Outlines

All outlines are for educational purposes only.

Corporate Taxation

CORPORATE TAXATION 2010
Formation of Corporation
- intro
  - 351
    - SH do not recognize gain or loss on transfer of prop controlled (80) corp.
      - new & old corps
- requirements
  - one+ persons (indviduals corps, parts, etc) must transfer property to a corp;
    - property - $, inventory, accounts receivable, patents, goodwill & industrial know-how
  - the prop must be trasferred solely in exchange for stock of the transferee corp; and
    - stock – not debt, not non-qualified preferred stock
  - transferors must control;
    - 80% of total combined voting power of all classes of stock entitled to vote and a least 80% of each class of nonvoting stock
  - immediately after exchange
    - no binding agreements that cause SH to lose control
- Stock for services
  - OI on exchange of stock for services
  - if transfer services and prop
    - entire stock count toward control
- Basis
  - exchanged basis
  - if more than one group of stock, basis allocated by proportionally by FMV
  - Prop transferred with built in loss
    - limited to FMV
    - if more than one prop transferred losses are netted with gains
    - corp may elect to reduce SH basis in stock to amnt of loss
      - allows corp to keep the basis higher than FMV
  - SH basis
    - formula:
      - transferor’s basis in property transferred minus;
      - amount of cash and FMV of boot; plus
      - gain recognized by transferor;
      - if more than one kind of stock
        
        basis allocated in propertion to FMV of each class
    - basis of boot received
      - FMV
  - Corp’s Basis
    - if the transferor recognizes gain b/c of the receipt of boot, the corps basis in the prop received is the transferor’s basis plus any gain recognized.
- Holding Period
  - tacked
- Boot
  - boot
    - property other than stock
    - transferor’s realized gain is recognized to the extent of the FMV of boot received
    - gain triggered by receipt of boot results in increase to the SH basis in the stock received and the C’s basis in the transferred prop.
      - Eg, SH transfer FMV 50 & basis 10; for 40 shares and $10.
        
        Gain is 40 but only $10 (the boot) realized
      - Eg, SH transfer FMV 50 & basis 10; for 5 shares and 45.
        
        Recognized gain is limited to 40, even though boot was 45
    - multiple properties transferred and boot received
      - boot allocated among transferred assets in proportion to their relative FMV
        
        eg, SH transfer 30 basis 5 & 20 basis 5; for 40 stock and 10 boot
        
        boot split 6 | 4
- Assumption of Liabilities
  - transferor relieved of liability reduces basis of stock received by amnt of relief
    - eg, SH transfers basis 20, FMV 60, debt (10), in exchange for 50 stock
      - SH basis in stock is 10
  - Liabilities in Excess of Basis
    - sum of liabilities received by C exceed aggregate adjusted basis of props transferred by SH
      - excess is treated as gain from sale or exchange of prop
        
        eg, SH transfer basis 30, FMV 100, debt (55); for stock 45
        
        SH must recognize 25 gain
        
        prevents negative basis
Nonliquidating Distributions
- Analysis
  - the amnt of distribution;
  - how much of that is a dividend;
  - the tax treatment of these amnts; and
  - whether the dividend is qualified and thus entitled to long cap gains
- Amount of Distinction
  - cash received by SH + FMV of any other prop; minus
  - liabilies assumed by SH
- Amount of Dividend
  - Dividend to the extent it is made out of EP for the tax year of distribution; or
  - if current EP are insufficient, out of EP accuumlated yb the corp
- Tax Treatment of Distributions
  - Dividend – included in GI
  - Non-dividend b/c exceeds EP
    - tax-free return of capital and reduced SH basis in stock;
    - in excess of basis is treated as gain from sale
      - capital gain – 15%
  - eg, C has 5 EP. Distributes 12 to SH who has basis in stock of 6
    - 5 dividend, basis 0, gain 1
- Property Distributions
  - Appreciated Property
    - Corp recognizes gain on nonliquidatind distributions of appreciated property in an amount equal to the difference between the FMV of the proeprty and its adjusted basis.
      - Eg, C distributes 10basis & 30FMV
        
        C recognizes 20gain. Increase EP 20
      - if property is subject to a liability, FMV of distributed property is treated as not less than the amnt of liability
        
        paying gain up to the loan
  - Loss Property
    - C may not recognize loss on the distribution of property with an adjusted basis that exceeds FMV.
      - Eg, C 30basis 10fmv to SH.
        
        No loss. C should have sold the property for a loss
Stock Redemption and Partial Liquidations
- overview
  - repurchase of stock.
  - Dividend or sale?
    - Lower equity interest – sale
  - Taxed as dividends under 301 unless qualifies as an exchange under one of four tests in 302b.
    - Reduction in interest; and
    - contraction of biz activities
  - Corp recognizes gain but not loss
  - Exchange used to be preferred because taxed lower than dividend
- Constructive Owndership of Stock (Family Attribution)
  - individual is treates as owning stock owned by:
    - spouse
    - children
    - grandchildren
    - *NO bro/sis
    - *only attributed once
  - From Corporations
    - stock owned by C is owned proportionately by a SH who owns actually or contructively 50% or more in the value of C’s stock
  - To Corporations
    - All stock owned by SH who actually and constructiviely owns 60% or more of C stock is attributed to the corp
      - eg, SH owns 60% of C. SH owns 100 shares of Y.
        
        C owns 100 shares of Y
- Redemption Treated as Exchange
  - Substantially Disproportionate Redemptions
    - requirements
      - Immediately after redemption, SH must own less than 50% of total combined voting power of all classes of stock entitled to vote.;
      - % of voting stock owned by SH must be reduced by 20%;
      - % of common stock (voting or non-voting) owned by SH must be reduced by 20%;
      - attribution rules apply
    - eg, SH owns 60 of 100. Redeems 25. Owns 35 of 75. less than 50% and reduction is less than 80% of SH prior ownership
    - series of redemptions:
      - smtz taken together as one transaction usually finding that there was substantially disproportionate redemption
  - Complete Termination of SH interest
    - Treated as exchange
    - Waiver of Family Attribution
      - complete termination of SH actual interest is treated as exchange even if SH constructively owns stock under 318.
      - requirements
        
        all interest terminated;
        
        10y look forward rule;
        
        SH not acquire stock for 10y (unless bequest)
        
        procedural req – notice to IRS
        
        10y look back rule;
        
        not acquired redeemed stock within 10y of distribution from a person whose stock is attributable under 318; or
        
        attributee received stock from SH;
        
        unless not motivated by tax avoidance
        
        innocent transfers ok
      - waiver of attribution by entities
        
        p192
    - Redemption is not essentially equivalent to a dividend
      - safe-harbor
      - meaningful reduction of SH proportiante interest;
      - facts and circumstances
    - Partial Liquidations
      - Only applies to noncorporate SH
      - partial liquidation
        
        not essentially equivalent to a dividend;
        
        corporate contraction
        
        involuntary events;
        
        change in nature of biz;
        
        reserve for expansion
        
        distribution is pursuant to a plan;
        
        distribution occurs w/i the tax year in which the plan is adopted or the succeeding tax year
      - termination of business safe harbot
        
        termination of biz and engaged in another biz
        
        qualified biz
        
        5y before distribution and not acquired w/i that time
        
        distribution of assets
        
        not a subsidiary
        
        pro rata redemptions
        
        pro rata to SH
        
        no surrender of stock required
- Tax Consequences of Redemptions
  - To SH
    - Redemption treated as Exchange
      - treated as sold to outsider
      - gain or loss
        
        no loss if SH owns (directly or indirectly) more than 50% of the corp stock
      - basis allocation? P 198
    - Redemption treated as 301 distribution
      - dividend to the extent of EP and the balance is a reduction of basis or cap gain.
      - If treated as a dividend basis of redeemed stock is added to basis of any remaining shares held by SH or 318 related
        
        eg, SH owns 100sh with basis50. C distributes 80 in redemption of 40. Distribution was a dividend.
        
        Basis of redemed shares (20) is added to basis of shares retained by SH
    - basis of distributed property
      - if treated as 301 distribution and SH receives property
        
        basis in prop is FMV of prop
  - To Corp
    - Recognition of gain or Loss
      - corp recognizes gain on distribution of appreciated property in redemption;
      - but not loss on prop that has declined in value – 311a,b
- Redemptions through Use of Related Corps
  - Overview
    - 304 prevenst SH from selling stock of one corp to another related corp in order to withdraw earnings while treating the transaction as a sale rather than a dividend.
    - 304 tests for dividend equivalency by applying 302 to determine
      - eg, SH owns all the stock in X & Y (each with lots EP – dividend). SH sells all or part of X to Y.
        
        SH has not reduced ownership in the stock while getting good cap gains rates from the exchange
        
        treated as constructive redemption and tested for equivalency under 302
    - gives another source of EP to reduce the cap gains on the transaction
  - Control
    - 50% of total combined voting power of all classses of stock or at least 50% of total value of all classes of stock.
    - 318 attribution rules apply; except
      - stock may be attributed between a corp and a 5% or more SH (instead of 50%)
  - How to Analyze
    - Does 304 apply
      - sale either a bro-sis or parent-sub;
    - if 304 applies, constructive redemption qualify for exchange treatement under 302b by comparing the SH actual and constructive ownership in the issuing corp’s stock before and after the transaction.
    - If constructive redemption is treated as a 301 distribution, determine the amnt and source of any dividend by looking to the EP of acquiring corp and then to the EP of the issuing corp.
    - Determine the effect on basis and EP
  - Brother-Sis Acquisitions – 304a1
    - Constructive Redemption
      - If one or more persons in control of each of two corps and sell stock of one corp (issuing) to the other (acquiring) in return for property, the prop is treated for purposes of 302 and 303 as a distribution in redemption of the stock of the acquiring corp – 304a1.
    - Tax Consequences
      - constructive redemption is treated as a 301 distribution
        
        amnt and source of dividend is determined by EP of acquiring corp and then EP of issuing corp.
      - Controlling SH is treated as having transferred the stock of the issuing corp to the acquiring corp in exchang efor acquiring corp stock in a tax-free transaction to which 351 applies.
      - Acquiring corp is treated as if it had redeemed the stock it was treated as issuing in the hypo 351 exchange;
      - Acquiring corp takes transferred basis from the SH in the acquired stock
      - SH increase basis in acquiring corps tock by the basis of the issuing corps stock that the SH was treated as having transferred in the deemed 351 exchange
    - Exchange
      - If treated as an exchange
        
        SH recognizes gain or loss measured by the difference between the amnt realized and the adjusted basis in the transferred stock;
        
        SH basis in the stock of the acquiring corp remains unchanged,
        
        acquiring corp takes a 1012 cost basis in the issuing corps stock
    - Examples
      - A & B each own 100X & 100Y represents all available stock;
      - Xep70 Yep40
      - A sells 30Xbasis10 to Y for $100
      - because A is in control of both corps (50%) 304a1 applies
      - Treated as constructive redemption of Y stock
        
        tested for dividend equivalence
        
        before sale A owns 50% after sale owns 42.5%
        
        70 shares actually and 15 constructively (b/c ows 50% of Y)
        
        since % of ownership of X stock after sale is not less than 80%, redemption does not qualify as substantially disproportiante under 302b2
      - Since 302b1 does not apply, the entire 100 is a dividend
        
        (if 302b1 would have applied then would be treated as a sale. 90 cap gain & Y takes 100 cost basis in 30 shares of X stock)
        
        40 from Y’s EP; and
        
        60 from X’s EP
      - A is treated as having transferred 30 shares of X corp to Y corp in echange for stock of equivalent value in a tax-free 351 exchange
      - Y is treaetd as if it redeemed the Y corp shares that it issued in that hypothetical transaction.
      - Y corp takes a 10 transferred basis in the 30 shares
      - A adds 100 to the basis of his Y stock
      - other examples p207
  - Parent-Sub Acquisitions – 304a2
    - Overview
      - If a sub acquires stock of parent (issuing) from SH in return for property;
      - property treated as a distribution in redemption of the issuing corps stock – 304a2;
      - constructive redemption is tested for dividend equivalency by reference to the stock of the aprent
      - 50% control test – 304c
    - Tax Consequences
      - If treated as a 301 distribution
        
        dividend is determined by EP of acquiring corp and then EP of issuing corp
        
        basis is treated the same as bro-sis acquisitions
        
        sub takes cost basisi of the stock of par
      - If contructive redemption is treated as a sale or exchange
        
        SH recognizes gain or loss under normal tax principles;
        
        sub takes a cost basis in par stock
    - Examples Par-Sub
      - A owns 60 of 100 shares of X
      - X owns 80 of 100 shares of Y – controling Y
      - A sells 20Xbasis20 to Y for $80
      - Transaction is treated by 304a2 as a distribution in redemption of X
        
        before the sale A owns 60% of X
        
        after the sale
        
        A owns 40 shares actually and 6.4 constructively
        
        80% of the 20 shares of X owned by Y (16) attributed to X; and
        
        40% of those 16 shares (6.4) are reattributed to A.
        
        total 46.4%
        
        reduction of 60% to 46.4% qualfies as substantially disproportionate under 302b2.
        
        A thus recognizes 60 cap and Y takes 80 cost basis.
- 304 with 351
  - 351 does not apply to any property received in a 304 distribution
- 304 and partial liquidations
  - 304 also qualifies as a partial liquidation under 302b4.
    - Eg, contraction of biz
Stock Distributions – 306
- overview
  - corp distributes its own stock to its SH;
  - stock dividend is generally not taxable if it does not increase SH proportinate ownership interest in the Corp
  - if distribution increases the interest of some SH or some SH receive property while others increase their proportionate interests
    - usually taxable
- Nontaxable Stock Distributions
  - generally not taxable unless exception in 305b
  - allocation of basis
    - if new stock not taxable
      - SH basis in old stock is allocated between new and old in proportion to FMV of each at date of distribution
        
        eg, A owns 100 shares basis of 12k.
        
        2-for-1 split A receives 100 more
        
        basis is now 60 in new 60 in old
        
        eg, same but A has common stock worth 75k & gets 25 perferred shares with value of 25k
        
        12k basis allocated 75% to common and 25% to preferred
  - holding period
    - old tacked to new
  - consequences to Corp
    - recognize no gain or loss on nontax stock distributions
- Taxable Stock Distributions
  - election of stock or property
    - the availability to take prop or stock makes it taxable – 305b1
    - treated as 301 distribution
      - dividends to the extent of EP
  - disproportionate distributions
    - some SH receive prop while others get stock
      - those who get stock are taxed on the value of the increased interest.
- Not covering 225-236
Complete Liquidation
- overview
  - corp distributes all of its assets or the proceeds of their sale, subject to any liabilities to SH in exchange for all their stock. Corp then disolves
- Complete Liquidations under 331
  - consequences to the SH
    - Recognition of Gain or Loss
      - treated as full paymen tin exchange for SH stock
      - difference between amount realized and SH basis in stock is gain or loss.
        
        FMV – liabilities
      - different blocks of stock
        
        amount received is pro-rata to the value of the different blocks
        
        then gain is calculated separately for the blocks
    - basis of distributed property
      - FMV
  - consequences to the Corp
    - corp recognizes gain or loss as if it had sold the prop for FMV
      - if property is subject to a liability then FMV is treated as not less than that liability
      - gains and losses treated separately
    - when loss is not recognized
      - related person (owns directly or indirectly more than 50% in the value of the corps outstanding stock; or
      - distribution of loss property is not pro rata in propotion ot ostock ownership; or
      - disqualified properties
        
        acquired by liquidating corp in a 351 trnasaction or as contribution to cap during the 5 y period ending on date of distribution
- Liquidation of a Sub
  - overview
    - change in form
    - neither parent SH nor liquidating sub recognize gain or loss
  - consequences to the SH
    - parent corp does not recognize gain on receipt of distribution in complete liquidation of a sub if the following requriements are met 332b:
      - cancellation of stock pursuant to plan
        
        sub distributes prop to par in complete cancellation or redemption of its stock – liquidates
      - contol
        
        par owns 80%+ total voting power 80% of total value of all outstanding stock of the sub. Nonvoting stock ignored
      - distribution must occur w/i one tax year
  - basis and holding period
    - transferred basis and tacked holding period
  - treatment of minority SH
    - SH recognize gain or loss & take a fair market value basis in any distribute prop
  - Consequences to Liquidating Sub
    - distributions to Par
      - no gain or loss
    - distributions to Minority SH
      - recognize gain but not loss
Tax-Free Reorgs
- Overview
  - change in ownership structure
  - tax free to corp and SH
  - readjustment
  - deferred gain & loss
  - statutory and judicial requirements
- Types
  - Acquisitive
  - Noncquisitive, nondivisive
  - divisive
- Judicial Requirements
  - Continuity of SH proprietary interest
    - substantial part of the proprietary interest in T preserved through an equity interest in P
      - P must acquire T by using P stock as consideration
  - Continuity of Biz Enterprise
    - P must continue T’s biz or use T’s asets in biz.
  - Biz Purpose
    - motivated by biz purpose
Acquisitive Reorgs
- Type A (statutory merger or consolidation
  - Continuity of SH proprietary Interest Requirement
    - requires that at least 50% of the consideration paid by P must consist of P stock (common or preferred)
      - Some T shareholders can receive only prop or debt as long as group maintains continuity of interest.
    - Eg, T merger into P, T SH receive 50% cash & 50% prop – good
  - Postacquisition continuity
    - T SH who receive P in exchange for the A reorg
      - SH can later sell the P stock even if binding agreement
  - Preacquisition continuity by Historic T SH
    - probably not important
- Type B Reorgs (Stock for Stock)
  - overview
    - P acquires T stock soley in exchange for P voting stock (or P’s parent)
    - P must be in control of T immediately after
      - control is 80% or more of T voting power and 80% or more of the total shares of each class of T’s nonvoting stock 368c
    - T remains alive as a sub of P
    - eg, P transfers voting stock to Ts SH in exchange for 90% T stock – good
  - solely for voting stock
  - creeping acquisitions
    - P must be in control of 80%
      - smtz P already has some T stock that it bought for cash
        
        if that T stock is old and cold then counts toward the 80%
- Type C Reorg (stock for assets)
  - overview
    - P acquires substantially all of Ts assets solely in exchange for P voting stock (or Ps parents)
    - T does not disolve but later liquidates
    - T transfers everything from P to Ts SH
  - substantially all of the properties
    - 90% of net or 70% of gross
      - eg, T has 100 assets and 20 liabilites;
        
        70% of 100 or 90% of 80
  - boot relaxation
    - P must acquire at least 80% of the FMV of all Ts assets soley for voting stock
      - Ts liabilities are treated as cash consideration
      - eg, T has 100 assets
        
        P acquires Ts assets for 80 P stock and 20 Cash – good
  - Creeping Acquisitions
    - prior stock acquisition by P of T (even for cash) is not considered
      - then not applied to boot relaxation rule
        
        eg, already own 60% of T stock. Then P gets Ts assets using 80% stock – good
- Forward triangular Mergers
  - overview
    - P wants T assets
    - P forms new S, by transger P stock for S stock in an exchange under 351
    - T is merged into S
    - T SH receive P stock
    - Ts assets and liabilities are transferred to S
    - P still owns S (now all of Ts assets)
  - requirements
    - S must acquire substantially all of propeties of T
      - same reqirement as Type C
    - No stock of S may be used as consideration in the merger
    - Transaction must have qualified as a Type A reorg if T had merged directly into P.
      - judicial continuity of interest
        
        P must acquire T using at least 50% of P stock
    - eg, T merge with S. T SH receive 100P and $100 – good
- Reverse Triangular Mergers
  - overview
    - P forms S, by transferring P voting stock and other consideration for S stock in a tax free 351
    - S merges into T
    - T shareholder reveive P voting stock and other consideration
    - P exchange its S stock for T stock
    - S disappears
    - T is a wholly owned sub of P
    - simmilar to a Type B
  - qualification requirements
    - T must hold substantially all of its properties and properties of S (other than the stock of P distrributed in the transaction and any boot used by S to acquire shares of minoirty SH)
    - P must acquire 80% control of T in exchange for P voting stock. Remaining 20% can be by cash or boot. Old T stock owned by P cannot be used.
    - Eg, S has P voting stock and cash. Powns no T. S merges into T. T SH woning 90% of T stock receive P voting stock and the other 10% SH of T get cash. – good
- Consequence to T SH
  - recognition of gain or loss
    - no gain or loss in exchange of T stock for P stock
      - except to the extent of boot reveived.
  - Character of gain
    - dividend to SH ratable EP
      - determine if dividend under 302
      - 318 attribution applies
      - eg, page 311
- consequences to T
  - T does not recognize gain when it distributes P stock or debt obligations received by T in the reorg.
  - T recognizes gain on boot received and then transferred to T SH as if T had sold the property
- consequences to P
  - if P transfers boot property, it recognizes gain or loss under general tax principles
- Failed Reorgs
  - taxable acquisition of Ts assets or stock
  - T recognizes gain or loss on the transfer of its assets
  - T SH are treated as receiving a distribution in complete liquidation under 331
  - P obtains a cost basis in Ts asets
Corporate Divisions
- overview
  - Corp is divided into two or more separate corps that remain under the same ownership
  - distribution to SH stok of controlled sub
  - fi jud and stat req met, tax free
- Spin-Offs
  - Pro rata distribution of S stock by P to SH.
  - S may be preexisting sub or a corp formed immediately before
  - dimilar to dividend
- Split-Offs
  - non pro rata distribution of S stock by P to SH in exchange for all or part of their P stock
  - similar to redemption
- Split-Ups
  - P divides into S1 and S2;
  - distributes S1 and S2, either pro rata or non to SH
  - complete liquidation
- Summary of Requirements
  - P must control S immediately before distribution
    - 80% of S voting power & 80% of each class of outstanding nonvoting stock
  - P must distribute either all of the S sock held by P immediately before the distribution or distribute an amount of stock representing control of S
  - After P & S must be enganged in the active conduce of trade or business.
  - Each postdistribution trade or biz must have been actively conducted troughout the 5y period preceding the distribution, must not have been acquired during that period in a taxable transaction, and must not have been conducted by a corp the control of which was acquired by P or any corporate distributee SH of P, in a taxable transaction during 5y pre-distribution period
  - Ps distribution of S stock must not have been used principally as a dividce for the distribution of EP of P or S or both
  - Bona fide corporate biz purpose
  - SH of P prior to distribution must maintian sufficent continuity of proprietary int in both P and S followin distribution
- Quit

Formation of a Corporation – 351
- transfer to new or 80% control
- Requirements
  - Property
  - Transfer
  - Solely in Exchange for Stock
  - Control
    - 80% voting & 80% non-voting
  - Immediately after
    - no binding agreement transfers
- Stock for services
  - OI
  - Stock & services
    - all count to control
- Basis
  - exchanged
    - if more than one stock, allocated in propo FMV of stock classes
  - If trans prop with loss
    - limit to FMV
    - corp may elect to reduce SH basis
- Boot
  - gain on FMV
  - allocated among tranferred assets to determine gain
    - ie, one cap & one OI
  - basis in boot FMV
  - tacked holding period
- Liabilities
  - if liabilities assumed > aggregate adjusted basis of all prop transferred
    - excess is gain from sale
Non-Liquidating Distributions – 301
- amnt of distribution
  - cash or prop minus debt
- dividend to extent made out of EP – GI
  - rest is return of basis then gain from sale
- corp recognize gain on prop distributed
- SH basis
  - FMV
Stock Redemptions & Partial Liquidations – 302
- Constructive ownership – 318
- Treated as 301 distribution unless:
  - SH (att) now owns less 50%;
  - reduced 20%
Complete Termination of SH interest
- exchange
- waiver of 318 attribution
- must meet:
  - no interest
  - no interest w/i 10y from dist
  - no portion acquired from 318 person before distribution
- redemptions Not Essentially Equivalent to Dividend
- Partial Liquidations
- If redemption qualify for exchange
  - treated as sold to outsider
- if not qualify for exchange
  - 301 distributions
- Corp recognizes gain on distribution
Redemptions Through Related Corps – 304
- Brother-Sis
  - Person(s) in control of two corps sell stock of one corp to the other.
  - Property treated as distribution in redemtption of the acquiring corps stock and is tested for dividend equivalence under 302
    - reference to the stock of the issuing corp
  - If constructive redemption is not treated as exchange
    - dividend to the extent of EP of both Corps
- Parent-sub
  - Sub acquires stock of its parent from SH
  - treated as distributed in redemption of parent’s stock
  - tested for dividend equivalency by reference to that stock
  - If redemption is not treated as exchange,
    - dividend to the extent of EP of issuing and acquiring
Complete Liquidations and Taxable Corp Acquisitions
- treated as sale of stock
- basis in prop acquired is FMV
Liquidation of a Subsidiary
- 80% owned by Parent
- No gain if
  - S distributes assets to P and liquidates completely
  - Time limits
- can redeme to get to 80% and then liquidate
- Transferred basis
- Minority SH recognize gain/loss
Tax-Free Reorganization = 368
- tax treatment
  - T’s SH
    - no gain or loss on exchange of T stock for P stock (or securities for securities)
    - boot must be recognized
      - tested under 302 to determine if boot is an exchange
        
        if not, dividend to EP and reduce basis and gain
  - T
    - No gain on transfer of asets to P pursuant to a reorg plan
    - No gain when distributes P stock to T SH;
    - maybe gain on distribution of appreciated T assets not acquired in reorg or appreciated boot
- TYPE A (Statutory)
  - 50% of consideration paid by P to acquire T must consist of P stock
- TYPE B (stock-for-stock)
  - T stock solely in exchang efor P voting stock
  - P has control 80% after
  - No boot for the 80%
  - old & cold stock ok for cash to 80%
- TYPE C
  - P acquires substantially all Ts assets solely in exchange for P voting stock followed by liquidation of T
    - P’s assumption of liabilities not considered
  - Must acquire at least 80% of assets with voting stock
    - here liabilities assumed by P are treated as cash consideration
  - Old and cold count toward 80% and do not count as “cash consideration” for boot relaxation
- Forward triangular Merger
  - T into a S of P
    - reqs
      - S acquires substantially all of properties of T;
      - No stock of S is used as consideration;
      - transaction qould have qualified as a Type A reorg if T had merged into P
        
        ie, T SH collectively must receive at least 50% of P stock in the merger
- Reverse Triangular Merger
  - Merger of S into T
    - reqs
      - After the merger T holds substantially all of its properties and the properties of S (other than P stock and boot distributed to T SH);
      - In the merger P acquires control (80%) of T in exchange for P voting stock.
Corporate Divisions
- Types’
  - Spin-Off
    - similar to dividend
    - pro rata distribution of S stock by P to its SH
  - Split-OFF
    - similar to a redemption
    - distribution of S stock by P to some of its SH in exchange for all or part of their P stock
  - Split-Up
    - similar to complete liquidation
    - liquidating distribution by P of stock in to or more subsidiaries
  - Type D
- requirements
  - P controls S immediately before ddistribution – 80%;
  - P either distributes all of Ss stock or distributes control and establishes that the retention of stock or securities is not motivated by tax avoidance;
  - After P & S must be enganged in the active conduce of trade or business.
  - Each postdistribution trade or biz must have been actively conducted troughout the 5y period preceding the distribution, must not have been acquired during that period in a taxable transaction, and must not have been conducted by a corp the control of which was acquired by P or any corporate distributee SH of P, in a taxable transaction during 5y pre-distribution period
  - Ps distribution of S stock must not have been used principally as a dividce for the distribution of EP of P or S or both
  - Bona fide corporate biz purpose
  - SH of P prior to distribution must maintian sufficent continuity of proprietary int in both P and S followin distribution
- Active Trade or Biz
  - trade or biz is a specific group of activities carried on with a profit motive
- Active Conduct
  - requires performance of acttive and substantial management and operational functions – not passive
- Divisions of a single Integrated biz
- 5y Biz History
  - the active post-distribution trade or biz must have been actively conducted throughout the 5-year period preceding the distibution and may not have been acquired by P or a distributee corp in a taxable transaction during that period. If P expands a preexisting trade or biz during the 5y period, the new branches or locations are considered part of that older biz
- Disposition of Recently acquired Biz
  - Ps distribution of S stock will fail the active biz test if a controlling interest in P was acquired by a corporate SH within the 5y preceding the distribution
- Device limitation
- p 43

Taxation of Property Transactions

Taxation of Property Transactions 2010
Gifts
- Exclusion
- transferred basis
Discharge of Indebtedness
- Concellation of indebtedness income
  - treated as receiving cash equal to the debt
- Nonrecourse v Recourse
- Insolvency Exception
  - 108
    - cancelation of debt is excluded if discharge occurs in bankruptcy or T is insolvent
      - total liabilities – total assets
    - exceptions to exclusion
      - original seller reduces debt on property
    - Qualified Real Property Biz Indebtedness
      - Must be used in ToB
      - exclusion available only when loan > FMV
Transfers During Marriage of Pursuant to Divorce
- 1041a
  - no gain or loss b/t spouses or former spouses incident to divorce
    - incident to divorce
      - transfer w/i 1y or related to divorce
Exclusion from Gain from Sale of Principal Residence
- Exclusion of 500k (250k if not joint) of gain
- Ownership
  - applies if owned by trust
  - 2 of 5 years
  - if spouse died apply dead spouse time
- Use
  - used as principal resident 2 of 5 y
    - separate from ownership
  - gain on deprecation from biz use not applied
- Once per 2 year limitation
  - T cannot use more than once every 2 y; unless
    - sale for employment, health, etc
      - exclusion is only allowed to the lesser of the following:
        
        time since prior sale/2y; or
        
        time of own & use for 2^nd home/2
Ordinary and Necessary Biz Deductions
- defn of Ordinary & Nec
  - customary in biz
  - related to income production
- difference between deductions and capital biz subject to depreciation
  - O&N – used to repair to keep in working condition
  - Cap – Prop used to create other property
Capital Expenditures
- 263
  - new buildings and perm improvements made to increase the value
Home Office
- deductions – 280A
  - part used “exclusively and on a regular basis as one of the following
    - T’s principlal place of biz;
    - Meet or deal with customers in normal course of biz;
    - if a separate structure not attached to residence;
      - in connection with T’s biz
    - If ee – for conviencence of er
Deductions
- Type of property
  - used in trade or biz; or
  - held for the production of income; and
  - subject to wear and tear
- Lease-backs
  - As long as the lessor retains significant and genuine attributes of the traditional lessor status, the form of th etransaction adopted by the aprites governs.
- Intangibles
  - allowed deduction
    - types
      - goodwill, information based assets, licenses, trademarks, etc
    - straight line
    - 15y
- tangible Property
  - ACRS
  - half-year
  - residential rental & nonresidential real
    - mid-month
  - mid-quarter if 40% placed in servie during last 3m
  - straight-line
  - bonus depreciation?
Installment Sales
- Exception to gain recognition
  - 453
    - recognized on proportionate basis as payments are received unless T ellects out
    - loss reported in full in year of dispossession
    - gross profit ratio
      - (Amount realized – basis)/(selling price – mortgage)
      - report GPR * payment received that year as income
NonRecognition Transactions
- Overview
  - Purpose
    - defer gain
  - Attributes
    - basis, holding period, depreciation and recapture that attached to proeprty sold or exchanged will attach themsleves to the asset received
- 1031 Like Kind Exchanges
  - Exchangable Property
    - Held for Productive Use in Trade or Biz or Investment
      - exempt – stocks, securities, partnership ints, beneficial ints, choses in action.
      - Allowed – leases & patents & copyrights
  - Use of Intermediary
    - T & S will transfer prop to E. E will sell T’s prop and give cash to S and then give S’s prop to T
      - T cannot have constructive receipt of cash other than like-property
        
        right to receive, pledge, borrow or obtain benefits
        
        results in tax
    - T must ID like property 45 days after transfer; and
    - Exchange must be completed w/i 180 days of transfer of T’s prop to 3^rd party
  - Holding Period
    - tacked
  - Depreciation
    - amnt is transferred
    - method of new prop controls
  - Boot
    - recognition of Gain (not Loss)
      - recognize boot to the extent of gain
        
        if boot > gain,
        
        pay up to the gain amnt
    - increased basis
      - increase basis by the amount of gain “recognized” – payed tax on
    - Boot in transfers with a built in loss
      - basis in prop is reduced by the boot received
    - Debts on property
      - netted against each other
      - if T gives away more debt
        
        excess debt is boot
    - If T is paying the boot
      - basis is increased by amnt of boot paid
      - if paying boot prop – taxed on gain of appreciated boot property and
      - then FMV of boot property is added to the exchanged prop
- 1033 Involuntary Conversions
  - overview
    - T lose property, gets ins money and buys similar prop
      - not taxed
  - reqirements
    - property be compulsorily or involuntarily converted “as a result of its destruction in whole ore in part, theft, seizure, or requisiition or condemnation or threat or imminence thereof;
      - not voluntary
    - repacement occurs w.i 2 y of the close of the taax year of the conversion; and
      - purchased 80% stock of corp allowed
    - the repacement consist of property that is “similar or related in service or use.”
      - used for the same purpose
  - Gain Recognition & Basis
    - Any proceeds not reinvested in qualifying property is treated as boot
      - basis of converted prop
        
        decreased by money received and not expended for new property; and
        
        increased by the amnt of gain recognized
    - basis of acquired property is same
- Application of 1033 with 121
  - T does not want to use 500k primary residence exclusion on the destroyed property ]
    - perhaps using it on a property destroyed with more built in gain
Capital gains
- Individual limitation on cap losses
  - cap losses for individuals limited to cap gains plus 3k each year against OI
  - Cap Asset Requirements
    - held more than 1y
    - Not the following:
      - Inventory or prop held primarily for sale to cust
      - Depreciable property (including real estaet) used in a ToB
      - Copyrights;
      - Accounts receiable;
      - *important to determine if cap asset in business because want to net losses against cap or OI
  - Carry Back and Forward
    - Nex cap losses may carry back 3 years;
    - net capital losses of corps may be carried forward for 5 y
    - individuals may carry forward net cap losses w/o limitation
- Recapture
  - Recapture of depreciation on sale is OI
  - 1031 – first depreciation, then cap
  - installment sales
    - gain recaptured in year of sale
Passive Activity Loss
- overview
  - losses from tax shelters can only be deducted against income from other tx shelters. But tax shelter losses (in the aggregate) cannot be deducted against any oother kind of income.
    - Losses are carried forward to other passive activity losses

ERISA

ERISA
Stat Structure
- title 1, 4 titles
  - Part 1 – stat report and discl req for all ee bene plans
  - Part 2 & 3 – min partic, vest, bene accrual and funding rules for pension plans
  - Part 4 – fid rules
  - Part 5 – enforce through civil lit & preemption
  - 6&7 – health care plan rules
- title III
  - DOL & DOT author to enforce I & II
    - DOL – jur over reporting & discl, fid (transact), and Title I
      - performed by the Ee Bene Security Adm (EBSA) – part of DOL
    - DOT – pension plans & independent Code
Welfare Plans
- Provide bene to ee: health, accident, disable, death, unee,
  - sometimes severance: welfare if not contingent on ee’s retirement, payments not exceed 2x annual salary of ee, and pyemnts less than 2y after retire
    - otherwise pension
Non-ERISA
- Gov
- church
- plans solely comply with work comp, unee, or disab laws
- maintained outside US primarily for bene of nonres aliens
- unfunded excess bene plans
- participants only the part of a partnership
- solos (W)
Payroll Practices
- excluded from ERISA
- paying out of er’s general assets for ee who are sick from work, vacation, jury, mil, ed sabbatical
- recreational, dining, first-aid, gifts, discounts, ed,
  - from general assets
Multiemployer plans
- plans for union members under Taft-Hartley.
- Board of trustees comprised of equal numb of reps from management and labor
Multiple ER plans
- mult Ers MEWA
What is a Plan?
- Dillingham
  - Issue: Whether a plan exists
  - Held: Yes
  - 1. plan, fund, or program
    - intended bene, beneficiaries, source of financing, and procedure to apply and collect
  - 2, established or maintained
    - writing (not req for existence but required by fid)
    - other factors considered
      - financing
      - procedure for disbursment,
      - assurances to ees that plan exists
  - 3. by er or ee org or both
  - 4. for the purpose of providing
    - medical, surgical, hospital, sickness, accident, disab, death, unee, vacation, ed, day care, choloarship, legal serv, severance
  - 5. to participants or their benes
  - (6) in addition to 5 factors, must be more than one time (severance)
  - Reasonable per can ascertain the intended bene, a class of beneficiaries, the source of financing, and proceddures for receiving benes.
    - Eg, probationary period – no reas expectation
  - Covered:
    - union members, ee org, ees, former ees, their benes
      - NOT individual ees or entrepreneurial biz
- Musmeci v Schwegmann Super Markets
  - Issue: whether a voucher program to provide groceries to retierees is a “pension” plan
  - Held: Pension plan. Purpose to provide income at retirement. Not an exempt ee discount program.
Who is an Employee
- Nat Mut Ins v. Darden
  - Whether an insurance agent was an EE or an ind contractor?
  - Test for EE
    - Hiring party’s right to control the manner and means by which the product is accomplished.
    - Skill required
    - source of instrumentalities and tools
    - location of work
    - method of payment
    - hired party’s role in hiring and paying assistants
    - whither the work is part of the regular biz of the hiring party
    - whehter the hiring party is in biz
    - provision of ee bene
    - tax treatment of hired party
Participant
- ee in, or reas expected to be in, currently covered employment
- former ee w/ reas expectation of returning to covered ee or who have a colorable claim to vested bene.
  - Colorable claim – will prevail in a suit for bene or eligibility req will be fulfilled in future
Working owner
- non-ee if solo or with W.
- ee if plan covers one other ee
Waiver to particpate in plan
- knowing and vol
Writing of Plan
- requirements of the writing
  - written instrument that provides for one or more named fids
    - can name a committee, other
  - provide procedure for establishing and carrying out funding policy
  - describe the procedure for allocating and delegating fid responsibilities for the management and admin of the plan
  - describe the procedure for amending the plan, including the ID of the person(s) who have autho to amend plan
    - Curtiss-Wright v. Schoonejongen
      - “co reserves right at any time to mod or amend any or all provisions of Plan”
        
        valid description of procedure
  - specify the basis on which payments are mand to and from the plan
- optional inclusions in writing (not required)
  - allows person(s) to serve in more than one fid capacity
  - fid may employ advisors to assist the fid
  - authorized appointment by fid of investment manager
- may include more than one doc
Reporting Requirements
- fid requirement
  - if SPD or SMM inaccurate, incomplete or misleading, a plan participant may allege that the plan and its admin are estopped from denying a claim bene, or that the plan admin has breached the fid duty to inform plan participants concerning their plan bene
- Part 1, Title 1
  - sum plan discrip
    - may need to be in Spanish
    - eligibility req
    - descr of bene
    - circs that may dq
    - collective brgaining provisions
    - procedures for filing a claim for bene & appeals
    - names & addresses of fids & service of process
    - DOL office address
    - every 5^th year
    - w/i 120 days after effective or 90 of someone new coming in
  - sum of mat mods made to plan
  - annual report
    - exemption:
      - one-participant retirement plans having less than 250k in assets; or
      - fewer than 25 participants – simplified annual report
      - if more than 100 ee, must be audited
    - penalty exemption if not receive notice of deliquency for failure to file
  - sum annual report
  - periodic benefit statement
  - advanced notice of a blackout period
  - other specific info, if reqested by a plan participant or Sec of Lab
    - plan admin to furnish to any participant of Sec of Lab who makes a written reqest the latest updated SPD, an report, any perminal report, bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.
      - 30 days to furnish
      - 100$/day per participant who requested.
        
        Claim for civil penalties (Glocker)
        
        prejudice is only a factor for imposing
        
        bad faith not required but considered
      - 1k to the DOL if no response w/i 30 days
- Table on p63
- Criminal sanctions
  - willful violation of reporting and disc req is subject to potential sanctions for an individual up to 100k and 10y jail
Estopple Claims
- creates an enforcement obligation in the plan
- reqs
  - Misrep of mat fact;
  - Reas reliance on misrep; and
  - Detriment to the individual from reliance
Medicare
- 65+ or disable
- second payer if covered under other ins
Insured & Self-Insured
- Self-Insured (funded)
  - provide health bene to plan participants from a fund comprised of ee or er contributions or both or out of the general assets of the er.
- ERISA preemption: supersed any and all State laws that relate to any ee bene plans 514a
  - exception
    - Insurance Saving Clause: nothing shall be construed to exempt or relieve any person from any law of any state which regulates ins, banking, or securities.
      - Exception to ISC
        
        deemer clause: no ee bene plan (exceptions) shall be deemed to be an ins co or other insurer, bank, trust co, invst co or be engaged in biz of ins or banking for the purposes of any regulating state law.
        
        Eg, ee is not an ins co.
        
        basically, state cannot regulate self-funded plans
  - Met Life v Mass
    - Issue: Is state law mandating mental health bene preempted by ERISA’
    - Held: Law regulates ins, falls w/i ERISA preemption. ER purchased ins, the ins co must follow the state law regulating it. Deemer clause does not apply b/c ER purchased ins and was not self- ins
  - FMC v. Holliday
    - Whether a self-funded ee bene plan must follow state ins law
    - Held: Self-funded ERISA plans are exempt from state regs insofar as that reg “relates to” the plan
      - basically, ee plans are not insurance, thus not saved by the savings clause that allows states to continue regulating ins.
        
        If a plan is insured, State may regulate it indirectly through reg of its ins and ins’s insurance contracts
        
        If the plan is unins, State may not regulate it;
        
        unless MEWA & uninsured
  - Am Med Security v. Bartlett
    - Self-funded ee bene plan purchased stop-loss coverage from ins co
      - stop-loss: protects the plan for claims that exceed an “attachment point”
        
        lowers risk of the self-funded plan
    - Issue: whether state law can regulate self-funded plans with stop-loss ins?
    - Held: Stop-loss cannot be regulated by the state. State law relates to (connection with) ee plan, law falls under “savings” clause but violates “deemer”
- MEWA (Multiple ER Plans)
  - if MEWA benes are fully ins, the MEWA is subject only to state ins laws that govern financial standards, such as the maintenance of financial reserves etc. If MEWA is not fully insured, then MEWA is subject to both the provisions of Title I of ERISA and any applicable state ins laws to the extent such ins laws are not inconsistent with Title I of ERISA.
Cobra
- Overview: requires that a sponsor of group health plan must provide each qualified beneficiary, who otherwis would lose coverage under the plan due to the occurrence of a qualifying event, the opportunity to continue coverage under the plan.
  - Applies to ins & self-funded
- exempt ER plan from COBRA
  - if er maintaining the plan normally employed fewer than 20 ees on a typical biz day during the prior calendar year
    - self-ee & indi contractors not counted as ees
    - part-time ee is counted as a fraction of ee (time the ee works/time required by er to be considered full-time)
- Qualified Beneficiary protected by COBRA
  - ee or er or ee’s spouse or dependant
    - child born/adopt during continuation coverage
- Qualifying Event
  - COBRA continues coverage after the beneficiary would have been denied by the plan
  - table on 325
  - Termination
    - exception
      - ee fired for gross misconduct
        
        criminal act or intentional totious misconduct
    - Includes both getting fired and quitting or other reduction
      - if leave permitted under Fam and Med Leave Act, qualifying event does not occur
  - SS extension
    - if at any time during a period of 18m of CORBRA continuation coverag due to the covered ee’s temination of ee or reduction in hours, a qualified beneficiary becomes eligible to receive disability bene under SS.
      - Max period extended to 29 m for disabled bene
  - divorce
    - can’t get er to take spouse off and then get divorced.
  - Qualifying event occurs when ee informs er
  - multiple qualifying events
    - max of 26m
- Cost of Continuation Coverage
  - max 100% cost of coverage + 2% admin fee
    - ee probably paid a discount rate before
- Penalties of ER non-complyance
  - tax penalty of 110/d per qualified beneficiary for noncompliance period
    - paid to IRS
  - Civil enforcement
    - 502a1a & 502c, fed ct may order admin to pay civil penalty to the Ps of 110/d per qualified bene, for failure to provide notice of COBRA rights.
    - Ps may also ask to award “such other relief as it deems proper” 502c1
- Notification Requirement
  - When covered EE termination, ER must notify the admin of the plan within 30d.
  - Admin then has 14d to notify the qualified beneficiary of her rights to continue coverage, and this period may be longer if the plan is a multiemployer group health plan and it so provides.
  - Notice sent to EE’s last known address
- Election
  - qualified bene may elect continuation w/i 60d of qualifying event or notice of the qualifying event, whichever is later.
OBRA
- Qualified Med Child Support Order
  - requires parent to enroll a dependent child in plan and pay premiums
  - required to accept continuation coverage
- Coverage for adopted children
- Mins for Pediatric vaccines
HIPPA
- Restrictions on Preexisting Condition Coverage Exclusions
  - Group health plan (and insurer) may impose coverage exclusion for preex health only if all 3 criteria satisfied
    - advice, diagnosis, care, or treatment was recommeded or received within 6m endin on participant’s enrollment in plan
    - exclusion does not exceed 12m. 18M if participant fails to enroll in plan when first eligible
    - preexisting condition coverage reduced by aggregate period of the individuals prior creditable coverage.
  - Summary
    - if sought care w/i 6m & enroll w/i 30 days on last job, covered for 7m and then change jobs w/o significant break in coverage, then preexisting coverage exclusion on the ee for 5m.
- Non-discrimination
  - prohibits eligibility to enroll in plan
    - health status
    - med condition (including mental)
    - claims experience
    - receipt of helath care
    - med history
    - genetic information
    - evidence of insurability
    - disability
  - may discr against
    - part-time v full time
    - geographic local
    - different bene schedules for diff collective bargaining
Amending or Teminating plans
- settlor function doctrine
  - ers or other plan soponsors may adopt, mod, or term welfare plans
- McGann v. H&H Music
  - er cuts AIDS benes
  - May discrim in creation, alteration or termination of ee bene plans. But cannot discriminate against the participants themselves
- ADA
  - prohibits discrim against individual with disability in regard to compensation and other tems and conditions of employment, which include ee benefit plans sponsered by er.
  - 15+ ees
  - ers generally can avoid violation if they show proper cost saving analysis reasons for not covering an illness
- Title 7
  - 15+
  - race & sex discrim
    - includes preggo
- Medicare
  - ee plan must be first $ out
    - unless retiree then med is first money out
- Uniformed Services Ee & Reee Rights Act
  - COBRA qualifying event occurs after 31d deployment
  - extends coverage to 24m (or return) after qualifying event
- ADA
  - 20+
Vesting
- Welfare bene vest only if the plan contract provides so
  - must state unequivocally that the er is creating rights that will not expire
  - when silence as to vesting, presumed non-vesting (bubble bursting)
    - Bland v. Fiatallis
      - “lifetime” benes was enough to bust the bubble to create a triable issue wheahter the plan vested
Who is a Fiduciary
- Every plan doc must id at least one named plan fiduciary – 402a
- if plan held in trust, must id at least one trustee 403a
- Functional test
  - does not require kn or intent to become a fid
- 3 main categories of fid functions
  - persons who have discretionary authority over admin and management of the plan
  - persons who have any authority (whether discretionary or not) over the assets of the plan; or
  - persons who render investment advice concerning assets held by the plan for compensation, regardless of whether the compensation is paid out of plan assets and whether the compensation is direct or indirect
- Exceptions to Fiduciary Statuts
  - persons who assist in plan admin or management, but who perform only ministerial functions
  - professionals such as attys, accountants, actuaries, and other consultants who assist in the admin & management of the plan by rendering professional services ordinarily are not considered
  - persons who provide investment ed (as opposed to investment advice for compensation) are not fiduciaries.
  - ER does not act as a plan fiduciary when it performs certan actions known as settlor functions
    - settlor functions: include establishing, designing, terminating, or amending an ee bene plan.
      - Varity v. Howe
        
        CO made misrepresentations to ee and convinced them to leave the plan
        
        CO both ER and plan admin
        
        Issue: was CO acting as fiduciary at the time?
        
        Conveying info about the plan is a fiduciary act
        
        Fid must discharg duties with respect to the plan soley in the int of the participants and beneficiaries.
        
        Decieving to save money is not soley in int of ee
  - HMO acting thru Physician EE making treatment decisions are not fiduciaries
    - Pegram v. Herdrich
      - incentives for Mds to ration care held ok
      - Altho HMO is not fid merely b/c it administers or exercieses discretionary authority over its own biz, it may still be a fid if it admins the plan.
        
        Mixed eligibility decisions are not fiduciary dicisions
Fiduciary Duties
- overview of 404a1a – fid duty
  - duty of loyalty to plan participants (exclusive benefit)
  - duty of prudence
  - duty of diversification of plan assets
  - duty to follow plan terms (to the extent that they’re consitent with ERISA
- Co-fid duties 405
  - liability imposed on one fid (the co-fid) for a breach of fid responsibility by another plan fid if the co-fid:
    - knowingly participates in, or undertakes to conceal, the fiduciary’s breach
    - enables the fiduciary to commit the breach through the co-fid’s own breach of the duty of prudence; or
    - kas kn of the fid’s breach and fails to make reasonable efforts to remedy the fid’s breach
  - Procedure to voluntarily correct
  - Not liable for a breach of fid duty if breach was committed before the person became a fid or after the person ceased to be a fid.
    - (probably the co-fid would have his own breach tho?)
  - Exculpatory clauses relieving fids are void
- Delegation of fid duty
  - plan may direct fid to ID someone for investment, etc
    - the fid reponsibility is then limited to determining whether the direction is proper and not contrary to the terms of the plan. 403A1
- Bonding requirement & Fiduciary Ins
  - generally require that plan fids and other persons who handle plan funds or prop be bonded 412a
    - exempt: Corp, trust co, ins, bank
    - 10% of assets
      - amount of bond: min 10k, max 500k
  - if plan purchases insurance for fid
    - must allow recourse against the fid himself
  - if fid or er purchase ins for fiduciaries
    - no recourse req
- Joint & Several liability
  - breaching co-fids are subject to joint and several liability
Fid Duty of Loyalty (exclusive Benefit rule)
- 404a1a
- fid must act solely in the int of plan part and bene and must for the exclusive purposes of providing benefits to participants and their beneficiaries
- must defray reasonable expenses of admin the plan
- Plan assets shall be held for the exclusive purpose of providing benefits to participants in the plan and their bene – 403c1
- objective
  - good faith not defense
- dual role fids
  - may act as er and fid
    - fid actions must comply but incidental benefit to employer is ok
- Improper use of plan assets
  - promote a point of view
  - cannot detrement the plan to sacrifice unrelated objectives
Fid Duty of Prudence and Prudent Diversification of Plan Assets
- 404a1b – fid must act with “care, skill, prudence and diligence under the circs then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims
  - based on time decision was made – not results
    - good results can still be breach
  - objective
  - careful investigation
  - must use fund reasonably
  - includes mistakes in admin of plan
  - duty to monitor
- Prudent diversification
  - 404a1c
    - diversify investments to minimize risk of large losses, unless prudent
      - ex, one invest, geographic location, industry
        
        ex, invest mostly in low yeilding bonds – breach
      - if no diversification – burden on fid to show prudent
- Duty to Follow (or Disregard) Plan Terms
  - 404a1d
    - in accordance with the docs and instruments governing the plan insofar as such docs are consistent with ERISA
      - smtz must disregard plan requriments that are invalid
        
        non-diversification, eg
      - smtz must act beyond duties in plan
- Duty to Iinform
  - may have duty to provide relevant info to participants beyond the statutory disclosure requirements.
  - Serious Consideration Test
    - senario: first round takers sue for breach b/c second round offer better.
      - Fid must inform of second round of bene if under “serious consideration”
    - must inform when
      - specific proposal; and
      - discussed for implementation; and
      - by senior management with autho to implement change
  - 404a1b – inform
    - disclose info in response to participant questions
    - no mislead – silence sometimes misleading
Co-Fiduciary Duties
- allocation of duties of co-trustees
  - if duties are allocated among co-trustees in accordance with leg, a trustee to whom duties have not been allocated is not to be liable for any loss that arises from acts or omissions of the co-trustee to whom such responsibilities have been allocated.
    - However, watch for kn of the co-fid breach – liable
Prohibited Transactions And Expemptions
- makes illegal per se certain transactions
- Party in Interest Transactions – 406
  - Who is a P in Interest – 3(14)
    - plan fid, legal counsel to the plan, or ee of plan
    - provides services to plan
    - er or ee organization whose ees or members are covered by the plan
    - per who owns 50% or more of an er or ee org which itself is a party in int
      - ei, stockholders
    - relative of individual who is a PiI
    - entity which is owned 50% or more by a PiI
    - any ee, officer, dir, or 10% owner of an entity that is a PiI
    - any of the above relatives
  - Party in Interest Prohibited Transactions – 406a1
    - fid shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect
      - sale or exchange, of any prop between plan and PiI
      - lending of money or other extension of credit between plan and PiI
      - furnishing goods, services, or facilities between the plan and a PiI
      - transfer to, or use by or for the benefit of, PiI , of any asset of the plan; or
      - acquisition, on behalf of the plan, of any er security or er real prop in violation of 407a
    - Civil Liability PiI
      - Revenue Code up to 5% of amount involved.
      - If not correctd after notice from Sec of Lab, then up to 100% of the transaction
- Fiduciary Prohibited Transactions - 406b
  - - self-dealing using plan assets
      - even without bad faith
    - conflict of intrest between fid and the plan or participants
    - kickback from third party who is engaged in atransaction involving plan assets
    - Penalty:
      - enforced by Sec of Lab
        
        civil penalty
        
        all 409a & removal
      - 409a – authorizing fid must restore losses to plan that occurred as a result, and disgorge any profits
- Prohibited Trasactions Under the Code (IRS)
  - - prohibits transactions to disqualified persons – Code 4975c
      - disqualified person = PiI
        
        except: ee who earn less than 10% of the yearly wages of an er is not a dq ee
    - Penalty
      - excise tax by IRS
- Employer Securities or Real Property
  - - 10% limitation on FMV in er prop and securities
      - exept 401k
- Exemptions To Prohibited Transactions
  - Service Provider Party in Interest Exception (including attributed):
    - Transactions allowed:
      - sale, exchange, or leasing of any property
      - lending of money or other extension of credit, or
      - the use of, or transfer of, plan assets
    - Provided that:
      - plan receives no less, nor pays no more, than “adequate consideration” in connection with such transactions
    - Exception cannot be used by Fids
  - Loans by plan to participants or beneficiaries if;
    - equally available to all;
    - made according to the plan;
    - reas rate;
    - secured
  - Payment of reasonable compensation to plan service providers using plan assets
    - reasonable – plan able to terminate service quickly w/o penalty
  - reas rental space
  - paying benefits to a fid who is also part or bene
  - DOL issued admin exemptions
    - admin feasible;
    - in the interest of the plan, part, and benes;
    - protective of the rights of plan participants and benes
  - exemptions do not apply to fiduciaries unless qualify for admin exemption by DOL
- Excise Tax on Prohibited Transactions (IRS CODE & ERISA)
  - Do not apply to fid acting in fiduciary capacity (CODE)
  - Does not require knowledge of the transaction (CODE)
    - ERISA req – kn or shd have kn
  - Disqualified persons who participate in prohibited transaction (BOTH)
    - 15% anually of amount involved
    - 100% if not corrected after notice from IRS that 5% is due
  - DOL Civil penalty – 5% due from date of transaction to date of collection or date of notice
    - inadvertance not defense
- Compare liability ERISA & CODE
  - where a prohibited transaction occurs, a prudent fiduciary who engaged in the transaction only in his fiduciary capacity will not be liable under either the Labor or Code excise tax provisions, but any other disqualified person and any fiduciary who acted other than as a fiduciary will be liable (in the absence of regulations or a special exemption providing otherwise) for the excise taxes (or equivalent civil penalty).
Civil Claims
- requirements
  - standing
    - participant – ee or former ee who is or may be eligible to receive a benefit from an ee plan
      - derivative standing – ee assigns rights to DR if plan later denies coverage. Ok unless prohibited by the plan
    - beneficiary – is or may become eligible to receive a bene
    - venue
      - all claims
        
        district where plan is admin
        
        where the breach of fid occurred
        
        where a D resides
    - no right to jury
    - must exhaust plans appeals process before claim
      - general hardship exceptions
      - DOL regs
        
        plan must provide notice and reasons for claim denail
        
        reas opp for review
  - type of claim
    - 502a1b – part or bene to recover benes under terms of plan or to clarify rights to future benes
      - both state and fed jurisdiction
        
        (fed has exclusive jur for all other ERISA claims)
        
        D may remove to fed ct
        
        Met Life v. taylor
        
        if only state tort and K claims, preempted if the also fall under ERISA & removable
        
        once removed, fed ct. generally dismisses any other state claims due to preemption
        
        Other 502a actions – split cts on whether preempted by ERISA
      - Statute of Lim
        
        whatever would be the SOL in state ct
      - Standard of Review a1b claims
        
        de novo
        
        ct may consider additional evidence
        
        unless plan give admin or fid discretionary autho to determine eligibility or contstrue terms of plan
        
        abuse of discretion
        
        ct may only consider admin record compiled by admin and used to make admin decision
        
        unless conflict of interest by plan admin
        
        no special deference by admin to treating physician (applies to all ERISA)
      - Remedy
        
        limited to a court order directing the plan to pay amount of the disputed claim.
        
        Provide benefits due
        
        no compesaory damages for injury or loss resulting from wrongly denied claim
        
        if claimant dead
        
        limited to above remedy
    - 502a2 – part, bene, or fid agaisnt a fid for breach under 409a
      - sec Labor can also under 502a2
      - 409a
        
        fid personally liable make good to the plan any losses that result from fid’s breach; and/or
        
        profits obtained by use of plan assets; and/or
        
        discretionary autho to order other appropriate equitable or remedial relief and to remove the breaching fid.
        
        No compensatory or punitive damages under 502a2 for relief under 409a
        
        only (damages) to the plan itself
        
        how to measure
        
        potential lost investment earning of the plan
        
        what would have earned – what it earned = damages
        
        disgorgement under 409a
        
        return of $ earned from breach
        
        Cts divided over whether co-fid can seek indemnity from another more responsible co-fid
        
        actual kn of fid not required for breach
      - SOL – also applies to 502a3 actions if against a fid
        
        3y from date P had actual kn of breach or violation; or
        
        for affirmative actions that constitute a breach or violation, 6y of last action that was part of ongoing breach or vio; or
        
        for omissions, 6 y of the latest date the fid could have acted to cure the breach or vio; unless
        
        concealment
    - 502a3 – part, bene or fid to enjoin any act or practice that violates either Title I of ERISA or the terms of the plan, or to obtain appropriate equitable relief to remedy such a violation.
      - Also sec of lab
        
        under 502a5 – same language
      - remedy
        
        traditional equitable relief
        
        “appropriate” equitable relief
        
        ct has autho to take prop and $ from
      - Non-fiduciaries party in interest liability under 502a3
        
        no liability for non-fiduciaries who participates in a prohibited transaction involving plan assets – a violation of 404
        
        YES liability for non fiduciaries for 406 prohibited transaction violations
        
        502a3 does not mention who can be a D but 502a3 does allow for appropriate equitable relief
      - claims by individuals for breach of fid duty permitted under 502a3
        
        ex breach of Duty to Inform
        
        misrepresentation cases
        
        better to bring breach of DTI than estopple theory b/c easier to allow oral or informal written com to show communication between er and ee
        
        if claim could have been brought under 502a1b, ct will deny de novo in the 502a3 if wouldnt’ have been allowed in 502a1b
        
        ex, discretionary clause denial benes
    - 510 – prohibits ers from interfering with the exercise or attainment of rights under an ee bene plan
      - SOL
        
        analogous to state SOL
      - claims covered for violations of the following:
        
        disruption of ee priviliges to punish the exercies of rights under an ee plan
        
        disruption of ee privileges to prevent the vesting or enjoyment of rights under ee plan; and
        
        disruption of ee privileges to prevent or punish a person who gives testimony in any proceeding related to ERISA
      - P must show that D acted with specific intent to interfere with rights protected under 510.
        
        burden
        
        if P shows actions give rise to inference of discr intent,
        
        burden shifts to er to produce legitimate non-discr reasons
        
        burden then shifts back to P to show (perpond) that reasons just pretext for discrim
      - propper settlor functions do not violate 510
        
        but cannot fire ee to avoid benes
        
        another ex, refusing to hire
    - 502a5 – similar to 502a3 but applies to sec of lab
      - Sec of Labor action
      - against fid or any knowing participation in such such breach by other person
      - civil penalty
        
        20% of applicable recovery amount
      - also Sec can bring under 502a2
  - remedy
    - atty fees
      - fed cts have broad discretion to award reas atty fees and costs to either party in action brought by a part, bene, or fid under Title I of ERISA. 502G1
        
        considerations
        
        bad faith;
        
        ability to satisfy award;
        
        deterence
        
        benefit conferred on members of the plan as a whole; and
        
        merits of positions
        
        no presumption
    - Plan enforcement of reimbursment clause
      - existence of separate and identifiable fund from which recovery is sought

Sereboff v. Mid Atlantic
- Fid sues bene for reimbursement
- reimbursement clause in plan
  - got money didn’t reimburse
- 502a3 – equitable relief
  - prelim injunction & restraining order
- LC for reimbursment
- whether the claim was equitable
  - may get claims from a constructive trust
    - differes from Knudson in that funds were not in Knud’s possession
- Qualifies as a constructive trust, entitled to equitable relief
- requires a separate and identifiable fund
Inter-Modal v. Atchison
- 510 unlawful to discharge, fine, etc for purpose of interfering with attainment of any right tow which such participant may become intitled under plan.
- Held applies to unvested rights as well
- P allege D interferred with the attainnment of rights
varity v. Howe
- 502a3 authorize remdial relief
- P suing for equitiable reief under 404a
  - depends on the nature of the holder of the money and not on whether the plan is self-funded
510 interference
- 502a1b – protects specific rights under plan provision so 510 was included to be a specific remedy.
- 510 actions are enforceable under 502a3
- 510 – prohibits retaliation against actions in the workplace when their bene have been denied
  - whisleblower remedy
- also 510 protects against ex, ee vests after 5 years. Er fires all ees that are close to 5y.
  - No 502a1b action because plan has not been violated
  - however can bring 510 action to prevet this
- any 510 has to be plead under 502a1?
- Burden shifts to er to show non-discrim
  - then burden shifts back
- Inter-Modal
  - Weather 510 actions apply to welfare plans
    - Yes, applies to welfare even though plans don’t vest
- Plants closing
  - claim 510 can be defended if legit settlor functions made for biz considerations
    - need biz justification when the burden shifts to the er to show that closure is the result of solid econ basis
    - cannot simply fire an ee to save costs
      - smtz er will try to fire ee once they find out they’re sick
Varity v. Howe
- 502a3 provides rights for individuals and individualized relief
  - as opposed 502a2 – relates only to the plan
  - equitable catch-all
  - assert claims for damages
- review of 502
  - 502a1 – no fid can sue- only partic or beneficiarie
  - 502a2 – sec Labor or part or bene or fid
    - limited to fid breach and 409
  - 502a3 – no Sec Labor, part bene fid
    - enjoin or other equi relief , and other remedies
    - can seek individual relief. Does not have to go to the plan
      - get back pay and front pay, ex
        
        not damages but similar to damages – still equitable
        
        still cant get damages under 502a3
    - Duty to inform claim
    - Loss of investment opportunity
      - admin failed to rollover and caused losses
      - 502a3 breach of fid claim for restitution for amnt would have earned – amnt actually earned
        
        restitution does NOT include investment losses
        
        strange ruling
Exam
- 70 questions open book notes no comm
- first ½ of class is 30q
- more on fid material
- know rule related to settlor v. fid functions
- responsibilities of various players in the program
  - plan sponsers – limited fids to oversee but not micro manange
  - named – big dogs – full responsibilities
  - other fids – ins co that have claims resp
  - ivest managers
  - parties of int
    - lawy
    - cpa
- req of delegation of fid responsibilities
- given ex of settlor v. fid
- fid liability exposure
- memorize fid liability ins and bonding requirements and recourse coverage
  - fid lib ins
    - not required
    - plan can pay for premiums as long as recourse available against the fid to the insurance co for a breach
      - the fid then pays the plan to waive fid duty
  - fid bond
    - required
- investment activity
  - duty of divers
  - pay for admin expenses out of plan ok
- exclusive bene rule
  - plan assets used for payment of bene and reas admin expenses
    - if fid pays unreas large atty fee, not a proper use of plan assets and breach
    - no marketing, etc
- responsibility of person who delegates investment managers
- PoI prohibited transaction examples
- short questions
- dont memorize cases
- enforcement
  - who enforces
  - what is role of agencies
- litigation questions
- 502
  - jury trials
  - damage limitations
  - venue & standing provisions
- 502a1b 502a2 503
  - very important
  - disntguish those aspects of the statute

Public Interest Law

Public Interest Law and Practice

2007 /2008

General Info

Board/Commission v. Dept/Bureau
1. Board/Commission: multimember regulatory agency; decisions are made in a public forum; more advantageous from a Public Interest perspective
2. Dept/Bureau: headed by a single appointee; decisions generally made in closed settings

Bagley-Keene opening Meeting Act

* Brown Act is the local government counterpart

*Basic Requirements

Notice: Agencies must give notice of the meeting with an agenda by mail and on internet at least 10 days prior

Agenda: must be given with notice of the meeting time and give brief description of all action to be taken; no action can be taken unless its on the agenda

Background Documents: must be provided upon request

Public Comment: agency must give time for comment on both agenda items and non-agenda items, members cannot take action or speak about the non-agenda issues

Exceptions:

Closed/Executive session: must be during a regularly scheduled or special meeting; must be on the agenda; must give reason given; notes must be taken as to discussion and action taken
Special Meetings: may be held on fewer than 10 days notice where the 10 day notice requirement would impose substantial hardship and where subject matter is within specified criteria
Emergency Meetings: held on fewer than 10 days notice under narrow criteria

Remedies for Violations:

Criminal Sanctions: P must prove that Agency had actual knowledge of violation
Injunction: to stop the meeting from being held or the violation from being made
Mandamus
Statute of Limitations: 30 days

Underlying Principle: the public should know what the govt. (agency) is going to do before they do it, and be able to take part in the action

Board, Committee, Subcommittee, Task Force Meetings
1. Meeting Defined: any congregation of a majority of the members of a state body at the same time and place to hear, discuss or deliberate upon any item that is within the subject matter jurisdiction of the state body to which it pertains;
  1. Exceptions: other meetings, gathering and conversations as long as a majority of the members do not discuss, other than part of a scheduled program, items within the subject matter jurisdiction
2. Board Meetings: where a quorum of the board members are present
3. Committee Meeting: consisting of less than a quorum; includes subcommittee and task force meetings; members of the board who are not members of the committee may attend as long as the attend only as observers

Types of Meetings:
1. Regularly Scheduled Meetings: board, committee, subcommittee or task force may hold a regularly scheduled meetings
  1. Notice:
    1. Baord: 10 calendar days written and internet notice; must include name, address and phone number of a person who can provide further info and agenda items and brief description

NOTE: Agencies generally wait to give notice until the last minute (on the 10th required day) in order to allow enough time to include everything on the agenda that is intended

1. 1. 1. Committee: same notice requirements apply as above, unless committee if made up of less than 3
  2. Subject Matter: may be held to conduct customary business subject matter dictated by jurisdiction of the board under its enabling act; only items listed on the agenda and given 10 days notice may be discussed.
2. Special Meetings: may only be called where the 10 day notice requirement would impose substantial hardship on the state body and immediate action is required to protect the public interest, and meeting is to:

1. - - To consider pending litigation
    - To consider proposed legislation
    - To consider issuance of a legal opinion
    - To consider disciplinary action involving a state officer or employee
    - To consider the purchase, sale or exchange or lease of real property
    - To consider license examinations and applications
    - To consider an action on a loan or grant provided pursuant to div. 31 of Health and Safety Code
    - To consider response to a confidential final draft audit report

1. 1. Notice: must be given as soon as practicable after decision to hold meeting is made, notice to news must be given within 48 hours of meeting time, must be posted online 48 in advance of meeting
  2. Subject: no business matter other than that noticed
  3. Specific Requirements: agency must make a finding at the commencement of the meeting that providing 10 day advance written notice of the meeting would pose a substantial hardship or that immediate action is necessary to protect public interest; finding must be adopted with 2/3 vote of the agency members present
  4. Non-Agenda Items: may be discussed on 2/3 vote as long as need occurred after agenda was posted
2. Emergency Meetings: may be held in that case of an emergency, defined as:

1. - - Work Stoppage or other activity that severely impairs public health safety or both
    - Crippling disaster that severely impairs public health or safety or both

1. 1. Notice: news must be notified within one hour of the meeting, but if telephone services are not functioning, notice requirement is waived; notice must be posted online as soon as practicable after decision to hold meeting is made
  2. Specific Requirements: the following must be posted in a public place and on the interest for a min 10 days, as soon as possible after the meeting
    1. Minute
    2. List of persons notified or attempted to be notified
    3. Action taken
    4. Rollcall vote on the action taken
2. Closed Session:

1. - - Personnel Matters: consider the appointment, employment, evaluation or dismissal of a public employee or to hear complaints to charges against an employee, unless that employee requests a public hearing
    - Examination Matters:
    - Matters Effecting Individual Privacy: a committee consisting of less than a quorum may meet to discuss matters that would constitute an unwarranted invasion of privacy of an individual licensee or applicant
    - Administrative Disciplinary Matters:
    - Board of Accountancy Matters
    - Pending Litigation
    - Response to Confidential Final Draft Audit Report
    - Threat of Criminal Terrorist Activity
    - Advisory Bodies/Committees

1. 1. Notice: board must disclose in an open meeting the nature of the item to be discussed in the closed session
  2. Reporting: board must report publicly at a subsequent meeting any action taken and any Rollcall vote thereon
  3. Procedural Requirements:
    1. must be held during a regularly scheduled or special meeting and may not be scheduled independently
    2. must announce the general reasons for the closed session and cite legal authority under which the session is held
    3. only matters covered in the statement may be discussed
    4. staff person must attend and record minutes
    5. minute book available only to members of the agency, information received and discussed must be kept confidential
Deliberations and Voting:
1. Ex Parte Contacts: between an outside party and a board member, contacts regarding general matters are lawful and are not required to be disclosed (except at PUC), but contacts regarding disciplinary matters are barred
2. Seriatim Communications: series of conversations/emails; board members cannot have non-public conversations with other board members to discuss agenda items and intended action
3. Conference Calls: phone calls to individual agency members sufficient to constitute a quorum are prohibited

Public REcords Act [PRA]

Purpose

Designed to enable anyone to inspect records at public agency during regular office hours
Increase freedom of information and make govt. more public
Unique aspect: no Standing requirement

- Anyone can request and receive records from a state or local agency
- Usually done via written request
- Agency has 10 days to respond with whether or not they will produce the documents
- Agency can unilaterally extend the deadline by up to 14 days
- Agency must produce all requested records which are not exempt, or given reason why they are exempt
- Agency only has to produce pre-existing docs and don’t need to produce new docs in accordance with your request
- Agency can only charge the direct cost of duplication, not staffing charges associated with retrieval, duplication, etc (North County)

Who’s Covered:
1. § 6253.4. All state and local agencies: including: (1) any officer, bureau, or dept.; (2) any “board, commission or agency” created by the agency (including advisory boards); and (3) nonprofit entities that are legislative bodies of a local agency. (§ 6252(a),(b)). Many state and regional agencies are required to have written public record policies.
2. Who is not Covered:
  1. Courts: (§§ 6252(a), 6261) except itemized statements of total expenditures and disbursement)
  2. Legislature: (§ 6252)
  3. Private, non-profit corporations and entities
  4. Federal agencies ( 5 U.S.C. § 552)
What’s Covered:
1. “Records” includes all forms of communication related to public business “regardless of physical form or characteristics, including any writing, picture, sound, or symbol, whether paper, fiber, magnetic, or other media.” (§ 6252(e)) Electronic records are included, but sorftware may be exempt. (§§ 6253.9(a),(g), 6254.9(a,(d))
Process:
1. Access is immediate and allowed at all times during business hours. (§ 6253(a)). Staff need not disrupt operations to allow immediate access, but a decision on whether to grant access must be prompt. An agency may not adopt rules that limit the hours records are open for viewing and inspection. (§§ 6253(d); 6253.4(b))
2. The agency must provide assistance by helping to identify records and information relevant to the request and suggesting ways to overcome any practical basis for denying access. (§ 6253.1)
3. An agency has 10 days to decide if copies will be provided. In “unusual” cases (request is “voluminous,” seeks records held off-site, OR requires consultation with other agencies), the agency may upon written notice to the requestors give itself an additional 14 days to respond. (§6253(c)) These time periods may not be used solely to delay access to the records. (§ 6253(d))
4. The agency may never make records available only in electronic form. (§ 6253.9(e)
5. Access is always free. Fees for “inspection” or “processing” are prohibited. (§ 6253)
6. Copy costs are limited to “statutory fees” set by the Legislature (not by local ordinance) or the “direct cost of duplication”, typically 10-25 cents per page. Charges for search, review or deletion are not allowed. (§ 6253(b));
  1. North County Parents v. DOE, 23 Cal.App.4th 144 (1994).
  2. If a request for electronic records either (1) is for a record normally issued only periodically, or (2) requires data compilation, extraction, or programming, copying costs may include the cost of the programming. (§ 6253.9(a),(b))
7. The agency must justify the withholding of any record by demonstrating that the record is exempt or that the public interest in confidentiality outweighs the public interest in disclosure. (§6255)

*Access Tip: Always ask for both copies and access; after inspection you can reduce the copy request (and associated costs) to the materials you need.

The Request:

Plan your request; know what exemptions may apply.
Ask informally before invoking the law. If necessary, use this guide to state your rights under the Act.
Don’t ask the agency to create a record or list.
A written request is not required, but may help if your request is complex, or you anticipate trouble.
Put date limits on any search.
If the agency claims the records don’t exist, ask what files were searched; offer any search clues you can.
Limit pre-authorized costs (or ask for a cost waiver), and pay only copying charges.
Demand a written response within 10 days.

Exemptions:
1. Waiver: when an exempt document is disclosed, the exemption is presumed to be waived
2. Attorney-Client discussions: even if the agency is the client, but the agency (not the lawyer) may waive secrecy.
3. Appointment calendars and applications, phone records, and other records which impair the deliberative process by revealing the thought process of government decision-makers may be withheld only if “the public interest served by not making the records public clearly outweighs the public interest served by disclosure of the records.” The agency must explain, not merely state, why the public interest does not favor disclosure.
4. Preliminary drafts, notes and memos may be withheld only if: 1) they are “not retained…in the ordinary course of business” and 2) “the public interest in with-holding clearly outweighs the public interest in dis-closure.”
  1. Drafts are not exempted if:
    1. staff normally keeps copies; or
    2. the report or document is final even if a decision is not.
  2. Where a draft contains both facts and recommendations, only the latter may be withheld. The facts must be disclosed.
5. Home Addresses in DMV, voter registration, gun license, public housing, local agency utility and public employee records are exempt, as are addresses of certain crime victims.
6. Records concerning pending litigation are exempt, but only until the claim is resolved or settled. The complaint, claim, or records filed in court, records that pre-date the suit
7. “Personnel, medical and similar files” are exempt only if disclosure would warrant an unreasonable invasion of personal privacy
  1. employee contracts are not exempt
  2. NOTE: CA €’s right of privacy complicates things
8. Police Incident reports, rap sheets and arrest records are exempt unless disclosure would endanger an investigation of the life of an investigator.
  1. Investigative files may be withheld, even after an investigation is over, but the primary purpose of the files must be investigatory
  2. Identifying data in police personnel files and misconduct complaints are exempt
  3. DA can request and receive files without privilege being waived
9. Financial Data submitted for licenses, certificates, or permits, or given in confidence to agencies that oversee insurance, securities, or banking firms;
10. Tax, welfare, and family/adoption/birth records are all exempt. (§§ 6254(d), (k), (l), 6276).

Remedies
1. Administrative law requires you to exhaust the agency’s remedies before going to court
2. Fee Shifting Statute: Prevailing P has a right to atty fees

Rulemaking

* Note the 10 day notice requirement for meeting and agenda under PRA, but 45 day notice requirement for rulemaking decision under APA

Administrative Procedure Act [APA]: every regulation is subject to the rulemaking procedures (see II, below) unless expressly exempted
1. Mandatory Compliance (Armistead v. State Personnel Board)

NOTE: if the policy or procedure is contained in an applicable statute or duly adopted regulation, adoption as a regulation under the APA is not necessary

1. “Regulation:” every regulation, rule, order, standard, amendment, supplement or revision of any rule, regulation, order or standard adopted by any state agency it implement, interpret, or make specific the law enforced or administered by it, or to govern its procedure.
  1. Rule v. Adjudication: a rule applies to a class or group of persons, whereas an adjudication applies only to a single person (Greer)
  2. Internal enforcement decisions can be made without rulemaking process, but rulemaking process is needed where it may affect those outside the agency
2. “Underground Regulation:” a regulation or rule that has not been adopted pursuant to APA; APA prohibits the making use of such rules
  1. Because the rulemaking process is time consuming and arduous, agencies try to avoid and often do so through these “underground regulations” – though they are subject to having that rule voided by OAL (who almost always does so on review by deeming them as rules)
3. Exemptions: regulations regarding the following are exempt from procedure:
  1. Internal Management: narrow exemption; regulation must:
    1. Directly affect only the employees of the issuing agency
    2. Not address a matter of serious consequence involving an important public interest
  2. Forms: regulation is not needed if the form’s contents consist only of existing, specific legal requirements
  3. Audit Guidelines: regulation that establishes criteria or guidelines to be used by the staff or an agency in performing an audit, investigation, examination, or inspection, settling a commercial dispute, negotiating a commercial arrangement, or in the defense, prosecution, or settlement of a case, if disclosure would:
    1. Enable a law violator to avoid detection
    2. Facilitate disregard of requirements imposed by law
    3. Give clearly improper advantage to a person who is in an adverse position to the state
  4. Only Legally Tenable interpretations of a provision of law
  5. Rate, Price, Tariffs
  6. Legal Ruling of Tax Counsel issued by the Franchise Tax Board or State Board of CA
  7. Precedent Decision: quasi-judicial decision by a state agency
Steps of the Rulemaking Process
1. Agency Staff Prepares and Board/Dept. approves the concepts and draft language of the proposed regulation or change
2. Agency publishes notice of proposed rulemaking in Notice Register including:
  1. Information on the regulation sought to be enacted
  2. Date comment period ends
  3. Date time and place of hearing if one applies
  4. Agency contact person
3. 45 day Public Comment Period
4. Public Hearing (optional)
5. Agency either:
  1. Adopts regulatory change at open meeting
  2. Adopts proposal but modifies language, then releases modified test for 15 days
  3. Rejects proposal
6. If within DCA, Agency submits proposed action to DCA direction for review and approval
7. Agency prepares rulemaking record for submission to OAL
8. OAL has 30 working days to review for APA compliance and six criteria
  1. Authority/Consistency:; agency’s actions must be affirmatively authorized (strictly derivative)
  2. Reference
  3. Consistency: must be consistent with the existing authority superseding that of the agency
  4. Clarity: understandable by those persons affected by it
  5. Non-duplication
  6. Necessity: reasonably necessary to effectuate the purpose of the statute, supported by substantial evidence
9. OAL either:
  1. Approves and publishes approval in Notice Register
  2. Disapproves and publishes disapproval in Notice Register, then
    1. Agency corrects and resubmits to OAL within 120 days
    2. OAL approves and publishes in Notice Register
10. Regulatory Changes published in CA Code of Regulation (CCR)
Standards for Regulations
1. Must be easily understandable
2. Must have a rationale
3. Must be the least burdensome, effective alternative
4. Cannot alter, amend, restrict or enlarge a statute
Need for Regulations – Three Types of Statutory Provisions:
1. 1. Self Executing: so specific that no implementing of interpreting regulation is necessary to give it effect
  2. Wholly Enabling: cannot be legally enforced without a regulation
  3. Susceptible to Interpretation: may be enforced without a regulation but may need a regulation for its efficient enforcement
Emergency Regulations
1. Rule: agency can adopt an emergency regulation, which takes affect before any opportunity for public comment can be given, only if it can show that the regulation is necessary for the immediate preservation of public peace, health, safety or general welfare, or if a statute deems the regulation to be an emergency for purposes of APA.
2. Public Comment: within 5 days after reg is submitted to OAL for review, and agency may submit a rebuttal up to 8 days after submittal to OAL
3. OAL Review: OAL has up to 10 days to review reg to determine whether emergency has been demonstrated or deemed by statute; must meet the following standards
  1. 1. 1. Authority/Consistency:; agency’s actions must be affirmatively authorized (strictly derivative)
      2. Reference
      3. Consistency: must be consistent with the existing authority superseding that of the agency
      4. Clarity: understandable by those persons affected by it
      5. Non-duplication
      6. Necessity: reasonably necessary to effectuate the purpose of the statute, supported by substantial evidence
4. Effect: on approval, the reg goes into effect for 120 days; agency must conduct the regular rulemaking process to keep the reg permanently in existence; agency may request
5. *Bob:

Emergency rulemaking is not meant to evade formal rulemaking process, its just a way to get something in place while going through formal process
Saving money is not an emergency requiring immediate action
Director of OAL serves at the pleasure of the governor – which can impact what gets approved as an emergency (not much of a check

Initiating Rulemaking:

*the following provisions give any person the right to propose a rule or amendment

*practice tip: get agency staff on your side before proposing it

1. How to Initiate:

Cal Govt. Code §11340.6 – Except where the right to petition for adoption of a regulation is restricted by statute to a designated group or where the form of procedure for such a petition is otherwise prescribed by statute, any interested person may petition a state agency requesting the adoption, amendment, or repeal of a regulation as provided in Article 5 (commencing with Section 11346). This petition shall state the following clearly and concisely:

1. 1. The substance or nature of the regulation, amendment, or repeal requested.
  2. The reason for the request.
  3. Reference to the authority of the state agency to take the action requested.
2. Agency Response:

Cal Govt. Code §11340.7.

(a) Upon receipt…state agency shall notify the petitioner in writing of the receipt and shall within 30 days deny the petition indicating why the agency has reached its decision on the merits of the petition in writing or schedule the matter for public hearing in accordance with the notice and hearing requirements of that article.

(b) A state agency may grant or deny the petition in part, and may grant any other relief or take any other action as it may determine to be warranted by the petition and shall notify the petitioner in writing of this action.

(c) Any interested person may request a reconsideration of any part or all of a decision of any agency on any petition submitted…include the reason or reasons why an agency should reconsider its previous decision no later than 60 days after the date of the decision involved.

(d) Any decision of a state agency denying in whole or in part or granting in whole or in part a petition requesting the adoption, amendment, or repeal of a regulation pursuant to Article 5 (commencing with Section 11346) shall be in writing and shall be transmitted to the Office of Administrative Law for publication in the California Regulatory Notice Register at the earliest practicable date. The decision shall identify the agency, the party submitting the petition, the provisions of the California Code of Regulations requested to be affected, reference to authority to take the action requested, the reasons supporting the agency determination, an agency contact person, and the right of interested persons to obtain a copy of the petition from the agency.

OAL Review
1. Reviewing and Underground Rule:

*OAL determines whether something is a rule subject to the APA, but doesn’t actually do the voiding, the court must do so

1. 1. Request OAL to make a regulatory determination
  2. OAL makes regulatory determination as to whether it’s a rule and therefore was unlawfully adopted
  3. File writ of mandamus or request for declaratory relief in court, using OAL determination as evidence
2. *Bob – Problems with the OAL Review Process:
  1. Huge Paper Reliance:
    1. OAL made up primarily of young attorneys lacking experience in the area, so they rely mostly on the paper trail in reviewing the rule
      1. Problem: the agencies gets the last word in this paper trail, weakening the public’s opportunity to impact the rulemaking process
      2. Problem: Additional criteria added due to bureaucracy and paper reliance:
        
        Statement on housing impact
        
        Statement on small business impact
        
        Whether there are alternatives
        
        Whether rule varies from the federal rule
      3. Problem: Rulemaking files are now increasing in length because of the additional criteria and reliance on paper trails
      4. Problem: Agencies don’t want to go through these hoops, and so go underground instead
      5. Positive: Prior to OAL, the only time rules were examined was when someone challenged them in court, not OAL reviews every rule prior to adoption
  2. Ex-parte contacts of lobbyists with OAL
    1. Problem: OAL person reviewing the rule was not at the hearing combined with the ability to unilaterally accept or reject a rule and no checks on OAL
  3. Solution: combine the needed independence of OAL with expertise of those who can rely less on lobbyists and the paper trail

State Legislative process

*Administrative agencies are created by the legislature, so they can un-create them

The Legislature:
1. Senate:
  1. 40 Senators – 1 per district
  2. Can serve 2 consecutive 4 year terms
  3. Headed by the President Pro Tempore (Pro Tem), who is also the chair of the Rules Committee
2. Assembly:
  1. 80 members – 2 per district
  2. Can serve 3 consecutive 2 year terms
3. Legislative Term: 2 years; governed by series of deadlines:
  1. Introduce
  2. Last day for policy committee to hear
  3. Last day for appropriations committee to hear
  4. Not absolute, author can ask for “rule waiver”
  5. “Two year Bills”- where there is too much opposition or the bill needs additional drafting, the bill becomes a 2 year bill
  6. During the 2^nd year, all bills (old and new) have to get passed by both houses and onto governor’s desk, or they die and must be reintroduced during the first year of the next session
The Legislative Process
1. Sponsor: the person/group who is the major proponent of the idea for the bill and who introduces the idea to a legislator
2. Author: A Legislator sends the idea for the bill to the Legislative Counsel where it is drafted into the actual bill. The draft of the bill is returned to the Legislator for introduction. If the author is a Senator, the bill is introduced in the Senate. If the author is an Assembly Member, the bill is introduced in the Assembly.
3. First Reading/Introduction: A bill is introduced or read the first time when the bill number, the name of the author, and the descriptive title of the bill is read on the floor of the house. The bill is then sent to the Office of State Printing. No bill may be acted upon until 30 days has passed from the date of its introduction.
4. Committee Hearings:
  1. Committees:
    1. Rules Committee of the House of Origin – here it is assigned to the appropriate policy committee for its first hearing.
    2. Policy committee – assigned according to subject matter; each house has a number of policy committees; bills can be subject to more than one committee if subject matter pertains to more than one
    3. Senate/Assembly Appropriations Committee – only bills that require the expenditure of funds; requires 2/3 vote of this committee
  2. Process:
    1. a bill analysis is prepared that explains current law, what the bill is intended to do, and some background information and often lists organizations that support or oppose the bill.
    2. during the committee hearing the author presents the bill to the committee and testimony can be heard in support of or opposition to the bill.
    3. The committee votes by passing the bill, passing the bill as amended, or defeating the bill. Bills can be amended several times. It takes a majority vote of the full committee membership for a bill to be passed by the committee.
5. Second and Third Reading (House Floor):
  1. Second: bills passed by committees are read a second time on the floor in the house of origin and then assigned to third reading.
  2. Third: Bill analyses are prepared prior to third reading; bill is explained by the author, discussed by the Members and voted on by a roll call vote.
  3. Votes: generally require a majority (21 Senate and 41 Assembly); Bills that require an appropriation or that take effect immediately, generally require 27/40 Senate votes and 54/80 Assembly votes
  4. Reconsideration: If a bill is defeated, the Member may seek reconsideration and another vote.
6. Repeat Process in other House: Once the bill has been approved by the house of origin it proceeds to the other house where the procedure is repeated.
7. Resolution of Differences: If a bill is amended in the second house, it must go back to the house of origin for concurrence, which is agreement on the amendments. If agreement cannot be reached, the bill is referred to a two house conference committee to resolve differences. Three members of the committee are from the Senate and three are from the Assembly. If a compromise is reached, the bill is returned to both houses for a vote.
8. Enrolled to Governor: after both houses approve a bill, it is “enrolled” to the Governor, to:
  1. Sign the bill into law
  2. Allow it to become law without his or her signature
  3. Veto with descriptive veto message (which can be overridden by a two thirds vote in both houses)
9. California Law
  1. Assigned a chapter number by the Secretary of State
  2. Chaptered Bills (Statutes) become part of the California Codes, and are published in another source in chronological order
  3. Most bills go into effect on the first day of January of the next year. Urgency measures take effect immediately after they are signed or allowed to become law without signature.
Problems:

1. Non-Votes and Lack of Accountability: a non-vote is a no vote, so legislators escape accountability by not voting
2. Supermajority:
  1. Caucus Votes are organized to prevent the 2/3 vote required to pass an appropriations bill
  2. Gerrymandering: (drawing districts so as to put all the conservative votes into as few a districts as possible) affects the outcome of bills requiring 2/3 votes
3. Passivity: (tendency of legislators to become increasingly passive)
  1. “nose-counting”
  2. 90% of legislation enacted is meaningless after being revised so many times to appease those in opposition
4. Corruption:
  1. Money buys access to legislators
  2. No limitations on ex parte contacts
  3. Too much money influence
  4. Some limitations on campaign contributions, but limits that do exist are generally too high to make any difference
5. Suspense File: controversial bills put in the “suspense file” where they die if not removed
6. Spot Bills: useless bill introduced to act as a space filler until the last minute, when the author “gut and amend(s)” the bill

APA Adjudication Process

In General:
1. Scope:
  1. Agencies are quasi-judicial in nature and are thus authorized to discipline licensees who violate agency adopted rules of practice
  2. Agencies can petition courts to enjoin the unauthorized practice of a non-licensee in their respective trade
  3. Disciplinary authority extends to misdeeds committed by licensees prior to licensing (Hughes v. Board of Architectural Examiners)
2. Policy:
  1. Due Process: because a license is considered a property right, licensees are entitled to due process
  2. Combine expertise and independence
3. No particular model dictated by APA: Process varies from agency to agency
  1. APA only guarantees:
    1. 1. licensee will get fair notice of the charges
      2. written accusation
      3. public hearing before neutral tribunal
      4. opportunity for council as own expense
      5. written decision
      6. and opportunity for review
4. Note the difference being adjudication dealing with a vested right (license) and a prospective right
  1. 1. License revocation is the taking of a vested right
    2. Anything that attacks a vested right requires due process and state carries the burden of proving violation by C&C evidence
      1. notice
      2. opportunity for hearing
      3. representation (not paid for)
      4. hearing in front of neutral decision maker – in this case an ALJ
    3. Denial of access does not request due process and thus APA adjudication process does not apply
      1. Notice of Issues – right to know what that right is being denied
      2. No right to hearing in front of ALJ – but may be able to compel by mandamus
APA Adjudication Process (some exceptions according to agency)
1. Complaint or Report Filed with Agency

1. - Most agencies have mandatory reporting schemes (i.e. malpractice and criminal)

1. Agency Staff Screens Complaints

1. - Determined whether there is jurisdiction
  - Consider whether the complaint rises to the level of a Bus & Prof Code violation, justifying disciplinary action

1. Formal Investigation

1. - Conducted by agency or DCA investigator

1. Agency Staff Reviews Completed Investigation

1. - For minor violations, agency can impose citations, fines ranging from $0-5000, or orders of abatement

1. Executive Officer Sign-Off; Complaint goes to Attorney Generals office
2. AG Files Accusation with Office of Administrative Hearings (OAH)

1. - Now becomes public record (except contractor’s board)

1. Within 15 days of service of accusation, respondent may file notice of defense
2. Limited Discovery by Both Sides

1. - Depositions allowed only for someone who is not available for hearing

1. Pre-hearing conference on motion (or order of ALJ) or settlement conference (on order of ALJ)
2. Public Evidentiary Hearing Before OAH ALJ

1. - Board is represented by Deputy AG
  - Board must prove guilt by clear and convincing evidence

1. ALJ issues proposed decision

1. - Really just a recommendation to the Agency

1. Board members review ALJ’s proposed decision
2. Agency Decision
3. Judicial Review
  1. Superior Court (as of right)
  2. Appellate Court (as of right- Except MBC)
  3. Supreme Court (discretionary)
Problems/Controversies:
1. Final determination made by the agency:
  1. They are often dominated by members of the trade/profession (creating bias)
  2. No independence or expertise: those serving on the board are not experts, were not present at the hearing and did not hear the evidence
2. Lengthy adjudication process
  1. Decreases deterrence among licensees – the perceived likelihood of being caught is correlated to the length of time between violation and sanction.

- Fellmeth’s Solution: have some restriction on the license during the process, similar to a preliminary injunction, with the same requirements

1. Ex parte contacts
  1. Agency is quasi-judicial so they should abide by standard court rules that prohibit ex part contacts, but they are also quasi-legislative, so they need to have these contacts
Cost Recovery
1. Rule:
  1. Most agencies are statutorily authorized to request an ALJ to direct a licentiate found to have committed a violation of the licensing act to reasonable costs of the investigation and enforcement up to the date of the hearing;
  2. ALJ will make a proposed finding as the reasonable costs, and the board may reduce but not increase the proposed amount
  3. The agency may enforce the order for repayment in any appropriate court, and shall not renew or reinstate the license of any licensee who has failed to pay
2. Zuckerman v. Board of Chiropractic Examiners
  1. Facts: Z (chiropractor) argued that Cal. Code Regs., tit. 16, § 317.5 violated his due process rights by encouraging chiropractors accused of misconduct from requesting a hearing on the charges. The appellate court found that the 317.5 violated his due process rights.
  2. Held: Reversed;
    1. The purpose of the reg. is € permissible
    2. The regulation was discretionary, because the ALJ had to determine whether the board’s costs were reasonable, and the board could reduce or eliminate the cost award.
    3. The board could not assess the full costs of investigation and prosecution when to do so would unfairly penalize a chiropractor who committed some misconduct, but who used the process to obtain dismissal of other charges or a reduction in the severity of the discipline imposed.
    4. Reg. does not need to be reciprocal – to require the board to reimburse chiropractors who prevailed at disciplinary hearings for their costs would impair its ability to protect the public from chiropractors who injured the public.
Recent Changes
1. SB523 (effective July 1997):
  1. Administrative Bills of Rights:

1. 1. - Notice and opportunity to be heard
    - Prohibits ex parte contacts between interested outside parties and agency adjudicators
    - Separation of functions between prosecutors and adjudicators
    - Agency must state findings and reasons for its decisions
    - Reviewing court must give great weigh to the credibility findings of ALJ

1. 1. Flexible Enhancing Provisions:

1. 1. - ADR
    - Informal Hearings
    - Allows agencies to give administrative declaratory judgments
    - Allows for use of electronic media/phone in decision making

1. 1. Modernizing Existing APA:

1. 1. - Discovery disputes to be resolved by ALJ
    - Subpoena procedure to allow documents to be inspected prior to hearing
    - Ban on penalty guidelines that were not properly adopted

1. 1. Exemptions:

1. 1. - State Board of Equalization
    - CPUC
    - UC Regents
    - State Bar Court

APA Precedential Decision Provision
1. 1. RULE: There is generally no stare decisis in administrative practice – a decision may not be relied on as precedent unless it is designated as precedent; but under this provision, an agency may designate as precedent (thus be binding on future cases), a decision or part thereof that…is likely to recur
    1. Agencies have to keep an annually updated index of their precedential decisions on their website and make it available by subscription – so that practitioners can keep track of these additional “rules”
    2. Stipulations (accusation settlement) cannot be made precedential

1. 1. - Insurance commissioner tried to designate a stipulation as a precedential decision, which was struck down

1. 1. Hybrid Process: adopt regulations or set standards w/o rulemaking process, through adjudication process
Non-APA Adjudicative Proceedings
1. State Bar:
  1. Adjudication Process:
    1. Own ALJ
    2. Old System:
      1. cases were heard by examiners at local level
      2. review by State Bar review committee with 18 members that would allocated cases out to 2 members of the Bar – volunteer attorneys – who then make a final decision
      3. not much expertise or independence
      4. every case goes to CA SC for review
    3. New System – CPIL implemented State Bar Court:
      1. Hearing dept and panel of 6 State Bar Court Judges – like ALJ
      2. Accusation called Notice of Disciplinary Charges (NDC)
      3. Office of Chief Trial Council – makes decisions about investigations and whether to issue NDC
      4. Judges independent, appointed by supreme court
      5. Independent Review Dept of 3 judges, one of which used to be a non- attorney but now all 3 attorneys
      6. SC discretionary review
      7. 2 step, 8-10 month process
  2. In Re Rose
    1. Facts: The State Bar charged Rose with willful disobedience of a court order constituting cause for disbarment or suspension and the State Bar Court found willful violations with aggravating circumstances, recommending disbarment. After SC of California denied the petition for review, Rose argued that summary denial deprived him of due process and € right to judicial determination of disbarment.
    2. Held: SC may properly utilize the State Bar Court as its administrative arm to conduct preliminary determination of complaints; Cal. Const., art. VI, § 2, does not confer an independent right to oral argument in this context;
2. Medical Board:
  1. Procedure: 3 step process
    1. ALJ hearing with a panel of specialists
    2. ALJ OAL specialized office
    3. Discretionary review by Court of Appeal by writ (licensee can also file for agency review, but more difficult due to time limit)

*Fellmeth advocates for this process in other agencies – moving from 4.5 steps to 2.5 steps

1. 1. Leone v. MBC
    1. Facts: A physician disciplined by MBC could obtain judicial review of such order by commencing an administrative mandate proceeding. While the superior court had original jurisdiction of these proceedings, the legislature provided that the Court of Appeal should review the superior court’s decision pursuant to a petition for an extraordinary writ rather than by direct appeal. P’s argue that statute is un€, as CA € appellate jurisdiction clause grants them the right to direct appeal.
    2. Held: The appellate jurisdiction clause did not require the legislature to provide for direct appeals in all cases within the original jurisdiction of the superior courts.
    3. Problem: the statute allows the appellate court to just only a “postcard” denial, rather than a written opinion – without a written opinion parties and the public do not have the evaluate the decision.
2. DOI
  1. Run by a single, elected, commissioner
  2. Adjudication:
    1. In-house ALJ
    2. final decision made by commissioner, acting with individual authority on recommendation from ALJ (which he also hires)
    3. *Problem: because of on-house ALJ, there is not the same degree of independence
    4. Intervener Compensation: compensation of attorney’s fees up to $200/hour for consumer group advocacy in rulemaking and investigation, attempts to make up for industry advocacy
3. PUC
  1. 5 commissioners
  2. Not subject to APA, Badgley Keene
  3. Adjudication:
    1. In-house ALJ
    2. ALJ opinion goes to commission
    3. Commission makes the final decision, can adopt ALJ recommendation or not
    4. Review by Court of Appeal on writ
  4. Office of Ratepayer Advocates:
    1. utility companies have the right to pass certain costs on the their consumers, one of which is the cost of advocating in front of PUC
    2. Intervener Compensation: compensation of attorney’s fees up to $200/hour for consumer group advocacy in rulemaking and investigation, attempts to make up for industry advocacy (Ucan)
    3. In reality, utility companies still have more power
  5. Public Advisor for public exposure and to open up process to the public
Hybrid Proceedings
1. Safeco v. Garamendi: Commissioner’s “amended decision” was quasi-legislative in nature, and not adjudicatory. A legislative action is the formulation of generally applicable rules to be applied in future cases, whereas an adjudicatory act is an actual application of a rule to a specific set of circumstances.
Other forms of adjudication
1. Diversion – primarily for substance abuse
  1. Licensee pleads guilty but requests diversion, then court suspends the case until rehab program is completed, at which time the case is dismissed
  2. Problem:
    1. “Gaming” with MBC where doctors don’t actually complete the program
      1. State Bar can be diverted for psych reasons in addition to substance abuse – possible that attorneys are gaming the system
2. Mediation: Generally for low level offense/ quasi civil (i.e. consumer complaints)
3. Citation and Fine
  1. Agency cites someone for violating the law, the seeks to fine them
  2. Primarily used with non-licensees

 € Issue: whether or not agency that does not have JD over someone can cite and fine them

Judicial review and court action

Declaratory and Injunctive Remedies
1. Rulemaking:
  1. Remedy: Declaratory and injunctive relief
  2. Process: both remedies may be sought together by writ of ordinary mandamus to challenge agency action that has already occurred or is threatening to occur
  3. Basis: un€ or conflict with federal law or jurisdiction
  4. Standing: any person likely to be affected, liberally interpreted
2. Agency Adjudications: writ of administrative mandamus
3. Other Agency Actions: writ of ordinary mandamus or action for injunctive relief
4. Reverse OAL determination of a rule:
  1. Who: agency or party benefiting from the rule
  2. Remedy: declaratory relief
  3. Process: court must determine that the rule meets 6 criteria test (same criteria as used for approval)
    1. 1. Authority
      2. Reference
      3. Consistency
      4. Clarity
      5. Non-duplication
      6. necessity
5. Non-APA rules:
  1. Remedy: injunction or mandamus
  2. Standing: any person likely to be affected, liberally interpreted
6. Prevent Enforcement of Rule/Agency Action:
  1. Remedy: injunction, temporary restraining order pendante lite
Declaratory Action to Invalidate APA Rule:
1. Criteria:
  1. Substantially fails to comply with APA
  2. Facts recited to adopt on an emergency basis do not constitute an emergency
  3. Agency’s determination that the rule is “reasonably necessary to effectuate the purpose of the statute, € provision, or court decision is not supported by “substantial evidence”
  4. compliance with 6 substantive criteria
    1. Authority/Consistency
    2. Reference
    3. Consistency
    4. Clarity
    5. Non-duplication
    6. Necessity

Writ of Ordinary Mandamus Review – CCP §1085

*Adjudicatory actions only, not quasi-legislative functions such as rulemaking (subject to stricter administrative mandamus standard)

1. In General:
  1. may issue to compel performance of a ministerial act or mandatory duty if there is a clear legal right in the person seeking relief, a corresponding duty in the defendant, and a lack of any other adequate remedy Applies to all public officials
  2. Can be filed in the first instance in any court, does not need to be in superior court (as with Administrative Mandamus 1094.5)
  3. Can be used to challenge the abuse of discretion of superior court – directly to court of appeal, supreme court
  4. In general, no attorney fees awarded unless you are invoking a fee shifting statute or 1021.5 private attorney general fee clause (benefiting a group beyond that of the petitioner)
2. Requirements:
  1. Duty to perform/no adequate remedy at law (court discretion)
  2. Standing: petitioner must be “beneficially interested”
  3. Present duty and refusal to perform
    1. Duty must be mandatory, not discretionary
    2. Duty must exists contemporaneously with filing of petition
    3. Demonstrate that official has been requested to perform and refused, unless the duty affects the public interest
  4. Real Controversy (not ripe/moot)
  5. Exhaustion of administrative remedies
3. Statute of limitations
  1. Depends on the right or obligation sought to be enforced
    1. Statutory liability: 3 years
    2. Generic 4 year limit if no other applies
  2. Starts when demand first could have been made, not when first demand is actually made
4. Test: abuse of discretion (Official is not doing something that they are required to do, or are doing something that they don’t have the authority to do)
5. Standard of Review:
  1. §1085:
    1. Whether it was arbitrary or capricious
    2. Whether it was entirely lacking in evidentiary support, or
    3. Whether the agency failed to give noticed required by law
6. Procedures:
  1. Writ is issued upon the petition of party beneficially interested
7. Deference to Agency Policy and Quasi-Legislative Judgments
  1. Common Cause v. Board of Supervisors of LA County: court will act to correct abuse of discretion, but will not compel the exercise of discretion
Writ of Administrative Mandamus - CCP §1094.5
1. In General:
  1. Challenges an adjudicatory decision
  2. Action in equity, considerations of fairness
  3. Applies to non-govt. administrative agencies and public regulatory agencies
  4. Challenger can be the agency or the person affected by the decision/agency action
2. Requirements
  1. Must first exhaust all administrative remedies, including final decision by the agency before review; if no agency decision has been made, the court will remand it to the agency
    1. TIP: write and keep track of letters to the agency, to show that they made a decision, or neglected to do so (state in letter that no response is a denial)
  2. File writ in Superior Court
  3. Writ must inquire into the validity of any final administrative order made as the result of a proceeding required by law:
    1. A hearing is required to be given
    2. Evidence is required to be taken
    3. Discretion in the determination of facts is vested in the board/officer
3. Nature and Scope of Review
  1. Questions Asked:
    1. Did agency exceed its jurisdiction
    2. Was there a fair trial
    3. Was there an abuse of discretion
      1. Findings of fact must be on sufficient evidence
      2. Conclusions of law must connect to findings of fact/evidence
        
        Agency: want lots findings of fact and obvious conclusions of law
        
        Challenger: want questionable conclusions of law
  2. Standards of Review:
    1. Substantial Evidence: if no vested right and agency has fact finding power
    2. Independent Review: if there is a vested right at stake
      1. judge can take new evidence
4. Procedure:
  1. Not jury trial
  2. Normal rules of appellate practice apply
  3. Also an opportunity to raise € and error of law issues
5. Outcome:
  1. Win: reverse the case with remand to cure as appropriate
  2. Lose: agency decision stands
Agencies Subject to Special Review
1. Worker’s compensation Appeals Board (writ of mandate, court of appeal)
2. PUC (writ of review, CA Supreme Court)
3. State Bar (writ of review, CA Supreme Court)
4. Dept. of Alcoholic Beverage Control (writ of review, court of appeal or CA supreme court)

Theories and Methods of regulation

*in theory the market should serve the public interest, through bottom up democracy and consumer choice

Market Flaws
1. Natural Monopoly
2. Scarcity
3. Adhesion
4. External Costs
  1. Dishonesty/Damages
  2. Possible inability to collect damages
  3. Irreparable harm
5. Collusion
Solutions:
1. Regulation
  1. Permit: no prior restraint (no prescreening), but can be withdrawn upon mistake

1. 1. - Good solution when there is no risk of irreparable harm

1. 1. Certification: prior restraint; can function in the market without it but makes business better when you have it;

1. 1. - Good solution for adhesion/imperfect information

1. 1. License: substantive prior restraint and inability to practice without; most onerous but provides the most protection –

1. 1. - Good solution for irreparable harm
    - Problem: 1^st amendment doctrine against prior restraint
2. Alternatives to Regulation
  1. Bond/insurance
  2. Disclosure
  3. Rule of liability
  4. Prohibition
  5. Tax incentives
  6. Taxes/fees
  7. sale of marketing rights
  8. rewards
  9. restructuring

Identifying the Right Regulation Method
1. What market flaw exists?
2. Is there sufficient irreparable harm to justify prior restraint?
3. Does the regulation assure competence?/Is the method efficient?
4. Lack of alternative check to prevent?

i.e. can consumers judge competence?

Why so many Licensing agencies?
1. Fellmeth: too many!
  1. horizontally organized industries seek regulation to limit the competition and the supply of practitioners, thus driving the prices up
  2. legislature is familiar with licensing and with resort to predetermined licensing scheme rather than look at alternatives

*if there is no risk of irreparable harm, there is no prior restraint needed!

Flaw	Defined	Solution	Regulate?
Natural Monopoly	when only one entrepreneur can operate effectively across the range of demand	Structural change Rate regulation Govt. Ownership	yes
Scarcity	Not enough to service the demand	Market Sale (auction) Qualification First Come Line	yes
Adhesion/ Imperfect Information	Customer doesn’t get all the information and can’t make informed choice	Competition Consumer education Disclosure requirements Certification Permit/Rulemaking	yes
External Costs (Damages)	Production imposes costs on those apart from the buyer and the seller	Internalize by tie-in Internalize by tax transfer Internalize by selling marketing rights Equipment standards Harm/output standards Rule of liability	yes
External Costs (possible inability to assess/collect)	Production imposes costs and there is no assurance of restitution	Bonding/insurance requirements Preliminary relief	yes
External Costs (irreparable harm)	Production imposes health/safety costs that no damages will rectify	Mechanical tie-in by statute Straight Prohibition Public Prosecution (civil/criminal) License revocation	yes
Collusion	Top down coercion, no bottom-up choice (i.e. monopoly)	antitrust prosecution restructure the industry	no

Sunset Review

*the way to make sure that the agencies are necessary and are preventing harm

Defined: a provision in a statute or regulation that terminates or repeals all or portions of the law after a specific date, unless further legislative action is taken to extend it
Process:
1. A date in the agencies enabling statute determines when that agency is to “sunset”
2. Prior to expiration, agency must submit a report and leg. will hold public hearings
3. If program/agency is deemed unnecessary, leg. will let the date pass – deregulation
  1. In CA, just the board is abolished, not the licensing scheme
4. If program/agency is deemed necessary, leg. passes a bill extending the date
Who it Applies to
1. Originally did not apply to DCA agencies
2. Now applies to some non-DCA boards
3. Does not apply to State Bar or any commissions
Standards of Review
1. In the beginning the committee looked at 2 issues
  1. Is regulation necessary?
  2. How is the board performing?
2. SR now looks more at performance of the boards

Sunrise Process

9148. Any state board proposed for creation by the Legislature on or after January 1, 1991, or any category of licensed professional proposed for creation by the Legislature on or after January 1, 1995, shall be subject to this article.

9148.2. “state board” means any administrative or regulatory board, commission, committee, council, association, or authority consisting of more than one person, whose members are appointed by the Governor, the Legislature, or both

9148.4. Prior to consideration…a plan for the establishment and operation of the proposed state board or new category of licensed professional shall be developed by the author or sponsor of the legislation. The plan shall include, but not be limited to, all of the following:
1. A description of the problem …including the specific evidence of need for the state to address the problem.
2. The reasons why this proposed state board or new category of licensed professional was selected to address this problem, including the full range of alternatives considered and the reason why each of these alternatives was not selected. Alternatives that shall be considered include, but are not limited to, the following:
  1. no action
  2. use of a current state board or agency or the existence of a current category of licensed professional to address the problem,
  3. the various levels of regulation or administration available to address the problem.
  4. addressing the problem by federal or local agencies.
3. The specific public benefit or harm that would result…the specific manner in which the proposed state board or new category of licensed professional would achieve his benefit, and the specific standards of performance which shall be used in reviewing the subsequent operation of the board or category of licensed professional.
4. The specific source or sources of revenue and funding to be utilized by the proposed state board or new category of licensed professional in achieving its mandate.

————————————————————————————————————

Constitutional Limits

Constitutional Limits on Regulatory Actions
1. State Board of Dry Cleaners v. Thrift-D-Lux Cleaners: no need for the Board or the regulation
  1. Facts: Act provided for the creation of the Board and provided that the Board could establish minimum price schedules for dry cleaning services. Thrift-D-Lux charged a price below the board’s established minimum price. The board filed a complaint charging them with violations of the price schedule. The dry cleaning business sought a demurrer, which the trial court sustained, based on the ground that the minimum price provisions of the Act were in violation of the due process clauses of the state and federal constitutions.
  2. Held: affirmed, the price fixing provision of the Act was invalid because it was not an enactment that provided for the public health, safety, morals, or general welfare and that both the board and the price schedule violated the due process clauses of the state and federal €
2. Gibson v. Berryhill: Board too biased to hold its own license revocation hearings
  1. Facts: Appellee optometrists filed suit under § 1983 of seeking an injunction against scheduled hearings regarding revoking appellees’ licenses, alleging that the Board was biased and could not provide appellees with a fair and impartial hearing.
  2. Held: The Court affirmed the lower court’s conclusion that appellant Alabama Board of Optometry was so biased that it could not constitutionally conduct licensure revocation hearings but vacated the district court’s injunction.
3. Bayside Timber Co. v. Board of Supervisors
  1. Facts: Bayside Timber obtained an operations permit under the Forest Practice Act, , but the board of supervisors refused to issue local permits. The trial court ordered appellant to issue the permits. On appeal, appellants raised for the first time the constitutionality of the act.
  2. Held: the part of the act which provided for the promulgation of forest practice rules was unconstitutional
  3. Rationale: The court noted that the act had delegated to timber interests the power to formulate forest practice rules which, when adopted, had the force and effect of law, but had provided no guides or standards to prevent its abuse. Such a grant of authority was an unconstitutional delegation of legislative power. The court also noted that the fact that the authority had been delegated to persons with a pecuniary interest in the subject matter of the rules, therefore not protecting the public interest
    1. FPA delegated the authority to makes rules to those people who were directly affected by the rules (the trade regulated)
4. Moore v. Board of Accountancy
  1. Facts: Unlicensed accountants (non-CPA’s) challenged the Board of Accountancy rule forbidding non-CPA’s to use the terms “accountant” or “accounting” in their advertising.
  2. *CPIL Arguments:
    1. The rule infringes on first amendment commercial speech rights of independent accountants
    2. Legislature specifically authorized unlicensed accountants performing lawful accounting services to use the terms “accountant” and “accounting” in their advertising
  3. Court upheld but rewrote the rule (which they can’t really do) saying that non-CPA can use the terms if they provided a disclaimer that what they do does not require a CPA
  4. Motion for reconsideration denied
  5. Board still hasn’t changed the rule, and occasionally enforced the rule
5. Cornwell v. California Bd. of Barbering & Cosmetology
  1. Facts: African hairbraiders brought an action against state agencies and officials, alleging that the licensing requirements of the Cosmetology and Barbering Act, as applied to hairbraiders, violated the due process, equal protection, and privileges and immunities clauses of the federal and state constitutions.
  2. Held: The training requirements of the CBA were un€ as applied to P’s, as they were not rationally related to the means
  3. Rationale: the majority of the training was unrelated to the hair braiding profession and did not further the state interest in protecting the health and safety of the public
*Bob:
1. Arguments against state agencies:
  1. Everything state agencies do is limited by € concepts
  2. State € can create a higher floor than fed € in terms of individual liberty
  3. Employ strict scrutiny, heightened scrutiny or rational relation
    1. SS applies when FLI or equal protection of suspect class is involved
      1. political speech
      2. commercial speech (though in a HS manner)
      3. race
      4. religion
    2. HS applies in equal protection for questionable classification – in flux
      1. Disability
      2. Gender
      3. sexual orientation
    3. RR applies in all other contexts (what state attorney wants)
  4. Freedom of Contract
    1. Minimum Rate Regulation
    2. Entry Controls
    3. Generally not a viable argument, but may be in terms of minimum rate regulation
      1. Thrifty-Lux: struck minimum rates as violative of freedom of contract because there was a lack of nexus (RR standard)
  5. Due Process – Taking
    1. vested rights require higher procedural due process standards than prospective rights,
    2. what is not a taking is generally broadly interpreted, including property rights
    3. Maximum rate regulation: due process argument is in favor of commercial enterprise (i.e. insurance), argument is that they are entitled to a fair rate of return on their investment, and if they cannot obtain such through regulated rates then the regulation is a taking
    4. Entry Controls (Cornwell)
    5. Standards
    6. Enforcement/Discipline: SS usually met because there is a legitimate state interest in protection of the public, but turns on nexus – Gibson v. Berryhill
  6. Due Process – Procedure
    1. Maximum Rate Regulation
    2. Entry Controls
    3. Standards
    4. Enforcement/Discipline
      1. Gibson v. Berryhill: cannot regulate private and corporate optometrists be creating a board consisting of private optometrists discriminating against corporate
  7. Interstate Commerce
    1. Almost anything affects interstate commerce
    2. When state agencies burden interstate commerce (DCC):
      1. State agencies all create barriers for out of state competitors – are they concerned about out-of-staters flooding the market and decreasing the value of services, or are they legitimately concerned about protecting the public from lower standards used in other states?
      2. Case law has allowed the states to vary in their regulations to a certain amount – depends on what is being regulated
      3. Dairy Cases (Dean Milk, Shamrock)
  8. 1^st Amendment Free Speech
    1. Limitations on what standards (rules) can be set
    2. Commercial Free Speech – standard similar to HS
      1. VA Board of Pharmacy
        
        Argument: there shouldn’t be price regulations on pharmaceuticals because prices should be based on doctor’s advice
        
        Generic drug manufacturers wanted to advertise price
        
        Court found no nexus b/w pharmaceutical safety, doctor guidance and control and pricing prohibition
        
        Still can’t be misleading or deceptive
      2. Attorney Advertising case:
        
        Bar prohibits attorney advertising
        
        Courts says that the Bar can’t restrict advertising unless its misleading
    3. Political Free Speech – SS
  9. 4^th Amendment Search and Seizure
    1. Enforcement/Discipline
  10. 14 Amendment
    1. Equal Protection

Antitrust law limitations

Policy:
1. 1. Allocate economic resources
  2. Ensure lowest prices
  3. Ensure quality
  4. Ensure material progress
  5. Preserve democracy
  6. *Bob:
    1. Marketplace function: needs to be many actors acting independently and consumer choice for there to be a market – antitrust laws were designed to guarantee that bottom-up structure is going to work
    2. antitrust laws are focused on horizontal restraints
Excessive Regulation – Analysis
1. Threshold
  1. Market flaw:
    1. Risk of irreparable harm, and
    2. Market cannot assess quality

 YES: regulation ok

1. 1. Type of Regulation (licensing, certification, etc):
    1. Nexus: is the type of regulation appropriate – is there a nexus between the regulations and the need for regulation?
2. Scope/Degree:
  1. Does the agency regulate in areas without a need, or
  2. Does the agency regulate beyond the scope of the risk?
Federal Antitrust Laws
1. Sherman Act: (parallel to Cartwright Act – see below)
  1. In General: Prevents combinations in the restraint of trade
  2. State Action Immunity Doctrine:
    1. Parker v. Brown: State actions are not subject to the Sherman Act
    2. Midcal: Private actions are not subject to antitrust laws if:
      1. Actions are undertaken pursuant to a clearly articulated and affirmatively expressed state policy, and
      2. The actions are adequately supervised by the state
        
        MidCal:
        
        Facts: wine distributor challenges vertical price fixing on wine by liquor dealers assn
        
        Held: no immunity – clearly articulated and affirmatively expressed requirement is met, but there was no state supervision
        
        Hudson v. Chula Vista: municipalities immune if acting pursuant to state policy
        
        Facts: P sought to compete for trash collection contracts with City of Chula Vista. The City offered the contract to another provider without offering bidding opportunities to others, including P. P argues that the City acted in violation of the Sherman Act.
        
        Held: No violation – the City was operating under authority granted by the State and that state supervision need only be shown were private persons claim state immunity.
        
        Patrick v. Burget: peer-review practices not immune
        
        Facts: Physician who was given bad reviews and terminated by competing physicians on peer-review board challenges the peer-review practices under federal anti-trust law.
        
        Held: no immunity for peer-review practices; state procedural oversight is not “state supervision” within the meaning of the Midcal test; there is no “state supervision” unless the state has and exercises ultimate authority over private-privelige termination
2. Federal Trade Commission Act
3. Clayton Act

Must affect

interstate commerce

for federal antitrust law to apply

State Antitrust Laws
1. Cartwright Act: Provides a cause of action and remedies for antitrust violations occurring in CA, independent of federal law
  1. Parallel to Sherman Act: decision under Sherman Act are important guides in analyzing Cartwright matters, but are not binding
  2. Prohibited Conduct:
    1. Trusts: a combination of capital, skill or acts by two or more person for:
      1. Creating or carrying out restriction in trade/commerce
      2. Limit or reduce production or increase prices
      3. Prevent competition in manufacturing, transportation, sale or purchase
      4. Price fixing
      5. Enter into or carry out agreements fixing or limiting prices or competition
    2. Tying Arrangements: agreement requiring that a as a precondition of purchasing or obtaining services, that other services must be purchased and must be purchased through the seller
    3. Exclusive Dealing: a seller of a product may not by contract or coercion set the price at which the buyer may resell the product
    4. *Bob:
      1. Prohibits monopolization, not monopolies
        
        Legal monopolies arise by out-performing competitors
        
        Monopolization is acquisition through unlawful exclusionary acts
      2. Must be a combination:
        
        Ogopolistic structure: only a few competitors
        
        US v. Container: within 48 hours competitors raised their prices but govt. couldn’t prove that it was the result of any agreement. Court said that it was a combination because there was no reason to raise prices. Defense rebuts combination by showing that they had an independent reason to raise prices.
  3. Exemptions:
    1. State Action: government entities are not “persons” under the act, so the Act does not apply to the activities of govt. entities
      1. Exception: business discrimination provision applies to govt.
    2. Regulatory Action: certain regulatory statute provide exemptions for what would otherwise be an antitrust violation, such as CPUC and Food and Agriculture
    3. Noerr-Pennington: under the First Amendment, it cannot be a violation of the federal antitrust laws for competitors to lobby the government to change the law in a way that would reduce competition
      1. “Mere Sham Doctrine” – Noerr Pennington does not apply in the absence of a purpose to actually obtain government action
    4. Res Judicata: a P who was unsuccessful on a Sherman Act theory in federal court is barred from bringing Cartwright action in state court
    5. Collateral Estoppel: D may be bound where the facts of restraint of trade were established in another proceeding
    6. Reasonableness Standard: broad analysis of the facts specific to the business, the history of the restrain, and the reasons why it was imposed

*Bob – considerations:

1. 1. 1. 1. Relevant product market: elasticity of demand, product and all possible substitutes for that product; is a consumer looking for one also looking for the other?
      2. Relevant geographic market
      3. Goal: bottom-up choices rather than top-down offering
    2. Per Se Doctrine: 5 practices conclusively presumed to be unreasonable:
      1. Price fixing among competitors
      2. Market division among competitors
      3. Certain forms of group boycotts
      4. Tying arrangements
      5. Vertical price fixing or resale price maintenance
2. Unfair Practice
3. Unfair Competition
Conflict of Law:
1. Statute v. Regulation:
  1. Statutes are broad
  2. Regulations carve out an exception to the statute
2. Federal v. State:
  1. Federal statute entitled to supremacy as to matters that affect interstate commerce
  2. State can carve out exception to federal if:
    1. Clearly articulated and affirmatively expressed in the statute, and
    2. Subject to independent state supervision

state/private action

Limitations on Licensing Boards
1. The Problem:
  1. The majority of board members are licensed professionals in the industry – so they are also competitors of those they are regulating
2. The law:
  1. Supreme Court: state agencies are not immune from antitrust laws by virtue of their status alone
  2. State Action Immunity Doctrine:
    1. State actions are not subject to the Sherman (under Parker) or Cartwright Acts (under the language of the Act itself)

Private actions (Midcal) are not subject to antitrust laws if:

1. 1. 1. 1. Actions are undertaken pursuant to clearly articulated state policy, and

 the anticompetitive action must be foreseeable under the state grant of authority governing the subdivision, agency or board

 requires either state action itself or action in furtherance of clearly articulated policy

 may be anticompetitive if outside the scope of the board’s authority (thus members may be personally liable)

1. 1. 1. 1. The actions are adequately supervised by the state

 usually not necessary to prove for regulatory board members, but would be necessary for anticompetitive acts of non-board members

 amount of supervision required is proportional to the amount of discretion exercised by private parties

Ethical Standards for State/Local Officials

Basic concept: decisions should be made by the body politic on the merits, and if there is a vested profit stake there is an intensity of interest
Issues
1. Balance: to what extend should decisions be influenced by profit stake of lobbyists before the decision makers
2. Bribery:
  1. *Bob: The highest concern for all 3 branches
  2. Defined: a corrupt intent to influence
  3. To prove, you need to establish a quid pro quo
  4. Occurs most often in campaign contributions
3. Extortion:
  1. Defined: using a threat to get some to perform an official act
4. Conflict of Interest – §1090
  1. Defined: when there an interest/detriment that is disproportionate to the interest of the public (proportionality is key)
  2. Remedy is recusal
  3. Rule of necessity: if your vote is necessary to hold a vote, necessity may overcome the prohibition
5. Campaign Contribution:
  1. Amount Limits:
    1. There were fairly tights limits in 1960-1970’s
    2. There was an attempt in the 1980’s to enact a system of public finance for state legislative office, where support from local district would be matched 5x by the govt., and legislators put forward prop 73 to compete with it, which was sold as “more ethical” and had some limits but no public finance option – both won

- - Prop 73 was thrown out because limits were by year and not by campaign
  - No limits at all in CA until prop 34
  - Prop 34: (now in effect) $3k per person per election for state office, 20k for political committees

Bob

1. 1. Disclosure

- - Contributors have to disclose who and how much
  - Lobbyists have to disclose who they are, how much was given and to whom
  - Information is now online

1. Honoraria/Gifts:
  1. Cant take more than 250 from one source per year
  2. Lobbyists can only give $10 a month
  3. State officials and agency officials cant lobby the legislative or staff committee or agency that they served on for 1 year after leaving office

Budget Process

The agency’s budget enables them their enforcement capabilities
Mechanics/Timeline
1. 1-10 budget proposed
2. 2-18 LAO report
3. 5-14 may revise
4. 6-15 adoption
5. 7-1 effective date
Problems:
1. usually the 6/15 adoption timeline is not met
2. CA has supermajority requirement, 2/2 vote to enact the budget, which is exacerbated by caucus vote
Special Fund structure:
1. Does not come out of general fund
2. Comes from renewal fees coming from the industry
3. usually there is a ceiling under which agencies can request additional money
4. Problems:
  1. Regulations are subject to change according to special interests that may contribute financially to the agency
  2. Proprietary control: agencies are actually funded through consumers of that industry – regulatory structure allows the costs pass to the consumers
  3. Stealing from the funds by using accounting tricks to avoid taxes on new revenue
  4. State govt does not have the ability to go into debt like the federal govt.

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