ACQUISITION STRUCTURE & TRANSACTION ISSUES

Transcription

1 DUE DILIGENCE WORKPROGRAM I. BUSINESS OVERVIEW A. Obtain business background (possible sources) 1. SEC Filings 2. 10K Filings 3. 10Q Filings 4. Prior audited financials 5. Internal financials 6. Annual reports 7. Company brochures 8. Dunn & Bradstreet reports 9. Purchase agreement 10. External merger & acquisition memorandum 11. Current organization chart 12. List of facility locations 13. Job descriptions for multistate employees 14. Truck travel logs/summaries 15. List of states where company is qualified to do business 16. Identify intangible holding companies, financing companies, or other special purpose subsidiaries II. FASB 5, ACCOUNTING FOR CONTINGENCIES A. Rules for recording loss contingencies 1. It is more likely that not that a liability has been incurred at the date of the financial statements 2. And the amount of the loss can be reasonably estimated B. Disclosure may be required even where a loss contingency is not recorded III. ACQUISITION STRUCTURE & TRANSACTION ISSUES A. Is the acquisition a taxable or nontaxable transaction B. Is the acquisition a purchase of stock or assets C. Should a Newco or existing company acquire the stock or assets 1. Tax base implications 2. Apportionment factor implications 3. Nexus implications 4. Use of C corporation, general or limited partnership, limited liability company D. Can Alternative structure be used 1. LLC 2. LLP 3. Partnership (general or limited) 4. S corporation

2 E. Structuring of acquisition debt and related interest expense F. Implications of 338 or 338(h)(10) election G. Transaction Taxes on Purchase 1. Real estate transfer taxes 2. Sales and use taxes 3. Document recording taxes H. Carryover of tax attributes IV. NEXUS EVALUATION A. Sales by state B. Personal property owned & leased C. Personal property tax filings D. Real property owned & leased E. Business license filings F. Company employees G. Job descriptions of interstate employees H. Employees I. Independent representatives J. Agents K. State Employment tax filings L. Personnel activities & duties M. Sales tax registration accurate N. State tax filings consistent (payroll, property, income & franchise) O. Negotiated filing agreements P. Letter rulings Q. Interests in general or limited partnership interest R. Interests in single-member or multi-member limited liability companies S. Licensing of intangibles and filings in "Geoffrey" states V. SALES AND USE TAXES A. Obtain sales tax return filings and sales tax audit history 1. Sales tax filing calendar 2. Open sales and use tax permits 3. Sales tax returns (open periods) 4. Audit history 5. Audit files 6. Open audits (audit periods) 7. Open refund claims 8. Open contingency agreements 9. Open waivers 10. Audit appointments scheduled 11. Direct payment permits held 12. Special filing agreements 13. Voluntary negotiation agreements (open or closed)

3 14. State correspondence (rulings, filing invitations & inquiries) 15. Sales tax credits 16. Reserve documentation B. Inquire about 1. Products & services sold 2. Invoicing methods 3. Return & refund policies 4. Bad debt policies 5. Bad debt carryforwards 6. Discount policies 7. Resale certification policies (issuance & receipt) 8. Record retention policies 9. Reserve policies 10. Accrual policies 11. Warranties offered 12. Sample & Promotion policies 13. Repair policies 14. Maintenance agreements 15. Vendor selection policies C. Testing 1. Sales a) Exemptions b) Exemption documentation c) Sample selection d) Error calculation e) Extrapolation techniques f) Assumptions 2. Purchases a) Asset acquisition b) Supply purchases (purchase cards) c) Resale materials d) Direct pay permits e) Compliance with negotiated agreements f) Accruals g) Sample selection h) Error calculation i) Extrapolation techniques j) Assumptions 3. Capital Assets a) Sales b) Transfers c) Gifts d) Donations e) Business restructuring

4 4. Leasing Activities a) Intercompany transactions b) Leasing Subsidiaries c) Procurement subsidiaries d) Transportation subsidiaries D. Closing Items 1. Bulk Sale Requirements a) Notification b) Tax clearance certificates c) Old permits d) New permits e) Permit consolidation f) Resale/exemption certificates g) Final returns 2. Record retention a) Location b) Master lists c) Destruction dates VI. INCOME/FRANCHISE TAXES A. Issues to evaluate 1. Cumulative apportionment percentage 2. Determination of non-business income items 3. Expenses related to nonbusiness income items 4. Computation of apportionment factor numerators and denominators 5. Use of correct apportionment formulas 6. Sourcing of property, payroll and sales 7. Filing methodology 8. Unitary business group composition 9. Computation of franchise tax base 10. Computation of franchise tax apportionment formula 11. Identify intercompany transactions 12. Computation of state net operating losses (and loss carryforward schedules) 13. Disposition of material assets (or divisions) 14. Federal deferred intercompany transactions 15. Reserve analysis 16. State tax planning "strategies" implemented B. Document Request 1. Federal income tax returns for all open years 2. State and local income/franchise tax returns for all open years

5 3. Supporting schedules and workpapers for computation of property, payroll, and sales/receipts factors for apportionment formulas 4. Sales throwback information 5. List of income/franchise tax liabilities by state (and local jurisdiction) 6. Net operating loss carryforward schedules by state 7. List of open audits identifying jurisdiction, audit periods, issues, status and tax amounts 8. List of open refund claims 9. List of closed audits identifying jurisdiction, audit periods, issues, status and tax amounts 10. Copies of federal or state waivers of statute of limitations 11. Copy of accrual review workpapers (including reserve analysis) 12. Copies of income/franchise state tax calendars C. Discussion Issues 1. Business/Nonbusiness Income a) Identify material nonbusiness income items b) Is contemporaneous documentation of factual support and analysis of law available 2. Apportionment a) Composition of sales/receipts factors (e.g., interest, dividends, net gain from sales of assets, proceeds from sales of assets, commissions, service income, etc.) b) Sourcing of sales/receipts (1) Sales of inventory: by destination, by origination, or other (2) Service income: by location of services, location of benefit, billing address, or other (3) Income from intangibles: commercial domicile, legal domicile, location of intangibles, or other (4) Net gain from the sale of a division or company: by location of tangible assets, commercial domicile, legal domicile or other (5) Throw back sales: What is the treatment of U.S. government sales, foreign country sales, out of state sales c) Property valuation (original cost or net book value) d) Capitalization of rented property e) Sourcing of movable property f) Sourcing of payroll g) Payroll sourcing where a common paymaster is employed h) Special industry apportionment formulas i) Apportionment/Allocation of general and limited partnership interest

6 j) Apportionment/Allocation of multi-member or singlemember limited liability companies 3. Addition and Subtraction Adjustments to Federal Taxable Income a) What addition modifications were taken on the returns b) What subtraction modifications were taken on the returns c) Are intercompany transactions on an arms-length basis d) Dividend received deduction results 4. Unitary Business Issues a) Where is the company filing unitary returns b) Which companies are included in the unitary group c) Is contemporaneous documentation of factual support and analysis of law available d) Do any states require world wide combined reporting e) List of states where the company has made water's edge elections f) Have the water's edge elections been properly made 5. State Net Operating Losses a) Are detailed net operating loss carryforward schedules available showing years losses were incurred and years losses were carried forward or b) Are the state carry forward and carryback periods the same as federal c) If not, has the company conformed to the state carryforward and carryback periods and made any necessary state elections (if required) 6. Deferred Intercompany Transactions a) Identify existing deferred intercompany transactions under the federal consolidated return rules b) How and when have the deferred intercompany transactions been recognized for state and local tax purposes in separate company jurisdictions 7. Asset Dispositions a) Has the company disposed of divisions or companies in the past (or other significant assets) b) How was the calculation of state gain/loss performed (federal versus state basis) c) Was the gain/loss treated as business or nonbusiness income d) If business income, how was the gain/loss included in the apportionment factor e) If nonbusiness income, is contemporaneous documentation of factual support and analysis of the law available 8. Audit History a) Discuss status of current income/franchise tax audits, appeals, and refund claims

7 b) Review auditor reports and workpapers and client responses and protests c) Is the company taking aggressive filing positions d) Does the company have contemporaneous documentary support for the positions e) What are the issues and related tax exposure (or refund opportunities) for current audits f) Discuss closed state income/franchise tax audits g) Is the company filing consistent with closed audits 9. Franchise Taxes a) Are the proper items included in the franchise tax base (e.g., capital stock, retained earnings, long term debt, intercompany debt, reserves, etc.) b) Are investment in subsidiaries accounted for under the cost or equity method c) Is a deduction for investment in subsidiaries available d) Has the apportionment factor been properly calculated 10. Unclaimed Property a) Have all the entities filing UP reports b) Are all states in which they have vendors/suppliers/customers accounted for c) What types of property have they been reporting d) Do they look at the AR and credit entries e) Do they maintain a list of unclaimed property reports f) Have they been audited by a state or third party g) Were closing agreements signed as to property, years or issues VII. DUE DILIGENCE MEMORANDUM A. Components 1. Executive summary 2. Business background 3. Areas review 4. Personnel interviewed 5. Documents reviewed 6. Assumptions 7. Testing procedures utilized 8. Reserve calculation 9. Filing adequacy 10. Audit information 11. Material open items 12. Compliance adequacy