146
INTERNAL REVENUE CODE OF 1954
(A) such modification, extension, or renewal shall be considered as the granting of a new option, (B) the fair market value of such stock at the time of the granting of such option shall be considered as— (i) the fair market value of such stock on the date of the original granting of the option, (ii) the fair market value of such stock on the date of the making of such modification, extension, or renewal, or (iii) the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal, whichever is the highest. Subparagraph (B) shall not apply if the aggregate of the monthly average fair market values of the stock subject to the option for the 12 consecutive calendar months before the date of the modification, extension, or renewal, divided by 12, is an amount less than 80 percent of the fair market value of such stock on the date of the original granting of the option or the date of the making of any intervening modification, extension, or renewal, whichever is the highest. (2) DEFINITION OF MODIFICATION.—The term "modification" means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option— (A) attributable to the issuance or assumption of an option under subsection (g); or (B) to permit the option to qualify under subsection (d)(1) (B). If an option is exercisable after the expiration of 10 years from the date such option is granted, subparagraph (B) shall not apply unless the terms of the option are also changed to make it not exercisable after the expiration of such period. (f) E F F E C T OF DISQUALIFYING DISPOSITION.—If a share of stock, acquired by an individual pursuant to his exercise of a restricted stock option, is disposed of by him within 2 years from the date of the granting of the option or within 6 months after the transfer of such share to him, then any increase in the income of such individual or deduction from the income of his employer corporation for the taxable year in which such exercise occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year of such individual or of such employer corporation in which such disposition occurred. (g) CORPORATE REORGANIZATIONS, LIQUIDATIONS, ETC.^—For purposes of this section, the term "issuing or assuming a stock option in a transaction to which subsection (g) is applicable" means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if— (1) the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such shares is not more than § 421(e)(1)(A)
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