26 U.S.C. § 421 : US Code - Section 421: General rules

Search 26 U.S.C. § 421 : US Code - Section 421: General rules

(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 -
(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;
(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
(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.
(c) Exercise by estate
(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 -
(A) the holding period and employment requirements of
sections 422(a) and 423(a) shall not apply, and
(B) any transfer by the estate of stock acquired shall be
considered a disposition of such stock for purposes of section
423(c).
(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.
(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
(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.
(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
(2) such share is disposed of by such person pursuant to a
certificate of divestiture (as defined in section 1043(b)(2)),
such disposition shall be treated as meeting the requirements of
section 422(a)(1) or 423(a)(1), whichever is applicable.