Tax consequences of backdating options

07-Jun-2020 19:50

The pattern was somewhat more common in technology companies, smaller companies, companies granting options to more executives and directors, and companies with higher stock price volatility.

Only 7.7% of companies filing within the new two-day reporting window for options grants show a pattern of backdating, compared to 19.9% of companies that did not meet the requirements.We often are asked, “It’s a non-cash charge, how bad can that be? So, you may acquiesce to your auditor (or the SEC) and accept a cheap stock charge to put the issue behind you.But you may not be done with the problem if that causes the IRS to start looking at your case. Cancel and Reissue Sometimes, a company decides that it does not want to accept a cheap stock charge.Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date. Attorney's Office in Northern California has launched a series of investigations and in July issued criminal and securities fraud charges against two top executives at Brocade Communications. National concern about the practice has been spurred by a series of articles in the Wall Street Journal. Companies found to have practiced this could be forced to restate their earnings.

Only 7.7% of companies filing within the new two-day reporting window for options grants show a pattern of backdating, compared to 19.9% of companies that did not meet the requirements.

We often are asked, “It’s a non-cash charge, how bad can that be? So, you may acquiesce to your auditor (or the SEC) and accept a cheap stock charge to put the issue behind you.

But you may not be done with the problem if that causes the IRS to start looking at your case. Cancel and Reissue Sometimes, a company decides that it does not want to accept a cheap stock charge.

Dozens of companies are under investigation by the Securities and Exchange Commission for backdating stock options. Alternatively, a company could hit a low without actually backdating its options by granting awards just before a major (positive) earnings announcement, a practice known as "spring-loading." A more extreme and more clearly illegal practice was to say that an award was exercised on a date other than its actual exercise date.

Attorney's Office in Northern California has launched a series of investigations and in July issued criminal and securities fraud charges against two top executives at Brocade Communications. National concern about the practice has been spurred by a series of articles in the Wall Street Journal. Companies found to have practiced this could be forced to restate their earnings.

This typically will result in adverse tax consequences for the option recipient and a tax withholding responsibility for the company.