Tara owns common stock in Taupe, Inc, with an adjusted basis of $250,000 . She receives a preferred stock dividend which is nontaxable
a. What effect does the preferred stock dividend have on Tara's adjusted basis of the common stock?
b. How is the basis of the preferred stock calculated?
c. What effect does the preferred stock dividend have on Tara's gross income?
a.
Part of the adjusted basis of the common stock must be allocated to the preferred stock thereby decreasing the basis of the common.
b.
The amount that is allocated to the preferred stock is based on the relative fair market values of the common stock and the preferred stock on the date of the distribution.
c. Since the preferred stock dividend is nontaxable, it has no effect on Tara's gross income.
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