Quick Facts (Who Gets Audited) – 8 Major CA Business and Real Estate Law Developments
Blog No 153
September 13, 2022
By Mack W. Borgen
Author (7 Books): The White Binder – Your Personal Data and Information Book (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). As advertised in The New York Review of Books. Recipient of Eight National Book Awards
See my legal articles and other blogs at https://www.mackwborgen.com/ . Then, just click the “Blogs” tab.
Quick Facts
80% Drop in IRS Audits – So Who Does Get Audited?
2019 2010
All individual tax returns 0.2% 1.0%
Reporting:
No Income 1.1% 20.6%
Under $50,000 0.6% 1,6%
$50,000 – $100,000 0.4% 1.4%
$100,000-$500,000 0.4% 3.1%
$500,000 – $1,000,000 0.6% 3.6%
$1,000,000 – $10,000,000 3.3% 21.7%
Over $10,000,000 8.7% 21.5%
Source: Newsletter of Bryars Tolleson Spires and Whitman LLP – One of Southern California’s excellent accounting firms.
Conclusion: Our federal tax system depends, largely, upon voluntary reporting and compliance. However, some level of compliance is assured only by the potentiality of being audited. If under-reporting is found, then there is also a risk of monetary penalties and even criminal tax evasion prosecution. Now, for many reasons including the under-staffing of the IRS itself, the percentage of tax returns which in the U.S. are audited has dramatically shrunk in recent years – and especially since 2016.
Overall, there used to be about a one-in-a-hundred chance of being audited. Now, that is one-in- 500! The most dramatic audit diminishment has been among the tax returns of the ultra-wealthy. The percentage of those tax returns audited has dropped by about 75%!
The Proverbial Bottom Line. No one, absolutely no one, wants to be audited. But without at least a risk of audit, a “voluntary compliance system” eventually becomes a “pay-if-you-wish” system – and I guess the rest of us will cover the shortfall.
Eight Major Business, Contract, and Real Estate
Cases and Developments
General Sources: Daily or Periodic Judicial and Legislative Reports from various sources including the California Lawyers Association Daily Reports, the CLA’s Monthly Business Law News, and Announcements and Press Releases from the (California) State Attorney General’s Office.
1 . Contracts. Another court has held that an email confirmation from a partner CAN be deemed a “written instrument” for purposes of amending a partnership agreement. It is preferable to expressly authorize the use and acceptance of email confirmations in the notice and amendments sections of documents, but here, another US District Court joined the growing consensus that email confirmations will normally suffice.
2 . Employment Law. In California, the right of an employer to mandate that its employees agree to arbitrate their employment-related disputes is still in flux. Without going into detail, this issue (Chamber of Commerce of the U.S.A. v. Bonta) has been flipped, appealed, and reversed between the District Court and the Ninth Circuit. The status in California of such mandated-arbitration provisions remains, regrettably, in a state of confusion.
3 . Contracts – Clarity in Definition of Terms or Standards. The selection of terms and phrasing can lead to very different standards. Litigation is almost always the most challenging (and costly) means of dispute resolution, and contract clarity and comprehensiveness are oftentimes the best way to avoid the necessity of such litigation. I will use just one example. There is a ridiculous amount of litigation about one parties’ obligation to another party based upon the use the phrase “best efforts,” “reasonable efforts, and even “commercially reasonably best efforts.” The courts have rather consistently held “best efforts” to require a party to a high standard of effort than “reasonable efforts,” but the key is contract drafting and clarity.
4 . Real Estate. Short-Term Governmental Rental Regulation (or Even Prohibition) Not Deemed a “Taking” Under the 5th Amendment – California Coastal Act Exception. While this author is troubled by this series of cases, more and more courts are concluding that a governmental body MAY effectively prohibit the use of one’s property for short-term rentals. The courts’ strained logic is that the property still has other beneficial uses, and thus the property has not lost all of its value and usefulness to the impacted homeowners. In California, however, there is an exception. In California, it has recently been held that the California Coastal Act overrides local cities’ plans to implement short-term rental bans (Keen v. City of Manhattan Beach). Basically, coastal California cities are faced with a choice – give up on short-term rental bans or seek the approval of the Coastal Commission.
5 . Misuse of Consumer Data. There are more and more instances of corporations misusing (or misappropriating and selling) consumer information. Last month, U.S. Bank had the dubious distinction of joining Wells Fargo as another bank which “pressured and incentivized” its employees to use consumers credit reports and personal information to open other accounts, credit cards and credit lines without the consumers knowledge or consent. A paltry $37.5MM fined was imposed upon U.S. Bank. However, this case underscores the necessity of taking due diligence steps to assure that customer information data is secure. To that end, in certain cases and to minimize any third-party claims, I have recommended that in some cases — and especially when a substantial volume of customer data is assembled by a client corporation, it is advisable to schedule regular, third-party reviews with respect to all client and corporate data.
6 . Non-Compete and Non-Disclosure Agreements. Such agreements have become more and more common. However, over the last couple of years more states have banned or severely restricted their use. For example, in the first six months of this year alone, four more states (Hawaii, Maine, Oregon, and Washington) have enacted or amended state laws voiding, prohibiting, or restricting employer/employee nondisclosure agreements. Parallel trends have occurred with respect to non-compete agreements. Very, very summarily, some form of such agreements (including anti-raiding provisions), albeit carefully tailored, are still recommended by this author to protect, for example, an employer’s trade secrets and customer lists. They can still be enforceable and can have an appropriate chilling effect with respect to areas of potential disagreement or confusion.
7 . Condominium Deconversions. Some developers are creatively turning to condominium “deconversions” as a means of taking advantage of the strong multifamily rental demand. Such deconversions are enabled and regulated by state statutes and local ordinances. Oftentimes these statutes and ordinances permit such deconversions upon the approval of a super majority (e.g., 75% or more) of the condominium ownership. There are limited remedies for condo owners opposing the bulk sale so long as they timely (e.g., within 20 days) object to the proposed deconversion sale.
8 . Protecting Your Personal Assets – Assurance of Entity Capitalization and Steady Maintenance of Entity Documentation and Records. In another NY case, the court rejected a third-parties attempt to “pierce the corporate veil” of a corporation and impose direct personal liability upon, in this case, the corporate defendant’s sole principal. The claimant argued that the “corporation” was inadequately capitalized and routinely did not follow corporate procedures and documentation. In this case the court held that the claimant did not meet the “heavy burden” of so piercing the corporate veil. Salesmark Ventures, LLC v. Jay Singh, JJHM Trading Corp. The protection of one’s personal assets from corporate/business-based claims is critical and should not be ignored. There are many factors which a court will consider such as the following quick list: (1) whether the entity was undercapitalized, (2) whether the entity failed to maintain adequate corporate records, (3) whether the owners used the entity to promote fraud, or illegal activities, (4) whether the owners used the entity to pay for individual, non-corporate-related obligations, (5) whether the owners commingled personal and business assets, and (6) whether the owners and board failed to observe required “corporate formalities. It is certainly easy to forget, but sometimes it is advisable to conduct a formal, but “internal,” audits of one’s own corporation or other business entity to assure the protective shield of the corporation or LLC.
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