July 17, 2019

Archives for May 2, 2013

Funding a Small Business with Retirement Funds? Think Twice

AlexWenzelBy Alexander Wenzel

If you have listened to AM radio in the last three years, you may have heard advertisements for arrangements by which small business owners could use tax-deferred funds to inject some capital into their small business from their retirement funds. The IRS refers to these arrangements as Rollovers as Business Start-Ups (or “ROBS”), although the scheme is not limited to start-ups.

Structure of ROBS

One may be able to understand how the IRS feels about these arrangements by the acronym it has chosen for them. The ROBS arrangement is a fairly simple tax work-around that takes funds from an existing tax-deferred retirement account, rolls-over those funds to a new tax-deferred retirement account (the “ROBS Plan”) that has but one client (the business owner) and one investment (the small company). The ROBS Plan would acquire shares of stock in the company as an “investment”by making a nice tax-deferred injection of capital into the company. While this arrangement may be acceptable to the IRS in a narrow set of circumstances, there are some dangers to this type of funding.

Items of Concern

The IRS is most concerned with two aspects of these arrangements: (i) violations of nondiscrimination requirements of retirement plans; and (ii) faulty valuations of the small business stock traded for the capital injection.

Non-discrimination Issue: The Internal Revenue Code prohibits contributions or benefits provided under a qualified retirement plan from discriminating in favor of highly compensated employees—those who either own at least 5 percent of the company, or receive more than $80,000 in salary. The Treasury Regulations also provide that the benefits, rights, and features of a qualified retirement plan (including, in this case, the ROBS Plan) cannot be discriminatory in effect. That is, employees must be able to invest in the ROBS Plan, not just the business owner.

As is often the case, employees may not even know of the existence of a ROBS Plan, much less be able to participate in it. If either the business owner or the ROBS Plan holds more than 5 percent of the company’s equity and employees are not permitted to participate in the ROBS Plan, the ROBS Plan is in danger of violating the non-discrimination requirement.

Valuation Issue: The IRS is also concerned that the valuation of the stock issued to the ROBS Plan may be inflated. The business owner may not want to lose control of the business ownership to the ROBS Plan and may seek to sell a small percentage of the shares to the ROBS Plan at a high price not supportable by the company’s operations or financial condition. Any such transaction should be supported by a well-documented appraisal. Additionally, if the company’s only asset is the capital injected, the investment may be characterized as a “prohibited transaction” which may result in a 15 percent tax on the transaction, or even 100 percent tax if not promptly corrected.

Dangers abound with ROBS Plans, and it may be wise to pursue other avenues of funding a small business before using those hard-earned retirement funds.

Alex Wenzel is an associate attorney at Burns, Figa & Will, P.C. His practice focuses on real estate transactions and litigation, securities, and corporate formation and transactional work. Prior to becoming an attorney, Mr. Wenzel was a Presidential Writer for the White House in the Office of Special Letters and Responses. A native Ohioan, he earned his B.A. at the University of Cincinnati and his J.D. at the University of Denver.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Colorado Court of Appeals: Termination Upheld for Quadriplegic Medical Marijuana User Because Marijuana Remains Illegal Under Federal Law

The Colorado Court of Appeals issued its opinion in Coats v. Dish Network, L.L.C. on Thursday, April 25, 2013.

Medical Marijuana—CRS § 24-34-402.5—“Lawful Activity”—Attorney Fees.

Plaintiff Brandon Coatsappealed the trial court’s dismissal of his complaint for failure to state a claim and its order awarding defendant Dish Networks, L.L.C.attorney fees. The judgment was affirmed and the order was reversed.

Defendant fired plaintiff after he tested positive for marijuana, which was a violation of defendant’s drug policy. Plaintiff is a quadriplegic and licensed by the state of Colorado to use medical marijuana pursuant to the Medical Marijuana Amendment (Amendment). Plaintiff alleged that he used marijuana within the limits of his license, never used it on defendant’s premises, and was never under the influence of marijuana at work.

Plaintiff claimed his termination violated the Lawful Activities Statute, CRS § 24-34-402.5, which prohibits an employer from discharging an employee for “engaging in any lawful activity off the premises of the employer during nonworking hours.” Defendant filed a motion to dismiss, arguing that plaintiff’s use of medical marijuana was not a “lawful activity” because it was prohibited under state and federal law.

The trial court agreed with defendant and dismissed the complaint for failure to state a claim. The court also granted defendant’s motion for attorney fees pursuant to CRS § 13-17-201.

The Court of Appeals noted that all marijuana use was, and remains, prohibited by federal law. The Court held that this renders medical marijuana use not “lawful activity” for purposes of CRS § 24-34-402.5, finding the term includes federal and state law.

CRS § 13-17-201 mandates an award of reasonable attorney fees to a defendant when a court dismisses, pursuant to CRCP 12(b), an “action[] brought as a result of . . . an injury . . . occasioned by the tort of any other person.” The trial court granted the motion because it determined plaintiff’s claim constituted a tort claim.

The claim was based on a violation of CRS § 24-34-402.5, which is an employment discrimination provision of the Colorado Civil Rights Act (CCRA). Plaintiff was seeking back pay and benefits. Defendant first argued this is the equivalent of an invasion of privacy tort. The Court rejected this argument, because the interest being protected by this statutory section is from discriminatory termination based on lawful, off-the-job activity and not against intrusion into privacy or discovery and disclosure of private information.

Defendant further argued that the claim asserted had enough tort-like characteristics to be considered a tort. The Court found that although there is no satisfactory definition of what constitutes a tort, the primary purpose of tort law is to compensate individuals for injuries wrongfully suffered at the hands of others. The Court found that, based on the statute’s language and legislative history, its purpose is not to compensate an individual for breach of a statutory duty, but to eliminate workplace discrimination based on lawful, off-the-job activity. In addition, most traditional tort remedies are not available for this claim; the damages would simply restore the plaintiff to the wage and employment position he or she would have had absent the unlawful discrimination. The judgment dismissing plaintiff’s complaint was affirmed and the order awarding attorney fees was reversed.

Summary and full case available here.

Colorado Court of Appeals: Actions of County Requiring Posting of Bond Discriminatory Against Same-Sex Couple

The Colorado Court of Appeals issued its opinion in Rodgers v. Board of County Commissioners of Summit County on Thursday, April 25, 2013.

Building Regulations—Same-Sex Couple Discrimination—Colorado Civil Rights Act—Exhaustion of Administrative Remedies—Inverse Condemnation—Directed Verdict—Section 1983.

Plaintiffs Jason L. Rodgers and James R. Hazel, a same-sex couple, appealed the trial court’s judgment dismissing two of their claims and its entry of a directed verdict in favor of Summit County on their inverse condemnation claim. The judgment was affirmed in part and reversed in part, and the case was remanded with directions.

Plaintiffs built a home in Summit County that included a septic system. County employees found it did not comply with the County’s regulations or the approved building plan obtained by the previous owner. The County found that the septic tank was too small and required a subsurface drain that had not been installed. It also found that during the installation, the subcontractor had damaged wetlands on the property.

Winter was approaching and the issues couldn’t be fixed until spring, so the County offered a temporary certificate of occupancy requiring plaintiffs to fix the septic system, mitigate the wetlands damages, and post a bond for the estimated costs. Plaintiffs did not post the bond, the certificate of occupancy was not issued, and plaintiffs lost their home in foreclosure.

The trial court dismissed three of plaintiffs’ five claims under CRCP 8 and 12(b)(5). The parties agreed to bifurcate the inverse condemnation claim from the 42 USC § 1983 equal protection claim. The court entered a directed verdict on the inverse condemnation claim in the County’s favor during a bench trial. After plaintiffs rested in the jury trial on the § 1983 claim, the court directed a verdict in favor of the County on three of the four actions on the basis of which the plaintiffs asked that the jury be instructed that “taken as a whole collectively establish[] that the County treated them in a discriminatory manner.” The jury returned a verdict for the County on what remained of the § 1983 claim.

Plaintiffs argued it was error to dismiss their first and third claims for relief. The Court of Appeals disagreed. The first claim asserted that County officials discriminated against them by requiring certain actions not required of heterosexual couples before it would issue a certificate of occupancy. This claim seemed to arise under the Colorado Civil Rights Act. Under that Act, any person alleging discrimination must file a complaint with the Colorado Civil Rights Commission (CCRC). Plaintiffs never did so, and therefore it was not error to dismiss this claim for failure to plead exhaustion of administrative remedies.

Plaintiffs’ third claim asserted that the County deprived them of their constitutional rights of due process, equal protection, and freedom of association under the U.S. and Colorado Constitutions. These claims were appropriately dismissed because plaintiffs were not entitled to recover damages through such a direct claim. Section 1983 is the remedy for a person who has been deprived of a constitutional right by state action; under the Colorado Constitution a direct claim for damages will lie only where no other adequate remedy exists.

Plaintiffs then argued it was error to direct a verdict for the County on their inverse condemnation claim and on three of the four actions that formed the basis for the § 1983 claim. The Court affirmed on the inverse condemnation claim but reversed on the § 1983 claim.

Inverse condemnation is a claim for relief against a regulatory taking. The trial court found that the County’s regulations and response regarding the septic issues were reasonably applied to plaintiffs and the County did not deny them an economically viable use of their property. Moreover, the County’s septic regulations were reasonable and contributed to the legitimate public purpose of protecting groundwater and adjoining properties from contamination. The record clearly supported the trial court’s determination that no regulatory or per se taking had occurred.

On the § 1983 claim, plaintiffs alleged the County’s requirements were unreasonable and differed from requirements imposed on similarly situated heterosexual homeowners in four ways. The trial court analyzed each of the alleged discriminatory actions separately and entered a directed verdict in the County’s favor on three of them, allowing only an allegation that it was discriminatory to require plaintiffs to post a bond. It found plaintiffs had not presented sufficient evidence of similar situations, even when taken in the light most favorable to them, that could have established an equal protection claim.

Plaintiffs argued it was error to analyze the County’s conduct as discrete actions, rather than as a pattern of discriminatory conduct. The Court agreed, finding that at the directed verdict stage, the trial court’s role is not to separately weigh individual aspects of the evidence offered to support a single claim; its function is to decide whether the totality of the evidence would permit a reasonable jury to return a verdict against a defendant. The trial court may not “parse evidence presented” and grant a “partial directed verdict” on a claim. The partial directed verdict on the single § 1983 claim was error, and this claim was remanded to be retried.

Summary and full case available here.

HB 13-1318: Creating Excise and Sales Taxes to be Levied on Retail Marijuana

On April 18, 2013, Rep. Jonathan Singer introduced HB 13-1318 – Concerning the Recommendations Made in the Public Process for the Purpose of Implementing Certain State Taxes on Retail Marijuana Legalized by Section 16 of Article XVIII of the Colorado Constitution. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

Subject to voter approval at the statewide election in November 2013, the bill imposes a sales tax and an excise tax on the sale of retail marijuana, which was legalized by section 16 of article XVIII of the state constitution.

Sales tax: Beginning Jan. 1, 2014, the bill imposes a tax of 15 percent on the sale of retail marijuana or retail marijuana products to a consumer by a retail marijuana store. The tax imposed is in addition to the 2.9 percent state sales tax and any local government sales tax that is imposed on the sale of all property and services pursuant to current law.

On or after Jan. 1, 2014, the general assembly is authorized to establish a rate that is lower than 15 percent by a bill enacted by the general assembly and signed into law by the governor. After establishing a tax rate that is lower that 15 percent the general assembly may increase the rate by bill enacted by the general assembly and signed into law by the governor, so long as the rate does not exceed 15 percent. An increase in the rate does not require additional voter approval.

A retail marijuana store is required to add the tax imposed as a separate and distinct item, and when added, the tax constitutes a part of the total price of the retail marijuana or retail marijuana products purchased. A retail marijuana store is required to collect and remit the tax to the department in the same manner as the state sales tax is collected and remitted to the department pursuant to current law.

Of the revenues collected pursuant to the 15 percent sales tax, 10 percent will be distributed to each local government in the state that has one or more retail marijuana stores within its boundaries. Each local government’s share of the revenues collected shall be apportioned according to the percentage of retail marijuana and retail marijuana products sales tax revenues collected by the department in the local government as compared to the total retail marijuana and retail marijuana products sales tax collections that may be allocated to all local governments in the state. The remaining revenues shall be deposited in the marijuana cash fund and appropriated as directed by the general assembly.

Excise tax: Beginning Jan. 1, 2014, the bill imposes a tax on the sale or transfer of unprocessed retail marijuana by a retail marijuana cultivation facility to a retail marijuana store, retail marijuana product manufacturing facility, or another retail marijuana cultivation facility. The amount of the tax is 15% of the average market rate of unprocessed retail marijuana statewide on the date that it is sold or transferred, as determined by the department, and the tax is imposed when a retail marijuana cultivation facility sells or transfers unprocessed retail marijuana to a retail marijuana store, a retail marijuana product manufacturing facility or another retail marijuana cultivation facility.

On or after Jan. 1, 2014, the general assembly is authorized to establish a rate that is lower than 15 percent of the average market rate by a bill enacted by the general assembly and signed into law by the governor. After establishing a tax rate that is lower that 15 percent the general assembly may increase the rate by bill enacted by the general assembly and signed into law by the governor, so long as the rate does not exceed 15 percent. An increase in the rate does not require additional voter approval.

The bill specifies that every retail marijuana cultivation facility is required to keep certain records regarding the sale or transfer of unprocessed retail marijuana and is required to collect and remit the tax to the department.

As required by section 16 of article XVIII of the state constitution, the bill specifies that the first $40 million received and collected in payment of the excise tax on unprocessed retail marijuana shall be transferred to the public school capital construction assistance fund currently created in law. Any amount remaining after the transfer shall be transferred to the marijuana cash fund.

Revenue and spending limitations: The bill allows the state to collect and spend any revenues generated by the retail marijuana sales tax and retail marijuana excise tax as voter approved revenue changes.

Submission of ballot questions by the secretary of state: The bill requires the secretary of state to submit a ballot question at the statewide election to be held in November 2013 asking the voters to:

  • Allow the general assembly to impose a retail marijuana sales tax at a rate not to exceed 15 percent of the sale of retail marijuana and retail marijuana products;
  • Allow the general assembly to impose a retail excise tax at a rate not to exceed 15 percent of the average market rate of unprocessed retail marijuana on unprocessed retail marijuana at the time when a retail marijuana cultivation facility sells or transfers retail marijuana to a retail marijuana product manufacturing facility, a retail marijuana store, or another retail marijuana cultivation facility;
  • Allow the general assembly to decrease or increase the rate of either tax without further voter approval so long as the rate does not exceed 15 percent for either tax; and
  • Allow any additional tax revenue to be collected and spent notwithstanding any limitations in TABOR or any other law.

Marijuana cash fund: The bill changes the name of the existing medical marijuana license cash fund to the marijuana cash fund.

The bill specifies that the sale of marijuana or marijuana products by a medical marijuana center to a consumer and the sale or transfer of unprocessed marijuana by a marijuana cultivation facility to a medical marijuana center are not subject to either tax. The department of revenue (department) is required to promulgate rules for the implementation of both taxes.

On April 25 the Finance Committee amended the bill and sent it to the Appropriations Committee. On April 26, the Appropriations Committee amended the bill and sent it to the floor of the House for consideration on 2nd Reading.

Since this summary, the bill was amended in the House on Second Reading but passed, and also passed Third Reading in the House. It has been introduced in the Senate and assigned to the Finance Committee.

HB 13-1317: Implementing Major Provisions of Amendment 64 Regarding Legalization of Marijuana

On April 18, 2013, Rep. Dan Pabon introduced HB 13-1317 – Concerning the Recommendations Made in the Public Process for the Purpose of Implementing Retail Marijuana Legalized by Section 16 of Article XVIII of the Colorado Constitution, and, in Connection Therewith, Making an Appropriation. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

As introduced, the bill converts the medical marijuana enforcement division to the marijuana enforcement division and gives the division the authority to regulate medical marijuana and retail marijuana. The bill allows the division to receive moneys from the general fund. The bill deposits all of the application and licensing fees and sales, use, and special marijuana sales taxes from retail marijuana into a cash fund and permits supplementing the fund with moneys from the general fund to allow the division to operate. Once the division achieves a balance of cash funds sufficient to support the division, any excess revenue up to the amount of general fund moneys provided shall be transferred to the general fund. The bill sets the application fees for applicants who are current medical marijuana licensees or applicants at $500 and at $5,000 for new applicants. One half of the fee is transferred to the local jurisdiction. On Sept. 30, 2014, and each year thereafter, the state licensing authority must provide a report to the joint budget committee and the finance committees regarding the amount of revenue generated by retail marijuana and its regulatory work.

The bill creates the regulatory framework for retail marijuana. The bill allows an existing medical marijuana licensee or an existing medical marijuana applicant the opportunity to apply for a retail marijuana license with the option of converting its operation to a retail marijuana business or retaining a medical marijuana business and adding a retail marijuana business. The bill places a three-month moratorium on retail marijuana license applications from individuals who are not currently licensed for medical marijuana or an applicant for a medical marijuana license. The state licensing authority must act upon the applications no sooner than 45 days after receipt and no later than 90 days after receipt. The following businesses must be licensed to operate a retail marijuana business: retail marijuana stores, retail marijuana products manufacturers, retail marijuana cultivation facilities, and marijuana testing facilities. The bill allows the state licensing authority to issue a state license that is conditioned on the local jurisdiction’s approval.

The bill requires the state licensing authority to promulgate rules as required by the constitution and authorizes the state licensing authority to promulgate other rules with the assistance of the department of public health and environment.

The bill describes persons who are prohibited from being licensees and requires license applicants to undergo a background check. The bill also limits the areas where a licensed operation may be located. The state licensing authority may set fees for the various types of licenses it issues. The bill requires all officers, managers, and employees of a retail marijuana business to be residents of Colorado. All owners must be residents of Colorado for at least two years prior to applying for licensure. A licensed retail marijuana store and licensed retail marijuana products manufacturer may either grow its own marijuana or purchase it from a retail marijuana cultivation facility.

A retail marijuana store may only sell one-fourth of an ounce of marijuana to a nonresident during a single transaction. A retail marijuana store may not sell any retail marijuana product that contains nicotine or alcohol. A retail marijuana store must place each sold item in a sealed nontransparent container at the point of sale.

On April 26, the bill was amended and passed on 2nd Reading in the House.

Since this summary, the bill passed Third Reading in the House, and was assigned to the Senate Finance Committee.

HB 13-1316: Requiring Colorado Oil and Gas Conservation Commission to Adopt Uniform Groundwater Sampling Rules

On April 18, 2013, Rep. Dickey Lee Hullinghorst introduced HB 13-1316 – Concerning the Colorado Oil and Gas Conservation Commission’s Adoption of Uniform Statewide Groundwater Sampling Rules. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The Colorado oil and gas conservation commission recently adopted rules that require oil and gas operators to conduct groundwater sampling but specify less rigorous standards for particular areas of the state. The bill requires the commission to adopt uniform statewide groundwater sampling rules that obligate operators to sample groundwater sources at specified intervals before and after drilling of a well.

On April 26 the Appropriations Committee amended the bill and sent it to the House for consideration on 2nd Reading.

Since this summary, the bill passed Second Reading in the House with amendments, and passed Third Reading in the House as well. It was introduced in the Senate and assigned to the State, Veterans, & Military Affairs Committee.