409A: IRS Enforcement and Litigation

Tax Court cases involving alleged 409A violations:

  • Keels v Commissioner, TCM 2020-25: IRS asserted that section 409A applies to the year-end balances of the taxpayer’s termination and extended termination accounts for the years at issue; IRS lost due to lack of documents, and therefore no imputed income occurred for the taxpayer.
  • Howard Slater TC Summary Opinion 2010-1: holding that “Because petitioner has failed to meet the requirements of section 409A(a)(4) and because the commission is not subject to a substantial risk of forfeiture, petitioner’s commissions shall be included in petitioners’ gross income under sections 61(a) and 409A(a)(1)(A).”.
  • United States v. Brodnik, 105AFTR2d 2010-2244 (D W. Va. 2010): criminal matter involving a fraudulent deferred compensation arrangement;  based upon plaintiff’s request for discovery, the case appears to have begun from an audit that at least included 409A matters.

Chief Counsel Advice Memoranda issued in connection with IRS audits that at least in part addressed 409A:

  • 201518013 – correction of 409A problem in year compensation vests does not work.
  • 201521013 – stock option issues under 409A (grant date; established market for fair market value).
  • 200935029 – 409A and salary deferral program.
  • AM2009-006 – correction of backdated stock option does not cure disqualification from 162(m) exemption.
  • 201645012 – substantial risk of forfeiture for 409A from .

Private Litigation arising from 409A:

  • Rabbi Kroll vs. Cozen O’Connor (ND IL, pending) – Bloomberg Article (2/27/2020).
  • Wilson v Safelite (6th Cir. 2019) arose from an IRS audit that levied substantial penalties on a former CEO's $9.1 million account, due to deferral election failures under Section 409A.
  • Graphic Packaging Holding Co. v. Humphrey, No. 10-12015, 2010 WL 4608775 (11th Cir. Nov. 16, 2010): dispute concerning the valuation date of restricted stock units with 409A implicated via its six-month delay rule for distributions to “specified employees” of public companies.

IRS audit activity from 2014 forward … see ---