Feeds:
Posts
Comments

Archive for the ‘tax’ Category

There is one clear victor in the 2016 President Election results and that is those who loathe the current tax law and long for reform. President-elect Trump’s tax proposals align nicely with those previously posited by Republican tax writers like Paul Ryan and Kevin Brady, and with last Tuesday’s events resulting in a consolidation of power in the hands of the Republican party, it has been said that tax reform within Trump’s first 100 days in office is a “priority.”

Continue reading on Forbes.com.

 

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

Read Full Post »

Donald Trump was elected the 45th President of the United States last night, and while I allow that to sink in for a bit, it’s also worth nothing that Republicans retained control over the House and Senate. As a result, the GOP has unfettered control over the future of tax policy, meaning we may be in for some big changes. What can you expect?

Continue reading on Forbes.com.

 

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

Read Full Post »

I’ve got a confession to make. While I love to sell myself as a connoisseur of all things tax law, the truth is, I can’t stand dealing with state taxes. I’ve spent my entire career avoiding it at all costs. I find all the nexus and credits and allocation versus apportionment to be incomprehensible and largely annoying.

But I’ve got another confession to make. When a state tax court case contains the terms Larry Flynt, Hustler Club, and Beaver Bucks; well, it’s enough to make me drop whatever I’m doing on a Saturday night (read: nothing) and get writin’. So here goes…

Yesterday, the New York Supreme Court ruled that the state’s 4% “Amusement Tax” — which serves as a sales tax on strip club “purchases” among many other things, is not unconstitutional. Clearly, we’re going to need some background here. First, the facts.

Continue reading on Forbes.com.

 

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

Read Full Post »

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.

Read Full Post »

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

Read Full Post »

The IRS recently took a shot across the bow of limited partners of investment management companies with respect to the application of self-employment tax (or, SE tax, for short).  In fact, the ruling could potentially affect limited partners (including LLC / LLP partners) in every industry.  While this tax issue has been fought on several levels over the past 20 or more years, it had gone dormant since 1997.  Now, an IRS Chief Counsel Advice (ILM 201436049 (05/20/2014)), released on September 5, 2014, (the “ILM”) demonstrates that the IRS may be ready to renew the fight.

Currently, limited partners of limited partnerships and shareholders of Subchapter S corporations routinely take the position that their distributive shares of entity profits are exempt from SE tax.  The uncapped Medicare hospital insurance portion of the SE tax for high income taxpayers is now 3.8%, thanks to a 0.9% increase brought in at the close of 2012 to match up with the new Net Investment Income tax.  In the S corporation world this tax exemption is tempered by a requirement to pay reasonable compensation to S corporation shareholders (the compensation, unlike stock distributions, is subject to SE tax). In the world of limited partnerships the SE tax exemption does not extend to guaranteed payments for services which, for partners, are akin to salary.


The ILM deals with a fairly large investment management company (likely in New York City based on its structure), which acts as an investment manager for a family of funds (each treated as a separate limited partnership).  The IRS did not attack the allocations to the GP which held the profits interest in each underlying fund.  The Service was interested in only the management company and its treatment of the management fee income.  The management company in the ILM was structured as a limited liability company or LLC which was treated as a partnership for tax purposes.  It was stated that the LLC was a successor to a previous management company that was organized as an S corporation (this fact was not material to the analysis but did help explain why the management company was taking the tax positions it was). Each partner in the management company received a salary (erroneously reported on a Form W-2) and guaranteed payments, both of which were subject to SE tax.  In addition, each partner received allocations of partnership profits which were not subject to SE tax.  Some of the partners were investment managers but others were legal, human resources, information technology services and other infrastructure personnel.  

The IRS pointed out that Section 1402(a)(13), which exempts limited partners from SE tax, was enacted in 1977 prior to the proliferation of LLCs.  It also cited case precedent indicating that LLC members were not limited partners and were not entitled to the benefits of Section 1402(a)(13).  However, the Service went much further and pointed to the legislative history of the statute to advocate that the statute was not intended to shield limited partners from SE tax to the extent they were providing services to the partnership.  Rather, the Service claims, the statute was merely intended to exempt passive investors from SE tax.  The ILM also cites extensively to Renkemeyer vs Commissioner, 136 T.C. 137 (2011), in which the Tax Court unsurprisingly found that partners in a law firm formed as a limited liability partnership were subject to SE tax on their earnings.  The Tax Court also utilized broad language and cited to the intent of the statute and its related legislative history.  The ILM ultimately found that every partner of the management company was subject to SE tax on their allocations of earnings because the “Partners’ earnings are not in the nature of a return on a capital investment … [but rather]… are a direct result of the services rendered on behalf of Management Company by its Partners.”

 

This fight over SE tax related to limited partners and LLC members began in the early 1990s.  In 1994, Treasury issued proposed regulations that would have exempted LLC members from SE tax but only if the member lacked authority to make management decisions necessary to conduct the business of the LLC.  In January of 1997, Treasury withdrew the regulations and re-proposed new regulations.  The 1997 regulations would treat individuals as limited partners and able to take advantage of the SE tax exclusion unless the individual (i) had personal liability for the debts of the partnership, (ii) had authority to contract on behalf of the partnership, or (iii) participated in the activities of the partnership for more than 500 hours during the taxable year.  Importantly, the 1997 proposed regulations were not limited to LLC members.  Rather, it would have changed the SE tax situation for all partnerships.

Shortly after the 1997 proposal, Steve Forbes called the proposed regulations, “a major tax increase by a stealth regulatory decree.”  Others soon joined in a national campaign to kill the regulatory proposal including the then Speaker of the House, Newt Gingrich and radio talk-show host, Rush Limbaugh.  In June 1997, the Senate passed a nonbinding resolution declaring the proposed regulations outside the scope of Treasury’s authority, urging Treasury and the IRS to withdraw the proposal.  Congress ultimately imposed a 12-month moratorium on Treasury’s authority to issue guidance regarding the definition of “limited partner” for purposes of Section 1402(a)(13).  Since that time Treasury and the IRS have remained silent on the issue.

Fourteen years later, the Renkemeyer decision threatened to open the debate again but since the IRS agreed with the decision and such decision was limited to LLC members within a very specific (and egregious) fact pattern, the argument remained dormant.  Now, seventeen years after Congress thrashed the IRS for overstepping its bounds with regards to limited partners they are at it again.  

In June 2014, Curtis Wilson, IRS associate chief counsel (passthroughs and special industries), said that the IRS had been thinking about the extent to which individuals who are limited partners under state law might be prohibited from relying on the SE tax exemption.  Additionally, in the 2014-2015 joint Treasury-IRS priority guidance plan released August 26, 2014, the agencies announced they would tackle guidance on the application of Section 1402(a)(13) to limited liability companies.   

The ILM is a clear indication that the Service has decided to go back on the attack against limited partner / LLC member utilization of the Section 1402(a)(13) exemption from SE tax.  This may be another act of regulatory fiat that Congress will once again quash, as in 1997, but let the taxpayer beware.  The IRS is of the opinion that active LPs should pay SE tax on their full allocation of management fee income.  Management companies may be better off as S corporations which have a different statutory genesis for their SE tax exemption.  But, of course, this begs the question.  Why should different forms of passthrough entities receive different SE tax results?  Stay tuned on this issue.

Authored by Anthony J. Tuths, JD, LLM, Partner 

Read Full Post »

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

Read Full Post »