Question

Mr Fat Cat has decided to use the proceeds from the exercise of his SAR's of SCAT stock (Snacks 4 Cats, Inc) to help fund the exercise of his NQSOs. Mr Fat Cat received these options on January 5,2020, with an exercise price equal to the FMV at the date of the grant of $10. He then exercised the options on January 15, 2022, when the FMV of the stock was $50 and sold the stock on January 1, 2023 for $55. Which of the following statements are true?

1 At the date of the grant, Mr Fat Cat will have ordinary income of $10.
2. At the date of exercise, Mr Fat Cat wil havea positive AMT adjustmentof $40.
3. At the date of sale, Mr Fat Cat will have short term capital gain of $5.
4.Snacks 4Cats, Inc (the employer) will have adeductible expense in relation to this option of $50/share.
A. 1, 2, 3, and 4.
B. 1, 2, and 3.
C. 3 a n d 4.
D. 3 only

Answer 1

Mr. Fat Cat will have a short-term capital gain of $5 at the date of sale. The employer will not have a deductible expense in relation to this option of $50/share.

Step-by-step explanation:

To determine the accuracy of the given statements, we need to understand the tax implications of Mr. Fat Cat's stock options.

1. Statement 1: At the date of the grant, Mr. Fat Cat will not have ordinary income of $10. This is because ordinary income is recognized when the options are exercised, not when they are granted.
2. Statement 2: At the date of exercise, Mr. Fat Cat will have a positive AMT adjustment of $40. This statement is incorrect because there is no basis provided for calculating the AMT adjustment.
3. Statement 3: At the date of sale, Mr. Fat Cat will have a short-term capital gain of $5. This statement is correct because the selling price ($55) minus the exercise price ($50) equals a $5 gain.
4. Statement 4: Snacks4Cats, Inc. (the employer) will not have a deductible expense in relation to this option of $50/share. This is because the employer typically does not recognize any expense for nonqualified stock options.

Based on this analysis, the correct answer is Option D. 3 only.