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income resulting from a stock option meeting the requirements of
section 422 or 423 until the taxpayer sells the shares of stock.
Were our inquiry to end here petitioner would not have been
required to recognize any gain until he disposed of the shares of
stock he acquired by exercising his ISO. Our inquiry cannot end
here because of the application of the AMT.
Under section 56(b)(3), “Section 421 shall not apply to the
transfer of stock acquired pursuant to the exercise of an
incentive stock option (as defined in section 422).” Therefore,
for AMT purposes, shares of stock acquired by exercising a stock
option that qualifies as an ISO under section 422 are treated as
shares of stock acquired by means of exercising a nonqualified
stock option under section 83. See sec. 56(b)(3); sec. 1.83-
7(a), Income Tax Regs.; see also Speltz v. Commissioner, 124 T.C.
(2005) (slip op. at 22-23).
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 price he pays at the time he exercises the option if
the taxpayer’s rights in the shares are transferable or not
subject to a substantial risk of forfeiture.2 Sec. 83(a); Tanner
2 Section 83(a) provides:
SEC. 83(a) General Rule.–-If, in connection with
the performance of services, property is transferred to
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