Does Your Business Take Identity Theft Seriously? How To Avoid The Business Of Scamming

Businesses need to take security threats more seriously. The fourth day of the National Tax Security Week focused largely on this issue and offered ways business practices can optimize security of businesses and deter both business and client identity theft.

You may have never thought that a business’ identity can be stolen; and indeed, it may sound odd at first, but a business has identifying information that is unique to itself. Oddly enough, among the reasons businesses should be wary of potential scammers is that scammers will often file a business’ taxes.

Potential scammers look for little snit-bits of identifying information of the business. Scammers do not need every little detail about a business to gain access, they just need some of the information that is unique to the business to commit business identity theft and file a tax return on behalf of the “business”.

Though these riveting breaches are seldom discussed unless the breach happens to larger corporations (Target in 2013 and Marriott in 2018), the most common cyberattacks are aimed at businesses that have fewer than 100 employees.

In order to curb potential threats, the Federal Trade Commission suggests that businesses adhere to the following guidelines:
• Back up important files;
• Require strong passwords for all devices;
• Encrypt devices; and
• Enable multi-factor authentication whenever possible.

The IRS is also taking precautions to better protect business information from falling into the mischievous hands of scammers. Beginning on December 13, 2020, the IRS will be redacting sensitive information from the business tax transcripts and the summary of corporate tax returns.

Additionally, the IRS is making it easier for businesses that may have had a breach of identity be proactive in these matters by filing Form 14039-B, Business Identify Theft Affidavit (the “Affidavit”). The Affidavit should be filed by the business if any of the following occurs:
• The business receives a rejection notice for an electronically filed return because a return already is on file and the business did not file it;
• Notice about a tax return that the business did not file;
• Notice about Form W-2 filed that the business did not file; and
• Notice of a balance due that the business does not believe is owed.

Although businesses can start being more proactive in ensuring there will not be major security breaches related to taxes, it is important to note that the Affidavit should not be used if the business experienced a data breach that resulted in no tax-related impact. It is also important to remember that the changes the IRS is making does not absolve the business from making the necessary changes to better protect its information.

Fortunately for businesses, there are a number of ways to strengthen the security of a business. Determining the weaknesses posed by your individual business is vital in taking action against scammers. As always, the attorneys at Vandenack Weaver are here to assist you determine potential weakness and implement changes to strengthen your business’ security.

VW Contributor: Justin A. Sheldon
© 2020 Vandenack Weaver LLC
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The Section 355 Transaction: Waving Goodbye to Your Business Partner With Money in Your Pocket

A business is constantly changing and almost everyone wants to see their businesses evolve and grow.

However, when businesses have multiple owners, business relationships may sour due to both personal and professional conflicts. These conflicts can often lead to the dissolution and liquidation of a business if owners cannot find common ground, which often results in large amounts of realized income and capital gains tax. If you have almost or already reached such an impasse and you desire to continue operating the business, rather than dissolving your business, consider splitting your business via a Section 355 nonrecognition transaction (a Section 355 transaction can be used for both corporations and limited liability companies that have elected to be taxed as a corporation).

A Section 355 transaction in its most basic form generally involves a parent company and a subsidiary company. Though all requirements are the same within Section 355, there are three variations of the Section 355 fact pattern: 1) a spin-off, 2) a split-up and 3) a split-off.

  1. A spin-off involves the distribution of subsidiary company stock from parent company to the shareholders of the parent, without the surrendering of any parent stock.
  2. A split-up involves the distribution of two or more subsidiaries from the parent company to the shareholders of the parent company in complete liquidation of the parent company. The distribution of subsidiary stock can either be pro-rata to the parent company shareholders or each shareholder can acquire a separate subsidiary.
  3. A split-off involves the distribution of subsidiary to some or all of the parent’s shareholders in exchange for some or all of their stock in parent.

Regardless of the type of split, there are a number of requirements that must be satisfied to ensure the transaction qualifies for nonrecognition treatment. Though a number of the requirements are relatively straightforward, the requirement most prone to challenge is the business purpose requirement. The reason for this is because even if the transaction satisfies all other requirements, if no legitimate business purpose exists, the transaction will lose its nonrecognition treatment and the shareholders and company will be subject to tax.

Though what constitutes a business purpose is not clearly defined within Section 355, or the corresponding regulations, a legitimate business purpose has previously been found in the following situations:

  1. when there are two owners and they desire to split because the owners have interest in different business activities;
  2. when a parent company surrendered all outstanding stock in its subsidiary due to serious disputes between owners; and
  3. when a distribution was completed in order to increase the amount of commercial credit.

Nevertheless, it is important to note that simply because a business purpose has previously been found in the transactions, each transaction is independently reviewed and a business purpose that satisfied the requirement for one transaction may not satisfy the requirement for another.

Given the intricate requirements involved in properly structuring a Section 355 transaction to ensure nonrecognition treatment, it is important that you consult with competent legal counsel. If you have any questions about how a Section 355 transaction can help your business, the attorneys of Vandenack Weaver can assist you.

VW Contributor: Justin A. Sheldon
© 2020 Vandenack Weaver LLC
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Notice 2020-75: The IRS Intends to Issue Proposed Regulations to Assist with State and Local Tax (SALT) Deduction Cap

On November 9, 2020, the IRS released Notice 2020-75. With this Notice, the IRS described its intention to issue proposed regulations, in connection with the Treasury Department, which would allow a partnership or an S-corporation for tax purposes to deduct state and local taxes from their non-separately stated taxable income or loss for the tax year of payments. They would not be passed through to the partners or shareholders, where they would then be subject to the Tax Cuts and Jobs Act’s $10,000.00 limitation on state and local tax (“SALT”) deductions.

Internal Revenue Code Section 164(a) provides for the SALT deduction. The SALT cap was provided for by Section 164(b)(6). In response to the Tax Cuts and Jobs Act’s so-called “SALT cap,” many states, including Connecticut, Maryland, New Jersey, Oklahoma, Rhode Island, Wisconsin, and Louisiana, adopted laws which separately attempted to circumvent the “SALT cap” on the state level. For example, in Louisiana, Oklahoma, and Wisconsin, the solution involved entities calculating their tax base and paying state income tax; the partners and shareholders were not assessed a tax liability and were not assessed a distributive share of income for state income tax purposes.

The remaining states mentioned above took a different approach to circumvent the “SALT cap”, the work-around involved the entity paying state income tax, but retaining certain pass-through features; partners and shareholders would then receive a state income tax credit equal to all or a portion of their share of the tax paid by the entity (as an aside, of the states listed, only Connecticut’s entity taxation regime is mandatory).

With the issuance of Notice 2020-75, the IRS has effectively expressed its intent to approve these state-level work-arounds. The intention of the IRS was unclear up until this point, as it had previously shut down SALT deduction work-arounds involving contributions to a charitable state fund via proposed regulations.

In Notice 2020-75, the IRS has confirmed its intention to issue proposed regulations clarifying that state and local income taxes imposed on and paid by partnerships and S-corporations will be allowed to be deducted by the entities themselves. The Notice says that these taxes must be direct income taxes imposed and paid by the entity, and defines them as Specified Income Tax Payments. The Notice further indicates that the proposed regulations will allow an entity a deduction regardless of their state’s regime, be it mandatory or elective.

Additionally, the Notice states that an entity tax does not constitute an item of deduction if a partner or S-corporation shareholder takes into account the partner’s distribution share separately under Sections 702 or 1363. Specified Income Tax Payments, as they are defined by the Notice, also exclude deductions which would be disallowed by IRC Sections 703(a)(2)(B) (Partnerships) or 1363(b)(2) (S-corporations).

Whether the final regulations will be promulgated has yet to be seen. Additionally, there is concern among lawmakers that this arrangement will allow partners in a partnership or shareholders in an S-corporation to be treated more favorably than workers who earn their income through wages, as wage-earners cannot form an LLC and become sub-contractors in order to avail themselves of the deduction. Only S-corporations, partnerships, and LLCs treated as partnerships for tax purposes may take advantage of the proposed changes described by the Notice.

The proposed regulations are intended to apply to tax payments made by an entity on or after November 9, 2020, and Taxpayers may apply the rules in the Notice to Specified Income Tax Payments made in a taxable year of their entity ending after December 31, 2017. If you are a business owner, or are considering forming a business, and have any questions or concerns as to how this new Notice may affect your business taxes, you should not hesitate to reach out to our law firm’s tax professionals for a consultation or further explanation.

VW Contributor: Elena K. Whidden
© 2020 Vandenack Weaver LLC
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500 Series Notices Issued Once Again – The Hits Keep Coming

Due to COVID-19, on May 9, 2020, the 500 series notices were suspended. Now, it seems, the Internal Revenue Service (the “IRS”) has begun to issue the 500 series notices to taxpayers once again. What is a 500 series notice and what is the importunate of the IRS reissuing these notices you may ask?
The 500 series notices include three different types of notices that alert taxpayers about various stages of nonpayment – (1) the CP501, (2) the CP503 and (3) the CP504.

The CP501 Notice alerts taxpayers that they have a balance due to the IRS and their payment options.

The CP503 Notice alerts taxpayers that the IRS has not heard from the taxpayer about the unpaid balance and that the taxpayer’s property may be subject to a lien if they fail to pay.

The CP504 Notice alerts taxpayers that their remains and unpaid balance and that if not immediately paid, the IRS will levy the taxpayers state income tax refunds.

Regardless of the type of 500 series notice you receive, it is imperative that you follow the directions set forth in the notice to dispute the amount owed or to pay the balance due. If you do not successfully dispute the amount owed and you fail to pay the balance due, a penalty will be assessed, and the outstanding balance and penalty will continue to accrue interest until paid. Furthermore, once the IRS has levied your state income tax refund, if there is still a balance outstanding, the IRS will likely send you a notice of its intent to levy your other property, including: wages, bank accounts, business assets, personal assets, and social security benefits.

Now, all is not lost if you receive a 500 series notice, because there are options afforded to you that can reduce or eliminate the penalty and/or balance owed in part or even entirely. If, based on all the facts and circumstances in your situation, there exists reasonable cause for failure to pay the taxes when due, you will generally qualify for relief from penalties. Though lack of funds, in and of itself, is not a reasonable cause for failure to pay, the reason for the lack of funds may meet the reasonable cause criteria. Sound reasons, if established, may include: fire, casualty, natural disaster, pandemics, death, serious illness, incapacitation, and other reasons which establishes that you used all ordinary business care and prudence to meet your obligations. Regardless of the reason, the following facts need to be established in order to determine if the cause was reasonable:
• What happened and when did it happen?
• What facts and circumstances prevented you from paying your tax during the period you did not pay your taxes timely?
• How did the facts and circumstances affect your ability to pay your taxes?
• Once the facts and circumstances changed, what actions did you take to pay our taxes
• In the case of a business or estate, did the affected person or member have sole authority to make the payment?

If you have been financially impacted by COVID-19, you may satisfy the reasonable cause exception and have the penalty waived.

If you have received a 500 series notice and believe that the amount does not accurately reflect what you owe or if you have been impacted by the pandemic, or any other reason, the attorneys of Vandenack Weaver can assist you.

VW Contributor: Justin A. Sheldon
© 2020 Vandenack Weaver LLC
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Attorneys drafted force majeure clauses into contracts on the off-chance the parties could not fully perform a contract due to reasons specified in the clause. Until recently, force majeure clauses were overlooked and rarely invoked to cancel or suspend the performance of a contract. As with every other aspect of our lives, this changed, and similarly to how the pandemic spread like wildfire, the invocation of force majeure clauses to cancel or suspend the performance of a contract began spreading across the corporate world like wildfire.

Force majeure clauses are designed and drafted to excuse or suspend both parties from their respective performances of a contract under a certain set of limited circumstances. Because contracts are generally drafted to ensure the enforceability of its performance, courts have historically construed force majeure clauses rather narrowly.

Prior to COVID-19, most force majeure clauses did not include epidemics and pandemics in the boilerplate language of a force majeure clause.

An example of a boilerplate force majeure clause pre-COVID would hold that,

Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement to the extent, and for so long as, such failure or delay is caused by or results from causes beyond the reasonable control of the affected party including but not limited to fire, floods, embargoes, war, acts of war (whether war be declared or not), acts of terrorism, insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts of God or acts, omissions or delays in acting by any governmental authority or the other party.1

The “catchall” in properly drafted force majeure clauses is the “Act of God” provision.

When the pandemic began to spread like wild fire, we saw that supply chains were being disrupted, people were unable to go into work, and it became unsafe to do things that we wouldn’t have given a second thought to doing less than one year ago; which brings me to the crux of this blog. Is a pandemic an Act of God? And, if so, can a party suspend or cancel the performance of a contract by invoking this provision?

To properly invoke the force majeure clause, it must be drafted in such a way that would allow the clause to be reasonably construed to include pandemics. Many scholars believe that although case law is scant when it comes to interpreting a pandemic as an Act of God, it is reasonable to construe a pandemic as an Act of God, and as such able to excuse the performance of a contract drafted prior to COVID-19.2 However, the Act of God language must be included in the force majeure clause to invoke the catchall provision.

Even then, if a contract contains the Act of God language in a force majeure clause, it is not guaranteed that a party can invoke it to cancel or suspend its performance of a contract. The party wishing to cancel or suspend the performance of a contract must also show that despite the Act of God, the party still tried to perform its contractual duties.

Furthermore, to properly cancel or suspend the performance of the contract by invoking the clause, the party invoking it must demonstrate that the Act of God actually impacts its performance of the contract.3 That is to say, a party may not simply invoke an Act of God provision to relieve the party of its contractual duties; the party must shoulder its burden to demonstrate that there is a link between the Act of God and that party’s ability to perform the contract.

For more information, please contact:



3Beardslee v. Inflection Energy, LLC, 798 F.3d 90, 93 (2d Cir. 2015)

VW Contributor: Leslie E. Mueller
© 2020 Vandenack Weaver LLC
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Economic Impact Payments – What You Need to Know

The Internal Revenue Service has extended the deadline for individuals to claim an Economic Impact Payment by five weeks to help individuals who have not received a stimulus payment. The Get My Payment tool explains that users have until November 21 Midnight ET to request their economic impact payment. Eligible individuals can also visit and use the Get My Payment tool to find out the status of their Economic Impact Payment. This tool will show if a payment has been issued and whether the payment was direct deposited or sent by mail. Get My Payment tool might give a user the option of providing their bank account information to receive their payment by direct deposit. For example, if an individual’s payment was sent by mail and the Post Office was unable to deliver it. An individual must file a 2019 tax return to receive the payment if required to do so. The IRS provides an online database of authorized e-file providers for individuals to electronically file their tax return.

Important security features when using the Get My Payment tool
• Before using the Get My Payment tool, an individual must verify their identity by answering security questions.
• If the answers to the security questions do not match IRS records after multiple attempts, the user will be locked out of the tool for 24 hours. This is for security reasons. Those who can’t verify their identity won’t be able to use Get My Payment. If this happens, people should not contact the IRS.
• If the tool returns a message of “payment status not available,” this may mean the IRS can’t determine the person’s eligibility for a payment right now. There are several reasons this could happen. Two common reasons are:
o A 2018 or 2019 tax return is not on file and the agency needs more information or,
o The individual could be claimed as a dependent on someone else’s tax return.
• In some cases, if a taxpayer has filed their 2019 tax return but the IRS hasn’t processed it yet, they may receive “payment status not available.” Taxpayers who’ve already filed a tax return don’t need to take any action. The IRS continues to issue Economic Impact Payments as tax returns are processed.

While millions of Americans have received their economic impact payments, some may have to provide additional information to the IRS to get their payments. Questions regarding eligibility requirements, requesting an economic impact payment, calculating an economic impact payment and more can be answered here.

Individuals who are not required to file a tax return
There is a tool for Non-Filers: Enter Payment Info Here to register for a payment. To be eligible to fill out the non-filer application, an individual must be eligible for an Economic Impact Payment and the individual is not required to file federal income tax returns for 2018 and 2019 for any reason including:
• The individual’s income is less than $12,200
• The individual is married filing jointly and together the income is less than $24,000, and
• The individual has no income.

Individuals who can be claimed as a dependent on someone else’s tax return should also not use the non-filer tool. The IRS underscores that individuals should not use this tool if they are filing a 2019 tax return. If an individual was required to file a 2019 tax return but they used the Non-Filer tool, this could delay processing their tax return and their Economic Impact Payment. More information about non-filers can be accessed here.

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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IRS Releases Part 4 and 5 of a Five-Part Security Summit Tips for Tax Professionals during COVID-19

This article wraps up the last of the ​Security Summit’s​ five-part series called Working Virtually: Protecting Tax Data at Home and at Work. ​As a refresher, the Security Summit is made up of the Internal Revenue Service (“IRS”), state tax agencies, and private-sector tax industry officials. The impetus for releasing this five-part series was to equip ​tax practitioners with specific strategies to assess and secure their home and office data, due to the fact that many tax professionals are not working from home.​ ​This article explains the fourth and fifth tips that the Security Summit issued. The fourth tip reminds tax practitioners to be alert of and avoid phishing scams. The fifth tip reminds tax professionals that federal law requires them to have a written information security plan. The Security Summit further recommends that practitioners create an emergency response plan if they experience a data theft.

Tip 4: Avoiding Phishing Scams
What should tax practitioners be on the lookout for to spot potential phishing scams? First, phishing emails can have an urgent message. For example, cybercriminals can send an email impersonating human resources or an administrator asking for the recipient to update their password or other personal information by clicking on a link. The link will then take the individual to a fake site that feigns the appearance of a trusted source requesting them to insert personal information. Or, the email could contain an attachment for the recipient to click on that instead downloads malware on their computer. Now cybercriminals are capitalizing on COVID-19 fears ​by presenting themselves as providers of face masks or personally protective equipment in short supply. Tax professionals should beware of emails from criminals posing as potential clients. Tax practitioners should thus stay vigilant in scanning all emails and urge on the side of caution rather than clicking on any email attachment or any link in an email. When in doubt, taxpayers and tax preparers can forward suspicious emails posing as the IRS to

Lastly, because phishing scams are commonplace, and often successful, the Security Summit urges tax professionals to educate all office personnel about the dangers and risks of opening suspicious emails – especially during the COVID-19 period.

Tip 5: Make a Plan for Protecting Data and Reporting Theft
The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley ACT, requires that tax professionals have a written security plan in place to safeguard their client’s tax data. This federal law is administered and enforced by the Federal Trade Commission (“FTC”). The FTC underscores that a tax preparer’s security plan must be appropriate to the company’s size and complexity, the nature and scope of its activities, and the sensitivity of the customer information it handles. Therefore, a security plan for a solo tax practitioner would differ from a global firm’s security plan. On the other hand, the FTC does have requirements that apply to all tax companies, irrespective of their size and complexity.

Each tax institution must:
● Designate one or more employees to coordinate its information security program;

● Identify and assess the risks to customer information in each relevant area of the company’s operation, and evaluate its effectiveness of the current safeguards for controlling these risks;

● Design and implement a safeguards program, and regularly monitor and test it;

● Select service providers that can maintain appropriate safeguards, making sure the contract requires them to maintain safeguards, and oversee their handling of customer information; and

● Evaluate and adjust the program in light of relevant circumstances, including changes in the firm’s business or operations, or the results of security testing and monitoring.

Failure to have a data security plan may result in an FTC investigation. The IRS may also treat a violation of the FTC safeguards rule as a violation of the IRS Revenue Procedure 2007-40 which stipulates the rules for tax professionals participating as an Authorized IRS e-file Provider.

On July 10, 2019, the IRS created this ​youtube video​ to reiterate that all tax preparers must have a written security plan. The video also reiterates the basic requirements for how tax preparers can safeguard taxpayer data. And, as an additional tool, you can revisit the “Taxes-Security-Together” Checklist​ the Security Summit rolled out during the 2019 summer as a starting point for analyzing office data security. You can also look at IRS ​Publication 4557, Safeguarding Taxpayer Data (PDF)​, which details critical security measures that all tax professionals should enact. Finally, the Security Summit noted that the FTC is currently re-evaluating the Safeguards Rule and has proposed new regulations. Therefore, tax preparers should be alert to any changes in the Safeguards Rule and its effect on the tax preparation community.

Creating a Data Theft Response Plan; Report Data Thefts to the IRS
The Security Summit also recommends that all tax practitioners create a response plan so that they have steps in place should they experience a data theft. If a client or the tax firm are the victim of data theft, the Security Summit states that they should immediately:

Report it to the ​local IRS Stakeholder Liaison​. ​Stakeholder Liaisons will notify IRS Criminal Investigation and others within the agency. Speed is critical. If reported quickly, the IRS can take steps to block fraudulent returns in clients’ names and will assist through the process.

Email the Federation of Tax Administrators at ​Get information on how to report victim information to the states. Most states require that the state attorney general be notified of data breaches. This notification process may involve multiple offices.

Cyber attackers could also steal a tax practitioner’s identity too. Tax practitioners should
regularly check their IRS e-Services e-File Application to see a weekly count of tax returns filed with their Electronic Filing Identification Number (“EFIN”). Excessive filings are a sign of data theft. E-file applications should also be kept up to date. Circular 230 practitioners also can review weekly the number of tax returns filed using their Preparer Tax Identification Number (“PTIN”). Excessive filings are also a sign of data theft.

As always, tax professionals should take advantage of the additional resources the IRS provides related to security recommendations and questions in ​Publication 4557 Safeguarding Taxpayer Data​ (PDF), as well as the National Institute of Standards and Technology (NIST’s) Small Business Information Security: The Fundamentals​ (PDF).

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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IRS Releases Part 3 of a Five-Part Security Summit Tips for Tax Professionals

On August 6, 2020 the Internal Revenue Service (IRS), in partnership with the Security Summit, issued the third part of their five-part series providing tips for tax professionals to thwart off cyber-security attacks during COVID-19. This week the advice was focused on virtual private networks (VPN). A VPN ensures your location stays private, your data is encrypted, and you can surf the web anonymously.

To understand how a VPN works, it is important to understand the basic transaction that occurs when individuals browse the internet. For example, when an individual types in their browser they are entering the website’s domain name. A domain name designates the name of the website’s IP address. Every computer and device accessing the internet also has an IP address as well. When an individual types in into their internet browser they are sending their data into the internet until it reaches the server. Then that server translates the data and sends the website that individuals has requested to visit. During these transactions, however, individuals are not only sending  requests to visit various websites, they’re also sending out their computer’s IP address and other information too. This allows the potential for hackers to intercept a person’s information. The use of a VPN will protect an individual’s information from being intercepted. A VPN creates a tunnel that encrypts information. A VPN is essential for any business because it provides a safe way to transmit data between a remote user via the Internet and the business network.

Chuck Rettig, the IRS Commissioner noted that “We continue to see tax pros fall victim to attacks every week. Failure to use VPNs risks remote takeovers by cyberthieves, giving criminals access to the tax professional’s entire office network simply by accessing an employee’s remote internet.”

However, finding a legitimate vendor to purchase a VPN from can be difficult. Carefully review various companies that offer VPN services and be sure to choose a service that includes all the capabilities that will meet your needs.

And, while not stated in the IRS’s tip for this week, it is also important to know that while a VPN is necessary, it is not a magical privacy shield that will completely insulate any company from vulnerabilities to cyberattacks. For example, a VPN cannot protect you against a website setting a tracking cookie on your device that will then alert other websites about you. A VPN also cannot protect you against a website that sells your email address to a third-party data broker.

Lastly, the IRS tip for this week also includes the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) advice regarding VPNs:

  • Update VPNs, network infrastructure devices and devices being used to remote into work environments with the latest software patches and security configurations.
  • Alert employees to an expected increase in phishing attempts.
  • Ensure information technology security personnel are prepared to ramp up these remote access cybersecurity tasks: log review, attack detection, and incident response and recovery.
  • Implement multi-factor authentication on all VPN connections to increase security. If multi-factor is not implemented, require teleworkers to use strong passwords
  • Ensure IT security personnel test VPN limitations to prepare for mass usage and, if possible, implement modifications—such as rate limiting—to prioritize users that will require higher bandwidths.

As always, tax professionals should take advantage of the additional resources the IRS provides related to security recommendations and questions in Publication 4557 Safeguarding Taxpayer Data (PDF), as well as the National Institute of Standards and Technology (NIST’s) Small Business Information Security: The Fundamentals (PDF).

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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U.S. Supreme Court Rules Public Perception Determines Trademark Eligibility – It May Affect How You Protect Your Brand Online

On June 30, 2020, the United States Supreme Court ruled in Patent and Trademark Office v. B.V., that it is possible for a generic word combined with “.com” to receive a federally protectable trademark.

This landmark case strikes at the fundamental clash between two competing, yet central ideas in trademark law.

  • First, there is the notion that to protect the public from confusion, a company can receive trademark protection for works or symbols that the public understands to designate the source of goods or services.
  • Contrastingly, the second idea is that to protect unfair competition, a company cannot receive trademark protection for words or symbols that are “generic” names.

But what happens when a business has a generic name in which the public has come to associate that specific business with the specific goods or services it sells? The Supreme Court answered this very question, and found in an 8-1 decision that, owned by Booking Holdings Inc., is entitled to nationwide legal protection against competing trademarks. is a business that maintains a travel-registration website. The business sought federal registration of marks including the term “,” but the U.S. Patent and Trademark Office (PTO) denied the business’ trademark application. It is important to note that a trademark gives a business the ability to distinguish the goods or services it offers from another business. If a business’s application for a federal trademark is accepted, then that business has certain rights, including the right to protect its trademark against use by other businesses. This not only secures to the owner of the trademark the goodwill of her business, but it also protects consumers in that when they purchase a product bearing a particular trade-mark, they can be assured that they will get the product which it wants.

U.S. trademark law, however, does not confer trademark rights to companies that claim ownership of an entire category of goods, such as wine, or computers, or books. But what about the businesses that invested significant resources in building their brands, such as and When consumers think of, for example, most associate that domain name with a specific service.

Thus, the case turned on whether consumers perceived “” to be generic. In its opinion, the Supreme Court hypothesized that if consumers thought “” was generic, they might expect consumers to understand Travelocity — a similar service – to be a “” or if a consumer was looking for a trusted online hotel-reservation service, they would ask a frequent traveler to name her favorite “” provider.

The Supreme Court agreed with the lower court’s finding that consumers do not perceive “” in this generic way. Moreover, the PTO did not dispute that determination. Instead, the PTO argued for a “per se” rule against trademark protection for any generic word followed by a “.com.”

 Yet, the Supreme Court pointed to past instances where the PTO did not follow this rule. For example, the PTO granted trademark registration in the past to “” and “” The Court underscored that because domain names are one of a kind, a significant portion of the public will always understand a generic “.com” term to refer to a specific business. Thus, the Court rejected the PTO’s position that “” terms are categorically incapable of identifying a source or particular business.

There is a limiting principle to take away from this ruling. The Supreme Court did not rule that having a “” name automatically classifies that term as non-generic. The significance rests with whether consumers perceive that term as capable of distinguishing among members of the class. collected consumer surveys to show that 74% of consumers of travel services recognize as a trademark. Because the PTO offered no evidence to challenge that enjoys unparalleled consumer loyalty in the travel industry, there was no dispute with respect to whether consumers perceive to be a generic term.

For businesses, this case proves that if you harness time and effort in building your brand it can pay off. But it comes at a cost. A simple google search reveals that in 2018, spent $4 billion on marketing.  It is no surprise that spent a portion of those funds on buying Google Adwords to drive consumer traffic to their website. In the second quarter of 2019 alone, Booking Holdings, the parent company of spent $1.19 billion on performance marketing.

It is important to highlight the point that Justice Stephen Breyer made, as the sole dissenting opinion in this case. He cautioned that the majority’s decision will “lead to a proliferation of “” marks granting their owners a monopoly over a zone of useful, easy-to-remember domains.”

While consumer perception was central to this case, there is an additional cautionary tale with respect to how and other companies obtain that perception from consumers. Essentially, bought the public perception that was central to winning this case through the billions it spent on advertising and marketing. Notably, this was not discussed in the Supreme Court’s opinion, but nonetheless is something business owners, as well as the public, should keep in mind.

Accordingly, businesses must consider the value of both their trademark and the internet domain associated therewith — and how to ensure they are legally protected.  Simply registering an internet domain does not provide trademark protection and owning a trademark does not automatically provide your business with the right to the “.com” domain extension thereof.

As you consider how to promote your business, Vandenack Weaver attorneys can assist you in determining how to best protect your brand in commerce, social media and online.  If you have questions, please call at 402-504-1300 or contact us via

VW Contributor: Skylar Young
© 2020 Vandenack Weaver LLC
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The Second Circuit Upholds Regulation Best Interest

On June 26, 2020 the U.S. Court of Appeals for the 2nd District ruled that the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) authorizes the Securities and Exchange Commission’s (“SEC”) Regulation Best Interest rule and that the rule is not arbitrary and capricious. Specifically, the Court held that Section 913(f) of the Dodd-Frank Act grants the Securities and Exchange Commission (SEC) confers broad rulemaking authority which includes the Best Interest rule adopted by the SEC.

Background on the Regulation Best Interest Rule

Under federal law, both investment advisers and broker-dealers offer financial services to retail customers. However, only the former owe a fiduciary duty to their clients; broker-dealers do not. To reduce retail investor confusion in the marketplace regarding the investment advisory services and brokerage services, the SEC promulgated the Regulation Best Interest rule. Thus, the point of the Regulation Best Interest rule was to establish a “best interest” standard of conduct applicable to broker-dealers when making a recommendation of a securities transaction to a retail customer. A retail customer is a “natural person, or the legal representative of such a natural person, who: (A) receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an assigned person of a broker or dealer; and (B) uses the recommendation primarily for personal, family or household purposes.” However, the rule does not define “best interest.” Rather, it delineates four component obligations a broker-dealer must follow, in addition to prioritizing the interests of the retail customer above any interests of the broker-dealer or associated persons thereof. Those four obligations include:

  • The Disclosure Obligation,
  • The Care Obligation
  • The Conflict of Interest Obligation, and
  • The Compliance Obligation.

Issues in XY Planning Network, LLC., v. U.S. Securities and Exchange Commission

Petitioners in this case, including an organization of investment advisers, seven states, and the District of Columbia brought forth an action challenging the lawfulness of Regulation Best Interest. They argued that the Dodd-Frank Act requires the SEC to adopt a rule holding broker-dealers to the same fiduciary standard as investment advisers.

However, the Second Circuit held that the key language in Section 913(f) of the Dodd-Frank Act, which is permissive, reflects Congress’s intent to confer discretionary rulemaking authority to the SEC. The pertinent language states:

“the SEC may commence a rulemaking, as necessary or appropriate in the public            interest and for the protection of retail customers . . . to address the legal or regulatory standards of care for” broker-dealers.”

Petitioners argued that Section 913(g) narrows this discretionary authority under Section 913(f). Unlike the broad authority under 913(f), Section 913(g) is specific in that it authorizes the SEC to establish a fiduciary duty for broker dealers. Thus, Petitioners reasoned that 913(f) was a procedural authorization to commence rulemaking only and that 913(g) provided the substantive content for any such rulemaking. The Second Circuit disagreed and found this interpretation at odds with the plain meaning of the regulation in which 913(f) and 913(g) are two separate and freestanding grants or rulemaking authority that are not interdependent provisions that limit one another.

The Second Circuit also rejected Petitioners’ argument that Regulation Best Interest is arbitrary and capricious. Rather, the court highlighted the fact that the SEC considered thousands of comments and input before rejecting the extension of the fiduciary duty to broker-dealers. The Petitioners further alleged that Regulation Best Interest is arbitrary and capricious because the SEC failed to adequately address the significant evidence that consumers are not meaningfully able to differentiate between the standards of conduct owed by broker-dealers and investment advisers. But once again, the Court showed deference to the SEC’s determination that while a uniform standard of care may reduce retail investor confusion, this benefit could not overcome the burden that would result with respect to significant compliance costs for broker-dealers that would ultimately cause retail customers to experience an increase in the cost of obtaining investment advice and lead to a potential exit of broker-dealers from the market.

This is an important decision in that the Second Circuit has explicitly ruled that that Regulation Best Interest is the standard of conduct expected from broker-dealers. And, moreover, the court rejected the argument that Congress required the SEC to harmonize the investment adviser and broker-dealer regulatory models. Going forward, Regulation Best Interest will open the door to disclosures required for various broker-dealers when they are making explicit recommendations to clients in scenarios where the broker does not already have discretion to make trades. Given this important circuit decision, firms should heed the three-page Appendix the SEC issued on April 7, 2020 to implement plans with respect to Regulation Best Interest. The compliance date for Regulation Best Interest began in June 30, 2020.

VW Contributor: Skylar Young
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