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. Jocelyn owns 100 shares of stock in Pink, which she 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. Jocelyn receives 50 rights. She exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

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