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Under section 83, a taxpayer generally must recognize income
when he exercises a compensatory stock option to the extent that
the fair market value of the shares of stock transferred to him
exceeds the exercise price he pays if the taxpayer’s rights in
the shares are transferable or not subject to a substantial risk
of forfeiture. Sec. 83(a); Tanner v. Commissioner, 117 T.C. 237,
242 (2001), affd. 65 Fed. Appx. 508 (5th Cir. 2003); sec. 1.83-
7(a), Income Tax Regs.
Section 83(a) provides:
SEC. 83(a). General Rule.–-If, in connection with
the performance of services, property is transferred to
any person other than the person for whom such services
are performed, the excess of--
(1) the fair market value of such
property (determined without regard to any
restriction other than a restriction which by
its terms will never lapse) at the first time
the rights of the person having the
beneficial interest in such property are
transferable or are not subject to a
substantial risk of forfeiture, whichever
occurs earlier, over
(2) the amount (if any) paid for such
property,
shall be included in the gross income of the person who
performed such services in the first taxable year in
which the rights of the person having the beneficial
interest in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever
is applicable. * * *
Petitioner alleges that, because he exercised his
nonstatutory stock options with “essentially nonrecourse
financing”, the recognition of his gain would be delayed until he
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Last modified: May 25, 2011