Visiting the Committees

• Publication year: 2016
• Author: Commentary and Updates by the Committees

Visiting the Committees

Commentary and Updates by the Committees

COMPENSATION AND BENEFITS COMMITTEE

The Compensation and Benefits Committee provides a forum for members of the Taxation Section to learn and discuss issues relating to executive compensation, tax-qualified retirement plans, and health and welfare benefit arrangements. Membership in the Committee is open to employee benefit practitioners and Taxation Section members, and the participation of members of the Labor and Employment Law Section is encouraged. The Committee strives to include in discussions, high-level members of the Internal Revenue Service, U.S. Department of Labor Employee Benefit Security Administration, and California Franchise Tax Board.

Committee Activities

The Compensation and Benefits Committee schedules quarterly conference calls for all members interested in the topics that affect compensation and benefits. Members interested in participating, providing comments, or for more information regarding upcoming meetings and events should contact the Committee Chair, Alison Fay, at alisonfay@boutwellfay.com or Vice Chair, Michelle McCarthy, at mmccarthy@foxrothschild.com.

The Compensation and Benefits Committee held a quarterly conference call at noon on Tuesday, March 8, 2016. Colleen Hart, a partner with Proskauer, presented a program describing common securities law issues that arise when implementing employee benefit plans, particularly in California. The program provided counsel with guidance on what qualifies as a security, common exemptions from securities laws used in connection with employee benefit plans (with particular emphasis on those in available in California under Section 25102(o) of the California Corporate Securities Law) and registration statements, including Form S-8. The program covered Section 16 short-swing profit recovery law, executive compensation proxy disclosure rules, and proposed clawback rules under Dodd-Frank.

Quick Points IRS Approves Limited Liability Company as ESOP Sponsor

The Internal Revenue Service ("IRS") ruled that a limited liability company ("LLC") can sponsor an Employee Stock Ownership Plan ("ESOP"). ESOPs were previously thought to be available only to corporations. Like their corporate counterparts, LLC owners sometimes want to adopt an ESOP to provide benefits for employees and provide a buyer for owners ready to sell. Until now, those owners had no choice but to convert the LLC to a corporation. However, the IRS ruled in Private Letter Ruling ("PLR") 201538021 that an LLC taxed as an association can sponsor an ESOP, provided the LLC's ownership interests meet certain requirements.

Internal Revenue Code ("Code") section 4975(e)(7) requires ESOPs to be invested primarily in "employer securities," but there was no clear guidance on whether membership interests in an LLC could meet the definition of employer securities. Code section 4975(e)(8) defines employer securities for ESOP purposes by referring to Code section 409(l). For privately-held stock, Code section 409(l)(2) defines employer securities as common stock of an employer with voting power and dividend rights at least equal to the class of the employer's common stock with the greatest voting power and the greatest dividend rights. In short, the employer securities owned by an ESOP must be stock and must have rights at least equal to the greatest voting power and dividend rights available among all classes of the employer's common stock.

In the PLR, the IRS relied on Code section 7701(a)(3), which defines a "corporation" to include an association, and Code section 7701(a)(7), which defines "stock" to include shares in an association. Therefore, "unit shares" in an LLC taxed as an association can be considered "stock." Further, the LLC represented in its PLR request that all of its unit shares had identical distribution, dividend and liquidation rights and that it would amend its operating agreement to provide that all unit shares would have the same voting rights. The IRS ruled that because the LLC was taxed as an association, its unit shares would be employer securities eligible for investment by an ESOP, provided the "stock" meets the requirements of Code section 409(l)(2) described above.

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Practitioners who have long thought that an LLC taxed as a corporation should be eligible to adopt an ESOP now have a roadmap. Be aware, however, that a PLR can only be relied on by the taxpayer who requests it. Also, this PLR does not address the tax consequences of an LLC taxed as a partnership electing to be taxed as an association. An LLC that wants to adopt an ESOP without converting to a corporation may be wise to seek its own PLR.

- Wendy L. Gilligan, Folsom, CA

CORPORATE AND PASS-THROUGH ENTITIES COMMITTEE

The Corporate and Pass-Through Entities Committee focuses on issues faced by corporate taxpayers and provides opportunities for practitioners and corporate tax counsel to maintain a level of expertise in the field of corporate tax law, expand their professional contacts, and serve the profession, the public and the legal system. Membership in the Committee offers practitioners information on developments with respect to corporate and business tax and a greater voice on developments in such legislation.

Committee Activities

Normally, the Committee holds quarterly meetings via teleconference and interested members of the Tax Section are welcome to participate. In addition, members and other interested parties are welcome to submit articles for Quick Points on Corporate and/or Pass-through topics of general interest to the members of the Taxation Section. If you are interested in speaking at an event, submitting a Quick Point or would like more information regarding upcoming meetings and events, please contact the Committee Chair, Greg Zbylut at greg@gaztaxlaw.com.

Quick Points New Partnership Audit Rules-Bipartisan Budget Act of 2015

In November 2015, President Obama signed into law the Bipartisan Budget Act of 2015, which repealed the "TEFRA" partnership regime and replaced it with an entirely new regime for federal tax audits of partnerships for tax years beginning after December 31, 2017. The new rules can be expected to increase partnership audit rates by making audits and related tax assessments more efficient for the Internal Revenue Service ("IRS".)

Under the current rules, partnerships are generally subject to a single administrative proceeding to resolve audit issues at the partnership level. The tax liability for partnership items is determined at the partnership level, but any adjustments determined by the IRS flow through the partnership and are taken into account by the individual partners. Additionally, existing law requires certain partners to be notified of major developments in a partnership audit, and partnership-level audits are not necessarily binding on partners.

Under the new rules, audit adjustment to items of partnership income, gain, loss, deduction or credit, and any partner's distributive share thereof, are determined at the partnership level. Partners are no longer required to be notified regarding audit developments and partners will be bound by the determinations made at the partnership level.

When a partnership is audited, any prior year adjustments made at the partnership level will be assessed to the partnership in the current year. Thus, a partner who joined the partnership after the year or years being audited may bear the burden of an audit assessment for years in which they were not a partner. A partnership may avoid partnership-level taxation on audit adjustments by electing to issue adjusted Schedule K-1s to those individuals or entities who were partners in the year(s) under audit, thus shifting the tax liability from the entity-level to the partners. Those partners would be required to take the adjustments into account in the adjustment year through a simplified amended return process.

There is an opt-out election for partnerships with 100 or fewer partners consisting of individuals, corporations, and estates of deceased individuals. However, partnerships with partnerships or trusts as partners may not opt out of these rules. The election must be made annually with the partnership's tax return for that year. If the partnership makes the election, the IRS must issue a separate audit report to each partner, and each partner can act independently to challenge its own audit report under the deficiency procedures that otherwise apply to individuals.

- N. Aaron Johnson, Mather, CA

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ESTATE AND GIFT TAX COMMITTEE

The Estate and Gift Tax Committee is comprised of attorneys throughout the State of California who devote a significant portion of their practice to understanding the evolving areas of estate and gift tax planning, drafting, compliance, and controversy work. One of the primary functions of the Committee is to provide valuable, informative, high quality continuing education programs on behalf of the Taxation Section.

If you are interested in becoming a member or submitting a topic to speak or write on, please contact the Estate and Gift Tax Committee Chair, Wayne Johnson, at wrj@wrjassoc.com.

Committee Activities Election of New Estate & Gift Tax Committee Officers

At its fall meeting, the Taxation Section's Executive Committee approved Wayne R. Johnson to serve as chair to lead the Estate & Gift Tax Committee for the upcoming year. Donna Herbert of Thousand Oaks and Kyle Martin of Oakland will serve as advisors and Robin L. Klomparens of Mather is an at large advisor.

The new terms commenced at the Start of the 2015 Annual Meeting of the Taxation Section in La Jolla and will continue until the 2016 Annual Meeting of the Taxation Section. If you have questions or suggestions for how the E&G Committee can better serve its members, or you want to get more involved in E&G Committee activities, feel free to contact Wayne R. Johnson at wrj@wrjassoc.com.

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