Articles by Our Attorneys

Taxation of Foreign Investment in Delaware Entities

September 4, 2019 by Andrew R. Silverman, Esq.

taxation ID 136274785 © Pattanaphong Khuankaew | Dreamstime.com

Foreign investors and entrepreneurs who would like to do business in the United States are confronted with a number of legal decisions to make and, if not familiar with the local law, these decisions can be quite daunting. One question that invariably comes up for foreign investors who desire to form a Delaware entity is this: how will it be taxed?

Is the income taxable?

Your entity will be taxed if two conditions are present: (1) the entity is engaged in the sale of goods and services in the United States (referred to as “engaged in trade or business” or “ETB”); and (2) the entity earns income that is effectively connected with United States sources (such income, is often referred to as “effectively connected income” or “ECI”).

TIP: If your entity is subject to taxation in the United States, you may be able to offset the taxes by carefully planning how distributions will be made to the ultimate beneficial owner (i.e., the foreign shareholders or partners) and by taking advantage of the numerous tax treaties to which the United States is a party.

Taxation of Delaware C-Corporations

Federal Taxation

If your entity is a corporation and is subject to tax in the United States, it will be subject to double taxation. This means that the ECI will be taxed once upon receipt by the corporation and then a second time if it is later distributed to stockholders (such as through a dividend or liquidation). The current federal corporate tax rate is 21 percent of the ECI.

Delaware Taxation

Generally, Delaware will only assess a tax on ECI that is attributable to Delaware sources or if it has assets, employees, or activities in Delaware.

Taxation of Delaware LLCs and Partnerships

Federal Taxation

Generally, the federal government does not impose a tax on ECI that is received by the LLC or partnership but it does tax the members or partners directly. Thus, while an LLC or partnership can avoid double taxation, the members or partners will be exposed to federal and state and local taxes and will need to file US tax returns that report worldwide income. This may not be ideal for various reasons.

In such cases, each member or partner may form a “blocker” corporation to hold its membership or partnership interest. In such cases, the blocker corporation and dividends to its ownership will be taxed but reporting requirements on the ultimate beneficial owner will be reduced.

Delaware Taxation

Delaware does not impose income taxes upon LLCs and partnerships; however, the state will impose a gross receipts tax on income from Delaware sources.

Any foreign person or entity that desires to do business in the United States through a Delaware entity is advised to partner with US-based lawyers and accountants who are familiar with the legal and tax requirements.

Andrew Silverman is an attorney in the firm’s Business Department whose practice includes complex corporate governance and financing matters. If you are a Delaware business owner and desire guidance, call (610) 840-0286 or email [email protected].

The Pennsylvania Tax Benefit Rule Compared to the Federal Rule

August 27, 2019 by Joseph A. Bellinghieri, Esq.

Tax Benefit Rule ID 11188653 © Marius Scarlat | Dreamstime.com

By Joseph A. Bellinghieri, Esquire-

One of the questions I am often asked by clients is why does Pennsylvania impose tax on income in one year when I have had losses in the same investment for years which Pennsylvania has not allowed me to take. The federal government does not do that. Doesn’t the Pennsylvania tax benefit rule help me?

The tax benefit rule is a product of federal common law, created by federal courts in response to anomalies arising out of application of the annual accounting system for taxes contained in the Internal Revenue Code (“IRC”), and was eventually codified by Congress in Section 111 of the IRC. As the Pennsylvania Supreme Court summarized: In general, the rule applies when a deduction of some sort for a loss is taken by a taxpayer in one year, only to have the amount previously deducted recovered in a following tax year. Normally, the taxpayer would be responsible for including the recovered income on his personal income tax return for the year in which recovery occurred. The tax benefit rule states, however, that the recovery of the previously deducted loss is not includible to the extent that the earlier deduction did not reduce the amount of the tax owed in the year the initial deduction was taken. Put differently, the rule permits exclusion of the recovered item from income in a subsequent tax year so long as its initial use as a deduction did not provide a tax saving.

The Pennsylvania Supreme Court has recognized that the Pennsylvania Department of Revenue has seemingly adopted the tax benefit rule in its personal income tax guide and that the tax benefit rule is a complicated doctrine, with many different applications in varying factual scenarios. Unfortunately, there is no state statute or court opinion ensconcing the tax benefit rule in Pennsylvania law. However, Pennsylvania tax law is clear that income and losses must be segregated by class under §7303(a) of the Tax Reform Code of 1971. Furthermore, losses may only be used to offset income of the same class in the same tax year (i.e., they may not be carried over as they can be for federal tax purposes).

The Commonwealth Court of Pennsylvania has recognized that if the tax benefit rule could even arguably apply in some context in Pennsylvania, the unused deduction in the prior year would at least have to have been eligible to offset the subsequent year gain. In other words, under Pennsylvania law, the deduction would have to be an allowable offset against the gain had both been booked in the same tax year. Unlike federal tax law, which taxes income as a single class, Pennsylvania law recognizes eight separate classes of income subject to tax. Furthermore, Pennsylvania Regulations expressly prohibit taxpayers from offsetting or netting, income and losses across classes.

The classes of income under the Pennsylvania law include (1) compensation, (2) net profits, (3) net gains or income from disposition of property, (4) net gains or income derived from or in the form of rents, royalties, patents and copyrights, (5) dividends, (6) interest derived from obligations which are not statutorily free from State or local taxation, (7) Gambling and lottery winnings, and (8) net gains or income derived through estates or trusts.

In a series of cases discussing the only substantive tax benefit law case decided in Pennsylvania to date, the Supreme and Commonwealth Court of Pennsylvania determined that the tax benefit rule cannot be applied to exclude accrued but unpaid interest from the amount realized from sale or disposition of property at foreclosure. In those cases, the Taxpayers invested in a limited partnership which owned a building worth $360 million in the city of Pittsburgh. The Partnership financed $308 million with a nonrecourse Purchase Money Mortgage Note secured only by the Property. Interest on the Note accrued on a monthly basis at a rate of 14.55%. The accrued but unpaid excess would be deferred and, thereafter, compounded on an annual basis subject to the same interest rate as the principal amount of the Note.

Over the years, the Partnership’s net income from operations did not keep pace with projections. The Partnership actually incurred losses from operations for financial accounting, federal income tax, and Pennsylvania tax purposes every year of its existence. For Pennsylvania purposes, the Partnership allocated its annual losses from operations to each partner. Because of the Partnership’s dismal operations, the Partnership paid less monthly interest on the Note than it had projected. The property went into foreclosure in 2005.

At the date of foreclosure, the Partnership had an accrued but unpaid interest obligation of approximately $2.6 billion. The Partnership had used approximately $121.6 million of this amount to offset its income from operations that would otherwise have been subject Pennsylvania tax. The partners did not obtain any Pennsylvania tax benefit from the remainder of the losses. Also, neither the Partnership nor its individual partners received any cash or other property as a result of the foreclosure. That same year, the Partnership terminated operations and liquidated.

In 2008, the Pennsylvania Department of Revenue assessed Taxpayers for their pass-through share of the Partnership’s income realized from the foreclosure of the Property and the cancelation of debt. The class of taxable income at issue, in that case, was the “net gains or income from disposition of property” under Section 303(a)(3) of the tax code.

The court refused to apply the tax benefit rule. While it was true that each partner received no tax benefit from the loss in prior years, each Partner’s lack of offsetting income of the same class in those prior years (or in general) precluded the court from applying the tax benefit rule in those cases.

Overall, it is generally understood that “taxpayers seeking to avail themselves of the exclusionary aspect of the tax benefit rule must establish three requirements: First, there must be a loss that was deducted but did not result in a tax benefit. Second, there must be a later recovery on the loss. Third, and the one that most taxpayers fail is there must be a nexus between the loss and the recovery. This means that the loss must be from the same class as the income that would otherwise have to be reported on the taxpayer’s tax return.

Joseph A. Bellinghieri represents individuals and businesses with a variety of estate, tax, real estate, and business issues.

To schedule an appointment with Joe, call (610) 840-0239 or [email protected].

What is Mediation?

August 22, 2019 by Timothy F. Rayne, Esq.

By Timothy F. Rayne, Esquire-

Mediation is a form of Alternative Dispute Resolution, which means another way of resolving a legal controversy, like a Personal Injury Case, without negotiating a direct settlement with the other side or having a Jury Trial in Court.

In Mediation, the parties agree to use a neutral person, usually a senior or retired litigation attorney or Judge, to evaluate a case and try to help the parties reach a voluntary negotiated resolution. Nobody is forced to settle and either party can end the Mediation process at any time. The Mediator’s job is not to decide the case, but instead to help bring the parties to a negotiated settlement agreement.

The Mediation Process

The following is the usual step-by-step Process:

Pick a Mediator – The parties need to choose someone who they both trust and respect.
Educate the Mediator – Each party submits detailed descriptions of the case to the Mediator including documents and evidence that are important to the case.
Attend the Mediation – The Mediation itself is usually a day or half-day and takes place at the Mediator’s office, one of the lawyers’ offices or some other neutral location. The lawyers and clients are present and, in a Personal Injury case, a representative of the insurance company is either present or available by phone with authority to negotiate a settlement.
Joint Session – The Mediation begins with a Joint Session where the Mediator explains the Process. Often during the session, the lawyers will give Opening Remarks about the case.
Separate Sessions – After the Joint Session, the parties are sent to separate rooms and the Mediator travels between the two rooms discussing the merits of the case and working on negotiating a settlement.
Mediation Ending – A Mediation ends one of two ways, with a settlement or with one or both sides deciding that there cannot be a resolution.
After the Mediation – It’s common for the Mediator to stay involved in unsettled cases after the date of the Mediation and to continue to work with the lawyers to attempt to guide them to a resolution.

The Benefits of Mediation

Saves time, stress and expense – Mediation can save litigation time, stress and expense. It provides the opportunity to try to settle the case before the parties spend the time, effort, emotion and expense of trying the case in court.
Mediation is a Final Resolution – Mediation ends the case. It avoids the delay involved in a trial and eliminates the possibility of an appeal because it’s a final resolution.
Get insight and opinions of an experienced expert – At the Mediation you will get the opinions and insight of the Mediator who is an experienced and wise lawyer. The Mediator can evaluate the probability of each side winning the case as well as the fair value of the case. Although both parties must be aware that the Mediator’s job is to settle the case so he/she is always working towards that end, the Mediator often provides valuable feedback on the strengths and weaknesses of the case. This can help to settle the case or help us make the case stronger if it has to be taken to trial.

If your Personal Injury case cannot be settled directly with the defense, it is often advisable to consider the mediation process before taking a case to trial. Unless it is clear that the case has a very low probability of settling, the benefits of mediation are usually worth the time, effort and cost.

Tim Rayne is a Personal Injury Lawyer with the Pennsylvania law firm MacElree Harvey. Tim has law offices in Kennett Square and West Chester Pennsylvania. For over 25 years, Tim has been helping injured victims of accidents receive fair compensation from insurance companies. To learn more about Tim’s practice, visit timraynelaw.com.

To schedule your free consultation, call (610) 840-0124, or email [email protected].

How to Form a Delaware Corporation

August 15, 2019 by Andrew R. Silverman, Esq.

By Andrew R. Silverman, Esquire-

Delaware is a proper jurisdiction for business incorporation because its well-developed corporate law and capable judiciary make the resolution of legal issues predictable and efficient. In addition, Delaware is generally regarded as business-friendly, making it a great place for your start-up.

Fortunately, forming and organizing a Delaware corporation is an intuitive process.

Here is how it is done:

Draft a Certificate of Incorporation – This is the “birth certificate” of your new entity and it contains general information about the corporation. Once filed with the Delaware Secretary of State, a Certificate of Incorporation can only be amended by the vote of the stockholders. Thus, it is common that an incorporator will include governing rules that it does not want the board of directors or minority stockholders to change easily (e.g., preemptive rights and jurisdiction and forum selection clauses). A Certificate of Incorporation is signed by the person who files it, who is known as the “incorporator.”
Draft Bylaws – If a Certificate of Incorporation is the “birth certificate” of your corporation, the bylaws are its “constitution.” Bylaws will contain, among other things, voting procedures for the board and stockholders, annual meeting requirements, and provisions concerning officers. This document is not filed with the Delaware Secretary of State but should be kept with the corporation’s important documents.
Prepare the Action of Incorporator – The incorporator should sign a document that is often called the “Organizational Action of the Incorporator.” This document can do a number of things but, most importantly, it identifies the first board of directors of the corporation and formally adopt the bylaws.
Hold an Initial Meeting – Whether through an initial meeting or a consent of the board, the board will usually appoint officers, ratify the acts of the incorporator, and grant banking power to certain officers or directors. Most importantly, the corporation will also issue stock to the corporation’s first stockholders (also known as shareholders). The easiest way to do this is through an Initial Consent in Lieu of Organizational Meeting,” which is a document that sets forth the foregoing. To comply with Section 141(f) of the Delaware General Corporation Law, the unanimous written consent must be signed by each director. If the board cannot unanimously agree to the matters in the consent, it must hold a meeting and vote on each item. With respect to the issuance of stock, the secretary of the corporation generally issues stock certificates to the new stockholders following the initial meeting or after the consent is executed.

Additional documents are sometimes necessary or prudent. We often recommend that stockholders also enter into a stockholders (or shareholders) agreement that provides for management and stock transfer provisions that are not typically contained in a corporation’s bylaws.

Third Circuit Court of Appeals Decision Finds Amazon Liable For Faulty Products

August 9, 2019 by Timothy F. Rayne, Esq.

Amazon Product Liability_Photo 70456388 © M-sur - Dreamstime.com

On January 12, 2015, Heather Oberdorf returned home from work, put a retractable leash on her dog, and took the dog for a walk.[1] Unexpectedly, the dog lunged, causing the D-ring on the collar to break and the leash to recoil back and hit Oberdorf’s face and eyeglasses.[2] As a result, Oberdorf is permanently blind in her left eye. Oberdorf bought the collar on Amazon.com.[3]

As a result of the accident, she sued Amazon, including claims for strict products liability and negligence.[4] According to section 402A of the Second Restatement of Torts, “[o]ne who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer.”[5] The basis of strict products liability is the longstanding rule of the “special responsibility for the safety of the public undertaken by one who enters into the business of supplying human beings with products which may endanger the safety of their persons and property, and the forced reliance upon that undertaking on the part of those who purchase such goods.”[6]

“Section 402A specifically limits strict products liability to ‘sellers’ of products.”[7] Amazon asserted that it is not a “seller” within the confines of Section 402A “because it merely provides an online marketplace for products sold by third-party vendors.”[8]

Originally, the District Court agreed, stating that under Pennsylvania law, Amazon was not liable for Oberdorf’s injuries because it is not a “seller”.[9] In its opinion, the District Court emphasized that a third-party vendor—rather than Amazon itself—listed the collar on Amazon’s online marketplace and shipped the collar directly to Oberdorf.[10]

On appeal, the United States Court of Appeals for the Third Circuit, in a 2-1 panel decision, vacated the District Court’s ruling, stating that Amazon is a “seller” under Section 402A and thus strictly liable for consumer injuries caused by defective goods purchased on Amazon’s website.[11] According to the Court, Amazon’s involvement in transactions extends beyond a mere editorial function; it plays a large role in the actual sales process.[12]

As the Third Circuit noted, under Pennsylvania law, four factors should be considered when determining whether an actor is a “seller” under Section 402A:

(1) Whether the actor is the ‘only member of the marketing chain available to the injured plaintiff for redress’; (2) Whether ‘imposition of strict liability upon the [actor] serves as an incentive to safety’; (3) Whether the actor is ‘in a better position than the consumer to prevent the circulation of defective products’; and (4) Whether ‘[t]he [actor] can distribute the cost of compensating for injuries resulting from defects by charging for it in his business, i.e., by adjustment of the rental terms.’[13]

The Third Circuit ultimately concluded that each factor weighed in favor of imposing strict liability on Amazon.[14]

Senior Judge Jane Richards Roth, who wrote the majority opinion, pronounced that Amazon is a “seller”, “even though the products are sourced and shipped by third-party vendors . . . Amazon’s involvement in transactions extends beyond a mere editorial function; it plays a large role in the actual sales process.”[15] Amazon’s involvement includes “receiving customer shipping information, processing customer payments, relaying funds and information to third-party vendors, and collecting the fees it charges for providing these services.”[16]

Amazon Seeks En Banc Review of Panel Decision Holding It Liable for Products Sold by Third-Party Vendors

Now, Amazon has asked for the Third Circuit Court of Appeals to reexamine their decision, en banc,[17] (a session where the entire membership of the court will participate in the decision rather than the regular quorum[18]) requesting a fresh look at the case.

Amazon contends that the Third Circuit’s decision could have wide-ranging implications for online retailers in Pennsylvania.[19] In their motion, Amazon claimed that “the majority’s new rule was not grounded on clear and unmistakable precedent from any Pennsylvania court. Rather, the majority relied on a host of policy considerations—acting, in effect, as a super-legislature.”[20]

In its request for further review by an expanded panel, Amazon noted that other courts, including the Fourth Circuit, the Northern District of California and the Southern District of New York, have determined Amazon was not a “seller” for strict liability purposes.[21]

For now, at least, Amazon can be held strictly liable in Pennsylvania because, according to the Third Circuit, their role in the retail process amounts to being in the business of selling or marketing merchandise, rather than simply performing a tangential role.

Timothy F. Rayne, Personal Injury Attorney

For a free consultation, contact Tim Rayne at (610) 840-0124 or [email protected] regarding your injury claim.

[1] Oberdorf v. Amazon.com Inc., No. 18-1041, 2019 U.S. App. LEXIS 19982, at *1 (3d Cir. July 3, 2019).

[2] Id.

[3] Id.

[4] Id.

[5] Restat 2d of Torts, § 402A.

[6] Id.

[7] Oberdorf, No. 18-1041, at *9.

[8] Id.

[9] Id., at *1.

[10] Id.

[11] Oberdorf v. Amazon.com Inc, No. 18-1041 (3d Cir. 2019), Justia, https://law.justia.com/cases/federal/appellate-courts/ca3/18-1041/18-1041-2019-07-03.html.

[12] Id.

[13] Oberdorf, No. 18-1041, 2019 U.S. App. LEXIS 19982, at *11 (quoting Musser v. Vilsmeier Auction Co., 562 A.2d 279, 282 (Pa. 1989)).

[14] Id. at *12-17.

[15] Id. at 27.

[16] Id.

[17] Max Mitchell, Amazon Seeks En Banc Review of Panel Decision Holding It Liable for Products Sold by Third-Party Vendors, The Legal Intelligencer, July 22, 2019, https://www.law.com/thelegalintelligencer/2019/07/22/amazon-seeks-en-banc-review-of-panel-decision-holding-it-liable-for-products-sold-by-third-party-vendors/?printer-friendly.

[18] En Banc, The Free Dictionary By Farlex (2019).

[19] Max Mitchell, Amazon Seeks En Banc Review of Panel Decision Holding It Liable for Products Sold by Third-Party Vendors, The Legal Intelligencer, July 22, 2019, https://www.law.com/thelegalintelligencer/2019/07/22/amazon-seeks-en-banc-review-of-panel-decision-holding-it-liable-for-products-sold-by-third-party-vendors/?printer-friendly.

[20] Id.

[21] Id.

Subject Matter Jurisdiction: What is it and Why is it Relevant in a Divorce Case?

August 5, 2019 by Patrick Boyer, Esq.

subject matter jurisdiction Free photo 1104204 © Steve Holsderfield - Dreamstime.com

Subject matter jurisdiction refers to a Court’s authority to hear a particular case. It can be raised as a defense by any party at any time. In divorce cases, a party must typically be a bona fide resident of the state for six months or more preceding the filing of the action for a Court to have subject matter jurisdiction. A person domiciled in the state is considered a bona fide resident. Domicile refers not just a physical presence, but an intent to remain permanently.

What does and does not constitute domicile is often very fact-specific. A college student, who spends a semester or two out of state, may not be a domiciliary of that state if they intend to return to their original state. Factors to consider when evaluating domicile are things such as whether the person has bank accounts, driver’s licenses, and or voter registrations in a particular state. Do they have a lease or a permanent home in the state? Finally, it is important to consider the purpose of being in that state, is it for a special occasion or a limited purpose or is it for a more permanent purpose?

If you have questions regarding which state you should file a divorce action in, you should contact one of our attorneys.

Patrick J. Boyer concentrates his practice on family law. He advocates in various areas including, but not limited to, divorce, property division, alimony, child custody and visitation, child support, and domestic violence.

In addition, Patrick assists his clients with issues involving guardianship and third-party visitation. He is licensed in Delaware and Pennsylvania and works out of the firm’s Centreville, Delaware office.

If you have a family law matter or are considering divorce, contact Patrick J. Boyer at (302) 654-7294 or [email protected].

Taxation of Foreign Investment in Delaware Entities

Taxation of Delaware C-Corporations

Taxation of Delaware LLCs and Partnerships

The Pennsylvania Tax Benefit Rule Compared to the Federal Rule

What is Mediation?

The Mediation Process

The Benefits of Mediation

How to Form a Delaware Corporation

Here is how it is done:

Third Circuit Court of Appeals Decision Finds Amazon Liable For Faulty Products

Amazon Seeks En Banc Review of Panel Decision Holding It Liable for Products Sold by Third-Party Vendors

Subject Matter Jurisdiction: What is it and Why is it Relevant in a Divorce Case?

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Articles by Our Attorneys

Taxation of Delaware C-Corporations

Taxation of Delaware LLCs and Partnerships

The Mediation Process

The Benefits of Mediation

Here is how it is done:

Amazon Seeks En Banc Review of Panel Decision Holding It Liable for Products Sold by Third-Party Vendors

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