$1.$ Tax Consequences on the Grant Date $(2018)$

On the grant date, no tax consequences occur for either Royce Lewis or Buxton Corporation.

Royce Lewis: There are no tax consequences at the time the nonqualified stock options $($NQOs$)$ are granted because Royce has not yet exercised the options. Since NQOs do not trigger immediate tax liability upon grant, Royce does not have any income at this point.

Buxton Corporation: There are no tax consequences to the company on the grant date either. The grant of NQOs does not result in any tax deduction for the company at the time of grant.

$2.$ Tax Consequences on the Exercise Date $(2020)$

When Royce exercises the NQOs, the tax consequences arise.

Royce Lewis:

Income Recognition: Royce recognizes ordinary income equal to the difference between the exercise price and the fair market value $($FMV$)$ of the stock at the time of exercise. The FMV of the stock on the exercise date is $$25$ per share, and the exercise price is $$12$ per share.

Ordinary income $=($$$25-$ $$12)500$ shares $=$ $$13500=$ $$6,500.$

Tax Rate: Royce$$s $$6,500$ of ordinary income is taxed at his marginal tax rate of $37\%.$

Tax Liability $=$ $$6,50037\%=$ $$2,405.$

The ordinary income is recognized in $2020$ when the options are exercised, and this is subject to payroll taxes as well.

Buxton Corporation:

Tax Deduction: Buxton Corporation receives a tax deduction equal to the amount of ordinary income that Royce recognizes from the exercise of the options. This is the same amount as Royce's ordinary income.

Tax Deduction $=$ $$6,500.$

Buxton Corporation will receive a tax deduction for the $$6,500$ at its corporate tax rate of $21\%.$

Tax Savings for Buxton $=$ $$6,50021\%=$ $$1,365.$

$3.$ Tax Consequences on the Sale Date $(2024)$

When Royce sells the stock, the tax consequences are related to capital gains.

Royce Lewis:

Capital Gain: Royce sells the $500$ shares for $$39$ per share. His basis in the shares is the exercise price of $$12$ per share plus the ordinary income he recognized on the exercise date $($$$6,500$ total$).$ Thus, Royce$$s basis in the shares is:

Basis per share $=$ $$12+($$$6,500500$ shares$)=$ $$12+$ $$13=$ $$25$ per share.

Capital Gain: Royce sells the stock for $$39$ per share, and his basis is $$25$ per share, so the capital gain per share is:

Capital Gain per share $=$ $$39-$ $$25=$ $$14.$Total Capital Gain $=$ $$14500$ shares $=$ $$7,000.$

Tax Rate: Royce's long$-$term capital gain rate is $20\%,$ as he holds the shares for more than one year after exercise.

Tax Liability $=$ $$7,00020\%=$ $$1,400.$

Buxton Corporation:

Tax Consequences: There are no tax consequences for Buxton Corporation when Royce sells the stock, as it is not involved in the sale transaction.

Summary of Tax Consequences:

On the Grant Date $(2018)$:

Royce Lewis: No tax consequences.Buxton Corporation: No tax consequences.

On the Exercise Date $(2020)$:

Royce Lewis: Recognizes $$6,500$ of ordinary income, subject to a $37\%$ tax rate, resulting in a tax liability of $$2,405.$Buxton Corporation: Receives a tax deduction of $$6,500,$ resulting in tax savings of $$1,365.$

On the Sale Date $(2024)$:

Royce Lewis: Recognizes $$7,000$ of long$-$term capital gain, subject to a $20\%$ tax rate, resulting in a tax liability of $$1,400.$Buxton Corporation: No tax consequences.