[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.307-1]

[Page 46]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.307-1  General.

    (a) If a shareholder receives stock or stock rights as a 
distribution on stock previously held and under section 305 such 
distribution is not includible in gross income then, except as provided 
in section 307(b) and Sec. 1.307-2, the basis of the stock with respect 
to which the distribution was made shall be allocated between the old 
and new stocks or rights in proportion to the fair market values of each 
on the date of distribution. If a shareholder receives stock or stock 
rights as a distribution on stock previously held and pursuant to 
section 305 part of the distribution is not includible in gross income, 
then (except as provided in section 307(b) and Sec. 1.307-2) the basis 
of the stock with respect to which the distribution is made shall be 
allocated between (1) the old stock and (2) that part of the new stock 
or rights which is not includible in gross income, in proportion to the 
fair market values of each on the date of distribution. The date of 
distribution in each case shall be the date the stock or the rights are 
distributed to the stockholder and not the record date. The general rule 
will apply with respect to stock rights only if such rights are 
exercised or sold.
    (b) The application of paragraph (a) of this section is illustrated 
by the following example:

    Example A taxpayer in 1947 purchased 100 shares of common stock at 
$100 per share and in 1954 by reason of the ownership of such stock 
acquired 100 rights entitling him to subscribe to 100 additional shares 
of such stock at $90 a share. Immediately after the issuance of the 
rights, each of the shares of stock in respect of which the rights were 
acquired had a fair market value, ex-rights, of $110 and the rights had 
a fair market value of $19 each. The basis of the rights and the common 
stock for the purpose of determining the basis for gain or loss on a 
subsequent sale or exercise of the rights or a sale of the old stock is 
computed as follows:

100 (shares)x$100=$10,000, cost of old stock (stock in respect of which 
the rights were acquired).
100 (shares)x$110=$11,000, market value of old stock.
100 (rights)x$19=$1,900, market value of rights.
11,000/12,900 of $10,000=$8,527.13, cost of old stock apportioned to 
such stock.
1,900/12,900 of $10,000=$1,472.87, cost of old stock apportioned to 
rights.


If the rights are sold, the basis for determining gain or loss will be 
$14.7287 per right. If the rights are exercised, the basis of the new 
stock acquired will be the subscription price paid therefor ($90) plus 
the basis of the rights exercised ($14.7287 each) or $104.7287 per 
share. The remaining basis of the old stock for the purpose of 
determining gain or loss on a subsequent sale will be $85.2713 per 
share.