Ace Corporation Has a Single Class of Stock Outstanding

question 45

Essay

Ace Corporation has a single class of stock outstanding. Alan owns 200 shares of the common stock, which he purchased for $50 per share two years ago. On April 10, of the current year, Ace Corporation distributes to its shareholders one right to purchase a share of common stock at $60 per share for each share of common stock held. At the time of the distribution, the common stock is worth $75 per share, and the rights are worth $15 per right. On September 10, Alan sells 100 rights for $2,000 and exercises the remaining 100 rights. He sells 60 of the acquired with the rights for $80 each on November 10.
a) What is the amount and character of income Alan recognizes when he receives the rights?
b) What is the amount and character of gain or loss Alan recognizes when he sells the rights?
c) What is the amount and character of gain or loss Alan recognizes when he exercises the rights?
d) What is the amount and character of gain or loss Alan recognizes when he sells the new common stock?
e) What basis does Alan have in his remaining shares?

---

Definitions:

Kingpin

A critical component in vehicle steering mechanisms or in the coupling between a trailer and a tractor, around which steering or pivoting occurs.

Steering Axles

Axles equipped with mechanisms to alter the direction of a vehicle's wheels, facilitating steering.

Tandem Drive Axles

A pair of drive axles in a vehicle, typically trucks or buses, that work in conjunction to distribute the weight and increase the vehicle's traction.

Pusher Axle

A truck dead axle located in front of a drive axle that may or may not be a lift axle.