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Serious question: why does the IRS insist on valuing private company stock on the basis of a 409a valuation without taking into account whether a market for it
by jogjayr 10y ago
Serious question: why does the IRS insist on valuing private company stock on the basis of a 409a valuation without taking into account whether a market for it even exists? The 409a is paid for by the company which (as the article mentioned) has an interest in keeping it lower. And holders of common stock in private companies, in most cases, can't actually liquidate their holdings (leaving apart cases like pre-IPO Facebook which traded in secondary markets). So the stock is effectively worthless no matter what the 409a says. There shouldn't be tax due until there's a liquidation event that allows shares to be sold.
- brians 10y agoGiven the tax scheme is published well in advance, they certainly seem to be worth something---else who would take them?
- jogjayr 10y agoStock options and private stock are taken in the hope that they'll be worth something someday, not because they're necessarily worth anything at present. It's all well and good to say "X is the fair market value of this stock based on factors y, z and a"* . But when no market exists (or severely restricted ones where sellers have to take a loss) then that value is not relevant (or should be discounted appropriately). * I tried looking up (briefly) whether the absence or presence of a market for the company's stock is taken into account for a 409a valuation but couldn't find anything.