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modification, petitioner could still exercise her options if she
ceased to be an employee of CTI for more than 90 days, as long as
the consulting agreement had not been terminated for more than 90
days.
The options as modified failed the requirements of section
422(b). There is no plan in the record, and the option prices on
the dates of grant were not shown to be equal to or greater than
the fair market value of the CTI stock on those dates. The
options also failed the requirement of section 422(b)(3) in that
the options could be exercised up to 90 days after the
termination of the consulting agreement, the term of which could
have been extended by agreement of the parties. The effect of
the modification was to give the options an indefinite term, so
that each option was not limited “by its terms” as required by
section 422(b)(3).
2. Requirement of Section 422(a)(2)
Respondent also argues that the options are not entitled to
ISO treatment because petitioner was not an employee of CTI “at
all times during the period beginning on the date of the granting
of the option and ending on the day 3 months before the date” she
exercised her options as required by section 422(a)(2). We
agree. We apply the common law rules of employment to decide
whether petitioner ceased to be an employee of CTI on December 5,
2001; i.e., 3 months before the exercise date of March 5, 2002.
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