In 2014, Corporation X entered into a forward contract with Corporation Y whereb

Question

In 2014, Corporation X entered into a forward contract with Corporation Y whereby X would purchase 10 shares of ABC Corporation’s stock from Y for $10 on February 3, 2016. On February 3, 2015, the ABC Corporation stock had appreciated and the forward contract is worth $110. The forward contract settles on February 3, 2016 and X pays $10 for the ABC stock which is delivered to X on that date.

1. What must X include in gross income with respect to the foregoing transaction in 2015?

2. What must X include in gross income with respect to the foregoing transaction in 2016?

3. What are the tax consequences if X sells all 10 shares of ABC stock on February 3, 2017 at $12 a share?

4. Assume Y purchased 10 shares of ABC stock in 2000 at $5 a share. What are the tax consequences to Y when the forward contract settles on February 3, 2016?

Explanation / Answer

X entered in Forward contract date feb 16 with Mr Y for ABC Corporatation Stock for purchase of 10 shares @10$ each.

hence

1) No any income inculded in Mr. X income in 2015.

2) In Feb 16 shares value will be 110$ for which X have to Pay 100$ only. if X sales that shares in market in 2016 hence X income would be 10$

3)In terms of Income tax X has to pay capital gain on amount of Rs. 10 shares*(12-10)=20$

4)if Y purchase these shares @ 5 $ per share in 2000 and in 2016 sales @10$ per share then y have to pay long term capital gain on 10 share(10$-5$) = 50 $.

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