Corporate Finance Law Blog

Smart Grid Investment Grants Not Taxable

Davis Wright Tremaine — Fri, 12 Mar 2010 09:54:24 -0800

In a major smart grid development, the Internal Revenue Service yesterday released guidance (Rev. Proc. 2010-20) providing a safe harbor under which the $3.4 billion in Smart Grid Investment Grants (SGIGs) made pursuant to the American Recovery and Reinvestment Act (ARRA) will not be taxable to corporate recipients. After months of uncertainty, this determination will allow corporate recipients to finalize their grant agreements with the Department of Energy (DOE) and launch their investments without concern that they will be subject to federal taxation.

This guidance provides that the IRS will not challenge a corporation’s treatment of an SGIG as a nonshareholder contribution to the capital of the corporation so long as the corporation properly reduces the tax basis of the property it acquires with the grant (or other property owned by the corporation). Nonshareholder contributions to capital are not included in a corporation’s gross income for federal income tax purposes. This guidance is effective immediately and will allow DOE to begin finalizing grant agreements with the various utilities, private companies, manufacturers and others who have been authorized to receive these grants.

This guidance does not create a general federal tax exemption for all ARRA grants:

The guidance applies only to SGIGs made pursuant to 42 U.S.C. 17386 by DOE for qualifying investments under the $3.4 billion Smart Grid Investment Matching Grant Program as authorized by Section 1306 of the Energy Independence and Security Act of 2007 (Pub. L. 110-140), as amended by Section 405, Division A, of the ARRA (Pub. L. 111-5).
The guidance does not apply to Smart Grid Demonstration Grants made under 42 U.S.C. 17384.
The guidance does not apply to other ARRA grants, such as grants made under the $4.7 billion Broadband Technology Opportunities Program (administered by the Department of Commerce’s National Telecommunications and Information Administration) or the Broadband Initiatives Program (administered by the Department of Agriculture’s Rural Utilities Service). In a letter to Treasury Secretary Timothy Geithner earlier this month, the National Association of Regulatory Utility Commissioners requested guidance on the federal tax treatment of these broadband grants.
The guidance does not apply to any recipient that is not classified as a corporation for federal income tax purposes. Therefore, it does not apply to any recipient that is a partnership or a limited liability company treated as a partnership for federal tax purposes.
The guidance does not apply to state taxes.

Recipients of ARRA grants that do not qualify for the safe harbor will need to consider whether those grants are taxable under other authorities. Recipients of all ARRA grants, including SGIGs, will need to consider whether they are taxable for state or local tax purposes.

Storm Clouds on the Horizon: An Uncertain Future for Taxation of Carried Interests

Davis Wright Tremaine — Mon, 22 Feb 2010 15:44:29 -0800

Check out this informative presentation by DWT partner Jim Wreggelsworth on carried interest: STORM CLOUDS ON THE HORIZON: AN UNCERTAIN FUTURE FOR TAXATION OF CARRIED INTERESTS (PPP).

Washington Technology Industry Association's February Finance Community Meeting

Davis Wright Tremaine — Wed, 10 Feb 2010 16:05:31 -0800

Time to get back in the game?
February Finance Community Meeting

2/18/2010
5:00pm to 7:00pm
Davis Wright Tremaine, LLP (Davis Center)

The Washington Technology Industry Association has assembled a diverse panel of speakers from financial institutions, money managers and industry executives to discuss current trends and the current options and strategies to meet your needs. Whether you have a lot of cash, or only a little, an update on the current investment and corporate cash management environment will prove interesting.

Panel:
Chad Cohen, Zillow.com
Rob Derry, Silicon Valley Bank Asset Management
George Taylor, Moss-Adams Weath Advisors, LLC

Moderator:
Glenn Walcott, former CFO, Big Fish Games

Join the meeting for happy hour, networking and further discussion. Attendance is being limited to 50 participants. Click here for more information or to register.

Washington State Court of Appeals Rejects Novel Privacy Claim Based on Dissemination of Unsubstantiated Information

Davis Wright Tremaine — Fri, 29 Jan 2010 14:44:10 -0800

By Eric M. Stahl and Sarah K. Duran

The Washington Court of Appeals this week held that state law does not recognize a cause of action for invasion of privacy based on “negligent dissemination of unsubstantiated information.” Corey v. Pierce County, Case No. 62505-5 (Wash. App. Jan. 25, 2010).

The case is good news for Washington state media. It squarely rejects an expansive reading of the 2008 Bellevue John Does public records case and the emerging theory that truthful reporting about criminal investigations is actionable—a theory that, were it to be accepted by the courts, would upend decades of established defamation law.

The Corey decision arose from the 2004 termination of Pierce County deputy prosecutor Barbara Corey. She claimed that the county wrongfully fired her and that the elected prosecuting attorney, Gerald Horne, defamed her in statements to the press about a criminal investigation into Corey's handling of office funds. At trial, Corey presented evidence that Horne had publicly accused her of criminal conduct, even though he knew, at the time he spoke, that the allegations were false and that the investigation had found no improper conduct.

A jury awarded Corey nearly $3 million at trial. The Court of Appeals affirmed the verdict, including the findings that defendants acted with actual malice and had defamed her. But the court soundly rejected one of Corey’s theories—that her privacy had been invaded by “negligent dissemination of unsubstantiated allegations.”

Corey’s invasion of privacy claim was based on the argument that Horne had a duty to prevent dissemination of the existence of the criminal investigation so long as the charges were unsubstantiated. The theory was based on Bellevue John Does 1-11 v. Bellevue School District No. 405, 164 Wn.2d 199, 189 P.3d (2008), in which the Washington Supreme Court held that the identity of public school teachers accused of sexual misconduct was exempt from disclosure under the Public Records Act, if the wrongdoing was found to be “unsubstantiated.” Corey argued that the First Amendment did not bar a tort claim based on dissemination of harmful information, even if that information was true.

The trial court agreed, but the Court of Appeals reversed on this point, finding that Washington law does not support this type of privacy claim. The court explained that although the Public Records Act in some instances exempts public records from disclosure based on an employee’s privacy, “[n]othing in the case law establishes a tort cause of action” for disseminating such information in other contexts. (The court nevertheless let the jury award stand, finding that the verdict would have been the same even without the erroneous “negligent dissemination” instruction.)

Corey is the second recent opinion to reject the theory that Bellevue John Does supports a privacy tort claim for dissemination of unsubstantiated information. In Cawley-Herrmann v. Meredith Corp., 654 F. Supp. 2d 1264 (W.D. Wash. Sept. 8, 2009), a television station accurately reported that police were investigating claims that a teacher allegedly had assaulted a student in school. The allegation was later found to be unsubstantiated. The teacher sued the station for invasion of privacy (but not defamation), claiming the news report was tortious under Bellevue John Does. A Washington federal district court rejected the argument, finding that Bellevue John Does was limited to public records cases and did not set the standard for privacy in other contexts.

Under the “negligent dissemination” theory, reporting about criminal investigations—even where accurate, and even where based on official sources—would be actionable if the charges at issue were not substantiated. The effect of such a rule would be to bar a great deal of standard news reporting on police and criminal justice matters. Thanks to the Corey and Cawley-Hermann decisions, such reporting can continue in Washington, consistent with traditional principles of defamation law.

Strategy for Measure 67 Taxes

Davis Wright Tremaine — Wed, 27 Jan 2010 15:26:13 -0800

By Patrick J. Green and John A. DiLorenzo, Jr.

With the Jan. 26, 2010, passage of Measure 67 in Oregon, taxes on corporations with sales in the state will increase retroactively to 2009. C corporations will pay a higher minimum tax and higher corporate income tax on income in excess of $250,000. Other business entities will pay an increased minimum tax regardless of profits.

This advisory provides a brief analysis of Measure 67's implications and describes a strategy for tax reduction for businesses operating as C corporations.

New corporate minimum tax

C corporations filing Oregon income tax returns on Oregon source income were targeted for tax increases under Measure 67. Before passage of Measure 67, businesses operating as C corporations paid a minimum annual tax of $10 and a 6.6 percent income tax on profits. Measure 67 has increased the minimum annual tax to $150 regardless of profits.

Although all C corporations will experience this 15-fold increase in the minimum tax, those corporations with Oregon gross revenues in excess of $500,000 will be impacted most. For those corporations, Measure 67 increases the minimum tax rate of 0.1 percent. For example, a corporation with $500,000 of gross revenues will pay a minimum tax of $500, while a corporation with $10 million in gross revenues will pay $10,000 regardless of profits. The “minimum tax” can be as high as $100,000.

New permanent corporate income tax rates

An additional permanent tax increase applies to corporate profits. The current 6.6 percent income tax rate will apply to profits up to $250,000 then increase to 7.9 percent for net income in excess of $250,000 for tax years beginning on or after Jan. 1, 2009, and before Jan. 1, 2011. The top rate falls slightly to 7.6 percent for tax years beginning on or after Jan. 1, 2011, and before Jan. 1, 2013. For tax years beginning on or after Jan. 1, 2013, the 7.6 percent rate applies to corporate income in excess of $10 million.

Retroactive rates to 2009 business activity

Note that both of these increases apply to last year’s business activity! Businesses with high gross revenues and thin profit margins (e.g., grocery stores, nurseries and fuel companies), will experience a substantial increase in Oregon tax, since the tax applies on sales regardless of profit.

Tax reduction strategy

How can the owners of a C corporation who continue to conduct business in Oregon protect their business from these substantial tax increases? Many C corporations will qualify for S corporation tax status. An election can be filed with the Internal Revenue Service to convert to S status that will cap the Measure 67 minimum tax increase at $150 regardless of gross revenues. Corporations with calendar tax years beginning Jan. 1 can make the election retroactively to the first of this year by filing the form by March 15, 2010. While this won’t avoid the retroactive increase for 2009, it will begin to reduce tax liability immediately in 2010.

A C corporation may qualify to elect S status if it fits within the following requirements:

The corporation is a domestic corporation with not more than 100 shareholders (members of a family can qualify as “one” shareholder)
Have “qualified shareholders” (individuals but not nonresident aliens, estates for a short duration and certain trusts)
Maintain one class of stock (voting and nonvoting stock is permitted)

Recommendation

Taxpayers who conduct business as a C corporation should consult with their tax advisors to consider additional factors, including but not limited to the following:

Elimination of double tax (at both corporate and shareholder level)
Existence of current unused loss carry backs or carry forwards
Existence of built in gain (which may be lower in today’s economy)
Individual taxpayer income tax rates (since individuals pay tax on S corporate earnings)
Business owners’ succession planning and exit strategies

With the passage of Measure 67, S elections may be particularly attractive because an S corporation's minimum tax rate is capped at $150, and corporate income escapes increased corporate income tax rates.

We recommend that C corporation owners consult with their lawyers and tax advisors to determine whether an S election would save substantial tax. Should you wish to consult with Davis Wright Tremaine LLP, please contact the authors of this advisory, John DiLorenzo or Pat Green at (503) 241-2300.

Recent Decision Defines Standards of Care for Preserving Electronically Stored Information

Davis Wright Tremaine — Mon, 25 Jan 2010 16:41:31 -0800

"By now, it should be abundantly clear that the duty to preserve means what it says and that a failure to preserve records—paper or electronic—and to search in the right places for those records, will inevitably result in the spoliation of evidence."

By Elleanor H. Chin and Randy Gainer

01.25.10

The above quote from U.S. District Judge Shira Scheindlin’s decision in Pension Committee of the University of Montreal Pension Plan et al. v. Banc of America Securities LLC is a warning to all parties involved in litigation and their counsel. The decision will provide a reference point for evaluating whether parties were reasonable in the steps they took to preserve evidence at the onset of litigation. Lawyers, compliance officers and litigation decision makers must understand the implications of this ruling. Judge Scheindlin states ignorance is not an excuse for negligent loss of data.

Key take-away points

First, a party should issue written instructions to preserve documents and electronically stored information as soon as it anticipates litigation. Second, the individuals accountable for implementing the litigation hold should have sufficient personal knowledge of the technical processes to determine whether they are appropriate, and truly likely, to capture all relevant information.

Continue reading . . .

Partner Jim Fang to Speak at 4th National Symposium on Mergers & Acquisitions in China

Joseph M. Wallin — Fri, 22 Jan 2010 14:28:40 -0800

Zhi-Ying James (Jim) Fang
Partner - Los Angeles
213.633.6847
jimfang@dwt.com
Download VCard

The law firm of Davis Wright Tremaine LLP is pleased to inform you that our partner, Zhi-Ying James Fang, will speak at the American Conference Institute’s 4th National Symposium on Mergers & Acquisitions in China. The event takes place Feb. 25 and 26, 2010, at the Carlton on Madison in New York City. Mr. Fang will present on “Best Practices in Corporate Structuring and Consolidation” on Feb. 26 from 3:45 to 4:30 p.m. EST.

Mr. Fang has arranged for Davis Wright Tremaine clients, contacts and colleagues to receive $200 off the cost of registration. Just mention this special discount when you register (a free brochure is available from the registration page).

If you have any questions, please contact the American Conference Institute at (888) 224-2480 or via their Web site. Thank you.

Officers and Managers Risk Personal Liability, Penalties and Attorneys' Fees for Unpaid Wages

Davis Wright Tremaine — Tue, 12 Jan 2010 16:30:55 -0800

By Holly M. Hearn and Rebecca L. Olson

As employers begin 2010 facing a continuing economic downturn, managers and officers should be reminded of the potential personal risks that arise from the nonpayment of employee wages. The legal obligations that apply to corporate employers apply equally to individual officers and managers who exercise control over direct payment of wages and act willfully in failing to pay wages. This can come as a surprise because officers and managers often assume that they are not personally liable for corporate obligations. They also fail to appreciate the broad definition of “wages” and the limited nature of defenses.

If an employer has restricted funds available with which to pay operating expenses, vendor invoices and other costs, individuals who may meet the definition of “employer” should take care to ensure that employee wage payments are given priority to avoid claims imposing personal liability. If payroll costs become burdensome, the solution is not to forbear paying employees the wages they have earned, but to consider other alternatives to reduce expenses, including salary or hours reductions, layoffs (either permanent or temporary) or other cost-cutting measures.

Exposure under the Washington Wage Rebate Act and FLSA

Washington state’s Wage Rebate Act (WRA) provides an employee with a civil cause of action to recover unpaid wages, double damages, costs and attorneys’ fees where his or her employer or “an officer, vice principal or agent of any employer . . . [w]illfully and with intent to deprive the employee of any part of his wages . . . pay[s] any employee a lower wage than the wage such employer is obligated to pay such employee by statute, ordinance, or contract.” RCW 49.52.050, 49.52.070; see Morgan v. Kingen (Wash. 2009). The federal FLSA also provides for double damages in situations where employees are not paid wages owed. 29 U.S.C. § 216(b).

Other forms of payment deemed wages can also form the basis for wage claims under the WRA, for example, unpaid bonuses or commissions that are nondiscretionary and/or vested, severance payments that are promised pursuant to contract, and temporarily deferred salary payments. Washington courts liberally construe the wage-claim statutes to advance the Legislature’s intent to protect employee wages and assure payment. See Schilling v. Radio Holdings, Inc. (2009).

“Employer” includes individuals, officers and managers

Both the federal Fair Labor Standards Act (FLSA) and Washington state’s Minimum Wage Act (WMA) define an “employer” as any person “acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. § 203(d); RCW 49.46.010(4).

Under Washington law, these individuals include those who have power and/or authority to make decisions regarding wages or the payment or withholding of wages. See Ellerman v. Centerpoint Prepress, Inc. (2001).

Similarly, under the FLSA, an individual manager who “exercises control over the nature and structure of the employment relationship” or has “economic control over the relationship” is subject to liability as an employer under the FLSA. See Lambert v. Ackerley (1999). Examples of such control include day-to-day control over the employer’s operations, hiring and firing authority, salary-setting authority, responsibility for maintaining employee records, and of course, the power to manage the company’s finances, including directing the payment or nonpayment of wages. See Chao v. Hotel Oasis, Inc. (2007).

Willful withholding

Managers meeting the definition of employer under the FLSA or MWA can be personally liable for double damages and the employee’s attorneys’ fees where wages are “willfully” withheld. The standard of proving “willfulness” is not high. A court merely looks to see if “the person knows what he is doing, intends to do what he is doing, and is a free agent.” See Schilling v. Radio Holdings, Inc. (1998). In other words, a knowing failure to pay wages is enough to establish “willfulness”; the manager’s actions need not be malicious or the product of any intentional wrongdoing.

Limited defenses to claims of willful withholding of wages

There are only three limited defenses to claims of willfulness under Washington state law: (1) a careless mistake, (2) a bona fide dispute over the obligation to pay wages, and (3) the employee’s knowing submission to the withholding of wages. Individual officers or managers can remain personally liable for wrongful withholding despite the corporate employer’s inability to pay, or financial distress or liquidation in bankruptcy court, even where the bankruptcy trustee will not permit the payment of wages with frozen assets. See Morgan v. Kingen (2009).

For example, in Morgan, the individual officers’ choices to pay one debt over another, to not pay wages owed, and to ultimately file for bankruptcy subjected them to personal liability. The U.S. Court of Appeals for the 9th Circuit reached a similar result under the federal FLSA in Boucher v. Shaw (2009) where individual managers argued that their obligation to pay wages ended with the corporation’s conversion to Chapter 7 liquidation. The court disagreed, noting that the “overwhelming weight of authority” is that managers of a bankrupt corporation with operational control (as described above) can be personally liable under the FLSA for unpaid wages.

Under the FLSA, double damages are the norm, single damages are the exception. However, a court may decline to award double damages if the “employer” acted in subjective good faith and had objectively reasonable grounds for believing the conduct did not violate the FLSA. See Local 246 Util. Workers Union of Am. v. S. Cal. Edison Co. (1996).

The bottom line

In this difficult economy, individual managers who have a decision-making role in paying employee wages or maintain some operational control of the company, even in the event of bankruptcy, must remain vigilant in monitoring the employer’s payroll practices to ensure that employees are paid all wages owed, including nondiscretionary or vested bonuses and commissions, contractually promised severance payments and temporarily deferred wage payments.

If cash flow prevents the prompt payment of wages and other forms of compensation when promised, you should consult legal counsel on the best ways to avoid or minimize the risk of an expensive unpaid wage claim. If you receive a claim for unpaid and owed wages, you should respond quickly to avoid possible exposure to double damages, attorneys’ fees and costs.

Related Files

Disclaimer

This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

New in 2010: Self-Reporting and Excise Taxes for Health and Welfare Plan Problems

Joseph M. Wallin — Fri, 18 Dec 2009 09:48:50 -0800

By Dipa N. Sudra

Failure to comply with COBRA and other health and welfare plan rules can trigger heavy excise tax penalties. In the past, those penalties were rarely assessed and employers could quietly fix their own problems. Now, however, you may have to report your own problems and assess these taxes on yourself.

On Sept. 8, 2009, the Internal Revenue Service (IRS) issued final regulations regarding new reporting requirements. Starting in 2010, employers (and certain third parties) must self-report and pay excise taxes for failing to comply with the following:

COBRA
HIPAA portability, access, renewability and nondiscrimination rules
The Genetic Information Nondiscrimination Act (GINA)
Mental health parity rules
Minimum hospital stays under the Newborns’ and Mothers’ Health Protection Act
Continued group health plan coverage of postsecondary dependent children on a medically necessary leave of absence under Michelle’s Law
Health savings account (HSA) comparable employer contributions rules
Archer medical savings account (MSA) comparable employer contributions rules

Affected parties must report the excise taxes on Form 8928, “Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code.” Failure to file Form 8928 and pay excise taxes may lead to the imposition of penalties and interest. A draft form is available on the IRS Web site.

Excise tax amounts

The excise tax payable for each failure relating to items 1 through 6 above is generally equal to $100 per day per affected person.

The excise tax for noncompliance with the rules relating to Archer MSA and HSA comparable employer contributions is generally equal to 35 percent of aggregate employer contributions made to all Archer MSAs or HSAs during the applicable calendar year.

When to file Form 8928 and pay excise taxes

For noncompliance with items 1 through 6 above, Form 8928 is due and the excise tax is payable:

For employers and third parties (such as insurers or third-party administrators, who may be responsible for reporting and paying excise taxes relating to COBRA failures), on or before the due date for filing the employer’s or third party’s federal income tax return. An extension to file the income tax return does not extend the date for filing Form 8928.
For multiemployer and multiple employer plans, on or before the last day of the seventh month after the end of the plan year.

In both of the above cases, the return must reflect the portion of the noncompliance period for each failure that falls during the person’s taxable year or the plan’s plan year, as applicable. Generally, the noncompliance period begins on the day the failure first occurs and ends on the day the failure is corrected.

With respect to the excise tax for failure to make comparable contributions to Archer MSAs or HSAs, Form 8928 is due and the excise tax is payable on or before the 15th day of the fourth month following the calendar year in which the noncomparable contributions were made.

Late penalties and interest

Unless an exception described in the next section applies, penalties and interest will be assessed for failure to file Form 8928 and pay the excise tax on or before the due date.

Excise tax exceptions

For items 1 through 6 above, an excise tax does not apply:

For any period during which the responsible party did not know, or exercising reasonable diligence would not have known, that the failure existed.
If the failure is due to reasonable cause and not willful neglect, and is corrected within 30 days beginning on the first date the party otherwise liable for the tax knew, or exercising reasonable diligence would have known, that the failure existed. Correction means retroactively undoing the failure to the extent possible and placing the affected person in a financial position as good as he or she would have been in had the failure not occurred.
If the failure is due to reasonable cause and not willful neglect, in which case the excise tax may be partially or fully waived if it would be excessive relative to the failure involved.

If an employer fails to make comparable contributions to Archer MSAs and HSAs, the excise tax may be waived if the failure is due to reasonable cause and not willful neglect, and if the excise tax would be excessive relative to the failure involved.

Effective date

The excise tax reporting requirements apply for any Form 8928 due on or after Jan. 1, 2010. Generally, the rules are effective for taxable years of employers, plan years of multiemployer or multiple employer health plans, Archer MSA plan years or HSA employer contributions made for calendar years, beginning on or after Jan. 1, 2010.

Practice points

Employers should have procedures in place to identify potential excise tax issues; and relevant employees, such as human resources personnel, should be familiar with the excise taxes noted above. Employers should consider creating checklists of potential excise tax violations and periodically review the checklists.

For example, employers should work with their advisors or COBRA administrators to ensure that there are no COBRA violations.

Employers must also ensure that relevant employees are familiar with recent changes, such as:

The two new events under HIPAA permitting special enrollment in a group health plan for loss of eligibility for coverage, or entitlement to a state premium assistance subsidy, under Medicaid or a state child health plan. (Employers should watch out for model notices expected to be issued in 2010 regarding these new events, and should update the notice of special enrollment rights given to employees.)
Prohibitions under GINA against using genetic information for underwriting or certain other purposes. In particular, note that there may be violations of GINA if genetic information was obtained before, but used after, its effective date (such as information collected as part of a health risk assessment).
Parity requirements for medical benefits and mental health or substance use disorder benefits.
Michelle’s Law.

House Jobs Bill and Summary

Joseph M. Wallin — Thu, 17 Dec 2009 08:59:15 -0800

Attached is a copy of the Jobs Bill passed by the House, and a summary of the bill.

Among other things, the bill would extend COBRA assistance. From the summary:

"Help with Health Insurance for Unemployed Workers (COBRA): $12.3 billion to extend from nine to 15 months the 65% COBRA health insurance subsidy for individuals who have lost their jobs. The job lost eligibility date is extended in the provision to June 30, 2010. Approximately seven million people benefited from the premium subsidy provided in the Recovery Act."

Climate Change: Sen. Cantwell Introduces Alternative to Cap and Trade

Joseph M. Wallin — Tue, 15 Dec 2009 14:33:35 -0800

By Craig Gannett and Lauren Giles Wishnie

With the debate over climate change legislation stalled in the Senate, on Dec. 11, 2009, Sen. Maria Cantwell of Washington introduced her long-awaited alternative strategy for reducing carbon emissions dramatically by mid-century. In doing so, she and her Republican co-sponsor, Sen. Susan Collins of Maine, are challenging the widespread, but far from unanimous, consensus in support of the regulatory model known as cap and trade.

Overview

Cap and trade is the centerpiece of the House-passed Waxman-Markey climate bill, H.R. 2454, and the very similar Kerry-Boxer bill, S.1733, reported by the Senate Environment and Public Works Committee last month. Under both bills, an initial cap on emissions would be set, and then steadily lowered until it reaches 80 percent below 2005 emission levels by 2050. To achieve this, the Environmental Protection Agency (EPA) would regulate about 7,500 entities, such as manufacturing facilities and utilities, that use substantial amounts of fossil fuels.

Under both the Waxman-Markey and Kerry-Boxer bills, a portion of allowances to emit carbon would be issued without charge during a transition period in order to dampen the economic impact, and to support programs relating to renewables, energy efficiency and low-income assistance. But by 2035, all allowances would be auctioned. Any entity, including those with no obligation under the new law, would be allowed to purchase allowances at auction, thereby creating a market for the trading of allowances. Revenues from the auction would go to the Treasury Department, to be used to mitigate impacts on consumers and affected industries. Both bills are similar to the cap and trade system that has been functioning in Europe since 2005.

The Cantwell legislation includes a cap mechanism, and would arrive at virtually the same reductions by 2050, but diverges from the Waxman-Markey and Kerry-Boxer bills in almost every other important respect. Instead of regulating entities that use fossil fuels, the Cantwell bill would move “upstream,” regulating entities in the business of producing or importing fossil fuels. Consequently, the bill would regulate only about 3,000 entities nationally.

Under Cantwell’s bill, all allowances would be auctioned from the outset, the auctions would be open only to those with compliance obligations, and those regulated entities would not be able to purchase allowances significantly in excess of their emissions. Trading would be limited to regulated entities operating through a dedicated exchange platform administered by the Treasury. Auction revenue would be deposited in the Treasury, but three-quarters of it would then be returned to taxpayers on a per-capita basis in the form of monthly, tax-free “dividend” checks. The remaining quarter would be available for appropriation by Congress to fund programs designed to speed the nation’s transition to a low-carbon economy.

Cantwell’s rationale

In extensive written materials released along with her bill, Sen. Cantwell explains her rationale with respect to each of her innovations. Key points include:

1. Point of regulation. Cantwell’s bill chooses an “upstream” point of regulation, at the producer/importer level, before the fossil fuels reach those “downstream” entities that use them. Her reasoning is that there are fewer entities to regulate upstream, and that there will be fewer opportunities to “game the system” if the cost of allowances is imposed before fossil fuels are distributed among the many different energy-intensive industries.

2. Distribution of allowances. Unlike the Waxman-Markey and Kerry-Boxer bills, the Cantwell bill does not have a transition period during which allowances are distributed to entities for free. Rather, all allowances (“shares” in the Cantwell bill’s terminology) are auctioned from the outset.

3. Trading/market manipulation. In an attempt to control potential market manipulation, the Cantwell bill limits participation in auctions of shares to producers/importers of fossil fuels (defined in the bill as “first sellers”). Shares are tradable only among first sellers and only via a government-hosted exchange with publicly listed prices. Position limits will be imposed to prevent hoarding.

4. Dividends to taxpayers. The Cantwell bill requires that 75 percent of auction revenue be returned to consumers via a nontaxable monthly cash dividend paid on an equal per-capita basis to all legal residents of the United States. According to Cantwell, 80 percent of consumers will incur no net costs, and the lowest income levels will receive net positive benefits; the remaining 20 percent—those with the highest income—will see their net income reduced by less than 0.3 percent.

5. Safety valve. Unlike the Waxman-Markey and Kerry-Boxer bills, Cantwell’s bill provides that the price of allowances at auction will be limited by both a floor and a ceiling (commonly known as a “price collar”). At the outset, the price must be between $7 and $21, with an adjustment mechanism that would raise the band to about $16 to $40 by 2025, and to roughly $75 to $160 by 2050. According to Cantwell, the predictability of this pricing mechanism will make it easier for businesses to plan for and finance the necessary investments.

6. Offsets. The Waxman-Markey and Kerry-Boxer bills would allow emitting entities to offset a portion of their obligation by paying for emission reductions achieved through other means, such as changes in forestry practices. Cantwell’s bill does not allow offsets because, in her view, they remove some of the incentive for American companies to make the transition to a low-carbon way of doing business. She has in the past also expressed skepticism regarding the effectiveness of offset programs.

7. CERT Fund. The 25 percent of auction revenues not returned to consumers is directed to a new Clean Energy Reinvestment Trust (CERT) Fund. Among other things, revenues from the CERT Fund could be used to: (a) provide transition assistance to affected industries and workers experiencing economic dislocation due to climate change efforts; (b) provide mitigation and adaptation assistance to communities experiencing negative impacts from climate change; (c) support training programs to prepare workers for careers in energy efficiency, renewable energy and clean technology; and (d) support low-income energy efficiency loan programs.

Prospects

The prospects for the Cantwell bill are uncertain at this point. Until recently, the traditional cap and trade model seemed to be enjoying considerable momentum in Congress. However, that momentum has stalled in the Senate, where 60 votes are necessary to pass legislation over the objection of a determined minority. Currently, it appears that the cap and trade approach falls far short of that margin, with 10 to 20 moderate-to-conservative Democrats joining virtually all Republicans in expressing either deep reservations or outright opposition.

As an alternative to cap and trade, Sen. Cantwell’s bill is likely to merit a hard look from opponents of the Waxman-Markey and Kerry-Boxer bills. The cosponsorship of a Republican, albeit a moderate one, is helpful to Cantwell’s cause. If she can pick up support in the coming months from Senators who are now opposed to or skeptical of cap and trade, it is likely that at least some features of the Cantwell bill will find their way into the final legislation.

House Passes H.R. 4173, Financial Regulation Bill

Joseph M. Wallin — Fri, 11 Dec 2009 13:41:50 -0800

For the amendments made to the bill before passage, please see here. Once the full bill as passed is published, we will post it. You can find a copy of the bill before amendments here.

H.R. 4173, Wall Street Reform and Consumer Protection Act of 2009

Joseph M. Wallin — Thu, 10 Dec 2009 16:29:34 -0800

The House is debating these bills right now.

Financial Regulatory Reform

H.R. 4173, Wall Street Reform and Consumer Protection Act of 2009

TITLE I—Financial Stability Improvement Act, Summary

TITLE II—Corporate and Financial Institution Compensation Fairness Act,Summary

TITLE III—Over-the-Counter Derivatives Markets Act, Summary

TITLE IV—Consumer Financial Protection Agency Act, Summary

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Dec. 31, 2009, is Deadline for Public Companies to Amend Certain Performance-Based Compensation Plans

Joseph M. Wallin — Tue, 01 Dec 2009 15:45:29 -0800

By Jeni L. Meyer

Public employers may need to amend executive compensation agreements and plans prior to Dec. 31, 2009, to preserve the deductibility of performance-based compensation.

In Revenue Ruling 2008-13 (the “Ruling”), the IRS confirmed its earlier position that a plan or agreement that provides for payment following an executive’s termination without cause, for good reason or upon retirement will not qualify as deductible performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), regardless of whether the performance goals are satisfied.

As a result, this compensation will not be deductible if it exceeds the $1 million deduction limit. The Ruling provides relief for certain existing plans, as discussed in more detail in this advisory. Public companies should evaluate their plans as soon as possible to determine compliance.

Background

Code Section 162(a)(1) provides employers with a tax deduction for reasonable compensation for services. The Code caps the allowable deduction in any year at $1 million for compensation payable to a “covered employee” of a public company. A covered employee is defined as the public company’s chief executive officer and its three other most highly compensated officers whose compensation is required to be disclosed to shareholders under the Securities Exchange Act of 1934. The deduction limit does not apply to performance-based compensation provided that it is paid solely upon attainment of one or more pre-established, objective performance goals.

Revenue Ruling 2008-13

The Ruling clarifies that compensation will not fail to be qualified deductible performance-based compensation merely because the compensation is payable upon death, disability or change of ownership or control, even if the performance goals are not obtained. However, compensation that is payable upon an executive’s involuntarily termination, voluntary termination or retirement will not constitute performance-based compensation under any circumstances, regardless of whether the performance goals are fulfilled. Compensation payable under such an arrangement that exceeds $1 million in the taxable year will not be deductible.

Relief for existing plans

The Ruling provides employers relief in certain limited circumstances. Existing plans with payments triggered by termination without cause, with good reason or upon retirement will not be subject to the holding in the Ruling, provided that (a) the performance period for the compensation began on or before Jan. 1, 2009, or (b) the employment agreement that established the terms of the compensation arrangement was in place on Feb. 21, 2008 (without respect to future renewals or extensions, including renewals or extensions that occur automatically absent further action of one or more of the parties to the contract).

Action items

Public companies should review their outstanding compensation agreements and plans with covered employees to determine whether such arrangements may require amendment in light of the Ruling. Employers will need to act quickly to amend such arrangements to comply with the Ruling for performance periods beginning on or after Jan. 1, 2010.

Legislative Language of the America's Healthy Future Act

Joseph M. Wallin — Mon, 19 Oct 2009 15:44:10 -0800

The legislative language of the Senate Finance Committee's healthcare bill can be accessed here.

Broadband Stimulus Update and Next Steps in the Funding Process

Joseph M. Wallin — Thu, 10 Sep 2009 15:54:04 -0800

By Maria T. Browne, Paul B. Hudson, James M. Smith and James W. Tomlinson

Last week, the Commerce Department’s National Telecommunications and Information Administration (NTIA) and the Department of Agriculture’s Rural Utilities Service (RUS) jointly issued a press release with preliminary aggregated information about the applications submitted for the first round of broadband stimulus funding. NTIA and RUS (the “Agencies”) announced that they received approximately 2,170 applications requesting nearly $28 billion in funding, or approximately seven times the total amount allocated for this round.

As yet, very little information is available about the applications that were filed other than the aggregated data described by the Agencies. The sustainable broadband and public computer programs were more oversubscribed than broadband infrastructure, but demand far exceeds supply in all categories.

This advisory provides an overview of the applications that were filed and anticipated next steps in the funding process, including a discussion of possible challenges to broadband infrastructure applications.

Background and overview of the application process

As we have noted in previous advisories, the American Recovery and Reinvestment Act (ARRA) provided a total of $7.2 billion to the Agencies to expand access to and adoption of broadband services. NTIA was allocated $4.7 billion to deploy broadband infrastructure in unserved and underserved areas, expand public computer center capacity, and encourage sustainable adoption of broadband service, while RUS was allocated $2.5 billion to facilitate broadband deployment in primarily rural areas.

In the first round of funding, approximately $2.4 billion in grants and loans is available from RUS and up to $1.6 billion in grants is available from NTIA. The first round application deadline (after two extensions) was Aug. 24.

The Agencies will employ a two-step application review process. In the first step, applicants not meeting eligibility requirements will be rejected and remaining applicants will be awarded a point score based on their satisfaction of criteria in four categories: project purpose, project benefits, project viability and project sustainability. Those applicants that are deemed “most highly qualified” after this screening process will be informed “no earlier than” Sept. 14, and will advance to a step-two “due diligence” phase, during which they will be required to submit additional information as early as Oct. 15.

The first grant awards are expected about Nov. 7, 2009. If an application is not successful in the first round, the applicant may resubmit a revised proposal for the next application filing window, scheduled for sometime this winter.

Challenges to applications

The Agencies indicated in their press release that sometime “in the coming weeks” they will post online a searchable database containing each applicant’s 500-character summary of its application and a notice of the proposed funded service areas asserted by applicants to be "unserved"* or "underserved."** Once this information is placed on public notice, existing broadband service providers will have 30 days to submit information regarding their service offerings to rebut showings that the areas are unserved or underserved. Such information may be used by the Agencies to reclassify or reject an application. The Agencies have previously indicated that information submitted by existing service providers will be treated as proprietary and confidential to the extent permitted under applicable law.

The Public Notice announcing the opening of this comment period may provide further clarification regarding the scope of permissible submissions. For example, it is not known whether other entities besides “existing service providers” may comment on an application; whether the Agencies will accept other comments supporting or opposing applications (note that the applications will not be made publicly available from the Agencies); whether applicants will have the ability to respond; how the Agencies will administer confidential and proprietary subscriber data; and whether only broadband infrastructure applications are subject to comment.

State and local government broadband applications

Several state and local governments, including West Virginia, Massachusetts, Pennsylvania, Missouri and a consortium of Maryland cities and counties, recently announced that they filed applications for broadband stimulus funds under the Recovery Act. The full applications filed by Pennsylvania and West Virginia and the Maryland cities and counties consortium already have been made publicly available, and we anticipate that other applications filed by state or local governments eventually will become publicly available, either voluntarily (for public relations purposes), because of transparency requirements or through Freedom of Information Act requests.

During step two of the NTIA application review process, states will be given an opportunity to make recommendations concerning the allocation of funds for qualifying projects in or affecting their individual states. Specifically, the governor’s office of each state will receive a list of the applications under consideration, and will have 20 calendar days to provide a list and prioritization of recommended projects, along with an explanation of the reasons for their prioritization. States are of course likely to support their own public projects, but some are expected to support favored private projects as well. The Agencies have stated that states “will not have the ability to veto a particular project.”

FOOTNOTES

* Unserved means at least 90 percent of households lack access to terrestrial broadband service at the minimum transmission speed of 768 kbps downstream and 200 kbps upstream. A household is deemed to have access to such broadband service if it can readily subscribe to that service upon request.

** For last-mile projects (i.e., predominant purpose to provide service to end users), an area will be considered “underserved” if it meets any one of these three criteria: (i) broadband subscribership is less than 40 percent of households; (ii) no more than 50 percent of households have access to terrestrial broadband service of at least 768/200 kbps; or (iii) no party advertises transmission speeds of at least 3 Mbps downstream in the area.

Foreign-Funded Equity Investment Allowed to Incorporate in Pudong, China

Joseph M. Wallin — Thu, 10 Sep 2009 15:47:37 -0800

By Nicole Guo and Ron Cai

Since the outbreak of the global financial crisis, the typical model of China's capital market—that both fundraising and exit of private equity (PE) funds/venture capital (VC) are effected overseas—has begun to attract skepticism. In contrast, Chinese currency PE funds have been growing in past months. Chinese authorities have released a series of policies, meanwhile, to promote the development of equity investment.

At the end of 2008, the General Office of the State Council released “Several Opinions on Providing Financing Support for Economic Development,” which is significant for the growth of China's equity investment industry. Yet, until recently, foreign-funded equity investment, such as VC and PE funds, have only been allowed to form as "venture investment enterprises" or "venture investment management enterprises" (collectively, "Venture Investment Enterprises"); Venture Investment Enterprises were only allowed to take the form of limited liability companies.

Early in March 2009, China's Ministry of Commerce (MOFCOM) issued the circular, “Notice on Delegating the Examination and Approval Authority of Foreign Funded Investment Companies” (the "Circular"). The Circular delegates approval authority of foreign-invested Venture Investment Enterprises with registered capital of no more than $100 million (including the expansion of investment scale by no more than $100 million), to provincial-level departments of MOFCOM. The Circular also provides that equity investment of a substantial amount may seek approval from a local government, rather than from the central government, by dividing the investment into phases of no more than $100 million.

Upon issuance of the Circular, several foreign PE firms formed foreign-domestic investment companies after obtaining approvals from provincial-level local governments. Moreover, in competition to become China's "PE fund center" and attract international PE firms, the local governments of Beijing, Tianjin, Shenzhen and Chongqing have promised policies and laws to support the development of equity investment.

As part of the city's plan to become an international financial center by 2020, the Shanghai municipal government has been busy luring equity investors. In August 2008, four governmental divisions of Shanghai Municipality jointly issued the “Notice on Business Registration and Other Issues of Equity Investment Enterprises” (the "Notice"). The Notice extends tax breaks to equity investment enterprises and offers a 40 percent rebate on personal property taxes to investment firm senior executives. It further extends a 20 percent rebate to mid-level managers. Until recently, such benefits were offered only to domestic PE firms.

Pudong, Shanghai's largest district, is the most eager to attract equity investors with favorable policies. On June 10, Pudong's local government issued “Trial Measures Regarding the Establishment of Foreign-funded Equity Investment Management Enterprises” (the "Trial Measures"). The Trial Measures allow, for the first time in China, foreign-funded equity investment companies to register as equity investment management enterprises. However, the scope of "foreign-funded equity investment enterprises" is unclear. In China, there is no concrete definition of the same in the regulatory documents. It is popular belief that foreign-invested Venture Investment Enterprises, established under the Rules on Administration of Foreign-invested Venture Capital Enterprises, should be considered as foreign-funded equity investment enterprises. However, it is unclear whether consulting companies set up by global PEs to carry out fund management business should be included as well.

In order to control financial risk, it is stipulated in the Trial Measures that a foreign-funded equity investment management enterprise (FEIME) be incorporated as a limited company with registered capital of no less than $2 million. At least one of the FEIME's investors (or its affiliated entities) should be legally engaged in equity investment or equity investment management. In addition, a FEIME should have at least two executives with two or more years of experience in a senior managerial position in either equity investment or equity investment management.

The Trial Measures stipulate that FEIMEs are included under specific incentive and preferential tax policies offered to domestic equity investors as set forth in Shanghai Municipality's Notice of August 2008. The following incentives are available to FEIMEs:

Startup award

If the registered capital of a FEIME amounts to ¥500 million, it will be granted a lump-sum award of ¥5 million. ¥10 million and ¥15 million will be awarded to a FEIME if its registered capital reaches ¥3 billion and ¥5 billion, respectively.

Fiscal revenue refund

If a FEIME invests in a state-owned enterprise, high-tech enterprise, middle- or small-scale enterprise in Pudong, then half of the financial revenue generated from such investment and allocated to the Pudong government will be refunded to the investing FEIME.

Incentives for management

In addition to the property tax rebates extended under the 2008 Notice, senior executives of a FEIME will be offered a 20 percent rebate for their paid individual income taxes, while mid-level managers will be offered a 20 percent rebate for paid individual income taxes. In addition, a housing allowance of up to ¥200,000 will be offered to executives if a FEIME's trust fund reaches ¥1 billion.

Rent subsidy

If a FEIME is located in a specific area assigned by the Pudong government, a rental subsidy (¥500 per square meter per year) will be provided to it. Alternatively, an allowance equal to 1.5 percent of the purchase price of the office will be offered to the FEIME if it chooses to purchase an office in the area.

With the launch of the Trial Measures, all foreign-funded VC and PE companies already established in Pudong are allowed be re-registered as FEIMEs and are thus ineligible for certain tax incentives granted to equity investment management enterprises.

The Pudong government hopes that the Trial Measures will attract more foreign equity investment capital to China's domestic markets. The Trial Measures will expire on June 30, 2010. It is anticipated that a permanent regulation with respect to foreign-funded equity investment will be promulgated before then.

Prospects

Local governments have been promising preferential policies to lure PEs and VCs. However, major obstacles which impede the establishment of onshore PE and VC still exist. The first major obstacle is the foreign exchanges settlement issue on capital conversion. In the current environment, capital injected to a foreign-invested PE firm cannot be converted directly to RMB directly until the equity, investing project is approved by the Ministry of the Commerce or until the stock investment plan is approved by China's Security Regulatory Commission. Secondly, there remain strict limitations for overseas funds to invest in certain "Investment Prohibited Industries" or "Investment Restricted Industries" in China.

Moreover, Global PE firms are facing increased competition from domestic funds. Local firms have better contacts and are quick to strike deals. Domestic funds are less concerned with currency controls, taxation and exit strategies.

Despite the economic recession, it is estimated that PEs in China will rebound strongly next year. The long-awaited NASDAQ-style middle-small enterprise public offering board commenced in July 2009, which is good news for both foreign-funded and domestic PEs. The opening of this board offers a new channel for the funds of the existing foreign PE firms. It is reported that the Pudong government is in discussions with the central government in an attempt to further allow and encourage expanded overseas fund investment, such as foreign exchange control. It remains to be seen whether Pudong can lead the next wave of finance market growth by creating a more preferential and flexible environment. Blackstone Group, the world’s biggest private equity firm, recently unveiled plans to launch a ¥5 billion fund in partnership with the Shanghai government, Reuters reported. Other firms are following suit.

Disclaimer

Update - China's Food Safety Law: New Obligations and Increased Penalties

Joseph M. Wallin — Mon, 17 Aug 2009 12:16:42 -0800

By Ron Cai, Lin Zhu and Kevin Moore

This advisory updates our March 2009 advisory with recently promulgated implementation regulations.

Following a wave of tainted food scandals that rocked public confidence, the Standing Committee of China’s National People’s Congress enacted the Food Safety Law (FSL). The FSL, along with its implementing regulations, creates nationwide standards for everything from nutritional specifications of baby food to pesticide usage.

Effective since June 1, it is a result of years of drafting and revision. Hallmarks include a requirement for detailed record keeping at each step of the food production and distribution process as well as an expansive joint liability structure.

The FSL, which regulates food quality, food-related products and food additives, covers the following industries and processes:

Food producers and processors (collectively, “Food Manufacturers”), food distributors and caterers (collectively, “Food-Business Operators”)
Manufacturing and processing of food additives
Manufacturing and processing of (i) packaging materials, containers, detergent and disinfectant used with food; and (ii) tools and equipment used in production and processing of food (collectively, “Food-Related Products”)
Food Manufacturers’ and Food-Business Operators’ usage of food additives and Food-Related Products

The standards

China’s State Council will establish a national food safety commission to coordinate and oversee the new food supervision apparatus. Additionally, the FSL requires formulation of national food safety standards. The food safety standards are to include: limitations on hazardous ingredients; prescription for type and dosage of food additives, labeling and instruction requirements; hygiene requirements, food inspection methods and procedure; and even nutritional specifications for baby food.

The food safety standards will be formulated and published by the Ministry of Health (MOH) and must pass review and examination by an expert committee on the national food safety standards, which is to be composed of experts in medicine, agriculture, food and nutrition, as well as representatives from various departments of the State Council.

Inspection and record keeping

Under the FSL, Food Manufacturers, Food-Business Operators and food importers face new obligations for training, quality inspection and record keeping.

When purchasing raw food materials, food additives, Food-Related Products and edible agricultural products, they must inspect the seller’s relevant permit and inspection certificate of product quality. They are to maintain records of purchase details and inspection results including product name, specification, quality, purchase date, and the seller’s name and contact information, as well as all information relating to raw food material procurement and food processing. Food Manufacturers cannot purchase or use substandard raw ingredients, food additives or Food-Related Products. They are required to effect and record final inspection when food products exit the factory.

Food-Business Operators must inspect a seller’s permit and certification documents evidencing a food’s compliance with safety standards. They are to maintain records of purchase details and inspection.

Finally, food importers need to maintain record of the import and sale of food. Records are to be maintained for at least two years.

Previously, Food Manufacturers and Food-Business Operators needed only a food production permit issued by the General Administration of Quality Supervision, Inspection and Quarantine as well as a food hygiene permit issued by MOH. The FSL revamps China’s food safety permitting system by requiring Food Manufacturers and Food-Business Operators to obtain, where necessary: (i) a food production permit; (ii) a food distribution permit; and (iii) a catering service permit, with an effective term of three years. Before registering with the Administration for Industry and Commerce (AIC), Food Manufacturers and Food-Business Operators must obtain the permits.

Food importation

Foreign Food Manufacturers that export food to China should register with the Administration of Inspection and Quarantine (AIQ) for an effective registration term of four years. Exporters or agents, which export food to China, should file with AIQ.

Imported, pre-packaged food and food additives must have Chinese-language labels and instructions, containing information on the place of origin, name, address and contact information of the domestic agent. Chinese-language instructions should satisfy the requirements under Chinese law, including the forthcoming food safety standards.

If the food to be imported is a variety which is not subject to the food safety standards in China, or if imported food additives or Food-Related Products are a new variety in China, the food importer should submit safety evaluation documents to MOH to apply for approval before importation.

Recall

The FSL codifies a food recall system, which was previously regulated under administrative rules. Food products proven to be substandard are subject to: (i) cessation of production; (ii) recall; (iii) notification of Food-Business Operators and consumers; (iv) record keeping of the recall; and (v) report to the county-level (or above) quality supervision authority.

If a Food Manufacturer or Food-Business Operator fails to effect a recall accordingly, the county-level (or above) quality supervision authority, the AIC, or the State Food and Drug Administration (SFDA) can order a recall or suspend the violator’s business. If the violator fails to recall the food or fails to suspend business after a government authority’s official order, the substandard food products, the income earned therefrom, and any tools, equipment and raw materials used therein will be forfeited. If the value of the substandard food products is less than ¥10,000, the violator can be fined up to ¥50,000; if the product value is more than ¥10,000, the violator can be fined at 5 to 10 times the value. Relevant food permits may be revoked in serious cases.

Joint and several liability

Under the FSL, an expansive liability structure will be implemented. Food-related businesses need to take measures to prevent food safety accidents. For instance, organizers of food markets, lessors of counter space and exhibition organizers should inspect Food-Business Operators’ permits, clarify food supervision responsibilities of Food-Business Operators participating in the market, and periodically inspect the premises and conditions of Food-Business Operators. In the case of a violation, they should report immediately to the county-level AIC or the SFDA. Where a food market organizer, counter space lessor or exhibition organizer fails to perform any of the above obligations, they may be held jointly and severally liable for any food safety incident in their market.

Further, any social group, organization or individual that promotes a food product in misleading advertising that causes harm to consumers may be held jointly and severally liable with the Food Manufacturer and Food-Business Operator.

Punitive damages and priority of civil liability

The FSL provides that if a Food Manufacturer produces, or a seller knowingly sells, substandard food, consumers can claim for punitive damages equaling 10 times the original product price, in addition to normal compensation (ordered by a court) for losses caused to the consumer.

Miscellaneous provisions

In the past, some food industry giants were able to obtain inspection exemptions. The FSL abolishes any exemption for inspection.

Food products claimed to have specific health benefits are subject to stricter supervision. Labels and instructions cannot claim a product’s function to be prevention or treatment of disease. Further, labels and instructions must list ingredients and information prescribing who should and who should not consume a product. Also, misleading advertising of food products is banned, and advertisements cannot claim that a product may prevent or treat disease.

Conclusion

China’s Food Safety Law, along with its implementing regulations, appears to be as much a consequence of recent food safety scares as it is the result of protracted consideration and drafting. On top of the establishment of a national food safety commission and forthcoming safety standards, producers and distributors will be subject to increased penalties if they produce or sell substandard food. Even celebrities who endorse a product may be held jointly liable. Businesses will be required to maintain detailed inspection and purchase records and to obtain particular permits. Although compliance is likely to increase the cost of production, the FSL promises to improve food quality and safety for consumers of Chinese food products.

Disclaimer

Copy of Energy and Commerce Committee Bill

Joseph M. Wallin — Fri, 31 Jul 2009 22:10:52 -0800

The Energy and Commerce Committee passed its health care bill today. You can read a copy here.

The Joint Committee on Taxation wrote a helpful description of the tax provisions in the bill which was the precursor to this bill. You can find that analysis here.

Under the proposed bill, employers will either have to provide health care insurance or pay a penalty equal to 8% of the wages paid to employees (not capped). This 8% tax would be in addition to FICA taxes.

A good place to read H.R. 3200 is at Thomas.gov; link to bill here.

Ways and Means Passes Health Reform Legislation

Joseph M. Wallin — Fri, 17 Jul 2009 07:33:48 -0800

"WASHINGTON, D.C. – The House Committee on Ways and Means today passed H.R. 3200, the America’s Affordable Health Choices Act of 2009, by a vote of 23-18....These provisions will be merged with provisions currently under consideration in the Committees on Energy and Commerce and Education and Labor for consideration by the full House of Representatives in the coming weeks."

The text of H.R. 3200, the America’s Affordable Health Choices Act of 2009.

The individual income tax surcharge provisions are quoted below.

SEC. 441. SURCHARGE ON HIGH INCOME INDIVIDUALS.

(a) In General- Part VIII of subchapter A of chapter 1 of the Internal Revenue Code of 1986, as added by this title, is amended by adding at the end the following new subpart:

`Subpart B--Surcharge on High Income Individuals

`Sec. 59C. Surcharge on high income individuals.

`SEC. 59C. SURCHARGE ON HIGH INCOME INDIVIDUALS.

`(a) General Rule- In the case of a taxpayer other than a corporation, there is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to--

`(1) 1 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $350,000 but does not exceed $500,000,

`(2) 1.5 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $500,000 but does not exceed $1,000,000, and

`(3) 5.4 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $1,000,000.

`(b) Taxpayers Not Making a Joint Return- In the case of any taxpayer other than a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), subsection (a) shall be applied by substituting for each of the dollar amounts therein (after any increase determined under subsection (e)) a dollar amount equal to--

`(1) 50 percent of the dollar amount so in effect in the case of a married individual filing a separate return, and

`(2) 80 percent of the dollar amount so in effect in any other case.

`(c) Adjustments Based on Federal Health Reform Savings-

`(1) IN GENERAL- Except as provided in paragraph (2), in the case of any taxable year beginning after December 31, 2012, subsection (a) shall be applied--

`(A) by substituting `2 percent' for `1 percent', and

`(B) by substituting `3 percent' for `1.5 percent'.

`(2) ADJUSTMENTS BASED ON EXCESS FEDERAL HEALTH REFORM SAVINGS-

`(A) EXCEPTION IF FEDERAL HEALTH REFORM SAVINGS SIGNIFICANTLY EXCEEDS BASE AMOUNT- If the excess Federal health reform savings is more than $150,000,000,000 but not more than $175,000,000,000, paragraph (1) shall not apply.

`(B) FURTHER ADJUSTMENT FOR ADDITIONAL FEDERAL HEALTH REFORM SAVINGS- If the excess Federal health reform savings is more than $175,000,000,000, paragraphs (1) and (2) of subsection (a) (and paragraph (1) of this subsection) shall not apply to any taxable year beginning after December 31, 2012.

`(C) EXCESS FEDERAL HEALTH REFORM SAVINGS- For purposes of this subsection, the term `excess Federal health reform savings' means the excess of--

`(i) the Federal health reform savings, over

`(ii) $525,000,000,000.

`(D) FEDERAL HEALTH REFORM SAVINGS- The term `Federal health reform savings' means the sum of the amounts described in subparagraphs (A) and (B) of paragraph (3).

`(3) DETERMINATION OF FEDERAL HEALTH REFORM SAVINGS- Not later than December 1, 2012, the Director of the Office of Management and Budget shall--

`(A) determine, on the basis of the study conducted under paragraph (4), the aggregate reductions in Federal expenditures which have been achieved as a result of the provisions of, and amendments made by, division B of the America's Affordable Health Choices Act of 2009 during the period beginning on October 1, 2009, and ending with the latest date with respect to which the Director has sufficient data to make such determination, and

`(B) estimate, on the basis of such study and the determination under subparagraph (A), the aggregate reductions in Federal expenditures which will be achieved as a result of such provisions and amendments during so much of the period beginning with fiscal year 2010 and ending with fiscal year 2019 as is not taken into account under subparagraph (A).

`(4) STUDY OF FEDERAL HEALTH REFORM SAVINGS- The Director of the Office of Management and Budget shall conduct a study of the reductions in Federal expenditures during fiscal years 2010 through 2019 which are attributable to the provisions of, and amendments made by, division B of the America's Affordable Health Choices Act of 2009. The Director shall complete such study not later than December 1, 2012.

`(5) REDUCTIONS IN FEDERAL EXPENDITURES DETERMINED WITHOUT REGARD TO PROGRAM INVESTMENTS- For purposes of paragraphs (3) and (4), reductions in Federal expenditures shall be determined without regard to section 1121 of the America's Affordable Health Choices Act of 2009 and other program investments under division B thereof.

`(d) Modified Adjusted Gross Income- For purposes of this section, the term `modified adjusted gross income' means adjusted gross income reduced by any deduction allowed for investment interest (as defined in section 163(d)). In the case of an estate or trust, adjusted gross income shall be determined as provided in section 67(e).

`(e) Inflation Adjustments-

`(1) IN GENERAL- In the case of taxable years beginning after 2011, the dollar amounts in subsection (a) shall be increased by an amount equal to--

`(A) such dollar amount, multiplied by

`(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting `calendar year 2010' for `calendar year 1992' in subparagraph (B) thereof.

`(2) ROUNDING- If any amount as adjusted under paragraph (1) is not a multiple of $5,000, such amount shall be rounded to the next lowest multiple of $5,000.

`(f) Special Rules-

`(1) NONRESIDENT ALIEN- In the case of a nonresident alien individual, only amounts taken into account in connection with the tax imposed under section 871(b) shall be taken into account under this section.

`(2) CITIZENS AND RESIDENTS LIVING ABROAD- The dollar amounts in effect under subsection (a) (after the application of subsections (b) and (e)) shall be decreased by the excess of--

`(A) the amounts excluded from the taxpayer's gross income under section 911, over

`(B) the amounts of any deductions or exclusions disallowed under section 911(d)(6) with respect to the amounts described in subparagraph (A).

`(3) CHARITABLE TRUSTS- Subsection (a) shall not apply to a trust all the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B).

`(4) NOT TREATED AS TAX IMPOSED BY THIS CHAPTER FOR CERTAIN PURPOSES- The tax imposed under this section shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.'.

(b) Clerical Amendment- The table of subparts for part VIII of subchapter A of chapter 1 of such Code, as added by this title, is amended by inserting after the item relating to subpart A the following new item:

`subpart b. surcharge on high income individuals.'.

(c) Section 15 Not To Apply- The amendment made by subsection (a) shall not be treated as a change in a rate of tax for purposes of section 15 of the Internal Revenue Code of 1986.

(d) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

SEC. 442. DELAY IN APPLICATION OF WORLDWIDE ALLOCATION OF INTEREST.

(a) In General- Paragraphs (5)(D) and (6) of section 864(f) of the Internal Revenue Code of 1986 are each amended by striking `December 31, 2010' and inserting `December 31, 2019'.

(b) Transition- Subsection (f) of section 864 of such Code is amended by striking paragraph (7).