Shafting the shareholder, helping out the taxman

By Geoff Colvin, Fortune senior editor at large

The really wacky aspect of exercise backdating lies in the realm of taxes. Remember, executives who do this want to minimize their gain on exercise. But for the company that granted the options, that dreaded gain is a good thing because it's a tax deduction.

Thus, when an executive works a scam to reduce his reported gain on exercise, he's also shrinking his own company's tax deduction - causing it to pay more tax.

Note a couple of important points here. First, the shareholders are unambiguously getting shafted. Exercise backdating changes only one thing from their perspective, reducing the tax deduction their company gets. The company needlessly pays more tax, robbing shareholders of wealth, because some top executive got greedy.

Second, Uncle Sam probably comes out ahead on the deal. The executive, most likely a high-income person, is presumably paying the 35 percent top rate on his gain on exercise. The company he works for probably pays income tax at about a 40 percent rate - that's the average for U.S. corporations.

Now remember, for every dollar he reduces his gain, he also reduces his company's tax deduction by a dollar. Thus from the IRS's perspective, one less dollar taxed at 35 percent becomes one more dollar taxed at 40 percent.

So believe it or not, this new type of backdating is actually a tax dodge that leaves the taxman better off. Of course, it leaves the executive better off also, until he gets caught. Who loses? Just the shareholder.

Which is why you shouldn't merely shake your head at what looks like another tale of scoundrels trying to cheat the U.S. Treasury. In this case they weren't. They were stealing only from their own shareholders, and they knew it.

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Marvell Technology finds backdated options: Marvell (Charts) says incorrect dates were used on some stock option grants.

Suit charges Apple with new options woes: Report says shareholder suit cites 'spring-loaded' options granted ahead of good news that lifted Apple (Charts) stock.

SEC investigates UnitedHealth: Regulators target UnitedHealth (Charts) for alleged options backdating. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.