In year 1, Incentive Corporation grants Jessica, an employee, an ISO to buy 1,000 shares of Incentive stock for $28 per share at any time during the next seven years. On the grant date, Incentive stock is selling for $26 per share. In year 5, when the stock is selling for $38 per share, Jessica exercises the option and pays $28,000 ($28 strike price × 1,000 shares) to the corporation for the 1,000 shares of stock. Jessica holds these shares until year 8, when she sells them for $128,000. How much income or gain does Jessica recognize and how much can Incentive Corporation deduct, respectively?
a. No income and no deduction
b. $26,000 ordinary income at date of grant and $26,000 deduction at date of grant
c. $10,000 ordinary income when options are exercised and $10,000 deduction when options are exercised
d. $100,000 capital gain when options are sold and no deduction