Tae M. & Young J. Kim - Page 10

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               Section 421(a) provides an exception to the tax treatment              
          prescribed by section 83 for certain types of employee plans,               
          including employee stock purchase plans such as the Fannie Mae              
          ESPP involved here.  Section 421(a) provides, inter alia, that no           
          income will result when a taxpayer acquires stock upon the exer-            
          cise of an option granted under an employee stock purchase plan,            
          as defined in section 423(b).  Sec. 421(a)(1).  In general, the             
          stock so acquired qualifies as a capital asset in the hands of              
          the taxpayer.  When the taxpayer disposes of such stock, the                
          difference between the amount received on such disposition and              
          the taxpayer’s basis is capital in character.  See secs. 421,               
          1001, 1221, 1222; cf. sec. 14a.422A-1, Q&A-1, Temporary Income              
          Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981).9  If, however, the           
          taxpayer disposes of the stock acquired pursuant to an employee             
          stock purchase plan within two years of the granting of the                 
          option or within one year after the transfer of the stock to the            
          taxpayer, such disposition is a “disqualifying disposition”.  See           
          secs. 421(b), 423(a)(1).  In that event, the taxpayer is required           
          to recognize for the year of disposition compensation income that           
          is equal to the amount by which the fair market value of the                
          stock on the exercise date exceeds the option price of such                 
          stock.  Secs. 83(a), 421(b); sec. 1.83-7(a), Income Tax Regs.;              


               9See also Humphrey v. Commissioner, T.C. Memo. 2006-242;               
          Svoboda v. Commissioner, supra.                                             





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