Mark Patton never invested in the stock market before. He read about an innovative company called Space
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Question:
In December 2022, Space Explores successfully launches a prototype test space plane. Investors go wild and the stock goes up to a whopping $494 per share!!! Mark can't believe he made such a great investment. He tells his broker he intends to purchase the shares under his contract. In January 2023, when the stock is worth $502 per share, Mark pays $12,000 to buy the 1,000 shares, and immediately sells the shares for $502,000. Mark did not engage in any other stock trading in 2022 or 2023.
Question 2
What is the type of contract that Mark entered into?
A forward
An option
A swap
A straddle
Question 3
Mark is ready to file his 2022 tax return. He discusses his situation with 4 advisers, each of whom gives Mark conflicting advice. Which adviser is correct?
Mark's cousin Joe, a tax accountant who retired in 1997, tells Mark that he thinks he should include $481,763 in income in his 2022 tax return, because he intended to buy the shares at the end of 2022 when the stock was worth $494 per share ($494,000 - $12,000 - $237), but it has been several decades since Joe looked at the Tax Code or read the latest Tax journals.
Mark's nephew Tim, a Professor of Philosophy at the local university, tells Mark that he thinks he should include the $237 he paid for the contract as a deductible expense in 2022, but he does not have to recognize any income until 2023. After all, he actually paid the $237 in cash in 2022, but did not sell the stock until 2023, and philosophically, that sounds right. Tim never read a tax book in his life.
Mark's best friend and resident conspiracy theorist Verne tells Mark that he does not include anything on his tax returns because financial instruments and stocks are just fictions, and besides, paying taxes is voluntary.
Mark's old college classmate Lilly, a tax partner at a Big 4 accounting firm, tells Mark that he does not include anything on his 2022 tax return because he did not close out the contract in 2022. On his 2023 tax return, Mark will include $489,763 in income because he sold the shares when the stock was worth $504 per share ($504,000 - $12,000 - $237).
Related Book For
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley
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