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Eighteen days before the end of the manufacturing company's fiscal year close, Miller Grossbard & Associates gained a new client that had immediate concerns. The company had not deposited its estimated taxes, was undergoing a sales tax audit, and had an ongoing dispute with a former associate regarding his employment status. The immediate need was to identify the company's current income so that year-end tax planning could be performed. Unfortunately, the financial statements required substantial adjustments. The accrual basis taxpayer kept its books on a de facto cash basis. Capital transactions had been expensed, and depreciation had not been booked. Interest income was unknown because it lay in an off-balance sheet account. With the clock ticking, the only solution was to send in Miller Grossbard's rapid response team. After grappling with the unknown for two weeks, the financial statements fairly represented the taxable income for the year. With only four days left to devise and to implement a year-end tax plan, calls went out to the owner and his attorney. The recommended transactions were explained, and the necessary documentation was completed. Potential interest and penalties were averted, and taxes were deferred. The sales tax audit was similarly difficult. It had been underway for almost a year. The previous CPA had resigned. The state auditor was losing patience and had issued a deficiency letter. The manufacturing company, not knowing what to do, deposited thirty boxes of various records at the door of Miller Grossbard. Realizing that another challenge was before our firm, Miller Grossbard's rapid response team acted again. Boxes were inventoried to identify relevant information. Forty-two months of individual sales invoices were reviewed to determine those requiring exemption certificates. With the fax machine humming for three days, many missing certificates were received. Records were organized for the state auditor and presented for the state's review. With the aid of a capable sales tax attorney, the six-figure tax deficiency was reduced to less than $10,000. Another tax problem had been averted. The associate claiming to be an employee presented the usual risk of IRS assessments for unpaid social security, Medicare, and unemployment taxes, as well as failure to withhold income, social security, and Medicare taxes. The issue required an investigation of the facts and the drafting of a response to the IRS inquiry. The answer from the Service was unexpected. The Service, as allowed by law, declined to become involved in the dispute. The third issue was closed. Since this engagement, Miller Grossbard has assisted in a reorganization, substantially reducing the state and federal tax burden. We have developed operating budgets and advised on the upgrading of accounting software and the local area network.
The consulting arm of Miller Grossbard met with the owner to discuss the company's situation. The packager had a bright future if it could strengthen its organization and fend off the predatory behavior of its chemical supplier. Finding another supplier was not a solution since they, too, were more interested in acquisitions than supplying small packagers. After interviewing key employees to learn how corporate responsibilities were delegated, plant facilities were toured, and financial statements were studied. The company's balance sheet was strong, but manual production processes were used. The computer network and accounting system were primitive. Checking back orders meant retrieving sales orders from a file cabinet. A part-time employee made collection calls, yet accounts over 60 days were 17 percent of total receivables. The company had added large customer accounts, but was concerned whether more accounts could be absorbed. Following an initial investigation, Miller Grossbard addressed these multiple issues in a report. Of immediate interest were managing the accounts receivable and improving management information. More distant issues included automating the packaging process, obtaining industry certification, and enhancing sales and marketing. Miller Grossbard acted on the accounts receivable issue by writing a procedure describing the collection process and the making of calls. Elevating the stature of the collection process justified making the receivables clerk a full time employee. Information technology offers a wide range of solutions for a variety of budgets. Miller Grossbard suggested a system to coordinate estimating, purchasing, inventory control, and back-order management. As in-house familiarity with computer networks increased, adding Internet connections would enhance market research and allow electronic ordering by customers. The company's dilemma was how to accommodate more large orders without an enormous capital commitment. Miller Grossbard suggested first identifying suitable equipment to increase plant capacity followed by a capabilities assurance evaluation. Since this investigation would not offer an immediate solution, the interim answer was manual labor that could adjust with the fluctuating demand from the small sales base.
The review began with the interview of board members, managers, and other key employees. This information provided insight into the health care company's procedures and allowed Miller Grossbard to flow chart the process from the initiation of a purchase order through to the signing of the payment. Afterwards, a compliance check was performed to verify that actual practice conformed to management's approved procedures. This exercise highlighted certain issues related to internal controls, the segregation of duties, and training. The health care company acknowledged that although its accounting staff was highly organized, it was small. This had resulted in a compromise of the proper segregation of duties as well as certain internal controls. In addition, the board members who signed checks were unaware of the proper safeguards for handling support documentation. Miller Grossbard & Associates recommended procedural enhancements to the system, document changes to strengthen internal controls, and the formalization of board member training. The client accepted all of the recommendations and implemented the changes.
The first challenge was to understand the foreign situation so that an offshore structure could be devised that would minimize domestic taxation, be compatible with the existing foreign ownership, and not incur unnecessary foreign taxes. After receiving information about the foreign organization and its plan for expansion into the United States, Miller Grossbard identified several tax traps and proposed alternatives that would avoid or defer potential U.S. income taxes. As work progressed on the design of the foreign ownership, a structure began to develop for the domestic network of service companies. After considering the needs of the operating organization, a combination of partnerships and corporations was proposed in conjunction with a domestic holding company. The objective of this structure was to allow the decentralizing of management and to permit essential individuals to participate in ownership. The proposed organization also considered the capital requirements and the tax burden that would result. The recommendations for the U.S. organization and the foreign ownership structure were both adopted. The last part of the assignment was more intricate. Miller Grossbard investigated proposals and counteroffers before developing a strategy that would be acceptable to both buyer and seller. Because of our knowledge of federal and state tax systems and our understanding of the time value of money, Miller Grossbard was able to construct an offer that would accommodate both buyer and seller. We looked for trade-offs between cash to the seller today and deferred compensation at a lower tax rate in the future. The analysis included considerations of definite versus contingent payments, income versus capital gain, state income taxes, FICA and Medicare taxes, as well as the time value of money. Given the multitude of variables, the challenge was merely to find the combination that yielded a result suitable to both parties.
Without the S election, the new entity would be taxed as a C Corporation. The IRS denied the S election because of its untimely filing and assessed more then $200,000 in taxes. The client's CPA was unsuccessful in changing the IRS' position regarding the tax liability. The client decided that it was time to find a tax professional who could convince the IRS to alter its position. The client interviewed several firms and checked references. Miller Grossbard was selected. Intensive interviews were conducted by Miller Grossbard to learn the facts of the situation. Conferences were held with the client, the tax attorney who had initiated the restructure, and the client's CPA. After learning the details of the restructuring and the intent of the parties, Miller Grossbard prepared a Private Letter Ruling, which was submitted to the IRS. Following months of discussions with the Washington office to resolve the issues, the IRS granted relief and dismissed the tax assessment.
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