Answer:
$1350 OR $5100
Question (in proper order):
1. On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $7 per share. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4 when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $31 per share when his shares vest and will be $40 per share when he sells them. If Dave’s stock price predictions are correct, what are the tax consequences of the date of vesting to Dave if his ordinary marginal rate is 32 percent and his long-term capital gains rate is 15 percent?
OR
2. On January 1, year 1, Dave received 1,000 shares of restricted stock from his employer, RRK Corporation, On that date, the stock price was $6 per share. On receiving the restricted stock, Dave made the §83(b) election. Dave’s restricted shares will vest at the end of year 2. He intends to hold the shares until the end of year 4 when he intends to sell them to help fund the purchase of a new home. Dave predicts the share price of RRK will be $30 per share when his shares vest and will be $40 per share when he sells them. Assume that Dave’s price predictions are correct. What are the tax consequences of the date of grant to Dave if his ordinary marginal rate is 32 percent and his long-term capital gains rate is 15 percent?
Explanation:
Answer to Question 1
Dave has no tax consequences on the grant date. On the vesting date he will recognize ordinary income of $31000 and pay taxes of $9920 which is calculated below:
a) shares acquired $ 1000
b) fair market value at vesting date $31
c) ordinary income on vesting date $31000 (1000*31)
d) ordinary marginal tax rate 32%
e) tax due when shares vest $9920 (31000*32%)
Dave will owe $1350 on the sale date as calculated below:
f) amount realized $ 40000 (1000 shares*40 per share)
g) adjusted basis $31000 (given above c point)
h) long term capital gain $9000 (40000 – 31000)
i) long term capital gain rate 15%
j) tax due when shares sold 1350 (9000*15%)
Answer to the question 2
On receiving the restricted stock, Dave made the §83(b) election
Dave will owe no tax on vesting date since he made the §83(b) election
Dave tax consequences on the grant date is that he will recognize $6000 of ordinary income and pay taxes of $1920 as calculated below:
a) shares acquired $ 1000
b) fair market value at granting date $6
c) ordinary income on granting date $6000 (1000*6)
d) ordinary marginal tax rate 32%
e) tax due on grant date $1920 (6000*32%)
Dave will owe $5100 on the sale date as calculated below:
f) amount realized $ 40000 (1000 shares*40 per share)
g) adjusted basis $6000 (given above c point)
h) long term capital gain $34000 (40000 – 6000)
i) long term capital gain rate 15%
j) tax due when shares sold 5100 (34000*15%)