That, of course, is what is meant by abusive "backdating" in today's parlance.
The purpose of disguising an in-the-money option through backdating is to allow the person who gets the option grant to realize larger potential gains-without the company having to show it as compensation on the financial statements.
However, it can be permissible under certain circumstances.
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.
Background On April 10, 2007, the Internal Revenue Service (IRS) issued final regulations under Section 409A of the Internal Revenue Code.
Section 409A was added to the Internal Revenue Code in October 2004 by the American Jobs Creation Act.
This typically will result in adverse tax consequences for the option recipient and a tax withholding responsibility for the company.
Backdating is usually illegal; for example, one may use backdating to evade taxes. This issue is one of intense public interest because it strikes at the heart of the relationship among a public company's management, its directors, and its shareholders. Securities and Exchange Commission Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee: Thank you for inviting me to testify today about options backdating.An option giving the buyer the right to buy at a certain price is called a call, while one that gives him/her the right to sell is called a put.Options contracts are used both in speculative investments, in which the option holder believes he/she can secure a price much higher (or lower) than the fair market value of the underlying on the expiration date.The company is required to withhold applicable income and employment taxes at the time of option vesting, and possibly additional amounts as the underlying stock value increases over time.