Boutin Jones INC., Attorneys at Law

Menu Toggle

Practices

print

New Partnership Audit Rules Require the Amendment of Existing Partnership Agreements and Operating Agreements to Avoid Future Adverse Economic Results for Partners

Practice Alert

By: Jonathan Christianson and Brian Bowen

October 2017

Under existing law, except for small partnerships, Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) partnership audits of partnerships and limited liability companies that file as partnerships (“Partnership Entities”) occur at the partnership level, but the income tax due is assessed and collected at the partner level.  As a result, audits of Partnership Entities are currently burdensome and expensive for the Internal Revenue Service (“IRS”). In an attempt to simplify TEFRA audit procedures and to streamline the collections process, Congress has enacted new rules governing partnership audits in The Bipartisan Budget Act of 2015 (the “New Rules”) which will replace the existing rules governing partnership audits for most Partnership Entities.

Audits for 2017 and before will continue to be under the old TEFRA audit rules. The new rules apply to audits of tax years beginning after December 31, 2017; that is, for partnership tax years beginning on January 1, 2018 or later. Under the New Rules, additional tax resulting from audit adjustments will be assessed and collected at the Partnership Entity level and, with certain exceptions discussed below, the Partnership Entity will be responsible for payment of any taxes and penalties that are assessed or will receive any refund that may be allowed. As a result, the tax burden or refund benefit from a prior tax year may be shifted from former partners in the year under review to partners who continue as partners at the time of the audit adjustment. For example, a person admitted as a partner in 2019 might be required to bear the tax liability resulting from an audit adjustment relating to a tax period before that person became a partner. Unless addressed in the Partnership Entity’s governing documents, potential new investors may be reluctant to become partners, especially if the entity has previously engaged in tax deferred transactions such as like-kind exchanges.

Under the New Rules, a “partnership representative” replaces the “tax matters partner” required under existing law. Unlike the tax matters partner, the partnership representative has exclusive authority to act on behalf of the Partnership Entity with respect to the resolution of an audit, including the authority to appeal an assessment or settle with the IRS or other taxing agency. The actions of the partnership representative will bind the Partnership Entity and all of the partners at the time of the assessment. Beginning on January 1, 2018, the Partnership Entity’s governing documents must identify the partnership representative. The governing documents should also specify how a successor is appointed or removed and define the scope of the partnership representative’s discretion to resolve audit issues without the consent of the partners. Decisions made by the partnership representative in connection with an audit may have significant economic effects on the Partnership Entity and the continuing partners.

A particularly vexing feature of the New Rules is that the assessment of tax at the Partnership Entity may result in the imposition of tax on individuals who were not partners during the audited year and, conversely, the avoidance of tax by partners who withdrew as partners before the assessment of additional tax. As a result, the Partnership Entity should consider whether an indemnification provision should be included in the partnership agreement so that all persons who were partners during the audited year are ultimately responsible to the IRS or the Partnership Entity for any tax liability that would have been allocated to and paid by such partners. Similarly, the partners might consider whether a former partner should be compensated for any additional loss allocation or refund that would have benefitted such former partner.

Certain Partnership Entities may elect out of the New Rules (in which case the old audit rules apply). To qualify, the electing partnership must have 100 or fewer partners, and all of its partners must be individuals, corporations, estates of deceased partners or foreign entities treated as C corporations.  If a Partnership Entity has, as a partner, another partnership, a disregarded entity, a trust or even, it appears, a revocable living trust, then the Partnership Entity is not eligible to elect out of the New Rules. The election out of the New Rules is made with a timely filed tax return for the Partnership Entity for each taxable year and includes a disclosure of the name and taxpayer identification number of each partner of the Partnership Entity. The Partnership Entity must also notify each partner of such election.  Since most Partnership Entities are owned by legal entities, disregarded entities or trusts, we expect that few Partnership Entities will be eligible to elect out of the New Rules.

Although the Partnership Entity may be unable to elect out of the New Rules, a Partnership Entity can, in some instances, “push” the additional tax liability out to the partners. To do so, a Partnership Entity must make an election within forty-five (45) days after the final notice of adjustment. If the election is made, the Partnership Entity must provide to each partner a statement of the partner’s share of the final partnership adjustment for the year of the audit. Each partner for the year of the audit is then responsible for paying tax on such partner’s share of the adjustment, which includes a higher interest charge than normally imposed. For the election to be effective, the Partnership Entity must also provide the IRS with the current address and taxpayer identification number for each partner and any former partners who were partners in the year being audited. Failure to provide current information for all such persons renders the Partnership Entity liable for the additional tax or penalties assessed. As a consequence, the partners should consider amending the Partnership Entity’s governing documents to require each partner and any former partner for a specified period to advise the Partnership Entity of any change of address or taxpayer identification number.

A Partnership Entity’s governing documents should be drafted or amended to conform to the New Rules. At a minimum, a Partnership Entity’s governing documents must identify the partnership representative and should specify the scope, authority and obligations of the partnership representative, the current partners and the former partners with respect to an audit. In addition, the partners should consider whether it is in their interest to provide an indemnification mechanism in the partnership agreement designed to match the tax benefit or liability with the partners who were partners during an audited year.

If you have any questions on how the New Rules will affect your Partnership Entity, or desire to amend your entity’s governing documents, contact a tax attorney at Boutin Jones Inc.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

 

Practices

print

If Opportunity Knocks, Are You Ready to Open the Door? Being Sale-Ready in a Dynamic Business Environment

Historically low interest rates, demographics and market dynamics have created an environment where the opportunity to sell a business has never been better.

  • In 2008, business owners who may have been looking for an exit strategy were sidelined by the recession. Now, almost ten years later, many of these businesses have rebounded and their aging owners are looking for the exit as retirement looms ever closer.
  • After a few years of robust new company formation, an entire new generation of businesses are looking to be acquired by private equity groups and strategic buyers flush with cash seeking returns by consolidating new opportunities across regions, businesses and industries.

Most business owners are so busy running their businesses that they aren’t actively looking for an exit when an investment banker or business broker calls.

According to a recent survey of mid-market businesses, 53% of sellers are currently involved in or open to considering a sale in 2017 compared to only 34% in 2016. Even if you weren’t thinking about selling your business, your competitors might be. If you don’t answer the call, they might and there may not be a second chance. That call might be your first, last and best opportunity to maximize the value of your business.

Get Sale-Ready

If you get that call, would you be ready to sell? Fortune favors the well prepared, so being in a sale-ready state will allow you to take advantage of these opportunities when they arise. That state of readiness doesn’t happen overnight.

A recent survey showed that 37% of mid-market businesses considered themselves unprepared or neither prepared nor unprepared for sale. The flip side means that 63% of these businesses considered themselves prepared. As momentum shifts towards a buyer’s market, being prepared for sale can be the difference between success and failure.

Building your business into a sale-ready state will permit you to answer the door if opportunity knocks. It will also force you to focus on not only what drives the business but also what drives value in the business.

Assemble the Team

With a little advance planning, making your business sale-ready is a manageable task. The first step is assembling your team of key advisors—accountants, attorneys, tax advisors and financial planners. The goals should be to understand:

  • the sale process,
  • what your business will look like to a buyer,
  • steps you can take to increase the potential sales price for your company, and
  • how deal structures can impact how much you’ll be able to keep after the sale.

Engaging with your key advisors to model the potential outcomes can help set expectations appropriately and guide you to make any structural changes that could have a significant impact on your financial outcome if undertaken far enough in advance of any anticipated sale.

Confidentiality is key. The team must be made up of those you can trust to keep the process confidential. Revealing too early that you may be planning for a sale could send key employees packing or give valued customers a reason to go elsewhere.

Conduct Self-Diligence

A big piece of the sale process is the due diligence investigation conducted by the buyer and their advisors. That process will examine in excruciating detail all aspects of your business from finances to business processes to structural and legal matters. Your goal is to make sure the due diligence process goes as quickly and smoothly as possible, and does not reveal any deal-breaker issues.

Financial statements (and everything that goes into them) will be a prime target for scrutiny. Have they been prepared in accordance with GAAP? Are they compiled, reviewed or audited by a CPA? Have revenues and expenses been accounted for properly? Your company’s financials will form the basis for determining the value of your business. With advance work, policies and procedures can be implemented to increase their accuracy.

Ownership structure will be another key focus area. Are there any:

  • areas of dispute or uncertainty regarding ownership?
  • messy situations with former owners or departed employees?
  • promises or agreements regarding equity ownership that haven’t been resolved?

Key contracts are another area that can have a big impact on a sale. Are they assignable without the consent of the counterparty? Are long term contracts nearing expiration? Is there a new lease negotiation coming up in the near future?

Other areas that should be reviewed well in advance of a sale process include:

  • employment contracts and policies;
  • commercial credit arrangements;
  • pending or threatened disputes or litigation;
  • licensing and regulatory matters; and
  • intellectual property infringement issues.

With advance planning, all of these items can be reviewed and addressed in an orderly fashion and with a view to being able to deliver a thriving and stable business to a buyer with minimal delay and disruption and no post-closing surprises that could require you to forfeit a portion of the purchase price.

Preparing for Due Diligence

A prospective buyer’s due diligence investigation will require the review of a host of documents and business records. This usually means scanning and sharing pdfs of critical records and documents.

Collecting these documents and being prepared to make them available to a prospective buyer, their advisors and your advisors can be time consuming and disruptive. Often the flurry of activity required to respond to due diligence can tip off employees that something big might be in the works.

If key records and documents can be collected well in advance, it’s usually far less expensive and much less disruptive to the business. Many advisors, such as law firms, business brokers or accounting firms, can provide access to a virtual data room to allow you to upload these documents to a confidential and controlled site so they can be shared with one or more prospective buyers and their advisors without having to make and deliver physical copies or permit numerous on-site visits to inspect them.

Plan for Tomorrow Today

Even if you aren’t thinking about a sale in the near future, engaging in some thoughtful pre-planning is still wise. Market conditions, a health crisis or loss of a key employee, supplier or customer may force a decision sooner than desired. Engaging early will give you the time and information to preserve and enhance the value of your business so you have the choice to open that door when opportunity knocks.

You may find that, whether or not you sell your business, changes and improvements that you make as a result of the preparation-for-sale process increase the value and profitability of your company.

Contact Dennis Michaels or any of the attorneys in our corporate, tax or estate planning groups to begin planning for tomorrow today.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

Practices

print

California Supreme Court Decision on Documentary Transfer Tax

On June 29, 2017, the California Supreme Court held in 926 North Ardmore Avenue, LLC, v. County of Los Angeles, “Section 11911 [of the Revenue and Taxation Code] permits the imposition of a documentary transfer tax whenever a transfer of an interest in a legal entity results in a change in ownership of real property within the meaning of section 64, subdivision (c) or (d), so long as there is a written instrument reflecting a sale of the property for consideration.” So, whenever there is a change in control of an entity owning California real property or an original co-owner rule change in ownership of an entity owning California real property, documentary transfer tax applies, “so long as there is a written instrument” reflecting the sale of the interest in the legal entity for consideration.” In this case the written instruments were “six limited partner transfer and substitution agreements.”

The decision emphasizes the term “written instrument.” The statute refers to “each deed, instrument, or writing.” It is possible for a partnership interest, an LLC membership interest or a corporate stock transfer to occur without a written purchase and sale, transfer or substitution agreement, but the partnership agreement, LLC operating agreement and corporate stock register, respectively, would need to be updated to reflect the transfer of the partnership interest, membership interest or corporate stock. It remains to be seen whether in a case involving an oral transfer agreement a court would hold the update to the partnership agreement, LLC operating agreement or corporate stock register constituted a “written instrument.” We certainly know the counties and cities will take an affirmative position.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

Practices

print

Boutin Jones Welcomes New Shareholder

Jim McNairy has joined Boutin Jones as a new shareholder. Jim’s practice focuses on employment and business litigation, with a particular emphasis on protecting and enforcing intellectual property rights. He represents a wide range of companies and has been very effective in achieving excellent results, including never failing to obtain injunctive relief after initiating suit to help prevent unauthorized disclosure or use of client trade secrets. He is a graduate of the University of the Pacific, McGeorge School of Law.  

James D. McNairy      |       jmcnairy@boutinjones.com      |       916.321.4444

 

 

 

 

 

McNairyJ_eleakis205410-002

McNairyJ_eleakis205410-crop

Practices

print

LLCs Take Note: An Individual Who is Not a Manager or a Member Can Bind Your Company in Contract

In Western Surety Co. v. La Cumbre Office Partners, LLC, 8 Cal. App. 5th 125 (Cal. Ct. App. 2d Dist., Feb 2, 2017), a limited liability Company was subjected to claims for $6.07 million under an indemnity agreement even though the agreement was signed by an individual with no authority to bind the LLC and the agreement bore no relationship to the LLC’s business. The court determined that third parties benefit from a statutory safe harbor whereby an agreement is binding on an LLC even if the “manager” signing has no authority to sign, as long as the third party does not have actual knowledge of the manager’s lack of authority. Further, the court stated that third parties have no duty to conduct due diligence to ensure a signer is in fact an authorized signer.

Background:

La Cumbre Office Partners, LLC, a California limited liability company (the LLC), was managed by Melchiori Investment Companies, LLC (the Sole Manager). Mark Melchiori (Melchiori) was the managing member of the Sole Manager and the president of a separate corporation named Melchiori Construction Company, Inc. (Construction).

The purpose of the LLC was to hold and operate a single medical office building. The purpose of Construction was to engage in the construction business. Melchiori signed an indemnity agreement covering Construction’s projects. Even though the LLC received no benefit from, and had no relation to, the bonds underlying the agreement, the agreement included a signature block for the LLC to sign as an indemnitor. Melchiori signed the agreement in his individual capacity as the “managing member” of the LLC. Melchiori had no authority to sign the agreement and the agreement was not approved by any of the members of the LLC or by the Sole Manager.

The underwriter for the surety that prepared the agreement did not undertake any due diligence to determine whether or not Melchiori was authorized to sign the agreement on behalf of the LLC. Melchiori testified that when he signed the agreement he did not notice that he was signing on behalf of the LLC as its managing member, or that the LLC was listed as an indemnitor. He also testified he had no idea why the LLC was named as an indemnitor.

Construction defaulted on the contracts and the surety paid claims guaranteed under the bonds totaling $6.07 million. When the LLC refused to reimburse the surety for any of its losses or expenses, the surety filed a claim against the LLC.

Court’s Findings:

Despite the LLC receiving no benefit from, and having no relation to, the bonds, and despite the fact that an individual without any legal authority signed on behalf of the LLC, the court found that the LLC was bound by Melchiori’s signature on the agreement.

The court’s decision was based on Section 17157(d) of the California Corporations Code which provides as follows:

[A]ny… contract… or other instrument in writing… executed or entered into between any limited liability company and any other person, when signed by at least two managers (or [as here] by one manager in the case of a limited liability company whose articles of organization state that it is managed by only one manager), is not invalidated as to the limited liability company by any lack of authority of the signing managers or manager in the absence of actual knowledge on the part of the other person that the signing managers or manager had no authority to execute the same.1

This rule provides third parties with a statutory safe harbor whereby a written contract signed by an LLC’s manager is valid, even if the manager, without the knowledge of the third party, did not have authority. The court noted that the LLC did not claim that the surety had actual knowledge that Melchiori lacked authority to sign on behalf of the LLC. Thus, pursuant to the statutory rule, the LLC would be bound by the Agreement if it was found to have been signed by the LLC’s manager.

The LLC argued that the LLC’s manager did not sign the Agreement because the LLC’s manager was the Sole Manager, not Melchiori. The court found that a similar statutory rule applies to corporations. A prior case interpreting the rule held that corporate officers who sign on behalf of a corporation are not required to specify the office or offices they hold with their signature for the statute to apply, provided the signer is the person he or she is statutorily required to be (e.g., a president and CFO or secretary). In light of that case, the court found that had Melchiori signed his name without any official position, the LLC would have been bound by the agreement. Thus, the fact that the agreement mistakenly designated Melchiori as the managing member was a distinction without a difference. The actual manager of the LLC was a legal entity and therefore could sign the agreement only through the signature of a natural person. The natural person authorized to sign on the Sole Manager’s behalf was its managing member, Melchiori, and Melchiori did, in fact, sign the agreement. Therefore, the LLC was bound by the agreement despite the mistaken identification of Melchiori individually as its sole manager.

Lastly, the court found that whether a third party exercises due diligence to ensure a signer is in fact an authorized signer is irrelevant. The statutory rule does not require due diligence by third parties.

Does the LLC Have Recourse?

The LLC could sue Melchiori in his individual capacity for losses to the LLC sustained as result of his negligence or breach of fiduciary duty. However, any recovery would necessarily damage the relationship between the LLC and its manager and any recovery would be limited to the extent of Melchiori’s personal assets or insurance coverage, if any.

The Right Result?

This case appears to support the ability of a person (any person) to sign an agreement as the manager of a limited liability company (any limited liability company), causing the limited liability company to be legally bound in contract. This doesn’t seem like the right result. The court’s decision did not address two defenses the LLC might have made in this case: Without the LLC receiving any value or benefit by entering into the indemnity agreement, there wasn’t any legal consideration supporting the contract as between the surety company and the  LLC. Without consideration, there is no binding contract. Further, because Melchiori testified he didn’t notice he was signing on behalf of the LLC, an argument based on the defense of mistake also might have avoided this result. Because the court did not discuss these defenses, it appears they were not raised by the LLC in the litigation. Perhaps the court would have come to a different result had these defenses been asserted by the LLC.

A petition for review by the California Supreme Court has been filed in this case by the LLC. This Article will be updated to reflect whether review was granted and, if so, the end result. Nevertheless, the court’s decision currently stands and presents a risk for limited liability companies.

How Can a Limited Liability Company Avoid this Scenario?

A limited liability company could expand the indemnification provisions in its operating agreement to make the manager of the limited liability company liable for losses resulting from the negligence of its officers or agents. Since Melchiori was an officer of the Sole Manager, such a provision could have been relied upon by the LLC to seek recovery of the $6.07 million from the Sole Manager. However, such a provision would be unusual, in that most operating agreements contain provisions aimed at limiting the liability of the manager of the limited liability company. It may be difficult to find an entity that would be willing to serve as the manager if you insist on including such a provision in the operating agreement of your limited liability company.

Perhaps the better course of action is to take measures designed to ensure that this scenario never applies to your limited liability company. For example, you may wish to communicate the findings of the Western Surety case with the members, managers and officers of your limited liability company. Remind those who regularly bind your limited liability company to be vigilant about what agreements they are signing and whether they are being executed properly on behalf of your limited liability company. All material agreements should be reviewed by counsel to your limited liability company before they are signed.

We’re here to help. Please contact Andrea Bacchi, Iain Mickle or any other member of the Boutin Jones Corporate and Securities Group if you have any questions regarding this article.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

1    Even though this case was governed by the older LLC law, the Beverly-Killea Act, the court pointed out that identical language is contained in Corporations Code section 17703.01(d) of the California Revised Uniform Limited Liability Company Act, the current law governing LLCs formed on and after January 1, 2014.

 

Practices

print

M & A Engagement Letters - Don't Get Stung by the Success Fee

You’ve decided to sell your company, and you’ve engaged a financial advisor to find a buyer. The financial advisor sends you its standard form of engagement letter, and you sign it. Agreeing to pay the financial advisor a commission based on the sales price seemed reasonable at the time.

The engagement letter contains the following provisions (based on an actual engagement letter):

“Success Fee:  If, during the term of this agreement, the Company consummates a sale of stock or assets, the Company agrees to pay financial advisor in cash at the closing a success fee

in the amount of $225,000 plus three percent (3.0%) of the Selling Price.

“Selling Price” means the sum of the fair market value of any consideration received by the Company and/or its owners including:

(a)  Cash, notes and/or other securities from the purchaser, plus

(b)  The fair market value as of the closing of any assets including cash, other working capital and any other assets, less liabilities retained by the Company or distributed to its owners, plus

(c)  Any interest-bearing debt of the Company as of the closing that is assumed by the purchaser or is satisfied by the Company and/or its owners as of the closing; plus

(d)  Any contingent payments, noncompete agreements, consulting agreements, employment contracts and other forms of remuneration associated with the transaction received by any of the owners of the Company.”

Congratulations, We’ve Got a Deal!

A buyer for your company is found and a deal is consummated! The agreement calls for the purchase and sale of all of the outstanding stock of your company for an aggregate purchase price of up to $15 million, consisting of $10 million paid on the closing date and $5 million in the form of an earn-out (i.e., payment is contingent on the achievement of certain financial milestones after the closing).

  • Of the $10 million payable at closing, $5 million is payable in cash and $5 million is payable pursuant to a five-year promissory note.
  • Of the $5 million of cash payable at closing, $1.5 million is deposited into an escrow account to be used to satisfy the sellers’ indemnification obligations.
  •  The agreement requires the company to have at least $1.5 million of working capital on the closing date and requires the sellers to pay off a $1 million outstanding line of credit.
  • You and the other three owners of the company are each given an employment contract by the buyer that provides for a base salary of $250,000 per year.

The success fee is due and payable at closing

At the closing, the financial advisor determines the Selling Price to be $18.5 million, consisting of:

  • $15 million (the cash deemed to be received by the sellers at the closing plus the principal amount of the seller note); plus
  • $1.5 million (working capital required at closing); plus
  • $1.0 million (line of credit paid off at closing by the sellers); plus
  • $1.0 million (the deemed value of the employment contracts to the four sellers).

Accordingly, at closing the financial advisor receives $225,000 plus three percent of $18.5 million, for a total success fee of $780,000.

Unfortunately, things don’t work out as anticipated

As it turns out, the buyer was in over its head and didn’t understand your industry. It files for bankruptcy and defaults on the $5 million seller note. Before filing for bankruptcy, however, the buyer is successful in obtaining indemnification payments for the full escrow amount of $1.5 million. Needless to say, the earn-out milestones are not achieved, so neither you nor the other sellers receive any of the $5 million earn-out. In the end, you paid a success fee based on a “Selling Price” of $18.5 million but only received $2.5 million after paying off the $1 million line of credit. (You shake your head at the concept of paying a commission on debt that you pay off. That’s just crazy, you think.)

Had you paid a success fee based on what you and the other sellers actually received, it would only have amounted to $300,000. In hindsight, you overpaid the financial advisor by $480,000, or 160%. You’ve been stung by the success fee.

How to avoid being stung by the success fee

As this example illustrates, it is critical to get advice from experienced counsel before you engage a financial advisor for the sale of your business. To avoid being stung by a success fee in an M&A engagement letter:

  • Don’t sign any engagement letter until you’ve had it reviewed by your legal counsel and you’ve had an opportunity to discuss its terms with your counsel.
  • Limit any success fees based on an earn-out to earn-out amounts actually received;
  • Don’t include assumed debt in the definition of sales price upon which the success fee is based (after all, the assumption of the debt was factored into the purchase price);
  • Don’t agree to pay a commission on debt you pay off;
  • Exclude ancillary items from the definition of sales price, such as payments for consulting or employment agreements (after all, you need to perform services to receive those payments);
  • Only pay a success fee based on amounts in an escrow account if you actually receive those amounts;
  • Ensure the success fee structure incentivizes the financial advisor to secure the most favorable economic terms (such as by using a progressive fee structure where the fee percentage increases the higher the sales price); and
  • Ensure the minimum fee, if any, is not structured to disincentivize the financial advisor from seeking the best price for the transaction.

We’re here to help. Please contact Iain Mickle or any other member of the Boutin Jones Corporate and Securities Group if you have any questions regarding this article.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

M&A Engagement Letters - Don't Get Stung by the Success Fee (PDF)

Practices

print

Is Tax Reform Coming?

Tax reform is a real possibility in 2017 now that the Republicans control the U.S. Senate, the U.S. House of Representatives and the White House. While it is too early to know for sure what tax reform will look like, it is expected that any tax reform will be a mix of the proposals set forth by the House Republicans in their “A Better Way” proposal (the “House Plan”) and the proposals set forth by President Donald Trump on his website (the “Trump Plan”).

It is not certain what process the Republicans will use to pass tax reform. Tax reform can be accomplished through regular order or budget reconciliation.  To avoid a possible filibuster, the Republicans could pass tax reform using the budget reconciliation process.  If tax reform is accomplished through reconciliation, then the tax reform will not have the support of the Democrats.

The attached table compares some of the key points in the House Plan, the Trump Plan and the current tax law.

2017 Tax Reform Table

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

2017 Tax Reform Table

Article: Is Tax Reform Coming? (PDF)

Practices

print

Announcing New Shareholders

Shareholder Announcement 2017

Bashar Ahmad, Jarrod Burch, and Kimberly Lucia

Shareholder Announcement 2017

Practices

print

Year End Reminders for Tax and Estate Planning

The last months of the year are often hectic and it is easy to overlook important deadlines. Below are a few items to keep in mind as the new year approaches:

IRA Required Minimum Distributions and Qualified Charitable Distributions by December 31

Retirement funds in an IRA, SIMPLE IRA, or SEP IRA cannot be kept indefinitely. If you have reached the age of 70½, you must withdraw from your account a minimum amount each year called the “required minimum distribution” or “RMD.” This RMD amount is calculated annually based on the year-end balance of the previous year.

You are not required to take your first RMD until April 1 of the year after you turn 70½. Thereafter, each RMD must be taken by December 31. The penalty for failure to take an RMD is a 50% excise tax on any undistributed portion of the RMD.

The RMD received by the account holder is taxable income. Recent legislation has now made permanent the “Qualified Charitable Distribution” (or “QCD”) which many individuals used to incorporate charitable giving into their tax and estate planning. In using a QCD, the account holder directs the IRA administrator to pay the RMD amount directly to a charitable organization (but not a private foundation or donor advised fund). By using the QCD, the account holder satisfies the RMD withdrawal requirement, avoids recognizing any taxable income, and supports a charity of his or her choice. Making a QCD can be as simple as a one-page letter sent to the IRA administrator.

Annual Exclusion Gifts by December 31

In general for 2016, a person can give away up to $5.45 million in assets (during life or upon death) before an estate or gift tax is imposed. One major exception is that a person may give up to $14,000 to any individual without the gift counting against the $5.45 million exemption amount and without being required to file a gift tax return. These $14,000 gifts are often referred to as “annual exclusion gifts.”

Many individuals use annual exclusion gifts to transfer large amounts of assets over time to reduce estate tax exposure in the future. The gifts can be made directly to an individual or to a trust established for the benefit of one or more persons. The deadline to make annual exclusion gifts is December 31 each year.

Please contact Kent Silvester, Stuart List, or Stacey Brennan if you have any questions regarding this article.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

Practices

print

Federal Court of Appeals Rules in Favor of Enforcing Arbitration Agreements

The Ninth Circuit Court of Appeals, which handles appeals from all California federal courts, recently delivered a blow to Uber drivers seeking to maintain a class action lawsuit against the ride-sharing company. In Mohamed v. Uber Technologies, Inc., the Court held that the arbitration agreements signed by drivers at the outset of their relationship with Uber were largely enforceable.  The Court reversed an earlier ruling by the district court judge that found the agreements to be unconscionable. The Court found that the issues highlighted by the district court judge were “artificial.” The Court also found that the agreements’ opt-out provision provided drivers with an appropriate method to choose not to be subject to arbitration if they desired to maintain their right to bring class-action claims.

Although the ruling is largely a win for companies seeking to enforce arbitration agreements, the court also affirmed, consistent with California law, that the drivers’ claims brought under the California Private Attorneys General Act (PAGA) were not subject to arbitration. PAGA allows employees to sue employers, on behalf of the state, to receive civil penalties for violations of labor and safety laws.  This means that Uber and other employers are still vulnerable to PAGA claims in state and federal courts, notwithstanding otherwise enforceable arbitration agreements.  However, the overall effect of this ruling is that the majority of the drivers’ claims must be determined on an individual basis in front of an arbitrator, which is generally a speedy and less costly alternative to class-action litigation.

Please contact Mike Chase if you have any questions regarding this article.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.