On May 1, 2019, Peyton is granted the right to acquire 500 shares of Simon Corporation for $18 per share. The option qualifies under the company's incentive stock option plan. The current fair market value of the stock is $10. On September 18, 2020, when the stock is selling for $20 per share, Peyton exercises his option to purchase the stock. Peyton sells the shares on November 15, 2021, for $30 per share. Determine the tax consequences for Peyton and Simon Corporation on the:
a.Date of grantb.Date of exercisec.Date of sale
What will be an ideal response?
| a. | Peyton does not recognize any income at the date of grant. Because he does not recognize any ordinary income, Simon is not entitled to a compensation deduction. |
| b. | Peyton does not recognize any income on the date of exercise, and Simon is not entitled to a compensation deduction. However, the difference between the fair market value of the shares at the date of exercise ($20) and the exercise price ($18) is a tax preference in computing his alternative minimum tax liability. Peyton's tax preference is $1,000 [($20 - $18)×500]. Peyton's basis in the stock is $9,000 ($18×500). His holding period begins on the date of exercise. |
| c. | Peyton will recognize a long-term capital gain of $6,000 [($30 - $18)×500] on the sale of the stock. The gain is long-term because he has held the stock more than 12 months from the date of exercise. Simon is not entitled to a compensation deduction. |
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