Your client, Raptor Corporation, declares a dividend permitting its common shareholders to elect to receive 9 shares of cumulative preferred stock or 3 additional shares of Raptor common stock for every 10 shares of common stock held. Raptor has only common stock outstanding (fair market value of $45 per share). One shareholder elects to receive preferred stock, while the remaining shareholders choose the common stock.
Raptor asks you whether the shareholders recognize any taxable income on the receipt of the stock. Prepare a letter to Raptor or a memo for the tax research file regarding this matter. Raptor’s address is 1812 S. Camino Seco, Tucson, AZ 85710.