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:
a. $20,000 in the common and $8,000 in the preferred.
b. $2,000 in the common and $18,000 in the preferred.
c. $18,000 in the common and $2,000 in the preferred.
d. $19,802 in the common and $198 in the preferred.
e. None of the above.
c
RATIONALE: Basis is determined by allocating the basis of the common stock between the preferred stock and the common stock according to the fair market value of each. Thus, $8,000/$80,000 of the $20,000 original basis in the common stock, or $2,000, is allocated to the preferred stock, and $72,000/$80,000 of the $20,000 original basis, or $18,000, is allocated to the common stock.
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