Link from CFO Magazine
"The IRS legal memorandum, AM 2009-006, released on July 6, 2009, addresses the issue of whether the compensation emanating from these discounted options constitutes "qualified performance based compensation." The answer is an unequivocal no...
Whether a stock option satisfies the requirements of Regulation Section 1.162-27(e)(2)(vi)(A) is determined as of the date of grant of the option. The regulations do not provide a mechanism to retroactively reprice an option to transform compensation resulting from the exercise of the option into performance based compensation. Because the compensation arising from the option grants in this case was not based solely on an increase in the price of the stock after the grant date, none of the compensation attributable to the options in question was qualified performance based compensation."
Link to IRS GC Memo