Amended 1964
- 1964 Pub. L. 88-272 Pub. L. 88–272 amended section generally, and among other changes, inserted provisions relating to the effect of a qualifying transfer, and to the basis of shares acquired when an option is exercised by an estate, and omitted provisions relating to treatment of restricted stock options, a special rule where option price was between 85 percent and 95 percent of value of stock, acquisition of new stock, definitions, modification, extension, or renewal of option, and corporate reorganizations, liquidations, etc. See sections 421 to 425 of this title.
Cases: Luckman v. Commissioner, 418 F.2d 381 (7th Cir. 1969); Bagley v. Commissioner, 85 T.C. 663 (1985); Montgomery v. Commissioner, 127 T.C. 43 (2006)
Final rules 3
(a) Effect of qualifying transfer If a share of stock is transferred to an individual in a transfer in respect of which the requirements of section 422(a) or 423(a) are met—
Amended 1958, 1981, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(i)(I), substituted “422(a) or 423(a)” for “422(a), 422A(a), 423(a), or 424(a)” in introductory provisions.
- 1981 Pub. L. 97-34 Pub. L. 97–34 inserted references to section 422A(a) in subsecs. (a), (b), and (c)(1)(A) and to section 422A(a)(1) in subsec. (b).
- 1958 Pub. L. 85-866 Pub. L. 85–866, § 25, inserted sentence authorizing substitution of “grantor corporation” or “corporation issuing or assuming a stock option in a transaction to which subsection (g) is applicable” for “employer corporation”.
Cited by 11
(1) no income shall result at the time of the transfer of such share to the individual upon his exercise of the option with respect to such share;
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(i)(II), struck out “except as provided in section 422(c)(1),” before “no income”.
(2) no deduction under section 162 (relating to trade or business expenses) shall be allowable at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or assuming a stock option in a transaction to which section 424(a) applies, with respect to the share so transferred; and
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(i)(III), substituted “424(a)” for “425(a)”.
(3) no amount other than the price paid under the option shall be considered as received by any of such corporations for the share so transferred.
(b) Effect of disqualifying disposition If the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of section 422(a) or 423(a) except that there is a failure to meet any of the holding period requirements of section 422(a)(1) or 423(a)(1), then any increase in the income of such individual or deduction from the income of his employer corporation for the taxable year in which such exercise occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year of such individual or of such employer corporation in which such disposition occurred. No amount shall be required to be deducted and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.
Amended 1981, 1990, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 251(b), inserted at end “No amount shall be required to be deducted and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.”
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(ii), substituted “422(a) or 423(a)” for “422(a), 422A(a), 423(a), or 424(a)” and “422(a)(1) or 423(a)(1),” for “422(a)(1), 422A(a)(1), 423(a)(1), or 424(a)(1),”.
- 1981 Pub. L. 97-34 Pub. L. 97–34 inserted references to section 422A(a) in subsecs. (a), (b), and (c)(1)(A) and to section 422A(a)(1) in subsec. (b).
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(c) Exercise by estate
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(1) In general If an option to which this part applies is exercised after the death of the employee by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the provisions of subsection (a) shall apply to the same extent as if the option had been exercised by the decedent, except that—
Cited by 2
(A) the holding period and employment requirements of sections 422(a) and 423(a) shall not apply, and
Amended 1981, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(iii)(I), substituted “422(a) and 423(a)” for “422(a), 422A(a), 423(a), and 424(a)”.
- 1981 Pub. L. 97-34 Pub. L. 97–34 inserted references to section 422A(a) in subsecs. (a), (b), and (c)(1)(A) and to section 422A(a)(1) in subsec. (b).
(B) any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of section 423(c).
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(iii)(II), substituted “section 423(c)” for “sections 423(c) and 424(c)(1)”.
(2) Deduction for estate tax If an amount is required to be included under section 423(c) in gross income of the estate of the deceased employee or of a person described in paragraph (1), there shall be allowed to the estate or such person a deduction with respect to the estate tax attributable to the inclusion in the taxable estate of the deceased employee of the net value for estate tax purposes of the option. For this purpose, the deduction shall be determined under section 691(c) as if the option acquired from the deceased employee were an item of gross income in respect of the decedent under section 691 and as if the amount includible in gross income under section 423(c) were an amount included in gross income under section 691 in respect of such item of gross income.
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(iii)(III), substituted “423(c)” for “422(c)(1), 423(c), or 424(c)(1)” wherever appearing.
Cited by 3
(3) Basis of shares acquired In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies—
(A) the basis of such share shall include so much of the basis of the option as is attributable to such share; except that the basis of such share shall be reduced by the excess (if any) of (i) the amount which would have been includible in gross income under section 423(c) if the employee had exercised the option on the date of his death and had held the share acquired pursuant to such exercise at the time of his death, over (ii) the amount which is includible in gross income under such section; and
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(iii)(III), substituted “423(c)” for “422(c)(1), 423(c), or 424(c)(1)” wherever appearing.
(B) the last sentence of section 423(c) shall apply only to the extent that the amount includible in gross income under such section exceeds so much of the basis of the option as is attributable to such share.
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(B)(iii)(IV), (V), substituted “section 423(c)” for “sections 422(c)(1), 423(c), and 424(c)(1)” and “such section” for “such sections”.
(d) Certain sales to comply with conflict-of-interest requirements If—
(1) a share of stock is transferred to an eligible person (as defined in section 1043(b)(1)) pursuant to such person’s exercise of an option to which this part applies, and needs § 1043(b)(1)
Amended 1958
- 1958 Pub. L. 85-866 Pub. L. 85–866, § 26(a)(1), substituted “in the case of a variable price option” for “in case the purchase price of the stock under the option is fixed or determinable under a formula in which the only variable is the value of the stock at any time during a period of 6 months which includes the time the option is exercised” and inserted “fair” before “market value”.
(2) such share is disposed of by such person pursuant to a certificate of divestiture (as defined in section 1043(b)(2)), needs § 1043(b)(2)
such disposition shall be treated as meeting the requirements of section 422(a)(1) or 423(a)(1), whichever is applicable.
The term “certificate of divestiture” means any written determination—
“Reasonably” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)
Amended 1958, 2004
- 2004 Pub. L. 108-357 Pub. L. 108–357, § 905(a), added subsec. (d).
- 1958 Pub. L. 85-320 Pub. L. 85–320 added subpar. (C).
- 1958 Pub. L. 85-866 Pub. L. 85–866, § 26(a)(2), added par. (7).