QWERTY_keyboard.jpgA lawsuit against a New Jersey insurance company sought damages for a November 2013 data breach that reportedly resulted in the theft of personal information of hundreds of thousands of policyholders. The plaintiffs sought to certify the suit as a class action on behalf of other policyholders whose information was compromised. They asserted causes of action for breach of contract, negligence, and violations of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., and the New Jersey Consumer Fraud Act (CFA), N.J. Rev. Stat. § 56:8-1 et seq. In March 2015, however, the district court dismissed the lawsuit, holding that the plaintiffs lacked standing to sue under the FCRA. In re Horizon Healthcare Services Inc. Data Breach Litigation, No. 2:13-cv-07418, opinion (D.N.J., Mar. 31, 2015).

The defendant is a New Jersey-based health insurance company that provides services to about 3.7 million individuals. At some point over the weekend of November 1-3, 2013, an unknown individual stole two laptop computers from the defendant's office in Newark. The laptops, which were protected by passwords, contained the personal information of over 839,000 policyholders, including names, dates of birth, member numbers, and addresses. The computers also contained Social Security numbers and clinical information for some policyholders.

The defendant issued a press release several days after the theft describing the extent of the data breach. It stated that it was not clear if the thief or thieves would be able to break the password protection to access the information on the laptops. It individually notified the policyholders whose information was contained on the laptops, and it offered free identity theft protection and credit monitoring services to policyholders whose Social Security numbers might have been compromised.

Continue reading "New Jersey Insurance Company Not Liable to Members for Data Breach, Court Rules" »

10939979096_cab7741637_z.jpgTitle III of the Americans with Disabilities Act (ADA) of 1990, 42 U.S.C. § 12181 et seq., prohibits businesses classified as "public accommodations" from discriminating against individuals with disabilities, and it may require them to make modifications to their facilities and services to allow reasonable access. The definition of "public accommodation" has been a matter of dispute for all 25 years of the law's existence. Several recent court cases have addressed whether businesses that provide services exclusively via the internet may be considered "public accommodations" within the meaning of Title III. Federal courts have reached different conclusions, so the dispute is likely to continue.

"Public accommodation" is broadly defined by Title III to include hotels, restaurants, theaters, public meeting spaces, retail stores, service establishments, train and bus stations, museums, parks, and schools, to name but a few. 42 U.S.C. § 12181(7). A common Title III claim might involve the alleged inaccessibility of a business' physical location, such as due to a lack of wheelchair ramps. What about businesses that provide all their services online, with no physical facilities for customers? Claims against this type of business have included claims that video-streaming services do not accommodate deaf customers, and that websites do not accommodate blind customers.

Whether a web-based business meets the definition of a "public accommodation" is still a matter of dispute in the federal court system. The Third Circuit Court of Appeals, which has jurisdiction over New Jersey, has ruled that Title III only applies to physical locations. Ford v. Schering-Plough Corp., 145 F.3d 601, 613 (3rd Cir. 1998). That case involved loss of access to insurance benefits, not services offered by a web-based company, but the decision could apply to that sort of business. The court based its ruling on the definition of "public accommodation" found in Title II of the Civil Rights Act of 1964, which is limited to "places." Id., citing 42 U.S.C. § 2000a(a).

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S&P500_(1950-12).jpgA superior court in New Jersey denied a motion by the credit rating agency Standard & Poor's Financial Services ("S&P") to dismiss a lawsuit brought under the New Jersey Consumer Fraud Act (CFA), N.J. Rev. Stat. § 56:8-1 et. seq. Hoffman, et al v. McGraw Hill Financial, Inc., et al, No. ESX-C-216-13, opinion (PDF file) (N.J. Super. Ct., Essex Co., Dec. 31, 2014). The New Jersey Attorney General is alleging financial and advertising fraud involving mortgage-backed securities, which were a major factor in the 2008 financial crisis. The case, which should be of interest to New Jersey small businesses and consumers alike, has traveled to federal court, to a multidistrict litigation (MDL) matter, and back to state court.

S&P publishes research and analysis of stocks and bonds, maintains indices like the S&P 500, and issues credit ratings for private companies and government entities. The New Jersey Attorney General alleges that, from at least 2001 to 2008, S&P based its ratings of various mortgage-backed securities on its own financial interests, and gave favorable ratings to companies that were paying clients, even if they did not merit such a rating. Numerous other states and the federal government have sued S&P over the same general allegations.

The New Jersey lawsuit (PDF file), originally filed on October 9, 2013, asserts three causes of action against S&P and its parent company: (1) Misrepresentations and knowing omissions of material fact under the CFA, N.J. Rev. Stat. § 56:8-2; (2) unconscionable commercial practices under the CFA, id.; and (3) misrepresentation and knowing omissions of material fact in violation of the Advertising Regulations, N.J. Admin. Code § 13:45A-9.2(a)(9).

Continue reading "New Jersey Attorney General's Consumer Fraud Suit Allowed to Proceed Against Investment Ratings Company" »

4517840289_e6558e6f0a_z.jpgA little-known federal agency within the Department of Commerce, the Bureau of Economic Analysis (BEA), revived a reporting requirement last year for U.S. companies receiving foreign investments. It also expanded the reporting requirements for U.S. companies that directly invest in foreign businesses. Prior to the recent amendments to these rules, the reporting requirements only applied to companies directly contacted by the BEA. Now they apply to any U.S. company that meets the benchmarks for reporting.

The International Investment and Trade in Services Survey Act authorizes the Executive Branch "to collect information on international investment and United States foreign trade." 22 U.S.C. § 3101(b). The BEA is charged with carrying out this purpose. It revived Form BE-13, the "Survey of New Foreign Direct Investment in the United States," in a final rule published in August 2014, after having discontinued the survey in 2009. 79 Fed. Reg. 47573, 15 C.F.R. § 801.7. Another final rule, published in November 2014, changed the requirements for Form BE-10/11, the "Benchmark Survey of U.S. Direct Investment Abroad." 79 Fed. Reg. 69041, 15 C.F.R. § 801.8.

Information provided in the surveys may only be used "for analytical or statistical purposes" by the federal government, to enforce reporting requirements, and for "augmenting and improving the quality of data collected by the Bureau of the Census." 22 U.S.C. §§ 3104(c), (d). Failure to file reports as required can result in civil penalties of $2,500 to $25,000, as well as criminal penalties of up to one year's imprisonment and a fine of up to $10,000. 22 U.S.C. § 3105.

Continue reading "New Reporting Requirements Take Effect for U.S. Businesses with Foreign Investors, and Businesses that Invest Abroad" »

345829246_a7434a76dc_z.jpgElecting "subchapter S" status has many benefits for a corporation and its shareholders, although it is subject to certain limitations on the number and type of shareholders. If a corporation's S status is revoked, it may be able to make the election again at a later date, but that raises the question of whether tax benefits available to shareholders during the original subchapter S election are still available. The Office of Chief Counsel for the Internal Revenue Service (IRS) recently issued a memorandum on this question with regard to corporate earnings for which shareholders paid income tax, but that they did not receive as dividends. IRS regulations assign a special account for these funds and allow shareholders to withdraw them tax-free in later tax years. The account does not, however, survive the revocation of subchapter S status, meaning that shareholders lose tax-free access to those funds.

Shareholders of S corporations pay taxes on corporate income, similar to partnership taxation. They are responsible for paying income tax on their pro rata share of corporate income even if they do not receive dividends during that tax year. The IRS allows S corporation shareholders to withdraw dividends for previous tax years without incurring additional tax liability, since that money was already taxed. IRS regulations define an "accumulated adjustments account" (AAA) as containing the amount of corporate earnings taxed to shareholders but not yet paid out to them. 26 U.S.C. §§ 1366(a)(1), 1368(e)(1); 26 C.F.R. § 1.1368-2. The account is not apportioned among the shareholders.

The question presented to the IRS was whether an S corporation's AAA survived "beyond the post-termination transition period into a subsequent S period." In Memorandum No. 201446021 (PDF file) ("IRS Memo"), issued on November 14, 2014, the IRS concluded that the AAA does not survive this transition.

Continue reading "Converting an S Corporation to a C Corporation Eliminates Certain Tax Benefits, According to the IRS, Even If the Corporation Converts Back to S Status" »

Analyzing_Financial_Data_(5099605109).jpgFund transfers between business subsidiaries could be considered interest-generating loans under New Jersey tax law, according to a series of court cases culminating in a decision by the New Jersey Supreme Court. The shipping company United Parcel Service (UPS) appealed the assessment of late fees and penalties against five of its subsidiaries by the New Jersey Division of Taxation (NJDOT). The New Jersey Tax Court affirmed the NJDOT's findings regarding imputation of interest income, but it held that the late fees and penalties were in error. UPS v. Dir., Div. of Taxation ("UPS I"), 25 N.J. Tax 1 (2009). The Superior Court, Appellate Division and the Supreme Court of New Jersey affirmed the Tax Court's ruling. UPS v. Dir., Div. of Taxation ("UPS II"), 61 A.3d 160 (N.J. App. Div. 2013); UPS v. Dir., Div. of Taxation ("UPS III"), No. A-16/17, Sep. Term 2013 072421, opinion (N.J., Dec. 4, 2014).

The plaintiffs belonged to two groups of UPS subsidiaries: a group consisting of "internal service companies" that support other subsidiaries, and a group of companies "that transported packages and documents." UPS I, 25 N.J. Tax at 11. The UPS parent company maintained a "cash management system" for its subsidiaries that involved transferring all cash received by the subsidiaries into a bank account maintained by the parent company on a daily basis. Id. at 14-15.

The NJDOT treated these transfers as loans from the subsidiaries to the parent company and imputed interest income to the subsidiaries that was not reported. It assessed late payment penalties and five-percent amnesty penalties, N.J. Rev. Stat. §§ 54:53-17, 54:53-18, against the subsidiaries. UPS appealed these actions.

Continue reading "Transfers of Funds Between Businesses with Common Ownership May Be Deemed Loans under New Jersey Tax Law" »

Dr_Martens,_black,_old.jpgNew York and New Jersey laws provide a wide range of options regarding the organization and structure of businesses, with recognition that the needs of a small, one- or two-person operation are likely to be substantially different from those of a much larger business. Businesses with no formalized legal structure are known as sole proprietorships if they have only one owner, and general partnerships if they have two or more. An informal business structure works for many business owners, but the business entities defined by state law have certain benefits that everyone should consider. Converting a business from a sole proprietorship to a limited liability company (LLC) can be an effective way for a business owner to protect both the business and themselves.

Sole Proprietorship vs. LLC

Operating a business as a sole proprietorship may offer some advantages:

- Simplicity: There is no need to file any specific paperwork with the state to maintain the business, aside from an assumed business name, also known as a "DBA."

- Only one tax return: A sole proprietorship, unlike a corporation, does not file its own tax return. The business owner includes business income and expenses in a schedule attached to his or her personal return.

These possible advantages, however, come with some distinct disadvantages:

- The owner of a sole proprietorship is personally liable for any and all business debts.

- Similarly, business assets are susceptible to claims against the owner as an individual.

- A sole proprietor must keep meticulous records distinguishing personal and business assets, debts, and expenses.

Continue reading "Converting a New York or New Jersey Sole Proprietorship to an LLC" »

US-DeptOfCommerce-Seal.svg.pngThe U.S. Department of Commerce (DOC) recently released a digital tool to help businesses engaged in the export of goods abroad. Federal export laws require a substantial amount of due diligence regarding the intended recipients and end users of export shipments. The DOC may hold an export business liable for violations of these requirements. The White House has enacted a policy of reforming controls on exports. Part of this initiative involves streamlining the screening process with the Consolidated Screening List (CSL), a collection of "watch lists" from various federal agencies. In November 2014, the DOC announced the release of an application program interface (API) that allows export businesses to search the CSL much more efficiently.

Under the Export Administration Act (EAA) of 1979, 50 U.S.C. App. § 2401 et seq., the U.S. President has the authority to regulate U.S. exports for national security and other reasons. Congress has placed restrictions on exports directly through laws like the Arms Export Control Act (AECA) of 1976, 22 U.S.C. § 2751 et seq. Exports may also be restricted by sanctions against specific countries and laws or regulations related to terrorism and other international criminal matters.

In 2013, the DOC's Bureau of Industry and Security (BIS) charged the University of Massachusetts at Lowell with violations of the Export Administration Regulations (EAR) for shipping atmospheric testing equipment to an entity in Pakistan on the BIS Entity List, 15 C.F.R. Supp. 4. This list identifies entities that the federal government believes may have indirect connections to weapons of mass destruction (WMD) programs. The BIS claimed that the university violated the EAR by shipping the equipment without a required license. 15 C.F.R. §§ 734.3(c), 744.11, 764.2(a); 63 Fed. Reg. 64322 (Nov. 19, 1998). In this case, the equipment itself was not a controlled item, but the recipient was subject to government restrictions. The university agreed to a $100,000 civil penalty, suspended for two years. See also United States v. Roth, 642 F.Supp.2d 796 (E.D. Tenn. 2009), 628 F.3d 827 (6th Cir. 2011).

Continue reading "Export Businesses Receive Compliance Assistance from U.S. Commerce Department Software" »

-Miracle_Cure!-_Health_Fraud_Scams_(8528312890).jpgThe Federal Trade Commission (FTC) has filed a lawsuit against a Nevada company and its affiliates for a variety of alleged deceptive practices in the sale of products online. FTC v. Health Formulas, LLC, et al, No. 2:14-cv-01649, complaint (D. Nev., Oct. 7, 2014). The lawsuit is the first one brought by the agency under the Restore Online Shoppers' Confidence Act (ROSCA), 15 U.S.C. § 8401 et seq., which Congress passed in 2010. ROSCA requires online sellers to disclose the details of transactions known as "negative options" to consumers up front. The FTC claims that the defendants violated ROSCA and several other federal statutes in their marketing and sales activities. It obtained a temporary restraining order (TRO) and a preliminary injunction (PI) against the defendants, and it is seeking a permanent injunction.

A "negative option" is defined as a transaction in which the consumer's failure to reject goods or services through some affirmative act constitutes acceptance of the seller's offer. 16 C.F.R. § 310.2(u). To put it another way, the customer accepts the goods or services and becomes obligated to pay for them by doing nothing. Negative option billing is common in online or mail-order clubs like Columbia House, which periodically send customers a CD or DVD and allow them a period of time to return it, after which they are billed for it.

Consumers have generally not been successful challenging negative option billing provisions in court if the contract clearly discloses the nature of the transaction, but many negative options are not so clearly explained. ROSCA requires online sellers to "clearly and conspicuously disclose[]...all material terms of the transaction" to the consumers before obtaining their billing information in online sales and marketing. 15 U.S.C. §§ 8402, 8403.

Continue reading "FTC Brings First Lawsuit Under 2010 E-Commerce Statute" »

295128_6656.jpgA business may decide to sell all or a substantial amount of its business assets to another individual or company for a variety of reasons. These types of transactions are known as "bulk sales" if they are not part of ordinary business activities. Both New York and New Jersey require businesses that collect sales tax to disclose a planned bulk sale to state tax authorities. This disclosure is the purchaser's obligation, since the purpose is to allow the state to determine the seller's tax liability. If the purchaser does not make the required disclosures, it could become liable for the seller's outstanding tax debt to the state. The disclosure process is not terribly complicated, but it appears to be one that many businesses forget in the course of purchasing another business' assets.

What Is a "Bulk Sale"?

Any sale of business assets that is not part of the normal course of business could qualify as a bulk sale under state law. A bulk sale may occur if a company is going out of business, upgrading its equipment, or making significant changes in its business activities. Bulk sales may also occur in mergers or acquisitions, or if a business is converting from a sole proprietorship to a corporation or other business entity.

"Business assets" include any assets used in the course of business, including:
- Personal property, such as computers, office furniture, and inventory;
- Intellectual property, including patents, trademarks, and trade secrets;
- Certain types of real property; and
- Intangible assets, like business goodwill.

Continue reading "New Jersey and New York Require Notice Before Bulk Sales of Business Assets" »

Bitcoin_ATM_Plate.jpgThe New York Department of Financial Services (DFS) recently issued proposed regulations for businesses that deal with "virtual currencies," defined by the U.S. Department of the Treasury as a medium of exchange that operates much like traditional currency, but only in some environments. Virtual currencies are gaining in prominence as an alternative to fiat currencies like the dollar and the euro, although they have been highly controversial. New York appears to be one of the first states to take serious steps towards regulating businesses that perform virtual currency transactions for customers.

Bitcoin is probably the most famous virtual currency, but it is far from the only one. The currency only exists in the online world, having no physical representation like actual coins or bills. The process by which new Bitcoins are created, known as "mining," involves performing increasingly complex computer calculations. Bitcoin has grown as a form of payment for goods and services online, but it is also the subject of scrutiny based on allegations that it is used for illegal online purchases, such as drugs and identity theft information.

Bitcoin is treated somewhat like a commodity by some people, as suggested by the fact that the value of one Bitcoin is typically expressed in terms of U.S. dollars. Online exchanges allow people to exchange various other currencies for Bitcoins. As of mid-November 2014, one Bitcoin is worth about $400. One presumably happy Norwegian man discovered in late 2013 that the $27 worth of Bitcoins he purchased in 2009 had appreciated in value to about $886,000.

Continue reading "New York Financial Regulators Propose Rules for Bitcoin and Other Virtual Currencies" »

1.12.02NewYorkStockExchangeByLuigiNovi1.jpgThe number of initial public offerings (IPOs), in which a company first offers its stock for sale on public exchanges, has skyrocketed during the first nine months of 2014. 220 companies went public during that time, raising about $77 billion. The record-breaking IPO of the Chinese company Alibaba alone raised $21.8 billion, but the vast majority of 2014 IPOs reportedly consist of "emerging growth companies" (EGCs), a category established in 2012 by the Jumpstart Our Business Startups (JOBS) Act. EGCs are smaller companies that have often been unable to meet the regulatory requirements for IPOs, but now they account for most or all of the growth in the number of IPOs in recent years.

The JOBS Act was introduced in Congress as H.R. 3606 in March 2012. It quickly passed both houses of Congress, and the President signed it into law that April. The law relaxes various regulatory requirements for smaller public companies and expands their eligibility to go public. It also increases, from 500 to 2,000, the number of record stockholders a company may have before it must register with the Securities and Exchange Commission (SEC).

The JOBS Act amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to include "emerging growth companies." H.R.3606 §§ 101(a) - (b), 15 U.S.C. § 77b(a)(19), 15 U.S.C. § 78c(a)(80). An EGC is defined as a company that began issuing securities to the public after December 8, 2011, and that had less than $1 billion, adjusted for inflation, in annual gross revenues during the most recently ended fiscal year.

Continue reading "Initial Public Offerings by Small Businesses Are Surging, Possibly Due to JOBS Act" »

Manhattan.jpgOne of the most important benefits of forming a corporation or other business entity is the protection of owners and managers from personal liability for acts performed on behalf of the business. Holding a shareholder or officer liable is known as "piercing the corporate veil." This may occur for acts found to be illegal or grossly negligent. A series of decisions from the Court of International Trade (CIT) and the Federal Circuit Court of Appeals addressed the liability of a corporate president, who was also the sole shareholder, for failure to pay customs duties on imported goods. The Federal Circuit ultimately applied a broad interpretation of the statute in question and held that the corporation and the shareholder may be held jointly and severally liable.

The corporation, Trek Leather, Inc., imported a number of men's suits during a period of about eight months in 2004. According to U.S. Customs and Border Protection (CBP), Trek Leather's sole shareholder and president used other corporate entities to purchase materials for foreign manufacturers. The manufacturers used the materials, known as "assists" in federal customs law, to produce the suits that he imported. CBP alleged that he failed to include the cost of these assists in the total price that he reported to customs officials. A lower price meant a lower customs duty.

CBP brought an action against Trek Leather and the shareholder in the CIT for misrepresenting the value of imported goods under 19 U.S.C. § 1592(a). The shareholder argued that he could not be held personally liable because he was not the "importer of record." The CIT found that the statute applied to him as well as the corporation. It granted CBP's motion for summary judgment and ruled that Trek Leather and the shareholder were jointly and severally liable for unpaid customs duties and related civil penalties. United States v. Trek Leather, 781 F.Supp.2d 1306 (USCIT 2011).

Continue reading "Federal Appellate Court Pierces Corporate Veil, Holds Shareholder Liable for Customs Violations" »

BurgerKingFood.jpg"Corporate inversion," the process by which a corporation merges with a foreign corporation and relocates its headquarters to the foreign company's home country, has received a considerable amount of attention in recent months. It is often expressly intended to reduce a corporation's tax burden by moving the company to a country with lower corporate taxes, while still maintaining physical operations in the U.S. The White House and others have criticized the practice, and corporations are lobbying against laws that would restrict it. The Internal Revenue Code (IRC) already contains "anti-inversion" provisions, and a recent notice from the Department of the Treasury (DOT) states that new Internal Revenue Service (IRS) regulations will enhance the scrutiny of foreign mergers.

Section 7874 of the IRC, 26 U.S.C. § 7874, seeks to regulate corporate inversions. It applies to any U.S. corporation that transfers its headquarters and other assets overseas through a merger with a foreign corporation after March 4, 2003. The merged foreign corporation is subject to the same tax treatment as a domestic corporation if 80 percent of its stock is held by the U.S. company's former shareholders, and it does not have "substantial business activities" in its home country. Id. at §§ 7874(a)(2), (b). If the merged foreign corporation has 60 percent of its shareholders in common with its domestic predecessor, the IRS designates it as a "surrogate foreign corporation" and applies U.S. tax rates to the amount of its inversion gain. Id. at §§ 7874(a)(1)-(2).

Several U.S. corporations have announced inversion plans in 2014. While some of them decided not to follow through after public opinion turned against them, other deals are still in the works. The U.S. pharmaceutical company Pfizer abandoned a bid to acquire the British company AstraZeneca, and the pharmacy chain Walgreens decided not to reorganize in Switzerland after merging with that country's Alliance Boots. The fast-food chain Burger King, however, is reportedly still in the process of acquiring Tim Hortons and reorganizing in Canada.

Continue reading "Treasury Department Issues New Guidance for Corporations that Transfer Operations Abroad to Reduce Tax Liability" »

Fondos_archivo.jpgA business entity created under the laws of New Jersey or another U.S. state is, at the most basic level, a collection of legal rights and obligations aimed at specific business activities, usually with the goal of making a profit. Those rights and obligations depend on a substantial number of agreements that should be reduced to writing and stored where a business owner can easily find them.

The following list includes 15 types of documents you should keep with your business records. You might need any of them if you have a disagreement with a business partner, co-owner, contractor, or employee, if you want to do business with a government agency, if you are looking for venture capital or other new investors, if you are trying to wind the business down, or simply in preparation for the unexpected. A few ounces of paper might be worth many pounds of future regret.

1. Formation Documents

Forming a business entity requires filing documents with the state and paying a fee. In New Jersey, the Department of the Treasury's Division of Revenue and Enterprise Services handles business formation. A document forming a corporation is often known as a Certificate of Incorporation, while one creating a limited liability company (LLC) is known as a Certificate of Organization.

Continue reading "Corporate Recordkeeping for Small Business Owners" »