File - NSAC - Far Western Chapter

Report
NASC Far Western Chapter Annual
Conference
International Tax Update and Reporting
Monterey, California
May 27, 2010
TAX
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT
INTENDED OR WRITTEN BY KPMG TO BE USED,
AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF
(i) AVOIDING PENALTIES THAT MAY BE IMPOSED
ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY
ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on
authorities that are subject to change. Applicability of the information to
specific situations should be determined through consultation with your tax
adviser.
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2
DATED MATERIAL
The material contained in these course materials is current as
of the date produced. The materials have not been and will not
be updated to incorporate any technical changes to the content
or to reflect any modifications to a tax service offered since the
production date. You are responsible for verifying whether or
not there have been any technical changes since the
production date and whether or not the firm still approves
any tax services offered for presentation to clients.
You should consult with Washington National Tax and
Risk Management-Tax as part of your due diligence.
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3
Objectives
Discuss the tax compliance activities for cooperatives
relating to international operations or transactions
Identify common issues, elections, and planning
opportunities that may arise when dealing with
multinational cooperatives
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4
Agenda
Part I: U.S. Reporting Overview
Part II: Forms and Schedules
Part III: Other Items of Importance
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5
Part I: U.S. Reporting Overview
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6
U.S. Reporting Overview
Form 1120-C (and Form 1118 if elected)
US COOPERATIVE
FOREIGN ENTITY
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7
U.S. Reporting Overview
Forms 5471 and 5472
Form 5471
FOREIGN
US CO-OP
FOREIGN ENTITY
(income effectively
connect to a USTB)
FOREIGN
US CO-OP
51%
FOREIGN
49%
Controlled Foreign Corporation
CFC
Form 5472
Form 5472
From 1120F if:
U.S. trade or business, regardless whether or not it had U.S. source income or
exemption under a treaty
Income effectively connected to a U.S. trade or business
U.S. source income
Claiming treaty benefits with respect to the items listed above
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8
U.S. Reporting Overview
Forms 8865 and 1065
If a reportable event
Form 8865
US CO-OP
51%
Form 8865
FOREIGN
US CO-OP
25%
49%
FOREIGN
75%
Foreign
Partnership
Foreign
Partnership
If ECI or U.S. Source FDAP
If ECI or U.S. Source FDAP
Form 1065*
Form 1065*
*K-1s required for U.S. partners and passthrough U.S. partners only
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9
U.S. Reporting Overview
Form 1065
Form 1065 is used by both U.S. and foreign partnerships
Generally, a foreign partnership files Form 1065 if it has gross
income:
Effectively connected to a trade or business within the U.S.
or
Derived from sources within the U.S.
A foreign partnership required to file Form 1065 generally must
report all of its foreign and U.S. source income
A foreign partnership filing Form 1065 solely to make an election
need only provide its name, address, and EIN on page 1 and
attach the appropriate statement
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10
U.S. Reporting Overview
Form 1065—Exceptions
Exceptions to Filing
Foreign partnerships that has U.S. source income equal to or less
than $20,000 and has no ECI
And only if:
Less than 1% of any partnership item of income, gain, loss, deduction, or
credit was allocable to direct U.S. partners
Foreign partnership that has U.S. source income, but has no ECI
and no U.S. partners
All required Forms 1042 and 1042-S were filed,
The tax liability of each partner was withheld at the source (if
applicable), and
Not a withholding foreign partnership
Other foreign partnerships with no ECI may have modified filing
obligations
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11
U.S. Reporting Overview
Form 8858
US CO-OP
Form 5471
US CO-OP
51%
Disregarded Entity
FDE
Form 8865
FOREIGN
49%
Foreign Reverse Hybrid
F—Ptnr
US—Corp
US CO-OP
51%
FOREIGN
49%
Hybrid Foreign Entity
F—Corp
US—Ptnr
If USTB, ECI or
U.S. Source FDAP
If ECI or
U.S. Source FDAP
Form 1120F
Form 1065
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12
Part Ii: Forms and Schedules
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13
Forms and Schedules
Form 5471, CFC Information Return
Form 5472, 25% Foreign-owned U.S. Corp or Foreign
Corp with ETB
Form 926, Transfer of U.S. Property to a Foreign Corp
Form 1120F, Foreign Corp Tax Return
Form 8865, CFP Information Return
Form 8858, FDE Information Return
Form 1118, Foreign Tax Credit
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14
Form 5471—Annual Accounting Period
Except for Schedule O report information for the tax
year of the foreign corporation that ends with or within
your tax year
Example
1/1
12/31
Foreign Corporation
6/30
U.S. Person
The U.S. Person would
report the foreign
corporation’s activity for
the annual year ended
12/31.
For Schedule O, report acquisitions, dispositions, and
organizations or reorganizations that occurred during
the U.S. person’s tax year
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15
Form 5471—Benefits of Good Reporting
Benefits of Reporting Accurate and Complete Information on
Form 5471
Earnings and profits history—minimizes the complexity and cost of
a study
History of foreign income taxes paid—facilitates calculation of
dividend income and deemed paid credit
Source of information regarding foreign financial statements,
subpart F income, distributions, foreign taxes paid or accrued, etc.
Information may be needed for future restructurings and
reorganizations
Minimizes costly and time-consuming examinations
Avoids penalties
ILM 200748006—Form 5471 Reasonable Cause May Apply
Changes in HIRE ACT
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16
Form 5472—Purpose
Generally, a reporting corporation must file Form 5472
if it had a reportable transaction with a foreign or
domestic related party
Form 5472 is used by the IRS to obtain information
about transactions between the related parties to
conduct a proper audit
The IRS’ procedures relate directly to possible
adjustments under § 482 and all other Code sections
that affect the tax treatment of transactions between
related parties
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17
Form 926, Transfer of Property to
a Foreign Corp
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Form 926—Purpose
Transfers of property offshore creates the possibility
of tax avoidance when nonrecognition provisions
would normally render the transaction tax-free
Form 926 provides the IRS with detailed information
on transfers by U.S. persons of property to a foreign
corporation.
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Form 926—Who Must File
U.S. persons that make certain outbound transfers of
property to foreign corporations pursuant to the
corporate liquidation, organization and reorganization
provisions of the Internal Revenue Code (§§ 332, 351,
354, 355, 356, or 361)
Note: A U.S. person who transfers property to a foreign
partnership in a contribution described in § 721 reports
this transfer on Schedule O, of Form 8865
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20
Form 8865 CFP Information
Return
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Form 8865—Purpose
Reporting rules similar to those applicable for
controlled foreign corporations
Used by the IRS to monitor transactions between U.S.
persons and foreign partnerships, including:
Contributions of property by U.S. 10% or greater
partners to the foreign partnership
Acquisitions, dispositions and substantial changes of
proportional interests of U.S. partners in the foreign
partnership
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22
Form 8865—Categories of Filers
Category 1
A U.S. person who controlled the foreign partnership
at any time during the partnership’s tax year
Control = 50% or more direct or constructive interest
in the partnership
A 50% interest is equal to:
50% of capital,
50% of profits, or
50% of the deductions of losses
For determining constructive ownership refer to the
rules under § 267(c) (excluding § 267(c)(3))
There may be more than one Category 1 filer for a
partnership for a particular partnership tax year
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23
Form 8865—Categories of Filers
Categories 2 and 3
Category 2 Filer
A U.S. person who owned 10% of the partnership
during the year while the partnership was controlled by
10% or greater U.S. partners
If the partnership had a Category 1 filer, no partner will
be considered a Category 2 filer
Category 3 Filer
A U.S. person who contributed property to a foreign
partnership in a section 721 transaction if the U.S.
person:
Owned 10% of the partnership, directly or constructively, or
The value of the property contributed exceeds $100,000
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24
Form 8865—Categories of Filers
Category 4
A U.S. person that had a reportable event under
section 6046A during the year, including:
Certain acquisitions of interests in the foreign
partnership where either:
The U.S. persons direct interest in the partnership increased to
10% (e.g., from a 9% interest to a 10% interest), or
The U.S. persons direct interest in the partnership increased by
10 percentage points (e.g., from 11% to 21%)
Certain dispositions of foreign partnership interests
Certain changes in proportionate interest in the foreign
partnership
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25
Form 8858, FDE Information
Return
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Form 8858—Definitions
Foreign Disregarded Entity (FDE)
A business entity that is not formed in the U.S. and is
treated for U.S. tax purposes as disregarded as an
entity separate from its owner pursuant to a CTB
election (Treas. Reg. § 301.7701-2 and 3)
Form 8858 does not apply to a “true branch” (unincorporated
operation)
Tax Owner of the FDE
Person that is treated as owning the assets and
liabilities of the FDE for U.S. federal tax purposes
Direct Owner of the FDE
Legal owner of the FDE
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Form 8858—Definitions
Tax Owner and Direct Owner Example 1
CFC is a tax owner of the FP
and FDE
U.S. CO-OP
CFC is a direct owner of FP
CFC
(Canada)
FP is a tax owner and direct owner
of FDE
FP
(France)
FDE
(Germany)
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28
Form 1118, Foreign Tax Credit
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29
Foreign Income Taxes
Credit vs. Deduction
Foreign Tax Credit
Annual Election
Dollar for dollar credit against U.S. tax payable.
Subject to limitation
Available for creditable foreign income taxes and for any taxes
paid in lieu of an income tax
File Form 1118 to claim the credit
Deduction to Taxable Income
Deduction may be taken in lieu of credit (§ 164(a))
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30
Part III: Other Items of
Importance
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31
Other Items of Importance
Relevant Information Reporting Code Sections
Penalties for failure to submit information
Statute of Limitations
Withholding Tax
Making an Initial Entity Classification Election
Form 1120-C, Schedule N, Foreign Operations of U.S.
Corporations
Form 8621, Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing
Fund
List of other relevant forms
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32
Relevant Information Reporting Code
Sections
For your reference below is a list of the Internal Revenue Code
sections that require information reporting with respect to Forms
5471, 5472, 926, 8865, and 8858. Further guidance is available in
the regulations under these Code sections
§ 6038 requires U.S. persons that control certain foreign
corporations and/or partnerships to report certain transactions of
the foreign corporation and/or partnership
Form 5471, 8858, and 8865
§ 6038B requires U.S. persons to report certain transfers of
property to foreign corporations and foreign partnerships, as well as
certain liquidation distributions to non-U.S. persons
Forms 8865 and 926
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33
Relevant Information Reporting Code
Sections (Cont’d)
§ 6038A and 6038C requires a 25% foreign owned U.S.
corporation or a foreign corporation engaged in a USTB to report
certain transactions with a foreign or domestic related party
Form 5472
§ 6046 requires a return to be made by certain U.S. persons who
are or become officers or directors of foreign corporations, or make
certain acquisitions of the stock of foreign corporations;
Form 5471
§ 6046A requires U.S. persons to report certain acquisitions and
dispositions of interests in foreign partnerships, along with
substantial changes in the proportional interests in foreign
partnerships
Form 8865
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34
Penalties for Failure to Submit
Information
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35
Civil Penalties
§ 6038 Information Reporting
Applies to Forms 5471, 8865, and 8858
$10,000 penalty for failure to furnish required
information for each annual accounting period for
each entity
If failure-to-file continues for more than 90 days after
IRS notice, IRS may impose an additional $10,000
penalty for each 30-day period (or fraction thereof), up
to $50,000 maximum additional penalty for each entity
FTC reduction penalty: Potential loss of a portion of
foreign taxes available for credit under §§ 901, 902,
and 960
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36
Civil Penalties
§ 6038A Information Reporting
Applies to Form 5472
$10,000 penalty for failure to furnish required
information for each annual accounting period for
each entity
Each member of a group of corporations filing a
consolidated information return is a separate reporting
corporation subject to a separate $10,000 penalty
If failure-to-file continues for more than 90 days after
IRS notice, IRS may impose an additional $10,000
penalty for each 30-day period during which the
failure continues after the 90-day period ends
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37
Civil Penalties
§ 6038B Transfers to Foreign Persons
Applies to Forms 926 and 8865, Sch. O
A penalty equal to 10% of the FMV of the property at
the time of the transfer
Limited to $100,000, unless the failure is due to
intentional disregard
The transferor must recognize gain on the contribution
as if the contributed property had been sold for its
FMV
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38
Civil Penalties
§§ 6046 and 6046A Reportable Transactions
Applies to Forms 5471 and 8865
$10,000 penalty for each failure to file for each
reportable transaction
If failure-to-file continues for more than 90 days after
IRS notice, IRS may impose an additional $10,000
penalty for each 30-day period (or fraction thereof), up
to $50,000 maximum
§ 6046 penalties implemented by § 6679
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39
Criminal Penalties
Criminal penalties under § 7203, 7206, and 7207 may
also apply for failure to submit information or for filing
false or fraudulent information
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40
Recent Developments for Forms 5471
IRS LMSB Letter Concerning Form 5471
“Beginning January 1, 2009, the Internal Revenue
Service Center will automatically assert appropriate
penalties on late filed Forms 1120 with Forms 5471
attached”
This will not preclude the IRS from assessing penalties
prior to January 1, 2009
The penalty for a late filed or incomplete Form 5471
applies even if no tax is due
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41
Statute of Limitations
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42
Statute of Limitations
§ 6501(c)(8)
§ 6501(c)(8) provides rules for failure to report information under
IRC §§ 6038, 6038A, 6038B. 6046, 6046A, and 6048
Similar to other U.S. income tax returns the statute of limitation is
limited to three years
The three-year statute of limitation begins to run when the form is
timely filed and complete
E.g. A taxpayer timely files Form 1120-C for its year end 1999, but
fails to attach Form 5471. In 2002, this taxpayer files the Form
5471 to report its 1999 transactions, which was originally due in
2000 with its 1999 Form 1120-C. In this case the statute of
limitations runs from 2002–2005
FORMER LAW: This extension of the statute of limitations does
not apply to the entire income tax return. In the above example, the
statute of limitations for the Form 1120 is not affected by the late
filing of the Form 5472
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43
Statute of Limitations
Recent Changes to § 6501(c)(8)
Public Law No. 111-147 significantly changes the limitations
period for taxpayers required to file Forms 926, 3520, 3520-A,
5471, 5472, 8621, 8858 and 8865
The period for assessment of tax for the entire return is extended
until 3 years following reporting the appropriate information on
those forms
That is, tax may be assessed on any return, even if unrelated to
the information that was not reported, for a period 3 years
following the date that information was appropriately reported.
Congress has called these changes a “clarification of existing
law”
As a result, any tax return that did not include information required
under any of the relevant forms is potentially open for assessment
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44
Statute of Limitations
§ 6501(c)(8) (Cont’d)
Substantially Incomplete Forms
The determination of substantially incomplete forms is
based on the rules provided under the relevant code
section (IRC §§ 6038, 6038A, 6038B. 6046, 6046A, or
6048)
§ 6501(c)(8) will apply as if the form had not been filed
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45
Withholding Tax
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46
U.S. Taxation of Investment Income
Generally, the United States taxes the gross amounts
of a foreign person’s U.S. source non-business
investment income that is not ECI
This non-business income is referred to as “FDAP”
income
E.g., interest, dividends, rents, royalties, etc.
Generally, the person controlling the payment of income
must deduct and withhold U.S. tax at 30% (or lower
treaty rate)
Certain FDAP items of a foreign person are not subject
to gross-basis taxation
E.g., short-term OID, “portfolio interest”
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47
Withholding Forms
Form 1042, Annual Withholding Tax Return for U.S.
Source Income of Foreign Persons
Form1042-S, Foreign Person's U.S. Source Income
Subject to Withholding
Form 1042-T, Annual Summary and Transmittal of
Forms 1042-S
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48
Withholding Forms (Cont’d)
W-8 BEN, Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding
W-8 IMY, Certificate of Foreign Intermediary, Foreign
Flow-Through Entity, or Certain U.S. Branches for
United States Tax Withholding
W-8 ECI, Certificate of Foreign Persons Claim That
Income Is Effectively Connected With the Conduct of a
Trade or Business in the United States
Form 8804, Annual Return for Partnership Withholding
Tax
Form 8805, Foreign Partner’s Information Statement of
Section 1446 Withholding Tax
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49
Withholding Forms (Cont’d)
Form 8813, Partnership Withholding Tax Payment
Voucher
From 8288, U.S. Withholding Tax Return for
Disposition by Foreign Persons of U.S. Real Property
Interests
Form 8828-A, Statement of Withholding on
Dispositions by Foreign Persons of U.S. Real Property
Interests
Form 8828-B, Application for Withholding Certificate
for Dispositions by Foreign Persons of U.S. Real
Property Interests
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50
Making an Initial Entity
Classification Election
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51
Making an Initial Entity Classification
Election
Form 8832, Entity Classification
The form of the entity may be selected upon the inception of the
business or at anytime during the operation of the business
A classification election, excluding an initial election, must be
maintained for five years
See Treasury Regulation § 301.7701-2(b)(8) for the per se entity
list
Due within 75 days from the date the entity was formed
An election will be effective on the date specified in the Form 8832
so long as the date specified is not more than 75 days prior to the
date the election is filed and not more than 12 months after the
date the election is filed
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52
Form 1120-C, Schedule N
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53
Form 1120-C, Schedule N, Foreign
Operations of U.S. Cooperatives
Who Must File
U.S. domestic cooperatives that, at any time during the year, had
assets in or operated a business in a foreign country or a U.S.
possession may have to file Schedule N
Includes indirect ownership through subsidiaries, partnerships or
disregarded entities
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
FOR INTERNAL USE ONLY.
54
Form 8621, Return by a
Shareholder of a PFIC or QEF
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
FOR INTERNAL USE ONLY.
55
PFIC Overview
Anti-deferral regime prohibiting the ability of U.S.
persons to defer U.S. taxation on passive investments
channeled through foreign entities
A PFIC is generally any foreign corporation that meets
either an income test or an asset test
Income test—75% or more of its gross income for a
taxable year is “passive income”
Asset test—the average percentage of assets held by
the corporation during the taxable year produce passive
income or which are held for the production of passive
income is at least 50%
Look-through—25% (assets and income)
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
FOR INTERNAL USE ONLY.
56
List of Other Relevant Forms
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
FOR INTERNAL USE ONLY.
57
List of Other Relevant Forms
Form TD F 90-22.1, Report of Foreign Bank and
Financial Accounts
Form 8838, Consent to Extend the Time to Assess Tax
Under Section 367-Gain Recognition Agreement
Form 8833, Treaty-Based Return Position Disclosure
Under Section 6114 or 7701(b)
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
FOR INTERNAL USE ONLY.
58
Presenter contact Information
Phil Mogen
Principal
KPMG International Corporate Services
San Francisco, CA
(415) 963-7312
[email protected]
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
FOR INTERNAL USE ONLY.
59

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