Why Organize Early?

Although many company founders are reluctant to take the plunge into creating a corporate entity, often putting this step off for as long as possible, there are some good reasons to consider forming as soon as possible. Holding Period Stock Value The IRS will look at the time between forming and value given for stock at that time, and the company’s value at any financing or liquidity event. Hypothetically, if founders gave $.01 of value for their shares at formation, and they receive a funding round that values the company at $.50/share a week later, they need to be able to convince the IRS in an audit that they created enough value in the company in that one week to warrant the 50x increase in the value of the company. In a situation like this, your company is more than likely to arouse the suspicion that you sold yourselves shares at below market value. The General Partnership Many states, including Washington, have ratified some version of the Uniform Partnership Act (UPA). Washington’s is codified as chapter 25.05 of the Revised Code of Washington. Although the preferred form of entity for most startups is a C corporation, a founder should also be attentive to the provisions of the UPA or its equivalent in his or her state. The reason for this is that many of these acts contain provisions similar to the following from RCW 25.05.055:   (1) Except as otherwise provided in subsection (2) of this section, the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not...

From IP Assignments to 83(b) Elections: IP and Tax Pitfalls for Startup Company Founders

In a previous post I wrote about some of the ways in which a good attorney advisor can help a startup avoid some of the common mistakes made by early stage companies when contemplating formation. In this article, I address some of the additional IP and tax pitfalls that founders should keep cognizant of amidst the excitement of getting their new venture off the ground. Assignment and Ownership of IP Assignment and ownership of a company’s core IP from the pre-formation stages through funding and eventual exit are part and parcel of the nuanced advice provided by an experienced attorney. IP assignments must be clear and correct between the parties. Although the founders are focused on the success of their idea at the outset, if things go sideways it needs to be clear what the company owns and what the individual founders own. Does the founder’s agreement assign to the company all related IP from before incorporation as well as after incorporation? Is there a technical founder who wishes to retain rights to his personally developed IP until some specified event (e.g., funding) occurs? Founders agreements must contain clear and unambiguous terms in order to establish a chain of ownership for all of the company’s IP early on. This will be important later on to potential funders, partners and acquirors. In situations where founders remain employed in other companies or have recently left a company, any IP ownership provisions in their current or previous employment agreements should be scrutinized. Don’t just assume that the individual owns all of the IP that they’ve create outside of work hours—make sure that...

Tax Free Corporate Reorganizations

Three Statutory Options for Tax Free Corporate Reorganizations Structured properly, corporate reorganizations can assist in solving business problems. What are the benefits to a corporate reorganization? A properly structured reorganization can be tax-free under the Internal Revenue Code. In addition, reorganizations  provides businesses the opportunity to protect assets, avoid liabilities and transfer contracts by savvy use of the provisions of Subchapter C of the Internal Revenue Code. For example, a business may want to isolate the liabilities of a certain sector of their business to insolate the remainder of the business. Reorganizations can also be structured to allow the Acquiring entity to utilize the Target entity’s tax attributes, most notably its net operating losses (NOLs). The Internal Revenue Code puts certain limitations on these uses so proper guidance is needed for businesses to fully take advantage of these aspects of the tax code. Any business looking to expand or merge with another business will need advisors to review the reorganization options and craft a plan to accomplish corporate planning and structuring goals. Below is a brief summary of commonly used reorganization devices. Reorganizations The Internal Revenue Code § 368 is the statutory basis to accomplish tax-free corporate reorganizations. The tax code provides a multitude of options and compliance rules. Federal tax law generally provides certain mergers and acquisitions will be a Tax-Free event only if the transaction possesses the following attributes: Plan of Reorganization Business Purpose Continuity of Business Enterprise Continuity of Proprietary Interest Plan of Reorganization – Typically, a Plan of Reorganization consists of a formal written agreement between the parties. The agreement can outline the intentions of...

Tax Opinion Letters

Tax Opinion Letters Can Avoid Penalties To avoid penalties a tax opinion letter must comply with Circular 230. In recent years, the IRS has cracked down on the protections of a tax opinion letter. Prior to 2004, a tax opinion letter taking a tax position could protect taxpayers from significant penalties based on their reliance of that opinion letter. This led to tax practitioners taking aggressive tax position even when the facts and legal precedent didn’t support their findings. Many taxpayers who implemented abusive tax shelters were not penalized for their evasive activity. This all came to an end in 2004 & 2005 when the IRS amended Circular 230. The Circular 230 amendments defined the standards that tax professionals must abide by when providing written tax advice. It further defined the content of a tax opinion letter which reviewed transactions, plans, or arrangements where the significant or principal purpose was to avoid or evade taxes. If tax opinions do not meet the standards of Circular 230, taxpayers will still be subject to hefty IRS penalties if the IRS determines a deficiency exists. A good tax opinion letter will contain an extensive review of the relevant facts and technical tax issues. Furthermore, substantial legal authority and analysis must be discussed in the opinion. Tax opinion letters must view the transaction from all perspectives and come to a well-reasoned conclusion. Generally, if the letter meets the threshold of more-likely-than-not, it can be used to protect a taxpayer from any future penalty liabilities. A recent Tax Court decision, Canal Corp. v. Comm’r, 135 T.C. No. 9 (2010), affirmed the ongoing importance in...

Audit Reconsideration

Audit reconsideration can be a viable action to eliminate an IRS tax liability that has been unfairly assessed without full consideration of the facts.  It is always advised to contact tax professional when defending IRS assessments.  Our tax professionals have sufficient experience to assist in eliminating, in whole or in part, our clients’ IRS liabilities.  Below you will find information regarding the Audit reconsideration process. IRS will only reconsider a previous audit if: New Information is submitted that, if accepted, would change the tax liability; Filed a Return after the IRS completed a substitute return; IRS made a Computational Error in the assessment; or  Liability is Unpaid or Credits are denied. IRS will Deny an Audit Reconsideration if: Closing Agreement has been entered (FORM 906); Offer in Compromise reached; Agreement with Appeals (FORM 870-AD); Amount Due is a result from a FPAA under the TEFRA statute; or A Court has ruled on a Final Determination. Procedure to File an Audit Reconsideration Request:  File a Tax Return (if not previously done);  Formal Letter identifying the changes;  Include Supporting Documentation (Form 4549 & add’l docs); and  Include Contact Information and Convenient Time to Call. What to Expect:  Collection Activity will cease if Request is Sufficient for Review;  Adjustments will be made if necessary; and Continue to Pay Installment during Reconsideration If Assessment still NOT correct:  Request Conference with Appeals Office; and  Formal Letter requesting appeal OR Pay amount due and file a Refund Suit in the US Court of Federal Claims (File within 2 years or after 6 months if no response on Audit Reconsideration) Share...

Managing Your Federal Tax Liability

Most people want to ignore federal tax liability hoping that it will go away.  However, the consequences of tax debt far outweigh the cost of resolving the liability. A quick acting taxpayer can save hundreds and thousands of dollars in interest and penalties by proactively pursuing a resolution.  In fact, the methods described below can be executed relatively quickly and without a large expense. Offer in Compromise Under I.R.C. §7122, the federal government provides taxpayers an opportunity to settle federal tax debt.  This method is called an Offer in Compromise.  A properly filed Offer in Compromise is a binding agreement between the IRS and the taxpayer.  The IRS agrees not to collect more than the amount offered if the taxpayer remits payment in full.  The IRS permits taxpayers to make installment payments on their reduced offers. The IRS may eliminate a taxpayer’s entire debt in an Offer in Compromise.  However, not all offers are accepted.  As a matter of fact, the IRS accepted less than 25% of offers per the IRS Data Book in 2010.  The IRS does not arbitrarily reject offers; however, they reject offers that do not qualify based on IRS standards outlined in IRS Policy Statement P-5-100.  Experienced tax attorneys possess insight and understanding on how to evaluate taxpayers’ likelihood of a successful Offer in Compromise. Taxpayers must proceed with caution when hiring many national tax resolution offices who promote themselves as settling taxpayers’ tax debt for “pennies on the dollar”.  Many of these firms fail to inform their clientele that their offers are hopeless until their checks have been cashed.  While an Offer in Compromise...