- 13 -
section 421(a), applies to the exercise of the ISOs. Thus,
respondent contends that petitioners properly reported the gain
recognized from exercising those ISOs as ordinary income for
regular tax purposes on their original 2000 return under section
83.
Section 421(a) provides that, if the requirements of section
422(a) are met, a taxpayer does not recognize income either upon
the granting9 of an ISO to the taxpayer or when the stock is
transferred10 to the taxpayer upon exercise of an ISO.
Recognition of income is deferred until disposition of the
stock.11 Sec. 421(a); sec. 14a.422A-1, Q&A-1, Temporary Income
Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981). If the
requirements of section 422(a) are satisfied, gain on the sale of
the stock is characterized as capital gain.12 Secs. 1221 and
1222; sec. 14a.422A-1, Q&A-1, Temporary Income Tax Regs., supra.
9 The date on which an ISO is granted is the date on which
all corporate action necessary for the grant of the ISO is
completed. Sec. 1.421-7(c)(1), Income Tax Regs.
10 For purposes of secs. 421 through 424, the term
“transfer” means the transfer of ownership or substantially all
rights of ownership of a share of stock to an individual pursuant
to his exercise of a statutory option. Sec. 1.421-7(g), Income
Tax Regs.
11 A disposition of ISO stock generally means any sale,
exchange, gift, or transfer of legal title to, the stock. Sec.
424(c)(1).
12 New regulations under sec. 422 became effective Aug. 3,
2004, but they are not applicable to this case. Sec. 1.422-5(f),
Income Tax Regs.
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011