El Toro Corporation declared a common stock distribution to all shareholders of record on June 30,year 1.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,year 1.What are the tax consequences of the stock distribution to Raoul?
A)$0 dividend income and a tax basis in the new stock of $100 per share.
B)$0 dividend income and a tax basis in the new stock of $60 per share.
C)$0 dividend income and a tax basis in the new stock of $40 per share.
D)$15,000 dividend and a tax basis in the new stock of $100 per share.

Question

Quizplus · Accepted Answer

The stock distribution is not taxable as dividend income because it is a stock dividend. Raoul's total basis of $18,000 (300 shares x $60) is allocated over the new total of 450 shares (300 original + 150 new), resulting in a basis of $40 per share.

El Toro Corporation Declared a Common Stock Distribution to All