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In just a few short hours, Hillary Clinton and Donald Trump are set to square off in the first presidential debate of the 2016 campaign, in an event that is sure to be remembered for the mutual admiration and respect the candidates show one another.

That’s ridiculous, of course: the gloves are sure to come off tonight, and nothing will be off limits, from Clinton’s emails and marriage to Trump’s bankruptcies and healthy orange glow.

What we won’t get enough of, however, is tax talk, largely owing to the fact that the general population is much more concerned about:

  1. Whether we’ll be able to continue to stockpile lethal arsenals in our crawlspace, and
  2. How we can keep everyone that is not a member of our immediate family from entering the country.

With vital issues such as those at stake, who’s got time to discuss corporate inversions and capital gains rates?

But while it may not drive ratings, tax policy deserves its time in the spotlight this evening. Through an unfortunate turn of events, however, I will not be able to moderate tonight’s debate, with that unfortunate turn of events being that no one has asked me to moderate the debate. But if they had, you could be damn sure that aside from being the most disapproving, condescending moderator since the principal in Billy Madison, I’d get to the bottom of these ten tax questions that must be answered:

Mr. Trump: About those tax returns…will we be seeing those anytime soon?

While there is no law requiring a presidential candidate to release his or her tax returns for public inspection and ridicule, it has become regular practice, and subsequently an expectation of the voting public, since the early 1970s. While a tax return is undeniably private information, it can tell us much about a candidate, including his or her sources of income, propensity for philanthropy, and effective tax rate.

As of today, however, Trump has refused to fall in line, alternatively insisting he cannot release his return because he is 1. under “continuous audit,” or 2. “no one cares about the return except the media.” That of course, is ridiculous; people care, even if for most people, Trump’s return would be as decipherable as Chinese arithmetic. In fact, it certainly appears that Trump cared four years ago, as illustrated by this poignant tweet about then-Republican candidate Mitt Romney:

trump

The fact is, we deserve to see Trump’s return. After all, he has built his campaign on the notion that he is a “winner,” and many of his supporters herald his business acumen. But what if his returns paint a drastically different picture? Many have speculated that Trump has been resistant to release his returns because the magnitude of the numbers and complexity of his holdings will invite the same scrutiny Romney endured, but isn’t the much greater threat to Trump the possibility that those returns show…not much of anything?

Ms. Clinton: The one thing both parties can agree upon with regard to tax policy is that the Code needs to be simplified. Yet you are proposing adding another ordinary income tax rate, five(!) new rates on capital gains, and a second alternative minimum tax calculation. You do realize this is the opposite of simplicity, right?

Under current law, income is taxed at progressively increasing rates. Ordinary income — things like wages and interest — is potentially subject to seven rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Clinton would add an eighth bracket, for taxpayers with income in excess of $5 million, of 43.6%.

In addition, Clinton would not only raise the top rate on capital gains — which currently stands at 20% before considering the net investment income tax of 3.8% — to 24% for those same taxpayers with income greater than $5 million. Clinton would then make those taxpayers earn that 24% rate by holding a capital assets for six years prior to sale: for each year the asset is held, the rate would drop, like so:

  • less than 2 years: 43.6%
  • > 2 years: 40%
  • > 3 years: 36%
  • > 4 years: 32%
  • > 5 years: 28%
  • > 6 years: 24%

Lastly, Clinton would require that any taxpayer with income in excess of $2 million pay an effective tax rate of 30%. This rule — coined the “Buffet Rule” because Warren Buffet once famously claimed that he pays a lower rate than his secretary — would require a second alternative tax calculation be performed for the taxpayer.

As you can see, these changes would layer considerable additional complexity on an tax Code that is already a tangle of cross-references, exceptions to exceptions, limitations and thresholds. And while these changes are all targeted at the wealthiest 1% of taxpayers — who can surely afford and likely employ a sophisticated tax preparer — the fact remains that by adding this much additional complexity, even the brightest paid preparers will be forced to review the output of their computer system, shrug their shoulders and say, “eh…looks good to me.”

Mr. Trump: You previously promised that all business owners would pay tax at a maximum rate of 15% on business income. Your updated plan released last week, however, seemed to indicate that you’d abandoned this plan. Which is it?

Under current law, if a taxpayer earns self-employment income from a business — or if business income is earned by the taxpayer through an S corporation or partnership — the income is taxed on the individual’s return, subject to individual rates rising as high as 39.6%. Trump, however, has proposed reducing the corporate rate from 35% to 15%, and in an earlier version of his plan, stated that this 15% rate would apply to all business income, including any income earned by a self-employed individual, S corporation shareholder or a partner in a partnership.

This proposal immediately set off alarm bells in the tax community by promising to offer one of the greatest tax shelters of our lifetime: after all, why would anyone want to be an employee — and pay tax on their wages of up to 33% under Trump’s plan — when they could instead become an independent contractor and be guaranteed a top rate on their “business income” of 15%?

When Trump released his updated plan last week, it seemed to indicate that he had abandoned this plan, and that only corporations would be entitled to the 15% rate. Since that time, no one has been able to get a clear answer from the Trump campaign as to whether the proposal has been tossed; in fact, the Tax Foundation was so confused by the responses that it was forced to score the latest Trump plan two ways: once with the business tax cut in, once without. The resulting difference amounted to $1.5 trillion in tax revenue over 10 years, reflecting the magnitude of a provision that no one, Trump included, seems willing or able to confirm exists.

Ms. Clinton: Do you intend to do anything about the corporate tax rate?

During his eight-year run as President, Barack Obama and his Republican counterparts haven’t agreed on much when it comes to tax policy, but they have agreed that the current corporate tax rate of 35% needs to come down. While most Republicans favor a rate of 25%, in his past few budgets President Obama has pitched a top corporate rate of 28%, while allowing a 25% rate for manufacturers.

To date, however, Clinton hasn’t stated her position on or proposal for the corporate tax rate. Would she leverage off the Obama budget? Or is she content with a 35% rate?

Mr. Trump: So are you going after the two sacred cows — mortgage interest and charitable contributions — or not?

Donald Trump has embraced his role as a “political outsider,” unbeholden to the constraints, promises, and quid pro quos of a career politician. But in at least one way, he’s shown his political savvy: in his initial proposal, he promised to “limit the benefit of itemized deductions,” but to preserve full deductions for mortgage interest and charitable contributions.

This, of course, is necessary because if you threaten to remove or limit deductions for home ownership or philanthropy, you risk career-ending backlash from the powerful real estate and tax-exempt lobbies. This is precisely why every candidate — regardless of political party and not named Ben Carson — promises to preserve these two deductions.

In his latest plan, however, Trump states that he will simply limit itemized deductions to $200,000 for married taxpayers and $100,000 for single taxpayers, with no special exception from the cap afforded mortgage interest or charitable contributions. Is Trump taking aim at the sacred cows, or has he just neglected to add detail to his proposal?

Both Ms. Clinton and Mr. Trump: Will either of you do anything about the bizarre tax treatment currently levied on perfectly legal marijuana facilities?

Marijuana is now legal in many states for medicinal purposes, and in a few, including my home state of Colorado, for recreational purposes. Marijuana remains, however, firmly entrenched within Schedule 2 of the Controlled Substance list, making the drug illegal for federal purposes. As a result, these perfectly legal — from a state perspective — marijuana facilities face draconian tax treatment: by virtue of Code Section 280E, they are not entitled to deduct ANY of their expenses — aside from the cost of marijuana grown or purchased for resale. This is because that provision prohibits a business from deducting expenses “attributable to trafficking in a controlled substance.”

Courtesy of Section 280E, these facilities are required to pay tax on 100% of their net revenue, which for any other industry on the planet, would likely serve as its death knell; selling weed is so lucrative, however, that to date these shops have been able to survive.

And it’s not as if Section 280E is one of those provisions that’s buried in the law but that the IRS doesn’t enforce; to the contrary, the Service can, does, and will continue to apply Section 280E at every turn. In Colorado, the state has attempted to alleviate the pain by allowing deductions for G&A expenses on the facility’s state income tax return, but unless one of these candidates is willing to remove marijuana from Schedule 2 of the Controlled Substance List or amend Section 280E, medical and recreational marijuana facilities will continue to suffer at the hands of conflicting federal and state legal authority.

Mr. Trump: How exactly do you intend to pay for your tax cuts?

Give Trump credit for this: when his original tax plan was revealed to cost $11 trillion over ten years, he went back to the drawing board and revamped the proposal.

He had originally intended to reduce the current seven-rate system to four: 0%, 10%, 20% and 25%. Dropping the top rate nearly 15% — from 39.6% to 255 – proved too costly, however, so in his latest plan, Trump would adopt three rates: 12%, 25% and 33%, with the top rate kicking in at income in excess of $225,000 (if married, $112,500 if single).

Even with those changes, however, the most recent study by the Tax Foundation indicates that Trump’s tax cuts would the U.S. $6 trillion in tax revenue over the next decade if he preserves his 15% business rate proposal, and $4.5 trillion should he abandon it. Even when taking into account dynamic scoring — which anticipates that when taxes are cut, additional tax revenue will actually be collected due to economic growth, expanding businesses and increased wages — the Trump plan would reduce revenue by $4 trillion if the business cut is retained, and $2.6 trillion if it’s abandoned.

As you may have noticed, the country currently has a bit of a spending problem, and as a result, is deep in debt. If we forego $4 trillion in tax revenue over the next decade, how are we making up that shortfall? Where is the spending cut?

Ms. Clinton: With all due respect, have you gone cuckoo-bananas with your latest estate tax plan?

Under current law, if you die owning assets with a value in excess of $5.45 million, you pay tax of 40% on the value in excess of that threshold. Until last week, Clinton had long proposed dropping that exemption to $3.5 million and increasing the estate tax rate to 45%. On Thursday, however, Clinton took a page from the Bernie Sanders Wealth Redistribution Playbook, promising to further increase the rate to 50% on estates valued in excess of $1o million, 55% on estates worth more than $50 million, and an incredible 65% on estates valued in excess of $1 billion.

In an election where Clinton’s best chance of victory may come from stealing votes from “Never Trump” Republicans, she may well have ostracized those same voters with her latest estate tax pitch. And when you consider that the proposal won’t actually generate much in the way of taxes — about $800 billion over ten years, due largely to the fact that the number of estates in excess of $50 million each year typically number only in the hundreds – it seems a risky approach designed more as a “I’m willing to take on the super rich” talking point than an actual revenue raiser.

Mr. Trump: How do you respond to reports that your tax changes will actually increase taxes on single parents and low-income families?

Originally, Trump promised an expansive 0% bracket that would “remove 70 million people form the tax rolls.’ When faced with the bill for such promises, however, Trump, as discussed above, redesigned the plan, exchanging the 0% bracket for a 12% bottom bracket. And while he promises to increase the standard deduction from $12,600 to $30,000 (for married, $15,000 for single), he would also completely do away with personal exemptions, which currently amount to $4,050 per member of the household.

As a result, while the standard deduction has more than doubled, taxpayers with multiple children have lost over $16,000 in personal exemptions while also seeing their tax rate rise from 10% under current law to 12% under Trump. In addition, the head of household filing status would be eliminated under the Trump plan.

And while Trump promises to add three new child incentives to the Code — a deductible $2,000 contribution to a savings plan, an above-the-line deduction from adjusted gross income for child care expenses, and a refundable credit of up to $1,200 for low-income taxpayers — a recent study by Lily Batchelder at NYU reveals that even with these incentives, the combination of changes in Trump’s proposal would cause nearly 7.8 million families with minor children to experience an increase in their tax bills.

While the Trump campaign has called Batchelder’s report “fatally flawed” in a flurry of tweets, she has thoughtful responses to each criticism that can be found on her SSRN feed. In any event, the possibility of increased taxes on low-income taxpayers warrants a question in tonight’s debate.

Ms: Clinton: When it comes to taxing the rich, when is enough enough?

Clinton intends to raise $1.5 trillion in tax revenue over the next ten years, with nearly every penny coming from the richest 1%. The top rate on ordinary income would jump from 39.6% to 43.6%. The top rate on capital gains would jump from 20% to 43.6%(!). The Obamacare 3.8% net investment income tax would be retained. The Buffet rule would be added. The estate tax would jump to 65% in some cases. Itemized deductions would only offset income at a 28% rate.

Convincing arguments can be made both ways: that the rich should pay more of the total tax burden, or that soaking innovators and business leaders only hurts the economy and limits the trickle down of wealth to middle and lower income taxpayers. Take whichever position you embrace and go with it; I’m not here to tell you you’re wrong.

What I am curious about, however, is where it stops. Clinton’s proposals far outreach even the aggressive plans posited by President Obama; as mentioned above, they are beginning to resemble Sanders’ ideology far more than anything in the current presidential budget. In a time when the country is as divided as ever between the haves and the have nots, taking on the rich makes for good campaign fodder when the have nots comprise 99% of voters. But is it sound tax policy?

Hopefully, between charges of infidelity, failed business dealing, lying to the FBI, and thinly-veiled racism, we’ll get one or two of these questions addressed tonight. But I wouldn’t count on it.

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On Friday, July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”), which extended funding to the Highway Trust Fund (“HTF”) for an additional three months.
This Act contains several important tax provisions, including modified due dates for several common tax returns, overruling of the Supreme Court’s Home Concrete decision, required additional information on mortgage information statements, and required consistent basis reporting between estates and beneficiaries.
Tax Return Due Date Modifications

The Act sets new due dates for partnership and C corporation returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), and several other IRS information returns.

Partnership Returns

The new due date is March 15 (for calendar-year partnerships) and the 15th day of the third month following the close of the fiscal year (for fiscal-year partnerships). Currently, these returns are due on April 15 for calendar-year partnerships. The Act directs the IRS to allow a maximum extension of six months for Forms 1065, U.S. Return of Partnership Income.

C Corporations

The new due date is the 15th day of the fourth month following the close of the corporation’s year. Currently, these returns are due on the 15th day of the third month following the close of the corporation’s year.

Corporations will be allowed a six-month extension, except that calendar-year corporations would get a five-month extension until 2026 and corporations with a June 30 year end would get a seven-month extension until 2026.

The new due dates will apply to returns for tax years beginning after December 31, 2015. However, for C corporations with fiscal years ending on June 30, the new due dates will not apply until tax years beginning after December 31, 2025.

Other Forms Affected

The new Act directs the IRS to modify its regulations to allow the following maximum extensions:

5 and 1/2 months on Form 1041, U.S. Income Tax Return for Estates and Trusts;
3 and 1/2 months on Form 5500, Annual Return/Report of Employee Benefit Plan;
6 months on Form 990, Return of Organization Exempt From Income Tax, Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code, Form 5227, Split-Interest Trust Information Return, Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and Computation of Section 192 Deduction, Form 8870, Information Return for Transfers Associated With Certain Personal Benefit Contracts, and Form 3520-A, Annual Information Return of a Foreign Trust With a U.S. Owner.
The due date for Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, will be April 15 for calendar-year filers, with a maximum six-month extension.

FinCEN 114 (former FBAR)

The due date for FinCEN Form 114 is changed from June 30 to April 15, and for the first time taxpayers will be allowed a six-month extension to October 15.

Additional Information on Mortgage Interest Related Returns

The Act amends Sec. 6050H to require new information on the mortgage information statements that are required to be sent to individuals who pay more than $600 in mortgage interest in a year. These statements will now be required to report the outstanding principal on the mortgage at the beginning of the calendar year, the address of the property securing the mortgage, and the mortgage origination date. This change applies to returns and statements due after December 31, 2016.

Changes Related to Basis Reporting Between Estate and Beneficiaries

The Act amends Sec. 1014 to mandate that anyone inheriting property from a decedent cannot treat the property as having a higher basis than the basis reported by the estate for estate tax purposes. It also creates a new Sec. 6035, which requires executors of estates that are required to file an estate tax return to furnish information returns to the IRS and payee statements to any person acquiring an interest in property from the estate. These statements will identify the value of each interest in property acquired from the estate as reported on the estate tax return. The new basis reporting provisions apply to property with respect to which an estate tax return is filed after the date of enactment.

The Home Concrete Case is Overruled

In Home Concrete & Supply, LLC, 132 S. Ct. 1836 (2012), the Supreme Court held that the extended six-year statute of limitation under Sec. 6501(e)(1)(A), which applies when a taxpayer “omits from gross income an amount properly includible” in excess of 25% of gross income, does not apply when a taxpayer overstates its basis in property it has sold.

In response to this decision, the Act amends Sec. 6501(e)(1)(B) to add this language: “An understatement of gross income by reason of an overstatement of unrecovered cost or other basis is an omission from gross income.” The change applies to returns filed after the date of enactment as well as previously filed returns that are still open under Sec. 6501 (determined without regard to the amendments made by the Act).

If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s National Tax Services Group or email us at taxbriefs@withum.com.

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There are two basic types of business combinations – taxable and nontaxable.

Taxable Business Combinations (Asset Purchase):

In a taxable business combination, new tax bases for acquired assets and assumed liabilities are generally determined on the basis of the fair market value. The acquirer “steps up” the acquiree’s historical tax bases in the assets acquired and liabilities assumed to fair market value.  Under the U.S. federal income tax law (IRC Section 338), certain stock purchases can be treated as taxable business combinations if an election to treat the stock purchase as a taxable asset purchase is filed.

Both the seller and purchaser of a group of assets that makes up a trade or business generally must use Form 8594 to report the transaction and both must attach the form to their respective income tax returns.  The taxpayers are not required to file Form 8594 when a group of assets that makes up a trade or business is exchanged for like-kind property in a transaction to which section 1031 applies and when a partnership interest is transferred. For stock purchases treated as asset purchases under Sections 338(g) or 338(h)(10), the purchaser and seller must first file Form 8023, to make the 338 election.  Form 8883 is then filed by both the purchaser and the target to supply information relevant to the election.

There is no legal requirement that the target and acquiring company take consistent positions on their respective tax returns, and therefore each could in principle take a different position favorable to itself.  However, if they do so, the IRS is likely to discover this fact and protect itself by challenging the positions taken by both parties.  To avoid this result, acquisition agreements almost always provide that the parties will attempt to agree on an allocation of price among the assets within a relatively short time after the closing of the transaction. 

Non-Taxable Business Combinations (Stock Purchase):

In a nontaxable business combination, the acquirer assumes the historical tax basis of the acquired assets and assumed liabilities. In this case, the acquirer retains the “historic” or “carryover” tax bases in the acquiree’s assets and liabilities. Generally, stock acquisitions are treated as nontaxable business combinations (unless a Section 338 election is made). Nontaxable business combinations generally result in significantly more temporary differences than do taxable business combinations because of the carryover of the tax bases of the assets acquired and liabilities assumed. To substantiate the relevant tax bases of the acquired assets and assumed liabilities, the acquirer should review the acquired entity’s tax filings and related books and records. This information should be evaluated within the acquisition’s measurement period.

The non-taxable corporate reorganization Internal Revenue Code provisions are concerned with the form, rather than the substance, of the transaction.  Therefore, it is important to document that the correct procedures have been followed.  Regulation Section 1.368-3 sets forth which records are to be kept and which information needs to be filed with tax returns for the year that such a transaction is completed.  Each corporate party to a non-taxable reorganization must file a statement with its tax return for the year in which the reorganization occurred that contains the names and EINs of all parties, the date of the reorganization, the FMV of the assets and stock transferred, and the information concerning any related private letter rulings.  All parties must also maintain permanent records to substantiate the transaction.  While there are no statutory penalties for failure to comply with the reporting requirements, the IRS has argued that failure to comply with the requirements could indicate that a transaction was a sale and not a non-taxable reorganization.

Authored by Robert Cutolo

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One of the major advantages of owning real estate in a partnership is the ability to leverage the real estate and distribute the proceeds of the borrowing to the partners on a tax free basis. 

FOR EXAMPLE: 

Individuals A & B equally own a Limited Liability Company that is treated as a partnership for tax purposes.  The LLC owns real estate with a tax basis of $1 million and a fair market value of $5 million.  The LLC borrows $3 million from a bank on a non-recourse basis, that is, the bank can only look to the property for repayment.  Neither partner is personally obligated to repay the bank.  Immediately after the borrowing, the LLC distributes the $3 million equally to the two partners.

As long as the non-recourse liability is allocated equally to the two partners, the withdrawal of $1.5 million by each partner is a tax free transaction.  This follows Section 752 of the Internal Revenue Code which states that any increase in a partner’s share of the liabilities of a partnership shall be considered a contribution of money by such partner to the partnership.  In effect, the partner’s outside tax basis is deemed to increase by his share of the increase in the partnership’s liabilities.  This increase can provide sufficient tax basis to allow a withdrawal of funds to be considered a tax-free return of basis. Additionally, such an increase in outside tax basis can permit the use of valuable deductions, the benefit of which may have been deferred absent the increase in liabilities and tax basis.     

While an increase in a partner’s share of partnership liabilities increases the partner’s outside basis, a decrease in the partner’s share of partnership liabilities decreases the partner’s outside basis.  Thus, it is important for partner A and B that their share of the partnership’s liabilities does not significantly decrease.  A significant decrease may have the same effect as withdrawing money in excess of tax basis, i.e. resulting in a current taxable gain. 

Thus, a partnership that is contemplating taking in new partners or contributing its property to a larger partnership (for example, a real estate venture fund) must examine how the reallocation of its liabilities will affect the tax liability of its current partners.

A partner who is facing a taxable event due to the reallocation of liabilities may find it beneficial to guarantee a portion of the partnership’s non-recourse liabilities.  A guarantee will convert a portion of the non-recourse liability to a recourse liability.  Partnership recourse liabilities are allocated to that partner who may be ultimately liable for the debt. Thus, by guaranteeing the debt, the partner may be able to maintain a sufficient allocation of partnership liabilities to avoid gain.     

While a guarantee of debt is good for tax purposes, most partners are not willing to take on a possible liability that they did not have previously.  A guarantee may not be a good economic choice.

BOTTOM DOLLAR GUARANTEE

A method of guaranteeing the debt while mitigating the economic risk of satisfying the guarantee is a so-called “bottom dollar guarantee.”  This is a guarantee where the partner agrees to repay partnership debt only if the bank collects less than the guaranteed amount from the partnership. In the example above, if partner A signs a bottom dollar guarantee for $1 million, partner A will only have to satisfy this guarantee if the bank cannot collect at least $1 million of the $3 million debt from the partnership.  Once the bank collects $1 million from the partnership, partner A is relieved of all further liability on the debt.  This is contrary to a normal guarantee, where the guarantor is liable for any and all amounts of the debt left unsatisfied by the partnership up to the stated guarantee amount.

The Internal Revenue Service has been struggling with the issue of whether a bottom dollar guarantee is a real guarantee and should be respected as such for tax purposes.  Recently released proposed regulations under Section 752 make it clear that the IRS will not recognize bottom dollar guarantees as valid guarantees of partnership debt. Under the proposed regulations, a partner only bears the economic risk of loss if the partner is liable for amounts that the partnership does not satisfy. 

The new proposed regulations will not be effective until published in final form.  However, for those partners who have bottom dollar guarantees in place at the time the regulations are finalized, a seven year transition rule is provided. In conclusion, the proposed regulations, if finalized in their current form, will provide that a partner is not able to both mitigate his or her economic risk and increase his or her outside tax basis when he or she guarantees partnership debt.  Accordingly, maintaining a partner’s share of partnership debt will require that the partner take on a real economic burden.  

By Robert E. Demmett, CPA, MS, Partner | rdemmett@withum.com

If you have any questions about this real estate update, please contact your WithumSmith+Brown professional or a member of WS+B’s Real Estate Services Group. 

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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

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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

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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.

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