El Toro Corporation declared a common stock distribution to all shareholders of record on June 30 of the current year. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 390 shares of El Toro stock, with a tax basis of $63 per share. The fair market value of the El Toro stock was $103 per share on June 30 of the current year. What are the tax consequences of the stock distribution to Raoul?

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BlackTom AI · Accepted Answer

This question concerns a stock distribution that is treated like a nontaxable stock dividend, since Raoul receives one share for every two shares he already owns and there is no cash involved.
Option A: '$0 dividend income and a tax basis in the new stock of $103 per share.' The basis per share would not reflect the fair market value on the distribution date; rather, tax basis is allocated across the total shares. Using the market value here would be incorrect for basis calculation, so this option misstates the basis.
Option B: '$0 dividend income and a tax basis in the new stock of $63 per share.' This would preserve the old basis per share, which is not how basis is allocated when a parent-split or stock distribution occurs. The total basis should be allocated over more shares, reducing per-share basis accordingly.
Option C: '$0 dividend income and a tax basis in the new stock of $42 per share.' Correct. The distribution is nontaxable as a stock dividend, and the total tax basis ($63 × 390 = $24,570) is allocated evenly over the new total number of shares (390 × 2 = 780? Wait—with a 1-for-2 distribution, you receive 1 new share for every 2 old shares, so the new total shares become 390 + 195 = 585 shares). The correct per-share basis is $24,570 total basis divided by 585 shares, which equals $42 per share. This reflects proper basis allocation after a proportional stock distribution without cash.
Option D: '$20,085 dividend and a tax basis in the new stock of $103 per share.' This implies there is a dividend recognized for tax purposes and uses the old market value for basis, which is incorrect for a nontaxable stock distribution. The dividend amount and the per-share basis here do not align with the applicable tax rules for stock distributions.
In summary, only Option C correctly states that there is no dividend income recognized and that the new per-share basis should be $42 after a 1-for-2 stock distribution, given Raoul’s original basis of $63 per share on 390 shares.

SU25-BL-BUS-A329-2695 Quiz 19

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