As has been reported all over, it looks like the Automotive Industry will set some sales records in 2016 (see here, here, and here for example). As summarized by JD Power, “The full-year sales forecast of 17.5 million units would surpass the total from 2015 by about 5,000 units. Light trucks figure into the upsurge, along with higher incentives—eclipsing $4,000 per vehicle for the first time on record—as automakers clear out 2016 model-year vehicles.” When read that way, this news is less encouraging than it appears on its face.
Setting sales records is almost never bad. However, if they are set with huge incentives, discounts, and an intention to clear out inventory, that is obviously not any reason to anticipate further growth in 2017. In fact, a deeper dive into the numbers shows some slightly less favorable statistics. For example, the Wall Street Journal reports that “Retail sales, which strip out sales to fleet buyers, such as rental-car companies, were expected to reach 14.1 million units for the year, a 1.2% decline from 14.2 million units in 2015.”
What will 2017 bring?
There is no reason to think that sales will set another record. The Automotive industry is very cyclical and higher incentives, higher inventories and deeper discounts may sell more vehicles in the short run, but often leads to educed profitability and lower sales in the long run. Is your company planning for potential slower sales in 2017? What have you done with your supply chain and customers? If you have not already planned for the second half of 2017, or even that start of 2018, you are likely already behind.
© 2016 Foley & Lardner LLP
President Obama Authorizes Additional Sanctions on Russian Individuals and Entities: Executive Order 13964
Originally, EO 13964 focused on cyber-enabled malicious activities that harmed or significantly compromised the provision of services by entities in a critical infrastructure sector. This included significant disruptions to the availability of a computer or network of computers, or causing a significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.
In light of Russia’s recent use of cyber means to undermine democratic processes, the president has amended the EO to cover additional activities, authorizing sanctions on individuals/entities who tamper with, alter, or cause misappropriation of information with the purpose or effect of interfering with or undermining election processes or institutions. Under this authority, the president has sanctioned nine entities and individuals, including two Russian intelligence services (the GRU and the FSB), four individual officers of the GRU and three companies that provided material support to GRU’s cyber operations.
These new sanctions highlight the importance of regular and diligent screening of transactions, as well as the need to periodically review existing screening practices to ensure that they are up to date. It is critical to remember that an individual who may have been an acceptable business partner one day may be on a sanctions list the next.
©2016 Drinker Biddle & Reath LLP. All Rights Reserved
Several notable tax court opinions were issued 2016 dealing with a variety of substantive and procedural matters. In our previous post – Year in Review: Court Procedure and Privilege – we discussed some of these matters. This post addresses some additional cases decided by the court during the year and highlights some other cases still in the pipeline.
We have also written frequently on the 3M case, which involves whether the Internal Revenue Service’s (IRS) blocked income regulations are valid. That case has been submitted fully stipulated to the Tax Court and all briefs have been filed. For prior coverage, see here, here, and here.
Point: Transfer pricing is a point of emphasis with the IRS. Given that slight changes to a taxpayer’s transfer pricing methodologies can produce substantial adjustments, taxpayers need to continue to monitor judicial developments in the area. This includes not only how courts view the arm’s length standard, but also taxpayer challenges to the IRS’s rulemaking authority.
The Administrative Procedures Act and Deference to IRS Interpretations
Following the Supreme Court’s 2011 Mayo opinion, taxpayers have increasingly turned to the Administrative Procedures Act (APA) to challenge IRS actions. In addition to the posts linked above regarding APA challenges in transfer pricing cases, we have written about the QinitiQ and Ax cases dealing with whether an explanation provided in a notice of deficiency is insufficient under the APA. See here and here]. Additionally, the Supreme Court provided guidance in a non-tax case regarding the proper application of the APA in the analysis of the validity of agency regulations.
Another area we have frequently posted on is the level of deference afforded to IRS interpretations. Discussions of general deference principles and cases decided in 2016 can be found here, here, here, here, and here]. Additionally, as we noted here, the Supreme Court recently granted certiorari to decide the limits of Auer deference.
Practice point: Whether the IRS’s position in published or unpublished guidance is afforded deference, and, if so, the appropriate level of deference, is important to taxpayers both in planning their transactions and defending them before the IRS and the courts. This area continues to evolve, particularly in the area of Auer deference, and taxpayers need to be aware of new developments.
Information Reporting Requirements
The IRS’s Offshore Voluntary Disclosure Program remains a tool for noncompliant taxpayers to come to the IRS to resolve outstanding tax reporting matters. For an update on this subject, see here. The release of the Panama Paper in April 2016, which we wrote about here received considerable attention. A recent opinion out of a district court in California also provided more guidance on the willful standard for failure to file foreign information reporting forms. See here.
Practice point: OVDP remains open, but it could be closed by the IRS at any time. Noncompliant taxpayers need to consider all options in this area, and should consider which option might be best depending on their specific situation.
The IRS has been increasingly asserting penalties in cases. We recently discussed here some of the penalty procedural rules at issue in the Graev case. We also discussed the substantial authority defense, as applied by the Fifth Circuit in Chemtech Royalty Associates. See here.
Point: Taxpayers who are facing penalty determinations and assessments should consider whether they may have any procedural challenges to the IRS’s method of approval and assessment of penalties, in addition to considering the more standard, substantive defenses like reasonable cause and substantial authority. It is important to adequately document your position prior to taking a tax return position to avoid any initial assertion of penalties by the IRS.
Register for the 24th Annual Marketing Partner Forum January 25-27: Client Collaboration & the New Rules of Engagement
In January 2017, Marketing Partner Forum returns to Terranea Resort in Rancho Palos Verdes, CA for a three day summit on law firm marketing and business development set against the breathtaking Southern California shoreline. Marketing Partner Forum will welcome law firm marketing partners, rainmakers, practice group heads, business development leaders and esteemed corporate counsel for a dynamic and vibrant conference designed for the industry’s most experienced professionals.
Call to register: 1-800-308-1700
Marketing Partner Forum is designed for client development partners, rainmakers, and the senior-most legal marketing and business development professionals across the legal industry. Our content reflects the experience and sophistication of our international audience in terms of rigor, ambition and scope. Attendees can expect to hear from venerable thought leaders both within and outside of the legal industry. Enjoy ample networking opportunities and the stunning scenery, golf course, spa and hiking trails at one of California’s most picturesque resorts. Take advantage of our brand new Marketing Partner Conference Track consisting of several compelling sessions designed specifically for the law firm partnership. Interact directly with senior clients and network for new business. Explore the brand new Marketing Partner Forum Technology Fair. Bring your family to our Thursday night reception and Friday Bloody Mary Brunch. Depart the event with practical takeaways to share with peers and firm leadership.
A federal district court recently issued a preliminary injunction barring enforcement of a rule prohibiting the use of pre-dispute arbitration agreements with patients in long-term care facilities that participate in Medicare and Medicaid programs.
The new rule, promulgated by the Centers for Medicare and Medicaid Services (CMS), would have taken effect on November 28, 2016. It would have prohibited (1) entering into pre-dispute arbitration agreements and, (2) requiring the signing of an arbitration agreement as a condition of admission. The injunction was granted by U.S. District Court Judge Michael P. Mills, who sits in the Northern District of Mississippi, at the request of members of the nursing home industry to stop the rule from taking effect while it is being challenged in court. In their lawsuit, the American Health Care Association and four other state and local health care groups are claiming that CMS and the Department of Health and Human Services are overstepping their authority in issuing the rule. Specifically, the plaintiffs contend that Congress has repeatedly rejected legislation to invalidate arbitration agreements, and further argue that the rule isn’t necessary to protect the health and safety of nursing home residents.
In entering his order, Judge Mills did concede that the CMS rule does appear to be based on “sound public policy.” As some residents of nursing homes suffering from ailments such as dementia and the like might not have the capacity to grasp what an arbitration agreement entails, in addition to the fact that there is stress upon nursing home residents and their families that is inherent to the admissions process, it can be argued that arbitration and the nursing home admissions process do not belong together.
However, in granting the injunction, Judge Mills stated that, as sympathetic as the court may be to the public policy considerations that motivated the rule, it is not willing to allow the federal agency to overstep its executive authority and “engage in a rather unprecedented exercise of agency power. The court is unwilling to play a role in countenancing the incremental ‘creep’ of federal agency authority beyond that envisioned by the U.S. Constitution.”
The nursing home industry has said that arbitration offers a less costly alternative to court. Facilitating more lawsuits, the industry has said, could drive up costs, forcing some nursing homes to close. Lawyers representing residents, however, state that people being admitted to nursing homes are often at the most stressful juncture of their lives, and are not equipped or capable of understanding what it is they are being asked to sign. Regardless of whether one believes striking down the rule would help the nursing home industry reduce its legal costs, or that the rule assists the families of nursing home residents in getting justice, it is clear that the court’s grant of the injunction as well as the impending decision in the underlying case will have an impact upon the future of the nursing home industry.
Taking its cue from other, larger cities, San Marcos, Texas, recently voted to raise the minimum wage to $15 dollars per hour for businesses applying for tax breaks and others incentives to build or expand in the city. In addition to the higher wage, businesses must also offer all employees and their dependents benefits equal to those offered to full-time employees. The San Marcos City Council saw requiring the higher pay rate as a way businesses could return the favor of receiving tax incentives to the local economy. This new law applies only to future businesses seeking economic development incentives, and not companies already doing business in San Marcos. The city joins the ranks of cities such as Los Angeles, Seattle, San Francisco, and Washington, D.C. that require a “living wage.”
Key Takeaways for Businesses in San Marcos
Businesses seeking tax incentives to build or expand in San Marcos need to be prepared to pay a higher minimum wage and offer benefits to all of employees. This trend is likely to continue in other cities across the nation.
© 2016, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.
On November 2, 2015, the Bipartisan Budget Act of 2015, (the Act), H.R. 1314, 114 Congress/Public Law No. 114-74, made significant changes to the rules governing US federal income tax audits of partnerships (New Audit Rules). The New Audit Rules are codified at Internal Revenue Code Sections 6221 through 6241. On August 4, 2016, the IRS released temporary and proposed regulations relating to certain aspects of the New Audit Rules. And, on December 6, 2016, technical corrections to the New Audit Rules (Technical Corrections) were introduced in both the House of Representatives, H.R. 6439, and in the Senate, S. 3506.
The New Audit Rules take effect for taxable years beginning on or after January 1, 2018, and are intended to facilitate Internal Revenue Service (IRS) audits and adjustments with respect to certain types of partnerships. In the wake of the New Audit Rules, all partnerships should evaluate whether their agreements (existing as well as those in the negotiation stages) address the new rules.
The New Audit Rules apply broadly to partnerships with 11 or more partners at any one time during the tax year. A partnership is also subject to the rules if any of its partners is a partnership, a limited liability company which is treated as a partnership or as a disregarded entity (it is expected that additional guidance will be released in the future to allow a “look through” to the regarded member of a disregarded entity, but that guidance has not yet been issued), a trust, a nominee, a nonresident alien or an S corporation. Partnerships with 100 or fewer partners, however, may be eligible to elect out of the New Audit Rules. Recommended Action: The partnership agreement should address the election out and if the election out is intended to be perpetual, the agreement might include a covenant to remain under 100 partners.
The New Audit Rules provide for tax adjustments at the partnership rather than the partner level. Technical Corrections would focus the adjustments to amounts or items relevant in determining the income tax liability of any person (e.g., partnership items, affected items, and computational items). Mechanically, the partnership may cause its current partners to bear the tax liability or may “push out” the tax liability to the persons who were partners during the reviewed year. The election must be made no later than 45 days after receipt of a notice of final partnership adjustment. If the push out election is made, the interest rate on imputed underpayments is determined at the partner level and is 2 percent higher than the rate for imputed underpayments which are not pushed out. Technical Corrections would provide guidance with respect to the push out election for tiered partnerships. Recommended Action: Consider whether the push out election should be mandatory, and if so, amend the partnership agreement accordingly.
The TMP is no more! Under the New Audit Rules, the partnership designates a “partnership representative.” The partnership representative has the sole authority to act on behalf of the partnership in an audit. The partnership and the partners are bound by the actions taken by the partnership representative on behalf of the partnership. The partnership representative does not need to be a partner in the partnership. Recommended Action: Consider amending the partnership agreement to define the standards for selecting, terminating and replacing the partnership representative. Consider amending the partnership agreement to require the partnership representative to consult with the partners with respect to key issues, such as extending the statute of limitations, settling an audit, filing a petition for readjustment and making the push out election.
A partnership may elect to apply the New Audit Rules to any of its partnership returns filed for a partnership taxable year beginning after November 2, 2015, and before January 1, 2018. Temporary Regulations § 301.9901-22T provide time, form and manner for a partnership to elect into the New Audit Rules. Recommended Action: Consider whether there is any benefit to electing to apply the New Audit Rules before the mandatory application date. The benefits of electing early application of the New Audit Rules may include a more efficient audit process and the ability to cause current year partners to bear the tax liability following an adjustment. If your partnership is tiered with partnerships as partners, electing into an entity level tax may obviate the need to issue amended Forms K-1 and having to amend multiple federal and state returns due to an IRS adjustment.
© 2016 McDermott Will & Emery