McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 14

{Planning} Yost received 300 NQOs (each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $15 per share) at the time he started working for Cutter Corporation three years ago.Cutter's stock price was $15 per share.Yost exercises all of his options when the share price is $26 per share.Two years after acquiring the shares, he sold them at $47 per share.
a.What are Yost's tax consequences (amount of income/gain recognized and amount of taxes payable) on the grant date, the exercise date, and the date he sells the shares, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?
b.What are Cutter Corporation's tax consequences (amount of deduction and tax savings from deduction) on the grant date, the exercise date, and the date Yost sells the shares assuming its marginal tax rate is 25 percent?
c.Assume that Yost is cash poor and needs to perform a same-day sale in order to buy his shares.Due to his belief that the stock price is going to increase significantly, he wants to maintain as many shares as possible.How many shares must he sell in order to cover his purchase price and taxes payable on the exercise?
d.Assume that Yost's options were exercisable at $20 and expired after five years.If the stock only reached $18 dollars during its high point during the five-year period, what are Yost's tax consequences on the grant date, the exercise date, and the date the shares are sold, assuming his ordinary marginal rate is 35 percent and his long-term capital gains rate is 15 percent?