On Feb. 8, 2007, the Internal Revenue Service made an unusual offer to employers: on very short notice — by Feb. 28, 2007 — employers could inform the IRS of their intent to pay the back taxes and penalties owed by (non-insider) employees who exercised stock options with “an exercise price of less than fair market value of the underlying stock on the date of grant in 2006.” See IRS Announcement 2007-18 (“Corporate Resolution Program For Employees Other Than Insiders For Additional 2006 Taxes Arising Under �409A due to the Exercise of Stock Options”). Under this program, companies with backdated options programs were “allowed” to calculate and pay, by June 30, 2007, on behalf of their employees who exercised such options, a 20 percent penalty tax, and an additional 1 percent interest on underpayments, owed by such employees under �409A of the Internal Revenue Code.

If your company is taking the IRS up on the offer, you will have the satisfaction of knowing that you can pay taxes that your employees, not the company, really owe. The amounts you pay on your employees’ behalf will be included in the employees’ gross incomes for 2007, as they would have been if the IRS Announcement 2007-18 had not been issued. And you will have openly alerted the IRS, and possibly the Securities and Exchange Commission, to the fact that your stock options program has historically included (if it does not still include) backdated or “in the money” options.

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