IRS Voluntary Disclosure Practice @ Paper This Deal

Faced with the situation that you or your company has been misreporting income or miscalculating taxes, you should not stick your head in the sand and hope that it never catches up with you.  You should work with your accountant and attorney and calculate the amount due.

First, the IRS has two voluntary disclosure programs.  The first is for domestic voluntary disclosure of tax issues, which I am discussing here.  The other is a separate program for Offshore Account Voluntary Disclosure (to be discussed in a later post). Continue reading

Trademark Consent Agreements @ Paper This Deal

When filing a trademark application, if the USPTO Examining Attorney issues an initial refusal because he or she finds that there is a substantial likelihood of confusion with a pre-existing mark, this can be an issue with respect to getting the application registered.  One way around this is to enter into a Consent Agreement with the holder of the pre-existing filed trademark.

The holder of the pre-existing filed trademark may not have any incentive to enter into such an agreement, so monetary compensation may be required.  As their are usually parameters that are agreed to, such as use of the marks in certain industries, on certain products, in certain markets, using fonts, colors, etc.

Something to remember is that if you file the Consent Agreement with the USPTO it is a public document and can be viewed by others.  This is an issue if you are paying monetary compensation.  A way to avoid this is to draft two agreements (or one with all of the issues and the compensation in a side letter agreement).

The existence of a Consent Agreement when an initial refusal for confusion is usually found by the Examining Attorney to be a good factor in allowing the filer to have its application registered.  The holder of the pre-existing filed mark is a good barometer for what would be seen as confusion by consumers in the marketplace.

Partnership Taxation: Substantial Economic Effect @ Paper This Deal

Partnership taxation is a complex area of tax law. We’ll be walking through some of the issues you should be aware of.

The first is to ensure you are getting the deal you thought you were.  Partners (or LLC members where the LLC has multiple members and does not “check the box“) can agree on how to allocate the profit and losses of the business as they see fit in the agreement.  The allocations can be done in any manner the partners/members choose, provided that the allocations have “substantial economic effect.” See IRC 704(b); Treas. Reg. 1.704-1(b). Continue reading

Strip Rights @ Paper This Deal

In addition to the other ways we’ve discussed here (stock options, phantom stock, stock appreciation rights), another way to compensate individuals working for a startup is to give them a cash payment upon a change in control of the company, called in the industry a “strip right”.

For example if a startup company has four founders each owning 25% of the shares, and they bring on another but don’t grant him or her shares, the initial founders can agree to pay the new individual a percentage of the “net proceeds” received from a “change in control” of the corporation.   “Net proceeds” is usually defined as the gross proceeds received minus transaction costs and brokers commissions as well as some other items.   A “change in control” is defined as it normally is in these agreements, and covers if the company merges with another or sells substantially all of the company’s assets.  In such a case, the shareholders would receive cash (or assets it can sell for cash, like tradeable shares of the acquirer).  The strip right agreement would require the shareholders that granted it to pay to the holder of the strip right, either a percentage or flat fee before they received their cash for the change of control.

In the example, if the four founders grant a 10% strip right, and a couple years down the road the company is sold for one million dollars, with transaction fees of $100,000, the holder of the strip right would receive $90,000 (net proceeds of $900,000 x ten percent).    The shareholders would split the rest of the $810,000 and each receive $202,500.

One of the benefits of the granting of the strip right is that it is not taxable to the recipient.  The downside, at least to the recipient is that they are not a shareholder of the corporation and they may never receive a cent if there is never a change in control.  Due to its tenuous nature, the strip right is usually granted in connection with other compensation awards.

 

SEC Adopts Final Rules Amending Regulation A @ Paper This Deal

On March 25, 2015, the SEC adopted final rules amending Regulation A, referred to now as Regulation A+. These amendments were required by Congress via Title IV of the JOBS Act which was passed some time ago. (we are all still waiting for the Regulation Crowdfunding rules to be finalized).

The general rule is that when a company offers or sells a security, the security must either be registered or an exemption from registration must be relied upon.  Regulation A has been on the books for a long long time and has been relied on very little.

Now the SEC has a tough job, its tasked with allowing companies to raise money via offerings of securities but on the other hand it needs to ensure that fraud does not run rampant. These two goals don’t have to be mutually exclusive, but the SEC has generally focused on the latter of the two at the expense of the first.  Continue reading

S Corporations: Loss of S Election Due to Disparate Distributions

Another item that could cause an entity taxed as an S corporation to lose the election is disparate distributions.  Like most things, this is simple in theory but more complicated in application.  The theory is that the shareholders of an S corporation are entitled only to the proportion of corporation distributions based on their percentage ownership of the stock.  In other words, if you are a shareholder of an S corporation, you are entitled to the same proportion of distributions as you own shares (if you own 1/3 of the shares, you are entitled to 1/3 of the distributions). Continue reading

S Corporations: Losing S-Corp Status Due to Passive Income

Owners of corporations elect S corporation taxation status for the pass through and other benefits the election provides. There are various things that can arise that would cause an S corporation to lose its election.  In this and following posts, I’ll walk through some of the most common.  The one I want to discuss now is the S corporation passive income restriction.  Continue reading