Tax Deferral on Exercise of Statutory Stock Options

§ 421. General rules(a) Effect of qualifying transferIf 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 dispositionIf 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. (c) Exercise by estate(1) In generalIf 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).