We
have
been
thinking
and
talking
about
Section
409A
for
more
than
8
years
now,
but
most
of
that
discussion
has
been
hypothetical.
We
have
pursued
compliance
with
Section
409A,
but
have
been
left
to
wonder:
What
would
actually
happen
if
an
arrangement
violated
Section
409A?
Is
the
IRS
monitoring
compliance
or
enforcing
these
requirements?
Well
now
we
have
some
answers.
A
federal
court
recently
issued
a
ruling
(here)
dealing
with
the
consequences
under
Section
409A
of
a
discounted
stock
option
arrangement.
In
addition
to
providing
some
specific
legal
analysis
on
Section
409A
issues,
the
court’s
decision
provides
some
insights
into
how
a
case
like
this
might
arise.
Background.
The
case
involves
a
founder
and
senior
executive
of
a
technology
company
(Marvell
Semiconductor)
who
was
granted
stock
options
in
2003.
In
the
wake
of
the
various
stock
option
backdating
scandals,
the
company
reviewed
its
option
program
and
repriced
the
2003
option
grant.
As
a
result,
the
executive
paid
over
$5,000,000
in
additional
exercise
price,
presumably
reflecting
that
the
options
had
been
substantially
discounted
when
awarded.
The
IRS
Takes
Notice.
Disclosures
regarding
this
repricing
must
have
caught
the
IRS’s
attention.
In
2010,
it
issued
the
executive
a
notice
of
deficiency
to
the
executive
assessing
additional
taxes
and
penalties
under
Section
409A
in
excess
of
$3,000,000.
The
executive
paid
the
assessed
amounts
and
then
sued
to
obtain
a
refund,
arguing
that
the
option
arrangement
was
not
governed
by
Section
409A.
The
Court’s
Analysis.
The
court
made
several
important
rulings
regarding
the
impact
of
Section
409A
for
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