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As a Silicon Valley corporate attorney, I work with a lot of Internet law and cyberspace law issues and am often asked by businesses to make sure their websites keep them free from trouble. Whether you are a large, multi-national corporation, a mid-size company, or a small business owner, chances are you run and operate a commercial website. One way to minimize the risk that comes from operating a commercial website is to create the conditions, sometimes called Terms of Use, that govern a visitor’s use of the site. A court decision in September, however, found that website terms could be invalid and therefore fail to provide any protection to website operators. Because the court is located in the federal district that includes California, it is a critical decision that affects California website operators.

The case, In re Zappos.com Inc., Customer Data Security Breach Litigation, 2012 WL 4466660 (D. Nev. Sept. 27, 2012) arises out of Zappos’ customer data security breach in January of this year. As is typical in a data breach situation, Zappos notified all persons whose personally identified information may have been compromised. When the inevitable lawsuit was filed, Zappos attempted to enforce an arbitration clause in the Terms of Use found on its website. A federal court in Nevada said “not so fast”.

Some background is helpful. Terms of Use are often created with little thought, and can often be changed at any time by the website operator. They typically are submitted as a “browse-wrap” agreement, which, unlike a “click-wrap” agreement, does not require the user to click on a box to confirm the user’s consent to the agreement. Browse-wrap agreements are usually referenced with an inconspicuous link at the bottom of a home page.

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As 2012 is coming to an end, corporations and individuals alike are already thinking about taxes that they will need to pay at year-end. Every meeting I have with business owners lately somehow comes around to talking about taxes and how much I expect taxes to increase next year. The passage of Assembly Bill 1492 added yet another tax to the mix – the wood and lumber tax. This tax may affect homeowners, contractors and real estate developers.

We have all heard that ordinary federal income tax rates, currently maxing out at 35%, are scheduled to increase to 39.6%. Dividends could lose their special tax treatment and be taxed at this ordinary income tax rate as well. Federal long term capital gains rates will go from 15% back up to 20%. Payroll taxes may go back up from 4.2% to 6.2%. The AMT exemption amount may go back to 2010 levels. And high income earners will have an additional 3.8% Medicare tax. But on top of all that, starting January 1, 2013, those of us in California will also have to pay an additional 1% tax on the sales price of engineered wood and lumber products. (Assembly Bill 1492 (Ch. 12-289)).

Normally I would write this off as minor, but this year my husband and I are actually right in the middle of planning a huge fencing and deck project for our new house. (Did you know there was still residential land in the Silicon Valley that has not been fenced?) So, it was quite annoying to read about how this tax is going to be instituted on lumber, decking, railings and fencing as well as particle board, plywood and other wood building products, and even non-wood but wood-like products such as plastic lumber and decking. Even more so because it is already the middle of October and I’m pretty sure our project won’t be completed until early 2013. So, if I buy all the wood before the end of the year, I save 1%… but probably end up with more than I need and the inability to return it. But, if I wait until January to buy it just in time to install it, I am going to hate paying that extra 1%.

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Whether it is a group lunch to welcome a new employee to our law firm, a birthday dinner for family, or Moms’ Night Out with friends, I often find myself enjoying Silicon Valley restaurants from San Jose to Palo Alto with a group of six or more. It is not uncommon to have the restaurant automatically add the gratuity, which is usually 18%, to our bill. This has always bothered me – not because I have a problem with paying the 18% (I often tip more than that), but because it is sometimes not obvious on the bill, and they still provide the blank line for you to add a tip, as if they are trying to trick people into double-tipping. Well, if you do not like the automatic 18% gratuity added to your bill, you will be happy to hear about a recent IRS ruling (Revenue Ruling 2012-18, June 25, 2012). This ruling clarifies the definition of tips verses service charges, each of which is treated differently for tax purposes. The result will likely be the end of automatic gratuities.

The IRS ruling states:

“The employer’s characterization of a payment as a “tip” is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. The criteria of Rev. Rul. 59-252, 1959-2 C.B. 215, should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages under section 3121 of the Code. The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered. For example, Rev. Rul. 59-252 holds that the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages for FICA tax purposes.”

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Whether an acquisition is in San Jose, Cupertino, San Francisco, or anywhere else in California or the United States, any corporate lawyer will tell you that a buyer will not close a deal unless certain conditions are satisfied. Fortunately, closing conditions contained in mergers and acquisitions documentation have become standardized. Exceptions, however, always arise based on the unique attributes of the transaction, and standard does not always mean simple.

Some merger or acquisition closing conditions are standard and rarely require negotiation. For example, one of the standard closing conditions is that there is no injunction, law, or court order that prevents the transaction from proceeding. Outside of an actual known threat to a transaction, these clauses are rarely negotiated in a private company acquisition transaction.

Another standard closing condition is that the requisite corporate approvals will be secured. Because the respective Board of Directors of the each company will have approved the acquisition agreement, this is usually a noncontroversial item.

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As a business and real estate lawyer in San Jose, I have been paying special attention to the recovering real estate market. I have noticed an increase in residential and commercial properties transactions in San Jose, Sunnyvale, and Santa Clara. As much as the real estate market has improved, lenders are still cautious when it comes to providing financing, which has affected some of my business and real estate clients.

When the credit market is tight and financing is harder to obtain, sellers of real property may be more willing to provide seller financing to a buyer in order to sell a property. This is even more common when the seller and the buyer have some pre-existing relationship. When representing the seller, I will protect the seller by securing the loan with a deed of trust against the property so that if the buyer does not make the loan payments, the seller can take back the property. This sounds like a low risk proposition for the seller. However, taking back the property may be worse than it sounds. If the value has gone up since the seller bought it, which is usually the case, there is no way to reinstate the seller’s former base-year value for property tax assessment purposes. When the seller sells the property to the buyer, the property is reassessed. When the seller repossesses the property, the property will be reassessed again. Since there is no sales price to determine the value when the property is repossessed, an appraisal must be done. Seller, as the new owner, must report the fair market value of the property to the County. Penalties of up to $20,000 apply for failing to report a change in ownership. In my blog, “New Rules for Business Entities Change of Ownership Reporting for Real Property,” I talked about the need to report a change of ownership of an entity that owns real property as well.

So, if you are considering providing financing to a buyer on the sale of your property, you may want to think twice about whether you are comfortable with the remedy of repossessing the property with a new property tax value. It may be worthwhile waiting for a buyer who does not require you to assist with financing.

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As a business and real estate attorney in Santa Clara County, I have often heard our Tax Assessor, Larry Stone, talk about how hard his office is working to reappraise properties to make sure the property tax assessment roll is correct. However, I just spoke with a California homeowner who is close to losing her home and is being forced to list it for sale. As we spoke, I looked up her address online and found that her property taxes were based on a value far in excess of the amount her real estate agent has told her she should be able to sell for. This is costing her thousands of dollars per year in extra property taxes.

This conversation came at a time that my own property tax assessments from Santa Clara County have just arrived in the mail, reminding me that I need to reconsider the comparable sales in my area and decide whether it is time to contact the Assessor’s Office with the information. When you get that yellow notice in the mail, do not ignore it. Take a close look at the information on the card and see if it is in line with what you think your property is worth. If it is not, you should call the Assessor’s Office, provide them with any supporting documentation, and see if you can get the staff to agree with you. If they do not, in Santa Clara County you have until September 17, 2012 to file an appeal. Under Proposition 13, your base-year value (the value when you bought your property) can be increased by no more than 2% per year. However, if the market value has fallen below the adjusted base-year value as of a January 1st lien date, you can get a Proposition 8 assessment which is the lesser of the Prop. 13 adjusted base-year value or the market value. Keep in mind that once you get a Prop. 8 assessment, you are no longer limited to a 2% increase per year. If the value jumps up, your assessment can recover up to the Prop. 13 level at any time. For example, if you buy a home for fair market value of $1 million and the value goes up $50,000 immediately after you buy it, the assessment is limited to a 2% increase over the base-year value, or $1,020,000 (instead of $1,050,000). However, if the value of your property falls to $900,000 the following year, you can get a Prop. 8 assessment of $900,000. The following year, your assessment is not limited to $900,000 plus 2%, but can recover all the way up to the base-year plus 2% per year for each year since the purchase year.

During the appeal process, you must pay the assessed property taxes. Then, if you get the value reduced, you must actually call and ask for your refund check.

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As a Silicon Valley corporate attorney who often represents the selling company in mergers and acquisitions, I know that a huge amount of effort goes into signing an acquisition agreement. As I have discussed in past blogs, issues from earnouts to preparing exceptions schedules will have turned into countless hours of negotiations, documentation, and late night telephone calls for both the seller and the acquiring company and their corporate lawyers. In the end, the agreement is signed and everyone gets some well-needed sleep, only to wake up to the final sprint to closing.

In this blog, I will discuss what happens when a deal does not close simultaneously with the signing of the acquisition agreement. Similar to a contract for buying a house, many merger and acquisition deals require the buyer and seller to sign an agreement, and then perform additional items before the final closing.

At the same time as the deal team pours over the necessary closing tasks, there is still a business to run. Even though the seller remains in control of the business, the buyer wants to make sure it eventually acquires a company that is in good working order. For this reason, commitments are designed to guide business operations pending the closing.

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In the past couple of years, corporations and limited liability companies that were formed or registered in California have had to deal with long delays from the Secretary of State in getting their documents processed. Whether the document that is being filed is a Statement of Information, Certificate of Dissolution or Cancellation, or Articles of Incorporation or Organization, the Secretary of State is taking weeks or even months to process a filing. As a business lawyer in San Jose, I have seen a multitude of problems resulting from such delays.

Statements of Information are experiencing the greatest delays, as the Secretary of State is taking several months to process a filing. This has actually created problems for some businesses that pay the filing fee with a check that contains an expiration or “void-by” date. If the check expires before the Secretary of State is able to process the Statement of Information, the Secretary of State will either reject the Statement or treat the payment as a dishonored payment.

Since many of my San Jose clients are newly formed LLCs, I frequently see these delays cause another type of problem. Very often, my client’s bank will require a copy of the LLC’s filed Statement of Information before opening a bank account or approving a loan. Because of the significant amount of time that it is taking for the State to process Statements, I often have to work with my client to take advantage of a relationship with the bank and ask the bank to accept a copy of the Statement that the LLC has submitted for filing.

I can avoid this situation in several ways if I am aware of the need to provide a filed copy of a Statement of Information by a certain date.

For a corporation, we can file the Statement of Information online with the Secretary of State and then request a copy of the record (this option is currently not available to LLCs). This avoids the usual queue. In addition, most regional state offices offer the opportunity for a corporation or LLC to pay an expedited service fee for filing a Statement of Information in person at the Secretary of State’s Sacramento office. We can email the document to our agent in Sacramento who actually walks it into the Secretary of State and files it on an expedited basis over the counter. The benefit to using the expedited service is that we can receive a filing confirmation or response within a guaranteed time frame (usually 24 hours).

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Every corporation, limited liability company and limited partnership, that either forms in California or registers to do business in California must pay an annual minimum franchise tax of $800. However, I just read an article in Spidell’s California Taxletter that really annoyed me (Volume 34.7, July 1, 2012, pages 75-76). The article, entitled “Midyear switch from S to C corporation means an extra $800” says that when a corporation files two short year returns for one calendar year, each return is subject to the $800 minimum tax even though the corporation is the same entity for civil law purposes. Because it is changing its tax status, it is two different entities for tax purposes and therefore must pay the minimum tax twice in one year. As a corporate and business attorney, I am sensitive to this issue since many of my clients are small businesses or partnerships in San Jose, Santa Clara and other parts of Silicon Valley, and every dollar counts when you are running a small business.

This could be an issue in many midyear circumstances, including:
• When an S corporation loses its S election
• When an LLC switches from single member to multiple member
• When an LLC switches from multiple member to single member
• When a limited partnership changes into a limited liability company
• When 50% of the ownership of a limited partnership or limited liability company changes hands
• When an LLC elects to be taxed as a corporation, or revokes such an election
• If an entity changes accounting periods resulting in two short-period returns

Although this may look reasonable on the surface of one tax return independently, when you look at both returns together this looks like double-dipping to me. If one entity has to file two tax returns for one calendar year, I think the entity should get credit in the second tax return for any minimum tax already paid for that entity for that year. However, with California’s ongoing budget crisis, I know this argument will fall on deaf ears. Therefore, I applaud Spidell’s California Taxletter for informing tax practitioners of this tax trap. I’m hoping California business owners, as well as out of state owners with businesses registered in California, will read this blog and avoid inadvertently paying double minimum taxes. As a California business lawyer, I will do what I can to structure deals for my clients to avoid this double tax.

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San Jose and Santa Clara are such vibrant places to do business that many foreign companies want to relocate to Silicon Valley. As a corporate lawyer working with start-up companies, I have helped a number of ventures enter the U.S. market, and have worked with companies from Australia, Canada, China, Denmark Finland, India, and Israel, among others.

In past blogs, I have discussed some of the threshold considerations faced by companies leaving their home countries and relocating in the U.S. I have also discussed some of the entity forms that companies can adopt when deciding to access the U.S. market merely to sell their products or services.

Companies that decide that they want to access the private equity markets and managerial and technical talent resident in Silicon Valley often relocate their headquarters here in the U.S. For these companies, a “flip-up” will allow them to grow their company in the U.S. by being in a position to access local capital and hire a sophisticated workforce.

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