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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 * * *
[Emphasis added.]
The language of Publication 525 is no less plain and clear: "You
do not meet the holding period requirement * * * if you sell the
stock within 1 year after its transfer to you or within 2 years
after the option was granted." Thus, contrary to petitioner's
interpretation, the two disjunctive holding periods are alternate
disqualifying conditions; that is, if either obtains, section
421(a) does not apply. Since petitioner did not satisfy the one-
year-after-transfer holding period, section 421(a) does not apply
to the transfer of the Fluor stock to him.
We accordingly sustain respondent's determination that
petitioners failed to report $73,374 of compensation income in
2002.
Accuracy-Related Penalty
Respondent determined that petitioners were liable for a
section 6662(a) accuracy-related penalty based on a substantial
understatement of income tax. See sec. 6662(a) and (b)(2). A
"substantial understatement" exists for this purpose if the
amount of tax required to be shown on the return exceeds that
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