If one were to sell vested non-qualified options to the issuer rather
than exercise for shares, would it be a capital gain income or
ordinary income for tax purposes. Pls respond with IRS code reference,

Hello Webster61,

The general section related to this topic is Title 26, Subtitle A,
Chapter 1, Subchapter P, Part IV.
  http://www.fourmilab.ch/ustax/www/t26-A-1-P-IV.html
The title of this part is "Special Rules for Determining Capital Gains and Losses".

The more specific reference is section 1234 which has three major categories
  http://www.fourmilab.ch/ustax/www/t26-A-1-P-IV-1234.html
which states [lightly edited to clarify your situation] in (a) [...]
purchaser [of the option]
  "Gain or loss attributable to the sale [...] of, [...], an option to
buy or sell property shall be considered gain or loss from the sale
[...] of property which has the same character as the property        
   to which the option relates has in the hands of the taxpayer (or
would have in the hands of the taxpayer if acquired by him)."

Ugh. Let's try a more readable interpretation:
 - if the option is for an item (property) that is subject to capital
gains, then the sale of the option is subject to capital gains.
 - if the option is for an item (property) that is not subject to
capital gains, then the sale of the option is not subject to capital
gains.

The exceptions to this general rule cover:
 - property generally for sale to customers (inventory), see section 1221.
 - if the "property" is not subject to capital gains (see comment above)
 - the property is bought when an option to sell is not exercised, in
that case, the loss is assed to the basis value of the property.

Unless I interpret your statement incorrectly, none of these
exceptions apply so the gain / loss should be treated as capital gains
(like the shares would be).

To get additional information about the US Tax Code, I recommend
general searches such as:
  IRS code
  US Tax code
or in the Google Directory at
http://directory.google.com/Top/Regional/North_America/United_States/Government/Law/Codes_and_Acts/?tc=1
or in a searchable version of the tax code hosted at
  http://www.fourmilab.ch/ustax/TaxSearch.html
where the phrase I used was
  sell and options and capital and gain
to find the relevant section(s) for this answer. There were eight
sections listed for this search and the first one appears to be most
relevant to your situation.

If you need further explanation - please make a clarification request
and I can provide further information.

  --Maniac

http://www.888options.com/

Free CD might have it.