When an individual or business provides services to another business, they must be classified as an employee or independent contractor.  The Colorado Department of Labor does conduct audits to determine whether a business is properly classifying their workers.  This article has been prepared by a Denver tax attorney to provide additional information regarding an audit by the CO DOL.

If you’re concerned about an Colorado Department of Labor audit of your business, get in touch with the McGuire Law Firm about what you can do to protect your business.

Who Does the Colorado Department of Labor Audit?

The Colorado Department of Labor can audit any business paying contractors to determine if the classification of the third-party as a contractor is correct.  

What is the Audit Process with the Colorado Department of Labor?

First, the business will receive a notice that they are being audited for the classification of their workers.  The audit notice will provide the examiner or auditor’s name and contact information as well as a request for documents.  After producing the requested documents, the examiner may have questions or they may provide their findings.  The findings will outline which third parties they believe should have been classified as an employee and the tax or penalty for failing to properly classify the parties.  You have the right to appeal the findings of the examiner and state your case to an appeals officer.

What Documents Are Requested by the CO DOL?

The examiner will generally request all of your business records relating to the payroll such as W-2s, W-3, 941s, payroll ledgers or summaries and related information.  Further, the examiner will request your income statement, copies of 1099s and any contractor files such as your independent contractor agreements with the contractors.

What is the CO DOL Focusing on in a Classification Audit?

The focus is primarily on whether or not the parties that received 1099s or payments for services were properly classified as independent contractors.  Thus, although the payroll information is important, the list of parties your business issued 1099s to or paid as a contractor are likely to be the primary focus.  The DOL examiner will use the 1099s and expense ledger to then have a list of all parties paid who could possibly be reclassified as an employee.

How Are Parties Chosen for Audit by the CO DOL?

Some audits can be random, while others may have been selected given the amounts paid to third parties as contractors in comparison to employees.  Further, we are told many audits begin when a third-party claims unemployment as an employee but are told they have been treated as a contractor and may not be eligible for unemployment benefits.  When the individual claims they are an employee, the DOL may determine they should investigate further as to the business paying this third party.

What Are the Penalties for Improperly Classifying Workers?

The penalties can be severe.  A first time willful violation can be a $5,000 penalty per offense with a $10,000 penalty of the classification is not corrected within 60 days of the DOL finding the offense.  Further, the DOL can penalize a business $25,000 for a second or later willful violation and up to $50,000 for repeat violations.

Why Does the CO DOL Care About My Worker Classification?

The DOL cares because a business does not pay unemployment insurance for independent contractors.  Thus, the unemployment insurance fund can be reduced or weakened when an employee does not properly classify their workers as employees.  Further, the individuals seeking unemployment are harmed when they do not qualify for unemployment.

What Other Tax Ramifications Exist?

If the DOL reclassifies third-parties as employees and you begin paying these employees wages, the wages would then be subject to social security and Medicare tax.  The total social security and Medicare tax is 15.3% with half (7.65%) being withheld from an employee’s paycheck (the employee portion) and the other half being paid by the employer (the employer matching portion).  The employer matching portion is why many businesses would prefer to classify workers as contractors because they do not have to pay the 7.65% matching amount.

What to do if You Have Received Notice of Audit

If you have received a notice of audit from the DOL, please consider speaking with a Denver tax attorney at The McGuire Law Firm.  A tax attorney can represent you and assist you through the audit as well as assist with properly drafting contractor agreements and classifying workers in the future.  Contact us for a free consultation.

When a business owes payroll taxes to the Internal Revenue Service the liability or exposure goes beyond the business owing the payroll taxes.  When employment taxes are owed to the IRS, the IRS can personally assess individuals from within the business a portion of the employment taxes known as the Trust Fund Recovery Penalty (TFRP).  To assess individuals the TFRP, the IRS conducts a trust fund investigation.  This article has been prepared by a tax attorney to provide information relating to the trust fund investigation process. Contact the McGuire Law Firm to speak with an attorney about the trust fund investigation process.

What is the 941 Trust Fund?

Prior to discussing how the IRS goes about their trust fund investigation, it is important to understand what the trust fund is.  The trust fund amount is the amount of social security and Medicare tax and the federal withholding tax withheld from an employee’s paycheck.  This amount is deemed to be held in “trust” by the IRS to be paid over to the Department of Treasury so the individual receives credit for the withholding.   The IRS takes the trust fund amount very seriously, hence why they can personally assess and collect the trust fund separately from the corporation, LLC or entity that has accrued the underlying the 941 or payroll tax debt.

When is the Trust Fund Investigation Conducted by the IRS?

First and foremost, for the IRS to conduct the trust fund investigation there must be a 941 tax liability.  That being said, once a revenue officer is assigned to collect the employment tax debt from the business entity, one of the first steps the revenue officer takes is to begin the trust fund investigation.  Thus, the trust fund investigation will generally be initiated within a few weeks to a month of when the IRS revenue officer is assigned whether or not known to the business owners. 

What Does the Trust Fund Investigation Consist Of?

The investigation will consist of the revenue officer reviewing corporate or partnership documents such as tax returns, articles of incorporation or organization, bylaws or partnership agreements, bank statements, cancelled checks and any other information or document that may shed light as to who within the business has the necessary authority and control to be personally assessed.  The IRS revenue officer will also conduct what is called the 4180 Interview.

What is the 4180 Interview?

The 4180 Interview is an interview conducted by the IRS with individuals within the business of which the IRS feels may be willful and responsible parties.  The 4180 Interview asks questions relating to an individual’s role, position and duties within the company, their knowledge and actions taken relating to the payroll tax debt and who else, if anyone could conduct certain actions within the business.  The 4180 Interview provides significant information to the IRS about the individual taking the interview and others within the business who may also need to be interviewed.  Generally, any owner, officer or director within a business would be asked to conduct the 4180 Interview.  The failure to conduct the interview may lead to the IRS proposing the personal assessment of the trust fund to the individual if other information, such as the tax returns or the bank signature cards show the individual held a certain position of control of authority within the business.

What are Common Documents Requested or Obtained by the IRS During the Investigation?

The IRS will almost always request the bank statements, cancelled checks and bank signature cards for the business for the tax quarters whereby the 941 taxes were accrued.  Additionally, the IRS will generally request and review the employment tax returns and income tax returns for the business as well as internal business documents and agreement depending upon what the business may or may not have. 

What Happens After the IRS Has Conducted the Trust Fund Interview?

After the revenue officer has conducted their trust fund investigation, the revenue officer will propose the personal assessment of the trust fund to the individuals the revenue officer has determined is a willful and responsible party for withholding and paying over the withholding taxes.  The IRS can propose the trust fund assessment to one or more individuals within the business and the debt is a joint and several liability meaning that the IRS can collect the full amount of the trust fund from one individual even when multiple individuals have been assessed.  

Can the Assessment of The Trust Fund be Appealed?

Yes, you can appeal the proposed decision of the trust fund.  When the IRS proposes the assessment, you have 60 days from the date of the notice to appeal the assessment.  The appeal will be held with an IRS Appeals Officer and the appealing individual needs to show why they do not have the requisite power, authority and knowledge to be held responsible.  

What Happens Once an Individual is Assessed the Trust Fund?

Once assessed, the trust fund becomes a personal liability to the IRS.  The IRS can file a federal tax lien attaching to the individual’s assets and take collection action against the individual such as bank levies, wage garnishments and the potential seizure of other personal assets.

How Can I Get Assistance with an IRS 941 Trust Fund Investigation?

If a business you own, manage or have any control over owes payroll taxes (941 taxes) to the IRS it is likely you could be subject to the trust fund investigation.  It is recommended you speak with a tax attorney regarding your personal exposure to the trust fund.  A tax attorney can represent you before the IRS prior to and during the 4180 Interview as well as appealing the assessment or resolving the tax due if assessed.  You can contact The McGuire Law Firm for a free consultation with a tax attorney regarding the above matters.

Tax-exempt and/or nonprofit organizations may be required to file form 5471. There are several instances where form 5471 would be required. Often, detailed analysis and thorough understanding of the tax rules are required to determine if there is a filing obligation. Failing to file (including late filing) for form is subject to a $10,000 penalty on a per form per year basis. The penalty may be abated if the taxpayer has reasonable cause for the failure to file the form 5471.

Please consult with a qualified professional when making determinations of form 5471 filing obligations. As you might expect, I am such a qualified professional. Please reach out with any form 5471 questions. Please see my contact information below.

When is a tax-exempt and/or nonprofit entity or organization required to file form 5471?

On its face, it seems unlikely that tax-exempt (TE) and/or a nonprofit (NP) entity or organization would ever be required to file form 5471, but there are a number of occasions where the form 5471 is required to be filed by a TE and/or NP entity .

To understand the form 5471 filing requirement, it helps to know who is required to file form 5471? In a very condensed summary, US persons (individuals, corporations, partnerships, trusts) are required to file form 5471 if they own or control certain percentage amounts of a foreign corporation. Specifically, if a US person owns, controls, purchases or disposes of 10% or more of a foreign corporation, there is a strong likelihood of a form 5471 filing obligation at some point in the lifecycle of the investment. US entities or people who own 10% or more of a foreign corporation are considered US Shareholders for definitional purposes of form 5471 filing obligations. For a more thorough discussion on when a form 5471 is required to be filed, please read this discussion.

US TE and NP organizations are generally organized in one of two ways: either as a state corporation or a trust. Both corporations and trusts are subject to the rules for filing form 5471 as they are specifically considered US persons as defined by the Internal Revenue Code (IRC). As such, TE and NP organizations would be considered US persons for purposes of applying the form 5471 filing rules.

There are a couple reasons why a TE and/or NP organization would own shares in a foreign corporation. First, and the most obvious, is the organization has established an entity in foreign country to carry out its mission. For the vast majority of TE and/or NP organizations, this scenario won’t arise, but could be a possibility. Second, the TE and/or NP has invested in a foreign corporation either directly or indirectly through its fund investments. The most likely instance a TE and/or NP organization would have a form 5471 filing obligation arises when that organization has made investments in non-open market vehicles such as hedge fun or private equity fund investments. Hedge fund, private equity fund and special purpose investments can give rise to form 5471 filing obligations depending on how the investment is structured.

Why should a TE and/or NP organization care if had or has a form 5471 filing obligation?

In short, penalties. Failure to file form 5471 may result in a $10,000 penalty per form per year. Additional penalties may apply depending on category filer the shareholder falls into for form 5471. Filing the form 5471 late is considered a failure to file the form and subject to penalty.

For a large organization, the failure to file penalties can add up to a large amount if it is determined the organization has failed to file multiple forms 5471 over several years.

What can be done to prevent the form 5471 penalty?

Timely filing the from 5471 will prevent a penalty. If the 5471 is already delinquent, the organization may be able to avoid the penalty if it has reasonable cause for its failure to file. Note, reasonable cause is ill defined and a fairly subjective standard in the hands of an IRS examiner.

Where does form 5471 get filed?

Generally, the form 5471 is attached to an income tax return. For a TE and/or NP entity, the form 5471 is generally attached to form 990-T, whether or not the organization has any unrelated business taxable income.

How can a TE and/or NP organization tell if they have a form 5471 filing obligation?

The only sure way to tell if the organization has a form 5471 filing obligation is through a thorough analysis of its investments. Often, it is not obvious that an investment has been made in a foreign corporation, but taking the following steps could help make the determination:

• Step 1
  • Analyze each of the investments the TE and/or NP has made to determine if it is a foreign or US formed entity.
• Step 2
  • If the entity is foreign, determine what type of entity it is and if there have been any US choice of entity elections made.
• Step 3
  • If the foreign entity is a corporation for US tax purposes, determine how much of the entity is owned by the organization. This ownership analysis includes determining the percentage owned of value of the foreign corporation and the percentage owned of voting rights of the foreign corporation.
• Step 4
  • If the organization owns between 10% and 50%, determine how much of the entity is owned by other US Shareholders (those owning vote or value of 10% or more). This analysis helps determine if the entity was a controlled foreign corporation while the organization owned its interest.
• Step 5
  • Determine if the entity owns an interest in other foreign entities.
• Step 6
  • If you have owned this investment longer than the current tax year, analyze when the investment was made and make determinations as to whether there was a filing obligation in the past as well.

What is the point of all these steps?

The point of these steps is to gather enough information to determine if there is, or should have been, a form 5471 filing obligation.

Step 1 details:

In step 1, the entire list of the alternative investments made by the organization should be reviewed to determine if the entity is US or foreign. The best way to make that determination is to work through your investment consultant or inquire directly with the investment company.

Step 2 details:

In step 2, determining what type of entity will help direct what US tax forms may be required. With respect to form 5471, the entity in question would be a corporation for US tax purposes. There are a few ways to get an indication of the type of entity, but the best way is to inquire of the fund. Sometimes reliance on common sense will result in the wrong answer. For example, the fund may be organized as a limited partnership in the Cayman Islands. It seems clear the entity is a partnership in the Cayman Islands. For Cayman Islands legal (and tax) purposes, that entity is in fact, a partnership. What can’t be determined just by the name of the entity is if the US owner (current or past) has made a check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes. Certain entities are eligible to choose how they will be treated in the US for US income tax purposes, either as an association taxable as a corporation, a partnership, or a disregarded entity. If the owner made the check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes, it should be considered a corporation for determining form 5471 filing obligations.

Inquiry to the fund asking specifically about any check-the-box elections is preferred.

Step 3 details:

At this point the form 5471 determinations can start to be made. Understanding the ownership percentages will allow the owner to determine if they are considered a US Shareholder or not. If the TE and/or NP organization is a US Shareholder then at some point a form 5471 should have been filed with respect to that ownership of the foreign corporation. If the TE and/or NP owns more than 50% of the foreign corporation, there is a clear form 5471 filing obligation for the TE or NPF organization.

Step 4 details:

If the TE and/or NP owns between 10% and 50% of the foreign corporation, certain annual form 5471 filing obligations will be required if the foreign corporation is considered a Controlled Foreign Corporation (CFC). A foreign corporation is a CFC when US Shareholders (US people that own 10% or more) own more than 50% of the foreign corporation. Thus, in the instance a TE and/or NP organization is consider a sub-50% US Shareholder of a foreign corporation, it will need to understand if there are other US Shareholder such that the foreign corporation is considered a CFC in order to determine how to file form 5471.

Step 5 details:

In step five, a determination or inquiry should be made to understand if the foreign corporation owned by the TE and/or NP organization owns an interest in other foreign corporations as subsidiary companies. If so, the TE and/or NP organization may be required to file form 5471 for those lower tier entities as the TE and/or NP organization is deemed to own what its investment owns in proportionate share.

Step 6 details:

Step 6 ensures that the TE and/or NP organization either has or doesn’t have delinquent form 5471 filing obligations.

What happens if a TE and/or NP is required to file form 5471?

If the discovery is made for the current tax year filing and the tax return is still timely and not late, then prepare and file the form 5471. That’s an easy thing to say, but the form 5471 is a relatively complicated form and understanding what needs to be completed on the form should be addressed. Generally, it is best to seek professional advice.

If it is determined that the form 5471 filing should have occurred in a prior year, the prior year return should be amended to attach the form 5471. As discussed earlier, late filed form 5471 is subject to penalty. The penalty may be abated if the failure to file was due to reasonable cause. Work with a qualified professional to determine how best to proceed.

Christopher Stroh, J.D. & LL.M (Taxation)

chris@jmtaxlaw.com

720-784-3296

Christopher has spent the majority of his career focused on the international tax implications for businesses, tax-exempt organizations and individuals who engage in some form of cross-border activity, either knowingly or not!  Christopher advises entities and individuals who need help or advice with the US international tax implications of structuring businesses (US or foreign) or has any sort of non-US activity that may require US tax reporting. In addition to planning and consulting on US international tax items, Christopher helps prepare and advise on all manner of US international tax forms.

Our Denver business attorneys are highly skilled and practice various transaction matters. They know how to guide businesses through the complexities of the law effectively. We can assist you with drafting contracts, negotiating deals, and resolving disputes.

We advise on employment agreements, intellectual property issues, commercial leases, real estate transactions, mergers and acquisitions, and general corporate matters. We understand the importance of protecting your interests and strive to educate our clients about their business decisions’ legal requirements.

We offer free initial consultations to discuss your particular situation and determine whether we are the right fit for you. Contact the McGuire Law Firm today to schedule your consultation.

Why You Need a Business Attorney in Denver

When you start a business, there are many things to consider, including how much money you want to spend on legal fees. You might think that hiring a full-time lawyer is the best option. But what if you don’t have enough cash flow to cover those costs? What if you’re starting and don’t know anyone who could recommend someone trustworthy? Or maybe you’ve been running your business for a while now and feel ready to hire a lawyer. Here’s a quick guide about finding and picking a business attorney.

A business lawyer can help you understand what the law says about your particular industry and business model. They are experts in navigating the many complexities involved in running a business. Your business attorney can also help you avoid common pitfalls and challenges, such as tax liabilities and potential lawsuits.

When starting a new business, knowing where you stand legally is essential. This includes ensuring that your business name is protected, that your intellectual property is secure, and that you comply with all state and federal laws.

Once you have been operating your business for a while, a business attorney can assist you in negotiating contracts, resolving disputes, and protecting your interests during mergers and acquisitions.

Your business attorney can also guide you through compliance issues, including establishing internal policies and procedures, developing a risk management plan, and managing third-party vendors.

Determine Why You Need a Business Attorney in Denver

The best time to hire a small business lawyer is before you need one. This way, you’ll know exactly what questions you want to be answered and whether you’re getting good value for your dollar. Here are three reasons startups and small businesses should consider hiring a business attorney in Denver.

Choose the Right Entity Type

Choosing the correct type of business entity is critical because it affects everything about how you run your business. If you choose the wrong form, you could end up paying unnecessary taxes, running afoul of corporate regulations, or even losing out on opportunities to be part of a larger organization.

Drafting Legal Documents

Drafting legal documents such as term sheets and operating agreements requires specialized knowledge. In addition to knowing the ins and outs of the law, you’ll need someone who knows the fine print of drafting contracts.

Navigating Securities Laws

Securities laws are complex and often confusing, especially regarding crowdfunding. Having a small business lawyer on board can make navigating this area much more manageable.

Finding a Business Attorney In Denver

One of the best places to start your research is online. Whether you find a business attorney before you need them or you’re looking for a legal advisor for a specific situation, you can follow a couple of best practices. These include having multiple options to compare, finding numerous lawyers to meet with, and selecting the individual that’s the perfect fit for your business.

If you’re looking for a general business attorney, make sure they specialize in areas relevant to your business. Start with local directories like Yelp or Google. Some attorneys specialize in commercial law, while others focus on intellectual property issues. It’s essential to compare their experience levels, qualifications, fees, and references.

Finally, once you’ve narrowed down your list of candidates, it’s advisable to schedule meetings with each of them. By doing so, you’ll be able to ask questions about their background, experience, and fee structure. After meeting with several attorneys, choose the one that’s the best match for your needs.

Helpful Questions To Ask a Business Attorney

The third step in finding the best small business law firm is to compare the rates offered by different firms. You don’t necessarily have to hire a big-name firm to provide legal representation; many smaller businesses choose local attorneys who are familiar with their industry and can help them navigate complex issues.

When comparing rates, consider that several factors affect what a small business owner must pay for legal counsel. Some factors include how long it takes to close a deal, whether the lawyer offers discounts to repeat customers, and whether the firm provides ongoing support.

In addition to reviewing fees, ask the following questions during your research:

• How long have you been a business attorney in Denver?
• What percentage of your practice consists of representing businesses?
• Do I need to pay retainer fees up front?
• Will my case require hourly billing?
• Are there any costs associated with hiring a business attorney in Denver?
• Can I review documents before signing a contract?

Business Formations

Businesses come in all shapes and sizes. Some start small and grow into large corporations. Others take off like wildfire and become household names. There are even those that remain relatively unknown despite having been around for decades. Regardless of how long a business has been operating, it is essential to understand what type of business structure best suits one’s needs. For example, does one want to be a sole proprietorship, partnership, corporation, LLC, LLP, or S Corporation?

The McGuire Law Firm offers free consultations to discuss your particular situation and answer questions about the pros and cons of each type of business entity. We can help you choose the correct form of business organization for your needs.

Mergers, Acquisitions, Sales, and Business Transactions

The McGuire Law Firm provides legal counsel for mergers, acquisitions, sales, and other business transactions. Our firm represents buyer and seller clients, and we focus on providing effective solutions to complex problems.

We represent businesses and individuals in commercial litigation matters, including breach of fiduciary duty claims, securities fraud cases, intellectual property disputes, and employment law disputes.

Our experience includes representing buyers and sellers in business transactions ranging from simple asset purchases to multi-million dollar acquisitions and complex corporate restructurings.

In addition to serving as general business lawyers, we offer specialized expertise in the following areas:

• Business Litigation & Dispute Resolution
• Corporate Restructuring & Bankruptcy
• Employment Law
• Intellectual Property
• Merger & Acquisition Transactions
• Real Estate
• Taxation & Accounting

Need a Business Attorney in Denver?

A business attorney can explain the benefits and drawbacks of each option and help you determine which is best suited for your circumstances.

If you are facing serious tax issues, you must contact JM Tax Law immediately. We offer free consultations and work hard to ensure our clients understand what options are available to them. Our attorneys provide practical solutions to complex problems and work diligently to ensure that our clients receive the best possible outcome. Contact us today to learn about how we can assist you.

Common Use for a Forward Triangular Merger

One standard method used is a forward triangular merger, or as some people refer to it, an indirect merger under Section 368(a)(2)(D) of the Internal Revenue Code. This type of merger is beneficial when a parent corporation is looking to purchase or acquire another entity, known as the target corporation, but is hesitant to inherit any liabilities or other negative aspects of the target. 

In a traditional A reorganization under Section 368(a)(1)(A), the target corporation merges directly with the acquirer. At this point, the acquirer is responsible for all liabilities associated with the target. Therefore, the purchasing corporation may often structure the transaction as a forward triangular merger rather than a traditional A merger by using a subsidiary to protect against any known or unknown liabilities the target may have. A Denver business attorney has prepared the article below to provide additional information on a forward triangular reorganization.

Where Forward Triangular Mergers are Prevalent

Forward triangular mergers are also prevalent where entities plan to use a significant amount of cash, or boot, in the deal.

Unlike reverse triangular mergers, forward triangular mergers have greater flexibility in the amount of boot that may be used in the transaction since the 80% voting requirement does not apply under Section 368(a)(2)(D) for purposes of consideration.

For example, consider Corporation P, which would like to acquire Corporation T. However, Corporation T has a massive liability on its books that Corporation P is hesitant to accept. Corporation P will first set up another entity called a subsidiary. The Corporation T is the target corporation and will then merge into a subsidiary, rather than Corporation P, for consideration provided by Corporation P. The target corporation ceases to exist and thereby liquidates. At this point, the only surviving corporation in the merger is the subsidiary. Thus, the shareholders of Corporation T will ultimately receive the consideration provided by Corporation P. This structuring allows the target’s liabilities to remain isolated within a subsidiary while simultaneously allowing the purchasing corporation to acquire the target, Corporation T. 

Note that even though this may be considered a tax-free reorganization, there may still be tax consequences to the target corporation’s shareholders upon liquidation, depending on the amount and type of consideration used in the transaction (See Internal Revenue Code Section 354).

Three Critical Things to Remember in a Forward Triangular Reorganization

 First, this transaction only qualifies for tax-free treatment if it would have satisfied the requirements of a traditional A reorganization under Section 368(a)(1)(A) had the merger been done directly between the purchasing corporation and the target corporation. This requires evaluating the transaction as if the subsidiary were not used. If the target merged into the purchasing corporation and still satisfied the A reorg requirements, then this would help Section 368(a)(2)(D)(ii). This requires a statutory merger and, even more importantly, continuity of interest requirements.

Second, in Section 368(a)(2)(D) reorganization, no stock of the wholly-owned subsidiary entity may be used as part of the consideration in the transaction. The only stock acquisition of the purchasing corporation, Corporation P in the above example, may be used. However, other reviews from the subsidiary may be provided, such as cash. Suppose the stock of the wholly-owned subsidiary corporation is used. In that case, it will fail the requirements of Section 368(a)(2)(D) and may result in a taxable transaction unless it satisfies another reorganization structure under Section 368.

Finally, according to the treasury regulations under 1.368-2, the purchasing corporation must substantially acquire all of the target’s assets by using the subsidiary.

Forward triangular reorganizations optimize restructuring without facing tax consequences while removing the transfer of a target’s liabilities to a parent corporation. Depending on the type and value of consideration available, a forward triangular reorganization may be the best restructuring tool for your merger.

Key Takeaways

• A forward triangular merger is a form of reorganization that provides a means to avoid the potential tax consequences of acquiring a company with substantial liabilities. It accomplishes this by merging the target with a subsidiary of the acquiring corporation. The target corporation ceases to exist and is liquidated. The sole remaining corporation is the subsidiary.
• The IRS considers a forward triangular merger to be a reorganization because it satisfies the definition of a reorganization found in Section 368(a).
• However, the IRS does not allow a forward triangular merger to qualify as a tax-free reorganizational event unless the following conditions are met:
  • The acquiring company must pay fair market value for the target company’s assets.
  • The target company continues to operate after the acquisition.
  • The acquired company ceases to exist and is liquidated.

You can contact The McGuire Law Firm to discuss your business or tax-related issues with a Denver business attorney or tax attorney. 

A reorganization allows a company to restructure its operations without triggering significant tax consequences. A reorganization is generally considered a change in the form of a corporation rather than a mere change in the place of doing business. For example, suppose a company moves its headquarters from New York City to Los Angeles. In that case, it will likely qualify as a reorganization because the move changes the form of the corporation. However, if a company merely changes its name, it may not qualify as a reorganization. You should consult your accountant or other professional advisors about the potential tax implications if considering a reorganization or B reorganizations.

What Are B Reorganizations?

In B reorganizations, the acquiring corporation acquires all of the target corporation’s shares. The acquiring corporation doesn’t need to pay any money to purchase the target corporation’s shares. Instead, the acquiring corporation pays the target corporation’s shareholders for the acquired shares. This means that the acquiring corporation owns the target corporation’ shares directly.

The acquiring corporation then calculates the basis of the target corporation’s share using the same method as if it had bought the shares. For example, if the acquiring corporation buys 100 shares at $10 per share, the acquiring corporation will calculate the basis of the target shares as if the acquiring corporation owned those shares. If the acquiring corporation paid $100 for the shares, the basis would be $100.

B reorganizations are complex transactions that require careful planning and execution. They must be done correctly to avoid legal issues.

What Are The Control Requirements For B Reorganizations?

In B Reorganizations the control requirement is satisfied if the acquiring corporation possesses at least 80% of the value in all classes of voting stock plus at least 80% of all other classes of stock. If the acquiring corporation acquires 80% of the value from Classes A and B, it will satisfy the control requirement. However, receiving less than 80% of the value may still qualify for a tax benefit. For example, consider five classes of stock – Class A and Class B, with voting rights, Class C, Class D, and Class E, none of which have voting rights.

What Type of Consideration May Be Used In B Reorganizations?

A B reorganization is a type of corporate restructuring that allows companies to move assets out of an insolvent subsidiary and back into the parent company. This corporate restructuring requires a particular form of corporate reorganization called a “B” reorganization. Only certain types of corporations are eligible for a B reorganization, including those whose primary activity consists of owning or operating businesses in the same line of business as the corporation seeking the reorganization. For example, if a company owns a hotel chain, it could seek a B reorganization to transfer all of its hotels to another company. However, if a company owns real estate, it could not pursue a B reorganization unless it also owned a hotel chain.

Can B Reorganizations Occur Over a Series of Transactions?

A reorganization can occur when a company acquires another company. A reorganization occurs when the acquiring company’s shareholders receive all or substantially all of the target company’s shares. Reorganizations can be accomplished via multiple steps. For example, an acquisition could involve the purchase of all outstanding shares of the target company at a price below its fair value. Then, the shareholders of the acquiring corporation could vote to approve the merger. Finally, the acquiring corporation could issue additional shares to the target company’s shareholders.

Will There Still Be Minority Shareholders?

B reorganizations require at least 80% control to be successful. This isn’t the right choice if you’re looking to reduce your share count. A B reorganization doesn’t necessarily mean that you’ll lose any control. You could retain all of your shares if you wanted to. But if you’re looking to reduce the number of outstanding shares, other options are available.

If you are considering a business sale or acquisition, you may qualify for a tax benefit under Internal Revenue Code Section 368(a)(1)(A) if the transaction meets specific requirements. For example, you must not have shareholders other than yourself, and you cannot transfer all of your assets to another entity. You also need to meet specific financial criteria. If you meet those criteria, you may be eligible for a tax deduction for the amount paid to acquire the company.

Key Takeaways

Bankruptcy is an attempt to turn around a failing business. If a company is insolvent, then it cannot repay its creditors. When a company files for bankruptcy, it must submit a reorganization plan. An insolvent company will often file for Chapter 11 bankruptcy protection.

The plan’s purpose is to restructure the company’s finances and operations to return it to solvency. The goal is to put the company back on track to repay its debts. Insolvent companies often need to cut costs drastically. This includes cutting wages and benefits, laying off employees, closing stores, and selling assets. These actions are called “reorganizing.” A judge usually supervises reorganizations. The judge approves the reorganization plan, and the company emerges from bankruptcy if all goes well.

A Chapter 11 bankruptcy filing allows a company to reorganize its finances while continuing operations. This type of filing is often used when a company needs a period of time to restructure its debt and re-establish its financial structure. It also gives companies breathing room to negotiate with creditors and avoid liquidation. Companies may file for Chapter 11 protection if they cannot pay all of their debts or if they are unable to come to an agreement with their creditors about how to repay them.

Conclusion

If you’re considering a reorganization, you owe it to yourself, your shareholders, and your employees to follow a rigorous plan rather than winging it. You will make better decisions, keep everyone more involved and engaged, capture more value and avoid costly mistakes.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney and learn if your transaction qualifies as a B reorganization for tax deferral purposes.

When buying a company, you have two options: buy all its shares or just the company’s assets. If you’re looking to sell your company, you may also choose to sell all of its shares or just its assets. There are pros and cons to stock sales or asset sales options. For example, if you own 100% of a company, you will receive all the proceeds from any future company sales. However, you’ll get less money if you sell only the company’s assets. It would be best to consider both types of transactions when making an investment decision.

An acquisition is a purchase of shares in a company. An asset transaction is when you buy something like a house or car. A stock transaction is when you buy shares in a company. When you buy shares in a corporation, you become a shareholder. You get all the rights that come along with that. If you buy 100 shares of XYZ Corporation, you will receive one share of XYZ Corporation. That means you own 1/100th of the company. You also get all the rights that accompany owning a piece of the company. For example, if the company owns a factory, then you get access to the factory. 

This article has been prepared by a Denver business attorney and tax attorney to discuss section 338(h)(10) of the Internal Revenue Code.

Stock sales

In a stock sale, the company sells its shares to another company. The buyer buys all the shares owned by the sellers. The buyer also takes on all the debts and obligations of the company. The buyers gain full ownership of the company and become responsible for paying any debt or obligation incurred by the company. If the company does not have enough money to pay back the debts, the buyer must either sell off other assets or borrow money to pay them back.

Buyers should consider whether they are willing to assume the risks of buying a company’s stock. When selling a company, the seller must disclose any material facts about the company’s financial condition. 

For example, if a company faces legal challenges, there could be a lawsuit against the company. If the company is facing environmental problems, the company could face fines or penalties. Employees could strike or go on strike if the company faces labor issues. All of these situations could cause the price of the company’s stock to drop significantly.

A stock sale will allow the owners to retain control of the company while still allowing them to sell shares to investors. If the company has many copyrights or patents or has significant government or corporate contracts that are difficult to assign, then a stock sale may be a better choice. A stock sale also allows the owners to reduce the risk of losing those contracts.

Sellers often prefer to sell stocks because all the proceeds are tax-free. Sellers also avoid paying taxes on any income earned while holding the shares. For example, if you sold your stock at $100 per share, you’d pay $20 in federal income taxes. If you held onto the stock until it reached $150 per share, you’d owe $50 in federal income taxes. But if you sold the stock worth $100, you’d owe nothing on the sale.

A deal structure can greatly impact the future of both the buyer and the seller. Other factors, including the company’s structure and industry, can also affect the decision. Buyers and sellers need to consult with their business intermediary, legal counsels, accountants, and others early in the process to ensure that all necessary information is gathered and understood before making a final decision.

Asset Sale

When selling an asset, the seller remains the legal owner of the entity while the buyer purchases individual assets. For example, when selling a car, the seller keeps ownership of the vehicle while the buyer buys the engine, transmission, tires, etc. A typical asset sale does not involve buying the seller’s cash or paying off debts. Instead, the buyer pays for the assets individually. An asset sale is often called “cash-free” and “debt-free.”

Net Working Capital is usually included in an Asset Purchase Agreement. It includes items like Accounts Receivable, Inventory, and Accounts Payable.

Selling a corporation can have significant tax consequences for both the buyer and seller. Generally, sellers of corporate entities prefer to engage in a stock sale rather than an asset sale, while buyers choose to engage in an asset sale. However, it is not impossible to satisfy both parties to the transaction with a §338(h)(10) election.

Asset Purchase

If a purchaser pays for a target company’s stock, they receive a cost basis under §1012 for the value of the stock itself. On the other hand, buyers prefer an asset purchase over a stock purchase to increase their basis for depreciation purposes. The underlying assets held by the selling corporation retain the same basis as before, which does not create a benefit for the purchaser in terms of depreciation.

Asset Purchase Example

For instance, consider a corporation that holds a machine that costs $500. In years one and two, the corporation depreciates the machine by $100 per year, so the adjusted basis under §1012 is now $300. This also assumes that the seller holds the stock with a basis of $500, the total fair market value of the entity is $1,000, and there are no liabilities.

If the corporation engages in a stock sale, the purchaser will pay $1,000 for the stock since that is the fair market value. The buyer’s basis in the stock will be $1,000 under §1012. However, the machine retains the $300 basis. There is no adjustment to this underlying asset. The seller enjoys capital gains treatment on $500 of gain from the stock sale, which is the difference between the amount realized of $1,000 and the adjusted basis of $500 (§1001). Even though the buyer purchased the stock for $1,000, he may only use the machine’s basis of $300 for depreciation purposes. There is no step-up in basis allowed for underlying assets absent the §338 elections.

Limitations to Asset Purchases

Note that there are some limitations to asset purchases that make stock purchases more favorable. These include limitations built-in by contracts and other legal obligations. There could also be other liability issues that prevent sellers from engaging in an asset sale.

For these reasons, section 338 may provide an attractive alternative to satisfy both the buyer and seller in a business sale. Please discuss any specific business or tax matters directly with your business attorney or tax attorney.

To speak with a Denver business attorney or tax attorney, please contact The McGuire Law Firm at 720-833-7705.

When you start an LLC business, you are usually excited about what lies ahead. You might even dream about all the possibilities of starting a new venture. However, when you close down your business, you might feel like you need to get rid of any unfinished projects before moving on to the next thing. However, several legal requirements must be met before officially dissolving your LLC. Filing paperwork with the state and informing creditors are two of those requirements. These steps will protect you from personal liability if something goes wrong during the closing period. A Denver business attorney has prepared this article to provide additional information on dissolving an LLC in Colorado. 

Why Should You Dissolve an LLC?

To start a business, you must register your company name with the Secretary of State. You also need to file articles of incorporation with the state. If you are doing business in another state, you may need to file a similar document. Once you registered your company name, you must notify the IRS and other relevant tax authorities. You should also keep records of all payments made to yourself and the corporation. When you dissolve the company, you stop paying taxes and filing returns.

Dissolution is a legal procedure that ends the existence of a corporation. A company can dissolve itself if its owners agree to do so. Suppose the owners of a dissolved corporation wish to continue operating under another name. In that case, they must file articles of incorporation under the state’s general corporation law. Dissolving a corporation does not affect any contracts entered into before the dissolution. A corporation may also be dissolved voluntarily by filing Articles of Dissolution with the Secretary of State. Dissolution of a corporation does not mean that the corporation ceases to exist. Instead, it dissolves the corporate entity and returns all assets to the individual shareholders. When a corporation dissolves, the directors and officers remain liable for any debts incurred before dissolution.

Vote to Dissolve the LLC

The first thing you need to do when dissolving a company is to get all the members to agree to dissolve the company. You will then need to follow the procedures set out in the organizational documents. If there are no specific procedures, you must follow the general procedure outlined in your state’s business laws. Once the company is dissolved, you must keep track of any outstanding debts or liabilities.

File Your Final Tax Return

When you dissolve your corporation, you must notify your state tax agency of your intent to dissolve. If you fail to do so, you could face fines and penalties. Once notified, the state tax agency will send you a notice indicating whether you need to pay additional taxes. If you have already paid all of your taxes, then there is nothing else to worry about. However, if you have not yet filed your taxes, you should still contact the state tax agency to let them know you intend to dissolve your corporation.

You must file your final tax return at the end of every calendar year. You may need to file quarterly instead of annually if you are self-employed. You will also need to file an annual report with the IRS. You must file your final employment tax returns within 90 days after the end of each quarter. Failure to file timely means you could face penalties.

File the Proper Dissolution Forms

Next, go to your state’s Secretary of State or Corporations Division website to find the dissolution forms. You will need to provide basic information about yourself and your company. Some states require additional information, such as proof of payment of outstanding taxes. Fees vary by state but generally range from $10-$50. Check the form instructions for the exact requirements.

You need to get an official Certificate of Dissolution from the state. You can do this online at the Secretary of State website. Once you receive the certificate, you must file it in your LLC record books. Be sure to include your LLC number, name, and other information. Make sure you also include the filing fees, if any. There may be additional requirements depending on what type of entity you are forming. For example, you must pay taxes if you are forming a corporation. If you are forming a partnership, you must register with the IRS.

Settle Outstanding Debts

It would be best if you let your creditors know about the dissolution. You can send them a letter via certified mail and return the receipt requested. If unsure what kind of creditor you have, check with your attorney or contact your state’s Secretary of State’s office. Your state’s law will specify the proper procedure. Usually, you must provide notice within 30 days of the dissolution. Any claim filed against you after the deadline will be dismissed if you fail to provide notice.

It’s important to keep track of your debts and credit card balances. If you’re unsure whether you need to send out notices to creditors, check your credit report first. A free copy of your credit report can be found at annualcreditreport.com. You can also get one every four years through AnnualCreditReport.com. Once you’ve checked your report, you should consider sending out notices to creditors.

Distributing Assets

You may need to pay your creditors before distributing any money to your LLC members. You will also need to allocate assets among your LLC members. These allocations are usually based on an owner’s share of the company. For example, if you have three owners with a 40-30%-30% ownership split, each owner gets 30% of the company’s total value. However, you can change the distribution of your LLC’s assets at any time. Doing so will require a special meeting of your LLC’s board of directors.

Take Care of Your Employees

Employment taxes. If you have one employee, you must pay them any final wages or compensation owed. You also need to make final federal tax deposits. The trust fund recovery penalty may apply if you don’t deduct or deposit employee income, social security, and Medicare taxes.

You must pay quarterly federal income tax on all wages paid during the year. You also must pay the estimated tax if you expect to owe more than $1,000 at the end of the year. Failure to pay the required due amount may be subject to penalties and interest.

You must complete an annual return if you paid wages during the calendar year. Suppose you paid wages to any employee during the calendar year. In that case, you must report the total wages paid to all employees. You must also report the total amount of FICA taxes withheld from wages paid to all employees, including those who did not receive wages. You must attach a copy of Form W-2 to the return. For more information about reporting wages, see Publication 1546, Reporting Employee Compensation and Benefits.

If your company receives tips, you must file Form 8027, “Employer’s Annual Information Return,” to report the final tip income. You also need to allocate tips to each employee. If you don’t, you may face penalties.

Conduct Other Wind Down Processes

A proper conclusion to your business involves closing out your accounts, including your business bank account, federal employer identification number (FEIN), and any state tax ID number, if applicable. You should also cancel any contracts and leases that may still be active and let your customers know when your last day of business will be.

Further Steps

If you register an LLC, you will automatically get a tax ID number in many states. You need to keep track of this number and update it when you change your name or state of incorporation. If you fail to do this, you may not be able to claim certain deductions or credits.

When you close your LLC, you’ll file your federal and state income taxes. You’ll also need to file any employment taxes owed. The IRS has a checklist of tax-related actions you need to take when dissolving an LLC. You’ll help avoid future fees, obligations, and lawsuits when you dissolve your LLC.

Contact The McGuire Law Firm to discuss your business questions and issues with a Denver business attorney. 

Section 338 Election of the Internal Revenue Code provides a way to treat stock purchases as asset acquisitions for tax purposes only. In other words, under Internal Revenue Code §338(h)(10), the selling corporation will bear the tax associated with the transaction, but there will only be one level. This single layer of taxation is based on the inherent gain in the assets held by the entity, but there is no tax on the subsequent stock sale. Section 338 Election of the tax code can help resolve some of the issues created in stock sales to benefit both buyers and sellers. This article has been prepared by a Denver business attorney and tax attorney to discuss the specific problems in greater detail.

Requirements for Section 338(h)(10)

Section 338(h)(10) elections require that both the buyer and the seller be corporations, and both parties must agree to make the election (see §338(a)). Unlike section 338(g), where the purchaser bears the tax burden, the seller pays the tax from the asset sale, so this requires agreement between the corporate parties.

Additionally, 338(h)(10) requires a qualified stock purchase. Section 338(d) defines a qualified stock purchase as one where the transaction occurs within a 12- month acquisition period and also satisfies the elements of §1504(a). Section 1504(a)(2) requires purchasing 80% of the vote and value of the target entity. For purposes of §338(h)(10), the 12- month acquisition period is not limited to a calendar year.

If a 338(h)(10) election has been properly made, the transaction is essentially treated as an asset sale followed by liquidation, with the tax liability flowing to the selling party. Mechanically, the purchasing target corporation is

 deemed to create a new target entity. This new entity’s sole purpose is to purchase the assets of the original entity. This allows an asset purchase while maintaining the stock sale characteristics for legal purposes. In other words, the asset sale is only considered for tax purposes, not other legal aspects. Note, the asset sale does trigger gain to the selling corporation, but there is no subsequent tax from the stock sale, thus eliminating the second level of taxable income. Treating the sale as a stock purchase may benefit the purchaser, such as maintaining specific contracts, permits, licenses, and other corporate attributes that could be lost from an asset purchase agreement.

The Tax Perspective

From a tax perspective, the purchasing party is satisfied because the transaction has been treated as an asset sale that provides a stepped-up basis for the assets. The seller is satisfied because there has only been one level of tax from the sale of the assets. This increases depreciation deductions which may be used to offset ordinary income in the future. Additionally, if the selling party has any losses, then depending on the character of the gain, these may be offset by the deemed asset sale.

Overall, §338 transactions provide a way for buyers and sellers to structure a transaction to maximize the benefits of both stock sales and deemed asset sales while reducing tax liabilities to each party. You should discuss the elements and implications of a section 338 transaction with your business attorney or tax attorney.

You can schedule a free consultation with a Denver business attorney or tax attorney by contacting The McGuire Law Firm at 720-833-7705.

Are you considering establishing a corporation? Perhaps you have considered contributing property as consideration for your interest while another member would like to contribute cash. You may even find yourself in a situation where a third person would like to donate his services in exchange for an interest in the corporation. Each of these situations can have significant tax consequences, so you must plan to maximize the benefit of the formation. This article was drafted by a Denver Business Attorney and Denver tax attorney to provide information related to the contribution of a property when you form a corporation.

Features of IRC Section §351 

One of the most attractive features of forming a corporation is in §351 of the tax code. This provision allows persons to contribute property to a corporation without recognizing gain if done correctly. 

Alternatively, §351 may stop some members from recognizing a loss, which may be a negative factor. As a general rule, the exchange of stock for property creates a §1001 event taxable. However, Congress wanted to make a way where taxpayers could still contribute property to a corporation without getting hit with a huge tax liability. This resulted in §351, but this code section does create requirements for it to apply.

Requirements in IRC Section §351 

Many requirements must be met, and the whole transaction may trigger immediate tax consequences if the conditions are not met. Remember that simply contributing property to a corporation does not eliminate the gain nor create a step-up basis, similar to §1014. Instead, the tax consequences will linger in the background until any realized gains or losses must be recognized in the future. 

Section §351 of the Internal Revenue Code applies only to the contribution of property, which does not include services. However, there are exceptions, but you must be careful when creating a corporation with someone who plans to provide any services in their interest. The contribution of services may completely ruin a §351 transaction, depending on the value.

Requirements in IRC Section §368(c)

Under Section §368(c) of the Internal Revenue Code, members must also acquire control of the corporation’s formation. This section requires that the members contributing to the property possess 80% of the voting power and 80% of shares of all other classes of stock issued by the corporation.

Non-Recognition and IRC Section §351

Additionally, the non-recognition portion of Internal Revenue Code Section §351 applies only to situations where the members receive solely stock for their interest. However, in cases where members receive boot, or something other than stock, in exchange for their contribution, they may recognize gain or loss. Receiving something different than stock does not always ruin the §351 transaction entirely, but it may trigger profit or loss, which could defeat the entire purpose of the transaction.

Liabilities and IRC Section §351

Liabilities also create issues with IRC Section §351 transactions where the corporation assumes the debt. It is not uncommon to have machines or other equipment carrying a note or obligation to consider one’s interest. As mentioned above, the courts did not want to discourage taxpayers from transferring property to a corporation simply because a liability encumbered it. Instead, the whole purpose of §351 was to encourage entity formations.

As a general rule, if liabilities are incurred on a property for legitimate business purposes, these will not trigger gain or loss upon formation. Instead, the penalties will be accounted for on the member’s basis in the corporation. However, there is an exception where the liabilities exceed the basis of the property. Under §357(c), there will be gain recognition, but only to the extent that the liabilities exceed the basis.

Forming a corporation can have many benefits, but you must consider all the contributions made before determining the overall tax consequences to the newly formed corporation and its shareholders. 

In Summary

Consider speaking with a Denver business attorney and Denver tax attorney regarding the business and tax implications of forming a corporation and contributing property to the corporation. Planning the contributions in the beginning can help avoid significant tax liability in the future.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney or Denver Tax attorney. Call us at 720-833-7705 or John@jmtaxlaw.com