During 2011, Madame Martel exercised a stock option that she held in her employer (a CCPC). It is now November 2012. She is currently contemplating a number of scenarios in terms of the shares she received under the 2011 stock option exercise. She has asked you to explain the tax consequences of her actual and contemplated transactions.
The details of the stock option exercised during 2011 are as follows.

The current fair market value of a share is $42.
Madame Martel is married and has two children (ages 21 and 15). She is expecting large dividends to be paid on the above shares in December 2012 and each December on an ongoing basis. She also expects that the shares will increase in value quite considerably over the near future. As a result, she is looking for a means of splitting income with her immediate family. She is proposing the following scenarios in terms of distributing these shares amongst her immediate family:
(1) Gift the shares to her spouse and children (Vs to her spouse and Vs to each child);
(2) Sell the shares to her spouse and children Qh to her spouse and V3 to each child) for cash proceeds of $20 per share; or
(3) Sell the shares to her spouse and children (V3 to her spouse and 7:s to each child) in exchange for a note payable of $42 per share.
The note payable described in (3), above, will be payable over five years with no interest. Since the note pays no interest and is repayable over future years, the estimated present value of the note is $25 per share.
REQUIRED
Prepare a memorandum to Madame Martel explaining the income tax consequences of her completed and proposed transactions.

Transcribed Image Text:

Fair market value of Number of shares purchased Fair market value of shares at grant date $20 Exercise price shares at exercise date 6,000 $20 $35