ID: Office: UILC: CCA_2009031117162015 ----------------------- 409A.00-00 Number: 200914047 Release Date: 4/3/2009 From: -------------------- Sent: Wednesday, March 11, 2009 5:16:22 PM To: --------------------- Cc: Subject: 409A Regarding our phone c onversation, I could find the language that I described to you. However, I would argue that § 409A(a)(1)(A) provides that amount deferred under a nonqualified deferred com pensation plan are included in gross income. Section 409A is not dependent on othe r provisions generally, rather it provides its own set of rules. Section 409A supersedes the general rules with respect to constructive receipt that exist under § 451 and under case law. See § 409A(c) (providing that earlier inclusion may be required und er other provisions, and that amounts that are includable under § 409A are not again included in gross income where includable under another provision at some later date). Therefore, § 409A and the regulations thereunder operate independently from §§ 451 and 83 except where otherwise specifically provided. The following from Notice 2008-113 indicates that an option that is exercised cannot be corrected for § 409A purposes, even if it is corrected in the same taxable year. D. Correction of Exercise Price of Otherwise Excluded Stock Rights 1. Relief for Amounts to which § IV.D Applies If this § IV.D applies to a stock right, the stock right is treated from the date of grant as not providing for a deferral of compensation for purposes of § 409A . 2. Amou nts to which § IV.D Applies. This § IV.D applies if during a service provider's taxable year a failure occurs that is described in § IV.D.2(a) and the requirements of § IV.D.2(b) are met. (a) A failure is described in this § IV.D.2(a) if, under the term s of a stock right, the stock right would not provide for a deferral of compensation under § 1.409A - 1(b)(5)(i)(A) (excluded stock options) or § 1.409A - 1(b)(5)(i)(B) (excluded stock appreciation rights), except that the exercise price of the stock right is erroneously established at less than the fair market value of the underlying stock on the date of grant. (b) Before the stock right is exercised and not later than the last day of the service provider's taxable year in which the service recipient gr anted the service provider the stock right, the exercise price is reset to an amount not less than the fair market value of the underlying stock on the date of grant.

2 3. Example In the following example, it is assumed that Employee is an individual who se taxable year is the calendar year and Employee and Employer both satisfy the applicable requirements of §§ III and IX of this notice. Example: On January 1, 2009, Employer grants Employee a stock option to purchase 100 shares of stock, and the stock option otherwise would not provide for a deferral of compensation for purposes of § 409A except that due to an error the exercise price is set at an amount below the fair market value of the stock on January 1, 2009. On July 1, 2009, Employee partially exercises the stock option and purchases 40 shares, but retains a stock option to purchase 60 shares. Provided that before the earlier of January 1, 2009 or the exercise of the remaining stock option to purchase 60 shares, the exercise price of the sto ck option to purchase 60 shares is reset to a price at or above the fair market value of the underlying stock on January 1, 2009, the stock option to purchase 60 shares may qualify for the relief provided in this section. Because the exercise price was not reset before the exercise on July 1, 2009, the portion of the stock option that was exercised to purchase 40 shares is not eligible for the relief provided in this section. The § 409A regulations provide that options issued at a discount are consid ered nonqualified deferred com pensation for purposes of § 409A. (5) Stock options, stock appreciation rights, and other equity-based compensation -- (i) Stock rights -- (A ) Nonstatutory stock options not providing for the deferral of compensation. An opt ion to purchase service recipient stock does not provide for a deferral of compensation if -- (1) The exercise price may never be less than the fair market value of the underlying stock (disregarding lapse restrictions as defined in § 1.83-3(i) ) on t he date the option is granted and the number of shares subject to the option is fixed on the original date of grant of the option;