Jul 22

Audit Committee Standards

While there are many requirements and expectations of an issuer’s audit committee, the 1934 Exchange Act under rule 10A(3) mandates five specific standards in order for a company to be listed.

1.  Independence – each member of the audit committee must be a member of the Board of Directors of the listed issuer, and must otherwise be independent:

-  there can be no consulting, advisory or compensatory relationship, outside of that as a member

-  members of the AC can not be affiliated persons as defined of the issuer or any subsidiary.

2.  Responsibility – the audit committee, as a sub-committee of the Board of Directors must be directly responsible for the appointment, consultation with, and retention of the registered independent accounting firm, while including oversight including problem resolution between management and the auditor.

3.  Complaint Resolution – the AC must establish procedures for addressing complaints received by the issuer including anonymous submission by employees.

4.  Advisers – the AC must have the authority to engage advisers, including accountants, auditors, attorneys and consultants they feel are reasonable and necessary to carry out the duties of the committee.

5.  Funding -  the issuer must provide appropriate funding to allow the AC to carry out their duties as a committee of the Board of Directors.

Our experience has been that if there is a failure in meeting the requirements for an audit committee established by the ’34 Act it typically is for one of two reasons:  first, and most common there is often confusion as to who the auditor should be responsible to – the AC or management.  All too frequently, the unofficial role that management can play in the selection of the auditor becomes significant.  Second, is the ‘step-child’ status many audit committees relegate complaint resolution too.  this absolutely can not be the case if the issuer is going to minimize exposure, considering our litigious society.


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Nov 5

Income Tax Provisions set to expire in 2013

Income Tax provisions that are scheduled to expire or change after 2012 include the following:

 A.      Income Tax Rates.  Tax rates are scheduled to revert to the pre-2001 level.

  1. 2012 individual rates are: 10%, 15%, 25%, 28%, 33%, and 35%.
  2. 2013 individual rates are scheduled to be: 15%, 28%, 31%, 36%, and 39.6%.

  B.      Employee FICA Tax Rate.The 2% reduction in employee’s FICA tax expires.  (The 2013 FICA base will be $113,700).

 C.      Marriage Penalty Relief:

  1. Standard Deduction for a married couple has been twice that of a single person.  The standard deduction for a married couple will become 167% of a single person’s.
  2. The 15% bracket: For married is twice that of a single.  The upper limit for joint filers will decrease.  Based on 2012 amounts the 28% bracket would begin at $59,000 instead of at $70,700.

 D.      Itemized Deductions.  Phase-out is scheduled to apply in 2013.

 E.       Personal Exemptions.  Phase-out is scheduled to apply in 2013.

 F.       Earned Income Credit (EIC).  The EIC phase-out would be determined to modified AGI instead of just AGI.  Also EIC would be reduced by the AMT.

 G.     Child Tax Credit. $1,000 credit would drop to $500 and would not be allowed for the AMT.  The refundable portion would change.

 H.     Adoption Credit and Employer-provided Exclusion.  Will be reduced.

 I.        Child and Dependent Care Credit.  The current 35% credit will drop to 30%.  The current qualifying expenses will drop from $3,000/$6,000 to $2,400/$4,800. 

 J.        Capital Gains:

  1. Will generally increase from 15%-20%
  2. Will be 10% for taxpayers in the 15% bracket (currently taxpayers in 10%/15% are at 0%).
  3. The 25% and 28% rates will stay.
  4. The special 18% tax on assets held five years will return (8% if in the 15% bracket).

 K.      Dividends.  Will be taxed as regular income up to 39.6%.

 L.       Accumulated Earnings Tax (AET).  Exemption amount will be reduced.

 M.    Personal Holding Company (PHC) Tax.  Will increase from 15% in 2012 to 39.6% next year.

 N.     Alternative Minimum Tax (AMT).  Exemption amount will be reduced.

 O.     Coverdell Education Savings Accounts.  Per beneficiary limit on annual contributions will drop from $2,000 to $500.

 P.      Employer provided Educational Assistance.  Scheduled to expire after 2012.

 Q.     Student Loan Interest.  AGI phase-outs would drop and 60-month rule would again apply.

 R.      American Opportunity Tax Credit  (AOTC).  Scheduled to expire after 2012.

 S.       Employer-provided Child Care Facilities Credit.  Scheduled to expire after 2012.

 T.       Estate Taxes.

  1. Maximum estate tax rate will be 55%.
  2. Estate exclusion will drop to $1,000,000
  3. Portability will be discontinued.
  4. State tax deduction would end and state credit return.
  5.  5% surcharge on estates over $10M would return.
  6.  Other items would return, e.g., installment payments.
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Nov 5

Summary of Tax Provisions Expiring Prior to 2012

• Credit for non-business energy property.
• Plug-in electric vehicle credit.
• Plug-in conversion credit.
• New energy efficient home credit.
• Energy efficient appliance credit.
• Employer wage differential for active duty members of the uniformed services.
• Alternative minimum tax (AMT) exemption for many personal credits.
• Deduction of expenses for school teachers.
• Deduction for mortgage insurance premiums.
• Deduction for state and local sales taxes instead of state and local income taxes.
• Tuition and fees deduction.
• Tax-free distribution from retirement accounts or charitable purposes.

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Mar 29

MD & A Are You Blowing an Opportunity?

As a service to our public company clients we routinely perform an extensive review of the other information included in their annual report.  While  completing a large number of such reviews recently for our clients with December 31 year-ends we became aware of opportunities that are regularly over-looked by issuers.  In preparing Management’s Discussion and Analysis there are some critical elements that will make them more effective.

Attitude - your MD & A is an opportunity to tell the story of the company in a positive way.    As is your web page, your SEC filings are the ‘face’ of the company to potential shareholders, investors and others considering doing business with you.  Do not minimize this opportunity by viewing it primarily as an obligation.  We all have a tendency to spend less time on things we view as ‘necessary evils’ as opposed to ‘opportunities’.

Approach - the primary purpose of the MD & A is to allow the reader to “look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company” (SEC Financial Reporting Policies sec. 501).    The MD & A is intended to be entirely prospective, not historical.  Too frequently we see comments like “As of 12/31/x1 revenues declined $xxx,xxx which was a reduction of x% over revenues of $xxx,xxx as of 12/31/x0″.  That’s historical, not prospective, and anyone could calculate it from the financials.  It provides no additional information of any value to the reader.

 Executive Level Overview – Sec. 501.12 is a gift from the SEC that most issuers don’t open.  This is a chance to tell your story.  Because many companies have become larger, global and more complex, and the disclosure rules correspondingly so,  MD & A has  become lengthy and complex and correspondingly, boring and so not read as thoroughly as it should be.   In an effort to improve clarity and understandability many company’s are incorporating an Executive Level Overview (ELO) as an introductory section  summarizing the most significant areas of the MD & A that management wants to emphasize.  Typically this includes:  economic or industry wide factors; how the company earns revenues and generates cash; lines of business, locations, principle products, services; and provide insight into material opportunities, challenges and risks which management is most focused on.

It is a ‘highlight’ of those things that are important to the company, reported elsewhere as well (e.g. Risk Factors, or Business Description).

Liquidity, Capital Resources, Results of Operations – You must address each of these areas specifically.   When drafting these comments keep in mind that you should address three questions for the reader: (1) What happened? (2) Why did it happen? and most importantly (3) Is it expected to continue?  That last one is the crux of the MD & A.  Remember – the reader is entitled to assume that “past performance is indicative of future performance” unless you tell him different.

Other Tips - (1) If you’ve previously discussed it in your Form 10k you don’t need to keep beating it to death unless it applies to new information in the current interim filing .  Most companies over disclose information that they’ve previously discussed numerous times.  The unwelcome result is that the points you want to make get buried in the irrelevant.  (2)  Discussion for interim reports should be limited to material changes occurring subsequent to the last annual report.  Over disclosure, again,  can result in burying relevant information in the minutiae.  (3) The SEC requires that it be “presented in clear and understandable language”.  That means you need to lose the ‘legalese’.   (4)   In the words of an internationally recognized securities attorney with whom we’ve worked – “Disclosure is too important to leave up to only the attorneys”.  While their focus is compliance, as it should be, this is more than a compliance document.  It is  the public face of your company.  Remember it is an opportunity to ‘sell’ to investors, financiers and those people you want to do business with.  (5)  Finally, sentence structure,  grammar and spelling are critical.  If your MD & A is sloppy, those reading it will assume the company is run the same way.

You have a great company with a great business plan and outlook for the future.  Tell the world in your MD & A.


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Sep 14

The Federal Research & Development Tax Credit

Chances are that you or companies you know are not taking advantage of a valuable tax credit.

John Williams is our director of tax services and recently was published on this topic.

Northern Nevada Weekly

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May 31

A Road-map for IRS Audits . . . Schedule UTP has Arrived!

The following is part I of a two part blog post, which will describe the specific reporting requirements of Schedule UTP and discuss the IRS’ objectives and rational for its new reporting requirements. Part 2 will apply the  requirements of Schedule UTP to specific factual situations and reconcile the resulting reporting requirements to those requirements under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48″).

The much anticipated IRS audit road-map, Schedule UTP, is now reality for certain large corporate taxpayers.   Corporations that file Form 1120, U.S. Corporation Income Tax Return, Form 1120-F, U.S. Income Tax Return of a Foreign Corporation and certain insurance companies with assets of more than $100 million must file a Schedule UTP starting in 2010. To view Schedule UTP, click here. To view the IRS instructions to Schedule UTP, click here. Schedule UTP must be attached to a calendar year 2010 tax return or to a fiscal year-end return that begins in 2010 and ends in 2011

The initial reporting threshold of $100 million of total assets will be reduced to $50 million starting in 2012 and to $10 million for the 2014 tax year.  Only a corporate taxpayer or related party that has issued audited financial statements covering all or a portion of the corporation’s tax year is required to file a Schedule UTP.  Compiled or reviewed financial statements are not audited financial statements.

Note that a corporation without audited financial statements is still required to file Schedule UTP if it meets the related party definition.   A “related party” is any entity that has a relationship described in IRC Section 267(b), Section 318(a), or that is included in the consolidated audited financial statements in which a corporation with audited financial statements is also included.

A corporation must report tax positions taken on a U.S. federal income tax return if:

  • The corporation has taken a position on its federal income tax return for the current year or for a prior year, and
  • The corporation or a related party has either
    • Recorded a reserve with respect to that tax position in audited financial statements, or
    • Not recorded a reserve for a tax position because the corporation expects to litigate the position.

A tax position taken on a return is defined as one that would result in an adjustment  to a line item on a return or that would be included in a Section 481(a) adjustment (i.e. a change in a method of accounting) if the position were not sustained on upon an IRS audit. If multiple positions affect a single line on the tax return, each tax position is treated as a separate tax position. A tax position is based on a unit of account used to prepare the audited financial statements in which the reserve has been recorded. The unit of account must be the same unit of account used by the taxpayer in its financial statements for purposes of FIN 48.  If no FIN 48 reserve was required, the tax position need not be reported on Schedule UTP.

The initial FIN 48 reserve for financial statement purposes will trigger the reporting requirement on Schedule UTP. Interestingly, subsequent increases or decreases in the FIN 48 reserve will not require additional Schedule UTP reporting. Additionally, no Schedule UTP disclosure is required with respect to tax positions taken on a return before January 1, 2010, even if a corporation records a reserve for financial statements issued in 2010 or later.

A corporation must report on Schedule UTP a tax position for which it did not record a reserve based on its expectation to litigate the position if: (i) the probability of settling with the IRS is less than 50% and (ii) no reserve was recorded in the financial statements because the corporation intends to litigate the tax position and has determined that it is more likely than not to prevail on the merits in litigation.

Schedule UTP is divided into three parts. In part I, the corporate taxpayer reports tax positions taken in the current year that meet the definition of a UTP disclosure position. Part II is used to report tax positions taken by a corporation in a prior year that has not been reported on Schedule UTP.  Part III is used to provide a concise description of each uncertain tax position reported in parts I and II.

For each UTP, the corporate taxpayer must provide the following information:

  • Identify the Internal Revenue Code section related to each UTP (up to three code sections).
  • Indicate whether the UTP is temporary and/or permanent book-tax difference.
  • If the UTP relates to a pass-through entity (e.g. partnership, S corporation, etc.) the EIN of the pass-through must be reported.
  • Disclosure with respect to those UTPs whose relative size (by amount of dollar reserve) is greater than or equal to 10% of all UTPs listed on parts I and II of Schedule UTP for that tax year.
  • All UTPs on parts I and II must be ranked based on size with the number “1″ assigned to the largest, “2″ to the next largest, and so on. The letter T must be provided for all transfer pricing related issues and the letter G for all other UTPs.

IRS Commission Doug Shulman announced the following goals of Schedule UTP

  • Create certainty regarding a taxpayer’s obligation sooner rather than later.
  • Cut down on the time it takes that IRS to find issues and complete an audit.
  • Provide consistent treatment across taxpayers.
  • Make efficient use of government resources by focusing on issues the pose the greatest risk of noncompliance.
  • Ensure that both the IRS and taxpayer spend more time discussing the law as it applies to the facts and less time looking for information.
  • Help the IRS prioritize taxpayers for examination
  • Help the IRS identify issues where there is uncertainty and where further guidance is necessary.
  • Help the IRS prioritize selection of issues during an audit.
  • Obtain key information regarding uncertain tax positions without getting into the heads of the taxpayer or their advisors as it relates to quantifying risk.

The practical impact of Schedule UTP is that the affected corporate taxpayer must now carefully consider its FIN 48 analysis and disclosure in conjunction the preparation of Schedule UTP and its defense of its tax position.  In part 2, we will apply the new disclosure requirements to specific factual situations.


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May 19

Treasury Issues Final Regulations on FBAR Filing Requirements and IRS Releases Revised FBAR Form

On February 24, 2011, the Treasury Department issued final regulations (the “Regulations”) regarding the Report of Foreign Bank and Financial Accounts (“FBAR”). The Regulations, which can be found here, are effective March 28, 2011 and apply to FBARs for 2010 due on June 30, 2011, as well as any FBARs for prior years which were deferred under prior IRS guidance. The Treasury also noted that it plans to permit electronic filing of the FBAR (once technology updates are implemented), but did not announce a specific time frame for electronic filing.

The Regulations (i) addresses the scope of the persons that are required to file reports of foreign financial accounts; (ii) specifies the types of accounts that are reportable; (iii) provides filing relief in the form of exemptions for certain persons with signature or other authority over foreign financial accounts; and (iv) adopts provisions intended to prevent persons subject to the rule from avoiding their reporting requirement.


The Regulations generally require a US person who has a financial interest in, or signature or other authority over one or more foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year to disclose that interest to the IRS. The disclosure must be made on Form TD F 90-22.1, FBAR, and form must be filed on or before June 30 of each calendar year for accounts maintained during the previous calendar year.  In March 2011, the IRS published a revised FBAR form with accompanying instructions that reflect the changes made by the Regulations.

Key provisions of the Regulations include:

US Person

  • The term US person includes a US citizen, US resident or domestic entity (including, but not limited to a corporation, partnership, trust, or limited liability company). In the case of trusts, a US trustee must file the FBAR for the trust.
  • A legal permanent resident who elects under a tax treaty to be treated as a non-resident for tax purposes must nonetheless file the FBAR.

Financial Interest

The Regulations state that a US person has a financial interest in a bank, securities or other financial account in a foreign country if:

  • The US person is the owner of record or has legal title to the account, regardless of whether the account is maintained for his own benefit or for the benefit of others.
  • A person acts as an agent, nominee, attorney or in some other capacity on behalf of the US person with respect to the account.
  • The account is held by a corporation in which the US person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares.
  • The account is held by a partnership in which the US person owns directly or indirectly more than 50 percent of the partnership’s profits or capital interest.
  • The account is held by any other entity in which the US person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits.
  • A trust, in which the US person is the trust grantor and the US person has an ownership interest in the trust for US Federal tax purposes.
  • The account is held by a trust in which a US person either has a present beneficial interest in more than 50 percent of the assets or from which such US person receives more than 50 percent of the current income.

Signature or Other Authority

An individual has “signature or other authority” over a financial account if he (alone or in conjunction with another) has the authority to control the disposition of money, funds or other assets held in the account by direct communication (whether in writing or otherwise) to the person maintaining the account.

The preamble to the Regulations states that the test for determining whether a US person has signature or other authority over an account (and thus a FBAR filing obligation) is whether the foreign financial institution will act upon a direct communication from such US person regarding the disposition of assets in that account. In addition, the preamble to the Regulations clarifies that officers and employees who are obligated to file FBARs because they have signature or other authority over an employer’s foreign financial accounts are not required to personally maintain the records of the foreign financial accounts of their employers.

The officers and employees with signature or other authority over the foreign financial account of the following entities are not required to report that he has signature or other authority over that account as long as he has no financial interest in the account:

  • Banks that are examined by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration;
  • Financial institutions registered with and examined by the US Securities and Exchange Commission (the “SEC”) or the US Commodity Futures Trading Commission;
  • Entities that are registered with and examined by the SEC that provide services to investment companies registered under the Investment Company Act of 1940;
  • Entities with a class of equity securities (or American depository receipts) listed on any US national securities exchange, and US subsidiaries of US entities with a class of equity securities listed on a US national securities exchange if the US subsidiary is identified on a consolidated FBAR report filed by the parent.
  • Entities with a class of equity securities (or American depository receipts in respect f equity securities) registered under section 12(g) of the Securities Exchange Act.

Reportable Foreign Financial Accounts

  • Bank Accounts – A “bank account” is a savings deposit, demand deposit, checking, or any other account maintained with a person that is in the banking business.
  • Securities Account. A “securities account” is an account maintained with a person involved in the business of buying, selling, holding, or trading stock or other securities.
  • Other Financial Account. The term “other financial account” means (i) an account with a person in the business of accepting deposits as a financial agency; (ii) an account that is an insurance or annuity policy with a cash value ; (iii) an account with a person acting as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or (iv) an account with a mutual fund or similar pooled fund which issues shares that are available to the general public in addition to having a regular net asset value determination and regular redemptions.
  • The proposed regulations specifically reserved the treatment of investments companies other than mutual funds or similar pooled funds, and the Final Regulations continue to do so. As a result, for the time being, interests in other investment entities such as foreign hedge funds and private equity funds that have periodic redemptions are not considered foreign financial accounts, and therefore FBARs do not have to be filed with respect to such interests.
  • The preamble to the Regulations clarifies that an account is not a foreign account under the FBAR if it is maintained with a financial institution located in the US even though the account may contain holdings or assets of foreign entities. The preamble also clarifies that, in general, the FBAR rules do not apply to omnibus accounts in which a US bank, acting as a global custodian combines the assets of multiple investors and creates pooled cash and securities accounts in non-US markets. The preamble states that as long as the US customer cannot directly access their foreign assets maintained at the foreign institution, the US customer maintains an account with a financial institution located in the US, and therefore will not have to file a FBAR with respect to assets held in the omnibus account and maintained by the global custodian.

Other Special Rules

25 or more Foreign Financial Accounts – A US person that has a financial interest in, or signature or other authority over 25 or more foreign financial accounts is only required to provide the number of financial accounts and certain other basic information on the FBAR report; however, such US person will be required to provide detailed information concerning each account when requested by the IRS.

Consolidated Reports – US entities are permitted to file consolidated FBAR reports on behalf of itself and any entity in which it owns directly or indirectly more than a 50 percent interest.

Participants and Beneficiaries in Certain Retirement Plans – Participants, owners, and beneficiaries in retirement plans under IRC sections 401(a), 403(a), 403(b), 408, and 408A are not required to file a FBAR report for any foreign financial account held by or on behalf of the retirement plan.

IRS Releases New FBAR Form

The Internal Revenue Service has released a revised Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), which can be found here. The revised FBAR Form is used to disclose financial interests in or signature authority over foreign financial accounts where such accounts exceed $10,000 in the aggregate at any time during the calendar year. The revised FBAR Form implements the Regulations as discussed above and is to be used for the upcoming June 30, 2011 filing deadline and can be found here.

The instructions to the revised FBAR Form provide additional guidance to assist filers in completing the Form. Revised definitions, which include “United States Person,” “signature authority” and “foreign financial account,” track the changes described in the final Regulations. In addition, the instructions offer clarifying guidance on how to complete the Form, including, for example, where the filer is an individual with signature authority over a foreign financial account, is a disregarded entity, or is an entity that does not have a United States mailing address.

The revised instructions clarify that consolidated reporting is available for non-corporate as well as corporate affiliates, and instruct filers on how to determine the maximum account value of each account. The revised instructions also provide a reorganized list of exceptions to the filing requirement, which confirms the categories of exceptions as expanded under the final Regulations; this list indicates that the following persons, among others, are not required to file FBARs:

  • owners and beneficiaries of IRAs and participants in and beneficiaries of tax-qualified retirement plans;
  • officers and employees with signature authority but no financial interest in financial accounts of companies, the shares of which are registered with the SEC (including those listed on a US national securities exchange); and
  • officers and employees of entities which are registered with and examined by the SEC and provide services to registered investment companies (i.e., registered investment advisors) with signature authority but no financial interest in the financial accounts of such companies.


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Apr 21


An IC-DISC can provide a permanent 20% tax savings (or even more) for qualifying U.S. manufactures and exporters.


For U.S. exporters operating their business via a sole proprietorship or pass-through entity (e.g., limited liability company (LLC), S corporation, limited partnership (LP)), the IC-DISC benefit is essentially tied to the differential between the qualified dividend rates and the ordinary income tax rates. This differential was originally set to expire on December 31, 2010 but Congress extended it in late December of 2010 to December 31, 2012.

Many practitioners strongly believe that this differential will be extended past 2012 even if tax rates on ordinary income increase. In addition to benefiting sole proprietorships and pass-through entities, exporters operating their business via a C corporation can benefit by using the IC-DISC to eliminate double taxation on a majority of their export income, as well as to reduce the need to incur additional payroll taxes on income paid to their shareholders/officers. The IC-DISC is not a tax shelter.

To qualify as an IC-DISC, a domestic corporation must pass two main tests known as the qualified export receipts test and the qualified export assets test. The qualified export receipts test requires that 95% of the gross receipts of the IC-DISC constitute qualified export receipts. The qualified export assets test requires that 95% of the assets of the IC-DISC be qualified export assets. Qualified export assets include accounts receivable, temporary investments, export property, and loans to producers.

Because most of the qualified export receipts categories focus on export property, it is critical that the exporter substantiate that its exports satisfy the definition of export property. Three requirements must be met in order for the IC-DISC to receive income from an export sale. The export property must:

(1) Be manufactured, produced, grown, or extracted in the U.S. by a person other than the IC-DISC.

(2) Be held primarily for sale, lease, or rental for use, consumption, or disposition outside the United States

(3) Have a maximum of 50% foreign content.

Although exporters often think of newly produced property as export property, used equipment and even scrap also qualify.

In its most recent form, the IC-DISC can provide a permanent 20% tax savings (or even more) for qualifying U.S. exporters. In certain cases, it eliminates U.S. tax entirely on the majority of export income. In addition, distributions to individual shareholders are currently taxed at a maximum rate of 15% – providing a way to convert 35% ordinary income to 15% qualified dividend income. Of course, this assumes that the U.S. exporter generates operating profits and is creating taxable income in the U.S.

IC-DISC Structure

The IC-DISC is a “paper” entity used as a tax-savings vehicle. It does not require corporate substance or form, office space, employees, or tangible assets. It simply serves as a conduit for export tax savings. An important feature of the IC-DISC is that shareholders can be corporations, individuals, or a combination of these.

This is how an IC-DISC works:

  • Owner-managed exporting company forms a special U.S. corporation that elects to be an IC-DISC. The election is made on IRS Form 4876-A, which must be filed within 90 days after the beginning of the tax year.
  • Exporting company pays IC-DISC a commission.
  • Exporting company deducts commission from ordinary income taxed at up to 35%.
  • IC-DISC pays no tax on the commission as long as certain qualification standards are met such as the 95% qualified export assets and the 95% qualified export receipts requirements of Section 992(a)(1).
  • Shareholders of an IC-DISC are not taxed until the earnings are distributed as dividends. However, the shareholders must pay annual interest on the tax deferred.
  • Shareholders that are individuals pay income tax on qualified dividends at the capital gains rate of 15%. C Corporation shareholders are automatically considered to have received 1/17th of the IC-DISC’s taxable income even if no distributions are made.
  • The result may be a 20% or more tax savings on commission.

Permanent Tax Savings on Global Sales

Permanent tax savings begin with the exporting company deducting the commission it pays to the IC-DISC from its ordinary income, which is taxed at up to 35%. Tax law sets the commission rate, which is based on export sales revenue, as the greater of either 50% of net export income or 4% of export sale revenue. Because the IC-DISC is tax exempt, tax is paid only on distributions to shareholders. Individual and pass-through company shareholders pay income tax on qualified dividends at the long-term capital gains rate of 15%.

Ability to Leverage Cost of Capital

An IC-DISC is more than a tax-savings vehicle. It can also be used as a deferral tool to leverage a company’s cost of capital. IC-DISC earnings need not be distributed to shareholders; they can instead be used to perpetuate and grow the deductible dividend tax rate savings. Tax rate savings are perpetuated by lending accumulated IC-DISC earnings back to the exporting company in return for a note and interest. The exporting company can deduct the interest expense, and interest income is considered a dividend to the IC-DISC shareholders. Reinvesting IC-DISC earnings back into the exporting business results in additional tax rate savings and diminishes the group’s cost of capital.

Opportunities to Create Management Incentives

Businesses can also use ownership in the IC-DISC to provide incentives. Exporting company management and other personnel can be named as shareholders, which allows them to benefit from additional cash flow created by increasing global sales.

Means to Facilitate Succession Planning

An IC-DISC offers a number of ways to execute a succession plan. Among these, ownership in the IC-DISC can be used as a means of generating cash, which can be distributed to shareholders in a tax-advantaged manner. IC-DISC shareholders participating in a buyout of current or previous shareholders can leverage these tax-advantaged IC-DISC earnings to pursue the buyout plan.


For U.S. exporters, the IC-DISC is the only remaining tax-saving opportunity. If you are unsure about whether or not an IC-DISC will work, ask the following questions:

  • Do you have any transactions outside of the U.S.?
  • Do you use overseas distribution?
  • Does your product cross any borders?
  • Are you generating operating income?

If the answer to any of these questions is yes, an IC-DISC could be a valuable tax-savings vehicle for your business.

On the surface, the rules covering the IC-DISC may seem simple. However, to maximize the tax benefit, a qualified IC-DISC advisor should be engaged. Many times an IC-DISC expert can double if not triple the tax benefit the IC-DISC provides by applying their in-depth understanding of how to structure the IC-DISC and using the complex advance pricing rules that the Internal Revenue Code allows for determining the tax benefit. A firm that has proven IC-DISC expertise, offers fixed fees, and optimizes the IC-DISC on a transactional basis (which almost always provides the best result) should be chosen.



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Apr 18

SEC “Seeking Small Business Input”

In line with President Obama’s recent Executive Order relating to regulation and the regulatory environment the SEC is seeking input on topics that specifically impact smaller reporting companies. 

In the request for comments they state “We are particularly interested to hear your views on rules that affect smaller reporting companies, as well as smaller companies that are not subject to the Commission’s reporting requirements but seek to raise capital in the exempt markets.”

The SEC request is looking for comments within the following 3 areas where you can post and read comments posted by others:

  • Regulations and Exemptions Relating to the Offer and Sale of Securities
  • Disclosure and Reporting Requirements
  • Updating Commission Rules to Promote Economic Growth

As of today there are very few comments posted and most of them relate to exempting smaller reporting companies from the XBRL requirements citing cost constraints. 

I urge everyone in the smaller reporting company arena to take advantage of the opportunity to make suggestions.

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Apr 13

The Hire Act of 2010 Extends The Statute of Limitations for Failure to Report Certain Foreign Activities


Among the provisions of the Hiring Incentives to Restore Employment (“HIRE”) Act,  enacted into law March 18, 2010, is Section 513(c) that provides that the three-year period of limitations during which the Service may assess additional tax does not begin to run until all of the information required under Internal Revenue Code (“IRC”) sections 6038, 6038A, 6038B, 6046, 6046A, and 6048 is filed (e.g., Forms 5471 or 8865), and that the limitations period extension is not limited to adjustments related to the information required to be reported by  these sections, but will apply to all items for the taxable period. Section 513(c) of the HIRE Act also authorizes a new six-year period of limitations for the assessment of tax related to an income omission in excess of $5,000 attributable to foreign financial assets required to be reported under new IRC section 6038D.


Taxes generally are required to be assessed within three years of the filing of the return, regardless of whether the return was timely filed. There are several exceptions to the general three-year rule. These exceptions include, for example, instances where a return is false or fraudulent (unlimited limitations period), there is a substantial omission of gross income (six-year limitations period), or a taxpayer fails to include on any return a Form 8886, Reportable Transaction Disclosure Statement, with respect to a listed transaction (limitations period does not expire before the date which is one year after the earlier of (a) the date Service is furnished with such information or (b) the date a material advisor furnishes the taxpayer’s name under the list-maintenance rules).

Prior to enactment of the HIRE Act, IRC section 6051(c)(8) provided that the three-year limitations period did not expire until three years after the date on which the Secretary of the Treasury was provided with information required, for example, on Forms 5471, 5471, or 926. The suspended limitations period generally has been applied only to the issues or items related to the foreign information reporting – not the entire tax return.

Section 513(c) of the HIRE Act provides that the three-year period of limitations does not begin until the foreign reporting information has been furnished to the Service. The provision clarifies that the period of limitations is suspended for all items on the return, not just items related to the omitted information reporting required under IRC sections 1295(b), 1298(f), 6038, 6038A, 6038B, 6046, 6046A, and 6048. Thus, it applies to any reporting required under the authority of these sections and the regulations there under (including Forms 926, 3520-A, 5471, 5472, 8621, 8858, and 8865). Section 513(c) of the HIRE Act further provides a new six-year limitations period for the assessment of tax on understatements of income attributable to foreign financial assets.

For this purpose, an understatement of income attributable to foreign financial assets is an omission from income in excess of $5,000 and the omitted income is attributable to an asset with respect to which information reporting is required under new IRC section 6038D. New IRC section 6038D requires individual taxpayers with an interest in a “specified foreign financial asset” during the taxable year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets exceeds $50,000.

Impact on Financial Statement Reporting

The period of limitations may also affect accounting for income taxes under ASC 740 (formerly known as FAS 109), such as tax liabilities that a taxpayer may have recorded with respect to uncertain tax positions. For example, in the case of a failure to comply with the foreign information reporting provisions referred to in IRC section 6051(c)(8), a previously recorded uncertain tax position liability that may have been released due to the expiration of the statute of limitations may be required to be recorded again as a result of the suspension of the limitations period under IRC section 6051(c)(8).


Taxpayers must be diligent in ascertaining the extent to which foreign operations and information is gathered and reported as required. The failure to identify and properly include such information as required may suspend the start of the limitations period, such that the Service may assess additional tax.

For a complete technical explanation of the Hire Act prepared by the Joint Committee on Taxation, click here


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Apr 11

Form 5471 – A Harsh New Reality for US Shareholders of Foreign Corporations

Who is required to File Form 5471?

Certain US persons who are shareholders (both corporate and individual shareholders), officers or directors of a foreign corporation may be required to file Form 5471 on an annual basis. Here, is a link to the IRS Website on filing requirements l.

There are four categories (including corporate shareholders) that may be required to file the form, as follows:

1. A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation.
2. A person who becomes a US person while owning 10% or more of the stock of the foreign corporation.
3. A US person who had control of a foreign corporation for at least 30 days.
4. A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of the that year.

What Information is Required?

The required information may be as minimal as the identification of the US shareholder and the name and address of the foreign corporation – or it may be as extensive as a comprehensive balance sheet and income statement converted from multiple foreign currencies into US dollars, including computations of cumulative earnings & profits and disclosure of related party transactions.

When is Form 5471 Due?

Form 5471 is due with the income tax return of the affected shareholder. For most corporations, that would March 15th or the extended due date. For most individuals, that would be April 15th or the extended due date.

How Long does it take to Prepare?

The IRS estimates the average time to prepare Form 5471 is approximately 38 hours, exclusive of record keeping time and the time required to learn about the relevant law and the instructions. The learning time could be much longer for someone who is not familiar with the pertinent sections of the tax law.

Harsh Penalties – A New Reality

For many years, it was extremely rare to get any IRS reply regarding a filing, even if the form was very late. The IRS has been warning in public statements that the Form 5471 penalties were coming and would be automatically assessed by the IRS computer. The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471.

Remember, very often, the information on this form does not result in any taxable income or tax due for the taxpayer.  So, the $10,000 penalty is a “disclosure” penalty, unrelated to the actual tax consequences of the information provided on the Form 5471. The $10,000 penalty is real and is now being automatically assessed.

If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period or fraction thereof during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000.

Why should a US Corporation with NOLs still be Concerned?

With the economic downturn, many US corporations have build-up significant net operating losses (NOLs). Thus, management may not be overly concerned about filing Form 5471, based on its belief that the company’s NOLS will shelter any potential exposure. However, because the failure to file Form 5471 results in a penalty (not a tax), NOLs do not any shelter this exposure.

Thus, the often unforeseen result is a FIN 48 liability and hit to the P&L for $10,000 for each unfiled Form 5471. For example, a US corporation with four foreign subsidiaries for which Forms 5471 have not been filed in the three most recent tax years would be required to accrue a $120,000 (a $10,000 penalty for each unfiled Form 5471 x 4 subsidiaries x 3 tax years) FIN 48 liability and current year P&L expense, which can be a huge P&L hit for company with no US taxable income.

Additionally, the three year statute of limitations with respect to the underlying tax income tax return (Form 1120, 1040, etc.) does not start running until Form 5471 is properly filed, as the return was not complete at the time it was originally submitted.




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Mar 17

Small Business Jobs Act of 2010

On September 23, the House passed the Small Business Jobs Act of 2010 (H.R. 5297) and signed into law by President Obama on September 27, 2010.

The following are some of the key provisions of the 2010 Act:

  • Section 179 Expense Election expanded: For tax years beginning in 2010 and 2011, expense limit is increased to $500,000 and phase-out threshold increased to $2 million;
  • Section 179 for (some) real estate: For tax years beginning in 2010 and 2011, taxpayers can elect to treat certain real estate as Section 179-eligible. Qualifying real estate includes:
    • Qualified leasehold improvements;
    • Qualified restaurant property; and
    • Qualified retail improvement property.
  • Bonus depreciation extended: Available for property purchased through December 31, 2010;
  • Luxury auto depreciation increased: As a result of the extension of bonus depreciation, first-year depreciation of automobiles is bumped up $8,000;
  • Deduction for start-up expenditures increased: Under Section 195, increased from $5,000 to $10,000 for taxable years beginning in 2010 (only);
  • Exclusion for small business stock: For purchases made after the date of enactment and before January 1, 2011, the exclusion for small business stock under Section 1202 is increased to 100%;
  • Five-year carryback for general business credits: Effective for credits determined in the taxpayer’s first taxable year beginning after December 31, 2009 (one year only), the carryback period for an “eligible small business” is increased from one to five years. In addition, the credit is not subject to the AMT limitation;
  • Built-in gain period shortened to five years: For taxable years beginning in 2011 (only), the recognition period for the BIG tax is shortened to five years;
  • Deduction for health insurance for SECA purposes: For 2010 (only), the deduction for self-employed health insurance is also a deduction for purposes of the SE tax;
  • Cell phones removed from listed property: Permanent and effective for tax years ending after 2009;
  • Information reporting required for rental property: Effective for payments made after December 31, 2010, rental real estate is treated as a trade or business for information reporting purposes. IRS to prescribe de minimis exceptions;
  • Higher information return penalties: Penalties under Section 6721 are substantially increased beginning in 2011;
  • Section 457 plans can include Roth accounts: For tax years beginning after December 31, 2010; and
  • Rollovers from elective deferral plans to in-plan Roth accounts allowed: Effective on the date of enactment. Will allow a two-year deferral (2011 and 2012) for rollovers done in 2010.

If you would like to know how these new provisions may specifically impact your 2010 taxes, please contact us at Mark Bailey & Co.  The IRS has included the provisions of the 2010 Act on its website. To view, click here.


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Mar 17

Foreign Bank Account Reporting – 2011 Offshore Voluntary Disclosure Initiative

Does the date June 30, 2011, mean anything to you?

It should – especially if you’re a “U.S. person” (US citizen, Green Card holder and/or a non-resident alien if you are physically present in the US over a prescribed number of days and hold foreign assets with an aggregate value of $10,000 or more.

June 30th is the deadline for filing  “Form TD F 90-22.1″ for 2010;  this  “foreign bank account report” (FBAR) gives the Treasury a look at your  foreign “bank, brokerage, or ‘other’ financial accounts” you held during 2010 .  If you have a financial interest in, or signature or other authority over foreign bank, securities or “other” financial accounts with an aggregate value exceeding $10,000, you must file the FBAR. That’s true even if the account contains only precious metals or other non-cash assets, or generates no income.

The FBAR is not the only reporting obligation for your offshore investments.  Additionally, you must also report your foreign accounts each year on Schedule B of your Form 1040, federal income tax return. Moreover, the IRS has created a special reporting regime for Americans with more than $50,000 in non-U.S. assets.

FUBAR – ‘Fouled Up Beyond All Recognition’

The FBAR offshore reporting regime truly is FUBAR. The tax penalties for failing to file FBAR forms are draconian. You could end up paying a $10,000 fine per unreported account for each year you neglect to file the FBAR. Far worse, if you “willfully” fail to file the form, you face a fine up to $500,000, five years imprisonment . . . or both.  In addition, if you own more than 50% of the shares of a corporation (by value, U.S. or foreign) with a foreign account, the corporation must file a FBAR. You must also file a separate FBAR in your own name acknowledging the same account.  Similar rules apply to partnerships. Even a single-member LLC, taxed as a “disregarded entity,” is a “U.S. person” for FBAR purposes.

Offshore Voluntary Disclosure Initiative

If for whatever reason you failed to satisfy the FBAR requirements anytime during the past eight years – now is your chance!  A  new IRS initiative allows certain taxpayers to voluntarily disclose hidden offshore accounts (accounts outside of the US) without the risk of criminal prosecution and also provides for reduced civil penalties for prior noncompliance with offshore account reporting requirements. The initiative, known as the 2011 Offshore Voluntary Disclosure Initiative (OVDI), was announced by the IRS on February 8, 2011. Taxpayers participating in the 2011 OVDI must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by August 31, 2011.

Penalty Framework

The 2011 OVDI provides the following penalty framework during the eight-year look-back period:

  • an “off-shore” penalty of 25% on the highest annual aggregate balance in the unreported accounts;
  • an “accuracy-related” penalty of 20% for unpaid taxes; and
  • late filing and/or late payment penalties in certain cases.

A taxpayer with offshore accounts or assets that, in the aggregate, did not exceed $75,000 in any calendar year during the look-back period will qualify for a reduced 12.5% rate instead of the standard 25% rate. A 5% rate (instead of the standard 25% rate) will apply in certain limited circumstances (e.g., in the case of foreign residents who were unaware that they were U.S. citizens).

Under the 2011 OVDI, taxpayers will not be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. The 2011 OVDI also offers a modified mark-to-market election for taxpayers with interests in passive foreign investment companies (e.g., foreign mutual funds) to determine the income from such investments.


Taxpayers, including entities such as corporations, trusts and partnerships, who have undisclosed offshore accounts or assets are eligible to apply for the 2011 OVDI. However, taxpayers under criminal or civil investigation by the IRS or who participated in the 2009 Offshore Voluntary Disclosure Program (predecessor to the 2011 OVDI) are ineligible.


There is a fairly simple process to make a voluntary disclosure under the 2011 OVDI. A taxpayer may either submit basic personal information by fax letter to the IRS or submit a more detailed disclosure letter from the outset. Either way, a detailed package of information must ultimately be provided to the IRS to secure acceptance into the program. Mark Bailey & Co. has taken several clients through this process and can assist you.


The IRS has launched a new webpage that includes the full terms and conditions of the 2011 OVDI, as well as the necessary forms and documents for making a disclosure.  Additionally, the webpage contains information regarding the procedure for making a voluntary disclosure and a comprehensive FAQ. For more information regarding the 2011 OVDI, click here .



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Sep 15

2010 SEC and FASB Update

Mark Bailey & Company is hosting our 2010 SEC and FASB Update for smaller & mid sized reporting companies. This workshop is put on by The SEC Institute and offered at 1/2 the cost of similar forums. This two day workshop qualifies for 16 CPE credits and includes welcome reception, continental breakfasts and lunch daily.  This event will be hosted at Arrowcreek Country Club in Reno, Nevada October 25-26, 2010.

Event information, course outline and registration information is below.

SEC Update 2010

Please call our offices at 775-332-4200 for more information or email mturri@markbaileyco.com.

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Apr 22

The Not-So-Great Smaller Reporting Company Fair Value Debate

My favorite question from clients that doesn’t appear to have a good answer, despite what we generally tell them, is “How do we account for this note payable that we just issued along with shares of stock?”  The simple non-useful auditor answer – “just account for the transaction at its fair value.”

This answer has sparked seemingly endless discussion amongst the team members in our firm along with our clients which we fondly refer to as the “Circle of Hate” discussions.  Consider the following example:

Company X issues a three year $100,000 note payable with a stated interest rate of 15% in a private placement transaction.  In order to get interest from potential investors, the Company also issues 1,000,000 shares of Rule 144 restricted common stock.  The quoted market price on the issuance date is $0.15 and the average daily trading volume is 5,000 shares.  Again, the question is what is the value of debt on the issuance date, and how does that value change as time passes through maturity?

Scenario 1

Probably the most popular amongst small issuers that I have seen, although not without significant flaws, is to value the shares first into APIC and assign the corresponding discount to the debt and begin accreting the debt.  The flaws(issues) with this methodology in the example above are significant.  Strictly adhering to the Level 1 input of the quoted price (in this example assume under GAAP the quoted market price is the most reliably measurable) the discount on the $100,000 debt is $150,000.  This leaves what we refer to as the “floating debit” of $50,000. 

Now what to do with the $50,000 has been of great internal debate with seemingly no winning choice.  The apparent precedent amongst issuers is to cap the value at the proceeds received of $100,000, ignore the remaining $50,000, and begin accreting the debt from zero.  One major problem with this approach is there is not a way to calculate an effective interest, as required by GAAP, to accrete from zero.  Issuers, however, seem to get around this by disclosing the following “we amortize the debt discount over the life of the loan using the straight line method which approximates the effective interest method”.  Since there really is not a way to calculate the effective interest rate I am not real sure how this can be the case, but seems to be working for several issuers.

A second option that does not appear to make sense, is to book the $50,000 as a prepaid loan cost of some sort and amortize it over the life of the loan.  Again, there appears to be some GAAP basis in that debt issuance costs are required to be amortized over the life of the loan.  This methodology just doesn’t pass the smell test.  Why?   The issuer has a $100k obligation which does not initially appear on its balance sheet, but $150k in assets($50k of which doesn’t generally meet the definition of an asset), $0 liability, and $150k increase in capital.  I can’t think of a way to make entering into a financial obligation look any better.

Another popular strategy, although difficult to support in most instances, is to discount the quoted market price of the stock.  Most issuers that I have had discussions with generally have great common sense arguments, but no clear GAAP basis or assumption / model development for such discounts.  Most arguments are something along these lines “if they try to sell 10,000,000,000 shares tomorrow when the average daily volume is 5,000 it will drive down the price”, therefore, a marketability and blockage dicount of XX% is appropriate, not to mention the stock is restricted under Rule 144.  The problem many issuers face is developing supportable assumptions for the XX% discount.  It would be nice to apply recently issued accounting literature related to inactive markets and non-orderly transactions, however, that guidance indicates various factors need to be considered – not how to apply them to fair value models.

Scenario 2

Estimate the fair value of the debt first and assign the remaining fair value to the stock issued.  Again there are significant difficulties in developing a supportable fair value with this methodology.  The first of which is determining an appropriate effective interest rate.  Since the Company in the example does not have, nor has it ever had, the ability to obtain financing without significantly sweetening deals with equity or other equity linked instruments there is not an internally comparable rate to base it on.  Also, other companies within its industry having similar traits are experiencing the same problem so there really isn’t any available Level 2 surrogate.  This leads to Level 3 inputs at best with little guidance on how to develop assumptions.

Scenario 3

Basically a hybrid of the above 2 not-so-great techniques.  Estimate the relative fair value of each component then develop a supportable basis to allocate the value of the total package.  This has the same issues as Scenario 1 and 2, but at least the Company has presumably considered each possibility.

Scenario 4 

Take the entire $100k from the note issuance and spend it on a valuation expert to “properly” account for the transaction.

All thoughts and comments on how to break the “Circle of Hate” are welcome and encouraged.

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