Published JANUARY 2010 1
TAX STRATEGIES FOR
Challenging Times
JANUARY 2010
Tax Strategies for Challenging Times
Published JANUARY 2010 1
Tax Strategies for Challenging Times
In today’s economy, strategies undertaken to preserve enterprise value often create important tax issues, opportunities,
and choices. With proper tax planning, many companies will be able to identify significant tax savings opportunities and
avoid unexpected cash out flows and adverse exposures. This guide, authored by Plante & Moran’s national tax office,
outlines many of the most common issues facing companies in today’s challenging economy. This publication is intended
to serve as a technical reference guide; however, it is not intended to provide a complete description of each issue. If you
need assistance with an issue covered in this guide, please contact your Plante & Moran representative or regional office
listed at the end of this document.
Executive Summary
THIS TAX GUIDE IS SEPARATED INTO THE FOLLOWING CATEGORIES:
1. Bad Debts
2
2. Inventory
3
3. Cancellation of Indebtedness (COD) Income
4–5
4. Expanded NOL Carryback
6
5. Potential for Tax Liabilities Even if NOLs Exist
7
6. Idle and Excess Capacity Facilities
7. Business Restructuring
8–9
10–11
8. Depressed Asset Value Opportunities
12
9. Tax Accounting Methods
13
10. Tax Refunds and Payments
14
11. State and Local Tax
15
12. International Tax
16
13. Business Acquisitions and Sales
17–18
14. Miscellaneous
19–20
2 Tax Strategies for Challenging Times
1 Bad Debts
BUSINESS BAD DEBTS — When a business trade receivable becomes wholly or partially worthless, a
taxpayer generally may write it off to obtain an ordinary deduction. While there is no brightline test for
determining the value of a trade receivable, relevant factors to consider in determining if a decrease in
value has occurred include serious financial reverses of the debtor, insolvency, lack of assets, persistent
refusals to pay, abandonment of the business, bankruptcy and receivership, security (if any), and
expiration of the statute of limitations. However, factors may exist that suggest no decreases in value
have occurred such as the creditors’ failure to press for payment, creditors’ willingness to make further
advances, availability of collateral or guarantees, debtors’ earning capacity and continued operations.
To be deductible, a trade receivable must be specifically written off on the taxpayer’s books versus
being reserved or provided for in an allowance for doubtful accounts. Under current tax law, a wholly
worthless trade receivable must be written off in the year it becomes worthless.
TIMING FOR TRADE RECEIVABLES BAD DEBT DETERMINATION — In order to secure a tax deduction,
taxpayers are generally not required to make a final determination of whether a debt is uncollectible
(or partially uncollectible) for tax purposes until the end of their tax year. It is possible that economic
conditions will allow for a more complete and simpler analysis on the collectability of a company’s trade
receivables at that time versus earlier in the tax year. Taxpayers should review their receivables as their
year-end approaches to ensure that any bad receivables are written off in their books and records and
that documentation appropriately supports any deductions.
ESTIMATED TAXES — A mid-year determination of a bad debt deduction may be necessary to calculate
annualized taxable income for estimated tax purposes. This may require determinations to be made
before the end of the year if bad debt deductions are desired for this purpose. However, the same
information must be obtained regardless of the timing of the deduction.
RELATED PARTY RECEIVABLES — The IRS and state authorities generally apply a higher level of
scrutiny when dealing with bad debt deductions between related parties. The emphasis and focus on
documentation supporting any deduction likely needs to be more robust than for unrelated party bad
debt. This is true even in consolidated groups where the federal tax impact might not be significant but
the state and local tax impact is significant if each legal entity is filing separate returns.
Published JANUARY 2010 3
2 Inventory
LOWER OF COST OR MARKET (LCM) INVENTORY METHOD — The LCM inventory method may allow
for write-downs of depressed inventory still on hand. This deduction is available when the replacement
cost of purchased inventory or the reproduction cost of produced inventory is less than the basis of
the inventory. It is common for the tax and GAAP calculations for LCM adjustments to be different so a
GAAP deduction will not always lead to a similar tax deduction. LCM does not apply to taxpayers using
the LIFO inventory method, but other taxpayers may be eligible for an automatic accounting method
change to the LCM method of accounting.
SUBNORMAL INVENTORY — In addition to the potential benefits of taking LCM write-downs,
subnormal inventory may also be written down. “Subnormal inventory” includes inventory that is
unsalable at normal prices or unusable in the normal way because of damage, imperfections, wear,
changes of style, odd or broken lots, or other similar causes, as long as the inventory is offered for sale
at a written-down price within 30 days after the end of the tax year. However, excess stock does not
qualify for the deduction.
POTENTIAL REPEAL OF INVENTORY METHODS — President Obama has laid out a detailed tax proposal
that includes several items specifically affecting taxpayers with inventory assets. He has proposed
the repeal of the LIFO inventory method beginning in 2012 (with an eight-year spread on the income
pickup) and the repeal of the LCM inventory method (with a four-year spread on the income pickup).
4 Tax Strategies for Challenging Times
3
Cancellation of Indebtedness (COD)
Income
NEW COD INCOME DEFERRAL — There are several nuances related to the tax treatment of COD
income. For tax years beginning in 2009 or 2010, the recognition of certain COD income can be deferred
until 2014 and be reported ratably from 2014 through 2018. Only COD income created from the
“reacquisition” of a taxpayer’s own debt qualifies; however, a “reacquisition” can include an acquisition
of the debt for cash, the exchange of the debt for another debt (including a deemed exchange
resulting from a modification of the debt), the exchange of the debt instrument for corporate stock or a
partnership interest, the contribution of the debt instrument to capital, and the complete forgiveness of
the indebtedness by the holder of the debt instrument.
It is currently unclear if COD income created on foreclosures of property or on partial reductions
of principal qualifies, but further guidance is expected to be provided by the IRS. In the right
circumstances, this provision can be very beneficial, but careful consideration needs to be given
to alternatives that may exclude the COD income from taxable income since the exclusion may be
significantly more or less beneficial than the deferral.
SIGNIFICANT MODIFICATIONS OF DEBT — A significant modification of debt is treated as a deemed
exchange of the “old” debt for “new” debt. A modification could be significant if it includes a change
in yield, change in the timing of payments, change in the principal balance, change in the obligor, or
change in the nature of the instrument. COD income may be generated if the deemed issue price of the
“new” debt is less than the principal balance of the “old” debt. This calculation needs to be performed
whenever any debt instrument is modified to ensure the proper treatment of any COD income that may
result and any original issue discount that may be created. In situations where clients are materially
modifying existing financing arrangements, either with financial institutions or other subordinated debt
holders, the tax implications of such modifications should be contemplated.
EXCLUSION OF COD INCOME — COD income may be excluded from taxable income in a variety of
circumstances including, among other exclusions, when a taxpayer is bankrupt or insolvent. However,
these exclusions also generally require that certain tax attributes of the taxpayer be reduced (i.e., NOLs,
general business credits, basis in assets, etc.). When reducing the tax basis of assets, the tax basis is
generally not required to be reduced below the amount of the remaining liabilities of the taxpayer.
This rule may create an apparent windfall to taxpayers that have incurred debt without creating a
tax attribute. This may occur, for example, if a historically successful business incurred debt to fund a
distribution or to redeem an owner. In this instance, no tax attribute would have been created since the
cash obtained in the financing was distributed.
Published JANUARY 2010 5
CAPITAL CONTRIBUTION vs. EXCHANGE FOR STOCK — When an owner has made a loan to a business
and is willing to give up his or her rights in that loan, the transaction should be structured carefully since
different forms of the transactions may lead to very different tax results. For example, a contribution
of the debt to the capital of a corporation may sometimes be accomplished without triggering COD
income. Alternatively, an exchange of the debt for stock of a corporation or an interest in a partnership
may result in COD income to the extent that the value of the interest received is less than the debt
exchanged. When a 100 percent owner is involved, these transactions are identical from an economic
perspective but may have different tax implications. Anytime an owner is considering restructuring
a loan to its business, thorough consideration should be given to all available options before the
transaction is consummated.
CONVERT PARTNERSHIP TO A CORPORATION — The most common way of excluding COD income
from taxable income is the insolvency exception. The insolvency exception allows an insolvent taxpayer
to exclude COD income from taxable income to the extent of its insolvency. In a corporation (or S
corporation), solvency is determined at the entity level. However, in the case of a partnership (including
an LLC taxed as a partnership), insolvency is determined at the partner level. If the partners of a distressed
business are solvent, they will not be able to exclude any partnership COD income from their taxable
income. If an insolvent partnership is expecting COD income but its partners are solvent, it should
consider converting to a corporation in order to avoid the COD income becoming taxable to its partners.
While this conversion is a very complex transaction and may create a current tax liability to the partner, it
is possible that any tax created would be less than the tax on the COD income that would otherwise be
recognized. Legal issues should also be considered before executing this type of transaction.
6 Tax Strategies for Challenging Times
4 Expanded NOL Carryback
EXPANDED FIVE-YEAR NOL CARRYBACK — The American Recovery and Reinvestment Act of 2009 (2009
Recovery Act) allowed eligible small businesses (with average gross receipts of $15 million or less) to
elect to carry back net operating losses (NOLs) from 2008 for three, four or five years rather than the
standard two years. The Worker, Homeownership, and Business Assistance Act of 2009 provides a similar
election to all U.S. businesses of every size to carry back NOLs up to five years but with a 50 percent
income limit on NOL offsets in the fifth year.
The new, expanded election is available for NOLs incurred in either 2008 or 2009, but not for both years.
However, an eligible small business that elected under the 2009 Recovery Act to carryback 2008 NOLs
may make the election for an additional year, enabling the qualified small business to carry back NOLs
from both 2008 and 2009 for up to five years.
50 PERCENT LIMITATION — Under the new law, an NOL carried back to the fifth year before the loss year
is limited to 50 percent of the available taxable income for that year. Any remaining NOL can fully offset
taxable income in the remaining four carryback years.
The 50 percent limitation does not apply to an eligible small business that elected to carry back its 2008
NOL under the 2009 Recovery Act. However, it does apply to its 2009 NOLs.
ELECTION — The election to take advantage of the new law’s NOL provision must be made by the due
date (including extensions) for the tax return filed for the taxpayer’s last taxable year beginning in 2009.
Once made, the election is irrevocable. If the taxpayer had previously elected not to carry back an NOL
from a tax year ending before the date of enactment of the new law, the taxpayer may revoke that
election before the due date (including extensions) for filing the taxpayer’s 2009 return.
AMT — The new law also suspends the 90 percent income limitation on the use of NOLs for determining
the alternative minimum tax (AMT) for an extended carryback year.
Published JANUARY 2010 7
5
Potential for Tax Liabilities Even if
NOLs Exist
AMT LIABILITIES AND NOL UTILIZATION — Often times, distressed businesses are required to pay
federal, state, or local tax even though they have significant net operating or business losses (“NOLs”).
Specifically, a federal Alternative Minimum Tax (“AMT”) liability often results since taxpayers can only
offset 90 percent of Alternative Minimum Taxable Income (“AMTI”) with NOLs. This situation commonly
occurs when a significant income-generating event, such as the cancellation of debt, occurs during
the tax year which results in the taxpayer having taxable income for the current year that is offset
by carryforwards of NOLs for regular tax purposes. The 90 percent limitation is waived for taxpayers
electing expanded NOL carryback provisions of the Worker, Homeownership, and Business Assistance
Act of 2009.
STATE TAXES — Even when federal NOLs exist or losses exist on a consolidated basis, state and local
taxes must be considered. Corporations in a consolidated group or disregarded entities treated as a
single federal taxpayer may have to file separate tax returns in certain states and local jurisdictions. Such
standalone entities may have taxable income which could create tax liabilities even though losses exist
on a consolidated basis. In additions, states may calculate the amount of NOLs differently than federal
tax law, and have different rules for determining if NOLs can be carried over. Franchise or net worth
taxes also must be considered as these taxes are typically based on assets or equity, which may remain
positive even though losses are incurred.
8 Tax Strategies for Challenging Times
6
Idle and Excess
Capacity Facilities
DEPRECIATION — Generally, when facilities are idled, an impairment loss might be recognized for
book purposes if the carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows. If this condition is met, such an impairment loss would be measured as the difference
between the carrying amount and fair value of the asset. For tax purposes, assets generally cannot be
written down until disposed of but may continue to be depreciated even if they are not currently in use.
This may result in taxable income being higher than book income. Fixed asset records should be closely
monitored to ensure that tax depreciation is calculated accurately.
FIXED ASSET WRITE-OFFS — Fixed assets generally cannot be written off for tax purposes until
physically disposed of. However, the potential exists to write off some assets if they are formally
abandoned or permanently withdrawn from service (usually by physically segregating the abandoned
assets from the productive assets). These abandoned assets may even be kept on hand to use for spare
parts, as long as the equipment itself is not on “standby” in case of productive equipment failures.
CAPITAL ASSET TRANSFERS — When facilities are idled or closed, assets are commonly transferred
to other facilities. The tax implications of transferring assets between facilities should be considered,
particularly if the facilities transferring or receiving capital assets are held by separate legal entities.
The form of the transfer may involve a sale or intercompany lease at fair market value. From a tax
perspective, it is important to characterize the transfers and to record the transfers consistently
with that characterization. This is true even if filing consolidated tax returns, since any deferred
intercompany gains may have current or future tax consequences or if the transfers are between
disregarded entities since certain states do not follow the disregarded federal status and may
separately tax the transactions. The form of the transaction could also result in other state and local
income, sales tax, or transfer tax implications. It is important to substantiate and document asset
transfers so the separate legal entities maintain properly stated books in case of a bankruptcy or other
legal claims are made against the entities.
PROPERTY TAXES — Some states or municipalities have provisions allowing for reduced personal
property tax assessments for idle or scrap property (neither Illinois nor Ohio have a personal property
tax but Michigan does allow for an idle or scrap property reduction). For real property within any state,
there could potentially be valuation reductions due to functional or economic obsolescence. Functional
obsolescence is the inability of the property to perform the function for which it was originally designed
or intended while economic obsolescence occurs when the property owner can no longer earn a
fair rate of return on the ownership or operation of the property. A depressed economy may cause a
Published JANUARY 2010 9
property to be used at less than normal capacity (i.e., economic obsolescence). State and local rules
as well as the current fair market value, use, and utilization of all personal and real property should be
evaluated to determine if property tax savings opportunities exist.
SECTION 263A CAPITALIZATION — When a facility is idled, GAAP may require some or all costs
allocable to an idle facility to be immediately expensed and not capitalized into the value of the
inventory. Tax rules may require costs such as insurance, taxes, rent, and other similar costs to continue
to be capitalized. However, depreciation and amortization expense related to a temporarily idled
facility can be immediately expensed under §263A as long as the idling is not ordinary (i.e., closing a
facility on a weekend is ordinary while a two-week shutdown for retooling is not ordinary). The overall
adjustment related to this issue may lead to a significant increase in capitalized §263A costs. See Treas.
Reg. §1.263A-1(e)(3)(iii)(E).
PRACTICAL CAPACITY INVENTORY ADJUSTMENTS — If a facility is not idled, but is simply operating
at less than normal or maximum capacity, GAAP may require fixed and variable facility costs that are
associated with unused capacity to be immediately expensed and not capitalized into the carrying
cost of inventory on the balance sheet. This method of accounting is specifically barred by tax rules
and may result in a significant increase in capitalized §263A costs for tax purposes. See Treas. Reg. 1.
§263A-2(a)(4).
10 Tax Strategies for Challenging Times
7 Business Restructuring
COMBINING BUSINESSES — In some cases, businesses that have been acquired or started at different
points in time may not be structured in the most tax efficient way. For example, a foreign corporation or
an equity fund may own multiple corporate entities on a standalone basis. This type of structure does
not allow for income of one entity to offset losses in another. Certain restructuring techniques may
be available in these scenarios to mitigate this issue. These may include creating a holding company
structure to allow for consolidated corporate tax returns to be filed, or converting the corporations into
flow-through entities to allow for income and losses to be netted at the owner level. A number of issues
should be considered before restructuring.
BASIS CREATION TRANSACTIONS — An owner can typically only utilize losses from a flow-through
entity to the extent it has basis in that entity. However, certain techniques might be available to create
basis to allow for excess losses to be used currently. Some taxpayers use traditional techniques such
as making loans or capital contributions to entities to create basis. Other business owners may prefer
to actually combine a business for which they have a high basis with a business for which they have
insufficient basis in order to use current or suspended losses. These business combinations and basis
creation transactions should be planned carefully to make sure that they accomplish their intended tax
results. The transactions should also be reviewed carefully from an asset protection standpoint.
WORLDWIDE TAX PLANNING — Taxpayers should consider their worldwide tax structure to make sure
that worldwide tax is minimized. This may include restructuring international operations to maximize
the use of losses and foreign tax credits. While this could be a costly endeavor, the long-term efficiency
of the restructured business may allow for increased cash flow on a worldwide basis.
TAX-FREE REORGANIZATIONS — While tax-free reorganizations generally become less common when
values have decreased significantly, they can still make sense in the right situation. However, structuring
a transaction as a tax-free reorganization can be difficult and may not be possible when a company has
very little or no value. In some cases, if values have decreased significantly, it may be more beneficial
to structure the reorganization as a taxable transaction to harvest any losses that may exist for the
company or its shareholders.
CONTRIBUTION OF PROPERTY TO AN ENTITY — It can be difficult to capitalize a new entity with an
existing business or property on a tax-free basis if the liabilities exceed the tax basis of assets. This is
especially true when capitalizing a corporate entity. Generally, gain will be recognized by contributing
shareholders to the extent that the debt assumed by the corporation exceeds the tax basis of the
contributed assets. However, the rules are more flexible for contributions to partnerships.
Published JANUARY 2010 11
WORTHLESS SECURITIES — If a corporation owns more than 80 percent of another corporation, any
security of the subsidiary corporation can be written off by the parent as an ordinary deduction if it
becomes worthless. Eligible securities may include stock and certain debt obligations as long as certain
other requirements are satisfied. Other consequences may result from this deduction and must be
explored. If the security is not a security of a subsidiary corporation, the write-off will generally result in a
capital loss.
STATE AND LOCAL TAXES — Any business restructuring decision should also consider state and local
income, franchise, gross receipts, and sales and use taxes. The state and local tax profile of a restructured
business can change considerably when, for example, two businesses are combined together.
For example, merging one corporation with sales tax nexus limited to a single state with another
corporation with sales tax nexus in multiple states could subject the first corporation’s sales to sales
tax compliance in all of the states in which the second corporation has sales tax nexus. The income or
franchise tax apportionment formulas of a combined business may also significantly shift the tax burden
of the combined business compared to the previous tax burden of the standalone businesses.
12 Tax Strategies for Challenging Times
8
Depressed Asset Value
Opportunities
GENERAL VALUATION OPPORTUNITIES — With many assets at their lowest values in years, a variety
of strategies have become increasingly attractive. Future tax legislation should be factored when
determining whether to implement these strategies. For example, President Obama’s budget proposals
include a limitation on valuation discounts for family limited partnerships.
Potential strategies include the following:
The conversion of a C corporation to an S corporation can be advantageous if the potential for
built-in gains tax is minimized due to lower values.
The gifting of assets that are depressed in value but have a high likelihood of future
appreciation can be an effective way to transfer future value while minimizing current gift tax
consequences. Caution should be exercised before assets that have a built-in loss are gifted
since such losses may be permanently disallowed.
Loaning money to businesses or related individuals can be done at very low rates since the
target Applicable Federal Rates (AFR) are very low.
Setting up certain trusts (such as a Grantor Retained Annuity Trust or a Charitable Lead Annuity
Trust) whose gift tax implications vary with interest rates could also be very beneficial.
Sales of assets to Intentionally Defective Grantor Trusts benefit from depressed asset values, low
AFRs, and potential valuation discounts.
A conversion of an IRA to a Roth IRA may be less costly when asset values are low or when
resulting income may be offset by other losses.
Any other tax issue or transfer strategy that is based on an asset’s fair market value or the time
value of money should be analyzed.
Published JANUARY 2010 13
9
Tax Accounting Methods
And Generally Accepted Accounting Principles (GAAP)
ACCOUNTING METHOD CHANGES — In general, accounting method changes must be made when a
taxpayer is not following proper tax methods. It is important to ensure that the tax accounting methods
are proper even if a change to a proper method results in an increase to income or if there is no current
tax effect due to loss or other carryovers. While this applies to all taxpayers, it can be more important
to taxpayers who recently engaged in an acquisition or who are filing their first return. The first year of
filing is typically the best opportunity for a taxpayer to consider its accounting methods since they can
simply be adopted, as opposed to formally changed.
HEDGING TRANSACTIONS — A hedging transaction is a transaction entered into by a taxpayer in the
normal course of a trade or business for the purpose of reducing risks such as price changes, fluctuations
in foreign currency values, or changes in interest rates. As prices and interest rates continue to fluctuate,
hedging transactions will continue to be prevalent. To be considered a hedge for tax purposes,
documentation must be completed on the day the hedging transaction is entered into. In the absence
of proper documentation, there is a risk that any loss on a sale of the hedge could be considered capital,
while any gains could be treated as ordinary income. Hedging transactions have their own specific
method of accounting for tax purposes that generally require the hedge and the hedged item to be
considered as a single item for purposes of determining how income or loss should be recognized. For
example, an interest rate swap that converts a variable interest rate to a fixed rate would be combined
with the corresponding debt, so that the expense recognized on the debt and the effects of the
hedge will equal a fixed rate of interest on the debt. These rules are complex and must be considered
separately for every hedging transaction entered into by a taxpayer.
DEFERRED TAXES — When losses are incurred or expected, deferred tax valuation allowances must
be carefully considered. The calculation of deferred taxes can be complicated, particularly after a stock
acquisition, due to changes made by purchase accounting and limitations resulting from the acquisition.
The calculation of deferred taxes should be carefully planned.
14 Tax Strategies for Challenging Times
10 Tax Refunds and Payments
FORM 4466, QUICK REFUND OF CORPORATE TAX PAYMENTS — This form allows a corporation to
receive a refund of tax overpayments if filed after year-end but before the original due date of the tax
return. The IRS generally must act on the request within 45 days of the filing date. This may allow for
quicker access to overpayments where a tax return cannot be filed quickly or may simply force the IRS
to refund overpayments more quickly in cases where a tax return can be filed.
FORM 1045/1139, TENTATIVE REFUND OF NOL CARRYBACK — These forms allow for a tentative
carryback of an NOL for individuals or corporations in order to receive a refund of taxes paid in a prior
year as long as they are filed in specified time periods. The IRS generally must act within 90 days of the
filing date. These forms are alternatives to filing amended returns reflecting the NOL carryback, which
may take the IRS much longer to process.
FORM 1138, EXTENSION OF TIME FOR PAYMENT OF TAXES BY A CORPORATION EXPECTING A NET
OPERATING LOSS CARRYBACK — This form allows a corporation to extend the payment of tax for
Year 1 if it is expecting an NOL in Year 2 that can be carried back. This avoids the problem of paying
the Year 1 tax when it will simply be refunded later due to a Year 2 loss. This form must be filed after
the beginning of Year 2, but only taxes that are due after the date the form is filed can be extended
(i.e., Year 1 extension payments due in Year 2, or assessments made in Year 2 but related to a prior year).
FORM 1127, APPLICATION FOR EXTENSION OF TIME FOR PAYMENT OF TAX — This form allows for
up to a six-month extension to pay tax due, but only if a payment would cause an undue hardship
on the taxpayer. The “hardship” must be more than a simple inconvenience — it must be proven that
substantial financial loss would result without an extension (e.g., selling property at “fire sale” prices).
However, the application process is very onerous since extensive proof must be submitted to support
these claims. When an extension of time is unlikely to be accepted or is simply not desired, taxpayers
can apply to pay tax due in installments by filing Form 9465.
INDIVIDUAL WITHHOLDING AND ESTIMATES — Individuals, unlike corporations, may rely on a prior
year tax of $0 to avoid paying estimates in the following year, but withholding on wages is generally
mandatory even if the prior tax was $0. However, if no tax liability existed in the prior year and no
tax liability is expected in the current year (without consideration for tax payments made), wage
withholding can be eliminated. This withholding elimination requires the filing of a new Form W-4
with the employer indicating that the taxpayer is “exempt.”
Published JANUARY 2010 15
11 State and Local Tax
DIFFERENCES FROM FEDERAL RULES — As state budgets become tighter, many states are decoupling
from federal rules in a number of areas. Commonly, decoupled provisions include items, such as bonus
depreciation, §179 expensing, the five-year deferral of certain COD income, and other recent “stimulus”
rules. There are also many states that simply have different rules from the federal rules in a number of
more common areas, including COD income and exclusions, loss limitations after acquisitions (i.e., §382),
treatment of §338 elections to treat a stock purchase as an asset purchase, tax-free reorganization rules,
and more. These areas can be very complex and significant tax dollars can be at stake. Accordingly,
proper planning and research needs to be performed at the state and local levels whenever a significant
federal issue is encountered.
REAL AND PERSONAL PROPERTY TAX ASSESSMENTS — Property values have uniformly decreased in
almost all parts of the country. As a result, it is possible that real and personal property tax assessments
may not be reflective of current values. If a taxpayer thinks this may be the case, it should consider
appealing the assessment or following whatever valuation dispute process exists for their local
jurisdiction. Many of these appeal processes have strict filing deadlines, some of which may have
already passed for 2009. It may be appropriate to plan ahead now for any potential 2010 property tax
assessment appeals.
16 Tax Strategies for Challenging Times
12 International Tax
PROFITABLE IN FOREIGN COUNTRIES BUT NOT IN U.S. — Worldwide planning is very important when
a U.S. parent company has little or no income due to limitations placed on the utilization of foreign
taxes. To avoid double taxation, a U.S. parent must have foreign source income (FSI) in the same year
that it has foreign taxes and when it is itself profitable. Though foreign taxes can be carried forward or
backward, FSI cannot – therefore careful planning must be done to recognize FSI in years with overall
domestic income. FSI can come from dividends from controlled foreign corporations, from earnings
of disregarded foreign entities or branch operations, or from the parent company’s export sales if they
meet certain requirements. Proper short-term and long-term planning can help to maximize foreign tax
credits and mitigate the effects of double taxation.
PROFITABLE IN THE U.S. BUT NOT IN FOREIGN COUNTRIES — Being profitable in the U.S. but not in
foreign countries can be problematic because, like above, tax may be paid in the U.S. even though the
company is not profitable on a worldwide basis. Proper planning can help to avoid this scenario. For
example, when a foreign subsidiary is unprofitable, it might make sense to convert it into a disregarded
entity or branch so that its losses can flow-through to the U.S. return. The tax consequences to all parties
of this transaction should be carefully reviewed.
TRANSFER PRICING — Transfer pricing can be more important in a depressed economy for several
reasons. First, transfer pricing may help mitigate some of the issues identified above by reducing income
in profitable jurisdictions and decreasing the losses in loss jurisdictions. This balancing of income can
help to reduce worldwide effective taxes. Secondly, many transfer pricing methodologies are based on
comparable transactions or on some type of assumed profit or cost-plus arrangement. However, when
the economy suffers and prices begin to fluctuate from their historical norms, intercompany prices
must be updated as well. This may become more difficult when comparable companies are going out of
business or are significantly changing their own cost structures which may make their transactions less
comparable going forward.
INTERCOMPANY OBLIGATIONS — Many taxpayers with complex corporate structures utilize an equally
intricate system of intercompany funding. Many times, this funding is done through cash transfers and
journal entries, without proper legal documentation supporting the movement of money between
legal entities. It is recommended to have all intercompany obligations formalized in legal documents
and properly reflected in all financial records. When this funding is being done across international
borders, it becomes even more important to formalize these obligations because of the risk of a foreign
operation going into bankruptcy (or the equivalent local form of bankruptcy), and undocumented
intercompany obligations being disregarded by courts.
Published JANUARY 2010 17
13 Business Acquisitions and Sales
SECTION 382, LOSS LIMITATIONS — Section 382 may limit a corporation’s ability to use NOL carryovers
or other tax attributes (e.g., capital losses, credit carryovers, tax basis in fixed assets and other assets,
etc.) to offset income following a change in ownership. An ownership change occurs when greater
than 50 percent of the value of a corporation’s stock changes ownership within a three-year period. The
annual limitation on the utilization of these tax attributes is based on a percentage (the tax-exempt
interest rate published monthly by the IRS) of the value of the loss corporation at the time of the
ownership change.
SECTION 382, BUILT-IN GAINS AND LOSSES — Section 382 may also limit deductions for built-in losses
which exist when the tax basis of assets exceeds their fair market value or where certain accruals or
deferred deductions exist. However, the presence of built-in gains may enable the taxpayer to increase
the amount of its net operating losses that can be deducted. As a result, a built-in loss limitation can be
very costly for a business that undergoes an ownership change, but the recognition of a built-in gain
can be very beneficial. The calculations necessary to support either scenario can be very complex and
require significant analysis. Proper care should be given to these limitations prior to consummating any
change in the ownership of a corporation with any tax attributes or built-in losses that may be limited.
LOSS CARRYOVER WAIVERS — In a consolidated group, adjustments must be made to the basis of the
parent’s investment in subsidiaries using a similar methodology as an individual’s basis in S corporation
stock. With regard to NOLs and capital losses, an adjustment to basis occurs only when the loss is
utilized, not necessarily when the loss is incurred. However, if an NOL or capital loss expires unused,
basis must be reduced at that point. However, if a corporation is acquired into a consolidated group,
an election exists that can treat all or a portion of the loss carryover as expiring immediately before the
subsidiary joins the group. This election may prevent negative basis adjustments for the expiration of
losses that are not expected to be used (e.g., if §382 limited the utilization of those carryovers to the
point where they mathematically could not be used before they expire). The failure to make this election
could result in a significantly higher gain or a lesser loss when the subsidiary is sold.
UNIFIED LOSS RULES — When the stock of a corporation is acquired, all of that corporation’s tax
attributes, such as its basis in its assets, are generally retained and carry over to post-acquisition
periods. However, when the stock of a subsidiary is acquired from a consolidated group and the selling
consolidated group recognizes a loss on the sale, it may be necessary to reduce the inside basis of tax
attributes of the acquired subsidiary. Alternatively, the seller may make an election to forego its loss, in
order to enable the subsidiary to retain its attributes. This rule must be considered before an acquisition
18 Tax Strategies for Challenging Times
is agreed to because absent appropriate protections in the transaction document, the seller controls
whether to make the election to forego its loss. This is an issue that purchasers of stock should consider
before executing a transaction.
ACQUISITION STRUCTURING — When considering how and where to structure an acquisition or
a new business, the effects of the structure on federal and state returns should be considered,
including methods to offset losses with income, changes to unitary filings, apportionment dilution,
and other issues. The specific form of the transaction (i.e., use of a new consolidated corporate
subsidiary, a new brother-sister corporation, a disregarded entity, etc.) can drastically change the tax
results of the overall operations. It is best to plan and project these scenarios early on in the process
of deciding if an acquisition will occur, to allow for ample time to gather information and to perform
any necessary analysis.
ACQUISITION OF TROUBLED BUSINESSES — When a troubled business is being acquired, more
significant tax and legal considerations exist. If it is possible that certain pieces of the acquired business
may not be viable after the acquisition, it might be possible to acquire those assets in a separate legal
entity from the rest of the business in order to improve the likelihood that certain assets can be protected
from creditors. However, it still may be desirable to keep that business in a structure that will allow any
losses incurred to offset income from the more successful aspects of the business. These competing
factors can be addressed with proper planning and structuring before the acquisition occurs.
Published JANUARY 2010 19
14 Miscellaneous
PERSONAL LIABILITY FOR TAXES — Many states may hold officers personally liable for certain unpaid
taxes. This may be true even when the business itself is bankrupt or terminated. Taxpayers and their
officers must be careful to understand these rules in order to make proper decisions on what parties
to pay first when it faces liquidity problems. Persons responsible for paying federal payroll taxes (i.e.,
officers, controllers, clerks, etc.) can also be held personally liable for these taxes if they are not paid by
the employer.
OBAMA AND OTHER TAX PROPOSALS — President Obama proposed increasing the maximum tax
rates to 39.6 percent for ordinary income and 20 percent for capital gains. Some Congressional tax
proposals, primarily related to health care reform, have also proposed tax surcharges on higher income
taxpayers, which could bring the rates as high as 45 percent on ordinary income and 25.4 percent for
capital gains.
20 Tax Strategies for Challenging Times
GUIDING COMPANIES THROUGH A CHALLENGING ECONOMY
At Plante & Moran, we understand the tremendous
challenges, as well as the unique concerns, of operating a
business in today’s economic climate. We can help you evaluate
the tax-related complexities associated with your situation so
that you can have confidence that the steps you are taking today
are the right ones.
We focus on helping companies:
About Plante & Moran
Plante & Moran is the nation’s
12th largest certified public
accounting and business advisory
firm, providing clients with financial,
Uncover opportunities for tax efficiency
Identify tax refund opportunities
Preserve and manage tax attributes
human capital, operations, strategy,
Provide structuring guidance to potentially derive
future tax benefits
Moran has a staff of more than
In addition, our dedicated team of tax and business advisors can
help you look at the big picture, including cost estimating and
cost reduction strategies, employee productivity, quality issues,
inventory control, health care, logistics, information technology,
and more. Services include:
technology, and family wealth
management services. Plante &
1,600 professionals in 21 offices
throughout Michigan, Ohio, and
Illinois, as well as in Monterrey,
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Bankruptcy
Cash flow modeling
Plante & Moran has been recognized
Debt restructuring
Operational restructuring
Services to committees
including FORTUNE magazine, as
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Viability assessments
by a number of organizations,
one of the country’s best places to
work. For more information, visit
plantemoran.com.
For more information about how Plante & Moran can help your company, please visit plantemoran.com or
call the Plante & Moran office conveniently located near you (see back page for listing).
Published JANUARY 2010
ABSENCE OF FEDERAL TAX PENALTY PROTECTION
The Internal Revenue Service recently issued regulations that require written advice regarding tax matters
to meet very detailed and comprehensive requirements before they can be relied upon by a taxpayer to
avoid penalties that might apply if the tax benefits or results discussed in the document are disallowed.
Compliance with these rigorous standards and requirements exceeds the scope of this engagement.
Consequently, the analysis and advice contained in this document regarding federal tax matters is not
intended to be used, and may not be relied upon by you, for the purpose of avoiding any federal tax penalty.
Disclaimer: The information provided in this memorandum is only a general summary and is being
distributed with the understanding that Plante & Moran, PLLC is not rendering legal, accounting, or other
professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever
in connection with its use.
This publication is intended as a reference guide, but is not intended to provide a complete description of
each issue due to the complexity of many of the items.
22 Tax Strategies for Challenging Times
Plante & Moran thanks the following team members for their contributions to this guide:
Kurt Piwko 586.416.4948
kurt.piwko@plantemoran.com
Paul Freidel 312.602.3604
paul.freidel@plantemoran.com
Robert Shefferly 586.416.4927
robert.shefferly@plantemoran.com
James Minutolo 513.595.8800
james.minutolo@plantemoran.com
Mike Monaghan 586.416.4943
mike.monaghan@plantemoran.com
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