Question

Wonder Corporation declared a common stock dividend to all shareholders of record on September 30, 2013.

Shareholders will receive 3 shares of Wonder stock for each 5 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 hte Wonder stock was $180.00 per share on September30, 2013. What are the tax consequences of the stock dividend to Diana?
A. $0 dividend income and a tax basis in the new stock of $180.00 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 $180.00 per share

Answer 1

The tax consequences of the stock dividend to Diana are that she will not have any dividend income, and her tax basis in the new stock will be $67.50 per share.

Step-by-step explanation:

The tax consequences of the stock dividend to Diana are option B. She will not have any dividend income and her tax basis in the new stock will be $67.50 per share.

To calculate the new tax basis, we first need to determine the fair market value of the new shares Diana received. She received 3 shares of Wonder stock for each 5 shares of stock she already owned. Since she owned 300 shares, she received (300 / 5) * 3 = 180 new shares. The fair market value of the Wonder stock was $180.00 per share, so she received 180 * $180.00 = $32,400 worth of new shares.

Her total basis before the dividend was $27,000, so her new tax basis for the new shares is $32,400 / 180 = $180.00 per share. This means she will not have any dividend income, and her tax basis in the new stock will be $67.50 per share ($90.00 - $22.50).