-13-
C. Exception Treating Certain Transfers as the Grant of an
Option
An exception to the general rule treats certain exercises of
options and receipts of shares as the grant of another option
instead of a transfer of shares. Sec. 1.83-3(a)(2), Income Tax
Regs. The exception treats the transaction as another option
where the amount paid for the exercise is a debt secured by the
shares on which there is no personal liability. Id. Whether a
transaction is viewed in substance as the grant of an option
rather than a transfer depends on the facts and circumstances.
Id. This analysis includes factors such as the type of property
involved, the extent to which the risk the property will decline
in value has been transferred, and the likelihood that the
purchase price will be paid. Id.
Petitioners argue that their situation is the same as that
described in section 1.83-3(a)(7), Example (2), Income Tax Regs.
(Example 2), where an employee pays his or her employer for
shares by giving the employer a note for the purchase price on
which the employee has no personal liability. See sec. 1.83-
3(a)(7), Example (2), Income Tax Regs. Petitioners contend that
because the employee in Example 2 is treated as having received
an option, petitioners should also be treated as having received
an option.
Petitioners argue the key factor to be considered is whether
an employee has capital at risk. If the employee has no capital
at risk, they argue, the transaction is in substance the grant of
an option regardless of whether the debt is to the employer or to
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