ABC Corp issues stock warrants to its shareholders. Mary owns 2,500 shares of stock and receives 2,500 warrants. Mary’s basis in her shares is $30,000 and their FMV is $100,000. The warrants give Mary the option to purchase the shares at $100 per share. The FMV of each warrant is $2. Mary has held her shares for 5 years. Mary sells 700 of her warrants for $2,800 and she exercises the remaining 800 warrants.

A. What are the results to Mary if the distribution was taxable?

B. What are the results to Mary if the distribution was tax-free? What are Mary’s choices, if any?

Answer rating: 100% (QA)

A If the distribution of stock warrants is taxable Mary would need to recognize taxable income equal to the fair market value of the warrants received ... View the full answer