26 U.S.C. § 83: Property transferred in connection with performance of services

the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over the amount (if any) paid for such property, the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over the amount (if any) paid for such property. An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary. The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual. The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture. subject to a substantial risk of forfeiture, and not transferable. For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply. In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value. that such cancellation was not compensatory, and that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations, the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and the amount, if any, paid for the cancellation, a transaction to which section 421 applies, a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2), the transfer of an option without a readily ascertainable fair market value, the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or group-term life insurance to which section 79 applies. In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. such exchange shall be disregarded for purposes of subsection (a), and the property received shall be treated as property to which subsection (a) applies. In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services. If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a). the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer), the date the employee first becomes an excluded employee, the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection), the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock. in connection with the exercise of an option, or in settlement of a restricted stock unit, and in connection with the performance of services as an employee, and during a calendar year in which such corporation was an eligible corporation. The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture. no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock. except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5), employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit. For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee. In the case of any calendar year beginning before January 1, 2018 , clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same. is not an excluded employee, and agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met. who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years, the chief executive officer of such corporation or an individual acting in such a capacity, or the chief financial officer of such corporation or an individual acting in such a capacity, who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation). An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b). the qualified employee has made an election under subsection (b) with respect to such qualified stock, any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis. For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection. Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased. The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock. Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph. For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation. certify to such employee that such stock is qualified stock, and that the employee may be eligible to elect to defer income on such stock under this subsection, and the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period, the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding. This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units. Except as provided in paragraph (2), the amendments made by this section [amending this section and sections 409A, 422, 423, 3401, 3402, 6051, and 6652 of this title] shall apply to stock attributable to options exercised, or restricted stock units settled, after December 31, 2017 . The amendments made by subsection (e) [amending section 6652 of this title ] shall apply to failures after December 31, 2017 .” such transfer occurred in November or December of 1973 and was pursuant to the exercise of an option granted in November or December of 1971, in December 1973 the corporation granting the option was acquired by another corporation in a transaction qualifying as a reorganization under section 368 of the Internal Revenue Code of 1954 [now 1986], the fair market value (as of July 1, 1974 ) of the stock received by such person in the reorganization in exchange for the stock transferred to him pursuant to the exercise of such option was less than 50 percent of the fair market value of the stock so received (as of December 4, 1973 ), in 1975 or 1976 such person sold substantially all of the stock received in such reorganization, and such person makes an election under this section at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe. Paragraph (1) shall not apply to transfers with respect to any employee to the extent that the application of paragraph (1) with respect to such employee would (but for this paragraph) result in a reduction in liability for income tax with respect to such employee for all taxable years in excess of $100,000 (determined without regard to any interest). If refund or credit of any overpayment of tax resulting from the application of paragraph (1) is prevented on the date of the enactment of this Act [ Oct. 22, 1986 ] (or at any time within 6 months after such date of enactment) by the operation of any law or rule of law, refund or credit of such overpayment (to the extent attributable to the application of paragraph (1)) may, nevertheless, be made or allowed if claim therefor is filed before the close of such 6-month period. If the assessment of any deficiency of tax resulting from the application of paragraph (1) is prevented on the date of the enactment of this Act [ Oct. 22, 1986 ] (or at any time within 6 months after such date of enactment) by the operation of any law or rule of law, assessment of such deficiency (to the extent attributable to the application of paragraph (1)) may, nevertheless, be made within such 6-month period.” the amount paid for such property was not less than its fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), and the election is consented to by the person transferring such property.