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Step carefully with loans between a business and its owner.

Loans Business Owner

Written by Matt Eckelberg

October 18, 2019.

It’s common for owners of closely held businesses to transfer money into and out of the company. But it’s critical to make such transfers properly. If you don’t, you might hear from the IRS.

Why Loans Are Better

When an owner withdraws funds from the company, the transfer can be characterized as compensation, a distribution or a loan. Loans aren’t taxable, but compensation is and distributions may be taxable.

If the company is a C corporation, distributions can trigger double taxation — in other words, corporate earnings are taxed once at the corporate level and then again when they’re distributed to shareholders (as dividends). Compensation is deductible by the corporation, so it doesn’t result in double taxation. (But it will be subject to payroll taxes.)

If the business is an S corporation or other pass-through entity, there’s no entity-level tax, so double taxation won’t be an issue. Still, loans are advantageous because compensation would be taxable to the owner (and incurs payroll taxes), and distributions, even though maybe not taxable themselves, would reduce an owner’s tax basis, which makes it much harder to deduct business losses.

There are also some advantages to treating advances from owners as loans. If they’re treated as contributions to equity, for example, any reimbursements by the company may be treated as distributions and possibly be taxable in a C corporation situation.

Loan payments, on the other hand, aren’t taxable, apart from the interest, which is deductible by the company. A loan may also give the owner an advantage in the event of the company’s bankruptcy, because debt obligations are paid before equity is returned.

How to Define It

Establishing that an advance or a withdrawal is truly a loan is important. If you don’t make that distinction, and the IRS determines that a payment from the business is really a distribution or compensation, you (and, possibly, the company) could end up owing back taxes, penalties and interest.

Whether a transaction is a loan is a matter of intent. It’s a loan if the borrower has an unconditional intent to repay the amount received and the lender has an unconditional intent to obtain repayment.

Unfortunately, even if you intend for a transaction to be a loan, the IRS and the courts aren’t mind readers. So, it’s critical that you document any loans and treat them like other arm’s-length transactions. Among other things, you should execute a promissory note and charge a commercially reasonable rate of interest — generally, no less than the applicable federal rate.

Set and follow a fixed repayment schedule and secure the loan using appropriate collateral. (This will also give the lender bankruptcy priority over unsecured creditors.) And you must treat the transaction as a loan in the company’s books. Last, you must ensure that the lender makes reasonable efforts to collect in case of default. Also, for borrowers who are owner-employees, you need to ensure that they receive reasonable salaries, to avoid a claim by the IRS that loans are disguised compensation.

Looking Good

The IRS keeps a wary eye on business owners who borrow from themselves. Our firm can guide you through the process to withstand the scrutiny of the agency’s gaze.

Matt Eckelberg

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TRANSFER PRICING OF INTERCOMPANY LOANS AND CASH POOLING

October 9, 2018.

TRANSFER PRICING OF INTERCOMPANY LOANS AND CASH POOLING

Two hot areas of transfer pricing for consideration are intercompany loans and cash pooling. These two intercompany financing transactions are used by most multinational entities (MNEs) and are being targeted by the IRS and global tax authorities. Yet, most intercompany loans remain undocumented and have commercial terms that would not meet the required transfer pricing standards.

On July 3, 2018, the Organization of Economic Cooperation and Development (OECD) released a discussion draft on the transfer pricing aspects of financial transactions. The discussion is part of Action 8 - 10 of the base erosion and profit shifting (BEPS) initiatives.

With the increased transparency provided by the BEPS initiatives, intercompany financing is attracting more attention than ever before. The release of this OECD discussion draft is another attempt at assuring MNEs are complying with global transfer pricing guidelines. The IRS and other global tax authorities are becoming more sophisticated and thorough in their audits, and will be paying more attention to intercompany financing transactions.

One of the major issues addressed is how to analyze financial transactions. In particular, the identification of debt versus equity in related party financial transactions. Some items to consider include the following:

  • Presence or absence of a fixed repayment date;
  • Obligation to pay interest;
  • Right to enforce payment of principal and interest;
  • Existence of intercompany agreement;
  • The ability of the borrower to obtain loans form an unrelated lending institution; and

loan transfer between companies

Intercompany loans must be structured with consideration of the items listed in the table above in order to be respected as an arm's length transaction for transfer pricing purposes. Otherwise, the IRS or foreign taxing authorities may characterize all or some of the transaction as equity. The terms and conditions of the loan between the related parties are critical in analyzing the intercompany transaction. 

Cash pooling arrangements are also included and should have the formalities of an intercompany agreement, provide clear benefits to participants and reward the cash pool leader for its assets employed and risks assumed. Keeping in mind that short-term versus long term balances in a cash pooling arrangement should be respected, as well as special attention to excessive outstanding balances.

Intercompany loans and cash pooling arrangements are present in many, if not all, MNEs. Governments all over the world are watching these unpopular intercompany transactions and more global audits are predicted. Also, financial statement auditors and tax compliance service providers are now asking for support, transfer pricing documentation on tax provisions or tax returns from a transfer pricing specialist.

Please be sure your intercompany financing meets not just the US requirements but global expectations as well. For more information contact us in one of our many locations .

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  • GAINS & LOSSES

Taxing the Transfer of Debts Between Debtors and Creditors

  • C Corporation Income Taxation
  • NOL & Other Tax Attributes
  • Individual Income Taxation

T he frequent transfer of cash between closely held businesses and their owners is very common. If the owner works in the business, the transfer is likely to be either a salary to a shareholder/employee or a Sec. 707(c) guaranteed payment to a partner. Alternatively, the transfer may be a loan. As long as the true substance of the transaction is a loan, it will be respected for tax purposes. 1

The cash flow is not exclusively from the businesses to the owner. Many owners prefer to capitalize their closely held business with a combination of equity and debt. Once again, these loans will be respected and not reclassified as equity if they are bona fide loans.

In the normal course of business, these loans are repaid. The receipt of the repayment will be tax free except to the extent it is interest. However, in difficult economic conditions, many of these loans are not repaid. To the extent that the creditor cancels the obligation, the debtor has cancellation of debt (COD) income under Sec. 61(a)(12). This income is taxable unless the taxpayer qualifies for an exclusion under Sec. 108. In other cases, the debt is transferred between the parties either as an independent transaction or part of a larger one. This article reviews these transactions.

Two basic types of transfers have created significant tax issues. In the first, the debtor transfers the debt to the creditor. If the debtor is the owner of a business and the business is a creditor, the transfer appears to be a contribution. If the business is the debtor and the owner is the creditor, the transfer can be a distribution, liquidation, or reorganization. The other type of transfer is from the creditor to the debtor. Again, the transaction can take the form of a contribution if the creditor is the owner, or it can take the form of a distribution, liquidation, or reorganization if the creditor is the business.

Debtor-to-Creditor Transfers

Corporations.

The two seminal cases that established the framework for analyzing the transfer of a debt obligation from a debtor to a creditor are Kniffen 2 and Edwards Motor Transit Co. 3 Arthur Kniffen ran a sole proprietorship and owned a corporation. The sole proprietorship borrowed money from the corporation. For valid business reasons, Kniffen transferred the assets and liabili ties of the proprietorship to the corporation in exchange for stock of the corporation, thereby transferring a debt from the debtor to the creditor. The transaction met the requirements of Sec. 351.

The government argued that the transfer of the debt to the creditor was in fact a discharge or cancellation of the debt (a single step), which should have been treated as the receipt of boot under Sec. 351(b) and taxed currently. The taxpayer argued that the transfer was an assumption of the debt and, based on Sec. 357(a), should not be treated as boot.

The Tax Court acknowledged that the debt was canceled by operation of law. However, it did not accept the government’s argument as to the structure of the transaction. Instead, it determined that two separate steps occurred. First, the corporation assumed the debt. This assumption was covered by Sec. 357(a). After the assumption, the interests of the debtor and creditor merged and the debt was extinguished. Since the transfer was not for tax avoidance purposes, Sec. 357(b) did not apply. The result was a tax-free Sec. 351 transaction, except to the extent that the assumed debt exceeded the bases of the assets transferred, resulting in gain under Sec. 357(c). This decision established the separation of the debt transfer from its extinguishment.

Edwards Motor Transit Co. cites, and is considered to have adopted, the approach in Kniffen . For valid business reasons, the owners of Edwards created The Susquehanna Co., a holding company, and transferred Edwards’ stock to it under Sec. 351. Susquehanna borrowed money from Edwards to meet certain financial obligations. To eliminate problems that arose from having a holding company owning the stock of an operating company, the owners merged Susquehanna into Edwards under Sec. 368(a)(1)(A). The government acknowledged that the basic transaction was a nontaxable merger. However, the government wanted the company to recognize income as a result of the cancellation or forgiveness of the debt. The Tax Court ruled for the taxpayer, on the grounds that the debt transfer (from debtor to creditor) was not a cancellation of the debt. The ruling cited Kniffen as authority for this conclusion.

On its surface, Edwards Motor Transit affirmed the decision and reasoning in Kniffen . The Tax Court stated, “The transfer by the parent corporation of its assets to Edwards [its subsidiary] . . . constituted payment of the outstanding liabilities . . . just as surely as if Susquehanna had made payment in cash.” This statement relied on both Kniffen and Estate of Gilmore. 4 In Gilmore , a liquidating corporation transferred a receivable to its shareholder who happened to be the debtor. In that case, the court ruled the transaction was an asset transfer and not a forgiveness of debt. The court based its conclusion in large part on the fact that no actual cancellation of the debt occurred.

The statement in Edwards Motor Transit quoted above, however, is inapposite to the conclusion in Kniffen . A payment is not a transfer and assumption of a liability. Since Susquehanna was deemed to have used assets to repay the debt, the Tax Court should have required Susquehanna to recognize gain to the extent that the value of the assets used to repay the debt exceeded their bases. The conclusions in Kniffen and Edwards are consistent only in their holdings that these debt transfers were not cancellations of debts that would result in COD income. In Kniffen, the court ruled that the debt was assumed and then extinguished. In Edwards, the court ruled that the extinguishment of the debt constituted repayment.

It is possible that the Tax Court reached the correct outcome in Edwards Motor Transit but for the wrong reason. In Rev. Rul 72-464, 5 a debtor corporation merged into the creditor corporation in a tax-free A reorganization under Sec. 368(a)(1)(A). The ruling concluded that the debtor corporation did not recognize any gain or loss on the extinguishment of the debt within the acquiring corporation. General Counsel Memorandum (GCM) 34902 6 provided the detailed analysis behind the conclusion.

The GCM cited both Kniffen and Edwards 7 and adopted their underlying rationale. Specifically, it concluded that the basic transaction (the reorganization) results in a transfer of the debt to the acquiring corporation. It is after the transfer that the debt is extinguished by the statutory merger of interests. The transfer is an assumption of debt, which is nontaxable under Sec. 357(a). Therefore, the transferor (debtor corporation) recognizes no gain or loss.

This is exactly what happened in Ed wards . The debt was assumed, not repaid. Therefore, the Tax Court should have reached the conclusion that the transaction was nontaxable under Sec. 357(a) and not have relied on the questionable authority of Estate of Gilmore 8 or concluded that the debt was repaid.

Liquidations

The transactions discussed up to this point have been either tax-free corporate formations (Sec. 351) or tax-free reorganizations (Sec. 361). In a different transaction that is likely to occur, the creditor/shareholder liquidates the debtor corporation.

If the transaction is not between a parent and its subsidiary, taxability is determined by Secs. 331 and 336. Prior to 1986, the outcome might have been determined by Kniffen and Edwards . With the repeal that year of the General Utilities 9 doctrine (tax-free corporate property distributions) and the enactment of current Sec. 336, the outcome is straightforward. Under Sec. 336, the debtor corporation that is liquidated recognizes its gains and losses. Whether the liquidated corporation is treated as using assets to satisfy a debt requiring the recognition of gain or is treated as distributing assets in a taxable transaction under Sec. 336, all the gains and losses are recognized.

The taxation of the shareholder is a little more complex. First, the shareholder must determine how much it received in exchange for the stock. The most reasonable answer is that the shareholder received the value of the assets minus any debt assumed and minus the face amount of the debt owed to it by the liquidated corporation. This amount is used to determine the gain or loss that results from the hypothetical sale of stock under Sec. 331. Second, the shareholder must determine what was received for the debt, whether assets or the debt itself. The amount received in payment of the liquidated corporation’s debt is a nontaxable return of capital. If the shareholder is deemed to have received the debt itself, then the debt is merged out of existence. The basis of all the assets received should be their fair market value (FMV) under either Sec. 334(a) or general basis rules.

If the liquidated corporation is a subsidiary of the creditor/shareholder, the results change. Under Sec. 337, a subsidiary recognizes neither gain nor loss on the transfer of its assets in liquidation to an 80% distributee (parent). Sec. 337(b) expands this rule to include distributions in payment of debts owed to the parent corporation. Therefore, the subsidiary/debtor does not recognize any gain or loss.

The parent corporation (creditor) recognizes no gain or loss on the liquidation of its subsidiary under Sec. 332. The basis of the transferred property in the hands of the parent is carryover basis. 10 This carry­over basis rule also applies to property received as payment of debt if the subsidiary does not recognize gain or loss on the repayment. 11 In other words, the gain or loss is postponed until the assets are disposed of by the parent corporation.

One important exception to the nonrecognition rule is applied to the parent corporation. Under Regs. Sec. 1.332-7, if the parent’s basis in the debt is different from the face amount of the debt, the parent recognizes the realized gain or loss (face amount minus basis) that results from the repayment. Since this regulation does not mention any exception to the rules of Sec. 334(b)(1), the parent corporation is required to use carryover basis for all the assets received without adjustment for any gain or loss recognized on the debt.

This discussion of liquidations assumes that the liquidated corporation is solvent. If it is insolvent, the answer changes. The transaction cannot qualify under Secs. 332 and 337. The shareholder is not treated as receiving any property in exchange for stock; therefore, a loss is allowed under Sec. 165(g). The taxation of the debt depends on the amount, if any, received by the shareholder as a result of the debt.

Partnerships

The taxation of debt transfers involving partnerships is determined, in large part, by Secs. 731, 752, and 707(a)(2)(B). Specifically, the taxation of transfers by debtor partners to the creditor/partnership is determined by the disguised sale rules of Sec. 707(a)(2)(B), whereas transfers by debtor partnerships to a creditor/partner fall under Secs. 731 and 752.

Sec. 707(a)(2)(B) provides that a transfer of property by a partner to a partnership and a related transfer of cash or property to the partner is treated as a sale of property. The regulations specify the extent to which the partnership’s assumption of liabilities from the partner is treated as the distribution of the sale price.

Regs. Sec. 1.707-5 divides assumed liabilities into either qualified liabilities or unqualified liabilities. A qualified liability 12 is one that:

  • Was incurred more than two years before the assumption;
  • Was incurred within two years of the assumption, but was not incurred in anticipation of the assumption;
  • Was allocated to a capital expenditure related to the property transferred to the partnership under Temp. Regs. Sec. 1.163-8T; or
  • Was incurred in the ordinary course of business in which it was used, but only if all the material assets of that trade or business are transferred to the partnership.

The amount of qualified recourse liabilities is limited to the FMV of the transferred property reduced by senior liabilities. Any additional recourse liabilities are treated as nonqualified debt.

If a transfer of property is not otherwise treated as part of a sale, the partnership’s assumption of a qualified liability in connection with a transfer of property is not treated as part of a sale. The assumption of nonqualified liabilities is treated as sale proceeds to the extent that the assumed liability exceeds the transferring partner’s share of that liability (as determined under Sec. 752) immediately after the partnership assumes the liability. If no money or other consideration is transferred to the partner by the partnership in the transaction, the assumption of qualified liabilities in a transaction treated as a sale is also treated as sales proceeds to the extent of the transferring partner’s share of that liability immediately after the partnership assumes the liability. 13 Following the assumption of the liability, the interests of the debtor and creditor merge, thereby extinguishing the debt. The result is that generally the full amount of these assumed liabilities are part of the sale proceeds. 14

The assumed liabilities that are not treated as sale proceeds still fall under Sec. 752. Since the transaction results in a reduction of the transferor’s personal liabilities, the taxpayer is deemed to have received a cash distribution equal to the amount of the debt assumed under Sec. 752(b). Given that the debt is immediately extinguished, no amount is allocated to any partner. The end result is that the transferor must recognize gain if the liability transferred exceeds the transferor’s outside basis before the transaction, increased by the basis of any asset transferred to the partnership as part of the transaction.

A partnership may have borrowed money from a partner and then engaged in a transaction that transfers the debt to the creditor/partner. The first question is whether the initial transaction is a loan or capital contribution. Sec. 707(a) permits loans by partners to partnerships. The evaluation of the transaction is similar to one to determine whether a shareholder has loaned money to a corporation or made a capital contribution. The factors laid out in Sec. 385 and Notice 94-47 15 should be considered in this analysis.

Assuming the debt is real and it alone is transferred to the creditor/partner, the outcome is straightforward. The partner is treated as having made a cash contribution to the partnership under Sec. 752(a) to the extent that the amount of debt exceeds the amount allocated to the partner under the Sec. 752 regulations. If part of the debt is allocated to other partners, these other partners are treated as receiving a deemed cash distribution.

If the transfer is part of a larger transaction, then the analysis is a little more complex. The transfer of the other assets is governed by Secs. 737, 731, and 751. Sec. 737 requires a partner to recognize gain if, during the prior seven years, the partner had contributed property with built-in gain to the partnership and the current FMV of the distributed property exceeds the partner’s outside basis. The partner is treated as recognizing gain in an amount equal to the lesser of (1) the excess (if any) of the FMV of property (other than money) received in the distribution over the adjusted basis of such partner’s interest in the partnership immediately before the distribution reduced (but not below zero) by the amount of money received in the distribution, or (2) the net precontribution gain of the partner. The outside basis is increased by the amount of the deemed contribution because the partner assumed a partnership liability. After any gain under Sec. 737 is determined, the general distribution rules of Secs. 731 and 751(b) apply to the transaction. In effect, the transfer to a creditor/partner of a partnership debt owed to the partner is treated the same as any liability assumed by the partner. The extinguishment of the debt should not result in additional tax consequences.

Creditor-to-Debtor Transfers

In addition to debtor-to-creditor transfers, there are creditor-to-debtor transfers. The outcome of these transactions is determined by the two-step analysis in Kniffen . The creditor is treated as having transferred an asset to the debtor/owner. After the transfer, the interests of the debtor and creditor merge, resulting in the extinguishment of the debt. This extinguishment is generally nontaxable since the basis of the debt and the face amount are equal. 16 The result changes if the basis in the hands of the creditor and the adjusted issue price of the debtor are not equal. 17

One of the initial pieces of guidance that addressed this question was Rev. Rul. 72-464. 18 In this ruling, the debt was transferred in a nontaxable transaction. Consequently, the recipient (the debtor) had a carryover basis in the debt. Since this basis was less than the face amount, gain equal to the difference was recognized. This ruling did not explain the reasoning behind the gain recognition or the potential impact if the value of the debt was different from its basis. 19 These items were addressed in Rev. Rul. 93-7. 20

Rev. Rul. 93-7 analyzed a transaction between a partnership and a partner, here designated P and A , respectively. A was a 50% partner. This percentage allowed A to not be a related party to P under Sec. 707(b). P also had no Sec. 751 assets, and A had no share of P ’s liabilities under Sec. 752. These were excluded because they did not affect the reasoning behind the taxation of debt transfers. A issued a debt with a face amount of $100 for $100. P acquired the debt for $100. When the debt was worth $90, it was distributed to A in complete redemption of its interest, which had an FMV of $90 and outside basis of $25. In other words, a creditor/partnership distributed debt to the debtor/partner.

The debt was an asset, a receivable, in the hands of P . When it was distributed to A , P determined its taxation under Sec. 731(b), which provides that no gain or loss is recognized by a partnership on the distribution of property. The application of Sec. 731(b) in this transaction followed directly from Kniffen , which treated the transfer of a debt as a separate transaction from any extinguishment that follows the transfer. Under Sec. 732, A ’s basis in the transferred debt was $25. 21

The basis rules of Sec. 732 assume that a built-in gain or loss on distributed property is realized and recognized when the recipient disposes of the property. In this situation, the distributed debt was extinguished, and therefore no future event would generate taxable gain or loss. Consequently, this extinguishment became a taxable event. In this specific case, A recognized gain of $65 ($90 FMV – $25 basis) and COD income of $10 ($100 face − $90 FMV.) The ruling did not spell out the reasoning for the recognition of both gain and COD income. It is the correct outcome based on Regs. Sec. 1.1001-2. Under that regulation, when property is used to satisfy a recourse obligation, the debtor has gain equal to the difference between the value of the property and its basis, and COD income equal to the difference between the amount of debt and the value of the property used as settlement. The distributed debt is property at the time of the distribution, and the rules of Regs. Sec. 1.1001-2 should apply.

In Rev. Rul. 93-7, the value of the debt was less than the face amount. A debt’s value could exceed its face amount. In that case, the revenue ruling indicated, a deduction for the excess value may be available to the partner as a result of the deemed merger. In Letter Ruling 201105016, 22 the IRS ruled that a taxpayer was entitled to a deduction when it reacquired its debt at a premium as part of a restructuring plan. Rev. Rul. 93-7 cited Regs. Sec. 1.163-4(c)(1), and Letter Ruling 201105016 cited Regs. Sec. 1.163-7(c). Both regulations state that the reacquisition of debt at a premium results in deductible interest expense equal to the repurchase amount minus the adjusted issue price. Regs. Sec. 1.163-4(c)(1) applies to corporate taxpayers, while Regs. Sec. 1.163-7(c) expanded this treatment to all taxpayers. Based on these regulations and the treatment of the distribution as an acquisition of a debt, an interest expense deduction should be permitted when the value exceeds the amount of debt, whereas COD income is recognized when the value is less than the amount of the debt.

In Rev. Rul. 93-7, the partnership was the creditor, and the debt was transferred to a debtor/partner. The reverse transaction can occur, in which a creditor/partner transfers debt to the debtor/partnership in exchange for a capital or profits interest. Sec. 721 applies to the creditor/partner. Therefore, no gain or loss is recognized. However, Sec. 108(e)(8)(B) applies to the debtor/partnership. Sec. 108(e)(8)(B) provides that the partnership recognizes COD income equal to the excess of the debt canceled over the value of the interest received by the creditor. This income is allocated to the partners that owned interests immediately before the transfer. The partnership does not recognize gain or loss (other than the COD income) as a result of this transaction. 23 The value of the interest generally is determined by the liquidation value of the interest received. 24 If the creditor receives a profits interest, the liquidation value is zero, and therefore the partnership recognizes COD income equal to the amount of debt transferred.

Corporate Transactions

Debt transfers between corporations and shareholders are just as likely as transfers between partners and partnerships. If the transferor is a shareholder or becomes a shareholder as a result of the transaction, Secs. 1032, 118, and 351 provide basic nontaxability. However, Sec. 108 overrules these sections in certain cases.

If the shareholder transfers the debt to the corporation as a contribution to capital, Sec. 108(e)(6) may result in the recognition of COD income by the corporation. Under Sec. 108(e)(6), the corporation is treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness. Therefore, the corporation has COD income amount equal to the excess of the face amount of the debt over the transferor’s basis in the debt immediately prior to the transfer. In most cases, the face and basis are equal, and no COD income is recognized. If the transfer is in exchange for stock, Sec. 108(e)(8)(A) provides that the corporation is treated as having satisfied the indebtedness with an amount of money equal to the FMV of the stock. Therefore, the corporation recognizes COD income equal to the excess of the face value of the debt over the value of the stock received. In many cases, the value of the stock is less than the debt canceled, and therefore COD income is recognized. Sec. 351 provides that 80% creditor/shareholders recognize neither gain nor loss if the debt is evidenced by a security. If Sec. 351 does not apply, the creditor/shareholder may be able to claim a loss or bad-debt deduction.

Rev. Rul. 2004-79 25 provides a detailed analysis of the transfer of debt from a creditor corporation to a debtor shareholder. The analysis is similar to the one for partnership distributions covered by Rev. Rul. 93-7, discussed previously.

Modifying the facts of Rev. Rul. 2004-79, assume that a shareholder borrows money from his corporation. The face amount of the debt is $1,000, and the issue price is $920. The original issue discount (OID) of $80 is amortized by both the corporation and the shareholder. At a time when the adjusted issue price and basis are $950 but the FMV is only $925, the corporation distributes the debt to the shareholder as a dividend.

From the corporation’s point of view, this is a property dividend. Rev. Rul. 2004- 79 cites Rev. Rul. 93-7, but it could just as easily have cited Kniffen . As a property dividend, the transaction’s taxa tion to the corporation is governed by Sec. 311. Since the value in the revenue ruling was less than the basis, the corporation recognized no gain or loss. If the value had appreciated, the corporation would have recognized gain equal to the appreciation.

The shareholder receives a taxable dividend equal to the value of the debt; consequently, the debt has a basis equal to its FMV of $925. Since the debt is automatically extinguished, the shareholder is treated as having satisfied an obligation in the amount of $950 with a payment of $925. Therefore, the shareholder must recognize $25 of COD income.

A second fact pattern in the revenue ruling is the same, except the value of the distributed debt is $1,005. Under these facts, the shareholder would be entitled to an interest expense deduction under Regs. Sec. 1.163-4 or 1.163-7 in the amount of $55 ($1,005 − $950). In other words, the shareholder is deemed to have reacquired its own debt for a payment equal to the basis that the distributed debt obtains in the transaction.

The conclusions of Rev. Rul. 2004-79 are consistent with those in Rev. Rul. 93-7. They follow the reasoning of Kniffen .

Another transaction that could occur involving shareholder debt is a liquidation of the corporation, resulting in a distribution of the debt to the debtor/shareholder. The results should be similar to those in Rev. Rul. 2004-79. The corporation that distributes the debt is taxed under Sec. 336. Therefore, the corporation recognizes gain or loss depending on the basis of the debt and its FMV. This is the same result as in the dividend case, except that the loss is recognized under Sec. 336 instead of being denied under Sec. 311. The shareholder’s basis in the debt is its FMV under Sec. 334(a). The shareholder recognizes COD income or interest expense, depending on whether the basis is less than or greater than the adjusted issue price of the debt. These results flow from the regulations under Secs. 61 and 163 and are consistent with the conclusions in the above revenue rulings.

The results change slightly if the liquidation qualifies under Secs. 332 and 337. The IRS discussed these results in Chief Counsel Advice 200040009. 26 Sec. 332 shields the parent from recognition of income on the receipt of the debt. Sec. 337 shields the liquidating corporation from recognizing gain or loss on the transfer of the debt to its parent corporation. The basis is carryover basis under Sec. 334(b). Then, because the debt is extinguished, the parent recognizes either COD income or interest expense on the extinguishment of the debt. As in the prior revenue rulings and Kniffen , the extinguishment has to be a taxable event because the elimination of the carryover basis prevents the parent corporation from having a taxable transaction in the future involving this debt. These results are consistent with prior decisions.

The results discussed for a parent/subsidiary liquidation should also apply if the debtor/corporation acquires a corporation that owns its debt in a nontaxable asset reorganization. In this case, Sec. 361 replaces Secs. 332 and 337. The extinguishment of the debt is a separate transaction that should result in recognition of income or expense.

Acquired Debt

So far, this article has discussed transactions between the debtor and creditor. Now it turns to how the holder of the debt acquired it. In many cases, the holder acquired the debt directly from the debtor, and the acquisition is nontaxable. In other situations, the debt is outstanding and in the hands of an unrelated party. The holder acquires the debt from this unrelated party. In these cases, Sec. 108(e)(4) may create COD income.

Under Sec. 61, if a debtor reacquires its debt for less than its adjusted issue price, the debtor has COD income. Sec. 108(e)(4) expands on this rule: If a party related to the debtor acquires the debt, the debtor is treated as acquiring the debt, with the resulting COD income recognized. Related parties are defined in Secs. 267(b) and 707(b)(1).

The regulations provide that the acquisition can be either direct or indirect. A direct acquisition is one by a person related to the debtor at the time the debt is acquired. 27 An indirect acquisition occurs when the debtor acquires the holder of the debt instrument, where the holder of the debt acquired it in anticipation of becoming related to the debtor. 28 The determination of whether the holder acquired the debt in anticipation of becoming related is based on all the facts and circumstances. 29 However, if the holder acquires the debt within six months before the holder becomes related to the debtor, the acquisition by the holder is deemed to be in anticipation of becoming related to the debtor. 30

In the case of a direct acquisition, the amount of COD income is equal to the adjusted issue price minus the basis of the debt in the hands of the related party. In the case of indirect acquisitions, the calculation depends on whether the debt is acquired within six months of being acquired. 31 If the holder acquired the debt within six months of being acquired, the COD income is calculated as if it were a direct acquisition. If the holder acquired the debt more than six months before being acquired, the COD income is equal to the adjusted issue price minus the FMV of the debt instrument on the date that the holder is acquired.

When a debtor reacquires its own debt, in addition to reporting COD income, the debtor has the debt extinguished as a result of the merger of interests. When a related party acquires the debt, the debtor has COD income, but the debt remains outstanding. In these cases, the debtor is treated as issuing a new debt instrument immediately following the recognition of the COD income for an amount equal to the amount used to calculate the COD income (adjusted basis or FMV 32 ). If this issue price is less than the stated redemption price at maturity of the debt (as defined in Sec. 1273(a)(2), the difference is OID that is subject to the amortization rules of Sec. 1272.

Rev. Rul. 2004-79 provides a simple example of this transaction. In the ruling, a parent corporation, P , issued $10 million of debt for $10 million. After issuance, S , a subsidiary of P , purchased the debt for $9.5 million. Under Regs. Sec. 1.108-2(f), P had to recognize $500,000 of COD income ($10 million face − $9.5 million basis to S ). After this recognition, P was treated as having issued the debt to S for $9.5 million. Therefore, $500,000 of OID was amortizable by P and S . If S later transfers the debt to P , the previously discussed rules determine the taxation of the transfer using S ’s basis ($9.5 million + amortized OID).

Secs. 61 and 108(e)(4) apply only if the debt is acquired for less than the adjusted issue price. If the acquisition price is greater than the adjusted issue price, the acquiring party treats this excess as premium and amortizes it, thereby reducing the amount of interest income recognized by the holder.

Installment Obligations

An installment obligation differs from other obligations in that the holder recognizes income when cash is collected in payment of the obligation. The rules describing the taxation of installment obligations were rewritten as part of the Installment Sales Revision Act of 1980, P.L. 96-471. Under old Sec. 453(d) (new Sec. 453B(a)), if the holder of an installment obligation distributes, transmits, or disposes of the obligation, the taxpayer is required to recognize gain or loss equal to the difference between the basis in the obligation and the FMV of the obligation. There is an exception to this rule for distributions in liquidation of a subsidiary that are exempt from taxation under Sec. 337.

Prior to the Code revision, the regulations permitted the transfer of installment obligations without gain recognition if the transaction was covered by either Sec. 721 or 351. 33 Although the regulations have not been revised for the Code change, the IRS continues to treat Secs. 721 and 351 as overriding the gain recognition provision. 34

If the transaction results in transfer of the obligation either from the creditor to the debtor or from the debtor to the creditor, the tax result changes. The seminal case is Jack Ammann Photogrammetric Engineers, Inc. 35 In it, the taxpayer created a corporation to which he contributed $100,000 in return for 78% of the corporation’s stock. He then sold his photogrammetry business to the corporation for $817,031. He received $100,000 cash and a note for $717,031. He reported the sale under the installment method. When he was still owed $540,223 on the note, he transferred it to the corporation for stock of the corporation worth $540,223. He reported this as a disposition under Sec. 453(d) and recognized the deferred gain. Later, he filed a claim for refund, arguing that Sec. 351 prevented recognition of the deferred gain. After allowing the refund, the IRS assessed a deficiency against the corporation, arguing that the corporation came under Sec. 453(d). The corporation argued that, under Sec. 1032, it was not taxable. The Tax Court ruled for the IRS.

The Fifth Circuit reversed the decision. The underlying reasoning was that the disposition by the shareholder and the extinguishment of the debt in the hands of the corporation were separate transactions. The extinguishment did not fall under Sec. 453(d). The court indicated that the IRS should have assessed the tax against the shareholder.

Following this case, the IRS issued Rev. Rul. 73-423. 36 In this ruling, a shareholder transferred an installment obligation from Corporation X back to the corporation in a transaction described in Sec. 351. The ruling concluded that the transfer was a satisfaction of the installment agreement at other than face value under Sec. 453(d)(1)(A) and that the shareholder was required to recognize gain without regard to Sec. 351. The corporation had no gain or loss under Sec. 1032 and Ammann .

Sec. 453(d) is now Sec. 453B(a), and the rule has not changed. Therefore, if a creditor transfers an installment obligation to the debtor in an otherwise tax-free transaction, the obligation is treated as satisfied at other than its face value, and the creditor is required to recognize gain or loss as discussed in Rev. Rul. 73-423. 37

New Sec. 453B(f) covers transactions in which installment obligations become unenforceable. This section covers the extinguishment of an installment debt through a merger of the rights of a debtor and creditor. The Code treats these transactions as dispositions of the obligation with gain or loss recognized. When the debtor and creditor are related, the disposition is at FMV but no less than the face amount.

If the debtor of an installment obligation engages in a transaction in which the creditor assumes the debt, the results are consistent with those of transactions involving obligations other than installment notes. The debtor is deemed to have received cash equal to the amount of the debt. This is fully taxable unless exempted by Sec. 357, 721, or a similar provision. The creditor falls under Sec. 453B(f), with the extinguishment treated as a taxable disposition of the obligation for its FMV (which for related parties is no less than the face amount).

Business entities often incur debts to their owners, and, conversely, the owners incur liabilities to their business entities. In numerous transactions these obligations are canceled for consideration other than simple repayment of the debt. Based on Kniffen , these transactions are treated as a transfer of consideration followed by an extinguishment of the debt. If a shareholder’s debt to his or her controlled corporation is transferred to that corporation along with assets, the transaction may be tax free under Secs. 351 and 357(a). If a shareholder/creditor receives the related corporate debt in a distribution or liquidation, Sec. 311 or 336 determines the corporation’s taxation.

The cancellation of a partner’s debt to the partnership is generally governed by the distribution rules, including the constructive sale or compensation rules of Sec. 707(a)(2). When a partner cancels the partnership’s debt, the partner has made a contribution to capital. This can have consequences to all partners since the total liabilities are decreased and the partners’ bases are decreased under Sec. 752.

In most cases the merger of debtor and creditor interests is nontaxable. However, if the basis of the debt or receivable does not equal the face amount of the debt, income or loss is recognized. The exact amount and character of the income or loss depends on factors discussed in this article. It is important for the tax adviser to identify those cases in which the debt transfer is not tax free.

1 Invalid loans to shareholders have been reclassified as dividends.

2 Kniffen , 39 T.C. 553 (1962).

3 Edwards Motor Transit Co. , T.C. Memo. 1964-317.

4 Estate of Gilmore , 40 B.T.A. 945 (1939).

5 Rev. Rul. 72-464, 1972-2 C.B. 214.

6 GCM 34902 (6/8/72). The GCM also refers to Sec. 332, which will be dis cussed later.

7 As the GCM points out, by using Sec. 357(a), taxpayers could achieve the same outcome in C reorganizations.

8 See Chief Counsel Advice 200040009 (10/6/00), which suggests Estate of Gilmore ’s requirement of a formal cancellation of debt before COD income is recognized may no longer be valid.

9 General Utilities & Operating Co. v. Helvering , 296 U.S. 200 (1935).

10 Sec. 334(b)(1).

12 Regs. Sec. 1.707-5(a)(6).

13 If the partnership transfers money or other consideration in the transaction, the amount treated as sales proceeds may be limited under Regs. Sec. 1.707-5(a)(5)(i)(B).

14 Under Regs. Sec. 1.707-5(a)(3)(ii), a partner’s share of liabilities is reduced by liabilities assumed that are anticipated to be reduced. Based on Kniffen and Edwards , the reduction will be anticipated.

15 Notice 94-47, 1994-1 C.B. 357.

16 See, e.g., IRS Letter Ruling 8825048 (3/23/88).

17 The transaction that gives rise to the difference and the taxation that results are discussed later.

18 Rev. Rul. 72-464, 1972-2 C.B. 214. Although this is a debtor-to-creditor transfer, the result is the same.

19 See GCM 34902 (6/8/72).

20 Rev. Rul. 93-7, 1993-1 C.B. 125.

21 If the partnership makes a Sec. 754 election, the partnership has a Sec. 734 adjustment of $75 ($100 inside basis – $25 basis after distribution).

22 IRS Letter Ruling 201105016 (2/4/11).

23 Regs. Sec. 1.108-8, effective Nov. 17, 2011.

24 See the Regs. Sec. 1.108-8(b)(2) safe-harbor rule.

25 Rev. Rul. 2004-79, 2004-2 C.B. 106.

26 CCA 200040009 (10/6/00).

27 Regs. Sec. 1.108-2(b).

28 Regs. Sec. 1.108-2(c)(1).

29 Regs. Sec. 1.108-2(c)(2).

30 Regs. Sec. 1.108-2(c)(3).

31 Regs. Secs. 1.108-2(f)(1) and (2).

32 Regs. Sec. 1.108-2(g).

33 Regs. Sec. 1.453-9(c)(2).

34 See IRS Letter Rulings 8824044 (3/22/88) and 8425042 (3/19/84).

35 Jack Ammann Photogrammetric Engineers, Inc. , 341 F.2d 466 (5th Cir. 1965), rev’g 39 T.C. 500 (1962).

36 Rev. Rul. 73-423, 1973-2 C.B. 161.

37 Although this revenue ruling involved a corporation, the IRS believes the same rule applies to partnerships. Treasury is currently working on a revision of the regulations to clarify the results. See the preamble to Regs. Sec. 1.108-8, T.D. 9557 (11/17/11).

Proposed regulations would update rules for consolidated returns

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loan transfer between companies

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

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loan transfer between companies

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Intercompany Loans: The Pros And Cons for a Startup

Intercompany Loans: The Pros And Cons for a Startup

Founders quickly become familiar with applying for and receiving business loans to balance their cash flow or make expansions. However, intercompany investments have different standards for lenders and borrowers and require having a parent company or subsidiary.

There are benefits to using this method of loan-borrowing, but it’s essential to understand all the details surrounding intercompany loans before jumping in. Below, we’ll go over what makes these loans different and how businesses can use them. 

What Is An Intercompany Loan?

An intercompany loan is established between two related companies, typically with the subsidiary receiving money from the parent company. Loans under this category operate in the same fashion as traditional loans. 

Intercompany transactions have a fixed interest based on the current market rate with a loan term agreement from one to five years. Rarely can companies financially benefit from a long-term internal loan, but it is an option. 

Two unrelated companies can’t exchange loans. The borrower or lender is required to have ownership over the other company. Some business owners open a parent company to gain funding and then open a subsidiary for operational purposes.

Types Of Intercompany Investments

There are three categories of intercompany loans based on the percentage of ownership the lender gets of the company: 

  • Minority Passive : Less than 20% ownership
  • Minority Active : 20%-50% ownership
  • Controlling Interes t: Over 50% ownership

Other intercompany investments can fall outside these categories without losing validity depending on how ownership works between the two companies involved.

Are Intercompany Loans Considered Debt?

Intercompany lending is considered debt in the same way as a traditional loan. The borrower is under a legal obligation to pay the issuer. Interest is deducted during tax time from each recorded loan payment. 

The IRS recently augmented tax codes related to intercompany financing and the deductions on interest. Under new 538 regulations , both companies participating in an intercompany loan have to meet the following guidelines: 

  • The borrower is financially able to repay the loan.
  • The borrower agrees unconditionally to repay the loan.
  • Borrower and issuer have proof of a debt-creditor relationship (payments made, for example).
  • The loan's interest rates must match the current market and follow the arm’s length price . 

Not following the rules mentioned above or lack of proper documentation can trigger the IRS to change the loan’s classification to “stock trade,” eliminating interest as tax deductible. Missteps in documentation and IRS requirements lead to complicated tax issues for the parent company and its subsidiaries or affiliates. 

Why Companies Engage In Intercompany Lending

In most cases, companies use this type of funding as a quick cash flow problem solver. For example, a subsidiary can fix financial issues or launch a new product without straining costs by borrowing from a parent company. 

A parent company can also alleviate this stress by investing via a loan. The income earned is put towards the loan, and the issuer takes their cut from owning the subsidiary as net income grows. 

Both options also reduce excessive paperwork typically associated with bank loans.

‍ Other reasons are:

  • Purchasing fixed assets for depreciation tax deductions.
  • If a subsidiary struggles to raise funding, the parent company can step in to keep production and operations on schedule. 
  • Limit spread banks earn
  • Alternative for capital investments, fundraising, or outsourced loans.
  • Improve the financial standing of the borrowing company.

Advantages And Disadvantages Of Intercompany Lending

There are benefits and risks associated with intercompany loans. Business decisions as a whole come with both, but intercompany lending affects two separate companies instead of one. 

  • No need to fill out loan applications with multiple banks or agree to high-interest rates.
  • A quick process is typically done through third-party software.
  • Investment capital raised by the parent company can be given directly to the subsidiary.
  • Banks or outsourced companies take a cut of the loan.

Disadvantages

  • Intercompany settlements : Despite the relationship between the two companies, one party may question the interest recordings, a payment could be logged as missing, or different accounting periods can cause problems with proper reconciliation.
  • Tax issues : The interest rate and payments must be recorded, and each is subjected to individual tax regulations. 
  • Inability to pay : If the subsidiary or borrower takes a brutal financial hit, the cash flow problem can overflow to the issuer. This can negatively impact the financial standing of both companies and affect overall credit ratings, which can make outsourced borrowing harder in the future.
  • Broken terms and conditions : If a borrower does not follow legal obligations, this can trigger an audit from the IRS, cause the issuer financial strain, or require a legal battle between the two companies.

‍ Tips For Intercompany Loans

If you’ve decided on an intercompany loan, you can do a few things to reduce problems associated with the transfer of funds. These actions aren’t a guarantee there won’t be bumps in the road, but preparation is key to limiting the damage.

  • Define roles : Anyone involved in transferring and receiving intercompany funding should have a clear and defined job with specific responsibilities to avoid wire-crossing. 
  • Proper software : Implement time-saving software that seamlessly integrates funds with an accurate reflection of different metrics. This is important when accounting periods do not line up between companies. 
  • Cash management : This loan is most likely for a specific reason. Ensure you and your team have a plan and know where the money is going.

Managing Your Finances With Zeni

As a Zeni client, you’ll have an entire finance team dedicated to handling your books. And we grow with your company. You can add new services as you need them or change packages if you want an overhaul of bookkeeping services.

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Mastering Intercompany Fund Transfers: From Parent Company to Subsidiary

Understanding intercompany fund transfers, why transfer money from parent company to subsidiary, methods of transferring money from parent company to subsidiary, optimizing intercompany fund transfers, strategies for transfer money from subsidiary to parent company.

  • Navigating Tax Implications

Navigating the Complexities with Confidence

In the intricate landscape of corporate finance, the seamless transfer of money between a parent company and its subsidiary is a critical maneuver that demands strategic planning, precision, and a deep understanding of the intricacies involved. These intercompany fund transfers come in various forms and serve different purposes, but they all share a common thread: the movement of capital within an organization’s internal structure. In this comprehensive article, we will delve even deeper into the nuances of transferring money from a parent company to a subsidiary, exploring the reasons, methods, key considerations, tax implications, and more.

Intercompany transactions, also known as intercorporate transactions, encompass a wide range of financial activities occurring between different entities within the same corporate group or organization. In this context, a parent company stands as the central controlling entity, often owning, either wholly or partially, one or more subsidiary companies. These transactions can involve the transfer of cash, assets, services, or equity among affiliated companies, depending on the strategic objectives and financial needs of the organization.

Several reasons drive the need for transferring funds from a parent company to a subsidiary:

Capital Injection: Subsidiaries, especially start-ups or new ventures, may require additional capital to fund their operations, expand their businesses, or address financial challenges. Transferring money from the parent company can provide the subsidiary with the necessary financial support.

Operational Expenses: Subsidiaries often share operational expenses with the parent company, such as payroll, technology infrastructure, or lease payments. Transferring funds helps cover these shared costs efficiently.

Strategic Investments: The parent company might want to invest in a specific subsidiary’s growth or development, such as expanding into new markets or launching innovative projects.

Compliance and Reporting: Properly documenting and accounting for intercompany transfers is essential for regulatory compliance and financial reporting. It ensures transparency and accuracy in financial statements.

Selecting the most suitable method for facilitating the transfer of funds from a parent company to a subsidiary hinges on various factors, including the company’s financial strategy, taxation considerations, and long-term objectives. Below are two primary methods, each with its merits and potential complexities:

Intercompany Loan: This method involves the parent company providing a loan to the subsidiary. The transaction is documented, typically with an associated interest rate and a formal loan agreement. While this approach allows for the repayment of the loan, it can generate interest income for the parent company, which may have tax consequences.

Pros: Flexibility, the possibility of repayment, clear documentation.

Cons: Interest income for the parent company, potential tax complexities.

Capital Contribution: In this approach, the parent company injects capital directly into the subsidiary by recording it as an investment. The subsidiary, in turn, records the capital as equity. This method is often used when the parent company intends to strengthen the subsidiary’s financial position without expecting repayment.

Pros: One-time action, no interest income, strengthens the subsidiary.

Cons: Irreversible, potential complexities if funds need to return to the parent company.

Key Considerations for Successful Transfers

Successfully transferring money from a parent company to a subsidiary requires careful planning and adherence to best practices:

  • Documentation: Thoroughly document all intercompany transactions, whether through loans or capital contributions. Formal agreements and clear records are essential for compliance and financial reporting. Every intercompany transaction, whether conducted through loans or capital contributions, must be exhaustively documented. Formal agreements and meticulous records are vital for compliance, audit trails, and accurate financial reporting.
  • Tax Implications: Be aware of the tax implications associated with each method and consult with tax professionals to ensure compliance with relevant tax laws and regulations. Profoundly comprehend the tax implications associated with each method. Collaborate with tax professionals to ensure full compliance with relevant tax laws and regulations, mitigating potential surprises during tax assessments.
  • Financial Reporting: Follow generally accepted accounting principles (GAAP) to accurately report intercompany transactions in financial statements, consolidating data where necessary.
  • Accurate Financial Reporting: Adhere to generally accepted accounting principles (GAAP) when reporting intercompany transactions in financial statements. This ensures the precise consolidation of financial data where necessary, upholding transparency.
  • Strategic Planning: Consider the long-term financial strategy and objectives of both the parent company and the subsidiary. Ensure that intercompany transfers align with these goals.
  • Strategic Alignment: Align intercompany transfers with the long-term financial strategy and objectives of both the parent company and the subsidiary. Ensure that these transfers contribute to the overarching organizational goals.

The effectiveness of intercompany fund transfers relies not only on their execution but also on optimizing the entire process. Achieving this optimization involves careful consideration of various aspects:

Interest Rates: When utilizing intercompany loans as a means of transferring funds, it is vital to establish fair and market-appropriate interest rates. This ensures that the parent company is not at a disadvantage while generating interest income, and the subsidiary does not face an undue financial burden.

Currency Exchange: For multinational corporations with subsidiaries in different countries, currency exchange rates can significantly impact fund transfers. Employ hedging strategies or timing adjustments to mitigate the effects of unfavorable currency fluctuations.

Legal and Regulatory Compliance: Stay vigilant about complying with local and international regulations governing intercompany transactions. This includes adherence to transfer pricing rules, anti-tax avoidance measures, and regulations specific to the industries in which subsidiaries operate.

While transferring funds from a parent company to a subsidiary is a common practice, there are also situations where it becomes necessary to move money in the opposite direction. Fund transfers from a subsidiary to a parent company can serve various purposes:

Debt Repayment: Subsidiaries may need to repay loans or debt obligations to the parent company. Timely repayment ensures the financial health of both entities.

Profit Distribution: When a subsidiary generates profits, it can distribute dividends to the parent company, providing returns on the parent’s investment.

Risk Mitigation: In cases where a subsidiary faces financial distress, transferring funds to the parent company can help mitigate risks and safeguard the overall stability of the corporate group.

avigating Tax Implications

The tax landscape surrounding intercompany fund transfers is intricate and varies by jurisdiction. However, there are some general principles to consider:

Transfer Pricing: Many countries have specific transfer pricing regulations that require intercompany transactions to be priced at arm’s length—meaning, transactions should occur at prices that would be agreed upon by unrelated entities in an open market.

Withholding Taxes: Depending on the countries involved, withholding taxes may apply to certain intercompany transactions, particularly those involving interest payments or dividend distributions.

Thin Capitalization Rules: Some jurisdictions impose rules limiting the deductibility of interest expenses on intercompany loans if the borrower is excessively leveraged. Understanding these rules is crucial to optimizing the tax efficiency of intercompany loans.

In conclusion, mastering the art of transferring money from a parent company to a subsidiary demands a profound understanding of financial strategies, regulatory compliance, and effective communication. Intercompany fund transfers play a pivotal role in bolstering subsidiary growth, optimizing financial resources, and securing the overall success of an organization. By meticulously considering the methods and best practices outlined in this article, companies can navigate the complexities of intercompany transactions with confidence and precision, ensuring a robust financial foundation for the entire corporate family.

The transfer of assets from a subsidiary to a parent company refers to the movement of resources, which can include cash, property, equipment, inventory, or any other valuable items, from the subsidiary entity to its controlling parent company. This transfer can occur for various reasons, such as repatriating profits, consolidating resources, or optimizing the utilization of assets within the corporate group. It is a fundamental aspect of intercompany transactions aimed at ensuring the financial health and strategic alignment of the entire organization.

Yes, a parent company can indeed transfer funds to a subsidiary. Such fund transfers often serve as a crucial means of providing financial support to subsidiaries for various purposes, including operational expenses, capital injection, strategic investments, or debt repayment. These intercompany fund transfers are typically executed through mechanisms like intercompany loans, capital contributions, or direct cash transfers, and they require careful planning, documentation, and adherence to legal and regulatory requirements.

Recording income from a subsidiary involves several steps: 1. Accrual Basis: Income from a subsidiary is typically recorded on an accrual basis, meaning it is recognized when it is earned rather than when the cash is received. 2. Consolidated Financial Statements: In cases where the parent company prepares consolidated financial statements, the subsidiary’s income is combined with the parent’s financial results. This consolidation ensures a comprehensive view of the group’s financial performance. 3. Intercompany Eliminations: Any intercompany transactions, including revenues and expenses, between the parent and subsidiary, must be eliminated to avoid double counting. This is a standard practice in preparing consolidated financial statements. 4. Equity Accounting: If the parent company does not have control over the subsidiary but has significant influence, it may use equity accounting, where its share of the subsidiary’s income is recorded as an equity investment on its balance sheet. 5. Dividend Income: If the subsidiary distributes profits to the parent company in the form of dividends, this income is recorded when the dividends are declared by the subsidiary.

A parent company can fund a subsidiary through various methods: 1. Intercompany Loans: The parent company can provide loans to the subsidiary to cover its financial needs. These loans should be properly documented, including terms, interest rates, and repayment schedules. 2. Capital Contribution: The parent company can inject capital directly into the subsidiary by purchasing additional shares or contributing equity. This strengthens the subsidiary’s financial position. 3. Cash Transfers: The parent company can transfer cash directly to the subsidiary’s bank account to meet its financial requirements. Such transfers should be recorded and documented for transparency and compliance. 4. Profit Retention: If the subsidiary generates profits, these can be retained within the subsidiary for reinvestment in its operations or for use in repayment of debt or other financial commitments. 5. Asset Transfers: The parent company can transfer physical assets or inventory to the subsidiary, providing valuable resources for its operations. The choice of funding method depends on the specific financial needs and strategic objectives of the parent company and subsidiary, as well as compliance with regulatory and tax considerations.

Mastering Intercompany Fund Transfers: From Parent Company to Subsidiary

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New IRS Regulations on Intercompany Debt Transactions: Not Just a Tax Matter

The impacts of new IRS regulations governing intercompany debt transactions could potentially stretch beyond corporate tax departments to operational functions and, in some cases, strategic decision-making, at certain organizations. The rules, which are issued under Section 385 of the U.S. Tax Code, increase documentation requirements around intercompany debt transactions and under certain circumstances would recast debt between related parties as stock.

“CFOs, treasurers, tax directors and controllers may want to consider having candid conversations about the impact of the 385 regulations and whether the limitations on the ability to use debt in certain structures would significantly affect a transaction’s internal rate of return,” observes Christopher Trump, principal, Washington National Tax Office, Deloitte Tax LLP.

Released in October 2016, the final regulations apply to debt instruments issued by U.S. corporations and can apply to both U.S. debt issuers with foreign subsidiaries, as well as to multinational companies that own U.S. companies that have issued debt. It’s important to note that although the regulations have been finalized, there is some uncertainty in the current environment with respect to the future of these and other regulations, a situation that requires close monitoring over the coming months.

“A big surprise for many companies in the final regulations is that the rules cover instruments other than intercompany loans, such as trade payables and receivables between subsidiaries in the corporate group,” says Melissa Cameron, principal, Deloitte Risk and Financial Advisory, and global treasury leader, Deloitte & Touche LLP. Ms. Cameron notes that the added focus on documentation and timely settlement of trade payables and receivables likely will require many organizations to assess and update related intercompany accounting processes and controls.

While the rules can be seen as a way to help protect the U.S. tax base from abusive practices, such as earnings stripping by multinationals, the final 385 regulations also have a heavy focus on increasing documentation for debt issued by U.S. corporations. The impetus behind the IRS’s increased documentation requirements seems rooted in the belief that debt transactions between related parties are not sufficiently documented and transaction terms are not observed in the same manner as third-party debt.

“Executives also should consider potential state taxation implications of the 385 rules, including organizations based or operating solely in the United States” says Valerie Dickerson, partner, Washington National Tax Office, Deloitte Tax LLP. She explains that under the 385 rules, members of a consolidated group required to file a consolidated U.S. federal income tax return are treated as one corporation. “As a result of partial state conformity to federal income tax regulations, businesses based in states that require taxable income to be computed beginning with pro forma federal income may have to apply the 385 rules separately for state and federal jurisdictions,” she adds. In other situations, absent state rules around the application of consolidated return regulations, organizations may have to provide different earnings and profit measures, as well as new basis calculations, to satisfy state and federal rules.

The documentation regulations, found in Section 385-2 of the final regulations, apply to debt transactions that take place after January 1, 2018, with documentation required to be completed by the time the organization’s next tax return is filed in 2019. For the transactions to be treated as debt, the 385-2 requirements impose a documentation prerequisite on certain related-party debt instruments. The rules generally require written documentation of four indebtedness factors:

—The issuer’s unconditional obligation to pay an agreed upon amount;

—The holder’s rights as a creditor;

—The issuer’s ability to repay the obligation; and

—The issuer’s and holder’s actions that provide evidence of a debtor-creditor relationship, such as payments of interest or principal and actions taken on default.

As a result, standalone financial statements and three-year financial projections may be needed. Challenging will be the ability to help track liquidity on a daily basis and understand whether future distributions could fall under the debt recharacterization rules. “If documentation requirements are not met, debt instruments covered by the rules could be treated as stock for federal tax purposes,” says Sally Morrison, partner, Deloitte Tax LLP.

“To comply effectively with 385 regulations, organizations will have to determine which businesses within their corporate group structure—and which debt instruments within those businesses—are covered by the 385 regulations,” notes Thomas Driscoll, partner, Deloitte Tax LLP.

Once covered transactions are identified, organizations are required to report and clear intercompany transactions within the provision’s ordinary course of 120 days. “These tasks can be challenging, especially for organizations that have to tap multiple ERP systems for large amounts of transactional data, clear those transactions, and provide an effective audit trail that documents adequate governance rules, procedures and controls,” observes Mr. Driscoll.

Potential Operational and Strategic Impacts

Corporate treasury functions also could be affected by the 385 regulations. Organizations may need to modernize liquidity management practices and systems, particularly with regard to visibility into global operations for managing cash and financial risk exposure. For instance, under the documentation rules, treasury functions could benefit from systems that view the global liquidity of each business within their corporate structure on a daily basis.

In addition, the new regulations could affect an organization’s decisions around strategy, including mergers and acquisitions. For example, the debt recharacterization provisions, referred to as the 385-3 rule, pertain to debt issued by a U. S. business that falls outside the consolidated group for federal income tax purposes. The recasting of debt as stock could affect the status of certain interest deductions used by organizations, as well, potentially prompting management to rethink how they approach transactions. M&A transactions that could fall into this category include acquisitions of unrelated companies and the integration of companies within a global consolidated group.

Reworking Processes to Prepare for the New Rules

For many organizations, addressing challenges that stem from the 385 regulations will require reengineering existing processes and systems while updating roles and responsibilities. In reworking financial processes it will be important to have clear communication from functional leaders so finance, treasury, tax and controllership teams agree on responsibilities, timelines and the governance over affected transactions. In addition, some organizations may need to set up cross-functional funding groups among the four functions to identify when particular transactions are taking place, or when to address situations in which subsidiaries may be unable to meet interest payments. In those cases, a governance committee charged with identifying red flags, such as non-payments, could provide proactive assistance in advance of defaults.

In general, controllers responsible for complying with 385 regulations will be looking to pull reports for aging intercompany payables and receivables on a timely basis, and potentially perform more in-depth financial information for credit analyses on an annual basis for borrowers falling within the scope of the regulations.

Documentation, standalone credit analysis and the ability to report and settle intercompany transactions on a timely basis may be new disciplines for some organizations that have not yet applied these processes to trade payables and receivables. Other organizations may find that additional resources in terms of both people and systems are needed in treasury and intercompany accounting departments to address new requirements. For example, under the new regulations, treasury teams will be required to manage cash concentration levels for the cash concentration header account as well as the individual subsidiary organizations, while accounting teams likely will need up-to-date systems to manage intercompany payables and receivables effectively. Specifically understanding and limiting cash pool borrowings to a maximum of 270 days (without looking for further working capital exemptions) will require additional capabilities and administration. For some companies, even simple management of intercompany transactions, such as ensuring intercompany interest payments are paid when due, may cause increased requirements for documentation and monitoring.

“When organizations peel back the onion on the 385 regulations, they may begin to see a number of significant operational challenges,” says Ms. Cameron. “It will be important for cross-functional teams to understand borrowing characteristics and limits—and the potential impact on the organization’s strategic decisions. It will also be critical to provide the necessary documentation, processes, controls and monitoring and, where needed, the technology to enable and scale these needs,” Ms. Cameron adds.

Related Resources

Deloitte March 7, 2017, Webcast: Preparing for the Changing Landscape—The New Section 385 Regulations

Accounting for Income Taxes: Addressing Process-driven Risks

Questions? Write to Deloitte CFO Journal Editor . Follow us on Twitter @deloittecfo

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. About Deloitte: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms. Copyright © 2017 Deloitte Development LLC. All rights reserved.

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Make an inter-company funds transfer

This article is for small businesses who use Xero

Set up liability accounts to record the transfer of cash between two organisations that operate as part of a group.

The transfers themselves can be recorded using spend money and receive money transactions.

You don't generally need to account for tax on these transactions, but you should check this with your accounting advisor.

You'll need to do a couple of things in different parts of Xero - the following assumes a fairly simple example of two companies that funds are moving between.

Add the transfer accounts

Add a new account to record the funds going backwards and forwards between your companies.

The account should be a 'Liability', with a code number and name that you'll easily recognise as being used for company transfers, for example, 855 - Company A Inter-company Transfers. The account should have the No Tax / Tax Exempt tax rate.

Each company you intend to move funds between should have a transfer liability account set up. If you are transferring funds between more than two companies you should discuss with your accountant or bookkeeper whether you should run the transfers all through one liability account or use one for each company.

Make the transfer

Add a spend money from the company you are withdrawing the funds from (for example, Company A) and code it to the transfer liability account that you've set up.

Add a receive money for the company receiving the funds (for example, Company B) and code it as funds received from the (Company A) transfer liability account.

Keep all of these inter-company transfers separate from any other information for your businesses. That is, use the transfer liability account you've set up rather than raising invoices that contain tax. This will enable your accountant or bookkeeper to easily consolidate any inter-company movements at year end.

Monitor what's in the transfer accounts

Record this activity on your Dashboard by  editing the transfer account you've set up and checking the Show on Dashboard Watchlist  option.

What's next?

Once the cash transfers have been processed by your bank, you'll want to reconcile the transactions you created in each organisation.

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Saturday, 16 December 2023

Startup Guide to Intragroup Transfers

Need to transfer funds between your companies? Here's how to do it compliantly, avoiding common pitfalls.

Why transfer money between entities?

More and more start-ups are structuring their legal entities using holding companies (parent companies, or top companies, however you choose to call it) and use a subsidiary company for operations, often overseas. ‍

There are plenty of good reasons for this, such as accessing overseas investments, tax incentives and future planning to name a few. This process is known as a “Delaware flip" and if you're planning on expanding to the US, you may want to consider doing it through Delaware. We covered the Delaware flip in detail in a previous post.

With this increasing in popularity, we've seen many startups struggle with the admin behind the money transfer, wasting time that could be better spent on talking to customers and building. Understanding tax implications is crucial, but it shouldn’t consume your time. Here’s a guide for your first intragroup transfer.

Staying compliant when moving funds

First things first, this example is for a business where one entity owns 100% of the other. There may be multiple subsidiaries, but for simplicity's sake, let’s assume one parent company and one subsidiary. Also, I’m assuming that the parent company holds investment funds and is otherwise not used for anything else (like sales or hiring). All hires, sales contracts, and expenses are in your subsidiary, at least for now.

In this situation, you have two options to document the cash transfer (the investment you raised) from your parent company to your operational subsidiary. Remember that each company has its own circumstances to consider, so treat this post as a starting point for your research.

Both of these can be applied at the end of your financial year, so don’t panic if you have sent money sporadically without documenting it.

🗒️ Intragroup loan ‍

The parent company transfers money and records it in both accounts as a loan. To comply with tax laws, you must apply an interest rate to the loan so it's “arms-length”. Not doing this could cause issues with tax authorities further down the line. Draft a loan agreement, and you are good to go.

Can be repaid, so if you plan to work in your home country now but want to open an office where your parent company is in a year or so, you can send money back without too much complexity.

The interest rate will generate income in your parent company, and if you have no plans to repay it, it might create additional admin for you and your accountants.

🗒️ Capital contribution

The parent company invests money in the subsidiary. The subsidiary records the cash as capital (equity). Consider this an internal fundraise — the subsidiary can then issue shares in itself to the parent company (even though it’s already 100% owned by the parent). A board resolution and notifying your local company register is how you formalise this.

Straightforward, with no ongoing commitments or interest complications.

Irreversible, so if you need to return funds back to the parent company, you would have to consider a separate mechanism to move funds back, like dividends or a loan.

Services agreements and transfer pricing‍

The two options above can be used when the parent company is simply an investment-taking shell. If you need to transfer funds between two entities with operational activities (R&D and Sales), then you may need a services agreement, and you need to work out the correct transfer pricing method to apply.

Just recharging costs can leave you with a tax headache, so you essentially need a mark-up. This also includes cases where one of your companies is used for invoicing (as your customer or supplier might want to deal only with a US company). This is a wholly separate and complex area that I’ll cover in a different post.

If you are heading towards your year-end and have made these types of transfers without any documents, don’t worry. Speak to us, and we can set this up for you. Then, get back to building something people want!

How Caribou can help‍

As a Y Combinator company , we are no stranger to the famous Delaware Flip , which is used to create a holding company in Delaware in order to raise money from US venture capital firms. We support international Y Combinator companies from every batch, so get in touch if you’re unsure of what you should do next.

Have questions?

We’re ready to chat no matter where you are on your journey.

Set up intragroup agreements, transfer pricing policies, and benchmarking in a few clicks.

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Intercompany Expenses and Transfers

by Melissa (Toronto ON Canada)

Be Aware! Removing monies from a CCPC can create potential tax problems.

Be Aware! Removing monies from a CCPC can create potential tax problems.

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Recent transfer pricing audit trends – CRA zeroes in on intercompany loans

The non-arm's length transactions which can be subject to Canadian transfer pricing legislation include tangible products, intangibles, intra-group services and cost-contribution agreements. Recently, however, the Canada Revenue Agency (" CRA ") has been focusing on financial transactions — namely the interest rates on intercompany loans.

Let's begin by providing an example of such a transaction and assume that a Canadian company, Canco, receives an intercompany loan of 1B$ from its parent, Forco, at a fixed rate of 10% over a 10-year period. Canco would pay 100M$ annually in interest to Forco, documented on the T106 Information Return as a financial interest transaction.

Canco must demonstrate the arm's length nature of the interest rate in its transfer pricing contemporaneous documentation. If the CRA disagrees, and proposes, as an example, a 9% interest rate, Canco could be looking at a transfer pricing adjustment of 10M$ per year on the loan, as well as an automatic referral to the transfer pricing review committee for the potential assessment of penalties.

How can taxpayers mitigate audit risk on intercompany financial transactions?

Generally speaking, taxpayers should proceed with the same analysis they would apply to any non-arm's length transaction with non-residents. They must identify the related parties to the transaction, define the covered financial transaction and determine the functions, assets and risks related to the entities and the covered transaction. For financial transactions, additional focus is generally placed on risk as a credit rating score will play a significant role in determining the interest rates available to the borrower.

As a result, transfer pricing documentation closely examines the risk-level of the borrower, specifically considering Canco's credit rating at the time the loan was entered into. As Canco is a separate entity in the arm's length world, it is very likely that a stand-alone credit rating will be required, unless it is determined that Canco will benefit from implicit support from its parent. First, verify if a credit rating agency, such as Standard & Poor's or Moody's, has already determined Canco's credit rating. If not, credit rating agencies publish credit rating methodologies to help estimate the stand-alone credit rating of an entity. While there are limits to these methodologies, they provide a valid approach to help determine Canco's risk level.

Once the credit rating has been determined, Canco will select a transfer pricing methodology to help establish the arm's length level of interest to be charged. One possible approach is to identify comparable loans by Forco to a third party (e.g. similar credit rating, equivalent loan terms, etc.) and proceed with reliable adjustments, if applicable, to determine an appropriate level of interest. If such agreements are not available or comparable, a search for third-party comparable loans with similar characteristics can help establish an arm's length range of interest rates for that credit level.

Canco's analysis will determine whether the 10% interest rate is consistent with what parties dealing at arm's length would have agreed to. If the 10% interest rate is an arm's length rate, the intercompany loan can be finalized and a transfer pricing report (i.e. contemporaneous documentation), covering all aspects outlined in paragraph 247(4)(a) of the Income Tax Act (" ITA "), will document the steps and the approach undertaken to determine and use an arm's length transfer price. The transfer pricing report will be prepared for the taxation year during which the intercompany loan was entered into.

Is a transfer pricing report required for subsequent years for the same loan?

According to paragraph 247(4)(b): "for each subsequent taxation year or fiscal period, if any, in which the transaction continues, makes or obtains, on or before the taxpayer's or partnership's documentation-due date for that year or period, as the case may be, records or documents that completely and accurately describe each material change  in the year or period to the matters referred to in any of subparagraphs 247(4)(a)(i) to 247(4)(a)(vi) in respect of the transaction."

What would constitute a material change? Each loan is different, but generally, the terms of a loan are static and modifying the terms could generate significant penalties and/or incur significant financial and legal transaction costs. As a result, one would not expect any material change to the terms of the loan. If there are no material changes in subsequent years, the documentation prepared, including the assumptions and analysis used to document the transaction when the loan was executed in Year 1, should apply to subsequent years. From that perspective, any multinational enterprise would rightly interpret that they correctly determined arm's length prices when they entered into the intercompany loan and may not be required to prepare contemporaneous documentation for subsequent taxation years according to paragraph 247(4)(b), as there are no material changes to the terms of the loan.

However, other circumstances may be considered a material change. For example, Canco's credit rating could improve, allowing Canco to have access to better interest rates. Or, interest rates may trend lower over the term of the loan, implying that Canco's opportunity cost of holding the loan at that interest rate increases. These could be considered a "material change" that requires records or documents in subsequent years to show the interest rate remains arm's length. The underlying assumption by the CRA is that an arm's length borrower would seek a lower rate of interest, if available, without necessarily considering other financial considerations such as penalties, prepayment fees and financial and legal costs, related to loan renegotiation in an arm's length setting.

When producing transfer pricing documentation for Year 2, there is a high probability that the credit rating of the borrower has not changed, and the available interest rates are similar and within the range of the rate applied when the loan was executed. However, as time passes, the likelihood increases of a change in circumstances that would impact the credit rating of the borrower and the range of available interest rates, or changes in the economy which may have reduced interest rates in general.

Ultimately, while paragraph 247(4)(b) does not require that contemporaneous documentation be prepared unless there is a material change, taxpayers and the CRA could disagree on whether certain changes are material. Therefore, taxpayers often choose to document the loan each year to reduce the potential risk of penalties.

How would the CRA approach an audit of intercompany financial transactions?

The CRA would first request records or documentation showing Canco determined and used arm's length transfer prices. Once these records or documentation are provided, within three months of the request, the CRA could proceed with an audit of the financial transaction, issue audit queries and request functional interviews with key personnel at Canco. From experience, the CRA may focus on the market circumstances when the loan was entered into, the type of loan, the credit rating of the borrower and the range of interest rates in the year under consideration.

The CRA may also agree with the terms of the loan as established in the first year, but challenge the arm's length valuation of the interest rates and the credit rating in the later years. In this scenario, the core assumption is that Canco would seek a better interest rate from the lender if market rates have dropped or its credit rating has improved. The underlying terms of the loan will also be reviewed to determine Canco's flexibility in renegotiating the loan.

We've recently seen a number of transfer pricing audits on various intercompany loans where, as interest rates improved throughout the term of the loan, the CRA challenged and raised an income adjustment on the basis that the rate was no longer arm's length. Specifically, based on the example used in this article, if Canco entered into a loan in 2012, a 10% interest rate may have been within the arm's length range based on Canco's credit rating, but outside the range when rates trended lower in 2018 and 2019. While conceptually, any borrower would seek a better rate to lower their borrowing costs, other economic factors will limit their ability to do so at arm's length. This raises several questions: can Canco repay the intercompany loan and seek a different lender with a better interest rate? Is there a lender that would agree to the lower rate for Canco? Is there a penalty or prepayment fee to renegotiate the loan and how much does that offset the interest differential? What are the financial and legal fees associated with the change? How much would the terms of the loan change?

Anybody who has renegotiated a loan or mortgage understands there are underlying costs associated with early repayment and renegotiation. Based on our recent experience, however, these factors have not yet been addressed in CRA audits, even though they are routine in arm's length transactions.

Other considerations

While the example in this article speaks to Canco borrowing from its parent, Forco, the reverse scenario, where Canco is lending to a Forco, is also possible. In this situation, the CRA may review Forco's credit rating and validate the interest received by Canco on the intercompany loan. The same questions discussed above would accordingly apply in this scenario.

Also, a word of caution regarding the prescribed pertinent loans or indebtedness (" PLOI ") rate. While one may assume this is an "acceptable" rate, as it is researched and published quarterly by the CRA, new subsection 247(2.1) provides an ordering rule which provides that the arm's length nature of the rate must first be determined, and the adjusted amount can be used in relation to other sections of the ITA . As a result, there may be situations where the CRA determines that the PLOI rate, even if properly applied by Canco, is not an arm's length rate under section 247.

How to manage an audit of intercompany financial transactions?

Documenting and validating the arm's length nature of the interest rate when the intercompany loan is established is key to demonstrating Canco has made reasonable efforts and preventing potential penalties. If the CRA requests a copy of the taxpayer's contemporaneous documentation, the taxpayer must present such contemporaneous documentation to the CRA within three months of the CRA's written request.

If, upon review of the taxpayer's documents, the CRA proceeds with further queries, they will likely focus on the terms of the loan and the credit risk determination, as this is closely linked to the interest rate of the loan. How Forco and Canco interact, whether or not there is implicit support by the parent, and other factors will be considered by the CRA .

Should the CRA proceed with an adjustment on the interest expense, normal dispute resolution mechanisms will be available, such as filing a request for mutual agreement procedure with the Canadian competent authority, a notice of objection with the CRA Appeals Directorate or a notice of appeal to the Tax Court of Canada.

In conclusion, while intercompany loans are commonplace within a multinational enterprise, the CRA 's recent focus on these transactions should prompt taxpayers to proceed with utmost diligence when documenting and establishing an appropriate arm's length interest rate.

Should you have any specific questions about this article or would like to discuss it further, you can contact the author or a member of our Tax Dispute Resolution Group .

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How Do Debt Consolidation Programs Work?

Jerry Brown

Jerry Brown

Contributor

Jerry is a freelance contributor to Newsweek’s personal finance team. He primarily covers loans, including personal loans, home equity loans, and student loans. When he isn’t writing, he enjoys spending time with family, riding an electric bike or scooter through the French Quarter in New Orleans, and traveling.

Claire Dickey

Claire Dickey

Senior Editor

Claire is a senior editor at Newsweek focused on credit cards, loans and banking. Her top priority is providing unbiased, in-depth personal finance content to ensure readers are well-equipped with knowledge when making financial decisions. 

Prior to Newsweek, Claire spent five years at Bankrate as a lead credit cards editor. You can find her jogging through Austin, TX, or playing tourist in her free time.

Updated February 12, 2024 at 2:55 pm

Newsweek Vault’s loan experts evaluated multiple data points to help our readers make sense of their borrowing options across student loans and personal loans. To narrow down the best available offers, we weigh the product pros and cons across five core categories, including:

  • Application process
  • Eligibility requirements
  • Interest rates
  • Loan amounts (minimum and maximum)
  • Repayment flexibility”

If you’re struggling to repay debt, a debt consolidation program could help you save money and repay your debt faster. But before enrolling in one, make sure you understand the potential risks. Here’s how debt consolidation programs work, the pros and cons of different relief options and alternative solutions.

Vault’s Viewpoint on Debt Consolidation Programs

  • A debt consolidation program could help you lower your interest rates and save money.
  • Not-for-profit and for-profit credit counseling agencies typically offer debt consolidation programs.
  • The downside of debt consolidation programs is that they often come with one-time and monthly fees.

Credit counseling agencies provide different services, but they generally include the following:

Debt Management Plans (DMPs)

A credit counselor can work with you to create a DMP to kick unsecured debts—like medical bills and credit card debt—to the curb. Under this plan, you send the counseling agency a monthly lump-sum payment. It then distributes those funds to creditors who’ve agreed to participate.

A possible advantage of a DMP is that an agency might negotiate a lower rate with some of your creditors. On the flip side, a disadvantage is that a company might require you to close some of your credit card accounts.

Debt Settlement

Debt settlement companies might offer to negotiate with your creditors to accept a one-time payment that’s less than the amount owed. While this option might help you avoid bankruptcy, it comes with many risks, such as high fees and possible credit damage.

Debt Consolidation vs. Debt Consolidation Programs

Debt consolidation involves taking out a new loan to pay off existing debt. It allows you to combine multiple debts into a single debt with one monthly payment—hopefully at a lower rate.

A debt consolidation program doesn’t combine your debts. Instead, it only allows you to make a single monthly payment to a company that distributes those funds to your creditors.

What Companies Offer Debt Consolidation Programs?

Debt relief services, such as DMPs, are generally offered by for-profit and not-for-profit credit counseling agencies. Nonprofit agencies tend to be more reputable than for-profit agencies, according to the Federal Trade Commission (FTC). You can find a list of government-approved credit counseling agencies by visiting the U.S. Department of Justice website.

When researching and comparing counseling agencies, the FTC recommends steering clear of companies that charge fees before helping you avoid potential scams.

If you want someone to negotiate debt on your behalf, consider contacting a debt settlement company or debt attorney. Just keep in mind that the Consumer Financial Protection Bureau (CFPB) warns consumers to only use this option as a last resort because of its possible drawbacks like expensive fees.

How to Consolidate Your Debt on Your Own

While enrolling in a debt consolidation program can be an excellent choice if you want professional help, the trade-off is that it can be expensive. However, the good news is that there are ways to consolidate debt yourself and save money without paying a company.

Below are some financial products you could use to consolidate debt.

Debt Consolidation Loans

A debt consolidation loan is a personal loan you can use to merge all of your debts into a single debt. These loans generally come with fixed rates and are often unsecured, meaning you don’t have to risk an asset, such as a car title or bank account, to qualify. You could save a lot of money in interest if you qualify for a personal loan with a lower rate than your existing debt.

Balance Transfer Credit Cards

Balance transfer credit cards allow you to transfer credit card debt from one issuer to another. These cards typically come with 0% or low-interest promotional periods that can help borrowers save money. As long as the balance is paid off during this window, you can avoid interest fees.

A potential downside is that you must pay interest on any remaining balance once the promotion expires. Another drawback is that the credit card issuer typically charges a balance transfer fee that generally ranges from 3% to 5% of the transferred amount.

You usually need good to excellent credit to qualify for the best offers, though there are credit cards for fair credit and credit cards for bad credit that feature introductory balance transfer offers.

Home Equity Loans and Home Equity Lines of Credit (HELOCs)

Homeowners could consolidate debt with a home equity loan or HELOC. A home equity loan is a lump sum you can borrow and pay back in fixed monthly installments. By contrast, a HELOC is a revolving financial product that generally has an adjustable rate.

Before you use a home equity loan or HELOC, review your finances to assess whether you can comfortably afford to repay the loan. A significant downside of both of these options is that you could lose your home if you default.

Is A Debt Consolidation Program Right for You?

The answer depends on your unique financial circumstances. If you’re experiencing financial hardship and are having trouble negotiating with your creditors, enrolling in a debt consolidation program might be beneficial. But if you have good credit and can qualify for lower rates, you might save more money consolidating debt yourself.

Frequently Asked Questions

Debt consolidation programs help you devise a plan to pay off unsecured debts like credit cards and most personal loans . An unsecured debt doesn’t require you to pledge collateral—an item of value, such as a car or home—to qualify.

The cost varies depending on the company you choose to work with and where you live. That said, the average one-time set-up fee for a DMP is $33, and the average monthly payment is $25, according to Money Management International . Some companies may waive or reduce those fees if you’re experiencing financial hardship or if you’re an active-duty military service member.

The answer depends on several factors, such as the type of program and the terms. For example, some organizations might require you to close your credit card accounts if you enroll in a DMP, which could increase your credit utilization ratio (the amount of available credit you’re using) and lead to a temporary drop in your score. In addition, the CFPB warns that allowing a company to settle your debt could harm your credit.

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Get quick cash with the 4 best fast business loans, these lenders can fund your small business loan in as little as two days or less..

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When a financial emergency strikes, your business might need cash in a pinch. In such cases, it's crucial to find a small business lender that provides a speedy application process, favorable terms and quick funding.

CNBC Select compared over a dozen lenders to find the best business loans when you need access to cash in two days or less. (See our methodology for more information about how we chose the best fast small business loans.)

Best fast small business loans

  • Best for lower credit scores: OnDeck
  • Best for long-term loans : Funding Circle
  • Best for financing options: Credibly
  • Best for line of credit: Bluevine

Best for lower credit scores

Types of loans, better business bureau (bbb) rating.

Loan amounts

$5,000 to $250,000

Up to 24 months

Minimum credit score needed

Minimum requirements.

In business at least 1 year, $100,000 annual revenue, business bank account

Terms apply.

  • Potential for same-day cash disbursement (only available in certain states, for term loans up to $100,000)
  • Top-tier A+ rating with the BBB
  • Low minimum credit score
  • Fixed monthly payments
  • 100% Prepayment Benefit option, so you can pay your loan off early without any penalty or fee
  • Doesn't lend to businesses in Nevada, North Dakota or South Dakota
  • Early prepayment fee if you don't qualify for the 100% Prepayment Benefit

Who's this for? OnDeck offers term loans of $5,000 to $250,000 with repayment terms of up to 24 months. Its loans have a minimum 625 FICO credit score requirement, making it a more accessible option for those with lower credit scores.

Standout benefits: OnDeck advertises a quick application process that you can complete in a few minutes online. You can also check if you qualify for a loan without a hard credit pull . If your loan amount is $100,000 or less, you may qualify for same-day funding, depending on your state.

[ Jump to more details ]

Best for long-term loans

Funding circle.

$5,000 to $500,000

3 months to 10 years

In business at least 2 years, no bankruptcies within the last 7 years

  • No prepayment penalties
  • Funding in as little as 48 hours
  • You have to be in business at least 2 years to qualify

Who's this for? Funding Circle can be a good choice if your business needs a larger sum and more time to pay it off. You can borrow up to $500,000 and take up to seven years to repay the loan. This lender also stands out for not having a minimum revenue requirement.

Standout benefits: Funding Circle offers a quick application process and allows you to see if you qualify without a hard credit check. The lender can fund your loan in as quick as two days and charges no prepayment penalties.

Best for financing options

Long-term loans, working capital loans, business line of credit and merchant cash advance

$5,000 to $400,000

3–15 months

Must have been in business for at least six months and have average monthly revenue of at least $15,000

  • Offers multiple options for small business financing
  • Can get approved within four hours
  • Low minimum credit score requirement
  • Provides loan amounts of up to $400,000
  • Funds deposited as soon as the same business day
  • Considers overall business health as an approval criteria
  • Requires an average monthly revenue of at least $15,000

Who's this for? Credibly offers many options for those considering alternatives to traditional term loans, including working capital loans, merchant cash advances, long-term loans, business lines of credit and equipment financing. Depending on the type, you can borrow up to $400,000 and receive same-day funding.

Standout benefits: You can pre-qualify online with a soft credit pull and get approved in less than four hours. Additionally, certain products such as merchant cash advance and equipment financing may be available even if your credit needs some work.

Best for line of credit

Bluevine business line of credit, annual percentage rate (apr).

Starting at 6.20% APR

Up to $250,000

6 or 12 months

Credit needed

Early payoff penalty, maintenance fees.

5% of the missed repayment (minimum of $35)

  • Open to borrowers with fair credit (minimum 625 score)
  • High loan maximum
  • Quick funding
  • Option to pay monthly or weekly
  • Requires at least 24 months in business which may not suit newer businesses
  • Requires at least $40,000 in monthly revenue
  • Not available for all industries or in all states

Who's this for? A line of credit can give your business continuous access to a revolving line of capital when you need it. Bluevine offers credit lines of up to $250,000 and a quick application process. It considers applicants with credit scores as low as 625.

Standout benefits: Bluevine charges no fees for opening, maintaining, prepayment or account closure on its business lines of credit. When you request funds, you can get the money within hours of approval with the bank wire option.

More on our top fast business loans

OnDeck is an online small business lender that aims to provide fast and simple financing. Besides business term loans, the lender offers business lines of credit .

Eligibility requirements

At least one year in business, a 625 personal FICO score, $100,000 business annual revenue, a business checking account .

Repayment schedule

Daily or weekly

[ Return to summary ]

Funding Circle is a global online lender that works with small businesses. Besides business term loans, it also provides SBA 7(a) loans and business lines of credit.

$25,000 to $500,000

660 FICO score, two years in business, no personal bankruptcies within the last seven years, a business that doesn't operate in select industries such as speculative real estate, nonprofit organizations, weapons manufacturers, gambling businesses, marijuana dispensaries and pornography

Bi-weekly or monthly

Credibly is an online fintech lending platform specializing in financing solutions for small and medium-sized businesses. It focuses on the business's overall health when working with borrowers rather than strictly traditional financial factors.

Specific requirements may vary, but you'll generally need at least six months in business, a credit score of over 500 and an average monthly revenue of $15,000 or more.

Daily, weekly or monthly

Bluevine is a fintech company offering financial products for businesses, including business checking accounts, business loans and credit cards .

Credit lines up to $250,000

A 625 FICO score, at least 24 months in business, $40,000 in monthly revenue, a business operating or incorporated in an eligible U.S. state

Fixed monthly or weekly payments over six or 12 months for each draw

What is the quickest way to get a business loan?

The quickest way to get a business loan is to work with an online lender specializing in fast business loans — or loans that can get funded in two business days or less.

How fast can you get a small business loan?

You can get a fast small business loan funded within 24 to 48 hours of approval, depending on the lender.

Can I get a business loan with a 500 credit score?

It may be challenging to get approved for a business if you don't have good credit, but some lenders may be willing to work with borrowers with low credit scores

How long do you have to be in business to qualify for a loan?

Requirements vary by lender, but online lenders typically require borrowers to be in business for at least six months to two years.

Bottom line

A fast business loan can be a financial lifeline when your business needs quick access to funds. Still, even when you need financing urgently, take your time to compare offers from several lenders. Remember that most lenders can pre-qualify you with a soft credit pull, so you can view the terms without any impact on your credit.

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.  Sign up here .

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every business loan review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of business loan products . While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See  our methodology  for more information on how we choose the best fast business loans.

Our methodology

To determine which fast business loan lenders offer the best terms, CNBC Select analyzed over a dozen U.S. loans offered by both online and brick-and-mortar lenders. We narrowed down our rankings by only considering business loans that offer funding within one to two business days of approval.

We compared each small business loan on a range of features, including:

  • Minimum and maximum loan amounts
  • Length of term
  • Credit score needed
  • Application requirements
  • Streamlined application process
  • Fund disbursement
  • Customer support
  • Better Business Bureau rating
  • Customer reviews, when available

The rates and fee structures for small business loans are subject to change without notice, and they often fluctuate in accordance with the  prime rate . Your APR, monthly payment and loan amount depend on your credit history and creditworthiness.

To take out a small business loan, lenders will conduct a hard credit inquiry and request a full application, which could require both personal and business proof of income, identity verification, proof of address and more. You'll likely also need to put up collateral, which can include business equipment, real estate or personal assets.

Catch up on CNBC Select's in-depth coverage of  credit cards ,  banking  and  money , and follow us on  TikTok ,  Facebook ,  Instagram  and  Twitter  to stay up to date.

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Create a form in Word that users can complete or print

In Word, you can create a form that others can fill out and save or print.  To do this, you will start with baseline content in a document, potentially via a form template.  Then you can add content controls for elements such as check boxes, text boxes, date pickers, and drop-down lists. Optionally, these content controls can be linked to database information.  Following are the recommended action steps in sequence.  

Show the Developer tab

In Word, be sure you have the Developer tab displayed in the ribbon.  (See how here:  Show the developer tab .)

Open a template or a blank document on which to base the form

You can start with a template or just start from scratch with a blank document.

Start with a form template

Go to File > New .

In the  Search for online templates  field, type  Forms or the kind of form you want. Then press Enter .

In the displayed results, right-click any item, then select  Create. 

Start with a blank document 

Select Blank document .

Add content to the form

Go to the  Developer  tab Controls section where you can choose controls to add to your document or form. Hover over any icon therein to see what control type it represents. The various control types are described below. You can set properties on a control once it has been inserted.

To delete a content control, right-click it, then select Remove content control  in the pop-up menu. 

Note:  You can print a form that was created via content controls. However, the boxes around the content controls will not print.

Insert a text control

The rich text content control enables users to format text (e.g., bold, italic) and type multiple paragraphs. To limit these capabilities, use the plain text content control . 

Click or tap where you want to insert the control.

Rich text control button

To learn about setting specific properties on these controls, see Set or change properties for content controls .

Insert a picture control

A picture control is most often used for templates, but you can also add a picture control to a form.

Picture control button

Insert a building block control

Use a building block control  when you want users to choose a specific block of text. These are helpful when you need to add different boilerplate text depending on the document's specific purpose. You can create rich text content controls for each version of the boilerplate text, and then use a building block control as the container for the rich text content controls.

building block gallery control

Select Developer and content controls for the building block.

Developer tab showing content controls

Insert a combo box or a drop-down list

In a combo box, users can select from a list of choices that you provide or they can type in their own information. In a drop-down list, users can only select from the list of choices.

combo box button

Select the content control, and then select Properties .

To create a list of choices, select Add under Drop-Down List Properties .

Type a choice in Display Name , such as Yes , No , or Maybe .

Repeat this step until all of the choices are in the drop-down list.

Fill in any other properties that you want.

Note:  If you select the Contents cannot be edited check box, users won’t be able to click a choice.

Insert a date picker

Click or tap where you want to insert the date picker control.

Date picker button

Insert a check box

Click or tap where you want to insert the check box control.

Check box button

Use the legacy form controls

Legacy form controls are for compatibility with older versions of Word and consist of legacy form and Active X controls.

Click or tap where you want to insert a legacy control.

Legacy control button

Select the Legacy Form control or Active X Control that you want to include.

Set or change properties for content controls

Each content control has properties that you can set or change. For example, the Date Picker control offers options for the format you want to use to display the date.

Select the content control that you want to change.

Go to Developer > Properties .

Controls Properties  button

Change the properties that you want.

Add protection to a form

If you want to limit how much others can edit or format a form, use the Restrict Editing command:

Open the form that you want to lock or protect.

Select Developer > Restrict Editing .

Restrict editing button

After selecting restrictions, select Yes, Start Enforcing Protection .

Restrict editing panel

Advanced Tip:

If you want to protect only parts of the document, separate the document into sections and only protect the sections you want.

To do this, choose Select Sections in the Restrict Editing panel. For more info on sections, see Insert a section break .

Sections selector on Resrict sections panel

If the developer tab isn't displayed in the ribbon, see Show the Developer tab .

Open a template or use a blank document

To create a form in Word that others can fill out, start with a template or document and add content controls. Content controls include things like check boxes, text boxes, and drop-down lists. If you’re familiar with databases, these content controls can even be linked to data.

Go to File > New from Template .

New from template option

In Search, type form .

Double-click the template you want to use.

Select File > Save As , and pick a location to save the form.

In Save As , type a file name and then select Save .

Start with a blank document

Go to File > New Document .

New document option

Go to File > Save As .

Go to Developer , and then choose the controls that you want to add to the document or form. To remove a content control, select the control and press Delete. You can set Options on controls once inserted. From Options, you can add entry and exit macros to run when users interact with the controls, as well as list items for combo boxes, .

Adding content controls to your form

In the document, click or tap where you want to add a content control.

On Developer , select Text Box , Check Box , or Combo Box .

Developer tab with content controls

To set specific properties for the control, select Options , and set .

Repeat steps 1 through 3 for each control that you want to add.

Set options

Options let you set common settings, as well as control specific settings. Select a control and then select Options to set up or make changes.

Set common properties.

Select Macro to Run on lets you choose a recorded or custom macro to run on Entry or Exit from the field.

Bookmark Set a unique name or bookmark for each control.

Calculate on exit This forces Word to run or refresh any calculations, such as total price when the user exits the field.

Add Help Text Give hints or instructions for each field.

OK Saves settings and exits the panel.

Cancel Forgets changes and exits the panel.

Set specific properties for a Text box

Type Select form Regular text, Number, Date, Current Date, Current Time, or Calculation.

Default text sets optional instructional text that's displayed in the text box before the user types in the field. Set Text box enabled to allow the user to enter text into the field.

Maximum length sets the length of text that a user can enter. The default is Unlimited .

Text format can set whether text automatically formats to Uppercase , Lowercase , First capital, or Title case .

Text box enabled Lets the user enter text into a field. If there is default text, user text replaces it.

Set specific properties for a Check box .

Default Value Choose between Not checked or checked as default.

Checkbox size Set a size Exactly or Auto to change size as needed.

Check box enabled Lets the user check or clear the text box.

Set specific properties for a Combo box

Drop-down item Type in strings for the list box items. Press + or Enter to add an item to the list.

Items in drop-down list Shows your current list. Select an item and use the up or down arrows to change the order, Press - to remove a selected item.

Drop-down enabled Lets the user open the combo box and make selections.

Protect the form

Go to Developer > Protect Form .

Protect form button on the Developer tab

Note:  To unprotect the form and continue editing, select Protect Form again.

Save and close the form.

Test the form (optional)

If you want, you can test the form before you distribute it.

Protect the form.

Reopen the form, fill it out as the user would, and then save a copy.

Creating fillable forms isn’t available in Word for the web.

You can create the form with the desktop version of Word with the instructions in Create a fillable form .

When you save the document and reopen it in Word for the web, you’ll see the changes you made.

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  • International

Judge orders Trump and companies to pay nearly $355 million in civil fraud trial

By Lauren del Valle , Kara Scannell , Jeremy Herb , Dan Berman and Elise Hammond , CNN

Trump will likely be forced to turn over full judgment amount of $355 million to move ahead with appeal

From Lauren del Valle and Kara Scannell

Former President Donald Trump and his co-defendants will likely need to come up with the full judgment of $355 million  ordered by Judge Arthur Engoron Friday, with potentially more in interest, in order to move forward with an appeal, sources familiar with the matter have confirmed to CNN.

Those sources explained that this is the typical procedure required by the law, though some of the details, including the total amount to be frozen, could change. 

Trump and his lawyers said Friday they intend to appeal the decision.

That money will be held in an account pending the appellate process, which could take years to litigate.

The 9% interest Judge Engoron ordered Trump and his company to pay on the nearly $355 million judgment will continue to accrue until it’s paid per the order. 

Typically, the state requires a notice of appeal within 30 days of the judgment.

Fact check: Trump’s baseless claim that Biden and the Justice Department are behind his civil case

From CNN's Daniel Dale

In his remarks Friday evening, President Donald Trump claimed,  as he has before , that President Joe Biden was a hidden hand behind the civil fraud case in New York.

“All comes out of the DOJ, it all comes out of Biden,” Trump said. “It’s a witch hunt against his political opponent, the likes of which our country has never seen.” 

Facts First:  There is no basis for Trump’s claim that Biden or the Justice Department is behind the civil case. The case was brought by New York state Attorney General Letitia James – after an investigation  she began in 2019 , roughly two years before Biden became president. As Trump has repeatedly noted, James, a Democrat,  campaigned  in 2018 on a pledge to pursue Trump. Also, federal agencies do not have jurisdiction over state cases like this.

James filed the lawsuit that led to this trial  in September 2022  – about two months before Trump  launched his 2024 campaign .

Trump: We will appeal New York civil fraud ruling

From CNN staff

Former President Donald Trump speaks to the media on Friday.

In remarks from Mar-a-Lago, Donald Trump slammed Judge Arthur Engoron, New York Attorney General Letitia James and vowed to appeal Friday's ruling that orders he and his companies pay nearly $355 million.

“It’s a very sad day for, in my opinion, the county," the former president said speaking from Palm Beach, Florida.

"We’ll appeal, we’ll be successful, I think,” Trump said

More on the ruling: The ruling in  the New York civil fraud case also says Trump will be  barred  from serving as an officer or director of any New York corporation or other legal entity in the state for three years, among other restrictions.

Earlier Friday, Trump called the ruling a sham on Truth Social.

CNN's Kate Sullivan contributed reporting to this post.

New York attorney general: The court ruled in favor of "every hard-working American who plays by the rules"

From CNN’s Samantha Beech

New York Attorney General Letitia James speaks to the media on Friday, February 16.

Attorney General Letitia James celebrated today's civil fraud ruling in remarks from New York, saying the court ruled "in favor of every hard-working American who plays by the rules."

“Today justice has been served, today we proved that no one is above the law. No matter how rich, powerful, or politically connected you are, everyone must play by the same rules," the attorney general said.

James added, “Donald Trump may have authored the ‘Art of the Deal,’ but he perfected the art of the steal.”

"And so after 11 weeks of trial, we showed the staggering extent of his fraud, and exactly how Donald Trump and the other defendants deceived banks, insurance companies and other financial institutions for their own personal gain," she continued. "We proved just how much Donald Trump, his family and his company unjustly benefited from his fraud."

James said, “I want to be clear, white collar financial fraud is not a victimless crime. When the powerful break the law, and take more than their fair share, there are fewer resources available for working people, small businesses and families.”

The attorney general thanked those in her office who helped work on the case.

“The scale and the scope of Donald Trump’s fraud is staggering, and so to is his ego, and his belief that the rules do not apply to him. Today, we are holding Donald Trump accountable,” James said.

James did not take questions from reporters and departed the room directly after her remarks, which largely reflected the written statement issued by her office earlier Friday. 

Judge: Common excuse that "everybody does it" is all the more reason to be vigilant in enforcing rules

From CNN’s Jeremy Herb, Laura Dolan and Nicki Brown

Judge Arthur Engoron presides over closing arguments in January.

The New York judge criticized one of the defenses put up by Donald Trump’s lawyers in the civil fraud case, writing in his ruling that claiming “everybody does it” is no reason to get away with fraud.

In fact, Judge Arthur Engoron argued it’s all the reason to be more vigilant in actually enforcing the rules. 

“Here, despite the false financial statements, it is undisputed that defendants have made all required payments on time; the next group of lenders to receive bogus statements might not be so lucky. New York means business in combating business fraud," the judge said.

Known for his colorful writing, the judge also quoted an "ancient maxim" before saying the frauds at issue in this case "shock the conscience."

"As an ancient maxim has it, de minimis non curat lex, the law is not concerned with trifles. Neither is this Court," Judge Arthur Engoron wrote in his ruling. "But that is not what we have here." "The frauds found here leap off the page and shock the conscience," the judge wrote.

Remember: Trump’s attorneys argued during the trial that the attorney general’s claims against Trump had no victims — the banks were paid back and were eager to do business with Trump.

But the attorney general argued, and the judge agreed, that the fraudulent loans Trump received at lower rates had an impact on the marketplace. Plus, the law used to bring the claims against Trump does not require there to be victims of fraud in a traditional sense. 

Does Trump have to pay the nearly $355 million judgment immediately? What we know

From CNN's Fredreka Schouten

Legal experts say former President Donald Trump is likely to use a bond, secured with his assets as collateral, as the first step in satisfying the judgment in the New York civil fraud case brought by New York Attorney General Letitia James.

On Friday, Judge Arthur Engoron ordered Trump and his companies to pay nearly $355 million, which Trump has vowed to appeal.

Under a so-called appeal bond, Trump would put up a percentage of the judgment and a third-party company that is the guarantor “is on the hook for the full amount,” said Joshua Naftalis, a former federal prosecutor now in private practice in New York.

“It’s not just the president: Anybody faced with this size of a judgment would probably go the appeal-bond route, because to put up that kind of money is enormous,” Naftalis said. “That could be his entire cash position.”

What Trump has available: It’s difficult to determine the full assets available to Trump, because his business is a privately held concern and does not regularly file reports with regulators. In a deposition taken last year as part of the case brought by James, the former president said his company had more than $400 million in available cash.

Adam Leitman Bailey, a real estate attorney in New York, said Trump likely would have to put up 10% of the judgment in cash, plus an additional fee. 

In January, a jury in a civil defamation case  ordered Trump to pay $83.3 million  to former magazine columnist E. Jean Carroll, on top of the $5 million verdict she had already won against him last year.

2-year ban on Trump’s adult sons leaves Trump Org leadership in question

From CNN’s Lauren del Valle

Eric Trump, left, and Donald Trump Jr. wait for their father to speak at the White House in 2020.

Donald Trump’s eldest sons — who’ve essentially run the Trump Organization since 2017 — are barred from serving as executives in New York for two years, according to Judge Arthur Engoron's order.

The Trumps will have to navigate the two-year penalty as they sort out the future of the family-run real estate company that also hasn’t filled the chief financial officer or controller positions vacated by former Trump Org. execs Allen Weisselberg and Jeff McConney.  

During closing arguments last month, Engoron questioned whether the attorney general presented any evidence that Trump’s eldest sons knew that there was fraud going on at the company — but ultimately found them liable for issuing false financial statements, falsifying business records, and conspiracy claims. 

The judge knocked Eric Trump’s credibility in his ruling, pointing out inconsistent testimony he gave at trial.  He “begrudgingly” conceded at trial that he actually knew about his father’s statements as early as 2013 “upon being confronted with copious documentary evidence conclusively demonstrating otherwise,” the judge wrote. 

Engoron also said Eric Trump unconvincingly tried to distance himself from some appraisals of Trump Org properties that offered a much lower valuation than reported on Donald Trump’s financial statements. 

More on the ruling: Eric and Donald Trump Jr. were both ordered to pay more than $4 million in disgorgement, or “ill-gotten” profits, they personally received from the 2022 sale of Trump’s hotel at the Old Post Office building in Washington DC. 

Ivanka Trump gets to keep her profits on the building sale because she was dismissed as a defendant in the case by an appeals court ahead of trial. But that didn’t stop Engoron from weighing in on her trial testimony, calling it “suspect.” 

Trump has been ordered to pay $438 million this year in fraud and defamation cases

From CNN's Jeremy Herb

President Donald Trump speaks during a press conference held at Mar-a-Lago on February 8, in Palm Beach, Florida.

Judge Arthur Engoron hit Donald Trump with his biggest punishment to date Friday, in a ruling that fined the former president nearly $355 million for fraudulently inflating the values of his properties.

The dollar amount dwarfed the verdict against Trump issued last month in the defamation case brought by E. Jean Carroll — an $83 million judgment — hitting home just how much the New York attorney general’s civil fraud case threatens Trump’s business empire.

Engoron found Trump liable for fraud, conspiracy, issuing false financial statements, and falsifying business records, barring him from serving as director of a company in New York for three years.

While the judge pulled back from trying to dissolve the Trump Organization altogether, Engoron issued a blistering 93-page opinion that painted the former president as unremorseful and highly likely to commit fraud again.

"This Court finds that defendants are likely to continue their fraudulent ways unless the Court grants significant injunctive relief,” Engoron wrote. 

The judge also ruled that Trump will have to pay millions in interest on the judgement amount.

Trump's attorneys are planning to appeal the New York civil fraud ruling. Here's what to expect next

Former President Donald Trump and his lawyers Christopher Kise and Alina Habba attend closing arguments in the civil fraud trial in January.

Donald Trump’s attorneys have already appealed Judge Arthur Engoron’s 2023 summary judgment that found the former president liable for fraud — and the former president's attorneys are already planning to appeal Friday's decision , too.

Trump attorney Christopher Kise responded to Engoron's ruling in a statement Friday, saying the court "ignored the law, ignored the facts.”

Kise added Trump will appeal and “remains confident the Appellate Division will ultimately correct the innumerable and catastrophic errors made.”

During the 11-week trial, Trump’s attorneys repeatedly criticized Engoron’s handling of the case and raised objections “for the record” and a potential appeal. 

Engoron often acknowledged the likelihood of an appeal during the trial.

The ruling is likely to be tied up in the courts on appeal for a long time, and Engoron’s ruling Friday was written with an eye toward surviving an appellate challenge.

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