The Federal Tax Implications of Redating Stock Option Grant Dates and Exercise Dates

Abstract

Backdating of stock option grants is receiving substantial investigative attention by the Securities and Exchange Commission, the Department of Justice, the Public Company Accounting Oversight Board, and the Internal Revenue Service. The redating of stock options has significant potential economic and legal implications to executives, employees, and shareholders of the granting firms. Accordingly, this topic is of considerable current interest in both the academic and popular press. In this paper, we discuss the tax implications of manipulating stock option grant and exercise dates, review the tax treatment of stock option and stock purchase plans including I.R.C. §162(m) and I.R.C. §409A implications, and present a real world example illustrating the potential economic magnitude of this problem to both the option grantees and the option granting firms.