder recognize a deductible loss?
2. If a shareholder sells a stock right, what is the formula for computing his or her basis in the stock right for purposes of determining taxable gain or deductible loss on the sale?
3. If a shareholder exercises a stock right, what is the formula for computing his or her basis in the share of common stock acquired?

Please answer each question in complete sentences, and cite the name and number of the IRS publication where you found each answer, and the page numbers on which the answer is found. Use your own words in the answer do not simply copy the IRS publication