
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC423]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                Subchapter D--Deferred Compensation, Etc.
 
                     PART II--CERTAIN STOCK OPTIONS
 
Sec. 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 pursuant to his exercise of an option granted 
after December 31, 1963, 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 granting 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 corporation granting 
    such option, a parent or subsidiary corporation of such corporation, 
    or a corporation or a parent or subsidiary corporation of such 
    corporation issuing or assuming 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 
    corporation to purchase stock in any such corporation;
        (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, immediately 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 ownership of an individual, and stock which the employee 
    may purchase under outstanding options 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 corporation whose employees are granted any of 
    such options by reason of their employment by such corporation, 
    except that there may be excluded--
            (A) employees who have been employed less than 2 years,
            (B) employees whose customary employment is 20 hours or less 
        per week,
            (C) employees whose customary employment 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 employees granted such 
    options shall have the same rights and privileges, except that the 
    amount of stock which may be purchased by any employee under such 
    option may bear a uniform relationship to the total compensation, or 
    the basic or regular rate of compensation, of employees, and the 
    plan may provide that no employee may purchase more than a maximum 
    amount of stock fixed under the plan;
        (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;

        (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 determinable in the manner described in 
        subparagraph (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 option 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 portion thereof) first becomes exercisable 
        during 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 accrued 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 otherwise than by will or the laws of descent and 
    distribution, and is exercisable, during his lifetime, only by him.

For purposes of paragraphs (3) to (9), inclusive, where additional terms 
are contained in an offering 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 subsection (a), or in the 
event of his death (whenever 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, whichever 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 purposes 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.

(Added Pub. L. 88-272, title II, Sec. 221(a), Feb. 26, 1964, 78 Stat. 
67; amended Pub. L. 94-455, title XIV, Sec. 1402(b)(1)(E), (2), Oct. 4, 
1976, 90 Stat. 1732; Pub. L. 98-369, div. A, title X, Sec. 1001(b)(5), 
(e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99-514, title XI, 
Sec. 1114(b)(13), Oct. 22, 1986, 100 Stat. 2451; Pub. L. 101-508, title 
XI, Sec. 11801(c)(9)(D), (E), Nov. 5, 1990, 104 Stat. 1388-525.)


                               Amendments

    1990--Subsec. (a). Pub. L. 101-508, Sec. 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, Sec. 11801(c)(9)(D)(ii), 
substituted ``424(a)'' for ``425(a)''.
    Subsec. (b)(3). Pub. L. 101-508, Sec. 11801(c)(9)(E), substituted 
``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 employees, 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, Sec. 1402(b)(2), provided that 
``9 months'' would be changed to ``1 year''.
    Pub. L. 94-455, Sec. 1402(b)(1)(E), provided that ``6 months'' would 
be changed to ``9 months'' for taxable years beginning in 1977.


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 applicable to years beginning 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

    Section 1402(b)(1) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning in 1977.
    Section 1402(b)(2) of Pub. L. 94-455 provided that the amendment 
made by that section is effective with respect to taxable years 
beginning 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 section 421 of this title.


                               Regulations

    Secretary of the Treasury or his delegate to issue before Feb. 1, 
1988, final regulations to carry out amendments made by section 1114 of 
Pub. L. 99-514, see section 1141 of Pub. L. 99-514, set out as a note 
under section 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 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 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 [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 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.

                  Section Referred to in Other Sections

    This section is referred to in sections 421, 424, 1042, 6039 of this 
title.
