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have vested in petitioner before he was terminated. All ISOs
were granted to petitioner pursuant to a lapse restriction which
required petitioner to be employed by Ariba for 1 year for 25
percent of the shares to vest and another 3 years for the
remaining 75 percent to vest. Once the stock petitioner acquired
upon the exercise of option No. 117 had vested, petitioner was
not required to return the shares under any condition.
Because the condition under which petitioner was required to
return the stock was not permanent, i.e., it was a lapse
restriction, it was not certain that petitioner’s services would
be terminated before the stock vested. See sec. 1.83-3(a)(7),
Example (1) and (3), Income Tax Regs.18 The Ariba stock was not
transferred on the date of exercise under a condition that was
18 Example (1). On Jan. 3, 1971, X corporation sells for
$500 to S, a salesman of X, 10 shares of stock in X corporation
with a fair market value of $1,000. The stock is nontransferable
and subject to return to the corporation (for $500) if S’s sales
do not reach a certain level by Dec. 31, 1971. Disregarding the
restriction concerning S’s sales (since the restriction is a
lapse restriction), S’s interest in the stock is that of a
beneficial owner, and therefore a transfer occurs on Jan. 3,
1971.
In contrast to petitioner and the taxpayer in Example (1),
the taxpayer described in Example (3), sec. 1.83-3(a)(7), Income
Tax Regs., exemplifies a situation where the taxpayer’s stock is
subject to a nonlapse restriction, requiring the taxpayer to
return the stock upon termination of employment (which is always
certain to occur) and without the option to acquire ownership of
the stock before termination. Thus, in Example (3) the stock
will be returned “upon the happening of an event that is certain
to occur” because termination is certain to occur, and the
taxpayer will never have the opportunity to keep the shares after
termination.
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