Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, 20X3. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000). The fair market value of the Wonder stock was $180 per share on September 30, 20X3. What are the tax consequences of the stock distribution to Diana

Diana's dividend income will be $0.

Tax basis of  Diana in the new stock is $56.25 per share

Explanation:

Since no dividend is declared, Diana will not have dividend income, i.e., her dividend income will be $0.

The tax basis of Diana in the new stock can be calculated as follows:

Existing shares = 300

Additional shares to receive = (300/5) * 3 = 180

Total new shares = 300 + 180 = 480

Tax basis of  Diana in the new stock = $27,000 ÷ 480 = $56.25 per share

Zero dollar of dividend income

Tax basis = $56.25 per share

Explanation:

Diana will have a zero dividend income, this is because, there was no divided that was declared in the distribution of the common stock

Evaluation the tax basis of Diana in the new stock using the method

Shares in existent= $300

Additional shares to receive = (300/5) * 3 = 180

Total new shares = shares in existent + additional shares to receive

Total new shares = 300 + 180

Total new shares = 480

Tax basis of Diana in the new stock = total basis /total new shares

Tax basis of  Diana in the new stock = $27,000 ÷ 480

Tax basis = $56.25 per share

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