Answer:
a. What amount of taxable dividend income, if any, does Madison recognize in 2009?
Madison doesn't have to recognize any income because she is not getting any. Only after Madison decides to sell his stocks will he recognize any taxable income if she makes a gain.
b. What is Madison's income tax basis in her new and existing stock in Badger Corporation, assuming the distribution is non-taxable?
Madison current basis is $100 per stock, and after the stock dividend it will be $100 / 1.1 = $90.91 per stock
c. How would you answer questions a and b if Madison was offered the choice between 1 share of stock in Badger for each 10 shares she owned or $100 cash for each 10 shares she owned in Badger?
then the cash dividend would be $10 per stock, which results in $10 x 1,000 = $10,000 taxable income. Her basis in the stock will remain not change.
