NYSE and Deutsche Boerse (DB) Merge to Survive

Brian S. Weinstock

By Brian S. Weinstock



Is America’s dominance in capitalism clearly over?

The NYSE merger is one of survival both for the NYSE and for the German securities exchange Deutsche Boerse.

The NYSE is inefficient, i.e. the pit, traders on the floor. Lower fees and better efficiencies created the mess at the NYSE.  The NYSE has too many outdated traditions which created numerous types of inefficiencies, forcing the NYSE into a downward position. Even the NASDAQ was doing better than the NYSE regarding efficiencies via electronic trading.

We live in a global economy. There are trading exchanges all over the world, i.e. China, Tokyo, Brazil , Russia, India, Australia, London, etc. The stock exchanges in China and Brazil are some of the largest in the world. Everybody in the world can access securities exchanges via the Internet.

The dollar is weak right now. Europe has a debt crisis and the Euro is not so stable.

Not long ago, one of Europe’s leading independent forecasters for the Treasury asserted that the Euro could collapse as a result of Europe’s debt crisis. The European Central Bank’s Governing Council Member asserted that it is not up to the bank to save countries where governments run the risk of being insolvent.

Right now, Ireland, Greece, Portugal, Italy, and Spain have a lot of debt problems and plenty of entities are buying more insurance at higher prices to cover potential losses in those countries.

Germany had good growth in 2010 but their economic model is centered around exports, i.e. cars and machines. Asia (China) drove Germany’s growth in 2010. Can Germany sustain their economic model since other European countries (mainly southern Europe) have stagnant economies re: exports and imports? The European debt crisis has pushed the Euro down which has made German exports more competitive.

Right now, US exports are even better than German exports because the US dollar is weak, too.

Since Germany appears to be in the best economic position in Europe more people are putting capital in Germany when investing in Europe. German exporters could take a huge hit if Europe’s debt crisis runs into other European countries.

Who knows what will happen because regulators have to look this over. Also, there are may political issues with this deal starting with a fight over what to name the exchange. Politicians could crush the regulatory process simply because they do not like the proposed name. I suspect it will go through because both exchanges need this for survival.

I think the NYSE deal is a play on a world asset which is undervalued as a result of a weak US dollar.

Ex: InBev could not purchase AB if the US dollar was strong. InBev took advantage of a weak US dollar and is now dealing with a lot of debt and debt service. The strength of the US dollar runs in cycles just like the markets. Will the US dollar stay at its current value forever or remain at lower values when priced against other global currencies? I suspect not.

The World Bank has predicted a global growth of 3.3% for 2011. Europe’s debt crisis is a huge factor which could derail any global recovery.

The European Central Bank has asserted that inflation may be around for months in Europe which would probably require a European interest rate hike which would make borrowing from global banks tougher than it already is.

However, major companies are lean and mean now and sitting on trillions of dollars of cash. In addition to inflation and a debt crisis, the 17 member European nation is still facing 10% unemployment which was after a recent drop. Also, housing prices continue to drop in Europe although it appears that it has bottomed out.

Is America’s dominance in capitalism clearly over? I would say no since nothing is clear right now with global economies, global financial markets and global debts and debt service.

ROBS Transactions as a Financial Investment Tool: Legal Traps for the Unwary

Brian S. Weinstock

By Brian S. Weinstock



Over the last few years, ROBS transactions have dramatically increased which means that the funds being used to capitalize these transactions has significantly increased too. I wrote about ROBS transactions last June in a post called “ROBS transactions: the Department of Labor and IRS Regulation.”

Recently, Mr. Alan Lavine interviewed me for an article in Financial Advisor Magazine about ROBS transactions with regard how they are being used as financial investment tools and whether investors should participate in this type of transaction. The article, “Rolling Over, Starting Up,” appears in the in the December 2010 issue. The article’s subtitle is: Clients can tap into retirement savings to start new businesses, but there are legal traps for the unwary.

It was an honor to be quoted by Mr. Lavine who is an accomplished author and syndicated columnist. Mr. Lavine and his wife, Gail Liberman, wrote Rags to Riches which was featured on Oprah and hit two best seller lists.

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

Brian S. Weinstock

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.

NFL: American Needle and the Collective Bargaining Agreement

Brian S. Weinstock

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.

ROBS transactions: the Department of Labor and IRS Regulation

Brian S. Weinstock

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.

Missouri Historic Tax Credit

Brian S. Weinstock

By Brian S. Weinstock



Currently, the Missouri legislature is debating on whether to restructure the state’s historic tax credit program given the state’s budget crisis. Governor Nixon apparently believes that the state’s historic tax credit programs are large and have been usurping state funds that could go public schools, colleges and universities. Therefore, his administration believes that these programs need to be reformed to free up cash flow for other state programs. Governor Nixon’s administration has proposed creating new statutes for six separate state historic tax credit programs with discretion on the amount awarded, whether to award any amount at all, whether to award any or all of a particular year’s credits allocation and whether to cap certain tax credits at $314 million a year. No rules or regulations have been set in place for the Missouri Department of Economic Development to even make these types of determinations which will only serve to complicate the process even though the current process has been recognized as a national model.

In 1999, The Wall Street Journal published an article entitled “In St. Louis Developers Bank on Tax Credits” wherein the author called the Missouri Historic Tax Credit program “a national model.” The article explains “the Missouri program provides state income tax credits for 25% of eligible rehabilitation costs of approved historic structures. The credit which has no cap applies to both residential and commercial buildings and can be used in conjunction with the 20% federal historic tax credit. In addition, the state tax credit is transferable: Mercantile Bank (now US Bank) has set up the Missouri Tax Credit Clearinghouse to buy and sell credits.” Rehabilitation construction projects such as Cupples Station, the Chase Park Plaza and projects on Washington Avenue and surrounding areas in downtown St. Louis would not have taken place without these tax credits. Without these tax credits, these properties would most likely continue to be an eye sore for the community and definitely not creating new jobs nor increasing state and local government revenue.

The Missouri Growth Association (MGA) and St. Louis University performed a ten year study with regard to Missouri’s historic tax credit programs. In March 2010, they released their conclusions which revealed that the Missouri historic tax credit program contributed to the creation of over 43,000 Missouri jobs with average salaries of $42,732, $669 million in newsales, use and income tax revenues which directly benefited the state and local governments as well as $2.9 billion in private investment in Missouri. According to the Missouri Department for Economic Development, Missouri Historic Tax Credit projects created 4,900 Missouri jobs in 2007, which according to David Listokin of Rutgers University Center for Urban Policy Research, equals 38 jobs per $1 million invested or more jobs than highway or new construction projects. Moreover, the Missouri Department of Economic Development noted that from 1998 – 2008 over $4 billion of investment had been leveraged throughout Missouri as a result of the Missouri Historic tax Credit Program as well as $858 million being invested in 2008. In addition, the Missouri Department of Economic Development has concluded that over 66 communities in Missouri have taken advantage of these historic tax credit programs.

According to the Downtown Community Improvement District (2009), St. Louis City alone has 5,000 new residents as a direct result of Missouri’s Historic Tax Credit programs which caused the city to have its first population increase in fifty years. All of these new residents as well as visitors are paying new local taxes to the state and St. Louis City.

The discussion of removing or capping Missouri’s Historic Tax Program would have zero effect on the 2010 budget since historic tax credits have already been approved for this year. Any change to the Missouri Historic Tax Credits programs would only affect future state budgets. If the state historic tax programs are changed, developers would then analyze the cost to renovate a historic building with the potential revenue. In addition, changes to the programs or uncertainty in the programs will cause more problems for developers in terms of financing a project. At this time, developers are having a hard time financing projects as a result of new internal lending policies and procedures. Many lenders are requiring anywhere from 40% percent equity to 100% collateralization in order to obtain a loan. If the state has a stable historic tax credits program, a developer can leverage those funds to aid in financing a project.

While Missouri is debating whether to institute significant changes to the Missouri Historic Tax Credits programs which was deemed “a national model”, Kansas removed its historic tax credits cap. Further, Iowa increased their historic tax credits cap and Illinois is organizing a historic tax credit program. If Missouri wants to continue to grow jobs, grow revenue for state and local governments as well as increase private investment; particularly, when the country and the state are hopefully coming out of a significant economic recession, the Governor and state legislators need to think long and hard about altering a extremely successful state historic tax credit program which is not only the envy of many other states but has been recognized on a national level.

Kaiser and IRS tax shelters

Brian S. Weinstock

By Brian S. Weinstock



On April 12, 2010, the Department of Justice, Tax Division filed a Complaint in the United States District Court for the Eastern District of Missouri against Philip Kaiser requesting a permanent injunction and other relief. The public record reveals that the Department of Justice, Tax Division is attempting to enjoin Kaiser and all those in active concert or participation with him from allegedly organizing, promoting or selling “tax schemes” known as:

  1. a Private IRA Corporation or “PIRAC”,
  2. a Charitable Family Limited Partnership or “Char-FLP”,
  3. a Real Estate Purchase Option, and
  4. Derivium also called a “90% stock loan.”

If you take steps to correct any IRS violations before the IRS begins to investigate your transactions, you can take advantage of IRS correction programs. Once an IRS investigation begins with regard to you, you cannot take advantage of these programs. The IRS has already begun investigations into self-directed Roth IRA accounts or PIRACs as well as the Charitable Family Limited Partnership or Char-FLP. A Justice Department spokesman has already been quoted as stating that the Department of Justice is going to get Kaiser’s client list. Therefore, time is of the essence to contact an attorney to assist you in reviewing your transaction and with any potential IRS examination.

Updated pleading in U.S. Court of Appeals… read more.
Article discussion McGraw Milhaven… read more.

ROBS transactions or “Rollover As Business Start-ups” transactions

Brian S. Weinstock

By Brian S. Weinstock



Over the last two years, lending institutions have changed internal policies and procedures with regard to loan approval as a result of the global financial crisis. Most domestic lenders require anywhere from forty percent equity to one hundred percent collateralization in order to begin the discussion of obtaining a loan. This has caused many business deals to stall or vanish. These circumstances have given rise to alternative sources of financing for start-up business, franchise purchases and purchases of existing business or assets. One such way is through a Rollovers As Business Start-ups or known by the Internal Revenue Service (IRS) as a ROBS transactions.

From 1992 – 2007, many employees built up their retirement funds through qualified 401k plans. As a result of the global economic and financial crisis, typical losses in a 401k plan ranged from thirty percent to forty percent of retirement assets. Despite these losses, these individuals still have significant sums of money in these accounts which have been assisted by an increase, from the DOW’s low of about 6,547 in 2009, in the United States securities exchanges. Many United States employees have a substantial percentage of their entire savings locked up in a 401k account which cannot be touched unless the taxpayer is willing to pay a penalty for an early withdrawal before 59 and one-half years old. Over the last several few years, the IRS has seen an increase in ROBS transactions which are being promoted by various entities across the United States as a significant method to capitalize a start-up business, to buy a franchise, capitalize an existing business or buy the assets of an existing business. Essentially, a promoter is a company or individual who markets and sells a tax shelter. A tax shelter is an investment, agreement or plan that is established for the purpose of avoiding or evading federal income taxes.

A ROBS transaction is a tax shelter whereby an individual uses pre-tax passive retirement assets, such as funds in a 401k, to capitalize new or existing businesses without paying taxes on the retirement assets. Typically, the promoter assists the individual through the process by initially incorporating a C-corporation for the taxpayer. The same corporation adopts a qualified 401k profit sharing plan which the promoter markets. The newly established 401k is a plan which includes an uncommon plan election allowing 401k participants to invest their entire account balance in the employer’s stock. At this point, the promoter typically then executes a rollover of retirement money into the new 401k plan. The promoter then directs the 401k to purchase employer stock in the C-corporation. The promoter’s client then transfers existing 401k funds to the C-corporation in order to capitalize the C corporation. The promoter’s client does not pay any taxes or penalties for this distribution or early withdrawal of the existing 401k funds.

Throughout the process, the promoter advises their client that the ROBS transaction meets the requirements of federal law under an ERISA exemption. The promoter typical informs their client that the client will receive a (advisory) letter from the IRS indicating that the ROBS transaction with withstand an IRS review. In addition, the promoter may advise the client that any outside attorney will not be able to advise them that the ROBS transaction is illegal or unable to withstand an IRS review. Given the circumstances surrounding a ROBS transaction, we are not aware of any official opinion letter from the IRS which addresses the issue of whether there is a violation of federal law under ERISA or the prohibited transaction rules with regard to the form or structure and operation or administration of a business, such as a C-corporation, under a ROBS transaction.

While the IRS has not officially deemed the ROBS transactions illegal, they have coined the term “ROBS” for these transactions, are vigorously investigation these transactions with the Department of Labor, have only stated the form may not be a violation “per se” of federal law but at no time has the Department of Labor or the IRS ever stated that these transactions from the structure through the operations will withstand an IRS review. In fact, the answer is that nobody knows whether the ROBS transaction is legal. The fact that the federal government is running massive deficits as well as the IRS :

  1. calling these transactions ROBS, 
  2. having targeted these transactions, and
  3. having issued a stern memorandum for these transactions, should raise red flags with regard to how the Department of Labor and the IRS will treat ROBS transactions in the future.

On October 1, 2008, the Director of Employee Plans for the United State Department of the Treasury issued a Memorandum with regard to guidelines regarding Rollovers As Business Start-ups. The Memorandum reveals that the IRS does not believe that the form of all of these transactions may be challenged by the IRS as being non-compliant “per se” but each case is to be considered on a case by case basis. The problem with a ROBS transaction might not be so much with the form or the structure of the deal but more so with operating and administering the deal after the transaction is completed. Two primary issues raised by the IRS are:

  1. violations of the nondiscrimination requirements, in that benefits shall not satisfy the benefits, rights and features test of Treasury Regulations,
  2. prohibited transactions as a result of deficient valuations of stock,
  3. promoter fees,
  4. “permanent” retirement program,
  5. exclusive benefit of the retirement plan,
  6. the retirement plan not communicated to the employees, and 
  7. inactivity in cash or deferred arrangement.

The United States government encourages the use of retirement plans. In order for an employer to take advantage of these legal tax shelters for their employees, the employer shall adopt the retirement plan for the exclusive benefit of its employees. A lawful use of a 401k is to provide a way for employees to save funds for their retirement. After the plan is adopted, the administrator chooses investments which the employees can choose to invest their savings. With regard to a ROBS transaction, the 401k is being used to shelter income for taxpayers who want to start a business or capitalize an existing business. In this scenario, the 401k is not being used as a way for employees to save money for retirement but as means to capitalize a business.

The Department of Labor and the IRS are currently examining ROBS transactions and have targeted these transactions for review. The IRS Memorandum referenced-above has declared that ROBS transactions “may violate law in several regards.” The IRS has noted that each transaction will be reviewed on a case by case basis as opposed to issuing a blanket letter indicating that all of these transactions are legal. If you have engaged in a ROBS transaction, time is of the essence to contact an experienced attorney to have the transaction reviewed to determine if there have been any violations of federal law. If so, these violations can typically be corrected. If you take steps to correct any violations before the Department of Labor and the IRS begin to investigate your transaction, you can take advantage of the Department of Labor and IRS correction programs.

Once an investigation into your ROBS transaction has begun, you cannot take advantage of their correction programs. If an investigation begins and violations of federal law have been found, the taxpayer can be subject to their entire 401k being taxed, excise taxes, back taxes, penalties, and any other taxes that your ROBS transaction incurred. Moreover, the taxpayer may have a civil lawsuit against any individual or firm who assisted and counseled the taxpayer with regard to the ROBS transaction.

U.S. Energy Policy, Intangible Drilling Costs (IDCs) and Income Tax Deductions

Brian S. Weinstock

By Brian S. Weinstock



Since 1913, the intangible drilling costs (IDC) tax deduction has allowed oil and gas companies to obtain capital for the huge risk of exploring and developing new locations of oil and gas. This tax deduction is critical when it comes to providing an incentive for oil and natural gas companies to continue to explore and develop new sites for oil and gas. For tax purposes, IDCs get special treatment. Usually, costs that benefit periods in the future must be capitalized and recovered over those periods as opposed to being expensed in the period they are realized.

Under the special rules, an operator or working owner can either expense or capitalize these costs if they pay for or incur IDCs in association with the exploration and development of gas or oil on property located in the U.S. IDCs include all payments made by an operator or working owner for wages, fuel, repairs, hauling, supplies, drilling or development work done by contractors under any contract which is necessary for the drilling of a well including drilling, shooting, cleaning, clearing, roads, surveying, geological work, and in the construction of tanks, pipelines, and any other physical structure necessary for the drilling and preparation of the well which are incidental and necessary to the drilling and preparation of a well for oil and gas.

If elected to expense these items, the owner or working operator deducts the amounts of the IDCs as an expense in the taxable year the cost is paid or incurred. If IDCs are not expensed but capitalized, they can be recovered via depreciation. If the well is dry, the IDCs can be deducted.

The ability to expense IDCs is critical for the exploration and development of new sources of oil and gas. Natural gas and oil is a key component with respect to U.S. demand for sources of energy. Currently the Obama Administration wants to repeal the expensing of IDCs.

This could crush the domestic U.S. oil and gas industry.

There would no longer be any incentive for small to medium sized oil and gas companies in the U.S. to explore and develop new wells. Moreover, the repeal would essentially wipe out millions U.S. jobs associated with this industry at a time when many state governments are bankrupt, unemployment levels are high and revenues for state governments and the federal government are declining.

In addition, some estimates have indicated that a repeal of IDCs could wipe out $3 billion of U.S. business investments in oil and gas development and exploration at a time when the U.S. needs these types of investments. Moreover, a repeal of IDCs would destroy corporate financial value which would directly impact securities such as mutual funds as well as 401(k) plans or other retirement plans.

There is no doubt that America must develop alternative sources of energy including renewable sources but oil and gas remains a key ingredient for the U.S. energy policy including national security. Repealing the tax benefit for IDCs would put a significant dent in America’s security and ability to compete in a global economy during a severe economic downturn which does not appear to be showing any signs of quick recovery.

ERISA, FEHBA, Medicare (CMS) and Personal Injury claims

Brian S. Weinstock

By Brian S. Weinstock



Whether you are a plaintiff or defendant with regard to a personal injury claim, it is important to determine whether there are any issues with respect to ERISA, FEHBA and Medicare.

Employee Retirement Income Security Act of 1974 (ERISA)is federal law which establishes minimum standards for pension plans in private industry and includes extensive rules with regard to federal income tax effects of transactions associated with employee benefit plans. Congress established this law with the intent to protect the interests of participants in employee benefits plans and their beneficiaries by requiring financial disclosure to them, establishing fiduciary duties with respect to the plans and allowing access to federal courts to obtain remedies. ERISA addresses pension plans in detail but also effects health care plans. Thus, ERISA applies to all employee welfare benefit plans offered by private sector employers or unions whether offered through insurance or a self-funded arrangement. ERISA’s preemption clause states that ERISA “shall supersede any and all state laws insofar as they relate to any employee benefit plan” which would include a health care plan.

Under an ERISA plan such as a self-funded health and welfare fund, i.e. union health insurance, a plaintiff can recover benefits due under the terms of the plan, enforce rights under the plan and receive a clarification of rights to future benefits under a plan. These health care plans outline when a participant must repay them. These plans typically include language such as when “you or your Dependent achieve any recovery whatsoever, through a legal action or settlement in connection with any sickness or injury alleged to have been caused by a third-party, regardless of whether or not some or all of the amount recovered was specifically for medicalor dental expenses for which Plan benefits were paid.” Moreover, it is not uncommon for the ERISA plan fiduciaries to require a beneficiary to sign additional documents before making any payment to a health care provider with respect to medical care for alleged injuries from a personal injury claim. These additional documents typically contain language which includes “I understand that the Fund must be reimbursed for medical benefits or for any benefits paid as a result of an injury or illness if any recovery is made for that injury or illness.” For example, a plaintiff in a state claim may have health insurance through a self-funded health and welfare fund.

If the health and welfare fund were to make payments to medical providers on behalf of the plan participant with respect to a personal injury claim, the health and welfare fund would be entitled to obtain reimbursement for all funds which were paid out to the medical providers. If the Fund was not reimbursed all the benefits that they paid on the claim, the fund would have the right to file a federal lawsuit seeking reimbursement of the funds they paid out on behalf of the plan participant. In practice, the fund would sue the former state claim plaintiff who is actually a plan participant. If this happens, the former plaintiff now turned defendant will most likely call their former attorney and sue them as well as the insurer, who insured the defendant in the state law claim, as third-party defendants in the ERISA case. A judgment in favor of the fund would require the former state law plaintiff to reimburse all funds their healthcare plan paid on their behalf as well as any other damages allowed under federal statute for ERISA claims such as attorney fees, interest and costs. It could be easy to overlook a potential ERISA claim; especially, if the plaintiff in the state claim is a dependent under an ERISA plan.

The Federal Employees Health Benefits Act (“FEHBA”)established a program to provide federal employees, federal retirees and their eligible family members with subsidized health care benefits. FEHBA has a broad preemption clause which is similar to the preemption clause in ERISA. Since the clauses are similar and because there is limited federal case law with respect to FEHBA, courts generally refer to decisions regarding ERISA’s preemption clause for guidance. A majority of federal courts have concluded the FEHBA preempts state law claims just like ERISA. Again, it is important to determine whether the plaintiff in the state claim is a direct beneficiary or dependent under a FEHBA plan in order to protect the FEHBA lien to avoid any further litigation to enforce the lien in federal court.

The Centers for Medicare and Medicaid Services (“CMS”) handles Medicare claims. With respect to workers compensation claims, CMS has established guidelines, such as being a current Medicare beneficiary, as to when CMS interests must be taken into account before the claim can be settled. If the plaintiff meets the threshold criteria for reporting to Medicare, the parties would be required to submit a proposal to CMS outlining various issues including the plaintiff’s injuries, their treatment, current physical condition and any expected future treatment arising from their injuries including prescription medication. CMS will review the proposal and make a determination as to what if any funds need to be placed in a Medicare Set-Aside trust to pay for future medical treatment related to the alleged accident. Besides being a current Medicare beneficiary, CMS has established other thresholds which require one to take into account Medicare’s interests before a workers compensation claim is settled.

If one fails to take into account Medicare’s interest, Medicare can deny medical benefits to the injured party for their injuries at any time in the future once they become a Medicare beneficiary. If one fails to take into account CMS’s interests with respect to their thresholds then CMS is authorized to file a lawsuit against “any entity” including a beneficiary, provider, supplier, physician, attorney, state agency or private insurer that has received any portion of a third party payment directly or indirectly if those third party funds should have been paid for injury related medical expenses. Moreover, any plaintiff attorney who fails to properly recognize Medicare’s interests can be liable for double damages. With regard to liability claims, liability insurance, including self insurance, no fault insurance and workers compensation insurance must register electronically with CMS by September 30, 2009. As of January 1, 2010 claims must be tracked by the insurers to determine whether injured parties are Medicare beneficiaries. All parties have to report these claims to CMS as of April 1, 2010.

Dating back to January 1, 2010, if a liability insurer obtained a lump sum settlement with a Medicare beneficiary for $5,000 or more, Medicare must be notified so that they are allowed to determine whether a Medicare Set-Aside trust must be established for the plaintiff with respect to future medical treatment for any of the injuries allegedly related to the liability claim. At this time, CMS has no plans for a formal set-aside process with respect to liability claims but it will review and approve Medicare Set-Aside trust accounts for liability claims. For every day that CMS is not notified, there is a $1,000 per day penalty for insurance carriers who fail to report settlements to Medicare within 60 days of payment. It is important to note that CMS is constantly issuing memorandums updating their policies and procedures with respect to Medicare Set-Aside trusts; thus, Medicare could ultimately issue a formal set of procedures for Medicare Set-Aside trusts for liability claims.

In conclusion, it is extremely important to determine whether there is an ERISA, FEHBA or Medicare issue with respect to a personal injury claim.