Solutions Chapter 4 - 29 Incentive Stock Options Three...

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29. Incentive Stock Options Three years ago, Netcom granted an ISO to Karen to buy 2,000 shares of Netcom stock at $6 per share exercisable for five years. At the date of the grant, Netcom stock was selling for $5 per share. This year, Karen exercises the ISO when the price is $30 per share. a. How much income should Karen have recognized in the year the ISO was granted? b. How much income does Karen recognize when she exercises the ISO? c. What are the tax consequences for Netcom from the ISO in the year of grant and in the year of exercise? d. What are the tax consequences to Karen and to Netcom if Karen sells all of the stock for $50 per share two years after exercising the options? Solution: a. Zero. No income is recognized when the option is granted. b. Zero. No taxable income when the option is exercised (however, the bargain element is subject to the alternative minimum tax). c. Zero. No tax consequences for Netcom in the year of grant or exercise.
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