Wilton corporation has a single class of commmon stock outstanding. Robert owns

Question

Wilton corporation has a single class of commmon stock outstanding. Robert owns 100 share, whihc he purchased in 2009 for $100,000. In 2015, when the stock is worth $1,200 per share, Wilton declares a 10% dividend payable in common stock. On december 10, 2015, orbert receives 10 additional shares. on january 30, 2016, he sells 5 of the 10 shares for $7000.

a. how much income must robert revognize when he receives the stock dividend?

b. How much gain or loss must robert recignize when he sells the common stock?

c. what is robert's basis in his remanining common shares? when does his holding period in the new common shares begin?

Explanation / Answer

a) Income must robert recognize when he receives the stock dividend is zero , Stock Dividend is non taxable under secton 305(a)

b)Gain or loss must robert recognize when he sells the common stock :

Sale Value = 7000

Less : Basis of Stock = 100000/(100+10%*100) * 5 = $ 4545.45

Gain to be recognise = 7000-4545.45 = $ 2454.55

c) Robert's basis in his remanining common shares = 100000/110 *(110-5)

Robert's basis in his remanining common shares = $ 95,454.55

The holding period in the new common shares begin from 2009 when he acquired the original share.

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