Grace is an officer of a local bank that merges with a national bank, resulting in a change of ownership. She loses her job as a result of the merger, but she receives a cash settlement of $590,000 from her employer under her golden parachute. Her average annual compensation for the past five tax years was $200,000.
a. What are the tax consequences to Grace and the bank of the $590,000 payment?
b. Assume instead that Grace's five-year average annual compensation was $110,000 and that she receives $390,000 in the settlement. What are the tax consequences to Grace and the bank?