Question

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1-for-2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuart's gross income from the receipt of the additional Turquoise and Blue shares is: a.$0. b.$7,200. c.$12,000. d.$4,800. e.None of these choices are correct.

Answer 1

Answer:

The answer is: A) $0

Explanation:

I am assuming Stuart's stock is part of his retirement account. If this is true, then the stock dividends and stock splits are not taxed as they are earned (but they will be taxed later when Stuart starts receiving his distributions).

If Stuart's stock was not part of his retirement account, then he would have to pay taxes (usually a 15% tax rate applies).

Answer 2

Answer:

The answer is: b

Explanation:

Gross income is defined for tax purposes as the encapsulation of all income inclusive of salaries or wages, profit, interest income, rental income, dividend income and so on. This amount is exclusive of tax and is calculated before taking into account any expenses or deductions. Dividends comprise a distribution to shareholders of profits derived from operational activities of a business. Stock splits are a means of diluting share value in a bid to make a company's  share price more competitive and to reach more potential investors. It entails increasing the number of shares per shareholder in proportion to their current shareholding. The cost that Stuart paid for the shares before and after the stock split remains the same. Stuart would only realise a gain, or incur a loss, on sale of the shares (assuming no further shares are purchased). Therefore, gross income would only be affected at the date of disposal of the shares. Since dividends are a distribution of company profits, they are included in Stuart's income at the time of distribution, cash or otherwise. The value of the shares received in lieu of the dividend would be included in Stuart's gross income.