View all text of Part II [§ 421 - § 425]
§ 421. General rules
(a) Effect of qualifying transfer
If a share of stock is transferred to an individual in a transfer in respect of which the requirements of section 422(a) or 423(a) are met—
(1) no income shall result at the time of the transfer of such share to the individual upon his exercise of the option with respect to such share;
(2) no deduction under section 162 (relating to trade or business expenses) shall be allowable at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or assuming a stock option in a transaction to which section 424(a) applies, with respect to the share so transferred; and
(3) no amount other than the price paid under the option shall be considered as received by any of such corporations for the share so transferred.
(b) Effect of disqualifying disposition
(c) Exercise by estate
(1) In general
If an option to which this part applies is exercised after the death of the employee by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the provisions of subsection (a) shall apply to the same extent as if the option had been exercised by the decedent, except that—
(A) the holding period and employment requirements of sections 422(a) and 423(a) shall not apply, and
(B) any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of section 423(c).
(2) Deduction for estate tax
(3) Basis of shares acquired
In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies—
(A) the basis of such share shall include so much of the basis of the option as is attributable to such share; except that the basis of such share shall be reduced by the excess (if any) of (i) the amount which would have been includible in gross income under section 423(c) if the employee had exercised the option on the date of his death and had held the share acquired pursuant to such exercise at the time of his death, over (ii) the amount which is includible in gross income under such section; and
(B) the last sentence of section 423(c) shall apply only to the extent that the amount includible in gross income under such section exceeds so much of the basis of the option as is attributable to such share.
(d) Certain sales to comply with conflict-of-interest requirements
If—
(1) a share of stock is transferred to an eligible person (as defined in section 1043(b)(1)) pursuant to such person’s exercise of an option to which this part applies, and
(2) such share is disposed of by such person pursuant to a certificate of divestiture (as defined in section 1043(b)(2)),
such disposition shall be treated as meeting the requirements of section 422(a)(1) or 423(a)(1), whichever is applicable.
(Aug. 16, 1954, ch. 736, 68A Stat. 142; Pub. L. 85–320, § 1, Feb. 11, 1958, 72 Stat. 4; Pub. L. 85–866, title I, §§ 25, 26(a), Sept. 2, 1958, 72 Stat. 1623, 1624; Pub. L. 88–272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 63; Pub. L. 97–34, title II, § 251(b)(1), Aug. 13, 1981, 95 Stat. 259; Pub. L. 101–508, title XI, § 11801(c)(9)(B), Nov. 5, 1990, 104 Stat. 1388–524; Pub. L. 108–357, title II, § 251(b), title VIII, § 905(a), Oct. 22, 2004, 118 Stat. 1458, 1653.)