Taxpayer has entered into a contract with Financial Institution (“FI”) in which Taxpayer will receive 75% of the fair market value (“FMV”) of publicly traded stock (“X”).  Taxpayer will be required to deliver the stock to Financial Institution in 5 years depending on the FMV of the stock at that time.  X stock currently trades at $100 per share, and Taxpayer has 10,000 shares.  Therefore, the current FMV is $1,000,000.  Taxpayer receives $750,000 and under the contract is obligated to: (i) transfer all 10,000 shares to FI if X trades below $100 in 5 years, (ii) transfer stock with a FMV of $1,000,000 to FI if X trades between $100 and $110 in 5 years, or (iii) transfer 9,090 X shares owned if X trades at $110 or above in 5 years.  Taxpayer had the option to settle in cash, as opposed to actually delivering the shares.  Taxpayer’s accountant is also the accountant for Taxpayer’s father (who also owns a substantial amount of X stock).  Unknown to Taxpayer, FI has a guarantee from Taxpayer’s father that he will loan 10,000 shares of X stock to FI for 5 years (which FI plans to use in a hedging transaction).

1) What is the significance of father’s guarantee to loan FI 10,000 shares of X stock during the 5 year period? 

2) Does father’s guarantee have any effect on Accountant as it relates to Accountant’s preparation of Taxpayer’s income tax return? 

Answer rating: 100% (QA)

Answer 1 Significance The fathers guarantee is the assurance for the FI in the case of defaults or breaches while entering contact with the taxpayer F... View the full answer