Friends, Inc. grants 200 stock options to Phoebe, its CEO, on February 1, Year 2 when the stock has a fair market value of \($85\) per share. The terms are as follows:

• Exercise price is \($110\) per share.

• Phoebe can immediately exercise the option, it is traded on an exchange, and has a readily ascertainable value of \($60\) per share.

• Phoebe exercises the options on December 31, Year 3 when the stock is selling for \($135\) per share.
• Phoebe sells the 200 shares of stock for \($175\) per share on May 6, Year 5.
What are the tax consequences for this transaction?