Question

Badger corp. declared a stock dividend to all shareholders of record on march 25 of this year. shareholders will receive one share of badger stock for each ten shares of stock they already own. madison cheeseman owns 1,000 shares of badger stock with a tax basis of $100 per share. the fmv of the badger stock was $110 per share on march 25 of this year. what amount of taxable dividend income, if any, does madison recognize this year? what is madison's income tax basis in her new and existing stock in badger corporation, assuming the distribution is non-taxable?

Answer 1

Madison does not recognize any taxable dividend income this year. Madison's income tax basis is $91 per share.

Step-by-step explanation:

We are informed that the Badger corp. issues 1 share for every 10 shares of stock already held. This means that for the 1,000 shares Madison owns, she receives 100 new shares. However, this stock dividend is paid to all shareholders on a proportionate basis. Hence, Madison does not recognize any taxable dividend income this year.

The total number of shares now held by Madison is:

1,000 + 100 = 1,100

Therefore, Madison's income tax basis in each share of stock is:

(1,000 / 1,100) * $100 = $90.91

Answer 2

Answer to part a of this question is "The stock dividend is not taxable because it is pro rata to all the shareholders."

Answer to 2nd question is "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."