Page 351

TITLE 26-INTERNAL REVENUE CODE TAXABLE YEARS AFTER 1977 Subsecs. (a)(1) and (c)(1), (2) of this sec- tion amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effec- tive for taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMENDMENTS 1976-Subsecs. (a)(l), (c)(1), (2). Pub. L. 94-455, § 1402(b)(1)(F), (2), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c)(3). Pub. L. 94-455, § 603(c), added provi- sion following subpar. (B) that options described in the preceding sentence should be treated as ceasing to meet the requirements for options granted after Dec. 31, 1963, if they are not exercised before May 21, 1981. EFFECTIvE 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 subsecs. (a)(1) and (c)(1) and (2) of this section by sec- tion 1402(b)(1)(F) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsec. (c) by section 603(c) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1975, see section 603(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 422 of this title. 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 sec- tion 421 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 421, 422, 423, 425, 1023, 6039 of this title. § 425. Definitions and special rules (a) Corporate reorganizations, liquidations, etc. For purposes of this part, the term "issuing or assuming a stock option in a transaction to which section 425(a) applies" means a substitu- tion of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if- (1) the excess of the aggregate fair market value of the shares subject to the option im- mediatly after the substitution or assumption over the aggregate option price of such shares is not more than the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, and (2) the new option or the assumption of the old option does not give the employee addi- tional benefits which he did not have under the old option. For purposes of this subsection, the parent-sub- sidiary relationship shall be determined at the time of any such transaction under this subsec- tion. (b) Acquisition of new stock For purposes of this part, if stock is received by an individual in a distribution to which sec- tion 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, such stock shall be considered as having been transferred to him on his exercise of such option. A similar rule shall be applied in the case of a series of such distributions. (c) Disposition (1) In general Except as pivided in paragraph (2), for purposes of this oart, the term "disposition" includes a sale, exchange, gift, or a transfer of legal title, but does not include- (A) a transfer from a decedent to an estate or a transfer by request or inheri- tance; (B) an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or (C) a mere pledge or hypothecation. (2) Joint tenancy The acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership shall not be deemed a. disposition, but a termination of such joint tenacy (except to the extent such employee acquires ownership of such stock) shall be treated as a disposition by him occurring at the time such joint tenancy Is terminated. (d) Attribution of stock ownership For purposes of this part, in applying the per- centage limitations of sections 422(b)(7), 423(b)(3), and 424(b)(3)- (1) the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, direct- ly or indirectly, by or for his brothers and sis- ters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and (2) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned pro- portionately by or for its shareholders, part- ners, or beneficiaries. (e) Parent corporation For purposes of this part, the term "parent corporation" means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (f) Subsidiary corporation For purposes of this part, the term "subsid- iary corporation" means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the em- ployer corporation if, at the time of the grant- ing of the option, each of the corporations other than the last corporation in the unbro- ken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Page 351 § .125