Dividends of additional stock

Chapter 11 covered the treatment of qualified and non-qualified cash dividends. This handout will explain the tax treatment to an individual who receives additional shares of stock as either a stock dividend or a stock split. IRC § 305(a) provides that the receipt of proportional shares of common stock by existing common shareholders does not constitute taxable income to the recipient. Taxpayers are required to allocate the tax basis in their original stock to both the old and the new shares of stock proportionately. The holding period of the new shares will be the same as the holding period of the old shares. Example: John owned 1,000 shares of Johnson & Johnson common stock. The shares were originally purchased on 5/1/2005 for a total cost of $ 55,000. On 6/1/2013, John received a 10% stock dividend receiving 100 additional shares of stock. The tax ramifications to John are as follows: • John will not recognize any taxable income in 2013 by receiving the 100 additional shares. • John’s basis in his existing shares will be allocated to both his old shares and new shares as follows: SharesTotal BasisPer Share Basis Original Shares1,000$ 55,000 $ 55 New Shares 100 All 1,100$ 55,000 $ 50 • John’s basis of the original 1,000 shares is now $ 50,000, and his basis for the new 100 shares is $ 5,000. Additionally John’s holding period for the 100 new shares will be the same as his holding period for the 1,000 shares. Stock Splits: A shareholder who receives a stock split essentially treats the shares received due to the split the same way as the receipt of a stock dividend. First, a stock split does not constitute taxable income to the recipient. Second, the recipient will allocate their existing basis of the old shares to both the old and new shares. Third, the new shares will receive the same holding period as the old shares. Example: John owns 500 shares of Exxon common stock. He purchased the shares on 10/1/2010 for $ 20,000. In 2013 Exxon announces a 2 for 1 split, and on 10/1/2013 John receives 500 additional shares of Exxon common stock. The tax ramifications to John are as follows: • John will not recognize any taxable income in 2013 as a result of this split. • John’s old tax basis of $ 20,000 ($ 40 per share) will be allocated to all of the shares (new basis of the 1,000 shares will be $ 20 per share for a total of $ 20,000). • John’s holding period in his old Exxon shares will be “tacked” to his new shares. (All of his shares are considered acquired on 10/1/2010).