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Mark received 10 ISOs (each option gives him the right to purchase 16 shares of Hendricks Corporation stock for $7 per share) at the time he started working for Hendricks Corporation five years ago when Hendricks’s stock price was $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. (Enter all amounts as positive values. Leave no answers blank. Enter zero if applicable.)

a. What are Mark’s taxes due 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?

Taxes Due Grant date Exercise date Sale date

b. What are Hendricks’s tax consequences on the grant date, the exercise date, and the date Mark sells the shares?

Answer 1

(a) No tax consequence is applicable to Mark on the grant date.

On the exercise date, Mark has no regular income tax consequences but he will be subject to alternate minimum tax, computation of which is provided as follows:

Amount 160 $7 Particulars |(1) Number of shares acquired (10 ISO 16 shares] (2) Exercise Price (3) Required cash for exercising the right [1*2] (4) Market Price (5) Market value of shares [104] (6) Bargain element [5 - 3] $1,120 $35 $5,600 $4,480

The bargain element is includable in alternative minimum taxable income computation, hence this will require Mark to pay alternate minimum tax.

On sale date, Mark will be subject to following taxes:

Particulars |(1) Number of shares acquired (10 ISO*16 shares) (2) Exercise Price (3) Cash basis [1*2] (4) Market Price (5) Market value of shares [1*4] (6) Long term capital gain [5 - 3] |(7) Capital gains rate (8) Tax liability [6*7] Amount 160 $7 $1,120 $35 $5,600 $4,480 15% $672

(b) Hendricks is not subject to any tax consequences on grant date, exercise date and sale date because the shares are allotted as a part of incentive stock options.