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Veteran Business Attorney Daniel W. Kehr Joins BB&K

03 Aug 2016 00:00:00 -0800

For Immediate Release: Aug. 3, 2016
Media Contact: Denise Nix • 213-787-2552 • denise.nix@bbklaw.com

SAN DIEGO, Calif. - Best Best & Krieger LLP is pleased to welcome Daniel W. Kehr as a partner to the Business practice group. Based in the firm's San Diego office, Kehr provides corporate general counsel, technology, real estate, as well as trust, estate and succession planning legal services.

Prior to joining BB&K, Kehr managed his own law firm, Kehr Law. Kehr provides legal services for a variety of clients, including individuals, entrepreneurs, investors and businesses, including start-ups and mature companies, across a broad range of industries, such as technology, software, Internet, gaming, insurance, manufacturing, distribution, real estate and professional services.

“Dan's experience as a business owner gives him a unique perspective that his business clients appreciate and benefit from. That experience, coupled with his knowledge and skills in handling a variety of business law matters, make Dan an asset to the firm's clients,” said Managing Partner Eric Garner.

A native of Huntington Beach, Calif., Kehr attended the University of California, Los Angeles for his undergraduate studies. He was an NCAA intercollegiate baseball athlete. He earned his law degree from California Western School of Law in two years, and passed the California bar exam while studying at the University of San Diego.

Kehr’s full biography is available at www.bbklaw.com.

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Best Best & Krieger LLP is a national law firm that focuses on environmental, business, education, municipal and telecommunications law for public agency and private clients. With 200 attorneys, the law firm has nine offices nationwide, including Los Angeles, Sacramento, San Diego and Washington, D.C. For more information, visit www.bbklaw.com or follow @BBKlaw on Twitter.

Best in Law: Tax Ruling Confirms Protocol on Job-Related Judgments

04 Oct 2015 00:00:00 -0800

By Katrina Veldkamp

The California Court of Appeal recently confirmed that employment-related settlements or judgments are wages from which employers must withhold payroll taxes.

In Cifuentes v. Costco Wholesale Corp., Cifuentes challenged former employer Costco’s withholding of payroll taxes from a wrongful termination judgment.

The court ruled in favor of Costco, holding that tax law requires employers to withhold payroll taxes or face liability to the IRS and other tax authorities.

Cifuentes was awarded more than $300,000 in both back pay and front pay for wrongful termination. Costco withheld approximately $116,000 in payroll taxes from the judgment, including Federal Income Contribution Act (FICA) contributions, federal and state income taxes, and state disability insurance.

Cifuentes claimed that, due to the tax withholding, Costco had failed to satisfy the judgment in full. The appellate court disagreed.

Whether or not to withhold payroll taxes from back pay and similar settlements has been a pressing issue for employers, especially in California. Until now, the only California appellate decision regarding taxation of employment settlements held that an employer is not required to withhold payroll taxes from an award of lost wages to a former employee. However, since that decision, Lisec v. United Airlines, Inc., the majority of state and federal courts, including the U.S. 9th Circuit Court of Appeals, have agreed that employers should withhold taxes from such settlements.

Furthermore, the IRS has consistently affirmed its position that employment-related judgments and settlements are wages subject to payroll tax withholding. Because of the conflicting state and federal guidance, California employers were faced with a choice between not satisfying a judgment or potentially being liable for the taxes not withheld. The court in Cifuentes resolved this conflict by repudiating Lisec and following the majority view.

The Internal Revenue Code generally defines wages that are subject to income and FICA tax withholding as any payment for services performed by an employee for his or her employer. The Supreme Court has clarified that this definition encompasses the entire employer-employee relationship, not just the work actually done. California tax law is identical to federal law with respect to withholding from wages. As a result, back pay, front pay, and any other payment associated with the employer-employee relationship are considered wages for federal tax purposes, even if the award is not linked to actual service. Whether any such award is granted as part of a judgment, as opposed to a settlement, does not affect its tax treatment (except in the case of back pay for lost wages on account of personal physical injury or physical sickness, which is not considered wages subject to taxation).

On the other hand, damages in hiring discrimination suits that are granted to individuals who were never actually hired are not considered wages because no employment relationship ever existed.

If an employer does not withhold payroll taxes as required by law, it becomes liable for the taxes, including the employee’s far greater share. In addition, an employer that does not properly withhold payroll taxes may be subject to penalties and interest for underreporting and failing to pay taxes.

Even if an employer is able to prove that an employee paid the income and/or FICA taxes, it may still be liable for applicable penalties and interest. Because of this risk of liability for improperly withheld taxes, the court in Cifuentes concluded that “Costco chose correctly” in withholding from the judgment. Costco’s potential exposure for failing to withhold taxes outweighed the slight inconvenience to Cifuentes of seeking a refund for any overpaid tax.

California employers now have clear guidance regarding the taxation of employment-related settlements and judgments. To avoid the risk of potential tax exposure, employers should withhold appropriate payroll taxes on awards for lost wages. Such withholding will not prevent an employer from fully satisfying a judgment.

* This article first appeared in The Press-Enterprise on Oct. 4, 2015. Republished with permission.

Best in Law: Tax Planning Vital in Acquisitions

19 Apr 2015 00:00:00 -0800

BY KYLE PHILLIPS

The structure of a business combination, acquisition or disposition can have significant tax consequences to all parties in the transaction. With different structures yielding different tax consequences, it is important to plan accordingly to mitigate the tax impacts of the transaction.

A simple and straightforward structure is a stock purchase transaction, where the shareholder of a corporation sells stock in the corporation to a prospective purchaser. The seller recognizes capital gain or loss on the sale of the shares, and the purchaser takes a tax basis (i.e., the reference point by which future gain or loss is recognized with respect to a sale) in the acquired shares equal to the purchase price. Further, the corporation remains the owner of its assets, and continues to be on the hook for all of its liabilities and obligations.

The legal and administrative simplicity of this structure, combined with the favorable tax treatment to the seller, makes a stock purchase very appealing to parties negotiating the deal.

On the other hand, in an asset acquisition, the purchaser acquires assets, and if applicable, assumes liabilities of the corporation. While the corporation generally recognizes capital gain or loss on the sale of assets, depending on the assets sold, a portion of that gain may be re-characterized as ordinary income subject to higher tax rates than capital gains. Further, the purchaser of the assets will allocate the purchase price among the assets acquired, which could result in beneficial tax treatment for the purchaser.

An asset acquisition requires an additional step of transferring ownership of the acquired assets to the purchaser that is not required in a stock purchase transaction. As a result, the administrative burden and potential ordinary income treatment of the gain in an asset purchase transaction should be balanced against the tax benefits that inure to the purchaser in the transaction.

Each transaction is unique and involves different variables and concerns. Because an increased tax liability can reduce a party’s return on the transaction, care should be exercised at the outset of negotiations to ensure that a tax-efficient structure is implemented that will benefit all parties in the transaction.

*This article first appeared in The Press-Enterprise on April 19, 2015. Republished with permission.

BEST IN LAW: Employers need to heed Obamacare Reporting Rules

22 Mar 2015 00:00:00 -0800

BY ISABEL SAFIE

Compliance with reporting obligations is always important for any employer, but the employer reporting requirements under the Affordable Care Act pack a significant penalty that makes compliance particularly important.

In fact, employers could be subject to penalties of up to $100 per return and $200 per employee for failing to timely file the required returns or furnish specified statements to employees.

Thus employers, whether private or governmental, will need to ensure that they have systems in place to collect certain data pertaining to health coverage provided in 2015 and later that will need to be reported to the IRS beginning in 2016.

The reports provide the IRS with information used to determine if employers are subject to penalties under the “play-or-pay” rule or whether individuals are subject to penalties under the individual mandate.

The reporting procedures will be similar to those used in connection with the W-2 Form used to report annual wages. Consistent with the requirements, Form 1095-B or 1095-C will need to be prepared for each employee covered by the reporting obligations and filed with the IRS using a transmittal Form 1094-B or 1094-C.

Certain small employers will need to use the “B series” forms to report minimum essential coverage, while the “C series” forms will be used by employers subject to the play-or-pay rule to provide the IRS with information to determine whether penalties are applicable.

Minimum Essential Coverage (Forms 1094-B and 1095-B)

Generally, “minimum essential coverage” includes an insured plan or coverage offered in the small or large group market or a self-insured group health plan. The good news for most small employers, generally those that are not subject to the play-or-pay rule, is that they will not be required to submit any of the returns discussed here. This is because the obligation to report data connected to minimum essential coverage falls on the insurance carrier rather than the employer, unless the coverage is provided on a self-insured basis.

Small employers that provide minimum essential coverage on a self-insured basis will be required to use the B-series forms to report certain employee information, including names, addresses and other key information.

In contrast, the insurance carrier is responsible for reporting insurance coverage provided by small employers on an insured basis. Thus, employers providing minimum essential coverage through an insurance carrier that assumes the risk of providing health coverage for insured events will have no filing obligation. Most small employers provide minimum essential coverage on an insured basis and, therefore, will not be subject to this filing requirement.

Reporting by Applicable Large Employers (Forms 1094-C and 1095-C)

All applicable large employers will be required to make an annual report to the IRS with respect to each full-time employee. The returns must contain various items of information including:

Whether the employer offers coverage to the employee
The employee’s share of the cost for self-only coverage
Number of full-time employees for each month
Name, address and Social Security number of each full-time employee

Applicable large employers with 50 to 99 full-time and full-time equivalent employees are required to file annual returns even if they are eligible for transition relief and exempt from the play-or-pay rule until 2016.

Filing Deadlines

Statements must be furnished to employees on or before Jan. 31 of the filing year. Copies of the information return filed with the IRS can be used for this purpose. The returns must be filed with the IRS on or before Feb. 28, or March 31 if filing electronically.

The information reporting requirements are lengthy and complex. Although reporting will not occur until early 2016, it is important for employers that will be responsible for these reporting obligations to take proactive action in 2015 to facilitate the reporting obligation. Therefore, it is important for employers to do the following:

Review and understand the reporting requirements.
Obtain copies of the reporting forms and identify the information that will need to be gathered and reported.
Identify the employees for whom reports will need to be submitted.
Designate a responsible person to gather the necessary information.
Calendar applicable deadlines to ensure that statements and returns are submitted timely.

*This article first appeared in The Press-Enterprise on March 22, 2015. Republished with permission.

Charitable Hospital Organizations and the Affordable Care Act

06 Mar 2015 00:00:00 -0800

The IRS has issued final regulations providing guidance on certain complex requirements imposed on charitable hospital organizations added by the Patient Protection and Affordable Care Act of 2010. Specifically, the Regulations clarify the types of entities subject to the requirements, the consequences for failing to satisfy the requirements and certain reporting obligations. Importantly, charitable hospital organizations must satisfy these requirements to retain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code .

Among other items, the Act provides that charitable hospital organizations are required to:

Conduct a community health needs assessment, and adopt an implementation strategy to satisfy the community health needs identified in the CHNA at least once every three years;
Establish a written financial assistance policy and a written policy related to care for emergency medical conditions; and
Make reasonable efforts to determine whether an individual is eligible for assistance under a FAP before engaging in extraordinary collection actions.

An entity is subject to the requirements to the extent it is treated as a “hospital organization.” The Regulations define a “hospital organization” as an organization recognized (or seeking to be recognized) as tax-exempt under Section 501(c)(3) operating one or more facilities that are required to be licensed, registered or similarly recognized as a hospital.

The Regulations clarify that, subject to certain exceptions, a charitable hospital organization that fails to comply with the CHNA requirements for a taxable year will be subject to a $50,000 excise tax. However, the tax may not apply if the error is minor, and either inadvertent or due to reasonable cause, and is corrected. Lastly, the Regulations provide that the IRS will consider all of the relevant facts and circumstances in determining whether to revoke a charitable hospital organization’s tax-exempt status.

The Regulations generally apply to tax years beginning after Dec. 29, 2015. For tax years beginning on or before then, organizations may generally rely on a reasonable, good faith interpretation of the requirements. The full text of the Regulations may be accessed here.

The requirements described in this legal alert are detailed and complex. Please contact one of the attorney authors of this legal alert listed at right in the Tax group, or your BB&K attorney, for additional information and analysis regarding the requirements applicable to charitable hospital organizations.

Disclaimer: BB&K legal alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

Congress Passes Tax Increase Prevention Act of 2014 and Retroactively Extends Tax Relief Provisions

22 Dec 2014 00:00:00 -0800

The Tax Increase Prevention Act of 2014 retroactively extends, through Dec. 31, various individual and business tax relief provisions that previously expired during calendar year 2013 or 2014. The full text of the Act, passed by Congress last week, may be accessed here.

Significant features of the Act impacting individual taxpayers include:

1. State and Local Sales Tax Deduction. The Act retroactively extends the ability of an individual taxpayer that itemizes deductions to elect to deduct state and local general sales and use taxes instead of state and local income taxes. Prior to the passage of the Act, this election was not available for tax years beginning after Dec. 31, 2013.

2. IRA Distributions to Eligible Charities. Subject to certain limitations, taxpayers aged 70 1/2 or older may make tax-free distributions from their Individual Retirement Accounts to charities. Such charitable IRA distributions are not subject to the charitable contribution limits that otherwise apply to charitable contributions made by individuals.

3. Discharged Home Mortgage Debt. The exclusion from gross income of income derived from the discharge of “qualified principal residence indebtedness” is extended, and applies to home mortgage debt discharged before Jan. 1, 2015. This exclusion previously only applied to qualifying debt that was discharged before Jan. 1, 2014.

These retroactive extensions provide a welcome relief for individual taxpayers who elect to itemize their deductions, instead of taking the standard deduction, as well as for certain individuals who desire to make charitable contributions from their retirement accounts.

On the business side, the highlights of the Act include, but are not limited to:

1. Extension of Certain Tax Credits. The Act retroactively extends the Research Credit, the Work Opportunity Tax Credit, the Indian Employment Credit, the New Markets Tax Credit and the Differential Wage Payment Credit for employers.

2. S Corporation Five Year Recognition Period for Built-in-Gain Tax. The five-year recognition period provided for an S corporation with built-in-gains at the time of converting from a C corporation is extended and applies for tax years beginning in 2014. This extension provides much needed clarity to tax attorneys, tax advisors and accountants advising clients contemplating making an election to treat their corporations as an S corporation.

3. Exclusion of 100 percent of Gain on Certain Small Business Stock. The Act extends the 100 percent exclusion from income on all gain recognized on the disposition of qualified “small business stock.”

4. Lower Shareholder Basis Adjustments for Charitable Contributions by an S Corporation. Prior to the Act, for charitable contributions in tax years beginning before Dec. 31, 2013, a shareholder in an S corporation who makes a contribution of property to a charitable organization reduces his or her basis in the S corporation stock by an amount equal to the shareholder’s pro-rata share of the adjusted basis of the contributed property. The Act extends this provision for contributions in tax years beginning before Jan. 1, 2015.

5. Bonus First Year Depreciation Extended. Subject to certain conditions, an additional first year depreciation deduction was permitted equal to 50 percent of the adjusted basis of certain property acquired and placed into service after Dec. 31, 2011 and before Jan. 1, 2014. The Act extends this bonus first-year depreciation for one year so that it applies to certain property acquired and placed into service before the end of calendar year 2014.

The impact of the Act on your tax filing position and business may be complex. For additional details regarding how the extensions provided in the Act may impact your business, please contact one of the attorney authors of this legal alert listed at right in the Tax group or your BB&K attorney.

IRS Guidance Released on the Delayed Implementation of the Affordable Care Act’s Play or Pay Rules

11 Jul 2013 00:00:00 -0800

On the heels of last week’s announcement that the Affordable Care Act’s (ACA) reporting requirements and Play or Pay penalties will not go into effect until 2015, the IRS has released transition relief clarifying that the delayed implementation is restricted solely to these provisions. The individual mandate, eligible individuals’ access to premium tax credits, the PCORI and transitional reinsurance fees, and all other ACA provisions will take effect as originally scheduled.

Providers of minimum essential coverage, such as insurance companies and self-insuring employers, are required to report certain information to the IRS each year. In addition, all large employers subject to the Play or Pay rules must provide certain information to the IRS on an annual basis. These requirements were originally scheduled to go into effect in 2014, but have been delayed one year to allow additional time for simplification of the reporting requirements and to give those required to report information additional time to prepare. Proposed rules are expected to be released this summer, and the transitional relief encourages voluntary compliance with those rules in 2014.

The information large employers must report each year makes it possible for the IRS to determine if the employer is subject to the Play or Pay penalties. Due to the delayed implementation of this requirement, the Play or Pay penalties also had to be delayed until 2015. Though the transition relief encourages employers to maintain or expand health coverage in 2014, no Play or Pay penalties will be assessed for 2014. As such, all large public and private employers that do not offer affordable coverage providing minimum value to full-time employees in 2014 will not be subject to the Play or Pay penalties if one or more full-time employees enroll in a health plan through the Exchange and receive a premium tax credit or cost-sharing reduction.

If you have any questions about the delay in the reporting requirements, the Play or Pay penalties or the Affordable Care Act, please contact John Wahlin, Isabel Safie or Allison De Tal in the firm’s Employee Benefits group, or your BB&K attorney.

Disclaimer: BB&K legal alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

New Small Business Jobs Act Offers Credit and Tax Relief

08 Nov 2010 00:00:00 -0800

President Obama recently signed the Small Business Jobs Act of 2010 into law. In addition to providing small businesses with access to much needed credit, the Act contains numerous tax incentives for acquiring and investing in small businesses.

Increased Loan Amounts

The Act dramatically increases the maximum amounts available for the U.S. Small Business Administration’s two chief guaranteed loan programs. The 7(a) loan program is commonly used to help existing small businesses and start-ups acquire financing. The maximum amount for the 7(a) loan program is now $5 million rather than $2 million. The 504 loan program is used to assist in the acquisition of fixed assets, like real estate or equipment. This program’s maximum has also been increased from $2 million to $5 million, or $5.5 million for certain manufacturing related loans.

Increased Exclusion for Certain “Qualified Small Business Stock” Gains

The Act contains eight new tax cuts, but one of the most important is the amendment of Internal Revenue Code Section 1202. The Act added language which allows non-corporate taxpayers to exclude 100% of the gain, subject to limitation, from the sale of “qualified small business stock” acquired after September 27, 2010 and before January 1, 2011 if it is held for more than five years. It further provides that the gains exclusion shall not be considered a tax preference item for the purposes of calculating the alternative minimum tax. Effectively, this also excludes such gains from the alternative minimum tax.

“Qualified small business stock” is generally stock in a domestic C corporation that is a “qualified small business” on the date that the stock was originally issued, and is acquired by the taxpayer at its original issue. In order to be considered “qualified small business stock,” the corporation must meet Section 1202’s “active business” requirements for the time during which the taxpayer has held the stock.

Increased Deduction for Start-up Expenditures

The Act also increases the amount of start-up expenditures taxpayers can elect to deduct under Internal Revenue Code Section 195 from $5,000 to $10,000 for tax years beginning in 2010. The phase out threshold was also increased from $50,000 to $60,000. Thus, the $10,000 deduction is reduced, but not below zero, by the amount which the start up expenditures exceed $60,000. The deduction must be taken in the year an active trade or business starts. The deduction must be taken in the year an active trade or business starts.

Expansion of Expensing and Depreciation

In addition to the above changes, the Act increases the amount taxpayers may elect to immediately expense for certain depreciable property placed in service during 2010 and 2011 under Internal Revenue Code Section 179. The Act also extends the availability of Internal Revenue Code Section 168(k)’s bonus depreciation deduction. It allows a deduction of 50% of the cost of “qualified property” that is acquired and placed in service during 2010, or in some cases 2011.

For more information on these and other provisions in the Small Business Jobs Act of 2010, and how they can be used to your company’s benefit, please contact your BB&K attorney or Business Transactions attorney George Reyes.

Disclaimer: BB&K e-Bulletins are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.