Sehat Sutardja and Weili Dai v. United States, 109 Fed. Cl. 358

Sutardja and Dai seek a 2006 tax refund related to 409A penalties on Marvell stock options.
Option grant to Sutardja occurred 2003–2004, vesting in segments with a 30‑day post-termination exercise window.
The option price was allegedly discounted and later amended; a 2006 exercise purchased shares at a reduced price.
IRS issued a $3.173M 20% 409A tax plus $304k interest in the 2006 year; plaintiffs paid and then claimed refunds.
Court ruled there is a genuine factual issue whether the option was discounted; however, four legal theories can be resolved on summary judgment.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether 409A applies to discounted stock options	Sutardja contends 409A does not tax option grants at the grant; discount does not trigger deferral.	Government argues discounted options are within 409A if they fail conditions; 409A applies.	409A applies to discounted options; plaintiffs’ partial summary judgment denied, govt granted.
Whether deferral of compensation is defined by 31.3121(v)(2) for 409A	Plaintiffs urge in pari materia with FICA regulation to define deferral.	Deferral definition from 31.3121(v)(2) does not apply to 409A.	31.3121 does not apply for 409A deferral definition; govt granted.
Whether there was a legally binding right to compensation upon vesting	California law gives only a right to buy upon exercise, not compensation until exercise.	Option itself with vesting is compensation once the vesting condition is met.	There was a legally binding right upon vesting; plaintiffs’ position rejected, govt granted.
Whether short-term deferral from Notice 2005-1 applies	Vested portions could be received within 2½ months; short-term deferral exception should apply.	No short-term deferral because plan terms allowed up to ten years; no substantial risk of forfeiture.	Not met; short-term deferral exception does not apply; govt granted.

Commissioner v. Smith, 324 U.S. 177 (U.S. 1945) (stock options generally not taxable at grant; tax upon exercise when discounted or not)
Commissioner v. LoBue, 351 U.S. 243 (U.S. 1956) (deferral timing measured at exercise when option granted without readily ascertainable value)
Rowan Companies v. United States, 452 U.S. 247 (U.S. 1981) (in pari materia considerations for cross-referencing regulatory definitions)
DeLaRosa v. Peake, 515 F.3d 1319 (Fed. Cir. 2008) (treatment of deferral/deferral definitions in 409A context)
Drye v. United States, 528 U.S. 49 (U.S. 1999) (treaty/state-law alignment in federal taxation analysis)
Ala. Tissue Ctr. v. Sullivan, 975 F.2d 373 (7th Cir. 1992) (statutory interpretation principles in regulatory cross-reference context)
Morgan v. Comm'r, 309 U.S. 78 (U.S. 1940) (federal revenue acts tax framework; interpretation of rights in property)