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Whiteford Taylor Preston LLP

Phase I Environmental Site Assessments
Phase I Environmental Site Assessments (""Phase I"") are a familiar component of due diligence in most real estate transactions. But all too often, a Phase I is perceived as just another check box on the list of necessary conditions to complete a feasibility study or satisfy a lender. To the contrary, a Phase I may provide valuable information, and assist the parties in identifying and allocating environmental risk within the context of the transaction. This article discusses key issues and considerations relevant to performing and effectively using the results of a Phase I.

Before spending $2,000-4,000 on a Phase I, try answering the following questions:
1. What is a Phase I?
2. What does a Phase I not disclose?
3. Why should a Phase I be performed?
4. When should a Phase I be performed
5. Who should prepare a Phase I?
6. How will Phase I standards change on November 1, 2006?
7. How can an attorney add value to a Phase I?

Real estate professionals (i.e. brokers, developers, attorneys, and investors) should be able to answer most, if not all, of these questions.

What is a Phase I?
In general terms, a Phase I is an inquiry into the current environmental condition of a property. It is intended to uncover evidence of past, present or potential releases of hazardous materials whose presence may result in cleanup liability, third-party liability for property damage, and/or third-party liability for bodily injury.

08-02-2006

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Farella Braun + Martel LLP

IP Seminar with Taiwan Intellectual Property Association (TIPA)
In assocaition with TIPA and the Formosa Transnational Law Firm, attorneys John Cooper, Jeffrey Fisher and Jonathan Lemberg presented on the topic "Patent Pooling and Litigation Practices in the United States" at a seminar in Taiwan.

08-02-2006

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Quarles & Brady

Quarles & Brady LLP Estate Planning Attorney Becomes Board Certified
Susan Kubar, a partner in Quarles & Brady LLP’s Estate Planning Group, has passed the Florida Bar Board of Legal Specialization and Education Exam for Wills, Trusts and Estates. Effective August 1, 2006, she will be a Board Certified Attorney in Wills, Trusts and Estates.

In the state of Florida only certified lawyers are allowed to identify themselves as ""Florida Bar Board Certified"" or as a ""specialist."" Certification is the highest level of recognition by The Florida Bar of the competency and experience of attorneys in the areas of law approved for certification by the state Supreme Court. Each certified lawyer has passed peer review, completed 90 hours of continuing legal education within three years immediately preceding application and has passed a written examination demonstrating knowledge, skills and proficiency in the field of wills, trusts and estates law to justify the representation of special competence.

Ms. Kubar's practice focuses primarily on estate planning and estate administration, including preparation of estate planning documents, and overseeing both estate and trust administrations. She has experience representing corporate clients with the formation and operation of corporations, partnerships and limited liability companies, and research and analysis of personal and corporate income tax issues. Ms. Kubar is a member of the American Bar Association, Collier County Bar Association and the Naples Estate Planning Council.

08-02-2006

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McGuireWoods LLP

Eric Bilik Speaks on E-Discovery at Jacksonville Bar Association
Eric Bilik (Jacksonville) spoke on "E-Discovery: The Future is Now" at the Jacksonville Bar Association Corporate Counsel Section on June 26 in Jacksonville. The presentation focused on the new e-discovery amendments to the Federal Rules of Civil Procedure and strategies for implementing effective e-discovery legal hold procedures.

08-02-2006

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Heller Ehrman, LLP

Recent Stock Plan-Related Accounting Announcement
here continue to be important technical and practice developments affecting executive and employee compensation arrangements, including equity compensation. The current developments described below remind us that companies that have not recently done so should consider having all documents and procedures relating to operation of their compensation programs, including stock plans, reviewed to ensure that they are up-to-date and legally compliant.

Recent Accounting Interpretation Affecting Stock Plan Anti-Dilution Provisions
In recent weeks, certain public accounting firms have concluded that under FAS 123(R), the accounting standard that governs equity compensation, companies may incur a significant additional compensation expense in the event outstanding equity awards are proportionately adjusted to preserve the value of such awards following certain corporate restructuring events (such as stock splits, reverse stock splits, stock dividends and similar recapitalization transactions) unless the governing plan documents require such an adjustment. Where awards are adjusted under a plan provision that merely permits such an adjustment (or under a plan that is vague or silent as to how awards should be treated under these circumstances), the accountants will treat the adjustment as a modification of the awards. Generally, award modification requires a new measurement of the award (as though it were newly granted on the modification date), which could result in additional compensation expense with respect to the award. Therefore, companies operating stock plans that do not have a mandatory proportionate, equitable adjustment provision risk incurring additional compensation expense in the event they engage in certain corporate restructuring transactions.

Most stock plans have “anti-dilution” adjustment provisions. Because the accounting standard generally used prior to FAS 123(R) did not require that these provisions be mandatory, stock plan anti-dilution provisions vary in the extent to which they require proportionate adjustment of awards and shares reserved for issuance under the plans. Accordingly, companies should consider reviewing all stock plan documents under which awards either are currently outstanding or may be issued in the future, as it may be possible to amend these provisions to avoid additional compensation expense in the event of a future corporate restructuring. Once a company is “in contemplation” of a restructuring transaction, however, it will be difficult to amend the plans without risk of incurring additional compensation expense.

We recommend that companies review their plan anti-dilution provisions with counsel. In addition to accounting consequences, amendments to these provisions have contract, tax, securities law disclosure, and exchange listing requirement implications. Amendments to anti-dilution provisions should be carefully and narrowly tailored to work within the specific plan, including to avoid unintended application of the amendment provisions on plan change of control provisions (which otherwise should not be affected by this recent interpretation).

Upcoming Additional Developments in the Compensation Area
We expect two significant regulatory developments affecting compensation practice over the next few weeks: The final version of the SEC’s new executive compensation disclosure rules, which the Commission approved on July 26th, should be available in the next few days. In addition, we expect further IRS guidance with respect to the new deferred compensation tax law, including final regulations, to be issued in September.

The pending SEC disclosure release includes the first significant revision to the SEC’s executive compensation disclosure rules since 1992. These new rules will apply to filings made with respect to fiscal years ending on or after December 15, 2006. The release also modifies the disclosure rules applicable to Form 8-K with respect to executive compensation and officer and director appointment and termination matters. We expect the Form 8-K changes to become effective in late September or early October. The new rules will also address corporate disclosure issues on public companies’ stock option grant process, requiring that companies provide more specific disclosure about the manner in which stock option grant decisions are made, who within the board of directors or within company management is involved in the process and bears responsibility for such decisions, and the general timing in which such grants are made vis a vis public disclosure of corporate news. Once the final SEC rules are issued, we will provide a further Client Update on the new disclosure rules.

The new SEC executive compensation disclosure rules will require disclosure of the option grant process without dictating that such process be implemented in any particular manner. The spotlight on stock option grant practices that have so occupied the headlines this summer and the new disclosure requirements likely will cause many companies, including those not subject to formal or internal option grant investigations, to review their compensation procedures and practices. Such a review would typically include not only equity compensation plan documents, but also additional documents and procedures such as compensation committee charters, charters for any other persons or groups involved in the grant and implementation process, procedures for approving award grants (including those related to board and board committee unanimous written consents) and for memorializing award grants, corporate disclosure policies, and contracts and procedures used with third-party service providers involved in administering stock plans.

The long-anticipated deferred compensation tax release, expected early this fall, will likely include final regulations under Internal Revenue Code Section 409A, as well as new proposed regulations on a number of interpretive points that were not addressed in the proposed regulations released last year. Currently, the transition period for complying with Code Section 409A ends on December 31, 2006. There is speculation that the IRS will extend this transition period into 2007, though whether such an extension will be offered (and the scope of any such relief) is not known or assured at this time. Accordingly, unless and until the IRS announces an extension of the transition period or other relief from the requirement that deferred compensation arrangements comply with Section 409A by year-end to avoid potential penalties, companies should be preparing to have all plan and other compensation arrangements that might be subject to Section 409A (including employment arrangements that involve severance benefits) reviewed and if appropriate amended prior to the end of this year. In most cases, especially if amendments are required, this review will take several weeks to accomplish and companies should begin this process as soon as possible to ensure completion by year-end.

In summary, although we will continue to see developments in the compensation area over the next few months, now is the appropriate time to begin review of affected compensation arrangements to make sure that any appropriate changes are made prior to the end of the Section 409A transition period and to assure that companies are prepared on compensation matters for their next-upcoming financial statement audit and for proxy season.

08-02-2006

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Fulbright & Jaworski L.L.P.

Partner To Leave Fulbright For Job With Treasury Department
Fulbright & Jaworski L.L.P. partner Bill Bowers has accepted a role with the U.S. Treasury Department, where he will become senior counsel in the office of the Assistant Secretary for Tax Policy.

Bowers joins the U.S. Treasury Department on Sept. 5.

I have long hoped for the opportunity to serve the public in this role. It is a tremendous honor and privilege to be part of the Treasury’s tax policy team,” said Bowers. “I am very humbled by this opportunity to work with the exceptionally talented tax professionals and dedicated public servants at the Treasury.

At Fulbright, Bowers concentrated on federal income tax planning for business transactions. He also is an adjunct professor in the law schools at the University of Texas and Southern Methodist University.

Bowers has written and spoken extensively on federal tax issues, is considered one of “The Best Lawyers in America” and among a select group of “Super Lawyers” in tax law. He also was featured in Chambers & Partners USA: Guide to America’s Leading Business Lawyers in 2004. Bowers is the immediate Past Chair of the Tax Section of the State Bar of Texas.

At the Treasury, Bowers’ focus will be tax policy regarding pass-through entities.

Representing taxpayers for thirty years has given me an appreciation for the tax compliance system,” said Bowers, who looks forward to his upcoming involvement in the broader administration of tax laws.

Fulbright Tax Department Head Jack Allender said besides being an outstanding tax lawyer, Bowers is a great friend and partner.

Bill is irreplaceable,” Allender said. “However, public service has always been a strong tradition at Fulbright. While we will greatly miss Bill, opportunities at this level in the government are rare and we completely understand and appreciate his desire to pursue this position. We wish him the best.

Bowers, who received his law degree from Southern Methodist University and Masters of Taxation from Georgetown University, has lived in Dallas since 1979.

Dallas partner-in-charge Kenneth Stewart said Bowers’ tax expertise will be a great addition to the Treasury Department.

Bill knows the law and the issues companies face as they work to comply with it,” Stewart said. “He will bring a perspective and expertise to the Treasury that will be appreciated in all corners.

08-02-2006

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Nixon & Peabody, LLP

New Section 4965 May Significantly Affect Tax-exempt Entities That Are Parties to Section 42 and Other Tax-credit Transactions
On May 17, 2006, Section 4965 became part of the Internal Revenue Code with the enactment of the Tax Increase Prevention and Reconciliation Act (TIPRA). The Code section provides new excise taxes that can apply to tax-exempt organizations that engage in many tax-credit-related transactions, as well as their managers. In addition, TIPRA amends Section 6033 and 6652 of the Code to provide new disclosure rules for tax-exempt organizations that participate in these transactions. Now, in Notice 2006-65, dated July 11, 2006, the IRS has spelled out some of the rules under these new provisions, with a possibly chilling effect for tax-credit projects that involve tax-exempt organizations. This Affordable Housing Tax Alert summarizes the new rules, but before you read them, we call to your attention the fact that the IRS has invited comments on the new rules to be submitted by August 11, 2006. This is one time that such comments will be especially important.

New Section 4965 applies to many tax-exempt entities and their managers that engage in “prohibited tax shelter transactions,” defined to include (among others) transactions “with contractual protection” as defined in regulations prescribed by the Treasury Department.1 The notice defines this term using the recently adopted regulations on “reportable transactions” which we discussed in a previous alert.2

Here’s a short summary of the definitions included in the reportable transaction rules: In its Section 6011 regulations, Treasury defined a transaction with “contractual protection” as one in which a taxpayer “has the right to a full or partial refund of fees…if all or part of the intended tax consequences from the transaction are not sustained.” For this purpose, “fees” are defined as being “paid by or on behalf of the taxpayer or a related party to any person who makes or provides a statement, oral or written, to the taxpayer or related party (or for whose benefit a statement is made or provided to the taxpayer or related party) as to the potential tax consequences that may result from the transaction.” Note that regulations under Section 6112 provide: “A fee does not include amounts paid to a person, including an advisor, in that person's capacity as a party to the transaction. For example, a fee does not include reasonable charges for the use of capital or the sale or use of property.”

There are three possible situations to which the new Section 4965 rules might apply, and each should be reviewed in light of the definitions described in the preceding paragraph. These are: (a) when an exempt organization is the developer, and it adjusts the development fee (or makes a payment to the investor) if tax credits are less than expected; (b) when an exempt organization serves as the “syndicator” and adjusts its fees or returns part of an investor’s capital contribution if tax credits are less than expected; and (c) when a third party (e.g., a for-profit syndicator) provides a guarantee of benefits, and an exempt organization is merely a “party” to the transaction.

Based on the definition of “fees” described above, an excellent argument can be made that development fees that might be reduced or refunded (as described in item (a)) are not subject to these rules, since they are paid for the services rendered as a “party to the transaction.” Indeed, the IRS recently endorsed the practice of exempt organizations returning development fees as part of a tax-credit guarantee, in an internal memorandum discussing its approval process for applications for tax-exemption status.3 However, the argument may be harder where either the exempt organization or another person serves as the syndicator, and the investor is either guaranteed the tax benefits or entitled to a refund from the syndicator (i.e., items (b) and (c) in the preceding paragraph). Note that the new rules do not require the tax-exempt entity to be the one providing the “contractual protection;” only that it be a party to a transaction that has such protection.

In any event, many exempt organizations will want more than an “excellent argument.” When only the “reportable transaction” rules were at issue, it seemed easy enough to make a “protective filing,” and it is not surprising that participants chose to comply with those rules, rather than risk an adverse IRS interpretation.

Now, the new TIPRA provisions have raised the level of concern about these rules, because new Section 4965 provides for a very high excise tax—as high as the greater of (a) all of the entity’s “net income” from the transaction or (b) 75% of the proceeds received by the entity for the taxable year attributable to the transaction—if the entity “knew, or had reason to know” that the transaction was a prohibited tax shelter transaction. Furthermore, “the person with authority or responsibility similar to that exercised by an officer, director, or trustee” with respect to the transaction is subject to a fine of $20,000 for each approval. Finally, new amendments to Sections 6033 and 6652 require disclosure to the IRS of these transactions, with a $100-per-day penalty for failure to disclose (up to a maximum of $50,000), as well as an additional $100 per day (up to a maximum of $10,000) for failure to comply with a specific demand from the IRS. Note that disclosure of a transaction does not insulate the exempt organization from liability. Effectively, the provisions are requiring the organization to notify the IRS if it is engaging in a transaction that could subject it to liability.

Remarkably, the new excise taxes are effective for taxable years ending after May 17, 2006, with respect to transactions entered into at any time, provided that income or proceeds are “properly allocable” to any period ending after August 15, 2006 (i.e., ninety days after TIPRA became effective). In other words, transactions entered into many years ago, with outstanding development fees subject to adjusters if anticipated tax credits are not achieved, might be subject to these penalties.4

The new disclosure requirements apply to disclosures “with a due date after May 17, 2006.” Neither the code provisions nor the notice provide a form or a specific due date for transactions covered by the new rule. Section 6033(a)(2) simply requires a filing “in such form and manner and at such time as determined by the Secretary.” Accordingly, it is possible that disclosures could be required for transactions that occurred before TIPRA but for which the organization continues to receive income or proceeds. While the “better view” is that only “new” transactions must be disclosed, the effective date language suggests that “old” transactions can be subject to the rules as well.5

As a result, unless and until Congress addresses these issues, or the IRS amends either the notice or the reportable transaction regulations, it is not clear whether exempt organizations should participate in transactions that arguably have “contractual protection.” An alternative may be to structure transactions using tax-paying subsidiaries of exempt organizations, but this can be a high price to pay if it means conceding that fees earned by the organization would now be subject to tax. Similarly, it is not easy to advise on what should be done with transactions that have outstanding fees subject to adjusters. Currently, there is nothing in the notice or elsewhere that provides any kind of “grandfathering,” other than the August 15 reference that appears above.

Unofficially, the IRS has acknowledged that these issues are on their radar screen, but they haven’t yet settled on how to treat them, or just when additional guidance will be provided. Recognizing the enormity of the issue, we will be preparing a letter to the IRS urging that transactions described in Sections 42 (low-income housing), 45D (new markets), and 47 (historic rehabilitations) of the code be excluded from the definition, and we would be pleased to receive your thoughts and comments in this regard.

You should feel free to contact us to find out more about Section 4965. Please contact Forrest Milder, 617-345-1055 or fmilder@nixonpeabody.com.

1.The new rules also apply to the especially egregious transactions known as “listed transactions” and to “confidential transactions,” but these will not be discussed in this alert.

2.See “IRS Disclosure Requirements Affecting Tax Credit Transactions” dated April 21, 2005, available on the Nixon Peabody website, at http://www.nixonpeabody.com/linked_media/
publications/SA_04212005.pdf.

3.See “IRS Releases New Internal Memorandum on Qualifying Housing Organizations for Tax-Exempt Status,” dated May 2, 2006, also on our website, at http://www.nixonpeabody.com/publications_detail3.asp?Type=P&ID=1351

4.It may be possible to make contrary arguments based upon the wording of the code section that refers to “prohibited tax shelter transaction,” a term that was not defined until TIPRA became law. However, it is difficult to recommend this approach. Plainly, the “effective date” of the excise tax provision is “tax years ending after May 17, 2006, with respect to transactions before, on, or after such date ….”

5.Like the excise tax provision, the “effective date” of the disclosure provision is “tax years ending after May 17, 2006, with respect to transactions before, on, or after such date ….

08-02-2006

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