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trial. Respondent asserted that petitioner’s trial testimony
demonstrated that petitioner’s options were not ISOs as defined
in section 422(b). Respondent’s motion was denied by Order dated
May 10, 2006. Under the following analysis, petitioner’s options
are treated as ISOs (consistent with respondent’s position in the
notice of deficiency).
OPINION
I. Taxation of Stock Options
A. Incentive Stock Options
Generally, under section 421(a), a taxpayer is not required
to recognize income upon the grant or exercise of an ISO.7
Section 422(a) provides that section 421(a) shall apply with
respect to the transfer of a share of stock to a taxpayer
pursuant to the exercise of an ISO if (1) no disposition of such
7 Sec. 422(b) defines an incentive stock option (ISO) in
pertinent part as an option granted to a taxpayer by an employer
corporation (or a parent or subsidiary corporation) to purchase
stock of any such corporation but only if (1) the option is
granted pursuant to a plan which is approved by the stockholders
of the granting corporation, (2) such option is granted within
the earlier of 10 years from the date such plan is adopted or
approved by the stockholders, (3) such option is not exercisable
after 10 years from the date such option is granted, (4) the
option price is not less than the fair market value of the stock
at the time such option is granted, (5) such option is not
transferrable by the taxpayer other than by will or the laws of
descent and distribution and is exercisable during the taxpayer’s
lifetime only by the taxpayer, and (6) such taxpayer, at the time
the option is granted, does not own stock possessing more than 10
percent of the total combined voting power of all classes of
stock of the employer corporation or of its parent or subsidiary
corporation.
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