Intellectual property comprises some of the most valuable assets a business may hold – its brands, patents, know-how, and other intangible rights that make the business unique.  The intellectual property assets (IP) throughout the energy sector—upstream, midstream, downstream and service providers along the way—will be affected as more energy companies seek bankruptcy relief in the wake of both the oil price war and the Covid-19 pandemic. Even companies not considering bankruptcy for themselves are likely to be affected when their IP licensors or licensees file for bankruptcy.

There is no one-size-fits-all answer to IP or bankruptcy issues, much less when they collide in a licensor or licensee’s bankruptcy case. A creditor-licensor of intellectual property rights is in a vastly different position than a creditor-licensee who takes its rights from a newly bankrupt party. This article explains some of the rights and obligations of the non-debtor licensor and licensee of IP. It also provides a brief overview of how potential IP buyers can benefit from Section 363 of the Bankruptcy Code, which allows them to acquire a bankrupt entity’s IP assets free and clear of that entity’s liabilities.

1. Rights and restrictions by a licensor against the debtor-licensee.

When an IP licensee files bankruptcy (i.e., becomes the “debtor” in a bankruptcy case), the non-debtor licensor may be placed in a precarious position.  Debtors are debtors because they cannot (or will not) pay their debts. If the debtor-licensee was already behind on license payments, and then files bankruptcy, the non-debtor licensor’s first instinct may be to terminate the license. Once the bankruptcy is filed, however, the licensor cannot unilaterally terminate the license without bankruptcy court approval.  The filing of a bankruptcy petition triggers an “automatic stay,” which prevents creditors from taking any actions against the debtor and its estate due to pre-bankruptcy debts. Violations of the automatic stay can carry hefty fines or worse; therefore, it is imperative to tread carefully and seek advice of counsel before taking any actions against a bankrupt debtor. Moreover, many courts have found that the “automatic termination” clauses that trigger upon a filing of bankruptcy are unenforceable. Thus, before terminating the license, the non-debtor licensor must obtain permission to do so from the bankruptcy court.

A bankruptcy filing gives the debtor-licensee great latitude in how to treat what is termed an “executory” IP license. The classification of a license as “executory” is an important distinction because a debtor-licensee may elect to reject (terminate), assume (keep the license as-is), or assign (effectively, sell or otherwise transfer)[1] an executory license. See 11 U.S.C. §365. While the bankruptcy statute does not define the term, a contract is generally considered “executory” if each party has ongoing obligations to perform in some way, and courts have been overly accommodating in finding contracts to be executory. For example, some courts have determined that a licensor’s continued obligation not to sue its licensee for infringement caused the license to be executory. Obligations as simple as a licensee’s requirement to maintain confidentiality, appropriately mark a patented product, or provide accounting of sales have been found to satisfy the “continued obligation” requirement.

A licensee’s ability to assume or assign a license may raise great alarm to a licensor concerned that its rights could fall into the hands of an ineffective licensee or a competitor.  Luckily, the power to assign or assume a license is not absolute. Section 365(c)(1) of the Bankruptcy Code prevents a debtor-licensee from assigning or assuming an executory contract when (a) the licensor does not consent to the assumption/assignment and (b) applicable law otherwise excuses the licensor from accepting performance or rendering performance to another party. While an anti-assignment clause in the license will be disregarded for these purposes, a clause that specifically allows assignment under certain circumstances may be used to provide the requisite consent. A non-debtor licensor should insert itself into negotiations about a possible sale and assignment of a license to ensure that its rights are protected, and it should be prepared to file an objection to the assignment with the bankruptcy court when necessary to protect and preserve its rights.

Depending on the circumstances, a licensor may urge the bankruptcy court to treat license payments that accrue while a bankruptcy case is pending as an administrative claim. If accepted, the claim would be entitled to priority over some other claims against the estate and paid during the course of bankruptcy. If unsuccessful, however, this action may be detrimental to the licensor’s rights.

2. Rights and restrictions of the licensee against a debtor-licensor.

When a licensor files bankruptcy, a licensee will logically fear that it will lose the rights to continue using a critical piece of technology. After all, the same statutes that allow a bankrupt licensee to reject, assign, or assume an executory contract also apply to the licensor. Importantly, Section 365(n) of the Bankruptcy Code protects a licensee’s ability to continue business as usual in some regards. Notably, even if a bankrupt licensor rejects an IP license, the licensee can elect to either (1) accept the termination and assert a breach of contract claim or (2) continue to act on the license as it existed on the day the bankruptcy petition was filed. In effect, as long as the licensee continues to uphold its end of the license (e.g., pay royalties, appropriately mark and account for product sold, etc.), the licensee will be entitled to continue using the technology or other licensed IP as it existed when the bankruptcy petition was filed. One important caveat is that the licensee’s rights will often not extend to any improvement to the technology made after the petition is filed. Moreover, the licensee is on its own if an infringement claim is made against it. A licensor who has rejected a license will not be required to perform any obligations under the license, such as defending its licensee from infringement claims, other than to refrain from suing the licensee for infringement.

It is important to note that the particular provisions of Section 365(n) only apply to copyright, patent and trade secret/know-how licenses; they do not apply to trademark licenses.  For information on a recent Supreme Court ruling concerning trademarks and bankruptcy, see our article at https://www.louisianalawblog.com/business-and-corporate/recent-united-states-supreme-court-decision-tackles-question-of-what-happens-when-bankruptcy-meets-intellectual-property/.

3. Issues and benefits of acquisitions through bankruptcy – the 363 sale.

Sales of a bankrupt company’s assets through Section 363 of the Bankruptcy Code offer a great opportunity for a solvent company to expand its patent portfolio, acquire desirable IP licenses, and otherwise expand its IP.  Bankruptcy sales are a specialized form of asset acquisition; a potential buyer should engage experienced counsel to guide it through the process and avoid potential landmines.  One particularly attractive aspect of “363 Sales,” as they are often called, is that purchasers of estate assets can usually obtain those assets free and clear of any liens and encumbrances.[2]  The buyer can often take the assets free of any unknown liabilities, such as infringement claims that pre-date the sale.

As with any asset purchase, due diligence will need to be performed on the assets (IP) to be acquired. Unlike typical deals, however, sales through the bankruptcy are often subject to a relatively short timeline. Due diligence of the bankrupt assets is typically compressed and may have to be performed without substantial assistance from the bankrupt seller, who often lacks the necessary funds or infrastructure to assist. Diligence is particularly important because the seller may cease to exist as a going concern soon after the sale closes.  Post-closing indemnities are rare, and trying to enforce one may be practically impossible.  This risk is typically factored into the purchase price for the assets.

Moreover, portfolios are often acquired in less than pristine shape. It costs money to maintain IP rights: both U.S. and foreign patent and trademark registrations require the payment of maintenance fees to remain in force, and many foreign countries require these payments annually. The failure to pay these fees at any time may result in the abandonment of the rights. As such, the potential purchaser needs to ascertain the status of all significant intellectual property rights and develop a plan during the due diligence to take over and cure[3] any issues or defects that may exist. Likewise, to the extent that pending applications are acquired, the purchaser needs to be ready to take over these applications in whatever state they exist and take immediate action to perfect these rights. Kean Miller maintains relationships with foreign IP attorneys who are ready to assist our clients in the protection of their rights across the globe.

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[1] Perhaps the biggest concern is that a debtor-licensee may assign its license to a competitor of the licensor.

[2] Chapter 11 Bankruptcy permits licensees of the estate’s IP to petition the Court to protect their interest by insuring that the licensees be permitted to continue using the technology.

[3] Some jurisdictions allow for the revival of IP rights upon the payment of the owed annuity and a surcharge, while others require the owner to file a petition explaining why the payment was missed. Depending on the circumstances, forfeited rights may not be able to be revived.

Last week, President Trump unveiled his Guidelines for Opening Up America Again.  The Guidelines present a three-phase, criteria-based, framework to allow individuals and employers to return to normal activities.  The return-to-work envisioned by the White House calls for the easing of current restrictions, not the wholesale abandonment of those restrictions.  The guidelines are not statutes nor regulations, but are guidelines.  Ultimately, state and local governments may establish specific requirements for meeting the White House’s guidelines, and those requirements will likely vary.  For example, in advance of Texas’ move to re-open, Harris County, Texas Judge Lina Hidalgo issued an order mandating that everyone in Harris County over the age of 10 wear a face covering when outside their home.  Judge Hidalgo’s order is effective April 27, 2020 through May 26, 2020.  Although many state and local governments have not issued specific return-to-work requirements, there is much to be gleaned from the White House’s guidelines.

At each of the White House’s phases, there are certain expectations for both individuals and employers.  Although employers do not yet know what the specific return rules may be in their state, parish, county, or municipality, employers should begin to consider what they will need to do to meet the White House guidelines and any forthcoming state or local rules.  During all phases, the White House encouraged employers to develop and implement appropriate policies for social distancing and protective equipment, temperature checks, sanitation, use and disinfection of common and high-traffic areas, and policies related to travel (including adhering to CDC guidelines regarding isolation following travel).

Recognizing vulnerable workers, in phases 1 and 2, employers are encouraged to strongly consider “special accommodations” for personnel who are members of a vulnerable population.  Consistent with this guideline, vulnerable individuals are likewise encouraged to continue to shelter in place.

In phases 1 and 2, employers are encouraged to continue to allow teleworking.  For those who return to work, social distancing (strict social distancing in phase 1 and moderate social distancing in phase 2 ) will be the new normal (both at work and in public settings), and physical touching (e.g., handshaking) is a thing of the past.  Everyone (both in the workplace and in public) should be given a 6-foot personal area.  To assist with social distancing, the White House guidelines call for the closing of common areas in employment settings (during Phases 1 and 2), and employees should not use other employees’ telephones, desks, spaces, tools, or equipment.  The idea is to decrease the opportunities for contact and cross-contamination.  This includes areas of potential cross-contamination such as printers, copy machines, and even the ubiquitous (but high touch) coffee machine, and employers should consider how to minimize those contact points.

To minimize waits for elevators and to avoid rushes of employees at one time, flexible and staggered work schedules should be considered.  To the extent necessary, workspaces may need to be modified to increase distances between employees and possibly add physical barriers between employees (e.g., “sneeze guards”).  For some employers, it may make sense to also establish flow patterns and make certain hallways and stairwells one-way, to keep employees from running into one another.  Employees may still need to interact with one another, so remote and virtual interactions should be the rule – even within the same workplace.  Employers will also need to serve as gatekeepers for their visitors, and visitors to the workplace should be kept to an absolute minimum.

Once employees return to work, employers will need to pay special attention to cleaning practices and ensuring a safe work space in compliance with CDC, OSHA, state, and local guidelines.  Employers should be prepared to continue to educate employees on proper hygiene, including hand washing, no touching of the face, and covering one’s mouth and nose when coughing or sneezing.  Employers will need to make sure to have sufficient hand washing stations and supplies, paper towels, hand sanitizer, disinfectant wipes, and tissues.  Depending on the employment setting, employers may have to provide PPE or may be ordered to provide cloth face masks.  To maintain a healthy work environment, employers should be prepared for routine professional cleanings and disinfecting, consistent with CDC guidelines, as well as regular and recurring cleaning of high touch areas throughout the day of things such as doorknobs and handles, elevator buttons, and drawer pulls.  Employers may also want to consider removing supplies and common-use items from printer and copy areas.

The guidelines also call for employers to monitor their workforces for symptoms of COVID-19 and not to allow anyone who is symptomatic to physically return to work until cleared for return.  Importantly, the guidelines also call for employers to develop and implement policies and procedures for workforce contact tracing following an employee’s positive COVID-19 test.  Limiting employee interactions should greatly simplify contact tracing.

The first 2 phases of the White House guidelines address the path back to “normal.”  Phase 3 is a return to some semblance of normalcy, or at least a new normal.  A return to normal as we knew it may not occur until a vaccine or some other mitigating anti-viral medicine is found.

The coronavirus continues to adversely impact so many, and the court systems across the country are adapting in kind.  On April 2, 2020, Louisiana’s Governor in Proclamation JBE 2020-41 suspended all legal deadlines at least until April 30, 2020.  Further, the Louisiana Supreme Court has issued orders over the last few weeks to help the court system navigate through these challenging times of our increasingly disrupted world.  Below is a digest of the most up-to-date information regarding courts in Louisiana as of the time of this posting.

On April 22, 2020, the Supreme Court amended its April 6, 2020 order as it pertains to jury trials and remote proceedings.

As of April 6 2020, the Louisiana Supreme Court repealed all of its former orders and replaced it to continue all civil bench trials, hearings, and court appearances scheduled to commence in any Louisiana state court before May 1, 2020, to be reset by local order for a later date no earlier than May 4, 2020. All jury trial, civil or criminal, were continued until June 30, 2020 pursuant to the Louisiana Supreme Court’s April 22, 2020 order.

Until at least May 4, 2020, courts may only conduct in-person proceedings to address emergency matters that cannot be resolved virtually. Courts must continue to take measures to limit access to courtrooms and other spaces, with absolute minimum physical contact, to practice social distancing and limit in-person court activity to only the emergency matters. As this situation is constantly changing, courts are further instructed to follow all guidelines issued by the Center for Disease Control, the President and the Governor, and to further limit access to courtroom and other spaces to the maximum number of people set forth in any future guideline or official proclamation that may be issued. All emergency matters should be conducted with the use of video and telephone conferencing whenever possible.

Hearings related to civil protective orders, child in need of care proceedings, emergency child custody matters, proceedings for children removed from their home by emergency court order, proceedings related to emergency interdictions and mental health orders,  temporary restraining orders and mental health orders, and matters of public health related to this crisis and other emergency matters necessary to protect the health, safety and liberty of individuals as determined by each court are considered emergency civil matters that should be conducted via video and/or telephone conferencing.

Court proceedings by telephone, video, teleconferencing or any other means that do not involve in-person contact may proceed with consent of all parties and the judge. Further, courts may consider matters that can be resolved without in-person proceedings.  Per its April 22, 2020 order, the Louisiana Supreme Court ordered that consent for remote proceedings in civil matters “shall not be unreasonably withheld by any party” and provided that a trial judge can enforce this Order “pursuant to authority granted by the Louisiana Code of Civil Procedure Article 191 or as expressly provided by law.”

Courts should work with parish clerks to encourage in-person filings of court pleadings to be replaced with filing by other means, such as U.S. mail, e-filing, email or facsimile. In all criminal, juvenile and civil matters handled on an emergency or expedited basis, a record shall be kept under the direction of the acting judge for each action.

Please see below for additional court-specific information.

  1. Louisiana Supreme Court: All filings which were or are due to the Court from March 12, 2020 through May 1, 2020 shall be considered timely if filed no later than May 4, 2020.
  2. First Circuit Court of Appeal: The court is closed until April 30, 2020 unless extended by further order. The court will still handle administration of emergency matters. All oral arguments are continued without date and will be scheduled to take place as soon as possible after May 1, 2020. The court will accept filings via U.S. Mail and e-filing. All deadlines set by the court in all cases pending before the court are extended until Friday, May, 1, 2020.  All filings due during the period of March 12, 2020 through May 1, 2020 or which become due during this period shall be deemed timely if filed on or before May 1, 2020.
  3. Second Circuit Court of Appeal: All parties must submit filings via e-filing, mail or fax (fax filings are allowed only with prior notification and authorization from the Clerk of Court during normal court business hours). Payments for fax or e-filing fees must be mailed. No in-person filings will be accepted. The entire April docket has been re-set for May 18, 2020.
  4. Third Circuit Court of Appeal: The courthouse shall maintain restricted access until April 30, 2020 and will reopen on May 1, 2020 unless extended by further order.  All deadlines are extended until April 30, 2020. All oral arguments scheduled to take place through April 30, 2020 and May 31, 2020 will be submitted on briefs.  All filings must be submitted by email, U.S. mail, or fax filing. For purposes of computing the timeliness of filings, this period of suspension shall be considered a legal holiday; and therefore, pleadings otherwise due in this Court during this legal holiday shall be deemed timely if filed on or before Friday, May 1, 2020.
  5. Fourth Circuit Court of Appeal: All oral arguments scheduled to take place through April 30, 2020 are continued unless parties notify the court to have their matters submitted on briefs. All filings must be submitted via e-filing.  The court will send all notices by electronic means.
  6. Fifth Circuit Court of Appeal: The court is closed, but court operations are occurring remotely.  All filing deadlines for the court will be suspended until at least May 1, 2020. For purposes of computing the timeliness of filings, this period of suspension shall be considered a legal holiday; and therefore, pleadings otherwise due in this court during this legal holiday shall be deemed timely if filed on or before May 4, 2020. Appellee briefs otherwise due between March 12, 2020 and May 1, 2020 shall be considered timely if filed on or before May 26, 2020. The court will accept e-filings and emergency fax filings while closed.  Filings by mail will be processed as circumstances allow.  No in-person filings are allowed.
  7. United States Court of Appeals for the Fifth Circuit: In-person oral arguments scheduled in New Orleans for April are cancelled. Parties are advised that the court has suspended until further notice the requirement to file paper copies of electronically filed pleadings and documents. The Clerk’s Office remains open for telephonic, electronic, and mail operations. The Clerk of the Court may direct the parties or counsel to provide paper copies of filings on a case-by-case basis, and at a future date, parties or counsel may be directed to provide paper copies of filings previously submitted electronically. All current deadlines for attorney filers remain in effect, except for those regarding production of paper copies. Extensions with justification may be requested from the Clerk’s Office following normal procedures and rules.  The Court has authorized panels to conduct oral arguments using videoconferencing technology or by means of audioconferencing.  The court will, when feasible, provide real-time public access to the audio-only portion of oral arguments that are conducted using videoconferencing technology or by means of audioconferencing. The Court expects that such access will be feasible for most if not all arguments.
  8. United States District Court, Eastern District of Louisiana: The court building is closed. All civil and criminal bench and jury trials, hearings, proceedings and conferences scheduled before or on May 1, 2020 are continued to a date to be reset by each presiding judge. Those continuances do not continue any pending deadlines other than the trial dates. Attorneys should contact the presiding judges in their continued cases if they seek to modify such other deadlines. Litigants may file documents electronically, by U.S. mail, or by facsimile. Due to concerns regarding COVID-19, until May 1, 2020, the Clerk’s Office for the Eastern District of Louisiana will not accept sealed documents on paper for filing. Sealed documents should be submitted by email to the Court.
  9. United States District Court, Middle District of Louisiana:  All civil and criminal (bench and jury) trials are postponed to a date to be determined by the presiding judge on or after May 1, 2020.  This postponement does not affect any other pending deadlines other than the pre-trial conference and trial dates. Parties seeking to modify other deadlines must do so by written motion. All civil evidentiary hearings and other in-court hearings and proceedings requiring personal appearances, on the dockets of the United States District Court and the United States Bankruptcy Court, set before April 30, 2020 are hereby postponed, to be reset by, and at the discretion of, the presiding judge. Prescriptive, peremptive and statute of limitation deadlines are hereby suspended until April 30, 2020. No in-person filings will be accepted through April 30, 2020 or until further order of this Court. Filings in sealed matters which are required to be filed conventionally (in-person) pursuant to administrative procedures shall be filed by facsimile by sending an electronically signed pleading in PDF format via encrypted or secure email (if available).  Non-sealed pleadings and sealed pleadings that are not required to be filed conventionally pursuant to administrative procedures should not be submitted to this email box and must be submitted for filing through CM/ECF. Electronic filing via the CMECF system will be fully functional and help desk support will be available.
  10. United States District Court, Western District of Louisiana: All civil and criminal jury trials scheduled to begin on any date from now through July 1, 2020, are continued, to a date to be reset by each presiding judge. All other hearings, conferences and/or proceedings are subject to the discretion of the individual judge presiding over the proceeding. Any court filings or correspondence may be time-stamped and placed in the drop box located in each division.  Any and all payments made to the Clerk, U. S. District Court for the payment of fines, fees, criminal debt or restitution must be made online via www.pay.gov or paid via money order or check and mailed to any divisional office.
  11. Civil District Court for the Parish of Orleans: On April 7, 2020, the court issued an order extending the closure of Civil District Court for the Parish of Orleans, First City Court, and Second City Court, until 8:00 AM on Monday, May 4, 2020.  All civil matters that are set during the closure are continued and will be reset by request or by order of the court, and the parties are instructed to contact the division clerk for further instructions. The court’s order does not prohibit any court proceeding by telephone, video conferencing, or any other means that do not involve in-person contact. And the court’s order does not affect the court’s consideration of matters that can be resolved without in-person proceedings. All judgments rendered by a First and Second City Court or Civil District Court judge during the suspension period will be mailed pursuant to La. C.C.P. article 1913 after April 30, 2020.With respect to the Civil Division of the Civil District Court for the Parish of Orleans, you can continue to electronically file (e-file) documents and can fax file documents. Additionally, the Clerk of Civil District Court has offered free subscriptions to the Remote Access system, including civil records and land records, to ensure public access.  Existing subscriptions are being extended. For more information, please visit the Civil District Court for the Parish of Orleans’ website or the Clerk of Civil District Court for the Parish of Orleans’ website
  1. 19th Judicial District Court for the Parish of East Baton Rouge: The 19th Judicial District Court for the Parish of East Baton Rouge is closed until 8:00 AM on Friday, May 1, 2020, and those with pending criminal cases and civil matters set during this closure will be notified of a new court date. All dockets are cancelled except for emergency and time-sensitive matters as determined by the court that may be held by teleconference or video conference. The court’s order expressly does not prohibit any court proceedings by telephone, video conferencing, or any other means. The East Baton Rouge Parish Clerk of Court’s Office will be closed to the general public through April 30, 2020, except that it will be open only for emergency filings between the hours of 8:00 AM to 12:00 PM Monday thru Friday. During this period of closure, e-filing through Clerk Connect and fax filing will be accepted. For more information, please visit either the 19th Judicial District Court’s website or the East Baton Rouge Clerk of Court’s website.
  2. 15th Judicial District Court for the Parishes of Acadia, Lafayette and Vermilion: In all parishes, the courthouses shall be closed to the public except to provide services in the following categories: (1) civil domestic protective orders under title 46:2131 (domestic violence), 46:2181 (post-separation family violence), and 9:361 (sexual abuse); (2) emergency child custody matters pursuant to La. C.C.P. article 3945; (3) proceedings for children removed from their home by emergency court order; and (4) emergency interdiction/commitment matters. All civil jury trials scheduled to commence during the month of May are continued and shall be reset by order of the judge in each division in which such civil jury trials are scheduled. In Lafayette Parish, the public is instructed to call the Clerk’s Office between the hours of 10:00 AM to 2:00 PM Monday thru Friday. And in Acadia Parish, the public is instructed to call the Clerk’s Office between the hours of 8:30 AM to 4:00 PM Monday thru Friday for emergencies or questions until further notice. For more information, please visit the 15th Judicial District Court’s website, the Acadia Parish Clerk of Court’s website, the Lafayette Parish Clerk of Court’s website, or the Vermilion Parish Clerk of Court’s website.
  3. 1st Judicial District Court for the Parish of Caddo: The Court’s website advises that you should not come to the courthouse unless absolutely necessary, and you will only be allowed in the courthouse if necessary. Through May 1, 2020, all civil and domestic trials, hearings and court appearances are hereby continued, to be reset by order with the following exceptions: (1) civil protective orders; (2) emergency child custody matters pursuant to La. C.C.P. article 3945; (3) emergency interdictions; (4) public health matters related to the current health emergency; (5) civil commitments where the party is in continued involuntary custody; and (6) any matter in which a rule to show cause is granted after the moving party sets forth written grounds why the matter should proceed despite the concerns surrounding the coronavirus and that rule is set for hearing by the court. The Clerk of Court is directed that matters may be placed on a court’s docket for consent judgment or confirmation of preliminary default judgments only after the judge’s office has approved the setting. The Clerk’s Office will be open from 8:30 AM to 1:00 PM Monday thru Friday until further notice. A small staff will be on hand until 4:30 PM Monday thru Friday to answer phones and to complete filings and e-recordings. For more information, please visit the Caddo Parish Clerk of Court’s website.
  4. 14th Judicial District Court for the Parish of Calcasieu: All civil hearings and court appearances set for any date between March 23, 2020 and May 4, 2020, are hereby continued to a date to be reset by the appropriate judge, except for the following: (1) civil protective orders; (2) emergency child custody matters; (3) matters of public health; and (4) matters deemed necessary by the Duty Judge as provided by the Louisiana Supreme Court order. A judge will be available at the courthouse between 8:30 AM to 4:30 PM Monday thru Friday to handle such matters. The Clerk’s Office has no public access except for filings pursuant to the Louisiana Protective Order statutes, pursuant to Louisiana Code of Civil Procedure articles 3945 and 3601, and to request a property bond for the purpose of bonding someone out of jail. Through May 1, 2020, the Clerk’s Office has reduced hours from 8:30 AM to 12:30 PM Monday thru Friday. All business with the Clerk’s Office at this time should be only that which is deemed an emergency or critical in nature. Customers are encouraged to use e-recording, e-filing, fax filing, US mail, Fed-Ex, or UPS when available for matters that are urgent, as Document Exchange will no longer be staffed at the door. For more information, please visit the Calcasieu Parish Clerk of Court’s website.

 

For more information about state district courts, parish and city courts not mentioned here, visit the Louisiana Supreme Court website for frequently updated court information.

On April 20, 2020, the Louisiana Department of Health (“LDH”) Office of Public Health issued Healthcare Facility Notice/Order Notice #2020-COVID 19-ALL-10 (“Notice-10”) which supersedes prior notices and lifts some of the restrictions on medical, surgical and dental procedures as well as other healthcare services beginning on April 27, 2020.  All licensed healthcare facilities and professionals in Louisiana must adhere to Notice-10.  The three areas covered by Notice-10 include: (1) medical and surgical procedures; (2) dental visits and procedures; and (3) healthcare services other than procedures.

Medical and Surgical Procedures

All medical or surgical procedures in which a delay will not adversely affect the particular patient or the underlying disease process should continue to be postponed.  Medical and surgical procedures may only be performed if the following conditions are met:

1. to treat an “emergency medical condition” which is defined as a medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain, psychiatric disturbances and/or symptoms of substance abuse) such that the absence of immediate medical attention could reasonably be expected to result in:

(a) Placing the health of the individual (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy;

(b) serious impairment to bodily functions; or

(c) Serious dysfunction of bodily organs.

2. to avoid further harms from underlying condition or disease.

3. to treat time-sensitive medical conditions, but only if each of the following conditions/requirements are met:

(a) Each patient undergoing such a medical or surgical procedure shall undergo an appropriate pre-operative clinical evaluation to minimize the risk that the patient has COVID-19 including COVID-19 testing, if available;

(b) Each patient must comply with strict social distancing measures from the time of the pre-operative clinical evaluation through the day of the surgery;

(c) The facility and healthcare provider shall have an adequate and appropriate supply of personal protective equipment (“PPE”) to treat patients, including COVID positive patients with at least a 5-day supply on hand at the facility. The facility cannot be dependent on the state or other governmental body to meet the 5-day requirement;

(d) There is an adequate supply chain to the facility/healthcare provider for medical equipment, supplies, and medications;

(e) The facility/healthcare provider has adequate medical staff, including surgical, surgical support, recovery, and nursing staff, to meet the needs of all patients;

(f) The facility/healthcare provider shall conduct constant monitoring of hospital, regional, and state resources, as well as ESF-8 reports, indicating coronavirus burden of disease and impact.

Dental Visits and Procedures

Any dental visit, procedure, and surgery (“dental procedure”) in which a delay will not adversely affect the particular patient or the underlying disease process should continue to be postponed.  Dental procedures can only be performed under the following conditions:

1. to treat an “emergency medical condition” which is defined as a medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain, psychiatric disturbances and/or symptoms of substance abuse) such that the absence of immediate medical attention could reasonably be expected to result in:

(a) Placing the health of the individual (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy;

(b) Serious impairment to bodily functions; or

(c) Serious dysfunction of bodily organs.

2. to avoid further harms from underlying condition or disease.

3. to treat Time-Sensitive Dental Conditions if ADA algorithms 2 and 3 and CDC Guidelines are followed for screening patients and for treating patients.

Healthcare Services, Other than Medical, Surgical or Dental Procedures

For healthcare services (other than a medical or surgical procedure or a dental procedure), all providers are directed by LDH to offer telehealth rather than an in-person visit when medically appropriate and when the same standard of care can be met. In-person healthcare services should be postponed when patient outcomes would not be compromised. LDH recognizes that there may be some legitimate and valid barriers preventing some services from shifting to telehealth.  Providers are to use their best medical judgment within the scope of their license to make the determination of whether to use telehealth on a case-by-case basis.  Providers must consider the entire clinical picture when determining if a service can be safely postponed, including the consequences to both the patient and to the healthcare system.  All providers are encouraged to follow LDH and CDC recommendations to reduce COVID-19 exposure should an in-person visit be deemed necessary.

Follow-Up Post Procedure or Visit

Within 10-14 days after a procedure or in-person visit, the provider must make contact with the patient to determine whether the patient has signs/symptoms of COVID-19 or has tested positive for COVID-19 since the procedure.  The contact with the patient must be documented in the medical record.  If the patient has signs/symptoms of COVID-19, recommendations must be made by the provider including appropriate testing. The healthcare provider must also immediately notify the Office of Public Health if any such patient has tested positive for COVID-19.

Discontinuance of Procedures and Compliance

The State Health Officer has the authority to order the immediate discontinuance of medical, surgical and dental procedures to treat time-sensitive medical conditions.  In making this determination, the State Health Officer will consider statewide or region-wide:  ventilator capacity; ICU bed availability; med surg bed availability; the number of new admit COVID-19 cases; and any other criteria deemed appropriate.

Each facility and healthcare provider that performs a medical, surgical or procedure or other healthcare service should comply with the Centers for Medicare and Medicaid Services (“CMS”) April 19, 2020 Recommendations for Re-opening Facilities to Provide Nonemergent Non-COVID-19 Healthcare: Phase I and any subsequent recommendations or guidance issued by CMS.

Any provider acting in good faith shall not be found to be in violation of the directives set forth in Notice-10.

On April 16, 2020, the Offshore Marine Service Association (OMSA) issued a memorandum providing guidance for the protection of maritime personnel on vessels during the COVID-19 pandemic. The memorandum aims to support the uninterrupted flow of the nation’s marine transportation system while maintaining the safety of maritime personnel. The guidelines contained and referenced in the memorandum follow the recommended standards and practices from national and international bodies such as the U.S. Coast Guard (U.S.C.G.), Center for Disease Control and Prevention (CDC), World Health Organization (WHO), and International Maritime Organization (IMO).

As OMSA indicated in a previous memorandum providing guidance to the transport of potentially infected personnel, the spread of COVID-19 can result in placing the vessel and/or crew under quarantine for a period of no less than 14 days. To mitigate the spread of the disease and ensure the safety of the individuals aboard, the vessel operator and crew must risk assess the situation, develop plans, and set up isolation areas. These procedures should include:

  • Properly equipping the vessel with necessary protective gear (e.g., PPE) or having such supplies readily available at shoreside facilities.
  • Establishing and communicating isolation protocols to ensure that all individuals are aware of safety measures, including any restrictions and isolation areas.
  • Periodic monitoring and screening individuals to identify any suspicions of COVID-19 aboard while ensuring the confidentiality of the information (e.g., medical records). If possible, use devices to detect temperature changes and fever. Alternatively, watch for commonly known symptoms of fever and follow the guidance on fever detection from the CDC.
  • Designating an isolation area stocked with necessary supplies. Preferably, this area should have its own ventilation system with negative air pressure to prevent airborne contamination. Alternatively, ventilation crossovers should be minimized.
  • Assign a Designated Observer to assist the isolated individual while limiting the contact with the remaining crew.
  • Establishing and implementing stringent cleaning and disinfecting procedures, particularly for the isolation areas as well as the routes leading to the isolation areas. When items must be cleaned and sanitized in the vessel’s laundry facility, avoid cross contamination, and wash and dry those items at the highest permissible temperature. Disposable PPE and cleaning materials should be discarded into designated garbage bags and not into bins or bags located in common spaces.

Once a symptomatic individual is identified, Vessel operators should also develop plans and procedures for the arrival at the port. These procedures should consist of:

  • Proper notification to the U.S.C.G and any other governmental body as directed by the U.S.C.G. If the vessel is arriving in the U.S. from a foreign port, notify the CDC directly.
  • Follow any and all outlined vessel’s Safety Management System and Job Safety Analysis, particularly the isolation procedures.
  • Use proper safety equipment (e.g., PPE). All individuals involved should properly utilize and dispose PPE. Clean and disinfect any areas and surfaces that were in contact with the potentially infected individual.

The implementation of protocols and the communication among stakeholders are essential to ensure the safety of the crew while maintaining the viability of the endeavor. During this pandemic, communication concerning the responsibility and liability during transport, financial responsibility of the vessel during a potential downtime and/or quarantine, and the financial responsibility surrounding any disinfecting activities, including the stocking of protective gear, should be taken into consideration

If you have questions, please contact Chuck Talley at 504-585-3046.

For more information:  https://cdn.ymaws.com/offshoremarine.org/resource/resmgr/omsa_guidelines_for_the_prev.pdf (full memorandum from OMSA attaching practical checklist sheets [pages 8-17])

Under Section 1031 of the Internal Revenue Code, a taxpayer may sell real property (the relinquished property) and replace it with real property of a like-kind (the replacement property) without recognizing tax on the sale if certain requirements are met. Two of those requirements involve deadlines:  the taxpayer must identify replacement property within 45 days of the sale of the relinquished property and acquire the replacement property within 180 days of the sale of the relinquished property.

Opportunity Zones have similar deadlines:  under Section 1400Z-2 of the Internal Revenue Code, taxpayers may defer capital gains that are invested in a Qualified Opportunity Fund within 180 days. These capital gains may usually be deferred until December 31, 2026, potentially avoiding any taxable gain on the liquidation of the Qualified Opportunity Fund Investment if the investment is held for at least 10 years.

As a result of the ongoing coronavirus pandemic, taxpayers were understandably concerned about their ability to meet these 45-day and 180-day requirements.  Thankfully, the Internal Revenue Service issued Notice 2020-23, which extends the deadline to July 15, 2020, for several types of returns and other requirements that were due to be performed between April 1, 2020 and July 15, 2020.

The notice specifically provides an automatic extension of the Section 1031 deadlines until July 15, 2020, and the Section 1400Z-2 deadline for any period that would end between April 1, 2020 and July 15, 2020.   Obviously, this is welcome news to taxpayers who were unsure if they could comply with looming deadlines.

On March 27, 2020, President Trump signed H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (Public Law No: 116-136, the “CARES Act” or the “Act”).  Title I of the CARES Act creates the Paycheck Protection Program (discussed in more detail here).  Generally speaking, the Paycheck Protection Program permits certain small businesses to apply for a small business loan which may be forgiven, in whole or in part, if the loan proceeds are used to pay for certain eligible expenses, e.g., the payment of certain payroll costs, interest on a covered mortgage obligation, payments under a covered rent obligation, and the payment of certain utilities.

This blog post summarizes significant uncertainties created by tax and accounting issues related to the Paycheck Protection Program.  A separate blog post containing a more detailed review of the tax changes contained is the Act is available here.  Additional details regarding the employment and employee benefits changes is available here.  Additional guidance related to the CARES Act is forthcoming.  All of Kean Miller’s guidance related to the coronavirus pandemic is located here.

UPDATE – Since April 2, the Treasury Department has been issuing interim final rules and additional guidance related to the Paycheck Protection Program.  That guidance is available here.  This blog post has been updated, where indicated, to reflect that guidance.  Please note that FAQ no. 17 in the new guidance suggests that applicants that have previously filed under prior guidance may rely on the rules in place at that time or may work with their lenders to revise their applications to apply the new rules. 

Tax and Accounting Issues Raised by the Paycheck Protection Program

Determination of Expenses Eligible for Forgiveness – While the preliminary hurdle for any taxpayer will be the amount of the loan that they are eligible for, it is just a loan unless eligible for forgiveness.  Therefore, of greater importance will be the manner and time within which the loaned funds must be spent to be forgiven.  Otherwise, it is simply a loan that must be repaid.  Section 1106 of the CARES Act defines the expenses that, if paid with the loan proceeds, are eligible for forgiveness.  Payments of eligible expenses related to covered mortgage or rent obligations and covered utility payments must relate to mortgage or lease obligations incurred or in force before February 15, 2020 and utility payments for which service began before February 15, 2020.  The amount eligible for forgiveness is calculated with reference to costs incurred and payments made related to an eligible expense during the 8-week period beginning on the date of the origination of the covered loan.  By computing the amount eligible for forgiveness based on both costs incurred and payments actually made the Act appears to create a hybrid-accounting accrual/cash method of accounting rule for the determination of eligible expenses.

The hybrid accounting method appears to indicate that certain costs, notably payroll costs related to eligible self-employed individuals, need not be actually paid during the covered period.  This may also make sense because it is possible that the date payroll checks are issued for services performed during a portion of the 8-week covered period could fall outside of the 8-week period.  For example, if the 8-week period ends on a Wednesday and the payroll for the week is paid on the following Friday, it appears the Act permits the portion of payroll costs incurred for services performed Monday through Wednesday to be eligible for forgiveness.

Because the amount of the loan is computed with reference to actual payroll costs, it is likely the majority of forgivable expenses paid will relate to payroll actually paid but based on the statutory language as written, it also appears that it may be possible to pre-pay certain eligible expenses.  While unlikely, this situation could arise if, for some reason, a borrower’s covered expenses did not equal or exceed the amount borrowed.  Absent additional guidance, in that situation, a borrower might read the statute to permit the borrower to pre-pay a covered expense.  At this time, it is not clear whether additional guidance will be issued to clarify or impose additional limitations on the calculation of the amount of covered expenses that are eligible for forgiveness.  One practical step a borrower should consider is timing the origination of the loan to coincide with payroll dates to avoid the potential payroll issue discussed above.

UPDATE – On the evening of April 2, 2020, the Treasury Department issued an interim final rule, 13 CFR Part 120, while the rule is largely silent on the accounting issue discussed here, it does contain a new, arguably arbitrary, cap on the calculation of forgivable expenses.  Specifically, the rules states that only 25% of the loan forgiveness amount may be used to pay non-payroll costs, e.g., rent, interest, and utilities.  There does not appear to be any basis for this rule in the CARES Act.  As a result, the rule appears to exceed the scope of the CARES Act.  If Congress intended to place this seemingly arbitrary cap on the loan forgiveness amount, a retroactive technical corrections bill may be required.

Uncertainty Regarding How Certain Business Concerns Should Apply for Relief – The CARES Act should be clarified, ideally by swift legislative action, to make it clear that partners and partnerships are not excluded from the relief provisions.  The Act contains a poorly worded definition of payroll costs that could be read so as to defeat the purpose of the statute.  Specifically, the Act refers only to the net self-employment earnings of a sole proprietor or an independent contractor in the definition of payroll costs, which language may be read to exclude the self-employment of partners in a partnership.  That is, as written the Act does not clearly specify that the net self-employment earnings of certain eligible self-employed individuals, such as partners, should be included in the definition of payroll costs, thereby, creating uncertainty as to the availability of loans to these otherwise eligible individuals and creating uncertainty as to the computation of the amount of loans available to these particular business organizations which constitute a significant part of the United States economy.

As a result of what appears to be at worst, a drafting error, the Act could be read to suggest that a partnership that is a small business concern could not include the net earnings from self-employment of its partners in its payroll costs.  Thus, if the partnership had no employees, under this interpretation, its payroll costs would be zero, and the applicant would effectively be ineligible for relief under the Paycheck Protection Program.  In contrast, if that partnership was structured as an S corporation for tax purposes and its owners received a combination of W-2 wages (included in payroll costs) and dividends (likely excluded from payroll costs) it would be eligible for a higher loan amount since the wages would be considered payroll costs.

The “payroll costs” of an owner of  a single member limited liability company on the other hand, is more clearly covered by the statute even if the limited liability company has no employees and thus no “payroll costs.”  This type of eligible small business concern and is no different in practice than a sole proprietorship operated by an individual in their individual capacity and for tax purposes, assuming no elections are made for an alternative tax treatment, they are indistinguishable.  A limited liability company with a single member is simply “disregarded”.  Nevertheless, while the “payroll costs” of such a limited liability company would not ordinarily include net self-employment income, the Act itself defines “payroll costs” as “the sum of payments of … income of a sole proprietor or independent contractor that is … net earnings from self-employment,…”  In contrast, if that individual did business as a sole proprietor (without the interposition of a limited liability company) his or her  net earnings from self-employment would be included in payroll costs and would more clearly be eligible for relief.

Some of the confusion in the Act is caused by the use loose of terms that have more specific meanings for tax purposes.  While the term “sole proprietor” has a unique meaning for income tax purposes, the term “independent contractor” is not an income tax classification for income tax imposition purposes.  The latter term relates more generally to whether or not a payor is required to withhold the recipient’s income taxes from payments to the recipient and also to whether the payor has to chip in for payroll tax purposes.  It is not an income tax classification like sole proprietor.

Additional confusion results because the Act does not make it clear as to who among possible applicants, in certain circumstances, is entitled to apply for a loan or whether all possible applicants may file.  That is, the Act is drafted in a manner that appears to permit both an eligible self-employed individual, such as a partner or the owner of a single member limited liability company, and the associated partnership or limited liability company to apply for a loan.  However, in both of those instances the unfortunate terminology in the Act used to define “payroll costs’ could cause the loan amount to be zero regardless of whether the individual owner or the entity applied for the loan because in either case the individual owner or owners’ net earnings from self-employment are not defined as payroll costs, for the reasons mentioned above.  Thus, in the case of an entity with no employees that suffered losses related to the pandemic, depending on how the language is interpreted by a decision-maker lender, neither the entity nor its individual owner(s) would be eligible for meaningful relief.

It is not clear how lenders will interpret the definition of payroll costs in this context.  Given the pressing need to distribute cash to business owners quickly, it may be that lenders include payroll costs related to an eligible self-employed individual in the loan calculation.  But issues may arise when the applicant seeks loan forgiveness depending on how the lender interprets the immunity provisions in Section 1106 of the CARES Act.

There is no indication that Congress intended to preclude a large swath of the American economy doing business in partnership form from receiving Paycheck Protection Program loans based solely on their choice of business organization.  It is our understanding that the Small Business Administration is in the process of drafting detailed regulations that will address the computation of “payroll costs” as it relates to partners and partnerships and other businesses as well as their owners, for a Paycheck Protection Program Loan.  As we understand it, the Small Business Administration intends to release that guidance on Friday, April 3.  What is not clear at this point is whether the apparent drafting error will be clarified by regulation or, ideally, a technical corrections act.  It should be noted that, if needed, Congress could pass a statute containing the necessary technical corrections, making the corrections retroactive to the passage of the CARES Act.  Although Congress is not currently in session, ideally any such action could take place prior to the time applicants began seeking loan forgiveness.  Nevertheless, uncertainty about loan eligibility for certain businesses and self-employed individuals may remain for some period of time.

Hopefully the regulations to be issued tomorrow will mitigate at least some of the uncertainty.

UPDATE – On April 14, 2020, the Treasury Department issued an interim final rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (13 CFR Part 120), which addresses this issue.  Specifically, the rule addresses the eligibility and calculation of payroll costs for partnerships, partners, limited liability companies filing their federal income taxes as partnerships, sole proprietors and independent contractors.  With respect to partnerships and partners, the rule states that the appropriate borrower is the partnership (and not each individual partner) and that the partnership may include up to $100,000 of the self-employment income of each “general active partner” in the partnership’s payroll costs.  While not explicitly stated, it appears a partner’s self-employment income would be their net earnings subject to self-employment tax on their individual income tax return (discussed in more detail below).  The term “general active partner” is not defined but it appears to be an attempt to distinguish an investor from a partner that actively participants in the partnership’s operations.  Additional guidance may be required to clarify this term.  As noted above, a retroactive technical correction may also be required to the CARES Act to clarify this issue.

Determination of Payroll Costs for a Sole Proprietor, Partner, or Owner of an S corporation – The amount of compensation paid to an eligible self-employed individual is relevant to both determining the amount of the Paycheck Protection Program loan as well as the amount of the loan that may be forgiven.  The term eligible self-employed individual is defined with reference to Section 7702(b) of the Families First Coronavirus Response Act (Public Law No: 116-127).  The Families First Coronavirus Response Act defines an eligible self-employed individual as an individual who:

  1. Regularly carries on any trade or business within the meaning of [IRC Section 1402], and
  2. Would be entitled to receive paid leave during the taxable year pursuant to the Emergency Paid Sick Leave Act if the individual were an employee of an employer (other than himself or herself).

IRC Section 1402 defines self-employment income and generally includes income received by a sole proprietor or a partner in a partnership.

With respect to eligible self-employed individuals, the definition of payroll costs includes net earnings from self-employment.  Taken together with the reference to IRC Section 1402 in the definition of eligible self-employed individual, the reference to net earnings from self-employment appears to mean that the amount of a sole proprietor or partner’s payroll costs is the amount reported on their tax return that is subject to self-employment tax.   Thus, for purposes of determining the payroll costs related to a sole proprietor or an individual partner in a partnership, it appears appropriate to reference the amount of income reported on their individual income tax return that was subject to self-employment tax, which generally includes the gross income derived by an individual from any trade or business carried on by the individual, less deductions allocated to the business, and also includes a partner’s distributive share of income or loss from a trade or business carried on by a partnership.  This position appears to be supported by the Paycheck Protection Program Information Sheet for Borrowers, which was released by the Treasury Department on March 31, 2020.  That said, as noted above, at present a partner is not included in the definition of an eligible self-employed individual and it is not clear how a partnership (or its partners) should apply for a Paycheck Protection Program loan.

Generally speaking, the owner of an S corporation would receive wages (reported on Form W-2) from the S corporation.  It appears those wages would likely be considered to be the S corporation owner’s payroll costs, i.e., it is unlikely the owner of an S corporation could include dividends received in the payroll costs for purposes of the Paycheck Protection Program.

Because the determination of payroll costs for a sole proprietor, partner, or owner of an S corporation is not entirely clear, additional guidance is required.  The lack of guidance is problematic because the amount of a sole proprietor or partner’s payroll costs may be directly related to previously made tax elections or decisions or to decisions currently being considered for their 2019 return.  As a result, it may be necessary to amend previously filed returns or carefully consider decisions related to a 2019 return after additional guidance is released.

UPDATE – On April 14, 2020, the Treasury Department issued an interim final rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (13 CFR Part 120), which addresses this issue.  Specifically, the rule addresses the calculation of payroll costs for partnerships, partners, limited liability companies filing their federal income taxes as partnerships, sole proprietors and independent contractors.  The payroll costs of a sole proprietor or independent contractor that report their self-employment income on Schedule C, is the amount reported on Schedule C line 31 (net profit or loss).  Thus, a sole proprietor or independent contractor that operated at a loss does not appear to be eligible for relief under the Paycheck Protection Program.  The interim rule also creates a seemingly arbitrary rule that the loan forgiveness amount does not include any otherwise forgivable expense the sole proprietor or independent contractor did not claim or was not entitled to claim a deduction for on their 2019 return.

The calculation of a partners’ payroll costs is not entirely clear in the interim guidance.  By referencing the “self-employment income of general active partners” the guidance seems to imply payroll costs should be computed with reference to net earnings from self-employment from Schedule K-1 (Form 1065), box 14, code A, reduced for unreimbursed employee expenses.  Additional guidance may be required to clarify this point.

Loan ForgivenessSection 1106 of the Act provides a mechanism under which certain indebtedness related to these loans can be forgiven.  Unless an exception applies, Internal Revenue Code (“IRC”) Section 61 requires a taxpayer to include cancelation of indebtedness income in its taxable income.  Section 1106 creates an exception to IRC Section 61 and provides that loan forgiven under the Act shall be excluded from a taxpayer’s taxable income for purposes of the Internal Revenue Code.  It should be noted that the Act is silent on whether a borrower’s tax attributes will be reduced under IRC Section 108 in the amount of the forgiven debt.  Additional guidance may be necessary to clarify this issue.

Employee Retention Credit for Employers Subject to Closure Due to COVID-19 – Section 2301 of the CARES Act provides an employee retention credit to employers, based on wages (and a proportionate amount of qualified health plan expenses) paid to employees, which is discussed in more detail here.  It is important to note that an employer taking a small business interruption loan under the Paycheck Protection Program is not eligible for the credit.

Deferral of Payment of Employer Payroll Taxes – Section 2302 of the Act also permits an employer to defer the payment of certain employer payroll taxes, which is discussed in more detail here.  The ability to defer payment of payroll taxes may not apply if the employer had indebtedness forgiven under the under the Paycheck Protection Program.

Interplay with the Families First Coronavirus Response Act – It should be noted that for purposes of the Paycheck protection Program payroll costs do not include qualified sick leave wages or qualified family leave wages for which a credit is taken under Sections 7001 or 7003 (respectively) of the  Families First Coronavirus Response Act.

Implications

The CARES Act contains an unprecedented economic stimulus and the tax provisions are designed to facilitate getting cash to individuals and businesses as soon as possible.  Unfortunately, the CARES Act requires many small businesses to make decisions quickly but because of the uncertainty created by the loose language of the Act and the lack of guidance to-date it is not clear how some businesses and business owners can make the decisions most appropriate for their businesses.  The apparent drafting error and lack of guidance is particularly problematic for certain business organizations, such as partnerships, because previously taken tax positions or tax positions currently being evaluated may directly impact the amount of their potential Payroll Protection Program loan, including the amount eligible for forgiveness.

Until additional guidance is released, if possible, it may make sense for a business refrain from taking action, which is unfortunate because many businesses are struggling or are in the midst of an existential crisis due to the coronavirus pandemic.  It is our hope that the Small Business Administration will release comprehensive guidance on these issues quickly that will mitigate the uncertainty.

 

For additional information, please contact the Kean Miller Tax Group: Jaye Calhoun at (504) 293-5936; Carey Messina at (225) 382-3408; Kevin Curry at (225) 382-3484; Jason Brown at (225) 389-3733; Angie Adolph at (225) 382-3437; J. Mark Miller at (318) 562-2701; Phyllis Sims at (225) 389-3717; Robert Schmidt at (225) 382-4621; Royce Lanning (832) 494-1711; or Willie Kolarik at (225) 382-3441.

While the Louisiana Department of Revenue (the “Department”) has extended some filing and payment deadlines, it has not extended the April 15 and June 15 deadline for making 2020 first and second quarter individual and corporate estimated state income tax payments. Nor has the Department extended the April deadline for reporting and remitting March state sales and use taxes.

Estimated Income Tax Payments for the 2020 Tax Year

Although the deadlines for filing 2019 income tax returns and paying 2019 income tax liabilities have been extended to July 15, 2020, the deadlines for making Louisiana state declaration (estimated income tax) payments for the 2020 tax year, for both individuals and corporations, have not been extended.  The Department has issued guidance (Rev. Rul. 20-002 (March 30, 2020)) stating that it will automatically grant a waiver of the underpayment of estimated tax (“UET”) penalty for first and second quarter estimated payments, under certain circumstances.  La. R.S. 47:118(I) provides that the Secretary may waive underpayment penalties when an individual’s failure to file was in good faith. The Secretary may presume an individual acted in good faith if the failure to make the estimated payment was attributable to extraordinary circumstances beyond the individual’s control. Revenue Ruling 20-002 provides that the public health emergency resulting from the COVID-19 pandemic and the general stay-at-home order creates extraordinary circumstances, including that taxpayers do not have their 2019 liability from which to base their 2020 estimated payments. As a result, the Department will automatically waive UET penalties otherwise due for the April 15 and June 15, 2020 estimated payments if:

  1. The estimated payment is made timely.
  2. The April 15, 2020 payment is at least 90% of the amount paid on the April 15, 2019 estimated payment.
  3. The June 15, 2020 payment is at least 90% of the amount paid on the June 15, 2019 estimated payment.

A taxpayer has until May 17, 2022, one year after the statutory due date of the 2020 return, to request the waiver.

For fiscal year filers, the UET penalty waiver will also be granted if the taxpayer’s timely-filed first and second quarter estimated payments satisfy the above criteria.

For corporate income taxes, the Department’s current guidance related to the coronavirus pandemic does not include estimated tax payment relief or an automatic penalty waiver.  But La. Rev. Stat. §287.655(D) provides safe harbors against the penalty for underpayment of estimated tax.  Nevertheless, since the determination of whether the penalty is due is based on various alternative mathematical computations, it is unclear how such relief would not be in some sense, “automatic.” See RIB 20-009 (March 23, 2020) for relief available with respect to income and franchise tax returns.

Late Filed Elections for Pass-Through Entity Tax

Rev. Rule 20-002 also states that the Department will consider an election by a flow-through entity to pay tax on its income as timely if the election is filed on or after April 16, 2020 but before July 16, 2020 (for a calendar year filer).  For a fiscal year filer with an election due between March 1 and May 30, 2020, the election will be considered timely if it is filed on or after the fifteenth day of the fourth month after the close of the taxable year but before the fifteenth day of the seventh month after the close of the taxable year.

Extension of Time or Transfer Credits (2019 Tax Period Only)

Rev. Rule 20-002 also extends the deadline for transferring a transferable credit or for the execution of a binding agreement to transfer such credit by thirty (30) days for income and franchise tax returns with an original due date between March 1 and May 30, 2020.  For a 2019 calendar year filer of returns for individual income tax, corporation income, composite partnership income tax and fiduciary income tax, the extended deadline is June 15, 2020.  For a fiscal year filer with an income or franchise tax return filing and payment due date between March 1 and May 30, 2020, the extended deadline is thirty days from the original due date of the return.

State Sales/Use Tax Returns Due in April of 2020

In Revenue Information Bulletin 20-008, the Department extended the deadline to report and remit February 2020 state sales and use taxes by sixty (60) days. The returns and payments are now due May 20, 2020 but the Department has not extended the April filing deadline for March 2020 taxes. Unless guidance extending this deadline is issued within the next week, the deadline for March 2020 taxes remains April 20, 2020.

For additional information, please contact the Kean Miller Tax Group:  Jaye Calhoun at (504) 293-5936; Carey Messina at (225) 382-3408; Kevin Curry at (225) 382-3484; Jason Brown at (225) 389-3733; Angie Adolph at (225) 382-3437; J. Mark Miller at (318) 562-2701; Phyllis Sims at (225) 389-3717; Robert Schmidt at (225) 382-4621; Royce Lanning (832) 494-1711; or Willie Kolarik at (225) 382-3441.

The IRS recently issued Notice 2020-23, which extends the deadline for certain time sensitive actions that are required to be taken between April 1 and July 15.  July 15 is the new deadline.  The covered time sensitive actions include those actions relating to tax exempt bonds set forth in Revenue Procedure 2018-58, such as giving notice of defeasance escrows, filing Form 8038 or 8038G and making any rebate or yield reduction payments.  The notice also amplifies and updates previous notices.

This morning, the Federal Reserve announced the creation of a new liquidity facility to ensure that municipal governments can maintain cash flows and continue to operate.  Under the new Municipal Liquidity Facility, the Federal Reserve will lend up to $500 billion to a special purpose vehicle that will purchase eligible notes directly from eligible issuers.  “Eligible notes” includes tax anticipation notes, tax and revenue anticipation notes, bond anticipation notes, and other short-term notes with maturities less than 2 years.  “Eligible issuers” include US states, Washington DC, cities with a population over 1 million, and counties/parishes with a population over 2 million.  Political subdivisions must each designate one eligible issuer.  Issuers can borrow up to 20% of 2017 revenues and the proceeds may be used for most cash flow management purposes as a result of reduced revenue or increased expenses due to COVID-19.  Importantly, eligible issuers may also use proceeds to assist other entities that are not directly eligible for the facility.  The facility will expire September 30, 2020, unless extended.