By Alex Rossi

The 5th U.S. Circuit Court of Appeals “adopt[ed] a bright-line rule [on January 11, 2018]: Section 1446(b)(3)’s removal clock begins ticking upon receipt of the deposition transcript” as opposed to running from the date of the deposition testimony. The decision in Morgan v. Huntington Ingalls, Inc., et al, No. 17-30523, __ F.3d __ (5th Cir. 1/11/18) was one of first impression for the court.

Plaintiff, Curtis Morgan filed the original lawsuit alleging he contracted mesothelioma as a result of asbestos exposure at various industrial facilities in Louisiana. Morgan specifically alleged that he was exposed to asbestos through his employment at Avondale Shipyard in New Orleans as a sheet metal tacker in the 1960s. Seventy-eight (78) defendants were originally named in the lawsuit.

Morgan was deposed over eight days from March 9 to April 13, 2017. On the second day of testimony, Morgan testified that he worked on unspecified vessels at Avondale Shipyard. On March 20, Morgan agreed with medical records presented by counsel for Avondale Shipyard that one of the vessels on which he worked was the USS Huntsville, a vessel Avondale refurbished on behalf of officers of the U.S. government.

Based on the testimony regarding Morgan’s work on the USS Huntsville for the U.S. Government, Avondale removed the case to the U.S. District Court for the Eastern District of Louisiana on April 28, 2017 under the federal officer removal statute and claimed that removal was timely filed 30 days after receipt of Morgan’s deposition transcript. Morgan opposed the removal as untimely, claiming that the removal clock began from Morgan’s testimony regarding the USS Huntsville, which took place 38 days prior to removal. Morgan further argued that the district court lacked subject matter jurisdiction under 28 U.S.C. § 1442.

In finding the removal untimely, the district court determined that the removal clock for “other paper” under § 1446 began running on the date of the oral deposition testimony, and not the later date of receipt of the deposition transcript. The district court did not address whether the substantive requirements of § 1442 had been met for federal officer jurisdiction.

Citing the plain meaning and purpose of § 1446(b), as well as policy considerations, the 5th Circuit found that oral testimony at a deposition does not constitute an “other paper.” Instead, the court found the removal clock begins upon receipt of the deposition transcript as the “other paper” providing the basis for the removal. In adopting this bright light rule, the 5th Circuit balanced the competing goals of removal: encouraging prompt and proper removal and preventing, hasty, improper removals. The court declined to follow the “notice” standard adopted by the 10th Circuit, finding it counterintuitive to start the clock for removal before the objective evidence is received by the defendant.

The 5th Circuit remanded the case to the district court to address whether the substantive requirements of federal officer removal have been met.

 

 

By Lou Grossman

On January 9, 2018, a split panel of the United States Fifth Circuit Court of Appeals affirmed an order from the district court, denying a motion to remand a matter removed under the Class Action Fairness Act (“CAFA”). The 2-1 decision In Warren Lester, et. al. v. Exxon Mobil Corp., et. al., No. 14-31383, __F3d___ (5th Cir. 1/9/2018) addressed two issues of first impression for the Fifth Circuit: (1) whether a motion to transfer and consolidate can effectively create a “mass action” removable under CAFA; and (2) if so, whether CAFA may be invoked as a basis for removal when one of the underlying suits comprising the new “mass action” commenced well before the 2005 effective date of CAFA. In affirming the action of the district court below, the Fifth Circuit answered both questions in the affirmative. A full copy of the opinion can be found here.  

The removed actions included two separate matters filed in the Civil District Court for the Parish of Orleans, State of Louisiana – Warren Lester, et. al. v. Exxon Mobil Corporation, et. al. and Shirely Bottley, et. al. v. Exxon Mobil Corporation, et. al. The Lester matter was filed by over 600 plaintiffs for personal injuries and property damages allegedly resulting from Naturally Occurring Radioactive Materials (“NORM”) in 2002. The Bottley matter, on the other hand, was filed in 2013 as a wrongful death and survival suit filed on behalf of Cornelius Bottley, a decedent-plaintiff in Lester, by his three remaining heirs. Following the selection of a trial flight in the Lester matter, which was to include the claims of Mr. Cornelius Bottley, the Bottley Plaintiffs moved to transfer and consolidate their suit with Lester. The matter was promptly removed by a defendant named only in the Bottley matter.

The Fifth Circuit rejected Plaintiffs’ argument that the consolidation was meant to attach the Bottley matter only to the pending trial flight such that it did not, as CAFA requires, propose a single trial with more than 100 individual plaintiffs. Rather, the Fifth Circuit held that the focus under CAFA is on the consolidation proposed, which in the case of the Bottley plaintiffs, was a consolidation of cases involving “overlapping liabilities, damages and questions of law and fact…the determination [of which] in either case will have great bearing on the other….” Plaintiffs’ Motion did not and, as a matter of law could not, limit consolidation to only the claims set for trial. As such, the Fifth Circuit found that it proposed a “mass action,” i.e. a joint trial of 100 or more plaintiffs’ claims, under CAFA.

More importantly, the Fifth Circuit examined the date of the proposed consolidation as determining the applicability of CAFA. Though Lester had been filed before CAFA’s enactment, the proposed consolidation was proposed years later. The Fifth Circuit found that the proposed consolidation created a new “mass action.” The Fifth Circuit reasoned that a civil action may commence before it becomes a “mass action,” and that the Bottley suit became a “mass action” when Plaintiffs proposed that the claims be tried jointly with those in the Lester matter. Bottley was a “civil action” commenced after CAFA’s effective date that subsequently became a mass action subject to CAFA’s removal provisions.

In affirming the denial of Plaintiffs’ Motion to Remand below, the Fifth Circuit established two compelling rules: (1) that a consolidation is effective to create a “mass action” under CAFA; and (2) that CAFA’s Section 9 requirements are met if one of the two consolidated actions was commenced after CAFA’s effective date.  In addition to providing guidance and interpretation regarding the commencement of a mass action, this opinion demonstrates a broad approach to CAFA.

By Sonny Chastain

In its recent campaign, Bud Light recognizes true friends of the Crown by raising a cold adult malted beverage and chanting Dilly Dilly.  The marketing slogan was created apparently coming out of nonsense and fun.  In its campaign, Bud Light seems to want people to celebrate with a lighthearted toast of Dilly Dilly and escape the Pit of Misery.

On December 1, Modest Brewing Company in Minneapolis introduced Dilly Dilly Mosaic IIPA into the market place.  Instead of the typical “stop it or else” demand letter, Bud Light turned an infringement situation into a marketing opportunity.  Bud Light sent an actor into the Modest Brewery dressed in medieval garb to read a pronouncement from the Crown.   The Town Crier proceeded to read from a scroll, requesting Modest’s latest brew be put on a limited edition run.  The Town Crier stated that the Crown was flattered by the loyal tribute, but noted that Dilly Dilly is a motto of the Crown and disobedience would be met with additional scrolls, formal warning, and a private tour of the Pit of Misery.  As a peace offering, the Town Crier also offered two employees a free trip to the Super Bowl which is being held in Minneapolis.

The unusual cease and desist demand is achieving rave reviews on social media.   Instead of dilly dallying around in the typical strong-arm legal maneuvering, Bud Light raised a Dilly Dilly to the Modest Brewing Company.  In a creative manner, Bud Light made its point of protecting its trademark from further infringement, while generating some laughs and likely some goodwill among consumers. So, to Bud Light, Dilly Dilly!

By Sonny Chastain

General Mills filed an application to register the color yellow appearing as the uniform background on a box of Cheerios.   It contended that consumers have come to identify the color yellow specifically with Cheerios, when used in connection with the goods.  It submitted survey evidence and expert reports to support the claim of acquired distinctiveness.  However, the trademark examiner concluded that General Mills failed to prove acquired distinctiveness and that the mark fails to function as a mark.  An appeal was submitted to the Trademark Trial and Appeal Board (“TTAB”).

General Mills argued that the purchasing public recognizes the color yellow on a package of toroidal (ring or doughnut-shaped) oat-based breakfast cereal as an indicator that it is the source of the cereal.  The record showed that General Mills has sold Cheerios since 1945.  In the decade prior to 2015, General Mills spent over $1 billion in marketing yellow-box Cheerios with sales exceeding $4 billion.  However, the question was not whether consumers recognized the term Cheerios as a source indicator but whether the color yellow identifies origin.

The TTAB agreed with the examiner’s conclusion citing lack of exclusive use of the color yellow.  The Board noted that the examiner pointed to 23 cereal products that offered packaging in a similar color.  Several of the products are even offered by companies which are recognized as General Mills’ biggest competitors:  Kellogg, Post, and Quaker.  Some of General Mills’ survey subjects showed their awareness of several of the products, especially Honeycomb and Corn Pops.  Additional cereal boxes cited included Joe’s O’s, Honey O’s, Tasteeos, Honey Bunches of Oats, Crispix, and Life.  The Board concluded that General Mills is not alone in offering oat-based cereals or even toroidal shaped, oat-based cereal in a yellow package.  Thus, customers are unlikely to perceive yellow packaging as an indicator of a unique source.  While the color may be attractive and eye-catching ornamentation, it alone did not connect to a potential source.   The Board noted that while customers are familiar with the yellow color of the Cheerio’s box, the color yellow is only one aspect of the complex trade dress that includes many other features that perform as a distinguishing and source-indicating function.   It was not persuaded that customers perceive the proposed mark, the color yellow alone, as indicating the source these goods.  The Board found the yellow background did not acquire distinctiveness and does not function as a trademark.

The case teaches that it is important to recognize what mark or components thereof function to identify a source. A question to ponder is, with what features do consumers identify to connect a particular good or service with a source of origin? General Mills took an aggressive view of the source identifying capability of this color which the Board concluded was not correct.  It is possible that if additional features had been included in connection with the overall trade dress, that registration may have been possible.

By Stephen C. Hanemann

The Carriage of Goods by Sea Act (“COGSA”) provides that it shall “apply to all contracts for carriage of goods by sea to or from ports of the United States in foreign trade.” In matters involving international trade, contracts for carriage – involving goods shipped to or from the United States via a foreign seaport – are those covered by a bill of lading or any similar document of title. In GIC Services, LLC v. Freightplus (USA), Inc., 120 F. Supp. 3d 572 (E.D. La. July 29, 2015); rev’d in part 866 F. 3d 649 (5th Cir. August 8, 2017), the EDLA recently held that a shipment of cargo from Texas to Nigeria, covered by a bill of lading, constituted a contract of carriage subject to COGSA.

GIC Services, LLC contracted with Freightplus (USA), Inc. to ship a tugboat, the M/V REBEL, to Lagos, Nigeria. Freightplus contracted with Industrial Maritime Carriers to provide a vessel on which the REBEL was to be carried. When GIC learned that the REBEL was actually delivered to Warri, Nigeria rather than Lagos, it instituted an action for damages against Freightplus.

In addition to the myriad of disputed issues arising out of the shipment of the tugboat, the carrier and shipper disputed the carrier’s right under COGSA to limit its liability to the $500 per package limitation. Freightplus maintained that its actions did not cause GIC’s losses, but even if they did, the carriage was governed by COGSA and Freightplus’ liability should be capped at $500, the COGSA per-package-damages limitation.

Freightplus filed a third-party complaint against IMC claiming that IMC was liable for losses and damages sustained by GIC. Although GIC paid Freightplus the full amount for freight, the payment was never remitted to IMC. Consequently, IMC claimed entitlement to a maritime lien against the REBEL, in rem, for unpaid freight charges for its carriage.

Evaluating the COGSA limitation issue first, the district court ruled that the per-package limitation under COGSA is rendered ineffective if the carrier is responsible for an unreasonable deviation from the contract of carriage. Finding that Freightplus did, in fact, cause or contribute to an unreasonable deviation from the contract of carriage, the Court held that Freightplus was not entitled to the COGSA per package limitation, and that it would answer in damages for all losses incurred by GIC due to the transportation errors. The Court considered, among other factors, Freightplus’ failure to deliver the goods at the port named in the Bill of Lading. The Court found that GIC made a prima facie case against Freightplus for committing an unreasonable deviation under COGSA not only because the tugboat was delivered to the wrong destination port, Warri, Nigeria, and not Lagos, but also secondary to Freightplus issuing an erroneous bill of lading.

The district court assessed $1,860,985 in damages against Freightplus in favor of GIC, but also found that IMC was responsible to pay 30% of that amount due to its contributory fault. But the trial court denied IMC’s claim of lien against the REBEL, in rem. The U.S. 5th Circuit affirmed the amount of damages awarded to GIC, as well as the allocation of fault between IMC and Freightplus.  However the 5th Circuit disagreed with the district court’s finding that IMC was not entitled to assert a maritime lien against the REBEL, in rem.

The 5th Circuit set out the well-settled maritime legal principal that that a maritime lien exists in favor of a ship owner over cargo for charges incurred during the course of that cargo’s carriage. Further, the 5th Circuit explained that maritime law permits an action in rem against the cargo itself and, therefore, IMC was entitled to obtain a maritime lien against the REBEL. Despite arguments to the contrary, the lien remained valid because the ocean carrier (IMC) took no action to release any source liable for unpaid freight from liability. The district court indicated that a different standard might apply concerning a carrier’s intent to release a liable source for unpaid freight from liability in the context of an in personam action and an in rem action, but the 5th Circuit disagreed and concluded that the district court erred in barring IMC’s maritime lien against the REBEL.

By Tod J. Everage

For nearly 30 years, district courts within the US 5th Circuit have evaluated whether maritime or state law applies to oil and gas service contracts using the 6-factor test from Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990). The Davis factors focused mainly on the nature of the work being performed and included the following questions: (1) what does the specific work order in effect at the time of the injury provide? (2) what work did the crew assigned under the work order actually do? (3) was the crew assigned to work aboard a vessel in navigable waters? (4) to what extent did the work being done relate to the mission of that vessel? (5) what was the principal work of the injured worker? and (6) what work was the injured worker actually doing at the time of injury? The arduous test has repeatedly been a subject of criticism in the 5th Circuit.

Seizing the opportunity, the 5th Circuit in In re Larry Doiron, Inc., voted to rehear the case en banc to finally rid itself of the Davis-inducing headaches. We previously wrote about this case after its first panel decision here. Upon initial consideration, the 5th Circuit applied Davis to a flow-back services contract, finding it to be a maritime contract. The Circuit Court’s decision fell in line with many other Davis cases that – even after weighing the 6 factors – seemed to primarily turn on the use of a vessel for the work. See here for example. Seeing that factor as gaining primacy, the 5th Circuit simplified the test down to two factors focusing more on the maritime nature of the contract rather than the work itself.

Indeed, the 5th Circuit noted that “most of the prongs of the Davis & Sons test are unnecessary and unduly complicate the determination of whether a contract is maritime.” And, the evaluation of those factors often required the Court to parse through minute factual details to determine what was going on. Take this case for example. The 5th Circuit had never evaluated a flow-back contract before. Thus, to answer the 2nd factor, the Court was forced to analogize flow-back services to casing, wireline, and welding services. The en banc panel found that exercise did nothing more than add “to the many pages dedicated to similar painstaking analyses in the Federal Reporter.” The Court also found the 3rd, 4th, and 6th factors equally irrelevant to finding whether a contract was maritime or not.

Though its own Davis-based jurisprudence had been leading the Court towards a test focused on the necessity of a vessel, the 5th Circuit looked to the U.S. Supreme Court for affirmation. In Norfolk So. Railway Co. v. Kirby, 543 US 14 (2004), the Supreme Court held that a claim for money damages for cargo damaged in a train wreck (on land) was governed by maritime law. Its analysis was based on a finding that the two bills of lading covering the transport of the cargo from Australia to Alabama were maritime contracts. Even though the train crashed on land, the Court found dispositive that the “primary objective” of these bills was “to accomplish the transportation of goods by sea from Australia to the eastern coast of the United States.” It was the nature of the contract that persuaded the Court, which was maritime commerce.

With that guidance in mind, the 5th Circuit set out a “simpler, more straightforward test.” The first question to ask is whether the contract is one to provide services to facilitate the drilling or production of oil and gas on navigable waters? This question will avoid having to delve into the actual services performed and more into the location of those services. If the services are intended to be provided on the water, the next question is whether the contract provides or whether the parties expect that a vessel will play a substantial role in the completion of the contract. If the answer is “yes” to both questions, the contract is maritime. Paring the test from 6 to 2 allows reviewing courts to “focus on the contract and the expectations of the parties.”

Though the other four Davis factors were tossed aside, they were not tossed away. The 5th Circuit left open the possibility of using those factors when dealing with an unclear contract. However, by doing so, it seems inevitable that all parties who face an unfavorable application of state or maritime law will claim the contract is unclear and find ways to evaluate the discarded factors anyway; especially those involving disputed oral work orders. We shall see.

Lawyers are notorious for mucking up the works and over complicating seemingly straightforward issues. Try finding a one-page contract for any services nowadays that isn’t written in 6 point font. The 5th Circuit’s en banc decision is a breath of fresh air. After years of debating why wireline work is not inherently maritime but why casing work is, maritime lawyers now have a much simpler (in theory) test to aid in predicting the applicable law to a contract, which can have serious ramifications depending on the outcome.

By Jaye Calhoun, Jason Brown, Willie Kolarik, Phyllis Sims, and Angela Adolph

The Louisiana Department of Revenue (the “Department”) has joined the ranks of cash-strapped states looking to raise additional corporate tax revenue through scrutinizing transfer pricing and proposing adjustments.  In transfer pricing audits, the Department looks at transactions between related parties (having common ownership) and seek to determine whether the transactions are priced as they would be if the parties were unrelated – i.e., whether the related-party transactions were made based on arm’s length standards. The current wave of arm’s-length transfer pricing audit activity in Louisiana is unusual, because Louisiana recently enacted an add-back statute and because the Department has been seemingly more active recently in attempting to assert the discretionary adjustment authority provided in La. R.S. 47: 287.480 to force related taxpayers to file combined returns.

During the past few years, the Department has worked with the Multistate Tax Commission’s (the “MTC”) transfer pricing initiative and Department personnel have received transfer pricing training from both the MTC and outside consultants.  The Department is also sharing information with other states and the Service.  The extent to which the Department is relying on outside consultants during the preparation of its quasi-transfer pricing study is not clear.

The Department’s recent arm’s-length transfer pricing adjustments rely on Louisiana’s transfer pricing statute (La. R.S. 47:287.480(2)), which tracks, verbatim, Internal Revenue Code Section 482 and permits the Secretary of Revenue to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among related businesses, if the Secretary determines that such distribution, apportionment, or allocation is necessary to prevent evasion of taxes or clearly to reflect the income of any of those businesses.  Historically, the Internal Revenue Service (the “Service”) relied on Code Section 482 to make a wide variety of adjustments to the federal tax returns of related taxpayers.  However, since the mid-1980s the Service has generally limited its application of Code Section 482 to arm’s-length transfer pricing adjustments for international transactions between related taxpayers. For its part, the Department appears to be targeting Louisiana taxpayers with intercompany royalty expenses for transfer pricing audits. But other intercompany transactions may trigger examinations as well.

The Department’s current arm’s-length transfer pricing audit approach relies on the comparable profits method,  In essence, Louisiana auditors are coming up with their own “transfer pricing studies” for targeted taxpayers.  The Department appears to be using the Compustat Global Database to identify comparable companies that engage in activities similar to the auditor’s understanding of the taxpayer’s activities and then attempts to locate those same companies in a proprietary third-party database that purports to compile royalty rates extracted from unredacted license agreements filed with the Securities and Exchange Commission. The Department also relies on largely undisclosed subjective and objective criteria to narrow the list of comparable entities, such as excluding any comparable entity with losses.

The Department’s arm’s-length transfer pricing adjustments contain two other significant flaws.  First, if the Department’s own audit adjustment determines that a taxpayer’s operating profit margin is within the arm’s-length interquartile range, the Department still creates an adjustment to increase the taxpayer’s operating profit to the median operating profit margin.  Second, the Department has attempted to apply its audit adjustments to one hundred percent (100%) of a taxpayer’s operating income, even if only a small portion of the taxpayer’s operating income relates to controlled transactions.

Implications

The current wave of Louisiana arm’s-length transfer pricing adjustments is cause for concern.  Indeed, not only have the obvious flaws in the Department’s transfer pricing methodology already resulted in significant inappropriate adjustments, but there is reason to believe the Department will refuse to correct those errors, preferring to litigate one or more test cases that will set a favorable precedent for its methodology.  Such a precedent could be damaging to any taxpayer that engages in related-party transactions and does business in Louisiana.

The Department’s recent approach to proposing arm’s-length transfer pricing audit adjustments reflect an attempt to apply a novel understanding of Code Section 482 transfer pricing concepts to Louisiana taxpayers.  The Department’s proposed audit adjustments also suggest that the Department will not accept a taxpayer’s third-party transfer pricing study, even if the Service accepted that study and agreed that the taxpayer’s federal taxable income was correctly reported.

Properly documenting intercompany transactions is key to achieving a good result in a transfer pricing audit.  Related taxpayers that engage in multi-state or international intercompany transactions should review their intercompany agreements and carefully document any intercompany transactions.  That documentation should include a determination of the functions performed and assets employed by each party to the transaction as well as any risks assumed related to the transaction.  Taxpayer’s should also regularly review and update their transfer pricing studies and internal transfer pricing methodology.

Because the Department is intent on pressing this issue, a taxpayer that has received an indication or a proposed assessment suggesting that the Department intends to raise a transfer pricing issue, should handle any response carefully. Once a proposed or formal assessment is issued taxpayers should take care to calendar all deadlines and strictly follow all procedural formalities for challenging/appealing disputed adjustments.  It is important not to miss any opportunity to contest a proposed transfer pricing adjustment, because, until the Department refines its approach, many of the adjustments we have seen do not appear to correctly reflect income and are subject to challenge.

For additional information, please contact: Jaye A. Calhoun at (504) 293-5936; Jason Brown at (225) 389-3733; Willie Kolarik at (225) 382-3441; Phyllis Sims at (225) 389-3717; or Angela  Adolph at (225) 382-3437

By Carey J. Messina and Kevin C. Curry

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “TCJA”). The TCJA enacts a number of important tax changes, including some significant changes to the federal gift tax and the federal estate tax that take effect in 2018. Specifically, the TCJA doubles the amount of the “applicable exclusion amount” for both gift tax and estate tax purposes (as well as the generation-skipping transfer tax exemption). Under prior law, the applicable exclusion amount in 2018 would have been $5,600,000 per person but it will now be approximately $11,200,000 per person. This increase in the applicable exclusion amount will serve to make the estate tax a “non-issue” for more individuals.

Any individuals who included formula bequests in their wills that were tied to the applicable exclusion amount should review the terms of their wills to make sure the increase in the applicable exclusion amount does not create unintended consequences (such as leaving too much money to trusts for children to the detriment of a surviving spouse). Also, the new applicable exclusion amount may allow spouses to structure their wills differently without estate tax consequences (such as simply leaving all property to a surviving spouse in full ownership rather than a usufruct or trust structure).

For those individuals who continue to have estate tax exposure after the TCJA, those individuals now have additional gift tax exemption and may consider making additional gifts to reduce their estate if they had otherwise used most of their applicable exclusion amount previously. The gift and estate tax changes by the TCJA will expire and revert back to the prior law on January 1, 2026 (unless extended in the future) so taxpayers with taxable estates may want to take advantage of the changes before the provisions expire or are changed by a later law.

 

 

By Jessica C. Engler

Delays are an unfortunate, but common occurrence on construction projects. These delays are sometimes caused by the project’s owner through change orders, delays in providing equipment and materials, slow response to requests for information, etc. When these delays occur, contractors will often request adjustments to the contract to account for the delay.

A major expense that certain contractors—particularly those performing government contracts—can recover as a portion of the contract price is home office overhead. Home office overhead includes expenses like home office staff, home office utilities, rent, supplies, advertising, legal and accounting expenses, insurance, and other general home office expenses that cannot be traced to or attributed specifically to one construction project. When a project is extended without an adjustment to the contract price, the contractor’s income stream for that project can be interrupted, which affects home office overhead—particularly if the contractor is not working on another project during the delay. Consequently, a reallocation of home office overhead may be needed, and different methods have emerged for approximating that reallocation.

One commonly used formulas for allocating home office expenses in cases involving a government owner is the Eichleay formula, which was established by a decision of the Armed Services Board of Contract Appeals in Eichleay Corporation, ASBCA No. 5138, 60-2 BCA 2688 (1960), aff’d on recon., 61-1 BCA 2894. Stated generally, the Eichleay formula “computes that daily amount of overhead that the contractor would have charged to the contract had there been no delay, and gives the contractor this amount of overhead each day of delay that has occurred during performance.” [1]

In limited cases, Louisiana courts have applied Eichleay when awarding a contractor delay damages. Louisiana courts apply a three-prong test to determine if a claimant is entitled to recover extended home office overhead damages, comprising:

  1. The contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay;
  2. The contractor must show that it incurred additional overhead expenses; and
  3. The contractor must have been required to remain “on standby” for the duration of the delay. [2]

To be considered “on standby” under this test, the contractor must show: (1) the delay was of indefinite duration; (2) the contractor was required to return to work at fully speed and immediately during the delay; and (3) most, if not all, of the contract work was suspended. [3]

The U.S. District Court for the Eastern District of Louisiana recently evaluated the meaning of “on standby” in determining whether a contractor was entitled to extended home office overhead. [4] Team Contractors, LLC v. Waypoint NOLA, LLC involved the development and construction of a hotel in downtown New Orleans, Louisiana (the “Project”). Team Contractors, LLC (“Team”) contracted with Waypoint NOLA, LLC (“Waypoint), the Project’s owner, to construct and/or renovate seven building floors. Waypoint also contracted with HC Architecture, Inc. (“HCA”), wherein HCA would serve as the Project’s architect and provide “all normal Architectural, Civil, Structural, and [mechanical, electrical, and plumbing] engineering services.” HCA subcontracted the mechanical, electrical, and plumbing (“MEP”) design work to KLG, LLC.

HCA delivered a complete set of specifications, including KLG’s MEP plans, to Team. Sometime after construction began, numerous components of KLG’s MEP design were determined to be noncompliant with New Orleans code requirements. Consequently, Waypoint issued several construction change directives, under which Team had to remove the faulty systems and rebuild the revised MEP systems before continuing its scheduled work.

Team filed suit, alleging breach of contract by Waypoint and negligence by Waypoint, HCA, and KLG. Team claimed that it incurred damages in the form of additional subcontractor work, hourly labor, increased supervision, and other recurring expenses, which extended its obligations and delayed the Project’s completion date. Among other damages, Team’s expert opined that Team suffered extended home overhead damages from the delay, with those damages calculated using the Eichleay formula.

The Defendants sought summary judgment that Team was not entitled to recover damages for extended home office overhead under Eichleay because there was no stoppage or suspension of the work. In response, Team presented evidence of and argued that there was a functional stoppage of “all or most of the work performed” pursuant to the contract, at least some of which was the result of construction change directives. For example, Team presented deposition testimony that the work was not advancing beyond minor, insignificant tasks.

The Eastern District Court evaluated Louisiana courts’ application of Eichleay, which it found has been “seemingly adopted . . . from federal courts without alteration.” Accordingly, the Court could rely on federal analyses of the issues. Federal courts have previously held that a total work stoppage is not required to recover extended overhead damages, so a contractor’s performance of minor tasks during the suspension does not bar recovery under Eichleay. The Court agreed that it was sufficient (for the purposes of Eichleay) for a contractor to demonstrate the work had “stopped or significantly slowed.” Therefore, to the extent it can prove it incurred delay-related damages and that those damages relate to the MEP errors, Team is not barred from recovering extended overhead damages under Eichleay.

This case is important for contractors, who often continue to perform some routine tasks or minor, minimal activities during a work delay. Under Team, continuing to perform work in some minor contexts, determined on a case-by-case basis, may not disqualify a contractor from being able to recoup delay-related damages. This case is also interesting because the suit was between private parties. Typically, the Eichleay formula is used in the context of government contracts. While the Eastern District did not make a specific ruling on the appropriateness of the Eichleay formula between private parties, this case leaves open the possibility that Eichleay could see more use in private contract disputes.

__________________________

[1] Id. (citing Bert K. Robinson, Construction Law: Elements of Contractor’s Damages, 38 La. B. J. 247, 248 (1990)).

[2] Gilchrist Const. Co., LLC v. State, Dep’t of Transp. & Dev., 2013-2101 (La. App. 1 Cir. 3/9/15), 166 So. 3d 1045, 1065.

[3] Id.

[4] CA-No. 16-1131, 2017 WL 4368084 (E.D. La. Oct. 2, 2017).

Overview

On December 22, 2017, President Trump signed into law H.R.1, also known as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes the most significant and sweeping changes to the federal taxation of business and individuals in more than a generation.  Due to the unusual speed with which the TCJA went through the legislative process, the new law raises several technical issues and contains numerous drafting errors that are expected to be addressed in a 2018 technical corrections bill.

This blog post summarizes several of the TCJA’s most significant tax changes for businesses and individuals.  The Kean Miller Tax and Transactions Groups will post additional summaries of specific, identified provisions in the coming days.

Corporate Tax Changes

Reduced Corporate Tax Rate – The TCJA permanently reduces the corporate income tax rate from 35% to 21% for tax years starting in 2018.

Capital Expenditures – For the next five years (or, for certain property, six years) the TCJA allows corporations to fully expense the cost of “qualified property,” including tangible personal property and computer software.  This provision is phased out after five years and does not apply to property currently in use.  In addition, the TCJA alters the cost recovery period for certain real property and leasehold improvements.  The Section 179 expensing cap is increased from $500,000 to $1 million.

Dividends Received Deduction – The TCJA reduces the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50% for tax years beginning after December 31, 2017.

Repeal of the Corporate AMT – The Corporate AMT is repealed for tax years beginning after 2017 and taxpayers can claim a refund for previously paid AMT amounts.

Net Operating Losses (“NOLs”) – The deduction for NOLs is limited to 80% of taxable income for losses arising in tax years after 2017.  NOLs generated in tax years ending after 2017 may be carried forward indefinitely, but the two-year carryback provisions are repealed (with certain exceptions).

Interest Expense Limitation –  For tax years beginning after December 31, 2017, the deduction for interest expense is limited to 30% of earnings before interest, taxes, depreciation and amortization through 2021 and of earnings before interest and taxes beginning in 2022.

Section 451 Revenue Recognition – Under the TCJA, and for tax years beginning after 2017, an accrual-method taxpayer is required to recognize income that is subject to the all-events test no later than the tax year in which the income is taken into account on the taxpayer’s financial statements (except for certain income).  The deferral method of accounting for advance payments for goods and services in Revenue Procedure 2004-34 is codified.

Research and Experimental Expenditures – Amounts paid or accrued for Research &Experimental expenditures after 2012 are capitalized and amortized over five years (15 years for certain foreign research expenditures).

Section 199 Domestic Production Deduction – The Section 199 deduction is repealed for tax years beginning after 2017.

Entertainment Expenses and Fringe Benefits – The 50% deduction for entertainment expenses is repealed, as are deductions for qualified transportation fringe benefits.  Deductions for other fringe benefits are also reduced or eliminated.

Like-Kind Exchanges – Under the TCJA, like-kind exchanges will be tax free, but only for real property exchanges.

Cash Accounting Limit Raised – More businesses will be able to use cash accounting as the upper limit in average annual gross receipts (measured as of the prior three years) has been raised from $5 million to $25 million.

Self-Created Property – The TCJA amends Section 1221(a)(3) and excludes patents, inventions, models or designs (whether or not patented), and secret formulas or processes that are held by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property, from the definition of a capital asset.  This provision is effective for dispositions after December 31, 2017.

Affordable Care Act – While the TCJA reduced the Affordable Care Act (the “ACA”) individual penalty to zero for months beginning after December 31, 2018, the ACA’s employer mandate rules have not been repealed and remain in full effect.

International Tax Changes

The TCJA’s most significant changes are to the US international tax regime.  Those changes include implementing a quasi-territorial tax system, imposing a one-time transition tax on accumulated foreign earnings, and imposing anti-deferral and anti-base erosion rules.

Pass-Through Deduction

The TCJA creates new Section 199A, which permits an individual to deduct up to 20% of their “qualified business income” earned through a partnership, S corporation or sole proprietorship, and qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income.  This deduction expires on December 31, 2025.

Qualified businesses includes partnerships; S corporations; sole proprietorships; REITs; cooperative and master limited partnerships.  However, specified service trades or businesses with income over $315,000 of taxable income for joint filers or $157,500 for other filers (with the deduction phased out over the next $50,000/$100,000 of taxable income) are excluded, including:

  • Any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services; or
  • Any business where the principal asset of the business is the reputation or skill of one or more of its employees

Qualified business income includes the net amount of qualified items of income, gain, deduction, and loss of a qualified trade or business that is effectively connected with the conduct of a US trade or business.  Certain specified investment-related income, deductions, or losses, and an S corporation shareholder’s reasonable compensation, guaranteed payments, or—to the extent provided in regulations—payments to a partner who is acting in a capacity other than his or her capacity as a partner are excluded from the definition of qualified business income.

Qualified business income deduction is limited to the greatest of 50% of wages paid by the business to its employees or 25% of wages paid plus 2.5% of the cost (unadjusted basis) of certain qualified business property.  Taxpayers with less than $315,000 of taxable income (joint return) or $157,500 (other filers) are not subject to this limitation (the wage limitation is phased in over the next $50,000/$100,000 of taxable income).

Individual Income Tax Changes

The TCJA reduces individual tax rates for taxable years beginning January 1, 2018 and ending December 31, 2025.  The top marginal tax rate is reduced from 39.6% to 37% and bracket widths are modified.  The new tax brackets are summarized below:

Single Individuals:

  • 10% – $0-$9,525
  • 12% – $9,525-$38,700
  • 22% – $38,700-$82,500
  • 24% – $82,500-$157,500
  • 32% – $157,500-$200,000
  • 35% – $200,000-$500,000
  • 37% – $500,000+

Married Filing Jointly and Surviving Spouses:

  • 10% – $0-$19,050
  • 12% – $19,050-$77,400
  • 22% – $77,400-$165,000
  • 24% – $165,000-$315,000
  • 32% – $315,000-$400,000
  • 35% – $400,000-$600,000
  • 37% – $600,000+

In addition to temporarily reducing the individual income tax rates and modifying the bracket widths, the TCJA also increased the standard deduction for married individuals filing jointly from $12,000 to $24,000 and for single filers from $6,350 to $12,700.  The TCJA also imposes significant limits on certain itemized deductions and eliminates several other deductions.  Notably, the TCJA limits the state tax deduction to $10,000, limits the mortgage interest deduction to the first $750,000 in principal value, and eliminates the home equity debt deduction and the personal exemption.  The limitation on itemized deductions, which phased out 3% of a taxpayer’s itemized deductions once income exceeded a threshold, is also suspended through 2025.  The Alternative Minimum Tax (“AMT”) is retained but the exemption is increased.

The Affordable Care Act required individuals not covered by a health plan that provided minimum essential coverage to pay a penalty with their federal tax return, unless an exception applied.  The TCJA permanently reduces that penalty to zero for months beginning after Dec. 31, 2018.

The legislation also permits distributions from retirement plans for persons who suffered losses as a result of the 2016 severe storms and flooding in Louisiana without penalty (but subject to tax, which may be spread over 3 years).  The distributions must be made before January 1, 2018.  Retirement plans may be amended to permit such distributions, and the amendment must be made by the last day of the first plan year beginning on or after January 1, 2018.  Also, distributees are permitted to repay such distributions within 3 years and treat them as rollovers.  This is an extension of the IRS guidance issued in 2016.

Implications

The TCJA is a significant and substantive, yet flawed revision to the US federal income tax regime.  The business tax consequences of the TCJA are only beginning to come into focus, but it is clear that most businesses should consider whether restructuring would make sense to maximize the tax benefits available under the TCJA.  In addition, certain provisions of the TCJA, such as the limitation on the interest expense deduction, could negatively impact certain businesses.  Those businesses should consider whether it is possible to restructure operations or financing to avoid or minimize the tax impact of the TCJA’s limitations on interest expense deductions.  For example, a highly-leveraged business could consider exploring alternative financing arrangements that do not generate interest expense.  Owners of flow-through entities that are not eligible for the 20% qualified business income deduction should also consider restructuring their operations in a manner that allows them to claim all or a portion of the deduction.

The TCJA will also have substantial state and local tax implications.  It is not clear at this time whether or to what extent states will conform to the provisions created by the TCJA.  But states like Louisiana that use federal taxable income as a starting point for computing state taxable income will certainly be impacted by the TCJA.

Kean Miller’s Tax and Transactions Group will continue to post updates as the implications of the TCJA for business and individual taxpayers become clearer.  For additional information, please contact:  Jaye Calhoun, Willie Kolarik, Jason Brown, Kevin Curry, Linda Clark, Bob Schmidt, and David Hamm.