In short
A pro rata stock dividend on common stock is generally not taxable. The shareholder spreads the basis of the original shares over the old and new shares, and the holding period of the new shares includes that of the old.
Key takeaways
- It is taxable if any shareholder can choose cash or other property instead.
- It is also taxable if it changes shareholders' proportionate interests, for example cash to some and stock to others.
- Taxable stock dividends are measured at the fair market value of the shares received.
Where it's tested
REG: C Corporation Taxation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A corporation owns 30% of the stock of another domestic corporation and receives a $100,000 dividend. Ignoring the taxable income limitation, what is the dividends-received deduction?