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B. ISOs Generally
Section 421(a) provides, if the requirements of section
422(a) are met,7 a taxpayer does not recognize income for regular
income tax purposes either upon the granting8 of an ISO to him or
when the stock is transferred9 to the taxpayer upon exercise of
an ISO. The recognition of income is deferred until the
disposition of the stock.10 Sec. 421(a); sec. 14a.422A-1, Q&A-1,
Temporary Income Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981).
Because of the application of section 421(a), when petitioner was
granted and exercised option No. 117, he did not recognize income
for regular tax purposes. If section 421 applies, section 83
does not. Sec. 83(e)(1).
C. Section 83 Impact on the Exercise of ISOs for AMT Purposes
However, section 421 does not apply to AMT. Sec. 56(b)(3).
Because it does not apply, section 83 controls the determination
7 At all times from the date of granting the option until 3
months before the date of exercise, the option holder must be an
employee of the company granting the option. Sec. 422(a)(2).
8 The date on which a 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.
9 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.
10 A disposition of ISO stock generally means any sale,
exchange, or gift of, or transfer of legal title to, the stock.
Sec. 424(c)(1).
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