Question

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 $67.50 per share.
B) $10,800 dividend and a tax basis in the new stock of $180 per share.
C) $0 dividend income and a tax basis in the new stock of $180 per share.
D) $0 dividend income and a tax basis in the new stock of $56.25 per share.

Answer 1

Diana will not have any dividend income and her tax basis in the new stock will be $180 per share.

Step-by-step explanation:

The tax consequences of the stock distribution to Diana are as follows:

1. Her tax basis in the new stock will be calculated by finding the fair market value of the Wonder stock on the date of the distribution, which is $180 per share, and multiplying it by the ratio of shares received to shares she already owns.
2. Therefore, her new tax basis in the new stock will be $180 * 180 = $32,400. Dividing this by the number of new shares received she will have a tax basis of $32,400 / 180 = $180 per share.