IRS Faces Setback on Path to Regulation of Tax Preparers

By Margaret Dreschel, J.D. Candidate 2015 | Posted on

Earlier this month, a federal judge effectively halted the IRS’s proposed multi-million dollar initiative to regulate tax preparers.  The magnitude of the blow became clear on Friday when the IRS asked the court to reconsider its permanent injunction on the initiative, citing the $50 million already spent on launching the program, $100 million already collected in fees, and over 100,000 tax preparers currently registered to take a competency test.  If the decision stands, the IRS not only faces these tremendous losses, but also potential class-action lawsuits from tax preparers and breach-of-contract costs.

U.S. District Court Judge James Boasberg for the District of Columbia previously issued a permanent injunction prohibiting enforcement of the agency’s rules requiring licenses for all previously unregulated tax preparers.  Judge Boasberg found that the IRS over-stepped its statutory authority by including tax preparers in the category of persons who “practice before the IRS” and are thereby subject to its regulations.  This was a victory not only for the three tax preparers who filed the suit last year with the help of the libertarian law firm Institute for Justice, but also for the estimated 600,000 tax preparers who would have been subject to the licensing rules starting this year.  The IRS’s proposed rules are available for viewing here, and the U.S. District Court’s opinion is here.

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Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

The FTC recently revised the Hart-Scott-Rodino thresholds effective for transactions closing on or after February 14, 2013. Transactions that exceed the thresholds must be reported to the FTC and DOJ for antitrust review before closing. The FTC annually updates the thresholds when there are changes to gross national product. In a recent client alert, Wilson Sonsini summarizes the updated thresholds and compares them to last year’s amounts.

FINRA recently invited those intending to become crowdfunding portals to voluntarily share information about their business.  FINRA stated that submissions will be free and all information will be kept confidential. FINRA plans to use the information to develop rules for the portals. In a recent client alert, Davis Polk summarizes what information FINRA is seeking and how it may play into the larger scheme of crowdfunding rule development.

The SEC recently approved new compensation committee requirements for companies listed on the NYSE and Nasdaq.  The requirements are designed to enhance compensation committee independence and specify compensation committee authority and responsibility. Companies are required to comply by the earlier of their first board meeting following January 15, 2014 or October 31, 2014.  In a recent client alert, Skadden explains the new requirements and which companies are subject to them.

 

Morgan Stanley Settles for $5 Million with Regulator for its involvement in Facebook IPO

By Jared Mayberry, J.D. Candidate 2015 | Posted on

Morgan Stanley recently agreed to pay a $5 Million fine for its involvement in Facebook’s initial public offering.  The fine was agreed to without admitting or denying wrongdoing, and settled charges from a Massachusetts regulator that claimed the firm violated an earlier settlement agreement blocking investment bankers from influencing analysts.

In 2003, ten brokerage firms were penalized for their conduct during the dotcom bubble.  The 2003 settlement noted that the brokerage firms engaged in acts that were considered conflicts of interest between research analysts and investment bankers, and that the respective firms did not manage the conflicts appropriately.  The current  potential violation of the settlement arose when a senior Morgan Stanley investment banker informed an analyst that David Ebersman, Facebook’s CFO, believed revenue for the second quarter and full year would be lower than anticipated.

Fearing his conduct did not comply with the 2003 settlement, the banker convinced Ebersman to file an updated S-1 registration statement.  The senior investment banker testified that his solution was an attempt to “update analyst guidance without creating the appearance of not providing the underlying trend information to all investors.”  Ebersman wrote to the board that the updated S-1 would “help us to continue to deliver accurate messages at the road show meetings (without someone claiming we are providing any selective disclosure to big accounts only).”

Immediately after the filing of the S-1, Facebook’s Treasurer made 15-minute update calls to about twenty syndicated research analysts.  The senior investment banker rehearsed with the Treasurer for these calls, but was not present in the room when the calls were placed.  The $5 Million fine comes out of what Forbes approximates to be a $68 Million fee from Facebook for their work as an underwriter for its May offering.

According to the Chicago Tribune, the litigation concerning the Facebook’s IPO is not over.  A proposed class-action case has accused Facebook of misrepresentations of its financial condition leading up to the companies much-anticipated IPO.  Collectively, the group has claimed over $7 million in damages.

For previous Network coverage of Facebook’s IPO, see here and here.

Professor Krishnamurthy: Feds should use inventive method to restructure home debt

By jsantiesteban | Posted on

Last week, Berkeley Law Professor Prasad Krishnamurthy published an opinion piece in the Oakland Tribune advocating that the government use shared appreciation mortgages to aid underwater homeowners. Shared appreciation mortgages are those in which a portion of the principle of a loan is written off in exchange for a share of the equity if the price of the home increases. While this method is already in use in the private sector, Krishnamurthy argues that the government, through the FHFA, should implement a similar plan. The article lays out the details of how the mortgages could aid homeowners and address some potential criticisms. Check out the full article here.

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

This week, Manatt has a guide on “How to Handle Confidential Investigations of Bank Activities,” published in the ABA Banking Journal. The guide explains how banks should handle potentially suspicious transactions identified during a safety and soundness examination. The guide stresses that while not every suspicious transaction warrants a full outside investigation, those involving “significant employee or customer negligence or misconduct, or violations of law or regulations” likely require such an investigation. The guide explains the requirements for planning, conducting, and ensuring regulatory compliance throughout the investigation.

Last week, Gibson Dunn published its “2012 Year-End Securities Enforcement Update,” including some interesting findings. Keeping pace with last year, the SEC filed 734 enforcement actions extracting more than $3 billion in penalties and disgorgement. The update notes, however, “the SEC confronted significant challenges in litigating previously filed enforcement actions against individuals in cases related to the financial crisis.”  These challenges aside, the SEC significantly increased actions against investment advisors and broker-dealers, bringing 147 and 134 cases against each, respectively. The update breaks down the enforcement actions, explaining in detail the types of entities and conduct likely to raise the ire of the SEC.

Among other tax changes, the American Taxpayer Relief Act of 2012 extends the 100 percent capital gain exclusion for “qualified small business stock.” This exclusion originally was implemented as part of the Internal Revenue Code of 1986, but only excluded from capital gains tax 50 percent (in some cases 75 percent) of gains from the sale of qualified small business stock. The Small Business Jobs Act of 2010 increased the exemption to 100 percent and increased the time frame in which the deduction applied. The recent Taxpayer Relief Act extended the exemption period to January 1, 2014. In a recent Client Alert, Latham & Watkins explains the requirements of “qualified small business stock” and the benefits and limitations of the exclusion. The Client Alert is available for download here.

 

The Week in Review: New Mortgage Rules and Citigroup’s Q4 Hit by Settlement

By Christopher Hammond, J.D. Candidate 2015 | Posted on

In an ongoing effort to protect homeowners facing foreclosure, the Consumer Financial Protection Bureau has issued new rules for mortgage servicers.  The rules, which won’t take effect until January 2014, include provisions requiring banks to consider and respond to loan modification applications submitted at least 37 days before a schedule foreclosure.  Similarly, servicers must inform borrows of alternatives to foreclosure and will not be able to begin foreclosure proceedings while homeowners are seeking a loan modification.  The rules also severely limit some of the lending practices (e.g. inflated up-front fees, interest-only payments, and high debt-to-income ratios) considered predatory by consumer groups. For more detail, see articles by WashPo and CNN.

Citigroup’s Q4 earnings report underperformed this morning – in large part due to its $1.29 billion in legal costs – and the company’s stock dropped 3.4% in early trading.  While most banks are still purging their balance sheets, there is worry that we may not have seen the end of these mortgage-crisis-era liabilities.  Citigroup’s CFO, John Gerspach, hinted on a Thursday conference call:  “I think that the entire industry is still looking at some additional settlements that are still yet to appear.”  For more, see NYTimes and Reuters.  [Bank of America’s Q4 was hit by settlements as well:  WSJ]

AIG Declines to Join Shareholder Lawsuit against U.S.

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Last week, the American International Group (AIG) board considered whether to join a lawsuit against the U.S. government alleging the terms of the company’s $182 billion bailout and takeover were too onerous.  The company’s directors heard arguments from the plaintiff in the case, former AIG CEO Maurice Greenberg, and lawyers for the Treasury Department. After the presentations, the board decided not to join.

The initial class action suit was filed in 2011 in both the Southern District of New York and the Court of Federal Claims by Mr. Greenberg’s new company Starr International Co. The suit, filed  on behalf of AIG shareholders, alleges that the Federal Reserve’s and the Treasury’s bailout resulted in dilution of AIG shareholder equity violating the takings clause of the Fifth Amendment. The complaint alleges that issuing additional shares was necessary to accommodate the government’s demand for an 80 percent equity stake. Eventually, the shares were issued without shareholder approval and in contravention of a shareholder vote rejecting the issuance, states the complaint. The complaint alleges that the resulting dilution of shareholder equity and voting power from the additional shares constituted a taking of private property without due process of law.  The complaint similarly alleges that the 14.5 percent interest rate charged on federal loans was a punitive attempt to provide a backdoor bailout to the rest of the financial industry.

In July 2012, the Court of Federal Claims rejected the Treasury’s motion to dismiss as to the takings claims, finding that the complaint sufficiently identified government actions requiring just compensation. In so doing, the court rejected the government’s argument that shareholders did not have a cognizable property interest in the equity and voting power associated with their shares. The Southern District of New York Court, however, dismissed the claims as to the Federal Reserve. That case is currently pending appeal in the Second Circuit.

AIG’s consideration of the lawsuit spurred controversy given the perception of success regarding the bailout.  AIG has been running commercials exclaiming “Thank you America.” However, its decision not to join the suit could open it to potential additional shareholder litigation if it misses out on a sizeable settlement attained by Mr. Greenberg.

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

While much attention has been paid to increasing taxes on high-income earners as a result of the fiscal cliff compromise (the American Taxpayer Relief Act of 2012), less attention has been paid to the compromise’s corporate tax provisions. In a recent Tax Department Update, Latham & Watkins summarizes the effects of the compromise on both individuals and businesses. The Update also covers the compromise’s effects for various energy-related credits, including the extension of a tax credit for qualified wind facilities. The Update is available for download here.

As part of the Dodd-Frank Act’s requirement for regulated and centralized derivatives trading, many nonfinancial companies that use derivatives may be required to register with the CFTC. However, there is an exception for a “nonfinancial end user.” In general, to qualify as a non-financial end user, the company must not be a swap dealer, major swap participant or other “financial entity.” Additionally, the derivatives must be used as for commercial, rather than investment, purposes. WilmerHale’s recent Corporate and Futures and Derivatives Alert provides a thorough explanation of the application of this exception for nonfinancial companies.

Gibson Dunn recently hosted its ninth-annual webcast, “Challenges in Compliance and Corporate Governance.” Corporate Counsel viewed the webcast and derived seven takeaways for 2013.  Among these lessons is that firms should broaden their focus. Between the SEC’s regulations on conflict minerals and sanctions on Iran, broad-based compliance efforts are necessary.  Another lesson is that firms should not forget the compliance tone in the middle. While many compliance officers focus on setting the tone for upper management, it is often middle managers who receive tips and should be trained on proper compliance procedures.  Check out the other takeaways here.

 

The Section 83(b) Election and the Fallacy of “Earned Income”

By Professor Matthew A. Melone, Lehigh University | Posted on

[Editors Note: This post is part of a series by authors in the forthcoming edition of the Berkeley Business Law Journal, which in conjunction with the Berkeley Center for Law, Business and the Economy, sponsors this blog. Professor Melone teaches graduate and undergraduate courses at Lehigh University’s College of Business and Economics. His research interests include federal income taxation and corporate governance. He has written extensively about comparative forms of doing business, executive compensation, partnership taxation, and accounting standards.]

The controversy over the taxation of income derived from “carried interests” and the apparent consensus that the taxation of such income unjustifiably converts erstwhile labor income into favorably taxed capital gains provide stark evidence of the degree to which a consensus has emerged that equity gains during the course of one’s employment are attributable to labor and should be taxed accordingly. Critics of the taxation of “carried interests” have also set their sights on what they believe is the corporate counterpart to such interests – the section 83(b) election. This election allows the recipient of non-vested stock to lock in the compensatory element of the transaction at the time that the stock is granted. Post-grant appreciation is taxed at capital gain rates. I agree that the election should be eliminated, but not because it fails to capture the essence of the transaction, but because it does precisely that. Therefore, the current elective treatment should be made mandatory.  (more…)

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Late last year, the Federal Reserve issued guidance on its new framework for supervising large financial institutions.  The Federal Reserve’s primary objectives will be to increase the resiliency of financial institutions, and to reduce the impact of an institution’s failure on the broader economy.   Changes include a greater emphasis on recovery and orderly resolution planning as required by Dodd-Frank.  In a recent publication, Sullivan & Cromwell reviews the specifics of the recent changes and explains how their implementation may differ from the previous regulatory framework.

The expectation that courts will recognize and enforce the insolvency proceedings of foreign courts is essential to certainty and predictability of cross-border transactions.  This is especially important where the two nations’ bankruptcy laws materially differ.  Three recent decisions in the U.S. and U.K. call into question whether such an expectation is reasonable.  In one of the cases, the Fifth Circuit held unenforceable a $3.4 billion restructuring plan approved by a Mexican court as “manifestly contrary to the public policy of the United States.”  The Fifth Circuit took issue with the Mexican court’s decision that shareholders receive $500 million in value while higher-ranking creditors receive only 40 percent of their claims.  In a recent client alert, DLA Piper explains the implications of these decisions for certainty and predictability of cross-border transactions.

The U.S. District Court for the District of Columbia recently dismissed a lawsuit challenging recent amendments to CFTC Rule 4.5. With limited exceptions, the amendments require registration by investment companies that trade in futures, options, and commodities. The plaintiffs, the Investment Company Institute and the U.S. Chamber of Commerce, argued the amendments were arbitrary and capricious in violation of the Administrative Procedure Act and that the CFTC failed to perform adequate cost-benefit analysis. In rejecting these arguments, the court found that the link between unregulated derivatives and the financial crisis provided an adequate basis for the amendments. In a recent Client Alert, Ropes & Gray explains the court’s reasoning and the decision’s implications for registered investment companies.