Answer:
Some assumptions made are: discount rate of 6%.
Seth’s marginal income tax rate is 35% and his capital gains rate is 15%.
look below
Tax cost associated with the current sale of inventory for $96000
amount realized 96000
less :Adjusted basis -30000
Ordinary gain recognized 66000
tax cost(66000*35%) 23100
Present value factor *1.00
Present value of tax cost 23100
Tax cost associated with the current receipt of 30 kingfisher share,then sales in five years of $90000 shares
current ordinary gain of kingfisher $6,000
tax cost(66000*35%) $2,100
Present value factor *1.00
Present value of tax cost
Capital gained on sale of kingfisher shares in five years
Amount realized 90000
less adjusted basis -30000
capital gained recognized $60,000
tax cost(66000*15%) $9,000
Present value factor *.7473
Present value of tax cost 6726
Total present value of tax cost 8,826
Explanation:
During discussions relating to the formation of kingfisher, seth mentions that he may be interested in either (1) just selling all of his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in kingfisher's formation as shown above but followed by a sale of his stock five years later for $90,000. what would be the tax cost of these alternative plans, stated in present value terms?
Some assumptions made are: discount rate of 6%.
Seth’s marginal income tax rate is 35% and his capital gains rate is 15%.
look below
Tax cost associated with the current sale of inventory for $96000
amount realized 96000
less :Adjusted basis -30000
Ordinary gain recognized 66000
tax cost(66000*35%) 23100
Present value factor *1.00
Present value of tax cost 23100
Tax cost associated with the current receipt of 30 kingfisher share,then sales in five years of $90000 shares
current ordinary gain of kingfisher $6,000
tax cost(66000*35%) $2,100
Present value factor *1.00
Present value of tax cost
Capital gained on sale of kingfisher shares in five years
Amount realized 90000
less adjusted basis -30000
capital gained recognized $60,000
tax cost(66000*15%) $9,000
Present value factor *.7473
Present value of tax cost 6726
Total present value of tax cost 8,826
