Question

Emily recently retired from Fox, Inc., a national retail store. When Emily retired her stock bonus plan had 5,000 shares of Fox, Inc. stock. Fox, Inc. took deductions equal to $10 per share for the contributions made on Emily’s behalf throughout the course of her career. At retirement, Emily took a lump-sum distribution of the employer stock. The fair market value of the stock at distribution was $25 per share. Sixteen months after distribution, Emily sold the stock for $30 per share.

what are Emily’s income tax consequences upon sale sixteen months after distribution?

a. $0, should would not have an income tax consequence.

b. $150,000 long term capital gain.

c. $75,000 long term capital gain; $25,000 short term capital gain.

d. $100,000 long term capital gain.

Answer 1

Correct Answer is D $100,000 long term capital gain

Rationale

??As mentioned above, Emily got the options after having deductions of $10 per share. It does not matter who actually paid the amount but it should be considered who is actualy bearning the amount. So in this case, even if employer is paying on behalf of Emily, the same will be deducted in net settlement of Emily and ultimately bearer of Cost is Emily.

When Emily sold this stock options then it created long term capital gain as she held the same for period of more than 12 months. Hence long term Capital gain for Emily (without indexation effect) will be =

net sale consideration - cost of acquistion = (30*5000) - (10*5000) = $100000