Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

BACKDATING OPTIONS? THAT'S RICH...

May 11, 2006

Well, it wasn't just alien luck after all.

Back in March the Wall Street Journal ($link) noted how the stock options of Affiliated Computer Services CEO Jeffrey Rich were always priced at exactly the low point of a stock decline - minimizing his option cost and maximizing his profit. Mr. Rich attributed his amazing streak of low option prices to "blind luck." The WSJ said he was lucky indeed - in fact, they said, a lottery ticket is twice as likely to win the Powerball drawing as his options were to be priced so consistently at market troughs.

Well, apparently Lady Luck had a little help:

Affiliated Computer Services Inc.'s shares lost ground Thursday after the technology outsourcer delayed its quarterly filing with regulators and expects to take a charge of around $40 million related to an internal probe into its stock-option grant practices.

ACS admitted in a filing with the Securities and Exchange Commission overnight that it granted stock options to executives with effective dates that "generally preceded" the date on which all members of its board's compensation committee gave written approval.

This is bad luck for the ACS tax department. The failure to properly price the options on the actual issue date will likely cost the company a lot of its tax deductions.

An excecutive who exercises a normal (non-ISO) stock option has income to the extent of the "spread" - the amount that the stock value exceeds the price paid to exercise the option. The tax law limits annual compensation deductions to $1 million per each public company executive. The biggest loophole to this rule is for stock options; the spread is deductible, even if over $1 million, if it is "solely" from the increase in option value after the grant date. When options are issued with a price lower than the stock value on the grant date, they flunk the "solely" test.

Apparently UnitedHealth is also questioning the luck of its own executives. The Wall Street Journal ($links) has more:

WSJ on ACS

WSJ on United Health

Tax Update prior coverage

UPDATES:

5/19/2006

5/18/2006

 • 2005 Year-end planning       Bookmark: del.icio.us • Digg • reddit