The closest thing to a minefield in today’s
global business environment may be the
myriad U.S. and foreign tax rules affecting cross-border business. Companies involved in international business need an
effective global tax strategy, or risk incurring
highly unfavorable tax consequences. Worse,
uninformed companies can miss the opportunities to take advantage of U.S. and foreign
incentives available to companies engaged in
cross-border business transactions. International tax pitfalls and opportunities exist
even for relatively small U.S. companies that
merely sell goods destined for U.S. export or
engage in foreign R&D.
Smart Business spoke with Doug Wright of
Burr Pilger Mayer LLP to gain insights into
the complexities of global tax planning, how
companies can simplify them, and how international tax consultants can help.
How do companies benefit from partnering
with international tax consultants?
International tax specialists can help companies convert tax traps for the unwary into
opportunities. Effective upfront international tax planning can reduce a company’s global tax costs by minimizing the potential for
paying double taxes to a foreign jurisdiction
and the U.S. An effective global tax strategy
will balance U.S. and foreign tax considerations in the context of a company’s broader
business and financial objectives. This translates into increased after-tax cash flow,
increased after-tax earnings and financial
statement benefits, and ultimately increased
Why is international taxation so complex?
The various U.S. and foreign taxing jurisdictions are all seeking a bite of the same
cross-border revenue apple. They have
become increasingly proactive and diligent
in pursuing collection of what they consider
to be their ‘fair share’ of a company’s cross
border revenues. A good example of this is
the development during the last decade or so
of widespread and complex international
transfer pricing rules, which require companies to document their annual compliance
with strict ‘arm’s length’ standards for
pricing intercompany transfers of goods
and services. These and other international
tax rules are constantly changing, which
becomes a major minefield for uninformed
companies that are engaged in cross-border
International tax consultants can meld the
U.S. and the foreign tax sides of a company’s
business into a coherent tax and business
strategy. They are well-versed with the
issues, trends and changes involved in
international tax planning, and track them
What is the key to an effective international
To do international tax planning properly, a
company has to develop a global tax strategy
that facilitates its global business objectives.
The starting point is developing a solid understanding of a company’s business and financial position, its international operating strategy, and where and how it intends to operate
outside the U.S. With this knowledge, an
international tax consultant can help a company develop an overall global tax strategy
that makes good business sense and is practicable. International tax planning for specific situations can then be approached in a
coherent manner, taking into account the
company’s broader global tax and operating
Do international tax rules provide incentives
Yes, there are significant cross-border tax
incentives available in the U.S. and abroad. A
key U.S. incentive for exporters is the IC-DISC (Interest Charge Domestic International Sales Corporation). Although this incentive
has existed for more than 35 years, many U.S.
companies aren’t aware of it or may not realize that they qualify. It can significantly
reduce the U.S. tax by 50 percent or more on
income from sales of certain export products
and from certain international services. The
IC-DISC rules are highly complex, however,
so an experienced international tax consultant can help a company identify and capture
the maximum IC-DISC export tax benefits.
What risks exist for companies that do not
develop effective international tax strategies?
Companies that are not familiar with international tax rules, cross-border transfer pricing requirements and double tax treaties are
much more likely to suffer unnecessarily
high global tax costs, including increased tax
compliance burdens and tax penalties. For
example, many less-developed countries
don’t have a good international tax treaty network, so it takes careful cross-border tax
planning to minimize tax burdens, including
high foreign corporate tax rates and high
withholding taxes applied to a wide spectrum of ‘outbound’ payments from such
countries. The same holds true with transfer
pricing. The U.S. has had fairly well-developed transfer pricing rules for many years,
including potential transfer pricing adjustment penalties and interest charges, but
developed and developing foreign countries
also now have their own sets of transfer price
rules. So, it’s no longer just a matter of being
focused on the IRS side of the transfer pricing equation, but also making sure that foreign transfer pricing problems are not created. An experienced international tax adviser
can assist a company in establishing a tax-effective cross-border transfer pricing strategy that helps ensure that U.S. and foreign tax
and transfer pricing landmines are not inadvertently stumbled upon.
DOUG WRIGHT is a partner in Burr Pilger Mayer LLP’s International Tax Practice. Reach him at (925) 296-1044 or email@example.com.
John F. Eller first experienced a leadership transition when the two founders of SB Architects retired from the firm and left him in charge.
“The thought that scared me to death was, ‘The founders are going away; now what?’” he says.
But Eller rose to the occasion. The principal and president of SB assembled a strong team around him, and with his guidance, SB Architects has become a 98-employee, two-office enterprise that earned $28.8 million in 2008 revenue.
Smart Business spoke with Eller about how to motivate employees and how to tell when they are ready to be promoted.
Q. How do you motivate employees?
Each member of our management team defines that a little differently. For me, I define it in terms of what motivated me. What I’ve found successful in motivating other people is describe to them and encourage them toward opportunity.
Try to eliminate for them and encourage them toward really demonstrating their particular talents and capture the opportunities that will come by that demonstration.
I usually define it in terms of, ‘Do your job, and as best you can, do your boss’s job.’ My advice to them as part of the motivation is, ‘Always be learning.’ Always be focused on trying to do their job as well as they can, be in command of that responsibility, but always look to do their boss’s job, so they learn while there is a safety net. The security is that their boss is responsible for their own performance. But the more that person can do their boss’s job, they learn in an environment with a certain level of safety — but they take on the opportunity to improve the performance of their boss.
Then, when they are given the opportunity to step into that position, they’ve already been doing it. They’ve already demonstrated their capacity to do it.
Q. How do you handle an employee who doesn’t want to take advantage of those opportunities?
Every company has people who find their comfort zone. It is incumbent on the person to engage in the company.
For those who want to come punch the clock and do their job and do it well, they can be valuable people in the company. Very talented people who participate in the company at that level — you tolerate for their talent. You provide them with a certain level of reward.
But the people who really want to participate in the company, who take that extra step, are the ones who reap the greatest benefit just in personal return and also in the reward the firm provides and acknowledges them for their efforts.
Q. How do you assemble a strong management team?
You look for those people who took advantage of opportunity, stepped up and showed an interest in participating at that level — people who demonstrate not only the desire but the sense of judgment, sense of people, sense of ‘firm first.’
Really, it comes down to trusting your instincts about people and knowing that a variety of people have to compose the management team. It’s not a one size fits all; it’s not just little clones of myself but people with different talents, different attitudes, different perspectives.
They complement each other. Over time, establish that group so there is a significant level of trust between the players.
Q. How can you tell when an employee is ready to take that next step up?
That’s mostly gut instinct. But I’ve always found that to be a really interesting dynamic. There are people in the company who are very ambitious. They aspire to title and request it. Generally, those are the people who are not ready.
They can be, and you can tolerate elevating them for their talent and ambition, but in some respects, you want the person who just does what you are hoping they’ll do as they follow their career path. They understand there is opportunity, pursue it and take those steps without the need for acknowledgment.
Yeah, it’s there. They want it, but they aren’t asking for that acknowledgment. They are more often surprised by the opportunity. When you say, ‘I want you to be engaged at this level,’ and, ‘I want you to do this, this and this,’ they feel surprised, motivated, challenged, scared, all those things.
Then they acknowledge they’ve been honored. But the real answer is the people who deserve it most are those who may in their own hearts harbor expectations and desires, but they don’t go about advertising it. They don’t go about insisting on that recognition. When given that opportunity, over and over, I’ve seen them ask, ‘Are you sure?’ They have that trepidation; they have that doubt. But it tends to translate to a desire to prove that your guess that they can step up and take that responsibility is accurate.
How to reach: SB Architects, (415) 673-8990 or www.sb-architects.com
The recently named chairman, president and CEO told the then-$18.8 million unified communications company that the new revenue goal was $100 million. With the room suddenly silenced, Combs — who helped lead Nextel’s growth during the ’90s — assured people that the aggressive challenge was one the company could handle.
His track record helped sell his employees on the idea, and four years later, the company exceeded the goal, posting fiscal 2008 revenue of $128.7 million. After that, Combs found his people a little harder to knock out.
“When it was clear we were going to make the goal, it was not as crazy to say we’re going to hit a billion,” Combs says. “A new hire might say, ‘This guy doesn’t know what he’s talking about,’ and other people tell them, ‘He is crazy, but we will do it.’”
Smart Business spoke with Combs about why you need to ask who a potential hire’s biggest antagonist is, how you get your people to believe in unbelievable growth goals and why you have to build an A team.
Take the time to find an ‘A.’
You have to attract people to your team that are A players. If the executives at the organization are not A’s, then that isn’t happening. A’s hire A’s. B’s don’t hire A’s — and C’s never hire an A. So if you’re going to build a team — particularly if you’re going to grow something very large very quickly — you’ve got to have people who can do and accomplish a lot more and are more adept than people who are a B or a C.
I personally expect that the quality of the management teams, the sales teams, the engineering teams that we’re bringing in are top notch. There’s a real tendency to say, ‘This (person) seems good. I’m in trouble, and I don’t have any other candidates, and she may not be an A, but let me get her on board right now.’ ... And you say, ‘We’ll straighten her out later.’ And that never happens because you don’t change people.
A lot of people seem to think that checking references is just something that you do as it’s convenient. I personally take time to check references for the people that join my team, and I will spend an hour on the phone with those individuals probing.
I developed a list of questions, which helps to really get at the issues. If they didn’t include their former supervisor, ask, ‘Who was their boss, and what would he or she say about them?’ The one I like the best: ‘This guy Mike sounds like a good guy; who was his biggest antagonist in the organization? Oh, it was the CFO. Well, what would the CFO say about him?’
Or, ‘Give me a difficult situation you were in and how he reacted. Would you hire him again — if so, why?’ And if the answer to that question is yes, you ask, ‘Why haven’t you hired them in your organization?’
Earn support during times of opposition.
There are times when you have to go against the team. ... So being able to stand up and articulate your principles is important, but you better anticipate and handle the disappointment and frustration they’re going to feel.
If you have a strong need to be liked, then this is not a position you want because you have a lot of opportunity to frustrate people. You have to have a clear vision of where you’re taking the business, and you have to maintain that direction through the frustration of people who you really respect.
But being a leader is working through that short-term frustration to show them the way to that long-term success.
When Wayland Hicks was the CEO of Nextel, I ran the largest region of the company, and he and I didn’t agree on more things than we agreed upon. But he had the ability to articulate to me my position as well as I could, and if somebody could do that and decide to do something different, then I felt very comfortable supporting that.
I was surprised at how much passion I would end up putting into supporting his position because he understood my position and decided to go another direction.
Anybody can do that. It’s not a matter of communication skills; it’s based on the investment of time. If you’re in a rush situation, stopping and taking the time to listen to someone and then articulating their position back to them takes a lot of time. But if you do it, then people know that you listened and will support the process.
Use your credibility to encourage
You’ve got to set bold, impossible goals, and you have to be able to convince the team that they’re going to accomplish those goals. When I joined ShoreTel ... I made an announcement to the team that our goal was $100 million, and when I did that, there was literally no oxygen left in the room.
We’d been working for seven or eight years to get to $18 million and to have this person come in and say we’re going to get to $100 million was seen as being pretty radical.
But you don’t send an e-mail out saying we’re going to be $100 million when you’re $18 million; it’s always done in person. They have to understand from you that you’ve been able to reach big goals before.
At Nextel, I was the 34th employee, so it helps to share that track record with them, and by letting them see what you’ve done, they see that you know what you’re talking about.
HOW TO REACH: ShoreTel Inc. (800) 425-9385 or www.shoretel.com
Hiring employees with an eye toward diversity, whether it’s ethnic, gender or age-related, can help fuel excitement and creativity. For the long-term growth of a business, it’s beneficial to have employees who share the same core values, such as a passion for their chosen field, but who offer a variety of perspectives and can communicate with all types of customers.
After all, points out Melissa Pollard, senior vice president and group manager in Comerica’s Orange County Middle Market Banking Group, your customers will be from a diverse population. And you should be able to reflect the kind of customer that you have.
“Creating a culture that is welcoming of all, regardless of their race, sex or age, opens up a company’s opportunities,” she says. “Having a diverse work force allows you to better serve your clients’ needs.”
Smart Business spoke with Pollard about the virtues of diversity, what types of initiatives are most effective and how a company’s creativity can be enhanced by hiring a heterogeneous group of employees.
In what ways can companies benefit from having a diverse work force?
From my experience — having been in banking for 21 years — it seems as though, initially, diversity was the politically correct thing to do. We’ve come to find out, however, that not only is having a diverse work force the politically correct thing to do, it is also the smart thing to do financially. When you look at companies that rank high in terms of diversity metrics, they tend to outperform other companies financially.
What types of diversity initiatives are most effective?
Through all of our diversity initiatives we’re trying to empower our colleagues by strengthening their internal and external connectivity. Our focus internally is to attract, retain, mentor and promote our diverse colleagues within the bank. Externally, we want to champion the benefits of having a diverse work force and work with as diverse a client base as possible.
Periodically, we have internal events that provide educational programming and are designed to be a mentoring/ learning/connecting type of event for internal colleagues. Our external events, such as investment seminars, are designed for business development opportunities.
How should a company go about providing equal opportunity for leadership positions?
The key is to hire and develop talent with an eye towards diversity, provide mentors with similar backgrounds and then provide adequate training so new hires can be groomed to reach their goals. Almost half of the officers at our bank are women. Over the years, women have been well represented here, which gives us a unique advantage. When you have a well-balanced work force, there is less of a disparity between the sexes in leadership positions. When you combine all of our initiatives — women’s, African-American, Hispanic, Asian-Pacific — they represent the majority of our work force.
How can a company’s perspective and out-reach be broadened by having a diverse work force?
If you have a homogeneous work force, then everyone will be like-minded; when faced with decisions and questions, you will only get one answer. The benefit of having diversity is there are many different perspectives that can be shared and all of the different backgrounds will make your organization stronger.
Let’s say you have a dozen people in the room that share the same background and you pose a problem to them. You’re probably going to get the same type of feedback from each of them. But if you have a dozen people in the room and they are all representing different cultural backgrounds and various upbringings, you will likely get a dozen different responses. Creativity is enhanced and solutions can be customized and tailored to fit each client’s needs.
Speaking from a banking perspective, the clients and marketplace that we serve are diverse. We are trying to create a friendly business environment because we believe there is strength through diversity. Having individuals that represent a variety of different backgrounds makes us stronger.
MELISSA POLLARD is senior vice president and group manager in Orange County’s Middle Market Banking Group, and chair of the Western Market Women’s Initiative of Comerica Bank. Reach her at (714) 435-4406 or firstname.lastname@example.org.
Selecting a new bank is a task that should not be taken lightly. It is key, says Mike Silva, senior vice president and group manager of Comerica Bank, to search for a bank that will pay attention to your company’s individual needs.
“For midsized businesses, there are no cookie-cutter deals; there are nuances to every midsized business owner’s financing needs. Selecting a bank that provides flexibility and customization for these needs is extremely important,” he adds.
Smart Business spoke with Silva about selecting a bank in uncertain times, the importance of having a backup plan in place and the benefits of open communication.
How should a company go about selecting a bank in uncertain times?
Now more than ever, it’s important to do your homework as to the financial where-withal of your bank. It’s hard to pick up a paper and not read about banks with problems, failed banks and banks where the Fed has forced acquisitions. In this environment, it’s important for clients to do their homework about the creditworthiness of their lender.
Why is it so important to look for a bank that has a history of supporting its customers through various business cycles?
We live in a very cyclical world, and there have been a lot of new players, including foreign banks and nonbank lenders, who have entered the commercial bank lending arena in the last five years. Just as easy as it was for them to get in, it is as easy for them to get out of the lending environment. It’s very important to find a lender that has extensive experience in the commercial lending arena and has a deep dependence on revenue and income from that area. Banks that focus on other things — but dabble in commercial lending — find it pretty easy to get out in an economic downturn. Other banks that are dependent on commercial lending for revenue can’t exit because it is such an important part of their business. As a result, they are much more experienced and are better positioned to ride through various economic cycles.
What type of service and performance standards should a business expect from its bank?
You don’t ever want to be your bank’s biggest client or its smallest client. You want to make sure that you are an important enough client that you get good service, but not so large that your bank may be hamstrung in terms of delivering credit or other products and services that you need. Every business owner should have a banker who understands his or her business and who consistently underwrites to the same standards. This ensures that changing credit policies or a changing economic environment do not have a significant impact on the way that you borrow money.
Once a selection has been made, what steps can a business take to maximize the relationship with its bank?
It is very important to be openly communicative and to share both good news and bad news on a timely basis. From a business owner’s standpoint, it is critical to develop annual projections and to manage your business to those projections. When there is a negative variance, talk to your banker earlier rather than later. I have had clients who, in certain instances, don’t want to talk about a problem until they can figure out a solution. Sometimes the problem festers or grows and, in some cases, there is no timely answer. We find that it would be much more helpful for us to be supportive of a client in such a situation if we knew what was going on in a timely fashion.
How can a company most effectively transition from one financial institution to another?
Companies should have a backup banking relationship in place. The banking industry is currently experiencing unparalleled turmoil. If you are beholden solely to your bank and it has issues outside of your control, the lending relationship that is so crucial to you could disappear overnight. This can happen even if you are the best customer your bank has ever had. By developing a relationship with a backup financing source — someone who knows you almost as well as your existing bank — you are not starting from scratch if there are issues.
How important a role does communication play in sustaining a positive working relationship?
Communication plays an extremely important role. Businesses should communicate up and down the chain of command with their bank. Clients commonly complain about the turnover among their bankers. Unfortunately, this is often the nature of the beast, so it is important to maintain dialogue and be known not only by your banker but also by his or her boss, in case you need something special or you need someone to champion an exception in the organization for you.
MIKE SILVA is senior vice president and group manager of Comerica Bank. Reach him at (415) 477-3274 or email@example.com.
John Varel has started and grown 12 companies during his career. It hasn’t always been easy, and sometimes, he really had to fight his way to find growth. His most recent company is no exception. As founder, chairman and CEO of FusionStorm, a technology solutions provider, he successfully grew the company to $120 million in revenue in just five years. When the company took a hit and dropped to $12 million, he could have just given up. Venture capitalists and board members walked away, recommending he file for bankruptcy. Instead, he took the business back to nearly $500 million in revenue during the last six years, and despite the tough economy, Varel says that more growth is still attainable.
“You have to weather the pain,” he says. “If you want to be a leader, you really have got to do anything and everything that you’d ask one of your people to do, and do it in the worst of times.”
He says that there are basic tenets essential for growth that apply in all economic conditions — communication, collaboration and empowerment.
“We have to communicate more effectively,” Varel says. “We have to collaborate across groups and teams and practices. Then we have to remember that even though we all seem to think we can be all-knowing, we have to let the individual teams be empowered and let them make mistakes and move on and learn from them.”
When Varel started one of his offices, the guy he hired had a bigger vision that required more people and money than Varel envisioned. Despite reservations, he agreed to let him have the resources to do the job his way.
“As soon as I said yes, I knew I made the wrong decision,” he says. “And then I never communicated it for three or four months.”
Now he has a budget in that office twice as large as it should be, and he realized that if he had just communicated the problem upfront, he could have avoided the issue altogether.
“Wherever I have failed in a simple act of trying to achieve success within a company or business, I can take it back to I wasn’t clear upfront what I expected from that individual,” he says.
The lesson is, if you want to grow your organization, you must learn to communicate.
“First, it starts with the leader of the company,” Varel says. “I don’t mean manager of the company. I mean leader. There are plenty of effective managers in the world, but none of them will be leaders. A leader ... is someone who would crawl across cut glass to get the goal that they need done. I have to have in my execution of being the CEO a very clear, simple, direct vision that I am passionate about and that I communicate that consistently and regularly and repetitively.”
For example, if he says his vision could be that he wants FusionStorm to be a $1 billion company by 2010. He says it’s an easy vision — there isn’t a word in there that somebody would-n’t understand. The problem comes with helping people see how they fit in to it. If someone runs just a $20 million division, he or she may worry that he or she can’t contribute to $1 billion. Varel says his role is to make people realize that even a $40,000 contribution gets the team closer to $1 billion than nothing at all.
“The simpler you make it, the better off you are,” he says. Start planning early and involve people. He and his team have a financial planning session in August or September every year for the following year.
“The first thing I lay out is, ‘What would have to be true for us to keep our exponential growth continuing?’” he says.
Sometimes people will say that they don’t think the company can continue at the current rate, but he reiterates that that’s not the question.
“I don’t want to hear the word ‘can’t,’” he says. “I said, ‘What would have to be true for us to keep that kind of growth going?’ It takes the people out of the mindset of being an incremental gain manager, which a lot of people have. I mean, anybody can hit whatever the industry average is that you’re in.”
Instead you have to communicate bigger goals to each other.
“What I’m looking for are people who answer that question in a constructive way,” Varel says. “Then it becomes a dialogue and the communication opens back up again. We as leaders have to ask the right open-ended questions that allow the individuals to think beyond the parameters of what is the norm. Otherwise, you will have the norm.”
When Varel was a child and his mother caught him fighting with his siblings, she didn’t just send him to his room or make him sit in timeout. Instead, he had to do the unbearable — stand there — often with a bloody nose — hugging his enemy sibling for 30 minutes.
Despite how much he hated it, it taught him to play nicely with others, and that’s a lesson that helps him today as he grows his company.
For example, Varel has an amazing employee who does the work of three people — and does it well. The problem is the person isn’t a team player and won’t communicate — he isn’t playing nice in the corporate sandbox, and it’s burning bridges with his co-workers.
That employee has to go because if you don’t take action, people will see you putting up with an ego for the sake of performance.
When other employees see this, it creates issues that prevent you from growing and moving forward.
“You see it in sports all the time,” he says. “There’s always this maverick basketball or football player who’s got such a strong ego that he’s the reason the team is successful. There in lies a cancer for collaboration. Nobody wants to work with him then ... they don’t want to play nice in the same sandbox. Sorry. This is the sandbox we’re in, and we all have to play nice.”
In order to nurture more collaboration in your organization, you have to first get to know your people.
“Start off, No. 1, by being involved in every meeting and session you could as a listener because you don’t know who your people are,” Varel says. “You don’t know who the ego-maniacs are. You don’t know who the individuals are who will be ‘me’ versus ‘team.’ You don’t know who has personal agendas. You don’t know the personal phobias.”
Part of getting to know people happens outside of the conference room though. Varel calls each of his 400 employees to wish them a happy birthday, but he also asks them other questions, like how are things going, what they see right, what they see wrong, why they like working at FusionStorm and about their family.
“Ask the open-ended questions, and then shut up and listen because your leaders will come to the surface,” he says.
The next step to fostering collaboration is to recognize the laws of nature.
“When you have two individuals, you have two different ideas already,” Varel says.
With this issue, remind people that their differences are OK, but they need to work past them. Varel has a statement on the wall that reads, “You can disagree emphatically in this meeting, but when you get out of this room, you agree with one another emphatically on execution.” For that to actually happen, watch how people respond both verbally and physically.
“If someone shrugs their shoulders or nods their head, you know they’re not 100 percent on board,” Varel says. “Then you ask, ‘Are you sure? What else is bothering you?’ That’s all you can do.”
While he’s been burned before, at least asking these questions on the front end creates more buy-in and collaboration later.
“Open discussions prior to that are acceptable, but after that, they’ve got to be agreeing and having each other’s backs, so to speak,” he says. “Otherwise, empowerment will fail.”
Varel doesn’t live in San Francisco. He doesn’t live in California. He doesn’t even live in the continental United States. Instead, he has a home in Maui, and every other week, he visits a different FusionStorm office.
The fact that he doesn’t have to watch over the shoulders of all his people is a testament to how much he trusts them to get their jobs done themselves, and that empowerment is the third ingredient to successful growth.
“The first word that comes to mind is the word ‘trust,’” Varel says. “You said you were going to do it, you said you can do it, you said you will do it, so I trust you. But if you stumble, I can be your worst enemy or your strongest supporter, depending how you stumble, and if you fail because of that, then we’re both mutually responsible.”
If you want to have that same attitude, you first have to throw your employees a line.
“I give them enough rope that they’re either going to show their true colors and hang themselves, or they’re going to execute beyond my wildest expectations,” Varel says.
He says that another major part of empowerment is to keep your mouth closed and your ears wide open.
“Secondly, I’m listening while they tell me what their plan is,” he says. “Most managers want their ideas heard. They’re intelligent people — they’ve grown through the ranks. Young or old, they have some basis for believing that they are right in what they want to say, and then I let them talk that through.”
While he doesn’t always do everything that his people suggest, he says that allowing them to present their ideas helps them feel that they can contribute to your vision.
“After they’ve had the opportunity to execute on their own plans and see them succeed or fail, they grow stronger as a manager and/or leader and have earned the right for that empowerment,” Varel says.
But it all comes back to the first two parts that Varel has hit on.
“It’s in not doing the first two — communicating or collaborating across groups, they’re going to fail at empowerment,” he says. “They can’t operate within their own island. They’ve got to have the first two down in my opinion.”
Lastly, he says that as the leader, you have to be careful that while you sit in on meetings, you don’t dominate the meetings. By empowering his people instead of micro-managing them, it has created a culture that people want to be in, and numbers talk — FusionStorm’s turnover is less than 5 percent, which is about one-third of the industry average.
“I could very easily sit in and spend my day sitting in on all of these calls, but then we wouldn’t be a company that’s growing at 70 percent annual compounded growth,” Varel says. “We wouldn’t have gotten out of that fire we were in in 2002 to grow from ($12 million) to a half a billion [dollars]. If I were micro-managing, I wouldn’t have had any leaders that were capable of doing anything because I would be doing it all. You can’t scale that way.”
HOW TO REACH: FusionStorm, (415) 623-2626 or www.fusionstorm.com
Cancellation of debt income (CODI) from distressed properties is becoming more prevalent in today’s economy. The term CODI sounds discouraging; however, there are a few opportunities to minimize the current tax impact as a result of debt forgiveness or debt restructuring.
As Jackie Matsumura of Burr Pilger Mayer explains, “There are several ways to deal with the inability to make loan repayments, including short sales, workouts, foreclosure, abandonment, to name a few.” But, she adds, “There are different tax and nontax implications for each of them, and dealing with distressed properties is definitely not something that owners want to do alone.”
She recommends property owners seek the advice of a tax professional before making any decisions.
Smart Business discussed the tax implications of CODI with Matsumura to learn more about them and the importance of seeking tax advice early.
Is cancellation of debt income always taxable?
No, not always. CODI is generally taxable, but there is a provision in the tax law which allows the exclusion of CODI from taxable income. The provision applies to individuals and businesses, and to name some exceptions for real property owners — let’s call them ‘taxpayers’ — who file Chapter 11, who are insolvent, or who have qualified real property indebtedness or qualified principal residence indebtedness qualify for the exclusion. In addition, there are specific tax consequences as a result of the exclusion; for example, net operating losses are reduced by the exclusion amount, tax credits are reduced, and/or the tax basis in property is reduced.
Also, the determination of whether CODI is taxable depends on the type of taxpayer, meaning whether the taxpayer is an individual, corporation or a pass-through entity. In a partnership situation, the determination is not made at the partnership level, but at the partner level. As a result, one partner’s allocated CODI income may be treated differently from another partner’s because one may be insolvent but the other may not, or one may file Chapter 11 but the other may not.
How can tax professionals help parties involved in buying and selling distressed properties get through the CODI maze?
Tax professionals can help taxpayers deal with distressed properties on the front end. Factors that affect tax results include what type of property is held, whether it is a principal residence, investment property or real estate used in a business; how the properly is held, say, by an individual, corporation or a partnership; what type of loan is involved, whether it’s recourse or nonrecourse; or if the taxpayer has other businesses or has other unrelated tax issues to consider. Their tax advisers can assist in projecting out the tax implications of restructuring debt, when combined with other aspects of the taxpayer’s tax situation, or recommend the ideal timing of certain events to minimize taxes. Also, careful planning is necessary because the character of income may differ between CODI and loss from disposition of property (ordinary income versus capital loss).
Are laws regulating disposition of distressed properties and CODI changing?
Yes. For example, Congress recently enacted the Mortgage Forgiveness Debt Relief Act of 2007, which allows homeowners to exclude up to $2 million of debt that is forgiven through Dec. 31, 2009. One thing to note, however, is that the amount is not really tax-free, because the basis of that property is reduced by whatever is excluded from income; so it’s really a deferral of tax.
Is it in lenders’ and owners’ best interests to cancel debt tied to distressed properties?
That depends. It is generally a business decision as to what the pros and cons of cancelled debt are from both the lenders’ and taxpayers’ perspectives. Taxpayers try restructuring the debt with lenders so that they can keep their property and protect their credit ratings. And, lenders do not necessarily want to foreclose on distressed property, sell it and get whatever they can for it. That could be more costly than trying to work out a deal with the taxpayers. Each lender works with the taxpayer differently. Some are willing to explore other options and others are not, so the taxpayer may not be able to control that decision.
Does anyone benefit from forgiving taxpayers’ debt on distressed properties?
A reduction in the amount of debt may benefit both the taxpayer and the lender. One scenario is where the lender works with the taxpayer to reduce the balance of the debt, but in exchange, receives a partial interest in the ownership of the property or the entity that owns the property. This way, the taxpayer is able to keep the property and the debt repayment is more manageable, and the lender would share in the future profits generated from the property.
Since there are multiple scenarios with different tax consequences, it is highly recommended that taxpayers seek counsel very early in the process.
JACKIE MATSUMURA is a partner in the Tax Practice at Burr Pilger Mayer. Reach her at firstname.lastname@example.org or (925) 296-1035.
Perhaps the only thing worse than a customer whose payments are 60 days overdue is one who notifies you that it is declaring bankruptcy. What you do in the days after a debtor declares bankruptcy has a major effect on what, if anything, you collect.
“It is important to have a general understanding of how bankruptcy can affect your ability to collect an outstanding debt and the steps you should take to maximize that potential recovery,” says Bradley C. Mall, attorney with Munck Carter, P.C. in Dallas. “Even before the current financial crises, we saw a sharp increase in the number of bankruptcy filings.”
In August 2008, bankruptcy filings reached a new high of 4,476 per day. At that time, predictions were that bankruptcy filings would top one million by the end of 2008. Given the current financial times, actual filings are likely to be significantly higher. What is a business owner to do?
Smart Business asked Mall how a business owner should react to a client’s bankruptcy filing.
If I hear that a client is declaring bankruptcy, what should I do first?
The safest thing is to confirm that filing by contacting the debtor and obtaining a case number and/or name and telephone number of the debtor’s attorney. Alternatively, most attorneys can confirm the filing through the bankruptcy court’s online filing system, PACER.
Failing to confirm a filing can have adverse consequences. Not only is any action taken in the pursuit of collection voidable post-filing, such action may open you to monetary liability. Actions taken in pursuit of debt collection — even actions as simple as filing a lien — violate the Bankruptcy Code’s ‘automatic stay’ provisions and are voidable.
What is ‘proof of claim’?
In the business world, to receive payment for services rendered or products supplied, you submit an invoice. In a bankruptcy proceeding, creditors file a proof of claim. You should attach any and all documents that support your claim. For example, if the claim is based on a promissory note, attach the note. If the debt is secured by collateral, attach confirming documents, such as a Uniform Commercial Code Financing Statement (UCC-1). A proof of claim is deemed allowed upon filing with no more action to be taken unless and until an objection is filed as to the claim.
This does not mean that you will receive all or any money from the debtor. Rather, it establishes your claim and its position within the hierarchy of claims payment. You do not have unlimited time to file proof of claim. In a Chapter 7 (liquidation) case, the deadline is usually 90 days after the first meeting of creditors. In Chapter 11 (reorganization) cases, the court sets the deadline.
How do I move up in the payment hierarchy?
Vigilance in the processing and protection of your claim before bankruptcy is filed is key to your position in the hierarchy of claims payment under the Bankruptcy Code. Where your claim falls in terms of payment is entirely dependent upon the classification of your debt prior to the bankruptcy filing. So, if your debt is secured, your claim will have priority, i.e., be paid before general unsecured creditors. This does not mean that your claim will be paid in full, or even at all.
Conversely, failure to properly perfect and record your security interest may cause your claim to be classified as unse-cured, which is close to last in line for payment. Further, because the bankruptcy trustee (or the debtor in Chapter 11 cases) can avoid any transfer of an interest in the debtor’s property (such as filing a UCC-1 or other lien documents) that occurred up to 90 days before the filing, it is important to ensure that you are timely taking the necessary steps to perfect your security interests and thereby protect any potential claim should the debtor file for bankruptcy protection.
What is this going to cost me?
This depends on numerous variables that should be analyzed in considering how best to proceed. Just because a debtor files for bankruptcy protection does not mean you should throw up your hands and write off the debt. Chances are you will not receive 100 cents on the dollar. But, if you take the necessary steps during the course of your everyday business activities to perfect and protect your claim, chances are good that you will receive some return.
In any case, consult a bankruptcy attorney who can explain the process and your options and help you determine an appropriate course of action.
BRADLEY C. MALL is a shareholder with Munck Carter, P.C., practicing in the Litigation Section. His practice focuses on commercial disputes and includes trials, arbitration, mediation and appeals. Reach him at email@example.com.
Allegedly there are two things certain in life: death and taxes. Death is irrevocable. Taxes are subject to change, especially in California, where significant new tax provisions have been enacted into law recently. They range from new net operating loss (NOL) suspension and credit utilization limitations to increased penalties for under-payments of estimated quarterly tax payments. The provisions will not affect all companies, but sorting out which ones they do can be confusing. In some cases, enlisting the help of professional financial advisers might be advisable.
“If a company has the capability to analyze its tax situation, it can do that,” says Gary Hui of Burr, Pilger & Mayer. “But, if it needs outside help, working with professional advisers might save it time, money and aggravation.”
Smart Business spoke with Hui about how and when companies should start preparing for the changes.
Are all California companies affected by the new tax provisions?
No. Corporations with taxable income less than $500,000 in 2008 and 2009 tax years are not affected by the new NOL deduction suspension or credit utilization limitation provisions. The revised California NOL carryover provision will impact all ‘loss’ companies, though. In short, any state NOL generated by a corporation in a tax year beginning on or after Jan. 1, 2008, will have a carryover period of 20 years as compared to 10 years in the prior law. It is especially useful for life science companies due to their long development cycle and regulatory approval process.
Finally, aside from the fiscal impact to a company, the new law will also have impact on a company’s accounting for income taxes for SEC reporting purposes, if the company is publicly traded.
Are all life science companies exempt from the underpayment penalty?
The new 20 percent underpayment penalty, which is in addition to any other existing penalties, specifically targets corporations with unpaid taxes in excess of $1 million in tax years beginning on or after Jan. 1, 2003. With a California corporate tax rate of 8.84 percent, that translates to taxable income of at least $11.3 million. Life science corporations in the development stage are unlikely to have that level of taxable income.
How will these tax provisions affect California companies?
Corporations with taxable income of $500,000 or more in 2008 and 2009 will not be able to use their net operating losses generated in prior years to reduce their taxable income in those years. However, if the corporation has California research tax credits, which is most likely in a life science corporation, it may use the available credit to reduce up to 50 percent of its state tax liability. Consequently, a California corporation with taxable income not less than $500,000 in 2008 and 2009 will have to pay at least 50 percent of the tax liability in those years, even if it may have net operating loss and/or research tax credit carryforwards that would otherwise reduce the CA tax substantially.
When should California companies begin preparing for these tax provisions?
They should start immediately to assess whether the NOL suspension and credit utilization limitation provisions would affect them, since these provisions have direct cash flow impact. Also, if the new 20 percent penalty applies to any of the prior year tax filings, the corporation is allowed up to May 31, 2009, to amend the affected tax return and pay the additional tax to mitigate or eliminate the penalty.
Will these tax provisions have a detrimental effect on California companies if they do not prepare properly for their implementation?
Yes, any underpayment of tax will trigger penalty and interest. Any potential underpayment of tax and the related penalty and interest will have to be included and disclosed in the audited financial statements of a publicly traded company.
Are there any other new tax provisions of which companies should be aware?
Several. The first two quarterly estimated tax installments will carry higher percentages for tax years beginning on or after Jan. 1, 2009. Tax credit may be assigned to other combined group members for them to reduce their tax liabilities in tax years beginning on or after Jan. 1, 2010. In the old law, the tax credit was attached with the combined group member that earned the credit and could not be utilized by other members of the combined group.
Other NOL related provisions do not have immediate cash flow impact on a corporation in 2008. For example, the carryover periods for NOLs generated prior to 2008 are extended by two additional tax years and by one additional tax year for the NOL generated in 2008. A new NOL carryback provision will allow a limited carryback of NOLs generated in a tax year beginning in or after 2011 up to two preceding tax years.
Incidentally, for California LLCs, the payment date of the LLC fee has been accelerated to the 15th day of the sixth month of the taxable year, instead of the 15th of the fourth month of the following tax year.
GARY L. HUI, CPA, is tax senior manager with Burr, Pilger & Mayer. Reach him at (415) 677-3324 or firstname.lastname@example.org.
When it comes to computers and the legal world, things are happening at warp speed. It seems that every week there is new precedent set when it comes to e-discovery. What must corporations keep? Who can see what? Who are the relevant actors?
If attorneys are challenged to keep up with case law, what’s a business owner to do? We turned to Dyan M. House, an attorney with the Dallas law firm of Munck Carter, P.C., to help point us in the right direction.
“E-discovery is a hot topic right now, and it affects everyone in business today,” she says.
There has been a significant number of cases dealing with e-discovery issues, especially since the Federal Rules of Civil Procedure were amended to address issues with electronically stored information (ESI). Those rules went into effect on December 1, 2006.
Smart Business talked to House to find out what businesses need to know about e-discovery.
What is the scope of changes in e-discovery?
In many ways, the issues we are facing with e-discovery are not that different from those involved in discovery of paper documents and other tangible items. However, given the amount of ESI that is created on a daily basis, these issues are compounded. Every day, billions of e-mails are sent and numerous documents and other files are created.
ESI can be found on a broad range of devices and in various media, including live e-mail systems, archive e-mail systems, computer systems (including legacy systems), portable backup media, USB keychain drives, network servers, home directories, shared files, backup tapes/disaster recovery tapes, phones, PDAs and more.
There was a New York case on employment law that set the framework for e-discovery. What does it say?
Zubulake v. UBS Warburg, LLC is generally considered the first definitive case on issues in e-discovery. In 2003 and 2004, the Southern District of New York issued a series of opinions that addressed the scope of a party’s duty to preserve electronic evidence during the course of litigation, a lawyer’s duty to monitor his or her clients’ compliance with electronic data preservation and production and imposition of sanctions for destruction of electronic evidence. The Zubulake court set forth an analysis for deciding disputes regarding the scope and cost of the discovery of ESI. The analysis includes considering the availability of evidence sought from other sources, the extent to which the requests are tailored to obtain relevant information and the importance of issues at stake in the litigation.
The Zubulake and Qualcomm cases both addressed sanctions. What did the courts say?
The Zubulake court noted that the severe sanction of an adverse inference instruction may be imposed when the party seeking the sanction can show that:
1) the party having control over the evidence had an obligation to preserve the evidence at the time it was destroyed;
2) that the evidence was destroyed with a culpable state of mind; and
3) that the destroyed evidence was relevant to the party’s claim or defense. Because the court determined that the employer willfully deleted e-mails, the court granted the plaintiff’s request for sanctions, ordering the defendant to pay costs of re-deposing witnesses with respect to issues raised by the destruction of evidence.
Qualcomm Inc. v. Broadcom Corp. is much discussed because of the egregious nature of the discovery violations and severity of the sanctions. The fact that Qualcomm’s attorneys accepted unsubstantiated assurances that prior searches for relevant documents were sufficient and they ignored numerous warning signs that the document search and production were inadequate, more than 46,000 relevant documents were not produced. Therefore, the court imposed an $8.5 million sanction on Qualcomm and referred the matter to the State Bar of California for investigation.
When am I under ‘reasonable anticipation of litigation,’ and what does this require of my company?
‘Reasonable anticipation of litigation’ is determined when an organization’s relevant people anticipate litigation. When a party is under a ‘reasonable anticipation of litigation,’ the party’s duty to preserve evidence is triggered. This also means that the company’s routine document retention/destruction policy should be suspended and a ‘litigation hold’ should be issued to ensure that relevant documents are preserved. Determining when there is a reasonable anticipation of litigation is a fact-dependent analysis. At the absolute latest, a party’s notice of the filing of a lawsuit is the trigger.
DYAN M. HOUSE is a member of the Intellectual Property Section of Munck Carter, P.C. where she concentrates her practice in the areas of trademark, copyright and licensing. House provides counsel to a variety of businesses including restaurants, retail, engineering firms, software companies and nonprofit organizations on the transactional side as well as preparing for and handling litigation. Reach her at (972) 628-3638 or email@example.com.