Thursday, November 9, 2017

Storm On The Horizon: Amend Your Partnership Agreement Before The IRS Does It For You


As we approach the end of 2017, many uncertainties prevail in the United States tax system. Late last week, Congressional leaders proposed extensive tax reform legislation that has sparked sharp debates about rates, deductions, eliminating some taxes, and frankly, whether any of it can be actually passed into law. There is, however, prior legislation that goes into effect in just 8 weeks that may require the prompt attention of certain businesses and individuals.  Effective January 1, 2018, key changes will apply to all entities that are taxed as partnerships (including limited liability companies); therefore, it is imperative that all impacted entities evaluate partnership and operating agreements to determine whether amendments may be required to address the changes.
The Bipartisan Budget Act of 2015 significantly changes the landscape for the way the Internal Revenue Service (IRS) audits partnerships. These changes are not just administrative details, but rather they (i) potentially change how economic risk is shared between partners in the context of a tax audit, and (ii) imbue a single partnership representative with absolute power to effect those changes.  In addition, all partnerships continue to be subject to prior audit rules for tax years prior to 2018.  Available elections may be different, the powers of those representing the partnerships may be different, and the rights of partners to participate in, and affect the outcome of, audits may be different, depending on which audit regime applies.  For example, audits of small partnerships (less than 100 partners) have historically resulted in adjustments at the individual partner level. But after January 1, all adjustments are at the partnership level unless the partnership is eligible to make, and in fact makes, an election every year to be exempted.
The IRS is increasing audit activity and the changed partnership audit rules are part of the IRS strategy to improve its ability to examine more entities in less time. In the past, the tax matters partner had to notify partners of key audit developments and partners had the right to participate in any phase of administrative proceedings.   Now, because a partnership representative has no statutory duty to keep partners informed, and partners have no statutory right to participate in the audit, partners and partnerships that do not address these important rights and responsibilities in partnership organizational documents may experience unwelcome economic results with little or no warning. In addition, partnerships must now be prepared to operate under two sets of audit rules, depending on which years are under audit. The law is designed to increase IRS efficiency, but can negatively impact the interests of individual partners. This means that a partner’s most important protection against an unexpected audit result is a well-drafted partnership or operating agreement that addresses any required changes to a partnership’s ownership structure, how audit-related decisions will be made, what role individual partners will have in decision-making, and how economic consequences of audits will be shared among current and historic partners.
The Tax and Estate Planning department of Jennings, Strouss & Salmon, P.L.C. has significant experience in assisting our clients with such partnership issues.  In order to be ready for the coming partnership audits that could encompass past as well as future years, we suggest that partnership and operating agreements be evaluated and updated in the near future.  Appropriate changes to organizational documents should be accomplished long before the IRS issues the first audit notices.  Although we expect partnerships to begin to receive audit notices under the new rules after the 2018 tax year, it is appropriate to begin the discussions now because some of the changes to governing documents may affect critical partnership governance ownership, and economic issues that will require more than perfunctory attention from the partners.  We are available to discuss and review your existing partnership or operating agreements and provide guidance on the best way to address this new regulatory environment.


About Jennings, Strouss & Salmon, P.L.C.
Jennings, Strouss & Salmon, P.L.C., has been providing legal counsel for 75 years through its offices in Phoenix and Peoria, Arizona; and Washington, D.C. The firm's primary areas of practice include advertising and media law; agribusiness; automobile dealership law; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit www.jsslaw.com and follow us on LinkedInFacebook, and Twitter.

The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit www.b3strategies.com.


Please note that this client alert has been prepared by Jennings, Strouss & Salmon, P.L.C. for informational purposes only. These materials do not constitute, and should not be considered, legal advice, and you are urged to consult with an attorney on your own specific legal matters. Transmission of the information contained in this client alert is not intended to create, and receipt by the reader does not constitute, an attorney-client relationship with Jennings, Strouss & Salmon or any of its individual attorneys.





Friday, September 22, 2017

Thursday, September 21, 2017

New Form I-9 Now Effective


Labor and Employment Group Jennings, Strouss & Salmon, P.L.C.

Effective as of September 18, 2017, employers must now use the new version of the I-9 Employment Eligibility Verification form issued by the U.S. Citizenship and Immigration Services (USCIS) on July 17, 2017.

The revised version of the Form I-9 includes new wording in the instructions and changes to the List of Acceptable Documents.

For additional information or questions regarding the new Form I-9, please contact one of our Labor and Employment attorneys listed below.
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Employers have many options for hiring labor and employment legal representation; however, unlike Jennings, Strouss & Salmon, few encompass the reputation, history, experience, and full-service functionality under one roof.

Minimum wage and overtime issues under the Fair Labor Standards Act create unique challenges for employers. We offer creative solutions and swift litigation support. From internal compliance audits to Department of Labor investigations, we guide clients through the maze of regulations to ensure they comply with the ever changing laws, and defend clients facing wage and hour litigation in both individual and collective claims.

Our labor and employment attorneys are also experienced at handling the wide-range of employment issues that challenge businesses, big and small. They regularly assist clients in hearings before numerous administrative agencies, such as the EEOC, OSHA, NLRB, OFCCP, U.S. Department of Labor, Arizona Civil Rights Division, and the Arizona Department of Economic Security. In addition, our labor and employment attorneys are skilled litigators, defending clients in all types of lawsuits brought before state and federal courts (both trial and appellate). They also assist our clients in resolving disputes through negotiation, mediation, arbitration, early neutral case assessment and other alternative dispute resolution techniques.

For assistance with any of your labor and employment needs, please contact one of our experienced labor and employment attorneys:

John J. Egbert - johnegbert@jsslaw.com - 602-262-5994
Chris M. Mason - cmason@jsslaw.com - 602-262-5817
Otto S. Shill -  oshill@jsslaw.com - 602-262-5956
John "Jack" G. Sestak, Jr. - jsestak@jsslaw.com - 602-262-5827
Lindsay G. Leavitt - lleavitt@jsslaw.com - 602-262-5825

Monday, September 11, 2017

Jennings Strouss Wins Unprecedented Arizona “Lemon Law” Lawsuit

Jennings, Strouss & Salmon, P.L.C., a leading Phoenix-based law firm, announced that it secured a favorable verdict in a three-year “lemon law” litigation with BMW of North America (BMW N.A.). This is the first verdict in Arizona (and possibly the United States) where a jury found that excessive brake noise is a defect under a governing “lemon law” statute.

In 2012, while residing in Oregon, Dr. Nordean and his wife took delivery of a custom ordered 2013 BMW M6 coupe, a luxury high performance vehicle that was hand built in Germany. The vehicle was ordered through, and delivered to, a BMW-authorized dealer in Nevada. After approximately 1,500 miles, the Nordeans noticed excessive brake noise and howling, as well as brake vibration when coming to a stop. They reported the problem to an authorized dealer in Oregon.  Upon relocating to Arizona in 2013, The Nordeans again reported the problem to an authorized dealer in Scottsdale, where an attempt was made to fix the brake problems by installing updated and re-designed brake pads that would allegedly reduce the brake noise. The re-designed brake pads, also manufactured by BMW N.A., eliminated the brake howling and vibration problem; however, they caused the brake noise to be louder and more frequent. After four failed attempts to correct or repair the excessive brake noise, the Nordeans requested in writing that the manufacturer repurchase the M6 under Arizona’s “lemon law” statute. The manufacturer refused. In response, the Nordeans hired Jennings Strouss attorney Christopher D. Lonn to file a lawsuit against BMW N.A., under the consumer protection-focused Arizona “lemon law” statute.

During a four day jury trial in the Maricopa County Superior Court, Mr. Lonn was able to establish, without being required to have an expert witness testify, that there was a defect in materials or workmanship regarding the excessively noisy brakes that did not conform to the express warranty from BMW N.A. Another interesting fact in the case was that BMW N.A. had previously repurchased two other 2013 BMW M6s in another state for the exact same brake noise issues. These buybacks occurred just a few months before the Nordeans requested the repurchase of their vehicle, which was denied by BMW N.A.

After deliberating for 2.5 hours, the jury found in favor of the Nordeans and ordered BMW N.A. to repurchase the vehicle, with a modest offset of the purchase price for use of the vehicle. This is believed to be the first “lemon law” verdict issued by a jury against BMW N.A. in Arizona.
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About Jennings, Strouss & Salmon
Jennings, Strouss & Salmon, P.L.C., has been providing legal counsel for 75 years through its offices in Phoenix and Peoria, Arizona; and Washington, D.C. The firm's primary areas of practice include advertising and media law; agribusiness; automobile dealership law, bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit www.jsslaw.com and follow us on LinkedIn, Facebook, and Twitter.

The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit www.b3strategies.com.

Friday, August 25, 2017

Section 1202’s Qualified Small Business Stock: The Oft-Forgotten Exclusion

By: Paul J. Valentine, Attorney, Jennings, Strouss & Salmon, P.L.C.

Since the advent of the limited liability company, the C corporation has often been the ugly stepchild in choice of entity analysis. Yet, the Internal Revenue Code contains a little known provision that may make the C corporation more attractive. New ventures should consider § 1202’s Qualified Small Business Stock (“QSBS”) provisions before determining which tax regime best suits their needs. Otherwise, upon sale, founders and investors may miss out on significant tax savings.

Potential Tax Benefits of QSBS

As long as an eligible shareholder has held QSBS for five or more years, then all or a portion of the shareholder’s gain upon sale can be excluded from federal tax. The maximum exclusion is the greater of $10 million or ten times the shareholder’s “adjusted basis” (the “QSBS Exclusion”). Any portion that is not excluded is generally taxed at twenty-eight percent (28%).
The amount of the exclusion depends on when the shareholder acquired the QSBS, and is as follows:

Date Stocks ReceivedExclusion Rate
Before February 18, 2009Fifty Percent (50%)
February 18, 2009 to September 27, 2010Seventy-Five Percent (75%)[1]
September 28, 2010 to PresentOne Hundred Percent (100%)

Thus, QSBS acquired on or after September 28, 2010, enjoys the benefit of the one hundred percent exclusion rate up to the applicable cap. Additionally, this exclusion is per shareholder, not per company. That means that each of the eligible shareholders may benefit from the QSBS Exclusion.
It is important for shareholders that hope to benefit from this generous tax provision to document the acquisition and operation of a Qualified Small Business (QSB) to properly substantiate the exclusion. State and federal taxing authorities can place roadblocks to claims for the QSBS benefit; therefore, it is worth discussing with qualified tax counsel during the set-up and operation of a QSB to ensure that the business qualifies, and continues to qualify, for this tax benefit.

Requirements for QSBS

Generally, the stock of a C corporation is treated as QSBS if it satisfies all of the following conditions:


1.    The Stock Must be Originally Issued after August 10, 1993
The first requirement is self-explanatory. The enactment of § 1202 by the Revenue Act of 1993 means that to qualify for the exclusion the QSBS must be issued after August 10, 1993.


2.    The Company Must Have Been a C Corporation for the Applicable Time Period
Section 1202 imposes a C corporation requirement in three different subsections. First, it defines a QSBS as stock in a C Corporation[2]. Second, the definition of a QSB is restricted to a domestic C Corporation[3]. Third, the active business requirements specify that a corporation must have been a C corporation during substantially all of the taxpayer’s holding period of the stock for which the taxpayer is claiming preferential treatment. In short, to qualify, the company must be a C corporation for the relevant time periods.


3.    The Shareholder Must Meet the Original Issuance Requirement
QSBS satisfies the original issuance requirement if the taxpayer disposing of it acquired the stock at its original issuance for money, property, or services provided to the issuing corporation[4]. Additionally, shareholders that acquire stock via certain typically tax-free transactions, such as gifts or bequests, are treated as having acquired the stock in the same manner as the transferor[5].


4.    The Company Must be a QSB
As discussed above, only a domestic C corporation is eligible to be a QSB[6]. Such a corporation may pass muster as a QSB only if it meets a pair of gross asset tests:
  • the aggregate gross assets of the corporation (or any of its predecessors) must not have exceeded $50 million at any time on or after August 10, 1993 and before the issuance of the stock for which the preferential treatment is being sought, and
  • immediately after the issuance, the aggregate gross assets of the corporation – including the amounts received at issuance – must continue to be no more than $50 million[7].
It is important to remember that the aggregate gross asset tests apply only through the issuance of the QSB stock. Future growth of the corporation does not deprive stock of QSB status. The purpose of the provision is to encourage entrepreneurs to risk their capital on new businesses.
The QSB statute also requires that the corporation and shareholders agree to submit reports to the Internal Revenue Service (“IRS”), as may be required by the Treasury to carry out the purpose of the exclusion[8]. To date, the IRS has yet to announce any reporting requirements applicable to QSBs or QSB shareholders.


5.    The Company Must Meet the Active Business Requirement

For purposes of claiming the partial gain exclusion under § 1202, a corporation’s stock is not treated as QSBS unless the corporation meets the active business requirement during substantially all of the taxpayer’s holding period for the stock for which it is claiming preferential treatment[9]. Additionally, the corporation must be an eligible corporation[10]. A corporation meets the active trade or business requirement for any period if, during that period, the corporation uses at least eighty percent (80%) of its assets, measured by value, in the active conduct of one or more qualified trades or businesses, and the corporation is an eligible corporation.
  • The Company Must Engage in a Qualified Trade or Business
In general, the term qualified trade or business is defined by negation. It is any trade or business other than:
  • Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees;
  • Any banking, insurance, financing, leasing, investing, or similar business;
  • Any farming business (including the business of raising or harvesting trees);
  • Any business involving the production or extraction of products of a character with respect to which a depletion deduction is allowable under § 613 or § 613A; and
  • Any business of operating a hotel, motel, restaurant, or similar business[11].
  • The Company Must Satisfy the Eighty Percent by Value Test
The qualified business test requires that a corporation use at least eighty percent (80%) of its assets measured by value for one or more such qualified trades or businesses[12]. Section 1202(e)(6) provides an exception to the eighty percent requirement, explaining that for purposes of the statute, an asset that is held as part of the reasonably required working capital needs of a qualified trade or business shall be treated as used in the active conduct of a qualified trade or business.

Additionally, excessive holdings of portfolio securities or of real estate will disqualify a corporation from meeting the active business requirement. In both cases, the threshold leading to disqualification is ten percent (10%) of the corporation's assets measured by value. If more than ten percent of the value of a corporation’s assets (in excess of liabilities) consists of portfolio stock or securities, the corporation cannot meet the active business requirement. All stock and securities held by a corporation are treated as portfolio stocks and securities, except for those that are either (a) held as working capital or (b) issued by a subsidiary of the corporation holding the stock or securities[13].

Finally, a corporation cannot meet the active business requirement if more than ten percent of the total value of its assets consists of real property that the corporation does not use in the active conduct of a qualified trade or business. For purposes of determining whether real property is used in the active conduct of a trade or business, the ownership of, dealing in, or renting of real property is not treated as the active conduct of a qualified trade or business[14].
  • The Company Must be an Eligible Corporation
A corporation can satisfy the active business requirement only if the business is conducted by an eligible corporation. The term “eligible corporation” means any domestic corporation other than (a) a domestic import sales company (“DISC”) or former DISC; (b) a corporation for which a § 936 election (a possessions corporation) is in effect for itself or for one or more of its direct or indirect subsidiaries; (c) a regulated investment company, real estate investment trust, or a real estate mortgage investment conduit; or (d) a cooperative.


6.    The Shareholder Must be an Eligible Shareholder

The QSBS exclusion applies to any taxpayer other than a corporation. That means that individuals, trusts, and other pass through entities are eligible to receive the benefit of this exclusion. With regards to pass through entities, each owner (member or partner) is deemed to proportionally own the QSBS held by the pass through entity provided that he or she acquired interest in the pass through entity prior to the date the QSBS was acquired by the pass through, and he or she continues that ownership through the date the pass through disposed of the QSBS.

Conclusion

For applicable ventures, QSBS is an attractive proposition. A ten million dollar (or more) exclusion is hard to beat, even with the most sophisticated tax planning. Companies that are likely to raise capital may wish to consider forming a QSB from the outset, as many sophisticated investors are now demanding QSBS in exchange for their investment. Although a C corporation is generally not perceived as the most tax efficient vehicle, there are techniques to reduce the burden of double taxation. Further, most startups are reinvesting their revenues to generate the desired growth, and a C corporation eliminates tax on phantom income for the company’s founders and investors. In other words, sometimes the ugly stepchild deserves a second look.

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About the Author,
Paul J. Valentine

Mr. Valentine is a Member of Jennings Strouss & Salmon’s tax department. His practice emphasizes structuring corporate, partnership, and real estate transactions, counseling medium and small businesses and tax-exempt organizations in tax matters, litigating tax cases in federal courts, and handling administrative controversies before the IRS |  www.jsslaw.com

About Jennings, Strouss & Salmon, P.L.C.

Jennings, Strouss & Salmon, P.L.C., has been providing legal counsel for 75 years through its offices in Phoenix and Peoria, Arizona; and Washington, D.C. The firm's primary areas of practice include advertising and media law; agribusiness; automobile dealership law; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit www.jsslaw.com and follow us on LinkedIn, Facebook, and Twitter.

The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit www.b3strategies.com.

Please note that this client alert has been prepared by Jennings, Strouss & Salmon, P.L.C. for informational purposes only. These materials do not constitute, and should not be considered, legal advice, and you are urged to consult with an attorney on your own specific legal matters. Transmission of the information contained in this client alert is not intended to create, and receipt by the reader does not constitute, an attorney-client relationship with Jennings, Strouss & Salmon or any of its individual attorneys.
 

[1] Shareholders in the seventy-five and fifty percent exclusion period may be subject to an alternative minimum tax (AMT) add-back that is outside the scope of this article. The one hundred percent exclusion rate is not subject to AMT.
[2] § 1202(c)(1)
[3] § 1202(d)(1)
[4] § 1202(c)(1)(B)
[5] § 1202(h)(1)(A)
[6] § 1202(d)(1)
[7] §§ 1202(d)(1)(A)-(B)
[8] § 1202(d)(1)(C)
[9] § 1202(c)(2)(A)
[10] Id.
[11] § 1202(e)(3)
[12] § 1202(e)(1)
[13] § 1202(e)(5)(B)
[14] § 1202(e)(7)