| Value Added
Business Solutions – State Income Tax Corporate Reorganization
Scenario
This Cherry, Bekaert & Holland client is
a middle market company that provides pharmaceutical products to
a variety of doctors, wholesalers and retailers. The company had
experienced rapid growth with annual sales over $400 million and
income of $70 million and is projected to approximately triple those
numbers by 2007. This client approached one of our local tax partners
about a strategy to realign its corporate structure. CB&H believed
this strategy was devised by the client. As a current tax compliance
client of the firm, CB&H was asked to render an opinion as to
whether the strategy was viable. At the time, CB&H was not aware
that our client had already been approached by a Big Four firm to
do the same work and that this firm had already delivered a proposal
on the realignment.
CB&H Action Steps
The purpose of the initial meeting – the
feasibility phase – was to visit the client location to learn
more about the financial and operational aspects of the business.
The CB&H SALT group gathered the information for the analysis
of their current corporate structure. CB&H used this analysis
to suggest a business realignment that will give the client the
best structure going forward. The CB&H SALT group then took
the data and created a calculation model with projected income levels
that would simulate future state income tax payments. The CB&H
SALT group segregated the current company into operational segments
and ran the calculations as if the segments were operating as separate
companies. Through these operational and corporate changes, we were
able to determine the projected income under each corporate structure.
The CB&H SALT group presented our findings to the financial
and operational leaders of the client, addressed a number of issues
and questions and re-calculated the client’s state income
tax based on our suggested changes. Based on a preliminary agreement
on the corporate structuring strategy and the associated amount
of savings, CB&H signed an engagement letter with the client.
CB&H is currently in the design phase of the project in which
we will fine-tune the structure that was presented in the feasibility
stage. After the completion of the design phase we will enter the
implementation phase of the project. This will entail the setting
up of the new structure through entity formation and the proper
execution of the legal documentation required for the transactions.
Results
Through the collaborative efforts of a CB&H
partner and the SALT group, this client should recognize a $2 million
state income tax savings. Over the next five years with the all
our suggested solutions implemented, this client should recognize
approximately $17 million in state income tax benefits.
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