Clergy Parsonage Allowance Under Attack

In a decision released November 22, 2013, U.S. District Judge Barbara B. Crabb of the Western District of Wisconsin held that a portion of Section 107 of the tax code (the provision dealing with the clergy housing allowance is unconstitutional). Specifically, Section 107(2), which permits clergy to receive a tax-free cash housing allowance was found to violate the establishment clause of the First Amendment. Section 107(1), which allows clergy tax-free use of a church-provided parsonage, was left intact.

A copy of the case is attached, and for convenience, I have copied the judge’s order below. As you can see from the order, the judge’s injunction against the government does not take effect until the conclusion of any appeal by the government (or the deadline for appeal passes).

————————————————–

ORDER

IT IS ORDERED that

1. The motion for summary judgment filed by defendants Timothy Geithner and Douglas Schulman (now succeeded by Jacob Lew and Daniel Werfel), dkt. #40, is GRANTED with respect to plaintiffs’ Freedom from Religion Foundation, Inc.’s, Annie Laurie Gaylor’s and Dan Barker’s challenge to 26 U.S.C. § 107(1). Plaintiff’s complaint is DISMISSED as to that claim for lack of standing.

2. Defendants’ motion for summary judgment is DENIED as to plaintiffs’ challenge to 26 U.S.C. § 107(2). On the court’s own motion, summary judgment is GRANTED to plaintiffs as to that claim.

3. It is DECLARED that 26 U.S.C. § 107(2) violates the establishment clause of the First Amendment to the United States Constitution.

4. Defendants are ENJOINED from enforcing § 107(2). The injunction shall take effect at the conclusion of any appeals filed by defendants or the expiration of defendants’ deadline for filing an appeal, whichever is later.

5. The clerk of court is directed to enter judgment in favor of plaintiffs and close this case.

Entered this 21st day of November, 2013.

BY THE COURT:
/s/
BARBARA B. CRABB District Judge

Interstate Income Tax Allocation for Corporations involved in Interstate Commerce

Uniform Division of Income Tax Purposes Act

In 1959 Alaska adopted the Uniform Division of Income for Tax Purposes Act (UDITPA).  The  National Conference of Commissioners on Uniform State Laws drafted UDITPA in 1957 to bring unify state tax codes with respect to the interstate income tax allocations for corporations involved in interstate commerce.

The Multistate Tax Compact

In 1970 Alaska adopted the Multistate Tax Compact (MTC). The MTC restated the UDITPA with some minor changes. Alaska codified the MTC  at AS 43.19.010. Per AS 43.19.010, article IV, section 9, the portion of a business’s total income apportioned to Alaska is determined by “multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.” The property factor is the fraction of the taxpayer’s total property and the property attributable to the taxpayer’s business in Alaska; similarly, the sales and payroll factors are fractions of the taxpayer’s respective total sales and payroll attributable to the taxpayer’s business in Alaska.

Allocation Formula for Interstate Income Tax Allocation

Alaska Statute 43.19.010, article IV, section 18 permits DOR to adjust a taxpayer’s tax burden if the statutorily mandated apportionment does not “fairly represent the extent of the taxpayer’s business activity in this state.” Subsection 18(a) allows DOR to apportion the taxpayer’s income based on separate accounting, while subsection 18(c) allows DOR to add “one or more additional factors” to the apportionment formula. The statute effectively requires that any remedy DOR enforces under section 18 be “reasonable.”

Alaska Statute 43.20.144 modifies AS 43.19.010’s apportionment scheme for all taxpayers “engaged in the production of oil or gas . . . in this state or engaged in the transportation of oil or gas by pipeline in this state.”10 Alaska Statute 43.20.144(c) provides three different apportionment formulas for such taxpayers, depending on the nature of the taxpayer’s oil or natural gas business in Alaska. Under AS 43.20.144(c)(1), a taxpayer that only transports oil or gas in Alaska is subject to a two-factor formula based on property and sales. Under AS 43.20.144(c)(2), a taxpayer that only produces oil or gas in Alaska is instead subject to a two-factor formula based on property and extraction. Finally, under AS 43.20.144(c)(3), a taxpayer that both transports and produces oil or gas in Alaska is subject to a three-factor formula based on property, sales, and extraction.

Constitutional Challenges to Interstate Income Tax Allocation

Under the Due Process and Interstate Commerce Clauses of the United States Constitution, a state “may not tax value earned outside its borders.” The central inquiry is “whether the state has given anything for which it can ask return.” But the United States Supreme Court has long recognized that taxing multi-state companies using strict geographic accounting fails to account for “the many subtle and largely unquantifiable transfers of value that take place among the components of a single enterprise.” The unitary business/formula apportionment method of taxation is meant to remedy this problem. Under this method, a taxing state first identifies the unitary business of which the taxpayer’s in-state activities are a part and then apportions the income of this unitary business to the taxing state according to a set formula.

In order for a business to be unitary, and thus amenable to formula apportionment, there must be flows of value between the parent and subsidiary. The United States Supreme Court has distinguished these flows of value from the mere passive flow of funds that arises from any parent- subsidiary relationship. Three “factors of profitability” indicate a unitary business:

  1. functional integration,
  2. centralization of management, and
  3. economies of scale.

Unitary Business Activities Supports Interstate Income Tax Allocation

  1. In Container Corp. of America v. Franchise Tax Board, the United States Supreme Court held a paperboard company to be unitary with its subsidiaries where the parent provided the subsidiaries with loans and loan guarantees, occasional assistance in obtaining equipment and fulfilling personnel needs, and general oversight and guidance. I
  2. In Alaska Gold Co. v. State, Department of Revenue, the Alaska Supreme upheld a finding of functional integration where the parent approved capital expenditures greater than $100,000, handled salaries and payroll for executives, and guaranteed the subsidiaries’ lease obligations.  
  3. In Earth Resources Co. of Alaska v. State, Department of Revenue, the Alaska Supreme Court upheld a unitary business finding where the parent provided the subsidiary with loans and loan guarantees, a uniform pay scale, salary guidelines, and a uniform retirement plan. In each of these cases the courts examined the same sorts of administrative and financial services.
  4. And in Tesoro Corporations and Subs v. State, Department of Revenue, The Alaska Supreme Court upheld a unitary business finding where the parent exercised almost complete control over the credit facilities, budgeting, cash management, project selection, personnel, uniform services in the fields of environmental compliance and safety, information services and technology, internal auditing, legal affairs, insurance, risk management, purchasing, and accounting.

 

 Selection of Taxation Regime Requires More Planning than Identifing a lower Rate

Just because the accountants can identify a better tax scheme in the code doesn’t mean that you can take advantage of the code.  In Tesoro’s case the company wanted both the economies of scale in management and it wanted to reduce the taxes by more favorable allocations.  Unfortunately the presence of unitary business activities precluded the independent activity allocations.  Accordingly, they now face penalties and interest from taxes outstanding for more than a decade.

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Alaska’s New Security Interest Law

Security interest law concerns security interests in personal property rather than real property.  The law is generally known as UCC 9, or the Uniform Commercial Code section 9.  We find the statute at Alaska Statute 45.29.101-709.    Alaska recently adopted the 2010 changes to the security interest law.  The law is effective for security interests after July 1, 2013.

The law instituted significant changes between the old recording rules and the new rules.  The impact of not recording your security interests may mean that you can’t collect your debt if the debtor becomes bankrupt.

 

What you need to record a lien.

You must give value to a debtor.  The debtor must have rights in the collateral.  The Debtor must give an acknowledged security agreement to you.

Properly Recording Perfects the Lien.

Properly recording the security interest provides notice to the world of your rights and perfects your interest.  The new rule changes substantially change the recording rules.

Account Debtors Must Comply With Notice of Debt Assignment

The statute includes new provisions that need debtors to pay the assignee of a debt rather than the original creditor.  A debtor’s failure to pay the assignee after notice of an assignment leaves the debtor liable to pay twice.

Filing Financing Statements

You will still use form UCC-1 to file the financing statement.  In most circumstances you will only need to file a single document and not multiple documents in several jurisdictions.  You don’t need to get the debtor’s signature on the financing statement to file the document.  You also don’t need to have the organization’s ID or the form of their entity.  If the proper filing place is in Alaska you can file online here.

Foreclosure After Default

You can still engage in self-help repossession of property as long as you can go ahead without breaching the peace.  You can also start a judicial foreclosure.  There are also still the rights of proceeding with a strict foreclosure.

Substance over Form

The statute will apply to transactions, even if you word your agreement in a way to try and escape the statute.  The bankruptcy court is likely to consider whether there is an obligation and whether it is secured by collateral. For example, the sale of Accounts can still be considered simply a UCC 9 security agreement transaction.  The risks of not recording the financing statement are that someone else may claim priority over you or a bankruptcy judge could rule that you are not perfected and therefore not collateralized.  Similarly transactions where you keep title may be treated as a security interest, requiring perfection.  It also applies to consignments, sales of intangibles, sales of promissory notes and accounts.

The New Location Rules

Where you record the financing statement depends on the debtor.  The debtors place determines the choice of law and the place of filing.  Registered organizations must be recorded at the place where they are organized.  Alaska companies in Alaska.  Delaware companies in Delaware.  Individual debtors in the state of their residence.  Other entities at the chief executive office.

Foreign Debtors are recorded in their own country, if their laws are like our UCC9; otherwise, you will need to record in Washington DC.  For all Canadian provinces, except Quebec you would file in Canada.  For other countries you can take a look at Prof. Arnold S. Rosenberg’s work at Thomas Jefferson School of Law here.

Other Means of Perfection

There are other means of perfection such as control or automatic perfection.  The control generally concern accounts, such as deposits, investments, electronic chattel paper and letters of credit.

Recording your Financing Statements

The financing statement lasts for six years without a continuation.  When you search the state records you do not know whether the recorded documents were actually authorized.  They are based solely on the name of the debtor as typed by the submitting party.  All financing statement once recorded stay in the system, even if they have been terminated. If the financing statement has been wrongfully terminated your interest may be subject to the existing claims.  Accordingly, reviewing the state documents is merely the start of your due diligence.

Debtor Name Trap

Many people working for companies don’t actually know what the official name for their business is as recorded in the State’s records.  If you simply take your debtor’s word for the name of the enterprise, it is likely the name will be incorrect and that could leave you unsecured.  It is a best practice to get a copy of the record recorded with the state.  You want the name from the articles of incorporation.  When the debtor is an individual you want to use their name as typed on their current drivers license issued by the State of Alaska.

 

For more information on the changes to Alaska UCC 9 give us a call.

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Contesting Alaska Deed of Trust Foreclosures

[Deed of Trust Foreclosure Sales

 

Many attorney’s knee jerk response is that deed of trust foreclosure sales don’t get set aside.  This certainly is the general rule.  However, Alaska has a long history of setting aside deed of trust foreclosure sales, even if they are only rare occasions.  Alaska is particularly troubling in that the statute provides for redemption rights only to the extent provided for in the deed of trust.  Because the statute does not require redemption rights the banks don’t allow any redemption rights.  Accordingly, the courts have allowed sales to be set aside.  Due process violation allegations have been made, but the Alaska Supreme Court has not reached the question by finding other reasons to allow the sales to be set aside.  Accordingly, the issue remains open whether a due process claim could be successful.  The following are excerpts taken from various pleadings and briefs filed in cases in Alaska.  Rather than waiting to provide a more cohesive analysis on the topic, I thought I’d make these resources generally available to those that might either use them as a launching point or to engage in debate on the issues.

Alaska Courts set aside Trustee Foreclosure Sales

“Equity Abhors a forfeiture and will seize upon slight circumstances to relieve a party therefrom.” Rosenberg v. Smidt, 727 P.2d 778, 783 (Alaska 1986) citing, Jameson v. Wurtz, 396 P.2d 68 (Alaska 1974).  The remedy of setting aside the sale will be applied in cases which reach unjust extremes.  Rosenberg v. Smidt, 727 P.2d 778, 783 (Alaska 1986) citing Semlek v. National Bank of Alaska, 458 P.2d 1003, 1006 (Alaska 1969).  If the bidders are allowed to claim the property after paying only a small fraction of the value of the property the matter has reached an unjust extreme.   See, e.g., Rosenberg v. Smidt, 727 P.2d 778 (Alaska 1986).

 

The Alaska Supreme Court has stated that

“. . .defects in the mechanics of the trustee’s exercise of the power to foreclose may render the foreclosure sale voidable.  Generally, mere inadequacy of price is not sufficient by itself to require the inadequacy of the sale price is (1) “so gross as to shock the conscience and raise a presumption of fraud or unfairness,” or (2) is coupled with other irregularities in the sale procedures, then invalidation of the sale may be justified.

Gross inadequacy is measured by reference to the fair market value of the property at the time of the sale.  Fair market value for these purposes has been defined as not the fair “forced sale” value of the real estate, but the price which would result from negotiation and mutual agreement, after ample time to find a purchaser, between a vendor who is willing, but not compelled to sell, and a purchaser who is willing to buy, but not compelled to take a particular piece of real estate.  Baskurt v. Beal, 101 P.2d 1041, 1044 (Alaska 2004).

 

Furthermore, “. . .a trustee has a duty to take reasonable steps to act impartially and in such a way as “not to sacrifice the debtor’s property.”  Id at 1046.

Alaska Deed of Trust Bidders Do Not Earn BFP Status when on Inquiry Notice of Defenses to Sale or they are Bad Faith Purchasers.

Alaska Stat. 34.90.030 grants bona fide purchasers at a foreclosure sale a conclusive presumption that the provisions for a non-judicial sale were performed if the trustee recites the factual specifics of their compliance with statutory requirements.  The Alaska Supreme Court has applied the statute in Rosenberg v. Smidt, 727 P.2d 778, 784 (Alaska 1986).  In Rosenberg the court stated that to qualify as a BPF the purchasers must be good faith purchasers for value and without notice of any defect.  Id.  Furthermore, a bad faith purchaser or one on inquiry notice does not become a BFP due to the recitations in the Trustee’s deed. Semlek v. National Bank of Alaska, 458 P.2d 1003 (Alaska 1969).

1) Foreclosure Purchaser Inquiry Notice may Defeat BFP Status: 

In addressing the quality of the bidder’s “notice,” the property owner only must show the bidders were on inquiry notice of potential defects in the sale to deprive the Bidders of BPF status.  Modrok v. Marshall, 523 P.2d 172 (Alaska 1974).

“It is a settled rule of property that circumstances, which suggest outstanding equities in third parties, impose a duty upon the purchaser’s to make a reasonable investigation into the existence of a claim.  Given suspicious facts, the status of bona fide purchaser turns upon whether there was a prudent inquiry into their import.”  Modrok v. Marshall, 523 P.2d 172 at 174 (Alaska 1974).

 

Facts that put bidder on inquiry notice of Defects of sale include:

 

1)                  Insufficiency of the Sale Price in comparison to the fair market value of the property sold;

2)                  Absence of the Owner at the Sale along with insufficient Trustee recitation of facts regarding the owners actual notice of the sale date.

 

When the owner is absent from the sale and the trustee’s deed fails to recite factual details in the deed then a bidder is on inquiry notice and is deprived of BFP status.  The court explained that requiring factual recitals tends to assure the requirements of law concerning mailing and delivery are complied with.  In the present case the trustee’s deed identifies the notice of sale which contained a specific sale date which was different than the actual sale date.  The trustee’ deed is completely silent on why the sale was continued or whether any factual steps were taken to apprise the owner of the new sale date.  This lack of any facts addressing this absence of notice to the Owner placed the Bidders on inquiry notice and deprived them of their BFP status.

2) Bad Faith Purchaser Conduct Defeats BFP Status:

A bad faith purchaser or one on inquiry notice does not become a BFP due to the recitations in the Trustee’s deed. Semlek v. National Bank of Alaska, 458 P.2d 1003 (Alaska 1969).  The Plaintiff’s following conduct caused their conduct to be bad faith:

1)            They created a collusive buying group to chill the sale and lower the auction price.

2)            They failed to address make sufficient inquiry into the items in which they were on inquiry notice;

3)            They failed to notify the owner of the sale so that she could timely object to the sale during the free statutory sale cancellation procedure.

Bidders had a duty to not chill the sale and take deliberate steps to lower the auction sale price.  .” Cf. McHugh v. Church, 583 P.2d 210, 214 (Alaska 1978).  The trustee must take “reasonable appropriate steps to avoid sacrifice of the debtor’s property and his interest.  Id.  “The trustee under a deed of trust generally regarded as owing a fiduciary duty to both the trustor and the beneficiary and is required to perform his duties impartially.   McHugh v. Church, 583 P.2d 210, 214 (Alaska 1978).  The trustee must take “reasonable appropriate steps to avoid sacrifice of the debtor’s property and his interest.  Id.  The Bidders were on notice that the borrowers were occupying the house before bidding on the property.

3)                  Possible factual Allegations

  1. The Bidders were the only bidders present at the sale.
  2. The Bidders created a collusive group to prevent competitive bidding at the sale thereby defeating the objective and purpose of a public sale.
  3. The Deed of Trustee attempted sale fails to comply with the Alaska Statutory requirements.
  4. The Bidder’s failed to promptly notify the Owners of the sale until after the lapse of A.S. 34.20.080(g) trustee rescission thereby intentionally depriving the Owner or Seller  the opportunity to correct any sale deficiencies.
  5. The Bidders were on notice that the deed of trust itself did not include redemption rights.
  6. The U.S. Constitutional Rights of due process which include notice and opportunity to be heard as guaranteed under the 14th Amendment was a matter of public record.
  7. The Alaska Constitution Article 1, Section 7 which affords due process rights to Alaska citizens was a matter of public record.
  8. The lender and Trustee breached the duty to seasonably advise the obligor on request of the amount in default.  Hagberg v. Alaska Nat’l Bank, 585 P.2d 559 (Alaska 1978).
  9. The lender and Trustee converted the owner’s right of reinstatement or satisfaction of the debt by breaching its duty to seasonably advising her of the cure amount or the redemption amount.  Young v. Embley, 143 P3d 936 (Alaska 2006).
  10. The Deed of Trust Trustee and lender have a duty to timely communicate the reinstatement and satisfaction amount; and, to be reasonably willing and able to accept a reinstatement or satisfaction from the debtor.   Nystrom v. Buckhorn Homes, 778 P.2d 1115; Alaska 1989).
  11. Perhaps the lender and trustee also have a duty to inspect the property, the tax rolls and consider the fair market value of the premises to fulfill its obligation to not forfeit the owner’s equity in the property.  This duty arises under the trustee’s  duty to act impartially to the trustor and beneficiary of the trust by informing the beneficiary of the continued sale date but failing to announce the continuance to the trustor.  These rights arise from the duty to not to sacrifice the debtor’s property for an insufficient amount.  McHugh v. Church, 583 P.2d 210  (Alaska 1978).  I propose the lender and Trustee also has a  duty to notify the trustor of the sale results within the trustee’s ten day timeline to rescind the sale thereby not sacrifice the owner’s equitable rights of redemption.

Alaska LLC Operating Agreements

Alaska LLC Operating Agreements

Partnerships have been around forever.  Corporations have been with us for 400 years. The American LLC was invented in Wyoming in 1977.  Alaska joined the fray more recently; however, they seem to have selected this entity as their entity of choice because the state makes it available for self filing online.  An Anchorage LLC lawyer helps point out some of the issues the State leaves out on their web site and why a visit with a lawyer can pay dividends later. Continue reading “Alaska LLC Operating Agreements”

Alaska Contractor’s Outlook with Government Shut Down

Government Shut Down Affects Contractors
http://flickr.com/photos/84539227@N00/10111702255

How will the government shut down affect Alaska contractors?

Considering all the moving parts and implications of the government shutdown what should Alaska contractors focus on now.  In short, brace yourself, what is happening now is not a one-off situation; this is  ground-zero for the foreseeable future.

Sequestration happened in March.  During that time federal job losses averaged 9,000 per month, or 72,000 jobs lost. We anticipate that federal payroll decline will escalate.

We expect continued:

1. Reduction in new contracts;
2. Changes in administration contract administration on existing contracts;
3. Changes in procurement type;
4. Increase in Bid Protest activity; and
5. Increase in CDA Claims activity

Cost and need will drive new contracts. The government will likely focus on existing programs over long-term projects. On vehicle usage, conservatism should be anticipated as the rule; the Fed has lots of flexibility for greater restrictions – so dot the I’s and cross the T’s.  You can expect a frequent use legacy indefinite in quantity contracts  (IDIQ) and a desire to lock contractors in to  Firm Fixed Price contracts.

Alaska Contractors can expect the government to offload risk to the contractor community.  Alaska Contractors will need to  manage this increased risk.  Alaska Contractors should approach opportunities with a focus on discipline and rigorous risk evaluation. Fully-funded contracts and phases should be safe; forward phases and contract options are  at risk and should be re-negotiated as soon as possible.

The same applies to your IDIQ task-orders.  The funded task or delivery orders should be safe.   Those that are not are at risk. You should determine 1) whether your contract relates to a sequestration exempt program; 2) whether it is impacted by any new congressional budget, 3) whether it is fully or incrementally funded, 4) when the agency anticipates exercise of options or issuance of task orders, and 5) what changes are planned.

With scarce contract opportunities; we expect an impact on Bid Protests and CDA Claims. The GAO shutdown creates doubt that protests will trigger an automatic stay.   If the GAO protests fails to stop disputed contracts, you may reconsider rolling the dice in more expensive litigation at the U.S. Court of Federal Claims. However, if you decide to engage the GAO; the Agency has issued guidance to federal contractors about how bid protests and related filings will be handled during this period.

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