Corporate Securities Law Blog

As previously reported (click here), the payment of certain severance benefits may be exempt from FICA taxes. Under the Sixth Circuit’s decision in Quality Stores (click here), severance pay made in connection with an involuntary separation from employment due to a reduction in force, plant shutdown or similar condition (“supplemental unemployment compensation benefits”) are not subject to FICA taxes. The request by the IRS for an en banc review of the Quality Stores decision was denied by the Sixth Circuit. The Supreme Court has granted the government’s request for a one-month extension to file its petition for certiorari, extending the due date from April 4 to May 3.

As previously reported (click here), the payment of certain severance benefits may be exempt from FICA taxes. Under the Sixth Circuit’s decision in Quality Stores (click here), severance pay made in connection with an involuntary separation from employment due to a reduction in force, plant shutdown or similar condition (“supplemental unemployment compensation benefits”) are not subject to FICA taxes. The request by the IRS for an en banc review of the Quality Stores decision was denied by the Sixth Circuit last month.

For the first time in more than a decade, Congress has enacted a permanent set of estate, gift and generation-skipping transfer tax rules. While Congress can always change the law, there is no automatic "sunset" or change built into the current law. 

On February 4th, the IRS issued final and further proposed regulations regarding noncompensatory partnership options, effective immediately.

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 into law. Summarized below are highlights of those and other changes to Federal tax laws affecting income, payroll, gift and estate, and generation-skipping transfer taxes beginning in 2013.

As the end of 2012 approaches, we consider what a notable year it has been for the future of healthcare reform, starting with the United States Supreme Court’s decision to uphold key provisions of the Patient Protection and Affordable Care Act (“PPACA”), and culminating with the November elections. Since PPACA’s enactment in 2010, employers have seen the roll out of various new requirements and disclosure obligations with respect to the healthcare benefits provided to employees. As we move closer to PPACA’s “individual mandate,” which becomes effective in 2014 and is viewed as the hallmark of the healthcare reform legislation, the following is a summary of certain requirements that employers should be aware of for 2013.

By Matthew Richardson

A California appellate court recently held as unconstitutional the California statutes extending the benefits of selling “qualified small business stock” (QSBS) to California taxpayers. In Cutler v. Franchise Tax Board (2012) 208 Cal. App. 4th 1247, the court held that the QSBS exclusion and deferral statutes – California Rev. & Tx. Cd. §§ 18038.5 and 18152.5 – discriminated against non-California corporations and therefore violated the Commerce Clause of the U.S. Constitution.

On September 24, 2012, the IRS issued Proposed Regulations §§ 53.4942(a)-3 and 53.4945-5 in order to reduce barriers to international grant-making made by private foundations. Secretary of State Hilary Clinton announced the guidance during an address at the Clinton Global Initiative. In particular, the new guidance modernizes the process of evaluating whether a foreign non-governmental organization is equivalent to a U.S. public charity for purposes of charitable giving.

The IRS recently announced that a contribution to a domestic LLC that is wholly owned and controlled by an IRC § 501(c)(3) charitable organization will be treated as if the contribution were made directly to the charitable organization, provided that the LLC has not elected to be taxed as a corporation. Although the IRS had previously provided guidance to public charities and private foundations as to the tax treatment of operating through such single-member LLCs, the July 31, 2012 release of Notice 2012-52 was the first guidance given to individual and corporate contributors as to the deductibility of their contributions. Left unaddressed, however, is the tax treatment of a contribution to a single-member, “disregarded entity” LLC organized in a foreign jurisdiction.

The IRS recently issued proposed regulations that provide new examples that illustrate what types of investments qualify as "program-related investments" (PRIs). These new examples are based on published guidance and on financial structures that had previously been approved in private letter rulings.

As previously reported in the January 9th blog article, today is the last day to file Form 8937 to report 2011 corporate actions that affect stock basis, as required under Internal Revenue Code section 6045B. Because the actual IRS Form 8937 was only very recently released, and because a number of questions about the form have arisen following its release, the IRS issued a Notice (Notice 2012-11) stating that it will not impose penalties for reporting incorrect information, provided that the issuer makes a good-faith effort to report timely and accurately. Further, the Notice states that the issuer can satisfy its filing requirement by posting the required information in a readily accessible format to an area of its primary public Web site.

For further information, please contact Matthew Richardson at (213) 617-4222.

As previously reported in the March 15 blog article, Section 6045B of the Internal Revenue Code imposes new reporting requirements on issuers of "specified securities" engaging in organizational actions after December 31, 2010 that affect the tax basis of their specified securities. Generally, a "specified security" includes shares of stock and interests treated as stock (such as an American Depository Receipt).

On September 21, 2011, the IRS announced (in Announcement 2011-64) a new program that will allow employers to resolve their worker classification problems at a relatively low cost. This new Voluntary Classification Settlement Program (VCSP) is available to businesses that erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees. Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year (technically, the employer will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under reduced rates). The employer will not be audited on payroll taxes related to these workers for prior years, and will not be subject to interest or penalties. To participate in the program, the employer must meet certain eligibility requirements, apply to participate in the VCSP, and enter into a closing agreement with the IRS.

Update:

The IRS recently came out with a Notice (Notice 2011-18) stating that, for transactions occurring in 2011, penalties will not be imposed against issuers for missing the deadline to file a return or post the tax return on the issuer's primary public Web site (which generally was required 45 days after the transaction), provided that the return is filed or the posting is made by January 17, 2012.

The Internal Revenue Service announced on February 8, 2011 the creation of a second special voluntary disclosure initiative for U.S. taxpayers with undisclosed foreign bank and other financial accounts. This new program is a follow-on to the IRS' original voluntary disclosure initiative that closed on October 15, 2009. The 2009 program reportedly attracted some 15,000 voluntary disclosures by taxpayers with previously undisclosed offshore accounts, and has been viewed within the government as a success in getting taxpayers "back into the U.S. tax system" by offering them the ability to avoid or significantly mitigate various the criminal and civil penalties that would otherwise have potentially applied had their failure to disclose been discovered by the IRS on audit.
 

General counsel often do not receive notices from tax agencies. These notices generally go to the financial officer's departments or to whomever handles taxes.

Notices from the Internal Revenue Service generally get attention, but notices from state or local agencies often get ignored because the amounts are small or the recipient does not think that the company has nexus (sufficient contacts) in the state to be subject to tax.
 

Included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law on December 17, 2010, a tax incentive relating to qualified small business stock ("QSBS") was extended for another twelve months.  Pursuant to this extension, noncorporate taxpayers are allowed to exclude all (100%) of their gain from the sale or exchange of  QSBS (subject to  a variety of special rules), provided that the stock is acquired after September 27, 2010 and before January 1, 2012.  The gain exclusion provision only applies to QSBS held for more than five years.  The amount of gain from the sale of QSBS that can be excluded by a taxpayer is generally limited to the greater of $10,000,000 (in the aggregate) or 10 times the tax basis of the QSBS sold.  Generally speaking, and with a few exceptions, QSBS must be acquired when it is issued in exchange for money, property (other than stock) or services.

On December 17, 2010 President Obama signed into law "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (the "2010 Act"). The 2010 Act made major changes to the federal transfer tax system, which includes the estate tax, the gift tax, and the generation-skipping transfer tax (the "GST tax"). These changes will have a tremendous impact on future estate planning, and they create some critically important decisions for estates of persons who died in 2010.

Congress recently enacted the "2010 Small Business Jobs Act," which includes an assortment of tax breaks and incentives for small businesses (as well as a few revenue raisers). 

Continue reading for a summary of some of the tax breaks and incentives provided by the act. 

A number of domestic jurisdictions (Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah and Puerto Rico) have enacted "series LLC" statutes, which provide for the creation of limited liability companies (LLCs) with separate "series."  Although such statutes generally do not treat each series as a separate entity for state law purposes, the association of members with one or more particular series is similar to direct ownership in that series, in that the terms of such members' rights, duties, and powers with respect to such series are specifically identified.  Series LLC statutes also typically provide that the debts, liabilities and obligations of one series generally are enforceable only against the assets of that series and not against assets of other series or of the series LLC.
 

The Chief Counsel of the IRS recently made statements that result in a change in the federal tax treatment of domestic partners registered pursuant to California state law.  In two recent pronouncements, the Chief Counsel concluded that registered domestic partners must each report one-half of community income on their federal returns.
 

On Thursday, March 18, 2010, President Obama signed into law the “Hiring Incentives to Restore Employment Act” (HR 2847) (the “HIRE Act”). The President’s signature sets the effective date for numerous HIRE Act provisions with an effective date geared to the March 18, 2010 date of enactment.

The following is a brief summary of certain tax provisions included in President Obama's budget proposal. Following this summary is a list of certain tax provisions that expired at the end of 2009 or will expire at the end of 2010 if Congress doesn't act to extend them.
 

On November 6, 2009, the "Worker, Homeownership, and Business Assistance Act of 2009" (the "Act") was signed into law. While primarily directed at extending unemployment compensation benefits, the Act provides a significant opportunity for taxpayers that have net operating losses in 2008 and 2009 to trigger tax refunds by carrying those losses up to five years back, rather than the two years generally provided under existing law. It is estimated that this extended carryback period could generate up to $33 billion in additional tax refunds for affected taxpayers.
 

Governor Schwarzenegger established the Commission on the 21st Century Economy (the "Commission") to evaluate and recommend changes to California's tax system. A report of the Commission's findings was published in September 2009. Six recommendations were proposed, which, if approved, would take effect in 2012.
 

In United States v. Textron Inc., 2009 WL 2476475 (1st Cir. Aug. 13, 2009), the United States Court of Appeals for the First Circuit held that the attorney work product doctrine only protects documents “prepared for use in possible litigation.” This arguably marks a significant modification of the previous rule in that Circuit and elsewhere that documents that were prepared “because of” possible litigation were protected under the work product doctrine. The consequences of this decision may be far-reaching. At the very least, corporate and tax counsel assisting in the preparation of documents that have both a business purpose and a possible litigation purpose should be aware that, unless those documents were “prepared for use” in litigation, they may be subject to discovery.
 

The City of Los Angeles Office of Finance recently implemented a Tax Penalty Amnesty Program (the "Program") that allows businesses that have not registered with the Office of Finance, or that have unpaid taxes or underreported gross receipts, to avoid a penalty of up to 40% of the tax due for tax periods ending on or before July 31, 2009. Additionally, no criminal action will be brought against any taxpayer that participates in the Program. The Program began May 1, 2009, and will be available through July 31, 2009.

The IRS recently issued "safe harbor" guidance that home loans modified under the Home Affordable Modification Program (HAMP) will not adversely affect real estate mortgage investment conduits (REMICs). Without this guidance, payments from the US government to lenders and servicers of home loans under HAMP may have resulted in a 100% penalty tax and may have jeopardized the securitization vehicle's tax-advantaged classification as a REMIC.

An election under section 338(h)(10) of the Internal Revenue Code is often used to characterize the sale of stock of an S corporation as a deemed sale of all of the corporation's assets. A proper federal election under section 338 will be deemed a proper election for California tax purposes, unless the taxpayer separately elects otherwise. The election will trigger corporate-level tax at the current rate of 1.5% on the hypothetical sale of assets arising from the election.

The American Recovery and Reinvestment Act of 2009 ("ARRA"), which President Obama signed into law on February 17, 2009, created a federal subsidy of the premiums payable by certain terminated employees for continuation coverage provided under employer-sponsored group health plans pursuant to the requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (also known as "COBRA"). The premium subsidy and new notification requirements under COBRA that apply to employers and plan administrators as a result of this legislation are summarized below.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Tax Act of 2009 ("ARRTA").  ARRTA contains significant potential Federal income tax relief for businesses.  Some of the more important provisions are summarized in the remainder of this article.

(1)  Lifetime Gifts – The annual exclusion amount that you can give to any individual without using your lifetime exemption or paying any gift tax has increased from $12,000 to $13,000.  A married couple, therefore, can give each of their children, grandchildren, or other persons $26,000 free of gift tax.  The gift tax lifetime exemption remains at $1,000,000.

(2)  Death Transfers – The federal estate tax exemption has increased to $3.5 million per person for a person dying in 2009.  A married couple currently can leave $7 million (less any exemption used during the lifetime of either spouse) to their children and other beneficiaries free of federal estate tax.

(3)  Transfers To Grandchildren – The exemption from Generation Skipping Transfer Tax also has increased to $3.5 million per donor.  A married couple can collectively shelter $7 million from death taxes in their children's estates in a long-term dynasty trust.

(4)  Required Minimum Distributions – The requirement that minimum distributions be made from IRAs and other defined contribution retirement plans has been suspended for 2009.  Thus, no 2009 minimum distribution needs to be made from any such retirement account this year.  (A first-time minimum distribution for 2008 that is required to be made by April 1, 2009 must still be withdrawn by that deadline.) 

Employers must furnish employees who exercised incentive stock options ("ISOs") or sold or otherwise transferred shares acquired under an employee stock purchase plan ("ESPP") during 2008 with a detailed information statement by January 31, 2009.

A common strategy for acquiring the business of a troubled company is to purchase assets rather than acquire all outstanding capital stock of the target, based on the general principle that a purchaser of assets is not responsible for liabilities of its seller absent an express or implied assumption.  Does the strategy work?  Depending on the liability and circumstances, the answers are "No" and "Maybe," and sometimes a qualified "Yes."  In troubled economic times, buyers may reconsider whether they are willing to rely upon indemnity by the seller or its owners, particularly since doctrines of public policy may render such an indemnity unenforceable in certain situations.

Recent changes to Chinese tax law has dramatic tax implications for foreign investors in the People's Republic of China.  Despite the changing tax landscape, there are still opportunities to take advantage of current tax law.

The Emergency Economic Stabilization Act of 2008 ("EESA"), which President Bush signed into law on October 3, 2008, created the Troubled Asset Relief Program ("TARP") under which the United States Treasury (the "Treasury") is generally authorized to purchase troubled assets from certain financial institutions.  EESA establishes different sets of restrictions for financial institutions based on whether they sell troubled assets directly to the Treasury or whether they sell troubled assets through an auction process.  EESA also modified certain tax code provisions that placed limitations on the deductibility of compensation paid to certain executives.  This blog provides a brief overview of EESA provisions that address the executive compensation practices of financial institutions participating in TARP.

One question facing public companies is whether or not to implement a stock ownership policy for its senior executives. In essence, a stock ownership policy requires each covered executive to hold a specified minimum amount of company stock. Corporate governance reform advocates routinely call for companies to establish stock ownership requirements including imposing hold until retirement (HTR) policies for equity awards held by company officers (see for example the September-October 2008 issue of The Corporate Executive). As a result of the on-going dialogue on this issue, I wanted to proffer the following concept for consideration by public companies and practitioners.

As reported by Barron's Clare McKeen, the Internal Revenue Service's new "Whistleblower Office" is open and ready for business.  If you are willing to tattle on your fellow man, the IRS is willing to pay you for the information.

Yes, sadly this is yet another blog posting dealing with that infernal Internal Revenue Code Section 409A. But, my musings here are not about the intricacies of 409A and the various tax issues it presents or even the fact that the year-end compliance deadline is now less than 125 days away! Rather my focus is on whether this pervasive tax statute also has the power to complicate securities law compliance as well.

On July 16, 2008, the Internal Revenue Service ("IRS") issued proposed new regulations relating to the information return and information statement requirements under Section 6039 of the Internal Revenue Code. As we reported in our January 24, 2008 blog article, Code Section 6039 requires corporations to file an information return with the IRS (the "Return") and furnish a written information statement (the "Statement") to each employee who exercises incentive stock options ("ISOs") or sells or otherwise transfers shares acquired under an employee stock purchase plan ("ESPP") by January 31 following the year in which such transactions occur.

IRS Notice 2007-86 extended the deadline for employers to bring documents into compliance with the final regulations of Section 409A of the Internal Revenue Code (the "Code") until December 31, 2008.  With less than six months remaining in the year, we strongly encourage all employers to now take action to implement a Section 409A review process in order to allow for sufficient time to assess compliance alternatives and prepare amendments to implement any necessary changes.  Because the amendment process may generally require Board action and employee consent, advance planning for the steps that need to be taken before the end of the year becomes even more crucial.

On June 17, 2008, the President signed H.R. 6081, the Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART”). HEART adds new provisions to U.S. law that significantly change the tax treatment of persons who give up their U.S. citizenship or long-term permanent resident status.

Click here to view a PDF copy of the document.

In a recently-issued Revenue Procedure (Rev. Proc. 2008-28), the IRS states that the modification of certain mortgage loans under foreclosure prevention programs involving, for example, interest rate reductions, principal forgiveness, extensions of maturity and alterations in the timing of changes in an interest rate generally will not cause the IRS either to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications create a liability for tax on a prohibited transaction. This relief is granted to real estate mortgage investment conduits (REMICs) and investment trusts where the mortgage loan meets all of the following conditions:

Section 403(b) annuity plans have historically been governed by a hodgepodge of Internal Revenue Service ("IRS") rulings and regulations dating back to 1964.  In 2007, however, the IRS finalized new, comprehensive regulations that are generally effective January 1, 2009.  Schools and tax-exempt employers that maintain 403(b) plans and their advisors must thoroughly review and revise their plans to comply with the new regulations.  The consequences of not doing so are dreadful (i.e., the loss of tax-deferred status of employer and employee contributions to the annuity plan).

The California Franchise Tax Board has announced that it will not appeal a recent court ruling that a fee levied on limited liability companies is an unconstitutional tax. The FTB plans to issue a notice April 14 addressing how protective refund claims filed by taxpayers will be handled. The deadline for filing a refund claim for the 2003 tax year is April 15, 2008.

On January 25, 2008, the Internal Revenue Service ("IRS") released Private Letter Ruling ("PLR") 200804004. This new PLR has apparently reversed an important position that served as guidance to public companies and practitioners regarding the tax deductibility of certain performance-based pay under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). For background, Code Section 162(m) generally limits the ability of public companies from deducting compensation in excess of $1 million paid to certain executive officers. However, compensation that meets the requirements of "performance-based compensation" is exempt from the $1 million limit under Code Section 162(m). Generally, compensation qualifies as performance-based only if it is payable when predetermined performance objectives are actually achieved in accordance with performance criteria that has been approved by shareholders. The regulations under Code Section 162(m) provide that compensation does not fail to qualify as performance-based merely because compensation is payable upon death, disability or a change in ownership or control.

Employers must furnish employees who exercised incentive stock options ("ISOs") or sold or otherwise transferred shares acquired under an employee stock purchase plan ("ESPP") during 2007 with a detailed information statement by January 31, 2008.

A requirement that corporations additionally file such information in a return with the Internal Revenue Service ("IRS") was added in 2006.  However, because regulations providing guidance on this new reporting requirement have yet to be issued, the obligation to file an information return with the IRS has been temporarily waived.  The IRS still plans to issue regulations regarding the reporting requirement and the regulations may be effective retroactively to January 1, 2007.  Note, however, that employers must continue to supply employees with the required information statements.

For further information and sample information statements, please contact Dawn Mayer at (213) 617-4246

In Notice 2007-49, the IRS indicated how it will define "covered employee" for purposes of Internal Revenue Code §162(m)'s annual limit of $1,000,000 on deducting compensation of public company officers in light of the September 8, 2006 amendments to Item 402 of Regulation S-K.

Yesterday the IRS published its long-awaited final Treasury regulations under Section 409A of the Internal Revenue Code ("409A"), all 397 pages. These regulations are significant because employers with arrangements and plans governed by 409A must have both operational and document compliance by December 31, 2007. This means arrangements and plans that were previously reviewed and/or amended to comply with the proposed regulations will have to again be reviewed to determine whether a subsequent amendment is necessary by December 31, 2007. The arrangements and plans in question include traditional non-qualified deferred compensation plans, bonus arrangements, certain equity based arrangements, employment agreements, severance arrangements and more.  The final regulations can be found here.

The IRS just issued Notice 2006-79, which provides transition relief from the December 31, 2006 deadlines of IRC 409A.  Specifically, this Notice provides further transition relief by:

On May 2, 2006, we reported that the Mexican Tax Administration Service ("SAT") issued a three-month suspension of taxpayer's external auditor's license to certify financial statements.  In Mexico, taxpayers of a certain size are required to submit electronically certain financial and tax information to the SAT.  An independent certified public accountant ("CPA") must include a declaration with this information regarding the tax compliance of its client.  This includes transfer pricing and contemporaneous documentation which the CPA must retain in its files.

China claims that more than 50% of foreign companies which have invested in China are currently reporting losses as the result of aggressive transfer pricing.  China has improved its tax sophistication and enforcement over the last several years and plans to increase the number of its audits to ensure that these companies are reporting an appropriate amount of tax.