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

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Pre-IPO Tax Planning Strategies

  • 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.