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TITLE 26-INTERNAL REVENUE CODE (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 les than 85 per- cent 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 deter- minable in the manner described in subpar- agraph (A) (8) under the terms of the plan, no employ- ee 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 por- tion 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 accured 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 other- wise 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 of- fering 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 per- cent and 100 percent of value of stock If the option price of a share of stock ac- quired 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 compen- sation (and not as gain upon the sale or ex- change 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 pur- poses of this subsection, the option price shall be determined as if the option were exercise( 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, § 221(a), Feb. 26, 1964, 78 Stat. 67, and amended Pub. L. 94-455, title XIV, § 1402(b)(1)(E), Oct. 4, 1976, 90 Stat. 1732.) TAXABLE YEARS AFTER 1977 Subsec. (a)(1) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for taxable years beginning after Dec. 31, 1977, by sub- stituting "1 year"for "9 months". AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455 provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. EmcTivE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" In subsec. (a)(1) of this section by section 1402(b)(1)(E) of Pub. L. 94-455 is effective with respect to taxable years beginning in 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 not6 under sec- tion 421 of this title. SECTION REFRED TO IN OTm SECTIONS This section Is referred to in sections 421, 424, 425, 1023, 6039 of this title. § 424. Restricted stock options (a) In general Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise after 1949 of a restrict- ed stock option, if- (1) no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 9 months after the transfer of such share to him, and (2) at the time he exercises such option- (A) he is an employee of either the corpo- ration 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 425(a) applies, or Page 349 § 424