tions order (as defined in subsection (p) of
section 414), and
‘‘(ii) in the case of any other person,
by any transaction in which gain or loss is
not recognized in whole or in part.
‘‘(3) ELECTION NOT TO TREAT OPTION AS PER-
FORMANCE STOCK OPTION.—An option shall not be
treated as a performance stock option if—
‘‘(A) as of the time the option is granted
the terms of such option provide that it will not
be treated as a performance stock option, or
‘‘(B) as of the time such option is exer-
cised the grantor and holder agree that such
option will not be treated as a performance
stock option.
‘‘(4) ENTITIES TO WHICH SECTION APPLIES.—
This section shall apply to an option granted to a
person who performs services for—
‘‘(A) the corporation issuing the option, or
its parent or subsidiary corporation,
‘‘(B) a partnership in which the corpora-
tion issuing the option holds (at the time of the
grant) a capital or profits interest representing
at least 20 percent of the total capital or profits
interest of the partnership, or
‘‘(C) a corporation or a parent or subsidi-
ary corporation of such corporation issuing or
assuming a stock option in a transaction to
which section 425(a) applies.
‘‘(5) HIGHLY COMPENSATED EMPLOYEE.—For
purposes of this subsection, the term ‘highly com-
pensated employee’ has the meaning given such term
by section 414(q).
‘‘(c) SPECIAL RULES.—
‘‘(1) 
GOOD
FAITH
EFFORTS
TO
VALUE
STOCK.—If a share of stock is acquired pursuant to
the exercise by any person of an option which would
fail to qualify as a performance stock option under
subsection (b) because there was a failure in an at-
tempt, made in good faith, to meet the requirement
of subparagraph (E) of subsection (b)(2), the re-
quirement of subparagraph (E) of subsection (b)(2)
shall be considered to have been met.
‘‘(2) PERMISSIBLE
PROVISIONS.—An option
that meets the requirements of subsection (b) shall
be treated as a performance stock option even if—
‘‘(A) the option holder may pay for the
stock with stock of the corporation granting the
option,
‘‘(B) the option holder has the right to re-
ceive property at the time of the exercise of the
option,
‘‘(C) the right to exercise all or any por-
tion of a performance stock option may be sub-
ject to any condition, contingency or other cri-
teria (including, without limitation, the contin-
ued performance of services, achievement of
performance objectives, or the occurrence of any
event) which are determined in accordance with
the provisions of the plan or the terms of such
option, or
‘‘(D) the option is subject to any condition
not inconsistent with the provisions of sub-
section (b).
‘‘(3) FAIR MARKET VALUE.—For purposes of
this section, the fair market value of stock shall be
determined without regard to any restriction other
than a restriction that, by its terms, will never lapse.
‘‘(4) DEFINITION OF PARENT AND SUBSIDIARY
CORPORATIONS.—For purposes of this section, the
terms ‘parent corporation’ and ‘subsidiary corpora-
tion’ have the meanings given such terms by sub-
sections (e) and (f) of section 425 except that such
subsections shall be applied by substituting ‘20 per-
cent’ for ‘50 percent’ each place it appears.
‘‘(5) PERFORMANCE CRITERIA.—In the case of
a performance stock option that provides that its ex-
ercise is subject to any conditions or criteria de-
scribed in subparagraph (C) of paragraph (2), the
date or time the option is granted with respect to
each share that may be acquired shall be the date
or time the original performance share option is
granted and subject to the provisions of section
425(h), no portion of the option shall be treated as
granted at any other time.
‘‘(6) CONVERSION OF OPTIONS.—If—
‘‘(A) there is a transfer of an incentive
stock option in exchange for a performance
stock option, and
‘‘(B) the number of shares that may be ac-
quired pursuant to such performance stock op-
tion and the transferred incentive stock option
are the same,
then the option acquired shall qualify as a perform-
ance stock option if the option price pursuant to the
performance share option is no less than the option
price under the transferred incentive stock option.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 421(a) of such Code is amended by
striking ‘‘or 423(a)’’ and inserting ‘‘, 423(a), or
424(a)’’.
(2) Section 421(b) of such Code is amended—
(A) by striking ‘‘or 423(a)’’ and inserting
‘‘, 423(a), or 424(a)’’, and
(B) by striking ‘‘or 423(a)(1)’’ and insert-
ing ‘‘423(a)(1), or 424(a)’’.
(3) Section 421(c)(1)(A) of such Code is
amended by inserting ‘‘and the holding period re-
quirement of section 424(a)’’ after ‘‘423(a)’’.
(4)(A) Sections 421(a)(2), 422(a)(2), and
423(a)(2) of such Code are each amended by strik-
ing ‘‘424(a)’’ and inserting ‘‘425(a)’’.
(B) Clause (ii) of section 402(e)(4)(E) of such
Code is amended by striking ‘‘424’’ and inserting
‘‘425’’.
(5) Section 423(b)(3) of such Code is amended
by striking ‘‘424(d)’’ and inserting ‘‘425(d)’’.
(6) Section 425(a) of such Code, as redesig-
nated by subsection (a), is amended by striking
‘‘424(a)’’ and inserting ‘‘425(a)’’.
(7) Section 425(c)(3)(A)(ii) of such Code, as re-
designated by subsection (a), is amended by striking
‘‘or 423(a)(1)’’ and inserting ‘‘, 423(a)(1), or
424(a)’’.
(8) Section 425(g) of such Code, as redesig-
nated by subsection (a), is amended by striking ‘‘and
423(a)(2)’’ and inserting ‘‘, 423(a)(2) and 424(b)(4)
(as modified by section 424(c)(4))’’.
(9) Section 425(j) of such Code, as redesig-
nated by subsection (a) (relating to cross-ref-
erences), is amended by inserting ‘‘performance
stock option’’ after ‘‘employee stock purchase
plans,’’.
(10) Section 1042(c)(1)(B)(ii) of such Code is
amended by striking ‘‘or 423’’ and inserting ‘‘423,
or 424’’.
(11)(A) Section 6039(a)(1) of such Code is
amended by inserting ‘‘or performance stock option’’
after ‘‘incentive stock option’’.
(B) Section 6039(b)(1) is amended by inserting
‘‘, performance share option,’’ after ‘‘incentive stock
option’’.
(C) Section 6039(c) is amended by striking
‘‘and’’ at the end of paragraph (1), by striking the
period at the end of paragraph (2) and inserting ‘‘,
and’’ and by adding at the end the following new
paragraph:
‘‘(3) the term ‘performance share option’, see
424(b).’’.
(12) The table of sections for part II of sub-
chapter D of chapter 1 of such Code is amended by
striking the item relating to section 424 and insert-
ing the following new items:
‘‘Sec. 424. Performance stock options.
‘‘Sec. 425. Definitions and special rules.’’.
(c) CLARIFICATION
OF
MINIMUM
TAX
TREAT-
MENT.—Neither the grant, exercise, sale, exchange, dis-
position, nor any other event or transaction involving a
performance stock option (as defined in section 424 of the
Internal Revenue Code of 1986) shall constitute a tax
preference item or adjustment for purposes of determining
the tax imposed by section 55 of such Code (relating to
alternative minimum tax).
SEC. 3. TAX TREATMENT OF GAIN ON PERFORMANCE
SHARE OPTIONS.
(a) EXCLUSION.—
(1) IN GENERAL.—Part I of subchapter P of
chapter 1 of the Internal Revenue Code of 1986 (re-
lating to capital gains and losses) is amended by
adding at the end the following new section:
‘‘SEC. 1202. 50-PERCENT EXCLUSION FOR GAIN FROM
STOCK ACQUIRED THROUGH PERFORMANCE
STOCK OPTIONS.
‘‘(a) GENERAL RULE.—Gross income shall not in-
clude 50 percent of the gain from the disposition of any
stock acquired pursuant to the exercise of a performance
stock option if such disposition occurs more than 2 years
after the date on which such option was exercised with
respect to such stock.
‘‘(b) DEFINITIONS AND RULES.—For purposes of
this section—
‘‘(1) PERFORMANCE STOCK OPTION.—The term
‘performance stock option’ has the meaning given
such term by section 424(b).
‘‘(2) CERTAIN ACQUISITIONS DISREGARDED.—
If stock described in subsection (a) is disposed of
and the basis of the person acquiring the stock is de-
termined by reference to the basis of the stock in the
hands of the person who acquired it through exercise
of the performance stock option, such person shall
be treated as acquiring such stock pursuant to such
option on the date such stock was acquired pursuant
to the exercise of such option.
‘‘(3) EXERCISE BY ESTATE.—If a performance
stock option is exercised after the death of an indi-
vidual holder by the estate of the decedent, or by a
person who acquired the right to exercise such op-
tion by bequest or inheritance or by reason of the
death of the decedent, the 2-year holding require-
ment of subsection (a) shall not apply to the disposi-
tion by such estate or person.’’.
(2) CONFORMING AMENDMENTS.—
(A)(i) Section 172(d)(2) of such Code (re-
lating to modifications with respect to net oper-
ating loss deduction) is amended to read as
follows:
‘‘(2) CAPITAL
GAINS
AND
LOSSES
OF
TAX-
PAYERS OTHER THAN CORPORATIONS.—In the case
of a taxpayer other than a corporation—
‘‘(A) the amount deductible on account of
losses from sales or exchanges of capital assets
shall not exceed the amount includable on ac-
count of gains from sales or exchanges of cap-
ital assets, and
‘‘(B) the exclusion provided by section
1202 shall not be allowed.’’.
(ii) Subparagraph (B) of section 172(d)(4)
of such Code is amended by inserting ‘‘,
(2)(B),’’ after ‘‘paragraph (1)’’.
(B) Paragraph (4) of section 642(c) is
amended to read as follows:
‘‘(4) ADJUSTMENTS.—To the extent that the
amount otherwise allowable as a deduction under
this subsection consists of gain described in section
1202(a), proper adjustment shall be made for any
exclusion allowable to the estate or trust under sec-
tion 1202. In the case of a trust, the deduction al-
lowed by this subsection shall be subject to section
681 (relating to unrelated business income).’’.
(C) Paragraph (3) of section 643(a) of
such Code is amended by adding at the end
thereof the following new sentence: ‘‘The exclu-
sion under section 1202 shall not be taken into
account.’’
(D) Paragraph (4) of section 691(c) of
such Code is amended by striking ‘‘1201, and
1211’’ and inserting ‘‘1201, 1202, and 1211’’.
(E) The second sentence of paragraph (2)
of section 871(a) of such Code is amended by
inserting ‘‘such gains and losses shall be deter-
mined without regard to section 1202 and’’
after ‘‘except that’’.
(F) The table of sections for part I of sub-
chapter P of chapter 1 is amended by adding
after the item relating to section 1201 the fol-
lowing new item:
‘‘Sec. 1202. 50-percent exclusion for gain from stock acquired
through performance stock options.’’.
(b) TREATMENT FOR WAGE WITHHOLDING AND EM-
PLOYMENT TAXES.—
(1) FICA TAXES.—Section 3121(a) of the In-
ternal Revenue Code of 1986 (defining 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 adding after para-
graph (21) the following new paragraph:
‘‘(22) any gain from the exercise of a perform-
ance stock option (as defined in section 424(b)) or
from the disposition of stock acquired pursuant to
the exercise of such a performance stock option.’’.
(2) FUTA TAXES.—Section 3306(b) of such
Code (defining wages) is amended by striking ‘‘or’’
at the end of paragraph (15), by striking the period
at the end of paragraph (16) and inserting ‘‘, or’’,
and by adding after paragraph (16) the following
new paragraph:
‘‘(17) 
any 
gain 
described 
in 
section
3121(a)(22).’’.
(3) WAGE WITHHOLDING.—
(A) Section 3401(a) of such Code (defining
wages) is amended by striking ‘‘or’’ at the end
of paragraph (19), by striking the period at the
end of paragraph (20) and inserting ‘‘, or’’, and
by adding at the end the following new para-
graph:
‘‘(21) any gain from the exercise of a perform-
ance stock option (as defined in section 424(b)) or
from the disposition of stock acquired pursuant to
such a performance stock option .’’.
(B) Section 421(b) of such Code (relating
to effect of disqualifying disposition) is amend-
ed by adding at the end the following new sen-
tence: ‘‘A deduction to the employer corporation
in the case of a transfer pursuant to an option
described in section 422, 423, or 424 shall not
be disallowed by reason of a failure to withhold
tax under chapter 24 with respect to gain on
stock acquired in the transfer.’’.
SEC. 4. STOCK OPTION COMPENSATION.
Section 14 of the Securities Exchange Act of 1934
(15 U.S.C. 78n) is amended by adding at the end the fol-
lowing new subsection:
‘‘(h) STOCK OPTION COMPENSATION.—The Commis-
sion shall not require or permit an issuer to recognize any
expense or other charge in financial statements furnished
to its security holders resulting from, or attributable to,
either the grant, vesting, or exercise of any option or other
right to acquire any equity security of such issuer (even
if the right to exercise such option or right is subject to
any conditions, contingencies or other criteria, including,
without limitation, the continued performance of services,
achievement of performance objectives, or the occurrence
of any event) which is granted to its directors, officers,
employees, or other persons in connection with the per-
formance of services, where the exercise price of such op-
tion or right is not less than the fair market value of the
underlying security at the time such option or right is
granted.’’
SEC. 5. EFFECTIVE DATE.
The amendments made by this Act shall apply to op-
tions granted after the date of the enactment of this Act.
Æ
HR 2759 IH——2