Question

XYZ declared a $1 per share dividend on August 15. The date of record for the dividend was September 1 (the stock began selling ex-dividend on September 2). The dividend was paid on September 10. Ellis is a cash-method taxpayer. Determine the economic income and the amount he must include in gross income under the following independent circumstances.

a. Ellis bought 180 shares of XYZ stock on August 1 for $37 per share. Ellis received a $180 dividend on September 10. Ellis still owns the shares at year-end.

b. Ellis bought 180 shares of XYZ stock on August 1 for $37 per share. Ellis sold his XYZ shares on September 5 for $39 per share. Ellis received the $180 dividend on September 10 (note that even though Ellis didn’t own the stock on September 10, he still received the dividend because he was the shareholder on the record date).

c. Ellis bought 180 shares of XYZ stock for $38 per share on August 20. Ellis received the $180 dividend on September 10. Ellis still owns the shares at year-end.

Economic Income____________

Amount included in Gross Income___________

Answer 1

Q. a. Ellis bought 180 shares of XYZ stock on August 1 for $37 per share. Ellis received a $180 dividend on September 10. Ellis still owns the shares at year-end.

Ans.: Economic Income will $ 360, being the value addition in purchase value.  Amount Included in Gross Income will only be $ 180 dividend ,as the Shares are still owned at the year end. IMP is that Ellis is using Cash System hence the value addition will not be part of this year Income.

Q. b. Ellis bought 180 shares of XYZ stock on August 1 for $37 per share. Ellis sold his XYZ shares on September 5 for $39 per share. Ellis received the $180 dividend on September 10 (note that even though Ellis didn’t own the stock on September 10, he still received the dividend because he was the shareholder on the record date).

Ans.: Economic Income is Zero as all Income has already been realized. Gross Income will be $ 180 as Dividend Plus $360 as higher sale value. Total Gross Income will be $540.

Q. c. Ellis bought 180 shares of XYZ stock for $38 per share on August 20. Ellis received the $180 dividend on September 10.  Ellis still owns the shares at year-end.

Ans.: Economic Income will be $180 being the value addition in purchase value. Gross INcome will be dividend of $ 180.