Workers Can Now Sue Each Other for Negligent Acts Committed Against Each Other

By Brian S. Weinstock

There are some unfortunate unintended consequences of the August 28, 2005 Missouri Workers Compensation Reform.

I wrote Workers Can Now Sue Each Other for Negligent Acts (just published by Associated Industries of Missouri) because I believe the case (mentioned within) sets a terrible precedent from a public policy standpoint.

Do we really want employees suing each over simple negligence when there is a remedy for the injured worker via workers compensation?

Employees probably have no insurance to protect themselves over these types of issues. This could have a devastating effect on small and medium size businesses so I believe it needs to be overruled by the Missouri Supreme Court or the legislature and the Governor need to fix this issue quickly.

09/3/10 6:00 AM

Employment Law, Litigation | Comment (0) |

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Workers Can Now Sue Each Other for Negligent Acts Committed Against Each Other

Mergers and Sales – Trade Secrets & Confidential Information

By Ruth A. Binger

Who Owns the Salesperson’s LinkedIn Account?

Owners/shareholders own businesses for many reasons, including selling the business at a value higher than the investment cost. However, when a business owner goes to sell his or her business and attempts to obtain the highest price available, it is important to understand where the value of that business lies and how to maximize that value to any potential buyer.

In many instances, a significant part of the business’s value is found in the intellectual property possessed by the employees.

Part of that intellectual property is found in the trade secrets and confidential information that the company develops to provide its services and products faster, cheaper, and better over time. A very critical component is the customer networks that its sales/marketing people developed over time.

Who owns those networks, especially LinkedIn, and the data associated with them?

With the complete transparency, and to some degree, anonymity of the internet, the owner’s duty to protect the intellectual property of his or her business becomes even more heightened.

Contrary to the new oracles, there is no such thing as free – everything that is created takes energy. Salespeople can be slowed down by nonsoliciations/noncompetes.

Companies can insist on owning the cell phones and smart phones. However, companies need to think about protecting the data that its employees develop on its time or downloaded from company data networks into LinkedIn, smart phones, emails, etc. This can be done by adding language protecting trade secrets and confidential information in data networks to employment manuals and employment agreements.

Today, businesses are bombarded with messages exhorting the establishment and maintenance of an organizational presence on popular Social Media sites and blogs. The members of Facebook, the largest social-networking site, with nearly 500 million members, or 22 percent of all Internet users, spend more than 700 billion minutes a month on the site. LinkedIn has over 75 million members in 200 countries and a new member joins LinkedIn approximately every seconds.

Your employees and your customers are becoming interdependent, sharing your trade secrets and confidential information at times when they are not careful. In short, your customers and employees are quickly and forcibly dictating your business operations and professional exchanges by becoming purchasing agents, spies, scouts, product reviewers and technical consultants for each other.

In every LinkedIn account that is established at the urging of the Company for the purpose of employment, there resides a goldmine of names, email addresses and other valuable contacts and professional information.

LinkedIn’s position is that the account constitutes a contract between the employee and LinkedIn. There are no cases in the United States regarding this issue.

Employees proffer free speech arguments and contend that employee owns the LinkedIn account because it is part of their knowledge base and they are entitled to take those contacts with them throughout their career. Employers, in turn, argue that they paid the employee to develop the data, or paid more to hire a person with extensive data, and therefore anything developed on its time with its money is its property. English courts have ruled that Outlook address books amount to employer proprietary databases and belong to the employer.

So, what does a prudent owner do?

Create a policy that is placed in the employment manual or noncompete agreement that makes it clear that the Company makes a significant investment in establishing or increasing the employee’s network of business contacts, that such information is protected confidential information or trade secrets and it is not to be disclosed. State affirmatively that direct dial telephone numbers, email addresses and other contact details that are generated on Company time or are provided by the Company are Company property and must be returned to the Company and deleted at the conclusion of the employment relationship.

New Hires can bargain with respect to who is exempted from the noncompete/nonsoliciation agreement and what information is exempt from the confidentiality/trade secret policy. This is in accord with Missouri and most states’ trade secrets laws. This policy would also accord with a 2001 Australian case where the Court held in a nonsocial media context that when an employee copies a significant number of client contact details into a personal address book used in the course of her job, such confidential list belongs to the employer, and must be returned at the conclusion of employment.

Today, noncompete and nonsolicitation clauses are invaluable, but they are not enough. Owners and employers must exercise more self help methods and stay ahead of the game.

Just as it is critical for the owner/employer to own the cell phone/smart phone number, and not the employee, it is also critical to own the employer’s confidential data infrastructure built on the employer’s time. If and when you, the owner, sell the business, you want something to sell that is protectable. You do not want to become another version of Wall Street giant Merrill Lynch that purchased AXA’s Advest Brokerage unit for $400 million in 2005 and by 2006 found that 417 of its 505 brokers had jumped ship with its customers and contacts.

Social media continues to rewrite the value of your business and you need to effectively manage and direct it or you will give it all away.

09/1/10 6:00 AM

Business Law, Employment Law, Intellectual Property | Comment (0) |

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Mergers and Sales – Trade Secrets & Confidential Information

Stepping Back. US MicroLending with Kiva: Raising Capital + Raising You

By Ruth A. Binger

When the usual suspects are rounded up to determine the reason for the decrease in start-ups and/or business failures in 2009/2010, in this author’s view, some blame must be placed on the business owner’s own failure to have introduced himself to his “better self” in the words of Napoleon Hill.

Bob Calcaterra recently noted this problem in the August 2010 Missouri Venture Forum Newsletter.

In Ralph Waldo Emerson’s essay “Experience,” he posits that all of us have an iron wire which he calls “Temperament” upon which the seeds of the individual are strung. He further argues in his essay “Compensation” that “strength grows out of our weakness and that indignation which arms itself with secret forces does not awaken until we are pricked and stung and sorely assailed.”

This veto or limitation power of adversity is the theme in the Summer 2010 Wilson Quarterly article “What Next for the Start- Up Nation” where the author speculates as to what attributes Israel start-up founders have that create so many successful start ups (persistence, mission critical focus, etc.) .

In twenty-seven years of counseling small businesses, I have found that the business owners who are the most successful are self disciplined, incredibly focused, hungry and have an iron will.

When one reviews the evidence of successful start-ups, one sees so many first and second generation Americans who will not give up. So, for those of you with the iron will or who want to develop that iron will by apprenticing at the bottom or “start where you are and build”, please check out the Microlending article in the New York Times. You will be introduced to Kiva.org, who has just started a pilot program lending to business owners in the United States. Remember, Microsoft was created in 1975, at the end of the first great recession since the Depression.

Who knows what will happen, you may become a Bill Gates.

07/31/10 6:00 AM

Banking and Finance, Business Law, Emerging Business | Comment (0) |

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Stepping Back. US MicroLending with Kiva: Raising Capital + Raising You

A Guide to Incorporating Your Missouri Business: The Issues and Problems Faced by Small Businesses When Incorporating (Part 3)

By David J. Binder

Buy-Sell Agreements or Shareholders’ Agreements

When you incorporate your business with another individual, it is very easy to forget that you two may not always be the shareholders of the corporation. What happens when a shareholder dies and his lazy son receives his stock in the corporation? What happens when a shareholder gets divorced and the ex-spouse receives corporate stock pursuant to the divorce decree? Depending upon what is stated in your corporation’s bylaws and buy-sell agreement, you may end up owning a corporation with someone you did not intend to, or would even like to, run the business with. Therefore, it is critical that the shareholders of a corporation plan ahead for such an occasion through the use of a properly drafted buy-sell agreement.

Overview of Buy-Sell Agreements

A buy-sell agreement is an agreement entered into by all of the corporation’s shareholders whereby they restrict who may hold corporate stock and how they can obtain it. The agreement provides for certain triggering events that will give the corporation and/or the remaining shareholders an option to purchase the shareholder’s stock. The usual triggering events include divorce, disability, death, or bankruptcy of a member. Basically, the shareholders of a corporation will want the buy-sell agreement to prevent corporate stock from being sold to, or obtained by, a third party in nearly all circumstances. Also, the buy-sell agreement will govern when one shareholder wishes to buy out another shareholder or when one shareholder wants to end his relationship with the corporation (typically due to issues among the shareholders).

Valuation of Stock Under a Buy-Sell Agreement

A key provision in the buy-sell agreement is the valuation of the shareholder’s stock. When you have a smaller business, it may be best to select a simple valuation approach instead of incurring the cost of having a Certified Public Accountant value your business. I have seen buy-sell agreements that used a multiple of business revenues, business earnings, business profits, business assets, or total compensation to the shareholder. If you did use a multiples valuation, I would suggest using one based upon some type of earnings or profits calculation because that will provide a more accurate value of the corporation.

To better understand a multiples valuation analysis, it may be best to provide an example. A buy-sell agreement for two equal shareholders provides a 3x earnings multiple for a corporation with $100 in earnings. If a shareholder’s stock was purchased under the buy-sell agreement, the interest would be purchased for $150. ($100 x 3 x 50%) Although this figure will not account for such things as future potential growth of the business, it does provide a simple, fair valuation of the corporation.

If you have a larger corporation and can afford to do so, then I would suggest having a Certified Public Accountant determine the value of the corporation. Although the valuation may cost more than a multiples valuation, it will provide you with the most accurate value of the business. However, it is important to note that any valuation will always be subject to some debate.

Payment Method Under Buy-Sell Agreement

Once you have determined the amount to be paid, it is critical to plan for the method of payment. Many entrepreneurs have nearly all of their financial resources tied up in their business and it may be very difficult for them to buy another shareholder out. Although cash would be ideal for the outgoing shareholder, it may impossible for the corporation or the other shareholders to pay in cash. Therefore, I would suggest that the buy-sell agreement provide that all or a part of the consideration to be paid be in the form of a promissory note. This would then allow the corporation or the other shareholders the ability to pay the amount over a reasonable time.

Conclusion

A buy-sell agreement, if drafted properly, will provide individual shareholders and their corporation with ownership continuity despite the occurrence of future unforeseen events. Although there may not be any current issues, it is important to have a buy-sell agreement in place at the time of incorporation. Otherwise, you will be faced with a much higher cost after the fact when you are either required to buy the unforeseen shareholder out or operate a business with him.

07/30/10 11:00 AM

Business Law, Emerging Business | Comment (0) |

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A Guide to Incorporating Your Missouri Business: The Issues and Problems Faced by Small Businesses When Incorporating (Part 3)

There are Fewer Accredited Investors Now: “Dodd-Frank Act”

By Joseph R. Soraghan

Wednesday, July 21, 2010, the number of investors available to entrepreneurs dropped significantly. On that date, President Obama signed the Dodd-Frank Wall Street Reform and Consumer and Consumer Protection Act (the “Dodd-Frank Act”) into law.

As we pointed out in the February 2010 Enterprise (Missouri Venture Forum), the legal requirements for raising capital from investors requires that either the offering of the investments be registered with the Securities and Exchange Commission, or that an exemption be available for the offering. The exemption which has become far and away the most used, and the most useful, to entrepreneurs is that for “accredited” investors under Regulation D.

Regulation D allows an investor to be “accredited” by having a net worth of only $1,000,000, or have an individual annual income exceeding $200,000 or $300,000 if investing with one’s spouse. Most users of this exemption qualified for it simply by assuring that all investors met the net worth requirement of $1,000,000.

And in calculating that net worth, until last Wednesday, essentially all of the investor’s assets could be included, including the investor’s primary residence. This is important because many, if not most, such investors’ $1,000,000 net worth consisted primarily of his or her primary residence.

But the Dodd-Frank Act excludes the value of an investor=s primary residence from the calculation of net worth for determining the accredited investors status (Section 412(a)).

Some persons in the entrepreneurial community predict that this will significantly reduce the number of persons who can qualify as “accredited.” (Other proposals were made in the legislative process leading to the Act which arguably would have effectively eliminated the usefulness of the exemption completely, but they were not adopted.)

Entrepreneurs seeking to raise capital, or in the process of doing so, must now use the new standard in determining compliance with the accredited investor status.

The changes emanating from the Act will eventually likely not be restricted to this one adjustment. The Act authorizes the Securities and Exchange Commission within one year to review and promulgate rules amending the definition of “accredited investor” (which amendment will likely require some showing of experience in “angel” investing). Within three years, the Government Accountability Office is required to submit a report to Congress regarding income, net worth and other criteria for accredited investor status, and within four years the SEC must review the accredited investor exemption in its entirety.

Joe Soraghan is a past president of the Missouri Venture Forum.

Released by permission of the Missouri Venture Forum newsletter ENTERPRISE (August 2010).

07/29/10 6:00 AM

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There are Fewer Accredited Investors Now: “Dodd-Frank Act”

A New Headache for Business Owners – The IRS Form 1099

By Patrick J. Murphy

Buried within just 23 lines of Section 9006 of the Healthcare reform bill, The Patient Protection and Affordable Care Act, H.R. 3590, 111th Congress, signed into law by President Obama on March 23, 2010 is a dramatic change to the 1099 reporting requirements.

Prior law IRS reporting laws required, generally, that if a business made payments in excess of $600 to a person or a business over the course of a year, the business was required to file a Form 1099 to report those payments. One copy would be sent to the IRS, another copy was sent to the person/unincorporated business to whom you paid in excess of $600. Payments made to a corporation and payments made in exchange for merchandise were generally not required to be reported.

Now, beginning January 1, 2012, every business, both large and small, will be required to issue additional tax documents to any vendor of services or property to which the business has paid more than $600 to in a tax year. As before, the business will need to send the tax form to both the IRS and to the person who received payments. The Form 1099 will need to be issued for basic business expenses such as airlines, hotels, rental cars, and restaurants, according to the Small Business Legislative Council. Also, for a business who sells or distributes goods, all of their suppliers of inventory are also considered vendors under this law. This new 1099 trail would expose payments to small operators that might now be going unreported, and which the federal government expects to cause a dramatic revenue increase to offset the cost of the health bill.

In addition to issuing the Form 1099s to all its vendors, a business will also have to obtain Taxpayer Identification Numbers (TINs) from all qualifying vendors. If the business is unable to do so, the business will be required to withhold a portion of the vendor’s payment and send it instead to the IRS. If a business fails to accurately file their 1099s, significant penalties can apply. Hopefully technical corrections will be made to this legislation to lessen the record keeping and reporting burden placed on small businesses by these requirements.

07/27/10 3:00 PM

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A New Headache for Business Owners – The IRS Form 1099

NFL: American Needle and the Collective Bargaining Agreement

By Brian S. Weinstock

Recently, the United States Supreme Court ruled 9 – 0 in favor of American Needle and against the National Football League (NFL). America Needle sued the NFL alleging anti-trust violations of Section 1 of the Sherman Act wherein “every contract, combination in the form of a trust or otherwise, or, conspiracy, in restraint of trade” is made illegal. The lawsuit raised the questions of whether the NFL is capable of engaging in a “contract, combination in the form of a trust or otherwise, or, conspiracy, in restraint of trade” as defined by Section 1 of the Sherman Act or whether the alleged activity performed by the NFL “must be viewed as that of a single enterprise for purposes of Section 1” of the Sherman Act.

If all thirty-two NFL teams could act as one entity, then provisions with respect to collusion could be severely eroded or exterminated altogether. This could allow the NFL to establish salary caps for players which would normally be illegal. This is significant given the pending labor dispute between NFL owners and the NFL players association (NFLPA). The United States Supreme Court held that each of the NFL teams is “substantial, independently owned, and independently operated.” Moreover, the court noted that the NFL teams compete with one another, not only on the playing field, but to attract fans, for gate receipts, for contracts with managerial and playing personnel and when it comes to licensing decisions even if it is through a joint venture known as the NFLP. With regard to the American Needle case, the court found that the NFL teams compete in marketing for intellectual property in terms of pursuing interests of each “corporation itself.” The court held that decisions by the NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that “deprive the marketplace of independent centers of decision making and therefore of actual or potential competition.”

NFL owners for the most part are smart people. Do you really believe that NFL owners expected to prevail with regard to American Needle’s allegations of anti-trust violations? Do you really think NFL owners believed that just because they organized the NFLP they would be insulated from Section 1 of the Sherman Act? Do you really believe that NFL owners thought the American Needle case was their golden ticket to increase their power over the NFLPA? NFL owners and the league knew there was a high probability that their position in the American Needle case would not prevail.

As a result of the American Needle case, the NFL is not going to be able to establish salary caps for players unless they have the approval of the NFLPA. One major issue with respect to the upcoming labor negotiations is a rookie salary cap. Right now, rookie salaries are not capped. NFL teams who pick at the top of the first round of the NFL draft do not necessarily want these picks even though they are in prime position to obtain the finest talent. These teams do not want these picks because of the amount of money they must guarantee (e.g. $40 million) to a player who has never played a single down in the NFL. The NFL draft is as much art as it is science and with this comes high risk in return for substantial gains or loses, e.g. JaMarcus Russell, Ryan Leaf, etc. NFL owners do not want to guarantee so much money to an unproven player. Can anybody really blame them? Would you put up $40 million for an unproven player? Is it reasonable to expect an owner to make that type of investment in a player who has not enhanced the value of the team?

Many so called experts claim that the American Needle case allowed the NFLPA to gain leverage at the bargaining table with respect to a new collective bargaining agreement (CBA) so that:

1. A lockout is less likely; and
2. NFL owners will put more effort into executing a new CBA to avoid a lockout.

Did the NFLPA really gain any leverage at the bargaining table? NFL owners are for the most part billionaires and have access to substantial sums of money to cover any debt service associated with facilities or costs with respect to operating their franchise. Moreover, the NFL has a television contract with DirecTV which is to pay $1 billion per year from 2011 – 2014. Even if there are no games in 2011, each NFL team will earn about $31 million per team during a lockout just with respect to the DirecTV deal. NFL owners are not hurting for money and will still eat three meals a day, live in their same homes and drive their same cars.

On the flip side, the average career for a NFL player is 3.5 years, the players’ contracts are not guaranteed and the vast majority of NFL players do not make millions of dollars in a year let alone over a career. Despite not earning large sums of money over their NFL career, most NFL players live well beyond their means in terms of homes, cars, clothes, entertainment, etc. NFL players need to remember who cuts their paychecks, why the have the privilege of playing in the NFL and who has incurred the debt to run a NFL franchise. The players have the privilege of being in the NFL because of the owners. Without the NFL and its owners, the vast majority of NFL players would be working a forty hour a week job earning a marginal income. The NFLPA and its members always want more money and benefits but they never want to take on any debt or risk associated with running a professional sports franchise. May be the NFL players should personally guarantee some of the corporate debt associated with the thirty-two NFL teams since they want to share in the profits.

The vast majority of NFL players cannot earn the same or similar salary in any other industry that comes close to what they can make in 3.5 years in the NFL. Since the average NFL career is 3.5 years, any time missed as a result of a lockout or strike would take time away from a playing career since any NFL player can always be replaced by a younger player. When NFL players were on strike for fifty-seven days in 1982, many of them wanted the strike to end so that they could get back to work and make their usual salary as opposed to earning strike pay. Although, one difference from 1982 is that the NFLPA has built up a large war chest for a long lockout and owns its own building which it can borrow against if in a pinch. However, NFL players know that they can be replaced as they were in 1987 with so called scab players. Even though the term “scab” paints a picture of lesser quality, fans have to realize that the NFL draft used to have many more rounds than the current seven rounds, i.e. Johnny Unitas taken in the ninth round, and every year players who are not drafted make NFL rosters, i.e. Kurt Warner, London Fletcher, etc. Thus, there are plenty of talented former college football players who are waiting to play in the NFL to show a team what they can do. While there may be a drop off in terms of the elite NFL talent, there surely is not much of a difference between high caliber scab players and the average NFL player.

The NFL has the best professional sports product in the United States with an $8 billion business which continues to grow. The NFL has never been more popular inside and outside of America. NFL owners and the NFLPA are well aware of the numbers and are not eager to ruin their product. NFL owners and league officials are well aware of what happened during the 1982 fifty-seven day long players strike and the 1987 strike which introduced fans to scab players for three weeks. Based on all the totality of the circumstances:

1. NFL owners are not eager to ruin their product with or without a victory in the American Needle case;
2. A lockout is not more or less likely given a NFL loss in the American Needle case;
3. NFL owners have the same motivation to avoid a lockout today as they did before the American Needle case; and
4. The leverage is still with the NFL owners when it comes to negotiating a new CBA.

06/12/10 7:00 AM

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NFL: American Needle and the Collective Bargaining Agreement

ROBS transactions: the Department of Labor and IRS Regulation

By Brian S. Weinstock

Recently, the Department of Labor advised that they are in the process of developing information to provide direction for Rollovers as Business Start-ups known by the IRS as ROBS transactions.

The IRS issued a memorandum on October 1, 2008 warning about potential pitfalls for ROBS transactions particularly related to prohibited transactions. Moreover, the Department of Labor and the IRS have indicated that a large percentage of ROBS transactions do not comply with federal rules and regulations with regard to tax-deferred retirement plans such as qualified 401k plans and IRAs.

According to Louis Campagna, Chief of the Fiduciary Interpretations Division for the Department of Labor’s Employee Benefits Security Administration, the direction being produced by his department shall address the Department of Labor’s apprehension with regard to ROBS transactions initiated with rollovers from employer sponsored qualified plans and individual retirement accounts, such as 401k plans and IRAs, in order to allow a professional to assess whether the ROBS transaction could be a prohibited transaction.

The Department of Labor is concerned with the employer’s intent when the ROBS transaction is initiated.

Specifically, the Department of Labor needs to determine whether the ROBS transaction was initiated to implement a lawful way for employees to save money for retirement or is the ROBS transaction being used to shelter income for taxpayers who want to start a business or capitalize an existing business. The latter would allow for the taxpayer to withdraw funds from the C-corporation with the 401k plan for reasons unrelated to the business. If so, the taxpayer could withdraw funds, which where designated as tax-deferred, before they are allowed to be withdrawn tax free.

The IRS has their own concerns with ROBS transactions such as the valuation of the transaction and their compliance with other rules for qualified retirement plans which invest in employer stock, therefore the IRS may publish their own memorandum with respect to the issues they have concerning ROBS transactions.

Besides the complex rules and regulations governing prohibited transactions, another major concern for the IRS is the ability to “unwind” ROBS transactions which have violated IRS rules and regulations for qualified retirement plans. If a 401k plan participates in a prohibited transaction, the entire 401k plan loses its tax deferred status. Therefore, the entire 401k becomes taxable. Another major issue is deterioration of the initial ROBS valuation. Many small to medium size business holders remove cash from the entity for reasons unrelated to the business. This type of action can cause a decrease in the initial value of the ROBS transaction and violate prohibited transaction rules and regulations.

Time is of the essence with respect to hiring a professional to review your ROBS transaction in order to determine if there have been any violations of federal rules and regulations, such as prohibited transactions. The IRS has a self-correction program for 401ks which taxpayers can take advantage of before an IRS examination.

06/9/10 7:30 AM

Business Law, Emerging Business, Tax | Comment (1) |

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ROBS transactions: the Department of Labor and IRS Regulation

The End of LIFO/FIFO Loan Participations between Banks?

By James M. Heffner

Loan participations are invaluable to community and regional banks who want to service their borrowers’ needs beyond its legal lending limits or risk tolerance. Loan participations frequently include “LIFO” (Last-in, First-out) and “FIFO” (First-in, First-out) provisions designed to streamline the lending process, simplify monitoring the legal lending limits, and entice banks to participate in a loan they would not otherwise consider.

LIFO loan participations are effective when the originating bank advances funds to its borrower up to its legal lending limit for that single borrower – subsequently the participating bank purchases that amount of the loan which exceeds the originating bank’s lending limit. For the participating bank’s trouble, or relative bargaining power, the participating bank is repaid its principal before the originating bank. The opposite holds true for FIFO loans. Regardless of the loans LIFO or FIFO status, in the event of default losses are shared between the originating bank and the participating bank on a pro-rata basis.

Effective January 1, 2010, FASB Statement No. 166, Accounting for Transfers of Financial Assets (“FAS 166”) altered what constitutes a transfer of a portion of a financial asset, e.g., a loan participation, to be treated as an actual sale. Per FAS 166, LIFO and FIFO participation loans do not qualify for sale accounting treatment. What this means to bankers is that the originating bank is now obligated to report that portion of the loan “sold” to the participating bank as a loan on its balance sheet. So, rather than account for only what the originating bank has outstanding, less what it sold to the participating bank, the originating bank now must include the aggregate balance of a borrower’s debt, which, in turn, is used to determine compliance with legal lending limits (see generally12 USC § 84; Reg O; RSMo § 362.170; and CSR 140-2.080).

The American Bankers Association has been proactive on this front, authoring a March 3, 2010 letter discussing the regulatory requirements for loan participations effected by FASB Statement No. 166. In its letter to the Federal Reserve and interested parties, the ABA recommends that FAS 166 should not be used to regulate legal lending limits – rather, “[c]ompliance with such limits should apply on the basis of the contractual borrower.”

To be clear, FAS 166 does not apply to loan participations where all cash flows from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership. What is less clear, however, is whether banks must are required to modify accounting methods for loans made pre-2010 but include disbursements post-2009, such as a revolving line of credit.

In sum, until the certain clarifications are made, in order to qualify for sale accounting the originating bank must carefully review its policies and procedures for loan participations, and understand the implications that come with FAS 166.

06/2/10 6:00 AM

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The End of LIFO/FIFO Loan Participations between Banks?

The Employment Tax Compliance Program—And What It Means for Businesses

By Patrick J. Murphy

What Is the Employment Tax Compliance Program?

The Employment Tax Compliance Program (ETCP) is an Internal Revenue Service (IRS) program which aims to lessen the income tax gap. The ETCP plans to do this by auditing 6,000 companies over the next three years to determine if the classification of certain employees within those companies as independent contractors is proper, as opposed to classifying those same individuals as employees. This classification is important for tax purposes as it is easier for taxes to be taken from employees, who are subject to the withholding system, as opposed to independent contractors. Independent contractors are not subject to this same withholding system, which can sometimes lead to the under-payment of taxes. By auditing these companies, the IRS can look to see if individuals who were claiming to be independent contractors are actually employees, and thus would be subject to more regulated taxing.

Who is the Employment Tax Compliance Program Targeted At?

The ETCP will mostly be targeting at those industries which traditionally have individuals working for them that are more often than not considered to be independent contractors. This will include industries such as construction, ground delivery, car service and trucking, to name a few. Unfortunately, there is no specific test which can differentiate an employee from an independent contractor. Typically an independent contractor will have and use their own tools, will create their own schedules and will have numerous “employers,” as opposed to working for the same individual or company for 40-hours-a-week for an extended period of time. However, many of those same factors can be used in finding that an individual is an employee. Determining the difference between the two groups is a very fact-intensive process, specific to each situation.

What Will the Audits Consist of?

Typically, the audits will be done on-site and face-to-face with an agent. Other information which will be pertinent to the audit will be documents provided by the IRS and information which can be gathered from the internet. As stated above, the audit will focus on the proper classification of individuals as independent contractors or employees.

What Can You do to be Prepared?

To be adequately prepared if the IRS should contact your business, one must be cognizant of those employees who may garner extra attention. These employees will be those who have been previously been classified as independent contractors, but perhaps for consecutive years have received a W-2 from your company. It would be prudent to gather documentation about these employees which bolster their independent contractor status (e.g. contracts, agreements between parties, etc.). Small changes in your relationships with these employees for the future might also help to bolster their status as independent contractor.

Businesses also should keep in mind Section 530 of the Revenue Act of 1978. This section allows for individuals who have long been classified as independent contractors to remain as such, so long as the requirements for “substantive consistency,” “reporting consistency,” and “reasonable basis” are met.

05/28/10 1:20 PM

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The Employment Tax Compliance Program—And What It Means for Businesses