Doing Business in California after Brinker

Dear Friends, Colleagues, and Clients,

If you own a business in California and pay employees, you should be aware of the Brinker case. What is the employer’s obligation with respect to employee meal and rest periods? Must an employer force its employees to take these breaks, or is it enough to make them available for employees who are interested in taking them? An incorrect answer can be expensive. California courts have seen a marked increase in employee class actions alleging meal and rest period violations. Employees seek an extra hour of pay for each day that they miss a meal period or a rest break, along with miscellaneous penalties, attorney fees, and interest, going back three to four years.

Recent oral arguments before the California Supreme Court raise the question, is it the employer’s duty to “provide” or “ensure” a meal break. The decision if mandated retroactively rather than prospectively could expose California employers to a new onslaught of lawsuits on this issue as well as potentially huge liability. Whatever the outcome, the Brinker case will be one of the most important wage and hour cases in California’s history.

By way of background, in the San Diego case of Brinker v. Superior Court (Hornbaum), the plaintiffs have argued that an employer must affirmatively ensure that their employees take the required meal periods, while defendants claim that the employer’s duty is only to provide the employee the opportunity to take the meal period free of any control by the employer. After much legal wrangling, most of the case rests on the Court’s interpretation of the Labor Code, which indicates that the employer is to “provide” a meal period.

During oral arguments, the plaintiff argued that under the “ensure” standard, employers would be justified in disciplining or even firing employees who did not follow instructions on taking their meal breaks. The Court seemed hesitant to adopt a standard that could lead to this outcome and appeared to favor a standard that provided flexibility, leaving the choice up to the employee as to whether or when they would take their meal break. The most insightful comment from the bench on this issue pointed out that, if the hallmark of a meal period is the employer suspending control over the employee, then the employee should be able to choose for themself whether to take the meal period at the designated time. Overall, the tenor of the questions suggested that the Court is in favor of a standard that leaves the employee some flexibility in deciding whether to take their meal breaks.

In a relatively rare circumstance, the California Supreme Court accepted a post-argument brief concerning the “rolling 5” issue – whether meal periods must be provided for every 5 consecutive hours of work, e.g., in an 8-hour shift, if an employee takes a meal period after 3 hours, then works a further 5 hours after the meal period, must a second meal period be provided. Also, the brief addresses whether the Court’s decision will apply prospectively or retroactively. If applied retroactively, the statute of limitations for meal period violations is 3 years, but challenges could also be filed under California’s unfair competition law, which has a 4-year statute of limitations.

The California Supreme Court is required by court rule to issue decisions 90 days after they are submitted. The Court previously submitted the Brinker case for decision after the November 8 oral argument, which is why most expected the final ruling by early February 2012. On December 14, the California Supreme Court vacated the November 8 submission of the matter based on its earlier decision to allow further briefing on the issue of whether the eventual decision will operate prospectively or retroactively. The Court has now ruled that additional briefing will be completed by January 13, 2012, and the matter submitted at that time. As a result, the Court should issue its decision by April 12, assuming no additional delays.

Recognizing the potential for significant liability exposure at the employer level, check with your insurance broker to determine if you have coverage. And, by all means, institute a rationale and effective asset protection structure at the company level in case a catastrophic lawsuit besets your company.

Wishing all of you a very healthy, happy and prosperous New Year.

Jeffrey M. Verdon Law Group, LLC

More Important IRS Reporting Requirements Released

Dear Friends, Colleagues, and Clients,

Many of our clients and regular Client Alert readers have foreign asset protection trusts or have invested directly and indirectly in assets which are foreign based. The Department of Treasury, in its attempts to further capture unreported income, has just released another information return, Form 8938, that requires certain eligible taxpayers to timely report the existence of these assets.

Many taxpayers or their CPAs, who are already filing the FBAR return, may not realize they may also be required to file this Form 8938.

This issue of Client Alert is intended to briefly describe the eligibility requirements and to recommend that you contact your CPA or tax compliance professional for further information, as failure to file the report carries significant penalties. Quoting from the IRS’ website:

Do I need to file Form 8938, Statement of Specified Foreign Financial Assets?

Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below).

Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010. For most individual taxpayers, this means they will start filing Form 8938 with their 2011 income tax return to be filed this coming tax filing season.

Upon issuance of regulations, FATCA may require reporting by specified domestic entities. For now, only specified individuals are required to file Form 8938.

If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold. If you are required to file Form 8938, you do not have to report financial accounts maintained by:

  • a U.S. payer (such as a U.S. domestic financial institution),
  • the foreign branch of a U.S. financial institution, or
  • the U.S. branch of a foreign financial institution.

Refer to Form 8938 instructions for more information on assets that do not have to be reported.

You must file Form 8938 if:

1. You are a specified individual.

A specified individual is:

  • A U.S. citizen
  • A resident alien of the United States for any part of the tax year (see Pub. 519 for more information)
  • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident)

AND

2. You have an interest in specified foreign financial assets required to be reported.

A specified foreign financial asset is:

  • Any financial account maintained by a foreign financial institution, except as indicated above
  • Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely:
  • Stock or securities issued by someone other than a U.S. person
  • Any interest in a foreign entity, and
  • Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

Refer to the Form 8938 instructions for more information on the definition of a specified foreign financial asset and when you have an interest in such an asset.

AND

3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • Unmarried taxpayers living in the U.S.: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Married taxpayers filing a joint income tax return and living in the U.S.: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
  • Married taxpayers filing separate income tax returns and living in the U.S.: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Taxpayers living abroad. You are a taxpayer living abroad if:

You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or

You are a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you are a taxpayer living abroad you must file if:

You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or

You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Refer to the Form 8938 instructions for information on how to determine the total value of your specified foreign financial assets.

Reporting specified foreign financial assets on other forms filed with the IRS.

If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938. However, you must identify on Part IV of your Form 8938 which and how many of these forms report the specified foreign financial assets.

Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.”

Conclusion: All taxpayers are presumed to know the law, no matter how confusing or obtuse. If you have any questions or concerns as to whether this new reporting requirement applies to your transactions, call your tax accountant or us and we will try to help you sort this all out.

Happy Holidays and a Happy New Year

Jeffrey M. Verdon Law Group, LLC

Piercing the Corporate Veil

Dear Friends, Colleagues, and Clients,

In this issue of Client Alert, we will examine the concept known as “Piercing the Corporate Veil,” and how this “weapon” is used by skilled plaintiff’s lawyers to reach beyond a corporation to trap assets personally owned by the corporation’s shareholders.

With the advent of the Internet and websites offering low cost incorporation services, many business owners will seek these lower cost alternatives to hiring a business lawyer and can run into trouble. Generally, these online “do-it-yourself” services provide only the most basic incorporation services, often without a lawyer involved, which initially may appear to be saving money for small start-up businesses. However, as the business becomes successful, these business owners fail to “upgrade” to a business lawyer skilled in maintaining their corporations and adopt the necessary corporate governance and procedures to ensure the corporation remains in compliance.

Since the 1800s, the corporation has been used as a means to shield its owners, or shareholders, from personal liability if the corporation loses a suit brought against it and there are insufficient corporate assets to satisfy the judgment. This “veil,” as it is often referred, may only be available if the corporation is (1) properly formed and (2) properly maintained according to the corporate statutory requirements imposed by state law. This issue of Client Alert will explore the “maintained” aspect of the corporate veil.

In all states, a corporation’s officers must adhere to a set of procedures in order for the corporation to be recognized as a bona fide entity. These requirements are not particularly onerous or difficult to meet, but they must be fulfilled every year to prevent running afoul of the law and risk the corporate veil being pierced as a result. Such formalities include, but are not limited to:

  • Annual meetings of the board of directors and shareholders;
  • Maintenance of a reasonable amount of capital in the business relative to the nature and extent of the company’s business activities;
  • Separate company books and records;
  • Maintain adequate capitalization in the company;
  • Avoid commingling of the personal and company assets;
  • Shares of stock should be issued;
  • Written shareholder agreement in place before shares are issued;
  • Appropriate tax elections are made (S Corp election must be filed within 75 days following the date of incorporation;
  • Timely filing of exemption from securities law.

All too often, we find that the business owner fails to properly maintain these aforementioned corporate requirements through neglect, oversight, or naivety. If the corporation is ever sued, the first thing the plaintiff’s lawyer will do is subpoena the corporation’s books and records, looking for any reason to assert that the corporation is not properly maintained. If improper maintenance can be established, the corporate veil may be “pierced,” exposing the shareholders to liability and providing the plaintiff’s lawyer with another party with deep pockets to include in the lawsuit.

In addition to the risk that the corporate veil may be pierced, the failure to follow certain corporate formalities could give rise to the IRS to disregard your form of business entity resulting in unintended income tax consequences for the company and its shareholders. For instance, the IRS requires that a corporation adhere to specific operational formalities in order to be recognized as a corporation for income tax purposes. A business owner’s failure to properly maintain the corporation could result in the IRS disallowing the corporation’s deductions and imputing its earnings and profits to the shareholders, resulting in the under reporting of income. If the deductions are eliminated, the distributions to the shareholders will be subject to double taxation — once at the company level and again at the shareholder level. In short, the consequences of falling short on these corporate requirements can be catastrophic for the shareholders.

Investors – Be Cautious: Many of our readers are investors in private equity and small businesses. More often than not, the investor will have no idea if the corporation is properly maintaining the books and records and complying with other corporate statutory requirements. If a lawsuit arises against the corporation, the passive investor could find himself or herself being named as a defendant in such a lawsuit under the Piercing the Corporate Veil theory of third-party liability.

Stress Test Your Corporation: As we wind down the year, think about stress testing your corporation’s books and records to determine if it will survive an aggressive plaintiff’s lawyer’s attempt to Pierce the Corporate Veil. Add this to your list of New Year’s resolutions and make an appointment to visit your attorney in January after the holidays.

Free Stress Test: If you don’t have a business lawyer to do this for you, my law firm will gladly perform a “stress test” at no charge to ensure your corporation is in satisfactory condition and not vulnerable to the corporate veil being pierced. The old adage, “An ounce of prevention is worth a pound of cure” really applies in this area, as the risk of loss is profound if this aspect of your business is not properly maintained.

Alternatively, if you would rather operate your business with little or no requirement for adherence to these formalities, consider operating as a limited liability company instead of a corporation, as the formalities are not nearly as stringent as that of a corporation.

We hope you find this information to be of value. Please feel free to write or call the law firm if you wish to take advantage of this limited time offer.

Wishing you a safe and joyous holiday season.

Jeffrey M. Verdon, Esq.

Jeffrey M. Verdon Law Group, LLC