Question

Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $16 per share) at the time he started working for Cutter Corporation three years ago. Cutter’s stock price was $16 per share. Yost exercised all of his options when the share price was $24 per share. Two years after acquiring the shares, he sold them at $50 per share. (Input all amounts as positive values. Leave no answer blank. Enter zero if applicable.)

a. What are Yost’s amount of income/gain recognized and amount of taxes payable on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?

	Income Amount	Taxes Due
Grant Date
Exercise Date
Sale Date

b. What are Cutter Corporation’s tax consequences (amount of deduction and tax savings from deduction) on the grant date, the exercise date, and the date Yost sells the shares?

	Amount of Deduction	Tax Savings
Grant Date
Exercise Date
Sale Date

Answer 1

Answeto @ number of shares acquired = 300 x10 shores = 3000 Amount needed to exercise a noid shares acquired & strike price per share. 3000X 16 = 48,000 market value of shares = no shares acquired ymarket price 1 per share 3.3000 x 24 = 72,000 Ordinary income = market value cl shaxs - amount needed to exercise 72,000 -48,000 = 24,000 .. To diability in the year of suscice = ordinary income X marginal tax rate = 24,000x 351. 8400

Amount realized = 3000 X 50 = 150000 Long term capital gain = Amount realized --adjusted basis = 150000 - 72,000 = 78,000 Tas liability in the year of sale = long term capital gain x marginal tax rate = 1378,000x150). = 11700 on the darke when y exercise the option, corporcetion c docs not receive a deduction {qual to 24,000 (bargain amount). Thus, .. corporation chas no toa. consequences on the grant date or sale date 6 4 . Hart, assume marginal tax rate. is 25),

So Corporation c. receiry a tan bencft is, 24000x a 54. = 6000. in the year of exercise.