Ruby Corporation Grants Stock Options to Iris on February 1

question 1144

Essay

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, 20 2019 under the following assumptions:
a. The stock option is an incentive stock option.
b. The stock option is a nonqualified stock option.

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Definitions:

Independent Variable

A variable that is manipulated in an experiment to observe its effect on the dependent variable, without being influenced by other variables.

Dependent Variable

The variable in an experiment that is expected to change in response to manipulations of the independent variable.

Least Squares Regression Line

A straight line that minimizes the sum of the squared differences between the observed and theoretical values.

Predict

To make an educated guess about the outcome of an event based on current information or data analysis.