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This client advisory focuses on the particular provisions of Notices 2006--100 that together affect discounted stock options with a particular emphasis on backdated options.

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As we noted in our October 10, 2006 Client Alert, Notice 2006-79 generally extended the transition period during which arrangements covered by Code 409A can be amended to conform to Code 409, but denies the benefit of the extension to backdated stock options for public companies that did not timely report the financial expenses.

Notice 2006-100 provides interim rules governing reporting and wage withholding under Code 409.

The alternatives are as follows: Notice 2006-79 Notice 2006-79 extended the transition relief to the end of 2007, with one exception.

The extension does not apply to any stock option or stock appreciation right (stock right) that (quoting from the notice): (A) was granted with respect to stock of a corporation that as of the date of grant had issued any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934;(C) with respect to the grant of such stock right, such corporation either has reported or reasonably expects to report a financial expense due to the issuance of a stock right with an exercise price lower than the fair market value of the underlying stock at the date of grant that was not timely reported on financial statements or reports for the period in which the related expense should have been reported under generally accepted accounting principles.

The employer can either withhold the necessary amounts from the option holders other income or advance the withholding amounts (and treat them as additional income, with respect to which further withholding is not required).

Persons, other than Section 16 persons, have until the end of 2007 to take remedial action with respect to discounted options.

If a person exercised a discounted option in 2005, which does not comply with Code 409A as of the date of exercise, he or she is subject to taxation (including the 20% excise tax and interest penalties) based on the option spread at the time of exercise less any prior amounts included in income.

The payer must issue an original or corrected Form 941 and Form W-2 or 1099-MISC, as the case may be, by the 2006 filing deadline, but wage withholding is not required.

Because ISOs must be issued at fair market value as of the date of grant, a backdated ISO is unlikely to qualify for ISO treatment.

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