Which of the following accurately describes the basis allocation for nontaxable distributions? A) Basis is based solely on the FMV of the new shares B) Basis is allocated equally b... Which of the following accurately describes the basis allocation for nontaxable distributions? A) Basis is based solely on the FMV of the new shares B) Basis is allocated equally between new and old shares C) Basis is allocated in proportion to the FMV of original stock and distribution D) Basis is always retained as the original acquisition cost
Understand the Problem
The question is asking for the correct description of how basis allocation works for nontaxable distributions, specifically how to allocate the basis between new and original shares.
Answer
Basis is allocated in proportion to the FMV of original stock and distribution.
The correct answer is C) Basis is allocated in proportion to the FMV of original stock and distribution.
Answer for screen readers
The correct answer is C) Basis is allocated in proportion to the FMV of original stock and distribution.
More Information
When shares are distributed, the overall tax basis needs to be divided among the shares in proportion to their fair market value (FMV), maintaining the total basis equal to the original cost.
Tips
A common mistake is thinking basis remains the original acquisition cost for all transactions, which isn't accurate for nontaxable distributions.
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