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Peter Press is in charge of manufacturing for MM and the CEO wants to make sure Peter is fully committed to MM. To do that, on April 22, 2014, MM granted Peter a nonqualified stock option (NSO) for 10,000 shares of MM stock with an exercise price of $5/share, which was the fair market value of the stock on that date. The option is exercisable any time over the next five years starting with the date of grant. If the option is exercised before April 22, 2017, Peter has to work until April 22, 2017 to vest in the stock. Assume the option does not have a readily ascertainable fair market value on April 22, 2014, the date of grant.
1.If Peter exercises the option immediately upon grant, what are the tax consequences to Peter and MM on the date of exercise? If a deduction is involved, what does MM have to do to make sure it gets the deduction?
2.Assume the same facts as question 1. What are the tax consequences to Peter and MM on the date of vesting April 22, 2017 if the stock is worth $15 a share? If a deduction is involved, what does MM have to do to make sure it gets the deduction?
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