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Proper Tax Planning and Compliance for Tax Audits2009, Philip Stein & Associates
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Staying One Step Ahead
Proper Tax Planning and Compliance for Tax Audits
Miriam C. KonstamCorporate Tax Services Manager
July 22, 2009
Tax Planning
• Debt vs. equity • Delaware franchise taxes• Establishing US operations
– State tax implications– Incentives or grants available
Agenda
Tax Compliance
• Forms W-8 Series• Sales Tax Issues and Audits
Debt vs. Equity
• IRC § 385 governs this issue
• Debt appears to have flexibility
• Debt must accrue interest and comply with
withholding requirements
• Taxpayer is bound by his decision, IRS is not
Debtor-creditor or corporation-shareholder relationship?• Is there an unconditional promise on the part of the debtor to pay a sum certain
• Is there convertibility into the stock of the corporation
• Are the rights of the creditor subordinate to those of general creditors
• Does the agreement give the creditor the right to participate in the management
of the debtor
• Is the debtor thinly capitalized
• Is there identity between the creditor and shareholders of the debtor;
• Were the funds repaid on the due date
• Is there presence of a maturity date
• What is the label placed upon the instrument by the parties
• Does the debtor have the ability to obtain loans from outside
lenders
Our Perspective• Most transactions have the characteristics of equity
– Ensuring treatment of debt
– Compliance with above
– Tax due on payment of interest
– Portfolio interest exception
• Treatment upon exit
– Equity – Return of capital and capital gain.
– Loan – Payment of interest and withholding; return of principal.
– Conversion Feature – Tax due on period of loan treatment, including if payment is
in shares
• Distribution of portfolio company’s earnings
How likely is it that this scenario will occur?
Delaware Franchise Taxes
• Certificate of Good Standing
• Default – Authorized Shares Method
• $75 for each 10,000 shares
• 40,000,000 x 75 = $300,000
10,000
Alternate Method
$ 14,000.00 TAX DUE
365 $ 14,000.00 40,000,000
Prorated for Number of DaysGross Tax
APVC For Tax Basis
40,000,000 1.000000 40,000,000
Assumed Par Value CapitalAssumed ParShares Authorized
1 20,000,000 $ 20,000,000 12/31/2008
Assumed ParTotal Shares IssuedGross Assets
The P. Stein Way
$ 7,000.00 TAX DUE
365 $ 7,000.00 20,000,000
Prorated for Number of DaysGross Tax
APVC For Tax Basis
20,000,000 0.500000 40,000,000
Assumed Par Value CapitalAssumed ParShares Authorized
0.5 40,000,000 $ 20,000,000 12/31/2008
Assumed ParTotal Shares IssuedGross Assets
Establishing US Operations
State Tax Implications
• 50 states
• Physical Presence
• Economic Presence
• Migration to Gross Receipts Taxes
• On the Upside – Grants & Incentives
Sales Tax Issues and Audits
• Is sale subject to sales tax?
- Transaction subject to tax
- End user – resale certificate
• Is there nexus in that state?
• Use tax
• 8,800 jurisdictions
• Audits – testing periods plus interest
Forms W-8
• IRS Tier I Issue – Closing the $100 billion tax gap
• Default Presumption Rules
• Substitute Form W-8
• Spreadsheet Equivalents