Backdating stock options steve jobs
When an incentive stock option ("ISO") is issued under IRC Sec.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.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.“It’s not a reflection of the Steve I knew.” Director Alex Gibney might take that as an endorsement. I recognize a lot of myself in him, in the fact that I work very hard, probably to the detriment of the time I spend with my family.
Also, Mike has ordinary income on the date the options are exercised and could be subject to much harsher rules under IRC Sec.409A instead (discussed below). 409A, was enacted after the Enron scandal and targets deferred compensation schemes, including in-the-money options granted before October, 2004 and vesting after December 31, 2004. 409A applies, Mike is taxed on the spread (,000,000) at the time his stock options vest, not when he exercises them. 409A triggers a 20% excise tax penalty in addition to the immediate income tax, plus interest (currently about 9% per annum, plus a 1% per year interest penalty) and potentially an accuracy-related penalty of an additional 20%!
In general, companies engaging in a classic backdating transaction chose a date when the stock price was at a low point and chose that favorable date as the grant date.
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.
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.
Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.