Back(dating) to the Future: Corporations with Backdating Irregularities to Face Tax Liabilities as Past Grants Lose Favored Status

Now that we can see the tip of the iceberg with well over 150 federal investigations pending (and scores others we don’t know of yet) corporations who have had to restate financials to account for the malfeasance of former executives will now face additional scrutiny with the Internal Revenue Service. In future posts, we will examine the tax consequences of these backdating cases and the way in which the IRS treats these cases.

As pointed out in a recent article in CFO.com as to one case:

“Mercury’s headaches haven’t ended. Aside from a possible SEC lawsuit against its directors, the company also faces $44 million in additional tax liabilities. While the cash expense is still being negotiated with the Internal Revenue Service, Mercury estimates it will have to withhold an additional $9.1 million to cover employee stock options that lost their tax-favored status as incentive stock options. To add more complications, Mercury reported that some of its executives had fudged option-exercise dates on several occasions to lower their personal tax bills, which could have resulted in the company underreporting its tax liability, exposing it to more penalties. Meanwhile, executive grants that could no longer be considered performance-based (and therefore tax-deductible) by virtue of being backdated have forced Mercury to give up $57.1 million of future tax breaks in the form of net operating loss (NOL) carryforwards.”

Stay tuned….

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