Internal Revenue Code:Sec. 422. Incentive stock options
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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. 422. Incentive stock options
(a) In general
Section 421(a) shall apply with respect to the transfer of a
share of stock to an individual pursuant to his exercise of an
incentive stock option if -
(1) no disposition of such share is made by him within 2 years
from the date of the granting of the option nor within 1 year
after the transfer of such share to him, and
(2) at all times during the period beginning on the date of the
granting of the option and ending on the day 3 months before the
date of such exercise, such individual was an employee of either
the corporation granting such option, a parent or subsidiary
corporation of such corporation, or a corporation or a parent or
subsidiary corporation of such corporation issuing or assuming a
stock option in a transaction to which section 424(a) applies.
(b) Incentive stock option
For purposes of this part, the term ''incentive stock option''
means an option granted to an individual for any reason connected
with his employment by a corporation, if granted by the employer
corporation or its parent or subsidiary corporation, to purchase
stock of any of such corporations, but only if -
(1) the option is granted pursuant to a plan which includes the
aggregate number of shares which may be issued under options and
the employees (or class of employees) eligible to receive
options, and which is approved by the stockholders of the
granting corporation within 12 months before or after the date
such plan is adopted;
(2) such option is granted within 10 years from the date such
plan is adopted, or the date such plan is approved by the
stockholders, whichever is earlier;
(3) such option by its terms is not exercisable after the
expiration of 10 years from the date such option is granted;
(4) the option price is not less than the fair market value of
the stock at the time such option is granted;
(5) such option by its terms is not transferable by such
individual otherwise than by will or the laws of descent and
distribution, and is exercisable, during his lifetime, only by
him; and
(6) such individual, at the time the option is granted, does
not own stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the employer
corporation or of its parent or subsidiary corporation.
Such term shall not include any option if (as of the time the
option is granted) the terms of such option provide that it will
not be treated as an incentive stock option.
(c) Special rules
(1) Good faith efforts to value of stock
If a share of stock is transferred pursuant to the exercise by
an individual of an option which would fail to qualify as an
incentive stock option under subsection (b) because there was a
failure in an attempt, made in good faith, to meet the
requirement of subsection (b)(4), the requirement of subsection
(b)(4) shall be considered to have been met. To the extent
provided in regulations by the Secretary, a similar rule shall
apply for purposes of subsection (d).
(2) Certain disqualifying dispositions where amount realized is
less than value at exercise
If -
(A) an individual who has acquired a share of stock by the
exercise of an incentive stock option makes a disposition of
such share within either of the periods described in subsection
(a)(1), and
(B) such disposition is a sale or exchange with respect to
which a loss (if sustained) would be recognized to such
individual,
then the amount which is includible in the gross income of such
individual, and the amount which is deductible from the income of
his employer corporation, as compensation attributable to the
exercise of such option shall not exceed the excess (if any) of
the amount realized on such sale or exchange over the adjusted
basis of such share.
(3) Certain transfers by insolvent individuals
If an insolvent individual holds a share of stock acquired
pursuant to his exercise of an incentive stock option, and if
such share is transferred to a trustee, receiver, or other
similar fiduciary in any proceeding under title 11 or any other
similar insolvency proceeding, neither such transfer, nor any
other transfer of such share for the benefit of his creditors in
such proceeding, shall constitute a disposition of such share for
purposes of subsection (a)(1).
(4) Permissible provisions
An option which meets the requirements of subsection (b) shall
be treated as an incentive stock option even if -
(A) the employee may pay for the stock with stock of the
corporation granting the option,
(B) the employee has a right to receive property at the time
of exercise of the option, or
(C) the option is subject to any condition not inconsistent
with the provisions of subsection (b).
Subparagraph (B) shall apply to a transfer of property (other
than cash) only if section 83 applies to the property so
transferred.
(5) 10-percent shareholder rule
Subsection (b)(6) shall not apply if at the time such option is
granted the option price is at least 110 percent of the fair
market value of the stock subject to the option and such option
by its terms is not exercisable after the expiration of 5 years
from the date such option is granted.
(6) Special rule when disabled
For purposes of subsection (a)(2), in the case of an employee
who is disabled (within the meaning of section 22(e)(3)), the
3-month period of subsection (a)(2) shall be 1 year.
(7) Fair market value
For purposes of this section, the fair market value of stock
shall be determined without regard to any restriction other than
a restriction which, by its terms, will never lapse.
(d) $100,000 per year limitation
(1) In general
To the extent that the aggregate fair market value of stock
with respect to which incentive stock options (determined without
regard to this subsection) are exercisable for the 1st time by
any individual during any calendar year (under all plans of the
individual's employer corporation and its parent and subsidiary
corporations) exceeds $100,000, such options shall be treated as
options which are not incentive stock options.
(2) Ordering rule
Paragraph (1) shall be applied by taking options into account
in the order in which they were granted.
(3) Determination of fair market value
For purposes of paragraph (1), the fair market value of any
stock shall be determined as of the time the option with respect
to such stock is granted.
Sources
(Added Pub. L. 97-34, title II, Sec. 251(a), Aug. 13, 1981, 95
Stat. 256, Sec. 422A; amended Pub. L. 97-448, title I, Sec.
102(j)(1)-(4), Jan. 12, 1983, 96 Stat. 2373; Pub. L. 98-369, div.
A, title V, Sec. 555(a)(1), div. B, title VI, Sec. 2662(f)(1),
July 18, 1984, 98 Stat. 897, 1159; Pub. L. 99-514, title III, Sec.
321(a), (b), title XVIII, Sec. 1847(b)(5), Oct. 22, 1986, 100 Stat.
2220, 2856; Pub. L. 100-647, title I, Sec. 1003(d)(1)(A), (2), Nov.
10, 1988, 102 Stat. 3384; renumbered Sec. 422 and amended Pub. L.
101-508, title XI, Sec. 11801(c)(9)(A)(i), (C), Nov. 5, 1990, 104
Stat. 1388-524, 1388-525.)
Miscellaneous
PRIOR PROVISIONS
A prior section 422, added Pub. L. 88-272, title II, Sec. 221(a),
Feb. 26, 1964, 78 Stat. 64; amended Pub. L. 94-455, title VI, Sec.
603(a), (b), title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat.
1574, 1834; Pub. L. 96-589, Sec. 6(i)(3), Dec. 24, 1980, 94 Stat.
3410, related to qualified stock options, prior to repeal by Pub.
L. 101-508, title XI, Sec. 11801(a)(20), Nov. 5, 1990, 104 Stat.
1388-521. For savings provision, see section 11821(b) of Pub. L.
101-508, set out as a note under section 29 of this title.
AMENDMENTS
1990 - Pub. L. 101-508, Sec. 11801(c)(9)(A)(i), renumbered
section 422A of this title as this section.
Subsec. (a)(2). Pub. L. 101-508, Sec. 11801(c)(9)(C)(i),
substituted ''424(a)'' for ''425(a)''.
Subsec. (c)(5) to (8). Pub. L. 101-508, Sec. 11801(c)(9)(C)(ii),
redesignated pars. (6) to (8) as (5) to (7), respectively, and
struck out former par. (5) ''Coordination with sections 422 and
424'' which read as follows: ''Sections 422 and 424 shall not apply
to an incentive stock option.''
1988 - Subsec. (b). Pub. L. 100-647, Sec. 1003(d)(1)(A), inserted
at end ''Such term shall not include any option if (as of the time
the option is granted) the terms of such option provide that it
will not be treated as an incentive stock option.''
Subsec. (b)(7). Pub. L. 100-647, Sec. 1003(d)(2)(B), struck out
par. (7) which read as follows: ''under the terms of the plan, the
aggregate fair market value (determined at the time the option is
granted) of the stock with respect to which incentive stock options
are exercisable for the 1st time by such individual during any
calendar year (under all such plans of the individual's employer
corporation and its parent and subsidiary corporations) shall not
exceed $100,000.''
Subsec. (c)(1). Pub. L. 100-647, Sec. 1003(d)(2)(C), substituted
''subsection (d)'' for ''paragraph (7) of subsection (b)''.
Subsec. (d). Pub. L. 100-647, Sec. 1003(d)(2)(A), added subsec.
(d).
1986 - Subsec. (b)(7). Pub. L. 99-514, Sec. 321(a), added par.
(7) and struck out former par. (7) which read as follows: ''such
option by its terms is not exercisable while there is outstanding
(within the meaning of subsection (c)(7)) any incentive stock
option which was granted, before the granting of such option, to
such individual to purchase stock in his employer corporation or in
a corporation which (at the time of the granting of such option) is
a parent or subsidiary corporation of the employer corporation, or
in a predecessor corporation of any of such corporations; and''.
Subsec. (b)(8). Pub. L. 99-514, Sec. 321(a), struck out par. (8)
which read as follows: ''in the case of an option granted after
December 31, 1980, under the terms of the plan the aggregate fair
market value (determined as of the time the option is granted) of
the stock for which any employee may be granted incentive stock
options in any calendar year (under all such plans of his employer
corporation and its parent and subsidiary corporation) shall not
exceed $100,000 plus any unused limit carryover to such year.''
Subsec. (c)(1). Pub. L. 99-514, Sec. 321(b)(2), substituted
''paragraph (7) of subsection (b)'' for ''paragraph (8) of
subsection (b) and paragraph (4) of this subsection''.
Subsec. (c)(4). Pub. L. 99-514, Sec. 321(b)(1), redesignated par.
(5) as (4) and struck out former par. (4) relating to carryover of
unused limit.
Subsec. (c)(5), (6). Pub. L. 99-514, Sec. 321(b)(1)(B),
redesignated pars. (6) and (8) as (5) and (6), respectively.
Former par. (5) redesignated (4).
Subsec. (c)(7). Pub. L. 99-514, Sec. 321(b)(1), redesignated par.
(9) as (7) and struck out former par. (7) which provided that for
purposes of subsec. (b)(7) any incentive stock option be treated as
outstanding until such option was exercised in full or expired by
reason of lapse of time.
Subsec. (c)(8). Pub. L. 99-514, Sec. 321(b)(1)(B), redesignated
par. (10) as (8). Former par. (8) redesignated (6).
Subsec. (c)(9). Pub. L. 99-514, Sec. 321(b)(1)(B), redesignated
par. (9) as (7).
Pub. L. 99-514, Sec. 1847(b)(5), substituted ''section 22(e)(3)''
for ''section 37(e)(3)''.
Subsec. (c)(10). Pub. L. 99-514, Sec. 321(b)(1)(B), redesignated
par. (10) as (8).
1984 - Subsec. (c)(9). Pub. L. 98-369, Sec. 2662(f)(1),
substituted ''section 37(e)(3)'' for ''section 105(d)(4)''.
Subsec. (c)(10). Pub. L. 98-369, Sec. 555(a)(1), added par. (10).
1983 - Subsec. (b)(8). Pub. L. 97-448, Sec. 102(j)(1),
substituted ''granted incentive stock options'' for ''granted
options''.
Subsec. (c)(1). Pub. L. 97-448, Sec. 102(j)(2), substituted
''Good faith efforts to value stock'' for ''Exercise of option when
price is less than value of stock'' as par. (1) heading and
inserted sentence providing that, to the extent provided in
regulations by the Secretary, a rule similar to that already
enunciated in the paragraph applies for purposes of par. (8) of
subsec. (b) and par. (4) of subsec. (c).
Subsec. (c)(2)(A). Pub. L. 97-448, Sec. 102(j)(3), substituted
''either of the periods'' for ''the 2-year period''.
Subsec. (c)(4)(A)(ii). Pub. L. 97-448, Sec. 102(j)(4),
substituted ''granted incentive stock options'' for ''granted
options''.
EFFECTIVE DATE OF 1988 AMENDMENT
Amendment by Pub. L. 100-647 effective, except as otherwise
provided, as if included in the provision of the Tax Reform Act of
1986, Pub. L. 99-514, to which such amendment relates, see section
1019(a) of Pub. L. 100-647, set out as a note under section 1 of
this title.
EFFECTIVE DATE OF 1986 AMENDMENT
Section 321(c) of Pub. L. 99-514 provided that: ''The amendments
made by this section (amending this section) shall apply to options
granted after December 31, 1986.''
Amendment by section 1847(b)(5) of Pub. L. 99-514 effective,
except as otherwise provided, as if included in the provisions of
the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such
amendment relates, see section 1881 of Pub. L. 99-514, set out as a
note under section 48 of this title.
EFFECTIVE DATE OF 1984 AMENDMENT
Section 555(c)(1) of Pub. L. 98-369, as amended by Pub. L.
99-514, title XVIII, Sec. 1855(a)(1), Oct. 22, 1986, 100 Stat.
2882, provided that: ''The amendment made by subsection (a)(1)
(amending this section) shall apply to options granted after March
20, 1984, except that such subsection shall not apply to any
incentive stock option granted before September 20, 1984, pursuant
to a plan adopted or corporate action taken by the board of
directors of the grantor corporation before May 15, 1984.''
Amendment by section 2662 of Pub. L. 98-369 effective as though
included in the enactment of the Social Security Amendments of
1983, Pub. L. 98-21, see section 2664(a) of Pub. L. 98-369, set out
as a note under section 401 of Title 42, The Public Health and
Welfare.
EFFECTIVE DATE OF 1983 AMENDMENT
Amendment by Pub. L. 97-448 effective, except as otherwise
provided, as if it had been included in the provision of the
Economic Recovery Tax Act of 1981, Pub. L. 97-34, to which such
amendment relates, see section 109 of Pub. L. 97-448, set out as a
note under section 1 of this title.
EFFECTIVE DATE
Section 251(c) of Pub. L. 97-34, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
''(1) Options to which section applies. -
''(A) In general. - Except as provided in subparagraph (B), the
amendments made by this section (enacting this section and
amending sections 421, 425 (now 424), and 6039 of this title)
shall apply with respect to options granted on or after January
1, 1976, and exercised on or after January 1, 1981, or
outstanding on such date.
''(B) Election and designation of options. - In the case of an
option granted before January 1, 1981, the amendments made by
this section shall apply only if the corporation granting such
option elects (in the manner and at the time prescribed by the
Secretary of the Treasury or his delegate) to have the amendments
made by this section apply to such option. The aggregate fair
market value (determined at the time the option is granted) of
the stock for which any employee was granted options (under all
plans of his employer corporation and its parent and subsidiary
corporations) to which the amendments made by this section apply
by reason of this subparagraph shall not exceed $50,000 per
calendar year ans shall not exceed $200,000 in the aggregate.
''(2) Changes in terms of options. - In the case of an option
granted on or after January 1, 1976, and outstanding on the date of
the enactment of this Act (Aug. 13, 1981), paragraph (1) of section
425(h) of the Internal Revenue Code of 1986 (formerly I.R.C. 1954)
shall not apply to any change in the terms of such option (or the
terms of the plan under which granted, including shareholder
approval) made within 1 year after such date of enactment to permit
such option to qualify as a incentive stock option.''
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.
TREATMENT OF OPTIONS AS INCENTIVE STOCK OPTIONS
Section 1003(d)(1)(B) of Pub. L. 100-647 provided that: ''In the
case of an option granted after December 31, 1986, and on or before
the date of the enactment of this Act (Nov. 10, 1988), such option
shall not be treated as an incentive stock option if the terms of
such option are amended before the date 90 days after such date of
enactment to provide that such option will not be treated as an
incentive stock option.''
PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
For provisions directing that if any amendments made by subtitle
A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title
XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to
any plan, such plan amendment shall not be required to be made
before the first plan year beginning on or after Jan. 1, 1989, see
section 1140 of Pub. L. 99-514, as amended, set out as a note under
section 401 of this title.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 56, 421, 424, 1042, 6039
of this title.
