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The United States Patent and Trademark Office (USPTO) has adopted final rules that implement provisions of the Trademark Modernization Act enacted on December 27, 2020.  Most of the rules will become effective on December 18, 2021. Highlights of the new rules include streamlined procedures for canceling registrations due to nonuse.  The underlying policy for these new procedures is to “clean up” the USPTO registration rolls by removing registrations of marks that are not being “used in commerce.” These new regulations are designed to provide efficient and less expensive alternatives to the traditional proceedings before the Trademark Trial and Appeal Board for cancellation of a registration.  A party utilizing these new procedures (known as “reexamination” and “expungement”) will need to allege a certain lack of use of the mark in question and request the USPTO to institute an expungement or reexamination proceeding.  If the USPTO decides to initiate a proceeding, the registrant will be allowed an opportunity to submit evidence showing use of the mark, in rebuttal of the alleged nonuse.  Ultimately, the proceedings could result in the registrant’s loss of registration rights if the registrant is not able to submit appropriate evidence of use.

            The new rules implement formalized procedures for the USPTO’s handling of “letters of protest,” which letters allow third parties to submit evidence in opposition to an application for registration during the examination stage.   

            Finally, the new rules shorten the time period in which applicants/registrants have to respond to USPTO office actions.  Currently, one has 6 months to respond to an office action.  Starting December 1, 2022, the response time will be shortened to 3 months.  (However, a one-time three-month extension may be requested upon payment of a $125 fee.)

For more information, email the Burton Law Firm at info@lawburton.com.

1. The Definition of “Family” Officially Changed to Include Your In-Laws.

One of the more interesting changes comes from AB 1033 (available here). A straightforward law, the California Family Rights Act is amended so that “family” includes an employee’s parents-in-law.

Current law makes it unlawful for an employer to refuse to grant a request by an employee to take up to 12 workweeks of unpaid protected leave during any 12-month period for family care and medical leave.

Existing law defines family care and medical leave to include, among other things, leave to care for a parent. This is now expanded to include your parents-in-law.

2. Arbitration Invoices Shall be Due the Same Day They Are Issued

SB 760 (available here) amends the current law to remove the thirty (30) day leeway given to employers (or technically whomever the drafting party is) to pay initial arbitration fees so arbitration can begin. The new law requires the arbitration provider to provide invoices for the fees, in their entirety, to all parties to the arbitration on the same day and by the same means.

In other words, employers who have mandatory arbitration clauses in their contract must pay their arbitration invoices immediately upon receipt or they waive their right to enforce arbitration.

Notably, the law allows for the arbitration agreement to expressly provide for “a different time for payment”; thus this provision can be easily contracted around.

3, Theft of Wages, Gratuity, or Other Compensation is Escalated from a Civil Misdemeanor to Grand Theft.

AB 1003 (available here) escalates the “intentional theft” of an employee’s “wages, gratuities, benefits, or other compensation” equal to $950 or over for an individual, or $2,350 or above for two or more employees, to a grand theft crime. The employer’s actions need not occur all at once and can cumulatively occur through any 12-month period.

In other words, employers who “knowingly” miss a paycheck, take a cut of their employee’s tips, or refuse to properly provide any benefits required by law or any further compensation due to their employees, risk “imprisonment in a county jail for up to 1 year or as a felony by imprisonment in county jail for 16 months or 2 or 3 years.”

Now is a good time to make sure your Human Resources and Payroll departments are in good shape.

4. California Cracks Down on Emotional Support Animals.

AB 468 (available here) cracks down on the liberal allowance for emotional support animals and has two main parts.

First, it restricts health care practitioners from providing documentation relating for an emotional support animal unless the health care practitioner:

• 1. Holds a valid license;
  2. Established a client-provider relationship with the individual for at least 30 days prior to providing the documentation;
  3. Completes a formal clinical evaluation of the individual regarding the need for an emotional support animal; and
  4. Provides verbal or written notice to the individual that knowingly and fraudulently representing themselves as the owner or trainer of a guide, signal or service dog (which is not the same thing as an emotional support animal) is a misdemeanor.

Second, it requires businesses that sell dogs to provide a written notice to the buyer or recipient of the dog stating that the dog does not have the special training required to qualify as a guide, signal, or service dog and is not entitled to the rights and privileges accorded by law to a guide, signal, or service dog.

5. Employment Posting Law Joins the 21st Century

SB 657 (available here) is a curious law, in that it provide legal permission for something every employer already does, and doesn’t actually do anything to make things better.

California law requires the posting of a variety of notices (wages, workers’ comp, etc.) in the workplace. The changes provide that in any instance in which an employer is required to physically post information, that employer may also distribute that information to employees by email with the document or documents attached.

Notably, the bill specifies that the employer must still physically display the required posting; it just allows them to email it as well. It is unclear why this needed to be codified in law, except perhaps to clarify that email was supplemental and not an alternative, and also to help remote workers; however, again, electronic posting is only allowed, and not required.

6. Nondisclosure Agreements and Other Related Non-Disparagement Agreements Cannot Cover Any Harassment or Discrimination.

SB 331 (available here) expands the topics protected by employee free speech, in that it expands the scope of matters which employers are prohibited from forcing an employee to refuse to divulge through a non-disparagement agreement. A non-disparagement agreement is when an individual has agreed that they won’t say anything negative about a company or its products, services, or leaders and generally covers all forms of communication. Employees will customarily sign such agreements as a condition for employment or as part of a settlement after a failed employment.

Previously, the law only protected sexual discrimination, meaning that you could never force an employee to refrain from divulging a previous circumstance of sexual misconduct or bias in the workplace; however, the law has been vastly expanded to include all forms of harassment, discrimination and/or retaliation. Furthermore, all employees must be made aware of this requirement for any non-disparagement contract to include the “magic words”:

Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.

In other words, employers cannot prevent an employee from disclosing any harassment, discrimination and/or retaliation they reasonably believe occurred in the workplace. Furthermore, employers must make their employees aware of this for any nondisclosure agreement to be valid.

7. Cal OSHA Expands Their Ability to Issue Workplace Health and Safety Violations

The Division of Occupational Safety and Health (Cal OSHA) retains the power, jurisdiction, and supervision over every employment and place of employment in California. SB 606 (available here) makes it so that employers who have specific violations within two or more locations are considered to have that violation “enterprise-wide” and Cal OSHA can cite them as such (meaning their entire operation, not just where they found the violations). This enterprise-wide presumption is rebuttable, so employers can bring evidence that the violations are narrowly limited to specific sites.

The law also allows Cal OSHA to cite employers for “egregious” violations, for repeated, negligent, or intentional violations which show clear bad faith by the employer. Only one of the following needs to be proven true for a violation to now be considered “egregious”:

1. 1. The employer, intentionally, through conscious, voluntary action or inaction, made no reasonable effort to eliminate the known violation;
   2. The violations resulted in worker fatalities, a worksite catastrophe, or a large number of injuries or illnesses. For purposes of this paragraph, “catastrophe” means the inpatient hospitalization, regardless of duration, of three or more employees resulting from an injury, illness, or exposure caused by a workplace hazard or condition;

• The violations resulted in persistently high rates of worker injuries or illnesses;

1. 1. The employer has an extensive history of prior violations of this part;
   2. The employer has intentionally disregarded their health and safety responsibilities;
   3. The employer’s conduct, taken as a whole, amounts to clear bad faith in the performance of their duties under this part; or

• The employer has committed a large number of violations so as to undermine significantly the effectiveness of any safety and health program that may be in place.

8. Subcontractors and Manicurists get a Three-Year Extension on the “ABC” Independent Contractor Test.

AB 1561 (available here) is simple in that it stops the “ABC” test from expiring on January 1, 2022, and extends it until January 1, 2025 for manicurist or a subcontractors. The ABC test is what the government uses to determine if an individual is an employee or an independent contractor. The statute summary itself clearly explains the test:

Existing law requires a 3-part test, commonly known as the ‘ABC’ test, to determine if workers are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the wage orders of the Industrial Welfare Commission. Under the ABC test, a person providing labor or services for remuneration is considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is:

• 1. free from the control and direction of the hiring entity in connection with the performance of the work,
  2. the person performs work that is outside the usual course of the hiring entity’s business, and
  3. the person is customarily engaged in an independently established trade, occupation, or business [source (edited for clarity)].

9. Extension of the Statute of Limitations for Alleged Violations of the Fair Employment and Housing Act

SB 807 (available here) requires employers to preserve personnel records for employees and applicants for four (4) years from the date of creation and extends the time that the Department of Fair Employment and Housing (DFEH) has to bring a civil action for unlawful employment practices.

Previously, the DFEH had 150 days to file an action, but this has been extended to two (2) years. Moreover, the statute of limitations for the alleged aggravated party’s right to file a case is extended by however long it takes the DFEH to decide if they will sue.

In other words, an individual’s right to sue their employer for an alleged unlawful employment practice has been extended by up to two (2) years.

10. Warehouse Workers Given Expanded Rights in Meeting Their Quotas

AB 702 (available here) applies to warehouses with 1,000 or more employees in total or 100 employees in a single warehouse. It requires such employers to provide to each employee information regarding performance quotas—namely, all working objectives based on productivity speed, a quantified number of tasks, or a required amount to be handled or produced. In other words, for any employee with a performance quota, such employers must:

• 1. Provide the employee with a written description of each quota to which the employee is subject upon hire or within 30 days of January 1, 2022 (the effective date of the law);
  2. Describe the quantified number of tasks to be performed or materials to be produced/handled;
  3. Define the time period within which the quota must be completed; and
  4. Describe any potential adverse action that could result from failure to meet the quota.

Furthermore, a quota must:

• 1. Allow the employee to take a legally required meal or rest break;
  2. Be compliant with occupational health and safety laws; and
  3. Be clearly discussed with the employee.

For more information, please contact our firm at 916-822-8700 or info@lawburton.com.

[On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives.]

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2021

• Increase to Allowable State and Local Tax Deduction (§137601): Currently, up to $10,000 may be deducted for state and local taxes. If passed, the new limitation would be $72,500 ($36,250 for married filed separately, trusts, and estates). This would be effective through 2031.

• Limitation on Excess Business Losses of Noncorporate Taxpayers (§138202): The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided relief for taxpayers by eliminating the excess business loss limitation (which disallows excess business loss for noncorporate taxpayers for losses in excess of $500,000 for joint filers and $250,000 for individuals) for the 2018, 2019, and 2020 tax years. This proposal would permanently disallow excess business losses for non-corporate taxpayers and would allow taxpayers whose losses are disallowed to carry those losses forward to the next succeeding tax year as a deduction.

Potential Corporate Tax Impact: Effective – Introduction Date (September 13, 2021) 

• Modification to Rules Governing the Sale or Exchange of Qualified Small Business Stock (§138149). Currently, a taxpayer (other than a corporation) who acquired (or acquires) Qualified Small Business Stock (“QSBS”) during certain periods in 2010, and thereafter, and has held the stock for more than 5 years, is able to exclude 100% of any gain from the sale or exchange of QSBS from his or her gross income. Under the proposal, if the taxpayer’s Adjusted Gross Income (“AGI”) equals or exceeds $400,000, or if the taxpayer is a trust or estate, then the 100% exclusion of any gain from the sale of a QSBS is reduced to 50%.

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2022 

• Modification to Treatment of Certain Losses (§138142): Under the proposed legislation, losses realized on certain securities will be treated as being realized on the day that the event establishing worthlessness occurred, rather than on the last day of the taxable year. This potentially limits the instances when such a loss would be treated as a capital loss as opposed to a short-term loss (ordinary loss). Also, under the proposed legislation, partnership indebtedness would be treated the same as corporate indebtedness for the purpose of Section 165 of the Internal Revenue Code (IRC) and worthless partnership interests would be treated as a loss from the sale or exchange of a partnership interest at the time of the identifiable event establishing worthlessness.  
• Wash Sale Rules Apply to Related Parties and Digital Assets (§138152): Currently, the Wash Sale Rule provides that a tax loss resulting from the sale of a security is not deductible to the extent the taxpayer acquires a substantially identical security at either 30 days before or 30 days after the loss. The proposed legislation would include digital currencies such as cryptocurrency in the Wash Sale Rule. Also, under the new legislation, related parties whose acquisition of a substantially identical security within 30 days would also implicate the wash sale rules. 
• Net Investment Income Tax Expanded (§138201): Under current law, a 3.8% tax is imposed on Net Investment Income (NII) on certain individuals, estates, or trusts if a trade or business is a passive activity for the taxpayer (i.e., the taxpayer does not materially participate in the trade or business). In other words, the 3.8% tax does not apply to income from a trade or business conducted as a sole proprietor, partnership, or S Corporation, if the taxpayer materially participates in the trade or business. Under the proposal, the 3.8% tax would be imposed on the NII of high-income individuals (taxpayers with greater than $400,000 in modified adjusted gross income (single filer) or $500,000 (joint filer)) regardless of whether the trade or business is a passive activity for the taxpayer so long as the income isn’t already subject to the Federal Insurance Contribution Act (FICA) or Self-Employment Tax. Additionally, the current tax is 3.8% of the lesser of NII or the excess of modified Adjusted Gross Income (AGI) over a set dollar amount. For trusts and estates, the current tax is 3.8% of the less of undistributed net income, or the excess of AGI over a set dollar amount. The drafted legislation also proposes to expand the definition of the NII subject to the tax by stating the 3.8% tax would apply to the greater of specified net income or NII. For trusts and estates, the 3.8% would apply to the lesser of (1) the greater the undistributed specified net income or undistributed NII; or (2) the excess AGI over the set dollar amount. 
• High Income Surcharge Tax (§138203): This proposal would impose a surtax equal to 5% of a taxpayer’s modified adjusted gross income in excess of $10,000,000 ($20,000,000 if married, filing separately) and an additional 3% of a taxpayer’s modified adjusted gross income in excess of $25,000,000. For this purpose, the modified adjusted gross income would be defined as the adjusted gross income reduced by any allowed deductions. Any modified AGI of an estate or trust in excess of $200,000 would now be subject to a tax equal to 5%. In addition, any modified AGI of an estate or trust in excess of $500,000 would now be subject to a further tax equal to 3%. 
• Rollover and Conversion Limits; Eliminate Back Door Roth IRAs (§138311): This proposal would prohibit after-tax IRA or employer plan contributions from being converted to Roth accounts for all taxpayers irrespective of income level. 
• IRA Non-Compliance Statute of Limitations Extended (§138312): This legislation would extend the statute of limitations for IRA noncompliance related to valuation related misreporting and prohibited transactions from 3 years to 6 years. This would apply to taxes to which the current 3-year period ends after December 31, 2021. 
• IRA Owners Treated as Disqualified Persons (§138313): The legislation proposes to further clarify that IRA owners (including individuals who inherit an IRA as beneficiary aft the IRAs owner’s death) are always disqualified persons for the purpose of applying the prohibited transaction rules. 
• Holding DISC or FSC In IRA (§138503): An IRA holding an interest in a Domestic International Sales Corporation (DISC) or Foreign Sales Corporation (FSC) that receives commission or payment from any entity, stock, or interest owned by the individual for whose benefit the IRA is established, is a prohibited transaction.

Potential Tax Impact to Individual Taxpayer: Effective – Enactment Date (January 1, 2022)

• Constructive Sale Rules Apply to Digital Assets (§138150): The Constructive Sale Rule under IRC §1259 provides that when there is a constructive sale of an appreciated financial position the taxpayer shall recognize gain as if such position were transferred at fair market value on the date of the constructive sale. A constructive sale occurs when a taxpayer holds an appreciated financial position and enters into certain designated transactions that substantially reduce taxpayer’s downside risk (such as a short sale). This tax proposal expands the definition of an “appreciated financial position” to include digital assets such as cryptocurrency. 
• Deductions for Attorneys Representing in Contingency Fee Cases (§138518): If passed, expenses made that would be repaid contingent on recovery or settlement would be included as Section 162 (ordinary business expenses) deductions.

Potential Corporate Tax Impact: Effective – January 1, 2023

• Corporate Alternative Minimum Tax (§138101): If passed, an alternative minimum tax of 15% would be imposed upon all income for corporations with an average income over $1 billion. Income is determined through an “adjusted financial statement.” This is a formal financial statement subject to certain rules but may generally be met with a form 10-K filed with the Securities and Exchange Commission.

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2029  

• Contribution Cap on Individual Retirement Plans of High-Income Taxpayers (§138301): The proposed legislation would prohibit new contributions to a Roth or traditional Individual Retirement Accounts (IRAs) if the total value of all of the taxpayer’s IRAs exceeds $10 million at the end of the prior tax year. However, rollover contributions shall not be treated as new contributions. This provision would only apply to individuals whose adjusted taxable income exceeds $400,000 (single filer) or $450,000 (joint filer). 
• Increased Required Minimum Distributions for Excess Balances (§138302): This legislation would impose new required minimum distributions for taxpayers whose adjusted taxable income exceeds $400,000 (single filer) or $450,000 (joint filer) and whose combined IRAs (Roth, traditional, and defined contribution plan) exceed $10 million at the end of year. These individuals, regardless of their age, would be required to take a minimum distribution in the following year of an amount equal to 50% of the amount by which the aggregate accounts exceed $10 million. For taxpayers whose aggregate account balances exceed $20 million, the taxpayer will be required to draw the lesser of: (1) the amount needed to bring the aggregate balance down to $20 million; or (2) the aggregate balances in all Roth IRAs and designated Roth accounts.

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2032  

• Rollover and Conversion Limits; Eliminate Back Door Roth IRAs (§138311):

This proposed legislation would eliminate the “backdoor” conversions of traditional IRAs or employer plan accounts to Roth IRAs for a taxpayer whose adjusted taxable income exceeds $400,000.

On September 13, 2021, the House Ways & Means Committee of the U.S. House of Representatives released the draft text of its proposed budget reconciliation bill (the “Build Back Better Act [First Draft]”), and on September 15, 2021 it approved various sections of the proposal. The Committee released an updated draft on October 28, 2021 (the “Build Back Better Act [Second Draft]). The Second Draft omitted many sections from the First Draft kept the rest with relatively little alteration. The Committee released a further draft on November 3, 2021 (the “Build Back Better Act [Third Draft]”) which returned certain sections from the First Draft. On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives. This document reflects the potential tax implications for the Third Draft. 

It is important for clients to note that as of the date of this article, these proposals are not the law, and are subject to ongoing negotiations. The proposed provisions could change considerably and there is no guarantee that any of the provisions will become law. Nevertheless, this article is to alert clients of the potential changes to individual taxpayers and the resulting consequences of such changes if they are approved. We encourage our clients to be proactive and plan in advance of possible impending changes.  

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2021

• Increase to Allowable State and Local Tax Deduction (§137601): Currently, up to $10,000 may be deducted for state and local taxes. If passed, the new limitation would be $72,500 ($36,250 married filed separately). This would be effective through 2031.

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2022 

• Net Investment Income Tax Expanded (§138201): Under current law, a 3.8% tax is imposed on Net Investment Income (NII) on certain individuals, estates, or trusts if a trade or business is a passive activity for the taxpayer (i.e., the taxpayer does not materially participate in the trade or business). In other words, the 3.8% tax does not apply to income from a trade or business conducted as a sole proprietor, partnership, or S Corporation, if the taxpayer materially participates in the trade or business. Under the proposal, the 3.8% tax would be imposed on the NII of high-income individuals (taxpayers with greater than $400,000 in modified adjusted gross income (single filer) or $500,000 (joint filer)) regardless of whether the trade or business is a passive activity for the taxpayer so long as the income isn’t already subject to the Federal Insurance Contribution Act (FICA) or Self-Employment Tax.

  Additionally, the current tax is 3.8% of the lesser of NII or the excess of modified Adjusted Gross Income (AGI) over a set dollar amount. For trusts and estates, the current tax is 3.8% of the less of undistributed net income, or the excess of AGI over a set dollar amount. The drafted legislation also proposes to expand the definition of the NII subject to the tax by stating the 3.8% tax would apply to the greater of specified net income or NII. For trusts and estates, the 3.8% would apply to the lesser of (1) the greater the undistributed specified net income or undistributed NII; or (2) the excess AGI over the set dollar amount. 

• High Income Surcharge Tax (§138203): This proposal would impose a surtax equal to 5% of a taxpayer’s modified adjusted gross income in excess of $10,000,000 ($20,000,000 if married, filing separately) and an additional 3% of a taxpayer’s modified adjusted gross income in excess of $25,000,000. For this purpose, the modified adjusted gross income would be defined as the adjusted gross income reduced by any allowed deductions. 
• Rollover and Conversion Limits; Eliminate Back Door Roth IRAs (§138311): This proposal would prohibit after-tax IRA or employer plan contributions from being converted to Roth accounts for all taxpayers irrespective of income level. 
• IRA Non-Compliance Statute of Limitations Extended (§138312): This legislation would extend the statute of limitations for IRA noncompliance related to valuation related misreporting and prohibited transactions from 3 years to 6 years. This would apply to taxes to which the current 3-year period ends after December 31, 2021. 
• IRA Owners Treated as Disqualified Persons (§138313): The legislation proposes to further clarify that IRA owners (including individuals who inherit an IRA as beneficiary aft the IRAs owner’s death) are always disqualified persons for the purpose of applying the prohibited transaction rules. 
• Holding DISC or FSC In IRA (§138503): An IRA holding an interest in a Domestic International Sales Corporation (DISC) or Foreign Sales Corporation (FSC) that receives commission or payment from any entity, stock, or interest owned by the individual for whose benefit the IRA is established, is a prohibited transaction.

Potential Tax Impact to Individual Taxpayer: Effective – Enactment Date (January 1, 2022)

• Deductions for Attorneys Representing in Contingency Fee Cases (§138518): If passed, expenses made that would be repaid contingent on recovery or settlement would be included as Section 162 (ordinary business expenses) deductions.

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2029 

• Contribution Cap on Individual Retirement Plans of High-Income Taxpayers (§138301): The proposed legislation would prohibit new contributions to a Roth or traditional Individual Retirement Accounts (IRAs) if the total value of all of the taxpayer’s IRAs exceeds $10 million at the end of the prior tax year. However, rollover contributions shall not be treated as new contributions. This provision would only apply to individuals whose adjusted taxable income exceeds $400,000 (single filer) or $450,000 (joint filer). 
• Increased Required Minimum Distributions for Excess Balances (§138302): This legislation would impose new required minimum distributions for taxpayers whose adjusted taxable income exceeds $400,000 (single filer) or $450,000 (joint filer) and whose combined IRAs (Roth, traditional, and defined contribution plan) exceed $10 million at the end of year. These individuals, regardless of their age, would be required to take a minimum distribution in the following year of an amount equal to 50% of the amount by which the aggregate accounts exceed $10 million. For taxpayers whose aggregate account balances exceed $20 million, the taxpayer will be required to draw the lesser of: (1) the amount needed to bring the aggregate balance down to $20 million; or (2) the aggregate balances in all Roth IRAs and designated Roth accounts.

Potential Tax Impact to Individual Taxpayer: Effective – January 1, 2032 

• Rollover and Conversion Limits; Eliminate Back Door Roth IRAs (§138311): This proposed legislation would eliminate the “backdoor” conversions of traditional IRAs or employer plan accounts to Roth IRAs for a taxpayer whose adjusted taxable income exceeds $400,000.

NOTE: This article does not list all of the legislation being proposed in the Build Back Better Act. It is merely a list of the provisions we believe to be most relevant to a majority of our clients. Please contact your tax attorney to discuss the potential legislation and how it may or may not affect your planning needs. Although it is impossible to know which provisions will pass, possible tax-planning strategies may still be available to those who would like to act in advance of the impending change.  

Please contact The Burton Law Firm at 916.822.8700 or info@burtonlawfirm.com for more info. 

On September 13, 2021, the House Ways & Means Committee of the U.S. House of Representatives released the draft text of its proposed budget reconciliation bill (the “Build Back Better Act [First Draft]”), and on September 15, 2021 it approved various sections of the proposal. The Committee released an updated draft on October 28, 2021 (the “Build Back Better Act [Second Draft]). The Second Draft omitted many sections from the First Draft kept the rest with relatively little alteration. The Committee released a further draft on November 3, 2021 (the “Build Back Better Act [Third Draft]”) which returned certain sections from the First Draft. On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives. This document reflects the potential tax implications for the Third Draft. 

It is important for clients to note that as of the date of this article, these proposals are not the law, and are subject to ongoing negotiations. The proposed provisions could change considerably and there is no guarantee that any of the provisions will become law. Nevertheless, this article is to alert clients of the potential changes to individual taxpayers and the resulting consequences of such changes if they are approved. We encourage our clients to be proactive and plan in advance of possible impending changes.  

Potential Tax Impact on Estate Planning: Effective – January 1, 2021

• Allowable State and Local Tax Deduction (§137601): If passed, an estate or a trust may deduct up to $36,250 for state and local taxes.

Potential Tax Impact on Estate Planning: Effective – January 1, 2022 

• Net Investment Income Tax Expanded (§138203): Under current law, a 3.8% tax is imposed on Net Investment Income (NII) on certain individuals, estates, or trusts if a trade or business is a passive activity for the taxpayer (i.e., the taxpayer does not materially participate in the trade or business). In other words, the 3.8% tax does not apply to income from a trade or business conducted as a sole proprietor, partnership, or S Corporation, if the taxpayer materially participates in the trade or business. Under the proposal, the 3.8% tax would be imposed on the NII of high-income individuals (taxpayers with greater than $400,000 in modified adjusted gross income (single filer) or $500,000 (joint filer)) regardless of whether the trade or business is a passive activity for the taxpayer so long as the income isn’t already subject to the Federal Insurance Contribution Act (FICA) or Self-Employment Tax.
   
  

  Additionally, the current tax is 3.8% of the lesser of NII or the excess of modified Adjusted Gross Income (AGI) over a set dollar amount. For trusts and estates, the current tax is 3.8% of the lesser of undistributed net income, or the excess of AGI over a set dollar amount. The drafted legislation also proposes to expand the definition of the NII subject to the tax by stating the 3.8% tax would apply to the greater of specified net income or NII. For trusts and estates, the 3.8% would apply to the lesser of (1) the greater the undistributed specified net income or undistributed NII; or (2) the excess AGI over the set dollar amount. 

• Surcharge on High Income Estates and Trusts (§138203): Any modified AGI of an estate or trust in excess of $200,000 would now be subject to a tax equal to 5%. In addition, any modified AGI of an estate or trust in excess of $500,000 would now be subject to a further tax equal to 3%.

NOTE: This article does not list all of the legislation being proposed in the Build Back Better Act. It is merely a list of the provisions we believe to be most relevant to a majority of our clients. Please contact your estate planning attorney to discuss the potential legislation and how it may or may not affect your planning needs. Although it is impossible to know which provisions will pass, possible tax-planning strategies may still be available to those who would like to act in advance of the impending change.  

Please contact The Burton Law Firm at 916.822.8700 or info@burtonlawfirm.com for more info. 

On September 13, 2021, the House Ways & Means Committee of the U.S. House of Representatives released the draft text of its proposed budget reconciliation bill (the “Build Back Better Act [First Draft]”), and on September 15, 2021 it approved various sections of the proposal. The Committee released an updated draft on October 28, 2021 (the “Build Back Better Act [Second Draft]). The Second Draft omitted many sections from the First Draft kept the rest with relatively little alteration. The Committee released a further draft on November 3, 2021 (the “Build Back Better Act [Third Draft]”) which returned certain sections from the First Draft. On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives. This document reflects the potential tax implications for the Third Draft.

It is important for clients to note that as of the date of this article, these proposals are not the law, and are subject to ongoing negotiations. The proposed provisions could change considerably and there is no guarantee that any of the provisions will become law. Nevertheless, this article is to alert clients of the potential changes to individual taxpayers and the resulting consequences of such changes if they are approved. We encourage our clients to be proactive and plan in advance of possible impending changes.

Potential Corporate Tax Impact: Effective – January 1, 2021

• Limitation on Excess Business Losses of Noncorporate Taxpayers (§138202): The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided relief for taxpayers by eliminating the excess business loss limitation (which disallows excess business loss for noncorporate taxpayers for losses in excess of $500,000 for joint filers and $250,000 for individuals) for the 2018, 2019, and 2020 tax years. This proposal would permanently disallow excess business losses for non-corporate taxpayers and would allow taxpayers whose losses are disallowed to carry those losses forward to the next succeeding tax year as a deduction.

Potential Corporate Tax Impact: Effective – Introduction Date (September 13, 2021)

• Modification to Rules Governing the Sale or Exchange of Qualified Small Business Stock (§138149). Currently, a taxpayer (other than a corporation) who acquired (or acquires) Qualified Small Business Stock (“QSBS”) during certain periods in 2010, and thereafter, and has held the stock for more than 5 years, is able to exclude 100% of any gain from the sale or exchange of QSBS from his or her gross income. Under the proposal, if the taxpayer’s Adjusted Gross Income (“AGI”) equals or exceeds $400,000, or if the taxpayer is a trust or estate, then the 100% exclusion of any gain from the sale of a QSBS is reduced to 50%.

Potential Corporate Tax Impact: Effective – January 1, 2022

• Modification to Treatment of Certain Losses (§138142): Under the proposed legislation, losses realized on certain securities will be treated as being realized on the day that the event establishing worthlessness occurred, rather than on the last day of the taxable year. This potentially limits the instances when such a loss would be treated as a capital loss as opposed to a short-term loss (ordinary loss). Also, under the proposed legislation, partnership indebtedness would be treated the same as corporate indebtedness for the purpose of Section 165 of the Internal Revenue Code (IRC) and worthless partnership interests would be treated as a loss from the sale or exchange of a partnership interest at the time of the identifiable event establishing worthlessness.

• Wash Sale Rules Apply to Related Parties and Digital Assets (§138152): Currently, the Wash Sale Rule provides that a tax loss resulting from the sale of a security is not deductible to the extent the taxpayer acquires a substantially identical security at either 30 days before or 30 days after the loss. The proposed legislation would include digital currencies such as cryptocurrency in the Wash Sale Rule. Also, under the new legislation, related parties whose acquisition of a substantially identical security within 30 days would also implicate the wash sale rules.

Potential Corporate Tax Impact: Effective – January 1, 2023

• Corporate Alternative Minimum Tax (§138101): If passed, an alternative minimum tax of 15% would be imposed upon all income for corporations with an average income over $1 billion. Income is determined through an “adjusted financial statement.” This is a formal financial statement subject to certain rules but may generally be met with a form 10-K filed with the Securities and Exchange Commission.

Potential Corporate Tax Impact: Effective – Enactment Date (January 1, 2022)

• Constructive Sale Rules Apply to Digital Assets (§138150): The Constructive Sale Rule under IRC §1259 provides that when there is a constructive sale of an appreciated financial position the taxpayer shall recognize gain as if such position were transferred at fair market value on the date of the constructive sale. A constructive sale occurs when a taxpayer holds an appreciated financial position and enters into certain designated transactions that substantially reduce taxpayer’s downside risk (such as a short sale). This tax proposal expands the definition of an “appreciated financial position” to include digital assets such as cryptocurrency.

NOTE: This article does not list all of the legislation being proposed in the Build Back Better Act. It is merely a list of the provisions we believe to be most relevant to a majority of our clients. Please contact your business or corporate attorney to discuss the potential legislation and how it may or may not affect your planning needs. Although it is impossible to know which provisions will pass, possible tax-planning strategies may still be available to those who would like to act in advance of the impending change.

Please contact The Burton Law Firm at 916.822.8700 or info@burtonlawfirm.com for more info.

In October of 2021, as a result of the largest leak of documents in history, 11.9 million files from over 2.94 terabytes of data were publicly released by the International Consortium of Investigative Journalists [ICIJ].

Concerning assets and individuals across the globe, this leak identified the financial affairs of more than 100 billionaires, 30 world leaders and 300 public officials. This leak is reminiscent of the Panama Papers released back in 2016 [ICIJ].

The Pandora Papers were published under the script of providing transparency on the use of “offshore” tax havens, which are utilized in order to mitigate taxes and secure privacy around one’s financial affairs. Included in the data were several high-profile individuals mired by controversy [Reuters].

Though the scope of this leak concerned “offshore” locations, the United States was likewise implicated in several tax-friendly jurisdictions. The most prominent of these was South Dakota, but they also included Florida, Delaware, Texas, and Nevada. The Pandora Papers identified 206 U.S. trusts linked to 41 countries holding assets worth more than $1 billion [ICIJ].

As the ICIJ notes, being named in the Pandora Papers is in no way synonymous with alleging the individuals identified conducted illegal activity. The use of offshore or domestic tax-friendly jurisdictions is both legal and accepted, if done correctly. Even so, being named in the Pandora Papers is bound to create controversy, and invites public and government speculation. Of the trusts named in the Pandora Papers, nearly 30 of the ones based in the U.S. have been identified as connected to individuals or companies accused of fraud, bribery or human rights abuses.

As specialists in Estate Planning and Trusts, The Burton Law Firm is actively monitoring the Pandora Papers and staying abreast of any changes in the law that may come from this leak. Please note that The Burton Law Firm represents individuals of all backgrounds and walks of life, having a firm foothold in both domestic and international communities. In short, none of The Burton Law Firm’s clients were affected by the data leak, and we continue to maintain the highest grade of professional responsibility and upholding attorney-client confidentiality.

For more information, visit the source of the leak at: https://www.icij.org/investigations/pandora-papers/ or email the Burton Law Firm at info@lawburton.com.