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TITLE 26-INTERNAL REVENUE CODE "In any case in which, on the date of enactment of this Act [Sept. 2, 19741, an individual is a participant in both a defined benefit plan and a defined contribu- tion plan maintained by the same employer, and the sum of the defined benefit plan fraction and the de- fined contribution plan fraction for the year during which such date occurs exceeds 1.4, the sum of such fractions may continue to exceed 1.4 If- "(A) the defined benefit plan fraction is not in- creased, by amendment of the plan or otherwise, after "(B) no contributions are made under the defined contribution plan after such date. A trust which is part of a pension, profit-sharing, or stock bonus plan described in the preceding sentence shall not be treated as not constituting a qualified trust under section 401(a) of the Internal Revenue Code of 1954 [section 401(a) of this title] on account of the provisions of section 415(e) of such Code [sec- tion 415(e) of this title], as long as it is described in the preceding sentence of this subsection." SECTION REFERED TO IN OTHER SECTIONS This section is referred to in sections 401, 403, 414, 4973 of this title; title 29 sections 1002, 1321. PART II-CERTAIN STOCK OPTIONS See. 421. General rules. 422. Qualified stock options. 423. Employee stock purchase plans. 424. Restricted stock options. 425. Definitions and special rules. AMENDMENTS 1964-Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 63, substituted "Part II-Certain Stock Op- tions" for "Part II-Miscellaneous Provisions", in the heading to Part II, and "General rules" for "Employee stock options" in item 421, and added items 422-425. § 421. General rules (a) Effect of qualifying transfer If a share of stock is transferred to an individ- ual in a transfer in respect of which the re- quirements of section 422(a), 423(a), or 424(a) are met- (1) except as provided in section 422(c)(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 allowa- ble at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or as- suming a stock option in a transaction to which section 425(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 re- ceived by any of such corporations for the share so transferred. (b) Effect of disqualifying disposition If the transfer of a share of stock to an indi- vidual pursuant to his exercise of an option would otherwise meet the requirements of sec- tion 422(a), 423(a), or 424(a) except that there is a failure to meet any of the holding period requirements of section 422(a)(1), 423(a)(1), or 424(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 attribut- able 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 dispo- sition occurred. (c) Exercise by estate (1) In general If an option to which this part applies is ex- ercised 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), 423(a), and 424(a) shall not apply, and (B) any transfer by the estate of stock ac- quired shall be considered a disposition of such stock for purposes of sections 423(c) and 424(c)(1). (2) Deduction for estate tax If an amount is required to be included under section 422(c)(1), 423(c), or 424(c)(1) in gross income of the estate of the deceased employee or of a person described in para- graph (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 sec- tion 422(c)(1), 423(c), or 424(c)(1) were an amount included in gross income under sec- tion 691 in respect of such item of gross income. (3) Basis of shares acquired In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies- (A) the basis of such share shall include so much of the basis of the option as is at- tributable 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 422(c)(1), 423(c), or 424(c)(1) 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 (B) the last sentence of sections 422(c)(1), 423(c), and 424(c)(1) shall apply only to the extent that the amount includible in gross income under such sections exceeds so much of the basis of the option as is attrib- utable to such share. (Aug. 16, 1954, ch. 736, 68A Stat. 142; Feb. 11, 1958, Pub, L. 85-320, § 1, 72 Stat. 4; Sept. 2, 1958, Pub. L, 85-866, title I, §§ 25, 26(a), 72 Stat. Page 345 § 421