California Creates Two New Business Entities

By Arlen Gunner

Governor Brown recently signed two new laws which have the effect of creating two new classes of corporations in California.  These laws give for-profit corporations the ability, in certain circumstances, to engage in activities that have been traditionally reserved for non-profit organizations.  These new corporations are called the flexible purpose corporation and the benefit corporation.

The Flexible Purpose Corporation (SB201)

A flexible purpose corporation is a corporation that designates in its articles of incorporation a special purpose, which may include charitable and other public purpose activities traditionally undertaken by nonprofit public benefit corporations.

A flexible purpose corporation permits its shareholders to designate its special purpose.  The special purpose designation allows the board of directors to consider not only the best interest of the corporation and the shareholders, but also whether the corporation's actions will further its special purpose.  The flexible purpose corporation is required to prepare an annual report which measures its success in carrying out its special purpose and report all material actions taken to carry out the special purpose.  It must also prepare a current report on expenditures made in pursuit of the special purpose if the expenditures will have a material adverse impact on the flexible purpose corporation's profits.  Current reports and portions of the annual report must be made publicly available on the corporation's website.  An existing corporation or other business entity may convert to a flexible purpose corporation by a two-thirds vote, subject to dissenters' rights.

The Benefit Corporation (AB361)

A benefit corporation must adopt the purpose of creating a general public benefit, which is defined as a material positive impact on society and the environment.  A benefit corporation may also adopt a specific public benefit from a list of seven categories identified in the law.  In carrying out their fiduciary duties, directors are permitted to consider the best interest of the benefit corporation, which is deemed to include the impact on employees, customers, shareholders, the community and society, and the environment.  In making its assessment, a benefit corporation must use a third-party standard selected by the boards of directors.  This corporation type must also prepare an annual benefit report explaining, among other things, whether the corporation pursued a general public benefit, the ways in which it pursued that public benefit, and the extent to which those benefits were created, as measured by the third-party standard.  The corporation's annual benefit report must be made publicly available through its website.  Existing corporations and other business entities may convert to a benefit corporation by a two-thirds vote, subject to dissenters' rights.

Whether or not there is an advantage to using either of these new corporations will have to be determined over time.  Both laws are very detailed additions to the Corporations Code and should be thoroughly reviewed.

  

SB201 relates to the Flexible Purpose Corporation and AB361 relates to the Benefit Corporation.  Both laws go into effect on January 1, 2012.  For more information or to evaluate the pros and cons of these new corporate structure, please contact me arg@vrmlaw.com

Estate Planning Alert: Potential Changes from the Congressional Super Committee

 by Geoffrey Weg 

The Joint Select Committee on Deficit Reduction (the "Super Committee"), a 12 member bipartisan Congressional committee, is scheduled to announce its proposals on Wednesday, November 23rd for reducing the national deficit by at least $1.5 trillion over the next 10 years. While the Super Committee's proposals are technically secret until November 23^rd, rumors have begun to circulate among tax and financial advisors about possible changes to the current estate, gift and generation-skipping transfer tax laws, including a proposed early reduction of the $5 million estate, gift, and generation-skipping transfer tax exemption.  The exemption is currently set at $5 million through December 31, 2012, after which it will revert to $1 million barring further congressional action. Other rumored changes include a return to higher estate, gift, and generation-skipping transfer tax rates, imposing minimum terms on grantor-retained annuity trusts, and limiting or eliminating valuation discounts for minority interests in entities. It is possible that the Super Committee may recommend these changes to become effective as early as November 23, 2011.

Although rumors of an immediate reduction in the Federal gift tax exemption are unsubstantiated and information on specific proposals of the Super Committee is not yet available, the possibility of such a reduction has been widely discussed by practitioners around the country. Therefore, we wanted to share this information with you in the event you or your clients are considering utilizing your $5 million Federal gift tax exemption. If you or your clients are considering making any gifts in 2011, it may be advisable to complete these gifts prior to November 23rd, if possible. Additionally, you may want to consider accelerating gifts that you otherwise planned to make in 2012 to avoid any potential impact from any Super Committee proposals.

Until Congress enacts a long-term extension or reformation of the current estate and gift tax system, the rumors and speculation will persist. Rather than add to the speculation about what might happen, we note the following points and opportunities that indicate now is a good time to take advantage of the current $5 million gift tax exemption:

•  Even without any legislative action, under current law the current $5 million exemption and 35% rate will revert at the end of 2012 to a $1 million exemption and a 55% rate.
•  In recent years, the Treasury Department has consistently recommended changes to substantially reduce the effectiveness of certain widely used planning techniques, including a significant reduction in the availability of valuation discounts applicable to transfers of limited partnership interests and other minority interests in family controlled entities, and an increase in the minimum term of grantor retained annuity trusts ("GRATs') from two to ten years.
• The benchmark interest rates that are required to be used in many estate planning transactions are at historically low levels. For example, the November rate used for GRATs is 1.4%, while the November rate for annual interest paid on a short term private loans is 0.19%.
• The current volatility in the financial markets may create favorable valuations of interests in closely-held entities for transfer tax purposes.

Many observers consider a sudden adverse change in legislation unlikely.  However it would be wise to remember that the legislation implementing the current favorable structure was enacted suddenly last December without any significant public discussion, and was not anticipated by many observers.  With the current emphasis on deficit reduction, it is plausible that Congress could very quickly enact legislation that would have substantial adverse impacts on the estate and gift taxes applicable to standard wealth-transfer techniques.

Geoffrey Weg to Speak at Cal Poly Pomona Inaugural Tax Institute Seminar On October 28

Geoffrey A. Weg is a tax attorney with the law firm where he practices tax and estate planning, tax controversy, and general corporate law. He is currently on the Executive Committee of the California State Bar Taxation Section, and also the current Chair of the Taxation Section of the Beverly Hills Bar Association. He has received an LL.M. in Taxation at Loyola Law School, graduating with Distinction.

Cal Poly Pomona Inaugural Tax Institute
Date: October 28, 2011
Time: 7:30am – 5:00pm
Location: Sheraton Fairplex Hotel and Conference Center
601 West McKinley Avenue Pomona, California, 91768
To register logon to Cal Poly Pomona Inaugural Tax Institute
Or call the Accounting Department at (909) 869-2327 Mon-Fri, 9 a.m.- 4:30 p.m.
or email nsmiller@csupomona.edu

Business Alert: SB 459 Imposes New Substantial Penalties For Miscategorizing Independent Contractors

by Gregory Gorman

Many businesses seek to cut costs by categorizing employees as independent contractors. By doing so, they avoid additional employment costs such as benefits, worker's compensation and unemployment. Governor Brown recently Senate Bill 459 into law (among other employment bills) which makes employers liable for civil penalties of $5,000 to $15,000 for each violation of “willful misclassification” of employees as independent contractors. In addition, if it is found that the employer has a pattern and practice of misclassifying independent contractors, the penalties can increase to a minimum of $10,000 to $25,000 per violation. The new law adds Sections 226.8 and 2753 to the Labor Code. 

In addition to the substantial civil penalties, employers who violate the law are also required to post a notice on their website, or if the employer does not have a website they must post it in an area available to employees and the general public, for one year about the violation.

The new law also

• Prohibits the willful misclassification of workers as independent contractors to avoid properly classifying them as employees.
• Prohibits charging misclassified workers any fees or making deductions from their compensation where those acts would have violated the law if the individuals had not been mischaracterized.
• Gives the Labor and Workforce Development Agency authority to assess penalties and take other action against violators, and requires it to report violators who are licensed contractors to the Contractors' State License Board; further it requires the Contractors' State License Board, once notified, to bring an action against the contractor.
• Subjects non-lawyers who advise an employer to misclassify a worker to joint and several liability with the employer.

This new law makes it of paramount importance that employers exercise caution when characterizing workers as independent contractors.

Gregory G. Gorman Joins the Litigation Group

We are pleased to announce that Gregory G. Gorman has joined the firm. Mr. Gorman is a commercial, real estate and employment law trial lawyer who for 25 years has successfully represented numerous clients in high profile cases and multi-million dollar claims.

“I’m thrilled to be joining a team of such talented and accomplished lawyers,” said Mr. Gorman. “They’re truly a group of outstanding attorneys that not only inspire me, but most importantly, motivate me to continue to excel at law.”

Mr. Gorman has been retained as trial counsel in numerous commercial real estate and employment law cases. He uses his litigation expertise as a tool to obtain efficient results for his clients. His high-profile cases include: A jury awarded his client more than $8 million for fraud; he defeated a claim for negligent misrepresentation and breach of contract even though his client did not disclose all of the problems challenging a shopping mall; and he defeated a wrongful termination claim in which the plaintiff and defendant were having an affair.

Mr. Gorman’s business and strategic acumen is polished from years of practical experience as managing counsel of a Fortune 400 company and general counsel to several start-up and mid-sized companies. Mr. Gorman recently assisted a client through two workforce reductions and the termination of underperforming employees within the scope of the ADA, FMLA and ADEA – all without a lawsuit. He has represented both plaintiffs and defendants in wage and hour class actions.

Mr. Gorman teaches executive legal and ethical decision making, business modeling and business law in an organizational consulting doctoral program at Phillips Graduate Institute. He has been hired to train boards regarding their responsibilities and turnaround strategies.

He was recognized as a "Super Lawyer" for his work in real estate and litigation before becoming managing counsel in charge of development for Yum Brands, which owns the Taco Bell, Kentucky Fried Chicken and Pizza Hut brands, among others.

Mr. Gorman earned a Juris Doctorate from the Northwestern University School of Law in 1987 and a bachelor’s degree in journalism from Northwestern’s Medill School of Journalism in 1984.

Contact Mr. Gorman

IRS Extends Deadline for Offshore Voluntary Disclosure Initiative Through September 9, 2011

by Geoffrey Weg

Due to the potential impact of Hurricane Irene, the IRS has extended the due date for Offshore Voluntary Disclosure Initiative ("OVDI") requests until September 9, 2011. The IRS has also significantly reduced the amount of information required by the revised deadline.

For those taxpayers who have not yet submitted their request and any documents, identifying information must be submitted by September 9, 2011. This includes name, address, date of birth and Social Security number and as much of the other information requested in the Offshore Voluntary Disclosures Letter as possible.

A 90-day extension for submitting the complete voluntary disclosure package of information is available. Such requests must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them. Requests for extensions must be made in writing and sent on or before the September 9 deadline.

The experienced tax attorneys of the Valensi Rose, PLC Tax & Wealth Planning Group are available to advise any taxpayers who may have an offshore account filing requirement or who may be eligible for participation in the OVDI.

Additional Relief For Short Sellers Of Real Property

By: Arlen R. Gunner, Esq.

Numerous homeowners have found themselves in the unenviable position of having to sell their homes for less than the amount they owe. This situation is commonly called a short sale. On September 30, 2010, the California legislature provided some initial relief for short sellers who obtained the consent of the First lien holder to the short sale. The law that became effective on that day created a new Section 580(e) to the California Code of Civil Procedure which required that no judgment can be rendered for any deficiency under a note secured by a First deed of trust or First mortgage for a residence in any case where the owner sells the residence for less than the amount owed at the time of sale so long as the written consent of the lender is obtained. Once the lender gives its written consent, it must accept the net sale proceeds as payment in full, and must fully discharge any remaining indebtedness on the First deed of trust or First mortgage. An exception to this rule occurs if the borrower commits fraud or waste with respect to the residence.

This statute, although well intended, did not protect the borrower in situations where the borrower had also placed a Junior lien on the residence. To correct this problem, the legislature passed an amendment to Section 580(e) on July 15, 2011 which expands Section 580(e) to prohibit a deficiency judgment upon all notes secured by deeds of trust or mortgages which encumber a residence. In any case where the borrower sells a residence for less than the remaining amount of all loans, and at the time of the sale it has the written consents of all lenders, then no deficiency judgment can be obtained against the borrower by any lien holder. The bill also provides that when the note is not secured solely by a deed of trust or mortgage on a residence, no judgment shall be rendered for any deficiency if the borrower sells the residence for a sales price less than the amount owed in accordance with the written consent of the lenders. Additionally, the law prohibits the lender from requiring that the borrower pay any additional compensation or consideration aside from the proceeds of the short sale in exchange for the written consent of the lender.

This new Section only applies if the borrower is an individual. It is not available if the borrower is a corporation, limited liability company, limited partnership or a political sub-division of the state. Nor shall this Section apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidence of indebtedness authorized or permitted to be issued by the Commissioner of Corporations or that is executed by a public utility.

The provisions of this Section cannot be waived and any attempt to do so will be void as against public policy.

This new statute, as amended, does not change existing law where no deficiency can be obtained in connection with the foreclosure of a purchase money loan or a loan that is secured by deed of trust or mortgage that is foreclosed pursuant to a power of sale.