Bernstein invited Brian Rowbotham to be one of their panel speakers at a breakfast event in Palo Alto. The topic was on how to maximize the value of your business investment in the events of sale and IPO.

1. Exit Strategies
Pre-IPO Tax Planning
Brian Rowbotham
Partner, Tax
Rowbotham & Company
br@rowbotham.com
(415) 433-1177
www.rowbotham.com

2. 2
Redemption Strategy
Redeeming common stock:
Tax issue: Redemption at 409A value or at Pfd. stock value?
Treatment of gains:
- 409A value – Long-term capital gain
- Spread between common and preferred - ordinary or capital?
Per share: common – 409A value $0.75
C Round preferred stock value $1.50
# of shares redeemed? Which value to use? ?

3. 3
Stock Transactions
 Exercise of non qualified stock options:
Ordinary income on spread, when exercised
But there’s no cash in hand to pay the tax.
Trusts to minimize state tax by using non-California trustee:
DING – WING - NING Trusts (Incomplete Non-Grantor Trust):
Irrevocable trust – Income tax assessed on Trust
Distributions constitute completed gift
• States to consider - Delaware – Wyoming – Nevada
• There are restrictions on controlling investment decisions
Lifetime gift tax exclusion $5.34mm for each taxpayer
($10.68mm for H &W)
Annual gift tax exclusion $14,000 per donee

4. 4
Planning vs. Securities Compliance
International tax planning may achieve
efficient outcome with foreign family investors
Execution:
Working with advisors – legal, tax, and financial
To achieve targeted outcome, one must:
- Have good documentation
- Follow the structure – or the IRS will disregard
Plan ahead to avoid unexpected hurdles
Non-U.S.
Foreign
Corporation
U.S. LLC
U.S.
Shares

5. 5
Reporting Non-U.S. Investments
Filing “Activities” include ownership in:
Potential Penalties
IRS Forms for Non-compliance (1) (2)
(1) Non-U.S. Corporation 5471 $10,000 / per year
(2) Non-U.S. Partnership entity 8865 $10,000 / per year
(3) Non-U.S. Trust 3520 25% of distribution
3520A 5% per month up to 25%
(4) Transfers of Assets to 926 25% of value (max $100,000)
a non-U.S. corporation
(5) Specified Foreign 8938 $10,000 / per year
Financial Assets
(6) Foreign Bank & FinCEN 114 50% of highest balance each year
Financial Account (formerly TDF 90-22.1)
(1) Potential criminal prosecution can result for non-reporting.
(2) If a U.S. resident files nonresident return based on an income tax treaty, they are still required to comply with all the disclosures above.

6. 5
Reporting Non-U.S. Investments
Filing “Activities” include ownership in:
Potential Penalties
IRS Forms for Non-compliance (1) (2)
(1) Non-U.S. Corporation 5471 $10,000 / per year
(2) Non-U.S. Partnership entity 8865 $10,000 / per year
(3) Non-U.S. Trust 3520 25% of distribution
3520A 5% per month up to 25%
(4) Transfers of Assets to 926 25% of value (max $100,000)
a non-U.S. corporation
(5) Specified Foreign 8938 $10,000 / per year
Financial Assets
(6) Foreign Bank & FinCEN 114 50% of highest balance each year
Financial Account (formerly TDF 90-22.1)
(1) Potential criminal prosecution can result for non-reporting.
(2) If a U.S. resident files nonresident return based on an income tax treaty, they are still required to comply with all the disclosures above.