Options abusers face tax bill

Are corporate boards, especially those sitting on compensation committees, personally liable for issuing options just before the release of good news, a practice known as springloading? Well, yes, according to rulings by Chancellor William B. Chandler III of the Delaware Chancery Court and spelled out by NYT columnist Floyd Norris in his Friday column. “It is difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at ‘market rate’ and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more,” Chandler wrote. This position goes beyond anything the SEC has said - and in a way, holds greater weight because Delaware is where most major companies are incorporated. Also engaged by Norris is an Internal Revenue Service ruling that has employees who innocently cashed in backdated options in 2006 facing a soaring tax bill. The IRS has given companies two weeks to decide whether to pick up the tax for the workers - possibly ticking off shareholders - or making workers pay the tax. From the NYT:

The tax issue stems from a law that took effect in 2005 regarding deferred compensation. It was not aimed at backdated options, but the I.R.S. says it applies to them if they were vested — that is, if the employee got the right to exercise them — after the end of 2004. Options can vest up to five years after they are issued, so some old option grants are partly covered. If a taxpayer exercised such an option in 2006, the effective tax rate rises from 35 percent of the profits to 55 percent, and interest penalties could make the figure even higher.