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Grant Thornton LLP. All rights reserved. PE Credit is not available for viewing archived programs visit http:// www.grantthornton.com/events for upcoming progr Accounting for income taxes: ASC 740 quarterly update Original Broadcast Date: September 2013

ASC 740 quarterly update

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CPE Credit is not available for viewing archived programs.Please visit http://www.grantthornton.com/events for upcoming programs.

Accounting for income taxes:ASC 740 quarterly update

Original Broadcast Date: September 2013

© Grant Thornton LLP. All rights reserved. 2

Randy RobasonNational Partner-in-Charge, TARAS Dallas, Texas

Joe CaliannoPartner,International Tax ConsultingWashington, D.C.

Chuck EvansPartner,Accounting Principles Houston, Texas

Today'sPresenters

Mark RitterManaging Director,Compensation and Benefits ConsultingAtlanta, Ga.

© Grant Thornton LLP. All rights reserved. 3

Terry GaulManaging DirectorState and Local Tax Houston, Texas

Today'sPresenters

Bill MarxPartnerFederal TaxPhiladelphia, Pa.

© Grant Thornton LLP. All rights reserved. 4

• Identify updates in federal issues • Name significant international tax developments • Define accounting principles issues • Recognize significant state tax issues • Identify and discuss new compensation and

benefits developments

ASC 740 quarterly updateLearning objectives

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ASC 740 quarterly updateAgenda

• Federal Legislative Updates and Related Tax Accounting Topics

• International taxation• Hot topics in accounting for taxes• State and local taxation• Compensation and benefits update

© Grant Thornton LLP. All rights reserved. 6

Federal Legislative Updates and Related Tax Accounting Topics

• Section 336(e) Regulations Issued• IRS Guidance Issued after Supreme Court Strikes Down

DOMA• Other Items You May Have Missed• Never Too Early to Plan

6

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Federal Legislative Updates and Related Tax Accounting Topics – Section 336(e) Regs.

Tax accounting implication

Are you accounting for the tax basis of acquired assets properly?

What is the effect of a Sec. 336(e) election?

Who makes the election?

What is the effective date of the regulations?

See T.D. 9619 for details.

© Grant Thornton LLP. All rights reserved. 8

Federal Legislative Updates and Related Tax Accounting Topics – IRS Issues DOMA Guidance

Tax accounting implication

• FICA refunds should not be accounted for under ASC 740, i.e., FICA is an excise tax for the employer

The Supreme Court held that section 3 of the

Defense of Marriage Act (DOMA) was unconstitutional.

What are the implications?

What did the IRS recently decide?

What should or can employers do?

© Grant Thornton LLP. All rights reserved. 9

Federal Legislative Updates and Related Tax Accounting Topics – Items You May Have Missed

9

What happened?

• IRS will no longer issue Section 355 comfort letters

• Deduction denied for costs associated with stock offering

• IRS cuts refundable corporate AMT credit

Tax Accounting?• Determining uncertain tax

benefits under ASC 740-10• Measured current tax

liability properly?

• Measured deferred tax asset properly?

© Grant Thornton LLP. All rights reserved. 10

Federal Legislative Updates and Related Tax Accounting Topics – Never Too Early to Plan

Why worry?

• It's budget season!

• Also, consider ASC 740-10-30-2 in the future

Sample of "Tax Extenders" That Will Expire at Dec. 31, 2013:

• Bonus depreciation; Increased Section 179 Expensing Limits; 15-year Straight-line Cost Recovery for Qualified Leasehold, Restaurant and Retail Improvements

• Credit for Increasing Research Activities

• Work Opportunity Tax Credit (WOTC)

• Look-through Rule for Controlled Foreign Corporations (CFCs)

• Subpart F Active Financing Income for CFCs

• and more…

© Grant Thornton LLP. All rights reserved. 11

ASC 740 quarterly updateAgenda

• Federal Legislative Updates and Related Tax Accounting Topics

• International taxation• Hot topics in accounting for taxes• State and local taxation• Compensation and benefits update

© Grant Thornton LLP. All rights reserved. 12

Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

12

• Sections 334(b)(1)(B) and 362(e)(1) (the anti-loss importation provisions) were enacted as part of the American Jobs Creation Act of 2004 to prevent erosion of the corporate tax base through the importation of loss in nonrecognition transactions

– These provisions have been operative for a number of years

– Section 334(b)(1)(B) cross-references section 362(e)(1)(B)

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Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

13

• The anti-loss importation provisions apply when a corporation acquires property that is described in section 362(e)(1)(B) in a transaction described in section 332, 362(a), or 362(b) and, under the generally applicable basis rules (other than the anti-loss duplication rule in section 362(e)(2) that applies in certain transactions), the acquiring corporation (Acquiring) would take the property with an aggregate basis in excess of value.

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Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

14

• Some typical transactions in which these provisions may apply include:

– A liquidation of a foreign corporation into a U.S. corporation in a section 332 liquidation,

– A foreign person's transfer of property to a domestic corporation in a section 351 transfer, and

– A foreign corporation reorganizing into a U.S. corporation in a section 368 reorganization.

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Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

15

– When an anti-loss importation provision applies, Acquiring's basis in each such property is equal to the property's value under these rules.

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Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

16

• Property is described in section 362(e)(1)(B) ("importation property") if two conditions are satisfied:

– Any gain or loss recognized on a disposition of the property would not be subject to Federal income tax in the hands of the transferor immediately before the transfer.

– Any gain or loss recognized on a disposition of the property would be subject to Federal income tax in the hands of the transferee immediately after the transfer.

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Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

17

• The IRS and Treasury recently issued proposed regulations (REG-161948-05) under sections 334(b)(1)(B) and 362(e)(1) that address several issues relating to the operation of these provisions including:

– The definition of importation property

– The treatment of partnerships, S corporations and grantor trusts when such entities are involved in the transaction

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Section 334(b)(1)(B) / 362(e)(1) and the Proposed Regulations

18

– Certain anti-avoidance rules that apply to domestic trusts, estates, RICs, REITs and cooperatives that directly or indirectly transfer property in a section 362 transaction, if the property had been directly or indirectly transferred to or acquired by the entity as part of a plan to avoid the application of the anti-importation provisions.

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Section 334(b)(1)(B)/362(e)(1) and the Proposed Regulations

19

– The application of the rules in the case of CFCs and PFICs

– The interaction of sections 367(e)(1) and 367(e)(2)

– General operation of the rules

© Grant Thornton LLP. All rights reserved. 20 20

Distribution of importation property in a loss importation transactionExample 1 - Liquidations under section 332Prop. Reg. § 1.334-1

U.S. Parent ("USP")

Foreign Corporation("FC")

100%

Basis $40 $120 $140

Value $50 $30 $20

A1 A2 A3 FC Assets:

Analysis1. Determine whether A1, A2 or A3 are

importation properties• Consider effect to transferor (FC) and

transferee (USP)• Assume that, if FC sold these assets

immediately before the transaction, no gain or loss recognized on the sale would have been taken into account in determining a Federal tax liability.• The fact that any gain or loss recognized

by a CFC may affect an income inclusion under section 951(a) does not alone cause gain or loss recognized by the CFC to be treated as taken into account in determining a Federal tax liability.

• If USP had sold these assets immediately after the transaction, USP would take into account any gain or loss recognized on the sale in determining its Federal tax liability.

FactsOn Date 1, FC distributes A1, A2 and A3 to USP in a complete liquidation that qualifies under section 332.

© Grant Thornton LLP. All rights reserved. 21 21

Distribution of importation property in a loss importation transactionExample 1 - Liquidations under section 332Prop. Reg. § 1.334-1

U.S. Parent ("USP")

Foreign Corporation("FC")

100%

Basis $40 $120 $140

Value $50 $30 $20

A1 A2 A3 FC Assets:

Analysis1. Determine whether the liquidation of FC is a

"loss importation transaction"• Aggregate basis of importation property: $300• Aggregate value of importation property : $100

• Because USP's aggregate basis in the importation properties would be, but for section 334(b)(1)(B) greater than the aggregate value, the distribution is a loss importation transaction.

2. Determine USP's basis in property received

• A1: $50• A2: $30• A3: $20

FactsOn Date 1, FC distributes A1, A2 and A3 to USP in a complete liquidation that qualifies under section 332.

© Grant Thornton LLP. All rights reserved. 22 22

U.S. Parent ("USP")

Foreign Corporation("FC")

100%

Basis $40 $120 $140

Value $50 $30 $20

A1 A2 A3 FC Assets:

FactsSame as Example 1, except FC is engaged in a U.S. trade or business and A3 is used in that U.S trade or business

Analysis1. Determine whether A1, A2 or A3 are importation

properties• Consider effect to transferor (FC) and

transferee (USP)• A3 is not importation property. • Only A1 and A2 are importation property.

2. Determine whether the liquidation of FC is a "loss importation transaction"

• Aggregate basis of importation property: $160• Aggregate value of importation property: $80

• Because USP's aggregate basis in the importation properties would be, but for section 334(b)(1)(B) greater than the aggregate value, the distribution is a loss importation transaction.

3. Determine USP's basis in property received • A1: $50• A2: $30• A3: $140 (carryover)

Distribution of importation property in a loss importation transactionExample 1A - Liquidations under section 332Prop. Reg. § 1.334-1

© Grant Thornton LLP. All rights reserved. 23

ASC 740 quarterly updateAgenda

• Federal Legislative Updates and Related Tax Accounting Topics

• International taxation• Hot topics in accounting for taxes• State and local taxation• Compensation and benefits update

© Grant Thornton LLP. All rights reserved. 24

Emerging Issues Task Force (EITF) Update

• ASU 2013 –11: Presentation of Unrecognized Tax Benefit

• Issue 13 – B: Investments in Qualified Affordable Housing Projects

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EITF Issue Accounting Standards Update (ASU 2013-11)13-C: final consensusPresentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists

Applies to all unrecognized tax benefits existing at effective date

Addresses diversity in practice

IssueWhether an unrecognized tax benefit can be offset against a deferred tax asset for a net operating loss, similar tax loss, or tax credit carryforward

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EITF Issue Accounting Standards Update (ASU 2013-11)13-C: final consensusPresentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists

Then…

Deferred tax assets (NOL or similar tax loss/credit carryforwards) for same jurisdiction with exception

at right…

Exception – If carryforwards not available

to settle additional taxes from disallowance or entity does not intend to use the

DTA for settlement

Net presentation – reduce deferred tax

asset

Gross presentation – present a liability for

unrecognized tax benefit

If company has an unrecognized tax benefit and…

© Grant Thornton LLP. All rights reserved. 27

EITF Issue Accounting Standards Update (ASU 2013-11)13-C: final consensusPresentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists

ABC Inc. has at the beginning of the year a deferred tax asset of $2.4 million resulting from a $6 million net operating loss carryforward (tax rate is 40%)—this is its only deferred tax item. The DTA is offset fully by a valuation allowance. During the current year, ABC reports taxable income of $3 million on its tax return, which includes a $2 million deduction that does not meet the recognition criteria of ASC 740. The unrecognized tax position is a permanent item. ABC’s NOL carryforward is available to settle the additional taxes from disallowance of the uncertain tax position related to the current year deduction.

Applying the guidance in ASU 2013-11:

ABC would offset the unrecognized tax position of $2 million ($0.8 million tax affected) against the available NOL of $3 million ($6 million less the tax return income of $3 million). The balance sheet would reflect a DTA of $0.4 million, net of any valuation allowance needed.

© Grant Thornton LLP. All rights reserved. 28

ASU 2013- 11Effective date and transition

28

• Public entities: annual periods, and interim periods within those annual periods, beginning after December 15, 2013

• Nonpublic entities: annual periods, and interim periods within those annual periods, beginning after December 15, 2014

• Prospective application, with option to apply retrospectively• Early adoption permitted

© Grant Thornton LLP. All rights reserved. 29

Issue 13-B: consensus-for-exposureInvestments in affordable housing tax credits

29

• Effective yield method: investor recognizes tax credit net of the amortization of limited partnership investment as a component of income taxes attributable to continuing operations

• Proposed guidance expected to expand availability of the effective yield method

IssueWhether to loosen the restrictions on applying an effective yield method for Low Income Housing Tax Credit (LIHTC) investments

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Issue 13-BInvestments in affordable housing tax credits

30

Old "effective yield" criteria New "effective yield" criteria

Availability of tax credits is guaranteed by creditworthy entity

Probable that tax credits will be available to investor

Projected yield based solely on cash flows from tax credits is positive

Projected yield based solely on cash flows from both tax credits and other tax benefits is positive

Investor is a limited partner in the affordable housing project for legal and tax purposes, and liability is limited to investment

Investor is a limited liability investor in the affordable housing project for legal and tax purposes, and liability is limited to investment

Investor retains no operational influence over investment and substantially all projected benefits result from tax credits and other tax benefits

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ASC 740 quarterly updateAgenda

• Federal Legislative Updates and Related Tax Accounting Topics

• International taxation• Hot topics in accounting for taxes• State and local taxation• Compensation and benefits update

© Grant Thornton LLP. All rights reserved. 32

Accounting Standard Update (ASU) 20013-11 (July 18, 2013)

32

Guidance on the presentation of an unrecognized tax benefit (UTB) when an NOL or tax credit exists

- UTB is presented as a reduction to the deferred tax asset (DTA) if the DTA is available to offset the UTB

- a form of "net" reporting

- Public entities – tax years beginning after December 15, 2013

- Nonpublic entities – tax years beginning after December 15, 2014

- Amendments should be applied to all unrecognized tax benefits that exist at adoption date

- Early adoption permitted

© Grant Thornton LLP. All rights reserved. 33

Pennsylvania Income Tax Legislation

33

Pennsylvania Tax Reform (H.B. 465)

- Intangible expense addback

- but do they really mean it?

- Market-based sourcing of receipts for services

- at long last - some guidance, any guidance

- Increase in NOL Cap

- but watch the refund claims on this one – What Cap?

- Franchise Tax "Dead Horse" legislation

– the "halfway there" theorem in operation

© Grant Thornton LLP. All rights reserved. 34

North Carolina and Massachusetts Income Tax Legislation

34

North Carolina Corporate Income Tax Rate reduction (H.B. 998)

- from 6.9% to 5.0% (and perhaps 3.0%)

Massachusetts adopts market-based sales factor apportionment (H.B. 3535)

- expansive adoption with some exclusions from the factor

Massachusetts sales/use tax imposed on computer and software services (H.B. 3535)

- H.B. 3535 overrode Gov. Patrick's veto

- Movements afoot to repeal services tax and replace revenues

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Texas Franchise (Income) Tax Developments

35

To simplify and improve the administration of the franchise tax (H.B 500)

- (minor) Rate Reduction and the 0.5% tax rate to select taxpayers

- $1MM or less Total Revenue - exemption from tax made permanent

- Pipeline Companies may claim COGS deduction

- certain Nonadmitted Insurance Organizations exempt from the tax

R&D Franchise Tax Credit/Sales/Use Tax Exemption (H.B. 800)

- a 5.0% franchise tax credit on R&D activities in Texas - or

- a sales/use tax exemption for depreciable property used in R&D activities (but not both in a single year)

But retroactive COGS Rule amendment remains the BIG news for qualified Taxpayers

© Grant Thornton LLP. All rights reserved. 36

Alaska and Oregon Tax Developments

36

Alaska referendum to repeal Oil Production Tax reduction

- ~$1B per year at issue

- Vote Yes! Repeal the Reduction!

- Or – Reducing What We Take is a Giveaway?

Oregon repeals related party addback statute (H.B. 3069)

- and for a very good reason!

- (they didn't really mean it)

© Grant Thornton LLP. All rights reserved. 37

Other State Tax recent items

37

MTC Three (3) Factor Elective Apportionment Formula

- California and Michigan in the judicial lead

In New York (at least) it depends upon how unitary your definition of "unitary" is

- Matter of Knowledge Corp.

California Supreme Court – NO Property Tax on Emissions Reduction Credits

- Elk Hills Power, LLC

- overruled appellate court, trial court and SBE

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Year-end State Income Tax Accounting considerations

38

Effective Tax Rate (ETR)

- Changes in laws, regulations, court decisions

- Mergers and divestitures

- Changes in apportionment patterns

- reconsider market-based sourcing applications

- Nexus

- Combined unitary filings

- State income tax treatment and reporting of pass-through entities

- State taxation (or not) of foreign operations

- Adjustments to tax expense outside the ETR

© Grant Thornton LLP. All rights reserved. 39

Year-end State Income Tax Accounting considerations

39

ASC 740-10 (fka FIN 48)

- Update SOL status

- know the effects of the federal SOL

- Take another look at issues and governing authorities

- consider acquisitions and divestitures

- Update interest and penalty computations

- Consider federal adjustments

- State computations should parallel federal ASC 740-10

- Current and deferred treatment of UTPs should be consistent

- Consider ASC 450 (fka FAS 5), including disclosures

- E.g., bulk sale sales/use tax liabilities/acquired liabilities

© Grant Thornton LLP. All rights reserved. 40

Year-end State Income Tax Accounting considerations

40

- Account reconciliations

- Tax assets (e.g., NOLs) and related valuation allowances

- State adoption (or not) of IRC Sec. 382 limitations

- Estimated payments

- Review FIT provision

- Intercompany agreements and transactions

- Credits and Incentives

- File these in the Better Early than Late or Never cabinet

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ASC 740 quarterly updateAgenda

• Federal Legislative Updates and Related Tax Accounting Topics

• International taxation• Hot topics in accounting for taxes• State and local taxation• Compensation and benefits

update

© Grant Thornton LLP. All rights reserved. 42

Special considerations in computing the APIC pool: Reorganizations

42

• Most reorganization transactions have implications for excess tax benefits held in APIC pool

• But first, what are excess tax benefits?

– Increments to the APIC pool created when equity compensation deductions exceed related deferred tax asset

– Used to offset tax benefit shortfalls (where tax deduction is less than related deferred tax asset)

• APIC pool tracks net excess benefits and shortfalls

• If insufficient balance in APIC pool to offset a shortfall, it's recognized as increased tax expense on income statement

© Grant Thornton LLP. All rights reserved. 43

Special considerations in computing the APIC pool: Reorganizations

43

• Most reorganization transactions have implications for excess tax benefits held in APIC pool:

– Pooling: Accounting method that allows the balance sheets of two companies to be added together pursuant to an acquisition or merger

– Purchase Accounting: The alternative accounting method, whereby the purchasing company adds the absorbed company's assets to its own balance sheet

– Sale of a subsidiary: Excess tax benefit pool stays with the parent if the excess tax benefit was from an award of the parent’s equity; it follows the subsidiary if it was related to an award related to the subsidiary’s equity

– Spin-offs: Currently conflicting views: either follow the subsidiary sale view above, or the pool follows the employee

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Special considerations in computing the APIC pool: Reorganizations

44

• Poolings

– No change in basis, and include all pooled companies' excess tax benefits

• Purchase Accounting

– Under this method new basis is recognized and excess tax benefits of target do not carry over to purchaser

– Excess tax benefits from awards issued in the acquisition (new awards or substitutions for target equity compensation grant) are recognized by purchaser

© Grant Thornton LLP. All rights reserved. 45

Special considerations in computing the APIC pool: Reorganizations

45

• Sale of a subsidiary

– Excess tax benefit pool stays with the parent if the excess tax benefit was from an award of the parent’s equity

– Follows the subsidiary if it was related to an award related to the subsidiary’s equity

• Spin-offs — Currently conflicting views, probably can account under either of two ways:

– Follow subsidiary sale method above, or

– Pool follows the employee (i.e., belongs to entity for whom services were performed)

© Grant Thornton LLP. All rights reserved. 46

Special considerations in computing the APIC pool: Reorganizations

46

• Special note: Bankruptcy accounting:

– Company generally applies fresh-start accounting upon emerging from bankruptcy (ASC 852-10)

– Fresh-start accounting creates new basis similar to purchase accounting

– Therefore apply purchase accounting approach and excess tax benefits do not remain with company upon emerging from bankruptcy

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Comments?Questions?

47

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Do you have any immediate concerns regarding ASC 740 matters?

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Please provide your name, phone number and email in the form on the next screen and we will be in touch. Only Grant Thornton will have the ability to see this information. 

Alternatively, please contact any of today's presenters directly. Their contact details are provided on the next slides.

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ContactInformation

Randy RobasonNational Partner-in-Charge, TARAS [email protected]

Joe CaliannoPartner,International Tax [email protected]

Chuck EvansPartner,Accounting Principles [email protected]

Mark RitterManaging Director,Compensation and Benefits [email protected]

© Grant Thornton LLP. All rights reserved.

ContactInformation

Terry GaulManaging Director,State and Local Tax [email protected]

Bill MarxPartner,Federal [email protected]

© Grant Thornton LLP. All rights reserved.

The foregoing slides and any materials accompanying them are educational materials prepared by Grant Thornton LLP and are not intended as advice directed at any particular party or to a client-specific fact pattern. The information contained in this presentation provides background information about certain legal and accounting issues and should not be regarded as rendering legal or accounting advice to any person or entity. As such, the information is not privileged and does not create an attorney-client relationship or accountant-client relationship with you. You should not act, or refrain from acting, based upon any information so provided. In addition, the information contained in this presentation is not specific to any particular case or situation and may not reflect the most current legal developments, verdicts, or settlements.

You may contact us or an independent tax advisor to discuss the potential application of these issues to your particular situation. In the event that you have questions about and want to seek legal or professional advice concerning your particular situation in light of the matters discussed in the presentation, please contact us so that we can discuss the necessary steps to form a professional-client relationship if that is warranted. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.

© 2013 Grant Thornton LLP, the U.S. member firm of Grant Thornton International. All rights reserved. Printed in the U.S.A. This material is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International, Ltd.

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