Flow Through Taxation

Limited liability companies, partnerships, and subchapter S corporations have so-called “flow through taxation.”  That means that the entity files a tax return but the taxes are owed by the shareholders.  Typically the taxes are assessed based on a percentage of ownership.  Flow through losses may be beneficial if you have other income which you can shelter with the losses.  Flow through profits are good if you get a distribution.  There is no requirement for flow through entities to make distributions so you could end up with taxable income, tax liability, and no money to pay the taxes.  Some flow through entities provide limited liability (LLCs, LPs, Sub S Corps) and some do not (general partnerships).  They are great for businesses being run for cash flow with many non-employee shareholders, since dividends are not doubly taxed.  If all owners are employees erstwhile profits can be distributed as paychecks and bonuses which are chargeable at the corporate level.  But if many owners are not employees dividends are the only way to distribute profit.  Typically the entity keeps a capital account for each owner.  Investments and undistributed profits increase an owner’s capital account, while distributions and distributed losses decrease an owner’s capital account.  But be careful of a negative capital account because having that written off can result in discharge of indebtedness income.  Some flow through entities are allowed entity owners and some are not.  LLCs are sometimes used for strategic alliances because each alliance partner receives a cash flow stream to use as it pleases.  If a new business is set up for cash flow, a flow through entity makes sense; if it is set up for capital appreciation maybe a non-S corporation makes more sense.  Flow through entities can convert into non flow through entities, but it is harder to convert the other direction.  If you are considering a new entity, talk to your accountant about whether a flow through entity makes sense for you.

 -- Paul Marotta

Supremes:  Your DNA is Not Your Own

After being arrested on first and second degree assault charges, the cops took a cheek swab of Alonzo King to check his DNA.  They found a match with an unsolved rape case, charged him, and he was convicted.  King claimed the cheek swab was an unreasonable search and seizure which violated his Constitutional Fourth Amendment rights.  The Supremes, led by Kennedy, disagreed finding that a cheek swab was not unreasonable and comparing it to a blood test.  But when that cheek swab results in your DNA being permanently indexed for everyone to access, we think more caution is called for.  This is not a case of checking blood alcohol level; this is a case of being tagged with a DNA match a decade later.  We don’t have any sympathy for rapists.  Gas ‘em if you want.  But these concepts are only really tested at the margins and the more heinous the crime the more careful we need to be that the rules aren’t bent to get a conviction.  Otherwise there will be no rules left.  Ninth Circuit Judge Alex Kozinski has made clear to us all that we control what is deemed “reasonable” and “unreasonable” by what we allow and don’t allow.  We can all help each other by decrying all such searches as unreasonable.  If enough of us do that, they will be seen as unreasonable by our courts.  The more we allow the more we invite.  The majority spoke quite a bit about the database being used for other purposes but seemed to imply that this could be done even if the person is never convicted of anything.  In other words, suspected until proven innocent.  That is not our system.  Scalia wrote for the minority, joined by Ginsburg, Sotomayor (the racist), and Kagan, saying, “The Fourth Amendment forbids searching a person for evidence of a crime when there is no basis for believing the person is guilty of the crime or is in possession of incriminating evidence.”  In other words, the search was unreasonable unless there was a basis for believing King to be the rapist, even if he was arrested for something unrelated, as here.  Scalia continued, “That prohibition is categorical and without exception,” and later said, “The Court’s assertion that DNA is being taken, not to solve crimes, but to identify those in the State’s custody, taxes the credulity of the credulous.”  We agree.  They got this one wrong and our liberty suffers further.

  --  Paul Marotta

Social Media Securities Disclosure

 

The SEC’s Division of Enforcement launched an investigation of Netflix after its CEO Reed Hastings posted on his personal Facebook page that Netflix’s monthly online viewing had passed one billion hours for the first time.  Netflix didn’t report this information to investors through a press release or 8-K.  Neither Hastings nor Netflix had previously used Hastings’ Facebook page to announce Netflix metrics, and no one told investors they might do so.  Netflix’s stock price rose over 10% during the next day.  Regulation FD did away with private analysts calls, and requires companies to make publicly available as soon as possible any information disclosed privately.  Disclosure can be by press release or 8-K filing.  Public companies frequently make 8-K filings following annual meetings since execs sometimes spill beans not already public.  In the investigative report the SEC said that use of social media to disclose company information was OK as long as it has alerted the public that it might do so through a specific outlet.  Websites already serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it.  The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix.  We were happy to see common sense prevail.

   

-- Paul Marotta