Problem 5-48 (LO. 7) lacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000. Last year, Jacob received a nontaxable stock dividend of 2,000 shares in Grebe Corporation. In the current tax year, Jacob sold all of the stock received as a dividend for $18,000. a. Complete the letter to Jacob describing the tax consequences of the stock sale. Raabe, Young, Nellen, Hoffman, & Maloney, CPAS 5191 Natorp Boulevard Mason, OH 45040 February 17, 2021 Jacob Corcoran 925 Arapahoe Street Boulder, CO 80304 Dear Mr. Corcoran: This letter is in response to your question about the sale of the Grebe Corporation stock that you received as a nontaxable stock dividend. Our conclusion is based upon the facts as outlined in your February 10th letter. Any change in facts may cause our conclusion to be inaccurate. Originally, you paid $24,000 for 10,000 shares of stock in Grebe Corporation, and last year a nontaxable stock dividend of 2,000 additional shares was received. The 2,000 shares were sold in the current year for $18,000. The on the sale of the 2,000 shares is determined by v your basis in the shares sold from the sales price. The tax basis in the 2,000 shares is $ per share. Your of $ on the sale is considered because the original Grebe stock has been held for than one year. Should you need more information or need clarification on our conclusion, do not hesitate to contact me. Sincerely yours, Heywood R. Floyd, CPA Partner
Problem 5-48 (LO. 7) lacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000. Last year, Jacob received a nontaxable stock dividend of 2,000 shares in Grebe Corporation. In the current tax year, Jacob sold all of the stock received as a dividend for $18,000. a. Complete the letter to Jacob describing the tax consequences of the stock sale. Raabe, Young, Nellen, Hoffman, & Maloney, CPAS 5191 Natorp Boulevard Mason, OH 45040 February 17, 2021 Jacob Corcoran 925 Arapahoe Street Boulder, CO 80304 Dear Mr. Corcoran: This letter is in response to your question about the sale of the Grebe Corporation stock that you received as a nontaxable stock dividend. Our conclusion is based upon the facts as outlined in your February 10th letter. Any change in facts may cause our conclusion to be inaccurate. Originally, you paid $24,000 for 10,000 shares of stock in Grebe Corporation, and last year a nontaxable stock dividend of 2,000 additional shares was received. The 2,000 shares were sold in the current year for $18,000. The on the sale of the 2,000 shares is determined by v your basis in the shares sold from the sales price. The tax basis in the 2,000 shares is $ per share. Your of $ on the sale is considered because the original Grebe stock has been held for than one year. Should you need more information or need clarification on our conclusion, do not hesitate to contact me. Sincerely yours, Heywood R. Floyd, CPA Partner
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
See Attached 5-48
Transcribed Image Text:b. Complete the memo for the file describing the tax consequences of the stock sale.
TAX FILE MEMORANDUM
DATE: February 17, 2021
FROM: Heywood R. Floyd
SUBJECT: Jacob Corcoran
Today I conferred with Jacob Corcoran regarding his letter of February 10th. Two years ago, Mr. Corcoran purchased 10,000
shares of Grebe Corporation for $24,000. Last year, he received a nontaxable stock dividend of 2,000 additional shares. He sold
the 2,000 shares this year for $18,000 and has asked me to determine the tax consequences of the sale.
Issue: How is the gain or loss determined on the sale of shares of stock received as nontaxable stock dividends determined, and
how is it taxed?
Conclusion: The shareholder's basis in the original 10,000 shares is reallocated to the 12,000 shares held after receiving the
stock dividend. His basis after the stock dividend is $
per share. His
on the sale of the
2,000 shares is $
. This is treated as
because the holding period of the original shares
Transcribed Image Text:Problem 5-48 (LO. 7)
Jacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000. Last year, Jacob received a nontaxable stock
dividend of 2,000 shares in Grebe Corporation. In the current tax year, Jacob sold all of the stock received as a dividend for $18,000.
a. Complete the letter to Jacob describing the tax consequences of the stock sale.
Raabe, Young, Nellen, Hoffman, & Maloney, CPAS
5191 Natorp Boulevard
Mason, OH 45040
February 17, 2021
Jacob Corcoran
925 Arapahoe Street
Boulder, CO 80304
Dear Mr. Corcoran:
This letter is in response to your question about the sale of the Grebe Corporation stock that you received as a nontaxable stock
dividend. Our conclusion is based upon the facts as outlined in your February 10th letter. Any change in facts may cause our
conclusion to be inaccurate.
Originally, you paid $24,000 for 10,000 shares of stock in Grebe Corporation, and last year a nontaxable stock dividend of 2,000
additional shares was received. The 2,000 shares were sold in the current year for $18,000. The
on the sale
of the 2,000 shares is determined by
your basis in the shares sold from the sales price. The tax basis in the
2,000 shares is $
per share. Your
v of $
on the sale is considered
because the original Grebe stock has been held for
than one year.
Should you need more information or need clarification on our conclusion, do not hesitate to contact me.
Sincerely yours,
Heywood R. Floyd, CPA
Partner
Expert Solution
Step 1
The non taxable distribution would be considered in the form of stock dividend, stock split. The distribution is not taxable when received by the investor and it will reduce the cost basis of the total number of shares held previously. The investors would be considered the capital gain when the non-taxable distribution would be sold. In that case, the income from the sale will be taxable.
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