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Funding of 401(k) using PPP loan


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2 hours ago, austin3515 said:

Thats what is so frustrating.  The stakes are incredibly high.  We need something more concrete.  I'm not even comfortable assuming that the reference to "paid or incurred" is intended to extend so far as to include the 2019 contributions.  a literal interpretation, sure.  But it just seems so outside the scope of the plain intention (i.e., the plain intention is clearly focused on those 8 weeks).  Is it "impossible" for them to come back at this stage and say the retirement contributions have to relate to the 8 week period?  I feel like we're not at a point yet where that is out of the question.

And I keep getting questions about defined benefit plan contributions.  I can;t imagine they are not eligible, but some more guidance would sure be nice.  Is it too much wishful thinking to assume we will get more guidance on this?   

Here's the white paper that we wrote Sat/Sun/Mon after the new forgiveness form came out. Use that for your source; you won't find anything better at this point.

LISIGassmanKetronStarrCameronPDF5_18_2020.pdf

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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That is an excellent article, thnank you for sharing (and writing it!).  That;s what Derrin was saying as well (of course not surprising you would say the same thing),  But this is exactly the kind of language that gives me pause (from the article):

Quote

In what appears to be a possible change in the SBA pronouncements, the new Loan Forgiveness Application can be read to allow for contributions to retirement programs that are incurred OR paid during the Covered Period to count in the determination of total payroll costs and forgiveness.  [emphasis added]

If I tell a client that they can just fund their 2019 profit sharing and they'll be golden, and then that turns out to be wrong, I'm really really in deep doo doo.  Don't I need somethig more concrete before giving that advice?  Larry, are you currently advising your clients to take this approach based on the guidance currently available?

 

Austin Powers, CPA, QPA, ERPA

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On page 14 of the article, "The instructions for Line 9 of the Application provide for the inclusion of 'any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the 8 week equivalent of $100,000 per year) for each individual, . . .'"

This limitation for self-employed individuals and partners appears to also apply to "owner-employees" as an "owner-employee" is listed as another group to be limited in addition to sole props and partners. Do they define this term "owner-employee" anywhere? What advice are you giving to S Corp owner-employees or C Corp owner-employees?

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3 minutes ago, John Feldt ERPA CPC QPA said:

On page 14 of the article, "The instructions for Line 9 of the Application provide for the inclusion of 'any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the 8 week equivalent of $100,000 per year) for each individual, . . .'"

This limitation for self-employed individuals and partners appears to also apply to "owner-employees" as an "owner-employee" is listed as another group to be limited in addition to sole props and partners. Do they define this term "owner-employee" anywhere? What advice are you giving to S Corp owner-employees or C Corp owner-employees?

The sloppy language all around causes much confusion to those that don''t do a deep dive.  

(3) Owner-employee. The term "owner-employee" means an employee who—
 (A)owns the entire interest in an unincorporated trade or business, or
 (B) in the case of a partnership, is a partner who owns more than 10
 percent of either the capital interest or the profits interest in such
 partnership.
To the extent provided in regulations prescribed by the Secretary, such
term also means an individual who has been an owner-employee within the
meaning of the preceding sentence.
 

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8 hours ago, austin3515 said:

That is an excellent article, thnank you for sharing (and writing it!).  That;s what Derrin was saying as well (of course not surprising you would say the same thing),  But this is exactly the kind of language that gives me pause (from the article):

If I tell a client that they can just fund their 2019 profit sharing and they'll be golden, and then that turns out to be wrong, I'm really really in deep doo doo.  Don't I need somethig more concrete before giving that advice?  Larry, are you currently advising your clients to take this approach based on the guidance currently available?

 

It is rare that Derrin and I don't agree, but it does happen.  When that happens, they usually they shoot off fireworks and advertise it in a full page ad in the New York Times.... but I digress.....

I tell clients that the guidance to date clearly allows for funding their retirement plans and that WHATEVER is contributed in the 8 weeks, without limitation, will count toward their compensation side of the reimbursement calculation.  I also tell people that if they are stretching to make this contribution, wait until about 6 weeks into their 8 weeks and let's see if we get more guidance.  And I say it's always possible that they can change their mind, but I am highly doubtful that will happen (but I could be surprised!).

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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7 hours ago, John Feldt ERPA CPC QPA said:

On page 14 of the article, "The instructions for Line 9 of the Application provide for the inclusion of 'any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the 8 week equivalent of $100,000 per year) for each individual, . . .'"

This limitation for self-employed individuals and partners appears to also apply to "owner-employees" as an "owner-employee" is listed as another group to be limited in addition to sole props and partners. Do they define this term "owner-employee" anywhere? What advice are you giving to S Corp owner-employees or C Corp owner-employees?

An S corporation owner is a shareholder employee, not an owner employee.  We see no justification for any other tortured interpretation. If they meant owners of S corps, I can guarantee they would have said S corps SOMEWHERE. They did not.  And the only statutory definition is as posted by my alter ego!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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4 hours ago, Gilmore said:

What about the deductibility issue?  I'm assuming that is still not resolved?

It is not, but I'll take any bet that it will be. I have absolutely no doubt. Both house and senate, democrat and republican have said that IRS analysis is NOT what congress intended and needs to be fixed. If not by IRS reinterpreting, then by congressional action. And I'm guess before the end of next week.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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13 minutes ago, Larry Starr said:

I tell clients that the guidance to date clearly allows for funding their retirement plans and that WHATEVER is contributed in the 8 weeks, without limitation, will count toward their compensation side of the reimbursement calculation.

Are you not concerned that future guidance might reflect a more limited interpretation?

Austin Powers, CPA, QPA, ERPA

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46 minutes ago, austin3515 said:

Are you not concerned that future guidance might reflect a more limited interpretation?

I'm concerned that the russians might launch a nuclear attack on us (about as much as I am "concerned" about a more limited interpretation provided later).  The downside is not so bad; they've contributed to the plan what they were going to contribute anyway.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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1 hour ago, Larry Starr said:

The downside is not so bad; they've contributed to the plan what they were going to contribute anyway.

I dont understand this.  The downside is terrible.  If they relied on this interpretation and the SBA later comes out and says "Seriously?  You know thats not what we meant.  The whole law is based entirely on the 8 weeks, and that was so clear that to take any other position was not in good faith."  You don;t know for sure they won;t say that (heck I would say that if it were me, because it kind of is that obvious).  And if they did come out and say that (which I notice you do allow can happen, even though it was buried in sarcasm and included a "shiny object" to distract the reader):

a) They funded the 2019 contribution which they might not have done if not forgivable because it was discretionary.    Even if they prefunded all of 2020 for the same reason, again they might not have done if not eligible for the forgiveness.

b) And now the have to fund something that is in line on top of that in order to get the loan forgiveness.

That would be a client that I would expect to fire me if that all happened based on my recommendation.  And because I don;t like to get fired, I'm not comfortable setting myself up for this one.  Now mind you I do not disagree with your literal interpretation of the very limited guidance that is available.  But even you have reservations as evidenced by your "hedgey" language ("it appears to" and "can be read to allow").  That's CYA language.  If I asked you (in 2019 anyway) what's the maximum loan amount, you would not say "the rules can be read to allow a loan of $50,000 or 50%".

Austin Powers, CPA, QPA, ERPA

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47 minutes ago, austin3515 said:

I dont understand this.  The downside is terrible.  If they relied on this interpretation and the SBA later comes out and says "Seriously?  You know thats not what we meant.  The whole law is based entirely on the 8 weeks, and that was so clear that to take any other position was not in good faith."  You don;t know for sure they won;t say that (heck I would say that if it were me, because it kind of is that obvious).  And if they did come out and say that (which I notice you do allow can happen, even though it was buried in sarcasm and included a "shiny object" to distract the reader):

a) They funded the 2019 contribution which they might not have done if not forgivable because it was discretionary.    Even if they prefunded all of 2020 for the same reason, again they might not have done if not eligible for the forgiveness.

b) And now the have to fund something that is in line on top of that in order to get the loan forgiveness.

That would be a client that I would expect to fire me if that all happened based on my recommendation.  And because I don;t like to get fired, I'm not comfortable setting myself up for this one.  Now mind you I do not disagree with your literal interpretation of the very limited guidance that is available.  But even you have reservations as evidenced by your "hedgey" language ("it appears to" and "can be read to allow").  That's CYA language.  If I asked you (in 2019 anyway) what's the maximum loan amount, you would not say "the rules can be read to allow a loan of $50,000 or 50%".

The downside of the russian's coming is terrible too! But I ain't gonna worry about it! Boy, all you can see is negatives; all I see is positives.  We don't know FOR SURE anything really ("does anyone really know what time it is? does anyone really care?).  I allow (in this environment) for ANYTHING, including getting a notice from SBA saying "never mind; just keep all the money" but that ain't gonna happen either.

For my clients there is no big downside.  We are talking about funding the 2019 contribution which they have already committed to and on which the 2019 admin has been completed and benefit statements prepared and distributed (we do our work on the accrual basis).   No downside to putting the money into the plan within the 8 weeks except for a possible effect on cash flow.  And if they want to put in some of the 2020, again no downside since they are going to do it anyway.  I am not telling them to put  money in that they aren't sure they want to put in.  There usually is NO OTHER source of funds for forgiveness; remember, this stuff shows up in the compensation calculation, unlike rent, utilities, etc.  The pay to the employees is already established; this is on top to get to 75% or more (even 100%).

Every client I talk to understands that we are using what we know at this point and that it could be different since they keep giving us new stuff.  I do not expect anything they give us from now on will "take away" anything we already have since so many people have already depended on those rules. Nobody will fire us for giving them the best we can figure at this point; and I practice what I preach. We are doing exactly the same thing.  I may have better relationships with our clients since the issues you are concerned about are not even an inkling of an issue in my mind. Only time will tell if I'm correct on all this. We HAD to put the reservations in the article, because I am not talking directly to those individuals to spend a couple of minutes going into greater depth of where we are now and what possible risks there might be (though at this point I am still leaving out my concern about the russians!). Do I have reservations: let me state this clearly - NO.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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Though it was tempting to respond, I've decided to just ignore your invocation of nuclear war.

There is just absolutely nothing stopping them from taking a hard-line "8 week expenses only" approach when they issue more guidance.  I'm old enough to remember when the IRS concluded that expenses funded by forgivable loans were non-deductible to the shock of many on-lookers who expressed disbelief they could take such an outrageous position.  I am among those who considered that position by the IRS to be outrageous.  Counting 2019's profit sharing as a "payroll related expense" for the 8 week window seems, to say the least, "aggressive."  And it would not seem outrageous to me if they said it did not work, depsite the open ended language in their 2 pages of instructions. 

I am hoping for some enormous Q&A that covers this and other questions that badly need answering.  Not least of which is this owner-employee nonsense.  Guidance just has to be forthcoming.  I'm advising clients to be ultra-conservative until the SBA says we can use your interpretation.

Austin Powers, CPA, QPA, ERPA

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3 hours ago, austin3515 said:

Though it was tempting to respond, I've decided to just ignore your invocation of nuclear war.

There is just absolutely nothing stopping them from taking a hard-line "8 week expenses only" approach when they issue more guidance.  I'm old enough to remember when the IRS concluded that expenses funded by forgivable loans were non-deductible to the shock of many on-lookers who expressed disbelief they could take such an outrageous position.  I am among those who considered that position by the IRS to be outrageous.  Counting 2019's profit sharing as a "payroll related expense" for the 8 week window seems, to say the least, "aggressive."  And it would not seem outrageous to me if they said it did not work, depsite the open ended language in their 2 pages of instructions. 

I am hoping for some enormous Q&A that covers this and other questions that badly need answering.  Not least of which is this owner-employee nonsense.  Guidance just has to be forthcoming.  I'm advising clients to be ultra-conservative until the SBA says we can use your interpretation.

Austin, I have no problem with other people taking positions different from mine; my friends will tell you that I am often a contrarian and I accept that readily (of course, I am almost always right!  No brag: just fact; LS for Walter Brennan ?). I too would LOVE them to come out and say "Larry was right all along".  They might or might not. But if clients ignore my opinion and don't qualify for 100% forgiveness because of a conservative approach, then who will be blamed? And if you didn't give your clients that information and let them make their own decision, I think there is a possible problem there.  The additional problem is that there is a very rigid time restriction and for the earliest recipients of PPP money, that runs out in the next few days.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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if they can get to 75% with just the 8 week period included, great. if not (and the final ruling is 2019 contributions do not count), then just a portion becomes a loan of 1%, right? or am i missing something? worst case scenario is just a portion not being forgiven.

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6 minutes ago, mattmc82 said:

if they can get to 75% with just the 8 week period included, great. if not (and the final ruling is 2019 contributions do not count), then just a portion becomes a loan of 1%, right? or am i missing something? worst case scenario is just a portion not being forgiven.

You are missing nothing.

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6 minutes ago, mattmc82 said:

if they can get to 75% with just the 8 week period included, great. if not (and the final ruling is 2019 contributions do not count), then just a portion becomes a loan of 1%, right? or am i missing something? worst case scenario is just a portion not being forgiven.

First, they need to get to 100%; 75% is just the MINIMUM needed on compensation to get no penalty.  If you get to 100% on compensation without worrying about the ancillaries (rent, utilities), then that is optimal.  If you are subject to penalty for not hitting all the targets (and don't forget about the FTE and reduction in comp tests), then yes, what you do get is forgiven and the rest just continues as a loan with a 2 year repayment and a 1% interest rate.  Not such a bad deal also.

 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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So lets say someones 8 week period does end and they took Larrys approach.  The reported that they spent enough for loan forgiveness and the loan is forgiven.  But then they get audited and SBA or the IRS disallows that portion.  Thats the worst case scenaro.  That you reported it as eligible, and took  the loan forgiveness, when you were not eligible for it.  Oh and by the way perhaps you could have found more eligible ways to spend the money thus getting 100% forgiveness. 

Austin Powers, CPA, QPA, ERPA

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23 minutes ago, Larry Starr said:

But if clients ignore my opinion and don't qualify for 100% forgiveness because of a conservative approach, then who will be blamed?

If its a question of "I have no other qualifying expenses left", I agree.  The only drawback in that case is cashflow.  If its a decision between funding contributions not specifically related to the 56 day period and another expense that qualifies for forgiveness, it is a very different situation. This should be a last resort, not a decision between expense A and Expense B.

 

29 minutes ago, Larry Starr said:

And if you didn't give your clients that information and let them make their own decision, I think there is a possible problem there.  The additional problem is that there is a very rigid time restriction and for the earliest recipients of PPP money, that runs out in the next few days.

The vast majority of practitioners should refer this to the client's tax advisor, and should not be handing out advice on PPP loans.  This is especially true if you are picking up your own knowledge on the subject from other people's abstracts, even when authored the legendary panda himself :) 

 

 

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I don't see this as a major risk for a TPA.  We don't tell them what to contribute or whether or not it is forgivable.  As Sgt. Friday says, we provide "just the facts".  The first fact is right now the guidance doesn't limit the amount of plan contribution to a pro-rated amount.  The second fact is that this may change.   So what are the strategic implications?

1.  If the question involves a 2019 contribution receivable that the client will have to contribute by 9/15/20 anyway (in order to claim a 2019 deduction), then the advice is pretty easy.  Go ahead and contribute it during the PPP covered period.   If it ends up all included in the forgiveness, great!  If not, they are no worse off than they would have been (assuming the  ~3 month acceleration of the contribution doesn't create a huge cash flow issue).

2.  If they are considering a 2020 pre-contribution, again if it is one they will have to make anyway, then it's just a timing/cash flow issue.  If they can swing the cash flow, go for it during the covered period.  Same result as (1).

3.  If they are considering a contribution that they would not otherwise make, they need to understand that there is a risk that later guidance may exclude some  or much of the contribution from the forgivable amount.  And they can't take the contribution out of the plan once deposited. If they are good with this risk, go for it.  If they are not good with it, don't.

 

I carry stuff uphill for others who get all the glory.

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11 minutes ago, austin3515 said:

So lets say someones 8 week period does end and they took Larrys approach.  The reported that they spent enough for loan forgiveness and the loan is forgiven.  But then they get audited and SBA or the IRS disallows that portion.  Thats the worst case scenaro.  That you reported it as eligible, and took  the loan forgiveness, when you were not eligible for it.  Oh and by the way perhaps you could have found more eligible ways to spend the money thus getting 100% forgiveness. 

Well, if you get your forgiveness application in on the day after the 8 weeks ends, our belief (which could be wrong of course) is that they will once again apply the rules in effect at the time of submission (we actually think that's why it won't change, because they will "have to" apply the rules in effect at time of application for funds, but that's another argument) and your retirement money will count even if they write a new rule after.  

In addition, it is the BANKS that will be "auditing" (or rather, approving the application for forgiveness) and they just can't determine how much retirement money, contributed during the 8 weeks, is applicable to each year.  Therefore, that's another reason why the rule won't change; the banks would not be able to administer it.  The agencies have been given marching orders from the White House to NOT make things difficult.  That's a real important restriction on them.  The IRS won't be auditing anything; this is not their battle. 

And if you have "more eligible ways" (whatever that means) to garner forgiveness, by all means do that first. But the only thing available is salaries, and I'm going to assume you have already maximized that as best as you can.  

I understand your reserved position; I just think it will disadvantage clients more than advantage them.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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2 minutes ago, shERPA said:

I don't see this as a major risk for a TPA.  We don't tell them what to contribute or whether or not it is forgivable.  As Sgt. Friday says, we provide "just the facts".  The first fact is right now the guidance doesn't limit the amount of plan contribution to a pro-rated amount.  The second fact is that this may change.   So what are the strategic implications?

1.  If the question involves a 2019 contribution receivable that the client will have to contribute by 9/15/20 anyway (in order to claim a 2019 deduction), then the advice is pretty easy.  Go ahead and contribute it during the PPP covered period.   If it ends up all included in the forgiveness, great!  If not, they are no worse off than they would have been (assuming the  ~3 month acceleration of the contribution doesn't create a huge cash flow issue).

2.  If they are considering a 2020 pre-contribution, again if it is one they will have to make anyway, then it's just a timing/cash flow issue.  If they can swing the cash flow, go for it during the covered period.  Same result as (1).

3.  If they are considering a contribution that they would not otherwise make, they need to understand that there is a risk that later guidance may exclude some  or much of the contribution from the forgivable amount.  And they can't take the contribution out of the plan once deposited. If they are good with this risk, go for it.  If they are not good with it, don't.

 

Precisely exact summary of what we are doing. Nice job there old friend! 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I guess I can;t understand why the advice isn't make the decision closer to the end of the 8 week period when maybe there will be guidance in favor or against.  That's the advice I'm giving and you'll have a tough time convincing me I'm doing anyone a disservice.  I don't see the advantage of a different approach.  And clients (and CPAs) are obviously turning to us for guidance on what retirement contributions are eligible for forgiveness.  So to say it should be referred elsewhere is probably just not realistic.  I guarantee you I know more about this aspect of it then "most" CPA's.  As we can see there is not much to know since they've told us next to nothing.

Sherpa, 1 and 2 in your post are "obvious."  The question becomes is it reasonable to claim them as part of the debt forgiveness calculation on a form you're filing with the SBA.  So yes its obvious to fund it, its less obvious whether Uncle Sam is willing to foot the bill (outside of contributions specifically related to  comp in the 8 week window).  Now, as someone already referenced, for cash flow reasons it would behoove someone to know if Uncle Sam will be paying for it or not.  If not, they may just as soon wait until September 15th to fund it.  This is no small consideration in the middle of an economic and health catastrophe.

The question that is really problematic has always been your 3rd point.  There are obviously a lot of medical practices out there where the Docs are not going to pony up $40,000 apiece (their $37K + the staff contribution) for retirement contributions when their business has dropped 50% overnight.  So whether or not this is eligible for forgiveness makes the difference between whether or not they will EVER fund it.

In any event I come back to the first thing I said.  Wait until the earlier of a) when we get the guidance ; or b) the end of your 8 week period before making any decisions.

Austin Powers, CPA, QPA, ERPA

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