- 17 -
F.3d 782 (8th Cir. 2006). Insofar as section 56(b)(3) provides
that section 421 shall not apply to the exercise of an ISO,
section 83 is applicable to the exercise of an ISO inasmuch as
the exclusion for ISOs set forth in section 83(e)(1) is negated.9
2. Section 83
Section 83(a) provides in pertinent part that if property is
transferred to a taxpayer in connection with the performance of
services (i.e., stock transferred to a taxpayer upon the exercise
of a stock option), the excess of the fair market value of the
stock (measured as of the first time the taxpayer’s rights in the
stock are not subject to a substantial risk of forfeiture) over
the amount, if any, paid for the stock (the exercise price) shall
be included in the taxpayer’s gross income in the first taxable
year in which the taxpayer’s rights in the stock are not subject
to a substantial risk of forfeiture. See Tanner v. Commissioner,
117 T.C. 237, 242 (2001), affd. 65 Fed. Appx. 508 (5th Cir.
2003); sec. 1.83-7(a), Income Tax Regs. As mentioned above, the
combined application of various provisions of sections 55, 56,
and 83, requires that, upon the exercise of an ISO, such income
be included in the computation of AMTI.
9 Sec. 56(b)(3) further provides, however, that sec.
422(c)(2) shall apply “in any case where the disposition and the
inclusion for * * * this part are within the same taxable year
and such section shall not apply in any other case.”
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