Disposition of stock
(c) Disposition of stock. (1) For purposes of sections 421 through 424, the term disposition of stock includes a sale, exchange, gift, or any transfer of legal title, but does not include (i) A transfer from a decedent to his estate or a transfer by bequest or inheritance; or (ii) An exchange to which is applicable section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036); or (iii) A mere pledge or hypothecation. However, a disposition of the stock pursuant to a pledge or hypothecation is a disposition by the individual, even though the making of the pledge or hypothecation is not such a disposition. (iv) A transfer between spouses or incident to divorce (described in section 1041(a)). The special tax treatment of 1.421-2(a) with respect to the transferred stock applies to the transferee. However, see 1.421-1(b)(2) for the treatment of the transfer of a statutory option incident to divorce. (2) A share of stock acquired by an individual pursuant to the exercise of a statutory option is not considered disposed of by the individual if such share is taken in the name of the individual and another person jointly with right of survivorship, or is subsequently transferred into such joint ownership, or is retransferred from such joint ownership to the sole ownership of the individual. However, any termination of such joint ownership (other than a termination effected by the death of a joint owner) is a disposition of such share, except to the extent the individual reacquires ownership of the share. For example, if such individual and his joint owner transfer such share to another person, the individual has made a disposition of such share. Likewise, if a share of stock held in the joint names of such individual and another person is transferred to the name of such other person, there is a disposition of such share by the individual. If an individual exercises a statutory option and a share of stock is transferred to another or is transferred to such individual in his name as trustee for another, the individual has made a disposition of such share. However, a termination of joint ownership resulting from the death of one of the owners is not a disposition of such share. For determination of basis in the hands of the survivor where joint ownership is terminated by the death of one of the owners, see section 1014 or section 1022, if applicable. (3) If an optionee exercises an incentive stock option with statutory option stock and the applicable holding period requirements (under 1.422-1(a) or 1.423-1(a)) with respect to such statutory option stock are not met before such transfer, then sections 354, 355, 356, or 1036 (or so much of 1031 as relates to 1036) do not apply to determine whether there is a disposition of those shares. Therefore, there is a disposition of the statutory option stock, and the special tax treatment of 1.421-2(a) does not apply to such stock. (4) The application of this paragraph may be illustrated by the following examples: