During discussions relating to the formation of kingfisher, seth mentions that he may be interested in either (1) just selling all of his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in kingfisher's formation as shown above but followed by a sale of his stock five years later for $90,000. what would be the tax cost of these alternative plans, stated in present value terms?

Some assumptions made are: discount rate of 6%.

Seth's marginal income tax rate is 35% and his capital gains rate is 15%.

look below

Tax cost associated with the current sale of inventory for $96000

amount realized 96000

less : Adjusted basis - 30000

Ordinary gain recognized 66000

tax cost (66000*35%) 23100

Present value factor * 1.00

Present value of tax cost 23100

Tax cost associated with the current receipt of 30 kingfisher share, then sales in five years of $90000 shares

current ordinary gain of kingfisher $6,000

tax cost (66000*35%) $2,100

Present value factor * 1.00

Present value of tax cost

Capital gained on sale of kingfisher shares in five years

Amount realized 90000

less adjusted basis - 30000

capital gained recognized $60,000

tax cost (66000*15%) $9,000

Present value factor *.7473

Present value of tax cost 6726

Total present value of tax cost 8,826

Explanation:

During discussions relating to the formation of kingfisher, seth mentions that he may be interested in either (1) just selling all of his inventory in the current year for its fair market value of $96,000 or (2) proceeding with his involvement in kingfisher's formation as shown above but followed by a sale of his stock five years later for $90,000. what would be the tax cost of these alternative plans, stated in present value terms?

Some assumptions made are: discount rate of 6%.

Seth's marginal income tax rate is 35% and his capital gains rate is 15%.

look below

Tax cost associated with the current sale of inventory for $96000

amount realized 96000

less : Adjusted basis - 30000

Ordinary gain recognized 66000

tax cost (66000*35%) 23100

Present value factor * 1.00

Present value of tax cost 23100

Tax cost associated with the current receipt of 30 kingfisher share, then sales in five years of $90000 shares

current ordinary gain of kingfisher $6,000

tax cost (66000*35%) $2,100

Present value factor * 1.00

Present value of tax cost

Capital gained on sale of kingfisher shares in five years

Amount realized 90000

less adjusted basis - 30000

capital gained recognized $60,000

tax cost (66000*15%) $9,000

Present value factor *.7473

Present value of tax cost 6726

Total present value of tax cost 8,826