IRS Looks Flexible on 409A Valuation Requirements

IRS officials told the Bureau of National Affairs (BNA Pension & Benefits Reporter, Feb. 21, 2006) that they will be issuing more specific guidelines on valuation requirements to meet the rules of Section 409A of the Internal Revenue Code on deferred compensation arrangements. The proposed regulations for this new law require that closely held companies have their stock appraised to make sure stock options and stock appreciation rights (SARs) are issued at fair market value. A third-party appraisal provides a safe harbor to meet these rules, but many companies will not want to do that. The rules also provide that valuations done by any person knowledgeable about business appraisals would qualify, but they do not define what "knowledgeable" is. The officials said that simply designating the board for this purpose would not work, as such a blanket rule could not guarantee that boards included knowledgeable people. But the officials indicated that examples they will provide will give comfort to companies worried that the rules set too difficult a barrier.