Prompt 1
To qualify for the nonrecognition of gain treatment, the owner of the corporate stocks must meet the following requirements before, during, and after the sale of stocks to an Employee Stock Ownership Plan (ESOP).
The owner must have owned the corporate stocks for at least three years before the sale.
The owner of the corporate stocks must reinvest the profits from the sale into qualified replacement securities within one year after the sale. The owner must then hold such securities for at least three years ( Hobbs et al., n.d. ).
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Upon the sale by the owner, ESOP must have ownership of at least 30% of the corporation’s stock ( Hobbs et al., n.d. ).
ESOP must also hold the purchased corporate stocks for at least three years.
For the owner to be considered for nonrecognition of gain treatment, their company cannot be a public company ( Hobbs et al., n.d. ).
Prompt 2
Calculation of long-term capital gain/loss for this year.
Long-term capital gain/loss = Current value – Original value (“ How to Calculate Capital Gains - Short term & Long term Calculation”, 2021 )
Original Value = $ 165,000
Current Value (as of December this year) = $ 550,000
Long-term capital gain/loss = $ 550,000 - $ 165,000
Long-term capital gain = $ 385,000
Therefore, statement (a), which states that Marcus has a long-term capital gain of $ 385,000 for this year, is true. Marcus accrued long-term capital gains of $ 385,000 due to the rise in the market price of his employee stock options over the years.
Calculation of the long-term capital gain/loss for the next year
Since Marcus waited for a year before he could sell his stocks, the capital gains or losses can be considered to be long-term (“ How to Calculate Capital Gains - Short term & Long term Calculation”, 2021 ).
Original value (as of December this year) = $ 550,000
Current value (fourteen months later) = $ 400,000
Long-term capital gain/loss = $ 550,000 - $ 400,000
Long-term capital loss = $ 150,000
Therefore, statement (c), which states that Marcus has a long-term capital loss of $ 150,000 next year, is true. Despite taking full distribution of the employer stock from the plan when it had appreciated in value compared to the original value, the market value for the stock must have depreciated in the subsequent fourteen months, forcing Marcus to count his losses and sell the stock at $ 400,000.
Statement (b) and (d) are not entirely true. An earning is only considered as an ordinary income if it is taxable at ordinary rates. Ideally, contributions to ESOP are not subject to income tax. Therefore, $ 165,000 collected throughout the plan’s period cannot be considered an ordinary income. Instead, Marcus mainly accrued a long-term capital gain that is subjected to reduced taxation compared to ordinary incomes. Therefore, since statements (b) and (d) suggest that Marcus acquired an ordinary income of $ 165,000, they are not true.
References
Hobbs, J., Maxwell, G., & Heckler, J. (n.d.) Employee Stock Ownership Plans (ESOPs), Including S Corporation ESOPs and Anti Abuse Measures.
How to Calculate Capital Gains - Short term & Long term Calculation. (2021). Retrieved 30 March 2021, from https://www.bankbazaar.com/tax/how-calculate-capital-gains.html
