Small Captive Insurance Companies - Husch Blackwell/media/files/events/2015/09/150922... · Small...

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Small Captive Insurance Companies A Tax Efficient Method to Manage Your Risks Dot Foods, Inc. Husch Blackwell LLP Marsh & McLennan LLC RubinBrown LLP September 22, 2015

Transcript of Small Captive Insurance Companies - Husch Blackwell/media/files/events/2015/09/150922... · Small...

Small Captive Insurance Companies

A Tax Efficient Method to Manage Your Risks

Dot Foods, Inc. Husch Blackwell LLP Marsh & McLennan LLC RubinBrown LLP

September 22, 2015

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Small Captive Insurance Companies

Raymond S. KreienkampPartner, Husch Blackwell, LLP

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Jeffrey B. KanePartner

Craig A. AdoorPartner

William MetzingerChief Financial Officer

Derek M. MartisusSmall Captives Sales LeaderSr. Vice President

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WHAT IS A CAPTIVE INSURANCE COMPANY?

• Insurance Company• Established by a parent group or groups• Specific Objective of covering the risks to which the parent is

exposed• Type of self-insurance

Small Captive Insurance Companies

Dot Foods, Inc.

William MetzingerChief Financial Officer

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Dot Foods, Inc. | Dot Foods Transportation

BillMetzingerSeptember22,2015BillMetzingerSeptember22,2015

Introduction

WilliamMetzinger,CFODotFoods,Inc.

• FormedMTSInsuranceCo.– Dec.2014(831bsmallcaptive)

• Partners– MarshandRubinBrown

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DotFoods,Inc.• MtSterling,IL• Privatelyheld• Foodredistributor• $6.5bannualsales• 3,000distributorcustomers• 9locations• 4,000employees• 850tractors/1,600trailers• ForbesLargestlist– #73

DotFoods,Inc.Locations

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BusinessCase–OurInterest

Selfinsuredhistory• Desiretoformalizeselfinsuredprocess• Whyareothersformingcaptives?

• Riskthatisnotinsurable• Wealthtransfer– privatecompanies• Taxstrategy– deductreserves

BusinessCase–ConcludedNO

• Multipletimesevaluated‐ ConcludedNO

• Nouninsurablerisk• Structureselfinsuredrisk– actuary• Nodesiretotransferwealth• Cash(premium)paidinsurancecompanynotavailabletogrowourbusiness

• Truerisksharingrequirement• Taxbenefitdidnotoffsetcostofcaptive

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BusinessCase–Change

• Section831b– providedmorethantaxtimingandfundedcostofformation

• Businessoperationsbeganproducingcashinexcessofbusinessdemands

• Concludedwewantedtobe“insurancecompany”

• Marshassistance

BusinessCase–Captive

• BeganPhaseI‐ August2014• CaptiveformedDecember2014

• Funded/deducted2015premium• DomesticDomicile– StateofUtah• 1styearcapital=$810,000• 1styearpremium=$1,190,000

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BusinessCase–Coverage

• Tradecredit• Wage&hour $415,000• Productrecall

• Fleetliability• Californiaquake $775,000

$1,190,000

BusinessCase–Future

• Buildreservesinsmallcaptive

• Utilizeselfinsuredreservestofundmoreequityasnecessary

• Transitiontoalargecaptive

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BusinessCase–Future

• Whatriskprovidemostopportunity(premiumreduction)?

• Transfertolargecaptivewithenoughcoveredrisktooffsetlostof831bbenefit

• IllinoistaxonCaptivePremiumsisheadwind• LargeCaptiveorExpandedSelfInsurance?

Thankyou

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Small Captive Insurance Companies

Small Captive Solutions

Derek M. MartisusSenior Vice President, Marsh & McLennan LLC

SMALL CAPTIVE SOLUTIONS

September 22, 2015

Derek M. MartisusSmall Captives Sales Leader, Sr. Vice PresidentMarsh & McLennan AgencyBurlington, VT

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MARSH

At a very high level, Small Captives are just like large captives………..

• Fund retained corporate risk;

• Means to access reinsurance markets for capacity;

• Profit center (underwriting risk of third parties); and

• Must satisfy Risk Transfer and Risk Distribution.

Small CaptivesSimilarities to Large Captives

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………….only smaller and with a special tax electionMARSH

Small Captives831(b) Simplified

Section 831(b) of the US Tax Code states that if a company:

– Is a Property & Casualty Insurer (satisfies Risk Shifting & Distribution); and

– Writes less than US$1.2 million in premium annually;

Then Company may choose to make the 831(b) election which will:

– Allow them to be taxed on investment income only.

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MARSH

The Marsh ApproachInsurable Risks

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Find Retained Insurable Risks

1. Deductible Layers (non-working so few frequency claims);2. Excess Layers;3. Exclusions to existing policies; and 4. Uninsured exposures

a) Cyber Liabilityb) Supply Chain Contingent Business Interruptionc) Intellectual Propertyd) Others……

MARSH

Types of Coverages – HIGH SEVERITY/LOW FREQUENCY (examples)

EPLI EPLI Wage and Hour Liability D&O Supply Chain or similar Business Interruption Covers Construction Defect Credit Intellectual Property Product Recall Errors & Omissions Political Risk Cyber Liability Contractors Pollution Environmental Liability Mold Liability Commercial property including wind and weather Excess Workers compensation Excess General liability Auto own damage including deductible reimbursement Warranty

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Earthquake Contractual Liability Executive Risk Flood Franchise impairment Kidnap and Ransom Legal Defense Expenses Reputational Risk Stop Loss Terrorism Contractual Liability General Liability Difference In Conditions Property Difference In Conditions Professional & Contractual Liability Umbrella Liability Group Captive Assessments Any other policy for which a comparative

commercial quotation is available.

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MARSH

Steps to CreationCaptive Feasibility Study Scope

The Feasibility Study will contain a review of the following topics: – A general discussion of captives;– The value of a captive for your company:

- Recommended coverages to insure through the captive;- Financial Value;- Operational Value;

– Recommended ownership structure;– Investment considerations (Intercompany loans and investments);– Domicile analysis and recommendation;– Cost considerations;

- Start-up and ongoing expenses;- Capitalization requirements;- Domicile taxes/fees;- Self Procurement Tax

– A step-by-step implementation plan and timeline for forming a captive;– Critical next steps for consideration; and– An outline of roles and responsibilities for the ongoing operations of the captive.

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Timing and DataMinimum Data Required for a Feasibility Study

• Marsh proposal for feasibility study:– 30 to 90 days to complete project.

• Information request will be designed by Marsh and sent to the client:– Parent company financial information;– Company organizational chart of legal subsidiaries;– Tax rates (US, global rates);– Insurance summary (noting retentions by line of coverage);– Allocation of payroll and revenue by state; and– Rate of return on parent’s cash flow.

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MARSH

The Incorporation Process

ClientInstruction

SelectService

Providers*

Meet Regulators

DevelopBusiness Plan

Capitalize

SubmitFinal

Documentation

Receiveapproval letter

ReceiveCertificate of

Authority

HoldOrganizational

Meeting

StartUnderwriting

SubmitApplication

Four Weeks Two to Four Weeks

STEP 1

STEP 2

STEP 3

STEP 4

STEP 5

STEP 6

Different domiciles will have slight variations on the above process.

*Including selection of captive manager, auditor, attorney, bank, actuary, and asset manager (optional).

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This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are intended solely for the entity identified as the recipient herein (“you”). This document contains proprietary, confidential information of Marsh. This document may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, auditing, investment or legal matters are based solely on our experience as insurance brokers, insurance managers and risk consultants and are not to be relied upon as actuarial, auditing, tax, investment or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

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Small Captive Insurance Companies

Legal Aspects of Captive Insurance

Craig A. AdoorPartner, Husch Blackwell, LLP

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© Husch Blackwell LLP

LEGAL ASPECTS OF CAPTIVE INSURANCE

Craig A. AdoorRaymond S. KreienkampSeptember 22, 2015

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ARE THERE VARIOUS TYPES OF CAPTIVE INSURANCE COMPANIES?

• Pure Captive (Single Parent Captive)• Group Captive• Association Captive• Branch Captive

WHAT TYPE OF ENTITY STRUCTURES ARE USED FOR CAPTIVE INSURANCE COMPANIES?

• Corporations • Limited Liability Companies• Not for Profit Corporations

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WHERE SHOULD I ORGANIZE MY CAPTIVE INSURANCE COMPANY?

• Costs• Convenience• On-going obligations• Regulatory environment• Demographics of the risk – international,

national, regional or Missouri only?

Captive Insurance Application Requirements Vary from Domicile to Domicile

Application for Admission (Certificate of Authority) Business Plan Outline Biographical affidavits for all directors and officers Listing of all authorized service providers Corporate documents (draft) Articles of Incorporation Bylaws

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Captive Insurance Application Requirements Vary from Domicile to Domicile (cont’d.)

Organizational chart Minimum capital and surplus guidelines Proforma financial projections Actuarial feasibility study Financial statements of parent company Insurance policies to be written and process

documentation

ARE THERE PARTICULAR BENEFITS TO ORGANIZING THE CAPTIVE INSURANCE COMPANY IN MISSOURI?

• Close to Home• Several Options for Businesses• Simplified Application Review Process• Known Up-Front Costs• Experience and Flexibility of the Department of

Insurance• Insurance Expertise in the State

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DETERMINE THE LEGAL RISKS AGAINST WHICH YOU ARE TRYING TO PROTECT

• Risks incidental to the business or industry in which your company operates

• Types of risks insured• D&O Liability• Anti-trust and unfair competition• Errors and omissions• Employment practices• Machinery Breakdown• Weather risks

Ongoing Requirements – Summary

Captive’s principal place of business in Missouri. An annual board meeting held in the state. At least one member of the board is a state resident. A resident agent for service of process. Use of approved service providers. Material changes in the business plan must be filed for

prior approval.

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Ongoing Requirements – Summary (cont’d.)

Material changes in rates must be filed within 30 days of adoption.

All proposed dividends must be filed for prior approval. Loans with investments in affiliated companies must be

filed for prior approval. Organizational changes such as mergers,

consolidations, redomestications are in compliance with Holding Company Statutes as they apply.

Ongoing Requirements – Summary (cont’d.)

Before March 1st each year an annual filing is due. Consists of financial statements certified by two officers using Missouri prescribed format.

Renewal fee before April 1st, (March 1st for SPLRC’s) renews license until April 1st of the next year. Fee is deductible from premium taxes.

June 30th, Audited Financials, including Actuarial Certification of Reserves.

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For additional information, please contact:

Craig A. Adoor314.345-6407 [email protected] S. Kreienkamp314.345-6478 [email protected] BLACKWELL LLP190 Carondelet Plaza, Suite 600St. Louis, MO 63105

Small Captive Insurance Companies

The Tax and Financial Considerations

Jeffrey B. KanePartner, RubinBrown LLP

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A true insurance company formed to write insurance coverage for a related group of businesses. It must be licensed in its chosen domicile

It must have business substance as a stand alone entity.

The term “Small Captive” refers to a captive insurance company writing less than US $1.2 million in annual premiums.

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What is a “Small Captive” for Tax Purposes?

Can qualify as an “insurance company” for US federal tax purposes If it meets certain “risk distribution” and “risk shifting” elements

It can then elect to be taxed only on investment income and trade or business income.

This is specifically allowed by tax law and various rulings and court cases.

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What is a “Small Captive” for Tax Purposes?

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Financial Advantages: Performance measurements.

Underwriting profit not subject to federal income tax if captive is properly structured (investment income is subject to federal income tax).

Potential build up of funds within the captive.

Efficient wealth-transfer mechanism.

Asset protection

Why Form a Captive?

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Can be formed domestically

offshore

Many states are passing captive legislation to compete with foreign jurisdictions for the captive business.

Surge of state laws and the more definitive guidance by the IRS are believed to account for the increase in interest to form captives in the U.S.

What Are The Tax Issues Related To Where A Captive Is Formed?

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Benefits of being onshore: No foreign entity tax reporting

Potentially fewer IRS audits and inquiries

Sometimes it is required (as in the case of a Small Captive)

Quicker state approval process

Convenient location

What Are The Tax Issues Related To Where A Captive Is Formed?(Continued)

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A Small Captive is an insurance company that receives no more than $1,200,000 of gross insurance premiums in a year.

Pays tax only on its taxable investment income and trade or business income.

The entity must be a “C Corp” or an LLC that elected to be taxed as a “C Corp.”

What Are The Tax Considerations?

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If set up outside the U.S., the entity must make an election to be treated as a domestic corporation.

Depending on who owns the insurance company, dividends paid are qualifying dividends subject to the lower rates.

Many states do not tax the income of a Small Captive but may have procurement or premium taxes instead.

What Are The Tax Considerations? (Continued)

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The premiums paid to the captive are deductible.

The captive must have economic substance and business purpose.

What Are The Tax Considerations? (Continued)

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Income tax benefits result if the payments are for “insurance.”

The term “insurance” is not defined in tax law.

The Supreme Court said that insurance has two components: Risk Shifting

The risk of loss is shifted to another entity

Risk Distribution

The captive must distribute its risk among several insured’s

What is “Insurance” for Tax Purposes?

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Safe Harbor 1 A parent-captive situation where the parent only comprises 50% of the

total insurance of the captive and the other 50% consists of third party risk will constitute “insurance” (Risk pooling)

Safe Harbor 2 Parent creates subsidiary captive. Parent has 12 separately recognized

subsidiaries that make payments to the captive. No one subsidiary constitutes more than 15% nor less than 5% of the total insurance. The arrangement constitutes “insurance”.

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What is “Insurance” for Tax Purposes?(Continued)

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Parent Operating Company

Captive Insurance Company

Third Party Risk(Purchased Risk Pool)

100%Owner

$600,000 in premiums

$600,000 in premiums

Captive Insurance Company

Parent

Subsidiary 1

Subsidiary 2

Subsidiary 3

Subsidiary 4

Subsidiary 5

Subsidiary 6

Subsidiary 7

Subsidiary 8

Subsidiary 9

Subsidiary 10

Subsidiary 11

Subsidiary 12

100%Owner

PREMIUMS

What is “Insurance” for Tax Purposes?(Continued)

Valid business purpose for formation must exist

Premiums based on arm’s length commercial rates

Adequately capitalized

No circular cash flows

Must pay claims from its own funds; separately maintained

Business operations and assets kept separate from insured

The captive must not be loosely regulated by its domicile

Other Tax Considerations

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In many cases, the operating company owns the captive. However, if the ownership of the captive is held by a trust for the business owner’s

family, (or outright by them), you can effect wealth transfer with very little use of gift tax exemption, if any.

Trusts may exist that already contain significant assets. If not, there are a number of options.

Trust will own the captive & have benefit of profits generated

Payment of premiums not considered to be gifts.

No estate tax inclusion if the trust is properly designed.

Planning

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Planning (Continued)

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OperatingBusiness

BusinessOwner

Captive Insurance Company

100% Owner

Insurance coverage

$1,200,000 premiums

Uses $250,000 gift to capitalize captive

$250,000 giftIrrevocable

DynastyTrust

(Note: This does not address risk shifting or risk distribution).

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Small Captive Insurance Companies

William H. Metzinger Chief Financial Officer, Dot Foods, Inc

Dot is a privately held food redistribution company serving the entire United States from eight distribution site around the Country. The corporate offices of Dot Foods are located in Mt Sterling Illinois. Bill is a certified public accountant and began his career in public accounting. He left public accounting to join the healthcare industry as CFO of St. Mary hospital in Quincy IL and later to serve as CEO. Bill joined Dot Foods in 1993 as CFO when Dot sales were $362m --- Dot sales today exceed $6b. Ranked by Forbes as 73rd of America’s Largest Private Companies Bill is responsible for planning Dot’s insurance risk coverage and has been a long time client of Marsh/McLennan and Rubin Brown. Dot’s insurance profile includes conventional insurance coverage; high deductible and self-insurance coverage and the establishment of an 831b captive Insurance Company in 2014. Bill resides with his wife of 41 years Sue in Quincy IL and has two adult children Kathryn and Bill. Kathryn and Bill both live in St Louis. Expecting 1st grandchild Nov 1st !

MARSH

Derek M. Martisus, ACAS, ASA, MAAA Senior Vice President, Marsh & McLennan Agency

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Derek Martisus leads the Small Captive sales efforts for Marsh & McLennan Agency (“MMA”). MMA is a wholly owned subsidiary of Marsh, dedicated to serving the insurance needs of middle market companies in the United States. Derek is responsible for providing captive solutions to MMA brokers and their clients across the US, working closely with Marsh’s Captive Solutions Group. Prior to joining MMA, Derek worked for Performa Limited, an asset management firm specializing in captive portfolios, where he was Head of US Insurance Solutions with primary responsibility for marketing, business development and client relationship management. Prior to joining Performa, Derek was a VP and Quantitative Analyst with Dwight Asset Management, supporting Dwight’s insurance clients. Derek spent the prior six years working as an actuarial consultant with Marsh Management Services. Derek is a credentialed life as well as P&C actuary. Derek earned a B.S. in Mathematics from the University of Notre Dame and an M.A. from Binghamton University.

MARSH

Marsh – A Leader in Quality, Scope, and Scale

Craig A. Adoor

Craig serves as a senior legal and transactional adviser within Husch Blackwell’s Food & Agribusiness industry team. He provides strategic business and results-oriented advice to senior management and boards of directors of publicly held and private companies. His counsel is based on a broad yet in-depth understanding of the legal and business challenges facing companies that operate in a number of different sectors, including those in the food and agribusiness industry. An experienced securities and mergers and acquisitions adviser, Craig has managed and continues to manage the legal work on complex corporate and commercial financings and capital-raising transactions, as well as managing many complex mergers, stock and asset acquisitions and dispositions, and corporate reorganizations. In addition, he advises senior management and boards of directors with respect to corporate governance issues. Craig also has served as de facto general counsel for a number of companies that do not have an in-house general counsel. Best Lawyers in America – Corporate Law, Securities/Capital Markets Law (2007).

Raymond S. Kreienkamp A certified public accountant, Ray is a member of the Financial Services industry team, with an emphasis on clients who require effective and guided advice on private wealth matters.

He counsels clients on sophisticated income and estate planning techniques, family business and succession planning, and creative methods for the formation, acquisition, management and disposition of businesses. He also advises on estate and trust administration.

Ray’s industry experience includes:

• Structuring a multigeneration trust to preferentially benefit descendants active in the business while providing asset protection and estate tax savings and taking advantage of a pending change in the gift and generation-skipping transfer tax law.

• Advising family owning significant business interests nationwide on income and estate tax saving business formation and disposition issues.

• Structuring sophisticated multistep process to defer income taxes on sale of business where current owners retain an investment in the ongoing operations.

• Represented a major bank in the tax-free acquisition of several banks in separate transactions.

• Represented banks and bank-holding companies in the acquisition and disposition of such entities in taxable and tax-free transactions.

• Advising real estate investment trusts (REITs) on tax issues related to their formation and on-going operations.

Ray has been nationally recognized for his trusts, estates and tax legal representations since 2007. Ray also has served as de facto general counsel for a number of companies that do not have an in-house general counsel.

National Firm: 17 Offices – 600 Attorneys

Aligned with Industry

At Husch Blackwell, team of lawyers with a depth of experience within a particular industry work together, across practice specialties, to deliver comprehensive solutions to help our clients achieve their business goals.

Jeff Kane, CPA Partner, RubinBrown LLP

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Jeff Kane is a Partner in RubinBrown’s Tax Services Group. With more than 40 years of public accounting experience, Kane specializes in providing tax and financial consulting. He has extensive experience with providing federal income tax consulting to businesses in a many industries and ranging from small start ups to multinationals. Kane also specializes in providing merger and acquisition tax consulting and structuring.

Specific Experience & Expertise

•Tax consulting

•Merger, sale and acquisition planning

•Tax return preparation and planning

•Family business succession planning

•Estate & retirement planning

•IRS examination matters

•Gift tax planning

Community Involvement •Board Member & Finance Committee, Opera Theatre of

St. Louis

•Dean’s Advisory Council, University of Detriot-Mercy

•Many Previous Civic and Community Leadership Positions

Professional Organizations •Member, American Institute of Certified

Public Accountants

•Member, Missouri Society of Certified

Public Accountants

•Member, Michigan Society of Certified

Public Accountants

•Former Member, Financial Executives

International

Education •B.s., Accounting, University of Detroit Mercy

[email protected]

314.290.3396

Founded in 1952, RubinBrown has been providing professional services for more than 60 years. During that time, RubinBrown has grown to be one of the largest firms in the nation. Inside Public Accounting lists RubinBrown as the 43rd largest firm in the United States. RubinBrown has offices located in the St. Louis, Kansas City, Nashville and Denver metropolitan areas.

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Services Overview

•RubinBrown is a full-service CPA and business consulting firm offering

the following range of services.

•Tax Services

• Wealth Management & Estate Planning

• Corporate, Partnership and Individual tax consulting and compliance

• State and Local Tax (SALT)

• Investment Exit Tax Strategy Development

• International Tax Consulting

Assurance Services

• Financial Statement Audits, Reviews & Compilations

• Public Company and Capital Formation Advisory Services

• Benefit Plan Audits

• Outsourced accounting and other entrepreneurial services

Business Advisory Services

• Mergers & Acquisitions

• Business Reorganization &

Financial Restructuring

• Business Improvement

• Enterprise Risk Management

• Valuation

• Fraud and Forensics

• Information Technology Risk

• Information Technology Services

• Litigation Services

• Cyber Security