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:

Bond

A fixed-income investment in which an investor loans money to an entity (typically corporate or governmental) that borrows the funds for a defined period at a variable or fixed interest rate.

Premium

In finance, this term refers to the amount by which the price of a bond or stock exceeds its principal or face value, or to an additional payment above the normal cost.