In a recent landmark decision, the U.S. Supreme Court ruled in favor of the Internal Revenue Service (IRS), confirming the IRS has the ability to request financial records from banks and other financial institutions without notifying the actual taxpayers involved. This decision came as a result of the case Polselli v. IRS, which involved a taxpayer owing $2 million in unpaid taxes and residing in Michigan.

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LIBOR has served as the benchmark interest rate for over 30 years and is currently tied to over $200 trillion in contracts and debt obligations. LIBOR serves as the underlying interest rate for multiple types of contractual obligations including business loans, mortgages, and even student loans. However, given the recent LIBOR rate setting manipulation scandal and its declining reliability, the United Kingdom’s Financial Conduct Authority has agreed to stop publishing the LIBOR, and banks will no longer be obligated to make LIBOR submissions, after December 31, 2021. SOFR is calculated daily based on overnight cash lending between banks collateralized by the United States Treasury in the repurchase agreement market. According to the Federal Reserve, SOFR is much more resilient than LIBOR is numerous ways including its transparency and the fact that it is more representative of the way financial institutions fund themselves today. The Federal Reserve began publishing daily SOFR rates on its website on March 2, 2020.

The ARRC has created the Paced Transition Plan to give guidance and encourage the adoption of SOFR here in the United States. The ARRC has recommended that contracts stop referencing LIBOR as the benchmark interest rate starting as early as this year in order to facilitate a smooth transition to SOFR by the end of 2021. Some financial institutions have already begun the transition process to SOFR, such as Freddie Mac, which will no longer purchase LIBOR Adjustable Rate Mortgages beginning January 1, 2021.

In addition to providing a transition timeline, the ARRC recommends that LIBOR contracts should, as soon as possible, include ARRC recommended, or substantially similar, fall back language. Two approaches for fallback language have been enumerated by the ARRC for those instances where a contract is still using LIBOR as an interest rate or for those previously executed contracts that do not provide for an alternative to LIBOR. The first approach, the “hardwire approach”, specifically sets forth a replacement benchmark interest rate that will be applied at the end of LIBOR and indicates the procedures that will be used to calculate and institute the new interest rate within the contract. Alternatively, the “amendment approach” permits the parties to a contract to amend the agreement at a future date, once LIBOR is phased out, and determine the new interest rate then, while still outlining the procedures that will govern selecting the replacement index. The hardwire approach eliminates the need for an amendment down the road for LIBOR based contracts by including language that addresses the potential replacement, while the amendment approach may work best for those older contracts that may not have anticipated the end of LIBOR. Either way, it is imperative that both approaches address how the new interest rate will be determined.

Whether it be assistance amending an executed contract or current debt obligation that does not include replacement language for LIBOR, or assistance navigating new contract negotiations and loan agreements, our experienced team of attorneys here at Dawda are ready to advise and help guide you through the transition away from LIBOR.

Written by Associate, Kathryn Kaleth.

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The IRS announced that the popular offshore voluntary disclosure program (OVDP) used by taxpayers to divulge previously unreported foreign assets with reduced penalties will be ending effective September 28, 2018.

Under the terms of the OVDP, which was originally initiated in 2009, and reinstated and modified in various forms in 2011, 2012 and 2014, taxpayers could avoid criminal charges and pay reduced civil penalties if they willingly disclosed foreign assets that were previously unreported and amended returns to pay back taxes. Per IRS statistics, since 2009, more than 56,000 taxpayers have used the program, resulting in more than $11 billion in taxes being collected.  The IRS will close these types of programs to motivate participation and may later open similar programs with higher penalties. There is no guarantee that the program will be reopened.

Foreign Income is Taxable and Many Foreign Assets Reportable

Closure of the OVDP program doesn’t mean taxpayers will stop paying taxes on foreign assets, however. The U.S. government mandates that all international income must be reported on an income tax return. The IRS will continue to provide education to taxpayers who may unknowingly fail to disclose foreign assets, and it will rely on whistleblower leads, civil examination and criminal prosecution to discourage flagrant offshore tax avoidance and noncompliance. The IRS will also rely upon the mandates of FATCA to require foreign banks to report offshore accounts held by US persons.

Additional Options for Undisclosed Foreign Income

For individuals who have not reported foreign income, investments or other monetary assets on their U.S. taxes, the September 28 deadline gives you only a few more months to become compliant with reduced penalties and no-inquiry into motive. Beyond that deadline, the penalties will be higher. Outside of OVDP, the IRS offers other programs for taxpayers who may not have been aware of their filing obligations to utilize. One such program is the Streamlined Filing Compliance Procedure, but, like the OVDP, the IRS may end this program at some point in the future as well.

Other options include:

• IRS-Criminal Investigation Voluntary Disclosure Program;
• Delinquent FBAR submission procedures; and
• Delinquent international information return submission procedures.

These programs and procedures have eligibility rules and possible inquiry into “reasonable cause” claimed by the taxpayer.

When to Consult an Expert

There are a variety of reasons why an individual or organization may fail to claim foreign financial assets. Regardless of the reason, it’s important to work closely with legal professionals who understand the nuances of navigating these difficult situations and can advise you of the best course of action based on your unique circumstances.

Even if you’re not sure if your foreign financial assets are taxable or if you qualify for the OVDP or a similar program, it’s important to consult a legal expert who is well-versed in these matters so you can avoid criminal charges or large financial penalties. Time is running out to utilize OVDP.

If you have questions about your assets or options or would like to discuss this matter further, contact me directly at (248) 642-1485 or by email at jmoss@dawdamann.com.

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Are the two entities a good fit? Lululemon wouldn’t make a good partner with Sears. They have different target markets but also they have vastly divergent corporate ethos and management styles.

One of the most difficult aspects of running a business is envisioning what companies would be good candidates for mergers and acquisitions. Yet, this is actually a far better way to go about M&A then simply evaluating a company because it is on the market.

The very best idea would be to have clearly delineated strategic plans and examine any new mergers within that rubric.

Ask yourself about their bottom line. It’s critically important to understand the financial underpinnings of any potential partner or component. This is not as easy as it seems. Expert attorneys and accountants can help you determine not only the earning power of the potential company mate, but also what the expected outlay would have to be to merge, consolidate or expand your operations.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is just one measurement of the health of a company. Do not rely on this one statistic as the sole determinant of your decision.

Don’t overstate the cost savings and underestimate the costs of merging. Often companies get excited over saving money in staff expenses and equipment and this can add up to a lot. But you won’t be able to just halve your staff in one fell swoop and for a period of time, you may be paying for twice as many people as you need. In addition, you will incur other costs for these synergies like severance payments and possible relocation costs for both people and equipment. It is highly likely that there will be up-front expenses prior to any cost savings.

Consider the down-side of merging. Are there any disadvantages to this merger or acquisition? Would you lose any key employees or significant customers? How would this affect your functioning or your bottom line? What difficulties do you anticipate in terms of management, financing of the acquisition, and the continued flow of operations? Are these aforementioned issues ones that can be overcome? All of these issues are called transition risk and should be a large part of your decision, just as significant as the price of the M&A.

Mergers and acquisitions, when conducted thoughtfully, can be a highly effective way to effectuate strategic growth. All companies are advised to consider the many aspects of these transactions before taking any action and to consult attorneys who specialize in mergers and acquisitions before making any decisions.

The post Making a Decision about a Merger or Acquisition: What You Should Consider appeared first on Dawda PLC.

FATCA, originally passed as part of a job creation bill, was crafted to eradicate off-shore tax evasion.

FATCA is designed to tax every American person’s earnings, regardless of where they have earned that money, whether in downtown Detroit or downtown Dubai. It is completely legal for Americans to hold off-shore accounts. However, under American tax law, those earnings abroad are subject to US taxes. These earnings have included interest and dividends.  FATCA is not just applicable to US citizens. It also comes into play for any “American person”, which includes those who are holders of a US green card.

In order to enforce FATCA, the United States is now using international banks and financial institutions to be the agents of compliance in this revenue producing plan. Foreign banks and financial institutions are now required by American law to report assets held by Americans and to act as agents of the IRS, withholding the taxes owed (at a rate of 30%). If the financial institutions do not comply, their US accounts would be subject to stiff penalties. So far, many of the world’s financial players are agreeing to these rules.

The Treasury office has announced that there will be a delay on the withholding requirement for stock trades until 2019. The banking industry has applauded the delayed rollout, stating that the financial institutions have more infrastructure work to do to prepare to be compliant. This is particularly the case in nations that have banking secrecy and do not have a system of collecting and storing tax information for their customers and clients.

It remains to be seen if further changes to FATCA will occur at the Congressional level in the intervening years.

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1. You must be vigilant if you are a 501(c)(3) organization, which most religious institutions are. Some (usually smaller) groups have a religious affiliation but have not registered as a 501(c)(3) with the Internal Revenue Service. So, for instance, a neighborhood Bible study group that collects no dues and rotates meetings between homes is small enough and not receiving the benefits of that non-profit status. They have more leeway as to what they can do.
2. Be very clear as to what are “church” events and what are private events. That is, individuals have the ability to host politicians at their homes or other venues for campaign events and fundraisers. These same individuals can invite their fellow parishioners. But, they have to be clear in the invitation and in any language relating to the event, that it is private and it is not sponsored in any way by the church.
3. Events that occur at the institution’s headquarters, offices or owned or leased property by the institution, must be structured carefully, in a way to limit exposure to the religious institution.
4. Candidates may not be endorsed by the organization or its officers or staff members, who speak on behalf of the institution. Sermons cannot exhort the congregants to vote for a certain candidate. Many religious groups are aware of this restriction, and “work around” it, encouraging their congregants to vote for people who support different core issues, without mentioning the politicians by name. This is technically legal, but not always advisable.
5. Candidate endorsement and electioneering is taboo in all official congregational settings, including services, board meetings, committee meetings, adult and child education sessions, and even during community service time, like feeding the hungry or walks or fundraisers for various charitable organizations.
6. Get out the vote events and candidate forums are allowed at religious institutions but they must be transparently non-partisan. A variety of candidates must be invited (they do not all have to show up), and again, no electioneering on the part of congregational leadership can occur.
7. DICEY SITUATION: A single candidate may speak about an issue of importance to the congregation (Middle East politics, abortion law, funding for the poor, etc.), as long as the candidate (or attendees!) does not ask for votes and as long as the event is not billed as a campaign event. It is best if any pre-publicity does not mention the candidate’s name or that he or she is running for office.

The post During Voting Season Don’t Step on the Line Between Church and State appeared first on Dawda PLC.

In a recent development in foreclosure related litigation, the Court of Appeals concluded in Federal Home Loan Mortgage Assocation v. Kelley, 2014 Mich. App. LEXIS 1272 (Mich. Ct. App. June 24, 2014) that because the foreclosing party obtained its mortgage interest in a voluntary transaction, it was subject to the recording requirement under MCL 600.3204(3). In contrast, the Court further clarified its discussion of mergers in Kim v JPMorgan Chase Bank, NA, 493 Mich 98, 825 NW2d 3239 (2012), as limited to those financial institution mergers initiated under 12 USC 1821. The statute at issue in Kim, 12 USC 1821, granted the FDIC the discretionary authority to merge a failed bank with another institution without any voluntary or affirmative action on the part of the other institution. Kim explained that these involuntary mergers are mergers “by operation of law.”

Unlike Kim, the merger discussed in Federal Home Loan Mortgage Association involved a voluntary transaction on the part of the transferee. The foreclosing party acquired Defendant’s mortgage by voluntarily merger of operations with another bank, and not by operation of law and thus was required under MCL 600.3204(3) to record its mortgage interest by assignment.  The financial institution’s failure to record the assignment of its interest rendered the foreclosure voidable, not void ad initio.

My recommendation to any of my banking clients is that before a lawsuit with a borrower ensues, my clients need to take a simple step and record the assignments of all mortgages at once. Borrowers must receive clear and immediate notice of the owners of their mortgage. It’s an easy step to take and the consequences of not doing it are very high.

by Randal R. Cole, Member, Dawda, Mann, Mulcahy & Sadler PLC

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The SEC has put the kibosh on utilizing social media for crowdfunding in many instances, because the opportunity to invest will be published to non-residents of Michigan. Therefore entities who wish to crowdfund must have multiple disclaimers about the investment opportunity being clearly an intrastate offering and there need to be adequate measures to ensure the investors are only Michigan investors.

Dawda attorneys offers extensive expertise in all areas of corporate financing and venture capital for both start-up and established business interests. We can help you navigate the sometimes murky waters of financing to help you grow your company and remain in compliance with the law as it changes.

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