Question

Hoosier Corporation declared a stock distribution to all shareholders of record on March 25 of this year. Shareholders will receive one share of Hoosier Corporation stock for each share of stock they already own. Hoosier reported current E&P of $624,000 and accumulated E&P of $3,060,000. The total fair market value of the stock distributed was $1,542,000. Barbara Bloomington owned 1,000 shares of Hoosier stock with a tax basis of $124 per share. (Leave no answer blank. Enter zero if applicable.)

a. What amount of taxable dividend income, if any, does Barbara recognize this year? Assume the fair market value of the stock was $162 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. Does the stock distribution affect Hoosier's accumulated E&P at the beginning of next year.

Answer 1

SOLUTION

A. The stock dividend is not taxable because it is pro rata to all the shareholders.

B. The new stock is allocated part of the tax basis of the old stock based on relative fair market value. In a 1 for 1 stock split, Barbara would allocate the basis of the old stock ($124) to the new stock, making her tax basis in the old and new stock $124 per share.

Original basis = 1,000 shares * $124 = $124,000

It must be shared between old and new shares.

So, $124,000/1,000 = $124 per share basis

C. Hoosier does not adjust its E&P for the stock dividend because it is not taxable to the shareholders.