Category: 409A

Apr 17 2007 by Jason

Final Regulations Under Section 409A Released

As you may recall, Brad and I have been blogging about 409A since the initial proposed regulations were released. You can find our series here.

The final regulations were released.  The work of artistry is 397 pages.  Since most of you will not find the need to read all 397 pages, you might be asking “so what’s the deal with the final regs?”

Basically, the final regs reaffirmed everything that we’ve been saying about 409A.  Nothing major has changed, although the tax experts are still sifting through the regulations and we’ll update you as info is delivered to us. 

One thing that the final regs did articulate (better, not great) was regarding start up companies potentially using their own internal finance people to conduct their 409A valuations.  As you might recall, our guidance was that all private companies should use an outside valuation firm, as the internal valuation method was too tough to comply with and potentially would lead to liability for the company and its financial officer.

Specifically, the regs say that an internal finance person can conduct a presumably valid 409A valuation if the person has “significant experience.”   This generally means at least five years of relevant experience in business valuation or appraisal, financial
accounting, investment banking, private equity, secured lending or other comparable experience in the line of business or industry in which the service recipient operates.

I don’t know if we have any financial folks at our start ups who fall under these guidelines.  It’s a pretty tough standard to meet.  Our original thoughts stand that the safest way is to employ outside valuation experts.

We’ll keep our eyes on all the different interpretations of the final regs and post from time to time on the latest and greatest thoughts.

Feb 13 2007 by Jason

The IRS Is Urging Companies To Pay Liabilities Of Workers With Backdated Options.

Brad sent me a link to an article the other day regarding the IRS urging companies to pay the taxes owed by workers that received backdated options. This has been a subject that hasn’t gotten nearly the limelight that the actual backdating scandals have gotten.

If you remember from our 409A series, stock options that are priced below fair market value subject the recipients of these options to a 20% excise tax on top of normal income tax on the spread.

The IRS came out the other day and “suggested” that companies who have issued backdated / under priced options should pay these liabilities on behalf of their employees. I won’t even try to estimate how much this aggregate liability amounts to. I’m sure the amount adds up to a “$B” number.

What’s interesting is that the government will make some money and if companies comply with this, the IRS will only have to go after one tax payer, the corporation, not the individuals.

As critical as we’ve been of 409A, I don’t have a ton of sympathy with companies who blatantly backdated their options. Brad’s bet (and I concur) is that this “suggestion” gets codified into the code when the final 409A regulations are published

Jan 9 2007 by Jason

California Gone "Mad" In Enforcement of 409A

A belated holiday gift was given to all California option grantees from the California Franchise Tax Board. If you remember from our previous series on 409A, if you screw up, the option holder gets hit with a 20% federal excise tax. Not to be outdone, it appears that California is also tacking on a 20% state excise tax as well.

A friend of ours at a large Silicon Valley law firm indicated that the instructions to the CA tax forms include this new 20% tax, and despite contrary reports last fall from the CA Tax Board, it appears they now intend to get in on the game. Please note that the online forms are different than the hard copies sent out to taxpayers.

Ahwnold? Ms. Pelosi? Please stop the madness.