Employment Law, Taxes, Corporate Law – 2022 Planning Considerations

Authored by Mark Lobb and Sean C. Tannenbaum

As we close out 2021, there is still uncertainty as to the law changes brewing in our nation’s capital. Although the Build Back Better Act (the “Act”) is still being debated, the issues on the table relate to the amount of spending and not the meat of the tax and estate planning text set forth in the Act. In addition to the law changes pending in Washington, California served up a host of law changes which will affect all Californians and in particular, employers. Below are eight proposed law changes which employers should be aware of as we move into 2022.

1. California Employment Law/Non-Disclosure Provisions:
  Currently, it is a violation of the Code of Civil Procedure (“CCP”) toinclude a non-disclosure provision (“NDP”) in a settlement agreement which prohibits the disclosure of facts related to claims of sex discrimination and sex harassment. Effective January 1, 2022, the CCP will be expanded to prohibit the use of an NDPin any settlement agreement concerning all forms of discrimination and harassment, whether based on sex or any otherprotected category under California law. This includes race, color, national origin, ancestry, religion, creed, age, disability,medical condition, genetic information, marital status, sexual orientation, and military/veteran status.
  This law only applies to settlement agreements resolving pending civil actions and administrative charges. It does not applyto claims settled prior to the commencement of a formal court or agency action. A settlement agreement may contain aprovision protecting the identity of the employee and a provision requiring the settlement amount to remain confidential.
2. California Employment Law/Non-Disparagement Clauses:
  Currently, the Government Code makes it unlawful for anemployer to require an employee to sign a non-disparagement agreement which denies an employee the right to discloseinformation about unlawful acts in the workplace, including harassment or discrimination, in exchange for a raise or bonus,or as a condition of employment or continued employment. In 2022, this law will be expanded to apply to severanceagreements. The new law prohibits an employer from including in a severance agreement a non-disparagement clauseprohibiting the disclosure of facts regarding harassment and discrimination. The law provides that an agreement containingsuch clause is unenforceable.
  Employers may include a provision in a severance agreement that requires the amount paid in severance to remainconfidential. And the terms of a severance agreement may still protect the confidentiality of the employer’s trade secrets,proprietary information, or other confidential information unrelated to unlawful acts in the workplace.
3. Estate Planning:
  The Build Back Better Act (the “Act”) changes the landscape for estate planning. In particular, if passedinto law, the use of irrevocable grantor trusts (“IRGs”) will be substantially limited. Upon enactment of the “Act,” several ofthe benefits of IRGs will no longer be available. To name a few: (1) installment sales to an IRG will be taxable, (2) assetsfunded into an IRG will remain in the grantor’s estate (along with the growth of those assets),and (3) distributions tobeneficiaries will be treated and taxed as gifts. For those who already have IRGs in place, however, there is a silver lining.IRGs created before the Act is implemented will be grandfathered in and continue to enjoy the benefits of the old rules. Butany contributions to a grandfathered-IRG made after the enactment of the Act will be subject to the new rules. In summary,planning tools for controlling the estate tax burden will still be available, but the use of IRGs will not be one of them.
4. Taxes:
  During the Donald Trump administration, a limitation was imposed on the amount of state and local taxes (“SALT”) which could be deducted from federal taxes to $10,000.00. Ways and Means Chairman Richard Neal confirmed House negotiators are “looking at” a possible two-year delay of SALT, meaning the cap would be suspended in 2022 and 2023, and then kick in again for 2024-2027.
  On July 16, Governor Newsom signed into law Assembly Bill 150 (the “Bill”) which is a partial work-around of the SALT deduction limitation imposed during the Trump administration. The Bill allows certain pass-through entities to elect to pay California income tax on behalf of their individual, estate, and trust owners. If elected, the entity takes the deduction for the state tax paid without limit. This reduces the federal taxable income passed through to the owners. In turn, the owners receive a California income tax credit for the tax paid by the entity that avoids the same income being taxed twice. The IRS acknowledges the legitimacy of this elective entity-level state tax work-around in IRS Notice 2020-75.
  If the two-year suspension of the SALT deduction limitation does not go into place, the California work-around must be considered and if applicable the manner in which income is realized through a client’s entity structure must be analyzed to maximize the deduction.
5. Regulatory:
  In Los Angeles, restaurants, bars, gyms, barber shops, movie theatres, shopping centers and many other such establishments are required to get proof of vaccination or proof of testing negative for Covid within 72 hours of entering the premises upon a patron’s first “in-person interaction” with staff.
  Patrons are allowed to self-attest to medical and religious exemptions but cannot use the indoor portion unless they provide proof of a negative COVID test.
  Anyone who fails to provide proof of vaccination or a negative Covid test can still use non-indoor portions of the establishment and are allowed in the indoor portion for brief periods to order or pick-up as long as they wear a mask.
  At the time of this writing, Los Angeles has shut down two In-N-Out burger restaurants for violating the ordinance. San Francisco has also caused store shut- downs for violating Covid ordinances. It is imperative all business owners stay on top of local ordinances and monitor new mandates.
6. Asset Protection:
  Irrevocable trusts provide great asset protection for business owners and wealthy individuals. Once trusts are created it is important to monitor trustee transactions to make sure they do not destroy the protections provided by the trust structure. If you have an irrevocable trust, the following is a good working checklist to periodically review:
  - Is the independent trustee truly independent? Is the independent trust related to or controlled by the beneficiaries?
  - Are there multiple transactions between the trust and the owner of an asset sold to the trust on an installment sale? If so, do those transactions conflict with or abrogate a financial interest of the trust.
  - Do transactions with parties related to the beneficiaries or the beneficiaries themselves deny a creditor the opportunity to liquidate a claim.
  - Is the grantor of the trust controlling the use of the assets in the trust or utilizing income generated by the trust to the grantor’s benefit?
  - If the trust has mandatory distribution provisions, is there a way to change the trust structure to abrogate those mandatory provisions?
  This list is not exclusive of the issues to be reviewed, but illustrative of items which need to be reviewed periodically to make sure the asset protection is robust.
7. Asset Protection/Businesses:
  As with Trusts, once a business entity is formed, it will provide no asset protection if certain “formalities” and rules are not followed. The most important rule which must be followed in all instances concerns capitalization and what courts will deem “at risk” by the shareholders. If a company is inadequately capitalized, most courts will allow the corporate veil to be pierced without any other corporate formality being violated. It is imperative that business owners review each year of capitalization and other items such as adequacy of liability insurance and shareholder loans. For a brush-up on the issues a court will consider in an alter ego analysis, the following list is provided:
  - Commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion
    of corporate funds or assets to other than corporate uses.
  - The treatment by an individual of the assets of the corporation the asset of the individual.
  - The failure to obtain authority to issue stock or to subscribe to or issue the same.
  - The holding out by an individual that the individual is personally liable for the debts of the corporation.
  - The failure to maintain minutes or adequate corporate records, and the confusion of the records of separate entities.
  - As discussed above, the failure to adequately capitalize a company, or the total absence of corporate assets.
  - The use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation.
  - The concealment and misrepresentation of the identity of the responsible ownership, management, and financial interest, or concealment of personal business activities.
  - The disregard of legal formalities and the failure to maintain arm’s-length relationships among related entities.
  - The use of the corporate entity to procure labor, services or merchandise for another person or entity which is outside of the promotion of corporate business.
  - The diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another.
  - The contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions.
  - The formation and use of a corporation to transfer to it the existing liability of another person or entity.
  The above list is not exclusive but a very good list to brush through periodically to make sure the appropriate rules are being followed. As to reviewing the issue of adequate capitalization, tax returns, balance sheets and insurance coverages need to be reviewed and discussed to determine whether “adequacy” exists.
8. Taxes/Entity Formation:
  Currently, the news indicates the Build Back Better Act will not raise corporate taxes. The current corporate tax rate is 21%. If you are forming a new entity and you are going to take on debt or leave money in the company for growth, you should consider using a Subchapter C corporation. The 21% rate is substantially lower than the higher individual rates which will apply to income generated by a flow through entity. Furthermore, currently, if you sell the stock of a Subchapter C corporation, there is the opportunity to avoid all tax on the first $10MM of the income generated by the sale.

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1. California Employment Law/Non-Disclosure Provisions:
  Currently, it is a violation of the Code of Civil Procedure (“CCP”) toinclude a non-disclosure provision (“NDP”) in a settlement agreement which prohibits the disclosure of facts related to claims of sex discrimination and sex harassment. Effective January 1, 2022, the CCP will be expanded to prohibit the use of an NDPin any settlement agreement concerning all forms of discrimination and harassment, whether based on sex or any otherprotected category under California law. This includes race, color, national origin, ancestry, religion, creed, age, disability,medical condition, genetic information, marital status, sexual orientation, and military/veteran status.
  This law only applies to settlement agreements resolving pending civil actions and administrative charges. It does not applyto claims settled prior to the commencement of a formal court or agency action. A settlement agreement may contain aprovision protecting the identity of the employee and a provision requiring the settlement amount to remain confidential.
2. California Employment Law/Non-Disparagement Clauses:
  Currently, the Government Code makes it unlawful for anemployer to require an employee to sign a non-disparagement agreement which denies an employee the right to discloseinformation about unlawful acts in the workplace, including harassment or discrimination, in exchange for a raise or bonus,or as a condition of employment or continued employment. In 2022, this law will be expanded to apply to severanceagreements. The new law prohibits an employer from including in a severance agreement a non-disparagement clauseprohibiting the disclosure of facts regarding harassment and discrimination. The law provides that an agreement containingsuch clause is unenforceable.
  Employers may include a provision in a severance agreement that requires the amount paid in severance to remainconfidential. And the terms of a severance agreement may still protect the confidentiality of the employer’s trade secrets,proprietary information, or other confidential information unrelated to unlawful acts in the workplace.
3. Estate Planning:
  The Build Back Better Act (the “Act”) changes the landscape for estate planning. In particular, if passedinto law, the use of irrevocable grantor trusts (“IRGs”) will be substantially limited. Upon enactment of the “Act,” several ofthe benefits of IRGs will no longer be available. To name a few: (1) installment sales to an IRG will be taxable, (2) assetsfunded into an IRG will remain in the grantor’s estate (along with the growth of those assets),and (3) distributions tobeneficiaries will be treated and taxed as gifts. For those who already have IRGs in place, however, there is a silver lining.IRGs created before the Act is implemented will be grandfathered in and continue to enjoy the benefits of the old rules. Butany contributions to a grandfathered-IRG made after the enactment of the Act will be subject to the new rules. In summary,planning tools for controlling the estate tax burden will still be available, but the use of IRGs will not be one of them.
4. Taxes:
  During the Donald Trump administration, a limitation was imposed on the amount of state and local taxes (“SALT”) which could be deducted from federal taxes to $10,000.00. Ways and Means Chairman Richard Neal confirmed House negotiators are “looking at” a possible two-year delay of SALT, meaning the cap would be suspended in 2022 and 2023, and then kick in again for 2024-2027.
  On July 16, Governor Newsom signed into law Assembly Bill 150 (the “Bill”) which is a partial work-around of the SALT deduction limitation imposed during the Trump administration. The Bill allows certain pass-through entities to elect to pay California income tax on behalf of their individual, estate, and trust owners. If elected, the entity takes the deduction for the state tax paid without limit. This reduces the federal taxable income passed through to the owners. In turn, the owners receive a California income tax credit for the tax paid by the entity that avoids the same income being taxed twice. The IRS acknowledges the legitimacy of this elective entity-level state tax work-around in IRS Notice 2020-75.
  If the two-year suspension of the SALT deduction limitation does not go into place, the California work-around must be considered and if applicable the manner in which income is realized through a client’s entity structure must be analyzed to maximize the deduction.
5. Regulatory:
  In Los Angeles, restaurants, bars, gyms, barber shops, movie theatres, shopping centers and many other such establishments are required to get proof of vaccination or proof of testing negative for Covid within 72 hours of entering the premises upon a patron’s first “in-person interaction” with staff.
  Patrons are allowed to self-attest to medical and religious exemptions but cannot use the indoor portion unless they provide proof of a negative COVID test.
  Anyone who fails to provide proof of vaccination or a negative Covid test can still use non-indoor portions of the establishment and are allowed in the indoor portion for brief periods to order or pick-up as long as they wear a mask.
  At the time of this writing, Los Angeles has shut down two In-N-Out burger restaurants for violating the ordinance. San Francisco has also caused store shut- downs for violating Covid ordinances. It is imperative all business owners stay on top of local ordinances and monitor new mandates.
6. Asset Protection:
  Irrevocable trusts provide great asset protection for business owners and wealthy individuals. Once trusts are created it is important to monitor trustee transactions to make sure they do not destroy the protections provided by the trust structure. If you have an irrevocable trust, the following is a good working checklist to periodically review:
  - Is the independent trustee truly independent? Is the independent trust related to or controlled by the beneficiaries?
  - Are there multiple transactions between the trust and the owner of an asset sold to the trust on an installment sale? If so, do those transactions conflict with or abrogate a financial interest of the trust.
  - Do transactions with parties related to the beneficiaries or the beneficiaries themselves deny a creditor the opportunity to liquidate a claim.
  - Is the grantor of the trust controlling the use of the assets in the trust or utilizing income generated by the trust to the grantor’s benefit?
  - If the trust has mandatory distribution provisions, is there a way to change the trust structure to abrogate those mandatory provisions?
  This list is not exclusive of the issues to be reviewed, but illustrative of items which need to be reviewed periodically to make sure the asset protection is robust.
7. Asset Protection/Businesses:
  As with Trusts, once a business entity is formed, it will provide no asset protection if certain “formalities” and rules are not followed. The most important rule which must be followed in all instances concerns capitalization and what courts will deem “at risk” by the shareholders. If a company is inadequately capitalized, most courts will allow the corporate veil to be pierced without any other corporate formality being violated. It is imperative that business owners review each year of capitalization and other items such as adequacy of liability insurance and shareholder loans. For a brush-up on the issues a court will consider in an alter ego analysis, the following list is provided:
  - Commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized diversion
    of corporate funds or assets to other than corporate uses.
  - The treatment by an individual of the assets of the corporation the asset of the individual.
  - The failure to obtain authority to issue stock or to subscribe to or issue the same.
  - The holding out by an individual that the individual is personally liable for the debts of the corporation.
  - The failure to maintain minutes or adequate corporate records, and the confusion of the records of separate entities.
  - As discussed above, the failure to adequately capitalize a company, or the total absence of corporate assets.
  - The use of a corporation as a mere shell, instrumentality or conduit for a single venture or the business of an individual or another corporation.
  - The concealment and misrepresentation of the identity of the responsible ownership, management, and financial interest, or concealment of personal business activities.
  - The disregard of legal formalities and the failure to maintain arm’s-length relationships among related entities.
  - The use of the corporate entity to procure labor, services or merchandise for another person or entity which is outside of the promotion of corporate business.
  - The diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another.
  - The contracting with another with intent to avoid performance by use of a corporate entity as a shield against personal liability, or the use of a corporation as a subterfuge of illegal transactions.
  - The formation and use of a corporation to transfer to it the existing liability of another person or entity.
  The above list is not exclusive but a very good list to brush through periodically to make sure the appropriate rules are being followed. As to reviewing the issue of adequate capitalization, tax returns, balance sheets and insurance coverages need to be reviewed and discussed to determine whether “adequacy” exists.
8. Taxes/Entity Formation:
  Currently, the news indicates the Build Back Better Act will not raise corporate taxes. The current corporate tax rate is 21%. If you are forming a new entity and you are going to take on debt or leave money in the company for growth, you should consider using a Subchapter C corporation. The 21% rate is substantially lower than the higher individual rates which will apply to income generated by a flow through entity. Furthermore, currently, if you sell the stock of a Subchapter C corporation, there is the opportunity to avoid all tax on the first $10MM of the income generated by the sale.