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Stock Bonus Plan Participant

Randy, age 63, is a participant in the stock bonus plan of XYZ, Inc., a closely held corporation. Randy received contributions in shares of XYZ stock to the stock bonus plan and XYZ, Inc. had the following income tax deductions:

Year 1: 100 shares with $12 value at time of contribution
Year 2: 125 shares with $15 value at time of contribution
Year 3: 150 shares with $8 value at time of contribution
Year 4: 200 shares with $18 value at time of contribution
Year 5: 400 shares with $20 value at time of contribution

Total: 975 shares with $14.75 simple average price

Randy terminates employment in year 6 and takes a distribution from the plan of 975 shares of XYZ, Inc., having a fair market value of $24,000. Which of the following correctly describes Randy's tax consequences in year 6 from this distribution if Randy does not sell the XYZ stock until year 8?

A. Randy has ordinary income of $15,875 and long-term capital gain of $8,125 in year 6.
B. Randy has long-term capital gain of $24,000 in year 6.
C. Randy has ordinary income of $15,875 in year 6.
D. Randy has a long-term capital gain of $8,125 in year 6.

Solution Preview

He doesn't have a gain or loss until he sells them. A is partially correct. He has ordinary income but no gain because he is still ...

Solution Summary

This solution provides the correct answer with explanation to the stock bonus plan question presented.

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