In this recently reported case, one Dr. Sutardja, a recipient of an allegedly discounted option, sued to recover 409A taxes imposed by the IRS. The case does not decide whether the option was discounted, but Dr. Sutardja argued that his option, even if discounted, shouldn’t be subject to 409A.
Essentially, he tried to argue that (1) the grant of the discounted option is not a taxable event, (2) stock options aren’t “deferred compensation,” (3) he didn’t have a legally binding right until he exercised the option, or (4) 409A couldn’t apply to the discounted option. Those familiar with 409A will sigh upon reading the list since clearly none of these arguments holds any water. Discounted options are subject to 409A and must have fixed dates for exercise and payment.
The interesting part of the case, though, was the government arguing that Dr. Sutardja did not have