Question

On December 1 of the current year (the declaration date), Z’s board of directors vote to pay a $600 distribution by mailing checks on December 31 of the current taxable year (the payment date) to shareholders of record on December 15 (the record date). The checks are actually received by shareholders on January 2. Shareholder C is an individual with a stock basis of $120. C sells his stock on December 10 for $1,620.

	a.	The distribution by the corporation will still be taxable to shareholder C.
	b.	The distribution by the corporation will be taxable to the purchaser from shareholder C.
	c.	C’s sale of the stock will generate capital gain
	d.	b and c.
	e.	None of the above.

Answer 1

Shareholders holding a share prior to the ex-dividend date will receive such dividend. The ex-dividend date is the date after which people who purchase shares would not be entitled to receive dividend on those shares. This date is usually 2 business days days prior to the record date (based on trade date+2 days settlement cycle) in order to give the custodian time to register all new shareholders by the record date.

As per the facts presented in this case, the record date is December 15, while shareholder C has sold his shares on December 10, i.e., 5 days before the record date. Thus it is clear that as on the ex-dividend date, C did not hold these shares and therefore his name was not listed as a shareholder on the record date. Hence C did not receive dividend and so distribution of dividend by the corporation will be taxable to the purchaser from C. Further, since C has sold his stock, this sale will generate capital gains depending on the holding period.

Answer : d. b and c.