In 2009, Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company's incentive stock option plan at an exercise price of $17 per share. On January 4, 2014, Merlin exercises the option when the fair market value of the stock is $22 per share. Which of the following isare) correct statements? I. Noble can deduct $6,000 as compensation expense in 2014. II. Merlin does not recognize any income but must include $6,000 as a tax preference item in computing his alternative minimum taxable income.
A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.

Question

Quizplus · Accepted Answer

Merlin does not recognize any regular income upon exercising the incentive stock option, but the bargain element ($5 per share) is a tax preference item for AMT purposes. Noble cannot deduct the $6,000 as compensation expense because it is an incentive stock option.

In 2009, Merlin Received the Right to Acquire 1,200 Shares