Advice on 409A Valuations for Start Up Companies

"With the advent of IRS Section 409A and the introduction of certain fair value accounting rules, valuation issues have become increasingly important for start-up companies. In the past, industry specific start-up “rules of thumb” may have been sufficient to serve as reasonable basis for any valuation concern. For example, the “Silicon Valley Rule” holds that the value of a common share is equal to 1/10 of the value of the preferred share pricing in the most recent capital round. While the simplicity of such rules can be appealing, the scrutiny of the IRS, SEC, and your auditors in combination with the potential liability associated with misreporting financial performance make it critical that value be determined and articulated in a credible fashion."

ARTICLE BY B. PATRICK LYNCH HERE

Student Law Article Re: 409A Correction Program

"This article reviews the current Code §409A(a) correction program and analyzes several issues related to creating the program, including whether the Treasury Department and the Service have legal authority to create it. The first section of this article discusses the history of Code §409A(a) and its requirements. The second section reviews Notice 2007-100 and provides an analysis of several issues related to the Notice. The third section reviews a few authoritative and administrative issues related to the development of the Code §409A(a) correction program. The fourth section suggests measures that should accompany the creation of an effective correction program under Code §409A(a). The fifth and final section provides concluding thoughts on the issues discussed in this article"

Article By Brian A. Benko Here

409A Audits - IRS Request List

Information Document Request

409A AUDITS COMMENCE

"The Internal Revenue Service ("IRS") has begun auditing companies' compliance with Section 409A of the Internal Revenue Code ("Section 409A"). This news may come as an unwelcome surprise to many who were hoping that the complexities and uncertainties of Section 409A might delay the IRS's enforcement efforts until more guidance was available and practices further developed. Information Document Requests ("IDRs") from the IRS to companies undergoing audits reveal that the IRS requires an audited company to disclose details of pay practices that could be subject to Section 409A and also to consider the possible application of Section 409A to these practices."

LINK FROM JONES DAY

Franchisors Using 409A Plans to Encourage Franchisee Store Remodeling

"A key provision of 409A allows a manufacturer (franchisor) to sponsor a deferred compensation plan for a service provider or independent contractor (franchisee). The resulting plan enables the franchisee to save up to 100 percent of their franchisee income pre-tax and invest it tax-deferred for the needed remodel. When the date arrives for the remodel, the franchisee takes the distribution and pays ordinary income taxes on the money received. If used for remodeling, which is a business expense, the franchisee may be able to expense it again.

To encourage system-wide participation, the franchisor could even make a matching contribution, or could predicate the match to the franchisee resigning their contract. A vesting provision could be added stating the match be used only for a refresh, remodel, or rebuild.

By sponsoring a tax-favored savings plan and encouraging participation with a match, the franchisor is assured that needed updating will take place on schedule. An updated store assures a consistent, positive customer experience across the system. The franchisor has also contributed to the goodwill of the relationship between franchisor and franchisee. And finally, the franchisee is happy because he or she now has a vehicle to save pre-tax and tax-deferred for a large future expenditure."

ARTICLE HERE

xtremErisa Discusses Substantial Risk of Forfeiture Under 457A

Forfeitable Manager Compensation - Here

"A question is bouncing around the market regarding what type of substantial risk of forfeiture is necessary before compensation will be subject to a substantial risk of forfeiture. This particular question boils down to the question of whether there needs to be a substantial risk that a service provider will voluntary separate or be terminated in order for that SP to be considered unvested. If the SP is considered unvested, and if the compensation in question is paid while the service requirement continues in place, or immediately after it expires, then the compensation may be a S-TD and Section 457A will, as to that compensation, be much ado about nada."

Sysco Reports Material Accelerated Distributions Under 409A Transition Relief

"The net balances of other long-term liabilities and prepaid pension cost decreased $85,596,000 during the first quarter of fiscal 2010 and decreased $34,507,000 during the first quarter of fiscal 2009. The decrease in the first quarter of fiscal 2010 is primarily attributable to three items....Second, our liability for deferred incentive compensation decreased due to accelerated distributions taken by plan participants of all or a portion of their vested balances pursuant to certain transitional relief under the provisions of Section 409A of the Internal Revenue Code...."

Report in 10-Q

News Report