Question

Mark received 10 ISOs (each option gives him the right to purchase 14 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?

	Taxes Benefit Grant date Exercise date Sale date

Answer 1

Requirement a

ISOs are incentive stock options given as compensation to employees. ISOs comes with option to employees whether to exercise the shares or cash. It comes with grant date, exercise date along with other terms and conditions.

Mark has no tax consequences on the grant date.

Mark has no regular income tax consequences on the exercise date, but recognizes $3,920 for AMT, the calculations are as follows:

(1) Shares acquired	140	(10 x 14 shares)
(2) Exercise price	$7.00
(3) Cash needed to exercise	$980	(1) × (2)
(4) Market price	$35
(5) Market value of shares	$4,900	(1) × (4)
(6) Bargain	$3,920	(5) – (3)
*The bargain element is includable in AMTI, which may cause Mark to pay AMT.

In the year of sale, Mark should recognize $ 3,920 as long term capital and shall pay tax as computed below

Description	Amount	Explanation
(7) Shares acquired with NQOs	140	(1)
(8) Market price at sale	$35.00
(9) Amount Realized	$4,900	(7) × (8)
(10) Basis	$980	(3) above
(11) Long-term capital gain	$3,920	(9) - (10)
(12) Marginal Tax Rate	15%
Tax due in year of sale	$588	(11) × (12)

	Taxes Due
Grant Date	NIL
Exercise Date	NIL
Sale Date	$ 588

Requirement b

As the options are ISOs, Hendricks has no tax obligation on grant date, exercise date or sale date.

kindly upvote