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TITLE 26-INTERNAL REVENUE CODE 1623, 1624' Feb. 26, 1964, Pub. L. 88-272, title II, § 221(a), 78 Stat. 63.) AMENDMENTS 1964-Pub. L. 88-272 amended section generally, and among other changes. inserted provisions relating to the effect of a qualifyinv transfer, and to the basis of shares acquired when an option is exercised by an estate, and omitted provisions relating to treatment of restricted stock options, a special rule where option price was between 85 percent and 95 percent of value of stock, acquisition of new stock, definitions, modifi- cation, extension, or renewal of option, and corporate rcorganizations, liquidations, etc. See sections 421 to 425 of this title. 1958-Subsec. ka). Pub. L. 85-866, § 25, added sen- tence authorizing substitution of "grantor corpora- tion" or "corporation issuing or assuming a stock option In a transaction to which subsection (g) is ap- plicable" for the term "employer corporation". Subsec. (d)(6)(C). Pub. L. 85-320 added subsec. (d)(6)(C). Subsec. (d)(1)(A)(ii). Pub. L. 85-866, § 26(a)(1), sub- stituted "in the case of a variable price option" for "in case the purchase price of the stock under the option is fixed or determinable under a formula in which the only variable is the value of the stock at any time during a period of 6 months which includes the time the option is exercised" end inserted "fair" preceding "market value". Subsec. (d)(7). Pub. L. 85-866, § 26(a)(2), added subsec. (d)(7). EFFECTIVE DATE OF 1964 AMENDMENT Section 221(e) of Pub. L. 88-272 providre 'hat: "(1) Except as provided in paragraph. (2) and (3), the amendments made by this section [adding sections 422 to 425, and 6039, amending sections 402, 421, 691, 6652, 6678, and the analysis preceding of sections 401 and 6031, and renumbering section 3039 as 3040 of this title] shall apply to taxable years ending after Decem. ber 31, 1963. "(2) The amendments made by paragraphs (1) and (3) of subsection (b) (adding section 3039, renumber- Ing section 3039 as 3040, and amending section 6678 of this title] and paragraph (2) of section 6652(a) of the Internal Revenue Code of 1954 (as amended by para- graph (2) of subsection (b)) [section 6652(a) of this title], shall apply to stock transferred pursuant to op- tions exercised on or after January 1, 1964. "(3) In the case of an option granted after December 31, 1963, and before January 1, 1965- "(A) paragraphs (1) and (2) of section 422(b) of the Internal Revenue Code of 1954 (as added by subsec. tion (a)) [section 422(b) of this title], shall not apply, and "(B) paragraph (1) of section 425(h) of such Code (as added by subsection (a)) (section 425(h) of this title], shall not apply to any change in the terms of such option made before January 1, 1965, to permit such option to qualify under paragraphs (3), (4). and (5) of such section 422(b)." EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec (a) of this section by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section l(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. Section 26(b) of Pub. L. 85-866 provided that: "The amendments made by subsection (a) [amending subsec. (d)(1)(A)(ii) and adding subsec. (d)(7) of this section] shall apply with respect to taxable years ending after September 30, 1958." Section 3 of Pub. L. 85-320 provided that: "The amendments made by this Act [adding subpar. (C) to subsec. (d)(6) of this section and repealing subsec. (d) of section 1014 of this title] shall apply with respect to taxable years ending after December 31, 1956, but only in the case of employees dying after such date." SECTION REFERRED TO IN OTI9R SECTIONS This section is referred to in sections 83, 422, 423, 424, 691 of this title. § 422. Qualified stock options (a) In general Subject to the provisions of subsection (c)(1), section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of a qualified stock option If- (1) no disposition of such share Is made by such individual within the 3-year period be- ginning on the day after the day of the trans- fer of such share, 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, such individual was an employee of either the corporation granting such option, a parent or subsidiary corpora- tion of such corporation, or a corporation or a parent or subsidiary corporation of such cor- poration issuing or assuming a stock option in a transaction to which section 425(a) applies. (b) Qualified stock option For purposes of this part, the term "qualified stock option" means an option granted to an in- dividual after December 31, 1903 (other than a restricted stock option granted pursuant to a contract described In section 424(c)(3)(A)), and before May 21, 1976 (or, if It meets the require- ments of subsection (c)(7), granted to an indi- vidual after May 20, 1976), for any reason con- nected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if- (1) the option is granted pursuant to a plan which Includes the aggregate number of shares which may be issued under options, and the employees (or class of employees) eli- gible to receive options, and which is ap- proved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; (2) such option is granted within 10 years from the date such plan is adopted, or the date such plan is approved by the stockhold- ers whichever is earlier; (3) such option by its terms is not exercis- able after the expiration of 5 years from the date such option is granted; (4) except as provided in subsection (c)(1), the option price is not less than the fair market value of the stock at the time such option is granted; (5) such option by Its terms is not exercis- able while there is outstanding (within the meaning of subsection (c)(2)) any qualified stock option (or restricted stock option) which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a cor- poration which (at the time of the granting of such option) is a parent or subsidiary cor- poration of the employer corporation, or in a predecessor corporation of any of such corpo- rations; (6) such option by its terms is not transfer- able by such individual otherwise than by will § 422 Page 346