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June 2015
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Businesses Use Innovative Technology & Behavioral Policy to Conserve Water

Businesses Use Innovative Technology & Behavioral Policy to Conserve Water Charles Goulding and Michael Wilshere discuss the engineering and behavioral practices utilized to enhance water conservation.

The growing worldwide water shortage problem is a large one. California is currently in the fourth year of its worst drought in recent history. Governor Jerry Brown recently issued an executive order mandating water use restrictions aimed toward reducing water consumption by 25%.

This means that only low-flush toilets and low-flow sinks will be available for sale after Jan. 1, 2016. Retailers will not be permitted to sell showerheads, toilets, urinals, bathroom, and kitchen faucets that violate the new standards. These provisions apply to commercial building owners installing new fixtures as well. Other states are experiencing similar water shortages and are expected to enact similar increasingly stringent restrictions.

Washington Governor Jay Inslee recently declared a statewide drought emergency expressing concern about the difficult decisions that must be made in allocating water among users. A 2013 survey of the world’s largest companies by Deloitte Consulting found that 70% of respondents identified water as a substantial business risk. With drought conditions threatening businesses in western regions of the country, managers are increasing their conservation efforts in order to boost their bottom line.

Like other naturally occurring events, water shortages can create large risks and opportunities for businesses. Recognizing the problem, most large consulting and accounting firms have published extensive coverage of the issue. These professionals can help their clients meet new legal mandates, reduce operating costs, and obtain available government rebates by conserving water.

Water conservation approaches generally fall into two categories:
  1. Engineering practices based on modifications in plumbing, fixtures and technology
  2. Behavior practices based on changing water use habits
The first approach involves innovative design techniques as well as cutting edge technology. Dual flush toilets, for example, have two separate flush options, one for solid wastes and another for liquid wastes. With this technology, both flush options are efficient but the liquid one uses even less water. A flush for solid waste uses about 1.6 gallons of water per flush while the liquid waste option only uses about 1.1 gallons.

For commercial building owners, this means reduced flush water usage of about 32% according to a recent study by the Department of Agriculture. Realizing this, managers of large corporate buildings are dramatically reducing water consumption. The Staples Center, for example, home to the Los Angeles Lakers and Los Angeles Clippers, conducted an energy audit and found that each of its 178 urinals used 44,000 gallons a year. By replacing them with waterless urinals, it has saved more than seven million gallons and $28,200 annually.

In addition, more cutting edge technology involves big data analytics, smart devices, and GPS. Irrigation software systems allow superintendents and groundskeepers to efficiently operate the entire irrigation system from their office. With the click of a mouse and the assistance of graphic screen displays you can adjust run times, cherry pick individual sprinklers, and adjust water pressure/distribution on a per sprinkler basis.

Setting the system so that it turns itself off automatically when it rains also saves water. Sensors not only have the ability to sense rain but also to gauge the level of rainfall or moisture in the soil and adjust water distributions accordingly. Other systems collect data from radio receivers that continuously gather precipitation and humidity data from weather stations. The data helps the computer make a decision on how much water to distribute at any given time. GPS and aerial photography allow users to simply tap a screen in order to activate the area that needs irrigation.

Technological innovation as discussed above is not the only way managers conserve water. The second approach involves behavioral practices. Some practical approaches for business include the following:
  • Detecting and fixing leaks
  • Making sure water pressure is not above 65 psi
  • Using reclaimed water
  • Instituting an employee water conservation awareness and education program
  • Conducting a facility audit to quantify water use
  • Dry sweeping or using a water broom instead of a hose to clean floors, sidewalks and other hard surfaces
Many of the water conservation techniques described above are being incentivized by federal and state governments. In many western states, typical commercial rebates are available for the use of water efficient technology such as, high efficiency toilets, low-flow faucets, grass replacement, rotating sprinkler nozzles, and other efficient water use and irrigation technologies. In many regions, commercial interest in such rebates has been so overwhelming that applications have been limited to a first-come first serve basis.

With the growing worldwide water shortage problem, businesses around the globe are conserving water to save on operating costs. The need to conserve is forcing innovative developments in water technology while managers are beginning to think about organizational behavior to reduce water usage. Rebates are available to commercial users for water conservation efforts.
A Refresher on Deferred Compensation Arrangements

A Refresher on Deferred Compensation Arrangements Generally, the guidance in FASB Accounting Standards Codification (ASC) 710, Compensation – General, provides the relevant guidance associated with accounting for deferred compensation arrangements. However, when deferred compensation arrangements are in substance a pension or other postretirement benefit plan, the applicable guidance is found in FASB ASC 715, Compensation – Retirement Benefits. In most situations, the applicable guidance to be followed in accounting for deferred compensation arrangements is found in FASB ASC 710. However, the following types of arrangements fall under the umbrella of guidance in FASB ASC 715:
  • Any arrangement that is in substance a pension or postretirement benefit plan, regardless of its form or the means or timing of its funding.
  • Written plans and unwritten plans where existence is discernible either from a practice of paying pension or other postretirement benefits or from verbal representations made to current or former employees.
  • Deferred compensation contracts with individual employees if those contracts, taken together, are equivalent to a plan that provides pension or other postretirement benefits.
  • Health and other welfare plans expected to be provided to employees deemed to be on a disability retirement.
As noted in the third item, if the aggregate of deferred compensation contracts with individual employees in substance result in the arrangements being equivalent to pension or other postretirement benefit plans, the guidance in FASB ASC 715 would need to be followed rather than the guidance in FASB ASC 710. In FASB ASC 715, the guidance is that the terms of individual contracts are considered to govern the accrual of obligations for deferred compensation, and the cost is to be attributed over the employee service periods until full-eligibility is attained. However, the guidance in FASB ASC 715 does not apply in addressing situations where employers follow a practice of providing pension or other postretirement benefits to selected employees under individual contracts with specific terms determined on an individual-by-individual basis. In these circumstances, the contracts need to be accounted for following the guidance in FASB ASC 710.

Pursuant to the guidance in FASB ASC 710, to the extent the terms of deferred compensation contracts attribute all or a portion of the expected future benefits to an individual year of employee service, the cost of those benefits is required to be recognized in that particular year. However, to the extent of the terms of the contract attribute all or a portion of the expected future benefits to a period of service greater than one year, the cost of those benefits is required to be accrued over that period of employee service in a systematic and rational manner.

In circumstances where arrangements include elements of both current and future services, only the portion applicable to the current services should be accrued. Further, some deferred compensation contracts provide for periodic payments to employees or their surviving spouses for life with provisions for a minimum lump-sum settlement in the event of the early death of one or all of the beneficiaries. The estimated amount of future payments to be made under these type contracts needs to be accrued over the period of active employment from the time the contract is agreed upon or entered into.

Using the provisions of FASB ASC, amounts to be accrued periodically are required to result in an accrued amount at the full-eligibility date equal to the then present value of all future benefits expected to be paid. These estimates are required to be based on the life expectancy of each individual concerned, based on the most recent mortality tables available, or on the estimated cost of annuity contract rather than on the minimum payable in the event of early death. At the end of the accrual period, the aggregate amount accrued should be equal to the then present value of the benefits expected to be provided to the employee, any beneficiaries, and covered dependents in exchange for the employee service to that date.

FASB ASC 710-10-55 provides illustrative guidance addressing various practical issues related to deferred compensation contracts.
Investor or Corporate Officer: The Risks of Ambiguous Authority

Investor or Corporate Officer: The Risks of Ambiguous Authority The following case, in the Matter of Peter Pappas, Determination DTA Nos. 822124 and 822125 (New York Division of Tax Appeals 2014), illustrates the issues that arose when an investor in two smaller corporations was characterized in corporate documents as holding more authority than he claimed that he actually held. In this case, the taxpayer, who owned 45 percent of each of two corporations, was held personally liable for the unpaid sales and use taxes owed by those corporations. How could such a result occur?

New York State Tax Law §1133(a) imposes on any person required to collect the tax imposed by Article 28 of the NY Tax Law personal liability for the tax imposed, collected, or required to be collected. A person required to collect tax is defined to include, among others, corporate officers and employees who are under a duty to act for such corporation in complying with the requirements of Article 28 (NY Tax Law §1131[1]).

The mere holding of corporate office does not, per se, impose tax liability upon an office holder. Rather, whether a person is an officer or employee liable for tax must be determined based on the particular facts of each case. As summarized in Matter of Constantino:

“[t]he question to be resolved in any particular case is whether the individual had or could have had sufficient authority and control over the affairs of the corporation to be considered a responsible officer or employee. The case law and the decisions of this Tribunal have identified a variety of factors as indicia of responsibility: the individual’s status as an officer, director, or shareholder; authorization to write checks on behalf of the corporation; the individual’s knowledge of and control over the financial affairs of the corporation; authorization to hire and fire employees; whether the individual signed tax returns for the corporation; the individual’s economic interest in the corporation (citations omitted).”

In terms of a general proposition, the issue to be resolved was whether the taxpayer had, or could have had, sufficient authority and control over the affairs of the corporation to be considered a person under a duty to collect and remit the unpaid taxes in question. One in a position of responsibility cannot escape the same by disregarding or delegating such responsibility to others to discharge.

The taxpayer bore the burden of proof to overcome the presumed correctness of the Division’s assessments. In order to prevail, “the taxpayer was required to establish by clear and convincing evidence that he was not an officer having a duty to act on behalf of the corporation, i.e., that he lacked the necessary authority or he had the necessary authority, but he was thwarted by others in carrying out his corporate duties through no fault of his own (citations omitted)”. The Court said that the taxpayer failed to sustain his burden of proof.

The taxpayer’s claim rested mainly on his assertion that he was not involved in the day-to-day affairs of the corporations, but instead worked full time in his import/export business. He asserted that he was merely an outside investor in the two franchises, and that although he might have been listed as an owner and officer (president), he did not have any responsibility to the corporations and that Mr. Papamichael was responsible for handling corporate affairs and running the stores. Essentially, the taxpayer maintained that he was duped by Papamichael, a long-time trusted former friend. In contrast, however, the evidence showed that the taxpayer invested a significant amount of money and also contributed a leasehold to the premises used as the business location for one of the corporate entities. He signed the franchise agreements and a guarantee of personal liability to the franchisors. He was also listed as holding the title of president, and was one of two majority stockholders of each of the corporations. He admitted having signature authority over the corporations’ bank accounts and authority to sign documents, including checks and tax returns on behalf of the corporations. These latter items carry with them more than the level of responsibility typically held by a mere outside investor.

The Court said that the taxpayer’s decision to rely on others and not be directly involved in operational matters did not relieve him of liability for the unpaid taxes at issue. It is well established that more than one person can be held liable as a responsible officer under the statute, and such liability is joint and several. In this regard, NY Tax Law §1133(a) provides that “every person required to collect any tax imposed by this article shall be personally liable for the tax imposed, collected or required to be collected under this article” (emphasis added), thereby creating joint and several liability for unpaid sales tax. The Division was under no obligation to pursue other responsible persons before proceeding against the taxpayer.

Moreover, there was no evidence to show that the taxpayer did not have or could not have exercised sufficient authority and control over the corporations’ affairs during the periods at issue herein so as to be excused from responsibility for their tax obligations. Although he maintained that others had full control over the businesses, he failed to present any corporate documents, including corporate minutes, establishing the same. Instead, it appeared to the Court that the taxpayer simply chose not to engage in any involvement or exercise any authority from the outset. Indeed, there was no indication that he asked to see the corporate books or bank statements or inquired as to the filing of tax returns, notwithstanding the presence of certain factors, including the essentially unexplained “inability” of Papamichael to sign documents or hold ownership of the entities, that would have made it clearly prudent for the taxpayer to have done so. It was likely that, at some point in time, information was deliberately withheld from the taxpayer, that he was misled with respect to the corporations’ tax obligations and that, ultimately, he was affirmatively precluded from participation in the corporate duties by the actions of Papamichael. However, the time frame after which the taxpayer was unable to exercise the foregoing authority to access and examine the books and records of the corporations and take necessary action was not clearly specified in the record.

The taxpayer contended that he should not be held responsible because he never possessed any actual authority to pay sales taxes. He claimed that the actions of Papamichael effectively thwarted him from having access to the corporations’ records and thus precluded his ability to take any action on behalf of the corporations. The Court said that the taxpayer’s arguments, at least concerning the periods at issue, were unavailing. The record did not include the articles of incorporation, corporate bylaws or minutes of any corporate meetings. The taxpayer was a corporate officer and one of two major shareholders of the corporations and, as such, had a fiduciary duty to the corporations in complying with the corporations’ tax obligations. The controlling consideration is the authority to act and not the degree to which one actually exercises that authority. Essentially, the taxpayer chose to trust Papamichael and to delegate the responsibility for the management of the corporations’ financial matters to him.

The record contained no evidence of any restrictions on the taxpayer’s ability or authority to inspect the corporate books and records during the periods at issue. Rather, it appeared to the Court he simply never asked to do so. The record revealed no real inquiries or efforts to assure compliance with the corporations’ tax obligations. In fact, there was no evidence as to the taxpayer’s efforts, if any, to obtain the corporations’ books and records at any time prior to retaining an attorney at some point in or about late 2005. He simply did not undertake any responsibility for the management of the corporations’ financial and operational matters, leaving the same to Papamichael, and he exercised no oversight or inquiry over how the financial aspects of the businesses were carried out. Such inaction did not excuse the taxpayer from responsibility. At a minimum, the manner in which the corporations were set up, including the taxpayer’s admitted knowledge that Papamichael could not sign documents, should have reasonably alerted him to the need to be more vigilant concerning how the corporations were being operated.

The Court said that the taxpayer raised no specific arguments in support of abatement of the penalties assessed in this matter. Accordingly, the Court found that the taxpayer was a person responsible for the collection and payment of sales tax pursuant to NY Tax Law §§ 1131(1) and 1133(a) and was personally liable for the sales taxes, plus interest and penalties.
The Accounting and Tax Aspects of Doing Business in Cuba

The Accounting and Tax Aspects of Doing Business in Cuba Charles R. Goulding and Jennifer Pariante discuss the potential of trade opportunities between the U.S. and Cuba and the barriers that currently still exist.

The recent thaw in U.S./Cuba relations has many U.S. businesses thinking about the potential for travel and hospitality in Cuba and providing consumer goods to Cuba’s 11,000,000 people. Accountants and tax professionals serving this market should be knowledgeable about the Cuban business environment while providing advice to companies interested in accessing this newly opening market.

The many decades of U.S. trade embargo have had a major impact. The Cuban per capita GDP is currently only $6,000 which doesn’t create a strong local consumer market despite the pent up demand.

A good example is the recent change in early 2014 permitting automobile sales in Cuba. In January 2014, Cubans were afforded the right to buy new and used vehicles for the first time in 50 years, however, price increases of 400 percent or more quickly diminished their hopes. Despite the huge demand (nine out of ten Cuban households are without cars), the prices were so high very few Cubans could afford to buy a new car from any of the international brands. For example, one of the lowest priced cars is a 2005 Renault, which was on sale in Cuba for the equivalent of $25,000, yet available outside Cuba online for a mere $3,000. Another example is the 2009 Hyundai minivan that was listed at the astronomical price of $110,000. Since the average monthly wage in Cuba is $20, the majority of Cubans will not be able to purchase any cars. Philip Peters, a longtime Cuba analyst and president of the Virginia-based Cuba Research Centre, pointed out that the exorbitant sticker prices on the cars would mean fewer sales and, as a result, the state leaving money on the table.

There are limited country resources and expertise for meeting today's construction project requirements for hotels and hospitality facilities. National hotel brands have construction standards particularly for hurricane zones that require high engineering, design and skill levels. Although these skills are available in nearby Miami, Miami is experiencing its own construction boom.

Accountants preparing project budgets need to be cognizant of the cost of time delays related to resource limitations and permitting requirements. For example, it took the recent production of the Broadway play Rent over a year to get the required permits to put on their show in Havana.

The type of recreational boating common to a major tourist market has been severely curtailed in an attempt to limit Cuban citizens from exiting the country. Cuba is not a party to many of the major North and South America free trade agreements, therefore cross border product transactions including import regulations, customs duties, and other trade processes are uncertain. Note, however, that in 2013 Cuba did create its first free zone and there are select free trade agreements (primarily with nearby South American countries).

The Wharton School of the University of Pennsylvania will host a major conference in New York City on April 1st, 2015. Titled the “Cuba Opportunity Summit,” senior U.S. executives will have the opportunity to gain insight into the legal and business challenges of doing business in Cuba. Additionally, they are seeking to formulate a strategic roadmap for entry into the market. The conference series is targeted at U.S.-based and multinational companies formulating their board strategies on Cuba, in the wake of the President’s announcement that the United States will seek to forge diplomatic relations with Cuba.

Trade with Cuba has great potential; however, patience and planning are required to manage the transition from a 1960’s economy to a 2015 business environment.
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