Facebook was one of the most hyped initial public offerings (IPOs) of 2012, yet the stock price stumbled in the wake of the company”™s public debut. After initially soaring, the stock price of the company dropped in value by 50 percent in the weeks following the social network”™s May 2012 public offering. Senior editor Stephen Gandel said in CNNMoney (May 18, 2012) that taxes were one of the potential reasons the stock failed to maintain momentum.
Tax planning is an important early step for any company looking to go public. Effective tax strategies boost shareholder value, thereby leading to greater success in meeting the potential of an IPO and the company”™s longer-term financial goals following the IPO. While not limited to these items, tax planning that identifies and addresses tax expense and exposures related to each of tax strategies is a good start.
Resolve financial issues. Unresolved issues, such as financial restatements, could be red flags for investors and handicap the stock price out of the gate.
Prepare for changes in legal entity structure. Flow through entities typically convert to a C corporation when going public, which brings with it a host of tax issues to be managed around built-in gains tax, earning distributions, tax provisions, and filing requirements.
Address uncertain tax positions. Review tax positions taken in prior years to identify and address those that are uncertain under “more likely than not” criteria.
Analyze deferred tax positions. Justify deferred tax assets and liabilities and track tax law changes to analyze their potential impact on deferred tax positions.
Reduce filing risk. File tax returns in all relevant state and international jurisdictions.
Use net operating loss carryforwards. Ownership changes associated with an IPO could restrict access to operating losses. Businesses that anticipate a significant change in ownership should make the greatest use of net operating losses prior to the offering.
Assess non-income tax considerations. These considerations include sales and use taxes, real property taxes, stock transfer taxes, transfer pricing, and the tax implications of using IPO proceeds.
Build an independent tax team. Establish an independent tax team to create tax controls, processes, and a reporting environment to meet tax issues as a public company.
Not every IPO is a success. Savvy investors have demonstrated in the marketplace that they are willing to pay more for companies with a clean bill of tax health and a tolerable level of tax risk. Businesses that pursue tax strategies to clean up financial statements and disclosures in-house, and in private, will have more success with their public debut.
Gary Purpura, managing partner of TaxOps”™ Stamford office, specializes in helping partnerships and corporations develop tax strategies and deal with complex compliance and financial reporting needs. He can be reached at gpurpura@taxops.com or 307-2820. Learn more at taxops.com.
