El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, year 1.Shareholders will receive one share of El Toro stock for each two 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, and the tax basis of the new shares is determined by allocating the original basis over the total shares owned after the distribution. Raoul's original basis was $60 per share for 300 shares, totaling $18,000. After the distribution, Raoul owns 450 shares (300 original + 150 new), so the new basis per share is $18,000/450 = $40.

El Toro Corporation Declared a Common Stock Distribution to All