The consequences of backdating executive stock options


16-Aug-2019 20:18

the consequences of backdating executive stock options-77

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422, the employee does not pay taxes on the date of grant or exercise, although he is subject to the alternative minimum tax on the spread once the option is exercised.If the employee holds the stock for at least one year after the date of exercise and two years after the date of grant, he is entitled to the federal long-term capital gains tax rate of 15% on the spread.If the stock increased to a share, the holder could exercise the option, pay /share to acquire the stock, then turn around and sell it for /share, earning

422, the employee does not pay taxes on the date of grant or exercise, although he is subject to the alternative minimum tax on the spread once the option is exercised.If the employee holds the stock for at least one year after the date of exercise and two years after the date of grant, he is entitled to the federal long-term capital gains tax rate of 15% on the spread.If the stock increased to $11 a share, the holder could exercise the option, pay $10/share to acquire the stock, then turn around and sell it for $11/share, earning $1/share in profit ($1,000 in total).

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422, the employee does not pay taxes on the date of grant or exercise, although he is subject to the alternative minimum tax on the spread once the option is exercised.

If the employee holds the stock for at least one year after the date of exercise and two years after the date of grant, he is entitled to the federal long-term capital gains tax rate of 15% on the spread.

If the stock increased to $11 a share, the holder could exercise the option, pay $10/share to acquire the stock, then turn around and sell it for $11/share, earning $1/share in profit ($1,000 in total).

If the stock dropped below $10/share, the stock would be "under water"; therefore, the option would not be exercised, since the stock price is lower than the cost of exercising the option.

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.

Thus, the option becomes "in the money", meaning there was a built-in profit on the underlying stock, on the grant date.

The stock option backdating scandal shows no signs of abating and the newly-discovered backdating of the date of exercise may give corporate American another black-eye.

Expect IRS to aggressively pursue this cheating since it amounts to tax fraud and evasion, pure and simple, and is relatively easy to prove.

/share in profit (

422, the employee does not pay taxes on the date of grant or exercise, although he is subject to the alternative minimum tax on the spread once the option is exercised.If the employee holds the stock for at least one year after the date of exercise and two years after the date of grant, he is entitled to the federal long-term capital gains tax rate of 15% on the spread.If the stock increased to $11 a share, the holder could exercise the option, pay $10/share to acquire the stock, then turn around and sell it for $11/share, earning $1/share in profit ($1,000 in total).

||

422, the employee does not pay taxes on the date of grant or exercise, although he is subject to the alternative minimum tax on the spread once the option is exercised.

If the employee holds the stock for at least one year after the date of exercise and two years after the date of grant, he is entitled to the federal long-term capital gains tax rate of 15% on the spread.

If the stock increased to $11 a share, the holder could exercise the option, pay $10/share to acquire the stock, then turn around and sell it for $11/share, earning $1/share in profit ($1,000 in total).

If the stock dropped below $10/share, the stock would be "under water"; therefore, the option would not be exercised, since the stock price is lower than the cost of exercising the option.

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.

Thus, the option becomes "in the money", meaning there was a built-in profit on the underlying stock, on the grant date.

The stock option backdating scandal shows no signs of abating and the newly-discovered backdating of the date of exercise may give corporate American another black-eye.

Expect IRS to aggressively pursue this cheating since it amounts to tax fraud and evasion, pure and simple, and is relatively easy to prove.

,000 in total).

While the focus of the Securities and Exchange Commission ("SEC") centers on improper accounting practices and disclosures, thereby violating securities laws, a major yet little explored consequence to the scandal involves potentially onerous taxes on those who received these options.

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.

In some cases, the date of exercise, rather than the date of grant, was changed to an earlier date to convert ordinary income into capital gains.

In general, companies engaging in a classic backdating transaction chose a date when the stock price was at a low point and chose that favorable date as the grant date.Here's how: Assume Mike receives 100,000 options on January 1, 2006 with an exercise price of /share and exercises them on July 1, 2006 when the stock is worth /share.



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