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of the option but at the time, pursuant to the employee’s
exercise of the option, the shares have been transferred to, and
become substantially vested in, the employee. See sec. 83(a),
(e)(3); Tanner v. Commissioner, supra at 242; sec. 1.83-1(a)(1),
Income Tax Regs. Shares become substantially vested in the
employee when the shares are either transferable or not subject
to a substantial risk of forfeiture. See United States v. Tuff,
supra at 1252; Racine v. Commissioner, T.C. Memo. 2006-162;
Facq v. Commissioner, T.C. Memo. 2006-111; sec. 1.83-3(b), Income
Tax Regs.
Section 83 does not apply to a “statutory” stock option;
i.e., an “incentive stock option” (ISO) within the meaning of
section 422(b), that meets the requirements of sections 421
through 424. As relevant herein, section 421(a) provides that if
the requirements of section 422(a) are met,4 a taxpayer does not
recognize income either upon the granting to the taxpayer of an
ISO or when the taxpayer receives stock upon the ISO’s exercise.
Recognition of income is deferred until disposition of the stock.
Sec. 421(a). Section 422(b) defines an ISO as a stock option
granted to an individual for any reason connected to his or her
employment, if granted by a corporate employer (or its parent or
4 Sec. 422(a) requires in relevant part that the option
holder be an employee of the company granting the option at all
times from the granting of the option until 3 months before the
date of exercise.
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Last modified: November 10, 2007