Apple option backdating scandal
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.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.
In our example, Mike's options vested immediately, so he owed ,000,000 in ordinary income on the date he received the stock grant. Note: IRS has a new initiative (IR 2007-30) allowing employers to pay the additional taxes incurred by rank and file employees caused by the company's backdating of stock options during 2006.
The stock option backdating scandal shows no signs of abating and the newly-discovered backdating of the date of exercise may give corporate American another black-eye.
Expect IRS to aggressively pursue this cheating since it amounts to tax fraud and evasion, pure and simple, and is relatively easy to prove.
Another variation on the stock option backdating scheme has emerged.
Instead of merely backdating the grant date to achieve a lower exercise price, the SEC has begun investigating whether executives have backdated the exercise date.