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Net Operating Loss Utilization Under Scrutiny and Risk of Audit

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Latest legal news and recent law changes.

Net Operating Loss Utilization Under Scrutiny and Risk of Audit

A business may generally deduct legitimate losses from its taxable income to reduce its tax due to the state and federal government. However, sometimes these losses are greater than income, and thus is called Net Operating Loss (“NOL”). Though obviously not a great sign for company longevity, NOL can still be utilized as a valuable asset for mergers and acquisitions because, if done correctly, a profitable company may merge with a non-profitable company with a NOL, and use the losses of the newly acquired company to offset its own profits, thus reduce its tax. Typically, NOL’s cannot be carried back, meaning that that a business suffering loss in one year cannot deduct them from previous years’ profits, only future years. However, the CARES Act of 2020 permitted net operating losses from some businesses from 2018, 2019, and 2020 to each be carried back for five (5) years each. Due to this allowance, the IRS refunded a total of $17.4 billion to 12,119 corporate taxpayers claiming this benefit through from March 27, 2020, to March 31, 2021. 

While internally reviewing submissions by the SE Division and the LB&I Division, the Inspector General found that 62.5% of the SB/SE Division allowances were incorrect as well as 33% of the LB&I’s Division, thus requiring refund in taxable reductions. The Inspector General has advised that the reasoning behind these errors is because the IRS has not change its examination plans and methodology to address the expanded carryback provision afforded by the the CARES Act, thus they were using outstated methods to process the forms. Despite its redactions, the Inspector General’s report still reveals a vital weakness for the IRS that can be resolved by comparing line 14 of form 1139 and assuring it reflects line 29a of Form 1120. A simple computer program would be capable of checking all Forms 1120 and 1139. A sinply computer program should be able to suffice, but perhaps not due to the 60-year-old state of its computer infrastructure. However, the IRS is set to received a $25,326,400,000 allocation for operations support, including information technology development, thus all companies who have utilized NOL in a merger and acquisition should prepare themselves for a potential audit. 

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The Burton Law Firm Welcomes Connor Deleuze as an Attorney

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Latest legal news and recent law changes.

The Burton Law Firm Welcomes Connor Deleuze as an Attorney

California has one of the lowest bar passage rates in the United States of America. For July 2022, only 52.4% of applicants passed the California Bar Exam [Source]. As such, we are proud to announce that our former Summer Associate and Law Clerk, Connor Deleuze has passed the July 2022 California Bar Exam, and now joins our team as our newest associate attorney.

Congratulations Connor Deleuze!!! We are proud of you and look forward to the great talent, enthusiasm, and hard work you bring to the Burton Law Firm.

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More Reporting for a Smaller World: US Entities will be Forced to Higher Annual Reporting Standards

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Latest legal news and recent law changes.

More Reporting for a Smaller World: US Entities will be Forced to Higher Annual Reporting Standards

As one is reminded upon every gasoline station visit, events on the other side of the world impact our lives. The Financial Crimes Enforcement Network (FinCEN) explained in its 99-page report to the Federal Register that its reporting regime is, in part, a response to the Russian invasion of Ukraine. FinCEN alleged that Russian actors have been using shell companies worldwide to evade sanctions. The well-publicized confiscation of Viktor Vekselberg’s 255-foot luxury yacht embedded in shell companies was given as an example. According to FinCEN, the United States is particularly vulnerable to this abuse due to an American reporting regime that is both decentralized and nearly anonymous. A business entity must be registered with the state when formed with varying disclosure requirements.

At least four states (Delaware, Nevada, New Mexico, and Wyoming) market themselves for LLC formation partially through the anonymity they afford. This will be impossible within a few years concerning the federal government. Entities formed before 2024 must file a report by January 1, 2025. Entities formed after 2023 must file their report within 30 days after formation. Any change in the reported information must be disclosed in an updated report within 30 days of the change.

The report identifies the reporting company and each “beneficial owner.” The term “beneficial owner” includes holders of at least 25% of the company’s equity and individuals with “substantial control” over the company, such as a senior corporate officer. An image of a document, such as a passport, must be submitted for each beneficial owner. Specifically, the image must be of a government-issued document used for identification with a unique identifying number must be submitted. Each report will be nonpublic, but the mechanics of government access have not been determined.

There are nearly two dozen types of entities that are exempt from these reporting requirements, usually because they are subject to different reporting requirements, such as publicly traded corporations. However, small businesses are targeted for returns through an exemption for large operating companies. A “large operating company” is an entity with a physical office in the U.S., 20 full-time employees in the U.S., and a tax return demonstrating more than $5 million in gross receipts.

Despite assurances to the contrary by commentators, “FinCEN intends that the reporting requirement will be accessible to the personnel of reporting companies who will need to comply with these regulations and will not require specific professional skills or expertise to prepare the report.” FinCEN estimates that most initial reports will cost $85.14. The proverbial fine print reveals an estimated range of $85.14 to $2,614.87 for each initial report and $37.84 to $560.81 for the annual report. The total reporting cost is estimated to be $22.7 billion for the first year and $5.6 billion annually after that, requiring 126.3 million hours and 35 million hours, respectively, affecting 32.6 million and 5 million companies. The penalty for willfully filing false information or for willfully failing to file is a fine of up to $10,000 and 2-years imprisonment with a civil penalty of $500 per day of violation.

If you have question or concerns about how these new reports may affect you or your business, please contact the Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

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The Good News of Inflation

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Latest legal news and recent law changes.

The Good News of Inflation

Inflation, aka increased prices on the items and services we all need and desire is bad news, right? Well, bad news and good news are usually intertwined when tax law touches reality, and inflation is no different. The Internal Revenue Service published its annual inflation adjustment to over 300 different thresholds and limitations across more than 60 tax provisions for the following year. On average, figures increased by approximately 7%. The exact increase varies with the rounding rules. The unified credit against the estate and gift tax increased to $12,920,000 for individuals, with a $1,720,000 increase for married couples, with a total of $25,840,000. For historical context, the individual increase of $860,000 is over 27% more than the 2001 total individual exemption. The annual gift exclusion increased from $16,000 to $17,000. Due to the combination of rounding rules (to the nearest $1,000) and previously low inflation, the annual gift exclusion was not adjusted for 2022. This announcement does not include changes to Individual Retirement Accounts (IRAs) or deferred compensation plans such as a 401(k) plan. However, the health flexible spending arrangement (FSA) contribution limit increased from $2,850 to $3,050, and the maximum carryover limit increased from $570 to $610. SO, there is good news from inflation; however, it can still harm the taxpayer by increasing specific penalties despite these benefits.

The personal income tax rates and long-term capital gains tax rates operate independently and differently. While individual income tax rates work on a marginal basis based on income, capital gains tax rates function categorically based on total income. As such, the first $11,000 of ordinary taxable income is taxed at 10% regardless of total income. So, whether the taxpayer is a high-net-worth individual or only has $11,000 of taxable income, their tax on the initial $11,000 will be the same. In contrast, the long-term capital gain rate for  individuals depend on total income. Thus it would then be 20% high-net-worth individuals, and 0% for those who make $11,00 or less, based on total income. In other words, different taxes treat income very differently. Therefore, inflation could be quite helpful…or it could be immaterial.

The updated Personal Income Tax Table and Capital Gains Table is below:

Personal Income Tax Table

Tax Rate

Single

Married Filing Jointly

37% over

$578,125

$693,750

35% over

$231,250

$462,500

32% over

$182,100

$364,200

24% over

$95,375

$190,750 

22% over

$44,725

$89,450

12% over

$11,000

$22,000 

10% at or under

$11,000

$22,000 

 

Capital Gains

Tax Rate

Single

Married Filing Jointly

20% if income is over

$492,300

$553,850

15% if income is at or under

$492,300

$553,850

0% if income is at or under

$44,625

$89,250

If you have question or concerns about how to maximize your tax efficnetcy, please contact the Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

 

 

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California May Owe Pedestrians $1,000.00

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Latest legal news and recent law changes.

California May Owe Pedestrians $1,000.00

California is adding a $1,000.00 carrot with its bundle of sticks in the State’s efforts fight pollution. Recently, the legislature passed SB 457, which may give pedestrians a sizable refund. This change comes after California recently made national news for passing legislation that phases out new gasoline-fueled cars by 2035, and will soon vote on whether to tax multimillionaires an additional 1.75% to fund environmental safety. This new law provides a $1,000 refund for tax years 2023-2027, through the Franchise Tax Board, for households that satisfy two conditions.

First, the household must not own a vehicle that “is required to be registered with the Department of Motor Vehicles” and is not “moved exclusively by human power.” As such, surprisingly, even fully electric cars are exempt from this tax credit. Second, the household must not have gross income which exceeds $60,000 for spouses filing joint returns, or $40,000 for those filing as individuals. It is unsure how many individuals will qualify for this refund. Of note, Governor Newsom’s has not yet signed or vetoed the law as of the date of this posting; however, if no action is taken by September 30, 2022, SB 457 becomes law.

Want to know if you qualify? Contact the Burton Law Firm at 916-822-8700 or info@lawburton.com and schedule a consultation.

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California’s “Pet Project” Becomes Law

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Latest legal news and recent law changes.

California’s “Pet Project” Becomes Law

On September 2, 2022, Governor Newsom signed SB 971 into law, therein adding new Section 50466 to the Health and Safety Code. The law guarantees tenant’s rights to own “one or more common household pets within the resident’s dwelling unit” to prevent discrimination against domesticated pet-owning tenants by landlords. It applies to landlords receiving subsidies from the California Department of Housing and Community Development or certain low-income housing tax credits. The legislature advises that the law was necessary because “[a] majority of Americans consider their pets to be family members and nearly three-fourths of renters have pets[.]” Applicable landlords cannot require pet rent, prohibit pet breeds, or have pet weight limits. Landlords can, however, require a pet deposit for potential damages.

Per the statue, the new law only applies to “common household pet[s]” defined as “domesticated animal, including, but not limited to, a dog or cat, that is commonly kept in the home for pleasure rather than for commercial purposes.” Thus, it is likely to be broadly interpreted. The expressly allows “one or more common household pets” and does not provide clarification on just how many pets are allowed; however, it must assumable be on a objectively reasonable standards as Section 50466 also does not affect state laws or local ordinances relating to “public health, animal control, and animal anticruelty, or other statutes or laws that require reasonable accommodations to be made for an individual with a disability who maintains an animal to provide assistance, service, or support.”

Section 50466’s effective date is January 1, 2023. However, pets must be permitted for housing developments funded through the Zenovich-Moscone-Chacon Housing and Home Finance Act since January 1, 2018. Ultimately, approximately 352,000 households are expected to be impacted. The mechanism for enforcement are not mentioned; however, the Department of Housing and Community Development has a preexisting enforcement process that can begins with a complaint to ComplianceReview@hcd.ca.gov. The Department can also help landlords comply with this and other housing law provisions by emailing ComplianceReview@hcd.ca.gov, or the Burton Law Firm can also assure landlords are compliant with this law and several others unique to California.

For more information, please call 916-822-8700 or email info@lawburton.com.

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Operating A 501(c)(3) During an Election Year

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Latest legal news and recent law changes.

Operating A 501(c)(3) During an Election Year

As elections are near, it is important for 501(c)(3) organizations to remember that they must adhere to numerous rules if they choose to engage in non-partisan activities. Developing an internal policy for staff to reference during election season can help to ensure that your 501(c)(3) organization maintains its tax-exempt status. Although a 501(c)(3) organization’s exempt purpose may be political in nature, by law, none of its staff time or resources may be used for partisan political activities or purposes (i.e., to support or oppose a political party or candidate running for public office). Even a suspected violation of this law can result in costly investigations and may even cause the loss of such organization’s tax-exempt status. In addition to losing its tax-exempt status, the 501(c)(3) organization may be subject to severe excise taxes on spending deemed to be political expenditures. Consequently, it is crucial that each 501(c)(3) organization provide clear guidance to its governing body, staff, volunteers, and any other individuals who work for the organization.

Below are some of the more common political activities a 501(c)(3) organization should avoid:

  • Contributing to a political campaign fund;
  • Making Statements (verbal or written) that favor or oppose candidates of a political party
  • Posting a website hyperlink to a specific candidate’s website

Determining whether a violation has occurred is on a case-by-case basis and is very fact-specific. Also, there are several non-partisan activities a 501(c)(3) organization is allowed to engage in. For example, a 501(c)(3) organization may engage in any of the following activities:

  • Take a public stance upon a political issue, including ballot measures, so long as they do not suggest a preference for any candidate.
  • Host a debate between candidates, so long as all of the candidates are treated equally and fairly.
  • Encourage people to vote, so long as the 501(c)(3) doesn’t tell them who to vote for.

Lastly, although the 501(c)(3) organization may not engage in partisan political activities, it is important to remember that individuals who work for the 501(c)(3) are not prohibited from supporting or opposing candidates in their personal capacity separate from the organization, so long as they do not use 501(c)(3) resources. However, each organization should have detailed specific policies and procedures established to clearly distinguish between activities individuals undertake in the name of the organization and activities individuals take separate from the organization.

For a sample 501(c)(3) election policy, check out:

https://bolderadvocacy.org/wp-content/uploads/2022/01/Sample-Election-Season-Policy.pdf.

Additionally, if you would like more information on navigating the permissible activities a 501(c)(3) may conduct during an election year, please contact the Burton Law firm at: 916.822.8700 or email info@lawburton.com.

 

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Inflation Reduction Act of 2022

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Latest legal news and recent law changes.

Inflation Reduction Act of 2022

H.R.5376, better known as the Inflation Reduction Act of 2022 (“Act”), was signed by President Biden on August 16, 2022, after narrowly passing in the House of Representatives on August 12, 2022 and in the Senate on August 7, 2022. [Congress.gov].

Although less than 6% of the Act’s text, the Act’s tax provisions will have a national impact equal in scope to the Act’s separate impact on the healthcare and energy industries for the next decade. There are three key tax components to the Act: The corporate minimum tax, the stock excise tax, and Internal Revenue Service (“IRS”) funding.

Corporate Minimum Tax

The Act provides a minimum corporate tax of 15% levied upon corporations with net income over $1 billion. This “Adjusted Financial Statement Income,” will begin with the net income reported to the Securities and Exchange Commission. As such, infamous corporations that avoided the federal income tax despite billions of dollars of income [e.g. CNBC], will collectively pay billions in taxes. The tax takes effect after December 31, 2022.

Stock Excise Tax

The Act also introduces an excise tax of 1% of the fair market value of stocks repurchased by corporations. Unlike the corporate minimum tax, there is no income threshold to incur this tax. The tax is applicable only to publicly traded corporations excluding contributions to retirement accounts, pensions, and employee-stock ownership plans (ESOPs). This tax takes effect after December 31, 2022.

Expected Internal Revenue Service Increased Funding

The Act also increases funding to the IRS by almost $80 billion. This is in addition to its ordinary budget ($14.1 billion was separately requested for the 2023 fiscal year). About $45.6 billion of this appropriation will be dedicated to tax enforcement. Taxpayers should be especially diligent for future filings. The remainder is largely for operational support at $25.3 billion, although significant amounts are reserved for taxpayer services ($3.2 billion) and business systems modernization ($4.8 billion). Certain ancillary expenses may still be of interest. For example, $15 million is allocated for a feasibility study of developing an official free efiling tax return system.

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Trustee’s Duties to Beneficiaries After the Death or Incapacity of the Settlor of a Revocable Trust

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Latest legal news and recent law changes.

Trustee’s Duties to Beneficiaries After the Death or Incapacity of the Settlor of a Revocable Trust

The settlor (also called “trustor”) of a revocable trust has the authority to change or cancel the trust’s provisions.  The settlor can also assign other trustees to help manage the trust. For a revocable trust, the trustee normally only owes duties to the settlor who is able to revoke the trust. However, the ability of the settlor to revoke the trust can be terminated upon the determination of the incapacity or the death of the settlor, causing duties to be owed by the trustees to the beneficiaries.  Cal. Prob. Code § 15800.

In the former case, when the settlor is determined to be incompetent and no one else is competent and entitled to revoke the trust, the trustee has a mandatory duty to provide the information in the Trust to the beneficiaries. Additionally, the trustee also has to produce annual accountings.  Cal. Prob. Code § 15800. The only exception would be that upon determining the incapacity of the settlor, the court appoints a conservator as the conservatee’s decision-making surrogate and the right to revoke the trust is automatically passed onto the conservator. Johnson v. Kotyck, 76 Cal. App. 4th 83, 90 Cal. Rptr. 2d 99 (1999).

For example, In Johnson, the court determined that  “the only limitation on the court’s ability to authorize the revocation of a conservatee’s revocable trust is if the trust instrument “(i) evidences an intent to reserve the right of revocation exclusively to the conservatee, (ii) provides expressly that a conservator may not revoke the trust, or (iii) otherwise evidences an intent that would be inconsistent with authorizing or requiring the conservator to exercise the right to revoke the trust.” Id. at 87.

In the latter case, when there is no other competent person entitled to revocation of the trust after the death of the settlor, the beneficiaries have the right to request information and annual accounting from the trustee. The accounting of the trust needs to list what the assets were at the beginning of the year, the spending and the income generated from the trust, and what assets remain at the end of the accounting term. Trust accounting helps with the supervision of the actions of the trustees to make sure that the trustees are doing their job. However, the existence of any other person entitled to revoke the trust then denies the beneficiaries access to the trust information and accounting. Further, the Law Revision Commission also comments on Section 1580(a) that “the consent of the person holding the power to revoke, rather than the beneficiaries, excuses the trustee from liability as provided in Section 16460(a) (limitations on proceedings against trustee).”

Hence, in summary, usually, if a revocable trust has an incapacitated settlor, then the Trustee must account to the beneficiaries and provide them with the terms of the Trust; however, the determination of incapacity of the settlor does not force an accounting or providing copies of the Trust if any other competent person has a power to revoke the trust in whole or in part when the trust is still revocable.

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Bad Faith Trust Litigation Could Result in Reimbursement of Attorney Fees Above Your Allocated Distribution

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Latest legal news and recent law changes.

Bad Faith Trust Litigation Could Result in Reimbursement of Attorney Fees Above Your Allocated Distribution

Usually, each party bears their own litigation costs; however, in Trust litigation, the Courts have discretion to force a losing party to pay the prevailing party attorney fees if the litigation was deemed in bad faith. Though the Courts have traditionally shied away from doing so, Bruno v. Hopkins signals a change in that trend. Moreover, the case highlights that the Probate Court can shift fees even if they exceed the party’s share of assets the trust [Bruno v. Hopkins, 79 Cal. App. 5th 801, 294 Cal. Rptr. 3d 852 (2022)].

In Bruno, the Petitioner argues the Trust was a forgery and challenge her own mother’s position as Trustee. Petitioner furthermore used the services of an Expert Witness to reinforce her claims’ merit. The Court did not agree, and held the Petitioner’s claims came in bad faith. The Court also held that it is unreasonable to rely on an expert’s conclusion when reliance on said expert testimony was also unreasonable.  Id., at 874.

The Court awarded $925,000.00 to the prevailing party, over four times the amount the Petitioner was to receive as a beneficiary.

The Court’s power to enforces this comes from their vast equitable power to award attorney fees against the losing party

Clients and Attorneys should both be aware that using an expert to support your claim will not necessarily shield you from court awarded attorney fees. If your litigation is deemed to have been brought in bad faith, you may be still be paying attorney fees to the other side even if you relied on an expert’s opinion to bring your claim.