In 2011,Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company's incentive stock option plan at an exercise price of $17 per share.On January 4,2016,Merlin exercises the option when the fair market value of the stock is $22 per share.Which of the following is(are)correct statements?
I.Noble can deduct $6,000 as compensation expense in 2016.
II.Merlin does not recognize any income but must include $6,000 as a tax preference item in computing his alternative minimum taxable income.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

In 2011,Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company's incentive stock option plan at an exercise price of $17 per share.On January 4,2016,Merlin exercises the option when the fair market value of the stock is $22 per share.Which of the following is(are)correct statements?
I.Noble can deduct $6,000 as compensation expense in 2016.
II.Merlin does not recognize any income but must include $6,000 as a tax preference item in computing his alternative minimum taxable income.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Merlin does not recognize any income for regular tax purposes when exercising an incentive stock option, but the difference between the fair market value and the exercise price ($6,000) is a tax preference item for AMT purposes. Noble cannot deduct this amount as a compensation expense.

In 2011,Merlin Received the Right to Acquire 1,200 Shares of Noble