{"identifier":"/us/usc/t26/s424","title":26,"num":"\u00a7\u202f424.","heading":"Definitions and special rules","text":"\u00a7\u202f424.\nDefinitions and special rules\n(a)\nCorporate reorganizations, liquidations, etc.\nFor purposes of this part, the term \u201cissuing or assuming a stock option in a transaction to which section 424(a) applies\u201d means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if\u2014\n(1) the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such shares is not more than the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, and\n(2) the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option.\nFor purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection.\n(b)\nAcquisition of new stock\nFor purposes of this part, if stock is received by an individual in a distribution to which section 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, such stock shall be considered as having been transferred to him on his exercise of such option. A similar rule shall be applied in the case of a series of such distributions.\n(c)\nDisposition\n(1)\nIn general\nExcept as provided in paragraphs (2), (3), and (4), for purposes of this part, the term \u201cdisposition\u201d includes a sale, exchange, gift, or a transfer of legal title, but does not include\u2014\n(A) a transfer from a decedent to an estate or a transfer by bequest or inheritance;\n(B) an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or\n(C) a mere pledge or hypothecation.\n(2)\nJoint tenancy\nThe acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership shall not be deemed a disposition, but a termination of such joint tenancy (except to the extent such employee acquires ownership of such stock) shall be treated as a disposition by him occurring at the time such joint tenancy is terminated.\n(3)\nSpecial rule where incentive stock is acquired through use of other statutory option stock\n(A)\nNonrecognition sections not to apply\nIf\u2014\n(i) there is a transfer of statutory option stock in connection with the exercise of any incentive stock option, and\n(ii) the applicable holding period requirements (under section 422(a)(1) or 423(a)(1)) are not met before such transfer,\nthen no section referred to in subparagraph (B) of paragraph (1) shall apply to such transfer.\n(B)\nStatutory option stock\nFor purpose of subparagraph (A), the term \u201cstatutory option stock\u201d means any stock acquired through the exercise of an incentive stock option or an option granted under an employee stock purchase plan.\n(4)\nTransfers between spouses or incident to divorce\nIn the case of any transfer described in subsection (a) of section 1041\u2014\n(A) such transfer shall not be treated as a disposition for purposes of this part, and\n(B) the same tax treatment under this part with respect to the transferred property shall apply to the transferee as would have applied to the transferor.\n(d)\nAttribution of stock ownership\nFor purposes of this part, in applying the percentage limitations of sections 422(b)(6) and 423(b)(3)\u2014\n(1) the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and\n(2) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.\n(e)\nParent corporation\nFor purposes of this part, the term \u201cparent corporation\u201d means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.\n(f)\nSubsidiary corporation\nFor purposes of this part, the term \u201csubsidiary corporation\u201d means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.\n(g)\nSpecial rule for applying subsections (e) and (f)\nIn applying subsections (e) and (f) for purposes of sections 422(a)(2) and 423(a)(2), there shall be substituted for the term \u201cemployer corporation\u201d wherever it appears in subsections (e) and (f) the term \u201cgrantor corporation\u201d or the term \u201ccorporation issuing or assuming a stock option in a transaction to which section 424(a) applies\u201d, as the case may be.\n(h)\nModification, extension, or renewal of option\n(1)\nIn general\nFor purposes of this part, if the terms of any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option.\n(2)\nSpecial rule for section 423 options\nIn the case of the transfer of stock pursuant to the exercise of an option to which section 423 applies and which has been so modified, extended, or renewed, the fair market value of such stock at the time of the granting of the option shall be considered as whichever of the following is the highest\u2014\n(A) the fair market value of such stock on the date of the original granting of the option,\n(B) the fair market value of such stock on the date of the making of such modification, extension, or renewal, or\n(C) the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal.\n(3)\nDefinition of modification\nThe term \u201cmodification\u201d means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option\u2014\n(A) attributable to the issuance or assumption of an option under subsection (a);\n(B) to permit the option to qualify under section 423(b)(9); or\n(C) in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised.\n(i)\nStockholder approval\nFor purposes of this part, if the grant of an option is subject to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval.\n(j)\nCross references\nFor provisions requiring the reporting of certain acts with respect to a qualified stock option, an incentive stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039.","url":"https://projectusc.org/usc/t26/s424.html","content":[{"t":"sec","id":"/us/usc/t26/s424","children":[{"t":"num","text":"\u00a7\u202f424."},{"t":"heading","text":"Definitions and special rules"},{"t":"subsec","id":"/us/usc/t26/s424/a","children":[{"t":"num","text":"(a)"},{"t":"heading","text":"Corporate reorganizations, liquidations, etc."},{"t":"chapeau","text":"For purposes of this part, the term \u201cissuing or assuming a stock option in a transaction to which section 424(a) applies\u201d means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if\u2014"},{"t":"para","id":"/us/usc/t26/s424/a/1","children":[{"t":"num","text":"(1)"},{"t":"content","text":" the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such shares is not more than the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, and","tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/a/2","children":[{"t":"num","text":"(2)"},{"t":"content","text":" the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option.","tail":"\n"}],"tail":"\n\n"},{"t":"continuation","text":"For purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection.","tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/b","children":[{"t":"num","text":"(b)"},{"t":"heading","text":"Acquisition of new stock"},{"t":"content","children":[{"t":"p","text":"For purposes of this part, if stock is received by an individual in a distribution to which section 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, such stock shall be considered as having been transferred to him on his exercise of such option. A similar rule shall be applied in the case of a series of such distributions.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/c","children":[{"t":"num","text":"(c)"},{"t":"heading","text":"Disposition"},{"t":"para","id":"/us/usc/t26/s424/c/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"In general"},{"t":"chapeau","text":"Except as provided in paragraphs (2), (3), and (4), for purposes of this part, the term \u201cdisposition\u201d includes a sale, exchange, gift, or a transfer of legal title, but does not include\u2014"},{"t":"subpara","id":"/us/usc/t26/s424/c/1/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" a transfer from a decedent to an estate or a transfer by bequest or inheritance;","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/c/1/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/c/1/C","children":[{"t":"num","text":"(C)"},{"t":"content","text":" a mere pledge or hypothecation.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/c/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Joint tenancy"},{"t":"content","children":[{"t":"p","text":"The acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership shall not be deemed a disposition, but a termination of such joint tenancy (except to the extent such employee acquires ownership of such stock) shall be treated as a disposition by him occurring at the time such joint tenancy is terminated.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/c/3","children":[{"t":"num","text":"(3)"},{"t":"heading","text":"Special rule where incentive stock is acquired through use of other statutory option stock"},{"t":"subpara","id":"/us/usc/t26/s424/c/3/A","children":[{"t":"num","text":"(A)"},{"t":"heading","text":"Nonrecognition sections not to apply"},{"t":"chapeau","text":"If\u2014"},{"t":"clause","id":"/us/usc/t26/s424/c/3/A/i","children":[{"t":"num","text":"(i)"},{"t":"content","text":" there is a transfer of statutory option stock in connection with the exercise of any incentive stock option, and","tail":"\n"}],"tail":"\n"},{"t":"clause","id":"/us/usc/t26/s424/c/3/A/ii","children":[{"t":"num","text":"(ii)"},{"t":"content","text":" the applicable holding period requirements (under section 422(a)(1) or 423(a)(1)) are not met before such transfer,","tail":"\n"}],"tail":"\n\n"},{"t":"continuation","text":"then no section referred to in subparagraph (B) of paragraph (1) shall apply to such transfer.","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/c/3/B","children":[{"t":"num","text":"(B)"},{"t":"heading","text":"Statutory option stock"},{"t":"content","children":[{"t":"p","text":"For purpose of subparagraph (A), the term \u201cstatutory option stock\u201d means any stock acquired through the exercise of an incentive stock option or an option granted under an employee stock purchase plan.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/c/4","children":[{"t":"num","text":"(4)"},{"t":"heading","text":"Transfers between spouses or incident to divorce"},{"t":"chapeau","text":"In the case of any transfer described in subsection (a) of section 1041\u2014"},{"t":"subpara","id":"/us/usc/t26/s424/c/4/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" such transfer shall not be treated as a disposition for purposes of this part, and","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/c/4/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" the same tax treatment under this part with respect to the transferred property shall apply to the transferee as would have applied to the transferor.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/d","children":[{"t":"num","text":"(d)"},{"t":"heading","text":"Attribution of stock ownership"},{"t":"chapeau","text":"For purposes of this part, in applying the percentage limitations of sections 422(b)(6) and 423(b)(3)\u2014"},{"t":"para","id":"/us/usc/t26/s424/d/1","children":[{"t":"num","text":"(1)"},{"t":"content","text":" the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and","tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/d/2","children":[{"t":"num","text":"(2)"},{"t":"content","text":" stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/e","children":[{"t":"num","text":"(e)"},{"t":"heading","text":"Parent corporation"},{"t":"content","children":[{"t":"p","text":"For purposes of this part, the term \u201cparent corporation\u201d means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/f","children":[{"t":"num","text":"(f)"},{"t":"heading","text":"Subsidiary corporation"},{"t":"content","children":[{"t":"p","text":"For purposes of this part, the term \u201csubsidiary corporation\u201d means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/g","children":[{"t":"num","text":"(g)"},{"t":"heading","text":"Special rule for applying subsections (e) and (f)"},{"t":"content","children":[{"t":"p","text":"In applying subsections (e) and (f) for purposes of sections 422(a)(2) and 423(a)(2), there shall be substituted for the term \u201cemployer corporation\u201d wherever it appears in subsections (e) and (f) the term \u201cgrantor corporation\u201d or the term \u201ccorporation issuing or assuming a stock option in a transaction to which section 424(a) applies\u201d, as the case may be.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/h","children":[{"t":"num","text":"(h)"},{"t":"heading","text":"Modification, extension, or renewal of option"},{"t":"para","id":"/us/usc/t26/s424/h/1","children":[{"t":"num","text":"(1)"},{"t":"heading","text":"In general"},{"t":"content","children":[{"t":"p","text":"For purposes of this part, if the terms of any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/h/2","children":[{"t":"num","text":"(2)"},{"t":"heading","text":"Special rule for section 423 options"},{"t":"chapeau","text":"In the case of the transfer of stock pursuant to the exercise of an option to which section 423 applies and which has been so modified, extended, or renewed, the fair market value of such stock at the time of the granting of the option shall be considered as whichever of the following is the highest\u2014"},{"t":"subpara","id":"/us/usc/t26/s424/h/2/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" the fair market value of such stock on the date of the original granting of the option,","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/h/2/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" the fair market value of such stock on the date of the making of such modification, extension, or renewal, or","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/h/2/C","children":[{"t":"num","text":"(C)"},{"t":"content","text":" the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"para","id":"/us/usc/t26/s424/h/3","children":[{"t":"num","text":"(3)"},{"t":"heading","text":"Definition of modification"},{"t":"chapeau","text":"The term \u201cmodification\u201d means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option\u2014"},{"t":"subpara","id":"/us/usc/t26/s424/h/3/A","children":[{"t":"num","text":"(A)"},{"t":"content","text":" attributable to the issuance or assumption of an option under subsection (a);","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/h/3/B","children":[{"t":"num","text":"(B)"},{"t":"content","text":" to permit the option to qualify under section 423(b)(9); or","tail":"\n"}],"tail":"\n"},{"t":"subpara","id":"/us/usc/t26/s424/h/3/C","children":[{"t":"num","text":"(C)"},{"t":"content","text":" in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised.","tail":"\n"}],"tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/i","children":[{"t":"num","text":"(i)"},{"t":"heading","text":"Stockholder approval"},{"t":"content","children":[{"t":"p","text":"For purposes of this part, if the grant of an option is subject to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"subsec","id":"/us/usc/t26/s424/j","children":[{"t":"num","text":"(j)"},{"t":"heading","text":"Cross references"},{"t":"content","children":[{"t":"p","text":"For provisions requiring the reporting of certain acts with respect to a qualified stock option, an incentive stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039.","tail":"\n"}],"tail":"\n"}],"tail":"\n"},{"t":"text","text":"\n"},{"t":"text","text":"\n"}]}]}