Category: Tax

IRS Issues Guidance on Deferral of Certain Employee Payroll Taxes

On Friday, August 28, the IRS issued Notice 2020-65, providing guidance about the deferral of certain employee payroll taxes under the President’s Executive Memorandum issued earlier in August. As has become the norm in these uncertain times, the guidance must be considered fluid and subject to change without notice. The existing guidance leaves many questions unanswered so we will continue to monitor this issue.

What Is the Employee’s Portion of the Payroll Taxes Subject to Deferral Under Executive Memorandum and Notice 2020-65?

In addition to income tax withholding, payroll taxes include Federal Insurance Contributions Act (FICA) taxes. FICA taxes include old-age, survivor and disability insurance (OASDI) (Social Security) and hospital insurance (Medicare). These payroll taxes apply at a rate of 15.3 percent for wages up to $137,700 for the 2020 calendar year. The obligation for the FICA taxes are equally divided between employers and employees at 7.65 percent, broken down as follows: 6.2 percent for Social Security and 1.45 percent for Medicare. Accordingly, for purposes of the Executive Memorandum and Notice 2020-65 the amount subject to deferral is 6.2 percent of the Social Security taxes as the employee’s share.

What Is Known

  • Deferral of the employee’s share of Social Security taxes appears to be voluntary by the employer based on the language in this notice, Code Section 7508A, and prior statements made by Secretary Mnuchin. Since the deferral is voluntary, the employer may forgo the deferral and timely withhold and pay over the required taxes.
  • The employer is the “Affected Taxpayer” under Notice 2020-65. Thus, an employee cannot require its employer to defer the taxes.
  • The option to defer applies to wages paid to an employee on a pay date during the period beginning September 1, 2020 and ending on December 31, 2020.
  • The option to defer only applies to employees earning less than $4,000 paid for a bi-weekly pay period.
  • The determination of whether the employee earns less than $4,000 per bi-weekly pay period is made on a pay period-by-pay period basis. Notice 2020-65
  • The employer must withhold and pay the deferred taxes under this notice ratably between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to the tax will begin to accrue on May 1, 2021, with respect to any unpaid applicable taxes. Notice 2020-65
  • “If necessary, the Affected Taxpayer [Employer] may make arrangement to otherwise collect the total Applicable Taxes from the employee.” Notice 2020-65. Implies the penalties will be assessed against Employer as the Affected Taxpayer as defined by the guidance.

What Is Not Known

  • What if the employee leaves the company?
  • What if employee doesn’t make enough money to pay the tax back?
  • It appears that the obligation to pay the deferred taxes remains with the employer in either situation above.

Absent further guidance or congressional action, the deferred taxes must be withheld from the employee’s wages and paid over to the government between January 1, 2021 and April 30, 2021. Employers who are considering allowing employees to defer payment of taxes should consult counsel and develop a plan to implement before ceasing to make deductions. Considerations for the plan should include an employee communication plan developed to address employee payment obligations after the deferral period expires or if the employee becomes no longer employed by the employer. In addition, the plan should take into account whether employees are covered by a collective bargaining agreement that triggers notice and bargaining obligations. Also, keep in mind that Michigan employers must have signed authorization from the employee to make deductions from wages. Employers should consider obtaining written authorization from qualifying employees who elect to defer that includes the plan to repay the deferred taxes and a backup in case the employee ceases to be employed before the taxes are paid.

© 2020 Varnum LLP
For more articles on the IRS, visit the National Law Review Tax, Internal Revenue Service and Treasury Legal News section.

Register for the 51st Annual PLI Estate Planning Institute

Live Webcast: Sept 14 – 15, 2020, 9 a.m. EDT

Click here to register.

The Tax Cuts and Jobs Act of 2017 (the “2017 Act”), which was enacted on December 22, 2017, included significant changes to the federal transfer tax regime and related income tax provisions.  More recently, the financial and societal impact of the COVID-19 pandemic of 2020 continues to reverberate and create uncertainty in the future.

This program will review the transfer tax and related income tax developments with the 2017 Act as a starting point, and will discuss how such developments impact estate, trust and income tax planning, and the administration of decedents’ estates.  Moreover, the program will review other recent developments regarding estate, trust and transfer tax and income tax planning.  Further, the COVID-19 crisis and the related estate, trust and income tax legislation and rulings promulgated in response to such crisis will be discussed.

What You Will Learn

  • Advising clients in a time of unprecedented uncertainty
  • An update on recent developments in all areas of estate, trust and transfer tax planning including legislation and rulings issued as a result of the COVID-19 crisis
  • A review of the interaction between the federal transfer tax regime and state transfer tax regimes
  • A review of the transfer tax and related income tax provisions of the 2017 Act
  • Income tax planning for estates and trusts
  • Administering estates and trusts during and after the COVID-19 pandemic
  • A review of the SECURE Act of 2019
  • A review of international estate planning and tax changes
  • FATCA and its progeny
  • A discussion of trust planning and divorce
  • Ethical considerations for attorneys
  • Elder law and special needs planning considerations
  • A review of tax issues for art collectors
  • An update on charitable donation planning
  • A review of electronic Wills and modern-day estate planning
  • Asset protection planning in a pandemic world

…and much more!

Special Features

  • Full hour of ethics credit

Who Should Attend

Attorneys and other professionals advising on estate planning and/or transfer tax planning, including accountants, financial planners and anyone else whose practice requires a solid understanding of estate planning.

Program Level: Overview

Prerequisites: Attendees should have a basic understanding of trusts and estates terminology and a foundational background in tax

Intended Audience: Attorneys, accountants, financial planners, and other professionals who specialize in estate planning, life insurance products and/or transfer tax planning

Advanced Preparation: None

See other upcoming events from PLI here.

Reactions to the U.S. Supreme Court’s Rulings in Trump v. Vance & Trump v. Mazars

In Trump v. Vance and Trump v. Mazars the Supreme Court issued opinions in two cases concerning the release of President Trump’s financial records.  Reactions to the July 9th rulings have varied, with opinions differing on whether or not Trump’s reputation and presidency will be significantly impacted by what his financial records may reveal.

Below, we outline the details of each case and the reactions to the Supreme Court’s decisions.

Background Trump v. Vance

In Trump v. Vance, the court stated that Trump had no absolute right to block the Manhattan District attorney’s access to Trump’s financial records for the purposes of a grand jury investigation. The court held in a 7-2 decision that “Article II and the Supremacy Clause do not categorically preclude, or require a heightened standard for, the issuance of a state criminal subpoena to a sitting President.” The court’s opinion was written by Chief Justice John Roberts for the majority including Justices Ginsburg, Breyer, Sotomayor and Kagan with Justice Kavanaugh filing a concurring opinion joined by Justice Gorsuch, and Justice Thomas and Justice Alito writing separate dissenting opinions.

Trump v. Vance involves a state criminal grand jury subpoena not served on President Trump, but on two banks and an accounting firm that were custodians of the records. The subpoenaed records are for eight years of Trump’s personal and business tax returns and other banking documents in the years leading up to the 2016 election served on behalf of New York District Attorney Cyrus Vance., Jr. Vance’s investigation centered around payments made to two women — Karen McDougal and Stormy Daniels — who alleged they had affairs with Trump before he entered office.

The Supreme Court considered state criminal subpoenas could threaten “the independence and effectiveness” of the president as well as undermining the president’s leadership and reputation, weighing Trump’s circumstances against those in Clinton v. Jones, the 1997 case where President Bill Clinton sought to have a civil suit filed against him by Paula Corbin Jones dismissed on the grounds of presidential immunity, and that the case would be a distraction to his presidency.

Trump argued that the burden state criminal subpoenas would put on his presidency would be even greater than in Clinton because “criminal litigation poses unique burdens on the President’s time and will generate a considerable if not overwhelming degree of mental preoccupation” and would make him a target for harassment.

The Court addressed Trump’s argument, stating that they “rejected a nearly identical argument in Clinton, concluding that the risk posed by harassing civil litigation was not ‘serious’ because federal courts have the tools to deter and dismiss vexatious lawsuits. Harassing state criminal subpoenas could, under certain circumstances, threaten the independence or effectiveness of the Executive. But here again the law already seeks to protect against such abuse … Grand juries are prohibited from engaging in ‘arbitrary fishing expeditions’ or initiating investigations ‘out of malice or an intent to harass.’”

The Court also considered that Vance is a case addressing state law issues where Clinton was a case addressing federal law issues. Trump argued that the Supremacy Clause gives a sitting president absolute immunity from state criminal proceedings because compliance with subpoenas would impair his performance of his Article II functions. Arguing on behalf of the United States, the Solicitor General claimed state grand jury subpoenas should fulfill a higher need standard.  In response, the Court ruled, “A state grand jury subpoena seeking a President’s private papers need not satisfy a heightened need standard … there has been no showing here that heightened protection against state subpoenas is necessary for the Executive to fulfill his Article II functions.”

Notably, the Supreme Court decision does not allow for public access to Trump’s tax returns; they will be part of a Grand Jury investigation, which is confidential.  However, many took away the message that the majority’s decision–bolstered by Gorsuch and Kavanaugh, Trump appointees, who concurred–that the law applies to everyone.

Reactions to SCOTUS Decision from Jay Sekulow and Cyrus Vance, Jr.

Both Vance and Trump’s attorney Jay Sekulow expressed they were content with the Court’s ruling, albeit for different reasons.

“We are pleased that in the decisions issued today, the Supreme Court has temporarily blocked both Congress and New York prosecutors from obtaining the President’s financial records. We will now proceed to raise additional Constitutional and legal issues in the lower courts,” Sekulow tweeted.

“This is a tremendous victory for our nation’s system of justice and its founding principle that no one – not even a president – is above the law. Our investigation, which was delayed for almost a year by this lawsuit, will resume, guided as always by the grand jury’s solemn obligation to follow the law and the facts, wherever they may lead,” Vance said in a statement.

Other Reactions to the Supreme Court’s Trump v. Vance Ruling

Following the Supreme Court’s arguments in Vance, lawyers and legal scholars commented about what the decision could mean for the presidency.

In a C-SPAN interview with National Constitution Center President and CEO Jeffrey Rosen, Columbia Law School Professor Gillian Metzger spoke about the issue of burden on the president in Vance, “A lot of what is being shown in these cases is who bears the burden when. Clinton v. Jones said that first, you have to show the burden on the presidency…already the Solicitor General is trying to move us beyond where we had been in Clinton vs. Jones. Among the justices on the court, my sense is that they are really trying to figure out what the standards should be…I didn’t get the sense of a stark ideological divide on this.”

In agreement with seeing the ruling as a victory for the rule of law, David Cole, the ACLU National Legal Director said: “The Supreme Court today confirmed that the president is not above the law. The court ruled that President Trump must follow the law, like the rest of us. And that includes responding to subpoenas for his tax records.”

Harvard Law professor Laurence Tribe, a frequent Trump critic, highlighted the victory on Twitter, saying: “No absolute immunity from state and local grand jury subpoenas for Trump’s financial records to investigate his crimes as a private citizen. Being president doesn’t confer the kind of categorical shield Trump claimed.”

Of a practical matter, though, Mark Zaid, the Washington attorney who represented the whistleblower who set the stage for Trump’s impeachment proceedings, tweeted:

 

“Even if Trump’s tax returns reveal fraud, I find it doubtful that this fact would finally be straw that broke his supporters’ back on election day.  But importance of ruling is that criminal investigation continues & will exist past expiration of Trump’s presidential immunity.” (Should we embed the tweet?)

Background for the Supreme Court’s Ruling in Trump v. Mazars

The Supreme Court remanded back to the lower courts the second case, Trump v. Mazars in a 7-2 decision. The Mazars case involved three committees of the U. S. House of Representatives attempting to secure Trump’s financial documents, and the financial documents of his children and affiliated businesses for investigative purposes. Each of the committees sought overlapping sets of financial documents, supplying different justifications for the requests, explaining that the information would help guide legislative reform in areas ranging from money laundering and terrorism to foreign involvement in U. S. elections.

Additionally, the President in his personal capacity, along with his children and affiliated businesses—contested subpoenas issued by the House Financial Services and Intelligence Committees in the Southern District of New York.  Trump and the other petitioners argued in the United States Court of Appeals for the Second Circuit that the subpoenas violated separation of powers. The President did not, however, argue that any of the requested records were protected by executive privilege.  Justice Roberts wrote the majority opinion, with Thomas and Alito filing dissenting opinions.

In Mazars, the District Court for the District of Columbia upheld the Congressional subpoenas, indicating the investigations served a “legislative purpose” as they could provide insight on reforming presidential candidate’s financial disclosure requirements.  However, Roberts writes: “the courts below did not take adequate account of the significant separation of powers concerns implicated by congressional subpoenas for the President’s information.”

In the opinion, Roberts sets out a list of items the lower courts need to consider involving Congress’s powers of investigation and subpoena, noting that previously these disagreements had been settled via arbitration, and not litigation.  Additionally, Roberts summarizes the argument before the court, drawing on the Watergate era Senate Select Committee D. C. Circuit  made by the President and the Solicitor General, saying the House must demonstrate the information sought is “demonstrably critical” to its legislative purpose did not apply here.  Roberts, stated that this standard applies to Executive privilege, which, while crucial, does not extend to “nonprivileged, private information.”  He writes: “We decline to transplant that protection root and branch to cases involving nonprivileged, private information, which by definition does not implicate sensitive Executive Branch deliberations.”

However, Roberts detailed that earlier legal analysis ignored the “significant separation of powers issues raised by congressional subpoenas” and that congressional subpoenas “for the President’s information unavoidably pit the political branches against one another.” With these constraints in mind, Roberts charged the lower court to consider the following in regards to congressional investigations and subpoenas:

  1. Does the legislative purpose warrant the involvement of the President and his papers?
  2. Is the subpoena appropriately narrow to accomplish the congressional objective?
  3. Does the evidence requested by Congress in the subpoena further a valid legislative aim?
  4. Is the burden on the president justified?

Reactions to Trump v. Mazars

Nikolas Bowie, an assistant Harvard Law Professor, turning to Robert’s analysis in the opinion on Congressional investigations opinion discussing Congressional investigations indicated the decision “introduces new limits on Congress’s power to obtain the information that it needs to legislate effectively on behalf of the American people . . . the Supreme Court authorized federal courts to block future subpoenas using a balancing test that weighs ‘the asserted legislative purpose’ of the subpoenas against amorphous burdens they might impose on the President.”

Additionally, Bowie points out, “it seems unlikely that the American people will see the information Congress requested until after the November election.”

Writing for the nonprofit public policy organization, The Brookings Institution, Richard Lempert, Eric Stein Distinguished University Professor of Law and Sociology Emeritus at the University of Michigan, concurs with Bowie’s point, writing that the Mazars decision may set a new standard for Congressional subpoenas moving forward:

“The genius of Robert’s opinion in Mazars is that while endorsing the longstanding precedent that congressional subpoenas must have a legislative purpose and without repudiating the notion that courts should not render judgments based on motives they impute to Congress, the opinion lays down principles which form a more or less objective test for determining whether material Congress seeks from a president is essential to a legislative task Congress is engaged in … Congress should be able to spell out in a subpoena why it needs the documents it seeks.”

Looking Ahead to What’s Next

There is a lot of information in these decisions to unpack, especially in relation to Congressional investigations and subpoenas.  Additionally, questions remain on how the lower courts may interpret Roberts’ directive to examine “congressional legislative purpose and whether it rises to the step of involving the President’s documents” and how Congress will “assess the burdens imposed on the President by a subpoena.”

 

Copyright ©2020 National Law Forum, LLC

 

ARTICLE BY Rachel Popa, Eilene Spear and Jennifer Schaller at The National Law Review / The National Law Forum LLC.

Proposition 13 Overhaul Qualifies for November Ballot

California Secretary of State Alex Padilla announced on Friday, May 29, 2020, that the revised initiative entitled “The California Schools and Local Communities Act of 2020” officially qualified for the November ballot. If passed, the initiative would establish a “split roll” where retail, office, commercial, and industrial real property would be taxed based on their market value, while residential property would continue to be assessed based on its purchase price.

THE CURRENT TAX REGIME: PROPOSITION 13

The current property tax regime under Proposition 13 generally provides that real property is taxed at one percent of its fair market value, which usually is the property’s purchase price. Unless there is a change in ownership of the property such as a sale, this “base value” can only increase by an inflationary rate that cannot exceed two percent per year. When property changes ownership, it is reassessed and the property’s base value is reset to its then current fair market value. Under Proposition 13, a property’s base value can be lower than its current fair market value, which in turn can reduce the amount of property tax that might otherwise be owed.

THE SPLIT ROLL

The ballot initiative creates a “split roll” if voters approve it in November. Under the split roll, commercial and industrial property with a fair market value of more than $3 million would be reassessed at its current fair market value at least every three years. The current tax regime under the Proposition 13 rules described above would continue to apply to all residential property, including both single-family and multi-unit structures and the land on which those structures are constructed or placed. The current rules also would remain in place for real property used for commercial agricultural production.

The process of administering this new tax regime will be determined by the California legislature, which will include, among other things, a process for reassessment appeals. The taxpayer will have the burden of proving that the property was not properly valued. The legislature also will determine a process by which to allocate mixed-use property between its commercial and residential uses for purposes of implementing the split roll.

The new regime will not apply to commercial or industrial property with a fair market value of $3 million or less unless any of the direct or indirect owners of such real property also own interests in other commercial and/or industrial real property. In that case, the new regime will apply if all such real property has an aggregate fair market value in excess of $3 million.

TANGIBLE PERSONAL PROPERTY TAX RELIEF

If passed, the ballot initiative would exempt small businesses from property tax on all of its tangible personal property. A small business is a business that: (1) has fewer than 50 annual full time employees, (2) is independently owned and operated such that the ownership interests, management and operation are not subject to control, restriction, modification, or limitation by an outside source, individual or another business, and (3) owns real property located in California.

For all other taxpayers, an amount up to $500,000 of combined tangible personal property and fixtures (other than aircraft and vessels) will be exempt from taxation.

WHEN WOULD THE SPLIT ROLL TAKE EFFECT?

The split roll would become operative beginning January 1, 2022, and the tangible personal property tax relief would become operative on January 1, 2024.

Despite the split roll becoming operative on January 1, 2022, the reassessment of undervalued commercial and industrial property will be implemented through a phase-in over two or more years. An owner of commercial or industrial property would only be obligated to pay taxes based on the new assessed value beginning with the lien date for the fiscal year when the assessor has completed the reassessment. In addition, if 50% or more of the square footage of a commercial or industrial property is occupied by a small business, such property will not be subject to the new regime at least until the 2025-26 fiscal year.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP

For more on real estate taxation, see the National Law Review Tax law section.

COVID-19: IRS Extends Production Tax Credit/Investment Tax Credit Safe Harbors

On May 27, 2020, the IRS issued Notice 2020-41, which responds to industry-wide supply chain disruptions due to the COVID-19 pandemic by giving renewable energy developers additional time to complete their projects. Most importantly, the Notice extends two safe harbors applicable to the renewable energy production tax credit (PTC) and investment tax credit (ITC).

First, the “Continuity Safe Harbor” is extended from four years to five years for projects that began construction in 2016 or 2017. Developers that put the project in service by the end of the fifth calendar year after the year construction began will be deemed to meet the continuous construction requirement.

Second, relief is provided for developers that intend to meet the beginning construction requirement by incurring 5% of project costs, i.e., by making payments for services or property they reasonably expected to receive within 3½ months (a/k/a the 3½ Month Rule). Developers that pay for services or property on or after September 16, 2019 and actually receive the services or property by October 15, 2020, will be deemed to satisfy the 3½ Month Rule.

This relief is available to developers of wind, solar, biomass, geothermal, landfill gas, trash, hydropower, fuel cells, microturbines, and combined heat and power systems.

©2020 Pierce Atwood LLP. All rights reserved.

For more on IRS Safe Harbors, see the National Law Review Tax Law section.

What to Do Now With Your CARES Act PPP Loan

A Warning

Those who have obtained Paycheck Protection Program (PPP) loans (or have applied or been approved for such loans but not yet received the loan proceeds) have been warned by the U.S. federal government to make sure that they, in fact, qualify for the loans. Secretary Mnuchin exonerated lenders who processed the loans and warned that it is the borrowers themselves who sign the application and make the relevant certifications who face potential criminal action for false certifications. Borrowers have now been given a grace period until May 7, 2020, to repay loans they may have obtained “based on a misunderstanding or misapplication of the required certification standard.” This short — now less than one-week — period gives PPP loan borrowers very little time to act and is aggravated by the ambiguity of applicable regulatory and other guidance as discussed below.

Thinking About What to Do

Borrowers are, and should be, asking, “what do we do about our PPP loan?” They are doing so in a unique moment. Indeed, a former member of a Congressional oversight board following the last financial crisis opined in the Wall Street Journal: “[B]orrower beware! Businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The ultimate cost may dramatically outweigh the temporary gain.” Understanding the issues that inform the answer to this question, unfortunately, involves some detailed analysis as discussed below.

Broad Loan Availability Initially Heralded and Broad CARES Act Approach

The signing into law of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)on March 27, 2020, was heralded as a critical response to the COVID-19 economic crisis. The PPP loan program was enacted to make $349 billion of loan funds broadly available to qualifying businesses so that those businesses could keep their employees employed. In fact, following enactment, the federal government repeatedly encouraged businesses to apply for (and lenders to quickly process) PPP loans. Even as late as April 15, 2020, Secretary Mnuchin announced that “[w]e want every eligible small business to participate and get the resources they need.” In order to broaden its reach, the CARES Act affirmatively took action to cut back eligibility restrictions in the existing Small Business Administration (SBA) loan program through which PPP loans are administered, including:

  • suspending the requirement that borrowers must not be able to obtain credit elsewhere;
  • repealing the requirement that liquid owners contribute capital alongside an SBA loan;
  • creating a presumption that loan applicants were adversely impacted by COVID-19; and
  • reducing the breadth of the complex affiliation rules.

The SBA itself even published guidance allowing borrowers to restructure their governance arrangements to qualify for a loan.

A Continuing Changing Landscape; Making a Decision to Keep a PPP Loan

Since the passage of the CARES Act, the landscape has continued to evolve — sometimes daily — with ongoing guidance from the SBA and Treasury, whether in the form of Interim Final Rules (immediately effective upon publication in the Federal Register without first soliciting public comment due to the emergency nature of the situation), FAQ guidance from the SBA with new questions and answers added frequently over the past month, or mere public statements by public officials. Through the end of April — just a month into the CARES Act — seven formal Interim Final Rules for the CARES Act have been issued and 12 updates to the SBA’s FAQs on the PPP have been published. It has been difficult to find clear guidance and sure footing, even before the most recent government warnings.

A Sudden Shift in Approach

On April 23, 2020, after significant press reporting and commentary on those participating in the PPP loans, the SBA and Treasury Secretary abruptly shifted course with the publication of a new FAQ (Question 31) stating that the certification each borrower makes in its application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” must be made “in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” (emphasis supplied). As to specific examples where certification might raise questions or get a closer look, an April 23 FAQ highlighted large public companies and an April 24 Interim Final Rule highlighted Private Equity (PE) portfolio companies. On April 28, Secretary Mnuchin made public comments promising audits of all loan amounts over $2 million, and then — also on April 28 — the SBA updated its FAQs twice to highlight this new certification interpretation as also applicable to private companies and to formalize the $2 million audit threshold requirement. In other words, virtually all borrowers must be cognizant of the certification that they made in their loan application.

What Does the Certification Mean?

Unfortunately, there is no real guidance as to what this certification means. However, one thing is certain — this certification and the question of access to “other sources of liquidity” will be judged in retrospect. It is anyone’s guess how long the “look back” risk will exist. Our experience is that these kinds of after-the-fact examinations have a long life. In this respect, a borrower may legitimately ask how it knows if it has access to liquidity — must a public company try to test the capital markets; must a PE fund owner consider drawing down on undrawn commitments or fund level credit agreements to fund a highly distressed portfolio company; will VC-backed companies be judged poorly in this context if their investors have large amounts of so-called “dry powder” to invest; and will private business owners have to evaluate their own wealth, liquidity positions, and borrowing capacity? These are all questions that have no ready answer through current SBA rules or guidance. The fact that the CARES Act “suspended” the normal requirement that a borrower be unable to obtain credit elsewhere and repealed the requirement of liquid owners to contribute capital has simply not been reconciled with the SBA’s new scrutiny on available liquidity, as the Treasury and SBA have leaned hard into the statutory certification requirement that any loan request must be “necessary.” Borrowers and applicants would be excused from asking what it means for the SBA to require liquidity that is not “significantly detrimental to the business.” Does that mean “significantly detrimental” to the current business owners (whether public company stockholders, PE or VC fund investors, or the owners of private businesses themselves) in terms of dilution or the like, or does this important phrase instead mean just what it says — such alternative available liquidity is not “significantly detrimental to the business” itself (e.g., financing that the business cannot make “work“ for any real period of time and which damages the business as a going concern)? Again, the SBA and Treasury have provided no clear answers.

The Other Key Certification Issue:

As borrowers evaluate their options to return loans before the expiration of the safe harbor on May 7, 2020, they must also focus on compliance with the SBA “affiliation” rules. The affiliation rules are complex and directly impact the question of who may apply for a PPP loan. This is because the way in which the CARES Act defines eligible borrowers largely turns on the number of employees involved, and an applicant must generally (under applicable regulatory guidance and rules, but subject to certain waivers set forth in the CARES Act itself) apply the SBA’s affiliation rules to aggregate its own number of employees with that of all of its affiliates. Thus, the application of the SBA’s affiliation rules is critically important to an applicant’s ability to make another certification in each PPP loan application: that “the Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program ….” So, in addition to the question of necessity for the PPP loan and alternate sources of liquidity, borrowers must ensure that they have considered the application of the affiliation rules (unless otherwise waived) in deciding whether to keep SBA loans.

Who Is an Affiliate Under the CARES Act?

According to the SBA, affiliate status for purposes of determining the number of employees of a business concern for PPP loans works as follows:

  • “Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both”;
  • “It does not matter whether control is exercised, so long as the power to control exists. Affiliation under any of the circumstances described [in 13 C.F.R. § 121.301(f)] is sufficient to establish affiliation” for applicants for the PPP; and
  • There are four general bases of affiliation that the SBA will consider when determining the size of an applicant: (1) affiliation based on ownership; (2) affiliation arising under stock options, convertible securities, and agreements to merge; (3) affiliation based on management; and (4) affiliation based on identity of interest.

As noted, these affiliation rules are both subtle and complex. Interestingly, even Congress did not seem to get the affiliation rules quite right in the CARES Act. In this regard, there are two SBA-related affiliation rules — rules set forth in 13 C.F.R. § 121.103 (Section 103) and rules set forth in 13 C.F.R. § 121.301 (Section 301). When Congress exempted certain business concerns from the affiliation rules for the PPP, it did so under the Section 103 rules. Yet, according to the SBA April 3 Interim Final Rule, it is, in fact, the Section 301 rules that govern affiliation for the PPP loan program (though the SBA explained that it would, consistent with the Congressional Section 103 waiver, also make that waiver applicable for Section 301).

Uncertainty in Application

As questions have arisen under these affiliation tests, borrowers who relied on them in submitting their application would be well advised to “double check” their analysis with appropriate counsel given the heightened scrutiny that will most certainly be applied in retrospective audits of PPP loan recipients. And, it is not just the application of the four bases of control that have given rise to questions of how the affiliation rules work, but the actual language of the CARES Act itself. In this regard, while the CARES Act clearly waives affiliation rules for “any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System [(NAICS)] code beginning with 72,” the CARES Act itself has a separate and more expansive provision for NAICS code 72 companies allowing for more than 500 aggregate employees and which provides: “During the covered period, any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72 at the time of disbursal shall be eligible to receive a covered loan.” This seems to be clear and self-executing language. Indeed, both applicable House and Senate publicly available explanations of the CARES Act suggest as much, explaining that a qualifying borrower is “Any business concern that employs not more than 500 employees per physical location of the business concern and that is assigned a North American Industry Classification System code beginning with 72, for which the affiliation rules are waived” (emphasis supplied). But, nowhere has the SBA specifically addressed the question of how these two specific NAICS code 72 provisions of the CARES Act are to be applied in conjunction with one another. Even the SBA FAQs seem to intentionally avoid addressing this issue head-on, leaving borrowers at risk for after-the-fact second-guessing.

The Criminal Issue

Secretary Mnuchin referenced criminal liability for a reason. During the past two decades, for every major crisis this country has witnessed, from the Financial Crisis to Hurricane Katrina, high levels of fraud were identified and addressed post-crisis. From the experience gained in prior disasters, the Department of Justice and other enforcers are well aware that fraud may occur under the CARES Act as well. They almost certainly realize that a strong way to prevent such fraud is to take an early, aggressive stance against misconduct. We would predict that U.S. law enforcement will seek to make extreme examples of the individuals who exploited COVID-19-related government assistance improperly and precluded the assistance from helping those actually in need.

The underlying criminal issues relating to PPP loans are relatively straightforward. The loan application itself makes clear that applicants are required to state they qualify, and advises that there are criminal penalties for knowingly making false certifications. Each applicant, by signing the loan application, makes the following statements:
I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

This certification is essentially the same certification generally applicable to forms and information required by a bank or the government that involve applications for loans, grants or other financial assistance. The certification provides that if you knowingly mislead or lie on the application, you have committed a felony. However, the one completing such an application should endeavor in good faith to provide correct information. This means not simply guessing or blindly answering to expedite processing of the loan application or superficially making the certifications in question. In short, if you mislead in order to receive a PPP loan or lie to receive forgiveness, there is a material risk that the government will believe a felony has been committed.

As stated above, because of the intense pressure to protect the integrity of the PPP loan program and to deter widespread fraud, government enforcers may well use additional criminal statutes to prevent fraud on the United States and the banks. PPP-related prosecutions may involve the usual bank fraud, wire fraud and other common financial fraud statutes. These specific laws all have the common requisite element of deceit. Further, the government will clearly feel free to use whatever remedies possible to recover ill-gotten PPP money and assess related fines to make the U.S. taxpayers whole through various civil enforcement remedies. To avoid such criminal consequences, borrowers need to exercise their best efforts to provide the government with accurate information. There is no criminal liability for mistakes or inadvertent omissions, but when actions are judged retrospectively, trying to prove a lack of intent is not a situation any borrower would want to face. Of course, possible criminal prosecution is not the only redress or negative consequence that wrongful borrowers may face. There are, for example, civil penalties and actions that can be pursued by regulatory or government authorities, qui tam actions, and possible stockholder or equity holders claims against boards or managers, not to mention the potential negative press.

In Sum – This Much is Clear – Double Check, Document and Be Careful Either Way

It would not be surprising or unreasonable for business owners to ask how they are supposed to act with any comfort as to PPP loans given all the uncertainty noted above, with the Treasury Secretary highlighting criminal penalties in relation to improper applications, and with a new “safe harbor” loan “give back” period running only until May 7. It also would not be surprising to see those borrowers who can find a way to make it without the PPP loan decide to return PPP loan proceeds (or not accept funds that have been approved but not yet been received) — even when they have been truly harmed by the COVID-19 pandemic, even when they have always intended to use the loan to keep employees paid exactly as intended by the CARES Act, and even when they believe they qualify for the PPP loan. What is clear from all of the above is that not much is truly clear with respect to the eligibility criteria and certification requirements for PPP loans. What also seems clear — including from the most recent SBA rules issued April 30 stating that the maximum loan amount for a related corporate group will be limited to $20 million — is that loans (even big loans) for qualifying firms are legitimate.

Some Practical Points

Finally, those borrowers who ultimately elect to keep their loans should strongly consider working with counsel to create a contemporaneous, written record to support their certifications or their current decisions to keep those loans based on the certifications that were made at the time of the loan application. There are two key inquiries. First, the borrower should review compliance with the affiliation rules to support the eligibility certification. Second, the borrower should review support for its “necessity” certification, considering (for example) the following questions:

  • What were the specific facts and circumstances showing that the applicant bore financial hardship and faced material economic uncertainty?
  • Did the applicant consider its ability to access capital, including conducting discussions with those who were in a position to provide capital such as the applicant’s current lender(s) and equity holders?
  • Did the applicant prepare a forecast projecting its liquidity position and effect on the operations of not obtaining a PPP loan and that would demonstrate that the loan was necessary to support the ongoing operations of the borrower? Alternatively, did the borrower conduct any other financial review in connection with such certification?

Best practices would then have the foregoing crisply documented and reviewed and approved by the borrower’s board or other governing body. The written record should demonstrate that a bona fide, good-faith effort was undertaken to support the certifications truthfully. If this exercise cannot produce a defensible written record, then the prudent decision may be to return the loan proceeds, ideally before elapse of the grace period for doing so.

Authored by: Trevor J. Chaplick, Peter H. Lieberman & Nathan J. Muyskens  of Greenberg Traurig, LLP

 

©2020 Greenberg Traurig, LLP. All rights reserved.

New Revenue Ruling 2020-8 Helps Taxpayers Seek COVID-19 Tax Refund Claims

Recently, in Revenue Ruling 2020-8, the Internal Revenue Service (IRS) announced that it was suspending Revenue Ruling 71-533, which had addressed the interaction of two Internal Revenue Code (IRC) provisions regarding limitations periods on refund claims, pending reconsideration of the holding of the earlier Revenue Ruling.

Under IRC section 6511(d)(2)(A), a taxpayer generally must make a refund claim relating to an overpayment attributable to a net operating loss (NOL) carryback no later than three years after the taxable year in which the NOL was generated. Under IRC section 6511(d)(3)(A), a taxpayer generally must make a refund claim relating to an overpayment attributable to a foreign tax credit carryback no later than ten years after the taxable year in which the foreign taxes were paid.

Revenue Ruling 71-533 had addressed a situation that implicated both of these provisions. Specifically, the taxpayer at issue in the ruling had incurred a NOL in 1969, which it carried back to 1966. After application of the NOL, the taxpayer had excess foreign tax credits available for 1966, which it then carried back to 1964. The ruling held that the ten-year limitations period in IRC section 6511(d)(3)(A) applied to claims for refund with respect to the 1964 overpayment.

In Revenue Ruling 2020-8, the IRS noted that, even though the fact pattern in Revenue Ruling 71-533 involved both a NOL carryback and a foreign tax credit carryback, the ruling did not consider whether IRC section 6511(d)(2)(A) should apply in lieu of IRC section 6511(d)(3)(A). Therefore, the IRS stated that it was suspending Revenue Ruling 71-533 pending reconsideration of its ruling. However, the IRS also stated that this suspension would not be applied adversely to refund claims properly filed within the IRC section 6511(d)(3)(A) limitations period in accordance with Revenue Ruling 71-533 during the period in which the ruling’s holding is being reconsidered.

Practice Point: Revenue Ruling 2020-8 is particularly important to taxpayers seeking refunds under the special COVID-19 rules. We discussed those refunds here. The IRS is trying to do everything it can to facilitate getting relief to taxpayers.

© 2020 McDermott Will & Emery

For more on IRS COVID-19 Guidance, see the National Law Review Tax Law section.

Stimulus, IRS Extended Deadline and Gifting Opportunities

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

  • President Trump signed the CARES Act on March 27, 2020, a $2 trillion stimulus package providing $560 billion of relief for individuals, including:
    • Cash Payments: $1,200 per individual ($2,400 for couples); plus $500 per qualifying child1
    • Retirement Funds: Early withdrawal penalties waived for distributions of up to $100,000, if withdrawal is for coronavirus related purposes
    • 401(k) Loans: Loan limit increased from $50,000 to $100,000
    • Required Minimum Distributions: Suspended in 2020 for IRA/401(k) plans, including inherited IRAs
    • Charitable Deduction: Up to $300 charitable deduction for 2020 taxpayers who utilize the standard deduction

Extension of filing and payment deadlines

  • The federal and Wisconsin income tax return filing and payment deadline for the 2019 tax year was automatically extended to July 15, 2020
  • The federal gift tax return filing and payment deadline for the 2019 tax year was automatically extended to July 15, 2020

Gifting opportunities

  • Low valuations, low interest rates, and the anticipated reduction in the federal estate/gift tax exemption from $11.58 million to approximately $6.5 million on January 1, 2026 have created many planning opportunities, including:
    • Gifts and/or sales to existing or newly established Trusts to take advantage of low valuations and use the $11.58 million exemption while it is still available;
    • Amending intra-family loans to take advantage of low interest rates; and
    • Creation of charitable lead trusts, grantor retained annuity trusts, and other estate planning techniques that benefit from low interest rates are particularly attractive right now.

Now may also be a good time for clients to review their existing estate plans to make certain that their plans are up to date and consistent with their wishes.

1Amounts are phased down for individuals making more than $75,000 ($150,000 for couples) and phased out for individuals making more than $99,000 ($198,000 for couples)

Copyright © 2020 Godfrey & Kahn S.C.

Important Guidance for IRS Tax Filers

Due to the situation created by the coronavirus, we’ve been fielding questions from clients, co-workers and accountants about potential changes in the tax filing and tax payment deadlines, as well as other IRS administrative issues such as examinations, collection actions and payment plans.

Because the president declared a national emergency, the IRS has broad powers under statute to extend certain deadlines. The IRS also has broad administrative authority. As of the date and time of this email, there has been no official guidance issued on extending the April 15 deadline for the filing of income tax returns. However, statements made on March 17, 2020 by Secretary of Treasury Mnuchin suggest that the government will allow a 90-day deferral of tax payments to the IRS.

Under this program, individuals can defer up to $1 million of tax payments, and corporations can defer up to $10 million, with no penalties and interest for 90 days. This program does appear to require the filing of a tax return first in order to obtain the deferral. Many questions on this program remain, and Varnum’s tax team will provide updates as they evolve.

Out of an abundance of caution, individuals may want to file an extension (Form 4868) prior to the filing deadline. This is NOT an extension in time to pay. As such, the first quarter tax estimates are due April 15 as is any shortfall in the expected 2019 tax liability. Please note, with respect to the payment deferral program, the secretary has not clarified whether the extension form or the estimated tax payment voucher falls under the definition of “return” for the payment deferral program. Finally, there are some safe harbors for estimated tax payments that may apply. Check the IRS website or talk to a tax advisor.

Tax preparers should check with the IRS employee assigned to any matter for the case status, including document requests, etc. If your client is honoring an IRS levy on an employee at this time, those obligations are still in force unless notified otherwise by the IRS. Some deadlines such as filing a Tax Court Petition for relief are statutory in nature and still valid.

© 2020 Varnum LLP

More on tax laws or the coronavirus outbreak on the National Law Review.

529 Plans: Estate Planning Magic

The most common way to reduce state and federal estate taxes is to make lifetime gifts to irrevocable trusts. However, in order for an irrevocable trust to escape estate taxation at the grantor’s death, the grantor may not retain the power to “designate the persons who shall possess or enjoy the property or the income therefrom.” (IRC § 2036(a)(2).) In other words, the grantor cannot change the beneficiaries of the trust.

This poses a problem. What if circumstances change? What if a grantor creates a trust for a child, but the child no longer needs the funds? What if the grantor ends up needing the funds themselves? A grantor can build flexibility into irrevocable trusts by granting powers of appointment to the beneficiaries or by appointing a trust protector, but these powers may not be held by the grantor. Thus, reluctance to give up control keeps many clients from making gifts to irrevocable trusts.

The general rule that a grantor must relinquish all control over gifted assets has been seared into the mind of every estate planning professional fearful of accidentally causing estate tax inclusion. But there is one exception: the humble 529 Plan.

Section 529 of the Code contains a shocking statement:

“No amount shall be includible in the gross estate of any individual for purpose of [the estate tax] by reason of an interest in a qualified tuition program.” (IRC § 529(c)(4)(A))

There are, of course, exceptions. 529 plans are (likely) includible in the estate of the beneficiary upon the beneficiary’s death. Also, if the grantor has made the election to “front load” five years of annual exclusion gifts to the 529 Plan (discussed further below) and dies before the five years expires, a portion of the gifted amount will be includible in the grantor’s estate.

Still, 529 Plans offer unparalleled flexibility in estate tax planning. A grantor can remain the “owner” of a 529 Plan and retain the power to change the beneficiary to a qualifying family member (which includes grandchildren, nieces and nephews, and others), while still removing the assets in the 529 Plan from his or her estate. This is in contrast with an irrevocable trust, in which the grantor cannot act as trustee and cannot retain the power to change the beneficiaries.

The other “magic” of 529 Plans is the ability to “front load” annual exclusion gifts. The annual exclusion from gift tax allows a grantor to transfer up to $15,000 per year, per person. But, if a grantor makes the proper election on a gift tax return, he or she can make five years of annual exclusion gifts in a single year and use no transfer tax exemption. If the grantor is married and elects “gift‑splitting,” the couple can transfer $150,000 to a 529 Plan in a single year and use no estate and gift tax exemption.

529 Plans are, of course, designed for education, and are not complete substitutes for irrevocable trusts. The “earnings portion” of non-qualified distributions (i.e., distributions not used for “qualified higher educational expenses”) from a 529 Plan are subject to ordinary income tax at the beneficiary’s tax rate plus a 10% penalty, and for this reason, care should be taken not to “overfund” a 529 Plan. However, 529 Plans can nevertheless serve as effective wealth transfer vehicles because of their income tax benefits and the high probability that a grantor will wish to make significant contributions to the education of at least some members of his or her family. Combined with their unparalleled estate tax features, this makes 529 Plans “estate planning magic.”

© 2020 Much Shelist, P.C.

For more Estate Planning, see the Estates & Trusts section of the National Law Review.