Virginia Expands the Virtual Meeting Space, Allowing Nonstock Corporations to Hold Annual Meetings in Cyberspace

Trying to find a location for your annual shareholder meeting, but concerned about cost and picking a place that is convenient for and will be attended by most of your members?  Virginia lawmakers recently enacted legislation with the aim to address these problems for nonstock corporations grappling with the difficulty of getting member participation at their annual meetings.  The Virginia General Assembly, effective July 1, 2018, passed House Bill 1205, which amended the Virginia Nonstock Corporation Act, allowing nonstock corporations to conduct annual and special meetings of members via electronic means, provided their Articles of Incorporation and bylaws do not require the meetings to be held at a specific location.  This allows nonstock corporations to move their meetings from a physical boardroom to a virtual boardroom.

Allowing virtual meetings for corporations is not a new phenomenon.  Delaware amended its General Corporation Law in 2000 allowing stock corporations to conduct virtual shareholder meetings.  In the age of the convenience of the Internet, many corporations have begun utilizing virtual meetings to reduce costs for both the corporation and individual shareholders, while increasing shareholder participation and board of director control over the structure of the meeting, as board of directors can limit any or all member communication.  Since 2000, additional jurisdictions have also begun allowing corporations to use online real estate and conduct their meetings without any in-person attendance.  Virginia, however, is one of the first jurisdictions to expand the use of virtual meetings from stock corporations to nonstock corporations as well.

Nonstock corporations are corporations that generally do not have owners or members that share in the corporation’s profit and are formed with no intention of generating a return of income.  Examples of these types of corporations are organizations that have Internal Revenue Code Section 501(c) tax-exempt status, such as charitable, fraternal, political, religious, trade, or civil organizations.  Nonstock corporations are typically managed by a board of directors and members have voting rights, just not a right to corporate profits.  Similar to the concerns of stock corporations preferring virtual meetings over physical meetings, nonstock corporations are also concerned with cost, convenience and member participation.  For example, without a bylaw specifying what constitutes a quorum, Section 13.1‑849 of the Virginia Nonstock Corporation Act only requires 10% of members to meet a quorum.

Virginia’s latest expansion allowing nonstock corporations a virtual means to hold annual shareholder meetings versus the confines of a physical venue is likely an attempt to remediate these problems and increase member participation.  It should be noted, Virginia House Bill 1205 does not alter notice requirements for the annual meetings.  The amendment also requires the nonstock corporation to implement reasonable measures to (1) verify that each person remotely participating is a member or proxy, and (2) provide the members a reasonable opportunity to participate in the meeting, vote on matters, and to read or hear the proceedings of the meeting.

While there is still little guidance on how nonstock corporations should organize virtual meetings with their members, it is yet to be seen how many nonstock corporations begin conducting virtual meetings or how many other jurisdictions follow suit and expand the ability of nonstock corporations to conduct virtual meetings.  As the Internet and technology, however, continue to connect the way people communicate, so too could formal corporate mechanisms enter the cyber world to conduct business meetings with their members.

© 2018 Vandenack Weaver LLC
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U.S. Supreme Court Expands Rights of States to Collect Tax on Internet Transactions

by James S. Pieper

Since the dawn of the Internet, online sellers have benefited from a line of United States Supreme Court precedent that prevented states from requiring out-of-state businesses to collect and remit sales tax on sales in states where the seller has no “physical presence.”

On June 21, 2018, the Court discarded its longstanding “physical presence” test, thus opening the door for state governments to impose a broader range of duties on remote sellers, including the duty to collect and remit sales tax.

In South Dakota v. Wayfair, Inc., South Dakota sought to defend its statute that imposed a duty on all retailers with more than $100,000 of sales or 200 transactions within the state to collect sales tax on transactions and remit the tax to the state.  For retailers with no physical presence in the state, the statute was clearly in violation of the historic interpretation of the Commerce Clause of the United States Constitution, which limits the ability of states to regulate “interstate commerce” unless there is a “substantial nexus” between the state’s interests and the commercial activity.

Prior court decisions concluded that a state could have no “substantial nexus” with a seller that had no “physical presence” in said state.  As a result, online sellers with no “brick-and-mortar” presence or employees working in a state were free from the obligation to collect tax on their sales.

In South Dakota v. Wayfair, the Court rejected its prior interpretations of the Commerce Clause and held that a “substantial nexus” could be created by online sales alone despite the lack of “physical presence.”  The decision was decided with a bare 5-4 majority.

As a practical matter, the majority of online sales already entail the collection of sales tax due to either requirements that were valid under prior law or voluntary compliance by larger online retailers (including amazon.com).  Some retailers with no physical stores, however, will lose the advantage of being able to undertake transactions without collecting tax (including the respondents in the case, wayfair.com, overstock.com and newegg.com).

It will be up to each state to set the parameters of which remote sellers might be exempt from collecting tax due to a lack of significant sales, and the Court did not set a constitutional standard for what level of sales would constitute a sufficient “substantial nexus” to allow a state to impose duties (only that South Dakota’s standards were more than sufficient).

Perhaps more importantly, by jettisoning the “physical presence” standard as inappropriate in an era of “substantial virtual connections,” the Court has raised the prospect of greater opportunity for individual states to tax and regulate the actions of businesses whose only connection to said state is via online presence.

All businesses that connect with customers in other states via online connections will need to have heightened awareness that state tax and regulatory requirements in those other states may now apply to those interactions due to the Court’s new reading of the scope of a state’s authority under the Commerce Clause.

© 2018 Vandenack Weaver LLC
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IRS Issues Notice on State and Local Tax Deductions

On May 23, 2018 the U.S. Department of Treasury and the Internal Revenue Service issued Notice 2018-54, which announced new  proposed regulations addressing state and local tax payment deductions for federal income tax purposes.

The 2017 Tax Cuts and Jobs Act places limits on an individual’s deduction to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of state and local taxes paid during the calendar year.  Any state and local tax payments above those limitations   are no longer deductible.  This new limitation is effective January 1st, 2018 and applies to taxable years after December 31, 2017 and before January 1, 2026.  This limitation will  have implications for many Nebraska residents according to data research  by The Pew Charitable Trusts. Based on IRS data from 2015, 28 percent of Nebraskans claimed a state and local tax deduction amount higher,  than $10,000.[1]

Several state legislatures, in response to this limitation, are considering adopting legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, in exchange for credits against the state or local taxes already required.  New York, Connecticut, and New Jersey, states known for having higher state taxes, have already enacted measures that allow taxpayers to fund municipal governments by making charitable donations that are both fully federal income tax deductible and satisfy state and local tax liabilities.   In these states, a taxpayer would be able to apply any amount of state and local taxes over $10,000 toward a municipal government fund and report the transfer as a charitable donation.   The  treatment of these state and local tax payments as charitable contributions effectively reduces  the taxpayer’s  federal income tax liability.

Notice 2018-54 informs taxpayers that the upcoming proposed regulations will assist them in understanding the relationship between federal charitable contribution deductions and the state and local tax payment deduction.  The notice also warns taxpayers to be mindful and cautious in making such transfers or donations, and to remember that federal laws control the proper characterization of payments for federal income tax purposes.  Finally, the Notice states the proposed regulations intend to clarify the requirements of the Internal Revenue Code, and that “substance-over-form” principles govern the federal income tax treatment of such transfers.  In colloquial terms the Treasury and IRS are stating that “if it looks, smells and operates like a state tax deduction those payments will most likely be characterized as state tax deductions with the applicable deduction limits.

[1] Phillip Oliff & Brakeyshia Samms, Cap on the State and Local Tax Deduction Likely to Affect States Beyond New York and California, The Pew Charitable Trusts (Apr. 10, 2018) http://www.pewtrusts.org/en/research-and-analysis/analysis/2018/04/10/cap-on-the-state-and-local-tax-deduction-likely-to-affect-states-beyond-new-york-and-california.

© 2018 Vandenack Weaver LLC

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FIRPTA: United States Resident, Foreign Person or “Disregarded Entity”?

Upon arriving at a piece of real property, a prospective buyer or real estate agent is usually on the look-out for hidden liabilities. One hidden tax liability could involve the Foreign Investment Real Property Tax Act (“FIRPTA”). An unfamiliar concept to many, tax liability arising under FIRPTA could put the purchaser on the hook for the seller’s real estate capital gains.

The FIRPTA tax, which taxes a foreign person’s disposition of real property, was designed to address widespread concern that foreign investors were purchasing United States real property and selling it at a profit, but not paying any tax. Generally, under FIRPTA, a transferee, who is often the purchaser, must withhold 15% of the total amount realized when purchasing United States real property from “foreign persons.” The IRC defines “foreign person” to include a nonresident alien individual, a foreign corporation, a foreign trust, a foreign partnership, a foreign estate, and any other person that is not a U.S. person as defined by the IRC.

If the seller is an individual, IRC Section 7701 provides various technical definitions for when a “nonresident alien individual” becomes a “residential alien individual,” making FIRPTA inapplicable. If the seller is a single-member limited liability company (“SMLLC”) organized in the United States, which is owned by a “foreign person,” the residency status of the SMLLC is “disregarded.” The seller is deemed to be the SMLLC owner, potentially subjecting the sale to FIRPTA. Under the IRC Treasury Regulations, there are various seller entities that are considered “disregarded entities.”

A certificate of non-foreign status provides the purchaser the requisite information to determine the seller’s residency status and whether funds need to be withheld to satisfy FIRPTA. In the above SMLLC scenario, a United States “disregarded entity” cannot provide a certificate of non-foreign status. The certificate of non-foreign status is required to state that the entity is not a disregarded entity, evidenced by a United States employer identification number. An individual transferor may also provide a certificate of non-foreign status, whereby the individual certifies he or she is not a nonresidential alien, and provides their Unites States taxpayer identification number, which is often their Social Security number.

Mischaracterizing a seller’s legal status under the IRC may create liability for the purchaser or their designated agent(s). A simple request by the purchaser or their agent of a notarized certificate of non-foreign status when purchasing real property will allow the purchasing party the ability to discover the FIRPTA implication, and its tax implications.

 

 

© 2018 Vandenack Weaver LLC

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#METOO: An Employer’s Response to Sexual Harassment Allegations

Charles Swindoll once said, “I am convinced that life is 10% what happens to me and 90% of how I react to it.” Employers must prepare and react appropriately to sexual harassment in the workplace, and the failure of which may result in public litigation. There are several simple steps that should be taken to assist in stamping out sexual harassment in the workplace, and in doing so, the added benefit is that it may also reduce a business’s liability exposure.

Through the employee policy or handbook (cumulatively “Policy”) and employee training, the entity should make its stance clear: zero tolerance for sexual harassment. An entity Policy should include specific examples of what sexual harassment looks like. Clarifying sexual harassment will empower employees to report their experiences, as well as provide the entity a framework to identify such wrongful behavior. Additionally, the company’s posture should be shared with the workforce through regular proactive training and reminders. Make the training mandatory. Revisit the training periodically throughout the year to impress upon the workforce the seriousness of sexual harassment. Continually update the Policy to reflect recent legal developments and/or any new procedure that may have been developed through actual situations that occurred within the entity. Through the Policy and training, liability will be reduced as entity workforce culture aligns with the entity: zero tolerance for sexual harassment.

Employers must provide clear procedure for dealing with sexual harassment, such as reporting and investigating. The entity must establish open channels of communication that provide the employee with specific individuals to whom they may confidentially report any incident of sexual harassment. Establishing a specific hierarchy for reporting can encourage employees to disclose sexual harassment early on. Remember, 10% is what happens to you and 90% is how you react. Take seriously claims of sexual harassment regardless of severity—upon disclosure, react! Immediately preserve any records of disclosure and any other correspondence related to the claim, as contemporaneous notes establish a timeline and the diligence of the employer to respond as quickly as possible. Also, carefully determine who and how the matter is best investigated.  Investigation can be done internally, by in-house legal, human resources, or other persons as designated or it may be done by outsourcing the investigation to a neutral third party. Employers may find that the most prudent investigations occur when neutral third parties are retained given the inherent conflict that could arise should any internal party discover that the allegations of harassment are founded. Upon concluding the investigation, a decision must be made on whether further legal action should be sought. Regardless, the entity must properly document any decision or evidence gathered through the investigation to establish the basis for its reaction and response to the allegations.

Ninety percent of any situation can be governed by how you react; and, reacting to sexual harassment allegations is a cumulative, ongoing process. In the advent of sexual harassment, an entity must provide an employee the ability to securely reveal sexual harassment, whereby upon the disclosure of such, the entity acts. Simple prudence not only prevents sexual harassment, it also precludes further harassment upon discovery. Ultimately, it limits the employer’s liability by clearly establishing its position: zero tolerance for sexual harassment.

© 2018 Vandenack Weaver LLC
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Business Entities as Parties to Real Estate Transactions: Who Has Authority?

Business entities buy and sell real estate on a regular basis. A successful transaction hinges, in part, on the proper parties executing the requisite documents. Because failing to correctly identify the parties and obtain proper signatures can be fatal to any real estate transaction, understanding who has authority to sign, on behalf of the entity, is imperative.

Four types of business entities are commonly involved in real estate transactions: (1) general partnerships; (2) limited partnerships; (3) limited liability companies; and (4) corporations.

A general partnership is an association of two or more persons to carry on as co-owners a business for profit. Formation of a partnership does not require a filing with the State, nor does it require a partnership agreement. As such, any conveyancing documents must clearly identify whether partnership property, versus non-partnership property, is being sold. In general, all partners should sign the conveyancing document to sell partnership property. However, a Statement of Authority may be voluntarily filed with the Secretary of State, granting specific partner(s) express authority to solely dispose of partnership property. Unlike the general partnership, a limited partnership (“LP”) is registered with the Secretary of State and is comprised of one or more general partners and one or more limited partners. Like the general partnership, a limited partnership may be governed by a partnership agreement. To convey real property, a deed must be executed by all general partners, unless a duly executed and authorized partnership agreement or Statement of Authority provides otherwise.

A limited liability company (“LLC”) is either member-managed or manager-managed and is created by filing a Certificate of Organization with the Secretary of State. The entity is governed by an operating agreement, which is not filed. Unless the operating agreement dictates otherwise, consent is typically required by all managers (if manager-managed) or members (if member-managed) to transfer real property outside the ordinary course of business. A duly executed and authorized Statement of Authority can be filed with the Secretary of State to supersede the signing authority as designated in the operating agreement. As such, be sure to confirm that the Statement of Authority is executed by all members or managers, depending on the LLC management structure.

A corporation is a legal entity that is owned by shareholders and operated by the Board of Directors. Articles of Incorporation must be filed with the Secretary of State to create a corporation. The corporation’s affairs are governed by its bylaws. If the corporate president does not have authority to transfer real estate, corporate disposition of property is generally a two-step process. The Board of Directors, as dictated by the bylaws, must consent to the transaction, and upon consent, the Board must pass a resolution that authorizes the transaction and designates the authorized signatory.

Early review of the relevant entity documents is key, if not crucial, to ensuring the proper parties are named and have executing authority in any real estate transaction. This simple, but fundamental, step can certainly facilitate not only a timely and efficient real estate closing, but also a successful transaction.

© 2018 Vandenack Weaver LLC
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End of the Year Tax Planning Considerations: New Issues Arise from Tax Legislation

            With the passage of new tax legislation by Congress, the usual gamut of year-end tax considerations has been made more complicated this year.  The timing of this legislation leaves US taxpayers with little time to determine what actions need to be taken this year to give them favorable consideration in 2017 and beyond.  Vandenack Weaver LLC has assembled the most important changes here for your consideration.  We encourage you to discuss these issues with your tax professionals.

  • 2018 Real Estate Taxes – The new tax legislation limits the deductibility of state income tax, real estate taxes, or sales tax to $10,000. With this new limit, some clients may find it advantageous to pay all but $10,000 of their 2018 real estate taxes in 2017.  If you are paying taxes into an escrow account, you are eligible to take the deduction in the year when the bank pays the property taxes, not when you pay the bank.  As such, consult with your bank to determine if you may take advantage of this.  Note, for those clients who are subject to the Alternative Minimum Tax (AMT) in 2017, paying early is inapplicable as these taxes are not deductible when computing AMT in 2017.

 

  • Gifts – Gift and generation skipping transfer tax exemptions will double under the new tax legislation. For those making large gifts, consider waiting until the new year in order to avoid 2017 tax consequences.  However, remember to make your annual gifts before the end of the year.  These limits will increase from $14,000 to $15,000 in 2018, but if you do not make a transfer in a calendar year, you will not get the exemption for that calendar year.

 

  • Payment Timing for Estimated State Income Taxes – Traditionally, state and local income taxes have been deductible provided that such tax payments were based on a reasonable estimate of the taxpayer’s actual liability (and that the state has authorized the tax payment). This was available even if you received a refund after the end of the year for which payments were made.  The new tax legislation curtails this practice.  For example, an amount paid in 2017 for taxes that are imposed in 2018 or later will be treated as though it was paid at the end of 2018.  This is particularly important for individuals who are under audit or who have outstanding liabilities for 2017 and earlier.  In 2018, deductions for payments of taxes attributable to prior years will be severely reduced.  Consider settling these issues prior to 2018.

  • Moving Expenses – Under the new tax legislation expenses for a work-related move will be eliminated (except for those in the military). While it is highly unlikely anyone who hasn’t planned to or already moved will be able to take advantage of this, it is important to take this change into consideration for your future plans.

  • Impact to Charitable Gifts – Although the new tax legislation did not make many changes to deductions for charitable gifts, other changes in the legislation will impact how far charitable gifts go in reducing your taxes. Because the tax brackets are shifting downward, many taxpayers will find themselves requiring fewer deductions in 2018. Thus, making a charitable deduction in 2017 could have a greater impact on your taxes than in 2018.  There are many factors that can impact the deductibility of your charitable contributions, so it is highly advised that you speak to a tax consultant before making any decisions.  It should also be noted that because of the overall decrease in itemized deductions and the increase of the standard deduction, some taxpayers will find it more advantageous to take the standard deduction in the new year.  If you are taking the standard deduction, then you will not be able to deduct your charitable contributions.  One change that was made to the deductibility of charitable gifts is in the ability to deduct 80 percent of an amount donated to a university in order to acquire the right to purchase tickets to the university’s sporting events.  That deduction will no longer be available after December 31. If you expect to make any such donations, you should consider doing so before the end of the year to take advantage of this expiring deduction.

  • Miscellaneous Itemized Deductions – If you do visit a tax consultant to discuss these issues, be sure to consider paying for those services in 2017! The new tax legislation eliminates the deductibility of tax preparation fees as well as other miscellaneous itemized deductions.  Some of these include appraisal fees for charitable gifts of property, investment advisory advice, and safety deposit box fees.  Clients should look at paying any of those expenses that are coming up in 2018 now to get the deduction before it is gone.

  • Unreimbursed Employee Expenses – Expenses that are attributable to an employee’s work and that have not been reimbursed are deductible in 2017. However, the new tax legislation will be eliminating this deduction.  As with miscellaneous itemized deductions, clients should look to move any of these expenses that they were planning to incur in 2018 to the current year.  Such expenses may include tools, uniforms, work-related education, even unpaid mileage and gas if the trip was work related.  Business owners are still able to deduct business expenses on Schedule C under the new legislation.

  • Mortgages – Current tax law allows for a deduction of the interest paid on up to $100,000 (for married couples) of home equity debt on a personal residence. This interest will no longer be deductible with the new tax legislation. Interest on mortgages for the acquisition of a principal residence will remain deductible, but the debt cap of $1,000,000 (for married couples) will be lowered to $750,000.  However, those who have purchased a home before December 15, 2017, will still be able to use the higher cap.  These changes may impact your decision in purchasing a home as it effectively increases the cost of the loan.  In addition, this is also one of the main reasons why many clients may consider taking the standard deduction in the future as the deduction for mortgage interest can make up a significant portion of your itemized deductions.

  • 8% Surtax – While the new tax legislation does not change the present 3.8% surtax on net investment income, some other changes may cause your taxable net investment income to rise in 2018. First, as noted earlier, the deduction for investment-related expenses will no longer be available.  In addition, state income taxes that could previously be deducted (to the extent they were connected to net investment income) are now capped at the $10,000 limit.  Clients should consider making any of these payments they can in 2017 in order to take advantage of these deductions.

  • Roth IRAs – The new tax legislation changes an existing rule regarding Roth IRAs. Presently, if you convert a traditional IRA to a Roth IRA, you may undo the conversion by recharacterizing it within specified time frames.  The new legislation removes the ability to recharacterize a Roth IRA.  In addition, there is legislative ambiguity as to what Roth IRAs may be impacted by this.  If you have converted an IRA in 2017 and are considering recharacterizing the subsequent Roth IRA, it is advisable you complete the recharacterization in 2017 to avoid any ambiguity in the law.

  • Capital Gains – Taxes on capital gains do not change significantly with the new tax legislation. However, there are some hidden issues to consider.  Because income tax rates and tax brackets are changing significantly, accelerating or deferring your capital gains may create a positive impact (or avoid a negative one).  Specifically, one of the major issues to consider is whether your taxable income will increase because of these changes that could bump your capital gains tax rate to a higher amount (from 15% to 20% for taxable income over $479,000).  One caveat to this issue is that it is highly dependent on other factors such as where you live.  Given the short amount of time left in the year it may not be possible to take advantage of these changes.

  • Pass-Through Business Limits – With the reduction of the corporate tax in the new tax bill, a corresponding change is made to the taxation of pass-through businesses (which do not pay the corporate tax) in order to keep them competitive. Those participating in a pass-through business will be able to deduct 20% of their allocable share of business income.  There are some limits to this, primarily if you earn more than $157,500 if single or $315,000 if married.  In addition, if you are in certain professional jobs such as accountants, doctors, or lawyers, the deduction will not apply unless you make under certain specified limits.  Still, small businesses may want to consider reorganizing in order to take advantage of these new tax savings.

  • Recently Purchased Business Equipment – One of the new provisions allows for the full and immediate expensing of qualifying capital investments (as opposed to gradual deductions). In addition, the provision will be applicable in the 2017 tax year for purchases made after September 27, 2017.  Businesses should speak to their tax professionals to consider if this applies to them or if they should purchase new equipment before the new year to include it on their 2017 return.

 

  • Limits of the Bill – One final point to note is that many of these changes will terminate in 2025 or earlier, at which time the tax code will revert to the old rules.  Therefore, consultation with a tax professional is encouraged to ensure that you will be receiving the best tax treatment now and in the future

 

© 2017 Vandenack Weaver LLC

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