Question

What are the tax consequences to Euclid from the following independent events?

a. Euclid bought 500 shares of common stock five years ago for $50,000. This year, Euclid receives 20 shares of common stock as a nontaxable stock dividend. What is Euclid's basis per share after this event?

b. Assume instead that Euclid received a nontaxable preferred stock dividend of 20 shares. The preferred stock has a fair market value of $5,000, and the common stock, on which the preferred is distributed, has a fair market value of $75,000.

Answer 1

a). As a result of the stock dividend, Euclid's per share basis is $100

      $50,000 / 500 shares = $100

b). After the receipt of the stock dividend, the basis of the preferred stock is $3,125, and the basis of the common stock is $46,875.

Common Stock                                                                 $75, 000

Preferred Stock                                                                  $5,000

                                                                                             $80,000

75,000 / 80,000 x 50,000 = 46,875

50,000 – 46,875 = 3,125