Taxes and the backdating of stock option exercise dates

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.

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We have found the IRS receptive to amending the request to a more specific set of documentation which addresses the IRS's goals.

Backdating of an option may prevent it from qualifying for the exception set forth in Treas. Backdating of a stock option might prevent such option from qualifying as an ISO as § 422(b)(4) requires that the option's exercise price be not less than the fair market value of the stock at the time such option was granted.

Withholding issues may arise for a corporation if an option that was labeled an ISO is later found to have been misclassified.

Furthermore, the Directive states the special requirements apply regardless of whether the issue arises from error or was the result of deliberate actions.

The Directive instructs agents to identify the existence of any backdating issues at the beginning of any corporate examination. The Directive states that the backdating issue should be identified early in the audit process so as to "ensure proper statute [of limitations] procedures are in place to address this issue at the individual level." Thus, the Directive signals that the IRS intends to use its audits of corporate taxpayers as a tool for the timely identification of individuals who have benefited from backdating so that the IRS can pursue separate audits of such individuals before any relevant statute of limitations lapse.The Directive is significant, nonetheless, in that it signals a nationally coordinated effort within the IRS to target transactions involving backdated stock options, and also establishes mandatory audit requirements and centralized reporting procedures within the IRS as relating to backdated stock options.

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