In 2014, Corporation X entered into a forward contract with Corporation Y whereby X would purchase 10 shares of ABC Corporation’s stock from Y for $10 on February 3, 2016. On February 3, 2015, the ABC Corporation stock had appreciated and the forward contract is worth $110. The forward contract settles on February 3, 2016 and X pays $10 for the ABC stock which is delivered to X on that date.
1. What must X include in gross income with respect to the foregoing transaction in 2015?
2. What must X include in gross income with respect to the foregoing transaction in 2016?
3. What are the tax consequences if X sells all 10 shares of ABC stock on February 3, 2017 at $12 a share?
4. Assume Y purchased 10 shares of ABC stock in 2000 at $5 a share. What are the tax consequences to Y when the forward contract settles on February 3, 2016?