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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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