Stock Rights

Stock Rights means:
rights to subscribe to additional shares of stock at a set price; stock rights may be offered to some or all shareholders. Normally, such a transaction is nontaxable.

Basis Allocation. When the rights represent 15% or more of the market value of the stock in a nontaxable transaction, the stockholder's tax basis is allocated between the stock and the rights in proportion to market value. If the rights are less than 15%, the stockholder may elect to allocate basis to the rights, or a zero basis will be assigned to them.

Sale of Rights. The sale of nontaxable rights generates gain or loss. The holding period for the stock on which the rights were distributed becomes the holding period for the rights. If nontaxable rights expire without exercise, no deductible loss is allowed. A purchase of rights on the open market and resale will result in a taxable gain or loss.

Exercise of Rights. The purchase of stock at its subscription price plus the basis of rights used to subscribe provides the basis of stock acquired on exercise.

Taxable Rights. A distribution of the rights to acquire stock in a corporation is taxable income to the shareholder when it is:

• a distribution instead of money.

• a disproportionate distribution.

• a distribution of convertible preferred stock.

• a distribution of common stock to some shareholders and preferred stock to others.

• a dividend or preferred stock.

• a transaction that increases the shareholder's proportionate ownership Former IRC (check if this IRC provision is current here) §§305 and 307.

See Dividend in the American Legal Encyclopedia and Dividend in the World Legal Encyclopedia.