Showing 4 posts in Tax.
A friend recently asked if the Georgia Angel Investor Tax Credit program would cover an angel investor’s investment in a start-up’s convertible promissory note. It was a good question because start-ups often raise funds through convertible notes. The short answer to his question was, “it depends.”
The Georgia Angel Investor Tax Credit program gives angel investors who are Georgia residents a tax credit for making qualified investments in Georgia start-ups. The program was amended in 2015 to cover qualified investments made in 2016, 2017 and 2018. (See Georgia Angel Investment Tax Credit (May 24, 2016))
The program allows the angel a tax credit of up to 35% for a qualified investment, capped at a credit of not more than $50,000 in any tax year, with the tax credit to be issued in the second year after the investment is made. (For example, a qualified investment made in 2015 would result in a tax credit for the 2017 tax year.) The state permits not more than $5 million in tax credits each year and start-ups need to apply for allocations of the tax credits if they have investors who want to take advantage of the program.
The Georgia Department of Revenue has issued rules to guide tax payers through the requirements of the program. (See Georgia Rule 560-7-8-.52)
To obtain a tax credit a “qualified investor” must make a “qualified investment” in a “qualified business” (tracking the definitions from the Georgia Rule). Answering the question originally posed, therefore, requires the taxpayer to walk through each of these definitions. An investment in a convertible promissory note, can be a “qualified investment” (assuming all of the other definitions are met) if the convertible promissory note satisfies the requirements of “qualified subordinated debt” (the only debt category within the definition of “qualified investment”). Qualified subordinated debt is “indebtedness that is not secured, that may or may not be convertible into common or preferred stock or other equity interest, and that is subordinated in payment to all other indebtedness of the qualified business issued or to be issued for money borrowed and no party of which has a maturity date less than five years after the date such indebtedness was purchased.”
It is this last requirement for “qualified subordinated debt” that most start-up convertible note deals may have difficulty satisfying. Most convertible notes issued by start-ups are not subordinated, but rather represent senior indebtedness that may not be subordinated. So, if a start-up wants to ensure that its convertible note offering will be eligible for the Georgia Angel Investment Tax Credit program, counsel for the start-up should carefully draft the subordination provisions of the note with a view towards the requirements of Georgia Rule 560-7-8-.52(2)(g).
Entrepreneurs and angel investors often ask whether an investment in a particular start-up will qualify as “qualified small business stock” for purposes of Section 1202 of the Internal Revenue Code (the “IRC”).
IRC Section 1202 creates a powerful incentive for investors to invest in qualified small business stock. If all the requirements of Section 1202 apply, an investor may exclude from income between 50% and 100% of the gain the investor realizes upon a qualifying sale of that small business stock that the investor has held for five years or more. In other words, under some circumstances, the investor’s gain can be tax-free!
My tax partner, Julian Fortuna, assisted in obtaining a great result for our client, Linchpins of Liberty, Inc., in its suit against the IRS.
Our client, Linchpins of Liberty, is a non-profit organization that, along with roughly 37 other clients, applied for non-profit status under IRC Sections 501(c)(3) or 501(c)(4). Because of their names, the IRS failed to properly process these organizations’ applications for non-profit status as part of a program that tried to frustrate or delay non-profit status for conservative or anti-administration organizations. Linchpins of Liberty, along with many other organizations, sued the IRS on constitutional grounds, claiming that they were being denied constitutional rights because of their political beliefs.
After the fact of the IRS’ program of delay and non-response came to light, the IRS claims to have halted the program and resumed the proper processing of applications for non-profit status. At the trial court level, the IRS had succeeded in dismissing certain of Linchpins of Liberty’s constitutional claims as moot on the grounds that the IRS was no longer engaged in its intentional policy of delay and non-response.
In an opinion released last week the D.C. Circuit Court of Appeals reversed the trial court’s ruling, holding that the IRS had not carried its “heavy burden” to prove that the constitutional claims were moot. The opinion of the D.C. Circuit took the IRS to task for its argument:
“The IRS offers a rather puzzling explanation for why the continued failure to afford proper processing to at least some of the victim applicants should not prevent a finding of cessation. That explanation is that the organizations whose applications were still pending “were involved in ‘litigation’ with the Justice Department . . . .” Id. at 27. . . It is not at all clear why the IRS proposes that not ceasing becomes cessation if the victim of the conduct is litigating against it. The IRS position is reminiscent of Catch-22 from the novel of the same name. Under that “catch,” World War II airmen were not required to fly if they were mentally ill. However, anyone who applied to stop flying was evidencing rationality and therefore was not mentally ill. See Joseph Heller, Catch-22 (1971). “You are entitled to an exemption from flying,” the government said, “but you can’t get it as long as you are asking for it.””
Julian Fortuna was co-counsel for these clients, along with the American Center for Law and Justice, and participated in oral argument in the case.
The Savannah Economic Development Authority (SEDA) is making Georgia an even more attractive place to shoot films, starting in 2016. This is a boost to an industry that didn't exist in Georgia in a big way until about 10 years ago, but that has grown rapidly: filmed entertainment brought about $6 billion to Georgia in 2014.
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