Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.For instance, if a stock was worth a share, a stock option may grant an option holder the right to purchase

Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.For instance, if a stock was worth $10 a share, a stock option may grant an option holder the right to purchase $1,000 shares at $10 a share for a period of 5 years.

Basically, a stock option is a contract right to purchase an amount of stock at a set price for a period of time.

For instance, if a stock was worth $10 a share, a stock option may grant an option holder the right to purchase $1,000 shares at $10 a share for a period of 5 years.

Stock option backdating has erupted into a major corporate scandal, involving potentially hundreds of publicly-held companies, and may even ensnare Apple's icon, Steve Jobs.

While the focus of the Securities and Exchange Commission ("SEC") centers on improper accounting practices and disclosures, thereby violating securities laws, a major yet little explored consequence to the scandal involves potentially onerous taxes on those who received these options.

SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.

Most employee stock options are, or purport to be, granted “at-the-money,” meaning that the exercise price of the option equals the market price of the underlying stock on the date of the grant.

For instance, one may backdate an insurance claim if there was an unavoidable delay between the date the insured event occurred and the day the claim was made.The stock plans of many public companies prohibit the granting of below-market options; other companies disclose in their SEC reports that stock options are granted at market and prepare their financial statements on that basis.The term “backdating” refers to a number of option granting practices in which the reported grant date is different from the date on which the option is actually awarded, resulting in an option that is already “in-the-money” at the time of the grant.For example, if one signs a contract on February 1, one may backdate it to January 31.Backdating is usually illegal; for example, one may use backdating to evade taxes.Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.Thus, the option becomes "in the money", meaning there was a built-in profit on the underlying stock, on the grant date.