FREE WEBINAR MEDICAL PRACTICES · • MGMA Government Affairs will continue to inform medical groups as the Administration releases additional waivers and further guidance on

Copyright © 2020 Gassman, Crotty & Denicolo, P.A. (5.6.2020 – Gassman / Ketron) Medical Practices - “How the Next $20 Billion Is Working and More”

1

***FREE WEBINAR***

Wednesday, May 6, 2020 9:00 a.m. – 9:30 a.m. / ET (30 minutes)

MEDICAL PRACTICESHOW THE NEXT $20 BILLION

IS WORKING AND MORE

Alan S. [email protected]

Brandon L. [email protected]


TABLE OF CONTENTS1 Pinellas County to offer no cost, no-symptom COVID-19 testing 4

2 CMS Interim Final Rule 6

3 Regulatory Alert: CMS Increases Telehealth Payments and Makes ACO Changes

7

4 Three Primary Loan and Grant Programs 9

5 HHS Provider Relief Fund - $20 Billion Disbursement 11

6 Provider Relief Fund Application 14

7 EIDL vs. PPP 54

8 SBA FAQs Guidance on the Meaning of Necessary 57

9 What Is “Necessary” 58

10 Background on PPP Loans 69

11 Necessity and the PPP Loan 75

12 Vagueness Doctrine 85

13 Who Needs a PPP Loan? 100

14 Supreme Court Interpretations of the Meaning of the Word Necessary

103

15 Guidance from IRC Section 537 – Accumulated Earnings Tax 1062


TABLE OF CONTENTS, CONT’D16 Opinion Letters / Fairness Opinions 110

17 Updates to SBA FAQs Guidance 116

18 AICPA Comments on Paycheck Protection Program 128

19 IRS Notice 20-32 – Non-Deductibility of Expenses Paid with PPP Funds That Are Later Forgiven

140

20 AICPA Does Not Agree 149

21 Estate Tax Planning Opportunities 151

22 Charitable Deductions and the CARES Act 156

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[email protected]@gassmanpa.com 4Copyright © 2020 Gassman, Crotty & Denicolo, P.A.

(5.6.2020 – Medical Practices – How the Next $20 Billion Is Working And More

Pinellas County to offer no-cost, no-symptom COVID-19 testingThis is the first time COVID-19 testing has been open to anyone in Pinellas.

By Justine Griffin Published May 5, 2020 | Tampa Bay Times

Pinellas County will begin offering no-cost COVID-19 testing to all residents for the first time, even if they are not displaying symptoms.

Last week, testing sites in Hillsborough County transitioned to allow anyone who wanted to get tested to make an appointment at a drive-through site. The health department in Pinellas County offered no-cost testing in south St. Petersburg neighborhoods last week, but this is the first time the county has widened its testing criteria to everyone.

The widening of testing comes after months of limited availability, with less than 2 percent of Florida’s population having been tested for COVID-19, the respiratory disease caused by the novel coronavirus. Some public health experts have argued that more widespread testing must be available before the country, or the state, could safety reopen. Gov. Ron DeSantis’ stay-at-home order expired Monday, loosening restrictions on beach access and allowing some businesses, like restaurants and retailers to open under social distancing guidelines.

mailto:[email protected]


https://www.tampabay.com/author/justine-griffin

https://www.tampabay.com/news/health/2020/04/27/st-pete-pinellas-test-for-coronavirus-in-underserved-communities/



Pinellas County to offer no-cost, no-symptom COVID-19 testing

This is the first time COVID-19 testing has been open to anyone in Pinellas.

The free testing began Monday at three Community Health Centers of Pinellas testing sites. Residents do not need to be a patient of the facility. People can walk up or drive up to be tested and do not need to be experiencing symptoms. Testing sites are open Monday through Friday 10 a.m. to 3 p.m.

The testing sites are located at:

• 707 East Druid Road, Clearwater

• 7550 43rd Street North, Pinellas Park

• 1344 22nd Street South, St. Petersburg

Patients are required to fill out a condensed electronic registration and must bring a valid I.D. Residents are encouraged to make an appointment by calling 727-824-8181.



tel:7278248181



CMS Interim Final Rule• On April 30, the Centers for Medicare & Medicaid Services (“CMS”) issued an interim

final rule intended to expand care to Medicare beneficiaries and provide more flexibilities to the providers that treat them.

• Changes to Telehealth• CMS is increasing payment for audio-only telephone E/M services (CPT codes

99441-99443) resulting in increased payments from $14-$41 to $46-$110.• CMS will now add new telehealth services on a sub-regulatory basis, rather than its

typical rulemaking process, to speed up the process of adding codes to the list

• Changes to Medicare Shared Savings Program (“MSSP”)• There will be no application cycle for a Jan. 1, 2021 start date• ACOs in the last performance year of their current agreement period (mainly Track

1 ACOs and Track 1+ Model ACOs) will be allowed to voluntarily extend their agreement period by an additional performance year in 2021

• Primary care services used for beneficiary attribution is expanded to include additional telemedicine services



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Regulatory alert: CMS increases telehealth payments and makes ACO changes

• April 30, 2020: Today, the Centers for Medicare & Medicaid Services (CMS) issued another round of regulatory waivers through an interim final rule intended to expand care to Medicare beneficiaries and provide more flexibilities to the providers that treat them. The changes outlined below will be effective for the duration of the COVID-19 public health emergency (PHE).

Changes to telehealth policy: Following MGMA advocacy, CMS is increasing payment for audio-only telephone E/M services (CPT codes 99441-99443) such that they are paid at the same rate as similar office and outpatient E/M visits, resulting in increased payments from $14-$41 to $46-$110. CMS believes that the resources required to furnish these services during the PHE are better captured by RVUs associated with level 2-4 established office/outpatient E/M visits. CMS is not increasing payment for CPT codes 98966-98968, which are intended for practitioners that cannot separately bill for E/M. This policy is retroactive to March 1, 2020.

• For telehealth services other than CPT codes 99441-99443 and 98966-98968 (now added to the list of covered telehealth services), Medicare continues to require modalities that have both audio and video capabilities.

• CMS is forgoing its typical rulemaking process to add new services to the list of Medicare services that may be furnished via telehealth. Instead, CMS will add new telehealth services on a sub-regulatory basis to speed up the process of adding codes to the list.

FROM MGMA Website



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Regulatory alert: CMS increases telehealth payments and makes ACO changes• Changes to Medicare Shared Savings Program (MSSP): There will be no application cycle for a

Jan. 1, 2021 start date, and ACOs in the last performance year of their current agreement period (mainly Track 1 ACOs and Track 1+ Model ACOs) will be allowed to voluntarily extend their agreement period by an additional performance year in 2021.

• ACOs participating in the BASIC track glide path will be permitted to maintain their current risk level under the BASIC track for PY 2021 and freeze progression to higher risk.

• CMS is removing all Part A and B payment amounts for episodes of care involving the treatment of COVID-19 for the purposes of determining benchmark year and performance year expenditures.

• The list of primary care services used for beneficiary attribution will be expanded to include additional telemedicine services.

• MGMA Government Affairs will continue to inform medical groups as the Administration releases additional waivers and further guidance on COVID-19 related regulatory changes. CMS’ press release on the changes can be found here and a fact sheet on MSSP changes can be found here.

FROM MGMA Website



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A. HHS Provider Relief

1. Part One - - 6.19% / First $30 Billion most practices received.

2. Part Two - - Next $20 Billion based on your percent of 2018$2.5 Trillion - - Apply by each Wednesday at noon.

3. More to come - - CARES Act Part Two – Another $100 Billion coming -No guidance yet.

B. Economic Injury Disaster Loan (“EIDL”)

The “Automatic $10,000” Direct from SBA and possibly more

C. Payroll Protection Program (“PPP”)

Based on 2.5 times last year’s payroll - - must spend on certain things to be forgiven over 8 weeks from receipts

Three Primary Loan and Grant Programs





HHS Provider Relief Funds Economic Injury Disaster Loan (EIDL) Paycheck Protection Program (PPP)

To prevent, prepare for, and respond to coronavirus, and shall reimburse the provider only for health care related expenses or lost revenues attributable to coronavirus.

The Funds cannot be used for the following:

1. Reimbursement for expenses or losses that have been reimbursed from other sources.

2. Executive pay exceeding a rate in excess of Executive Level II.

3. Lobbying

4. Abortions

5. Confidentiality/Non-Disclosure Agreements

6. Unpaid Federal Taxes

7. See other materials for additional items.

1. Payroll costs during business disruptions or substantial slowdowns

2. Providing paid sick leave to employees unable to work due to the direct effect of COVID-19

3. Mortgage payments

4. Rent

5. Meeting increased costs to obtain materials unavailable from the applicants original source due to interrupted supply chains

6. Repaying obligations other than those listed above that cannot be met due to revenue losses

1. Payroll costs including health care benefits, medical, or family leave, and retirement benefits

2. Providing paid sick leave for any illness

3. Mortgage interest payments, but not principal

4. Rent

5. Interest on other debt but not principal

6. Utilities

Permitted Use of Funds Note that funds cannot be used for duplicative purposes





HHS Provider Relief Funds –$20 Billion Disbursement





In the first relief payment HHS paid medical practices and businesses approximately 6.19% of their 2019 Medicare revenues, and requires that these funds be used to pay for expenses or to recoup lost profits of practices that have provide treatment for Covid-19 patients or patients who may have Covid-19after January 31st 2020 by providing diagnosis, testing or care. "HHS broadly views every patient as a possible case of COVID-19"

Those practices that received such payments on or before 5 pm EST Friday April 24th can now apply by Wednesday at noon EST each week to be batched for a second payment that is intended to have all practices share in $50 billion dollars in proportion to total revenues, including non Medicare revenues.

This is based upon the following:

1. The total business or practice revenues, including Medicare and revenues from other sources for medical care services for 2018 divided by 2.5 trillion dollars, which is the total amount of revenues reported by medical practice taxpayers in 2018.

2. The percentage in 1 above is multiplied by $50 billion dollars.

3. If the resulting number is less than what was received already in the 6.19% payment then the practice or business receives nothing.

Medical Practices and Businesses - -Get Your Share of the Next $20 Billion





If the resulting amount exceeds what was received already, then the business or practice will receive the lesser of

(a) the resulting number or

(b) the amount by which the total of the previous payment and this second payment exceed the sum of

(I) Lost revenues of the business or practice for March and April 2020.

(2) Any Increased expenses resulting from COVID-19

As with the first payment, any amounts received must be used for one ore more of the following uncertain uses:

to prevent, prepare for and respond to corona virus and that the payment shall reimburse the recipient only for health care related expenses or lost revenue that are attributable to corona virus. If a recipient doe snot have lost revenues or increased expenses due to COVID-19 equal to the amount received a recipient must return the funds.

For more information go to hhs.gov/providerrrelief or call 866 569 3522.

Medical Practices and Businesses - -Get Your Share of the Next $20 Billion



tel:8665693522



The Provider Relief Fund Application Portal is collecting four pieces of information for use in allocating remaining General Distribution funds:

1) a provider’s “Gross Receipts or Sales” or “Program Service Revenue” as submitted on its federal income tax return;

2) the provider’s estimated revenue losses in March 2020 and April 2020 due to COVID;

3) a copy of the provider’s most recently filed federal income tax return;

4) a listing of the TINs any of the provider’s subsidiary organizations that have received relief funds but that DO NOT file separate tax returns.

Provider Relief Fund Application





How do I estimate lost revenue in March or April?

You may use a reasonable method of estimating the revenue during March and April compared to the same period had COVID-19 not appeared. For example, if you have a budget prepared without taking into account the impact of COVID-19, the estimated lost revenue could be the difference between your budgeted revenue and actual revenue. It would also be reasonable to compare the revenues to the same period last year.

Why are you asking me for Gross Receipts or Sales?

We are asking for Gross Receipts because it is a measure of revenues you received during the applicable filing period.

Why are you asking me to estimate my revenue?

We realize that a final revenue number may not be available until a certain time after the end of April. As the program seeks to provide liquidity support to the healthcare system in a timely manner we are using estimated revenues.

General Distribution Portal FAQs for the Provider Relief Fund Application





$50 billion of the Provider Relief Fund is allocated for general distribution to Medicare facilities and providers impacted by COVID-19, based on eligible providers' net patient revenue. The initial $30 billion was distributed between April 10 and April 17, and the remaining $20 billion is being distributed beginning Friday, April 24.

• To expedite providers getting money as quickly as possible, $30 billion was distributed immediately, proportionate to providers' share of Medicare fee-for-service reimbursements in 2019. On Friday, April 10, $26 billion was delivered to bank accounts. The remaining $4 billion of the expedited $30 billion distribution was sent on April 17.

• This simple formula used the data on-hand to get the money out the door as quickly as possible. The Administration was transparent and upfront additional funds would be going out quickly to help providers with a relatively small share of their revenue coming from Medicare fee-for-service, such as children's hospitals.

• HHS will begin distribution of the remaining $20 billion of the general distribution to these providers on April 24 to augment their allocation so that the whole $50 billion general distribution is allocated proportional to providers' share of net patient revenue.

HHS Provider Relief Fund – Information from HHS Website on allocation of additional $20 Billion





• On April 24, a portion of providers will automatically be sent an advance payment based off the revenue data they submit in CMS cost reports. Providers without adequate cost report data on file will need to submit their revenue information to the General Distribution Portal for additional general distribution funds. (Link - https://covid19.linkhealth.com/docusign/#/step/1)

• Providers who receive their money automatically will still need to submit their revenue information so that it can be verified via the General Distribution Portal. (Link -https://covid19.linkhealth.com/docusign/#/step/1)

• Payments will go out weekly, on a rolling basis, as information is validated, with the first wave being delivered at the end of this week (April 24, 2020).

• Providers who receive funds from the general distribution have to sign an attestation confirming receipt of funds and agree to the terms and conditions of payment and confirm the CMS cost report. (Link to sign the attestation and accept the Terms and Conditions -https://covid19.linkhealth.com/#/step/1)




https://covid19.linkhealth.com/docusign/#/step/1

https://covid19.linkhealth.com/docusign/#/step/1

https://covid19.linkhealth.com/#/step/1



• The Terms and Conditions also include other measures to help prevent fraud and misuse of the funds. All recipients will be required to submit documents sufficient to ensure that these funds were used for healthcare-related expenses or lost revenue attributable to coronavirus. There will be significant anti-fraud and auditing work done by HHS, including the work of the Office of the Inspector General.

• President Trump is committed to ending surprise bills for patients. As part of this commitment, as a condition to receiving these funds, providers must agree not to seek collection of out-of-pocket payments from a presumptive or actual COVID-19 patient that are greater than what the patient would have otherwise been required to pay if the care had been provided by an in-network provider.




19Copyright © 2020 Gassman, Crotty & Denicolo, P.A. (5.6.2020 – Gassman / Ketron) Medical Practices - “How the Next $20 Billion Is Working and More”

Terms and Conditions – Relief Fund Payment from $20 Billion General Distribution

HHS.govCARES Act Provider Relief Fund

















































Other Statutory Provisions






































































HHS Provider Relief Funds Economic Injury Disaster Loan (EIDL) Paycheck Protection Program (PPP)

To prevent, prepare for, and respond to coronavirus, and shall reimburse the provider only for health care related expenses or lost revenues attributable to coronavirus.

The Funds cannot be used for the following:

1. Reimbursement for expenses or losses that have been reimbursed from other sources.

2. Executive pay exceeding a rate in excess of Executive Level II.

3. Lobbying

4. Abortions

5. Confidentiality/Non-Disclosure Agreements

6. Unpaid Federal Taxes

7. See other materials for additional items.



3. Mortgage payments

4. Rent

5. Meeting increased costs to obtain materials unavailable from the applicants original source due to interrupted supply chains



2. Providing paid sick leave for any illness

3. Mortgage interest payments, but not principal

4. Rent

5. Interest on other debt but not principal

6. Utilities

Permitted Use of Funds Note that funds cannot be used for duplicative purposes





Economic Injury Disaster Loan (EIDL) Paycheck Protection Program (PPP)

Who is Eligible?

Small businesses, including independent contractors and sole proprietors, with less than 500 employees that have suffered substantial economic injury as a result of a declared disaster

Small businesses, including independent contractors and sole proprietors, with less than 500 employees (or otherwise qualifies as a small business under SBA published size guidelines), and the uncertainty of the current economic conditions make the loan necessary to support the ongoing operations of the business.

Application Process Available now at https://covid19relief.sba.gov/#/

Applications will be provided by SBA approved lenders. https://www.sba.gov/sites/default/files/2020-04/Lenders%20participating%20in%20PPP%20by%20State_As%20of%2004%2023%2020.pdf

Sample application available at https://www.sba.gov/document/sba-form--paycheck-protection-program-ppp-sample-application-form

Max Loan Up to $2,000,000

Lesser of:

(1) 2.5 times average monthly payroll costs for employees for the prior 12 months (SBA regulations say this will not include payments to independent contractors) or

(2) $10,000,000 Application Deadline December 31, 2020 June 30, 2020

Permitted Use of Funds



3. Mortgage payments4. Rent5. Meeting increased costs to obtain materials

unavailable from the applicants original source due to interrupted supply chains



2. Providing paid sick leave for any illness3. Mortgage interest payments, but not principal4. Rent 5. Interest on other debt but not principal6. Utilities



https://covid19relief.sba.gov/#/

https://www.sba.gov/sites/default/files/2020-04/Lenders%20participating%20in%20PPP%20by%20State_As%20of%2004%2023%2020.pdf

https://www.sba.gov/document/sba-form--paycheck-protection-program-ppp-sample-application-form




Loan Forgiveness Eligibility

Only $10,000 may be received as a grant and is not required to be repaid even if subsequently denied for a loan.

Amounts over $10,000 will be required to be repaid.

Can roll loan into PPP loan if subsequently approved for PPP loan to be eligible for forgiveness.

Forgivable to the extent that the proceeds are used during an eight week period following the origination of the loan for:1. payroll costs (including health insurance, retirement plan

contributions, and state and local taxes assessed on compensation)

2. mortgage interest3. rent 4. utility payments

What Reduces the Amount of Forgiveness?

$10,000 grant will only need to be repaid to the extent that $10,000 is not used for permitted expenses

Amount eligible for forgiveness is reduced by: 1. amount of grant received under an EIDL loan2. Amount proportionate to any reduction in the number of

employees3. Compensation reduction in excess of 25% for employees making

less than $100,0004. Further reduced if at least 75% of loaned amount is not spent on

payroll costs

Exception if reduction in employees or salary is corrected by June 30, 2020.

Treatment of Payments to Independent Contractors

Permitted if considered a payment of an obligation that cannot be met due to revenue losses

Permitted as a payroll cost under statutory language, but not allowed under Interim Final Rules published by SBA.

Business Operation Requirement Must be in business prior to January 30, 2020 Must be in business prior to February 15, 2020.

Is Business Required to beUnable to Obtain Credit

Elsewhere?No. No.

Max Interest Rate 3.75% 1% per Interim Final Rules published by SBA(max of 4% under the statute)

Payment DeferralFor amounts received over $10,000 grant, no payments are due until one year after loan origination, but interest

is accrued.

Principal and interest payments are deferred for 6 months, but interest is accrued per Interim Final Rules published by SBA.






Term of Loan Up to 30 years Remaining balance after forgiveness will have a 2 year term.

Collateral Requirement Assets of business required as collateral for loans over $25,000 None

Personal Guarantee Only for loans over $200,000Loan cannot be secured by real estate of guarantor. None

Where to get the loan SBA Sponsoring Bank

Income Tax Treatment of Loan Forgiveness Unknown – Probably Tax Free Tax Free

Compensation to Lender(Paid from Government) N/A

5% on of loaned amount up to $350,000 3% - $350,000 - $2,000,000

1% - $2,000,000+

Compensation to “Agent”(Paid from Lender) N/A

1% - Less than $350,0000.5% - $350,000 – $2,000,000

0.25% - $2,000,000+





SBA FAQs Guidance on the Meaning of Necessary

FLASH NOTICE - - The May 7TH Amnesty Deadline for returning PPP loans that were not “Necessary to

support the ongoing operation of the business” has been deferred until May 14th,

which is also Marcia Gassman’s birthday (email [email protected] – please, no gifts!)

“And our little daughters would bring their pillows to dinner and lie on the floor and pretend to go to sleep whenever Martin started talking about tax law.”

Story told to Alan and Marcia Gassman by Ruth Bader Ginsberg






What is "Necessary”• PPP Loans require that the authorized representative sign the application,

which requires that the applicant affirmatively answer in good faith that the:

• "current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant."

• The Act does not provide definitions or metrics to help guide potential borrows on whether they should apply.

• What is “substantial economic injury” for purposes of EIDL qualification?

SBA publications provide the following guidance on the words “substantial economic injury”:

• The Applicant must establish that the claimed economic injury is substantial and is a direct result of the declared disaster.

• Substantial economic injury generally means a decrease in income from operations or working capital with the result that the business is unable to meet its obligations and pay ordinary and necessary operating expenses in the normal course of business.

[Statutory language is in orange print above]





31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

Question 31 published April 23, 2020.

Paycheck Protection Program – Recent Developments





43. Question: FAQ #31 reminded borrowers to review carefully the required certification on the Borrower Application Form that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. Is it possible for a borrower to obtain an extension of the May 7, 2020 repayment date?

Answer: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.

Question 43 published May 5, 2020.

Paycheck Protection Program – Recent Developments





37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: [See response to FAQ 31.]14

14Question 37 published April 28, 2020

Paycheck Protection Program – Recent Developments (SBA FAQs Guidance as of April 30,

2020)





In a string of tweets from his Twitter Account, Senator Marco Rubio provided the following insight into Congressional intent behind the certification that the loans must be “necessary to support the ongoing operations of the business”:

1. The Small Business Committee will use subpoena power to identify anyone who gave a false certification of the loan.

2. Businesses applying for a PPP loan must certify that they’ve been harmed by the crisis and need the PPP Loan to operate.

3. Any company with revenue to cover operations isn’t eligible.

What is "Necessary” – Guidance fromSenator Marco Rubio (April 20, 2020)





What If I Have Already Filed? – SBA FAQ Guidance

17. Question: I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020. Do I need to take any action based on the updated guidance in these FAQs?

Answer: No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.

Question 17 was published on April 6





Paycheck Protection Program Loans –Interim Guidance Issued by SBA Lenders can Rely on

Borrower Documentation

Can lenders rely on borrower documentation for loan forgiveness?

Yes. The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower. The Administrator, in consultation with the Secretary, has determined that lender reliance on a borrower’s required documents and attestation is necessary and appropriate in light of section 1106(h) of the Act, which prohibits the Administrator from taking an enforcement action or imposing penalties if the lender has received a borrower attestation.





As you may know, government guidance regarding the Paycheck Protection Program continues to evolve daily and we want to make sure we continue to keep you updated. In particular, we want to call your attention to recent public statements and official program guidance that retroactively update the required borrower certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

In an April 22 press briefing, Secretary Mnuchin advised of then pending guidance restricting the acceptable basis for a PPP loan borrower’s necessity certification and warned of “severe consequences” for borrowers who obtain a PPP loan based on a misunderstanding of the necessity certification. And in an April 28 media appearance, Secretary Mnuchin stated that every PPP loan of $2 million or more will be audited for program compliance prior to determination of the forgiveness amount of the loan, with an apparent focus on any other liquidity available to a PPP borrower. He also reminded borrowers that they could face “criminal liability” if their necessity certification is determined to be untrue.

The government has restated Secretary Mnuchin’s April 22 public statements as official guidance, providing that notwithstanding anything in the CARES Act to the contrary, all PPP loan borrowers are required to take into account their current business activity and their ability to access other sources of liquidity in reassessing whether they have or can make the necessity certification in good faith. Secretary Mnuchin and the guidance have identified public companies and companies owned by public companies as a subject of particular government concern regarding the validity of their necessity certifications, but have also expressly excluded from eligibility for the program hedge funds and private equity firms. The new rules also instruct portfolio companies of private equity firms to apply any applicable affiliation rules and carefully review the necessity certification.





The new necessity certification guidance applies retroactively to all PPP loans. Government guidance provides that any PPP loan borrower that returns all of its PPP loan funds no later than May 7, 2020, will be deemed to have made its necessity certification in good faith, and thus avoid any consequences for the prior certification made due to a misunderstanding or misapplication of the recently articulated necessity certification requirements.

Lenders are expressly authorized to rely on such a certification by a PPP loan borrower without review or confirmation. As such, we feel compelled to advise you that Truist’s acceptance of your PPP loan application and/or funding of your PPP loan does not constitute, and cannot be relied upon as implying, a conclusion or affirmation by Truist that such PPP loan proceeds are necessary for ongoing operations of your business or that the borrower has otherwise met applicable eligibility requirements for PPP loan participation. We also advise you that this notice may be furnished to the government in response to any inquiry regarding your loan.

We do not wish any of our clients to suffer criminal liability or other “severe consequences” for certifying that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations” of your business, and so we urge you to reconsider whether you remain comfortable with that certification in light of FAQ #31, the announced audit of PPP loans of $2 million or more and the availability of the limited safe harbor for those who return PPP loan funds by May 7, 2020. Please contact your legal counsel or other advisors to determine how you wish to proceed.

In view of this guidance, some borrowers have repaid PPP loans or are planning to do so before the May 7, 2020 deadline. If you have questions about the process or if you already received funding from Truist for a PPP loan and wish to repay your loan in full, please contact us at [email protected] and a Truist teammate will respond as soon as possible to help you with your request.

Your Truist Team

(Continued from previous slide)






• What happens if PPP loan funds are misused?• If you use PPP funds for unauthorized purposes, SBA will direct you to repay

those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

• The following certification is required to be made: • I understand that knowingly making a false statement to obtain a guaranteed

loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.

Paycheck Protection Program Loans –Interim Guidance Issued by SBA – Cont’d









Background on PPP Loans




Alan Gassman, JD, LL.M. is the founding partner of the law firm of Gassman, Crotty & Denicolo, P.A. inClearwater, Florida. Alan is a frequent contributor to LISI, and has authored several books and many articleson Estate and Estate Tax Planning, Trust Planning, Creditor Protection Planning, and associated topics. Youcan contact Alan at [email protected].

John Beck, JD, MBA, LL.M. is an associate at the law firm of Gassman, Crotty & Denicolo, P.A., inClearwater, Florida and practices in the areas of Estate Planning, Tax, and Corporate and Business Law. Johnis a frequent contributor to LISI and presents webinars on various topics for both clients and practitioners. Hisemail address is john@gassmanpacom.

Brandon Ketron, CPA, JD, LL.M. is an associate at the law firm of Gassman, Crotty & Denicolo, P.A., inClearwater, Florida and practices in the areas of Estate Planning, Tax, and Corporate and Business Law.Brandon is a frequent contributor to LISI and presents webinars on various topics for both clients andpractitioners. Brandon attended Stetson University College of Law where he graduated cum laude, andreceived his LL.M. in Taxation from the University of Florida. He received his undergraduate degree atRoanoke College where he graduated cum laude with a degree in Business Administration and a concentrationin both Accounting and Finance. Brandon is also a licensed CPA in the states of Florida and Virginia. Hisemail address is [email protected].

Here is their commentary:

EXECUTIVE SUMMARY:Shots fired across the bow of publicly traded companies and hedge funds that have applied for andreceived Payroll Protection Program (“PPP”) funds warn that the language requiring that a loan mustbe “necessary to support the ongoing operations of the business” is a serious requirement that couldcause taxpayers to be fined up to $1,000,000 and/or result in a prison term of up to thirty years.




The above quoted language, which comes directly from the language of the CARES Act, coupled with recentSBA pronouncements that publicly held companies and hedge funds will not meet this requirement because theyhave the ability to raise capital provides little (if any) comfort and raises significant confusion and uncertaintyfor small businesses and professional practices that have been successful for many years and managedconservatively in order to be able to survive a crisis like this one.

It is clear that PPP loan recipients and applicants need to be aware of this issue, and to consider what is their bestplanning strategy and action.

The recent “pronouncements” about this issue are causing many borrowers to conclude that it is safer to lay offworkers than to risk penalties or even criminal prosecution, especially when the business can “now afford” tokeep workers but would lose money and reduce its chances of survival in so doing.

FACTS:

On March 27, 2020 the CARES Act became law with a primary purpose of directing hundreds of billionsof dollars to small businesses and professional entities to save jobs under the Payroll Protection Program(“PPP”). Many small businesses have applied and some have received funding.

The great majority of U.S. businesses and entrepreneurs have experienced significant losses and facetremendous risks as a result of the COVID-19 crisis, including significant reductions in revenue, increasedexpenses, and a continual state of worry for what will happen in the future.


Even though some U.S. states appear to be re-opening to some extent, the COVID-19 pandemic does not seemto be anywhere near under control. Bill Gates, a well-qualified and respected individual with extensiveknowledge and experience with infectious diseases and business management, has expressed hopes that avaccine will become available within the year. The uncertainty surrounding the timeline for a vaccine isindicative of the uncertainty surrounding businesses reopening. Even if a vaccine is released within a year,many businesses will be terribly affected by the effects of COVID-19 for much longer, and businesses not yetprofoundly affected may be much like dominoes in a long line, waiting for the chain reaction that might blowtheir business into kingdom come. For example, questions still remain as to whether lenders will reduce orcall in credit that has been available to borrowers, and even shut down businesses that cannot satisfy loan ratiorequirements, or whether loans that include an “insecure lender” clause will permit lenders to call in loanswhen they feel that there is not sufficient capital to allow the loan to be as safe as it was when credit wasextended.

The purpose of the PPP is allow small businesses to have moneys and encouragement to keep theirpayrolls in place by covering the essential day-to-day operational expenses for a period of eight weeks after aloan is procured. The forgiveness of such loan, in whole or in part, also allows the business to increase itsoperating capital, if it is profitable during that period of time, in order to provide balance sheet assets that maybe sorely needed in the many months to come. The program requires that the moneys advanced be used solelyto cover employee payroll, utilities, rent, interest, health insurance, and pensions, with no allowance to pay forlegal and accounting fees that will be needed to help sort out how to comply with this complicated law.

The PPP loan calculation provides borrowers with a maximum of 2.5 times the average monthly amountof their payroll, health insurance, and pension expenses, with the average monthly expense calculated overtwelve months. Individual employee salaries are only includable in the calculation based upon $100,000 inwages/salary plus additional amounts paid for health insurance and retirement plan contributions.


PPP loans will be forgiven if the amounts spent during the eight weeks following the date of receivingthe loans satisfies these requirements:

(1) At least 75% of the funds are spent on payroll, including medical insurance and retirementplan contributions; and

(2) Other moneys are spent on rent, interest, and utilities based upon obligations in placebefore February 15, 2020.

COMMENT:

The subject of great concern that was brought to the forefront in the past few days is the question as towhat the requirement that the loan be “necessary to support the on-going operations of the applicant”actually means.

Every PPP borrower must attest to the fact that this requirement is met in their PPP loan application.The Small Business Administration (“SBA”) will be auditing recipients of the PPP loans. False claims thatare made intentionally with respect to this can result in criminal fines of up to $1,000,000, and imprisonmentfor up to thirty years.

The U.S. Treasury Department and SBA have released updated guidelines in a FAQ issued on April23, 2020 stating that “it is unlikely that a public company with substantial market value and access to capitalmarkets will be able to make the required certification in good faith, and such a company should be preparedto demonstrate to SBA, upon request, the basis for its certification.”

The SBA has stated that if a business has taken a loan that the business did not “need,” the businessmay return the loan by May 7, 2020, and face no criminal consequences.


Great pressure has therefore been placed on businesses to be sure of their eligibility, because they will facepotential criminal sanctions if the loan they received was not “necessary”. Unfortunately, and as discussedbelow, without a clear meaning of what “necessary” means, the statute containing the PPP eligibilityrequirements seems somewhat vague and ambiguous.

The SBA, Treasury Department, and lawmakers alike have all been issuing clarifications to theunprecedented program, its eligibility requirements, and its oversight, especially as it relates to criminalliability and the necessity requirement. These constant updates make one thing abundantly clearnotwithstanding the confusion: the statute and its requirements are not straight forward as presently drafted,and reasonable players on all sides of the system are understandably interpreting the requirements somewhatdifferently and inconsistently. LISI Commentator Bruce Brumberg’s series of articles on this situation can befound on his Forbes blog entitled Paycheck Protection Loan Backlash: How To Defend YourBusiness Reputation And Avoid Getting Shake Shacked.

Some larger businesses and hedge funds applied for PPP loans and were approved by the SBA after areview of their application. If these businesses are not qualified because the loans are not “necessary,” thenthe definition of “necessary” is not clear, because many of these applicants must have objectively interpretedthe requirements in a reasonable manner that ended in their concluding that they were eligible. Returning themoney now may be more motivated by a fear of “public shaming” as opposed to concluding that thenecessary standard may not have been met.

Some applicants applied for and received funding before many guidelines and clarifications were evenissued. If those applicants applied for and received funds relying on an objectively reasonable interpretationof an unclear statute, without any notice from government institutions or lawmakers to the contrary, thestatute might possibly be found to be unconstitutionally vague. While the authors are not experts in the area,we found the following in legal literature and feel that it is appropriate to share our understanding of this.

https://www.forbes.com/sites/brucebrumberg/2020/04/27/paycheck-protection-loan-backlash-how-to-defend-your-business-reputation-and-avoid-getting-shake-shacked



Necessity and the PPP Loan






• It is unclear what circumstances a business must be subject to in order for a PPP loan to be “necessary.”

• While there is very little guidance in relation to what would be considered “necessary,” there are other interpretations that one may be able to look at for some guidance.

• The term “necessary” was considered by the Supreme Court in 1933 in the case of Welch v. Helvering. A taxpayer claimed a deduction for ordinary and necessary business expenses and the court held that to deduct the expenses, the expenses merely had to be “appropriate and helpful.”

• In M’Cullouch v. State, the court held that the word “necessary” generally “imports no more than one thing is convenient, or useful, or essential to another.”






• BNA Portfolio 796-3rd states that the accumulation earnings tax is imposed when accumulated earnings are in “excess of those considered necessary for the reasonable business needs of the business.”

• It may be possible to look at the application of the accumulated earnings tax as a guide for what would be “necessary” for a business.

• Although cases involving accumulated earnings may not be binding in relation to the interpretation of the rules and regulations applicable to PPP loans, it may be considered as persuasive.





Section 531(a)GENERAL RULE

The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

(b)EXCEPTIONS

The accumulated earnings tax imposed by section 531 shall not apply to—

(1) a personal holding company (as defined in section 542),

(2) a corporation exempt from tax under subchapter F (section 501 and following), or

(3) a passive foreign investment company (as defined in section 1297).

(c)APPLICATION DETERMINED WITHOUT REGARD TO NUMBER OF SHAREHOLDERS

The application of this part to a corporation shall be determined without regard to the number of shareholders of such corporation.



https://www.law.cornell.edu/uscode/text/26/531






Former Section 531 Audit Guidelines

The former Section 531 Audit Guidelines recognized the following as acceptable reasons to accumulate earnings:

1. An actual or potential lawsuit;

2. A possible liability arising out of some contractual obligation;

3. A possible business reversal resulting from the loss of a customer;

4. Accumulations to guard against competition have been justified in some cases;

5. An accumulation to provide funds to finance a self-insurance plan (including key man life insurance, as well as the more common types of risk insurance; and

6. Accumulations to provide a retirement plan for employees





Application of Section 531• Generally, a ratio of current assets to current liabilities of approximately 2.5

to 1, or less, is considered to be reasonable, pursuant to John P. Scripts Newspapers, 44 T.C. 453(1965)

• In order to accumulate excess earnings, the present or pending issue must not be merely a remote possibility, or constitute an unrealistic hazard Gordon Turnbull, Inc., 41 T.C. 358 (1963)

• In Cheyenne Newspapers, Inc. v. Commissioner, T.C. Memo 1973-52, affirmed, 494 F.2d 429 (10th Cir. 1974), a taxpayer claimed that it needed additional capital reserves to cover losses and expenses that could occur as a result of an unspecified future blizzard shutting the business down for an extended time. Because the last time the company experienced such a shut down was 33 years ago, the possibility of such a shutdown was too remote.





Application of Section 531, Cont’d

• In Northwestern Indiana Tel. Co. v. Commissioner, 71 T.C.M. 2674, the Tax Court found that a company held excessive accumulated earnings because it was holding capital for the potential future upgrade to fiber optic cables, which were not economically feasible at the time. Accumulating earnings for a project that may never become economically feasible is not reasonable.

• In Dielectric Materials Co., 57 T.C. 587 (1972), the Tax Court held that accumulating earnings to buy additional copper used to manufacture products was a valid reason to accumulate earnings because a strike that would affect the availability of copper was expected.

• It is important to note that a potential strike could have resulted in the company being unable to purchase enough copper to continue its business in an economically feasible way.

• It is good to have a projection of the potential economic harm that a company may face given a certain contingency, and to show that the contingency is reasonably anticipated to happen.





Quotes from Dielectric Materials Co.

• In Dielectric Materials, the court looked at whether it was reasonable and necessary to accumulate additional earnings for an anticipated strike that would limit the ability of copper.

• The court stated “In 1966, an actual strike in foreign copper mines had occurred and, as of the close of the year, there existed the prospect of a domestic copper strike, the length and impact of which defied any precise prediction. The resulting economic turmoil in the copper industry and its potential effect upon petitioner's business in terms of availability of supplies, ability to satisfy customers, and prices of both purchases and sales seem obvious.”

• In its holding the court provided deference to the company, stating “[U]nder the circumstances herein, we will not substitute our business judgment for that of corporate management to hold that petitioner did not require an additional $20,531 of accumulated earnings."





More From Helvering

• The Helvering case indicated that if expenses were unreasonable, that they would not meet the ordinary and necessary requirements to the extent of its unreasonableness. Thus, if there are more economical and practical means of attaining the result, the expense is not reasonable.





Application of Section 531, Cont’d

• Pursuant to the above cases, it appears that virtually every company in operation today would have a valid reason to accumulate earnings that would generally be in excess of what the company reasonably needs to operate.

• With businesses closed, customers struggling to pay their bills, and the general uncertainty, it is easy to argue that holding extra capital is a necessity.

• We know that the coronavirus has disrupted, and will continue to disrupt businesses, the extent of such disruption is currently unknown.

• It would be a good idea for companies taking PPP loans to create projections showing probable economic outcomes based upon the expected affect of the coronavirus.





Vagueness Doctrine




In 1926, the U.S. Supreme Court issued its opinion in Connally v. General Construction Co., which greatlyexpanded what is known as the “vagueness doctrine.” In this case, the vagueness doctrine was explained toapply to “a statute which either forbids or requires the doing of an act in terms so vague that men ofcommon intelligence must necessarily guess at its meaning and differ as to its application.”

More recently, in 2015, the U.S. Supreme Court addressed the vagueness doctrine again in Johnson v. UnitedStates, stating that the government violates due process when it takes “away someone’s life, liberty, orproperty under a criminal law so vague that it fails to give ordinary people fair notice of the conduct itpunishes, or so standard-less that it invites arbitrary enforcement.”

Here, where property, or at the very least a property interest, is being denied to businesses by concluding thatthey are not qualified for a PPP loan due to a murky or overzealous “necessary” requirement, when objectivelyreasonable interpretations of the term have seemingly varied based upon each individual application for the loan, itmay be that the vagueness of the term “necessary” prevents criminal enforcement of this statute. This is mademore convincing by the fact that the CARES Act does not give the SBA or any other entity the right to promulgatelegislative regulations or guidance, and does not provide that hedge funds or publicly traded entities cannot qualifyfor PPP loans.

Since lawmakers and several government institutions have been issuing updated official and unofficialguidance on what “necessary” means in the context of PPP loans, ability to claim that there is sufficient vaguenessto make the statute inapplicable in a given situation is dependent upon being able to show that an applicant for PPPloans was provided “fair notice” of their ineligibility, which would disqualify them from claiming that the statutewas unconstitutionally vague, because they were aware of the general parameters that made them ineligible fromupdated guidelines after applying. Arguing vagueness would be more appropriate for a business that applied forand received a loan prior to the new guidelines being issued, but what court will require that applicants look forFAQ’s and tweets from a Senator, as mentioned below, before signing their application under the present stressfuland scattered circumstances that business owners find themselves in?



The Vagueness Doctrine

• The vagueness doctrine prevents criminal defendants from beingconvicted under statutes that are vague about the conduct theypunish.

• The U.S. Supreme Court opened this doctrine’s viability in 1926 inthe case Connally v. General Construction Co.

For the following slides, please note that:

Court quotations are in green.

Statutory quotations are in blue.





Connally v. General Construction Co.

• First the Court stated the general rule for vagueness:

• “That the terms of a penal statute creating a new offense must besufficiently explicit to inform those who are subject to it whatconduct on their part will render them liable to its penalties is awell-recognized requirement, consonant alike with ordinary notionsof fair play and the settled rules of law; and a statute which eitherforbids or requires the doing of an act in terms so vague that menof common intelligence must necessarily guess at its meaning anddiffer as to its application violates the first essential of due processof law.”

Connally, 269 U.S. 385, 391 (1926).





Connally v. General Construction Co.• The Court continued clarifying the vagueness doctrine’s purpose:

• “The dividing line between what is lawful and unlawful cannot beleft to conjecture. The citizen cannot be held to answer chargesbased upon penal statutes whose mandates are so uncertain thatthey will reasonably admit of different constructions. A criminalstatute cannot rest upon an uncertain foundation. The crime, andthe elements constituting it, must be so clearly expressed that theordinary person can intelligently choose, in advance, what course itis lawful for him to pursue. Penal statutes prohibiting the doing ofcertain things, and providing a punishment for their violation,should not admit of such a double meaning that the citizen may actupon the one conception of its requirements and the courts uponanother.” Connally, 269 U.S. 385, 393 (1926).





Connally v. General Construction Co.

• The following Oklahoma statute was deemed “unconstitutionally vague:”

• “That not less than the current rate of per diem wages in thelocality where the work is performed shall be paid to laborers,workmen, mechanics, prison guards, janitors in public institutions,or other persons so employed by or on behalf of the state, andlaborers, workmen, mechanics, or other persons employed bycontractors or subcontractors in the execution of any contract orcontracts with the state, shall be deemed to be employed by or onbehalf of the state” (emphasis added).





Connally v. General Construction Co.• The Court reasoned:

• “We are of opinion that this provision presents a doubleuncertainty, fatal to its validity as a criminal statute. In the firstplace, the words ‘current rate of wages' do not denote a specific ordefinite sum, but minimum, maximum, and intermediate amounts,indeterminately, varying from time to time and dependent uponthe class and kind of work done, the efficiency of the workmen,etc., as the bill alleges is the case in respect of the territorysurrounding the bridges under construction.” Connally, 269 U.S.385, 393 (1926) (emphasis added).

• “The statutory phrase reasonably cannot be confined to any ofthese amounts, since it imports each and all of them. The ‘currentrate of wages' is not simple, but progressive - from so much (theminimum) to so much (the maximum), including all between; andto direct the payment of an amount which shall not be less thanone of several different amounts, without saying which, is to leavethe question of what is meant incapable of any definite answer.”Id. at 393-94 (emphasis added).





Johnson v. U.S.• More recently, in 2015, the late Justice Scalia authored an opinion finding the

following U.S. Criminal statute to be unconstitutionally vague:• “Federal law forbids certain people . . . to ship, possess, and receive

firearms. In general, the law punishes violation of this ban by up to tenyears' imprisonment. But if the violator has three or more earlierconvictions for a “serious drug offense” or a “violent felony,” the ArmedCareer Criminal Act increases his prison term to a minimum of fifteenyears and a maximum of life. The Act defines “violent felony” as follows:”Johnson, 135 S.Ct. 2551, 2555 (2015).

• “any crime punishable by imprisonment for a term exceeding one year. ..that —

• (i) has as an element the use, attempted use, or threatened use ofphysical force against the person of another; or

• (ii) is burglary, arson, or extortion, involves use of explosives, orotherwise involves conduct that presents a serious potential risk ofphysical injury to another” (emphasis added)





Johnson v. U.S.• The Court colorfully ruled that the statute was unconstitutionally vague, stating:

• “Our cases establish that the Government violates this guarantee by taking awaysomeone's life, liberty, or property under a criminal law so vague that it fails to giveordinary people fair notice of the conduct it punishes, or so standardless that it invitesarbitrary enforcement.” Johnson, 135 S. Ct. 2551, 2556 (2015).

• “In the first place, the residual clause leaves grave uncertainty about how to estimatethe risk posed by a crime. It ties the judicial assessment of risk to a judicially imagined‘ordinary case‘ of a crime, not to real-world facts or statutory elements. How does onego about deciding what kind of conduct the ’ordinary case’ of a crime involves? Astatistical analysis of the state reporter? A survey? Expert evidence? Google? Gutinstinct?” Id. at 2557 (emphasis added).

• “At the same time, the residual clause leaves uncertainty about how much risk it takesfor a crime to qualify as a violent felony. It is one thing to apply an imprecise ‘seriouspotential risk‘ standard to real-world facts; it is quite another to apply it to a judge-imagined abstraction. By asking whether the crime ‘otherwise involves conduct thatpresents a serious potential risk,‘ moreover, the residual clause forces courts to interpret’serious potential risk’ in light of the four enumerated crimes—burglary, arson, extortion,and crimes involving the use of explosives. These offenses are ’far from clear in respectto the degree of risk each poses.’” Id. at 2558 (emphasis added).





Grayned v. City of Rockford

• On the opposite end of the spectrum, the U.S. Supreme Court issuedanother ruling in 1972 in Grayned v. City of Rockford, where the Courtconcluded that the following statute was constitutional:

• ”A person commits disorderly conduct when he knowingly:

• (i) Pickets or demonstrates on a public way within 150 feet of anyprimary or secondary school building while the school is insession and one-half hour before the school is in session andone-half hour after the school session has been concluded,provided that this subsection does not prohibit the peacefulpicketing of any school involved in a labor dispute . . . ”





Grayned v. City of Rockford, Cont’d• Before ruling the statute constitutional, the Court provided tenants to the vaguenessdoctrine:

• “First, because we assume that man is free to steer between lawful and unlawfulconduct, we insist that laws give the person of ordinary intelligence a reasonableopportunity to know what is prohibited, so that he may act accordingly. Vague lawsmay trap the innocent by not providing fair warning.” Grayned, 408 U.S. 104, 108(1972).

• “Second, if arbitrary and discriminatory enforcement is to be prevented, laws mustprovide explicit standards for those who apply them. A vague law impermissiblydelegates basic policy matters to policemen, judges, and juries for resolution on anad hoc and subjective basis, with the attendant dangers of arbitrary anddiscriminatory application.” Id. at 108-09.

• “Third, but related, where a vague statute ‘abut(s) upon sensitive areas of basic FirstAmendment freedoms,’ it ‘operates to inhibit the exercise of (those) freedoms.’Uncertain meanings inevitably lead citizens to “steer far wider of the unlawful zone' .. . than if the boundaries of the forbidden areas were clearly marked.’” Id. at 109.





Grayned v. City of Rockford, Cont’d

• The Court held the statute was not unduly vague, ruling as follows:

• “Although the question is close, we conclude that the antinoise ordinance is notimpermissibly vague.” Grayned, 408 U.S. 104, 109 (1972).

• “we find no unconstitutional vagueness in the antinoise ordinance. Condemnedto the use of words, we can never expect mathematical certainty from ourlanguage. The words of the Rockford ordinance are marked by ‘flexibility andreasonable breadth, rather than meticulous specificity,’ but we think it is clearwhat the ordinance as a whole prohibits.” Id. at 110 (emphasis added).

• “Designed, according to its preamble, ‘for the protection of Schools,’ theordinance forbids deliberately noisy or diversionary activity that disrupts or isabout to disrupt normal school activities. It forbids this willful activity at fixedtimes—when school is in session—and at a sufficiently fixed place—‘adjacent’ tothe school” (emphasis added). Id. at 110-11 (emphasis added).





Montenegro v. N.H. Division of Motor Vehicles

• In 2014, the New Hampshire Supreme Court in Montenegro v. N.H.Division of Motor Vehicles was faced with a vagueness argument for thefollowing statute:

• “[a] vanity ... registration plate shall ... [n]ot be ethnically, racially orwhich a reasonable person would find offensive to good taste”(emphasis added).

• In this case, Montenegro had the vanity license plate, “COPSLIE.”

• The New Hampshire DMV director found “a reasonable person wouldfind ‘COPSLIE’ offensive to good taste.”





Montenegro v. N.H. Division of Motor Vehicles, Cont’d

• The N.H. Supreme Court held that the statute was unconstitutionallyvague, stating:

• “The phrase ‘offensive to good taste’ is not defined in the regulation.Further, to the extent the phrase could be construed to prohibitobscene material, we note that a separate provision in the regulationprohibits vanity registration plates that are ’capable of an obsceneinterpretation.’” Montenegro, 93 A.3d 290, 297 (N.H. 2014) (emphasisadded).

• “The [‘reasonable person’] modifier fails to provide sufficient guidanceto DMV officials in determining which vanity registration plates shallbe authorized. ‘Reasonable people frequently come to differentconclusions.’” Id. (emphasis added).





• https://drive.google.com/open?id=1iND9dFy1gSq5WBoGrkvTUKK7yWbFilH6



https://drive.google.com/open?id=1iND9dFy1gSq5WBoGrkvTUKK7yWbFilH6



Who Needs a PPP Loan?





Who “Needs” a PPP Loan?

Almost every business owner and manager involved with the finances of a business are clearly awarethat there are significant capital needs, which include the obvious need for monies to keep a business like abar, restaurant or private school afloat, but also capital needs that are “necessary” to assure that the business orprofessional practice can survive negative future contingencies, which are much more likely now than theyhad been before this crisis.

For example, a professional practice that has expenses of $100,000 per month and $200,000 in the bankmay not “need” to spend PPP loan proceeds for three or even six months if revenues continue to allow thepresent cash in the business to last that long, but what happens if the key professional or manager of thebusiness gets sick with the COVID-19 virus and the business interruption insurance that the company has orwould now be willing to buy is not available because the policies do not cover a global pandemic? Whathappens if a major group of customers or suppliers turn out to be dominoes in the long string of black andwhite tiles that eventually fall on the business and cause it to be shut down or require it to operate at a loss forseveral months in order to survive?

Every borrower has a different situation, and many borrowers are receiving the same amount of revenueas they were before, and may have only slightly increased expenses, but a very uncertain future.





One example that comes to mind is critical care doctors, who have medical groups that primarily serviceemergency rooms and intensive care units.

One would generally not expect that their revenues have been reduced, but one would expect that theyhave a significant risk of losing key personnel for a long period of time, and also a fear that medical systems willbreak down and not provide them with compensation, or even the ability to work.

It is certainly arguable that the loan is not “necessary” for this group, but standing in their shoes, I wouldcertainly feel the need for additional capital, especially given the fact that a good many critical care professionalshave contracted COVID-19, leaving their practices without a doctor or doctors and other professionals when theyare terribly needed.

As a practical matter, many critical care pulmonologists have office practices are now suffering becausepatients with underlying health conditions should be deferring any contact with a medical office to the extentpossible. For example, patients who may have sleep apnea and need sleep studies or consultations are probablybetter off deferring these until it is safe to walk into a medical doctor’s office.





Supreme Court Interpretations of the Meaning of the Word Necessary





What Is the Meaning of the Word “Necessary”?

To further this discussion, it is necessary to consider the word “necessary,” and to what extent a court orjury would find that a business or professional practice did not have sufficient need for a PPP loan because it wasnot “necessary.” Guidance may be found from past and current interpretations of the word “necessary,” and morepointed updates have been provided recently relating to this issue.

Courts’ Interpretations of “Necessary”

In 1819, the fourth - and perhaps most famous - Chief Justice of the U.S. Supreme Court, John Marshall,issued a monumental Constitution-based decision defining the word necessary as it appears in the Necessary andProper clause of the United States Constitution.

In McCulloch v. State, the Supreme Court considered whether the word necessary must “always import anabsolute physical necessity, so strong, that one thing to which another may be termed necessary, cannot existwithout that other.” The Court concluded that it does not, and explained the word necessary “frequently importsno more than that one thing is convenient, or useful, or essential to another.”





Notably, Black’s Law Dictionary uses the same definition of “necessary” as Chief Justice Marshall did inhis opinion in McCulloch.

In 1933, the meaning of “necessary” was analyzed by the Supreme Court again in Welch v. Helvering,where a taxpayer attempted to take a deduction on expenses that he claimed fell within the test now found atInternal Revenue Code (IRC) Section 162 as being “ordinary and necessary” business expenses. Here, the Courtdetermined that the expenses in the case were necessary because “they were appropriate and helpful,” but theywere not ordinary.

“Appropriate and helpful” is certainly a lower standard than “essential.” Since Welch, a number of caseshave found that items that many would consider to be “luxury” items and services have qualified as “reasonableand necessary” business expenses, including the expense of paying for limousines to take key executives towork, taking spouses on business trips to make a good impression, and paying large salaries to key executiveswhose work could be performed by competent replacements for much less.





Guidance From IRC Section 537 –Accumulated Earnings Tax





The language and application of the Accumulated Earnings Tax may provide valuable guidance. Thisportion of the Internal Revenue Code imposes a tax on corporations (other than S corporations) that are found tohave a net worth exceeding "the reasonable needs of the business."

The regulations under IRC Section 537 make clear that the "reasonable needs of the business" can include"product liability loss reserves," and can include moneys set aside for possible future expenses that would be"directly connected with the needs of the corporation" and are "for bona fide business purposes."

The above quoted language comes from the following portion of IRC Section 537. These regulationsinclude discussion that confirms that it is necessary to have capital for the "reasonable future needs" of thebusiness based upon what "a prudent businessman would consider appropriate for the present businesspurposes and for the reasonably anticipated future needs of the business.“

It certainly seem that this is analogous to what is “necessary to support the operations of the business.”




Below is an excerpt from Treasury Regulation Section 1.537-1:

§ 1.537-1 Reasonable needs of the business.

(a) In general. The term reasonable needs of the business includes (1) the reasonably anticipated needs of thebusiness (including product liability loss reserves, as defined in paragraph (f) of this section), (2) the section 303redemption needs of the business, as defined in paragraph (c) of this section, and (3) the excess business holdingsredemption needs of the business as described in paragraph (d) of this section. See paragraph (e) of this sectionfor additional rules relating to the section 303 redemption needs and the excess business holdings redemption needsof the business. An accumulation of the earnings and profits (including the undistributed earnings andprofits of prior years) is in excess of the reasonable needs of the business if it exceeds the amount that aprudent businessman would consider appropriate for the present business purposes and for the reasonablyanticipated future needs of the business. The need to retain earnings and profits must be directly connected withthe needs of the corporation itself and must be for bona fide business purposes. ,,,. See § 1.537-3 for a discussion ofwhat constitutes the business of the corporation… See § 1.537-2, relating to grounds for accumulation of earningsand profits.

(b) Reasonable anticipated needs.

(1) In order for a corporation to justify an accumulation of earnings and profits for reasonably anticipatedfuture needs, there must be an indication that the future needs of the business require such accumulation, andthe corporation must have specific, definite, and feasible plans for the use of such accumulation. Such anaccumulation need not be used immediately, nor must the plans for its use be consummated within a short periodafter the close of the taxable year, provided that such accumulation will be used within a reasonable time dependingupon all the facts and circumstances relating to the future needs of the business. Where the future needs of thebusiness are uncertain or vague, where the plans for the future use of an accumulation are not specific, definite, andfeasible, or where the execution of such a plan is postponed indefinitely, an accumulation cannot be justified on thegrounds of reasonably anticipated needs of the business.


(2) Consideration shall be given to reasonably anticipated needs as they exist on the basis of the facts atthe close of the taxable year. Thus, subsequent events shall not be used for the purpose of showing that the retentionof earnings or profits was unreasonable at the close of the taxable year if all the elements of reasonable anticipationare present at the close of such taxable year. However, subsequent events may be considered to determine whetherthe taxpayer actually intended to consummate or has actually consummated the plans for which the earnings andprofits were accumulated. In this connection, projected expansion or investment plans shall be reviewed in the lightof the facts during each year and as they exist as of the close of the taxable year. If a corporation has justified anaccumulation for future needs by plans never consummated, the amount of such an accumulation shall be takeninto account in determining the reasonableness of subsequent accumulations.

(f) Product liability loss reserves.

(1) The term product liability loss reserve means, with respect to taxable years beginning after September 30,1979, reasonable amounts accumulated for the payment of reasonably anticipated product liability losses,as defined in section 172(j) and § 1.172-13(b)(1).

(2) For purposes of this paragraph, whether an accumulation for anticipated product liability losses isreasonable in amount and whether such anticipated product liability losses are likely to occur shall bedetermined in light of all facts and circumstances of the taxpayer making such accumulation. Some of thefactors to be considered in determining the reasonableness of the accumulation include the taxpayer's previousproduct liability experience, the extent of the taxpayer’s coverage by commercial product liability insurance, theincome tax consequences of the taxpayer's ability to deduct product liability losses and related expenses, andthe taxpayer’s potential future liability due to defective products in light of the taxpayer's plans to expand theproduction of products currently being manufactured, provided such plans are specific, definite and feasible.Additionally, a factor to be considered in determining whether the accumulation is reasonable in amount is whetherthe taxpayer, in accounting for its potential future liability, took into account the reasonably estimated presentvalue of the potential future liability.

(3) Only those accumulations made with respect to products that have been manufactured, leased, or sold shallbe considered as accumulations made under this paragraph. Thus, for example, accumulations with respect to aproduct which has not progressed beyond the development stage are not reasonable accumulations under thisparagraph.



Opinion Letters/Fairness Opinions




It is difficult to read the above and not come to the conclusion that most U.S. businesses and professionalpractices have a need for PPP loans that are necessary to support the ongoing operations of the business, justlike product liability loss reserves are well respected for those businesses that have exposure to product liabilitylosses.

A conventional and well-accepted analysis of what would be necessary to borrow to be reasonablycapitalized in a way that is similar to the Accumulated Earnings Tax analysis is the concept of the “fairnessopinion.” The “fairness opinion” is often issued by companies raising capital or engaging in transactionswhereby an independent opinion is provided as evidence that a business meets the required good faithcertification of being “necessary to support the ongoing operations of the Applicant.” This scenario is similar tothe use of fairness opinions that evolved from the landmark opinion of Smith v. Van Gorkom which was decidedby the Delaware Supreme Court in 1985. Fairness opinions are obtained from financial professionals to provideevidence that prudent business judgment was exercised in a corporate transaction, thus providing corporateboards with some level of liability protection. It is unclear whether opinions to support PPP good faithcertification would be recognized because of the lack of current guidance but it certainly would not hurt. Theauthors thank valuation experts Timothy Bronza, CPA/ABV, ASA, and Elitsa Healy, CFA, for their input withrespect to this.

Although it may still be unclear what “necessary” means for PPP loans, the SBA’s Economic InjuryDisaster Loan (EIDL) requires that applicants sustain a “substantial economic injury” that is a direct result of adisaster. COVID-19 qualifies as a disaster, but the “substantial economic injury” requirements are more in-depth and similar to the “necessary” requirement for PPP loans.

Substantial economic injury will most often consist of a decrease in revenue or a significant increase inexpenses with the result being that the business is unable to meet its obligations and pay ordinary and necessaryoperating expenses in the normal course of business.


“Necessary” for PPP loans could mean something very similar to “substantial economic injury,”especially given the below referenced recent pronouncements.

Some clarification on what “necessary” may mean under the PPP has been provided by individuallawmakers. Legally, this may be of some significance because the legislative intent behind the PPP is theclosest concrete guidance to date in absence of the SBA providing specific guidelines on the term.

In wake of the news that hedge funds and other large entities with presumably sufficient cash reserveswere receiving PPP loans, U.S. Senator Marco Rubio (R-FL) became vocal on Twitter and in mediaappearances about Congress’s intentions behind the PPP and the term “necessary.” Senator Rubio is the U.S.Senate Chairman of the Committee on Small Business and Entrepreneurship and was apparently very involvedwith the subject legislation.

Senator Rubio recently reiterated that PPP loans must be “necessary to support the on-going operationsof the business” and also indicated as follows:

1. The Small Business Committee will use subpoena power to identify anyone who gave a false certificationfor a PPP loan.

2. Businesses applying for a PPP loan must certify that they have been harmed by the crisis and need thePPP loan to operate.

3. Any company with revenue to cover its operations is ineligible.


While there is no doubt that Senator Rubio’s comments were well intentioned and may have an overallpositive impact, these statements likely have little to no precedential effect, and we know of no support forthe proposition that “[a]ny company with revenue to cover its operations is ineligible.”

If Senator Rubio’s comments had been included in Committee Reports or in initial SBA regulations,such statements might have some precedential effect and might reduce the level of confusion we areexperiencing surrounding the interpretation of the word “necessary”, but instead these comments have beenissued informally and without authority or authorization from the Statute or any governing body.

Based upon concerns voiced by advisors and businesses, it appears that these “pronouncements” willreduce both the number of loans taken, and the number of jobs that would have been saved by legitimate andconcerned business owners and professionals.

HOW ABOUT AN OPINION LETTER?

Many legal advisors will recommend that an opinion letter be issued in order to help prove thatproper conditions exist to qualify for a PPP or EIDL loan, and that the borrowers have no intent tobreak any law in applying for and receiving such a loan. This will add to the cost, and delay inobtaining loans, but may be the most prudent action, especially for independent officers and directorswho have not much to gain but much to lose by voting to take PPP or EIDL’s for a for-profit or not-for-profit agency. Associated questions include whether there is officer and director liability insurancethat will cover possible claims, including criminal defense costs, and whether such coverage can be putinto place or increased before a loan is taken.


CONCLUSION:

Advisors and borrowers must be very careful to closely examine their situation, and the conservative needs forcash and capital, which we believe can include recognition of the risks inherent in having a “stay-at-home”economy, which may have to endure the present challenges for a year or longer.

Given that many applicants did not receive loans because of the lack of funds or infrastructure to providethem, and that political winds may blow unpredictably, one would think that erring on the side of making surethat a business can survive the present crisis would be the most prudent course of action, especially whereemployees, contractors, suppliers, and customers rely on the business for their livelihood, products, andservices.

Advisors must do their best to educate present and would-be PPP borrowers by sharing and educating on thelaw and what uncertainties exist so that the benefits of taking the loans, and possible forgiveness, can beweighed against the uncertainty of possible penalties, repayment of amounts expected to be forgiven, or evencriminal prosecution.



Further on NecessityYou Can't Always Get What You Want

From the 1969 Rolling Stones album Let It BleedWritten by Mick Jagger and Keith Richards

You can't always get what you wantYou can't always get what you wantYou can't always get what you wantBut if you try sometimes you just might findYou just might findYou get what you need.

Originally released as the B side to Honky Tonk Women in July of 1969, which did not getinto the top 100 songs, it was released again in 1973 as an A side and reached number 42on the Billboard charts. It was later named the 100th Best Song in Rock and Roll by RollingStone Magazine.

The 4 Surviving Rolling Stones perform this song from four social distanced locationson YouTube at https://www.youtube.com/watch?v=N7pZgQepXfA

Mick JaggerGraduate of London School of

Economics and Political Science



https://www.youtube.com/watch?v=N7pZgQepXfA



Updates to SBA FAQs Guidance





32. Question: Does the cost of a housing stipend or allowance provided to an employee as part of compensation count toward payroll costs?

Answer: Yes. Payroll costs includes all cash compensation paid to employees, subject to the $100,000 annual compensation per employee limitation.

33. Question: Is there existing guidance to help PPP applicants and lenders determine whether an individual employee’s principal place of residence is in the United States?

Answer: PPP applicants and lenders may consider IRS regulations (26 CFR § 1.121-1(b)(2)) when determining whether an individual employee’s principal place of residence is in the United States.

Paycheck Protection Program – Recent Developments (SBA FAQs Guidance as of May 3,

2020)





34. Question: Are agricultural producers, farmers, and ranchers eligible for PPP loans?

Answer: Yes. Agricultural producers, farmers, and ranchers are eligible for PPP loans if: (i) the business has 500 or fewer employees, or (ii) the business fits within the revenue-based sized standard, which is average annual receipts of $1 million.

Additionally, agricultural producers, farmers, and ranchers can qualify for PPP loans as a small business concern if their business meets SBA’s “alternative size standard.” The “alternative size standard” is currently: (1) maximum net worth of the business is not more than $15 million, and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.)

35. Question: Are agricultural and other forms of cooperatives eligible to receive PPP loans?

Answer: As long as other PPP eligibility requirements are met, small agricultural cooperatives and other cooperatives may receive PPP loans.12

12Questions 32 – 35 published April, 24, 2020.


2020)





36. Question: To determine borrower eligibility under the 500-employee or other applicable threshold established by the CARES Act, must a borrower count all employees or only full-time equivalent employees?

Answer: For purposes of loan eligibility, the CARES Act defines the term employee to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.

By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of “fulltime equivalent employees” to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions.13

13 Questions 36 published April 26, 2020.


2020)





38. Question: Section 1102 of the CARES Act provides that PPP loans are available only to applicants that were “in operation on February 15, 2020.” Is a business that was in operation on February 15, 2020 but had a change in ownership after February 15, 2020 eligible for a PPP loan?

Answer: Yes. As long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership. In addition, where there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. If the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan. The Administrator, in consultation with the Secretary, has determined that the requirement that a business “was in operation on February 15, 2020” should be applied based on the economic realities of the business’s operations.


2020)





39. Question: Will SBA review individual PPP loan files?

Answer: Yes. In FAQ #31, SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.

The outcome of SBA’s review of loan files will not affect SBA’s guarantee of any loan for which the lender complied with the lender obligations set forth in paragraphs III.3.b(i)-(iii) of the Paycheck Protection Program Rule (April 2, 2020) and further explained in FAQ #1.15

15Questions 38-39 published April 29, 2020


2020)





40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

Questions 40 – 42 published May 3, 2020.


2020)





41. Question: Can a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount under the interim final rule issued by Treasury on April 27, 2020, make all the required certifications on the Borrower Application Form?

Answer: Yes. The Borrower Application Form requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.” On April 27, 2020, Treasury issued an interim final rule allowing seasonal borrowers to use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. An applicant that is otherwise in compliance with applicable SBA requirements, and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page 3 of the Borrower Application Form for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s interim final rule on seasonal workers.

Questions 40 – 42 published May 3, 2020.


2020)





42. Question: Do nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code qualify as “nonprofit organizations” under section 1102 of the CARES Act?

Answer: Section 1102 of the CARES Act defines the term “nonprofit organization” as “an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and that is exempt from taxation under section 501(a) of such Code.” The Administrator, in consultation with the Secretary of the Treasury, understands that nonprofit hospitals exempt from taxation under section 115 of the Internal Revenue Code are unique in that many such hospitals may meet the description set forth in section 501(c)(3) of the Internal Revenue Code to qualify for tax exemption under section 501(a), but have not sought to be recognized by the IRS as such because they are otherwise fully tax-exempt under a different provision of the Internal Revenue Code. Accordingly, the Administrator will treat a nonprofit hospital exempt from taxation under section 115 of the Internal Revenue Code as meeting the definition of “nonprofit organization” under section 1102 of the CARES Act if the hospital reasonably determines, in a written record maintained by the hospital, that it is an organization described in section 501(c)(3) of the Internal Revenue Code and is therefore within a category of organization that is exempt from taxation under section 501(a).16 The hospital’s certification of eligibility on the Borrower Application Form cannot be made without this determination. This approach helps accomplish the statutory purpose of ensuring that a broad range of borrowers, including entities that are helping to lead the medical response to the ongoing pandemic, can benefit from the loans provided under the PPP.

Paycheck Protection Program – Recent Developments (SBA FAQs Guidance as of May 3, 2020)





Bankrupt Entities and PPP• Since the CARES Act was passed, the SBA has required participating lenders to use an

SBA-created loan application that would disqualify any small business in bankruptcy from receiving a PPP Loan.

• There is nothing in the CARES Act, however, that prohibits debtors in bankruptcy from receiving PPP Loans.

• SBA Interim Final Rule Language:

• If the applicant or the owner of the applicant is the debtor in a bankruptcy proceeding, either at the time it submits the application or at any time before the loan is disbursed, the applicant is ineligible to receive a PPP loan. If the applicant or the owner of the applicant becomes the debtor in a bankruptcy proceeding after submitting a PPP application but before the loan is disbursed, it is the applicant’s obligation to notify the lender and request cancellation of the application. Failure by the applicant to do so will be regarded as a use of PPP funds for unauthorized purposes.





In re Hidalgo County Emergency Service Foundation• Challenged the aforementioned SBA-imposed ban against extending PPP loans to

bankrupt companies on the ground that it exceeded the SBA’s statutory authority and was in violation of section 525(a) of the Bankruptcy Code.

• Section 525(a) prohibits a governmental unit from denying “a license, permit, charter, franchise, or other similar grant” to a debtor in bankruptcy

• “Court finds and concludes that the Plaintiff would suffer immediate and irreparable harm without issuance of a temporary restraining order.”

• “Issuance of this temporary restraining order is in the public interest. The continued gainful employment of the Debtor’s approximately 250 employees benefits the public interest as a whole. The Debtor’s business as a “front line” health care provider is vitally important even in normal times, and even more so now for victims of COVID-19 in South Texas.”

• The Court, however, “make[s] no ruling on whether or not Hidalgo County EMS otherwise qualifies for a PPP loan.”





In re Hidalgo County Emergency Service Foundation• The Court also finds that:

• Hidalgo County EMS is authorized to submit a PPP loan application to any lender with the words “or presently involved in any bankruptcy” stricken from the SBA’s form, and, if Hidalgo County EMS satisfies all the other conditions in question #1 to the loan application form, mark the box answering question #1 “no.”

• Question 1 asks: “Is the Applicant or any owner of the Applicant presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?“

• To the extent any bank requires Hidalgo County EMS to execute any other forms, applications, or other documents for a PPP loan that include any language about whether Hidalgo County EMS or any owner of Hidalgo County EMS is involved in any bankruptcy, Hidalgo County EMS is authorized to strike the portion of such language about involvement in any bankruptcy and the Restrained Parties shall process the forms, applications, or other documents without any consideration of the involvement of Hidalgo County EMS or any owner of Hidalgo County EMS in any bankruptcy.

• The Restrained Parties shall not make or condition the approval of any PPP loan guaranty to the Debtor contingent on the Debtor or any owner of the Debtor not being “presently involved in any bankruptcy.”





AICPA Comments on Paycheck Protection Program

















































IRS Notice 20-32 –Non-Deductibility of Expenses Paid with PPP Funds That Are

Later Forgiven





Notice 2020-32PURPOSE

This notice provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.

BACKGROUND

I. Paycheck Protection Program The Paycheck Protection Program was established by section 1102 of the CARES Act. Under the

Paycheck Protection Program, a recipient of a covered loan may use the proceeds to pay (1) payroll costs, (2) certain employee benefits relating to healthcare, (3) interest on mortgage obligations, (4) rent, (5) utilities, and (6) interest on any other existing debt obligations. See section 7(a)(36)(F) of the Small Business Act (describing allowable uses of a covered loan). See also Q&A 2.r. in Part III of the





Notice 2020-32, Cont’d

interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, Docket No. SBA-2020-0015, 85 Fed. Reg. 20811, 20814 (April 15, 2020).

Under section 1106(b) of the Cares Act, a recipient of a covered loan can receive forgiveness of indebtedness on the loan (covered loan forgiveness) in an amount equal to the sum of payments made for the following expenses during the 8-week “covered period” beginning on the covered loan’s origination date (each, an eligible section 1106 expense): (1) payroll costs, (2) any payment of interest on any covered mortgage obligation, (3) any payment on any covered rent obligation, and (4) any covered utility payment. See section 1106(a) (defining the terms “covered period”, “covered mortgage obligation,” “covered rent obligation,” “covered utility payment,” and “payroll costs”), (b) (regarding eligibility for covered loan forgiveness), and (g) (regarding covered loan forgiveness decisions). However, section 1106(d) of the CARES Act provides that the amount of the covered loan forgiveness is reduced if, during the covered period, (1) the average number of full-time equivalent employees of the recipient is reduced as compared to the number of full-time employees in a specified base period, or (2) the salary or wages of certain employees is reduced by more than 25 percent as compared to the last full quarter before the covered period. In addition, pursuant to an interim final rule issued by the Small Business Administration, no more than 25 percent of the amount forgiven can be attributable to non-payroll costs. See Q&A 2.o. in Part III of the interim final rule, Business Loan Program Temporary Changes; Paycheck Protection Program, Docket No. SBA-2020-0015, 85 Fed. Reg. 20811, 20813-20814 (April 15, 2020).






Section 1106(i) of the CARES Act addresses certain Federal income tax consequences resulting from covered loan forgiveness. Specifically, that subsection provides that, for purposes of the Code, any amount that (but for that subsection) would be includible in gross income of the recipient by reason of forgiveness described in section 1106(b) “shall be excluded from gross income.” Thus, section 1106(i) of the CARES Act operates to exclude from the gross income of a recipient any category of income that may arise from covered loan forgiveness, regardless of whether such income would be (1) properly characterized as income from the discharge of indebtedness under section 61(a)(11) of the Code, or (2) otherwise includible in gross income under section 61 of the Code.

II. Deductibility of Eligible Section 1106 Expenses

Neither section 1106(i) of the CARES Act nor any other provision of the CARES Act addresses whether deductions otherwise allowable under the Code for payments of eligible section 1106 expenses by a recipient of a covered loan are allowed if the covered loan is subsequently forgiven under section 1106(b) of the CARES Act as a result of the payment of those expenses. This Notice addresses the effect of covered loan forgiveness on the deductibility of payments of eligible section 1106 expenses.





Notice 2020-32, Cont’dIII. Summary of Relevant Law

Section 161 of the Code provides that, in computing taxable income under section 63 of the Code, there shall be allowed as deductions the items specified in part VI, subchapter B, chapter 1 of the Code (for example, sections 162 and 163). However, section 161 of the Code provides that the allowance of these deductions is subject to the exceptions provided in part IX, subchapter B, chapter 1 of the Code. These exceptions include section 265 of the Code. See also section 261.

In general, section 162 of the Code provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Covered rent obligations, covered utility payments, and payroll costs consisting of wages and benefits paid to employees comprise typical trade or business expenses for which a deduction under section 162 of the Code generally is appropriate. Section 163(a) of the Code provides a deduction for certain interest paid or accrued during the taxable year on indebtedness, including interest paid or incurred on a mortgage obligation of a trade or business.

However, section 265(a)(1) of the Code and §1.265-1 of the Income Tax Regulations provide that no deduction is allowed to a taxpayer for any amount otherwise allowable as a deduction to such taxpayer that is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued)





Notice 2020-32, Cont’dwholly exempt from the taxes imposed by subtitle A of the Code. See generally section 265(a)(1); §1.265-1. The term “class of exempt income” means any class of income (whether or not any amount of income of such class is received or accrued) that is either wholly excluded from gross income under any provision of subtitle A of the Code or wholly exempt from the taxes imposed by subtitle A of the Code under the provisions of any other law. See §1.265-1(b)(1). The purpose of section 265 of the Code is to prevent a double tax benefit.

Section 265(a)(1) of the Code applies to otherwise deductible expenses incurred for the purpose of earning or otherwise producing tax-exempt income. It also applies where tax exempt income is earmarked for a specific purpose and deductions are incurred in carrying out that purpose. In such event, it is proper to conclude that some or all of the deductions are allocable to the tax-exempt income. See Christian v. United States, 201 F. Supp. 155 (E.D. La. 1962) (school teacher was denied deductions for expenses incurred for a literary research trip to England because the expenses were allocable to a tax-exempt gift and fellowship grant); Banks v. Commissioner, 17 T.C. 1386 (1952) (certain educational expenses paid by the Veterans' Administration that were exempt from income tax, were not deductible); Heffelfinger v. Commissioner, 5 T.C. 985 (1945), (Canadian income taxes on income exempt from U.S. tax are not deductible in computing U.S. taxable income); and Rev. Rul. 74-140, 1974-1 C.B. 50, (the portion of a state income tax paid by a taxpayer that is allocable to the cost-of-living allowance, a class of income wholly exempt under section 912, is nondeductible under section 265).





Notice 2020-32, Cont’dIn Manocchio v. Commissioner, 78 T.C. 989 (1982), a taxpayer attended a flight training

course that maintained and improved skills required in the taxpayer's trade or business. As a veteran, the taxpayer was entitled to an educational assistance allowance from the Veterans' Administration pursuant to 38 U.S.C. section 1677 (1976) equal to 90 percent of the costs incurred. Because the payments received were exempt from taxation under 38 U.S.C. section 310(a) (1976), the taxpayer did not report them as income. The taxpayer did, however, deduct the entire cost of the flight training course, including the portion that had been reimbursed by the Veterans' Administration. In a reviewed opinion, the court held that the reimbursed flight-training expenses were nondeductible under section 265(a)(1) of the Code.

NON-DEDUCTIBILITY OF PAYMENTS TO THE EXTENT INCOME RESULTING FROM LOAN FORGIVENESS IS EXCLUDED UNDER SECTION 1106(i) OF THE CARES ACT

To the extent that section 1106(i) of the CARES Act operates to exclude from gross income the amount of a covered loan forgiven under section 1106(b) of the CARES Act, the application of section 1106(i) results in a “class of exempt income” under §1.2651(b)(1) of the Regulations. Accordingly, section 265(a)(1) of the Code disallows any otherwise allowable deduction under any provision of the Code, including sections 162 and 163, for the amount of any payment of an eligible section 1106 expense to the extent of the resulting covered loan forgiveness (up to the aggregate amount forgiven) because such payment is allocable to tax-exempt income. Consistent with the purpose of section 265, this treatment prevents a double tax benefit






This conclusion is consistent with prior guidance of the IRS that addresses the application of section 265(a) to otherwise deductible payments. In particular, Rev. Rul. 83-3, 1983-1 C.B. 72, provides that, where tax exempt income is earmarked for a specific purpose, and deductions are incurred in carrying out that purpose, section 265(a) applies because such deductions are allocable to the tax-exempt income. In accordance with the analysis set forth in Rev. Rul. 83-3, the direct link between (1) the amount of tax exempt covered loan forgiveness that a recipient receives pursuant to section 1106 of the CARES Act, and (2) an equivalent amount of the otherwise deductible payments made by a recipient for eligible section 1106 expenses, constitutes a sufficient connection for section 265(a) to apply to disallow deductions for such payments under any provision of the Code, including sections 162 and 163, to the extent of the income excluded under section 1106(i) of the CARES Act.

The deductibility of payments of eligible section 1106 expenses that result in loan forgiveness under section 1106(b) of the CARES Act is also subject to disallowance under case law and published rulings that deny deductions for otherwise deductible payments for which the taxpayer receives reimbursement. See, e.g., Burnett v. Commissioner, 356 F.2d 755, 759-60 (5th Cir. 1966); Wolfers v. Commissioner, 69 T.C. 975 (1978); Charles Baloian Co. v. Commissioner, 68 T.C. 620 (1977); Rev. Rul. 80348, 1980-2 C.B. 31; Rev. Rul. 80-173, 1980-2 C.B. 60.






CONTACT INFORMATION

The principal authors of this notice are Sarah Daya and Patrick Clinton of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding the application of sections 161, 162, 163, and 261 please contact Ms. Daya at (202) 317-4891 (not a toll-free call); for further information regarding the application of section 265, please contact Mr. Clinton at (202) 317-7005 (not a toll-free call).





AICPA DOES NOT AGREE





AICPA Does Not AgreePublished May 1, 2020

In an email sent to their members, the AICPA expressed their disagreement with the Treasury's interpretation of the statute, specifically stating the following:

According to guidance the IRS released last night, PPP loan recipients whose loans are forgiven cannot deduct related expenses that are normally deductible. This guidance does not align with what we are hearing from Congress about the intent of the CARES Act and the PPP, and we are looking at all possible options for addressing this issue – including seeking a legislative solution, if necessary.

In a Journal of Accountancy Article, Chris Hesse, CPA, chair of the AICPA Tax Executive Committee stated that “In effect, the IRS guidance means that the taxability provision [Section 1106(i)] has no meaning. Why waste the ink to say that for purposes of the Code, the loan forgiveness is not includible in income, if the government will just take away deductions in the same amount?”

In the same article, Edward Karl, CPA, AICPA vice president–Tax Policy & Advocacy stated that “We’re hopeful that we’ll see movement on the legislative front early next week.”



https://click.e2.aicpa.org/?qs=eed3513a0d4244b9947bd7564fc8883d15e4bb6734e6157f8989195e6ec84107860171359c1498350c1afaaf34ba874a9085238783a3312fea7c87f3de159382



Estate Tax Planning Opportunities





Friday, April 24, 2020

COVID-19 Chaos Creates Opening For Millionaires To Pass Wealth To Their Children At Huge Tax SavingsBy Paul Caron

Coronavirus Market uncertainty caused by the coronavirus pandemic has created an opportunity for the very rich to pass more wealth to their children free, or virtually free, of tax.

Many people are in financial distress because the pandemic has forced businesses to temporarily shutter their operations, leading to furloughs and layoffs across the country. But those with enough wealth to shield themselves from any real hardship may find that it is an ideal time to deploy new tax-planning strategies.

Depressed asset values, combined with historically low interest rates, unprecedented estate and gift tax exemptions, and a favorable political climate, are making some tools more attractive than ever—especially those that allow parents to shift appreciable assets that have temporarily lost value to their children in a way that minimizes future estate and gift tax, according to estate tax attorneys.





Transferring depressed stocks, business interests, and real estate holdings to family members now could help individuals avoid estate and gift tax liabilities down the road, said Michael Rudegeair, tax director at Anchin, Block & Anchin LLP and incoming chair of an American Institute of Certified Public Accountants estate planning panel. ...

There are a variety of tools wealthy individuals can consider, planners said. One that may be especially attractive given the current mix of factors is the grantor retained annuity trust, or GRAT. ...

Sales to intentionally defective grantor trusts are attractive right now for similar reasons, several estate planners said. Intentionally defective grantor trusts contain a purposeful flaw that allows a person to transfer assets into the trust and continue to pay income taxes on the trust’s earnings, but locks in the assets’ initial value for estate tax purposes so any gain escapes the 40% tax at death.

Wealthy individuals may also want to think about intra-family loans because of the low interest rates. Gifting outright—without the extra hassle of a vehicle like a GRAT—is another appealing option because lower asset values mean parents have to use less of their gift and estate tax exemption.

COVID-19 Chaos Creates Opening For Millionaires To Pass Wealth To Their Children At Huge Tax SavingsBy Paul Caron





Current and Recent ApplicableFederal Rates (2020)

MONTH SHORT TERM MID-TERM LONG-TERM

January 1.60% 1.69% 2.07%

February 1.59% 1.75% 2.15%

March 1.5% 1.53% 1.93%

April 0.91% 0.99% 1.44%

May 0.25% (One quarter of one percent)

0.58%(58/100th’s of 1%

1.15%

(Can use lowest of last three months on a “sale or exchange.”)



155Copyright © 2020 Gassman, Crotty & Denicolo, P.A. (LISI 4.23.2020 – Gassman / Ketron)

$1,000,000 PROMISSORY NOTE/SCIN/PRIVATE ANNUITY/GRAT ALTERNATIVESMay 2020

CLIENT AGE 73

CLIENT(AGE 73)

TRUST(PURCHASER)

<3 Year Interest Only Installment Note @ .25% - Payment = $2,500 per year*

9 Year Interest Only Installment Note .58% - Payment = $5,800 per year*

<9 Year Interest Only Installment Note @ 1.15% - Payment = $11,500 per year*

12 Year Interest Only SCIN @ 6.587% - Payment = $65,870 per year*

3 Year Level Payment GRAT @ .8% - Payment = $338,685 per year*

Private Annuity Level Annual Payment - Payment = $86,817 per year*

**3 Year GRAT @ .8% - Initial Payment = $279,400 and Increases Annually by 20%

* Notes would have no penalty for prepayment – minimum payments are shown above.Self-cancelling installment Notes must balloon before life expectancy as measured at time of Note being made. John Smith’s lifeexpectancy is 12.33 years under IRS tables. The SCIN calculations above are based on a 12-year note term.

** This GRAT assumes that each annuity payment will increase by 20% each year.

All GRATs assume no taxable gift on funding

Note: May 2020 rates for annual compounding are:Short-Term -- .25%Mid-Term – .58% Usable through July 31, 2020 for a “sale or exchange”Long-Term – 1.15%

Alternatives: (Using May 2020 Applicable Federal Rates and May 2020 7520 Rate of .8%)

Thanks to Christopher J. Denicolo, Esquire for preparing this slide.



Charitable Deductions and the CARES Act





• The donation must be a “Qualified Charitable Contribution” which is made in cash, to a non-profit that is not a Private Foundation, Supporting Organization or a donor advised fund, and does not apply to carryforwards.

• Private Operating Foundations are considered to be public charities under Section 170(a)(1)(A) and contributions thereto will qualify.

• The CARES ACT provides that an “eligible” individual will be allowed to deduct up to $300 above the line for charitable donations made, if the taxpayer does not itemize deductions.

• In order to be eligible, the individual must not elect to itemize deductions.

Up To $300 Charitable Deduction For Taxpayers Who Do Not Itemize





• The $300 charitable deduction provision only applies to donations made in 2020, so if a taxpayer makes charitable donations of more than $300, the deduction cannot be carried forward.

• The Joint Committee Report clarified that a married couple filing a joint return would only qualify for one $300 deduction.

• The CARES Act does not indicate that the deduction is supposed to be limited to $300 for a married couple so it is unclear whether this was an error or if the IRS will take the position that a married couple will only be able to deduct $300.

Up To $300 Charitable Deduction For Taxpayers Who Do Not Itemize





• The CARES ACT allows individual taxpayers to take up to 100% of their AGI for allcash contributions that qualify as charitable deductions in 2020.

• The donation must be a “Qualified Charitable Donation,” which means that thedonation must be made to a public charity or a private operating foundation.Donations to private non-operating foundations and donor advised funds will notqualify.

• If the individual contributes more than 100% of their AGI to a charity in the year2020, then such excess can be carried forward in the normal manner for up to fivesubsequent tax years. That is, the normal AGI limitations will apply to amountscarried forward.

• The corporate charitable deduction limitation has been raised from 10% of netincome to 25%.

• This change is not permanent.

Increase In Percentage of Adjusted Gross Income That Can Be Deducted For Cash Contributions





• The Joint Committee Report provides that the 60% of AGI (and for 2020 the 100%of AGI) limitation is reduced to the extent that donations that do not qualify for the 60% of AGI limitation are made.

• This is contrary to the interpretation of the 60% of AGI limitation that of many tax professionals.

• We are not sure whether the Joint Committee’s report is correct, but is something that should be considered before making large cash donations.

• We hope that clarification and examples are provided in the future to clarify what is meant by the reduction. It may be that donations of capital gains property can be deducted first, and then cash can bring the deduction up to 60%, but this is unclear and the 2017 TCJA seems to indicate that a taxpayer making a 60% of AGI donation in cash to a public charity will be able to deduct the full 60% and carry forward all other charitable deductions.

Increase In Percentage of Adjusted Gross IncomeThat Can Be Deducted For Cash Contributions, Cont’d





Increase In Charitable Deduction Limitations, Cont’d

• The table below shows the charitable deduction limitations for donations to charity made in 2020.

AGI LIMITATIONS BY ENTITY AND ASSET TYPE

TYPE OF ASSETPRIVATE OPERATING

FOUNDATIONS/PUBLIC CHARITIES

PRIVATE FOUNDATIONS(Non-Operating)*

Cash (must be all cash to qualify for 100% of AGI)

100% of AGI 30% of AGI

Non-Capital Gain Assets, other than cash****


Capital Gain Assets*** 30% of AGI 20% of AGI





• The table below shows the charitable deduction limitations for carryforwards for excess charitable donations made in 2019 and for donations made after year 2020.

AGI LIMITATIONS BY ENTITY AND ASSET TYPE**

TYPE OF ASSETPRIVATE OPERATING

FOUNDATIONS/PUBLIC CHARITIES

PRIVATE FOUNDATIONS(Non-Operating)*

Cash (must probably be all cash to qualify for 60% of AGI)


Non-Capital Gain Assets, other than cash****


Capital Gain Assets*** 30% of AGI 20% of AGI

Increase In Charitable Deduction Limitations, Cont’d




163

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Documents

***FREE WEBINAR*** MEDICAL PRACTICES · • MGMA Government Affairs will continue to inform medical groups as the Administration releases additional waivers and further guidance on

FREE WEBINAR MEDICAL PRACTICES · • MGMA Government Affairs will continue to inform medical groups as the Administration releases additional waivers and further guidance on