PRIMER FOR CREATION AND OPERATION
OF NEVADA INVESTMENT SUBSIDIARIES  

A Nevada holding company must be operated as a bona fide corporation, separate and distinct from its parent and affiliates. As many of its activities as are reasonably possible must be confined to Nevada in order to establish a Nevada nexus. Such operational requirements are necessary in order (i) to establish the substance of the Nevada business, and (ii) sever or avoid any continuing nexus with the taxing jurisdiction of the parent of other affiliates. This means that the directors and shareholders should hold their meetings in Nevada. All of the assets of the holding company should be located in Nevada. All corporate decisions (including investment decisions) should be made in Nevada. All contracts should be executed in Nevada. The holding company should have officers and employees located in Nevada who perform their services and duties in Nevada. The holding company should have office space in Nevada and maintain its corporate minute book, stock book and accounting records in Nevada. The Nevada address, telephone number and fax number should be used for all purposes. Holding companies should have one or more bank accounts in Nevada into which all of its income is deposited and from which all of its payments are made. Additional discussion follows.

BOARD OF DIRECTORS The Board ideally should be comprised of Nevada individuals independent of the holding company's parent (or other affiliate). Control concerns often dictate that certain director positions be filled by officers and/or directors of the parent or affiliate corporation; however, it is advisable that one or more board members be Nevada residents. The members selected should be prepared to meet in Nevada on a regular basis (e.g. quarterly). It is of primary importance that the Board meet physically in Nevada and that the Board's investment decisions be made while meeting in Nevada. The Board of Directors should: adopt investment policies and review and modify those policies as needed; review and approve all investment transactions which the subsidiary has completed since the previous meeting; declare dividends as appropriate; and address any other matters affecting the subsidiary which properly come before the Board of Directors.

NEVADA OFFICE The holding company should have Nevada office space (with furniture and equipment) to accommodate the corporate business, with the corporate name identified in the building directory. Although many companies (with furniture and equipment) simply lease office space, furniture and equipment on a shared basis, it would be preferable to lease such assets (or to purchase them outright) individually and separately from other companies. The holding company should have its own telephone with a receptionist who answers the phone in the name of the holding company and provides general receptionist services. Typically, a shared receptionist is hired. The telephone number should be located in the local phone directory under the holding company name. Corporate stationery and business cards should reflect the holding company's name, address, and telephone number. Additionally, the holding company may need a Nevada post office box for various business purposes, such as for lock box services with a local financial institution. The Nevada office generally should be set up for true business purposes, providing necessary meeting space, offices for Nevada employees and filing, and record-keeping capacity for all matters relating to corporate business.

NEVADA EMPLOYEE A holding company should have officers and employees who reside in Nevada and perform their services and duties at the Nevada office. The holding company should pay salaries or other compensation to such officers and/or employees, and Nevada payroll taxes should be withheld and paid over to the proper taxing authorities. Employees should have real responsibilities (subject to appropriate controls) relating to the holding company's business, including for example, such matters as check signing authority, contracting for services with third parties, investment management (including placing trade orders), and bookkeeping and/or accounting functions (unless delegated to a local service provider).

CONTRACTS All contracts should be executed in Nevada with Nevada law governing. To the } extent that performance of a contract is required by the holding company, performance should be in Nevada. Some of the common contracts among holding companies include (i) lease contracts for office space, furniture and equipment, (ii) employment contracts with Nevada employees, (iii) service contracts for quality control, (iv) contracts for provision of financial, accounting and payroll services (including tax return preparation), (v) investment/custodial agreements, (vi) licensing or royalty agreements, and (vii) loan agreements with affiliates.

SERVICES IN GENERAL The holding company should engage professionals and other service providers who are independent of the professionals and service providers employed by the parent or affiliates of the holding company. States   auditors have asked for information which specifically identifies service providers to determine which service providers also provide services to affiliates of the holding company. This audit inquiry is an attempt to show common management between the holding company and its parent and affiliates, giving rise to questions of nexus (and thus taxing authority) in the home state. As an independent operation confined to Nevada, the holding company should take all measures to minimize the risk that its operations can be linked with the operations of non-Nevada affiliates.

BANKING SERVICES Holding companies generally establish checking accounts, custody accounts, investment advisory accounts  and other similar types of accounts at a local financial institution. All income received by the holding   company should be deposited in the local account, and all payments from the holding company should be made from the local account. In order to establish a Nevada commercial domicile for the holding company, the "situs" of the intangibles must be in Nevada, and investment decisions with respect to such intangibles must be made in Nevada. Establishing custodial and investment advisory accounts in Nevada to  hold and manage all the intangibles of the holding company (thus giving Nevada "situs" for the intangibles) may be essential in establishing the desired Nevada commercial domicile. Conversely, custody of intangibles outside of Nevada (i) may permit non-Nevada taxing authorities to assert that the holding company lacks Nevada substance, and/or (ii) may permit the taxing authorities of the state of custody to claim that such state has sufficient nexus to tax income of the holding company.

ACCOUNTING SERVICES Financial reports should be prepared on a periodic basis for review by the Board at its regular Nevada meetings. Typically, the holding company engages the services of a Nevada accounting firm (or the local office of a national accounting firm). The accounting firm can prepare all necessary tax returns for the holding company (including the quarterly Nevada Business License Tax and payroll tax returns).

LEGAL SERVICES Incorporation of the Nevada holding company, and preparation of contracts incidental to the operation of the company, may be accomplished by a Nevada law firm. The Nevada firm may act as resident agent for service of process, and may also apply for the company's federal tax identification number.

EXPENSES As a separately run, bona fide business, the holding company should make sure that its suppliers address invoices to the holding company and that all expenses of the holding company are paid by check drawn on the holding company's Nevada account. The holding company is responsible for all lease payments, all custodial and investment advisory fees, all utilities (phone, etc.), all equipment and supplies, and all professional fees, including accounting and legal fees. Importantly, the legal and accounting fees for organizational services, including advice in connection with the proper structure of the holding company, should be invoiced directly to, and paid by, the holding company.

AUDIT CONCERNS Below is a list of questions and areas of particular concern which may arise in an audit situation. The items are provided in order to demonstrate the importance of properly operating the holding company within the parameters outlined above.

Actual Audit Questions/Requests (sampling only): 1. Employees: (a) Compensation; examination of responsibilities versus level of compensation; (b) Record of which entity pays; (c) Job description/duties; (d) Copies of employment agreement; (e) Copies of payroll tax returns. 2. Identification of common officers/directors with affiliates. 3. Copies of phone bills and phone book entry. 4. Proof of payments with respect to all notes and accounts receivables from affiliates. 5. List of all suppliers and professionals paid by the holding company; copies of all invoices; identification of which suppliers and professionals serve parent or affiliates of holding company. 6. Amount paid to Nevada law firm (as opposed to parent's general counsel) and Nevada accounting firm (as opposed to parent's accounting firm). 7. Person responsible for investment decisions; proof of where investment decisions were made. 8. Copies of all minutes and organizational documentation of holding company and of affiliates (reflecting discussion of affiliates); proof of location of all meetings and who attended. 9. Description of bookkeeping functions and how cash needs are determined; copies of all bank statements, checks and deposit slips.

We urge potential users of a Nevada holding company to discuss the set-up and operation of a Nevada subsidiary with their Nevada and home state tax and legal advisors.