Corporation declares a nontaxable stock dividend payable in rights to subscribe to common stock. One right and $100 entitles the holder to subscribe to one share of stock. One right is issued for each share of stock owned. T, a shareholder, owns 100 shares of stock that she purchased two years ago for $70 per share. At the date of the distribution of the rights, the fair market value of the stock was $200 and the fair market value of each right was $40. T received 100 rights. T exercised 60 rights and sold the remaining 40 rights for $70 per right.
a. How much in taxable income does T have as a result of receiving the rights?
b. What is the tax basis of each of the stocks acquired with the 60 rights?
c. What are the tax consequences to T when the 40 rights are sold?