83 ANNUAL MEETING rd
THE STATE BAR OF CALIFORNIA rd 83 ANNUAL MEETING Program #147 How to Pierce the Corporate Veil Using Forensic Accounting Sunday, September 26, 2010 8:30 AM - 9:30 AM Sponsored by Litigation Section The State Bar of California and the Office of Section Education and Meeting Services are approved State Bar of California MCLE providers. Points of view or opinions expressed in these pages are those of the speaker(s) and/or author(s). They have not been adopted or endorsed by the State Bar of California’s Board of Governors and do not constitute the official position or policy of the State Bar of California. Nothing contained herein is intended to address any specific legal inquiry, nor is it a substitute for independent legal research to original sources or obtaining separate legal advice regarding specific legal situations. 2010 State Bar of California All Rights Reserved How to Pierce the Corporate Veil Using Forensic Accounting Richard M. Squar, CPA MBA-Tax, CVA, ABV, CFF Initial Considerations Liability Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 2 Initial Considerations Get to know the situation - Questionnaire Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 3 California Law on Alter Ego Facts and circumstances Question of fact, not law Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 4 California Law on Alter Ego Two-Pronged Test Separate personalities of corporation and individual no longer exist Inequitable result Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 5 Alter Ego Factors Commingling Corporate assets treated as own H ldi out corporate assets as own Holding Inadequate records, minutes Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 6 Alter Ego Factors Identical equitable ownership in two entities; representations Same business office or location Same employees, same professionals Thin capitalization, capitalization no corporate assets Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 7 Alter Ego Factors Diversion of assets Subterfuge of illegal transactions T Transfers f to corporation i off liabilities li bili i off person or entity i Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 8 Single Enterprise Theory Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 9 Undercapitalization Justify alter ego liability Undercapitalization Inadequate capital Thin capitalization Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 10 Undercapitalization Automotriz Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 11 Undercapitalization Adequacy of capital Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 12 Commingling of Assets and Records ((“Piggy Piggy Bank Theory”) Theory ) Inadequate accounting records No internal controls Sh h ld personall expenses Shareholder Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 13 Manipulation of Assets Corporations Code Section 500 Shareholder Distributions Retained R t i d EEarnings i Able to meet liabilities Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 14 Manipulation of Assets Net assets at least 125% of liabilities Current assets at least equal to current liabilities GAAP Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 15 Formalities Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 16 Documents Needed For Analysis Accounting Pyramid Source documents Sub ledgers Sub-ledgers General ledger Trial balance Financial statements Tax returns Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 17 Financial Statements Audit Review C Compilation il i Unaudited T returns Tax t Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 18 Concluding Remarks Richard M. Squar, CPA, Director of Tax and Litigation Support – Glenn M. Gelman & Associates Presentation to the California Bar Association, September 2010 19 Profile: Richard Squar is the Tax & Litigation Support Director of Glenn M. Gelman & Associates. He is a tax expert and has consulted on a multitude of litigation matters, frequently testifying as a litigation support/business valuation expert witness. With over 30 years of experience, he has been retained in a wide range of cases of various sizes. Prior to joining the firm, Richard started his own CPA firm that he built to over 80 people. His experience with clients spans the broad range of business, including real estate, manufacturing and distribution sectors, contractors, insurance agencies and sureties, and engineering, law and accounting firms. Richard holds the credential of CPA and has a Masters degree in Business Administration in Taxation having earned the Outstanding Graduate Award. He has taught graduate level tax courses and has published several articles. He is a Certified Valuation Analyst (CVA) and Accredited in Business Valuation (ABV) with the two most prestigious business valuation associations, the National Association of Certified Valuation Analysts and the American Institute of Certified Public Accountants (AICPA). He is also certified in Financial Forensics (CFF) with the AICPA. Richard is the Chapter President and National Treasurer of the Forensic Expert Witness Association.
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