§421 — General rules
81 cases·13 followed·25 distinguished·1 questioned·1 criticized·1 overruled·40 cited—16% support
Statute Text — 26 U.S.C. §421
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—
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;
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
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.
If the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of section 422(a) or 423(a) except that there is a failure to meet any of the holding period requirements of section 422(a)(1) or 423(a)(1), then any increase in the income of such individual or deduction from the income of his employer corporation for the taxable year in which such exercise occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year of such individual or of such employer corporation in which such disposition occurred. No amount shall be required to be deducted and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.
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—
the holding period and employment requirements of sections 422(a) and 423(a) shall not apply, and
any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of section 423(c).
If an amount is required to be included under section 423(c) in gross income of the estate of the deceased employee or of a person described in paragraph (1), there shall be allowed to the estate or such person a deduction with respect to the estate tax attributable to the inclusion in the taxable estate of the deceased employee of the net value for estate tax purposes of the option. For this purpose, the deduction shall be determined under section 691(c) as if the option acquired from the deceased employee were an item of gross income in respect of the decedent under section 691 and as if the amount includible in gross income under section 423(c) were an amount included in gross income under section 691 in respect of such item of gross income.
In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies—
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
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.
If—
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
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.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.421-1 Meaning and use of certain terms
- Treas. Reg. §Treas. Reg. §1.421-1(a) Option.
- Treas. Reg. §Treas. Reg. §1.421-1(b) Statutory options.
- Treas. Reg. §Treas. Reg. §1.421-1(c) Time and date of granting option.
- Treas. Reg. §Treas. Reg. §1.421-1(d) Stock and voting stock.
- Treas. Reg. §Treas. Reg. §1.421-1(e) Option price.
- Treas. Reg. §Treas. Reg. §1.421-1(f) Exercise.
- Treas. Reg. §Treas. Reg. §1.421-1(g) Transfer.
- Treas. Reg. §Treas. Reg. §1.421-1(h) Employment relationship.
- Treas. Reg. §Treas. Reg. §1.421-1(i) Additional definitions.
- Treas. Reg. §Treas. Reg. §1.421-1(j) Effective/applicability date—(1) In general.
- Treas. Reg. §Treas. Reg. §1.421-2 General rules
- Treas. Reg. §Treas. Reg. §1.421-2(a) Effect of qualifying transfer.
- Treas. Reg. §Treas. Reg. §1.421-2(b) If the amount which would have been includible in gross income under section 423(c) had the employee exercised the option on the date of his death and held the share at the time of his death exceeds the amount which is includible in gross income under such section, the basis of the share, determined under (a) of this subdivision, shall be reduced by such excess.
- Treas. Reg. §Treas. Reg. §1.421-2(c) If the amount includible in gross income under section 423(c) exceeds the portion of the basis of the option attributable to the share, the basis of the share, determined under (a) of this subdivision, shall be increased by such excess.
- Treas. Reg. §Treas. Reg. §1.421-2(d) Option exercised by the individual to whom the option was granted if the individual dies before expiration of the applicable holding periods.
- Treas. Reg. §Treas. Reg. §1.421-2(e) Incorporation by reference.
- Treas. Reg. §Treas. Reg. §1.421-2(f) Effective/applicability date.
- Treas. Reg. §Treas. Reg. §1.421-2(i) §1.421-2(i)
81 Citing Cases
(1) Transfers to which section 421 applies.--Solely for purposes of this paragraph (d)(2)(iii)(A), section 421 does not apply to the transfer of stock pursuant to the exercise of an option that meets the requirements of section 422(a) or 423(a).
Applicability ofSection.--This section shall not apply to-- (1) a transaction t which section 421 applies, (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuit plan which meets the requirements of section 404(a)(2), (3) the transfer of n option without a readily ascertainable fair market value, (4) the transfer ofproperty pursuant to the exercise ofan option with
e option exercise. Any gain or loss upon the subsequent sale of the stock will be capital in character. Secs. 1001, 1221(a); sec. 1.83-4(b)(1), Income Tax Regs. Certain employee stock options qualify for alternative treatment under the provisions of section 421. Specifically, section 421 applies to options that qualify as incentive stock options (ISOs) under section 422 (and to options that are issued pursuant to an employee stock purchase plan as defined in section 423). When the applicable sec
The AMT and Its Impact on the Exercise of ISOs For regular tax purposes, section 421 defers the recognition of income on the exercise of an ISO until the disposition of the stock.
ion means any compensation provided by a controlled participant to an employee * * * in the form of equity instruments, options to acquire stock (stock options), or rights with respect to (or determined by reference to) equity instruments or stock options, including but not limited to property to which section 83 applies and stock options to which section 421 applies, regardless of whether ultimately settled in the form of cash, stock, or other property.
al district court. See United States v. Rich, No. 5:10-cv-990 (W.D. Okla. filed Sept. 13, 2010). It sought double damages, costs, and fees under the National Housing Act, 12 U.S.C. §§ 1701-1750, and the Housing and Community Development Act of 1987, § 421, Pub. L. No. 100-242, 101 Stat. 1815, 1913 (codified as amended at 12 U.S.C. § 1715z-4a), for the recovery of Center assets and income. The government’s complaint alleged that the owners used the Center’s assets and income in breach of the regu
The committee explained the new provision in relevant part as follows: The bill provides that the transfer ofpropertyto a spouse incident to a divorce will be treated, for income tax purposes, in the same manner as a gift.
However, for purposes ofcomputing AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer ofstock pursuant - 6 - to the exercise ofan ISO.
Pertinent to this case, for purposes of computing a taxpayer's AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO .
Pertinent to this case, for purposes of computing a taxpayer’s AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO.
As applicable to the instant case, for purposes of computing a taxpayer’s AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO, as defined by section 422.
For purposes of computing a taxpayer's AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO a s defined by section 422 .
Specifically, section 56(b)(3) provides that "Section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option * * * .
As applicable to the instant case, for purposes of computing a taxpayer’s AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO, as defined by section 422.
Specifically, section 56(b)(3) provides that “Section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option * * *.
For purposes of computing a taxpayer’s AMTI, section 56(b)(3) provides that section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO as defined by section 422.
- 4 - “Where [as in the instant case], the option itself is transferred or canceled prior to exercise, section 421 is not applicable, and the gain realized on such cancellation or transfer is compensation.” Mitchell v.
793, Congress indicated its belief that “it is inappropriate to tax transfers between spouses.” H. Rept. 98- 432, part II, at 1491 (1984). - 7 - Petitioner was awarded 48.85 percent of her former husband’s Navy retirement pay, and received $5,836 directly from the DFAS in 1998. Petitioner argues that she is not the legal owner o
793. - 7 - interest which is deemed to have been sold to her. See id.; sec. 1012. Respondent, assuming the division of property upon divorce was an equal but taxable division, made the following determination of the amount of gain on the sale of the Compton residence: Selling price $119,000 Selling expenses (16,852) Adjusted bas
2763, 2871, alternative minimum taxable income should be computed using "average annual adjusted gross income", a concept taken from the income averaging provisions of sections 1301-1305. We rejected the taxpayer's argument and pointed out that, in defining alternative minimum taxable income, the statute used the words "gross inc
421(j)(3), 95 Stat. 313. - 61 - In this case, petitioner had no notice that respondent was challenging the adequacy of petitioner’s election under section 2032A(e)(8) (as opposed to whether petitioner had elected special use valuation under section 2032A(e)(8)) before the filing of respondent’s posttrial brief. When respondent’s estate tax au
421(h), 95 Stat. 172, 311-312, which provides: (13) Special rules for woodlands.-- - 37 - (A) In general.--In the case of any qualified woodland with respect to which the executor elects to have this subparagraph apply, trees growing on such woodland shall not be treated as a crop. (B) Qualified woodland.--The term "qualified woodland" means
172, 306. Thus, a cash lease between a decedent and a family member will not disqualify the property from special use valuation. H. Rept. 97-201, at 169, 1981-2 C.B. 352, 382. The ERTA amendment was explained in S. Rept. 97-144, at 133 (1981), 1981-2 C.B. 412, 464, as follows: - 13 - The bill does not change the present law requ
Section 1041 was enacted by section 421 of the Deficit Reduction Act of 1984 (DEFRA), Pub.
Section 1041 was enacted by section 421 of the Deficit Reduction Act of 1984 (DEFRA), Pub.