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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.Assuming Acme backdated the stock options to September 1st, what are the tax consequences to Mike and the company? 162(m) states that a public corporation may claim a tax deduction for compensation paid to its CEO and its four other highest-paid executives, but only if strict requirements are met.Some companies set the grant date at the lowest point within a 30-day window ending on the actual grant date, thereby virtually guaranteeing a below market price option.In other situations, when a company believes its stock would dramatically increase in value based on a future event, options are granted just prior to the favorable event. Another type of backdating occurs when the company will announce bad news that could temporarily depress its stock price.IRS intends the program to minimize compliance burdens on employees who are not corporate insiders while collecting the additional taxes due.Under the IRS initiative, employers will not report the additional taxes on the employee's W-2 and the employee will not be obligated to pay the additional taxes.422, the employee does not pay taxes on the date of grant or exercise, although he is subject to the alternative minimum tax on the spread once the option is exercised.

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.Here's how: 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.Mike will have ,000,000 of ordinary income on the date of exercise (100,000 x the spread of /share).Stock option backdating has erupted into a major corporate scandal, involving potentially hundreds of publicly-held companies, and may even ensnare Apple's icon, Steve Jobs.While the focus of the Securities and Exchange Commission ("SEC") centers on improper accounting practices and disclosures, thereby violating securities laws, a major yet little explored consequence to the scandal involves potentially onerous taxes on those who received these options.

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