Question

Please help!

Mark received 10 ISOs at the time he started working for Hendricks Corporation five years ago, when Hendricks's price was $5 per share (each option gives him the right to purchase 10 shares of Hendricks Corporation stock for $5 per share). Now that Hendricks's share price is $35 per share, Mark intends to exercise all of his options and hold all of his shares for more than one year. Assume that more than a year after exercise, Mark sells the stock for $35 a share. What are Mark's tax consequences on the grant date, the exercise date, and the date he sells the shares, assuming his ordinary marginal rate is 32 percent and his long- term capital gains rate is 15 percent? (Leave no answer blank. Enter zero if applicable.) AMT Income Regular Taxable Income or Tax Due Capital Gains $ 3,000 $ $ 3,000 $ $ 3,000 $ $ $ Grant date Exercise date Date of sale olo $ 3,000 3,000 3,000 0 $

Answer 1

Mark has no tax consequences on the grant date.

Mark has no regular income tax consequences on the exercise date, but recognizes $3,000 for AMT, the calculations are as follows:

Description	Amount	Explanation
(1) Shares acquired	100	(10 x 10 shares)
(2) Exercise price	$5.00
(3) Cash needed to exercise	$500	(1) × (2)
(4) Market price	$35
(5) Market value of shares	$3,500	(1) × (4)
(6) Bargain Element (AMT preference)*	$3,000	(5) – (3)

*The bargain element is includable in AMTI, which may cause Mark to pay AMT.

In the year of sale, Mark recognizes $3,000 of long-term capital gain and pays tax of $450, the calculations are as follows:

Description	Amount	Explanation
(7) Shares acquired with ISOs	100	(1)
(8) Market price at sale	$35.00
(9) Amount Realized	$3,500	(7) × (8)
(10) Basis	$500	(3) above
(11) Long-term capital gain	$3,000	(9) - (10)
(12)Capital Gain Tax Rate	15%
Tax due in year of sale	$450	(11) × (12)