Authored by Mark Lobb
Welcome to the October version of The Lobb Report. This edition covers tax deadlines, business owner taxation, estate planning and employment law issues.
In this edition, you can expect a comprehensive overview of an upcoming Supreme Court case along with recent legislative changes and their potential impact on your business operations, expert insights into emerging trends, and practical advice for business owners. We are committed to delivering content that is not only informative but also actionable, equipping you with the knowledge and resources you need to thrive in today’s dynamic business environment.
We hope you find this newsletter to be a valuable resource and an insightful guide as you continue to build and expand your business.
Additional Tax Filing Extensions: In February of this year the IRS extended tax filing and payment dates until October 16, 2023, for almost all California residents. Residents of Lassen, Modoc, and Shasta counties were not provided extensions. California fell in line and granted the same extensions. California taxpayers received extensions to file and pay their 2022 income taxes, 2022 gift taxes, estate tax returns falling due in 2023, and 2023 estimated income tax payments. Some time-sensitive tax actions, including some Section 1031 exchange deadlines were also extended.
In the afternoon of October 16, the IRS issued Notice 2023-189. This notice further extends the October 16 tax filing and payment deadlines to November 16, 2023. Shortly after the Notice was issued, California granted the same extensions, including the deadlines for Section 1031 exchanges.
Wealth Tax: During the 2023 spring legislative sessions, progressive lawmakers in California, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington announced plans to implement wealth taxes. None of those initiatives became law, but the dance is not over. Wealth taxes have political charm and no matter how many times such taxing schemes have failed in the past, they will not go away anytime soon.
A common theme with the states contemplating a wealth tax is a combination of already high taxes and population decline. High on both lists are California, New York, Hawaii and Minnesota. Could there be a correlation to taxing the rich and a population decline? Why would anyone move away from California or Hawaii?
Several European countries implemented versions of a wealth tax in the 1990’s. By the end of 2018, just three European countries still imposed an annual net wealth tax. Those countries were Norway, Spain, and Switzerland. However, the reality is that by 2018, the “tax” was no longer a traditional wealth tax but rather a higher tax rate on certain income or certain assets and not on total net worth. An OECD report notes that net wealth taxes faded because (1) administrative difficulties, (2) noncompliance, and (3) undesired emigration.
A progressive talking point in favor of a wealth tax is focused on leveling the playing field of income inequality. Proponents note that wealth taxes can reduce income inequality by reducing the accumulation of large amounts of wealth by individuals. Although in theory this is a logical outcome, it has not worked in any meaningful way. Wealthy people simply move to a more favorable taxing jurisdiction, thus reducing the tax base of the wealth tax jurisdiction.
From 1989 to 2017, France had a “solidarity tax on wealth” which was an annual progressive wealth tax on net assets above €800,000 for those with total net worth of €1,300,000 or more. The marginal rates ranged from 0.5% to 1.5%. It is estimated that 60,000 millionaires left France between 2000 and 2016 because of the tax.
There is a case pending with the U.S. Supreme Court titled Moore v. United States. It is speculated that a taxpayer victory could end the ability of a state to impose a wealth tax and prevent the taxing of unrealized gains. The decision in Moore should be published in 2024.
Wealth taxes have not only failed but create a wealth drain on the taxing jurisdiction imposing the wealth tax. When a politician pushes a wealth tax slogan, it has nothing to do with reducing income inequality or even raising meaningful revenue because neither result will occur for any sustainable period. The wealthy move away and the jurisdiction collects less in taxes.
Buy-Sale Agreements: It is imperative business owners understand the proper use and structuring of life insurance in the context of buy-sale agreements. In Connelly v. Internal Revenue Serv. the IRS assessed $1 million in taxes on an estate which could have been avoided with proper planning.
Crown C Corp. was owned by Michael and his brother Thomas A. Connelly, who was the director of Michael’s estate after he died. When Michael was alive, the brothers established a stock purchase agreement allowing either brother to purchase the other brother’s shares in the company upon death of the other person. The company could redeem the shares if an offer from the surviving brother was declined. Crown C Corp. took out an additional $3.5 million in life insurance on both brothers.
Following Michael’s death, the company used the $3.5 million from the life insurance proceeds to redeem his shares in the company for $3 million, utilizing the remaining $500,000 for company operations. Thomas reported the redemption of the shares in the estate’s taxes but didn’t report the life insurance proceeds redeemed by the company, which increased the value of Crown C.
The IRS asserted Crown was worth $3 million more than the estate reported due to the receipt of the insurance proceeds upon Michael’s death, issuing a deficiency of $1 million. The deficiency was upheld by the US District Court for the Eastern District of Missouri. The Court ruled the life insurance proceeds were a significant asset that must be included in the company’s valuation.
Caste Discrimination: On October 7, 2023, Governor Gavin Newsom vetoed proposed bill SB 403. This Bill sought to ban discrimination based on caste under the Fair Employment and Housing Act (FEHA), Unruh Civil Rights Act, and California Education Code. As mentioned in the last Lobb Report, this Bill was completely unnecessary because existing statutes already prohibit discrimination based on several categories, including sex, race, religion, disability, ancestry, etc. and state law specifies these statutes should be “liberally construed.”
Fresno and Seattle have each banned discrimination based on caste. Employers in those cities need to amend their policies and training programs to incorporate prohibitions of discrimination based on caste.
Additional California Employment Laws: On October 4, 2023, Governor Newsom signed SB 616 into law which changes the rules on sick leave. The new law goes into effect January 1, 2024.
The new law increases the annual accrual of sick leave to 40 hours, with an accrual cap of 80 hours. The law specifies that employers must provide 24 hours of sick leave by the 120th day of employment and provide an additional 16 hours by the 200th calendar day of employment for a total of 40 hours.
Previously, the law also allowed employers to limit usage of paid sick leave to 24 hours per year. This limitation has also been increased to 40 hours. Furthermore, the law previously allowed employers to forgo the accrual and carryover method by frontloading the full amount of sick leave on an annual basis. Most employers use this “frontloading” method instead of accrual. “The full amount” was previously defined as 24 hours. Starting in 2024, the definition will be increased to 40 hours.
Employers must reinstate unused paid sick leave to employees rehired within one year of separation unless paid sick leave was cashed out. The amount of paid sick leave available must be listed on an itemized wage statement. Paid sick leave must be paid on the payday for the next regular payroll period after the sick leave was taken.
Another Senate Bill (Senate Bill 848) which takes effect on January 1, 2024, will require businesses to grant eligible employees up to five days off following a qualifying reproductive loss event. This new law guarantees time off from work following a miscarriage or other reproductive loss. The term “reproductive loss event” is defined to mean a failed adoption, failed surrogacy, miscarriage, stillbirth, or unsuccessful assisted reproduction. The law does not specifically include abortion in the list of qualifying events.
The new law prohibits employers from retaliating against employees who take time off after a reproductive loss event. Employers will be required to maintain employee confidentiality relating to reproductive loss leave. The new law does not require the leave time to be paid.
If an employee experiences more than one reproductive loss event within a twelve-month period, the employer is not obligated to grant a total amount of reproductive loss leave time in excess of twenty days within a twelve-month period.
There have been many other new employment laws passed this year which will be effective in 2024. It is imperative to have employee manuals and training programs revamped.