Repricing Options Upwards Could Trigger SEC Rule 701 Limitations
"Presumably, options whose exercise price is increased to avoid being treated as a discounted option under 409A must also be recalculated for purposes of Rule 701 using the higher option exercise price. Would the recalculation be retroactively performed for the period when the initial grant was made or would the value of the amended option be included in Rule 701 numerical analysis as of the date of the amendment?"
Friday, September 5, 2008
Tuesday, September 2, 2008
409A Valuations of Private Venture-Backed Companies
Valuation Methodology Explained
"In summary, to value the common stock of an early-stage, privately held company, the appraiser can value the company's BEV using traditional valuation methodologies including the cost, market, and income approaches. But then he must allocate the BEV amongst the company's various classes of securities, and although this may appear to be a complex task, it can be accomplished by a competent appraiser following the guidance of the AICPA."
"In summary, to value the common stock of an early-stage, privately held company, the appraiser can value the company's BEV using traditional valuation methodologies including the cost, market, and income approaches. But then he must allocate the BEV amongst the company's various classes of securities, and although this may appear to be a complex task, it can be accomplished by a competent appraiser following the guidance of the AICPA."
Thursday, August 28, 2008
Article Suggests QSERP Practice May Be Problem Under 409A
Author notes potential 409A issue for QSERPS by virtue of removal of risk of forfeiture.
"These plans must be constructed under IRC §409A rules, which includes a requirement that the SERP funds remain an asset of the company, subject to substantial risk of forfeiture...Moving monies from non-qualified plans into qualified plans provides an immediate tax break for the company, and, in essence, removes the risk and virtually guarantees payment of the benefit to the executives. As deferred compensation, the executive maintains the tax-deferral advantage associated with the benefit, without the inherent risk of forfeiture. It will be interesting to see how this practice relates to 409A rules on deferrals."
"These plans must be constructed under IRC §409A rules, which includes a requirement that the SERP funds remain an asset of the company, subject to substantial risk of forfeiture...Moving monies from non-qualified plans into qualified plans provides an immediate tax break for the company, and, in essence, removes the risk and virtually guarantees payment of the benefit to the executives. As deferred compensation, the executive maintains the tax-deferral advantage associated with the benefit, without the inherent risk of forfeiture. It will be interesting to see how this practice relates to 409A rules on deferrals."
Tuesday, August 26, 2008
Amending "Good Reason" at the last Minute - From CompensationStandards Blog
Interesting discussion on amending the definition of "good reason." Interesting difference of opinion.
"Max correctly notes that this paragraph of the Notice keys the ability to reform the good reason definition on whether the right to payment is “subject to a substantial risk of forfeiture” – not on whether the good reason condition is tantamount to an “involuntary termination” condition under Section 409A. He also points out that the final regulations (§1.409A-1(d)(1)) say that if a right to payment is conditioned on “involuntary termination” it will be subject to a “substantial risk of forfeiture” -- but do not say the converse – i.e., that if a right to payment is not conditioned on involuntary termination it is not subject to a substantial risk of forfeiture (because there other ways to be subject to a substantial risk of forfeiture).
Given that these are two distinct standards (with involuntary termination being a subset of substantial risk of forfeiture), he concludes that as long as the right to payment is still subject to a substantial risk of forfeiture, you can fix at will (for the rest of 2008)."
"Max correctly notes that this paragraph of the Notice keys the ability to reform the good reason definition on whether the right to payment is “subject to a substantial risk of forfeiture” – not on whether the good reason condition is tantamount to an “involuntary termination” condition under Section 409A. He also points out that the final regulations (§1.409A-1(d)(1)) say that if a right to payment is conditioned on “involuntary termination” it will be subject to a “substantial risk of forfeiture” -- but do not say the converse – i.e., that if a right to payment is not conditioned on involuntary termination it is not subject to a substantial risk of forfeiture (because there other ways to be subject to a substantial risk of forfeiture).
Given that these are two distinct standards (with involuntary termination being a subset of substantial risk of forfeiture), he concludes that as long as the right to payment is still subject to a substantial risk of forfeiture, you can fix at will (for the rest of 2008)."
Monday, August 25, 2008
More From XremeERISA Blogger - Anti-Toggling Rule
Discussion of Anti-Toggling Rule and providing for alternative time and form of payments.
"Under what have come to be known as the anti-"toggling" rules (of Section 1.409A-3(c)), you can generally (unless an exception applies) only have one time and form of payment per particular type of cap-A triggering event.
There may be some emerging informal evidence (rely at your own risk) that, showing some flexibility, Treasury personnel are gravitating to what I'll call a permissible "subset" analysis."
"Under what have come to be known as the anti-"toggling" rules (of Section 1.409A-3(c)), you can generally (unless an exception applies) only have one time and form of payment per particular type of cap-A triggering event.
There may be some emerging informal evidence (rely at your own risk) that, showing some flexibility, Treasury personnel are gravitating to what I'll call a permissible "subset" analysis."
Monday, August 18, 2008
Xtreme ERISA Blog Discusses Unclear Short Term Deferral Issue
Interesting Article Regarding Olympics and Short Term Deferral Rules. Unclear whether this approach is permitted under the regulations.
"So what of a stream of severance payments? If one is terminated on 12/31, only two-and-a-half months' of payments would be made within the S-TD period? Does that possibility doom all but two-and-a-half months' of payments to the Curse of Cap-A?
The answer seems a resounding "no." Under the Regulations as technically corrected, the focus is on whether vesting could occur too long before payment or, stated conversely, whether payment is contemplated to be deferred by too much after a possible vesting event. The focus is not on whether a payment stream might be other than the one that it is. Essentially, you test your stream of payments as it runs, not as it may run. Thus, if the termination is in fact early enough in the year, all of the payments could be S-TDs."
"So what of a stream of severance payments? If one is terminated on 12/31, only two-and-a-half months' of payments would be made within the S-TD period? Does that possibility doom all but two-and-a-half months' of payments to the Curse of Cap-A?
The answer seems a resounding "no." Under the Regulations as technically corrected, the focus is on whether vesting could occur too long before payment or, stated conversely, whether payment is contemplated to be deferred by too much after a possible vesting event. The focus is not on whether a payment stream might be other than the one that it is. Essentially, you test your stream of payments as it runs, not as it may run. Thus, if the termination is in fact early enough in the year, all of the payments could be S-TDs."
Friday, August 8, 2008
Article on 409A Valuations from Quist Valuation
Article relating to 409A valuations for start-up companies.
"The impact and pressure to appropriately price equity grants has just begun. While many companies will continue to price stock options using their own internal expertise, the proposed IRC 409A rules have created a signficant demand for independent valuations. Numerous law firms have concluded that the Independent Appraisal Presumption, which is a valuation performed by a qualified indepedent appraiser is the clearest presumption available under the regulations and provides the best protection against the consequences of IRC 409A."
"The impact and pressure to appropriately price equity grants has just begun. While many companies will continue to price stock options using their own internal expertise, the proposed IRC 409A rules have created a signficant demand for independent valuations. Numerous law firms have concluded that the Independent Appraisal Presumption, which is a valuation performed by a qualified indepedent appraiser is the clearest presumption available under the regulations and provides the best protection against the consequences of IRC 409A."
Sunday, July 27, 2008
409A and "Regulatory Cousins" Leading Private Companies to Valuations
http://www.aboutbusinessarticle.com/2008/07/27/section-409a-and-its-regulatory-cousins-what-it-means-for-private-companies/
"The IRS recently threw down the gauntlet and placed pressure on private companies to get their valuations right at no matter what stage of development they are. The Service has backed up this gesture by exposing private companies to substantial tax liabilities and penalties if they do not."
"The IRS recently threw down the gauntlet and placed pressure on private companies to get their valuations right at no matter what stage of development they are. The Service has backed up this gesture by exposing private companies to substantial tax liabilities and penalties if they do not."
Tuesday, July 22, 2008
Wednesday, July 9, 2008
Wednesday, July 2, 2008
IRS May Soon Solve School Teacher 409A Problem
IRS expects that upcoming guidance will solve problem of recurring part-year compensation for school teachers.
"The regulations to be proposed are expected to address certain types of arrangements involving recurring part-year compensation, including common arrangements involving public school employees who provide services during a 10 month school year and elect to be paid ratably over 12 months. It is expected that the regulations would provide that if certain conditions described below are satisfied, §457(f) would not apply to such arrangements. It is also expected that a conforming change will be proposed for regulations under § 409A, so that § 409A also will not apply to such arrangements if such conditions are met."
NOTE FROM TEACHERS UNION
"The regulations to be proposed are expected to address certain types of arrangements involving recurring part-year compensation, including common arrangements involving public school employees who provide services during a 10 month school year and elect to be paid ratably over 12 months. It is expected that the regulations would provide that if certain conditions described below are satisfied, §457(f) would not apply to such arrangements. It is also expected that a conforming change will be proposed for regulations under § 409A, so that § 409A also will not apply to such arrangements if such conditions are met."
NOTE FROM TEACHERS UNION
Friday, June 27, 2008
Thursday, June 26, 2008
Wednesday, June 11, 2008
Sunday, June 1, 2008
Law Firm Publishes Notes From IRS Meetings on 409A
409A Gossip
"Representatives from the IRS and the Treasury Department have been making rounds in recent weeks to talk about compliance with section 409A of the Internal Revenue Code transitional guidance. The presentations have been conversational in tone and have included deep drilling on technical niceties that make for dense reading. The following notes include information provided by Treasury in May to the AICPA National Conference on Employee Benefit Plans in Las Vegas and the ABA Section of Taxation conference in Washington, D.C."
"Representatives from the IRS and the Treasury Department have been making rounds in recent weeks to talk about compliance with section 409A of the Internal Revenue Code transitional guidance. The presentations have been conversational in tone and have included deep drilling on technical niceties that make for dense reading. The following notes include information provided by Treasury in May to the AICPA National Conference on Employee Benefit Plans in Las Vegas and the ABA Section of Taxation conference in Washington, D.C."
Wednesday, May 28, 2008
ABA Comments to IRS Regarding 409A Correction Program
ABA Comment Letter
"Section 409A was enacted in part as a response to the issues identified in the Enron Report; however, section 409A is a broad and complex provision that covers
arrangements that were not the subject of the Enron Report. Inevitably, thousands of taxpayers will violate section 409A through honest errors, and not due to any form of abuse. We believe that the establishment of a permanent correction program would promote the efficient and equitable administration of the tax laws (including voluntary compliance) by permitting self-correction of inadvertent violations of the complex requirements of section 409A. Nothing in the Enron Report or other legislative history precludes such a program."
"Section 409A was enacted in part as a response to the issues identified in the Enron Report; however, section 409A is a broad and complex provision that covers
arrangements that were not the subject of the Enron Report. Inevitably, thousands of taxpayers will violate section 409A through honest errors, and not due to any form of abuse. We believe that the establishment of a permanent correction program would promote the efficient and equitable administration of the tax laws (including voluntary compliance) by permitting self-correction of inadvertent violations of the complex requirements of section 409A. Nothing in the Enron Report or other legislative history precludes such a program."
Tuesday, May 27, 2008
Black Box Corp Incurs 409A Costs
Earnings Release
"409A expenses
The Company incurred significant costs as a result of measures taken to address the application of Section 409A of the Internal Revenue Code of 1986, as amended, related to its stock options. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are generally non-recurring and cannot be changed or influenced by Management."
"409A expenses
The Company incurred significant costs as a result of measures taken to address the application of Section 409A of the Internal Revenue Code of 1986, as amended, related to its stock options. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are generally non-recurring and cannot be changed or influenced by Management."
Tuesday, May 13, 2008
Sen. Clinton Introduces Bill to Amend 409A
Bill Seeks to Cap Deferred Compensation
The Bill
S.2866
Corporate Executive Compensation Accountability and Transparency Act (Introduced in Senate)
SEC. 2. LIMITATION ON ANNUAL AMOUNTS WHICH MAY BE DEFERRED UNDER NONQUALIFIED DEFERRED COMPENSATION ARRANGEMENTS.
(a) In General- Section 409A(a) of the Internal Revenue Code of 1986 (relating to inclusion of gross income under nonqualified deferred compensation plans) is amended--
(1) by striking `and (4)' in subclause (I) of paragraph (1)(A)(i) and inserting `(4), and (5)', and
(2) by adding at the end the following new paragraph:
`(5) ANNUAL LIMITATION ON AGGREGATE DEFERRED AMOUNTS-
`(A) LIMITATION- The requirements of this paragraph are met if the plan provides that the aggregate amount of compensation which is deferred for any taxable year with respect to a participant under the plan may not exceed the applicable dollar amount for the taxable year.
`(B) INCLUSION OF FUTURE EARNINGS- If an amount is includible under paragraph (1) in the gross income of a participant for any taxable year by reason of any failure to meet the requirements of this paragraph, any income (whether actual or notional) for any subsequent taxable year shall be included in gross income under paragraph (1)(A) in such subsequent taxable year to the extent such income--
`(i) is attributable to compensation (or income attributable to such compensation) required to be included in gross income by reason of such failure (including by reason of this subparagraph), and
`(ii) is not subject to a substantial risk of forfeiture and has not been previously included in gross income.
`(C) AGGREGATION RULES- For purposes of this paragraph, all nonqualified deferred compensation plans maintained by all employers treated as a single employer under subsection (d)(6) shall be treated as 1 plan.
`(D) APPLICABLE DOLLAR AMOUNT- For purposes of this paragraph, the term `applicable dollar amount' means, with respect to any participant, $1,000,000.'.
The Bill
S.2866
Corporate Executive Compensation Accountability and Transparency Act (Introduced in Senate)
SEC. 2. LIMITATION ON ANNUAL AMOUNTS WHICH MAY BE DEFERRED UNDER NONQUALIFIED DEFERRED COMPENSATION ARRANGEMENTS.
(a) In General- Section 409A(a) of the Internal Revenue Code of 1986 (relating to inclusion of gross income under nonqualified deferred compensation plans) is amended--
(1) by striking `and (4)' in subclause (I) of paragraph (1)(A)(i) and inserting `(4), and (5)', and
(2) by adding at the end the following new paragraph:
`(5) ANNUAL LIMITATION ON AGGREGATE DEFERRED AMOUNTS-
`(A) LIMITATION- The requirements of this paragraph are met if the plan provides that the aggregate amount of compensation which is deferred for any taxable year with respect to a participant under the plan may not exceed the applicable dollar amount for the taxable year.
`(B) INCLUSION OF FUTURE EARNINGS- If an amount is includible under paragraph (1) in the gross income of a participant for any taxable year by reason of any failure to meet the requirements of this paragraph, any income (whether actual or notional) for any subsequent taxable year shall be included in gross income under paragraph (1)(A) in such subsequent taxable year to the extent such income--
`(i) is attributable to compensation (or income attributable to such compensation) required to be included in gross income by reason of such failure (including by reason of this subparagraph), and
`(ii) is not subject to a substantial risk of forfeiture and has not been previously included in gross income.
`(C) AGGREGATION RULES- For purposes of this paragraph, all nonqualified deferred compensation plans maintained by all employers treated as a single employer under subsection (d)(6) shall be treated as 1 plan.
`(D) APPLICABLE DOLLAR AMOUNT- For purposes of this paragraph, the term `applicable dollar amount' means, with respect to any participant, $1,000,000.'.
Friday, May 9, 2008
Marvell Technology Incurs 409A Penalties
Relates to Options Backdating
From the 10-K: "During the fourth quarter of fiscal 2007, the Internal Revenue Service notified our U.S. subsidiaries that fiscal 2004 through 2006 would be audited and would include an audit of Section 409A and payroll tax issues arising out of the stock option investigation. In fiscal 2007, we accrued $24.2 million of Section 409A liabilities for each of the restated years (including interest and penalties), accrued payroll taxes (including interest and penalties), where applicable. We elected to join and completed the IRS program Announcement 2007-18 and its California equivalent. Through the close of fiscal 2008 we paid $21.8 million for Section 409A liabilities under the available programs, including interest and penalties where applicable. During fiscal 2008, based on development of our IRS payroll tax audit, we accrued an additional penalty of $7.2 million related to the conversion of incentive stock options into nonstatutory stock options due to the mispricing of the original option grant."
The 10-K
Director Resigns
Another Director Resigns
From the 10-K: "During the fourth quarter of fiscal 2007, the Internal Revenue Service notified our U.S. subsidiaries that fiscal 2004 through 2006 would be audited and would include an audit of Section 409A and payroll tax issues arising out of the stock option investigation. In fiscal 2007, we accrued $24.2 million of Section 409A liabilities for each of the restated years (including interest and penalties), accrued payroll taxes (including interest and penalties), where applicable. We elected to join and completed the IRS program Announcement 2007-18 and its California equivalent. Through the close of fiscal 2008 we paid $21.8 million for Section 409A liabilities under the available programs, including interest and penalties where applicable. During fiscal 2008, based on development of our IRS payroll tax audit, we accrued an additional penalty of $7.2 million related to the conversion of incentive stock options into nonstatutory stock options due to the mispricing of the original option grant."
The 10-K
Director Resigns
Another Director Resigns
Thursday, May 8, 2008
Thursday, April 24, 2008
KLA-Tencor Violates 409A; Takes Charge Relating to Backdating; Reimburses Employees for 409A Penalties
KLA-Tencor takes big charge relating to backdating stock options, reimbursing employees for 409A penalty taxes, and related costs.
Press Release (see footnotes)
Stock option backdating; $65 million payout; $400 million in restatements.
Tender Offer to replace bad options
CFO Resigns
Press Release (see footnotes)
Stock option backdating; $65 million payout; $400 million in restatements.
Tender Offer to replace bad options
CFO Resigns
Monday, April 14, 2008
Friday, April 4, 2008
Tuesday, April 1, 2008
$50 Million in 409A Additional Taxes Incurred by Lam Research
http://www.bizjournals.com/eastbay/stories/2008/03/31/daily19.html
Lam (NASDAQ: LRCX) expects to record cash expenses for the quarter ended in March of $50 million to $55 million "to assume responsibility for the 409A tax liabilities of employees."
Lam Research 8-K
Lam Research Tender Offer to Optionees
Lam (NASDAQ: LRCX) expects to record cash expenses for the quarter ended in March of $50 million to $55 million "to assume responsibility for the 409A tax liabilities of employees."
Lam Research 8-K
Lam Research Tender Offer to Optionees
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