Hello,

I'm trying to solve part c) of the problem below.

49. Badger Corporation 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 10 shares of stock they already own. Madison Cheeseman owns 1,000 shares of Badger stock with a tax basis of $100 per share. The fair market value of the Badger stock was $110 per share on March 25 of this year.

a) What amount of taxable dividend income, if any, does Madison recognize this year?

(Answer: $0)

b) What is Madisons income tax basis in her new and existing stock in the Badger Corporation, assuming the distribution is nontaxable?

Answer: $90.91 per share. Madison will have a total of 1,100 shares after the distribution (=1,000 + 1,000/10) and her new basis will be the basis of her original shares divided by her new total number of shares (1,000 x $100)/1,100 = $90.91 per share.)

c) How would you answer parts (a) and (b) if Madison was offered the choice between one share of stock in Badger for each ten share she owned or $100 cash for each ten shares she owned in Badger?

When calculating the amount of the taxable dividend and the new basis of the shares received, should I use the fair market value of the shares listed in the problem, or the amount of cash she would receive if she had chosen the cash dividend instead of the stock dividend?

Thank you,