Back dating of stock

First, backdated options raise deductibility issues pursuant to § 162. An exception to this limitation is set forth in Treas. § 1.162- 27(e)(2)(vi), which exempts "qualified performance based compensation" from the

First, backdated options raise deductibility issues pursuant to § 162. An exception to this limitation is set forth in Treas. § 1.162- 27(e)(2)(vi), which exempts "qualified performance based compensation" from the $1 million limitation.

||

First, backdated options raise deductibility issues pursuant to § 162. An exception to this limitation is set forth in Treas. § 1.162- 27(e)(2)(vi), which exempts "qualified performance based compensation" from the $1 million limitation.

In order to qualify for this exception, the option in question must have an exercise price that equals or exceeds the per share value on the grant date (other requirements also apply). The second tax consideration identified in the Directive focuses on whether an option qualifies as an Incentive Stock Option ("ISO") pursuant to § 422.

million limitation.

In order to qualify for this exception, the option in question must have an exercise price that equals or exceeds the per share value on the grant date (other requirements also apply). The second tax consideration identified in the Directive focuses on whether an option qualifies as an Incentive Stock Option ("ISO") pursuant to § 422.

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.The IRS's interest in the tax implications of backdated options is not new.We are currently working with a number of clients that have already received Information Document Requests ("IDR") from the IRS requesting information relating to the backdating issue.The consequence of a discounted stock option being subject to § 409A is that the option holder recognizes taxable income as the option vests (and thereafter), whether or not the option has been exercised (in other words, whether or not the option holder has actually obtained any value from the option).This additional taxable income will be subject to a 20% federal tax in addition to the regular tax rate, plus regular state income taxes (and possibly additional state penalty taxes). It is important to note that taxpayers generally have until December 31, 2007, to amend their discounted stock options to comply with § 409A (generally by increasing the exercise price to what was fair market value on the date the option was granted), but any pre-amendment exercise made in 2007, however, are subject to § 409A taxes.

Leave a Reply