Pratt is ready to graduate and leave College Park. His future employer (Ferndale Corp.) offers the following four compensation packages from which Pratt may choose. Pratt will start working for Ferndale on January 1, year 1.

Benefit Description Option 1 Option 2 Option 3 Option 4 Salary $ 60,000 $50,000 $45,000 $45,000 Health insurance No coverage $ 5,000 $ 5,000 $ 5,000 Restricted stock 0 0 1,000 shares 0 NQD's 0 0 0 100 options ' Assume that the restricted stock is 1,000 shares that trade at $5 per share on the grant date (January 1, year 1); shares are expected to be worth $10 per share on the vesting date at the end of year 1; and no 83{b) election is made. Assume that the N005 (100 options) each allow the employee to purchase 10 shares at $5 exercise price. The stock trades at $5 per share on the grant date (January 1, year 1) and is expected to be worth $10 per share on the vesting date at the end of year 1, and the options are exercised and sold at the end ofthe year. Also assume that Pratt spends on average $3,000 on healthrelated costs that will be covered by insurance if he had coverage or is an after-tax expense if he isn't covered by insurance {treat this as a cash outflow). Assume that Pratt's marginal tax rate is 35 percent. {Ignore FICA taxes and time value of money considerations). Description Option 1 Option 2 Option 3 Option 4 Restricted stock V $ OV $ OV $ 10,000 $ Salary V $ 60,000 $ 50,000 $ 45,000 V $ 45,000 NQO's 0 0 0 V 5,000 Taxable Total $ 60,000 $ 50,000 $ 55,000 $ 50,000 Tax Rate 35% 35% 35% 35% Tax Paid 21,000 V $ 17,500 V $ 19,250 V $ 17,500 Cash paid at exercise $ 0 $ 0 $ 0 $ 5,000 After-tax cash value $ 39,000 $ 32,500 $ 35,750 27,500 Health care expenses V $ 3,000 $ 0 $ OV $ After-tax value $ 36,000 V $ 32,500 $ 35,750 V $ 27,500 VSCHEDULE D Capital Gains and Losses OMB No. 1545-0074 (Form 1040) Attach to Form 1040 or Form 1040NR. 2018 Department of the Treasury Go to www.irs.gov/ScheduleD for instructions and the latest information. Attachment Internal Revenue Service (99 Use Form 8949 to list your transactions for lines 1b, 2, 3, 8b, 9, and 10 Sequence No. 12 Name(s) shown on return Your social security number Part I Short-Term Capital Gains and Losses-Generally Assets Held One Year or Less (see instructions) See instructions for how to figure the amounts to enter on the (g) (h) Gain or (loss) lines below. (d) (e) Adjustments Subtract column (e) Proceeds Cost to gain or loss from from column (d) and This form may be easier to complete if you round off cents to sales price) (or other basis) Form(s) 8949, Part I, combine the result whole dollars. line 2, column (9) with column (9) 1a Totals for all short-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions) However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 1b 1b Totals for all transactions reported on Form(s) 8949 with Box A checked 2 Totals for all transactions reported on Form(s) 8949 with Box B checked 3 Totals for all transactions reported on Form(s) 8949 with Box C checked Short-term gain from Form 6252 and short-term gain or (loss) from Forms 4684, 6781, and 8824 4 5 Net short-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 . 5 6 Short-term capital loss carryover. Enter the amount, if any, from line 8 of your Capital Loss Carryover Worksheet in the instructions 6 7 Net short-term capital gain or (loss). Combine lines 1a through 6 in column (h). If you have any long- term capital gains or losses, go to Part II below. Otherwise, go to Part III on the back Part II Long-Term Capital Gains and Losses-Generally Assets Held More Than One Year (see instructions) See instructions for how to figure the amounts to enter on the (9) (h) Gain or (loss) lines below. (d) [e) Adjustments Subtract column (e) Cost from column (d) and This form may be easier to complete if you round off cents to Proceeds to gain or loss from (sales price) (or other basis) Form(s) 8949, Part II combine the result whole dollars. line 2, column (9) with column (g) 8a Totals for all long-term transactions reported on Form 1099-B for which basis was reported to the IRS and for which you have no adjustments (see instructions). However, if you choose to report all these transactions on Form 8949, leave this line blank and go to line 8b 8b Totals for all transactions reported on Form(s) 8949 with Box D checked 9 Totals for all transactions reported on Form(s) 8949 with Box E checked 10 Totals for all transactions reported on Form(s) 8949 with Box F checked. 11 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or (loss) from Forms 4684, 6781, and 8824 11 12 Net long-term gain or (loss) from partnerships, S corporations, estates, and trusts from Schedule(s) K-1 12 13 Capital gain distributions. See the instructions . 13 14 Long-term capital loss carryover. Enter the amount, if any, from line 13 of your Capital Loss Carryover Worksheet in the instructions 14 15 Net long-term capital gain or (loss). Combine lines 8a through 14 in column (h). Then go to Part III on the back . 15 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 11338H Schedule D (Form 1040) 2018Schedule D (Form 1040) 2018 Page 2 Part III Summary 16 Combine lines 7 and 15 and enter the result 16 . If line 16 is a gain, enter the amount from line 16 on Schedule 1 (Form 1040), line 13, or Form 1040NR, line 14. Then go to line 17 below. . If line 16 is a loss, skip lines 17 through 20 below. Then go to line 21. Also be sure to complete line 22. . If line 16 is zero, skip lines 17 through 21 below and enter -0- on Schedule 1 (Form 1040), line 13, or Form 1040NR, line 14. Then go to line 22. 17 Are lines 15 and 16 both gains? Yes. Go to line 18. No. Skip lines 18 through 21, and go to line 22. 18 If you are required to complete the 28% Rate Gain Worksheet (see instructions), enter the amount, if any, from line 7 of that worksheet D 18 19 If you are required to complete the Unrecaptured Section 1250 Gain Worksheet (see instructions), enter the amount, if any, from line 18 of that worksheet 19 20 Are lines 18 and 19 both zero or blank? Yes. Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040, line 11a (or in the instructions for Form 1040NR, line 42). Don't complete lines 21 and 22 below. No. Complete the Schedule D Tax Worksheet in the instructions. Don't complete lines 21 and 22 below. 21 If line 16 is a loss, enter here and on Schedule 1 (Form 1040), line 13, or Form 1040NR, line 14, the smaller of: . The loss on line 16; or 21 ($3,000), or if married filing separately, ($1,500 Note: When figuring which amount is smaller, treat both amounts as positive numbers. 22 Do you have qualified dividends on Form 1040, line 3a, or Form 1040NR, line 10b? Yes. Complete the Qualified Dividends and Capital Gain Tax Worksheet in the instructions for Form 1040, line 11a (or in the instructions for Form 1040NR, line 42). No. Complete the rest of Form 1040 or Form 1040NR. Schedule D (Form 1040) 2018