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Mary Jones, a senior manager at the CPA firm where you are employed, forwarded you an e- mail from a client (Caroline Wilson, the CFO of MTL Corporation). Mary asks you to write a internal memo to Jaqueline Noble, the CPA firm’s partner on the account, explaining the relevant tax issues and providing advice for the client. Mary wants you to submit the memo to the partner on Tuesday, November 10, 2020. Here is the e-mail from the client:
MTL Corporation is having a solid 2020 financial year! However, given the current economic uncertainty and the need to preserve cash, MTL’s Board of Directors has proposed the following changes to my compensation contract for 2020:
• Change the annual cash bonus of $100,000 to a stock bonus of 1,000 shares with a FMV of $100 per share
• Stock-option compensation, select one of two proposals:
o Non-qualified stock option (NQO) to purchase 1,200 shares o Incentive stock options (ISO) to purchase 1,200 shares
The stock bonus is expected to be approved by the Board of Directors on December 28, 2020 and awarded on December 31, 2020. I do not have to make any payment with regards to the stock bonus. For either the NQO or the ISO, the stock options will be granted on Nov 15, 2020 and vest on December 29, 2020 with an exercise price of $15. I plan to exercise on the vesting date as I expect the shares to appreciate further in over the next three years. The fair market value for the MTL shares is expected to be $100 per share on December 29, 2020. Stock market projections are for the shares to be valued at $150 per share on December 31, 2021. Regardless of which proposal I choose, I plan to sell the shares from the stock options at the end of 2021.
I want to understand how the award of a stock bonus and each of the two proposed stock options will affect my taxable income for 2020 and 2021. Which stock-option would you advise I choose? Also, I was wondering if you have any tax planning advice in regard to when I should exercise the stock options and/or sell the shares at the end of 2021, is there any tax benefits if I delay my plans? As you may recall, I am in the top marginal tax bracket (37%) for individual taxpayers. I look forward to your advice!
Chief Financial Officer MTL Corporation
Note: The assignment will be graded by the Ernst & Young Communication Center (EYCC) to provide you individualized professional feedback on your writing skills. Completed assignments should be submitted on D2L by 5: 00pm EST on Tuesday, November 10, 2020. Late assignments will not be accepted. Plagiarism, copying, or other academic misconduct will result in a zero for this assignment and may be reported to the Dean’s office. Here is a link to a video recording of EYCC’s presentation on business memo writing. You can also setup an appointment with EYCC to review a draft of your memo, details are in the video. Please ensure your memo is substantial complete before meeting with EYCC as there is only space for a single appointment per student.
|Category||Accounting & Finance||Level||Undergraduate|
|Budget||$30-50 (2-5 Pages/ Short Assignment) Approx.|
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