Backdating employee stock options tax implications

In addition, discounted options that do not have a fixed exercise date are subject to an additional twenty percent penalty tax. Therefore, any executive who failed to account for backdated options under 409A and/or failed to pay the penalty tax for options lacking a fixed exercise date could be criminally liable for willfully failing to pay taxes, see, e.g., I. C.7202, or providing fraudulent and false statements in a tax return, see, e.g.

Consequently, options granted at a discount would not qualify, and are subject to income tax and Federal Insurance Contributions Act (FICA) withholding.

1972) and Accounting for Stock-Based Compensation , Statement of Fin. Rene Beltranena Bea is a trial Associate in Jones Day's New York office.

Martha Boersch , a Partner in Jones Day's San Francisco office, is a trial lawyer who practices corporate criminal defense and complex civil litigation.

With more criminal charges in the pipeline, companies and executives need to understand the potential scope of criminal liability. ('Securities Act'); Securities Exchange Act of 1934, 15 U. Tax Fraud Executives who used backdating practices may also face criminal prosecution for federal tax fraud. Therefore, to be criminally liable under the Code's criminal statutes, a person must 'willfully attempt[]to evade or defeat any tax imposed by [the federal government].' I.

There are three major areas of potential criminal liability for former executives involved in stock options backdating: securities fraud, tax fraud, and mail or wire fraud. Backdating only becomes illegal when executives fail to disclose the practice in financial reports, and fail to properly account for backdated options according to Generally Accepted Accounting Principles (GAAP) and the relevant tax laws. Three possible violations of the Internal Revenue Code ('Code') could create criminal liability for backdating: (1) exceeding the compensation deduction limits of Section 162(m), (2) failing to qualify options under the rules that govern incentive stock options in Section 422, and (3) violating the provisions of Section 409A regulating deferred compensation.

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