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options, equal to the difference between the option price and the
fair market value of the stock on the date of transfer.
Petitioner's sale of the stock on the same day generates no gain,
as his basis in the stock (consisting of his option price and the
amount of ordinary income recognized under section 83(a)) equaled
his sales price.
Petitioner contends, however, that his Fluor stock options
were ISOs and that he satisfied the holding period of section
422(a)(1). That section provides as follows:
SEC. 422. INCENTIVE STOCK OPTIONS
(a) In General.--Section 421(a) shall apply with
respect to the transfer of a share of stock to an
individual pursuant to his exercise of an incentive
stock option if--
(1) no disposition of such share is made
by him within 2 years from the date of the
granting of the option nor within 1 year
after the transfer of such share to him * * *
IRS Publication 525 (as applicable for the preparation of 2002
Federal income tax returns) provides an explanation of the
section 422(a)(1) holding period requirement as follows:
If you receive a statutory stock option, do not
include any amount in your income either when the
option is granted or when you exercise it. You have
taxable income or deductible loss when you sell the
stock that you bought by exercising the option. Your
income or loss is the difference between the amount you
paid for the stock (the option price) and the amount
you receive when you sell it. You generally treat this
amount as capital gain or loss and report it on
Schedule D (Form 1040), Capital Gains and Losses, for
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Last modified: May 25, 2011