To complete this assignment, please do the following:
Instructions
To complete this assignment, please do the following:
Homework 5B Simple Interest and OID
A bond had an issue price of $1,000, a redemption price of $1,000, and a coupon rate of 8% and pays semiannual interest on Feb 1 and Aug 1. On Oct 1, 2020, an investor buys the bond for $1,040. The investor sells the bond on May 1, 2022, for $1,050.
What is the investors basis in the bond?
If the investor is a cash basis taxpayer, how much interest income must the investor include in income in 2020, 2021, and 2022?
If the investor is an accrual basis taxpayer, how much interest income must the investor include in income in 2020, 2021, and 2022?
How much capital gain or loss would the investor realize in 2022?
X Corp issues a bond on April 1, 2021, with a maturity date of March 31, 2031. The redemption amount is 100,000, and the bonds were issued to the public. The first price paid for the bond was $55,000, but most of the bonds issued sold for $50,000. The annual yield to maturity on the bond is 7%. The bonds do not have a coupon. Assume that B bought the bond on the date it was issued for $50,000.
How much interest income will B include in its income for 2021 if B is a cash basis taxpayer? If B is an accrual basis taxpayer?
If B sells the bond on April 1, 2022, for $52,000, will B have a capital gain/loss? If so, how much?
Instructions
To complete this assignment, answer the following questions:
Constructive Ownership
Why was Sec. 1260 enacted?
Investor purchases a call option on the XYZ partnership with a strike price of $50 million and simultaneously sells a put option on the XYZ partnership with a strike price of $50 million. The purchase price of the call was $4 million, and the sales price of the put was $3 million. Both options expire in exactly 5 years. 5 years from now (2022), when the value of the partnership underlying the options is $90 million, the investor exercises the call option. If the investor owned the underlying partnership for the 5 years, $3 million of long-term gain would have flowed through to the investor. The investor sells the partnership in 2023, more than 1 year after the call was exercised, for $95 million, and no income or loss flowed through to the investor from the partnership while the investor owned the partnership.
How much gain or loss does the investor recognize in 2022? 2023?
What is the nature of the gain or loss in each year?
Constructive Sales
Why was Sec. 1259 enacted?
What is a strategy that may be employed to avoid Sec. 1259?
Investor has zero basis stock with a FMV of $50 million. The investor buys a put with a strike price of $47,500,000. The taxpayer writes a call with a strike price of $60 million. The options expire in 5 years. The investor paid $3 million for the put and received $3 million for the call. The taxpayer is an individual. The rate of tax on LTCG is 20% and on STCG 37%. How should they close the transaction based upon the following stock values 5 years from now?
Price goes to $44 million
Price goes to $5 million
Investor owns 1,000,000 shares of stock of Corp. XYZ with a zero basis and a FMV of 100,000,000 that the investor has held for 20 years. The investor sells 1,000,000 shares of XYZ short for $100,000,000 in February 2019. In July 2020 when the stock is worth $150,000,000, the investor delivers the shares it is holding to close out the short sale. What are the tax consequences in 2019 and 2020?
Investor owns 1,000,000 shares of stock of Corp. XYZ with a zero basis and a FMV of 100,000,000 that the investor has held for 20 years. The investor sells 1,000,000 shares of XYZ short for $100,000,000 in February 2019. On January 21, 2020, the investor purchases 1,000,000 shares with a normal settlement for 120,000,000 and instructs the broker to deliver those shares to close the short sale. XYZ paid 4 dividends during 2019. The ex-dividend dates were March 1, June 1, September 1, and December 1. The total amounts of the dividends were $5,000,000. The investor did not borrow any money with respect to the transaction and because interest rates were so low did not receive any rebate on the short sale proceeds. What are the tax consequences in 2019 and 2020? Assume that closing the short sale on January 21 makes the constructive sale go away.
