11th Circuit Rules on 409A - 6 Month Wait

Plan was not clear as to when the RSU's should have been valued.

Guidance on "Unforseeable Emergency" Distributions

IRS issues Rev. Rul. 2010-27 clarifying that events must be beyond the control of the participant.

Article from Spencer's Benefits Reports - HERE

"Three Situations Addressed

The three fact situations addressed in Rev. Rul. 2010-27 do not fit within any of the examples used in Reg. Sec. 1.457-6(c)(2)(i) nor those used by the plan.

In the first situation, an emergency distribution was requested to repair the participant’s principal residence because of significant water damage that is not covered by insurance but is substantially similar to the need to pay for damage to a home as a result of a natural disaster. This is a permissible emergency distribution because it is the result of events beyond the control of the participant, the IRS said.

In the second situation, an emergency distribution was requested to pay for the funeral expenses of an adult son who is not a dependent. The IRS stated that was a permissible emergency distribution because “the need to pay for the funeral expenses of a non-dependent adult son is an extraordinary and unforeseeable circumstance that arises as a result of events beyond the control of the participant and that is substantially similar to the need to pay for funeral expenses of a dependent.”

The facts in the third situation involve a participant who requests an emergency distribution to pay for accumulated credit card debt. This is not a permissible emergency distribution the IRS said because it not arise “due to any events that are extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.”"

409A Can "Screw Up" Your Exit Strategy; "Incredibly Complex"

VentureBeat Article - Curtis Smolar, Esq. - HERE

409A Lawyers (and clients) Cartooned - How to Price Startup Company Options

XtraNormal Presents "A Short Video Explaining Option Pricing Under 409A" HERE

409A Changes the Game - No Post-IPO Profits for Facebook Employees

"The conventional wisdom is that you join a hot startup pre-IPO to get the low priced stock options. Techcrunch reports that some people are joining Facebook now to get in on pre-IPO shares.....The effect of the 409A requirement, and the new movement of private investors buying vested stock options from employees, is that the pre-IPO valuations, and thus the employee stock option price, are very close to the expected IPO price. So, how will there be a big bump in the stock price at IPO? My guess is there won't be a bump...and conventional wisdom will change."

Article from Don Dodge HERE

Update on 409A Audits

"Even though the audit program is relatively new, practitioners have informally shared anecdotal evidence on which issues the IRS appears focused on so far. The list of issues below is not exhaustive and other issues may be raised, depending on the nature and identity of the employer and its NQDC arrangements.

In general, however, it appears that the IRS is requesting detailed documentation on the following areas (i) if a plan intends to rely on the “short-term deferral” exception, the plan clearly must disclose the relevant terms, including detailed information on any forfeiture risks, (ii) employees' initial and “second” deferral elections must include specific terms for making elections, and specify both the initial and new payment dates, (iii) plan documents must provide detailed information on any events that would trigger the acceleration of benefit payments, particularly events triggered by an employer's deteriorating financial condition, and (iv) plans’ treatment of “specified employees,” (certain senior executive officers of publicly traded companies) who are subject to the general rule that payments cannot begin earlier than six months after termination of employment."

Article From Jackson Lewis

Federal Bank Regulators Focus on 409A

"In June 2010 the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (together, the Regulatory Agencies) issued guidance on sound incentive compensation policies for banking organizations......Another potential area of regulatory focus is compliance with Internal Revenue Code (Code) Section 409A, which governs all types of nonqualified deferred compensation. By December 31, 2008, banking organizations should have reviewed and amended, if needed, all nonqualified deferred compensation arrangements (including all deferred compensation plans, employment agreements, severance and change in control agreements, equity compensation plans and similar types of arrangements) to ensure either compliance with Code Section 409A or an exemption from Code Section 409A."

Note from Troutman Sanders

"Startup Company Blog" Calls for Repeal of 409A

"Repeal Section 409A as it applies to startups and small companies. Startups should not have to spend a bunch of money on lawyers, accountants and valuation experts in order to grant stock options and otherwise comply with this very complex and onerous law. Startups and small companies ought to be exempted. Better yet, Congress, just repeal Section 409A in its entirety."

From Joseph M. Wallin - HERE

IRS Turns to Private Sector Analysis to Train its Agents

White Paper prepared by Dominick Pizzano of Milliman used as IRS agent training tool.

Statistical Analysis of 409A Valuation Data

Accurserve: "Stellar Team and Solid Growth" command great valuations.

Update on Angel-Gate (or 409A-Gate)

Email Evidence Exists

Bombshell Evidence

"Valuations" of companies discussed by tech investors

Thus far, only the Felix Salmon article mentions the 409A issue.

Shock: 409A Central to Silicon Valley Price-Fixing Conspiracy

According to Felix Salmon, writing for Seeking Alpha Blog, powerful Silicon Valley angel investors may have attended a meeting to discuss the pricing of 409A equity valuations, colluding to apply downward pressure on the pricing.

"It seems to me that Arrington is right, and that this dinner was an attempt by some very powerful angel investors, led by Ron Conway, to collude with each other on a number of different fronts. Quite possibly including 409a stock option pricing. Arrington’s a lawyer by training, and if he says this is illegal, then it’s worth investigating the accusation seriously, rather than trying to dismiss it in a blog entry featuring lots of swearing along with multiple font colors and sizes."

ARTICLE HERE

Court Rejects Federal Jurisdiction for 409A Dispute

Executive Claims Potential Breach of Employment Agreement Raises 409A and ERISA Issues. Court remands to state court.

"Scharnweber is attempting to enforce the employment security agreement as he views it. And whether the employment security agreement is to be enforced according to his views does not depend on section 409A of the Internal Revenue Code. A state court's handling of Scharnweber's claims that entails references to the fact that Scharnweber might be subjected to a federal tax penalty would not disturb the "congressionally approved balance of federal and state judicial responsibilities." See id. at 914 (internal quotations and citation omitted) ("[I]nsofar as the state court may have occasion to consider the [federal issue] in adjudicating [the plaintiff's] state law claims, we do not think that the state court's consideration of the [federal issue] disturbs the `congressionally approved balance of federal and state judicial responsibilities[.]'"). Thus, the court finds that the complaint's references to a potential federal tax penalty do not raise a sufficient federal issue for purposes of establishing federal jurisdiction."

Court Decision Here

IRS Presents Informal Guidance on 409A

The Service Presents to ABA Joint Committee on Employee Benefits

Disagrees with ABA on certain issues. Non-compliant plans that expire worthless still subject to a additional tax.

409A Called "Nuclear Option" - Societal Cost Outweighs Benefit

Law Review Article by Andrew Wayne Stumpff HERE

"The article reviews the tax historical background that led to enactment of Internal Revenue Code Section 409A, particularly the history of weak judicial enforcement of the constructive receipt doctrine which had left open the door to significant tax timing abuse. The author argues, however, that in Section 409A Congress nonetheless overreacted, creating a statute whose overbreadth and penalty structure imposed its own societal cost (in the form of compliance and transaction expenses) that possibly outweighs the cost of the tax abuse the section was designed to correct. More generally, he argues that "binary," high-risk enforcement schemes, where the only two possible taxpayer states are full compliance and ruinous noncompliance, lead to inefficient results and are bad tax policy. Two other examples of this type of binary enforcement approach in U.S. employee benefits law are the qualified retirement and prohibited transaction regulatory regimes. The article shows that under such a regime it will be rational for a taxpayer to undertake a transaction only if the probability, P, that the transaction fully complies with all Code requirements satisfies: P x B > (1-P) x C, where B is the benefit expected from the transaction and C is the expected cost should the transaction be found not to be fully tax-compliant. In the 409A context, if one makes the assumptions, for example, that the benefits associated with deferring compensation have value equal to 15% of the amount deferred, and the penalty associated with violation of 409A is 2,000% of the amount deferred (plausible assumptions, given the 409A penalty structure), it will be rational to defer compensation only if the probability of full compliance is at least 99.3%, which approaches absolute certainty and is in practice often unattainable at reasonable cost."

M&C Spots 457A Trap for Multinational Corps

Multinationals view 457A as irrelevant for US employees serving foreign parents -- this view may cause lost deductions -- should re-evaluate -- M&C ARTICLE HERE.

"Many multinationals have adopted the view that the harsh income inclusion rules of Code section 457A are essentially irrelevant. Basically, this attitude stems from the belief that that the company's US employees providing services abroad to related foreign entities are doing so as employees of a US-based company pursuant to the terms and conditions of a secondment agreement. This article points out that while a secondment agreement, that is properly worded and implemented, may act as an effective shield against Code section 457A, it may also inflict a detrimental blow to the US company's subpart F income. Accordingly, any US company that seconds its employees to related foreign-based entities should re-evaluate that arrangement to assure that it is obtaining the desired tax outcome."

Attorney Ponders the Lebron James Fray and 409A

"As the ink dries on James’ new employment agreement, as well as those of Dwayne Wade and Chris Bosh, the Miami Heat and James’ attorneys will have inevitably contemplated and believed, in good faith, to have satisfied the requirements contained in the statute and in the accompanying regulations."

Article From Fed Tax Developments Blog HERE

Contraversy Developing over 409A Valuations

Some suggest valuation work going to "overseas" appraisers and valuation "chop shops."

Houlihan Lokey says "high profile" enforcment cases may be coming soon.

BVWire News on the story - HERE.

CFO's: 409A Valuation is Commodity Service, Care about Price, Not Quality

From BV Wire News - HERE

"“An amazing 67% of survey respondents single out cost as the key factor in making the decision to go forward with a 409A vendor,” writes Davis. Lest we kid ourselves, only 12% of respondents say that “quality” determines their choices. The majority of CFOs still see 409A as a “commodity service, [with] little value derived from the report beyond a compliance checkmark,” Davis says. In fact, the word “evil” was mentioned in 15% of the CFO responses (with only a few adding the qualifier “necessary.”)"

409A Hits Hollywood Workers

Payment amounts deferred and based upon future box office receipts - independent contractor exception to no avail - READ HERE

"The basic problem is that many service providers in the entertainment industry will not qualify under Section 409A’s exclusion for “independent contractors.” In the entertainment industry, agreements often require the talent to provide services in one year in exchange for compensation in a later year based on box office receipts. Absent compliance with the strict requirements of Section 409A, the talent might be required to include income in the year he acted rather than the year he was paid (assuming the payment is not subject to a “substantial risk of forfeiture”). To go one step further, suppose the motion picture is widely successful, leaving the audiences clamoring for a sequel. The actor might then renegotiate his agreement with the production company for a bonus against the contingent payments to be paid under the original agreement. In essence, the movie star has renegotiated his rights to future earnings and accelerated his receipt of amounts previously earned and deferred. Section 409A punishes this type of renegotiation."

Thanks to Roger Royse, Esq.

Pre-IPO Stock Sales Creating 409A Valuation Chaos

"The potential impacts of private secondary market sales on 409A valuations are, in a word, complex. Transactions may reflect discounts or premiums for marketability, liquidity, and/or control, each of which impact the fair market value of private company stock. Fur ther, purchasers may be willing to pay a premium for access to private stock they would not otherwise have, thus overpaying vis-à-vis fair market value. Such overpayments are sometimes referred to as a posturing or access premium, and are difficult to quantify. Similarly, sellers may be willing to take a lower-than-fair price due to extenuating financial exigencies. These issues are just the tip of the iceberg. When Arcstone is engaged to value equity securities where secondary sales have occurred (or are contemplated), we take a close look at the facts and circumstances surrounding the transactions themselves."

Article from SecondMarket.com

Optcapital Lobbying for Modifications to IRC 457A

"K&L Gates is lobbying for Optcapital, an executive benefits consulting firm, on supporting “modification of Internal Revenue Code section 457A to be included in technical corrections legislation,” according to lobbying disclosure records. Daniel Crowley, a Republican and former general counsel to the House Speaker’s office, and Patrick Heck, a former aide to Sen. Max Baucus (D-Mont.), are working on the account."

HERE

Shrewd Comments on 409A Valuations from Pro Appraiser

Focus on Evidence and More Bashing of Foreign Valuation Companies - Here

"Several clients ask us questions about what types of information is collected and why. You see, 409A valuations have got more to do with substantiation and evidence and less to do with valuation techniques and number crunching. One of the things we have noticed, especially, in valuation work from overseas is use of data sources, enumeration and explanation of data, and calculation methods that dont quite fit in with US Tax Court lingo or evidentiary standards. We collect information that is more appropriate to pass the evidentiary standards set out in usual IRS court cases and US GAAP standards. This also makes the audit work a breeze as most information they are looking for is set in in the manual"

Summary of 409A Issues in Severance Agreements

Chuck Shulman's Article HERE

Skadden Partner Completes 409A Handbook

Sneak Preview Here

Regina Olshan

Erica Schohn

Flashback: Regina Organizes Push for 409A Extension