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subsidiary) to purchase the stock of the employer (or parent or
subsidiary), but only if the requirements of section 422(b)(1)
through (6) are met.
B. Whether Petitioner’s Stock Options Were ISOs
Petitioners argue that petitioner’s stock options were ISOs.
Respondent argues that petitioner’s options were not ISOs in that
they failed the requirements of section 422(b)(1) through (6).5
Respondent argues alternatively that the options do not qualify
for ISO treatment because petitioner was not an employee of CTI
during the 3 months before their exercise, as required by section
422(a)(2). We agree with respondent in both regards.
1. Requirements of Section 422(b)
Section 422(b) generally sets forth six requirements that
must be met for a stock option to qualify as an ISO. First, the
option must be granted pursuant to a plan. Sec. 422(b)(1).
Second, the option must be granted within 10 years from the date
of the plan’s adoption. Sec. 422(b)(2). Third, the option by
5 Respondent argues primarily that the options failed the
sec. 422(b) requirements upon their issuance. Respondent also
argues that petitioner’s consulting agreement with CTI caused the
options to be modified, see sec. 424(h)(1), and that the options
as modified failed those requirements as well. While petitioners
assert in their reply brief that the issue of whether the options
as originally granted were ISOs is a new issue improperly raised
on brief, we disagree. Among other things, we note that
petitioners’ petition (before amendment at trial) alleged that
“The Commissioner erred by failing to determine that the stock
options were classified as incentive stock options by Cell
Therapeutics, Inc.”
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