market value of the rights at the time of the distribution is less than 15 percent of the fair market value of the old
stock at that time, the basis of such rights is zero unless the taxpayer elects to allocate. If the value is 15 percent or
more, a basis must be allocated to the rights, but only if the rights are exercised or sold. The stock basis is allocated
between the stock and the rights according to the relative fair market value at their distribution date. If nontaxable
rights are sold, the holding period runs from the date the original stock was acquired. If the rights are exercised,
the new stock’s holding period starts on the date of exercise.
Basis: Taxable Stock Rights
10. In the case of taxable stock rights, the amount of income is the fair market value of the rights at the date of
distribution. This fair market value is then the basis of the rights and the holding period of the rights begins on
the date of distribution. If the rights are exercised, the basis of the new shares is the subscription price plus the
basis of the rights and the holding period of the new shares begins on the date of exercise. The basis and holding
period of the old stock remain the same.
Basis: Gift Property
11. A taxpayer’s original basis for property acquired by gift is the same as the property’s adjusted basis in the hands of
the donor or the last preceding owner by whom it was not acquired by gift. If, however, the property’s fair market
value at the time of the gift is less than the adjusted basis to the donor, then the basis for determining loss is the
fair market value at the time of the gift. A selling price of gift property between the basis for determining gain and
a lesser fair market value will result in neither gain nor loss.
Basis: Pre-1977 and Post-1976 Gift Property
12. For gifts made prior to 1977, the full amount of the gift tax is added to the donor’s adjusted basis, but the basis
may not be increased above the fair market value at the date of the gift.
For gifts made after December 31, 1976, the basis is increased by the portion of the gift tax that is attributable
to the net appreciation in value of the gift. Net appreciation in value is defined as the amount by which the
fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift. The amount of basis
increase is as follows: