On January 1, 2018, the rules and procedures relating to IRS audits of partnerships, including those limited liability companies taxed as partnerships, (for purposes here, collectively, the “Partnerships”) will change. The Bipartisan Budget Act of 2015 (“BBA”)(26 U.S.C.A. §§6221-6241), which was signed by President Obama on November 2, 2015, is generally intended to make it easier for the IRS to audit Partnerships and to assess and collect underpayments of taxes. It allows the IRS to assess and collect taxes directly from the Partnerships rather than from the partners or members (for purposes here, collectively, the “Partners”) as was the case under the old rules. Continue Reading New IRS Partnership Audit Rules Take Effect Jan 1: What You Need to Know
One of the general and principal benefits of incorporating a business entity is limited liability; the owners of a corporation are not liable for the corporation’s actions or debts. There are, however, exceptions. One of the exceptions is the doctrine of “piercing the corporate veil,” under which courts may cast aside the “veil” of incorporation and hold a corporation’s shareholders personally liable for the corporation’s actions. Continue Reading First Department of New York Loosens the Standard for “Piercing the Corporate Veil”
In a recent U.S. Supreme Court case about pregnancy discrimination, Justice Breyer asked: “Why, when the employer accommodated so many, could it not accommodate pregnant women as well?” As an employer, that is a question you should now be asking when preparing, reviewing, or updating your company’s accommodation policies.
Many employers have policies and practices to ensure accommodation of disabled workers or those with temporary injuries or disabilities. However, employers may be overlooking their legal obligations to accommodate another group of workers: pregnant women who have pregnancy-related work limitations. Continue Reading Does your Employee Handbook stand up to the Supreme Court’s latest decision about accommodations for pregnant workers?
After months, maybe years, of planning, raising capital, obtaining permits and waiting out construction, your gleaming new building is open and occupied. Soon, you’ll get a simple, one-page letter from your county’s Tax Assessment Office. What should you do if that letter indicates that your property is worth about a half-million dollars more than your appraisal reflects? Every Pennsylvania property owner is entitled to an annual appeal of their property assessment through the real estate tax assessment appeal process. Knowing the value of your property, your tax liability and whether you can reduce your tax burden through an appeal is as critical as managing any other area of your financial portfolio.
Calculating your Property Tax and Fair Market Value (FMV)
In Pennsylvania, real property typically incurs school, city/township and county taxes. Each of the three taxes is assigned a millage rate, which is used to calculate the property’s tax liability. To calculate the total real estate tax owed, the total millage of all of the taxing authorities is multiplied by the property’s assessed value. It is important to note that tax assessment appeals only challenge the assessed value of your property, NOT the imposed millage rate. Millage rates are published on each county’s website.
The U.S. Department of Labor (DOL) issued guidance on July 15 aimed at curbing the misclassification of employees as independent contractors. The guidance provides several examples of workers in the construction industry. It is now clear that the DOL is bent on targeting contractors and subcontractors. If you have mechanics, installers, estimators, or any workers functioning as an independent contractor, you are probably at risk.
The DOL’s guidance begins by stating that most workers should be classified as employees and not independent contractors. According to the DOL, only workers that are genuinely in business for themselves may be classified as independent contractors. The DOL uses six factors to determine whether someone is in business for him/herself:
- Is the worker’s work an “integral part” of the employer’s business? According to the DOL, “for a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.” Therefore, hiring an individual who uses the tools of the trade as an independent contractor is risky business for almost any construction company.
- Does the worker’s managerial skill affect the worker’s opportunity for profit and loss? According to the DOL, a true independent contractor has the opportunity not only to make money but to lose it by making poor business decisions. The DOL is looking for independent contractors to exercise business judgment (not just decide how many hours they are going to work or how many projects they are going to accept from the employer).
- How does the worker’s relative investment compare to the employer’s investment? In order to be a true independent contractor, the worker must make a substantial investment (and therefore undertake some risk for a loss). The DOL’s view of what qualifies as a substantial investment may surprise you. Merely purchasing hand tools and other equipment is not enough. The DOL even cited a case where a group of rigging welders had invested in equipped trucks costing between $35,000 and $40,000 as being too small of an investment.
- Does the work performed require special skill and initiative? For this factor, the DOL focuses on business skills and not technical skills and uses the following example: “A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of the work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills).”
- Is the relationship between the worker and the employer permanent or indefinite? According to the DOL, a worker who works for the same employer for a sustained period of time is not showing the business initiative that one would expect from a true independent contractor. Workers who work until they are terminated look like at-will employees (not independent contractors).
- What is the nature and degree of the employer’s control? According to the DOL, in order to qualify as an independent contractor, the worker must control meaningful aspects of his own business and stand as a separate economic entity. This means that imposing quality control measures and schedules on a worker will likely render him/her an independent contractor.
In sum, the DOL’s guidance marks a clear signal to those in the construction community that using independent contractors carries significant risks. Mitigating measures, like issuing 1099 Forms and entering into written independent subcontractor agreements, will more often than not fail to save the day. These rules hold true for workers in the field and those performing office/non-manual work.
We have worked with dozens of contractors on classification issues. If you have any questions about the proper classification of someone who performs work for your company, please contact Marc Furman or Jonathan Landesman.
Having designated legal counsel is critical to any comprehensive crisis management strategy. Whether you are in pre-crisis, crisis or post-crisis—having an attorney involved in your decision-making process can be the difference between surviving or even thriving in a crisis and having a crisis disrupt your business or derail your career permanently. How can your attorney help you be ready for a crisis? For starters, counsel can assess your document retention and storage policies and recommend best practices. Your counsel should also review your readiness procedures with a dedicated crisis management team of public relations and marketing professionals as well as a company spokesperson. Being prepared for a crisis requires strategic planning.
Be ready for the BIG surprise or bombshell that may be lurking in your future. Please join me and my team of crisis management experts for a half-day program of invaluable crisis management training, February 17th in Bethlehem, PA hosted by the American Subcontractors Association of Central PA. Our all-star panel will feature David Blain, Principal, of McKonly & Asbury, Doug Dvorchak, Sales/Account Executive & Risk Control Consultant, with Murray Securus and Lydia Mantle, Bond Account Executive, also with Murray Securus. Using real-world examples, we will provide tips on risk management, protecting your credit and assets, among other topics. We will answer your questions in a live Q&A. The best crisis management response takes planning, a holistic effort and a range of expertise. Take this opportunity to learn from the best and start planning now for your own synchronized response. Make the best of what will surely be a stressful situation.
Tuesday, February 17th
Event Center at Blue
4431 Easton Avenue, Bethlehem, PA
Registration & Breakfast – 7:30 a.m. – 8:00 a.m.
Program: 8:00 a.m. – 11:30 a.m.
Forums like Angie’s List, Yelp, or even Yahoo Community Listserves allow homeowners and other contractor clients to recommend a contractor for a job well done. Just as often, however, disgruntled clients use these venues to vent about shoddy workmanship, defective construction, and unfinished contractor punchlist work. Although these forums seem safe and anonymous, anyone posting on these sites should be aware of the sometimes harsh legal consequences – and the fact that their posts (if untrue) could result in a successful defamation claim.
Recent Case Law: In Dietz Development, LLC v. Perez, Docket No. 2012-16249, Fairfax County Circuit Court, Virginia, a Virginia homeowner posted defamatory statements about a D.C. based contractor who performed work on her home – stating that his shoddy workmanship required extensive refinishing and insinuating that he stole jewelry from her home. The contractor posted a retort alleging that the homeowner retained or stole valuable goods from him and did not pay him for his work. He subsequently sued for defamation, claiming $750,000 in lost reputation and business contracts that were cancelled after the defamatory reviews were posted.
After a year of protracted litigation, a week-long trial and eight hours of deliberation, a jury returned an interesting verdict finding that the homeowner and contractor had both defamed each other. Accordingly, the jury rationalized that these acts offset each other and that no monetary award should be made to either side. However, while no monetary damages were awarded, monetary damage award will inevitably ensue as more of these types of cases go to trial.
If You Can’t Say Anything Nice . . . Accordingly, contractors should be wary of posting negative reviews of a client or other business or posting a retort to a negative review directed at them.
The Takeaway: Moreover, should you find yourself the subject of a negative review – do not impulsively strike back. While reviews that are fact or opinion based are not necessarily actionable, those containing untruthful allegations may be. Statutes, court procedures and case law protecting both anonymous online posters as well as the targets of their defamatory posts can vary widely from state to state. Moreover, given the ubiquitous nature of the Internet, you may find yourself in an unexpected legal jurisdiction. Accordingly, it is wise to engage an attorney who can 1) carefully review, document and preserve the negative reviews as evidence, 2) negotiate with website providers to remove the posts and 3) aid in identifying the often anonymous online poster. Finally, a contractor must also consider and weigh the effect of the negative review of his or her business online with the potential negative publicity associated with pursuing a previous client in court.
Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.
Wendy R. Bennett is an Associate in the Construction Group.
Lane F. Kelman contributed to this post.
A recent increase in fraud investigations relating to disadvantaged business enterprises (DBEs) has caused companies to revisit the qualifications of the DBEs they work with. Two recent investigations in New York State resulted in multimillion dollar settlements after investigators determined two companies were using DBEs as so-called “pass-through” entities. These pass-through entities were retained to perform certain work on projects, but performed none of the work and instead allowed other entities to fulfill the contractual requirements. Unfortunately, this scenario is not uncommon.
The reality is that some general contractors will use a DBE firm solely as a pass-through entity. In other cases, the DBE firm should never have received certification at all, or changes in ownership and management have caused the company to lose its qualification while maintaining certification. In October 2009, The U.S. Government Accountability Office, the investigative arm of Congress, conducted a detailed study on the use of DBEs in order to determine whether ineligible firms certified as DBEs were being awarded contracting opportunities, thus taking opportunities from legitimate DBEs. The study’s authors concluded that the unqualified DBEs were benefiting by obtaining contracting opportunities with federal government entities and the DBE certification system was vulnerable to fraud.
Additionally, DBE fraud can occur over decades. In a recent case, an officer of Perini Corporation pled guilty to conducting DBE fraud from 1988 through 2001, using several pass-through DBE entities to obtain contracting opportunities and paying the entities 3% to 5% of the subcontract value as a fee to run payroll. The officer pled guilty to criminal charges of money laundering and conspiracy, and the company paid several million dollars to settle the civil suit against it stemming from the fraud.
Who Qualifies as a DBE?
DBEs include women-owned businesses, minority-owned businesses, small businesses who qualify through the Small Business Administration, service-disabled veteran-owned businesses, and HUBZone businesses, which are located in historically economically disadvantaged areas and employ persons residing in such areas. Though requirements differ slightly among states and governmental organizations, the following requirements generally apply:
- The firm must be at least 51% owned by disadvantaged individuals, whether they be women, minorities, or other disadvantaged individuals;
- Those individuals must have managerial control and operational control over the business’s activities; and
- The individual disadvantaged owners’ net worth cannot exceed a certain amount (generally, $750,000, but this amount varies).
Managerial and operational control means, in a practical sense, that the individuals must have sufficient functional knowledge of the business so that they can successfully manage it. For example, though a woman owner of a plumbing business need not be a plumber, she must be able to effectively direct the work of the plumbers working under her, as well as to determine the equipment, man-hours, and materials required to complete any particular job, without relying on any other person to advise her.
With the current highly competitive climate, competitors are seeking to use every advantage to obtain contracting opportunities, including using the bid protest process to question the legitimacy of a DBE entity, whether that entity is a prime contractor or a subcontractor. For example, a general contractor submitting an unsuccessful bid may challenge the awardee’s bid on the basis that the DBE firms which the successful bidder proposes to use (or the DBE proposing to act as general contractor) are either not legitimate DBE firms, or do not have the capability to perform the work proposed.
In order to protect against such an investigation, before submitting a bid using a DBE subcontractor, it is critical to examine the DBE entity in light of the work that must be done before submitting a bid. Do the disadvantaged owners have the requisite knowledge to plan the project, direct the work, and ensure its completion? Will the DBE be capable of performing the work it proposes to do? Will the DBE need to obtain additional employees or subcontract part of the work to another entity? Performing this type of preliminary investigation prior to submitting a bid could save a company millions of dollars, as well as avoid criminal liability for the use of a fraudulent DBE.
The developer of 10 Rittenhouse, the luxury Philadelphia condominium building with 33 floors and units priced from $600,000 to $15 million, recently filed for bankruptcy protection under the court’s Chapter 11 procedures. In doing so, the developer, Philadelphia Rittenhouse Development L.P., prevented the senior lender, Istar Tara L.L.C. (Istar), from placing the property in receivership. Istar is said to have invested $251 million in the project. Unit sales have helped reduced the amount owed to about $190 million.
10 Rittenhouse is comprised of 135 condominium units, retail and restaurant space. Of the 135 units, to date only about 40 have been sold.
“There is no risk” to the current unit owners, said Steven H. Shepsman, executive managing director of New World Realty Advisors in New York, which is assisting the developer in its financial restructuring.
10 Rittenhouse is not the only troubled condominium project linked to Istar, as they also served as the senior lender for the Aria, a condominium building located at 1419 Locust Street. When Aria’s developer defaulted on its loan, Istar petitioned for and achieved the receivership of that building. This move resulted in sales of Aria units being halted for more than a year.
Pennsylvania is making a last call for companies that are out of compliance with the Commonwealth’s Unclaimed Property Law (Law). Sunday, October 31, 2010, is the last day to enroll in the Unclaimed Property Amnesty Program. After this date, businesses that are out of compliance may be subject to penalties and interest, which can date back to the time the property should have been turned over to the Commonwealth.
Many companies do not realize their obligations under the Law. The Law requires that any company holding any financial assets of a third party, which have been unclaimed or unused for a statutorily prescribed period of time, otherwise known as a dormancy period, is obligated to report and tender that unclaimed property to The Pennsylvania Treasury Department (Treasury Department). The Treasury Department will serve as a custodian, holding the assets in perpetuity until reclaimed by the owner.
Assets Subject to the Pennsylvania Unclaimed Property Law
Financial assets that are subject to this law include, but are not limited to, such commonplace things as:
- Wages and Payroll
- Accounts Payable
- Accounts Receivable
- Credit Balances/Customer Overpayments
- Gift Certificates/Layaways
- Unused Refunds/Rebates
- Escrow Accounts
- Unused Deposits
- Basic tangible property including, but not limited to, jewelry, money, antiques and musical instruments
Unclaimed property must be reported and turned over to the Commonwealth after a dormancy period of five years. However, unclaimed wages, payroll and commission payments must be turned over after a dormancy period of only two years.
Penalties for Non-Compliance with the Pennsylvania Unclaimed Property Law
If a company or organization does not comply with its obligation to both report and turn over unclaimed property, it runs the risk that the Commonwealth will discover this during a standard audit. If it is determined that a company has failed to properly handle, report and turn over any unclaimed property, the company will be required to turn it over and pay substantial penalties and interest. The Law provides that holders of unclaimed property who fail to file reports may be convicted and fined $100 for each day a report is withheld, up to a maximum of $1,000. Those who fail to turn over the unclaimed property may be convicted of a misdemeanor and fined between $1,000 and $10,000, imprisoned for up to two years, or both.
Pennsylvania Unclaimed Property Law Amnesty Program
While the normal reporting deadline is April 15th of each tax year, the Treasury Department has created a special amnesty program that expires on October 31, 2010. The amnesty program allows companies that have never reported unclaimed property, those who have gaps in their reporting history or those who simply missed the April 15th deadline to come into compliance without having to pay penalties and interest normally associated with non-filing. The program is open to all companies and organizations, other than those currently undergoing an audit and those that have been previously notified by the Commonwealth of their failure to report unclaimed property.
The attorneys at Cohen Seglias are available to assist businesses in determining whether they have a filing obligation in Pennsylvania and to ensure that they are in compliance with the Law. Please contact Alexander F. Barth for more information.