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Archive for the ‘cpa’ Category

If you’ve worked in the tax preparation world for any measure of time, you’ve assuredly run into the following conundrum:

My client is a member in an LLC. Is his/her share of the LLC’s income subject to self-employment income?

At that point, you went one of two directions:

  1. Opened up your tax research software/hard copy Code/Google machine, or
  2. Said “screw it, I’ll exclude it,” and went on with your life. (Ed note: this is the option you took).

Continue reading on Forbes.com.

 

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Snapshot of NBCUniversal Settlement

This past month NBCUniversal, which is a unit of Comcast Corp, settled $6.4 million dollar class-action lawsuit with a number of unpaid interns who had worked on Saturday Night Live.  Specifically, the allegation was that NBCUniversal violated labor laws by misclassifying the plaintiffs as “non-employee interns” rather than “employees”, thus denying benefits such as minimum wage, overtime pay, social security contributions, and unemployment insurance.

The settlement still must be approved by a judge, but of the settlement amount: $1.18 million would go to the plaintiffs’ attorneys; $10,000 would go to lead plaintiff Monet Eliastam as a service payment; five other plaintiffs would receive service payments; and the remaining interns would receive an average settlement payment of $505.

Fair Labor Standards Act

Pursuant to the Fair Labor Standards Act (“FLSA”), internships in the for-profit private sector will most often be viewed as employment, unless certain requirements related to “trainees” are met.  The distinction is that interns in the for-profit private sector who qualify as “employees” typically must be paid at least minimum wage and provided overtime compensation, whereas qualifying internships or training programs may be offered without compensation.

The determination of whether an internship or training program meets this compensation exclusion depends upon all of the facts and circumstances of each such program, but the following six criteria must be applied when making this determination:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If all of the factors listed above are met, an employment relationship does not exist under the FLSA, and the Act’s minimum wage and overtime provisions do not apply to the intern. 

Recent Trend in Litigation

There has been a recent trend in this type of litigation.  Last June a New York Federal Court held that unpaid interns of Fox Searchlight Pictures Inc. were “employees” pursuant to the FLSA.  The court reasoned that the functionality of NBCUniversal’s internship program was not that of a unique education to the intern.  Instead it was the employer who received the immediate benefit of the interns’ work, while the interns’ experience mirrored that of any other employee of the company (simply providing them knowledge of how a production office functions).

Additionally, a number of similar class-action suits have been brought against other large companies such as Atlantic Recording, Bad Boy Entertainment, Condé Nast Publications, Donna Karan, Fox Entertainment Group, Gawker Media, Sony, Universal Music Group, Viacom, and Warner Music Group.

What the Future Holds

The ultimate result could be these larger companies having to weigh the costs of: (a) creating policies, supervising, and operating an appropriately qualified internship program where pay is not required; versus (b) simply classifying interns as employees and paying them at least minimum wage.

However, with certain companies already believing in compensating interns and looking at them as potential future assets, those employers who have been taking advantage of free labor may be forced to compete fairly if they want to attract young talent.

If the threat of litigation and a cracking down in FLSA compliance results in paid internships becoming the norm rather than optional, why would interns seek out positions where the only benefit they receive is on-the-job training and exposure to a certain industry?  Many companies have exploited interns for free labor, while said interns, craving experience and resume firepower, have had to endure paying expenses such as commuting, local housing, meals, or course credit out of their own pockets.  The bottom line is that interns deserve to be adequately compensated for the work that they perform, and it appears that enforcing this notion just might come to fruition.

Authored by CJ Stroh

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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

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