Badger Corporation declared a stock distribution to all shareholders of record on March 25 of this...

Badger Corporation declared a stock distribution to all shareholders of record on March 25 of this year. Shareholders will receive one share of Badger stock for each 10 shares of stock they already own. Madison Cheesehead owns 1,000 shares of Badger stock with a tax basis of $100 per share. The fair market value of the Badger stock was $110 per share on March 25 of this year. (Leave no answer blank. Enter zero if applicable.)

a. What amount of taxable dividend income, if any, does Madison recognize this year?

b. What is Madison’s income tax basis in her new and existing stock in Badger Corporation, assuming the distribution is nontaxable? (Round your answer to the nearest whole number.)

c. How would you answer parts (a) and (b) if Badger offered shareholders a choice between receiving one additional share of Badger stock for each 10 Badger shares held or receiving $120 cash in lieu of an additional share of stock?

If she takes the: Stock Cash

Taxable dividend income ? ?

Income tax basis per share of new shares ? ?

Expert Solution

Answer:

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. After the stock dividend, Madison will own 1,100 shares of Badger stock (1,000 + 1,000/10), each with the same fair market value. Her basis in each share of stock will be $91, computed as (1,000 shares x $100 basis) / 1,100.

c. If Madison choose the stock, she would have a taxable dividend equal to $11,000, computed as 1,000/10 x $110, because the distribution has the potential to be non pro rata to the shareholders. Madison’s tax basis in the stock she receives will equal its fair market value of $11,000 (100 x $110). If Madison choose the cash, she would be taxed on the amount of cash received, $1,200. ($120 x 10)

ekkarill92 answered 1 year ago

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