In 2007, BB granted an incentive stock option (ISO) to Mr. Y to buy 8,000 shares of BB stock at $7 per share for 10 years. At date of grant, BB stock was trading on the AMEX for $6.23 per share. In 2016, Mr. Y exercised the option when BB’s stock was trading at $22.81 per share.
a. How much income did Mr. Y recognize in 2007 and 2016 because of the ISO?
b. Compute Mr. Y’s basis in the 8,000 shares.
c. What are the tax consequences of the stock option to BB in 2007 and 2016?