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B. Exception Treating Certain Transfers as the Grant of an
Option
An exception to the rule treats certain exercises of options
and receipts of shares as the grant of another option instead of
the transfer of shares. Sec. 1.83-3(a)(2), Income Tax Regs. The
exception treats the transaction as another option where the
amount paid for the exercise is a debt secured by the shares on
which there is no personal liability. Id. The determination of
whether a transaction should be viewed as a grant of an option
rather than a transfer is dependent upon the facts and
circumstances. Id. Courts look to such factors as (1) the type
of property involved, (2) the extent to which the risk the
property will decline in value has been transferred, and (3) the
likelihood that the purchase price will be paid. Id.
Petitioners argue that their situation is the same as that
described in section 1.83-3(a)(7), Example (2), Income Tax Regs.
(Example 2), where an employee pays his or her employer for
shares by giving the employer a note for the purchase price on
which the employee has no personal liability. Petitioners
contend that because the employee in Example 2 is treated as
having received an option, petitioners should also be treated as
having received an option.
Petitioners maintain that the key factor involved is whether
an employee has his or her own capital at risk. If there is no
capital risk, according to petitioners, the transaction is
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Last modified: May 25, 2011