Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. 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, 20X3. 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 Diana owns 300 shares of Wonder stock, she will receive a stock distribution of 180 shares (300 x 3/5). The fair market value of the new stock received is $32,400 (180 shares x $180). Since the stock distribution is tax-free, there is no dividend income. Diana's total tax basis in the new stock is $10,125 ($27,000 / 300 shares x 180 shares received). Therefore, her tax basis per share of the new stock is $56.25 ($10,125 / 180 shares received).

Wonder Corporation Declared a Common Stock Distribution to All Shareholders