(1) In general If an option to which this part applies is exercised after the death of the employee by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the provisions of subsection (a) shall apply to the same extent as if the option had been exercised by the decedent, except that
(A) the holding period and employment requirements of sections
422 (a) and
423 (a) shall not apply, and
(B) any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of section
423 (c).
(2) Deduction for estate tax If an amount is required to be included under section
423 (c) in gross income of the estate of the deceased employee or of a person described in paragraph (1), there shall be allowed to the estate or such person a deduction with respect to the estate tax attributable to the inclusion in the taxable estate of the deceased employee of the net value for estate tax purposes of the option. For this purpose, the deduction shall be determined under section
691 (c) as if the option acquired from the deceased employee were an item of gross income in respect of the decedent under section
691 and as if the amount includible in gross income under section
423 (c) were an amount included in gross income under section
691 in respect of such item of gross income.
(3) Basis of shares acquired In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies
(A) the basis of such share shall include so much of the basis of the option as is attributable to such share; except that the basis of such share shall be reduced by the excess (if any) of
(i) the amount which would have been includible in gross income under section
423 (c) if the employee had exercised the option on the date of his death and had held the share acquired pursuant to such exercise at the time of his death, over
(ii) the amount which is includible in gross income under such section; and
(B) the last sentence of section
423 (c) shall apply only to the extent that the amount includible in gross income under such section exceeds so much of the basis of the option as is attributable to such share.