26 U.S.C. § 423 — Employee stock purchase plans

Page 1480 TITLE 26—INTERNAL REVENUE CODE [§ 422A acting this section and amending sections 421, 425 [now 424], and 6039 of this title] shall apply with re- spect to options granted on or after January 1, 1976, and exercised on or after January 1, 1981, or out- standing on such date. ‘‘(B) ELECTION AND DESIGNATION OF OPTIONS.—In the case of an option granted before January 1, 1981, the amendments made by this section shall apply only if the corporation granting such option elects (in the manner and at the time prescribed by the Secretary of the Treasury or his delegate) to have the amend- ments made by this section apply to such option. The aggregate fair market value (determined at the time the option is granted) of the stock for which any em- ployee was granted options (under all plans of his em- ployer corporation and its parent and subsidiary cor- porations) to which the amendments made by this section apply by reason of this subparagraph shall not exceed $50,000 per calendar year ans shall not ex- ceed $200,000 in the aggregate. ‘‘(2) CHANGES IN TERMS OF OPTIONS.—In the case of an option granted on or after January 1, 1976, and out- standing on the date of the enactment of this Act [Aug. 13, 1981], paragraph (1) of section 425(h) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] shall not apply to any change in the terms of such option (or the terms of the plan under which granted, including share- holder approval) made within 1 year after such date of enactment to permit such option to qualify as a incen- tive stock option.’’ SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. TREATMENT OF OPTIONS AS INCENTIVE STOCK OPTIONS Pub. L. 100–647, title I, § 1003(d)(1)(B), Nov. 10, 1988, 102 Stat. 3384, provided that: ‘‘In the case of an option granted after December 31, 1986, and on or before the date of the enactment of this Act [Nov. 10, 1988], such option shall not be treated as an incentive stock option if the terms of such option are amended before the date 90 days after such date of enactment to provide that such option will not be treated as an incentive stock option.’’ PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. [§ 422A. Renumbered § 422] § 423. Employee stock purchase plans (a) General rule Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pur- suant to his exercise of an option granted under an employee stock purchase plan (as defined in subsection (b)) if— (1) no disposition of such share is made by him within 2 years after the date of the grant- ing of the option nor within 1 year after the transfer of such share to him; and (2) at all times during the period beginning with the date of the granting of the option and ending on the day 3 months before the date of such exercise, he is an employee of the cor- poration granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary cor- poration of such corporation issuing or assum- ing a stock option in a transaction to which section 424(a) applies. (b) Employee stock purchase plan For purposes of this part, the term ‘‘employee stock purchase plan’’ means a plan which meets the following requirements: (1) the plan provides that options are to be granted only to employees of the employer corporation or of its parent or subsidiary cor- poration to purchase stock in any such cor- poration; (2) such plan is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; (3) under the terms of the plan, no employee can be granted an option if such employee, im- mediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation. For purposes of this paragraph, the rules of section 424(d) shall apply in determining the stock owner- ship of an individual, and stock which the em- ployee may purchase under outstanding op- tions shall be treated as stock owned by the employee; (4) under the terms of the plan, options are to be granted to all employees of any corpora- tion whose employees are granted any of such options by reason of their employment by such corporation, except that there may be ex- cluded— (A) employees who have been employed less than 2 years, (B) employees whose customary employ- ment is 20 hours or less per week, (C) employees whose customary employ- ment is for not more than 5 months in any calendar year, and (D) highly compensated employees (within the meaning of section 414(q)); (5) under the terms of the plan, all employ- ees granted such options shall have the same rights and privileges, except that the amount of stock which may be purchased by any em- ployee under such option may bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of em- ployees, the plan may provide that no em- ployee may purchase more than a maximum amount of stock fixed under the plan, and the rules of section 83(i) shall apply in deter- mining which employees have a right to make an election under such section; (6) under the terms of the plan, the option price is not less than the lesser of— (A) an amount equal to 85 percent of the fair market value of the stock at the time such option is granted, or (B) an amount which under the terms of the option may not be less than 85 percent of the fair market value of the stock at the time such option is exercised; Page 1481 TITLE 26—INTERNAL REVENUE CODE § 423 (7) under the terms of the plan, such option cannot be exercised after the expiration of— (A) 5 years from the date such option is granted if, under the terms of such plan, the option price is to be not less than 85 percent of the fair market value of such stock at the time of the exercise of the option, or (B) 27 months from the date such option is granted, if the option price is not deter- minable in the manner described in subpara- graph (A); (8) under the terms of the plan, no employee may be granted an option which permits his rights to purchase stock under all such plans of his employer corporation and its parent and subsidiary corporations to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined at the time such op- tion is granted) for each calendar year in which such option is outstanding at any time. For purposes of this paragraph— (A) the right to purchase stock under an option accrues when the option (or any por- tion thereof) first becomes exercisable dur- ing the calendar year; (B) the right to purchase stock under an option accrues at the rate provided in the option, but in no case may such rate exceed $25,000 of fair market value of such stock (determined at the time such option is granted) for any one calendar year; and (C) a right to purchase stock which has ac- crued under one option granted pursuant to the plan may not be carried over to any other option; and (9) under the terms of the plan, such option is not transferable by such individual other- wise than by will or the laws of descent and distribution, and is exercisable, during his life- time, only by him. For purposes of paragraphs (3) to (9), inclusive, where additional terms are contained in an of- fering made under a plan, such additional terms shall, with respect to options exercised under such offering, be treated as a part of the terms of such plan. (c) Special rule where option price is between 85 percent and 100 percent of value of stock If the option price of a share of stock acquired by an individual pursuant to a transfer to which subsection (a) applies was less than 100 percent of the fair market value of such share at the time such option was granted, then, in the event of any disposition of such share by him which meets the holding period requirements of sub- section (a), or in the event of his death (when- ever occurring) while owning such share, there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, which- ever applies, an amount equal to the lesser of— (1) the excess of the fair market value of the share at the time of such disposition or death over the amount paid for the share under the option, or (2) the excess of the fair market value of the share at the time the option was granted over the option price. If the option price is not fixed or determinable at the time the option is granted, then for pur- poses of this subsection, the option price shall be determined as if the option were exercised at such time. In the case of the disposition of such share by the individual, the basis of the share in his hands at the time of such disposition shall be increased by an amount equal to the amount so includible in his gross income. No amount shall be required to be deducted and withheld under chapter 24 with respect to any amount treated as compensation under this subsection. (d) Coordination with qualified equity grants An option for which an election is made under section 83(i) with respect to the stock received in connection with its exercise shall not be con- sidered as granted pursuant an employee stock purchase plan. (Added Pub. L. 88–272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 67; amended Pub. L. 94–455, title XIV, § 1402(b)(1)(E), (2), Oct. 4, 1976, 90 Stat. 1732; Pub. L. 98–369, div. A, title X, § 1001(b)(5), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title XI, § 1114(b)(13), Oct. 22, 1986, 100 Stat. 2451; Pub. L. 101–508, title XI, § 11801(c)(9)(D), (E), Nov. 5, 1990, 104 Stat. 1388–525; Pub. L. 108–357, title II, § 251(c), Oct. 22, 2004, 118 Stat. 1459; Pub. L. 113–295, div. A, title II, § 221(a)(56), Dec. 19, 2014, 128 Stat. 4046; Pub. L. 115–97, title I, § 13603(c)(1)(B), Dec. 22, 2017, 131 Stat. 2164.) Editorial Notes AMENDMENTS 2017—Subsec. (b)(5). Pub. L. 115–97, § 13603(c)(1)(B)(i), struck out ‘‘and’’ before ‘‘the plan may provide’’ and inserted ‘‘, and the rules of section 83(i) shall apply in determining which employees have a right to make an election under such section’’ before semicolon at end. Subsec. (d). Pub. L. 115–97, § 13603(c)(1)(B)(ii), added subsec. (d). 2014—Subsec. (a). Pub. L. 113–295 struck out ‘‘after December 31, 1963,’’ after ‘‘option granted’’ in introduc- tory provisions. 2004—Subsec. (c). Pub. L. 108–357 inserted at end of concluding provisions ‘‘No amount shall be required to be deducted and withheld under chapter 24 with respect to any amount treated as compensation under this sub- section.’’ 1990—Subsec. (a). Pub. L. 101–508, § 11801(c)(9)(D)(i), struck out ‘‘(other than a restricted stock option granted pursuant to a plan described in section 424(c)(3)(B))’’ after ‘‘December 31, 1963’’. Subsec. (a)(2). Pub. L. 101–508, § 11801(c)(9)(D)(ii), sub- stituted ‘‘424(a)’’ for ‘‘425(a)’’. Subsec. (b)(3). Pub. L. 101–508, § 11801(c)(9)(E), sub- stituted ‘‘424(d)’’ for ‘‘425(d)’’. 1986—Subsec. (b)(4)(D). Pub. L. 99–514 substituted ‘‘highly compensated employees (within the meaning of section 414(q))’’ for ‘‘officers, persons whose principal duties consist of supervising the work of other employ- ees, or highly compensated employees’’. 1984—Subsec. (a)(1). Pub. L. 98–369 substituted ‘‘6 months’’ for ‘‘1 year’’, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below. 1976—Subsec. (a)(1). Pub. L. 94–455, § 1402(b)(2), pro- vided that ‘‘9 months’’ would be changed to ‘‘1 year’’. Pub. L. 94–455, § 1402(b)(1)(E), provided that ‘‘6 months’’ would be changed to ‘‘9 months’’ for taxable years beginning in 1977. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to stock at- tributable to options exercised, or restricted stock Page 1482 TITLE 26—INTERNAL REVENUE CODE § 424 units settled, after Dec. 31, 2017, see section 13603(f)(1) of Pub. L. 115–97, set out as a note under section 83 of this title. EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–357 applicable to stock ac- quired pursuant to options exercised after Oct. 22, 2004, see section 251(d) of Pub. L. 108–357, set out as a note under section 421 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to years be- ginning after Dec. 31, 1986, see section 1114(c)(1) of Pub. L. 99–514, set out as a note under section 414 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years begin- ning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years begin- ning after Dec. 31, 1977. EFFECTIVE DATE Section applicable to taxable years ending after Dec. 31, 1963, see section 221(e) of Pub. L. 88–272, set out as an Effective Date of 1964 Amendment note under sec- tion 421 of this title. REGULATIONS Secretary of the Treasury or his delegate to issue be- fore Feb. 1, 1988, final regulations to carry out amend- ments made by section 1114 of Pub. L. 99–514, see sec- tion 1141 of Pub. L. 99–514, set out as a note under sec- tion 401 of this title. SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. § 424. Definitions and special rules (a) Corporate reorganizations, liquidations, etc. For purposes of this part, the term ‘‘issuing or assuming a stock option in a transaction to which section 424(a) applies’’ means a substi- tution 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— (1) the excess of the aggregate fair market value of the shares subject to the option im- mediately after the substitution or assump- tion over the aggregate option price of such shares is not more than the excess of the ag- gregate fair market value of all shares subject to the option immediately before such substi- tution or assumption over the aggregate op- tion price of such shares, and (2) the new option or the assumption of the old option does not give the employee addi- tional benefits which he did not have under the old option. For purposes of this subsection, the parent-sub- sidiary relationship shall be determined at the time of any such transaction under this sub- section. (b) Acquisition of new stock For purposes of this part, if stock is received by an individual in a distribution to which sec- tion 305, 354, 355, 356, or 1036 (or so much of sec- tion 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. (c) Disposition (1) In general Except as provided in paragraphs (2), (3), and (4), for purposes of this part, the term ‘‘dis- position’’ includes a sale, exchange, gift, or a transfer of legal title, but does not include— (A) a transfer from a decedent to an estate or a transfer by bequest or inheritance; (B) an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as re- lates to section 1036) applies; or (C) a mere pledge or hypothecation. (2) Joint tenancy 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 (ex- cept 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. (3) Special rule where incentive stock is ac- quired through use of other statutory op- tion stock (A) Nonrecognition sections not to apply If— (i) there is a transfer of statutory option stock in connection with the exercise of any incentive stock option, and (ii) the applicable holding period require- ments (under section 422(a)(1) or 423(a)(1)) are not met before such transfer,