Ruby Corporation grants stock options to Iris on February 1, 2017. The options do not have a readily ascertainable value. The option price is $100, and the FMV of the Ruby stock is also $100 on the grant date. The option allows Iris to purchase 200 shares of Ruby stock. Iris exercises the option on August 1, 2018, when the stock's FMV is $150. Iris sells the stock on December 5, 2019 for $400. Determine the amount and character (i.e., ordinary, LTCG or STCG) of income recognized by Iris and the deduction allowed Ruby Corporation in 2017, 2018 and 2019 under the following assumptions:a.The stock option is an incentive stock option.b.The stock option is a nonqualified stock option.
What will be an ideal response?
a. Incentive stock option
| ? | Iris' Income | Ruby Corp's Deduction |
| 2017 option grant | 0 | 0 |
| 2018 option exercise | 0 | 0 |
| 2019 stock sale | $60,000 LTCG 200 shares × ($400 - 100) | 0 |
| ? | Iris' Income | Ruby's Deduction |
| 2017 option grant | 0 | 0 |
| 2018 option exercise | $10,000 ordinary income 200 shares × ($150 - 100) | $10,000 |
| 2019 stock sale | $50,000 LTCG 200 shares × ($400 - 150) | 0 |
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