El Toro Corporation Declared a Common Stock Distribution to All

question 27

Multiple Choice

El Toro Corporation declared a common stock distribution to all shareholders of record on June 30, 20X3. Shareholders will receive one share of El Toro stock for each two shares of stock they already own. Raoul owns 300 shares of El Toro stock, with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock distribution to Raoul?

• A)$0 dividend income and a tax basis in the new stock of $100 per share.
• B)$0 dividend income and a tax basis in the new stock of $60 per share.
• C)$0 dividend income and a tax basis in the new stock of $40 per share.
• D)$15,000 dividend and a tax basis in the new stock of $100 per share.

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Definitions:

Creditors

Individuals or entities that are owed money or other obligations by debtors.

Judicial Lien

A court order that allows a creditor to satisfy a debt by seizing the property of the debtor.

Creditor

An entity (person or institution) that lends money or extends credit to another party, expecting to be repaid in the future.

Legal Action

A formal proceeding taken in a court of law to enforce or defend a right or seek a remedy.