Question

Hoosier Corporation declared a 2-for-1 stock split to all shareholders of record on March 25 of this year. Hoosier reported current E&P of $600,000 and accumulated E&P of $3,000,000. The total fair market value of the stock distributed was $1,500,000. Barbara Bloomington owned 1,000 shares of Hoosier stock with a tax basis of $100 per share.a) What amount of taxable dividend income, if any, does Barbara recognize this year? Assume the fair market value of the stock was $150 per share on March 25 of this year.b) What is Barbara's income tax basis in the new and existing stock she owns in Hoosier Corporation, assuming the distribution is tax-free?c) How does the stock dividend affect Hoosier's accumulated E&P at the beginning of next year?

Answer 1

(a) The stock dividend is not taxable because it affects all shareholders pro rata

(b) Babara will transfer half of the old stock base to the new stock and make her new and old stock tax base $50

(c) Hoosier does not change his E&P for the stock dividend since the shareholders are not taxable.

Step-by-step explanation: