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While the National Collegiate Athletic Association (NCAA) landscape remains entwined with issues regarding compensation of student-athletes, another element of the debate reached a “foothold”…

U.S. District Court Judge Claudia Wilken (Oakland, CA) recently issued an injunction invalidating NCAA rules that prohibit student-athletes from being compensated for use of their names, images, and likenesses in television broadcasts and video games.

The decision is a win for certain student-athletes in the sense that it would allow football players in the top 10 conferences, and all Division I men’s basketball players, a limited share of the revenue generated by schools from the use of their likenesses. 

However, there are aspects of the injunction that provide factors somewhat beneficial to the NCAA.  Based on witness testimony and current NCAA rules, Judge Wilken determined that the NCAA and schools are allowed to cap the amount of money paid to college athletes while they are in enrolled in school; an eligible athlete must be paid at least $5,000 per year they are academically eligible, but schools do not have to necessarily pay more than that.  Furthermore, the compensation will likely be deferred as schools are permitted to pay the funds to a trust, which would then be held until after an athlete’s eligibility ends or he graduates, whichever occurs sooner. 

Former UCLA basketball player Ed O’Bannon had filed the class-action lawsuit on behalf of himself and other former college athletes against the NCAA, alleging that the NCAA’s prohibition on allowing student-athletes from receiving any compensation other than scholarships and the cost of attendance at schools violated federal antitrust laws.

The NCAA traditionally required student-athletes to sign a form before participating in athletics, which gave the NCAA permission to use player images and likenesses to “promote NCAA championships or other NCAA events, activities or programs.”  Because of this document, student-athletes had been unable to negotiate deals for the use of their likenesses, which the plaintiffs alleged was an unreasonable restraint on trade conspiring to fix the price for the use of athletes’ image and likeness at zero.

The injunction stops short of allowing athletes to receive money for endorsements, nor does it prevent the NCAA from creating rules that prohibit athletes from selling their name, image, and likeness rights individually.  But Judge Wilkin’s ruling is certainly a battle won by the Ed O’Bannon plaintiffs in this continuing “war” with the NCAA over amateurism and legal rights of student-athletes.

An issue with the decision is that was confined “revenue sports” (football players in the top 10 conferences, and all Division I men’s basketball players).  Thus, for the time being it remains up to the NCAA and the individual conferences and schools to determine how, or if at all, “non-revenue athletes” will be compensated for use of their likeness.  “Non-revenue athletes” encompasses the remaining Division I, Division II, and Division III athletes, as well as female student-athletes.  Application of Title IX, which requires equal opportunities and resources for all male and female athletes, is seemingly called into question if only certain athletes are able to be paid for to use of their likeness.

The ruling will not affect any recruit enrolled in college before July 1, 2016.  The NCAA has announced that it will appeal the ruling.

Authored by CJ Stroh

We have all heard the term milestone payment in the life science field. Generally, milestone payments are made under a collaboration agreement upon the completion of a successful stage of research. These payments are generally deductible for financial accounting purposes. However, these payments are generally capitalized and amortized in the eyes of the Internal Revenue Service.

The Internal Revenue Code generally allows a deduction for all ordinary and necessary expenses paid or incurred during a taxable year on carrying on a trade or business. However, expenditures that create or develop an asset with a useful life beyond the taxable year must be capitalized rather than expensed in the year paid.

The Internal Revenue Service believes that milestone payments relate to the acquisition or creation of intangibles and thus should be capitalized and amortized. They are generally amortizable over the life of the agreement, the remaining life of the patent or 15 years.

Authored by Stephen Talkowsky

This past week, Treasury Secretary Jacob Lew sent a letter to key members of Congress calling for the nation to embrace a “new sense of economic patriotism” and stop supporting corporations that are moving their tax home out of the U.S. to reduce their corporate income tax burdens by taking advantage of an existing loophole in the tax code.

The loophole, known as “corporate inversion,” is a transaction where a U.S. based multinational group acquires a foreign corporation located in a country whose tax rates are lower than in the U.S. These reorganizations have the effect of changing the U.S. corporation’s domicile to a foreign country but typically results in little change to the U.S. operations of the entity. Although operations in the U.S. would continue to be subject to U.S. tax, the foreign operations conducted by the newly formed group would be subject to the lower foreign country tax rates. In addition, the foreign income is not taxed to the U.S. shareholders until dividends are paid. Moreover, the U.S. corporation may engage in earnings stripping transactions where deductible payments to the parent company reduce U.S. taxable income.

These transactions are particularly attractive to pharmaceutical and medical device companies who seem to have more choices of appropriately sized targets overseas and enjoy many benefits of a global presence. Popular destinations seem to be Britain, Ireland and Bermuda for their lower tax rates and other attractive R&D incentives. Transactions involving pharma and medical device companies have spiked in recent years, most notably the recent merger of Medtronic and Covidien, the attempted acquisition by Pfizer of AstraZeneca, and the AbbVie takeover of Shire, the largest inversion deal to date.

Here’s a summary of how the proposed inversion of Pfizer might have worked:
A newly created UK holding company would acquire the shares of both Pfizer and AstraZeneca. In the resulting structure, Pfizer and AstraZeneca would be subsidiaries of the UK parent and the former Pfizer shareholders would own 73% of the UK company and AstraZeneca former shareholders would own 27%. Pfizer hoped to shift profits to the UK, where the tax rate is around 21% as compared to 35% in the US.

For similar types of inversion transactions like the one proposed in the Pfizer deal, the U.S. government has attempted to curb the use of these inversion transactions:

• Where shareholders of the U.S. corporation subsequently acquire over 50% of the new foreign parent corporation, section 367(a) causes a gain on the transfer of U.S. stock to the parent corp.
• Where shareholders of the U.S. corporation subsequently acquire 60% or more, but less than 80% of the new foreign parent corporation, section 7874 prevents the U.S. corporation from using tax attributes, such as NOLs, to offset section the 367(a) inversion gain.
• Where shareholders of the U.S. corporation subsequently acquire 80% or more of the new foreign parent corporation, section 7874 treats the new foreign parent company as a U.S. corporation for tax purposes, effectively removing any real U.S. tax savings from the transaction.

• In triangular reorganizations, section 367(b) and Notice 2014-32 causes a potential taxable dividend as a result of a “deemed” distribution between parent and subsidiary on the acquisition of the target foreign corporation in exchange for parent stock.

Under Pfizer’s proposed new structure, the corporation would not have been considered a U.S. corporation for tax purposes under section 7874 because less than 80% of the foreign parent company would be held by the former U.S. shareholders. The U.S. corporation might have had to pay tax under the other anti-abuse regulations of section 7874 and section 367, however it planned to save over $1 billion in tax due to the tax rate differential alone, according to some reports. In other inversion transactions, some corporations were able to avoid the imposition of section 367(a) inversion gain by manipulating certain aspects of section 367(b)(“Killer B reorganization” rules), in order to make the transaction nearly tax free. Much tax planning goes into achieving these various tax savings from moving overseas and the transactions can get very complicated.

The letter from Secretary Lew calls for a lowering of the U.S. corporate income tax rate, among the highest in the world. At the very least, he asks Congress to pass laws to prevent or deter companies from using these inversion strategies, including retroactive laws to prevent tax savings on restructuring deals already agreed to, such as the recent Shire takeover. Despite bipartisan disagreement on how to address the tax loophole, tax reform in this area is likely to occur in some form. However, many tax practitioners and financial experts believe that these transactions will continue to be used at an increased pace until real reform occurs to lower U.S. corporate tax rates. In the meantime, patriotism aside, corporate management will maintain its allegiance to its shareholders and continue to strive to improve the corporate bottom line in the ever increasing global economy.

Author: Susan San Filippo

So, you are development stage life science company located in New Jersey and, like the rest of us, in need of cash.  Your accountant tries to sell you a federal research and development tax credit study.  Your response is, “Why?  I don’t have any revenue and thus pay no taxes – get lost!”  While that may be the appropriate response from a federal perspective, that may not be the correct answer from the state of New Jersey’s perspective.

In 1999, New Jersey commenced a program that allows certain development stage companies (emerging technology or biotech companies) to actually sell their unused net operating losses (“NOLS”) and research and development tax credits for cash –  generally to the tune of 90 cents on the dollar.  So, if you have unused New Jersey R&D credits of $100,000, you may be able to sell those credits for $90,000!  The buyer is generally another New Jersey company in need of credits and NOLS.

As with any other program, when dealing with the Federal or State government you need to jump through some hoops and fill out some paperwork.  But, all in all, the process is not that painful.

So, if you are sitting on some unused credits and NOLS or you believe you may have some that you have not yet captured, it is probably worthwhile to taking a look to see if you are sitting on some cash.

Today’s post comes from Guest Blogger, Daniel Clark.

ANY business that requires their consumers to have internet access to enjoy their services will be affected by the new EU VAT digital services reform.

The new rules have been created with the intention of creating a “level playing field” for all businesses in the digital economy. These are the word of the EU’s Taxation Commissioner Algirdas Semeta who has also stated that the aim of the new EU VAT on digital services is to ensure that the digital economy “plays fair and pays fair.”

In a sense, the powers that be in Brussels, have become increasingly agitated over the influence and power of Silicon Valley multinationals within the EU.

The new rules will close the oft-used loophole of non-EU businesses setting up their European HQ in Luxembourg.  The Grand Duchy has become extremely popular due to its low-tax environment.  For some businesses – such as Amazon – the VAT rate drops as low as 3% for eBooks.  This is referred to as a ‘super-reduced’ rate.

The Silicon Valley giants have been able to do this without breaking any laws.  These new VAT rules are the European Commission’s first steps towards changing the tax culture in the EU.

So, why change VAT first?

VAT has not been as effective as the European Commission would have hoped.  It has been too easy to avoid or not comply with VAT regulations.  The main reason for this is that VAT – which was always intended to be a tax on consumption – was turned on its head and businesses took advantage.  The giants setting up in Luxembourg were doing so to take advantage of the low-tax environment because the rules allowed them to do so.  They charge the low VAT rate based on where they are located.  The key change in the new rules returns VAT to a tax on consumption and from January 2015 onwards VAT on digital services will be charged based on where the consumer is located.

This instantly eliminates any commercial advantage to setting up in a low-tax environment.

This will hurt Luxembourg

Luxembourg has already changed their VAT rates – probably because of the introduction of these new rules.  The finance ministry in Luxembourg has estimated a loss of between €600 million and €1 billion from the EU VAT on digital services reform.  That is 70% of its VAT revenue.

However, there isn’t a lot of sympathy for the Grand Duchy with many arguing that they have for too long taken advantage of the VAT system at the expense of other EU member states.

Meanwhile, EU member states with a large digital service consumer base such as the UK and Germany will benefit from the new rules.  Remember, VAT will now have to be charged based on the location of the consumer.  The rule change only affects B2C sales of digital services.  The UK, for example, has already estimated that it will benefit to the tune of €1.2 billion over four years between 2015 and 2018.

Way back near the end of May, which feels like a very long time ago, we published a couple of pages of overview on how to classify ownership interests in activities as passive vs. non-passive.  Somewhere in that article I promised to mention how real estate interests can qualify as non-passive activities.

This determination is key in the proper treatment of income and losses both for the purposes of the limitations under the passive activity loss rules and also for the inclusion in the calculation of the new Net Investment Income tax.

For an activity to be considered non-passive, the owner must materially participate in that activity and generally meet one of seven tests enumerated in Reg. Section 1.469-5T, explained previously.  Despite those requirements, rental activities are per se passive, that is, automatically treated as passive regardless of the level of the owner’s participation.  There are a couple of exceptions to that default which we mentioned in the earlier article for self-rental activities, holding a working interest in an oil and gas property, and where a grouping election would be allowed with a non-rental activity in only specific circumstances. However, the most frequently used (and risky) exception to the default treatment of real estate income or loss as passive is when an election is made for a real estate professionals.

Special rules are provided under IRC §469(c)(7) for rental activities commonly referred to as the real estate professional rules.  If the test is met, the rental activity of a real estate professional is treated as non-passive.  Treatment as non-passive is advantageous when a real estate rental activity is generating losses that can be used to offset other income such as interest, dividends and wages.  Conversely, the passive losses would not reduce other passive real estate income for purposes of the net investment income tax.  Planning to make this election should be well thought out in that it may not always be desirable to treat net rental real estate income or loss as non-passive and the election itself may invite increased IRS scrutiny.

Am I a real estate professional?

The real estate professional must satisfy two tests:

  • more than one half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and
  • such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.

At first glance, the test seems relatively easy to satisfy until you realize that for an activity to be counted towards the first and second test, the owner must materially participate in each activity to treat the income or losses as non-passive.  If there are interests in several real estate activities, this may be difficult to satisfy.  To help satisfy the material participation for each activity, a special grouping election can be made under Reg. Section 1.469-9 to treat all interests in rental estate as one activity. Once made, the election is binding for all future years the taxpayer is a qualifying real estate professional and is revocable only if there is a material change in facts and circumstances.  In case you missed the election, one can be filed with an amended return under Rev. Proc. 2011-34.

The rental estate activity is owned by a trust.  Can the trust be a real estate professional?

The Code nor the regulations address how material participation rules can be satisfied for taxpayers who are trust, estate or personal service corporations.  Under IRC §469(c)(7)(B) the requisite amount of service hours must be performed in real property trades or businesses, the performance of which the IRS has previously stated must be by a taxpayer who is a natural person and has the capability for physically performing such services.  In looking to case law for guidance, the U.S, Tax court in a recent decision, held that a trust taxpayer could meet the material participation standards through the performance of its trustees and thus qualify for the real estate professional exception under §469(c)(7). [Frank Aragona Trust, (2014) 142 TC No. 9.] In the case, the taxpayer was a trust that owned rental real estate properties and engaged in other real-estate activities.  The court ultimately rejected the IRS’ argument that a trust is incapable of performing personal services.  Rather, the Tax Court held that the trust is an arrangement whereby trustees have a fiduciary responsibility to manage assets for the benefit of the trust’s beneficiaries and therefore worked performed by an individual as part of their trustee duties are personal services for purposes of satisfying the section 469(c)(7) exception.

The trust was formed by a grantor who, after his death, was succeeded as trustee by his five children and one independent trustee.  All six trustees acted as a management board for the trust and made all major decisions regarding the trust’s property. In addition, a disregarded LLC, wholly owned by the trust, managed the trust’s rental real-estate properties.  The LLC employed several people, some of whom were the trustees.  The court ruled that not only were the activities performed by the individuals in their duties as trustee included as personal services performed in a real-estate trade or business, but also their time spent as employees of the LLC managing the rental real estate properties.

Because the requisite hours in real-property trades were met and the trust materially participated in the real property businesses, the trust met the exception to the per se passive treatment of rental real estate activities and was able to treat the income and losses from the activities as non-passive.

The Philadelphia 76ers will construct an $82 million dollar state-of-the-art practice facility and team headquarters in Camden, NJ, aimed to be completed by 2016.  Pursuant to New Jersey’s New Jobs Investment Tax Credit,” the State has awarded tax credits to the 76ers over a 10-year period (not to exceed $82 million,) which should allow the team to recoup the FULL cost of building the complex.

The deal guarantees an $8.2 million tax credit annually that the Sixers can use or sell, so long as the team (1) employs 250 people in Camden, and (2) stays in the city for 15 years.  If the team employee total at the facility drops below 250 in any year, the tax credits would be reduced to $5 million per year.

This specific New Jersey tax credit entitles corporate entities to a credit against the portion of their corporation business tax liability that is attributable to certain qualified investments in buildings, building components, equipment and capitalized start-up costs, in any new or expanded business facility in New Jersey, which results in the creation of a specified number of new jobs in the state.

The credit is determined by multiplying the amount of a corporation’s “qualified investment” by its “new jobs factor.” “Qualified investment” is determined based on the expected depreciation life of the property for federal income tax purposes, as depicted below:

  • property with a 3-year life—35% of cost;
  • property with a 5-year life—70% of cost; and
  • property with a life of seven or more years—100% of cost.

The “new jobs factor” is based on the number of jobs created in New Jersey which are directly attributable to the entity’s investment in the new or expanded business facility.

While the Sixers are required to provide 250 jobs to maintain the tax breaks, 200 of these positions are already filled by team administrators, players, and staff. Thus, only 50 new jobs will actually be created.

The 76ers are the only NBA franchise without its own practice facility, and the team has been using the Philadelphia College of Osteopathic Medicine for such purposes since 1999. The team will continue to play its home games at the Wells Fargo Center in Philadelphia.

The team’s individual players currently pay Philadelphia wage taxes on days they have home games, and pay other city wage taxes when the team is on the road. The players will eventually have to pay a New Jersey wage tax for the time they spend practicing in New Jersey.

Authored by CJ Stroh

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