Pink Corporation Declares a Nontaxable Dividend Payable in Rights to Subscribe

Multiple Choice

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.Each right entitles the holder to purchase one share of stock for $25.One right is issued for every two shares of stock owned.Jack owns 100 shares of stock in Pink,which he purchased three years ago for $3,000.At the time of the distribution,the value of the stock is $45 per share and the value of the rights is $2 per share.Jack receives 50 rights.He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

A) Jack must allocate a part of the basis of his original stock in Pink to the rights.
B) If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is zero.
C) Sale of the rights produces ordinary income to Jack of $62.50.
D) If Jack does not allocate a part of the basis of his original stock to the rights, his basis in the new stock is $625.
E) None of the above.