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Ten years ago, Carrie purchased 2,000 shares of common stock in Osprey Corporation for $20,000. In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred. Values at the time of the dividend are $8,000 for the preferred stock and $72,000 for the common. Based on this information, Carrie's basis in the stock is:

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Answer:

c. $18,000 in the common and $2,000 in the preferred.

Explanation:

Carrie's total basis on her investment hasn't changed and it remains at $20,000, what has changed is how that basis is distributed.

Since the current value of common stock + preferred stock = $72,000 + $8,000 = $80,000:

  • Carrie's basis in preferred stock = ($8,000 / $80,000) x $20,000 = $2,000
  • Carrie's basis in common stock = ($72,000 / $80,000) x $20,000 = $18,000

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