Tax consequences of backdating options
To avoid criminal liability, the company must have disclosed the fact that it was backdating and explained particularly how the option strike prices had been determined. Previously, companies were allowed to wait until the end of their fiscal year before reporting these transactions. Now option grants must be reported to the SEC within two business days of the grant date. Failure to do so may render financial statements 'false or misleading with respect tomaterial fact,' and create potential criminal liability under the securities acts. Filing an inaccurate report with the SEC might subject the company and its executives to a multitude of securities fraud violations for disclosures that are 'false or misleading with respect tomaterial fact.' Criminal liability for securities fraud will depend squarely on the disclosure and accounting made in a defendant's financial reports. Because backdated options have an exercise price lower than FMV as of the grant date, they are not excepted and must be included when calculating whether an executive's compensation has exceeded the cap. The event did not happen during the time period required for the benefit so an attempt is being made to pretend that it did.This is a fraud on the tax authorities, a criminal offence and is likely to get the lawyer who prepared the document disciplined by his regulator and possibly also charged as a co-conspirator. Criminal charges for backdating could include alleged violations of Section 17(a), 15 U. C.77q, which prohibits fraudulent interstate transactions, and Section 10(b), 15 U. This means a company must properly disclose and account for any backdating practices in its financial statements. Furthermore, the failure to record an expense for discounted options granted to employees might result in understated financials, which could in turn make other financial reports inaccurate, particularly net revenues.
If an executive who participated in backdating certified the company's financial reports, and those reports did not disclose and account for backdating, then he would be liable for making a fraudulent certification. Though federal courts have inconsistently construed these terms, Where the statute requires the person acted 'willfully and knowingly,' however, some courts require the government to show not only that the defendant knew that backdating was wrongful (willfully), but also that it was unlawful (knowingly). Internal Revenue Code Section 162(m) Section 162(m) caps the annual deduction for compensation paid to top executives at one million dollars. R.240.10b-5, which prohibit the use of manipulative and deceptive devices in connection with the purchase or sale of securities. Internal Revenue Code Section 422 Section 422 permits public companies to grant employees 'incentive stock options' (ISOs), allowing them to purchase the company's stock at a discount rate and free from taxes, unless and until the employee later sells any purchased shares. Whether executives will be criminally liable depends on whether they were consciously trying to cover up the practice of backdating. Like securities fraud, the criminal tax fraud statutes require an intent element. Securities Fraud The primary source of criminal liability for backdating are the federal securities acts, which regulate the sale of securities by publicly traded companies.