SECTION 409 (A) and its Regulations cousin - What it Means for Private Enterprises

The IRS recently threw down the gauntlet and put pressure on private companies to get their assessment correct no matter what stage of their development. Services supported this stance by exposing private companies for tax liabilities and substantial fines if they not.Since enactment of Section 409 (A), non-public companies that are struggling with how they determined that the exercise price of stock options or stock appreciation rights (SAR) was determined enough to be fair market value. Until now, most private companies are not worried about their stock valuations are very often, if at all. Valuation of private companies are usually required to close the transaction, to the ESOP, or soil and gift tax purposes. One could also throw a serious candidate earned IPO valuation to avoid "cheap stock" issues SEC.Many private companies do not qualify for one of these situations, so they are required valuation in the past. As a result, companies and management issues stock options can be a little excited about the development. However, despite the judgment in this situation may appear too complex and redundant, not all bad - just ask auditors.

Auditors expressed a desire for this to be done for years. They are aware of this development because it is a matter of assessment of stock options in financial reporting under FAS 123 and they want to know how a private company established option strike price. There is some risk of loss due to the auditors when they signed these standards, and professional judgment to provide them with a level of fairness and certainty they want. Given this, there is the potential for tax and financial reporting synergies here.With good assessment report on hand, the second problem can be satisfied simultaneously - two birds with one stone if the will You. First, let's examine the code and regulations driving change.

Say How is this reason: IRC Section 409A requires that private companies award stock options with exercise prices below the fair market value to deduct income tax at grant. Significant penalties for non-compliance or grant put option held private companies under increasing pressure to be able to support and maintain the fair market value determinations.FASB 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. FASB 15X (Working Draft - published October 21, 2005), Fair Value measurements, establishes a framework for measuring fair value under various accounting pronouncements that require fair value measurements FASB 15 X . In form, the Financial Accounting Standards Board considered the need to improve uniformity and comparability of the estimated fair value and enhanced disclosures about estimates.

In most cases, when the company's management to determine the amount and price of the option to use an informal, internal valuation, the tax burden on companies to prove to the IRS that the fair market value of equity is justified. In connection with the recently announced rule changes during the past years, many private companies to proactively adopt one of the "alleged" stock valuation methodology set forth in the proposed regulations.Procuring qualified independent testing leads to shifting the burden of proof to the IRS and can only be rejected by the IRS if the application of this method was found to be too unreasonable.