IRS Audit Triggers – Revised CA LLC Act – Quick Facts-Fancypants Word – More Readers!

By April 4th, 2022

Blog No 145 

April 5, 2022

By Mack W. Borgen

Author (7 Books): The White Binder (2022); The Writings of a Lifetime (2021); Dead Serious and Lighthearted – The Memorable Words of Modern America (Three Volumes) (2018-2019); and The Relevance of Reason – The Hard Facts and Real Data about the State of Current America (2 Volumes) (2013). The New York Review of Books. Eight National Book Awards

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Quick (Tax) Facts

IRS Tax Audit Rate: Less than 1%

Removal of Age Limit on Funding IRA: Effective 2019, even a post-70-year-old person can now fund up to $7,000 in a traditional or Roth IRA (Until April 15th of the tax year).

Rarely Need for Concern about Estate Taxation: Except for the very wealthy, estate taxes are rarely a concern because of the high exemption (Federal Exemption: $12.06MM for 2022). This is similarly true for states with estate and/or inheritance taxes, although 16 states do still such taxes.

Nine Recognized IRS Audit Triggers:

1 –        Major changes in income or deductions from your prior year(s).

2 –        Suspiciously rounded numbers (e.g., all ending in a 0 or a 5).

3 –        Misreporting W-2 or 1099 Income.

4 –        Excessively large charitable gifts.

5 –        Claiming of home office expenses.

6 –        Using personal car for business (Recommendation: Keep mileage logs).

7 –        Commingling of business and personal expenses.

8 –        You claimed the first-time homebuyer credit between 2008-2011.

9 –        Non-filing of or incomplete tax returns relating to prior years.

US Taxes Compared to Other Selected Developed Countries:

Denmark                      31.1%

Germany                      30.9%

Australia                      24.1%

U.K.                               22.7%

Japan                             21.0%

Canada                          18.4

United States         16.0%

South Korea                 14.4%

Mexico                           10.8%

(Based on married couple, one income, no dependents). Sources: Ellen Stark (Money); Bruce Horovitz (USA Today and Los Angeles Times)

Thought for the Day

It is hard to imagine that Jimi Hendrix (B: 1942, Seattle, WA – D: 1970, London, England) would have been 80 years old this year. It us even harder to imagine a wide acceptance of his still-resonating line about peace and power (and, for us this year, the tragedies of Ukraine):

“When the power of love overcomes the love of power, the world will know peace.”

Three Reasons to Read (O.K.- At Least Skim) the Fine Print!

 According to a Deloitte survey, 91% of people agree to terms and conditions without reading the legal agreement. However, as tedious as it is – and as almost impossible it is in our “Click Here” / “User Agreements” world, there are at least three reasons why reading entire legal agreements makes sense.

Those three reasons are as follows:

  1. Exit Penalties or Auto-Renewals. Many agreements have an “exit penalty” which requires one to pay for a period of time after you terminate the agreement. Other agreements have trapping auto-renewal provisions.
  2. Conversion of Rights. Some agreements take rights from you such as (a) right to use your likeness and personal information for targeted advertising (Facebook), (b) right to use your presentation without your permission (without attribution) if you are using online tools, and (c) right to track your location (navigation software).
  3. Limitations of Liabilities for Data Breaches. More and more agreements are purporting to insulate companies from any liability with respect to data breaches. Thus, with this in mind, one should be cautious of providing personal information or one should consider obtaining identify theft insurance.

Seemingly boilerplate or otherwise, some clients establish parameters or triggers for close document reviews such as all real estate transactions or if more than a target amount of money is involved. In these instances, the agreement would be reviewed in detail or even by counsel. Sometimes (e.g., in real estate transactions) de facto indemnities or waivers from the other party can be readily obtained. In many other instances, negotiations are impracticable or impossible (such as trying to negotiate PayPal’s 50-page user agreement), and thus the review would be, as a practical matter, only for the purpose of deciding whether to accept or decline the proposed agreement.  Thanks to the CPA Client Letter of Bryars Tolleson Spires + Witton, LLP.

Important Employment Law Cases Pending Before the California Supreme Court

(Note: I routinely draft Employment, Independent Contractor, and similar documents, but I rarely deal with wage-and-hour and whistleblower matters. Nevertheless, as a part of my general business practice, I track such major cases.)

Whistleblower / Retaliatory Termination Claims. People ex rel Garcia-Brower v. Kolla’s Inc.  Involves retaliatory employee termination after a whistleblower claim in which the claim may have already been known by the employer or the subject governmental agency. See also, Lawson v. PPG Architectural Finishes Inc. (Possible imposition by California SC of a “clear and convincing” evidentiary standard).

 Waiting-Time Penalties. Naranjo v. Spectrum Security Services, Inc. This class-action case addresses the issue of whether waiting-time penalties are recoverable for meal and rest period violations. Depending upon the outcome of this case, the potential penalties for CA meal and rest period violations could be substantially increased.

It’s Never Too Late to Remember  – Major Changes Pursuant

to the California Revised Limited Liability Company Act (the “Revised Act”)

The Revised Act became effective fully eight (8) years ago in 2014, but some of its provisions affect LLCs and the acts and transactions of LLCs created even before its enactment. Thus, it is important to remember to review the Operating Agreements of the then- and still-existing LLCs.

Many provisions of the Revised Act are the same as or similar to those of the old LLC Act, but there were a number of important substantive changes. The substantive changes, unless addressed by the LLC’s Operating Agreement, could significantly alter the rights of the members and manager in ways which conflict or override the LLC’s Operating Agreement.

To underscore the possible need to review one’s LLC Operating Agreement – especially if the LLC existed prior to 2014, some of the key – and exemplary — changes are set forth below:

Event of Conflict between Articles of Organization (the “Articles”) and the Operating Agreement. Under the Old Act, in the event of a conflict between the LLC’s Articles and the LLC’s Operating Agreement, the Articles would control. This has now been reversed. Now, in the event of a conflict, the Operating Agreement will control.

Member-Managed vs Manager-Managed. Under the Old Act, an LLC is by default member-managed unless the Articles provide otherwise. Under the Revised Act, an LLC is member-managed unless both the Articles and the Operating Agreement so provide.

Amendment of Operating Agreement. Under the Revised Act and absent an express provision to the contrary in the Operating Agreement, any amendment to the Operating Agreement requires unanimous member approval.

Manager’s Authority. Under the default rules set forth in the Revised Act, a manager has no authority to (a) sell, lease, or exchange LLC assets or (b) take any action “outside the ordinary course of business” without the consent of all members unless such rights of the manager are expressly so provided in the Operating Agreement.

Fiduciary Duties and Duties of Loyalty and Care of Managers and Members. The Revised Act is far more specific about these types of duties. For example, the duty of loyalty cannot be eliminated but the LLC’s Operating Agreement may identify specific types or even categories of activities which would not violate the duty of loyalty so long as they are “not manifestly unreasonable.” Similarly, under the Revised Act the duty of care cannot be eliminated or “unreasonably” reduced.

“Withdrawal” vs “Dissociation.” Under the Old Act, the departure of a member was referred to as a “withdrawal.” Now, this is referred to as a “dissociation. With respect to such “withdrawals/dissociations” there are a number of changes, but possibly the most important is the Revised Act’s defining of certain events which automatically result in a member’s dissociation. Such events include (a) the death of a member, (b) the appointment of a guardian or conservator, or (c) if the member is a trust, the trust’s entire interest is distributed. Possibly most importantly, under the Old Act if a member withdraws, the withdrawing member was not entitled to payment for such member’s interest unless other terms were contained in the Operating Agreement. However, this provision is not included in the Revised Act. Thus, unless the Operating Agreement affirmatively provides otherwise, a withdrawing member may claim entitlement to payment for such withdrawn interest.

Advisability of Review of Articles and Operating Agreement in Certain Cases. The foregoing examples of differences between the Old Act and the Revised Act are highly summarized, and they do not constitute all of the many changes. Especially if the subject LLC was formed prior to 2014 and is still conducting business, (a) the Articles and the LLC Operating Agreement should be closely reviewed to identify any de facto changes triggered by the Revised Act and (b) if and as necessary the members should be apprised of statutorily-enacted changes to their Agreement.

Attribution: The foregoing summary is based upon an excellent article about the California Revised Uniform Limited Liability Act prepared by the Law Firm of Freeman, Freeman Smiley.

Fancypants (Acadamese) Word of the Day

Asynchronous Learning:  Learning and instruction that do not happen at the same place and time.

Examples of use in sentences:

Serious Example: “Until the covid pandemic, I had never really thought much about the importance of using asynchronous learning.”

More Humorous Example: “Leave it to the academics to need a stupid phrase like ‘asynchronous learning’ to discuss the pros and cons of Zoom learning.”

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