The consequences of backdating executive stock options dating site of canada

Posted by / 20-May-2017 17:26

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.Mike will have ,000,000 of ordinary income on the date of exercise (100,000 x the spread of /share).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.Some companies set the grant date at the lowest point within a 30-day window ending on the actual grant date, thereby virtually guaranteeing a below market price option.In other situations, when a company believes its stock would dramatically increase in value based on a future event, options are granted just prior to the favorable event. Another type of backdating occurs when the company will announce bad news that could temporarily depress its stock price.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.

Backdating the date of exercise, rather than the date of grant, provides the employee with a double tax benefit and does not run afoul of IRC Secs. 422, since these code provisions address in-the-money options on the date of grant, not exercise.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

Backdating the date of exercise, rather than the date of grant, provides the employee with a double tax benefit and does not run afoul of IRC Secs. 422, since these code provisions address in-the-money options on the date of grant, not exercise.

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.

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.

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Backdating the date of exercise, rather than the date of grant, provides the employee with a double tax benefit and does not run afoul of IRC Secs. 422, since these code provisions address in-the-money options on the date of grant, not exercise.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.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.

/share in profit (

Backdating the date of exercise, rather than the date of grant, provides the employee with a double tax benefit and does not run afoul of IRC Secs. 422, since these code provisions address in-the-money options on the date of grant, not exercise.

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.

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.

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Backdating the date of exercise, rather than the date of grant, provides the employee with a double tax benefit and does not run afoul of IRC Secs. 422, since these code provisions address in-the-money options on the date of grant, not exercise.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.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.

,000 in total).If the stock dropped below /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.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.

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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).

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