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The Corporate Transparency Act Reporting Requirement

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The Corporate Transparency Act:

Beneficial Ownership Information Reporting Requirement

Effective January 1, 2024

By: Scott M. Ceurvels, Esq.

Beginning on January 1, 2024, new rules implementing the Corporate Transparency Act (“CTA”) will take effect, imposing obligations on many small businesses nationwide to report beneficial ownership information to the federal government.  The link below provides information pertaining to the key details and frequently asked questions regarding these obligations, including:

 

  • Who is Required to Report?
  • What has to be Reported?
  • When is the Deadline?
  • Who are the “Beneficial Owners?”
  • Where do I Report?
  • What if I Don’t Report?
  • Why is this Required?
  • What’s Next?

 

For the answers to these questions and how we can assist you with compliance, see:   CTA Reporting Requirements

For further information regarding your particular circumstances, or if you need assistance with compliance, reach out to your accountant or contact us at (315) 471-8111.

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

Selling Your Business – Be Mindful of Deal Structure and Purchase Price Allocation to Keep More Money in Your Pocket

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By: Daniel J. Fetter, Esq.

You accepted an offer to sell your business.  The buyer has proposed to purchase your company’s assets.  You are thrilled with the value the buyer has placed on the business and don’t pay attention to the transaction structure, i.e., asset vs. stock.  As the closing approaches, you begin to discuss how the purchase price will be allocated among those assets sold and suddenly you realize the purchase price was deceiving.

Deal Structure: Asset vs. Stock Sales.

For tax (and non-tax) reasons buyers typically prefer an asset purchase while sellers prefer to sell their stock in the target company.

Asset Sale.

The purchase price allocation is the process in which the buyer and seller assign a value to the assets to be sold.  This determines: (1) seller’s income tax liability; (2) buyer’s tax basis in the acquired assets; and (3) how quick the buyer can depreciate or amortize those assets to recognize future income tax savings.  Generally speaking, what is good for the seller is bad for the buyer, and vice versa.

Seller’s gain on the sale of assets will result in a combination of capital gains tax rates (up to 20% federal) and ordinary income tax rates (up to 37% federal).  In order to keep the tax bill low, seller will prefer to allocate more of the purchase price to goodwill and other intangible property taxed at the lower capital gains rate, which subjects buyer to a 15-year amortization period.

Buyer will prefer to allocate the purchase price among those assets which can be depreciated in the short-term (e.g., vehicles and equipment), which subjects seller to ordinary income tax rates.

An asset sale is the more common deal structure, and if the buyer insists on purchasing assets over stock, then seller may have leverage to negotiate an increased purchase price to account for the higher tax bill.

Stock Sale.

If selling stock of the target company only, no purchase price allocation is needed.  Seller’s gain on the sale of stock is taxed at the capital gains tax rate.  Buyer loses the ability to step up the tax basis in the acquired assets and assumes the target company’s depreciation history.  If the company’s assets are fully depreciated, buyer receives no future tax savings.

Be mindful of the deal structure and do not wait until the 11th hour to negotiate the purchase price allocation.

 

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

New York State Changes to Executive Law for Notary Publics

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By: Christopher J. Babiarz, Esq.

Effective January 31st, 2023, New York State has implemented new changes to the rules and regulations concerning Notary Publics which imposes additional important requirements on all notaries whether they are performing traditional notary services, or electronic notary services.

The most significant new change is the requirement that all types of notaries keep a journal documenting all notarial acts performed for a period of ten years.  The journal must track the following required pieces of information:

  1. The date and time the notarial service was performed; and
  2. The name and address of the principal (individual whose signature is being notarized); and
  3. The number and type of notarial service performed; and
  4. The type of credential used to verify the identity of the principal; and
  5. The verification procedure used to confirm the principal’s identity.

In addition to the five above categories, notaries performing electronic notarization must also document:

  1. Identification of the communication technology, certification authority, and verification providers used; and
  2. An actual audio and video recording of the act.

While these requirements apply to all notaries performing all types of notarial services, real property transactions are especially vulnerable to fraud, and the notary public is the first line of defense in preventing such crimes.  Fraud involving notaries typically occurs in one of two ways, and diligently adhering to the above-described process significantly helps to eliminate both.

The most obvious way that fraud is committed is when someone tries to get a document notarized and they are not the principal that they are claiming to be.  This type of circumstance can present itself a few different ways, such as by presenting a forged document that has already been signed outside the presence of a notary, and the individual is now seeking to have it notarized after the fact.  Or in a similar situation, the fraudster could be trying to get you to notarize a document without presenting a valid form of identification with a signature to compare to.

By routinely following a patterned behavior whenever you notarize a document you can avoid being implicated in this type of fraud entirely.  The requirements of the journal set forth core pieces of information that will eliminate many types of fraud just by carefully collecting this information in a methodical way.  While there are different credentials and/or personal knowledge which can be used to comply with item 4 in the journal list above, the gold standard would be a government issued photo ID or driver’s license.  If an individual is asking you to notarize without providing this particular document, that should trigger a red flag in your mind, and cause you to take a pause and re-evaluate the circumstance to make sure you are being compliant with the requirements above.  A notary may always refuse to provide a notarization service if they are not satisfied with the proof of identity, or if there is concern that the principal lacks capacity to execute a record, or if the notary suspects it is done so under duress.

The second type of fraud is less preventable on the part of the notary, but the impacts and inconveniences are also able to be greatly diminished by diligent journal keeping.  This type of fraud occurs when someone forges your notary stamp/seal using publicly available records.  In this scenario, your seal may be used to complete documents for recording with the county clerk that you will have never seen before, let alone have been in the same room as the person claiming to be the principal.  It is in this circumstance that being able to point to a meticulously kept journal that adheres to a consistent process will enable you to prove that you were not involved in the fraudulent notarization process and help you clear your name more efficiently than any other preventative measure.

In addition to the above described journal keeping requirements, New York has also clarified the current rules concerning electronic notarization.  Previously during the height of the pandemic, notaries were able to provide services via programs such as Zoom and Skype, this program was known as Remote Ink Notarization.  Although this program has since been removed, New York is seeking to replace it with Electronic Notarization.  The key difference between these two programs is that electronic notarization requires the use of specialized commercial software which allows the notary to perform identity proofing and credential analysis.  Although New York has not provided significant guidance on recommended programs to use for this purpose, we can anticipate that many reputable companies such as title companies will begin to rollout New York compliant programs that provide the above services, and allow for the recordation and storage of audio and video. Until and unless this program and software is in place, the important takeaway is that no notaries should be providing services through programs such as Skype or Zoom in New York without such additional software features. Electronic notarization is an additional program on top of traditional notarization, and must be applied for separately.

Whether you are performing an electronic notarization or a traditional notarization, the requirement to keep a journal is mandatory.  While the imposition of additional requirements on Notary Publics in New York may seem frustrating, they are truly designed in a way to protect the integrity of the notary service, and it also serves as an important safeguard to protect the individual notary as well from those seeking to commit fraud.

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

What Business Owners Should Know About The Corporate Transparency Act

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ATTENTION ALL BUSINESS OWNERS

 New Federal Information Reporting Requirements to be Imposed on Privately-Held Companies and Their Owners by the U.S. Department of Treasury

By: Scott M. Ceurvels, Esq.

Effective January 1, 2024, corporations, limited liability companies and similar entities (which are not publicly-traded companies) must file detailed information concerning the entity and its owners with the U.S. Department of Treasury. Significant penalties will be imposed on entities and owners for noncompliance with this new reporting requirement.

These obligations arise from the National Defense Authorization Act for Fiscal Year 2021, in which Congress enacted the Corporate Transparency Act (“CTA”) as a component of the Anti-Money Laundering Act of 2020. This article provides a summary of the CTA, the reporting requirements it creates and the penalties that could be imposed in the event of noncompliance.

Purpose. The CTA is intended serve a variety of purposes, from improving national security and anti-money laundering standards to gathering information about entities within the United States with “hidden owners” and setting a clear and universal standard for incorporation practices.

Reporting Obligation. The primary mechanism by which the CTA seeks to achieve these purposes is the establishment of a national registry of beneficial owners of certain entities, referred to as “reporting companies”, which will be required to file with the Financial Crimes Enforcement Network (FinCEN), a bureau within the U.S. Department of Treasury, reports identifying the company’s beneficial owners and information about company applicants. The contents of these reports will be discussed in more detail below.

Reporting Companies. The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is created by filing a document with the Secretary of State or similar office in any state, territory, federally recognized Indian Tribe, or under the laws of a foreign country and registered to do business in the United States.

Beneficial Owners. The CTA defines a “beneficial owner” as an individual who, directly or indirectly:

  • Exercises substantial control over the entity; or
  • Owns or controls not less than 25 percent equity in the entity.

The CTA also excludes certain individuals from the definition of beneficial ownership, including:

  • a minor child (as long as the child’s parent’s or guardian’s information is reported);
  • a person acting as an agent on behalf of another;
  • a person whose control over the company derives from employment, not ownership;
  • a person whose only interest in the company is through a right of inheritance; or
  • a creditor of the company (unless they qualify as a “beneficial owner”)

Company Applicants. The “company applicant” is either:

  • The person who directly files the document that creates the entity for domestic reporting companies, or the document that first registers the entity to do business in the U.S. if the entity is a foreign reporting company; or
  • The person who is primarily responsible for directing or controlling the filing of the relevant document, described above, by another person.

Reporting Requirements. In each report to FinCEN, a reporting company is required to provide the following information for each beneficial owner of the entity:

  • Beneficial owner’s full legal name;
  • Date of birth;
  • Current residential address; and
  • A unique identifying number from an acceptable identification document (driver’s license, passport, etc.).

Company applicants will also be required to provide this information, but may provide a business street address rather than a residential address. However, company applicants will only be required to provide this information for entities formed on or after January 1, 2024.

Additionally, certain “company information” is required in the report, including the reporting companies’:

  • Full legal name;
  • Any trade name;
  • Current address of the principal place of business;
  • Jurisdiction of formation; and
  • Internal Revenue Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the reporting company.

Exceptions. The CTA contains a number of exceptions for entities exempt from reporting, including certain regulated industries which already require similar beneficial ownership information reporting, publicly traded companies, certain investment companies, nonprofits and government entities.

There is also a significant exception that applies to “large operating companies” which meet the following conditions and are therefore exempt from the reporting requirement:

  • Employs more than 20 employees;
  • Filed in the previous tax year a tax return demonstrating more than $5 million in gross receipts or sales; and
  • Has an operating presence at a physical office within the United States.

Effective Date. The date that initial reports to FinCEN are due depends on whether the reporting company is an existing entity or a newly formed one. The final rule implementing the CTA will go into effect on January 1, 2024. Reporting companies in existence prior to this date will have one year, until January 1, 2025, to file their initial reports with FinCEN. Reporting companies created on or after January 1, 2024 will have 30 days after receiving notice of their creation or registration to file their initial reports with FinCEN.

Following the filing of a reporting company’s initial report, any changes to the information included in previous filings – except for changes with respect to the company applicant(s) – must be reported within 30 days of such change.

Penalties. Providing false information or failing to report complete information to FinCEN can result in fines of $500 per day up to a maximum civil penalty of $10,000 and imprisonment for up to two years. The CTA does contain a safe harbor from liability for the submission of inaccurate information if the person who submitted the report voluntarily corrects the report within 90 days.

For further information regarding your particular circumstances, or if you need assistance with compliance, reach out to your accountant or contact us at (315) 471-8111.

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

Working Group Supporting NY Farmers

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Jeff Fetter has been appointed to a Task Force in the support of New York farmers.   “The emphasis will be on administrative actions that can be taken by the Governor and state agencies to provide an immediate and timely response to important issues around supporting and expanding food production in New York.”

Read the complete story at:  Hochul Supports NY Farmers

Agri-Succession Planning 2022 – Planning and Utilization of the Advisory Team in a Difficult Economy

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By: Jeffrey M. Fetter, Esq.

The article below was recently published by DFA Financing/Agri-Max Financial Services, LP, in conjunction with the Dairy Farmers of America at:  https://dfafinancing.com/dfa-financing-news/blog/july-2022/planning-and-utilization-of-the-advisory-team-in-a

Economic challenges continually face today’s agriculture industry. Farm product prices are not under the farm’s control while operational and input expenses continue to rise year after year.  For those who have been working in agriculture for years, the cyclical nature of the difficult times continue to arise every few years.  Regardless of when the downturns occur or how long it continues, it is those who are prepared for these times who persevere through and continue to prosper.

The same holds true when it comes to facing the need for long term succession planning for a farm or ranch – it is critical to be prepared and to have a plan in place. Unlike many industries where the owners’ goal is to develop and then sell the business for the greatest financial gain possible, the owners of closely held agriculture businesses are generally more focused on ensuring the perpetuation of the farm or ranch for the next generation and beyond.  But, without the proper plan in place, that is close to being an impossibility.

What is succession planning?  Having a will? A buy sell agreement with your partners?  And, what role does the farm advisory team play in ensuring that a proper plan is in place.  The key players of the advisory team include the accountant, the attorney, the management consultant, the financial/insurance advisor and, of course, the banker. There may be others involved as well as each adds his or her own individual expertise and experience to the plan.  In many cases, the client may have a greater comfort level with one or more of the advisors than others so its important to have “the team” working together for the client. If the client sees that his team is all “on the same page”, the process is much easier for the client to accept.

It’s the advisory team that can facilitate the conversations with the client to make a succession plan a reality – despite the hesitation of the client.  When it comes time to acquiring land, purchasing equipment and machinery the consensus among the owners is many times “we need it now, help us get it!” But when it comes time to planning for the future, procrastination many times stands in the way.  It may be perceived as time consuming, too expensive or it may be just a reluctance of the senior generation to face the reality of the winding down of their careers.  Whatever the reason, the advisory team needs to impress upon the owners and management team – senior and junior – the importance of ensuring that a plan is in place for both expected and unexpected events.

It is critical to have the proper advisory team in place in developing and implementing an effective succession plan.  Each advisor plays an important role in the planning.   The role of all advisors is to ensure that discussions take place, plans are structured and that they are kept up to date and maintained as the tax laws, the operations and/or the family involvement change over the years.

Back to the primary question – what is agriculture succession planning?  It is not simply a will that leaves assets to family members and it is not simply a buy sell agreement that provides that if Dad dies, Uncle Bob buys him out and vice versa.  Succession planning involves many components of a well coordinated plan that is based on the particular circumstances that exist within the farm or ranch and most importantly it must be in writing and kept up to date.  These components include:

Estate Planning – farm based wills and trusts that do not simply divide assets among heirs.  What entities are involved and who is to own and manage them, etc?

Asset  Protection Planning – utilization of limited liability entities and trusts to protect assets for not only the current generation but future generations.

Management and Knowledge Transfer – establish a plan today that allows the junior generation to benefit from the years of experience of the senior generation and the many relationships that have been established by the senior generation over the years.  The time for son and daughter to meet the banker for the first time should not be at Dad’s funeral.

Succession Planning Agreements – planning for expected and unexpected events that will arise in the future such as death, disability, divorce, departure etc. with proper agreements such as buy sell agreements among the owners of the operation and employment and long term incentive arrangements with key employees who may not be owners, but are critical to the continued success of the farming operations.

Lifetime Planning – implementing the appropriate lifetime strategies to protect assets from plaintiffs in lawsuits, minimize or eliminate estate taxes including spouses in matrimonial matters and possibly to protect assets from being improperly managed by owners who should no longer be in controlling positions.

Opportunities for succession planning today are greater than ever.  Federal estate and gift exemptions are nine times what they were twenty years ago.  In 2022, there is a federal estate and gift exemption of $12,060,000.00 for each individual.  With a properly structured plan a married couple can benefit from a joint $24,000,000.00 exemption.  This affords opportunities not only for transfers at death, but utilizing long standing and accepted planning strategies to remove significant assets from a taxable estate during life – and this can be done in a manner that benefits both the senior and junior generations.  State laws must be taken into consideration as well as to potential estate taxes, but many states have followed the federal lead in lessening the impact of estate taxes on closely held business owners.

Under current law, the federal exemption is to be reduced to about one half of that amount in 2026.  Therefore, planning should begin as soon as possible if it is advisable to utilize lifetime gifting  opportunities.  Almost it may sound logical that if a farm owner utilizes only a portion of their exemption before 2026, they will still have the remaining exemptions, but that may not be the case – logic does not always play a role in tax law.

If a gift is made of $4,000,000 today and the federal exemption is reduced to $6,000,000 in 2026, the person’s remaining gift exemption is not $6,000,000 – its $2,000,000.  The law provides that if a portion of the present exemption is used, that’s charged against the remaining exemption.  However, if a person gifts $12,000,000 today and the exemption is reduced to $6,000,000, there is no “clawback” – that is, the person does not get charged back for going over the exemption.  Therefore, the most beneficial use of the lifetime exemption is when it is completely used. But, that may not be practical for many farm owners.  This is another example of where the advisory team plays an important role – determining the best action to take based on knowledge of the facts and circumstances surrounding the farm assets and operations, who the present and future players are, etc.

Summary

A properly structured succession plan provides opportunities not only for continued business with the current generation of owners and managers, but for establishing working relationships with the next generation.   For the farm, this is also important because if there is an unforeseen death, disability or other tragic event, there is inevitably a need to reorganize and address the ongoing operational needs of the farm during an extremely difficult time.  To ensure the continued support of the bankers and avoid an overall re-evaluation of the farm or ranch and its ability to get through this time of crisis, it is critically important that the bankers have a comfort level with those in the management team that everything will continue on as planned.  The time devoted to creating and maintaining a properly structured plan is worth as much or if not more than that new piece of machinery or tract of land.

 

The Succession Plan Audit

Questions to Ask

  1. Are wills up to date? Do they reflect current tax laws, provide for farm and non-farm heirs in an equitable, but not necessarily equal manner?
  2. Are financial powers of attorney, living wills and health care powers of attorney in place to ensure that the proper agents are acting for the client at a time when they cannot act on their own?
  3. Review and update Operating, Partnership and Shareholders Agreements. Are management, operational and tax related provisions up to date and reflective of the farm’s operations?
  4. Are there the proper entities such as corporations and limited liability companies established to protect assets from liability? Is there a need for multiple entities to shield assets from the liabilities arising in other entities?
  5. Are written leases in place to substantiate tax positions being taken on the tax return – including leases between related parties?
  6. Are key employees being properly respected by having long term incentive arrangements in place to ensure their future participation in the operation.
  7. Is there a buy sell agreement in place that addresses death, disability, divorce, departure, and other events which lead to the termination of an owner’s involvement in the operation?
    • Is the agreement up to date with all owners as parties?
    • Does the agreement reflect the need to ensure perpetuation of the farm to the next generation?
    • Are the buy out terms manageable from a cash flow perspective upon the occurrence of a triggering event? Is the agreement properly funded with insurance?
    • Is the valuation provision relevant to the operation and is it up to date?
    • Does the agreement reflect the “present intentions” of the parties. For example, two owners may have desired many years ago to buy each other out in the upon the occurrence of a triggering event such as death, disability or departure.  But, as the years go by, there may be less of a desire to want to have to buy out a partner.  It may be more practical to provide that if there is a triggering event the remaining owner has the option to purchase or to work with the departing owner (or estate) to sell the entire operation.  This avoids a “race to the door”.
  8. This checklist, of course, is an example of only a fraction of what needs to be considered in developing a proper succession plan.

 

This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken. For additional legal assistance contact Jeffrey Fetter at  [email protected].

 

 

New York’s Law on Surcharging Credit Card Users

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By: Jessica A. Villi, Law Clerk

When customers use a credit card to purchase goods or services, there is a processing fee that businesses must pay in order to receive payment. The fee can be anywhere from 1%-5% depending on the credit card company, so in order to help bear the cost, many businesses wish to impose an additional charge on their customers who choose to pay with credit or debit cards. This additional charge can be referred to as a “surcharge” or “convenience fee.” However, the practice of “surcharging” is prohibited by New York State under section 518 of the New York General Business Law, unless a business utilizes its exceptions. A business is legally allowed to “surcharge” their customers who use a credit or debit card while still complying with New York State law, as long as certain conditions are met.

The exception to section 518 allows businesses to charge a higher price when:

  • The business makes the higher charge, the “regular price”; AND
  • That price is advertised in a prominent place within the business.

Simply stated, section 518 regulates the way in which businesses may communicate their prices, rather than completely prohibiting them from adding an extra cost for the use of credit or debit cards.

For example, a merchant who wants to add a 3% surcharge fee to customers who pay with a credit card is permitted to do so, but only under certain conditions. Taken from the Supreme Court’s decision in Expressions Hair Design v. Schneiderman (2017), “A merchant who wants to charge $10 for cash and $10.30 for credit may not convey that price any way he pleases. He is not free to say “$10, with a 3% credit card surcharge” or “$10, plus $0.30 for credit” because both of those displays identify a single sticker price – $10 – that is less than the amount with which the credit card users will be charged. Instead, if the merchant wishes to post a single sticker price, he must display $10.30 as his sticker price.”

The regular cost of a good or service must be displayed as the price that a credit card user would pay at the register. Customers who pay in cash, by check, or by means other than a credit or debit card will be given a “discount” at the payment counter. So, in order to comply New York State law, businesses are required to post the higher credit card price labelled as the “regular price,” but may offer a discount to those who pay in cash. Businesses may post both prices, but must advertise the prices as (1) the “regular price” (the sum of the price of the product/service and the credit card fee) and (2) the “discounted price for cash payment.”

The second condition is the requirement that these prices must be posted in a prominent place within the business where it is easily viewable to customers prior to payment. The basis for these regulations are to avoid blindsiding the customer at the payment counter with an unexpected higher price tag and to ensure that customers are fully informed before making their decision to purchase.

A few examples of lawful ways to advertise prices, taken from the New York Division of Consumer Protection website, are listed below:

  • A sign on the wall that reads, “The first price listed is if you use a credit card or debit card for your purchase. The second is for cash.”
    • Good! Businesses may post both prices as long as customers are fully informed of their options before making their purchase.
  • A sign at the register that reads, “$3 discount for all cash purchases.”
    • Good! Cash prices may be advertised as a discount. This further establishes that the “regular price” (without a discount) will be a higher charge.
  • A sign on the door that reads. “3% discount for cash payments”
    • Good! Cash prices may be advertised as a discount. This further establishes that the “regular price” (without a discount) will be a higher charge.

Unlawful ways to advertise prices, also taken from the New York Division of Consumer Protection website are:

  • At the register, the cashier tells the customer, “There will be an extra $2 charge because you are using a credit card to pay.”
    • No: Why not? This information must be in writing and posted prominently within the business. Oral communication of prices is not permitted.
  • A sign at the register that reads, “$5 fee for credit card sales.”
    • No: Why not? Businesses may post a sign advertising cash discounts, not additional charges for using a credit or debit card.
  • After enjoying a meal and receiving the check, a customer is charged an additional “services fee” after saying that they will be paying with a credit card.
    • No: Why not? Customers must be informed of their payment options and prices before they reach the payment counter.

The bottom line is this:

  • The “regular price” must be the sum of the cost of the good/service plus the desired credit card fee; AND
  • Prices must be posted in a prominent place within the business; AND
  • Cash payments must be advertised as a “discount.”

For assistance with compliance, or to discuss other laws and regulations that may impact your business, reach out to your usual firm contact, or contact the firm at (315) 471-8111.

Recent Supreme Court Ruling Highlights the Trustees’ Duty to Monitor 401(k) Plan Investment Options

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By: Stewart M. McGough, Esq.

Participant-directed retirement plans (usually, 401(k) plans for private employers and 403(b) plans for public employees) have proliferated for over 40 years, driven in part by employers’ desire to shed their fiduciary responsibility for investing the plan’s assets.  The financial industry has encouraged this shift by offering hundreds of investment options, including brokerage accounts for individual stock and bond holdings, mutual funds and ETFs, and annuity contracts.  Often, the plan sponsor pays no or little attention to those options once the plan is first set up, and as shown in a recent United States Supreme Court ruling, that inattention can prove hugely expensive to the fiduciaries in charge of arranging the investment options.

In Hughes et al. v. Northwestern University et al, decided on January 22, 2022, the Administrative Committee for two Northwestern University retirement plans allowed participants to choose from among 400 mutual funds and annuity contracts (under a recent study, the average number of investment options was only 17).  The options included both retail mutual funds and funds which, although exactly the same as their retail fund counterpart, could only be offered by the fund sponsor to institutional investors.

Their only difference was in the amount of fees charged to the funds internally for investment management services, marketing expenses, brokerage fees and transfer fees.  The sum of these fees, as a percentage of the value of the fund itself, comprises an “expense ratio” that is identified in each fund’s prospectus.  In the Hughes case (and generally), the difference in the expense ratios between the retail funds and their institutional counterpart often exceeded one-half percent (50 basis points) each year.  Any participant who chose to invest in a retail fund, when the institutional fund was also available, suffered a much lower rate of return over time.  The plaintiff in Hughes complained that the retail funds should not even have been offered, and the Committee was liable for the losses the participants incurred by not investing in the institutional funds.

Plan trustees and administrators have often justified retail funds by employing expense sharing arrangements between the mutual funds/brokerage service company and the third party recordkeeper for the plan.  Under these arrangements, the mutual funds will cause a portion of the revenue they collect to be transferred to the recordkeeper to apply against (if not fully pay) the recordkeeper’s charges for its services.  In theory, that frees the Plan from having to pay for those services out of the general pool of plan assets, resulting in a net rate of return that is comparable compared to the returns using institutional funds.  It also shifts more of the burden for administrative costs to those participants with higher account balances under the theory that they are benefitting more from the plan than the other participants.

The plaintiff in Hughes argued that even though the plaintiff was given the choice between retail and institutional funds, the Committee breached its duty by offering retail funds knowing that the institutional versions would provide a higher rate of return, and that the recordkeeper’s fees (although paid in part under the expense sharing arrangement) were unreasonably high, therefore the retail funds were imprudent options.  The Committee argued that because it offered the choice between the two versions, it was the plaintiff’s responsibility to choose the better one for herself, and the Committee had exercised sufficient prudence.  Further, it argued that the sheer array of mutual fund options was enough to counter any argument that the Committee did not act prudently.

The Supreme Court held that the Committee could not rely on the vast number of investment choices as a complete defense to its actions, nor could the Committee defend merely on the basis that both the retail and institutional versions of the same fund were offered.  Rather, the Committee must at least take the following steps to demonstrate its prudence in creating and maintaining the menu of options available:

  1. The Committee must monitor the performance of any fund offered to determine if it is an appropriate option. If it determines one to be inappropriate, then the Committee must remove it within a reasonable time.  That holds true (for Northwestern) for each of the 400 funds offered.  One lesson from this – the plan sponsor should make available to participants only that number of funds it is willing to review and analyze on a regular basis.  But the plan sponsor must also satisfy the diversification requirements under ERISA so that participants are given a broad array of funds sufficient to allow them to choose funds that are within the participants’ own risk tolerance.
  1. The Committee must analyze the possible menu choices in the context of the Committee’s duties to provide prudent investments and to minimize expenses to the participants (since in every case, a plan’s expenses will at least in part be covered by plan assets). That may mean that retail (as opposed to institutional) funds may be more prudent if, after factoring in the net total expenses of the Plan’s administration considering potential revenue sharing arrangements that may be available, the participants are more likely to attain a higher rate of return (all other factors being equal) using the retail funds offered.

But it also requires the Committee to determine whether the expenses being charged the plan by outside third parties are reasonable.  Factoring in the participants’ account balances as a source of payment for those expenses would most likely be considered inappropriate.

There is one more point to mention.  The Court’s final words should give some comfort to plan fiduciaries when it noted that “difficult tradeoffs” may confront fiduciaries in making these decisions, even cautioning courts to consider the “range of reasonable judgments” a fiduciary may make considering the fiduciary’s “experience and expertise”.  At first blush, a fiduciary may take from this that the less experienced or knowledgeable one is, the prudence standard as applied to the fiduciary is not as high as for more knowledgeable fiduciaries.  A better reading is that fiduciary must understand his or her own weaknesses and retain qualified consultants to the extent necessary to satisfy the fiduciary’s duty to monitor plan investment options and the plan’s expenses.

Newsletters, blogs and articles of Scolaro Fetter Grizanti & McGough, P.C. are for informational purposes only and should not be relied upon as being legal advice.  Each situation has its own facts and circumstances and needs to be discussed with and/or analyzed by legal counsel.

Latest Guidance to New York’s New Pass-Through Entity Tax

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By: Stewart M. McGough, Esq.

Purpose.  Earlier this year, legislation was passed and signed into law in New York to provide many NY taxpayers with a strategy to “work around” the provision under the federal tax law that limits individual taxpayers to a $10,000 deduction for state and local income and real estate taxes paid (the “SALT” limitation).

Example.  Here’s an example showing how much additional federal taxes New Yorkers pay by application of the SALT limitation:

Assume Charlie is a partner in a NY partnership and that his share of the partnership’s 2021 net income is $400,000, which is also his adjusted gross income on his federal tax return (the amount appearing at the bottom of page 1 of the Form 1040).

New York’s average tax rate on taxable income of $400,000  is about 6.4%.  Therefore, Charlie’s New York income tax liability would be about $25,600.  If we assume his real estate taxes exceed $10,000, then none of his NY income taxes can be deducted on his federal return.  Had they been deductible, Charlie would have saved between $8,200 and $9,000 in taxes (depending on whether he filed as an individual or jointly with his spouse).

The “Work-Around”.  The new legislation enables the individual owners of “pass-through entities” – partnerships, LLCs and S corporations – to effectively regain the tax benefit by having the pass-through entity (which is not subject to the SALT limitation) opt into a new “pass-through entity tax” or PTET.  This approach shifts the New York income tax liability to the pass-through entity, which pays the PTET (the tax brackets for this tax are similar to individual tax brackets).  The law then grants a tax credit to each partner, member or shareholder (to be applied on his or her individual tax return) for his or her share of the taxes paid by the entity so that there is no “double tax” to both the entity and the individual owner.

The entity will deduct on its federal return the amount of NY taxes it paid, thereby reducing the amount of each individual owner’s share of the entity’s taxable income and in effect regaining for them the lost deduction under the SALT limitation.

In order to prevent the individual from in effect gaining a deduction on his or her NY return for New York taxes paid by the entity, the individual will have to add back into taxable income his or her share of the PTET paid by the entity.

Note the following:

  • The work around is available to general partnerships and limited liability companies even if a corporation, or partnership, or LLC is an owner of the partnership or membership interest.  However, the corporate owner, the partnership owner and the LLC owner are not eligible for any PTET credit.  A trust is eligible if it is  a direct owner of an interest in the pass-through entity, but it cannot pass the credits on to its beneficiaries.  In any of these cases, there will need to be adjustments made in the amount of PTET to be paid by the partnership to account for this ineligibility.
  • Each of the entity owners’ respective share of the PTET, and therefore the tax credit, is determined after all special allocations under the partnership or operating agreement have been accounted for.   Absent any special allocations, the PTET is shared based on each owner’s percentage share of profits and losses.  The shares allocated to owners of S corporations are  based on their respective stock ownership percentages.
  • If any owner is a non-resident of NY (i.e., resides less than half of each year in NY), then the entity must calculate separate pools, one consisting of the income, gains, losses and deductions that flow through to all NY residents, and the second pool consisting only of New York source income and the losses and deductions that apply to it, that are allocable to the non-resident.  In other words, the non-resident is only taxable on NY source income, and the calculation of the PTET must take that into account.
  • The PTET requires an annual election by the entity.  To elect into the PTET for 2021, an authorized person of the entity elects through the Business Online Services account by October 15, 2021.  For calendar years thereafter, the election must be made through that account by March 15 of the same year.
  • For the 2021 year (only), even if the entity elects the PTET, the individual partners, members or shareholders must make estimated NY tax payments as if no election were made (the entity need not make estimated payments).  This will most likely result in a refund due each individual after taking into account the credit allocated to the individual for the PTET paid by the entity.
  • For years beginning in 2022, the entity must pay estimated NY taxes using the online application form.  Estimated taxes will be calculated based on the lesser of 90% of the amount shown as due for the year, or 100% of the prior year’s PTET liability.  These estimated payments cannot be credited to any other tax liability of either the entity or the individual owners.

We trust this will help you and your accountants in addressing the SALT limitation that has affected so many New Yorkers.  After you have had a chance to review this, please do not hesitate to contact us.

 

New York HERO Act

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By Melissa L. Green, Esq.

 

On May 7, 2021, Governor Andrew Cuomo signed the “New York HERO Act” (the “Act”) into law.  Under the Act, the state aims to prevent occupational exposure to airborne infectious disease, including COVID-19.  The Act requires employers to develop workplace health safety plans in order to prevent the spread of airborne communicable illnesses, and to allow employees to establish and administer a joint labor-management workplace safety committee.

In a memorandum attached to the signed bill, Governor Cuomo requested “technical changes” that will likely delay the implementation of the law.  Specifically, Governor Cuomo has requested that the legislature provide employers with an opportunity to cure any failure to comply with the law, provide more detailed instruction on the development and implementation of workplace standards, and limit litigation to circumstances where employers are acting in bad faith and refuse to cure deficiencies. As written, the Act requires employers to have a health and safety plan in place thirty (30) days following the effective date of the law, and to allow employees to establish a joint labor-management workplace safety committee within six (6) months.  However, it is likely that the dates will be delayed following the legislative edits.  Below is a summary of what we know so far about the obligations the new law will place on employers.

Health and Safety Plan

 The New York State Department of Labor (“DOL”), in consultation with the New York State Department of Health (“DOH”), has been tasked to prepare a model airborne infectious disease plan (“Employer Safety Plan”), and establish minimum requirements for preventing exposure to airborne infectious diseases.  Under the law, the DOL must establish minimum safety requirements for worksites, differentiated by industry.  Once the DOL has established a model Employer Safety Plan, employers will have the choice to adopt the model or to create an Employer Safety Plan on their own with the same minimum standards express by the DOL in the model.

The Act provides some requirements that must be included in the model, but leaves it to the DOL to include any other matters the DOL Commissioner finds relevant.  Similar to the protocols issued by other governmental agencies in the last year – the DOL is required to include procedures and methods for the following:

  • Employee health screenings
  • Face coverings
  • Personal protective equipment (“PPE”)
  • Accessible hand hygiene stations
  • Cleaning/disinfecting shared equipment and frequently touched surfaces
  • Effective social distancing procedures (as warranted)
  • Compliance with mandatory or voluntary precautionary orders of isolation or quarantine
  • Compliance with applicable engineering controls (i.e. air flow, ventilation, etc.)
  • Designation of one or more supervisory employers to enforce compliance
  • Legal/regulatory compliance
  • Retaliation requirements

Importantly, where an employer opts to create their own Employer Safety Plan, the Act requires “meaningful participation of employees” (or of the appropriate collective bargaining representative, if applicable).  Further, all employees must be provided with a copy of the Employer Safety Plan on the effective date of the act, or upon hiring, whichever is later.  The Employer Safety Plan must also be included in employee documents, and posted “in a visible prominent location” in the worksite.  Unlike the emergency, temporary, COVID-19 regulations passed through various gubernatorial orders in the spring and fall of 2020, or the recommendations and best practices that continue to be released by federal employment and protective agencies, the Act is now a part of New York law.

Finally, under the Act employers are prohibited from retaliating against employees for exercising their rights, reporting violations, or refusing to work after a violation of the Employer Safety Plan.  The DOL is given the authority to issue fines to employers for violating the Act.  As discussed above, Governor Cuomo signed the Act after the legislature agreed to revisions including allowing a cure period before an employer may be subject to litigation.  It is unclear if the same protections will be built in for civil penalties.

Workplace Safety Committee

The Act also requires employers to “permit employees to establish and administer a joint labor-management workplace safety committee.”  The legislative intent appears to have been to target larger corporations.  Nonetheless, employers of any size are obligated to meet this requirement.  It is unclear if the legislative modifications will include clarification on the process required for employees to request the formation of such committee.  If such committee is formed, however, it is authorized to:

  • Raise health and safety concerns, hazards, complaints, and violations
  • Review any policy put in place in the workplace required by the Act (i.e. the Employer Safety Plan), or any provision of workers’ compensation law
  • Participate in governmental site visits
  • Review any report filed by the employer related to the health and safety of the workplace

Further, employers are required to allow employees to attend: 1) training on the function of worker safety committees, 2) an introduction to occupational safety and health, and 3) committee meetings on a quarterly basis.  Employees are entitled to their usual compensation for the aforementioned activities.  Employers may not retaliate against employees for participating in establishing a workplace safety committee.

Conclusion

Although the Act is awaiting revision, and guidance will certainly be forthcoming from the DOL regarding employer obligations, it is never too early to begin assessing corporate compliance.  For those New York businesses that established return to work plans in the spring and summer of 2020, the Employer Safety Plan may very well be a revised version of similar plans already in place.  However, for entities and organizations that are not used to employee involvement at the level that will be required by the employee safety committee (if formed), the Act may require some adjusting in the coming months.  Regular examination of corporate compliance with local, state, and federal laws and regulations should be a part of your corporate planning.  For assistance with compliance, or to discuss other laws and regulations that may impact your business, reach out to your usual firm contact, or contact Melissa Green ([email protected]).

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