El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

Question

Quizplus · Accepted Answer

The stock distribution is nontaxable because it is pro rata. The tax basis of the new stock is obtained from the original tax basis of the stock. The tax basis of the 300 original shares is $18,000 ($60 per share). The total basis is now allocated across 450 shares so the per share basis is $40 ($18,000/450 = $40 per share).

El Toro Corporation Declared a Common Stock Distribution to All