Example 4.24
4–17
Gross Income
If, in Example 4.23, instead of receiving the common stock, Aaron received 20 shares of Rhody Corporation
preferred stock as a stock dividend and it had a fair market value of $10 per share and the 100 original shares of
Rhody Corporation common stock at this time had a fair market value of $2,000, then the following computations would be necessary:
Computations:
$1,100
Basis of original stock
Fair market value of original stock
$2,000
Fair market value of the new preferred stock
200
Fair market value of preferred and common
$2,200
Basis of original 100 shares after stock dividend 1,100 × 2,000/2,200
$1,000
Basis of new stock after the dividend 1,100 × 200/2,200
$100
To determine whether or not the sale should be treated as a long-term capital gain, the date when the original
shares were purchased is the controlling factor. To be classified as a long-term gain, a capital asset must be
held for more than one year. For 2013, the tax on capital gains is a maximum of 20 percent if held greater than
12 months (28 percent for collectibles and section 1202 gains) and the taxpayer's income is over $400,000 if
single, $450,000 for joint filers.
The new shares take on the basis of the old shares. If lots of the old shares were purchased on different dates
and the dividend shares cannot be identified with any particular lot, then the new shares take the basis of the
earliest purchased stock. Reg. §1.1012-1(c).
Stock Rights
A stock right is defined as a distribution by a corporation to its shareholders of rights to purchase corporate stock. Usually, the shareholder has a right to buy the stock at less than fair market value. Therefore,
the stock rights have a market value. The stockholder receiving the rights has three alternative courses of
action. The stockholder may exercise, sell, or hold the stock rights.
If the market value of the stock rights is less than 15 percent of the market value of the stock with respect
to which it is distributed, then the basis of the rights is zero unless the shareholder irrevocably elects to allocate the basis between the stock and the rights. Code Sec. 307(b)(1). Where the market value of the rights
is 15 percent or greater, the basis must be allocated between the stock and rights according to their respective
values on the date on which the rights are distributed to the stockholder, not the record date. In Chapter
10, at ¶10,125, a full discussion appears on the allocation of basis for taxable and nontaxable stock rights.
Patient Protection and Affordable Care Act of 2010
The Patient Protection and Affordable Care Act of 2010 imposes several new provisions effective January 1,
2013. The provisions include:
a. A 3.8 percent medicare tax on unearned income of higher-income individuals (see below),
b. A 0.9 percent additional medicare tax on wages and self-employment income that exceeds $200,000
for single individuals, head of household, and qualifying widowers; $250,000 for married couples
filing jointly; and $125,000 for married couples filing separate returns.
Net Investment Income Tax
The 3.8 percent net investment income tax applies to individuals, estates and trusts that have income above:
Single individuals
Married filing jointly and Qualifying widowers
$200,000
250,000
Married filing separately
125,000
Head of household
200,000
The tax takes effect on January 1, 2013. Generally, investment income includes dividends, capital
gains, rental and royalty income, non-qualifying annuities and income from business which trade financial
instruments and passive activities.
¶4401