In what is known as a "stock dividend," a corporation pays out additional shares of stock to shareholders, rather than a cash dividend. A stock dividend usually does not result in taxable income to the shareholders.
For example, if you own 9 shares of ABC Co. stock and ABC Co. pays a stock dividend of 1 share for every 3 you own, you will receive 3 shares of stock, tax-free.
However, if you own 10 shares of ABC Co., you will be entitled to receive 3-1/3 shares in the stock dividend. To avoid the administrative costs of issuing fractional shares of stock, ABC Co. might pay cash in lieu of the fractional share. In that case, you would receive 3 shares of ABC Co. stock plus cash equal to the value of 1/3 share of ABC Co. stock.
To report cash in lieu of a fractional share in this situation, make these entries on our Capital Gains and Losses Worksheet:
Column (a) – Description of foregone fractional share (e.g., "1/3 ABC Co.")
Column (b) – Acquisition date of shares on which dividend was paid
Column (c) – Date of stock dividend
Column (d) – Amount of cash received
Column (e) – Basis of the fractional share. The basis is your basis in all of the stock before the dividend, times a fraction. The numerator of the fraction is the cash in lieu of a fractional share. The denominator of the fraction is the total value of the old stock, any stock dividend and the cash in lieu. Expressed as a formula:
Basis in fractional share = Old basis x Cash in lieu/Total value.