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Stock Split and Basis

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David brought 100 shares of common stock for $30,000. Later the corporation distributed a share of preferred stock for every two shares of common. At the date of distribution, the common stock had a FMV of $400 per share and the preferred stock had a FMV of $300 per share. What is David's basis in the common stock and the preferred stock after the nontaxable stock dividend?

Correct Answer: $17,143 common; $12,857 preferred

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The expert examines stock split and basis.

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If a new stock received in a non-taxable stock dividend is not identical to the old stock on which it is declared, the basis of the new and old stock is calculated by dividing the adjusted basis of the old stock between the old and new ...

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