I 

108TH CONGRESS 

1ST SESSION H. R. 286

To amend the Internal Revenue Code of 1986 to clarify the treatment of 

incentive stock options and employee stock purchase plans. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 8, 2003

Mr. HOUGHTON (for himself, Mr. BARTLETT of Maryland, Mr. COX, Mr. 

CRANE, Mr. TOM DAVIS of Virginia, Mr. DOOLEY of California, Ms. 

DUNN, Mr. ENGLISH, Mr. FILNER, Mr. FOLEY, Mr. GILLMOR, Mr. 

HAYWORTH, Mr. HERGER, Mr. HONDA, Mrs. JOHNSON of Connecticut, 

Mr. SAM JOHNSON of Texas, Ms. LOFGREN, Ms. PRYCE of Ohio, Mr. 

QUINN, Mr. RAMSTAD, and Mr. SESSIONS) introduced the following bill; 

which was referred to the Committee on Ways and Means 

A BILL

To amend the Internal Revenue Code of 1986 to clarify 

the treatment of incentive stock options and employee 

stock purchase plans.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. EXCLUSION OF INCENTIVE STOCK OPTIONS 

4 AND EMPLOYEE STOCK PURCHASE PLAN 

5 STOCK OPTIONS FROM WAGES. 

6 (a) EXCLUSION FROM EMPLOYMENT TAXES.—

7 (1) SOCIAL SECURITY TAXES.—
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1 (A) Section 3121(a) of the Internal Rev2 enue Code of 1986 (relating to definition of 

3 wages) is amended by striking ‘‘or’’ at the end 

4 of paragraph (20), by striking the period at the 

5 end of paragraph (21) and inserting ‘‘; or’’, and 

6 by inserting after paragraph (21) the following 

7 new paragraph: 

8 ‘‘(22) remuneration on account of—

9 ‘‘(A) a transfer of a share of stock to any 

10 individual pursuant to an exercise of an incen11 tive stock option (as defined in section 422(b)) 

12 or under an employee stock purchase plan (as 

13 defined in section 423(b)), or 

14 ‘‘(B) any disposition by the individual of 

15 such stock.’’. 

16 (B) Section 209(a) of the Social Security 

17 Act is amended by striking ‘‘or’’ at the end of 

18 paragraph (17), by striking the period at the 

19 end of paragraph (18) and inserting ‘‘; or’’, and 

20 by inserting after paragraph (18) the following 

21 new paragraph: 

22 ‘‘(19) Remuneration on account of—

23 ‘‘(A) a transfer of a share of stock to any 

24 individual pursuant to an exercise of an incen25 tive stock option (as defined in section 422(b) 
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1 of the Internal Revenue Code of 1986) or under 

2 an employee stock purchase plan (as defined in 

3 section 423(b) of such Code), or 

4 ‘‘(B) any disposition by the individual of 

5 such stock.’’. 

6 (2) RAILROAD RETIREMENT TAXES.—Sub7 section (e) of section 3231 of such Code is amended 

8 by adding at the end the following new paragraph: 

9 ‘‘(11) QUALIFIED STOCK OPTIONS.—The term 

10 ‘compensation’ shall not include any remuneration 

11 on account of—

12 ‘‘(A) a transfer of a share of stock to any 

13 individual pursuant to an exercise of an incen14 tive stock option (as defined in section 422(b)) 

15 or under an employee stock purchase plan (as 

16 defined in section 423(b)), or 

17 ‘‘(B) any disposition by the individual of 

18 such stock.’’. 

19 (3) UNEMPLOYMENT TAXES.—Section 3306(b) 

20 of such Code (relating to definition of wages) is 

21 amended by striking ‘‘or’’ at the end of paragraph 

22 (16), by striking the period at the end of paragraph 

23 (17) and inserting ‘‘; or’’, and by inserting after 

24 paragraph (17) the following new paragraph: 

25 ‘‘(18) remuneration on account of—
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1 ‘‘(A) a transfer of a share of stock to any 

2 individual pursuant to an exercise of an incen3 tive stock option (as defined in section 422(b)) 

4 or under an employee stock purchase plan (as 

5 defined in section 423(b)), or 

6 ‘‘(B) any disposition by the individual of 

7 such stock.’’. 

8 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS9 QUALIFYING DISPOSITIONS.—Section 421(b) of such Code 

10 (relating to effect of disqualifying dispositions) is amended 

11 by adding at the end the following new sentence: ‘‘No 

12 amount shall be required to be deducted and withheld 

13 under chapter 24 with respect to any increase in income 

14 attributable to a disposition described in the preceding 

15 sentence.’’. 

16 (c) WAGE WITHHOLDING NOT REQUIRED ON COM17 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER18 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

19 423(c) of such Code (relating to special rule where option 

20 price is between 85 percent and 100 percent of value of 

21 stock) is amended by adding at the end the following new 

22 sentence: ‘‘No amount shall be required to be deducted 

23 and withheld under chapter 24 with respect to any amount 

24 treated as compensation under this subsection.’’. 
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1 (d) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to stock acquired pursuant to op3 tions exercised after the date of the enactment of this Act.

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