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TITLE 26-INTERNAL REVENUE CODE (B) he ceased to be an employee of such corporations within the 3-month period pre- ceding the time of exercise. (b) Restricted stock option For purposes of this part, the term "restrict- ed stock option" means an option granted after February 26, 1945, and before January 1, 1964 (or, if it meets the requirements of subsection (c)(3), an option granted after December 31, 1963), to an individual, for any reason connect- ed 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) at the time such option is granted- (A) the option price is at least 85 percent of the fair market value at such time of the stock subject to the option, or (B) in the case of a variable price option, the option price tcomputed as if the option had been exercised when granted) is at least 85 percent of the fair market value of the stock at the time such option is granted; (2) such option by its terms is not transfer- able by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; (3) such individual, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary cor- poration. This paragraph shall not apply if at the time such option is granted the option price is at least 110 percent of the fair market value of the stock subject to the option, and such option either by its terms is not exercis- able after the expiration of 5 years from the date such option is granted or is exercised within one year after August 16, 1954. For purposes of this paragraph, the provisions of section 425(d) shall apply in determining the stock ownership of an individual; and (4) such option by its terms is not exercis- able after the expiration of 10 years from the date such option is granted, if such option has been granted on or after June 22, 1954. (c) Special rules (1) Options under which option price is between 85 percent and 95 percent of value of stock If no disposition of a share of stock ac- quired by an individual on his exercise after 1949 of a restricted stock option 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, at the time the restricted stock option was granted, the option price (computed under subsection (b)(1)) was less than 95 percent of the fair market value at such time of such share, then, in the event of any disposition of such share by him but, or in the event of his death (whenever occurring) while owning such share, there shall be included as compensa- tion (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 clos- ing with his death, whichever applies- (A) in the case of a share of stock ac- quired under an option qualifying under subsection (b)(1)(A), an amount equal to the amount (if any) by which the option price is exceeded by the lesser of- (i) the fair market value of the share at the time of such disposition or death, or (i) the fair market value of the share at the time the option was granted; or (B) in the case of stock acquired under an option qualifying under subsection (b)(1)(B), an amount equal to the lesser of- (i) the excess of the fair market value of the share at the time of such disposition or death over the price paid under the option, or (i) the excess of the fair market value of the share at the time the option was granted over the option price (computed as if the option had been exercised at such time). In the case of a 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. (2) Variable price option For purposes of subsection (b)(1), the term "variable price option" means an option under which the purchase price of the stock is fixed or determinable under a formula in which the only variable is the fair market value of the stock at any time during a period of 9 months which includes the time the option is exercised; except that in the case of options granted after September 30, 1958, such term does not include any such option in which such formula provides for determining such price by reference to the fair mamKe, value of the stock at any time before the option is exercised if such value may be great- er than the average fair market value of the stock during the calendar month in which the option is exercised. (3) Certain options granted after December 31, 1963 For purposes of subsection (b), an option granted after December 31, 1963, meets the requirements of this paragraph if granted pursuant to- (A) a binding written contract entered into before January 1, 1964, or (B) a written plan adopted and approved before January 1, 1964, which (as of Janu- ary 1, 1964, and as of the date of the grant- ing of the option)- (I) met the requirements of paragraphs (4) and (5) of section 423(b), or (ii) was being administered in a way which did not discriminate in favor of of- ficers, persons whose principal duties con- sist of supervising the work of other em- ployees, or highly compensated employ- ees. An option described in the preceding sentence shall be treated as ceasing to meet the re- quirements of this paragraph if it is not exer- cised before May 21, 1981. (Added Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 69, and amended Pub. L. 94-455, title VI, § 603(c), title XIV, § 1402(b)(1)(F), Oct. 4, 1976, 90 Stat. 1574, 1732.) Page 350 § 424