[Federal Register Volume 69, Number 200 (Monday, October 18, 2004)]
[Rules and Regulations]
[Pages 61309-61311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-22858]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9144]
RIN 1545-BA75


Statutory Options; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

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SUMMARY: This document corrects final regulations (TD 9144) that were

[[Page 61310]]

published in the Federal Register on Tuesday, August 3, 2004 (69 FR 
46401).
    The document contains final regulations relating to statutory 
options. These final regulations affect certain taxpayers who 
participate in the transfer of stock pursuant to the exercise of 
incentive stock options and the exercise of options granted pursuant to 
an employee stock purchase plan (statutory options).

DATES: This document is effective on August 3, 2004.

FOR FURTHER INFORMATION CONTACT: Erinn Madden, (202) 622-6030 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    The final regulations (TD 9144) that is the subject of this 
correction are under sections 421, 422, and 424 of the Internal Revenue 
Code.

Need for Correction

    As published, the final regulations (TD 9144) contains errors that 
may prove to be misleading and are in need of clarification.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Correction of Publication

0
Accordingly, 26 CFR parts 1 and 602 are corrected by making the 
following correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


Sec.  1.421-1  [Corrected]

0
1. Section 1.421-1(g), fifth sentence, the language ``See Sec.  1.422-
1(b)(3) Example 3.'' is removed and the language ``See Sec.  1.422-
1(b)(3) Example 2.'' is added in its place.
0
2. Section 1.421-1(j)(2), third sentence, the language ``For statutory 
options granted after June 9, 2003, and before the earlier of January 
1, 2006, or the first regularly scheduled stockholders meeting on the 
granting corporation occurring 6 month after August 3, 2004, taxpayers 
may rely on either the REG-122917-02 or this section.'' is removed and 
the language ``For statutory options granted after June 9, 2003, and 
before the earlier of January 1, 2006, or the first regularly scheduled 
stockholders meeting of the granting corporation occurring at least 6 
months after August 3, 2004, taxpayers may rely on either the REG-
122917-02 or this section.'' is added in its place.


Sec.  1.421-2  [Corrected]

0
3. Section 1.421-2(f)(2), second sentence, the language ``For statutory 
options granted after June 9, 2003, and before the earlier of January 
1, 2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004, taxpayers 
may rely on either the REG-122917-02 or this section.'' is removed and 
the language ``For statutory options granted after June 9, 2003, and 
before the earlier of January 1, 2006, or the first regularly scheduled 
stockholders meeting of the granting corporation at least 6 months 
after August 3, 2004, taxpayers may rely on either the REG-122917-02 or 
section.'' is added in its place.


Sec.  1.422-1  [Corrected]

0
4. Section 1.422-1(b)(3), example 2, fourth sentence, the language 
``Additionally, at the time of the disposition, section 422 and Sec.  
1.422-1(a) no longer apply, and thus, section 83(a) is used to measure 
the consequences of the disposition.'' is removed and the language 
``Additionally, at the time of the disposition, section 422 and Sec.  
1.422-1a) no longer apply, and thus, section 83(a) is used to measure 
the consequences of the disposition and the holding period for capital 
gain purposes begin on the vesting date, six months after exercise.'' 
is added in its place.


Sec.  1.422-5  [Corrected]

0
5. Section 1.422-5(e), tenth sentence, the language ``Under the rules 
of paragraph (b)(3) of this section, A has sold all 60 of the non-
section-1036 shares and 15 of the 40 section-1036 shares.'' is removed 
and the language ``Under the rules of paragraph (b)(2) and (b)(3) of 
this section, A has sold all 60 of the non-section-1036 shares and 15 
of the 40 section-1036 shares.'' is added in its place.
0
6. Section 1.422-5(f)(2), third sentence, the language ``For statutory 
options granted after June 9, 2003, and before the earlier of January 
1, 2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004, taxpayers 
may rely on either the REG-122917-02 or this section.'' is removed and 
the language ``For statutory options granted after June 9, 2003, and 
before the earlier of January 1, 2006, or the first regularly scheduled 
stockholders meeting of the granting corporation occurring at least 6 
months after August 3, 2004, taxpayers may rely on either the REG-
122917-02 or this section.'' is added in its place.


Sec.  1.424-1  [Corrected]

0
7. Section 1.424-1(a)(3)(ii), first sentence, the language ``A 
distribution (excluding an ordinary dividend or a stock split or stock 
dividend described in Sec.  1.424-1(e)(v)) or change in the terms or 
number of outstanding shares of such corporation; and'' is removed and 
the language ``A distribution (excluding an ordinary dividend or a 
stock split or stock dividend described in Sec.  1.424-1(e)(4)(v)) or 
change in the terms or number of outstanding shares of such 
corporation; and'' is added in its place.
0
8. Section 1.424-1(a)(10), Example 8, sixth sentence, the language 
``Based on these facts, a new option to purchase 200 shares of Y at an 
option price of $25 per share could be granted to E in complete 
substitution of E's old option.'' is removed and the language ``Based 
on these facts, and new option to purchase 200 shares of Y at an option 
price of $25 per share could be granted to E in complete substitution 
of E's old option. In the alternative, it would also be permissible in 
connection with the spin off, to grant E a new option to purchase 100 
shares of Y, at an option price of $25 per share, and E retains an 
option to purchase 100 shares of X under the old option, with the 
option price adjusted to $25. However, because X is no longer a related 
corporation with respect to Y, E must exercise the option for 100 
shares of X within three months from the date of the spin off for the 
option to be treated as a statutory option. See Sec.  1.421-1(h).'' is 
added in its place.
0
9. Section 1.424-1(a)(10), paragraph (iii) of Example 9, third 
sentence, the language ``Because the amendment of the plan to allow 
options on a different stock is considered the adoption of a new plan 
under Sec.  1.422-2(b)(2)(iii), the stockholders of X must approve the 
plan within 12 months before or after the date of the amendment of the 
plan.'' is removed and the language ``Because the amendment of the plan 
to allow options on a different stock is considered the adoption of a 
new plan under Sec.  1.422-2(b)(2)(iii), the stockholders of Y must 
approve the plan within 12 months before or after the date of the 
amendment of the plan.'' is added in its place.
0
10. Section 1.424-1(a)(10), paragraph (iii) of Example 9, fourth 
sentence, the language ``If the stockholders of X timely approve the 
plan, the future grants to acquire Y stock will be incentive stock 
options (assuming the other

[[Page 61311]]

requirements of Sec.  1.422-2 have been met).'' is removed and the 
language ``If the stockholders of Y timely approve the plan, the future 
grants to acquire Y stock will be incentive stock options (assuming the 
other requirements of Sec.  1.422-2 have been met).'' is added in its 
place.
0
11. Section 1.424-1(c)(4)(vi), the last sentence is removed.
0
12. Section 1.424-1(c)(4)(viii), second sentence, the language ``Thus, 
for example, if the terms of an option are inadvertently changed on 
March 1 to extend the exercise period and the change is removed on 
November, then if the option is not exercised prior to November 1, the 
option is not considered modified under this paragraph (e).'' is 
removed and the language ``Thus for example, if the terms of an option 
are inadvertently changed on March 1 to extend the exercise period and 
the change is removed on November 1, then if the option is not 
exercised prior to November 1, the option is not considered modified 
under this paragraph (e).'' is added in its place.
0
13. Section 1.424-1(g)(2), third sentence, the language ``For statutory 
options granted after June 9, 2003, and before the earlier of January 
1, 2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring 6 months after August 3, 2004, taxpayers 
may rely on either the REG-122917-02 or this section.'' is removed and 
the language ``For statutory options granted after June 9, 2003, and 
before the earlier of January 1, 2006, or the first regularly scheduled 
stockholders meeting of the granting corporation occurring at least 6 
months after August 3, 2004, taxpayers may rely on either the REG-
122917-02 or this section.'' is added in its place.


Sec.  1.6039-1  [Corrected]

0
14. Section 1.6039-1(g)(2), second sentence, the language ``For 
statutory options transferred after June 9, 2003, and before the 
earlier of January 1, 2006, or the first regularly scheduled 
stockholders meeting of the granting corporation occurring 6 months 
after August 3, 2004, taxpayers may rely on either REG-122917-02 or 
this section.'' is removed and the language ``For statutory options 
transferred after June 9, 2003, and before the earlier of January 1, 
2006, or the first regularly scheduled stockholders meeting of the 
granting corporation occurring at least 6 months after August 3, 2004, 
taxpayers may rely on either REG-122917-02 or this section.'' is added 
in its place.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 2. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec.  602.101  [Corrected]

0
15. Section 602.101(b) is amended by adding the entry ``1.422-1 * * * 
1545-0820'' to the table in numerical order.

Cynthia E. Grigsby,
Acting Chief, Publications and Regulations Branch, Legal Processing 
Division, Associate Chief Counsel, (Procedures and Administration).
[FR Doc. 04-22858 Filed 10-15-04; 8:45 am]
BILLING CODE 4830-01-P