I
107TH CONGRESS
1ST SESSION
H. R. 2695
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
AUGUST 1, 2001
Mr. HOUGHTON 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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. EXCLUSION OF INCENTIVE STOCK OPTIONS
AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTIONS FROM WAGES.
(a) EXCLUSION FROM EMPLOYMENT TAXES.—
(1) SOCIAL SECURITY TAXES.—
(A) Section 3121(a) of the Internal Rev-
enue Code of 1986 (relating to definition of
wages) is amended by striking ‘‘or’’ at the end
of paragraph (20), by striking the period at the
end of paragraph (21) and inserting ‘‘; or’’, and
by inserting after paragraph (21) the following
new paragraph:
‘‘(22) remuneration on account of—
‘‘(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b))
or under an employee stock purchase plan (as
defined in section 423(b)), or
‘‘(B) any disposition by the individual of
such stock.’’.
(B) Section 209(a) of the Social Security
Act is amended by striking ‘‘or’’ at the end of
paragraph (17), by striking the period at the
end of paragraph (18) and inserting ‘‘; or’’, and
by inserting after paragraph (18) the following
new paragraph:
‘‘(19) Remuneration on account of—
‘‘(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)
of the Internal Revenue Code of 1986) or under
an employee stock purchase plan (as defined in
section 423(b) of such Code), or
‘‘(B) any disposition by the individual of
such stock.’’.
(2) 
RAILROAD
RETIREMENT
TAXES.—Sub-
section (e) of section 3231 of such Code is amended
by adding at the end the following new paragraph:
‘‘(11) QUALIFIED STOCK OPTIONS.—The term
‘compensation’ shall not include any remuneration
on account of—
‘‘(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b))
or under an employee stock purchase plan (as
defined in section 423(b)), or
‘‘(B) any disposition by the individual of
such stock.’’.
(3) UNEMPLOYMENT TAXES.—Section 3306(b)
of such Code (relating to definition of wages) is
amended by striking ‘‘or’’ at the end of paragraph
(16), by striking the period at the end of paragraph
(17) and inserting ‘‘; or’’, and by inserting after
paragraph (17) the following new paragraph:
‘‘(18) remuneration on account of—
‘‘(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b))
or under an employee stock purchase plan (as
defined in section 423(b)), or
‘‘(B) any disposition by the individual of
such stock.’’.
(b) WAGE WITHHOLDING NOT REQUIRED ON DIS-
QUALIFYING DISPOSITIONS.—Section 421(b) of such Code
(relating to effect of disqualifying dispositions) is amended
by adding at the end the following new sentence: ‘‘No
amount shall be required to be deducted and withheld
under chapter 24 with respect to any increase in income
attributable to a disposition described in the preceding
sentence.’’.
(c) WAGE WITHHOLDING NOT REQUIRED ON COM-
PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER-
CENT AND 100 PERCENT OF VALUE OF STOCK.—Section
423(c) of such Code (relating to special rule where option
price is between 85 percent and 100 percent of value of
stock) is amended by adding at the end the following new
sentence: ‘‘No amount shall be required to be deducted
and withheld under chapter 24 with respect to any amount
treated as compensation under this subsection.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to stock acquired pursuant to op-
tions exercised after the date of the enactment of this Act.
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