PROBLEM 2 Hoosier Corporation declared a 2-for-1 stock split to all shareholders

Question

PROBLEM 2 Hoosier Corporation declared a 2-for-1 stock split to all shareholders of record on March 25 of this year. Hoosier reported current E&P of $600,000 and accumulated E&P of $3,000,000. The total fair market value of the stock distributed was $1,500,000. Barbara Bloomington owned 1,000 shares of Hoosier stock with a tax basis of $100 per share. a) What amount of taxable dividend income, if any, does Barbara recognize this year? Assume the fair market value of the stock was $150 per share on March 25 of this year. b) What is Barbara’s income tax basis in the new and existing stock she owns in Hoosier Corporation, assuming the distribution is tax-free? c) How does the stock dividend affect Hoosier’s accumulated E&P at the beginning of next year?

Explanation / Answer

(old stock 1000 shares @100 = 100,000 and now = 100,000/2000 = $50 per share)

1. Since it is pro rata to all the shareholders dividend income will not be taxable
2. Half of her basis in old stock would be allocated the new stock , that would make her tax basis in the old and new stock to $50 per share

(old stock 1000 shares @100 = 100,000 and now = 100,000/2000 = $50 per share)

1. No adjustment required to E&P since it is not taxable to the shareholers.

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