Valuation Services Bulletin: Q2 2020

To better serve you during the coronavirus pandemic, the Q2 Bulletin has been adapted to provide business content relevant to the current state of disruption. If you have any questions related to valuation or litigation matters, please contact us using this form, and we will be in touch as soon as possible. Whatever your needs, we are here to help you navigate this unprecedented time.

In This Issue:

** Articles appear in recent issues of BVWire’s ezine.

• Legal Avenues for Businesses Coping with COVID-19 Disruption and Damages
• IRS Discusses Tax Implications of COVID-19 Legislation
• What Family Law Practitioners Need to Know About COVID-19-Related Legislation
• AICPA Issues a Subsequent Event Toolkit

Legal Avenues for Businesses Coping with COVID-19 Disruption and Damages

Issue #211-1 (April 1, 2020)

In Franchising in the Time of COVID-19, an ABA panel recently discussed the scope of the disruption the pandemic has caused for franchisees and franchisors as well as legal doctrines on which franchisees/franchisors might rely to deal with the monetary damages to their businesses.

This excellent webinar took place on March 23, and the speakers were Kristin Lawrence Corcoran (Franchise World Headquarters LLC), Michael R. Gray (Lathrop GPM), Nicole Liguori Micklich (Urso, Liguori & Micklich), and Tao Xu.

Business interruption insurance: In an effort to stem losses resulting from the pandemic, businesses may consider filing a business interruption claim with their insurance. What losses are covered depends entirely on the individual policy, the speakers say. Consequently, while policies may be similar, they may include different riders and endorsements. Many policies have virus exclusions. Check yours.

The speakers note that, to make a valid claim, a business usually has to show that it suffered a “direct physical loss or damage to property.” Earlier this month, a restaurant in Louisiana filed a case arguing it suffered direct physical damage to the property in that employees who proved to have the virus actually contaminated the workspace, requiring the restaurant to shut down for decontamination. The insurance company should be liable for the cost of deep cleaning as well as loss of income.

The premise of the claim is that health experts know the virus can survive on surfaces up to 28 days. Further, health professionals have acknowledged the waiting times to test potentially affected persons and obtain test results. This delay allowed the virus to linger and contaminate the physical space, the argument goes.

The speakers note that insurance companies are much less likely to entertain arguments for “presumed contamination,” i.e., injury based on the general knowledge (assumption) that the virus is omnipresent. The speakers also note that some insurance policies may cover government-ordered closures; others may not. Again, the language of the individual policy controls the claims businesses can file. Diligently document all losses, file claims, and await the response from the insurance company, the speakers advise. They note that responses to claims and the development of claims are evolving.

Force majeure clauses: In this unrivaled crisis, franchise owners and holders may try to invoke force majeure (FM) clauses to escape certain contractual obligations. This French term, which means “superior force,” generally refers to events beyond the control of a party to the contract that make it impossible to perform under a contract. The ABA panelists note that there is no standard legal definition for FM. The language of a specific contract explains what events may allow a party to abandon the contract. Often, FM clauses in contracts expressly exclude health crises. It is not clear whether federal, state, or local orders that prohibit or make difficult movement, the performance of certain services, and access to certain supplies qualify as FM. The panelists caution that parties to a contract cannot escape performance just because doing so has become too expensive. Anyone thinking of pursuing this avenue must pay close attention to notice deadline requirements, the panelists advise.

IRS Discusses Tax Implications of COVID-19 Legislation

Issue #211-2 (April 8, 2020)

In an excellent ABA webinar that summarized and analyzed the COVID-19-related legislation Congress passed to alleviate the economic harm on businesses and persons, IRS Chief Counsel Michael Desmond spoke to some of the efforts the agency is making to achieve implementation. Here are a few takeaways from this item-packed discussion.

The presentation took place on April 2 and also included leaders from the ABA Tax Section: Sheri Dillon, Jennifer Breen, Lisa Zarlenga, as well as Anne Gordon (Tax Counsel, U.S. Senate) and Sunita Lough (IRS deputy commissioner services and enforcement).

CARES Act: This legislation was signed into law on March 27 and includes relief for small and large business through loans, guarantees, and other investments. Of particular note are provisions to provide qualifying employers with a refundable payroll tax credit of up to $5,000 for each employee’s wages paid from March 13, 2020, through Dec. 31, 2020. To qualify, a governmental shutdown order must have fully or partially suspended an employer’s operations during the COVID-19 crisis or the employer must have experienced a drop in gross receipts by more than 50% compared to the same quarter in 2019.

Further, the legislation seeks to make available additional cash flow and ensure liquidity by temporarily repealing the 80% of taxable income limitation on using the net operating loss carryovers that the 2017 TCJA imposed. Specifically, for a taxable year beginning before Jan. 1, 2021, a taxpayer can fully offset taxable income in that year with NOLs from prior taxable years. Also, taxpayers may carry back NOLs arising in 2018, 2019, and 2020 to their prior five taxable years. (This is the Tax Code § 172 provision.) Speakers noted that, if you are thinking of carrying back five years to offset prior income and get a refund, you may also have to amend state tax filings.

A key question was how quickly taxpayers could monetize their losses and get refunds. Chief Counsel Desmond said this issue was top of the list and two sets of guidance were coming soon, one addressing substantive issues and one procedural issues.

IRS notices: IRS Notice 2020-18 provides for an extension of the federal income tax filing date from April 15, 2020 (whether due date or extension) to July 15, 2020. The extension is automatic. Taxpayers may defer any amount of federal income tax payments until July 15, 2020. Note that this notice does not address payments due for other quarters or fiscal year taxpayers. Taxpayers with a different filing or payment due date other than April 15 must abide by the original date as of now. This may create a situation where Q2 estimated income tax payments are due on June 15, 2020, while Q1 estimated income tax payments are postponed from April 15, 2020, to July 15, 2020. IRS Notice 2020-20 provides the most up-to-date guidance and augments the relief by including Gift Tax and Generation-Skipping Transfer Tax returns.

IRS representatives also noted that, in the spirit of the “People First Initiative,” the agency is trying to “help people and businesses during these uncertain times.” The agency “generally” will not start new audits but will work on refunds “where possible,” without in-person contact. For audits in the works, the IRS will continue the work, the idea being that most taxpayers want the audit over with. Also, IRS appeals will continue to work cases. Taxpayers are encouraged to promptly respond to requests for information in these cases.

Note that the IRS continues to process tax returns and to issue refunds and seeks “to help taxpayers through its self-serving tools.”

What Family Law Practitioners Need to Know About COVID-19-Related Legislation

Issue #211-3 (April 15, 2020)

In a recent webinar, hosted by the American Academy of Matrimonial Lawyers (AAML), high-caliber presenters examined provisions in the mammoth COVID-19 federal legislation that are of particular significance to family law practitioners (attorneys and business valuators).

The discussion took place on April 9, and the speakers were Michelle F. Gallagher (Adamy Valuations), a nationally recognized BV expert, and Brian C. Vertz (Pollock Begg), a divorce attorney specializing in complex child support issues, business valuations, and other divorce-related issues.

No double dipping: In broad strokes, the Families First Coronavirus Response Act (FFCRA) provides emergency paid-leave benefits for employees who work for an employer that has fewer than 500 employees and who are unable to work because they are sick with the virus, care for someone with COVID-19, are in quarantine or self-isolation, or have children who cannot go to school because of mandatory school closures.

Employers affected by the employee’s absence may apply for refundable tax credits (from payroll taxes) to offset the cost of this extra paid leave. The FFCRA provisions apply to wages paid beginning April 1, 2020, and ending on Dec. 31, 2020.

Specifically, if an employee cannot work because he or she has COVID-19, the employer may get a refundable credit at the employee’s regular pay, up to $511 per day, for a total of 10 days. For other employees, including those caring for someone with the disease, an employer can claim up to $200 per day for up to 10 days. Gallagher notes that the IRS is still working on the forms an employer has to submit to get reimbursed.

The CARES Act includes an employee retention credit provision that says an employer may qualify for a refundable tax credit of up to $5,000 for each employee’s wages paid from March 13, 2020, through Dec. 31, 2020. To be eligible, an employer’s operations must have been fully or partially suspended because of the crisis by a shutdown order from a governmental entity or because gross receipts dropped by more than 50% in comparison to the same quarter in 2019.

Michelle Gallagher points out that there is no double dipping in the sense that, if an employer uses wages to qualify under the FFCRA, it cannot also use the same wages to secure benefits under another provision, i.e., the employee retention credit.

Employers struggling to pay employees and stay in business may be eligible for SBA loans that may be forgiven in part or even entirely. Under the paycheck protection program (PPP), smaller businesses (those with less than 500 employees), sole proprietors, independent contractors, and self-employed workers may apply. The SBA will forgive loans if the employer keeps the same headcount of workers and wages for eight weeks after disbursement of the loan. For full forgiveness, only about 25% of operating costs may go to nonpayroll costs, including rent. Under recent SBA guidance, lenders must disburse the loan proceeds within 10 days of loan approval. The eight-week count for the employer begins with the first disbursement of the loan.

Gallagher notes there is also no double dipping as concerns the PPP loan. An employer who wants to take advantage of the loan cannot also receive an employee retention credit.

Valuation considerations: Both speakers note that it’s important to consider the impact of the various remedies available to business owners and individuals in a business valuation or in calculating income for spousal support purposes for divorce purposes. Find out what the effect of the crisis has been on cash flow and what legal remedies a business has taken advantage of. Consider whether the PPP loan might be a windfall for the business owner. Consider the valuation date, Gallagher says. If, in an ongoing case, the most recent valuation was for Dec. 31, 2019, it may make sense to alert the attorney on the case to explore the possibility of doing an updated valuation. Note that different states have different valuation date requirements (date of separation, date of trial), but that courts, in this extraordinary situation, may allow for an updated valuation (which means more work for the valuator).

AICPA Issues a Subsequent Event Toolkit

Issue #211-4 (April 22, 2020)

In a prior issue of BVWire, we presented one valuation expert’s way of dealing with the coronavirus in valuation reports before it was known or knowable. In an appendix to her report, she considered the coronavirus a subsequent event as of the valuation date (Dec. 31, 2019), explained why she did so, and stated that the determination of value does not consider the effects of the virus. She also cited the language of the standards she was following, namely, the AICPA’s Standards on Valuation Services (SSVS No. 1 VS Sec 100, paragraph 43). This treatment is essentially consistent with the recently released AICPA VS Section 100 Subsequent Event Toolkit, a helpful resource that includes frequently asked questions and sample disclosure language. The Toolkit reminds valuers who adhere to VS 100 that the disclosure of a subsequent event is not required—it is up to the analyst to decide whether or not it is appropriate to make the disclosure.

VISIT THE KSM COVID-19 RESOURCE CENTER