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 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—
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
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.
For purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection.
Except as provided in paragraphs (2), (3), and (4), for purposes of this part, the term “disposition” includes a sale, exchange, gift, or a transfer of legal title, but does not include—
a transfer from a decedent to an estate or a transfer by bequest or inheritance;
an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or
a mere pledge or hypothecation.
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.
Special rule where incentive stock is acquired through use of other statutory option stock
Nonrecognition sections not to apply
there is a transfer of statutory option stock in connection with the exercise of any incentive stock option, and
the applicable holding period requirements (under section 422(a)(1) or 423(a)(1)) are not met before such transfer,
then no section referred to in subparagraph (B) of paragraph (1) shall apply to such transfer.
Statutory option stock
For purpose of subparagraph (A), the term “statutory option stock” means any stock acquired through the exercise of an incentive stock option or an option granted under an employee stock purchase plan.
Transfers between spouses or incident to divorce
In the case of any transfer described in subsection (a) of section 1041—
such transfer shall not be treated as a disposition for purposes of this part, and
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.
Attribution of stock ownership
For purposes of this part, in applying the percentage limitations of sections 422(b)(6) and 423(b)(3)—
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
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.
Modification, extension, or renewal of option
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.
Special rule for section 423 options
the fair market value of such stock on the date of the original granting of the option,
the fair market value of such stock on the date of the making of such modification, extension, or renewal, or
the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal.
Definition of modification
The term “modification” 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—
attributable to the issuance or assumption of an option under subsection (a);
to permit the option to qualify under section 423(b)(9); or
in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised.
[Pub. L. 88–272, title II, § 221(a)], Feb. 26, 1964, [78 Stat. 71], § 425; amended [Pub. L. 97–34, title II, § 251(b)(2)]–(4), Aug. 13, 1981, [95 Stat. 259]; [Pub. L. 97–448, title I, § 102(j)(5)], (6), Jan. 12, 1983, [96 Stat. 2373]; [Pub. L. 98–369, div. A, title V, § 555(b)], July 18, 1984, [98 Stat. 898]; [Pub. L. 100–647, title I, § 1018](l)(1), (2), Nov. 10, 1988, [102 Stat. 3584]; [Pub. L. 101–239, title VII, § 7811(m)(6)], Dec. 19, 1989, [103 Stat. 2412]; renumbered § 424 and amended [Pub. L. 101–508, title XI, § 11801(c)(9)(A)(i)], (F), Nov. 5, 1990, [104 Stat. 1388–524], 1388–525; [Pub. L. 104–188, title I, § 1702(h)(13)], Aug. 20, 1996, [110 Stat. 1874]; [Pub. L. 115–141, div. U, title IV, § 401(a)(98)], Mar. 23, 2018, [132 Stat. 1188].)