Texas Supreme Court Hears Oral Argument on Allstate v. Irwin

Originally published by David L. Plaut.

The Texas Supreme Court heard oral argument on Thursday, January 7, 2021 in Allstate v. Irwin, an underinsured motorist case out of San Antonio addressing the availability of attorneys’ fees in such cases.  Plaintiff Daniel Irwin sued Allstate seeking a declaration that he was entitled to recover damages resulting from the wreck under his UM/UIM benefits policy and attorneys’ fees.  On appeal, Allstate argued the trial court abused its discretion in awarding Irwin declaratory relief and attorneys’ fees.

Oral argument before the Texas Supreme Court largely focused on how the attorneys’ fees question was addressed in Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809 (Tex. 2006). Given the unique nature of UM/UIM litigation, the Brainard Court found that the carrier has no contractual duty to pay benefits until the insured obtains a judgment establishing the liability and underinsured status of the liable motorist. Brainard, 216 S.W.3d at 818. Brainard held there was no breach of contract in this context and thus no attorneys’ fees were available and emphasized that “an essential element to recovery of attorneys’ fees under Chapter 38 in a suit based on contract is ‘the existence of a duty or obligation which the opposing party has failed to meet.” Id.

The Irwin Court was particularly interested in the question of how the UM/UIM cause of action should be labeled in light of the fact that these are not “breach of contract” cases.   Irwin’s counsel argued the UIM claim in this context is necessarily a declaratory action under Chapter 37 of the Civil Practice & Remedies Code, thus entitling the policyholder to attorneys’ fees.  Allstate’s counsel disagreed emphasizing that Chapter 37 is not a “catch all” for causes of action that exist without a statutory or common law label.  The Texas Supreme Court will have to wrestle with the question of whether UM/UIM claims can be shoehorned into Chapter 37 despite the absence of the typical disputes between policyholder and carrier about the meaning of policy language. In resolving this question, the Court could simply note the validity of a “Brainard claim” brought as a stand-alone cause of action without any declaratory or breach of contract verbiage.  The Brainard claim involves a peculiar hybrid cause of action employing tort concepts in the insurance coverage context, but it is well-established and easily addressed at trial. Probably not going too far out on a limb to recognize that hundreds of such suits have been brought in the past fourteen years asserting “Brainard claims” for UM/UIM benefits without any declaratory label.

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Edge Computing Is the Next Big Thing You and Your Clients Need to Know About

Originally published by Peggy Keene.

Edge Computing Is on the Rise as IoT Device Use Increases

With the rollout of 5G and the Internet of Things having been completed, the next big thing is edge computing.  While the technical definition of edge computing and how it works is relatively complicated, edge computing can be explained, at its most basic level, as a process that improves response time, bandwidth use, and connectivity by having computation and data storage happen at a storage device nearby as opposed to happening in the cloud.

The Comeback of Edge Computing

Having originated in the 1990s, edge computing in itself is not new.  With the advent of smart devices, however, the Internet of Things (IoT) has created massive amounts of new data that must be processed constantly and in real-time, which often suffers in areas that have low connectivity or unreliable connections.

The advantage of edge computing, when compared to cloud storage, is that it can run much more reliably in areas that have low or unreliable connectivity to the Internet because edge computing often uses far less bandwidth than traditional cloud computing, reduces latency, and speeds up applications.  As such, experts predict that the increasing use of IoT devices will be see a correlating rise in the use of edge computing.

Edge Computing v. Cloud Computing

Because edge computing generally transmits data to nearby storage devices instead of the cloud, new and different kinds of privacy and security concerns can arise.  The distributed nature of edge computing requires different security protocols than those used in cloud computing.  Similarly, edge computing also requires different encryption mechanisms than those used in what has become traditional cloud computing.  As such, counsel should be aware that these significant differences exist and help ensure that clients properly understand such risks if their businesses intend to involve or rely on smart technology, the Internet of Things, or edge computing.

Key Takeaways on Edge Computing

Experts predict that 2021 will see a rise in the use of edge computing because:

• smart and IoT devices generally rely on edge computing;

• it has efficient bandwidth use, faster response time, and speeds up applications; and

• it works in areas that have low connectivity or unreliable connections.

For more information on data privacy, see our Technology and Data Privacy Services and Industry Focused Legal Solutions pages.

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A Second Class of Stock May Not Jeopardize Your S Election

Originally published by Zachary J. Montgomery.

On Christmas Eve, while Santa was packing up his sleigh, the Internal Revenue Service (“IRS”) released a Private Letter Ruling related to S election status. As noted in a previous Insight Blog, corporations may jeopardize their S election by failing to timely submit Form 2553, failing to obtain spousal consent, or, in this case, creating a second class of stock. Here, however, despite the creation of a second class of stock, the IRS determined that the termination of the taxpayer’s S election was inadvertent and, therefore, still valid.

S Election Terminations, Generally

Generally, a small business corporation may terminate its S election in a number of manners.[1] For example, a majority of the corporation’s shareholders may elect to voluntarily revoke the election.[2] Further, a corporation may cease to be a small business corporation (e.g., having more than 100 shareholders) or the corporation’s passive investment income may exceed 25 percent of gross receipts for three consecutive taxable years and the corporation has accumulated earnings and profits.[3]

Section 1362(d)(2)(A) and 1361(b)(1) describe the circumstances in which a corporation ceases to be a small business corporation:

(2) By corporation ceasing to be a small business corporation

(A) In general

An election under subsection (a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.

Section 1361(b)(1) defines the term “small business corporation”:

(1) In general

For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not—

• • have more than 100 shareholders,
  • have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual,
  • have a nonresident alien as a shareholder, and
  • have more than 1 class of stock.

Section 1362(f) describes inadvertent invalid elections or terminations. If a corporation’s S election status is terminated under Section 1362(d)(2)(A),

(2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent,

(3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken—

• • so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or
  • to acquire the required shareholder consents, and
  • the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period,

then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be, during the period specified by the Secretary.

Private Letter Ruling 202045006

On December 24, 2020, the IRS issued a Private Letter Ruling (“PLR”) related to a taxpayer’s request for a ruling under Section 1362(f).[4] The PLR states in part:

The information submitted states Company was organized on Date 1 as a limited liability company under the laws of State and elected to be an S corporation effective Date 2. On Date 3, an operating agreement, Agreement 1, was executed and included provisions in contemplation of Company being treated as a partnership for federal income tax purposes; however, the applicability of those provisions was not limited to such a situation.[5]

. . .

Company represents that since Date 2, Company and its shareholders have filed all tax returns consistent with Company having a valid S corporation in effect as of Date 2. Company also represents that since Date 2, all distributions were made to the shareholders based on their pro rata shares of ownership of Company. Company represents that entering into Agreement 1 created a second class of stock, causing its S corporation status to terminate. Company represents that, on Date 4, Agreement 2 replaced Agreement 1, in part, to eliminate the potential for a second class of stock under §1361(b)(1)(D). Company represents that the termination of Company‘s S corporation election was inadvertent and not motivated by tax avoidance. Company and each person who has been a shareholder of Company at any time on or after Date 1 through the date of this request have consented to any adjustments as may be required by the Secretary.[6]

Conclusion

Notably, the Internal Service Revenue concluded that the termination of the taxpayer’s S election as a result of Agreement 1 creating a second class of stock was inadvertent within the meaning of Section 1362(f). Consequently, the IRS held that the taxpayer’s S election was valid from the date the corporation originally made its S election to present, assuming the S election was otherwise valid and not terminated under Section 1362(d).

Here, the taxpayer received a favorable determination from the IRS. However, it should be noted that the PLR did not disclose the amount of time that lapsed between the date Agreement 1 was executed and the date Agreement 2 replaced Agreement 1—the IRS apparently determined that it was a “reasonable period of time” within the meaning of Section 1362(f)(3). Regardless, taxpayers should be mindful that certain corporate actions may jeopardize their S election status. The onus is on the taxpayer to quickly discover and remedy an inadvertent termination.

 

[1] See I.R.C. § 1362(d).

[2] See I.R.C. § 1362(d)(1).

[3] See I.R.C. § 1362(d)(2)-(3).

[4] I.R.S. Priv. Ltr. Rul. 202052003 (Dec. 24, 2020).

[5] Id. Agreement 1 incorporated certain provisions, such as the distribution of capital proceeds and the allocation of profit/loss from capital transactions.

[6] Id.

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Renewable Energy Tax Credits Extended by New COVID Relief Law

Originally published by Charles Sartain.

Author Joshua D. Smeltzer*

The recently passed Consolidated Appropriations Act, providing additional COVID pandemic relief, also includes important extensions for renewable energy tax credits. These extensions represent a significant tax benefit for renewable energy companies and their potential investors. However, if not done correctly taxpayers can lose the tax benefit and potentially face tax penalties. Here’s what you should know about the potential tax benefits and what to consider when claiming the credits.

The Investment Tax Credit

The Investment Tax Credit (ITC) under Internal Revenue Code Section 48 was extended by two years. This tax credit is popular for solar energy projects as well as other technologies (e.g. fuel cells, microturbines, small wind energy.) In general, solar projects beginning construction in years 2020 through 2022 are eligible for a 26% ITC, 22% ITC in year 2023, and 10% after 2023. The ITC is similar for other technologies except that it drops to 0% if construction begins after 2023, or if the project is placed in service after 2025.

The Production Tax Credit

The production tax credit (PTC) under Section 45 was also extended for one year. This tax credit is primarily used for wind projects and they can now begin construction in either 2020 or 2021 and be eligible for a 60% PTC. However, the one year extension also applies to other PTC-eligible technologies (i.e. biomass, geothermal, landfill gas, trash facilities, qualified hydropower and marine and hydrokinetic renewable energy facilities). If construction begins after 2021 then there is no eligibility for any PTC. However, a new tax benefit was also added by the new law in the form of a standalone ITC for offshore wind. These are facilities located in the inland navigable or coastal waters of the United States. Offshore wind projects are eligible for a 30% ITC for projects beginning construction before 2026 without any apparent phase down provisions.

“Legislative grace”

Tax credits are considered, by the IRS and the courts, as a matter of “legislative grace” and the burden is on a taxpayer to prove entitlement.  As such, renewable energy companies and their investors should be careful when incorporating these benefits in their agreements. The IRS and, if necessary, the courts have several tools available to them to recharacterize a transaction and remove claimed tax benefits if they feel that the transaction isn’t what it purports to be. Questions usually occur if the actions or agreements involved fail to show a genuine business venture with motivations beyond tax avoidance. The agreements and actions of the parties must document a clear business purpose outside of the tax benefits and show that all parties have a meaningful upside and downside potential outside of any tax benefit.

Indemnification – yes or no? 

An investor may desire, and a company may be willing to provide, certain guarantees or indemnifications that could prove problematic if the tax credits are later challenged by the IRS.  For example, direct or indirect guarantees of the investor being able to claim the credit, cash equivalents of the credits, guaranteed repayment of capital contributions because the credit can’t be claimed, or guarantees of repayment or indemnification if the credit is challenged by the IRS might cause problems. Therefore, the terms of the agreement must be evaluated carefully for provisions that could raise questions about the parties having a real stake in the transaction. Despite risks, if done correctly, these tax credits provide a great incentive for investors to direct money into the renewable energy sector that companies can use to help fund projects.

Tony Rice RIP

*Joshua is a talented addition to Gray Reed’s tax department.

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The Four Ps for Career Success

Originally published by Cordell Parvin.

In my last post I suggested that to get ready for 2021 you ask your self four questions.

In this blog I want to supplement my questions with the four Ps.

1. Picture Your Ideal Life
2. Prioritize
3. Plan
4. Perform

While I coached lawyers on each of these steps, it took listening to a podcast to remind me.

When I walk our dog Stella I usually listen to either a book or a podcast. Over the holidays I narrowed my library of podcasts by deleting many I had subscribed to on true crime. I wanted instead to easily assess the podcasts on writing fiction.

While walking Stella on a cold and dreary New Years Day I listened to the Red Sneakers Podcast hosted by New York Times best selling novelist, William Bernhardt. In the podcast, Bernhardt mentioned the Four Ps for success listed above. Unfortunately I couldn’t tell if Sarah Cannon or Sarra Cannon, both writers should get the attribution.

Picture Your Ideal Life: Remember my five questions blog? Answering those questions can give you some idea on the first P above.

Prioritize: I have written numerous blog post suggesting it is a myth to seek work-life balance. Instead I suggested focusing on your priorities. See for example: The Key to 2015: Schedule Your Priorities and Do the One Most Important Thing.

Plan: Have you created a plan for 2021? For January, 2021? For January 1-8, 2021, for January 5th? If you haven’t and you want to get started, take a look at Business/Career Planning: If You Are Still Stuck-Here’s Help and the links within the blog.

Perform: Plans are meaningless without performance. You must find ways to compel yourself to take the actions in your plans. Here is a blog I wrote with some thoughts on that subject: Your Key To Success: Turn Your Goals into Actions.

 

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Stories of Recovery: My Happy New Year

Originally published by Guest Blogger.

I remember a number of years having terrible experiences with New Year’s Eve and drihttp://feedproxy.google.com/~r/StateBarOfTexasBlog/~3/0zftFnfn_ZQ/nking too much, doing something that was humiliating or that caused a problem in my marriage and then swearing I’d quit drinking for the new year.

As a lawyer, I had the idea that working hard and playing hard was expected and understandable, and the stresses of practicing law would always guide me back to the bar or at least to the bottle within a few days. I always felt so ashamed of myself for the failure to keep my resolution. I actually hated myself for not putting those I loved before my desire to get relief from drinking. I couldn’t see at the time that I was actually powerless to quit on my own. I needed help.

After several years of feeling ashamed of my weakness with alcohol, I finally saw a friend that I knew was a hard drinker like me and an attorney I also greatly respected.  He appeared so happy and healthy, and I asked him what he was up to that made him seem so much better. He told me that he quit drinking and, because I knew that he drank to excess like I did for years, I was curious about what he did. A few days later, after I had a particularly rough weekend of drinking, I asked him for help, and he took me to an Alcoholics Anonymous meeting where several lawyers were in attendance.

I got a sponsor and began working the steps of the program and attending meetings as well as attending Lawyers Concerned for Lawyers meetings. When I got my 30-day chip, I cried in disbelief. I was doing so much better with the healthier tools that the program offered me to get the relief I was seeking from alcohol.

I realize now that all of those times that I tried to quit drinking for New Year’s were futile because I was not providing myself any new tools to replace the unworkable relief that alcohol once provided. I needed the new way of life and the connection. I needed the honesty and selflessness of helping others.

After being sober for a few months, I became able to help others do the same and I continued to work the program. Being an attorney became so much easier without being enslaved to alcohol. I had so much more time in my life to do work and take care of myself. I was so much healthier physically and mentally, and I had a purpose beyond me.

Now when each new year begins, I reflect on the pain that I was in each year and I have tremendous gratitude for the world of recovery and to be a lawyer that has the history I do so that I can be of service to so many others. It is indeed a happy new year every year now.

 

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State Bar COVID-19 response and other updates

Originally published by Amy Starnes.

Editor’s Note: The following message was sent to all members on January 5.

Dear Member,

This message includes updated information related to the COVID-19 pandemic and other State Bar of Texas information. We hope this message finds you and your loved ones safe and healthy.

Supreme Court of Texas Emergency Orders

The Texas Supreme Court recently issued two emergency orders related to the COVID-19 pandemic and evictions in Texas. The 31st Emergency Order renews the Texas Eviction Diversion Program, a statewide housing-assistance program designed to help tenants behind on rent avoid evictions. Learn more about the program at txcourts.gov/eviction-diversion.

The court’s 32nd Emergency Order extends deadlines for eviction procedures to reflect recent actions taken by Congress to continue certain eviction protections afforded in the CARES Act.

MCLE Deadlines Extended

We understand that the pandemic has made it difficult for some attorneys to complete their MCLE requirements on time. In response, the State Bar of Texas MCLE Department granted several extensions. Below are the current extensions offered. Attorneys with the following birth months:

• October—granted a 90-day extension with a final deadline of January 31.
• November—granted a 60-day extension with a final deadline of January 31.
• December—granted a 60-day extension with a final deadline of February 28.
• January—granted a 60-day extension with a final deadline of March 31.

The MCLE department continues to review compliance deadlines due to the pandemic. Please contact the MCLE department at 800-204-2222, ext. 1806, or mcle@texasbar.com if you have questions about the extensions or MCLE compliance requirements.

Register Now for Rules Vote Informational Forums

Texas lawyers have been called upon to exercise their right of self-governance by voting on proposed amendments to the Texas Disciplinary Rules of Professional Conduct and Texas Rules of Disciplinary Procedure. Voting will take place from February 2 to March 4 by paper and electronic ballot.

Public forums for the 2021 rules vote will take place via webinar on the following dates:

• January 5, 2021 (1 p.m. CST) – Register now
• January 14, 2021 (1 p.m. CST) – Register now
• January 26, 2021 (1 p.m. CST) – Register now
• February 9, 2021 (1 p.m. CST) – Register now

Each event will include a one-hour CLE presentation on the proposed disciplinary rule amendments (approved for one hour of MCLE ethics credit) featuring members of the Committee on Disciplinary Rules and Referenda, followed by a live forum where attendees can ask questions and provide comments regarding the proposed amendments.

Registration is free and open now. Register early to ensure you have a spot. If you can’t make it to a live event, a recorded version will be available on demand. Go to texasbar.com/rulesvote to learn more.

Stay Up to Date on State Legislation

The 87th Texas Legislature will meet from January 12 to May 31. During each legislative session, the State Bar of Texas offers the Friday Update email newsletter to keep members up to date on legislation of interest to the legal profession. The newsletter includes links to relevant bills with status information. Subscribe at texasbar.com/fridayupdate.

Take Care of Yourselves

In this challenging time, it’s important to take care of yourselves. We invite you to take advantage of the well-being resources for remote living collected by the Texas Lawyers’ Assistance Program and to attend TLAP’s monthly Remote Well-Being Wednesday program that will be held at noon CST on January 27. The topic is Making Healthy Habits Happen. The panelists are:

• Vance Hinds, Texas attorney
• Erica Grigg, TLAP attorney
• Chris Ritter, TLAP director

Sincerely,

State Bar of Texas

Resources to Keep You Informed: The State Bar of Texas continues to updatetexasbar.com/coronavirus with the latest resources and information to help you stay informed of the changes affecting our profession. You can also sign up for the State Bar’s Daily News Briefing attexasbar.com/dailynews to receive the latest legal news updates in your inbox every weekday.

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