Valuing outstanding stock rights under Sec. 409A.

Stock options and stock appreciation rights generally are excluded from coverage under Sec. 409A if issued with an exercise price that cannot fall below the fair market value (FMV) of the stock at the grant date, and the stock right does not contain any additional deferral feature. Notice 2006-4 addresses the application of this exclusion to outstanding stock rights and, specifically, the determination of whether the stock right has an exercise price no less than the stock's FMV at the grant date. For stock issued before 2005, a good faith valuation standard applies.

For options granted or rights issued after 2004, but not before the effective date of the final regulations (expected to be Jan. 1, 2007), the notice relies on the standard set forth in Notice 2005-1 that the FMV determination may be made using any reasonable valuation method.