(a) In general. Except as otherwise provided in Sec. 1.61-2(d)(6)(i) (relating to certain restricted property transferred after June 30, 1969), if any person receives an option in payment of an amount constituting compensation of such person (or any other person), such option is subject to the rules contained in Sec. 1.421-6 for purposes of determining when income is realized in connection with such option and the amount of such income. In this regard, the rules of Sec. 1.421-6 apply to an option received in payment of an amount constituting compensation regardless of the form of the transaction. Thus, the rules of Sec. 1.421-6 apply to an option transferred for less than its fair market value in a transaction taking the form of a sale or exchange if the difference between the amount paid for the option and its fair market value at the time of transfer is the payment of an amount constituting compensation of the transferee or any other person. This section, for example, makes the rules of Sec. 1.421-6 applicable to options granted in whole or partial payment for services of an independent contractor. If an amount of money or property is paid for an option to which this paragraph applies, then the amount paid shall be part of the basis of such option.
(b) Options to which paragraph (a) does not apply. (1) Paragraph (a) of this section does not apply to:
(1) Paragraph (a) of this section does not apply to:
(i) An option which is subject to the rules contained in section 421; and
(ii) An option which is not granted as the payment of an amount constituting compensation, such as an option which is acquired solely as an investment (including an option which is part of an investment unit described in paragraph (b) of Sec. 1.1232-3). For rules relating to the taxation of options described in this subdivision, see section 1234 and the regulations thereunder.
(2) If a person acquires an option which is not subject to the rules contained in section 421, and if such option has a readily ascertainable fair market value, such person may establish that such option was not acquired as payment of an amount constituting compensation by showing that the amount of money or its equivalent paid for the option equaled the readily ascertainable fair market value of the option. If a person acquires an option which is not subject to the rules contained in section 421, and if such option does not have a readily ascertainable fair market value, then to establish that such option was not acquired as payment of an amount constituting compensation, such person must show that, from an examination of all the surrounding circumstances, there was no reason for the option to have been granted as the payment of an amount constituting compensation. For example, such person must show that he had neither rendered nor was obligated to render substantial services in consideration for the granting of the option. In determining whether an option, such as an option acquired in connection with an obligation as part of an investment unit, has been granted as compensation for services, the ordinary services performed by an investor in his own self-interest in connection with his investing activities will not be treated as the consideration for the grant of the option. For example, if a small business investment company takes an active part in the management of its debtor small business company, the rendering of such management services will not be treated as the consideration for the granting of the option, provided such services are rendered for an independent consideration, or are merely protective of the small business investment company's investment in the borrower. See paragraph (c) of Sec. 1.421-6 for the meaning of the term ``readily ascertainable fair market value.''
(c) Statement required in connection with certain options. (1) Any person acquiring any option to purchase securities (other than an option described in subparagraph (2) of this paragraph) shall attach a statement to his income tax return for the taxable year in which the option was acquired. For the definition of the term ``securities'', see section 165(g)(2).
(1) Any person acquiring any option to purchase securities (other than an option described in subparagraph (2) of this paragraph) shall attach a statement to his income tax return for the taxable year in which the option was acquired. For the definition of the term ``securities'', see section 165(g)(2).
(2) The statement otherwise required by subparagraph (1) of this paragraph shall not be required with respect to the following options:
(i) Options subject to the rules contained in section 305(a) or section 421;
(ii) Options acquired as part of an investment unit consisting of an option and a debenture, note, or other similar obligation--
(a) If such unit is acquired as part of a public offering and the amount of money or its equivalent paid for such unit is not less than the public offering price, or
(b) If such unit is actively traded on an established market and the amount of money or its equivalent paid for such unit is not less than the price paid for such unit in contemporaneous purchases of such unit by persons independent of both the seller and the taxpayer;
(iii) Options acquired as part of a public offering, if the amount of money or its equivalent paid for such option is not less than the public offering price; and
(iv) Options which are actively traded on an established market and which are acquired for money or its equivalent at a price not less than the price paid for such options in contemporaneous purchases of such options by persons independent of both the seller and the taxpayer.
(3) The statement required by subparagraph (1) of this paragraph shall contain the following information:
(i) Name and address of the taxpayer;
(ii) Description of the securities subject to the option (including number of shares of stock);
(iii) Period during which the option is exercisable;
(iv) Whether the option had a readily ascertainable fair market value at date of grant; and
(v) Whether the option is subject to paragraph (a) of this section.
(4) If the statement required by subparagraph (1) of this paragraph indicates either that the option is not subject to paragraph (a) of this section, or that the option is subject to paragraph (a) of this section but that such option had a readily ascertainable fair market value at date of grant, then such statement shall contain the following additional information:
(i) Option price;
(ii) Value at date of grant of securities subject to the option;
(iii) Restrictions (if any) on exercise or transfer of option;
(iv) Restrictions (if any) on transfer of securities subject to the option;
(v) Value of the option (if readily ascertainable);
(vi) How value of option was determined;
(vii) Amount of money (or its equivalent) paid for the option;
(viii) Person from whom the option was acquired;
(ix) A concise description of the circumstances surrounding the acquisition of the option and any other factors relied upon by the taxpayer to establish that the option is not subject to paragraph (a) of this section, or, if the option is treated by the taxpayer as subject to paragraph (a) of this section, that the option had a readily ascertainable fair market value at date of grant.
(d) Effective date. This section shall apply to options granted after July 11, 1963, other than options required to be granted pursuant to the terms of a written contract entered into on or before such date. [T.D. 6696, 28 FR 13450, Dec. 12, 1963, as amended by T.D. 6706, 29 FR 2911, Mar. 3, 1964; T.D. 6984, 33 FR 19175, Dec. 24, 1968; T.D. 7554, 43 FR 31913, July 24, 1978]