Kevin and Diane have been your client for the past three years. At your recent tax meeting with them, they disclosed that they recently sold stock that they received as a gift from Diane's father about three years ago. They have a Form 1099-B in their name that shows the sale of the stock, which came to $70,000. Diane's father purchased the stock thirty years ago for $10,000, and it was worth $50,000 the day he gave it as a gift.

They areunder the impression that they don't have to report this sale on their tax return because they received the stock as a gift.

Also, they giveyou their Form 1099-DIV for the year, which shows that this same stock had a cash dividend of $3,798. They said that they received it in fourequal checks from the company over the course of the year. The formalso states that the dividend is a qualified dividend.

Task

In a research memo, explain to Kevin and Diane how to determine the taxability of both their stock saleandtheir cash dividend for the year.