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Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share). She started working for MNL Corporation four years ago (5/1/Y1) when MNL’s stock price was $8 per share. Now (8/15/Y5) that MNL’s stock price is $40 per share, she intends to exercise all of her options. After acquiring the 1,000 MNL shares with her stock options, she held the shares for over one year and sold (on 10/1/Y6) them at $60 per share.

Required:
a. What are Cammie's taxes due on the grant date (5/1/ Y 1), exercise date (8/15/Y5) , and sale date (10/1/Y6), assuming her ordinary marginal rate is 30 percent and her long-term capital gains rate is 15 percent?
b. What are MNL Corporation's tax savings on grant date (5/1/Y6), exercise date (8/15/Y5), and sale date (10/1/Y6), assuming its marginal tax rate is 35 percent?
c. Complete Cammie's Form 8949 and Schedule D for the year of sale. Also assume that the sale transaction of the MNL Corporation stock was not reported to Cammie on a Form 1099-8.

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Answer:

Kindly check explanation

Explanation:

Given the following :

A.)

Ordinary marginal rate = 30% = 0.3

Long term capital gain = 15% = 0.15

Number of shares (100 * 10) = 1000 shares

Amount of shares = (number of shares * price per share) = (1000 * $10) = $10,000

Tax liability on grant date = $0 ; as there is no recognized income

Market value of shares = (number of shares * market price of shares)

(1000 * $40) = $40,000

Ordinary income = $(40,000 - 10,000) = $30,000

Tax liability in year of exercise = (30,000 * 30%) = $9000

Revenue from sale = (1000*$60) = $60,000

Capital gain(Revenue - market value of shares)

Capital gain = (60,000-40000) = $20000

Tax liability in year of sale = $20000 * 15% = 3000

B.)

Marginal tax rate = 35%

MNL has no tax liability on grant date= $0

No tax Liability on sale date = $0

Tax liability in year of exercise = (ordinary income * marginal tax rate)

(30,000 * 0.35) = $10,500