There was an oddity in the sports world that lasted for generations. Professional athletes profited from their status through sponsorships for their name, image, and likeness (NIL), yet these NIL opportunities were closed to collegiate athletes. The National Collegiate Athletic Association (NCAA) opened opportunities to their athletes within some limitations beginning in 2021. As with all things in life, this generated ripples in the tax world. Organizations known as “NIL collectives” have arisen to facilitate NIL contracts for student-athletes. There are over 250 NIL collectives, and about a third of these have been established as nonprofit organizations and received § 501(c)(3) recognition from the IRS. Such a status requires operating for one or more charitable causes, often termed exempt purposes. An entities tax exemption is jeopardized when they operate for any substantial nonexempt purpose. A chief counsel memorandum recently released by the IRS concluded that NIL collectives operate for a substantial nonexempt purpose “in many cases.”

Citing eight cases and five revenue rulings in addition to the statutory and regulatory authority, the IRS detailed the basis of its reasoning and reviewed the requirements for tax exemption. A § 501(c)(3) entity must meet the operational test and satisfy the private benefit doctrine. The operational test softens the statutory mandate of operating “exclusively” for one or more exempt purposes to require only operating “primarily” for one or more exempt purposes. The private benefit doctrine requires the tax exempt entity to prove “that it is not operated for the benefit of private interests.”  The IRS found that the avowed purpose of a nonprofit NIL was to benefit a private interest, specifically the interests of the student-athletes. It may seem obvious but still important to note for the purposes of this analysis that student-athletes are not “a recognized charitable class.” Nevertheless, the IRS hypothesized that the interests of student-athletes could be transformed from a private interest to a public interest through “a finding that NIL collectives select student-athletes for participation based on need, such that their activities could be considered conducted for the relief of the poor or distressed, and that payments are reasonably calculated to meet that need.”

According to Sports Illustrated, certain leaders within the NIL collective community have prophesized IRS retaliation against nonprofit NIL collectives since the beginning of the phenomenon. NIL collectives who resisted benefactor pressure to claim tax exemption may now watch as the others scramble in damage control. This is an internal memorandum that cannot be used as precedent as a case or a revenue ruling would be able to be used. However, it clearly discloses the position of the IRS and its interest in this matter, leading many to believe that further IRS action may be imminent.

If you have questions or concerns about how these news 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.

In Fuentes v. Empire Nissan, Inc., it appears that Nissan attempted to test the limits of the use of small print in contracts.[1] The plaintiff was a discharged employee who sued in a superior court, arguing that the arbitration agreement in the contract that they had signed with Nissan was unconscionable. At first, the California Court of Appeals seemed sympathetic, remarking on the contract: “The longest paragraph squeezed something like 900 words into about three vertical inches.” The California Court of Appeal was so struck by the document in question that it uploaded the contract photocopy as an appendix to the opinion from the court record to demonstrate its lamentable quality. It is reproduced at the end of this article as well (without shrinking).

According to the dissenting opinion: “The arbitration agreement speaks for itself. The print is so fine it is unreadable without magnification. See if you can read it without giving up.” However, in order to prevail on a theory of unconscionability both procedural unconscionability and substantive unconscionability must be present. The Court of Appeals in Fuentes held: “Font size and readability thus are logically pertinent to procedural unconscionability and not to substantive unconscionability.” To hold otherwise, Fuentes claimed, would be to count font size twice, something the court was unwilling to do. Substantively fair or unfair contracts can be any size.

The court was alarmed by an analysis that could result in reducing “the unconscionability doctrine into a one-element defense where the sole issue would be whether there is procedural unconscionability.” Yet Fuentes noted in the same paragraph that “there is procedural unconscionability whenever one party has superior bargaining power and presents a contract of adhesion on a take-it-or-leave-it basis. That describes innumerable contracts, especially in the online world, where the standard contract is take-it-or-leave-it.” If so, unconscionability is already a single-element defense in most cases. Despite characterizing the contract’s defects as matters of procedural unconscionability, Fuentes concluded: “Given that there is no substantive unconscionability, we need not and do not address procedural unconscionability.”

Fuentes explicitly disagreed with a prior appellate case, Davis v. TWC Dealer Grp., Inc., 41 Cal. App. 5th 662 (2019), “which invalidated a substantially similar arbitration agreement.” Indeed, Davis held that excessively small print was a facet of substantive unconscionability. Davis did not provide analysis for this point, but it did cite OTO, L.L.C. v. Kho which stated: “Unconscionable terms… may include fine-print terms.”[2] Fuentes found that Kho judged a substantially similar arbitration agreement.

Although the Court in Fuentes enforced the arbitration agreement, it seems doubtful that a contract drafter would be flattered by an appellate court remarking on their work of art: “Is it strange that a contract can be enforced when it is nearly impossible to read? Contract law enforces contracts you cannot read at all, if you are blind, or illiterate, or the contract language is foreign to you.” In contrast, the dissenting opinion theorized that the font was so small that the terms were “unknowable.” As the employer who formed the contract terms would know them, there would be a lack of mutuality—a cause for substantive unconscionability. The dissent did not mention the majority opinion’s suggestion of a magnifying glass.

According to Fuentes, a contract can be binding even with font requiring “a strong magnifying glass.” Neither the majority opinion nor the dissenting opinion addressed the possibility of a font size so small it is not perceived as writing or detected at all. A person with healthy vision may be able to read text with a strong magnifying glass, while others may require a microscope. Fuentes leaves a split within the California Court of Appeals regarding the effects of excessively small print on the analysis of substantive unconscionability.

If you have questions or concerns about how these news 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.

Fuentes Contract

[1] Fuentes v. Empire Nissan, Inc., No. B314490, 2023 WL 3029968 (Cal. Ct. App. Apr. 21, 2023).

[2] OTO, L.L.C. v. Kho, 8 Cal. 5th 111, 130 (2019).

The Supreme Court opined about a canine chew toy in Jack Daniel’s Properties, Inc. v. VIP Products LLC. The defendant sells dog toys parodying Jack Daniel’s beverage. The toys are similarly shaped (but of different material) and are called “Bad Spaniels,” with a descriptive label of “The Old No. 2 On Your Tennessee Carpet” instead of “Old No. 7 Brand Tennessee Sour Mash Whiskey.” “The print at the bottom substitutes ‘43% poo by vol.’ and ‘100% smelly’ for ‘40% alc. by vol. (80 proof ).’” Jack Daniel’s Properties alleged trademark infringement, and the Court supplied pictures:

The Lanham Act protects trademarks from confusion and dilution. The trademark holder claimed both occurred. The 9th Circuit used the 2nd Circuit’s Rogers test which provides a threshold for further proceedings in cases of “expressive works.” The complainant must show either that the mark’s use “has no artistic relevance to the underlying work” or that the use “explicitly misleads as to the source or the content of the work.” If neither could be proved, the infringement claim must be dismissed according to the Rogers test.

“Without deciding whether Rogers has merit in other contexts,” the Supreme Court found that the Rogers test does not apply to alleged use “as a designation of source for the infringer’s own goods.” This reasoning was justified through prior applications of the Rogers test. Yet, the Court suspiciously professed avoidance of a broader opinion about the Rogers test, “which offers an escape from the likelihood-of-confusion inquiry and a shortcut to dismissal,” and “might take over much of the world” if left unchecked.  The Court noted two exclusions from dilution. Neither “noncommercial use of a mark” nor “fair use” for “parodying” may constitute dilution. However, the fair use “exclusion does not apply if the defendant uses the similar mark as a mark.” The Court determined that the 9th Circuit mistakenly interpreted the parody exclusion too broadly, exempting all parodic uses. Instead, “parody (and criticism and commentary, humorous or otherwise) is exempt from liability only if not used to designate source.”

The fate of Bad Spaniels is ambiguous. The Court disavowed the opportunity of determining it, simultaneously noting its parodic use designates source while maintaining that this parodic use benefits the alleged infringer in the analysis of trademark confusion—”consumers are not so likely to think that the maker of a mocked product is itself doing the mocking.” Justice Kagan wrote the Court’s unanimous opinion. Nevertheless, Justice Sotomayor also wrote a concurrence, joined by Justice Alito, to deemphasize the use of consumer surveys in determining trademark confusion. The final opinion was by Justice Gorsuch joined by Justice Thomas, and Justice Barrett. They joined the majority opinion in full yet expressed doubt about the Rogers test, instructing lower courts to “handle” the test “with care” and be “attuned” to a future Supreme Court decision that will resolve the status of the Rogers test.

If you have questions or concerns about how these news 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.

The IRS told a tale:

A Taxpayer creates a secure Business Online Account at IRS.gov and lets us know which communications methods they prefer – email, paper mail or phone. The taxpayer selects email. They later receive an email explaining tax credits and deductions for which they may be eligible. Their online account gives them access to easy-to-read data to start this year’s tax return. They have questions about how to file employment tax returns. A chatbot provides initial answers, and if they have specific questions, they can request a call from an agent. An agent calls them back, reviews their account history with them, and answers their questions. The taxpayers then prepare their own return. When they submit a return online, taxpayers get a real-time alert that shows easy-to-fix errors. They correct the errors and re-submit the return. After they file, they use their online account to track refund status and adjust preferences. They opt to receive their refund via direct deposit.

This vision of the tax filing process is not quite as ambitious in its simplicity as a taxpayer replying “Yes” to a text sent by the government (as some Swedes do), and at this time even this more mundane plan the IRS put out remains science fiction. However,  the IRS recently released the “Internal Revenue Service Inflation Reduction Act Strategic Operating Plan.” This plan lays out explicit goals, as well as how they will be achieved. Even though it was a month and a half late for the Secretary of the Treasury’s six-month deadline, it serves as proof that there is some movement towards making paying taxes a simpler process for the taxpayer in the US.  

In the plan, the IRS gave itself 5 primary objectives:[1]

1. “Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.” ($4.3 billion).
2. “Quickly resolve taxpayer issues when they arise.” ($3.2 billion).
3. “Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.” ($47.4 billion).
4. “Deliver cutting-edge technology, data, and analytics to operate more effectively.” ($12.4 billion).
5. “Attract, retain, and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.” ($8.2 billion).

Each of the 5 objectives is accompanied by several “initiatives” with multiple milestones and “key projects,” ultimately culminating in a 150-page report. While there are many listed initiatives, here are some that appear to be most relevant:

• Initiative 1.2 seeks complete digitalization for all forms by Fiscal Year 2027.
• Initiatives 1.4, 1.6, 1.10, and 1.12 anticipate online access and management for taxpayers’ affairs comparable to that of a bank customer beginning in Fiscal Year 2023 and fully enhanced by Fiscal Year 2026.
• Initiative 1.7 promises “to provide as much certainty on tax issues as possible.” This would be accomplished through more human resources and unspecified “additional guidance tools” for informal guidance. Completion of this initiative is projected to occur in Fiscal Year 2024.
• Initiatives 2.1-2.5 seek by Fiscal Year 2027 to timely notify taxpayers of errors and missed opportunities for credits/deductions and proactively guide the resolution of such issues. Notices will be written in plain English (rather than legalese that requires special knowledge of law or accounting) and at a similar level of linguistic accessibility for the other 7 most common languages in the U.S.
• Initiatives 3.1-3.4 purportedly reorganize the structure for IRS enforcement into a centralized process reliant on analytic models to detect noncompliance by Fiscal Year 2025, resulting in higher audit rates. The target for the audit rates, if there is one, is not explicitly given. However, it was noted that the audit rate for large corporations dropped from 10.5% to 1.7% from 2010 to 2019. The audit rate for partnerships in 2019 was 0.05%, down from 0.48% in 2011, and it was also recognized that individuals earning $1 million or more had an audit rate of 7.2% in 2011 and 0.7% in 2019.
• The report also stated that full modernization of IRS computer technology is anticipated to be achieved in Fiscal Year 2028.

The plan claimed that the number of auditors currently employed represents a record low, unseen since the Second World War. They seek to change this, and estimate that an additional 10,021 full-time equivalents (FTEs) will be hired during Fiscal Year 2023, of whom 1,543 will be allocated to enforcement. For Fiscal Year 2024, 19,545 FTEs total would be employed, with 7,239 of them working specifically in enforcement.

The plan also gave some interesting statistics related to taxpaying in the US, it states that:

• 260 million tax returns are processed each year.
• The average length of a tax return for a large corporation is 6,000 pages.
• The average individual income tax return requires 13 hours.
• The IRS sent almost 13 million notices regarding mathematical errors in Fiscal Year 2021.
• Of those eligible for the Earned Income Tax Credit, 21% did not claim it in 2019.
• “Several years may go by after filing before the IRS contacts a taxpayer about an issue.”
• Within the last decade, the number of IRS revenue agents decreased by nearly 35% while the amount collected in annual tax returns increased by more than 15 million.
• Individual taxpayer returns reporting more than half a million have grown by over 70%.
• The audit rate has decreased by 76% from 2011-2019.
• “IRS employees and taxpayers currently use over 600 applications to conduct the business of the IRS, many of which are custom-built and run on-premises in IRS data centers.”

Plans change, and at the moment, the IRS plan is entirely aspirational. However, sufficient funds have been allocated for the IRS to make the program a reality. The project promises to refrain from auditing individuals with income of $400,000 or less at a rate higher than “historic levels,” but “historic levels” for those specific taxpayers were conspicuously absent from the report. Moreover, a major thrust of the plan is to return the audit rates for the wealthy taxpayers, again to “historic levels,” which appears to sit at about 10-times the current rate for some levels of income. If the “wealthy taxpayer” definition is applied to any taxpayers with income of $400,000 or less their audit rate could be up to triple the current rate. Due to the IRS failing to disclose the specific “historic levels” that they are referring to, the poorest taxpayers could have an audit rate nearly 20 times the current rate without technically violating the “historic level” ceiling.

If you have questions or concerns about how these news 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.

[1] The IRS seeks reallocation of Inflation Reduction Act funds to devote $3.9 billion to “Energy Security” rather than the prescribed half billion for implementing Inflation Reduction Act energy tax incentives.

The IRS regularly makes rulings on situations that taxpayers face, and then publishes those rulings to give guidance to other taxpayers to follow when they find themselves facing similar situations. The recently published Revenue Ruling 2023-02 gives helpful guidance for estate planning. This ruling found that property “acquired from or to have passed from the decedent” usually has its fair market value as its adjusted basis. (IRC § 1014). This phenomenon is known as “step-up basis.” This rule is quite favorable for taxpayers, in fact at nearly $44 billion per year, it is one of the most significant tax expenditures the federal government engages in. A tax expenditure is an amount of money that the federal government forbears through favorable treatment in the tax code.  

Revenue Ruling 2023-02 evaluated the possibility of a step-up basis for a trust with the following characteristics:

• The grantor is taxed on the trust’s income.
• The transfer to the trust was a completed gift.
• The trust is irrevocable.
• The trust’s assets would not be included in the grantor’s estate.
• The trust’s assets are appreciated.
• The trust’s liabilities did not exceed the basis of trust assets.
• Neither the trust nor the grantor held a note obliging the other.

The ruling held that the trust’s assets would not benefit from a step-up basis. The fact that the gift was completed disqualified it from § 1014 treatment, §1014 being the section that defines what will qualify for a step up in basis by listing several sets of circumstances that qualify by being “acquired from or to have passed from the decedent.” The only applicable one for this type of trust is the most general: “Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent.” Ultimately, Revenue Ruling 2023-02 held that assets must be included in the estate for estate tax purposes to qualify for this clause.

Assets spared from the estate tax burden usually do not enjoy the benefits of a step-up basis and Revenue Ruling 2023-02 strengthened this general rule of estate planning even further.

If you have questions or concerns about how these news 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.

Taxpayers and practitioners who interact closely with the IRS always have a multitude of suggestions and ideas regarding improvement of the IRS services. Because they are aware of this, the IRS allows individuals to provide suggestions through the Taxpayer Advocate Service and the Office of Taxpayer Reduction. One may think that IRS employees have more significant opportunities to give their thoughts on avenues for improvement, but as it stands that assumption is incorrect. At one time, the IRS had an Employee Suggestion Program (ESP—not extra-sensory perception), but that program was eliminated on October 1, 2021, and there have been no plans to replace it. The Inspector General for the IRS (TIGTA) investigated the situation and released their report on it.

 The report found that the IRS employed 85,230 people as of January 2023, and until October 1, 2021, they could proffer their recommendations for improvement through ESP and be rewarded through a portion of the savings attributable to accepted suggestions. From fiscal years 2017 through 2021, 162 out of 4,672 ideas were adopted, with the total tangible savings for the first year of implementation amounting to $86,714 net of the awards. The IRS claimed that ESP was too expensive to operate and cost-ineffective as the total cost came to over $4 million annually. Yet, in TIGTA’s words: “If the IRS is going to make decisions about eliminating the ESP based almost exclusively on costs related to coordinators, it should make some effort to control those costs.” Most of the reported costs were due to the business unit coordinators, whose duties were purely administrative, and they were not subject matter experts. Those coordinators would conduct the initial review of the suggestions and coordinate with subject matter experts so that they would identify and manage the timeliness of the case.

The 207 coordinators did not work full-time on the ESP. Still, they spent an average of 31 hours per submission (after dismissing those that failed the “threshold criteria (i.e., statement of problem, proposed solution, and possible benefits)” each coordinator would handle fewer than three submissions per year. Nearly a third of the tips from fiscal years 2018-2021 were “over-aged,” despite the extension of the processing time from 75 days to 180 calendar days in September 2020 to allow coordinators more time to get to the suggestions. The delinquency was partially due to the coordinators’ tendencies to mislabel and misroute suggestions. The ESP was an automated digital program with a unique identification number attached to each suggestion. Yet they were not automatically tracked, and so all the tracing required manual attention.

 The report found that most suggestions were rejected early for failing to provide sufficient benefits that would outweigh the cost of adequately reviewing them, even if they did meet the base threshold for consideration. This is puzzling as formally  it was the subject expert evaluator’s job to evaluate the cost-efficiency of the proposal rather than the coordinator’s. The TIGTA observed that the suggestions’ utility cannot always be effectively monetized, making it hard to evaluate recommendations that purported to lead to things like better protections for taxpayer rights or more efficient enforcement tax law.

The TIGTA took a “judgmental sample” for review. In that review it found that 34 out of 40 suggestions were “not properly evaluated.” One suggestion proposed a computer program matching Forms W-2 with Forms 941. If a Form W-2 reported wages, yet the IRS lacked the parallel Form 941, reporting withheld payroll taxes, mischief was afoot.  The suggestion was rejected without evaluation because “the ESP is meant to suggest ideas that save the government money.” This was meant to combat taxpayers that IRS agents called “ghost employers” who would keep the withholdings for themselves. IRS Criminal Investigation independently created this automated verification almost eight years later.

The TIGTA was critical of the ESP officials’ competence stating in their report, “The ESP coordinators did not have the expertise to determine if certain suggestions should have been accepted or rejected.” For example, they were unaware of tutorial videos for ESP users. Coordinators “lacked the knowledge and experience necessary to determine whether a suggestion warranted further evaluation,” while evaluators “did not consider the overall concept of a suggestion. Instead, they made their determinations based on whether a suggestion could be adopted verbatim as described in the submission.” Finally, “ESP, while in existence, received minimal support from the individual business units’ leadership.” A 2021 survey ranked the IRS at “271 out of 432 total Federal subcomponent agencies in engagement and satisfaction.” The reasons do not appear to be due to the subject matter—the Tax Division of the Department of Justice was tied for 9th place. As a result of the report, the IRS agreed to “develop a service-wide employee feedback process to support the agency’s transformation efforts under the Inflation Reduction Act” with an “implementation date” of November 15, 2024.

If you have questions or concerns about how these news 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.

The IRS Inspector General reviewed federal employee tax compliance and their report is out. The report’s frustration with the lack of enforcement is palpable even in the title “The IRS Has Not Adequately Prioritized Federal Civilian Employee Nonfilers”. A total of $1.5 billion was owed by 149,000 federal civilian employees in FY 2021. The number of delinquent employees increased by nearly a third from FY 2015 to FY 2021, although the total number of federal civilian employees  increased by 6%.

Tax compliance issues can result in disciplinary measures for federal employees. However, the IRS is prohibited from sharing federal employee tax returns with federal agencies outside of the Treasury Department. The report credited the ability to discipline those employees as a reason why IRS employees have a 1.35% delinquency rate compared to the general 4.93% federal civilian delinquency rate. The IRS created a program in 1993 called the “Federal Employee/Retiree Delinquency Initiative” (FERDI) in an attempt to better monitor federal employees and their missed filings. These FERDI taxpayers include “anyone currently receiving a salary or pension from the Federal Government and who either fails to file tax returns or pay taxes owed.” The categorization of FERDI taxpayers apart from other taxpayers may have been intended to subject them to greater scrutiny, yet the effect has been the opposite. Although the Inspector General claimed federal employees “have a higher duty to file tax returns,” the report concluded: “The time the IRS dedicates to Federal employee nonfilers is minimal.”

In conducting their investigation the Inspector General discovered some shocking information. They discovered that the IRS knew of 42,047 federal employees between FYs 2016 and 2020 who failed to file for at least 2 years. Over 41% of this number did not file for 3 years or more years, and 19 did not file for at least 9 years. About 19% of repeat nonfilers had a minimum of $100,000 in income, and despite all of this, only10 employees received a fraudulent failure to file (civil) penalty from FYs 2016 through 2021. There is at least 1 FERDI taxpayer with a delinquency file that has not been resolved in 36 years.

The IRS rejected the proposal to refer all nonfilers who are delinquent for a set number of years to the Justice Department for potential criminal investigation. On the civil side, over 22,000 FERDI cases were referred to auditing in Examination in FY 2020. Examination worked on less than 1% of those cases. These files suffered such low priority that they did not even appear on the list of priorities because “inventory selection was limited to only eight priority buckets” as a result of “legacy programming limitations.” After some pressure from the Inspector General, such files are now third in priority “behind refund hold and high-income nonfiler cases.”

Apart from FERDI matters, the report gave an interesting summary of criminal tax investigations in general:

CI receives, evaluates, and investigates fraud referrals from the civil divisions after there have been established affirmative acts or firm indicators, or ‘badges,’ of fraud. CI then uses the results of those investigations to make referrals to the DOJ. When choosing whether to refer a case to the DOJ, CI will refer to each district’s unique process for case referral. This would include referrals pertaining to Federal employee nonfilers with multiple years of unfiled tax returns. The DOJ does not accept or deny cases for prosecution based on generalized sets of referral criteria. Rather, the process for determining which cases CI will refer to the DOJ requires [judicial] district-level collaboration and the exercise of experience-informed professional judgment.

When the IRS audits a tax return, the case file for the audit is stored in the Enterprise Case Management (ECM) system. The ECM system is used by the IRS “to modernize and consolidate legacy case management systems [there are at least 60], across the Internal Revenue Service (IRS), into an end-to-end enterprise solution in the cloud.” The U.S. Treasury Inspector General for Tax Administration (TIGTA) recently reviewed the security of the ECM system and issued a report containing their findings.         

The details that when notified of a security risk by the office of Security Risk Management, the responsible official must write a report within 60 days to identify the system weakness when the system has “a moderate security classification.” In compiling the report the TIGTA looked at one official and their response to receiving reports. The ECM Authorizing Official was notified of 9 “system security risks” on February 10, 2021. Three of the nine reports were timely created, four were 20 days late, and only two of the nine reports were complete. The initial resolution dates were projected to range from April 30, 2022, to May 2, 2022. Three risks remain unresolved, with varying completion schedules as late as October 31, 2023.

One of the issues TIGTA found on February 10, 2021, was the lack of malicious code protection for Linux. This has not been resolved and they still lack protection. In August 2022, the TIGTA convinced the IRS that malicious code protection is necessary even for Linux servers. Nevertheless, “the planned corrective action does not fully address the recommendation. After the IRS completes the development and testing of an automated malicious code protection solution for Linux servers, it should implement the solution on all applicable Linux servers.” There are two Linux servers in the cloud and two “residing on IRS premises.” Instead of protecting all Linux servers, only “on-premises Linux servers” are planned to be protected and then only beginning on February 15, 2024.

A July 2022 scan of the ECM system revealed 44 high-risk vulnerabilities and 50 medium-risk vulnerabilities. A “vulnerability” is defined as: “A weakness in an information system, system security procedure, internal control, or implementation that could be exploited or triggered by a threat source.”  The required remediation time for high-risk vulnerabilities is 30 days. For medium-risk vulnerabilities, the allotted time is 90 days. Of the high-risk vulnerabilities, 24 were unresolved for 166 to 201 days, and two of the 50 medium-risk vulnerabilities were unresolved for 132 days.

As of July 8, 2022, there were 917 user accounts for the ECM system. Of these, 401 had not signed in for at least 90 days, requiring deactivation. The IRS failed to disable 315 of the 401 user accounts. In October 2022, 4 “privileged user accounts” were not used since November or December 2021. The IRS did not monitor privileged user accounts until the Inspector General intervened in October 2022.

The IRS Chief Information Officer, Nancy A. Sieger, does not seem to believe the deficiencies this report discovered are severe. Instead, she claimed, “there is no evidence in this report that indicates the ECM system failed to adequately protect data from unauthorized access.”

The Supreme Court released an interesting labor law opinion, Helix Energy Solutions Group, Inc. v. Hewitt. The Fair Labor Standards Act of 1938 (FLSA) requires “covered employees” to receive overtime pay for work over 40 hours a week. Employees who work “in a bona fide executive, administrative, or professional capacity” are not covered. Unfortunately, those words do not shed much light on the status of the employee, and so their status is determined through regulations requiring the putatively uncovered employee to meet three tests: The Salary Basis Test, the Salary Level Test, and the Duties Test. The Duties Test is different for individuals with income of less than $100,000. The others, “highly compensated employees,” need only meet one of the three listed responsibilities rather than all three.

One illustrative example of how these tests are applied is the case of Michael Hewitt. Mr. Michael Hewitt worked for Helix Energy Solutions Group from 2014 to 2017 as a “tool-pusher.” In this capacity, he supervised a dozen or more workers. He worked in intense 28-day shifts—for one 28-day period known as a “hitch,” he would work an average of 84 hours a week but then have leave for the following 28-day period. He was paid biweekly throughout this time at a daily rate for each day he actually worked. Ultimately, “Helix paid Hewitt over $200,000 annually” without overtime.

The district court initially ruled in favor of the employer, but that decision was reversed by the 5th Circuit sitting en banc. The sole issue that was ultimately determinative was whether Mr. Hewitt was paid on a “salary basis.” Salary-basis may be met through either 29 C.F.R. § 541.602(a) (§ 602(a)) or 29 C.F.R. § 541.604(b) (§ 604(b)). Section 602(a) requiring “that the employee will get at least part of his compensation through a preset weekly (or less frequent) salary, not subject to reduction because of exactly how many days he worked.” Section 602(b) offers an option for employees who are compensated on “an hourly, a daily or a shift basis” instead of a weekly (or less frequent) one. This requires the employer to guarantee a certain amount “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek” and that such an amount is at least $455 per week (the opinion varies between “at least” $455 and “more than” $455) “regardless of the number of hours, days or shifts worked.” The employer conceded that § 602(b) was not met (there was not a guarantee of at least $455 per week) but argued that § 602(a) was satisfied. The Court disagreed and stated that § 602(a) applied only to employees paid by the week or longer and found that Mr. Hewitt was paid by the day.

The Supreme Court decision was made 6 to 3, with Chief Justice Roberts, Justice Thomas, and Justice Barrett joining the 3 Democratic appointees for an opinion delivered by Justice Kagan. Justice Gorsuch dissented, arguing that the case should be dismissed as improvidently granted as beyond the question for which the Court granted certiorari. Justice Kavanaugh, joined by Justice Alito, dissented on more substantive grounds. He argued that the $963 daily rate sufficed as fulfilling the weekly (or less frequent) as working for one day would effectively grant Mr. Hewitt $963 for the week, which is more than the $455 per week requirement. Justice Kagan described this argument as “a non-sequitur to end all non-sequiturs.” Helix forfeited its argument that the regulations were contrary to the statute by failing to raise it in the lower courts. Nevertheless, Justice Kavanaugh found the argument persuasive because, in his words, “I am hard-pressed to understand why it would matter for assessing executive status whether an employee is paid by salary, wage, commission, bonus, or some combination thereof.”

Helix serves as a reminder of the importance of being aware of the regulations and planning consciously to operate within them. As the majority opinion observed, had Helix “convert[ed] Hewitt’s compensation to a straight weekly salary for time he spends on the rig,” it would not have needed to pay overtime.

 If you have questions or concerns about how these news 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.

Governor Newsom signed SBX1-2, the “Gas Price Gouging Law,” into law on March 28h. The law begins with a reflection  on the gasoline price history in 2022, and then the new law declares: “Fundamental change is necessary to prevent future extreme price spikes and price gouging by oil companies.”  SBX1-2 will expand current reporting requirements into a comprehensive reporting regime affecting every link in the petroleum supply chain. The recipient of these reports, the State Energy Resources Conservation and Development Commission (Commission), is then empowered to set a “maximum gross gasoline refining margin,” in effect, a price ceiling for gasoline. The penalty for exceeding this price will be a percentage of the amount over this price multiplied by all gallons sold for the month. A court injunction would also be possible to allow the state to prevent higher prices from continuing to be charged and fees simply paid. Collected penalties will be kept in the “Price Gouging Penalty Fund,” newly created “to address any consequences of price gouging on Californians” upon subsequent acts by the legislature.

SBX1-2 will take effect on the 91st day after the legislature’s special session ends, June 26, 2023. Exemptions are possible upon proving to the Commission that “the maximum gross gasoline refining margin would be unconstitutional as applied to the refiner.” Alternatively, the Commission may impose a different maximum margin or other conditions “upon a showing by the refiner of good cause.”

A notice and comment period of at least 30 days will be required before a public hearing to determine the maximum margin and penalty. The maximum margin and penalty would then come into effect on the 60th day after the establishment or adjustment. Before the maximum margin and penalty can be set, the Commission must find “that the likely benefits to consumers outweigh the potential costs to consumers.” All relevant factors must be considered, including the possibility of supply shortages and higher average prices. Although two advisory subagencies will be created, the Commission will be solely responsible for setting and enforcing the margin and its penalties. The Commission currently has about 30 attorneys and a few accountants, and SBX1-2 did not increase the funding for the Commission.

The California State Auditor will be responsible for reviewing the efficacy of SBX1-2 in 2033. By operation of law, absent action from the Legislature, the margin and its penalty will be terminated within 180 days of the State Auditor’s report if the State Auditor determines that they should be terminated.

If you have questions or concerns about how these news 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.