Mixing Oil And Water: Backdated Stock Options Under Code § 409A

Two recent IRS Notices—Notice 2006-79 and Notice 2006-100—provide important relief and clarification respecting the taxation of nonqualified deferred arrangements. These notices are the latest guidance implementing Internal Revenue Code § 409, which was added to the Code as a part of the American Jobs Creation Act of 2004 (the "Act"). In the Act’s legislative history, Congress signaled its desire to exempt stock options granted at fair market value from Code § 409A, and the regulators have largely respected Congress’s wishes in this regard. Discounted options are another matter. Congress clearly viewed the discount as a deferral of compensation subject to the new regime.

Recent press reports of SEC investigations have focused the attention of the regulators and the public on "backdated" stock options. Option "backdating" is the term that has generally been applied in the media to instances where executives have intentionally dated an option at a date earlier than the actual date of