Martin Corporation granted an incentive stock option to employee Caroline on January 1,2010.The option price was $150,and the FMV of the Martin stock was also $150 on the grant date.The option allowed Caroline to purchase 160 shares of Martin stock.Caroline exercised the option on August 1,2012 when the stock's FMV was $250.Unless otherwise stated,assume Caroline is a qualifying employee.If Caroline sells the stock on September 5,2013 for $350 per share,she must recognize (ignore alternative minimum tax)

Question

Quizplus · Accepted Answer

No ordinary income is recognized at exercise because the FMV of the stock on the exercise date ($250) is greater than the option price ($150). Therefore, Caroline has a cost basis of $150 per share ($150 option price) for the 160 shares she purchased. When she sells the shares for $350 per share, she realizes a long-term capital gain of $200 per share ($350 sale price - $150 cost basis). Thus, her total long-term capital gain is $32,000 ($200 x 160 shares).

Martin Corporation Granted an Incentive Stock Option to Employee Caroline