Strategic Business Tax Planning

JOHN E. KARAYAN, JD, PHD, is a professor at California State Polytechnic University, Pomona. He is also a Partner at the law firm of Bond Karayan. Prior to his academic career, he was director of taxes at Informatics General Corporation (now Sterling Software); assistant tax counsel at The Parsons Corporations, and supervising specialist at Coopers & Lybrand (now PricewaterhouseCoopers). He is the Editor in Chief of the Journal of Interdisciplinary Studies as well as a member of the editorial review board (former associate editor) of Mid-Atlantic Journal of Business, Research in Healthcare Financial Management, and the Business Forum Journal. CHARLES W. SWENSON, CPA, PHD, is Professor and Leventhal Research Fellow in the Marshall School of Business at the University of Southern California, where he has taught for the last nineteen years. He holds a joint appointment at the California Institute of Technology (Caltech). His practice experience includes PricewaterhouseCoopers and Deloitte & Touche. He is a member of the AICPA and the American Economics Association, and is a cofounder of the National Tax Credit Group, LLC.

• About the Authors vAcknowledgments xiiiIntroduction xvPart 1 Strategic Tax Planning 1Chapter 1 A Framework for Understanding Taxes 3How are Taxes Important in Decision Making? 5Types of Taxes 8Basic Principles of Taxation 30Sources of Tax Laws 35Important Principles and Concepts in Tax Law 42SAVANT Framework 56Chapter 2 Using the SAVANT Framework to Guide Tax Planning 61Strategy 63Anticipation 66Value-Adding 72Negotiating 83Transforming 85Putting It All Together: SAVANT Concepts Illustrated 87Part 2 Forming the Enterprise 93Chapter 3 Choosing a Legal Entity: Risk Management, Raising Capital, and Tax Management 95Strategy 100Anticipation and Timing Issues 106Value-Adding 108Negotiating 110Transforming 112Putting It All Together: Applying SAVANT to Entity Choice 116Specialized Legal Forms 118Chapter 4 Financing a New Venture 125Internal Financing 126External Financing: Debt versus Equity 129Part 3 Operating the Firm 153Chapter 5 New Products: Development, Promotion, and Advertising 155New Products and Product Improvement 155SAVANT and Research and Development 175Chapter 6 Attracting and Motivating Employees and Managers: Company and Employee Tax Planning 179Executive Compensation 180Nonexecutive Employee Compensation 182Perquisites 189Pension and Profit-Sharing Plans 191Current and Deferred Compensation 195Limits on Deductibility on Executive Compensation 195Stock Options 196Management Bonus Plans 202Financial Statement/Finance versus Tax Strategy Trade-Offs 204Putting It All Together: Applying SAVANT to Executive Compensation 206Chapter 7 Market Penetration: Operating in Different States 213General Principles of State and Local Taxation 216Planning with Income Taxes: Manipulation of Plant, Workforce, and Point-of-Sale Locations 217Location Choice: Sourcing versus Production Platforms 228Distribution: Planning for Sales and Use Taxes 230Lobbying and Tax Abatements 235Trade-Offs with Local Tax Incentives: Infrastructure, Government Costs/Subsidies, and Other Local Costs 237Putting It All Together: SAVANT Applied to Market Penetration in Other States 237Chapter 8 Market Penetration: Company and Employee Tax Planning for Operating in Foreign Countries 241Some Basics on U.S. Taxation of Overseas Operations 241Some Basics on Taxation by Countries Other than the United States 244Tax Treaties 245Effective Tax Management 247Putting It All Together: Penetrating Foreign Markets from a SAVANT Perspective 263Chapter 9 Operations Management 269Production Design and Process Selection 269Inventory: Methods of Accounting and Includable Amounts 273Strategic Capacity Planning: Plant versus People 283Putting It All Together: Operations Management from a SAVANT Perspective 289Chapter 10 Financing Ongoing Operations and Tax Planning 293Operating Earnings 294Sale of Operating Assets 294Sale of Investments 296Short-Term Borrowing 298Accounts Receivable 299Decrease in Dividends 300Stock Dividends 302Stock Buybacks 303Using Employee Stock Ownership Plans 305Receipt of Dividends from Subsidiaries 306Putting It All Together: Financing Ongoing Operations from a SAVANT Perspective 312Chapter 11 Capital Budgeting 319Fixed Asset Acquisition 319Analysis from a SAVANT Perspective 324Putting It All Together: SAVANT Concepts Applied to Capital Budgeting 332Make or Buy Decisions 334Capital Budgeting and Plant Capacity 338Risk Considerations 343Chapter 12 Financial Statement Analysis and Proactive Tax Planning 347Segmental Analysis 347Other Tax Aspects in Segmental Analysis 350Strategic Analysis: Using Competitor’s Tax Note and Segmental Data 356Part 4 Changing Original Form 367Chapter 13 Restructuring 369Financial Restructuring 369Financial Restructuring in the SAVANT Framework 372Business Restructuring 375Legal Entity Restructuring 376Divestitures in the SAVANT Framework 382Selling Off Parts of the Business 383Selling a Business to an Outside Entity 384Chapter 14 Mergers and Acquisitions 391Some General Tax Rules 393Tax-Free Mergers and Acquisitions 393Statutory Mergers and Consolidations 395Taxable Mergers and Acquisitions 402Tax Planning and Acquisition Costs 405Allocating Purchase Price 406Financial Accounting Trade-Offs 406Maximizing Tax Benefits 407Leveraged Buyouts 411Sources of Merger and Acquisition Finance 412Defensive Strategies 415Merger and Acquisition Activity and Scrutiny by Tax Authorities 416Putting It All Together: Merger and Acquisition from a SAVANT Perspective 417Chapter 15 Other Topics in Changing Original Form 421Use of Flow-Through Entities for Divestitures 421Use of Flow-Through Entities for Acquisitions 425Liquidations 426Buying a Subsidiary for Its Assets 432Fighting Off Takeover Attempts with ESOPs 437Bankruptcies 439Appendix A Basic Tax Research Skills 441Steps in the Research Process 441Sources of the Law 441Getting Answers to Simple Questions 443Appendix B Present Value Analysis: Lump Sums 445Annuities 447Uneven Cash Flows 449Index 451