Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(A)(i), renumbered section 425 of this title as this section.
Cases: Ellison v. Commissioner, 55 T.C. 142 (1970); Groetzinger v. Commissioner, 87 T.C. 533 (1986); Rolfs v. Commissioner, 58 T.C. 360 (1972)
Final rules 3
(a) Corporate reorganizations, liquidations, etc. For purposes of this part, the term “issuing or assuming a stock option in a transaction to which section 424(a) applies” means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if—
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(i), substituted “424(a)” for “425(a)”.
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(1) the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such shares is not more than the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, and
(2) the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option.
For purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection.
(b) Acquisition of new stock For purposes of this part, if stock is received by an individual in a distribution to which section 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, such stock shall be considered as having been transferred to him on his exercise of such option. A similar rule shall be applied in the case of a series of such distributions.
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(c) Disposition
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(1) In general Except as provided in paragraphs (2), (3), and (4), for purposes of this part, the term “disposition” includes a sale, exchange, gift, or a transfer of legal title, but does not include—
Amended 1983, 1988, 1989
- 1989 Pub. L. 101-239 Pub. L. 101–239 made technical correction to Pub. L. 100–647, § 1018(l)(2), see 1988 Amendment note below.
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(l)(2), as amended by Pub. L. 101–239, substituted “paragraphs (2), (3), and (4)” for “paragraphs (2) and (3)”.
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 102(j)(6)(B), substituted “paragraphs (2) and (3)” for “paragraph (2)”.
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(A) a transfer from a decedent to an estate or a transfer by bequest or inheritance;
(B) an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or
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(C) a mere pledge or hypothecation.
(2) Joint tenancy The acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership shall not be deemed a disposition, but a termination of such joint tenancy (except to the extent such employee acquires ownership of such stock) shall be treated as a disposition by him occurring at the time such joint tenancy is terminated.
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(3) Special rule where incentive stock is acquired through use of other statutory option stock
Amended 1983
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 102(j)(6)(A), added par. (3).
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(A) Nonrecognition sections not to apply If—
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(i) there is a transfer of statutory option stock in connection with the exercise of any incentive stock option, and
(ii) the applicable holding period requirements (under section 422(a)(1) or 423(a)(1)) are not met before such transfer,
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(ii), substituted “422(a)(1) or 423(a)(1)” for “422(a)(1), 422A(a)(1), 423(a)(1), or 424(a)(1)”.
then no section referred to in subparagraph (B) of paragraph (1) shall apply to such transfer.
(B) Statutory option stock For purpose of subparagraph (A), the term “statutory option stock” means any stock acquired through the exercise of an incentive stock option or an option granted under an employee stock purchase plan.
Amended 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188 substituted “an incentive stock option or an option granted under an employee stock purchase plan” for “a qualified stock option, an incentive stock option, an option granted under an employee stock purchase plan, or a restricted stock option”.
(4) Transfers between spouses or incident to divorce In the case of any transfer described in subsection (a) of section 1041—
Amended 1988
- 1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(l)(1), added par. (4).
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(A) such transfer shall not be treated as a disposition for purposes of this part, and
(B) the same tax treatment under this part with respect to the transferred property shall apply to the transferee as would have applied to the transferor.
(d) Attribution of stock ownership For purposes of this part, in applying the percentage limitations of sections 422(b)(6) and 423(b)(3)—
Amended 1981, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(iii), substituted “422(b)(6) and 423(b)(3)” for “422(b)(7), 422A(b)(6), 423(b)(3), and 424(b)(3)”.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 251(b)(2), inserted reference to section 422A(b)(6).
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(1) the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and
(2) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.
(e) Parent corporation For purposes of this part, the term “parent corporation” means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
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(f) Subsidiary corporation For purposes of this part, the term “subsidiary corporation” means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
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(g) Special rule for applying subsections (e) and (f) In applying subsections (e) and (f) for purposes of sections 422(a)(2) and 423(a)(2), there shall be substituted for the term “employer corporation” wherever it appears in subsections (e) and (f) the term “grantor corporation” or the term “corporation issuing or assuming a stock option in a transaction to which section 424(a) applies”, as the case may be.
Amended 1981, 1990, 2018
- 2018 Pub. L. 115-141 Pub. L. 115–141 substituted “sections 422(a)(2)” for “section 422(a)(2)”.
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(iv), substituted “422(a)(2) and 423(a)(2)” for “422(a)(2), 422A(a)(2), 423(a)(2), and 424(a)(2)” and “424(a)” for “425(a)”.
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 251(b)(3), inserted reference to section 422A(a)(2).
(h) Modification, extension, or renewal of option
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(1) In general For purposes of this part, if the terms of any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option.
(2) Special rule for section 423 options In the case of the transfer of stock pursuant to the exercise of an option to which section 423 applies and which has been so modified, extended, or renewed, the fair market value of such stock at the time of the granting of the option shall be considered as whichever of the following is the highest—
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(v)(I), added par. (2) and struck out former par. (2) which related to special rules for sections 423 and 424 options and to an exception that such rules would not apply with respect to a modification, extension or renewal of a restricted stock option before Jan. 1, 1964, if the aggregate of the monthly fair market value for 12 consecutive months before date of modification, etc., divided by 12 is an amount less than 80% of the fair market value of such stock on the date of original granting or the date of modification, etc., whichever is higher.
(A) the fair market value of such stock on the date of the original granting of the option,
(B) the fair market value of such stock on the date of the making of such modification, extension, or renewal, or
(C) the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal.
(3) Definition of modification The term “modification” means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option—
Amended 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(v)(III), struck out at end “If a restricted stock option is exercisable after the expiration of 10 years from the date such option is granted, subparagraph (B) shall not apply unless the terms of the option are also changed to make it not exercisable after the expiration of such period.”
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(A) attributable to the issuance or assumption of an option under subsection (a);
(B) to permit the option to qualify under section 423(b)(9); or
Amended 1981, 1984, 1990
- 1990 Pub. L. 101-508 Pub. L. 101–508, § 11801(c)(9)(F)(v)(II), substituted “section 423(b)(9)” for “sections 422(b)(6), 423(b)(9), and 424(b)(2)”.
- 1984 Pub. L. 98-369 Pub. L. 98–369 struck out reference to section 422A(b)(5).
- 1981 Pub. L. 97-34 Pub. L. 97–34, § 251(b)(4), inserted reference to section 422A(b)(5).
(C) in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised.
(i) Stockholder approval For purposes of this part, if the grant of an option is subject to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval.
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(j) Cross references For provisions requiring the reporting of certain acts with respect to a qualified stock option, an incentive stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039.
Amended 1983
- 1983 Pub. L. 97-448 Pub. L. 97–448, § 102(j)(5), inserted reference to an incentive stock option.