Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, year 1.Shareholders will receive three shares of Wonder stock for each five shares of stock they already own.Diana owns 300 shares of Wonder stock, with a tax basis of $90 per share (a total basis of $27,000).The fair market value of the Wonder stock was $180 per share on September 30, year 1.What are the tax consequences of the stock distribution to Diana?
A)$0 dividend income and a tax basis in the new stock of $180 per share.
B)$0 dividend income and a tax basis in the new stock of $67.50 per share.
C)$0 dividend income and a tax basis in the new stock of $56.25 per share.
D)$10,800 dividend and a tax basis in the new stock of $180 per share.

Question

Quizplus · Accepted Answer

Since Wonder Corporation declared a stock distribution and not a cash dividend, Diana does not have any dividend income. Her tax basis in the new stock is calculated as follows: 
- The 300 shares she originally owned had a tax basis of $90 per share for a total basis of $27,000. 
- She received 180 new shares (300 × [3/5]) with a fair market value of $180 per share, giving her a total value of $32,400 ($180 × 180). 
- Her total number of shares is now 480 (300 + 180). 
Therefore, her new tax basis per share is $56.25 ($27,000 + $32,400 ÷ 480).

Wonder Corporation Declared a Common Stock Distribution to All Shareholders