Option backdating and its implications

Another variation on the stock option backdating scheme has emerged.

Instead of merely backdating the grant date to achieve a lower exercise price, the SEC has begun investigating whether executives have backdated the exercise date.

Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

There are two potential tax advantages in this scheme: First, the earlier the date of exercise, the sooner the 12-month period will be reached for the favorable 15% long-term capital gains rate.

In addition, by choosing an exercise date in which the stock had a low value, the executive converts potential ordinary income into capital gains.

However, by backdating the grant date to the date when Mike was offered the stock options (September 1st), the option price is lowered to /share and Mike receives built-in gain on the "spread" between the exercise price and the fair market value of the stock of /share or ,000,000.

Assuming Acme backdated the stock options to September 1st, what are the tax consequences to Mike and the company? 162(m) states that a public corporation may claim a tax deduction for compensation paid to its CEO and its four other highest-paid executives, but only if strict requirements are met.

The salary paid cannot exceed

There are two potential tax advantages in this scheme: First, the earlier the date of exercise, the sooner the 12-month period will be reached for the favorable 15% long-term capital gains rate.

In addition, by choosing an exercise date in which the stock had a low value, the executive converts potential ordinary income into capital gains.

However, by backdating the grant date to the date when Mike was offered the stock options (September 1st), the option price is lowered to $20/share and Mike receives built-in gain on the "spread" between the exercise price and the fair market value of the stock of $10/share or $10,000,000.

Assuming Acme backdated the stock options to September 1st, what are the tax consequences to Mike and the company? 162(m) states that a public corporation may claim a tax deduction for compensation paid to its CEO and its four other highest-paid executives, but only if strict requirements are met.

The salary paid cannot exceed $1,000,000, excluding performance-based compensation, such as stock options, provided the exercise price equals or exceeds the fair market value as of the date of grant. 162(m) has been violated since Mike received stock options at an exercise price of $20/share when Acme's stock was worth $30/share.

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There are two potential tax advantages in this scheme: First, the earlier the date of exercise, the sooner the 12-month period will be reached for the favorable 15% long-term capital gains rate.In addition, by choosing an exercise date in which the stock had a low value, the executive converts potential ordinary income into capital gains.However, by backdating the grant date to the date when Mike was offered the stock options (September 1st), the option price is lowered to $20/share and Mike receives built-in gain on the "spread" between the exercise price and the fair market value of the stock of $10/share or $10,000,000.Assuming Acme backdated the stock options to September 1st, what are the tax consequences to Mike and the company? 162(m) states that a public corporation may claim a tax deduction for compensation paid to its CEO and its four other highest-paid executives, but only if strict requirements are met.The salary paid cannot exceed $1,000,000, excluding performance-based compensation, such as stock options, provided the exercise price equals or exceeds the fair market value as of the date of grant. 162(m) has been violated since Mike received stock options at an exercise price of $20/share when Acme's stock was worth $30/share.

,000,000, excluding performance-based compensation, such as stock options, provided the exercise price equals or exceeds the fair market value as of the date of grant. 162(m) has been violated since Mike received stock options at an exercise price of /share when Acme's stock was worth /share.

Therefore, Acme may not deduct Mike's compensation in excess of the

Therefore, Acme may not deduct Mike's compensation in excess of the $1,000,000 salary, which could cause a restatement of earnings of $10,000,000.The company waits until the stock drops, then issues the options at a low point in the stock's price.This practice is called "bullet-dodging." To illustrate the effect of backdating options, consider Mike who is offered a job as CEO of Acme Corporation, a public company, on September 1st, when Acme's stock is worth $20/share.Employers must submit a notice of intent to participate in the program by February 28, 2007.(Check to see whether the initiative has been extended).When an incentive stock option ("ISO") is issued under IRC Sec.Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.

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Therefore, Acme may not deduct Mike's compensation in excess of the $1,000,000 salary, which could cause a restatement of earnings of $10,000,000.

The company waits until the stock drops, then issues the options at a low point in the stock's price.

This practice is called "bullet-dodging." To illustrate the effect of backdating options, consider Mike who is offered a job as CEO of Acme Corporation, a public company, on September 1st, when Acme's stock is worth $20/share.

Employers must submit a notice of intent to participate in the program by February 28, 2007.(Check to see whether the initiative has been extended).

When an incentive stock option ("ISO") is issued under IRC Sec.

Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.

,000,000 salary, which could cause a restatement of earnings of ,000,000.

The company waits until the stock drops, then issues the options at a low point in the stock's price.

This practice is called "bullet-dodging." To illustrate the effect of backdating options, consider Mike who is offered a job as CEO of Acme Corporation, a public company, on September 1st, when Acme's stock is worth /share.

Employers must submit a notice of intent to participate in the program by February 28, 2007.(Check to see whether the initiative has been extended).

When an incentive stock option ("ISO") is issued under IRC Sec.

Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.