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The National Law Forum - Page 535 of 753 - Legal Updates. Legislative Analysis. Litigation News.

Bank Regulators Require Changes to Tax Allocation Agreements

Dickinson Wright Logo

Acting in response to divergent results in recent court decisions, the Federal bankregulatory agencies have adopted an Addendum to their longstanding rules regardingincome tax allocation agreements between insured depository institutions (“IDI”) and their parent holding companies.[i] The Addendum requires holding companies and their IDI subsidiaries to review their existing income tax allocation agreements and to add a specified provision. The review and modifications must be effected as soon as reasonably possible, which the regulators expect to be prior to October 31, 2014.

Background

Most banks and thrift institutions holding deposits insured by the Federal Deposit Insurance Corporation (“FDIC”) are subsidiaries in a holding company structure. The Federal and State income tax returns of these IDI, as members of a consolidated group, are usually filed by the holding company parent. Refunds and other tax benefits of the consolidated group attributable to the IDI subsidiaries received by a parent holding company must be allocated to the IDI subsidiaries.

Since 1998, the Board of Governors of the Federal Reserve System (“Board”), the Office of the Comptroller of the Currency, and the FDIC (collectively, the “Agencies”) have applied uniform rules regarding such allocations. They are set forth in their Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (the “Policy”).[ii]

The Policy generally mandates that inter-corporate settlements between an IDI and its parent holding company be conducted in a manner that is no less favorable to the IDI than if it were a separate taxpayer. It also establishes a supervisory expectation that a comprehensive written tax allocation agreement will be entered into between a parent holding company and its IDI subsidiaries.

Among other things, the Policy specifies that a parent holding company that receives a tax refund from a taxing authority holds such funds as agent for the members of the consolidated group. It also requires that neither the tax allocation agreement nor the corporate policies of the parent holding company should purport to characterize refunds attributable to an IDI subsidiary received from a taxing authority as being property of the parent.

Addendum to the Policy

In several holding company bankruptcies since 2008, the FDIC has been unsuccessful in recovering for IDI subsidiaries tax refunds received and held by the parent holding company. In those cases, the courts have interpreted the applicable tax allocation agreement as creating a debtor-creditor relationship between the parent holding company and its IDI subsidiaries. Those courts have reached that result notwithstanding the Policy and its mandate that a parent holding company act as an agent for its IDI subsidiaries.[iii]Although other decisions have interpreted tax allocation agreements consistently with the Policy, the Agencies determined to modify the Policy and require additional action by holding companies and IDI with a view to avoiding such situations in future.

Under the Addendum to the Policy, each tax allocation agreement must be reviewed and revised to ensure that it explicitly acknowledges an agency relationship between the holding company and its subsidiary IDI with respect to tax refunds and does not contain any other language to suggest a contrary intent. A sample paragraph which the Agencies regard as sufficient is included in the Addendum.

The Addendum to the Policy also makes clear that tax allocation agreements are subject to the requirements of Sections 23A and 23B of the Federal Reserve Act. Among other things, this means that the parent holding company must promptly transmit tax refunds received from a taxing authority to its subsidiary IDI. An agreement that permits a parent holding company to hold and not promptly transmit tax refunds owed to an IDI may be regarded by the Agencies as inconsistent with Section 23B, and may subject the holding company and IDI to supervisory action. Similarly, an agreement that fails to clearly establish the agency relationship between the parent holding company and its IDI subsidiaries may be treated as subject to the loan collateralization and other requirements of Section 23A.

Conclusion

The Addendum the Agencies have made to the Policy does not represent a change in supervisory approach to these issues. It is a clarification in light of adverse bankruptcy experience and constitutes a reaffirmation of the Policy. Parent holding companies and IDI subsidiaries should arrange for a review of their existing tax allocation agreements and the inclusion in those agreements of the provision specified in the Addendum to the Policy. Action is required as soon as reasonably possible, but in any event before October 31, 2014.

Article By:

John K. Lawrence
Of:
Dickinson Wright PLLC

[i] Board Press Release (June 13, 2014). The Addendum will be published in the Federal Register.

[ii] 63 Fed. Reg. 64757 (Nov. 23, 1998).

[iii] See, e.g., FDIC v. Siegel (In re IndyMac Bancorp, Inc.), 2014 WL 1568759 (9th Cir., 2014).

© Copyright 2014 Dickinson Wright PLLC

Alice v. CLS Bank: Supreme Court Continues to Grope in Dark for Contours of Abstract Idea Exception

Schwegman Lundberg Woessner

In Alice Corp. v. CLS Bank Int’l (2014), the Supreme Court unanimously affirmed the one-paragraph per curium opinion of the en banc Federal Circuit, which found all claims of U.S. Patent Nos. 5,970,479, 6,912,510, 7,149,720, and 7,725,375 invalid under 35 U.S.C. § 101 for being directed to an abstract idea.

The Court based its affirmance on an application of a two-step process outlined in Mayo Collaborative Services v. Prometheus Labs, 566 U.S. ___ (2012). The first step is the determination of whether the claims are directed to a patent-ineligible concept such as a law of nature, natural phenomenon, or abstract idea. This step implicitly includes the identification of the concept at issue. The second step is to determine if the claims recite “an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself.”

The Court avoided providing “the precise contours of the ‘abstract ideas’ category” by relying on the similarity between Alice’s claims for intermediated settlement and Bilski’s claims for hedging. The Court characterized the Bilski claims as “a method of organizing human activity.” Accordingly, while only three justices signed Justice Sotomayor’s concurrence, stating that “any claim that merely describes a method of doing business does not qualify as a ‘process’ under §101,” the unanimous decision does implicate business methods as likely directed to abstract ideas.

At the Federal Circuit, the splintered opinion included a four-judge dissent that argued that the system claims should be patent-eligible even though the method claims were not. The Supreme Court disagreed with this view, finding that if the system claims were treated differently under §101, “an applicant could claim any principle of the physical or social sciences by reciting a computer system configured to implement the relevant concept” which would “make the determination of patent eligibility depend simply on the draftsman’s art.” To convey patent-eligibility, the claims at issue must be “significantly more than an instruction to apply the abstract idea … using some unspecified, generic computer.”

In my previous post regarding the oral argument before the Supreme Court, I noted that the Court seemed to be looking for reasonable and clear rules regarding the limits of the abstract idea exception to patentable subject matter, but did not get such a rule from any party. Perhaps as a result, this case was decided purely on its similarity to Bilski, and without providing much guidance as to the scope of the exception.

My thanks to Domenico Ippolito for this posting.

© 2014 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

Article By:

Steven Lundberg
Of:
Schwegman, Lundberg & Woessner, P.A.

Michigan District Court Confirms $1.6 Million Judgment Against Former Spartan and Detroit Red Wing Hockey Player

Varnum LLP

In a 17-page opinion issued on June 5, 2014, the Honorable Gordon J. Quist of the United States District Court for the Western District of Michigan entered an order recognizing a judgment entered in Switzerland against former NHL hockey player Kevin Miller. The case is of particular local interest in that Miller was born and raised in Lansing, played college hockey for Michigan State University, and played professional hockey for a number of teams, including the Detroit Red Wings.

The underlying judgment against Miller arose out of an on-ice incident on October 31, 2010, between Miller and Andrew McKim during a Swiss hockey league game. Miller checked McKim from behind, hitting McKim in the head and neck and causing McKim to fall on the ice and hit his head. McKim suffered a concussion and other injuries and was hospitalized for several weeks. The Swiss hockey league determined that Miller’s check was intentional and suspended Miller for eight games.

In addition, McKim brought a civil lawsuit against Miller for injuries resulting from the incident. At the conclusion of the civil proceedings in Switzerland, judgment was ultimately entered in the amount of 1 million Swiss Francs against Miller, which, when converted to United States dollars, and adding interest, costs, and attorneys’ fees, resulted in a current judgment amount of approximately US $1.6 million.

Miller challenged recognition of the judgment under the Uniform Foreign Country Money Judgments Recognition Act (“FCMJRA”), which Michigan has adopted. Miller raised two arguments: (1) that the Swiss judgment was repugnant to public policy and violated due process because Miller was not allowed to cross-examine the independent expert who provided opinion testimony about Miller’s intent at the time he checked McKim; and (2) that it was repugnant to public policy and violated due process for the Swiss civil tribunal to consider as evidence the determination by the Swiss hockey league that Miller’s check of McKim was intentional.

The district court was not persuaded that either of these objections rose to the level of the Swiss judgment being repugnant to public policy. The court noted that the fact that Swiss law does not allow for cross-examination of expert witnesses “is a mere difference of procedure that does not trigger the public policy exception.” Op. at 11. The district court also noted that the civil tribunal’s consideration of the hockey tribunal’s disciplinary determination was not repugnant to Michigan public policy in that the hockey tribunal’s determination was only one of numerous sources of information, and the “Swiss civil court did not accord preclusive effect to the National League proceeding that determined that Miller intentionally injured McKim.” Id. at 12.

The district court also held that these concerns did not deny Miller due process in the Swiss civil proceedings. The district court clarified that foreign tribunals do not have to provide identical procedural safeguards as United States courts, but rather “must only be compatible in that they do not offend the notion of basic fairness.” Id. at 14. Although the court acknowledged that the procedures in the Swiss tribunal were not identical to those in the United States, particularly the restriction on Miller’s ability to cross-examine the independent expert, “the Court cannot say the Judgment presents a serious injustice or lacks basic fairness, such that nonrecognition is appropriate.” Id. at 15.

© 2014 Varnum LLP

Article By:

Bryan R. Walters
Of:
Varnum LLP

 

“REDSKINS” US Trademark Registrations are Canceled for Disparaging Native Americans

MintzLogo2010_Black

A three-judge panel of the US Trademark Trial and Appeal Board (TTAB), for the second time and in a 2-1 decision, has held that the REDSKINS trademark used in connection with professional football and related services by the Washington Redskins National Football League team was disparaging to a substantial composite of Native Americans between 1967-1990, the time during which the registrations issued. It also held that the defense of laches did not apply to a disparagement claim where the disparagement pertains to a group of which the individual plaintiff or plaintiffs comprise one or more members. Accordingly, it ordered the registrations at issue canceled as violations of Section 2(a) of the Trademark Act. The cancellation of the registrations has no effect on the team’s ability to continue to use the REDSKINS marks.

Efforts to cancel the REDSKINS registrations have been ongoing for many years. The first petition to cancel the registrations was filed in 1992 and, after seven years of litigation, the TTAB canceled the registrations on grounds that the marks were disparaging to Native Americans. After several rounds of appeals and remands through the DC federal courts, the case was dismissed on grounds of laches.

While the above proceedings were still pending, six new individual petitioners, all Native Americans, initiated the current case seeking to cancel the same REDSKINS registrations. The matter was suspended pending a final decision in the above proceedings, and resumed in March 2010. After four more years of litigation, the TTAB again cancelled the registrations for disparaging Native Americans.

The Trademark Act prohibits registration of a trademark which may disparage persons or bring them into contempt or disrepute. A two-pronged test was used by the TTAB to decide the issue of disparagement as follows:

  1. What is the meaning of the matter in question, as it appears in the marks and as those marks are used in connection with the goods and services identified in the registrations?
  2. Is the meaning of the marks one that may disparage Native Americans?

Both questions are required to be answered as of the various dates of registration of the marks involved, which was between 1967 and 1990, considering the views during that time of a substantial composite of Native Americans, not the American public as a whole. The questions are not to be determined based on current views on the subject.

The TTAB found that first prong was satisfied by evidence that the term REDSKINS when used by the Washington Redskins football team retained its Native American meaning and imagery inherent in the original definition of the word. It stated that the football team “has made continuous efforts to associate its football services with Native American imagery.”

The second prong of the test required a determination of whether the use of the word was disparaging within the context of its use. “Context of use” can consist of several types:

  1. One which turns an innocuous term into a disparaging one;
  2. One which strips the disparaging meaning from the disparaging term; and
  3. One which has no effect on the disparaging meaning.

The TTAB held that as used by the football team, the word “Redskins” retained its original meaning and the context of the use had no effect on the disparaging nature of the word. It noted that the team’s “alleged honorable intent and manner of use of the term” did not change this finding.

In reaching its decision to cancel the registrations, the TTAB considered expert reports and testimony, dictionary definitions, and reference books. In considering the specific views of Native Americans, it considered the National Congress of American Indians’ (NCAI) 1993 Resolution 93-11, deposition testimony of several Native Americans, and various newspaper articles, reports, official records, and letters of protest filed at the Trademark Office. It concluded that the NCAI Resolution represented the views of a substantial composite of Native Americans who believed the term was disparaging, that the trend in dictionary usage labels corroborated the time frame of objections from Native Americans starting in the late 60s and continuing through the 90s as lexicographers began and finally uniformly labeled the term as “offensive” or  “disparaging,” and that, at a minimum, approximately 30% of Native Americans found the term used in connection with football services to be disparaging at all the times at issue.

In rejecting the laches defense, the TTAB stated that it was difficult “to justify a balancing of equities where a registrant’s financial interest is weighed against human dignity.”  Moreover, both it and the courts have routinely held that when a broader public policy concern is at issue, the laches defense does not apply.

The dissenting judge disagreed with the majority’s decision on the claim of disparagement arguing that the dictionary evidence relied upon was inconclusive and there was no reliable evidence to corroborate the membership of the National Counsel of American Indians. However, he stated that he wanted to make clear that the case was “not about the controversy, currently playing out in the media, over whether the term “redskins,” as the name of Washington’s professional football team, is disparaging to Native Americans today.” He disagreed with the majority that the evidence of record proved that the term was disparaging “at the time each of the challenge registrations issued.”

According to the Washington Post, the Redskins plan to appeal the decision and the team has no plans to discontinue use of the REDSKINS mark. Unlike the last proceeding, any appeal of this decision will not go to the DC federal courts but must now go to the United States District Court for the Eastern District of Virginia. This change was implemented in the America Invents Act which was enacted in September 2011 and it is not clear how a different court will decide these issues. The cancellation of the registrations will be stayed pending any appeal.

©1994-2014 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Article By:

Susan Neuberger Weller
Of:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Wisconsin’s Password Protection Law Mandates Review of Policies and Practices

Godfrey Kahn

Wisconsin has joined the ranks of other states who have limited the circumstances under which employees or applicants can be required to provide access to his or her personal Internet account. The Social Media Protection Act (2013 Wisconsin Act 208) became effective April 16, 2014. The new law makes it illegal for an employer to request or require an employee or applicant to disclose personal Internet account access information. A parallel prohibition within the Act applies to educational institutions and landlords.

A “personal Internet account” is defined as an Internet-based account that is created and used by an individual exclusively for purposes of personal communications. With the passage of the Act, employers are now prohibited from:

  • Requesting or requiring an employee or applicant, as a condition of employment, to disclose access information to the individual’s personal Internet account or to ask the individual to grant access to or allow observation of that account.
  • Discharging or otherwise discriminating against an employee for exercising his/her right to refuse to disclose personal Internet account access information.
  • Refusing to hire an applicant because the individual did not disclose personal Internet account access information.

While the law primarily protects the privacy of employees and applicants, it also offers employers a limited degree of protection. Specifically, employers can:

  • Request or require an employee to disclose access information to the employer in order for the employer to gain access to or operate an employer-provided (or employer-paid) electronic communications device provided by virtue of the employee’s employment relationship or used for the employer’s business purposes.
  • Discharge or discipline employees for transferring proprietary or confidential information or financial data to the employee’s personal Internet account without the employer’s authorization.
  • If the employer has reasonable cause, conduct an investigation or require an employee to cooperate in an investigation of any alleged unauthorized transfer of the employer’s proprietary or confidential information or financial data to the employee’s personal Internet account or to conduct an investigation of any other alleged employment-related misconduct, violation of the law or violation of the employer’s work rules. During the investigation, the employer can require the employee to grant access to or allow observation of the employee’s personal Internet account, but may not require the employee to disclose access information for that account.
  • Restrict or prohibit an employee’s access to certain Internet sites, while using an employer-provided (or paid for) electronic communications device, or while the employee is using the employer’s network or other resources.
  • View, access or use information about an employee or applicant that can be obtained without access information or that is available in the public domain.
  • Request or require an employee to disclose his or her personal electronic mail address.

A person who has been discharged, expelled, disciplined, or otherwise discriminated against for reasons provided under this law may file a complaint with Wisconsin’s Department of Workforce Development (the “DWD”).

Employers should make sure that their employment policies and practices conform to the requirements of 2013 Wisconsin Act 208. In particular, employers should make sure that employees using employer-provided or paid for electronic communication devices for business purposes do not have any expectation of privacy in such devices or the communications that flow from them.

In addition, employees should be informed that they are prohibited from disclosing proprietary or confidential information or financial data to anyone using personal Internet accounts and only for legitimate business reasons if using an employer-provided account. Lastly, employers should make sure that their employment policies are clear in reserving the right to conduct, and in expecting employees to cooperate in, investigations concerning the unauthorized transfer of proprietary, confidential or financial information.

Article By:

Jon E. Anderson
Of:
Godfrey & Kahn S.C.

Apple Inc. v. Rensselaer Polytechnic Institute and Dynamic Advances, LLC, Decision Denying Institution

DrinkerBiddle

Takeaway: A voluntary dismissal of a litigation without prejudice will not nullify service of a complaint for purposes of 35 U.S.C. § 315(b) if that litigation is immediately continued in a consolidated case.

In its Decision, the Board denied institution of the Inter Partes Review as time-barred under 35 U.S.C. § 315(b) because it was not filed within the statutory period of 35 U.S.C. § 315(b).  The date of service of two different complaints was an issue of primary focus by the Board.

In a first patent litigation, Patent Owner (Dynamic Advances) filed a complaint on October 19, 2012. Dynamic Advances, LLC v. Apple Inc., No. 1:12-cv-01579-DNH-CFH (N.D.N.Y.)(Dynamic I).  The complaint for the first litigation was served on Petitioner (Apple) on October 23, 2012.  In a second patent litigation, Rensselaer Polytechnic Institute and Dynamic Advances jointly filed a complaint on June 3, 2013. Rensselaer Polytechnic Inst. & Dynamic Advances, LLC v. Apple Inc., No. 1:13-cv-00633-DNH-DEP (N.D.N.Y.)(Dynamic II).  The complaint for the second litigation was served on Petitioner (Apple) on June 6, 2013.

The Petition in the instant proceeding was filed on January 3, 2014.  Thus, the service date of October 23, 2012 for the first litigation (Dynamic I) was more than 12 months prior to the filing of the Petition, whereas the service date of June 6, 2013 for the second litigation (Dynamic II) was less than 12 months prior to the filing date of the Petition.  The Board found that service of the first complaint on October 23, 2012, rather than service of the second complaint on June 6, 2013, controlled for purposes of determining whether the requested inter partes review was time-barred under 35 U.S.C. § 315(b).  Because the service date of October 23, 2012 for the first litigation (Dynamic I) was more than 12 months prior to the filing of the Petition, the Board found that the Petition was not filed within the statutory period of 35 U.S.C. § 315(b).

The Board’s rationale in reaching this conclusion related to the fact that on July 22, 2013, the court ordered consolidation of Dynamic I and Dynamic II under Fed. R. Civ. P. 42.  In doing so, the court ordered that pursuant to a joint stipulation of the parties, Dynamic I was “dismissed without prejudice and the parties would proceed to litigate their claims and defenses in [Dynamic II].”

Petitioner argued that under the decision in Macauto U.S.A. v. BOS GmbH & KG, IPR2012-0004 (“holding that a voluntary dismissal without prejudice nullified service of the complaint for purposes of 35 U.S.C. § 315(b)”), service of the first complaint on October 23, 2012 was not effective.  According to Petitioner, as in Macauto, the facts of the present case have the effect of leaving the parties as if the first action had never been brought.

The Board disagreed, finding that “Dynamic I cannot be treated as if that case had never been filed under the rationale of Macauto.”  Instead, the Board found that it was “persuaded that the circumstances in the instant case weigh in favor of close scrutiny of the effect of the dismissal of Dynamic I, because that cause of action, although dismissed, was continued immediately in Dynamic II.”

This proceeding was the third time that Petitioner had petitioned for inter partes review against the ‘798 patent.  In IPR2014-00077, institution was denied.  IPR2014-00320 was filed concurrently with the petition for this proceeding.

Apple Inc. v. Rensselaer Polytechnic Institute and Dynamic Advances, LLC,IPR2014-00319
Paper 12: Decision Denying Institution of Inter Partes Review
Dated: June 12, 2014
Patent 7,177,798 B2
Before: Josiah C. Cocks, Bryan F. Moore, and Miriam L. Quinn
Written by: Moore
Related proceedings: IPR2014-00077; IPR2014-00320; Dynamic Advances, LLC v. Apple Inc., No. 1:12-cv-01579-DNH-CFH (N.D.N.Y.); Rensselaer Polytechnic Inst. & Dynamic Advances, LLC v. Apple Inc., No. 1:13-cv-00633-DNH-DEP (N.D.N.Y.)

Article By:

Christopher Bruenjes
Of:
Drinker Biddle & Reath LLP

Federal Circuit Issues Decision Affirming Obviousness of a Molecule Patent Claim

Katten Muchin

On June 12, 2014, the US Court of Appeals for the Federal Circuit issued a precedential opinion affirming the obviousness of a patent claim directed to a drug molecule. Bristol-Myers Squibb Co. v. Teva Pharms. USA, Inc., ___ F.3d ___ (2014). This is an example of the Federal Circuit holding a molecule patent invalid for obviousness.

The Federal Circuit upheld US District Court for the District of Delaware Magistrate Judge Christopher Burke’s opinion that held claim 8 of U.S. Patent No. 5,206,244 invalid in light of a structurally similar molecule. Claim 8 covers the entecavir molecule, which is the active ingredient in BMS’ Baraclude® tablets, which are designed to treat hepatitis B virus (HBV) infection. Teva successfully argued that one of ordinary skill in the art seeking to make an anti-HBV drug in October 1990 would have selected a prior art compound called 2′-CDG as a “lead compound” and would have modified it by adding a methylene (i.e. carbon-carbon double bond) group as indicated in the diagram to the right, below.

Lead Compound

Relying on testimony from both parties’ experts and prior art publications, the Federal Circuit saw no error in the district court’s finding that 2′-CDG was a proper lead compound. There was sufficient evidence that one of ordinary skill would have studied carbocyclic nucleosides generally, and 2′-CDG specifically, as antiviral drugs, especially because BMS’ expert admitted that “medicinal chemists . . . were actually treating and using 2′-CDG as a lead compound” in the search for new antivirals. Slip. Op. at 9-10. BMS argued that 2′-CDG would not be a lead compound because it was discovered to be toxic after the filing date of the patent. Id. at 10. The Federal Circuit (and the district court) rejected BMS’ argument because in October 1990 (i.e. the date of the proper inquiry), “2′-CDG was not yet known to have high toxicity” and BMS’ expert agreed that researchers thought 2′-CDG was a promising compound at that time. Id. at 10.

Motivation to Modify

The Federal Circuit also found that the record amply supported the district court’s conclusion on motivation to modify 2′-CDG to make the patented compound, entecavir. Slip Op. at 11-14. For example, both parties’ experts agreed that chemists were making changes on the carbocyclic ring in the prior art, and Teva’s expert stated that such changes resulted in greater activity than changes elsewhere on the molecule. Id. at 12. Unrefuted expert testimony also explained that the modification would take place at the 2′ or 5′ position on the carbocyclic ring because small changes could easily be made only at these positions. Id. at 12. The experts also agreed that the skilled artisan would focus on the smallest elements for the substitution, and BMS’ expert stated that he would “rule out everything but the carbon.” Id.The Federal Circuit found no clear error in the district court’s finding that the modification required was a minor one based on the testimony of both parties’ experts and a prior art article teaching improved antiviral activity by addition of a methylene group to a carbocyclic nucleoside. Id. at 12-13.

Reasonable Expectation of Success

Based on the prior art and the structural similarity of 2′-CDG and entecavir, the Federal Circuit found no error in the district court’s finding of “reasonable expectation of success.” Id. at 14. In doing so, the Federal Circuit rejected a bright-line rule regarding reasonable expectation of success in new chemical entities proposed by BMS. Specifically, BMS had argued that the existence of unexpected properties forecloses a finding of a reasonable expectation of success. Id. at 14. Citing its en banc In re Dillon decision, the Federal Circuit held that “unexpected results do not per se defeat, or prevent, the finding that a modification to a lead compound will yield expected, beneficial properties.” Id. at 15. Instead, the court found that unexpected results should be analyzed as secondary considerations of nonobviousness. Id.

Secondary Considerations

The Federal Circuit found no reversible errors in the district court’s analysis of secondary considerations of nonobviousness.[1] The Federal Circuit was deferential to the lower court’s factual findings regarding evidence of secondary considerations, including unexpected results. Id. at 18. The district court found that the results regarding entecavir’s high potency and large therapeutic window were not entirely unexpected because it was known in the prior art that 2′-CDG was effective against HBV and had a good therapeutic window. Id. They were differences of degree, not kind. Id. While the district court credited entecavir’s high barrier to resistance as an unexpected property, the three properties taken together were not sufficient to support nonobviousness. Id. at 17-18.

Article By:

Robert B. Breisblatt
Christopher B. Ferenc
Jeffrey A. Finn
Samson Helfgott
Martin S. Masar III, PhD
Hassan Abbas Shakir
Of:
Katten Muchin Rosenman LLP

[1] The Federal Circuit found that the district court made two legal errors (albeit harmless ones) in assessing unexpected results because it: (1) compared entecavir to another HBV drug on the market and not the closest prior art, 2′-CDG, and (2) looked at what the inventor knew, not a person of ordinary skill in the art. Id. at 18-19. The Federal Circuit also found no error in the lower court’s findings on commercial success and long-felt need. Id. at 19.

Jumpstart Your Startup: Entity Selection and Formation

vonBriesen

When starting a business, you must decide what form of business entity to establish. The “choice of entity” decision is one of the most important decisions facing new business owners. There are several forms of business to choose from, each of which generates different legal and tax consequences. That said, there is no single form of entity that is appropriate for every type of business owner.

The most common forms of business are the sole proprietorship, partnership, C corporation, S corporation, and limited liability company.

Sole Proprietorship

A sole proprietorship is the simplest business structure. It is an unincorporated entity owned and run by one individual with no distinction between the business and the individual owner. The owner is entitled to all profits and is personally responsible for all the business’ debts, losses, and liabilities.

A sole proprietorship needs to obtain the necessary licenses and permits for the industry in which the sole proprietorship does business. If the business operates under a name different than the individual, registering that name (e.g., DBA name, short for “doing business as”) with a state agency may be required.

Because the business and the owner are one and the same, the business itself is not taxed separately. The owner is responsible for and reports income, losses and expenses for income tax purposes.

Partnership

A partnership is the relationship between two or more persons who join to carry on a trade or business. Each partner may contribute money, property, labor, and/or skill, and, in return, each partner shares in the profits and losses of the business.

Because partnerships involve more than one person, it is important to develop a partnership agreement. The partnership agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (i.e., bring in new partners or buy out current partners) and under what circumstances the partnership would be dissolved. In addition, owners of a partnership should determine which type of partnership to establish. The three most common types of partnership arrangements are:

  • General Partnership: Profits, liability, and management duties are presumed to be divided equally among all partners. If an unequal ownership distribution is preferred, the partnership agreement must document that preference. A general partnership ordinarily owns its assets and is responsible for its debts. It is important to note that in a general partnership, the individual partners are personally liable for all partnership debt, obligations and liabilities. No formal state registration and/or filing is required to form a general partnership.
  • Limited Partnership: A limited partnership requires at least one general partner and one limited partner. Limited partners are generally not liable for the debts and obligations of the limited partnership (though the general partners will be liable), but they must have restricted participation in management decisions. Limited partnerships ordinarily must be filed with a state.
  • Limited Liability Partnership: A limited liability partnership generally operates and is governed by the same rules as a general partnership, except: (1) its partners have limited liability for partnership debt, (2) it can choose to be taxed as a corporation or a partnership, and (3) it is formed by filing the appropriate documentation with a state.

Generally, a partnership must file an annual information return to report income, deductions, gains, and losses from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership income or loss on his or her individual tax return.

C Corporation

A C corporation is an independent legal entity incorporated in a single state, although it may do business in other states. Because a corporation is an independent legal entity, its existence continues until formally dissolved under the laws of the state in which it is incorporated. Ownership of a corporation is in the form of shares of stock, there is no limit to the number of stockholders, and there is no limit on the number of classes of stock a C corporation can issue. Additionally, the corporation itself, not the stockholders, is generally liable for the debts and obligations of the business.

For corporate governance, a corporation generally has a board of directors and bylaws. The initial directors may be named in the articles of incorporation or elected shortly after filing the articles of incorporation. Thereafter, directors are elected as set out in the articles of incorporation or bylaws.

For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the stockholders if and when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to stockholders and stockholders cannot deduct any loss of the corporation.

S Corporation

An S corporation is similar to a C corporation, except that an S corporation passes income, losses, deductions, and credits through to its stockholders for federal tax purposes. Stockholders of an S corporation report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Thus, an S corporation generally avoids double taxation on corporate income.

In order to become an S corporation, the corporation must make appropriate filings with the IRS. To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation;
  • Have only allowable stockholders, which are individuals, certain trusts and estates, and may not include partnerships, corporations (unless owned as a qualified subchapter S subsidiary), or non-resident aliens;
  • Have no more than 100 stockholders;
  • Have only one class of stock; and
  • Not be an ineligible corporation (e.g., certain financial institutions and insurance companies).

S corporations file specific tax returns and tax forms with the IRS.

Limited Liability Company

A limited liability company (“LLC”) is a hybrid entity that is treated like a corporation for limited liability purposes, but for tax purposes can choose to be taxed either as a corporation, partnership, or, in some cases, a disregarded entity (i.e., single-member LLC). A limited liability company is created under state law by filing articles of organization with a state. The owners of an LLC are referred to as “members” and generally may include individuals, corporations, other LLCs and other types of entities. There typically is no maximum number of members.

LLCs with more than one owner should have an operating agreement. An operating agreement usually includes provisions that address ownership interests, allocation of profits and losses, and members’ rights and responsibilities, among others.

Since the federal government does not consider an LLC a separate legal entity, an LLC with at least two members is, by default, classified as a partnership for federal tax purposes unless it files with the IRS and affirmatively elects to be treated as a corporation for tax purposes. An LLC with only one member is referred to as a single-member LLC and is treated as one and the same as its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it affirmatively elects to be treated as a corporation. An LLC may also elect to be taxed as an S corporation.

The business structure you choose will have significant legal and tax implications. In order to identify the best structure for you, it is important to understand your business goals and how the characteristics of each type of business entity can help you achieve those goals.

Article By:

Patrick J. Cannon
Of:
von Briesen & Roper, S.C.

Immigration Reform Efforts Are Still Alive

GT Law

Despite the recent resignation announcement of the House Majority Leader, immigration reform is still very much alive.

As reported just this week, the call to reform the country’s immigration system is louder than ever on and off The Hill. Immigration reform continues to garner strong and vocal support by CEOs, industry leaders and more. Placing the success or failure of immigration reform on the shoulders of one elected official is not an accurate metric. Indeed, several elected officials who strongly support immigration reform, and have for many years, won their respective primary with few challenges stemming from their support of immigration reform. Now is the time to move forward and refocus efforts to reform our country’s immigration system.

Article By:

Laura Foote Reiff
Of:
Greenberg Traurig, LLP

Retroactive Tax Planning Re: U.S. Shareholders of Foreign Corporations

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Converting Subpart F Income into Qualified Dividends

U.S. shareholders of foreign corporations are generally not subject to tax on the earnings of such corporations until the earnings are repatriated to the shareholders in the form of a dividend.  Moreover, when a foreign corporation is resident in a jurisdiction with which the United States has a comprehensive income tax treaty, the dividends distributed to its individual U.S. shareholders are eligible for reduced qualified dividend tax rates (currently taxed at a maximum federal income tax rate of 20 percent).

tax planning

Where a foreign corporation is classified as a “controlled foreign corporation” (“CFC”) for an uninterrupted period of 30 days or more during any taxable year, however, its U.S. shareholders must include in income their pro rata share of the Subpart F income of the CFC for that taxable year, whether or not such earnings are distributed.  A CFC is a foreign corporation, more than 50 percent of which is owned (by vote or value), directly or indirectly, by “U.S. shareholders.”  A U.S. shareholder, for the purpose of the CFC rules, is a U.S. person who owns, directly, indirectly or constructively, at least ten percent of the combined voting power with respect to the foreign corporation.

In addition to the inability to defer taxation on its share of a CFC’s subpart F income, one of the pitfalls of a U.S. shareholder owning stock in a CFC is that subpart F income is treated as ordinary income to the U.S. shareholder (currently taxed at a maximum federal income tax rate of 39.6 percent), regardless of whether the CFC is resident in a jurisdiction that has an income tax treaty with the United States.  Therefore, the U.S. shareholder would not be able to repatriate its profits at qualified dividend rates.

Among other things, subpart F income generally includes passive investment income (e.g., interest, dividends, rents and royalties) and net gain from the sale of property that gives rise to passive investment income.  Gain on the sale of stock in a foreign corporation, for example, falls within this category.  Consequently, when a CFC sells stock of a lower-tier corporation, the U.S. shareholders of the CFC will have to include their share of the gain from the sale as subpart F income, which will be taxed immediately at ordinary income rates.

Check-the-Box Elections

Pursuant to the “check-the-box” entity classification rules, a business entity that is not treated as a per se corporation is an “eligible entity” that may elect its classification for federal income tax purposes.  An eligible entity with two or more members may elect to be classified as either a corporation or a partnership. An eligible entity with only one member may elect to be classified as either a corporation or a disregarded entity.

Generally, the effective date of a check-the-box election cannot be more than 75 days prior to the date on which the election is filed.  However, Rev. Proc. 2009-41 provides that if certain requirements are met, an eligible entity may file a late classification election within 3 years and 75 days of the requested effective date of the election.  These requirements may be met if:

  1. The entity failed to obtain its requested classification solely because the election was not timely filed
  2. The entity has not yet filed a tax return for the first year in which the election was intended
  3. The entity has reasonable cause for failure to make a timely election

The conversion from a corporation into a partnership or disregarded entity pursuant to a check-the-box election results in a deemed liquidation of the corporation on the day immediately preceding the effective date of the election.  Distributions of property in liquidation of the corporation generally are treated as taxable events, as if the shareholders sold their stock back to the corporation in exchange for the corporation’s assets.  As a result, the corporation shareholders would recognize gain on the liquidating distributions to the extent the fair market value of the corporation’s assets exceeds the basis of the shareholders’ shares.  In addition, subject to limited exceptions, the corporation generally would recognize gain on the liquidating distribution of any appreciated property.

Converting Subpart F Income into Qualified Dividends

A CFC that elects to convert from a corporation into a partnership or disregarded entity generally would recognize Subpart F income on the deemed liquidation, to the extent it holds property that gives rise to passive investment income (such as stock in subsidiary corporations).  The subpart F income inclusion rules only apply, however, when the foreign corporation has been a CFC for a period of 30 uninterrupted days in the given taxable year.  Where the election is made effective as of January 2, the liquidation of the foreign corporation would be deemed to occur on January 1 of that year.  Because the foreign corporation would be deemed to have been liquidated on January 1, it would not have been a CFC for 30 days during the year of liquidation.  As a result, subpart F income would not be triggered on the deemed liquidation of the foreign corporation.

In addition, as a result of the check-the-box election, a U.S. shareholder of the foreign corporation would recognize gain on the deemed liquidation as if the shareholder sold its stock back to the corporation in exchange for the corporation’s assets.  Section 1248(a) provides, however, that when a U.S. person sells or exchanges its shares in a foreign corporation that was a CFC during the 5-year period prior to disposition, the gain from the sale is recharacterized as a dividend to the extent of the allocable share of the earnings and profits of the foreign corporation.  To the extent the foreign corporation is resident in a country with which the U.S. has an income tax treaty, its individual U.S. shareholders would be eligible for the reduced qualified dividend income tax rate on such dividend.

This may be illustrated by the following example:

A, a U.S. individual, is the sole shareholder of X, a foreign corporation resident in a country with which the United States has a comprehensive income tax treaty.  X owns 40 percent of the shares of Y, another foreign corporation.  In October 2013, X sells all of its shares of Y.  X is a CFC and the net gain from the sale of the Y shares constitutes subpart F income.  As a result, the gain would have to be included in A’s gross income as ordinary income.  Instead, X files a retroactive check-the-box election pursuant to Rev. Proc. 2009-41 to be treated as a disregarded entity as of January 2, 2013.  The election results in a deemed liquidation of X on January 1, 2013.  Because X has not been a CFC for a period of 30 uninterrupted days in 2013, however, subpart F income is not triggered on the deemed liquidation of X.  In addition, the gain recognized by A on the deemed liquidation of X is recharacterized as a dividend and subject to tax at the reduced rates applicable to qualified dividend income.

As a result, the combination of Section 1248(a) and the retroactive check-the-box rules allows individual U.S. shareholders of a CFC to convert gain that would be realized upon the sale of the CFC’s assets from subpart F income (taxed as ordinary income at rates up to 39.6 percent) to qualified dividend income (currently taxed at 20 percent).  Following the deemed liquidation of the foreign corporation, because all of the assets would be deemed to have been distributed to the shareholders in complete liquidation of the corporation, and the shareholders would recognize gain on the receipt of the assets, the basis of the assets would be stepped up to fair market value, reducing or eliminating gain recognized upon the subsequent sale of the assets of the former CFC.

Article By:

Jeffrey L. Rubinger
Nadia E. Kruler
Joshua Kaplan
Of:
Bilzin Sumberg Baena Price & Axelrod LLP