El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

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Business

Eliana Sutton

13 September, 17:56

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

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Explanation:

Stock dividend is a nontaxable income as it is a pro-rata distribution of additional shares to the existing shareholders of the company. Mr. Raoul's tax basis on 300 shares existing shares was 18.000 (60 per share * 300 shares). After receiving 150 (300/2) new stock on pro rata allotment, his tax basis on 450 shares would be $120 per share (18.000/150).