Month: January 2005

Bruce Carton, author of the Securities Litigation Watch, has an interesting post here about the tentative $54 million settlement reached January 5th with 10 former members of WorldCom’s board in the massive securities class action attacking the financial fraud at WorldCom. Here’s what he had to say about the settlement:

Although $54 million is not itself an extraordinary amount in the context of the hundreds of billions of dollars lost in the WorldCom case, the fact that $18 million will be paid by the directors themselves is a watershed event in the securities class action world. It is virtually unheard of for directors to be personally responsible in class action settlements, as such settlements are routinely covered by the company’s D&O insurance. In a highly unusual move, however, the New York State Common Retirement Fund reportedly insisted from the beginning of negotiations that there would be no settlement with the WorldCom directors without their agreement to personally pay a significant portion of the proceeds. Indeed, the $18 million dollars reportedly will come in varying amounts from the directors, with each individual payment accounting for a full 20 percent of that director’s aggregate net worth excluding their primary residences and retirement accounts.

He goes on to say that “coming on the heels of the SEC’s recent proclamations that the penalties it imposes must be paid by individual wrongdoers rather than their employer or insurance company” it is likely that the settlement with members of the WorldCom board will “have a jarring effect on anyone serving, or considering serving, on the board of a public company”:

Never before has it been so apparent that the consequences of failing in your duties as a board member may well include a significant loss of your own personal wealth. In the WorldCom case, for instance, directors who were compensated approximately $35,000 per year are now responsible, due to their alleged failings, for the payment of millions of dollars.

The Wall Street Journal had more on this in an article yesterday: “Directors Are Getting the Jitters.” The article states that public pension funds “have begun offering higher contingency fees if their attorneys win personal payments from individual officials, too.”

The WSJ article also states:

Timothy Burns, an attorney with Neal Gerber & Eisenberg LLP in Chicago and a co-chairman of the American Bar Association’s insurance-coverage litigation committee, thinks insurance policies could be rewritten so that coverage vanishes if a settlement or judgment requires individual directors to put up personal assets. Given the choice of either collecting more money from insurers or less directly from board members, investors might think twice before targeting personal assets, Mr. Burns believes.

The CorporateCounsel.net blog is reporting that the NYSE has posted updated FAQs regarding Section 303A.08, which requires shareholder approval for equity compensation plans. The updated FAQs discuss whether amendments to equity compensation plans to comply with Section 409A of the Internal Revenue Code require shareholder approval (C-15).

Will a blog entry ever make it into a U.S. Supreme Court case? It already has, as discussed here at the TaxProfBlog. While the blog doesn’t appear to be mentioned by name, at least the URL address made it in. The entry was referenced by Justice Stevens in his dissent (at p. 7, n.4) in yesterday’s U.S. v. Booker decision on the constitutionality of the federal sentencing guidelines. Congratulations to Douglas Berman (Ohio State), author of Sentencing Law and Policy Blog, for reaching such a milestone for the blawgosphere.

Today, leadership of Congress’ tax writing panels provided more detail in a news release about the legislative intent governing the implementation of H.R. 241, the Indian Ocean Tsunami Relief Act. The measure which passed the Senate and House on January 7, 2005 and was signed by the President last Friday is discussed in this previous post here. Excerpt from the news release:

• The Act applies only to charitable contributions of cash, whether by an individual or a corporation. Marketable securities and other property are excluded from the Act. Contributions made by credit card generally are treated as contributions of cash made at the time of the charge.
• Under the Act, taxpayers may choose whether to treat a contribution made in January 2005 as made on December 31, 2004, or as made in January of 2005. However, the deduction may be claimed only with respect to one taxable year. Taxpayers taking advantage of the Act are advised to make a notation to that effect on their 2004 tax return.
• The Act does not change any other present law rules with respect to charitable contributions. For example, the contribution must be a charitable contribution as defined in the Internal Revenue Code. Thus, the contribution must be made to an eligible organization, which, as under present law, generally does not include contributions to foreign organizations.
• The Act does not change the percentage limitations and carryover rules of present law. If a taxpayer takes advantage of the Act, the 2004 percentage limitations of a taxpayer apply to such contribution and any excess amount is treated as a carryover of a contribution made in 2004.
• Under the Act, contributions must be made for the Indian Ocean tsumami-related disaster relief. The taxpayer must substantiate that the contribution is made for such purpose.
• Taxpayers are not permitted under the Act to allocate a portion of a contribution to more than one taxable year. Thus, taxpayers are required to treat the entire contribution as made in January 2005 or as made on December 31, 2004. A taxpayer who makes multiple contributions may treat each contribution separately. For example, a taxpayer making three separate gifts of $100 each may treat two gifts as made on December 31, 2004, and one gift as made on the actual date of gift (in January 2005).

The news release makes some interesting points about substantiation of the tax deduction. For example, a receipt from a charity acknowledging that a contribution is intended to be used for tsumami-related purposes generally would be sufficient. Other forms of substantiation could include a taxpayer making a notation on the taxpayer’s check of the intended use of the contribution. While writing a notation on the check is acceptable, the news release makes it clear that, if the donee organization is not involved in assisting victims of the disaster, a notation on the check would not be sufficient in that case–in other words, one can’t turn a charitable contribution made in January of 2005 into a a 2004 charitable deduction by simply writing “tsunami” on the check.

An article here from NWAnews.com is reporting that a “bill filed with the Arkansas Legislature on Tuesday would prohibit managed care networks from practices that “discriminate” against doctors and hospitals, a move the bill’s sponsor says will put an “any willing provider” law into effect.” According to the article:

Senate Bill 43 is intended to open closed insurance networks such as those of Arkansas Blue Cross and Blue Shield, allowing health-care providers who are willing to meet an insurer’s terms to see patients at in-network rate . . .

A second bill filed by Faris, SB44, says individuals can sue over violations of SB43 and receive a court order requiring compliance with the law and an award of at least $1,000. . .

SB43 says insurers cannot “discriminate against any provider” who is willing to meet the “terms and conditions for participation.” The bill is the latest in Arkansas’ decade-long fight over “any willing provider,” a term used to describe laws that force insurance companies to extend network membership to any doctor or hospital willing and able to meet the network’s terms.

Here are the events leading up to the introduction of this legislation:

(1) An Arkansas any willing provider law (“AWP law”) called the “Arkansas Patient Protection Act” was passed in 1995, but had been barred from being enforced in Arkansas after a federal district court issued an injunction, holding that the AWP law was subject to preemption under ERISA. The injunction was affirmed by the 8th Circuit, in the case of of Prudential Insurance Company of America, et al. v.National Park Medical Center, Inc.

(2) The U.S. Supreme Court in the case of Kentucky Association of Health Plans v. Miller decided in April of 2003 that an AWP law in Kentucky was not preempted by ERISA (discussed in previous posts which you can access here.)

(3) After the Miller case was decided, a case was filed in federal district court in Arkansas asking for “a judicial determination” on how the Miller case impacted the old Arkansas AWP law.

(4) The injunction issued in 1998 was lifted on February 12, 2004 by a federal district court in Arkansas, based on the Miller case, but the decision lifting the injunction was appealed to the 8th Circuit. According to the Gazette article, oral arguments in the case–Prudential Ins. Co. v. HMO Partners–were heard in November of last year. You can read about the oral arguments in this article here, or even listen to the oral arguments as well as read the briefs filed in the case here.

According to the article, supporters of the proposed legislation don’t want to wait for the 8th Circuit to rule, and have introduced the legislation, modeling it after the Kentucky AWP law (which was upheld by the Supreme Court), in hopes that it will be enacted, thus bypassing the legal battle that has ensued in the courts.

Read about the legal issues pertaining to AWP laws in this article: “Kentucky’s “Any Willing Provider” Law and ERISA: Implications of the Supreme Court’s Decision for State Health Insurance Regulation” by Patricia A. Butler, JD, DrPH.

(Thanks to Benefitslink.com for the link to the article.)

Elaine L. Chao, U.S. Secretary of Labor and Chairman of the Board of the Pension Benefit Guaranty Corp.(PBGC), today announced the Bush Administration’s plan for strengthening the retirement security of workers and retirees covered by private, single employer defined benefit pension plans. Chao states, in the announcement, that the Administration has become “increasingly concerned as the number of terminated plans grows and the PBGC is forced to assume ever larger liabilities” and that “[i]f nothing is done, the financial integrity of the federal insurance system will be compromised and the pension security of 34 million workers and retirees will be more at risk.”

The announcement provides that the Administration’s plan is based on three main principles:

• Reforming the funding rules for private defined benefit pension plans to ensure full funding;
• Reforming PBGC premiums “to better reflect the real risks and costs”; and
• Increasing “disclosure of information about private defined benefit pension plans to workers, investors and regulators.”

There is a Fact Sheet summarizing the proposal and entitled “The Bush Administration’s Plan for Strengthening Retirement Security.” Two interesting aspects of the proposal:

(1) The proposal includes a change to the PBGC premium structure so that it would include a “risk-based premium” which would be based on “plan underfunding relative to the appropriate funding target.” The Fact Sheet notes that all underfunded plans would pay risk-based premiums.

(2) The proposal would allow “plan sponsors to make additional deductible contributions during good economic times.” (It’s about time!)

Today, the President signed into law H.R. 241, which accelerates income tax benefits for charitable cash contributions for relief of Indian Ocean tsunami victims.

The legislation provides as follows:

“SECTION 1. ACCELERATION OF INCOME TAX BENEFITS FOR CHARITABLE CASH CONTRIBUTIONS FOR RELIEF OF INDIAN OCEAN TSUNAMI VICTIMS.

(a) IN GENERAL- For purposes of section 170 of the Internal Revenue Code of 1986, a taxpayer may treat any contribution described in subsection (b) made in January 2005 as if such contribution was made on December 31, 2004, and not in January 2005.

(b) CONTRIBUTION DESCRIBED- A contribution is described in this subsection if such contribution is a cash contribution made for the relief of victims in areas affected by the December 26, 2004, Indian Ocean tsunami for which a charitable contribution deduction is allowable under section 170 of the Internal Revenue Code of 1986.”

Tax Analysts has more here.

HR.BLR.com reports that “Employers of All Sizes Are Providing Tsunami Relief.”

From an Associated Press article (via Findlaw.com)–“Bush Calls for Streamlining Tax Code“:

President Bush on Friday called streamlining and reforming the U.S. tax code an “essential task for our country,” but offered few hints of how he intends to get it done.

Treasury Secretary John Snow said “everything’s on the table,” including possibly the popular home mortgage and charitable deductions and a former senator leading a tax-reform panel for Bush said that a national sales tax or flat tax also could be in the cards.

Also, there is a press release containing the Executive Order establishing the President’s Advisory Panel on Federal Tax Reform (from the TaxProfBlog) as well as this Announcement of the appointment of members to the Advisory Panel. The Wall Street Journal here notes that the members are a “mix of academics, Wall Street types, and former government officials including former Minnesota Rep. Bill Frenzel, who served on Mr. Bush’s Social Security commission in 2001.”

Also, another article from the Wall Street Journal has more:

Snow insisted the administration is committed to tax reform and said he saw no reason why legislation couldn’t be ready to go to Capitol Hill by autumn. For one thing, he said the administration will be in close touch throughout the process with the tax panel so its recommendations won’t come as a complete surprise.

The tax panel will hold numerous hearings both in Washington and around the country both to get new ideas and to make the case for its recommendations, Mack said.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, is urging the Panel “to use the tax scoring conventions of Congress’s Joint Committee on Taxation in fashioning its tax overhaul proposals” as reported here in the Wall Street Journal:

The chairman and ranking minority member of the Senate Finance Committee on Friday urged President George W. Bush’s new tax reform panel to use the tax scoring conventions of Congress’s Joint Committee on Taxation in fashioning its tax overhaul proposals.

“We fear that failure to adhere to Congressional estimating standards would severely undermine any proposals recommended by the advisory panel,” said Senate Finance Committee Chairman Charles Grassley, R-Iowa, and Sen. Max Baucus, D-Mont., the senior Democrat on the committee.

And don’t miss this op-ed on tax reform by William F. Buckley, Jr. (from NPR.com)–“Whither Taxes?”–in which he makes this observation about tax reform:

[T]ax reform is a new code enacted after massive wrestling and eye-gouging and threats and excoriations, presented as a civilized enhancement of social policy. It is an assertion of justice, justice understood as a blend of considerations: the necessities of the state; the toleration of the body politic; the relationships of power among the affected interests; and rough justice. All of the above decocted from the minds and hearts of 535 legislators.

U.S. Secretary of Labor Elaine L. Chao issued the following statement on the December unemployment numbers released today:

“The economy created 157,000 jobs in December, many in higher paying fields including education and health services and professional and business services. This emphasizes the importance of the President’s economic programs and job training initiatives.”

The unemployment rate in December remained unchanged at 5.4% and more than 2.5 million jobs have been created in the last 16 months. The level of payroll employment is now 114,000 higher than in January 2001 and the annual average for 2004 shows that more Americans are working than ever before.”

USAToday reports:

President Bush called Friday’s report “a very positive set of numbers” that are proof the economy is growing. “That’s positive news,” he said at the end of a meeting with the leaders of a bipartisan panel he’s tasked with recommending reforms to the tax code.

The report didn’t sour economists, but it didn’t wow them either.