Today the IRS released Notice 2005-1, its initial guidance on new section 409A, about which I have said denigratory things before. The notice has unexpected good points and fully expected bad ones. On the one hand, it allows most stock appreciation rights plans to continue, though new plans will become unfeasible for nonpublic companies. That is a better result than the hints dropped over the past several weeks had foreshadowed. Less happily, though not surprisingly, deferral of gain on stock option exercise, a time-hallowed, nonabusive technique, was firmly ruled out, despite the fact that it does not conflict in any discenible way with the policy behind the statute and Congress had explicitly rejected proposals to bar it.
I’ll forbear trekking through the details. What most struck me as I read the document was how silly and pointless all of these new rules are. They don’t close revenue-draining loopholes; the estimated increase in federal revenues is $1 billion – over the next ten years. That is about as close to zero as revenue estimates ever get. Moreover, the estimate ignores the cost of compliance. I’ll be very surprised if companies don’t spend billions of dollars, in the aggregate, on lawyers’ and consultants’ fees as they redesign and rewrite their plans. Those fees will of course be tax-deductible. Meanwhile, the only people likely to pay additional taxes are those who don’t hear about the new law and blunder into one of its traps. All in all, resources will be diverted to unproductive ends, the government will lose money, and the only gainers will be people like me. I’m grateful for the subsidy but can’t quite understand why you all should be willing to provide it.
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