Internal Revenue Code:Sec. 421. General rules
From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.
From TaxAlmanac
Contents |
Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter D - Deferred Compensation, Etc.
PART II - CERTAIN STOCK OPTIONS
Statute
Sec. 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.
Sources
(Aug. 16, 1954, ch. 736, 68A Stat. 142; Pub. L. 85-320, Sec. 1,
Feb. 11, 1958, 72 Stat. 4; Pub. L. 85-866, title I, Sec. 25, 26(a),
Sept. 2, 1958, 72 Stat. 1623, 1624; Pub. L. 88-272, title II, Sec.
221(a), Feb. 26, 1964, 78 Stat. 63; Pub. L. 97-34, title II, Sec.
251(b)(1), Aug. 13, 1981, 95 Stat. 259; Pub. L. 101-508, title XI,
Sec. 11801(c)(9)(B), Nov. 5, 1990, 104 Stat. 1388-524.)
Miscellaneous
AMENDMENTS
2004 - Pub. L. 108-357, Sec 905. Section 421 (relating to general
rules for certain stock options) is amended by adding at the end the
following new subsection: "(d) Certain Sales To Comply With
Conflict-of-Interest Requirements..."
Effective Date.--The <<NOTE: 26 USC 421 note.>> amendment made
by this section shall apply to sales after the date of the enactment
of this Act.
2004 - Pub. L. 108-357 Sec 251(b). Section 421(b)
(relating to effect of disqualifying dispositions) is amended
by adding at the end the following new sentence: "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."
Effective Date.--The <<NOTE: 26 USC 421 note.>> amendments made
by this section shall apply to stock acquired pursuant to options
exercised after the date of the enactment of this Act.
1990 - Subsec. (a). Pub. L. 101-508, Sec. 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.
Subsec. (a)(1). Pub. L. 101-508, Sec. 11801(c)(9)(B)(i)(II),
struck out ''except as provided in section 422(c)(1),'' before ''no
income''.
Subsec. (a)(2). Pub. L. 101-508, Sec. 11801(c)(9)(B)(i)(III),
substituted ''424(a)'' for ''425(a)''.
Subsec. (b). Pub. L. 101-508, Sec. 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),''.
Subsec. (c)(1)(A). Pub. L. 101-508, Sec. 11801(c)(9)(B)(iii)(I),
substituted ''422(a) and 423(a)'' for ''422(a), 422A(a), 423(a),
and 424(a)''.
Subsec. (c)(1)(B). Pub. L. 101-508, Sec. 11801(c)(9)(B)(iii)(II),
substituted ''section 423(c)'' for ''sections 423(c) and
424(c)(1)''.
Subsec. (c)(2), (3)(A). Pub. L. 101-508, Sec.
11801(c)(9)(B)(iii)(III), substituted ''423(c)'' for ''422(c)(1),
423(c), or 424(c)(1)'' wherever appearing.
Subsec. (c)(3)(B). Pub. L. 101-508, Sec. 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''.
1981 - Subsecs. (a), (b), (c)(1)(A). 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).
1964 - 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.
1958 - Subsec. (a). Pub. L. 85-866, Sec. 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''.
Subsec. (d)(6)(C). Pub. L. 85-320 added subpar. (C).
Subsec. (d)(1)(A)(ii). Pub. L. 85-866, Sec. 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''.
Subsec. (d)(7). Pub. L. 85-866, Sec. 26(a)(2), added par. (7).
EFFECTIVE DATE OF 1981 AMENDMENT
Amendment by Pub. L. 97-34 applicable with respect to options
granted on or after Jan. 1, 1976, and exercised on or after Jan. 1,
1981, or outstanding on Jan. 1, 1981, or granted on or after Jan.
1, 1976, and outstanding Aug. 13, 1981, see section 251(c) of Pub.
L. 97-34, set out as an Effective Date note under section 422 of
this title.
EFFECTIVE DATE OF 1964 AMENDMENT
Section 221(e) of Pub. L. 88-272, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
''(1) Except as provided in paragraphs (2) and (3), the
amendments made by this section (enacting sections 422 to 425 and
6039, amending this section, sections 402, 691, 6652, 6678, and the
analysis preceding sections 401 and 6031, and renumbering section
3039 as 3040 of this title) shall apply to taxable years ending
after December 31, 1963.
''(2) The amendments made by paragraphs (1) and (3) of subsection
(b) (enacting section 3039, renumbering former section 3039 as
3040, and amending section 6678 of this title) and paragraph (2) of
section 6652(a) of the Internal Revenue Code of 1986 (formerly
I.R.C. 1954) (as amended by paragraph (2) of subsection (b)), shall
apply to stock transferred pursuant to options exercised on or
after January 1, 1964.
''(3) In the case of an option granted after December 31, 1963,
and before January 1, 1965 -
''(A) paragraphs (1) and (2) of section 422(b) of the Internal
Revenue Code of 1986 (as added by subsection (a)), shall not
apply, and
''(B) paragraph (1) of section 425(h) of such Code (as added by
subsection (a)), shall not apply to any change in the terms of
such option made before January 1, 1965, to permit such option to
qualify under paragraphs (3), (4), and (5) of such section
422(b).''
EFFECTIVE DATE OF 1958 AMENDMENTS
Amendment by section 25 of Pub. L. 85-866 applicable to taxable
years beginning after Dec. 31, 1953, and ending after Aug. 16,
1954, see section 1(c)(1) of Pub. L. 85-866, set out as a note
under section 165 of this title.
Section 26(b) of Pub. L. 85-866 provided that: ''The amendments
made by subsection (a) (amending this section) shall apply with
respect to taxable years ending after September 30, 1958.''
Section 3 of Pub. L. 85-320 provided that: ''The amendments made
by this Act (amending this section and section 1014 of this title)
shall apply with respect to taxable years ending after December 31,
1956, but only in the case of employees dying after such date.''
SAVINGS PROVISION
For provisions that nothing in amendment by Pub. L. 101-508 be
construed to affect treatment of certain transactions occurring,
property acquired, or items of income, loss, deduction, or credit
taken into account prior to Nov. 5, 1990, for purposes of
determining liability for tax for periods ending after Nov. 5,
1990, see section 11821(b) of Pub. L. 101-508, set out as a note
under section 29 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 56, 83, 422, 423, 691 of
this title.
