The following is not meant to be legal advice.
On July 11, 2007, the IRS released an internal Industry Director Directive memorandum dated June 15, 2007 (the "Directive"). The Directive designates transactions involving backdated stock options as a Tier I Issue for IRS agents. Tier I Issues are considered high strategic importance.
Backdated options raise deductibility issues. The Directive focuses on whether an option qualifies as an Incentive Stock Option ("ISO") pursuant to § 422. Backdating of a stock option might prevent such option from qualifying as an ISO because § 422(b)(4) requires that the option's exercise price be not less than the fair market value of the stock at the time such option was granted. The Directive applies to discounted stock options granted after December 31, 2004.
The Directive establishes mandatory audit requirements relating to backdated stock options. IRS field agents are required to audit all transactions involving backdated stock option grants. The Directive applies regardless of error or deliberate actions.
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