EMPLOYEE STOCK OPTIONS AND PURCHASE PLANS.

SEC. 221. EMPLOYEE STOCK OPTIONS AND PURCHASE PLANS. (a) In General.—Part II of subchapter D of chapter 1 is amended to read as follows: “PART II—CERTAIN STOCK OPTIONS “Sec. 421. General rules. “Sec. 422. Qualified stock options. “Sec. 423. Employee stock purchase plans. “Sec. 424. Restricted stock options. “Sec. 425. Definitions and special rules. “SEC. 421. GENERAL RULES. “(a) Effect of Qualifying Transfer.—If a share of stock is transferred to an individual in a transfer in respect of which the requirements 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 allowable at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or assuming 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 received 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 individual pursuant to his exercise of an option would otherwise meet the requirements of section 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 attributable 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 disposition occurred. 78 Stat. 64 “(c) Exercise by Estate.— “(1) In general.—If an option to which this part applies is exercised 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 acquired 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 paragraph (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 it 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 section 422(c)(1), 423(c), or 424(c) (1) were an amount included in gross income under section 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 attributable 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 attributable to such share. “SEC. 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 beginning on the day after the day of the transfer 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 corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or 78 Stat. 65assuming 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 individual after December 31, 1963 (other than a restricted stock option granted pursuant to a contract described in section 424(c)(3)(A)), for any reason connected 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) eligible to receive options, and which is approved 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 stockholders, whichever is earlier; “(3) such option by its terms is not exercisable 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 exercisable 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 corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; “(6) such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; and “(7) such individual, immediately after such option is granted, does not own stock possessing more than 5 percent of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation; except that it the equity capital of such corporation or corporations (determined at the time the option is granted) is less than $2,000,000, then, for purposes of applying the limitation of this paragraph, there shall be added to such 5 percent the percentage (not higher than 5 percent) which bears the same ratio to 5 percent as the difference between such equity capital and $2,000,000 bears to $1,000,000. “(c) Special Rules.— “(1) Exercise of option when price is less than value of stock.—If a share of stock is transferred pursuant to the exercise by an individual of an option which fails to qualify as a qualified stock option under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subsection (b) (4), the requirement of subsection (b) (4) shall be considered to have been met, but there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income for the taxable year in which such option is exercised, an amount equal to the lesser of— “(A) 150 percent of the difference between the option price and the fair market value of the share at the time the option was granted, or 78 Stat. 66 “(B) the difference between the option price and the fair market value of the share at the time of such exercise. The basis of the share acquired shall be increased by an amount equal to the amount included in his gross income under this paragraph in the taxable year in which the exercise occurred. “(2) Certain options treated as outstanding.—For purposes of subsection (b)(5)— “(A) any restricted stock option which is not terminated before January 1, 1965, and “(B) any qualified stock option granted after December 31, 1963, shall be treated as outstanding until such option is exercised in full or expires by reason of the lapse of time. For purposes of the preceding sentence, a restricted stock option granted before January 1, 1964, shall not be Created as outstanding for any period before the first day on which (under the terms of such option) it may be exercised, “(3) Options granted to certain shareholders.—For purposes of subsection (b)(7)— “(A) the term ‘equity capital’ means— “(i) in the case of one corporation, the sum of its money and other property (in an amount equal to the adjusted basis of such property for determining gain), less the amount of its indebtedness (other than indebtedness to shareholders), and “(ii) in the case of a group of corporations consisting of a parent and its subsidiary corporations, the sum of the equity capital of each of such corporations adjusted, under regulations prescribed by the Secretary or his delegate, to eliminate the effect of intercorporate ownership and transactions among such corporations; “(B) the rules of section 425(d) shall apply in determining the stock ownership of the individual; and “(C) stock which the individual may purchase under outstanding options shall be treated as stock owned by such individual. If an individual is granted an option which permits him to purchase stork in excess of the limitation of subsection (b)(7) (determined by applying the rules of this paragraph), such option shall be treated as meeting the requirement of subsection (b) (7) to the extent that such individual could, if the option were fully exercised at the time of grant, purchase stock under such option without exceeding such limitation. The portion of such option which is treated as meeting the requirement of subsection (b) (7) shall be deemed to be that portion of the option which is first exercised. “(4) Certain disqualifying dispositions where amount realized is less than value at exercise.—If— “(A) an individual who has acquired a share of stock by the exercise of a qualified stock option makes a disposition of such share within the 3-year period described in subsection (a)(1), and “(B) such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual, then the amount which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the 78 Stat. 67amount realized on such sale or exchange over the adjusted basis of such share. “(5) Certain transfers by insolvent individuals.—If an insolvent individual holds a share of stock acquired pursuant to his exercise of a qualified stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary, in any proceeding under the Bankruptcy Act, or any other similar insolvency proceeding, neither such transfer, nor any other transfer of such share for the benefit of his creditors in such proceeding, shall constitute a ‘disposition of such share’ for purposes of subsection (a) (1). “(6) Application of subsection (b)(5) where options are for stock of same class in same corporation.—The requirement of subsection (b) (5) shall be considered to have been met in the case of any option (referred to in this paragraph as ‘new option’) granted to an individual if— “(A) the new option and all outstanding options referred to in subsection (b)(5) are to purchase stock of the same class in the same corporation, and “(B) the new option by its terms is not exercisable while there is outstanding (within the meaning of paragraph (2)) any qualified stock option (or restricted stock option) which was granted, before the granting of the new option, to such individual to purchase stock in such corporation at a price (determined as of the date of grant of the new option) higher than the option price of the new option. “SEC. 423. EMPLOYEE STOCK PURCHASE PLANS. “(a) General Rule.—Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an option granted after December 31, 1963 (other than a restricted stock option granted pursuant to a plan described in section 424(c)(3)(B)), under an employee stock purchase plan (as defined in subsection (b)) if— “(1) no disposition of such share is made by him within 2 years after the date of the granting of the option nor within 6 months after the transfer of such share to him; 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, he is an employee of the corporation 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. “(b) Employee Stock Purchase Plan.—For purposes of this part, the term ‘employee stock purchase plan’ means a plan which meets the following requirements: “(1) the plan provides that options are to be granted only to employees of the employer corporation or of its parent or subsidiary corporation to purchase stock in any such corporation; “(2) such plan is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; “(3) under the terms of the plan, no employee can be granted an option if such employee, immediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation. For purposes of this paragraph, the rules of section 425(d) shall apply in determining the stock ownership of an individual, and 78 Stat. 68stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee; “(4) under the terms of the plan, options are to be granted to all employees of any corporation whose employees are granted any of such options by reason of their employment by such corporation, except that there may be excluded— “(A) employees who have been employed less than 2 years, “(B) employees whose customary employment is 20 hours or less per week, “(C) employees whose customary employment is for not more than 5 months in any calendar year, and “(D) officers, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees; “(5) under the terms of the plan, all employees granted such options shall have the same rights and privileges, except that the amount of stock which may be purchased by any employee under such option may bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of employees, and the plan may provide that no employee may purchase more than a maximum amount of stock fixed under the plan; “(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 less than 85 percent 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 determinable in the manner described in subparagraph (A); “(8) under the terms of the plan, no employee 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 portion thereof) first becomes exercisable during the calendar year; “(B) the right to purchase stock under an option accrues at the rate provided m 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 accrued 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 otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him. 78 Stat. 69 For purposes of paragraphs (3) to (9), inclusive, where additional terms are contained in an offering 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 Percent and 100 Percent of Value of Stock.—If the option price of a share of stock acquired 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 wits 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 compensation (and not as gain upon the sale or exchange 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 purposes of this subsection, the option price shall be determined as if the option were exercised 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. “SEC. 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 restricted 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 6 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 corporation 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 “(B) he ceased to be an employee of such corporations within the 3-month period preceding the time of exercise. “(b) Restricted Stock Option.—For purposes of this part, the term ‘restricted 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 connected 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 (computed 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 transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; 78 Stat. 70 “(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 corporation. 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 exercisable 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 exercisable after the expiration of 10 veal’s 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 acquired 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 6 months after the transfer of such share to him, but, 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, or in the event of his death (whenever occurring) while owning such share, there shall be included as compensation (and not as gain upon the sale or exchange 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— “(A) in the case of a share of stock acquired 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 “(ii) 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 qualify mg 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 “(ii) 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 6 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 78 Stat. 71include any such option in which such formula provides for determining such price by reference to the fair market value of the stock at any time before the option is exercised if such value may be greater 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 January 1, 1964, and as of the date of the granting 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 officers, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. “SEC. 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 substitution 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 immediately 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 additional benefits which he did not have under the old option. For purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection. “(b) Acquisition of New Stock.—For purposes of this part, if stock is received by an individual in a distribution to which section 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 provided in paragraph (2), for purposes of this part, 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 bequest or inheritance; “(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. 78 Stat. 72 “(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 tenancy (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 percentage 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, directly or indirectly, by or for his brothers and sisters (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 proportionately by or for its shareholders, partners, 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 Subsidiary corporation’ means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken 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. “(g) Special Rule for Applying Subsections (e) and (f).—In applying subsections (e) and (f) for purposes of section 422(a) (2), 423(a)(2), and 424(a)(2), there shall be substituted for the term ‘employer corporation’ wherever it appeal’s in subsections (e) and (f) the term ‘grantor corporation’, or the term ‘corporation issuing or assuming a stock option in a transaction to which section 425(a) applies’, as the case may be. “(h) Modification, Extension, or Renewal of Option.— “(1) In general.—For purposes of this part, if the terms of any option to purchase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option. “(2) Special rules for sections 423 and 424 options.— “(A) In the case of the transfer of stock pursuant to the exercise of an option to which section 423 or 424 applies and which has been so modified, extended, or renewed, then, except as provided in subparagraph (B), the fair market, value of such stock at the time of the granting of such option shall be considered as whichever of the following is the highest: “(i) the fair market, value of such stock on the date of the original granting of the option, “(ii) the fair market value of such stock on the date of the making of such modification, extension, or renewal, or 78 Stat. 73 “(iii) the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal. “(B) Subparagraph (A) shall not apply with respect to a modification, extension, or renewal of a restricted stock option before January 1, 1964 (or after December 31, 1963, if made pursuant to a binding written contract entered into before January 1, 1964), if the aggregate of the monthly average fair market values of the stock subject to the option for the 12 consecutive calendar months before the date of the modification, extension, or renewal, divided by 12, is an amount less than 80 percent of the fair market value of such stock on the date of the original granting of the option or the date of the making of any intervening modification, extension, or renewal, whichever is the highest. “(3) Definition of modification.—The term ‘modification’ means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option— “(A) attributable to the issuance or assumption of an option under subsection (a); “(B) to permit the option to qualify under sections 422(b) (6),423(b)(9), and 424(b)(2); or “(C) in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised. If a restricted stock option is exercisable after the expiration of 10 years from the date such option is granted, subparagraph (B) shall not apply unless the terms of the option are also changed to make it not exercisable after the expiration of such period. “(i) Stockholder Approval.—For purposes of this part, if the grant of an option is subject, to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval. “(j) Cross References.— “For provisions requiring the reporting of certain acts with respect to a qualified stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039.” (b) Administrative Provisions.— (1) Reporting requirement for certain options.—Subpart A of part III of subchapter A of chapter 61 (relating to information returns) is amended by renumbering section 6039 as 6040, and by inserting after section 6038 the following new section: “SEC. 6039. INFORMATION REQUIRED IN CONNECTION WITH CERTAIN OPTIONS. “(a) Requirement of Reporting.—Every corporation— “(1) which in any calendar year transfers a share of stock to any person pursuant to such person’s exercise of a qualified stock option or a restricted stock option, or “(2) which in any calendar year records (or has by its agent recorded) a transfer of the legal title of a share of stock— “(A) acquired by the transferor pursuant to his exercise of an option described in section 423(c) (relating to special rule where option price is between 85 percent and 100 percent of value of stock), or 78 Stat. 74 “(B) acquired by the transferor pursuant to his exercise of a restricted stock option described in section 424(c)(1) (relating to options under which option price is between 85 percent and 95 percent of value of stock), shall, for such calendar year, make a return at such time and in such manner, and setting forth such information, as the Secretary or his delegate may by regulations prescribe. For purposes of the preceding sentence, any option which a corporation treats as a qualified stock option, a restricted stock option, or an option granted under an employee stock purchase plan, shall be deemed to be such an option. A return is required by reason of a transfer described in paragraph (2) of a share only with respect to the first transfer of such share by the person who exercised the option. “(b) Statements To Be Furnished to Persons With Respect to Whom Information Is Furnished.—Every corporation making a return under subsection (a) shall furnish to each person whose name is set forth in such return a written statement setting forth such information as the Secretary or his delegate may by regulations prescribe. The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was made. “(c) Identification of Stock.—Any corporation which transfers any share of stock pursuant to the exercise of an option described in subsection (a)(2) shall identify such stock in a manner adequate to carry out the purposes of this section. “(d) Cross References.— “For definition of— “(1) The term ‘qualified stock option’, see section 422(b). “(2) The term ‘employee stock purchase plan’, see section 423(b). “(3) The term ‘restricted stock option’, see section 424(b).” (2) Penalties for failure to file information returns.— Section 6652(a) (relating to failure to file certain information returns) is amended to read as follows: “(a) Returns Relating to Payments of Dividends, Etc., and Certain Transfers of Stock.—In the case of each failure— “(1) to file a statement of the aggregate amount of payments to another person required by section 6042(a)(1) (relating to payments of dividends aggregating $10 or more), section 6044 (a) (1) (relating to payments of patronage dividends aggregating $10 or more), or section 6049(a) (1) (relating to payments of interest aggregating $10 or more), “(2) to make a return required by section 6039(a) (relating to reporting information in connection with certain options) with respect to a transfer of stock or a transfer of legal title to stock, or “(3) to make a return required by section 6052(a) (relating to reporting payment of wages in the form of group-term life insurance) with respect to group-term life insurance on the life of an employee, on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid (upon notice and demand by the Secretary or his delegate and in the same manner as tax), by the person failing to file a statement referred to in paragraph (1) or failing to make a return referred to in paragraph (2) or (3), $10 for each such failure, but the total amount imposed on the delinquent, person for all such failures during any calendar year shall not exceed $25,000.” 78 Stat. 75 (3) Penalties for failure to furnish statements to persons with respect to whom returns are filed.—Section 6678 (relating to failure to furnish certain statements) is amended— (A) by striking out “section 6042(c),” and inserting in lieu thereof “section 6039(b), 6042(c),”; and (B) by striking out “section 6042(a) (1).” and inserting in lieu thereof “section 6039(a), 6042(a) (1),”. (c) Technical Amendments.— (1) Section 402(a)(3)(B) (relating to taxability of beneficiary of employees’ trust) is amended by striking out “section 421(d) (2) and (3)” and inserting in lieu thereof “subsections (e) and (f) of section 425”. (2) The last sentence of subparagraph (B) of section 691(c) (2) (relating to allowance of deduction for estate tax in case of items constituting income in respect of a decedent) is amended to read as follows: “Such net value shall be determined with respect to the provisions of section 421(c) (2), relating to the deduction for estate tax with respect to stock options to which part II of subchapter D applies.” (d) Clerical Amendments.— (1) The table of parts for subchapter I) of chapter 1 is amended by striking out “Part II. Miscellaneous provisions.” and inserting in lieu thereof the following: “Part II. Certain stock options.” (2) The table of sections for subpart A of part III of subchapter A of chapter 61 is amended by striking out “Sec. 6039. Cross references.” and inserting in lieu thereof: “Sec. 6039. Information required in connection with certain options. “Sec. 6040. Cross references.” (e) Effective Dates and Transition Rules.— (1) Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to taxable years ending after December 31, 1963. (2) The amendments made by paragraphs (1) and (3) of subsection (b), and paragraph (2) of section 6652(a) of the Internal Revenue Code of 1954 (as amended by paragraph (2) of subsection (b)), shall apply to stock transferred pursuant to options 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 subsection (a)) shall not apply, and (B) paragraph (1) of section 425(h) of such Code (as added by subsection (a)) 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).