Tax Issues Related To Discounted Stock Options

In recent months the SEC has initiated investigations of over 100 companies with respect to backdating and various other stock option practices. Much of the attention has focused on the civil and criminal securities investigations, internal and/or independent committee investigations, accounting restatements, and derivative lawsuits. However, as most or all of the affected companies and accountants will sooner or later need to understand, there are very significant tax issues which arise when corporations issue stock options at a discount from the fair market value of the stock on the date of the grant.

This alert will address the three primary federal income tax issues related to discounted stock options: