On May 10, 2011, Somerton, Inc., grants Louise a nonqualified stock option to acquire 700 shares of

Question:

On May 10, 2011, Somerton, Inc., grants Louise a nonqualified stock option to acquire 700 shares of the company’s stock for $11 per share. The fair market value of the stock on the date of grant is $13. The option does not have a readily ascertainable fair market value. On June 1, 2011, when the fair market value of the stock is $15, Louise exercises the stock option. Determine the tax consequences for Louise and Somerton on the grant date of the option and the exercise date.