Hi! I uploaded my question and the solution. For the question 2) d) , I want to know exact amount of gain and its calculation. Also I want to know what "XYZ receives no deduction" means. Thank you.
Hi! I uploaded my question and the solution. For the question 2) d) , I want to know exact amount of gain and its calculation. Also I want to know what “XYZ receives no deduction” means. Thank you.
Employee Compensation Solution
a) Courtney is highly independent.
She identifies her own customers to woo and designs
her own sales pitch.
ABC provides her with an office, but she only uses it occasionally
(since she is usually traveling).
Overall, the law would indicate that she is a contractor.
This designation would also be her preference, so that she can deduct all of her expenses
(and for AGI/AMT).
b) Courtney is less independent, since ABC tells her which customers to visit and how to
pitch to them.
Thus, the law would probably require her to be designated an employee.
This would be acceptable to Courtney, since she would be entitled as an employee to
participate in ABC’s fringes.
a) In 2009, Louis exercises the options.
These are taxed as ordinary income on the
difference between the market price ($78) and the exercise price ($12): (78-12) x 100,000 =
In 2009, XYZ deducts the same amount: $6,600,000.
In 2014, Louis has a
long-term capital gain on the stock sale of proceeds – basis = (130 – 78) x 100,000 =
b) Nothing changes from a).
c) No tax effects occur until 2014.
Then, Louis has a long-term capital gain of proceeds –
basis = (130 – 12) x 100,000 = $11,800,000.
XYZ has no deduction in any year.
d) Everything is the same as b), except that XYZ receives no deduction.
1) Discuss whether Courtney should be classified as an employee or contractor.
both the dictates of tax law and Courtney’s preferences.
Courtney is a salesperson for ABC, Inc.
She spends most of her time traveling
around the country and meeting with potential customers.
She develops her
own customer contacts, decides with whom she should meet, and crafts her own
ABC pays Courtney a 15% commission on all sales she makes
and doesn’t reimburse her for any of her expenses.
The company does provide
Courtney with an office when she is in town.
Same as a), but ABC pays Courtney a salary rather than commission and
reimburses her for all traveling expenses.
The company gives Courtney a list of
customers to visit and provides her with a standard sales pitch (that all of ABC’s
One of the reasons that Courtney chose to work for ABC was
its group health insurance and employee child care services.
2) Louis is CEO is XYZ, Inc.
On March 1, 2004, XYZ grants 100,000 options to Louis
with an exercise price of $12 per share.
The current market price of XYZ stock is $12.
May 12, 2009, Louis exercises the options and pays $1.2 million to XYZ for 100,000
The stock price on May 12, 2009 is $78.
On January 6, 2014, Louis sells the stock
for $130 per share.
Identify all the tax effects of these transactions under the following assumptions:
The options are NQOs and Louis pays no AMT.
The options are NQOs and Louis pays AMT.
The options are ISOs and Louis pays no AMT.
The options are ISOs and Louis pays AMT.