Analyze tax implications of corporate stock dividend distributions on individuals for the following case study. Apply the IRS codes to the calculation of income based on the distribution of stock dividends. Support your conclusions with reference to specific IRS codes and regulations.
Palmetto Corporation has a single class of common stock outstanding. Terry owns 1,000 shares, which she purchased in 2007 for $100,000. Palmetto declares a stock dividend payable in 8% preferred stock having a $100 par value. Each shareholder receives one share of preferred stock for ten shares of common stock. On the distribution date-December 10, 2011-the common stock was worth $180 per share, and the preferred stock was worth $100 per share. On April 1, 2011, Terry sells half of her preferred stock for $5,000.
• How much income must Terry recognize when she receives the stock dividend?
• How much gain or loss must Terry recognize when she sells the preferred stock?
• What is Terry's basis in her remaining common and preferred shares after the sale? When does her holding period for the preferred shares begin?