Problem:
Randy, age 63, is a participant in the stock bonus plan of XYZ, Inc., a closely held corporation. Randy received contributions in shares of XYZ stock to the stock bonus plan and XYZ, Inc. had the following income tax deductions:
Year 1: 100 shares with $12 value at time of contribution
Year 2: 125 shares with $15 value at time of contribution
Year 3: 150 shares with $8 value at time of contribution
Year 4: 200 shares with $18 value at time of contribution
Year 5: 400 shares with $20 value at time of contribution
Total: 975 shares with $14.75 simple average price
Randy terminates employment in year 6 and takes a distribution from the plan of 975 shares of XYZ, Inc., having a fair market value of $24,000. Which of the following correctly describes Randy's tax consequences in year 6 from this distribution if Randy does not sell the XYZ stock until year 8?
A. Randy has ordinary income of $15,875 and long-term capital gain of $8,125 in year 6.
B. Randy has long-term capital gain of $24,000 in year 6.
C. Randy has ordinary income of $15,875 in year 6.
D. Randy has a long-term capital gain of $8,125 in year 6.