Toni Carter is Founder, President, and CEO of Copi Corporation (the "company"), a company working on alternative energy solutions - specifically improving battery technology. The company was founded 15 years ago and went public 10 years ago. Because of the high start-up cost (especially research & development), the company did not become profitable until about 18 months ago. Ten years ago, when the stock price of the company was $6.50 per share, it granted 20 million stock option shares to Toni. Vesting requirements and other stock option information were as follows:

Toni remained CEO for the entire vesting period of 6 years.

• The two novel battery prototypes were successfully developed and built at the end of the vesting period. (According to the company's financials the company was able to develop the prototypes in five years.)
• The company's sales increased by 100% at the end of the vesting period.
• The strike price was set as the market price at the time of the grant.
• The options were valued using a stock option pricing model at $112 at the time of the grant.
• The options expire after 10 years - which is the current year.

Questions:

1. Are the stock options granted to Toni considered qualified or non-qualified stock options for tax purposes?
2. How should the stock option grant be reported on the company's books (financial statements and notes to financial statements)?
3. Assuming Toni decides to exercise the stock options, what will be the tax consequences of the stock options to the company?
4. Assuming Toni decides not to exercise the stock options, how will this be reported by the company?
5. Assuming Toni decides to exercise the stock options, what would be the tax consequences to Toni? (Hint: you need to consider both, federal and state income tax consequences.)
6. Do you have any recommendations for Toni and the company?

Other potentially relevant facts:

• The current economic and political climate suggests that the Company will do quite well this year. Thus, for the current year, the stock price is estimated to increase at least 20% above the year-end price of $1,200 per share.
• The company currently has 1,033 billion shares outstanding. Its market cap is around $1.24 trillion.
• The company has benefitted significantly from preferential tax treatment in the past. Due to the Federal (and State) Government's increased attention on renewable energy sources, this is likely going to continue.
• Toni lived in San Diego when the options were granted. Last year, she moved to Nevada - mostly for tax purposes but also because of a new project initiated by a collaboration between the University of Nevada Reno and the Desert Research Institute.
• The shareholders are concerned that Toni's stock option exercise could affect the market price of the shares. Keeping shareholders happy is important for the company - especially since Toni is a quite controversial CEO whose actions have affected the market price of the shares in the past.