Selected Developments In Business Law Courtesy of CEB — Advising California Partnerships

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the February 2019 update to Advising California Partnerships. References are to the book’s section numbers. The most significant legal developments since the last update include developments in such important topic areas as professional responsibility, federal and state taxation, securities law, and arbitration.

February 2019 Update

An attorney services contract was unenforceable as against public policy due to the firm’s failure to disclose a known, existing conflict in violation of the California Rules of Professional Conduct even though the client agreed to a blanket waiver. Sheppard, Mullin, Richter & Hampton, LLP v J-M Mfg. Co. (2018) 6 C5th 59. See §§1.2, 1.23.

Automatic disqualification of a law firm is not necessarily required when an attorney previously worked for firm representing the opposing party. California Self-Insurers’ Sec. Fund v Superior Court (2018) 19 CA5th 1065. See §1.10.

The Internal Revenue Service has issued extensive proposed regulations to provide guidance on the complex provisions of new IRC §199A, enacted by the Tax Cuts and Jobs Act. Prop Treas Reg §§1.199A–1—1.199A–6; 83 Fed Reg 40884 (Aug. 16, 2018). The IRS has also published a proposed revenue procedure on methods for calculating W-2 wages for purposes of IRC §199A. IRS Notice 2018–64, 2018 Int Rev Bull 460. See §§2.21A, 13.2.

In May 2018, the Franchise Tax Board (FTB) issued proposed amendments to 18 Cal Code Regs §§23038(b)–1—23038(b)–3 to make them consistent with the federal check-the-box entity classification regulations that were in effect on May 1, 2014. https://www.ftb.ca.gov/law/regs/23038/Notice-Proposed-Rulemaking.pdf. See §3.8.

In June 2018, the IRS withdrew proposed regulations concerning the disguised sale rules under IRC §707 that it had issued in October 2016. The IRS also proposed to remove temporary regulations issued in November 2016 and reinstate regulations as they were in effect as of April 2016. 83 Fed Reg 28397 (June 19, 2018). See §§3.31, 13.19, 13.20, 13.54, 13.61.

The IRS has published guidance on procedures by which small business taxpayers may obtain automatic consent to change methods of accounting to reflect certain statutory changes enacted by the Tax Cuts and Jobs Act. Rev Proc 2018–40, 2018 Int Rev Bull 456. See §3.58.

A manufacturer’s use of a mark was not protected by the doctrine that the first to use a mark has superior rights, when the manufacturer had adopted the mark with knowledge of its previous use. Stone Creek, Inc. v Omnia Italian Design, Inc. (9th Cir 2017) 875 F3d 426. See §4.28.

The Bipartisan Budget Act of 2015 (BBA) (Pub L 114–74, 129 Stat 584), effective for tax years on or after January 1, 2018, changed the way the IRS conducts audits of partnerships and LLC tax returns and created a new centralized partnership audit regime. In August 2018, the IRS issued final regulations regarding the designation and authority of the partnership representative under the new audit regime. TD 9839, 83 Fed Reg 39331 (Aug. 9, 2018). In addition, it subsequently issued a new set of proposed regulations concerning the audit regime. 83 Fed Reg 41954 (Aug. 17, 2018). See §§6.14A, 6.56A, 13.3A.

In September 2018, California enacted legislation adopting the new federal partnership audit regime. The new state law mandates that if any item on a federal partnership return is changed or corrected by the IRS, the partnership must report the changes or corrections to the FTB within 6 months. Stats 2018, ch 729. See §§6.14A, 13.3A.

The Ninth Circuit found that general partnership interests in parcels of land that the defendant sold to investors were investment contracts and thus securities under federal law. United States SEC v Schooler (9th Cir 2018) 905 F3d 1107. See §11.9.

The California Legislation has extended the authority for architects, engineers, and surveyors to form professional LLPs to January 1, 2026, and the authority for lawyers and accountants to form professional LLPs indefinitely. 2018 Stats, ch 150. See §§12.15, 15.22.

The U.S. Supreme Court held that employers may require individualized arbitration proceedings. Epic Sys. Corp. v Lewis (2018) __ US __, 138 S Ct 1612. See §15.5A.

The California Supreme Court held that the decision whether a nonsignatory to an arbitration agreement can be compelled to arbitrate is a matter solely within the authority of the trial court, not the arbitrator. Benaroya v Willis (2018) 23 CA5th 462. See §15.5A.

In a case in which the parties had entered into a partnership that terminated when they formed a corporation, the appellate court noted that subsequent incorporation as a defense to the existence of a partnership must be pleaded as an affirmative defense. Eng v Brown (2018) 21 CA5th 675. See §15.80.