Pub. 3 2012 Issue 2

summer 2012 19 “Publicly traded” companies have to meet special requirements under Internal Revenue Code (“Code”) Section 409A, which was added to the Code pursuant to the American Job Creations Act of 2004. F ailure to comply with these requirements can result in tax, interest and a 20% penalty for executives, and reporting and with- holding penalties for their employers. The definition of “publicly traded” under 409A, however, is so broad that companies may be at risk of becom- ing “publicly traded” without their knowledge. When that happens, inad- vertently failing to comply with 409A may be costly both for the company itself, and for its top executives. Many people may incorrectly as- sume “publicly traded” means only those companies registered as “public” with the SEC, or traded on a widely recognized exchange such as the New York Stock Exchange or the Nasdaq. Management of private companies may also assume incor- rectly that the only way to become “publicly traded” is through a for- mal IPO or a merger with a publicly traded company. The definition in the 409A IRS regula- tions of “publicly traded” is based on being publicly traded on an “established securities market or otherwise.” The definition of “established securities Has Your Bank Become “Publicly Traded” Without Your Knowledge? By Sandra M. Murphy and Lynn S. Clarke, Bowles Rice McDavid Graff & Love LLP market,” is based on Treas. Reg. 1.897- 1(m) as follows: (k) Established securities market. The term established securities market means an established securities market within the meaning of §1.897-1(m). Treas. Reg. Section 1.409A-1(k). Treas. Reg. Section 1.897-1(m) is broad- ly drafted to include even interdealer markets, that may trade in stocks with- out the company’s management even being aware that the trades were going to take place, or that the trades would suddenly make the company “publicly traded” for purposes of 409A. Also, even certain foreign exchanges are included in the definition, as follows: (m) Established securities market. For purposes of sections 897, 1445, and 6039C, the term “established securities market”’ means — (1) A national securities exchange which is registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f), (2) A foreign national securities ex- change which is officially recognized, sanctioned, or supervised by govern- mental authority, and (3) Any over-the-counter market. An over-the-counter market is any market reflected by the existence of an interdealer quotation system. An interdealer quotation system is any system of general circulation to brokers and dealers which regularly disseminates quotations of stocks and securities by identified brokers or dealers, other than by quotation sheets which are prepared and distributed by a broker or dealer in the regular course of business and which contain only quotations of such broker or deal- er. Treas. Reg. Section 1.897-1(m). The consequences for a company of falling within the 409A definition of  Publicly Traded — continued on page 20