Monday, August 29, 2016

Prepare Early to Successfully Manage a Tax Audit: Part II


By: Otto S. Shill, III

This is Part II of a three-part blog focused on how business owners and managers can successfully prepare for and manage a tax audit. Part I discussed the need for business owners and managers to understand the financial details of the business.

This blog focuses on the second area: Why owners and managers should actively participate in decisions concerning how financial results are reported to government agencies.

It is critical that owners and managers understand financial and tax reporting. Many business owners believe that if their accountant prepares their tax return, it must be correct. Most accountants work very hard to accurately reflect the financial results of the business; however, accountants base their work on the financial information they receive from their clients. It is common for an accountant to prepare an income tax return based on the accounting system information he or she receives from the business owner or manager without ever receiving backup documentation. If the business’ accounting system is inaccurate, the return will be as well. Sometimes accountants receive unorganized documentation and receipts without a formal accounting system, requiring the accountant to do the basic data entry and make decisions about how items of income and expense should be characterized.

Even with the help of a competent accountant, it is the business and the business owner, not the accountant, who is responsible for the accuracy of the information reported on a tax return. Every person who signs a tax return as a business owner makes the following representation:

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. 

A business owner’s signature on a tax return is that owner’s representation to the government about the financial performance and tax liabilities of his or her business. That owner expressly states that he or she has read the return and its schedules, and that they are true and correct. In other words, the government will expect that the business owner understands both the reporting positions taken on a return and the transactions and documents upon which that position is based.

Many business owners rely on their accountants or attorneys for guidance on how to structure transactions and whether applicable law supports the reporting position; however, it is the responsibility of the owner who signs the return to understand the issues, transactions and justification for the reporting position taken. Therefore, to the extent that the law is uncertain with respect to the position, the risks associated with the reporting position should be no surprise at audit time. Business owners and managers should understand the economic impact of the transaction and why a particular reporting position about the transaction makes sense in the context of the business deal. In the end, the knowledge necessary to make the required representations to the government about the tax return is the same knowledge that empowers a business owners and/or managers to successfully respond to an auditor’s questions. It also empowers business owners and managers to arm their professional advisors with the information needed to effectively advocate in favor of the position taken on the tax return, or to reach a resolution of the issues.

In addition to understanding the financial and tax reporting aspects of their businesses, business owners should ensure that it is organized and filed in a way that allows an auditor to easily verify reported income or expenses against source documents. In general, the goal of audits is to verify that what a business has reported is permitted by law. The auditor’s first step in that analysis will be to verify the numerical values reported against source documents. Businesses that organize and store accounting records in a way that is similar to the way the information is organized on the tax return will spend far less staff and professional time to prove the basic numerical facts reported in the return. When business or financial reporting requirements dictate a different method of organization, a map outlining how financial accounting categories and the organization relates to the tax return can save time and money.

In the end, a business owner who understands the business’ financial and tax reporting positions and who retains source documents in a way that allows efficient verification of reported amounts will reduce costs and may shorten audit times. Part III of this article, which will be posted next week, will provide guidance on how to work with attorneys and accountants effectively to prepare for and manage a tax audit.
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Otto Shill is a member of the Tax, Estate Planning and Probate practice group at Jennings Strouss & Salmon, P.L.C.  He is a certified tax specialist and represents businesses, business owners and high wealth individuals in transaction matters and before the administrative agencies of state and federal governments in matters related to taxation, compensation and benefits, employment and government contracting.  Mr. Shill can be reached at oshill@jsslaw.com.

The tax attorneys at Jennings Strouss & Salmon, P.L.C. have decades of experience in successfully advising businesses, business owners and high wealth individuals in structuring transactions to achieve optimum business and tax results, and in defending them in audits and court proceedings before federal and state taxing agencies.

The United States Court of Appeals for the Fifth Circuit Remands FERC Orders Addressing Participation by Non-Jurisdictional Utilities in the WestConnect Transmission Planning Region and Re-Opens Cost Allocation Issue
















On August 8, 2016, the United States Court of Appeals for the Fifth Circuit ("Fifth Circuit" or "Court") issued a Decision on El Paso Electric Company's ("El Paso") petitions for review of FERC Orders addressing compliance with the requirements of Order No. 1000, et al., in the WestConnect planning region. The Decision vacated and remanded as arbitrary and capricious FERC's decision to allow non-jurisdictional utilities to participate in the WestConnect region as Coordinating Transmission Owners ("CTOs") not subject to binding cost allocation, thereby creating uncertainty about the future of joint transmission planning in this region.

During the process to comply with Order No. 1000, El Paso and the other WestConnect public utilities first proposed a non-binding cost-allocation approach whereby beneficiaries of projects identified in the regional planning process would enter into cost-sharing agreements. The WestConnect non-public utilities reasoned that requiring binding cost allocation would be tantamount to requiring construction of transmission projects and, as such, would be beyond FERC's jurisdiction. The WestConnect non-jurisdictional utilities supported the public utilities' initial proposal. FERC rejected this approach as contrary to Order No. 1000's call for binding cost-allocation, and distinguished binding transmission cost allocation from establishing an obligation to construct transmission projects. The WestConnect public utilities filed a request for rehearing of this order.

In a second set of compliance filings, the WestConnect public utilities proposed to allow non-public utilities to participate in the WestConnect as CTOs and submit projects for consideration in the regional planning process; however, projects electrically interconnected to CTOs and other non-enrolled transmission owners providing quantifiable benefits to those non-enrolled TOs would be excluded from regional cost allocation. The non-jurisdictional utilities again supported the cost allocation approach filed by the WestConnect public utilities. FERC rejected the WestConnect public utilities' proposal, reasoning that such approach would "unduly restrict consideration of transmission facilities that nonetheless may have regional benefits and are determined to be more efficient or cost-effective transmission solutions to regional transmission needs." In the same order, FERC denied rehearing on the binding cost allocation issue ("First Rehearing Order"). The WestConnect public utilities filed a request for rehearing of this order.

In a third set of compliance filings, the WestConnect public utilities proposed to allow CTOs to participate in transmission planning (including the ability to submit projects eligible for regional cost allocation and to vote in exchange for the payment of membership fees) with an option to join in and share the cost of a beneficial project but without being automatically bound to cost allocation. To avoid the free ridership concern, these compliance filings proposed to make ineligible for regional cost allocation a transmission projects benefiting a CTO if such CTO opted out of cost-allocation and the re-allocation of costs to jurisdictional utilities increased their original costs more than 10 percent. Again, the non-jurisdictional utilities supported this proposal. FERC rejected the WestConnect public utilities' cost-allocation proposal, reasoning that "the proposal might lead to the transmission planning process rejecting regional cost allocation for a proposed transmission solution that continues to be a more efficient or cost-effective solution for the remaining beneficiaries compared to other alternatives even after a cost shift." The same order denied reharing on the free ridership issue raised by the WestConnect public utilities ("Second Rehearing Order"), reasoning that Order No. 1000 did not seek to eliminate all instance of free ridership and, indeed, acknowledged that some beneficiaries of transmission facilities scape cost responsibility because they are not located in the same transmission planning region as the transmission facility from which they benefit. Finally, in a fourth set of compliance filings, the WestConnect public utilities deleted the language concerning exclusion of projects when a CTO opts out and there is an increase of overall project costs above 10 percent. FERC accepted the compliance filings on this issue.

The Fifth Circuit reviewed the First Rehearing Order and the Second Rehearing Order with respect to the cost-allocation issue. El Paso argued that the WestConnect rehearing orders resulted in unjust and unreasonable rates because they purportedly allowed non-jurisdictional utilities to benefit from transmission projects without paying a share of the costs, in violation of FERC's own precedent regarding cost allocation principles. FERC argued that the WestConnect rehearing orders would not result in unjust and unreasonable rates because public utilities could still use the reciprocity principle to encourage non-jurisdictional utilities to participate in transmission planning. While the Court recognized that Order No. 1000 declined to regulate non-jurisdictional utilities and, therefore, does not address free ridership by those utilities, it stressed that FERC still has a statutory duty to ensure just and reasonable rates. The Court found a discrepancy between how FERC described its goals in Order No. 1000 to achieve just and reasonable rates (i.e., to ensure just and reasonable rates by reducing free ridership and following cost causation principles) and how those principles were applied in the WestConnect region. Specifically, the Court found that FERC did not provide a reasoned explanation for: (1) why the non-jurisdictional utilities have incentive or obligation to participate in binding cost allocation when they can get many of the same benefits at the jurisdictional utilities' expense; and (2) how FERC can meet its obligation to ensure just and reasonable rates when many of the costs of new development will be imposed on only half of the utilities in the WestConnect region. On this basis, it remanded FERC's WestConnect rehearing orders.

Notably, Circuit Judge Reavley dissented from the majority decision reasoning that: (1) cost allocation determinations remain commensurate with the estimated benefits considered because if a CTO does not accept the cost allocation, the transmission planning process removes the benefits applicable to those CTOs when re-evaluating the project; (2) the free rider problem the public utilities complained of is not unique but rather is the same free rider problem that arises every time any entity not enrolled in the transmission planning region benefits from a new transmission facility; and (3) the Court should give deference to FERC's ruling reached upon consideration of the free rider issue against other policy goals (such as expanding opportunities for identifying and proposing more efficient or cost-effective regional transmission projects) and not treat the satisfactory explanation standard as "one that actually persuades the Court as to the wisdom of FERC's decision or that actually rebuts the Utilities' speculative contentions regarding unintended consequences."

The turmoil created by this Court decision may fracture the delicate balance that was struck to bring non-jurisdictional utilities into the fold of WestConnect and disrupt joint transmission planning by public and non-public utilities in the region. How FERC acts on remand could be significant from the perspective of its precedent on the reciprocity principle and authority under Section 211A of the Federal Power Act.

Monday, August 15, 2016

29 Jennings Strouss Attorneys Recognized in 2017 edition of Best Lawyers in America®


PHOENIX, Ariz. (August 15, 2016) - Jennings, Strouss & Salmon, P.L.C., a leading Phoenix-based law firm, is pleased to announce that 29 lawyers have been named to the 2017 Edition of Best Lawyers.

Best Lawyers has published their list for over three decades. Lawyers on the Best Lawyers in America list are divided by geographical region and practice areas. They are reviewed by their peers on the basis of professional expertise, and undergo an authentication process to make sure they are in current practice and in good standing.

Congratulations to the following Jennings Strouss attorneys named to the 2017 Best Lawyers in America list:

Gerald W. Alston - Arbitration; Commercial Litigation; International Arbitration - Commercial; International Trade and Finance Law; Litigation - Construction; Mediation

Thomas C. Arendt - Real Estate Law

Timothy W. Barton - Litigation - Real Estate

David Brnilovich - Real Estate Law

John R. Christian - Tax Law; Trusts and Estates

Richard K. Delo - Health Care Law; Legal Malpractice Law - Defendants; Medical Malpractice Law - Defendants; Personal Injury Litigation - Defendants

John J. Egbert - Commercial Litigation; Employment Law - Management; Labor Law - Management

Lee E. Esch - Real Estate Law

Jay A. Fradkin - Health Care Law; Litigation - Health Care; Medical Malpractice Law - Defendants; Personal Injury Litigation - Defendants

Jeffrey D. Gardner - Commercial Litigation

Joel L. Greene - Energy Law

Paul G. Johnson - Commercial Litigation

Gary G. Keltner - Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law; Litigation - Bankruptcy; Real Estate Law

Richard Lieberman - Banking and Finance Law; Business Organizations (including LLCs and Partnerships); Closely Held Companies and Family Business Law; Corporate Compliance Law; Corporate Governance Law; Corporate Law; Leveraged Buyouts and Private Equity Law; Mergers and Acquisitions Law; Private Funds / Hedge Funds Law; Securities / Capital Markets Law

Jay M. Mann - Construction Law; Litigation - Construction

Bruce B. May - Real Estate Law

Gary J. Newell - Energy Law

John C. Norling - Real Estate Law

Robert J. Novak - Banking and Finance Law; Real Estate Law

Michael R. Palumbo - Arbitration; Commercial Litigation; Mediation

J. Scott Rhodes - Administrative / Regulatory Law; Arbitration; Ethics and Professional Responsibility Law; Legal Malpractice Law - Defendants; Litigation - Municipal; Mediation; Municipal Law

Alan I. Robbins - Energy Law

Jack N. Rudel - Corporate Law

John G. Sestak, Jr. - Administrative / Regulatory Law; Commercial Litigation; Corporate Law; Litigation - Banking and Finance; Litigation - Construction; Litigation - Labor and Employment; Litigation - Real Estate

Richard Silverman - Energy Law

Wayne A. Smith - Real Estate Law

George C. Spilsbury - Corporate Law; Public Finance Law

Bradley J. Stevens - Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law; Litigation - Bankruptcy

Kenneth J. Sundlof, Jr. - Energy Law

About Jennings, Strouss & Salmon, PLC

Jennings, Strouss & Salmon, P.L.C., has been providing legal counsel for over 70 years through its offices in Phoenix and Peoria, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; automobile dealership law, bankruptcy, reorganization and creditors' rights; commercial litigation; construction; corporate and securities; employee benefits and pensions; energy; estate planning and probate; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics and professional liability defense; real estate; surety and fidelity; and tax. For additional information please visit www.jsslaw.com and follow us on LinkedIn, Facebook, and Twitter.
The firm's affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit www.b3strategies.com.

~JSS~

Contact: Dawn O. Anderson | danderson@jsslaw.com | 602.495.2806

Wednesday, August 10, 2016

Monday, August 8, 2016

Prepare Early to Successfully Manage a Tax Audit - Part 1





This is the first installment of a three part blog focused on how business owners and managers can successfully prepare for and manage a tax audit.

A tax audit is a confusing and intimidating event for most businesses and their owners, and almost always results in the business paying additional taxes, penalties and interest. As I help clients respond to tax audits, I find that people are often shocked at the outcome of the audit and devastated by the high cost to resolve it. I frequently hear comments like, “How can I owe so much money in taxes? I don’t make that much!” or “How can the IRS require me to pay that much? Do they really want to put me out of business?” or “My accountant takes care of filing my taxes, and has shown the auditor our records. It isn’t fair that the auditor won’t accept what he says!” Difficult financial times magnify these problems for businesses and their owners. When the economy slows down, businesses have lower profits and fewer resources to defend themselves. But declining profits mean declining tax revenues. Because government services must continue, government enforcement activities often increase in hard financial times.

A business needs several basic resources in order to successfully prepare for and respond to a tax audit. As with most business issues, advance planning can save tens of thousands of dollars in an audit situation and avoid costly, unnecessary litigation.

There are three areas on which businesses owners and managers need to focus to help avoid or be prepared for tax audits. First, business owners and managers need to understand the financial details of the business and manage the business profitably. Second owners and managers must actively participate in decisions concerning how financial results are reported to government agencies. Third, in today’s complex regulatory environment, every business needs the help of competent professionals who understand the business and who can effectively defend the justification for reporting positions.

This blog focuses on the first area: Owners and managers must understand the finances of the business.

Business owners often indicate that they cannot understand how a tax auditor can conclude they owe so much money when they see themselves as earning only a modest living. Often, such comments are evidence that the business owner may not understand the finances of his or her business. For example, a very common, difficult to solve problem is a business that spends more than it makes. The business may have significant gross revenues, many employees, and even lots of sales or work, but is liable for hundreds of thousands of dollars in payroll tax debt. Such a business typically has used available cash to pay employees, but can’t pay vendors on time and hasn’t reserved anything for payroll taxes or made tax deposits. The business owner may protest that there just isn’t enough money to pay employees and the taxes too.  Such a business typically spends more than it makes and it is likely to fail without corrective action. Once under audit, the Internal Revenue Service or other taxing authorities may attempt the business to stop operating if the business cannot make current tax payments. All too often the cumulative impact of past and current tax liabilities and other debts make it impossible to timely pay payroll, taxes and vendor accounts, and the business finds itself closed or in bankruptcy. If payroll taxes are at issue, neither the business entity structure nor a bankruptcy filing will shield a business owner from personal liability to the government for taxes that were withheld from employees, but not paid to the IRS.

To be financially successful, businesses and their owners must live within their means. Owners and managers need to collect and organize revenue and expense data, and be able to measure and understand financial results. Many businesses struggle simply because they don’t have a functional accounting system. Whether the system is manual or electronic, it must provide regular and accurate information. Owners and managers should also use that information to make good management decisions. Bills need to be paid on time, and reserves established to pay upcoming liabilities, including taxes. At the outset, owners and managers should review all tax liabilities applicable to their businesses and understand how they are measured, reported and paid. These liabilities need to be reviewed periodically to ensure the business remains compliant. That list should always include federal and state income tax, payroll taxes, workers compensation charges, and state and local sales and use taxes.

How does proper financial management impact a tax audit? When business owners and managers understand the finances of their businesses, they are better prepared to understand and respond to an auditor’s assertions. They will recognize whether alleged deficiencies exist in the context of their businesses.  They will know where to look for solutions and will likely have the documentation necessary to respond to an auditor’s questions. This knowledge empowers owners and managers to be able to identify whether an allegation can be answered with simple documentation, or whether there will be a debate concerning a technical point of law. It also enables owners and managers to work with their professional advisors in an efficient and effective manner.  Finally, they will be able to make financial and operational adjustments to ensure that the business remains financially viable while resolving outstanding tax liabilities.

My next blog will focus on the responsibility business owners and managers accept when they sign a tax return, and what the government will expect of them in an audit.

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Otto Shill is a member of the Tax, Estate Planning and Probate practice group at Jennings Strouss & Salmon, P.L.C.  He is a certified tax specialist and represents businesses, business owners and high wealth individuals in transaction matters and before the administrative agencies of state and federal governments in matters related to taxation, compensation and benefits, employment and government contracting.  Mr. Shill can be reached at oshill@jsslaw.com

The tax attorneys at Jennings, Strouss & Salmon, P.L.C. have decades of experience in successfully advising businesses, business owners and high wealth individuals in structuring transactions to achieve optimum business and tax results, and in defending them in audits and court proceedings before federal and state taxing agencies.



New Federal Reserve Board Rule Demonstrates Why Electric Utilities Must Expand Their Monitoring and Compliance Programs Beyond FERC


By: Deborah Swanstrom








Electric utility compliance programs typically cover regulatory requirements imposed by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act or Natural Gas Act and, more recently, by the Commodity Futures Trading Commission ("CFTC") under the Dodd-Frank Act. Regulations issued by those two commissions are monitored closely. But, if your electric utility does not monitor the actions of other federal agencies impacting energy trading and put related controls in place, your electric utility is at risk -- as evidenced dramatically by a new rule proposed by the Federal Reserve Board of Governors.

The proposed rule restricts an electric utility's ability to exercise default rights in not only futures and swap contracts, but also forward contracts. Many electric utilities may not be aware that this proposed rule impacts them because it uses the phrase Qualified Financial Contracts ("QFCs") to describe the type of contracts subject to the rule. At first blush, such phrase ordinarily would not be thought to include a forward contract. But, it does.

The proposed rule emanates primarily from the "orderly liquidation" authority in the Dodd-Frank Act. That Act establishes a special resolution process for failed financial firms, which are important to the financial system and economy. As part of the special resolution process, the rights of a failed financial firm's counterparties to terminate their contracts can be stayed, with the aim of allowing a transfer of the QFC obligations to another party with resources to continue to perform the obligations.

The proposed rule does two main things: (1) requires a covered entity to ensure that QFCs to which it is a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Act; and (2) prohibits a covered entity from being a party to QFCs that would allow a QFC counterparty to exercise default rights against the covered entity based on the entry of an affiliate of the covered entity into a resolution proceeding (including not only a special resolution proceeding but also a bankruptcy proceeding).

The "covered entities" obligated to comply with the proposed rule include global systemically important banking organizations ("GSIBs") and their subsidiaries. This includes, for example, subsidiaries of Morgan Stanley and Citigroup, which may trade with electric utilities in energy markets.

Moreover, the definition of "default right" captures contract provisions common in the energy industry. Subject to some exceptions, a default right generally is defined as a right to:
  • liquidate, terminate, cancel, rescind, or accelerate an agreement or transactions thereunder;
  • set off or net amounts owing in respect thereto;
  • exercise remedies in respect of collateral or other credit support or property related thereto;
  • demand payment or delivery thereunder or in respect thereof;
  • suspend, delay, or defer payment or performance thereunder, or modify the obligations of a party thereunder;
  • alter the amount of collateral or margin that must be provided with respect to an exposure thereunder;
  • demand the return of any collateral or margin transferred by it to the other party or a custodian or to modify a transferee's right to reuse collateral or margin; or
  • any similar rights.
Comments are due on the proposed rule by August 5th and the rule has not yet taken effect. But, electric utilities need to begin planning now to mitigate the risks of this rule, including by, among other things, taking a fresh look at which counterparties they will and will not trade with as a result of the rule.

For further information, please send an email with your contact information to dswanstrom@jsslaw.com.


Thursday, July 28, 2016

Richard Silverman Named Chair of the University of Arizona Foundation Board of Trustees


Jennings, Strouss & Salmon Member, Richard Silverman, recently assumed the position of chair of the University of Arizona Foundation Board of Trustees for the 2016-2017 fiscal year.

Read more here .