Chapter 19, Problem 53P

a.

To determine

Compute the long-term capital gain and the ordinary income on the sale.

Explanation of Solution

Compute the amount of long-term capital gains:

$\begin{array}{c}\text{Long-term}\text{capitalgains}\text{=}\text{Number}\text{shares}\text{×}\left(\text{Selling}\text{price}-\text{Issue}\text{price}\right)\\ \text{=}\text{100}\text{shares}\text{×}\left(\text{\$140}-\text{\$100}\right)\\ \text{=}\text{\$4,000}\end{array}$

The amount of ordinary income is $0.

b.

To determine

Compute the long-term capital gain and the ordinary income on the sale by assuming that Person R holds the stock only seven months and sells the shares for $140 per share.

Explanation of Solution

Compute the amount of ordinary income:

$\begin{array}{c}\text{Ordinary}\text{income}\text{=}\text{Number}\text{shares}\text{×}\left(\text{Fair}\text{market}\text{value}-\text{Issue}\text{price}\right)\\ \text{=}\text{100}\text{shares}\text{×}\left(\text{\$120}-\text{\$100}\right)\\ \text{=}\text{\$2,000}\end{array}$

 The amount of Ordinary income is $2,000 (the spread), in addition to $2,000(1) STCG.

Working note:

(1) Compute the amount of Short-term capital gains:

$\begin{array}{c}\text{Long-term}\text{capital gains}\text{=}\text{Number of}\text{shares}\text{×}\left(\text{Selling}\text{price}-\text{Fair}\text{market}\text{value}\right)\\ \text{=}\text{100}\text{shares}\text{×}\left(\text{\$140}-\text{\$120}\right)\\ \text{=}\text{\$2,000}\end{array}$

c.

To determine

Calculate the amount that can be deducted by Corporation C in part (b).

Explanation of Solution

The same amount that Person R realized as ordinary income ($2,000) and at the same time might be deducted by Corporation C.

d.

To determine

Compute the long-term capital gain and the ordinary income on the sale by assuming that Person R holds the stock only seven months and sells the shares for $115 per share.

Explanation of Solution

Compute the amount of long-term capital gains:

$\begin{array}{c}\text{Long-term}\text{capital gains}\text{=}\text{Number of}\text{shares}\text{×}\left(\text{Selling}\text{price}-\text{Issue}\text{price}\right)\\ \text{=}\text{100}\text{shares}\text{×}\left(\text{\$115}-\text{\$100}\right)\\ \text{=}\text{\$1,500}\end{array}$

The amount of ordinary income is $0.

e.

To determine

Compute the amount of long-term capital gain and ordinary gain on the date of the sale by assuming that the options are non-qualified stock options with a non-ascertainable fair market value in the date of the grant.

Explanation of Solution

Compute the amount of long-term capital gains:

$\begin{array}{c}\text{Long-term}\text{capital gains}\text{=}\text{Number of}\text{shares}\text{×}\left(\text{Selling}\text{price}-\text{Fair}\text{market}\text{value}\right)\\ \text{=}\text{100}\text{shares}\text{×}\left(\text{\$140}-\text{\$120}\right)\\ \text{=}\text{\$2,000}\end{array}$

The amount of LTCG is $2,000 and Person S also realizes ordinary income of $\left[\text{100 shares ×}\left(\text{\$120}-\text{\$100}\right)\right]$ $2,000 on the exercise date.

f.

To determine

Compute the amount of long-term capital gain and ordinary gain on the date of the sale by assuming that the options has an ascertainable fair market value of $10 on the date of the grant.

Explanation of Solution

Compute the amount of long-term capital gains:

$\begin{array}{c}\text{Long-term}\text{capitalgains}\text{=}\text{Number}\text{shares}\text{×}\left(\text{Selling}\text{price}-\text{Fair}\text{market}\text{value}\right)\\ \text{=}\text{100}\text{shares}\text{×}\left(\text{\$140}-\text{\$110}\right)\\ \text{=}\text{\$3,000}\end{array}$

The amount of LTCG is $3,000 and Person S also realizes ordinary income of $\left[\text{100 shares}\times \text{\$10}\right]$ $1,000 on the date of exercise.

Note: $\text{\$100=}\text{\$100+\$10}$