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Any Port in a Storm? 409A: Safe Harbors

The second in the series of articles about 409A compliance, this article explores the way to put the burden of proof of compliance back to the IRS.

By Alex Hodgkin

At three hundred ninety-seven pages, Section 409A is incredibly lengthy and complex. However, it does outline some reasonably clear approaches that help when it comes to developing compensation policies that comply with its provisions. These presumptive methods, known as safe harbors, shift the burden of proof of noncompliance to the IRS, if, and only if, implemented properly. All that really means is that if a company employs a safe harbor method to value the price of its stock options, the IRS must show that the company was grossly unreasonable in calculating the fair market value of the underlying security before it can claim any wrongdoing.

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