Question

On January 1, year 1, Dave received 900 shares of restricted stock from his employer, RRK Corporation. On that date, the stock price was $11 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 $43 per share when his shares vest and will be $55 per share when he sells them. Assume that Dave’s price predictions are correct and answer the following questions: (Leave no answers blank. Enter zero if applicable. Round your final answer to the nearest whole dollar value. Enter all amounts as positive values.)

a. What are Dave’s taxes due if his ordinary marginal rate is 32 percent and his long-term capital gains rate is 15 percent?

	Taxes Due Grant date Vesting date $ Sale date

b. If Dave’s stock price predictions are correct, What are the tax consequences of these transactions to RRK?

	Tax Benefit Grant date Vesting date $0 Sale date $0

Answer 1

a.

Grant Date	$ 3,168
Vesting date	$ 0
Sale Date	$ 5,940

i) Dave’s tax consequences on the grant date is that he will recognize $9,900 of ordinary income and pay taxes of $3,168 which is calculated as follows:

Description	Amount	Explanation
1)Shares acquired	900
2) FMV at grant date	$ 11
3) Ordinary income on grant date	$ 9,900	(1) * (2)
4) Ordinary Marginal Tax Rate	32%
5) Tax due on grant date	$ 3,168	(3) * (4)

ii) Dave will owe no tax on vesting date as he elected sec 83(b)..

iii) Dave will owe $ 5,940 tax on sale, which is calculated as follows :

Description	Amount	Explanation
1) Amount realized	$ 49,500	$ 55 * 900 shares
2) Adjusted Basis	$ 9,900	From line (3) of (i)
3) Long term Capital Gain	$ 39,600	(1) - (2)
4) Preferential Rate	15%
5) Tax due on this date	$ 5,940	(3) * (4)

b.

Grant Date	$ 0
Vesting Date	$ 12,384
Sale Date	$ 0

II) RRK will receive a tax benefit of $12,384 on the vesting date, which is calculated as follows:

Description	Amount	Explanation
1) Shares acquired	900
2) FMV at vesting date	$ 43
3) Ordinary deduction on vesting date	$ 38,700	(1) * (2)
4) Ordinary Marginal Tax Rate	32%
5) Tax Benefit	$ 12,384	(3) *(4)

i) & III) RRK receives no benefit on the grant date or when Dave sells the shares.