Key Corporation makes a stock dividend to its shareholders. The dividend consists of two common shares for each common share owned by the shareholder. The FMV of the shares are $1,000/ share. Tom, a Key Corp. shareholder, owns 100 common shares prior to the stock dividend. His basis in his common shares is $60,000. Key Corporation has $2,000,000 of E&P.

a. Is the stock dividend taxable to Tom? Why or why not?

b. What is his basis in the shares after the stock dividend?

c. Would your answer change if Tom was given a choice to receive 200 shares or $200,000? He chose stock. Would he have taxable income?