Variations of Backdating Options 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.

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The company waits until the stock drops, then issues the options at a low point in the stock’s price.

This practice is called “bullet-dodging.” To illustrate the effect of backdating options, consider Mike who is offered a job as CEO of Acme Corporation, a public company, on September 1st, when Acme’s stock is worth $20/share.

Scenario One: Mike will have paid taxes on $3,000,000 of ordinary income (taxed at a maximum of 35% federal) and will have $500,000 of short-term capital gains in the following year (taxed at ordinary income rates), since the stock rose $10/share since the date of exercise (100,000 x 5/share = $500,000).

Scenario Two: Mike will have $500,000 of ordinary income, but will receive $3,500,000 taxed at long-term capital gains rates, since he sold the stock more than 12 months from the date the options were granted.

As part of his compensation, Mike is offered a salary of $1,000,000 and 1,000,000 stock options that will vest immediately.

The board of directors approves the compensation package on November 1st, when Acme’s stock is worth /share. 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.

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.

Stock Options Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

For instance, if a stock was worth a share, a stock option may grant an option holder the right to purchase

The board of directors approves the compensation package on November 1st, when Acme’s stock is worth $30/share. However, by backdating the grant date to the date when Mike was offered the stock options (September 1st), the option price is lowered to $20/share and Mike receives built-in gain on the “spread” between the exercise price and the fair market value of the stock of $10/share or $10,000,000.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.Stock Options Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.For instance, if a stock was worth $10 a share, a stock option may grant an option holder the right to purchase $1,000 shares at $10 a share for a period of 5 years.Here’s how: Scenario One: Assume Mike receives 100,000 options on January 1, 2006 with an exercise price of $20/share and exercises them on July 1, 2006 when the stock is worth $50/share.

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The board of directors approves the compensation package on November 1st, when Acme’s stock is worth $30/share. However, by backdating the grant date to the date when Mike was offered the stock options (September 1st), the option price is lowered to $20/share and Mike receives built-in gain on the “spread” between the exercise price and the fair market value of the stock of $10/share or $10,000,000.

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.

Stock Options Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

For instance, if a stock was worth $10 a share, a stock option may grant an option holder the right to purchase $1,000 shares at $10 a share for a period of 5 years.

Here’s how: Scenario One: Assume Mike receives 100,000 options on January 1, 2006 with an exercise price of $20/share and exercises them on July 1, 2006 when the stock is worth $50/share.

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The board of directors approves the compensation package on November 1st, when Acme’s stock is worth $30/share. However, by backdating the grant date to the date when Mike was offered the stock options (September 1st), the option price is lowered to $20/share and Mike receives built-in gain on the “spread” between the exercise price and the fair market value of the stock of $10/share or $10,000,000.

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.

Stock Options Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

,000 shares at a share for a period of 5 years.

Here’s how: Scenario One: 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.