Question

In January 2020, Ezra purchased 2,000 shares of Gold Utility Mutual Fund for $20,000. In June, Ezra received an additional 100 shares as a dividend, in lieu of receiving $1,000 in cash dividends. In December, the company declared a two-for-one stock split. Ezra received an additional 2,100 shares, but there was no option to receive cash. At the time of the stock dividend in December and at the end of the year, the fund shares were trading for $5 per share. Also, at the end of the year, the fund offered to buy outstanding shares for $4.50. Ezra did not sell any shares during the year.
If an amount is zero, enter "0".
a. What is Ezra's gross income from the 100 shares received in June?
​$X
b. What is Ezra's gross income from the receipt of the 2,100 shares as a two-for-one stock split in December?
​$X
c. Should Ezra be required to recognize gross income in 2016 even though the fair market value of his investment at the end of the year was less than the fair market value at the beginning of the year?

Answer 1

Answer:

a. Ezra's gross income from the 100 shares received in June is $1,000.

b. Ezra's gross income from the receipt of the 2,100 shares as a two-for-one stock split in December is equal to $0.

c. The $1,000 gross income realized by Ezra in 2016 will be recognized by him. Also, when the shares are sold by Ezra, he is allowed to deduct an economic loss.

Explanation:

a. What is Ezra's gross income from the 100 shares received in June? ​$X

Since it is not stated that the price per share changed from January to June, we have:

Price per share in June = Amount of shares purchased in January / Number of shares purchased in January = $20,000 / 2,000 = $10

Gross income from 100 shares received in June = Price per share in June * Number of shares received = $10 * 100 = $1,000

This shows that gross income is equal to the amount of the cash dividends Ezra would have received if he had not receive an additional 100 shares as a dividend.

Therefore, Ezra's gross income from the 100 shares received in June is $1,000.

b. What is Ezra's gross income from the receipt of the 2,100 shares as a two-for-one stock split in December? ​$X

The impact of two-for-one stock split is to increase the number of shares of the company by 50% but also to reduce its price per per by 50%. As a result, the total value of shares held by each shareholders remains the same.

Since the total value of shares held by Ezra remains the same, this implies that Ezra's gross income from the receipt of the 2,100 shares as a two-for-one stock split in December is equal to $0.

c. Should Ezra be required to recognize gross income in 2016 even though the fair market value of his investment at the end of the year was less than the fair market value at the beginning of the year?

The $1,000 gross income realized by Ezra in 2016 will be recognized by him. Also, when the shares are sold by Ezra, he is allowed to deduct an economic loss.