II 

108TH CONGRESS 

1ST SESSION S. 206

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

incentive stock options and employee stock purchase plans. 

IN THE SENATE OF THE UNITED STATES 

JANUARY 23, 2003

Mr. ROBERTS (for himself, Mrs. CLINTON, Mr. HATCH, Mr. BINGAMAN, and 

Mr. KYL) introduced the following bill; which was read twice and referred 

to the Committee on Finance 

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.—

8 (A) AMENDMENT OF INTERNAL REVENUE

9 CODE.—Section 3121(a) of the Internal Rev-
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1 enue Code of 1986 (relating to definition of 

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

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

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

5 by inserting after paragraph (21) the following 

6 new paragraph: 

7 ‘‘(22) remuneration on account of—

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

9 individual pursuant to an exercise of an incen10 tive stock option (as defined in section 422(b)) 

11 or under an employee stock purchase plan (as 

12 defined in section 423(b)), or 

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

14 such stock.’’. 

15 (B) AMENDMENT OF SOCIAL SECURITY

16 ACT.—Section 209(a) of the Social Security Act 

17 is amended by striking ‘‘or’’ at the end of para18 graph (17), by striking the period at the end of 

19 paragraph (18) and inserting ‘‘; or’’, and by in20 serting after paragraph (18) the following new 

21 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 the Internal Revenue 

8 Code of 1986 is amended by adding at the end the 

9 following new paragraph: 

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

11 ‘compensation’ shall not include any remuneration 

12 on account of—

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

14 individual pursuant to an exercise of an incen15 tive stock option (as defined in section 422(b)) 

16 or under an employee stock purchase plan (as 

17 defined in section 423(b)), or 

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

19 such stock.’’. 

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

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

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

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

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

25 paragraph (17) the following new paragraph: 
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1 ‘‘(18) remuneration on account of—

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

3 individual pursuant to an exercise of an incen4 tive stock option (as defined in section 422(b)) 

5 or under an employee stock purchase plan (as 

6 defined in section 423(b)), or 

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

8 such stock.’’. 

9 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS10 QUALIFYING DISPOSITIONS.—Section 421(b) of the Inter11 nal Revenue Code of 1986 (relating to effect of disquali12 fying dispositions) is amended by adding at the end the 

13 following new sentence: ‘‘No amount shall be required to 

14 be deducted and withheld under chapter 24 with respect 

15 to any increase in income attributable to a disposition de16 scribed in the preceding sentence.’’. 

17 (c) WAGE WITHHOLDING NOT REQUIRED ON COM18 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER19 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

20 423(c) of the Internal Revenue Code of 1986 (relating to 

21 special rule where option price is between 85 percent and 

22 100 percent of value of stock) is amended by adding at 

23 the end the following new sentence: ‘‘No amount shall be 

24 required to be deducted and withheld under chapter 24 
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1 with respect to any amount treated as compensation under 

2 this subsection.’’. 

3 (d) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to stock acquired pursuant to op5 tions exercised after the date of the enactment of this Act.

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