Question

Wilson Corporation granted an incentive stock option to Reva on January 1, 2018. The option price...

Wilson Corporation granted an incentive stock option to Reva on January 1, 2018. The option price was
$300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to
purchase 150 shares of Wilson stock. Reva exercised the option on August 1, 2020, when the stock's
FMV was $400. Reva sells the stock on December 5, 2021 for $450 per share. Determine the amount and character(i.e., ordinary, LTCG or STCG) of income recognized by Iris and the deduction allowed Ruby Corporation in 2017, 2019 and 2020 under the following assumptions:

a. The stock option is an incentive stock option.
Reva's Income (Ordinary/STCG/LTCG) Wilson's Deduction
2018 option grant
2020 option exercise
2021 stock sale
b. The stock option is a nonqualified stock option.
Reva's Income (Ordinary/STCG/LTCG) Wilson's Deduction
2018 option grant
2020 option exercise
2021 stock sale

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Answer #1

Given Option price =$300

FMV=$300

Purchase 150 shares

stocks FMV=$400

Sells 450 per share

Reva's Ordinary Income 2020= Purchase price(FMV-Option price)

=150(400-300)

=150*100

=$15000

Ordinary Income = $15000

On the exercise date, the employee Reva recognize Ordinary Income equal to the spread between the FMV and option price.

Hence employer Wilson is allowed a deduction equal to the employee Reva's income.

2021= Long Term Capital Gain =Purchase price(Sales price-FMV)

= 150(450-400)

=150*50

=$7500

Total $15000+$7500

= $22500

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