Take two interactive backdating

03-Jan-2015 14:57 by 8 Comments

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The deadline for companies to enter the program was February 28, 2007.

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In Notice 2005-1 and the proposed regulations issued under Section 409A, the IRS provided a transition period during which companies could bring noncompliant plans into compliance with the new rules.

The initial transition period ended on December 31, 2006.

In Notice 2006-79, the IRS extended the transition period for compliance with Section 409A to the end of 2007 with one notable exception - backdated stock options and stock appreciation rights of companies whose securities are required to be registered under Section 12 of the Securities Exchange Act of 1934.

Therefore, backdated stock options and stock appreciation rights granted prior to the effective date of Section 409A by public companies are ineligible for modification after 2006.

A company that backdates stock options without disclosure subjects itself, its board of directors and its officers to a multitude of legal issues, particularly in the areas of securities law, federal income tax and fiduciary duty of public company directors.

As public concern over backdated stock options has continued to escalate over the past year, the Internal Revenue Service ("IRS"), the Securities & Exchange Commission ("SEC") and the courts have all responded in kind.

"Backdating" of stock options generally refers to the grant of a stock option with a grant date that is earlier than the actual date of grant (i.e., the date that the company's board of directors or compensation committee approves such grant).

However, during the last year, the term "backdating" has taken on a broader meaning and may be used to refer to other manipulative stock option grant practices, including forward-dating, spring-loading and bullet-dodging.

The IRS Compliance Program Backdated stock options or stock appreciation rights would typically be treated as discounted stock rights under Section 409A of the Internal Revenue Code.

Under Section 409A, a discounted stock right would subject the holder to a penalty tax of 20% plus interest (in addition to regular federal income taxes) when the stock right vests.

In order to allow companies to alleviate such concerns for employees, the IRS set forth in Announcement 2007-18 a compliance program by which companies could pay the additional taxes and interest charges for rank-and-file employees (non-insiders) who were affected by the exercise in 2006 of backdated stock options or stock appreciation rights.

The program was implemented because the IRS wanted companies to have the ability to "satisfy the tax obligations of employees who did not knowingly participate in these schemes" to backdate stock option grants.

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