Treas. Reg. § 1.423-1 — Applicability of section 421(a).

(a) General rule. Subject to the provisions of section 423(c) and paragraph (k) of this section, the special rules of income tax treatment provided in section 421(a) apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an option granted after December 31, 1963, under an employee stock purchase plan provided that the following conditions are satisfied—

(1) The individual must make no disposition of such share within 2 years from the date of the granting of the option, nor within 1 year (6 months for taxable years beginning before 1977; 9 months for taxable years beginning in 1977) after the transfer of such share to him; and

(2) At all times during the period beginning with the date of the granting of the option and ending on the day three months before the date of such exercise, the individual must be an employee of either the corporation granting the option, a related corporation of such corporation, or a corporation or a related corporation of such corporation issuing or assuming a stock option in a transaction to which section 425(a) applies.

(b) Cross-references. For rules relating to the employment relationship, see paragraph (h) of § 1.421-7. For rules relating to the effect of a disqualifying disposition, see section 421(b) and paragraph (b) of § 1.421-8. For definition of the term “disposition”, see section 425(c) and paragraph (c) of § 1.425-1.

Pension Law Library · https://pensionresource.website/EAMain?content=EAMain.Law&id=cfr26-1.423-1&asof=1997-04-01 · printed October 16, 2026. Unofficial copy compiled from official federal sources; verify against the official text before relying on it.