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Not So Fast With That Tax Penalty!May 31, 2011
The North Carolina Business Court tugged on the reins of the Department of Revenue (“DOR”) in its recent case, Delhaize America, Inc. v. Lay. In this case, the Court deemed the DOR’s $1 million tax penalty it attempted to impose on Plaintiff Delhaize (“Plaintiff”) unconstitutional since it ran afoul of both Plaintiff’s due process rights as well as the North Carolina Constitution. In this case, Plaintiff, the North Carolina operator of Food Lion grocery stores, was audited by the DOR after it restructured its operations by placing its trademarks, trade names, service marks, and other assets in the out of state subsidiary “Food Lion Florida” (“FLFL”). Plaintiff paid royalties and fees to FLFL and those were then repaid to Plaintiff in non-taxable dividends. Such actions subsequently resulted in “income distortions” and Plaintiff paying less tax. Thus, the DOR felt a $1 million dollar tax penalty was appropriate. In rendering its decision, the Court noted that a North Carolina Statute unequivocally stated a corporation “shall not file a consolidated tax return.” While this is clearly established, the guidelines for when combined returns might be acceptable are not leaving taxpayers completely in the dark on this issue. As a result, the Court deemed the DOR’s $1 million penalty a violation of due process and the North Carolina Constitution. In terms of the due process issue, Judge Tennille said taxpayers are individuals with a property interest who “must receive notice and an opportunity to be heard before the government can deprive them of their property.” In terms of the penalty conflicting with the North Carolina Constitution—which requires the power of taxation to be exercised in a “just and equitable manner”—the Court labeled the penalty unjust since no clear guidelines have been released stating when the penalty is deserved. Recovery of Lost Profits Allowed to Franchisor from Terminated FranchiseeMay 23, 2011
In the recent case of Meineke Car Care Centers, Inc v. RLB Holdings, LLC, (2011) the Fourth Circuit held that a franchisor could recover prospective damages, including lost profits, from a franchisee. Additionally, such recovery by the franchisor is permitted even when it terminated the franchisee due to the franchisee’s breach of the franchise agreement. In attempting to argue against this outcome, RLB, the franchisee, submitted to the Court that its shops were not “commercially feasible” to operate. Despite RLB’s efforts, the Court held that Meineke, the franchisor, did not need to show the shops could have been profitable. Instead, all that had to be illustrated was that the shops would have generated revenues upon which royalty payments would have been based. The Court agreed with Meineke’s method of calculating lost profits based on the average weekly sales of franchise shops multiplied by the number of weeks in the three year period for which it sought relief multiplied by the average historical royalty payments paid to Meineke. This formula was met with approval because as the Court noted in its opinion, using past profits as a tool to calculate future profits is a widely accepted method. Finally, the Court deemed recovery of lost profits possible for Meineke despite the fact its franchise agreement with RLB did not explicitly address such issue. In support of this, the Court stated that lost profit damages were “reasonably within contemplation of both parties,” making recovery nevertheless permissible. Are lost profits a possibility of recovery in contracts you have entered? Depending upon which side of the issue you are on, it may be worth a review of your contracts to determine whether lost profits could be recovered in your favor or if lost profits could costs assessed against you. The Operating Agreement is an Essential Document for an LLCMay 16, 2011
Every limited liability company (LLC) needs to have an operating agreement- whether there is one member or twenty. Unlike the North Carolina Business Corporation Act (N.C.G.S. Chapter 55), the Limited Liability Company Act (N.C.G.S. Chapter 57C) is minimal and does not sufficiently address governance of the company. While Chapter 55 contains many default rules (i.e. rules that apply if the company’s bylaws are silent), Chapter 57C has few. As a result, it is imperative that an LLC’s operating agreement comprehensively address the issues that may arise. The operating agreement is the governing document of the LLC. It sets forth how decisions will be made and establishes the duties and rights of members and managers. It is the first place to turn when a dispute arises or when there is a question about the appropriate manner of acting in a given situation. Finally, the existence of an operating agreement supports the notion that the LLC’s corporate structure is legitimate, and is a corporate formality evidencing the fact that the company is separate and distinct from the members. The operating agreement is not the only document the LLC needs in order to be effective and to document the relationships of those involved with the company. It is, however, the most basic, key component of an LLC’s corporate documents. If drafted correctly, the operating agreement can help your business avoid unnecessary and expensive litigation in the future. Contractors Beware: Your Corporate Shield is CrackedMay 9, 2011
In White v. Collins Building, Inc., issued January 4, 2011, the Court of Appeals extended individual liability to the president of a corporate general contractor for his role in defective construction. The court’s decision, based on the principle that a corporate officer is personally liable for his or her own torts, is the first to extend individual tort liability to a corporate officer in the construction context. At issue was the construction of a personal residence in Wrightsville Beach, North Carolina. Collins Building, Inc. (“Collins Building”) contracted with a developer to build the home, and Edwin E. Collins, Jr. (“Collins”), president and licensing qualifier for Collins Building, oversaw and supervised construction. After the home was purchased from the developer, the homeowners began experiencing problems with the windows and doors, and, consequently, water intrusion. The homeowners’ efforts to remedy the problems brought to light additional issues. Ultimately, a lawsuit was filed against the developer, Collins Building and Collins, individually, for negligent supervision of construction. On appeal, the issue before the court was whether Collins could be held personally liable for negligence committed in his capacity as a representative of Collins Building. The court, relying on the principle that a corporate officer is individually liable for his own torts, sided with the homeowners, holding that the allegations of the homeowners’ complaint adequately stated a claim against Collins. Although the court has previously addressed the imposition of tort liability on corporate officers, this decision is the first to address the issue in the construction context. Whether the holding is perceived as an expansion of law or the clarification of an existing point, it undoubtedly casts a spotlight on a crack in the contractor’s corporate shield. Key Considerations When Buying a BusinessMay 2, 2011
When buying a business, there are certain considerations that must be addressed in order to make sure the transaction is precisely what is contemplated by the parties. Some of the issues that often arise can have drastic effects on the value of the business being purchased, the success of the venture and the potential risk associated with not only the transaction, but the business going forward.
While just a few issues have been pointed out, there are many pitfalls associated with buying a business. Only through proper planning, negotiating and analysis can a buyer make the deal that he or she intends and that best suits his or her needs. |
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