Registration for H-1B Cap-Subject Petitions Opens in March

The electronic registration process for H-1B cap-subject petitions will open on March 1, 2022 and end on March 20, 2022. U.S. Citizenship and Immigration Services (USCIS) will utilize a random lottery process to select 85,000 petitions for the H-1B cap (65,000 for the general category and 20,000 for the U.S. advanced degree category). Applicants selected in the random lottery will be notified by March 31 and will have until June 30 to submit the H-1B petition for the beneficiary named in the registration. In previous years, USCIS has conducted second and third rounds of the lottery to meet the H-1B cap.

Varnum immigration attorneys have begun to collect information to be prepared for the March registration period. Employers with employees on F-1 Optional Practical Training (OPT) or candidates needing cap-subject H-1Bs should contact us by mid-February for assistance with registration.

US Supreme Court Halts Federal Vaccination Mandate for Employers, but Permits CMS Rule to Take Effect

Today, January 13, 2022 the U.S. Supreme Court issued two significant rulings regarding two of the federal COVID-19 vaccine mandates. First, the Supreme Court stayed the Federal Occupational Safety and Health Administration’s (OSHA) Emergency Temporary Standard (ETS) on COVID-19 for employers with 100 or more employees. This means the ETS is no longer in effect at this time, and employers are not under an obligation to comply with its requirements.

Second, the Court granted the federal government’s request that the preliminary injunctions blocking the Healthcare Centers for Medicare & Medicaid Services (CMS) Interim Final Rule (the “CMS Rule”) in certain states be lifted. This means CMS is allowed to move forward with its rule for healthcare workers nationwide, and that covered employers must comply with the CMS Rule.

The following is an update on the impact of the Supreme Court’s rulings for each rule.

OSHA ETS

As previously reported, the Supreme Court held an emergency hearing on January 7, 2022 regarding a judicial stay of OSHA’s ETS on COVID-19 for employers with 100 or more employees. Today, the Supreme Court ruled in favor of petitioners granting the judicial stay by a 6 –3 vote, with Justices Roberts, Thomas, Alito, Gorsuch, Kavanaugh, and Barrett voting in favor and Justices Breyer, Sotomayor, and Kagan dissenting.[1]

As a result, enforcement of OSHA’s ETS has been halted pending the disposition of the case in the United States Court of Appeals for the Sixth Circuit.

According to the Supreme Court’s ruling, the petitioners “are likely to prevail” on the merits of their case in front of the Sixth Circuit because COVID-19 impacts all areas of life and not just the workplace. The Supreme Court stated that “[p]ermitting OSHA to regulate the hazards of daily life – simply because most Americans have jobs and face those same risks while on the clock – would significantly expand OSHA’s regulatory authority without clear congressional authorization.”

While the Supreme Court acknowledged that OSHA has some authority to regulate occupation-specific risks related to COVID-19, it does not have such authority when OSHA takes an “indiscriminate approach” and “fails to account for” the crucial distinction between occupational risk and risk more generally.

The Supreme Court’s ruling today means that the ETS is stayed nationwide and that the vaccine and testing requirements for employers with 100 or more employees are blocked from taking effect. While this ruling is not the final decision of the case, such rulings are an indication of how the Supreme Court may ultimately decide should the case appear again in front of the Court. We will continue to monitor whether OSHA continues its efforts to defend the ETS after today’s ruling.

Healthcare Employers: CMS Interim Final Rule

As previously reported, the Supreme Court also held an emergency hearing on January 7, 2022 regarding the U.S. government’s request to issue a stay of the preliminary injunctions that are currently preventing the CMS Rule from taking effect in 25 states.

Today, the Supreme Court ruled in favor of the U.S. government, granting the judicial stay by a 5 – 4 vote, with Justices Roberts, Breyer, Sotomayor, Kagan, and Kavanaugh voting in favor and Justices Thomas, Alito, Gorsuch, and Barrett dissenting.[2]

According to the Supreme Court, the “challenges posed by a global pandemic do not allow a federal agency to exercise power that Congress has not conferred upon it.” However, “[a]t the same time, such unprecedented circumstances provide no grounds for limiting the exercise of authorities [an] agency has long been recognized to have.”

Here, the Supreme Court found that the CMS Rule fell within the authority that Congress had conferred on the Secretary of the Health and Human Services agency. Specifically, the Court stated that Congress has authorized the Secretary of Health and Human Services to “impose conditions on the receipt of Medicaid and Medicare funds” which are “necessary in the interest of the health and safety of individuals who are furnished services.” The Court noted that “COVID-19 is a highly contagious, dangerous, and – especially for Medicare and Medicaid patients – deadly disease.”

The Supreme Court’s ruling today means that the injunctions by the lower federal courts are lifted and the CMS Rule is in effect nationwide. We will have to wait and see if CMS issues any guidance for its compliance dates following the Court’s ruling.

Please contact your Varnum attorney, or any member of the firm’s labor and employment practice team, with questions about how this change will affect your workforce.

[1] National Federation of Independent Business, et al., v. Dep’t of Labor and OSHA, et al. and Ohio, et al. v. Dep’t of Labor and OSHA, et al.
[2] Joseph R. Biden, Jr., President of the United States, et al. v. Missouri, et al. and Xavier Becerra, Secretary of Health and Human Services, et al., v. Louisiana, et al.

To (b) Or Not to (b): Thinking Through a Potential Section 83(b) Election

Recently you came across an exciting startup company that is developing an app for business that could revolutionize an industry. After extensive discussions with its founder and the recognition that your skills could substantially benefit the company, the parties agree that you will soon receive restricted stock that will vest over a period of time in exchange for the valuable services you will provide over a multi-year period. After telling friends at a cocktail party about your exciting opportunity, they mention that you may want to make a section 83(b) election. Until this point you had successfully avoided anything to do with the IRS or tax, but after hearing of potentially “huge tax savings” from friends by simply making this election, you realize that you need to get a better understanding of this election and whether it’s right for you. Fear not, this article is here to help with your decision.

Receipt of Stock for Services

To understand a section 83(b) election, our service provider must first understand the default rule under section 83(a). Under section 83(a), when a service provider receives property in exchange for services, the service provider must recognize income computed as follows:

Fair market value (FMV) of the property received (more on this below) at the earlier of:

(1) the first time the property is transferrable, or

(2) the time the property is not subject to a “substantial risk of forfeiture” (SRF)

LESS: the amount paid for such property. 

An SRF exists if the service provider’s rights to the property (stock in our example) are conditioned on future events, such as future performance of services. For example, if a service provider receives restricted stock that vests 25 percent after one year of service with the remaining 75 percent vesting equally over 36 months, but the unvested stock is forfeited if they no longer provide services as required in the Restricted Stock Agreement, an SRF is in play. Thus, if our service provider above receives unrestricted stock of the company (i.e. can transfer immediately and the stock is not subject to an SRF) in exchange for services, there is no decision to make – they will have taxable income to the extent of the formula above. However, if our service provider receives stock that cannot be transferred and has an SRF, under section 83(a) they will not recognize income until the first tax year in which the stock is either transferrable or no longer has an SRF. That is, unless they make a section 83(b) election.

The Section 83(b) Election

Under section 83(b), a service provider can essentially elect out of the deferral of income under section 83(a) and include it in their gross income in the year the property is transferred. Instead of recognizing income as the stock vests, the service provider recognizes income in the year the stock is transferred to them to the extent, and in the amount, that the fair market value of the stock at the time of transfer exceeds the amount paid for it.

How do I decide whether to make a section 83(b) election?

If you’re asking yourself “why in the world would I trigger tax early that I could pay later?”, that’s certainly an understandable response. They answer lies in what you expect the value of the stock to be when it vests. Let’s return to our example where vesting occurs 25 percent after one year of service and 75 percent equally over the next three years provided services are still being provided. If the app is currently at the development stage with no revenue and little established value, but you expect development to be completed in the following year with an immediate substantial revenue stream, you have a prime situation where a section 83(b) election may be desirable. By making the election in the year the stock is received and picking up income at that point, the tax burden could be substantially less because it is based off a much lower FMV. On the other hand, if you wait until the stock vests to recognize the income and at that point the value of the company is substantially larger because the app is completed, there is substantial investment in the company, and there is a solid revenue stream, the burden could be substantially larger.

Are there downsides of making the section 83(b) election?  

Unfortunately, the section 83(b) election does not come without risk. As noted before, section 83(b) is only implicated where there is a SRF. Suppose that our service provider made a section 83(b) election because they felt the company had great potential and paid tax based on the current value, but decides to leave the company before it vests. Under that scenario, the service provider cannot take a deduction to offset the income picked up and tax paid in the year they received the stock, even though they never received the unrestricted stock.

When and how do I make a Section 83(b) election?

The timing of the section 83(b) election is crucial – it must be made within 30 days of the transfer of the stock. Thus, the company and the service provider should work together to ensure that this timeline is met. The section 83(b) election must be sent to the same IRS address to which the service provider sends their yearly tax return, and should include all of the following:

  1. Name, address and taxpayer identification number;
  2. A description of the property
  3. The date on which the property was transferred and the tax year for which the election is being made;
  4. Nature of the restrictions the property is subject to;
  5. The fair market value at the time of transfer;
  6. The amount paid for such property, if applicable; and
  7. A statement that any required notices have been furnished by the taxpayer. (For instance, the service provider must provide notice to the company that the section 83(b) election has been filed).

What are the tax implications to the company that issues the restricted stock?

The company that issued the restricted stock can take a deduction to the extent of the income recognized by the service provider in that same year.

Valuation Issues Pertaining to Section 83

Under section 83, whether income is recognized as the stock vests or done up front via a section 83(b) election, the FMV of the property must be computed without regard to any restriction other than a restriction on the property that never lapses. Thus, the service provider cannot reduce FMV for discounts and other items that reduce value.

Additionally, startups often issue restricted stock at a stage when it’s very difficult to determine the fair market value of the company, such as when the underlying IP is still in development or where there are little to no sales yet. The IRS standard for valuation is provided in Revenue Ruling 59-60, which states that FMV is “(t)he amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” Absent a buyer who comes forward to buy the company at a set price or other financial information (e.g, revenue numbers, etc.) that can establish a value that will satisfy Rev. Rul. 59-60, the service provider will have to work with the company to determine a proper value for the restricted stock. This could be satisfied, for instance, if the company is in the process of issuing securities or just completed a round to investors by using the valuations done in conjunction with those securities to determine FMV. It is important to note that if the service provider uses a value for determining their income from the section 83(b) election that differs from amounts used by the company for its activities, the IRS could use such documentation to support an income adjustment to the service provider.

Ultimately, if a section 83(b) election is made in the proper circumstances, it can generate substantial tax savings to the service provider, and an earlier tax deduction for the service recipient. It is important to note that there are additional nuances and restrictions in section 83 and the underlying authority that must be understood to reach the proper conclusion of whether to pursue such an election.

Varnum LLP advises businesses at all stage of development on issues including taxation, corporate, regulatory, employee benefits, mergers and acquisitions, and succession planning. Please contact us to set up a consultation.

Federal Vaccine/Testing Mandates Take Effect While Supreme Court Stays Silent

UPDATE: US Supreme Court Halts Federal Vaccination Mandate for Employers, but Permits CMS Rule to Take Effect

Today, January 10, 2022, the Federal Occupational Safety and Health Administration’s (OSHA) Emergency Temporary Standard (ETS) on COVID-19 for employers with 100 or more employees takes effect. Although many had anticipated that the U.S. Supreme Court might rule on the legality of the OSHA ETS prior to today, the Court’s failure to do so means that covered employers should be prepared to comply. A full discussion of the ETS’s requirements is available in our previous advisory: Here We Go Again: Sixth Circuit Lifts Stay of OSHA COVID-19 ETS for Employers With 100 or More Employees. Additional guidance from MIOSHA late last week suggests that covered employers in Michigan may have an additional two-week period, until January 24, 2022, to come into full compliance.

Background

On Friday, January 7, 2022 the Supreme Court heard expedited oral arguments regarding judicial stays facing two federal vaccine mandates concerning COVID-19: OSHA’s ETS on COVID-19 for employers with 100 or more employees and the Healthcare Centers for Medicare & Medicaid Services (CMS) Interim Final Rule (the “CMS Rule”) covering certain health care providers.

While many had anticipated some sort of preliminary ruling or even a stay of one or both mandates by today, as of the time this advisory was published there had been no ruling on either issue from the Supreme Court.

OSHA ETS and Recent MIOSHA Action

As previously reported, the U.S. Court of Appeals for the Sixth Circuit recently lifted a judicial stay that had previously prevented the implementation of OSHA’s ETS for employers with 100 or more employees. OSHA responded to this ruling by issuing new compliance dates for the ETS: Covered employers were given until today, January 10, 2022, to comply with all provisions, except for the testing requirement for unvaccinated employees. The testing requirement was rescheduled to take effect on February 9, 2022.

Several petitioners filed immediate emergency appeals to the Supreme Court asking the Court to reinstitute the judicial stay, pending a full hearing and decision on the matter. The Supreme Court granted the request and held an emergency hearing this past Friday, January 7, 2022 regarding a judicial stay of the ETS.

However, as of today, January 10, the Supreme Court has not yet issued a ruling. That means the federal ETS is in effect and will proceed according to the new compliance dates announced by OSHA, pending the Supreme Court’s disposition of the case. You can find a full discussion of those requirements in our previous advisory.

In the meantime, late last week the Michigan Occupational Safety & Health Administration (MIOSHA) issued a statement indicating that OSHA was not requiring states with state plans like Michigan to adopt the ETS or an equivalent until January 24, 2022. MIOSHA stated it is closely monitoring the status of legal challenges to the OSHA ETS while preparing for its deadline to adopt. You can read MIOSHA’s full announcement on the michigan.gov website: Labor and Economic Opportunity – COVID-19 Workplace Safety. This suggests that in Michigan at least, MIOSHA may not start enforcing the requirements of the OSHA ETS until January 24. Due to the lack of clarity, however, employers are urged to come into compliance with the OSHA ETS as soon as possible.

Healthcare Employers: CMS Interim Final Rule

As previously reported, on November 30, 2021 a federal judge in Louisiana issued a preliminary injunction to block the start of the CMS Rule, which applies to certain healthcare entities. The injunction from the Louisiana federal district court applied nationwide except for the ten states that were already under a preliminary injunction order issued on November 29 in Missouri.

On December 15, 2021 a three-judge panel for the U.S. Court of Appeals for the Fifth Circuit ruled that the lower Louisiana federal court only had the authority to block the mandate in the 14 states that had actually filed suit. The following day, a federal court in Texas granted a preliminary injunction to enjoin CMS from enforcing is vaccine mandate in Texas. Thus, the CMS mandate has been blocked from enforcement in 25 states but remains in effect in the remaining 25 states, including Michigan. On December 28, 2021, the CMS updated its FAQs indicating it is moving forward with implementation of the CMS in the 25 states not subject to the Stay and modified its compliance timeline to January 27, 2022 for phase one and February 28, 2022 for phase two. See External FAQ IFC-6 Guidance Memo 12 28 21 226 (508 Compliant).

The U.S. government applied to the Supreme Court asking for a nationwide stay of the injunctions issued by the lower federal courts, pending full review by the lower Circuit courts. The Supreme Court granted the request and also held an emergency hearing on the CMS Rule this past Friday, January 7, 2022.

Again, however, we have heard nothing further from the Supreme Court. Thus, the CMS Rule remains blocked in 25 states as of today, but continues on in the other 25 states.

Please contact your Varnum attorney, or any member of the firm’s labor and employment practice team, with questions about how these legal developments will affect your workforce and advice for bringing your organization into compliance with these mandates.

Michigan Announces Intent to Align With New CDC Quarantine and Isolation Guidelines

After a brief pause in which the Michigan Department of Health and Human Services (MDHHS) had stated it would not immediately adopt recently-updated CDC guidelines for COVID-19 quarantine and isolation, the MDHHS announced Friday, December 31, that it will update Michigan’s quarantine and isolation guidelines applicable to the general public to align with the new CDC guidelines.

Regarding this change, MDHHS stated: “The updated guidance is specific to the general public and does not change the current guidance recommendations for congregate settings, early childcare or K-12 settings – these settings should continue to use existing guidelines and policies regarding quarantine and isolation.”

Although MDHHS did not define “congregate settings,” it is likely, based on previous and CDC guidance, that the term applies to congregate living settings such as nursing homes, group homes, and correctional facilities. Michigan employers should continue to monitor MDHHS publications for the promised updated guidelines, as these may provide further clarity, and because rules are evolving quickly in the current changing environment. Varnum’s Labor and Employment Team will continue to monitor for new developments as well.

Michigan SALT Workaround Update: Accrual Taxpayers

As a follow up to our tax advisory issued December 23, 2021, pertaining to Michigan’s new SALT workaround (Michigan Tops the Growing List of States with a SALT Cap Workaround for Pass-Through Entities), we are providing this update to alert accrual-basis taxpayers regarding the Michigan SALT workaround and the deductibility of taxes under section 164.

Section 164(a) of the Internal Revenue Code provides a deduction for state and local income taxes “paid or accrued”. Under normal accrual method accounting rules, taxes may be deducted if both of the following apply:

  1. The all events test has been met (i.e. all events have occurred that fix the fact of liability, and the liability can be determined with reasonable accuracy); and
  2. Economic performance has occurred.

With respect to taxes, economic performance generally occurs when taxes are paid. However, there is an exception to this for recurring items that meet four requirements:

  1. The all-events test is met.
  2. Economic performance occurs by the earlier of:
    • 8½ months after the close of the year, or
    • The date you file a timely tax return (including extensions) for the year.
  3. The item is recurring in nature and the taxpayer consistently treats similar items as incurred in the tax year in which the all-events test is met, and
  4. Either:
    • The item is not material, or
    • Accruing the item in the year in which the all-events test is met results in a better match against income from accruing the item in the year of economic performance.

Thus, under normal instances, if payment of tax is made by an accrual-basis taxpayer with a timely filed tax return in the following year and the rest of the elements above are met, state income taxes can be deducted on an entity’s federal return. Applying the normal accrual rules to the Michigan SALT cap workaround without additional authority, a partnership/S corporation that makes an election to be taxed at the passthrough entity level but does not pay such taxes until it files a timely return may still deduct Michigan income taxes if the elements above are met.

There is substantial concern, however, that the IRS may challenge this deduction based on authority issued. In Notice 2020-75, the IRS provided a limited blessing of certain SALT workarounds but focuses on where “specified income tax payments” are made. The notice does not specifically address accrual taxpayers, or whether accrual accounting rules would still apply to such taxes allowing payment in the following year. There are also concerns that the IRS may view passthrough entity taxes paid by accrual taxpayers as not satisfying the accrual accounting rules because of the elective nature of the tax.

Given the lack of certainty in this area, the conservative position for accrual-basis taxpayers should be to pay the passthrough entity tax by December 31, 2021. Payments can be made today on the Michigan Treasury Online system, which also triggers the election for the passthrough entity tax. From communications with the State of Michigan, we expect additional guidance to be issued in January of 2022 for the Michigan SALT workaround, including the release of the election form. We will continue to monitor developments in this area. If you have any questions regarding the SALT workaround, please contact us for a consultation.

CDC Shortens Recommended COVID-19 Quarantine and Isolation Periods

On Monday, December 27, 2021, the Centers for Disease Control and Prevention (CDC) released updated guidance and shortened the recommended period for isolation following a positive test result or quarantine period following exposure to COVID-19.

Isolation applies to persons who have tested positive for COVID-19. The CDC has reduced the isolation period from 10 days to five days, so long as the person is either asymptomatic or symptoms are resolving. After the five-day isolation, the CDC recommends that the person continue to wear a mask for five days to minimize risk of infection to others.

The CDC also updated quarantine periods for individuals exposed to COVID-19. Individuals who have not received a full COVID-19 vaccination series and a booster shot must quarantine for five days and strictly adhere to the five-day masking requirement after isolation. Vaccinated individuals, including those who are boosted, do not need to quarantine following an exposure, but the CDC recommends that these individuals wear a mask for at least 10 days following the exposure.

Below is a chart outlining the current isolation and quarantine requirements:

Vaccination StatusExposed to COVID-19
(Quarantine)		Tested Positive for COVID-19
(Isolation)
Fully Vaccinated* with Booster• Wear a mask around others for 10 days
• Test on day 5 if possible		• Isolate for 5 days, but if symptoms, including a fever persist, remain at home.
• After 5 days continue to wear a mask around others.
Fully Vaccinated* without Booster• Wear a mask around others for 10 days
• Test on day 5 if possible		• Isolate for 5 days, but if symptoms, including a fever persist, remain at home.
• After 5 days continue to wear a mask around others.
Unvaccinated or Not Fully Vaccinated• Quarantine for 5 days and continue to wear a mask around others for 5 days after quarantine.
• If a 5-day quarantine is not feasible, wear a mask for 10 days after the exposure.
• Test on day 5 if possible.		• Isolate for 5 days, but if symptoms, including a fever, persist remain at home.
• After 5 days in isolation adhere to masking requirement for 5 additional days.

*Fully vaccinated, according to the CDC, means any individual who has completed the primary series of the Pfizer or Moderna vaccine within the last six months or completed the primary series of J&J vaccine within the last two months.

Please contact your Varnum attorney or any member of the firm’s labor and employment practice team with any questions.

Michigan Tops the Growing List of States with a SALT Cap Workaround for Pass-Through Entities

On Monday, December 20, 2021, Michigan Gov. Gretchen Whitmer signed into law House Bill 5376 (HB 5376), a bill that amended the Michigan Income Tax Act to allow pass-through entities such as S corporations, partnerships and certain trusts to make an election to pay tax at the entity level, and allow members/shareholders a credit for their portion of entity taxes paid. To understand the significance of this law, a little history is necessary.

Prior to the Tax Cuts and Jobs Act of 2017 (TC&JA), individual taxpayers had an unlimited federal tax itemized deduction for various taxes paid during the tax year, including state, local and foreign income taxes; state and local sales taxes; and state and local real estate and personal property taxes. For shareholders of S corporations and members of limited liability companies treated as partnerships for federal income tax purposes, income of these entities would be allocated to the shareholders/members, and they would then report such income on their individual federal tax returns and pay the necessary individual federal income taxes associated with such income. Shareholders/members would then deduct as an itemized deduction without limitation from their federal tax return the amount of state and local income taxes paid for the passthrough entities along with the other qualifying taxes paid. Generally, these passthrough entities would not pay income taxes at the federal level. 

With the passage of the TC&JA, a $10,000 cap was placed on the federal itemized deduction for taxes paid by individuals, thereby increasing the tax burden for taxpayers with tax payments exceeding the cap. In response to this, a number of states sought legislation to offset the effect of this additional tax burden without negatively impacting state tax revenues. HB 5376 is Michigan’s response to the TC&JA cap limitation.

Under HB 5376, taxpayers who are shareholders or members of passthrough entities or certain trusts can elect to calculate and pay Michigan income tax at the entity level. The tax rate at the entity level is 4.25 percent, the same as the individual income tax rate. With an election in place and payment of the necessary taxes, the passthrough entity can then deduct the amount of taxes paid without limitation on their federal tax returns (e.g., Form 1120S for S corps, Form 1065 for partnerships). Shareholders/members of such passthrough entities can then claim a credit on their Michigan individual income tax returns for their share of Michigan income taxes paid at the entity level. If the credit exceeds tax, it can result in a refund. The State of Michigan essentially receives the same amount of income taxes with the election in place – just from a different party, the passthrough entity. Hence, the “workaround”.

The election can be made retroactively beginning with the 2021 tax year, but it must be made by April 15, 2022. Once made, it is irrevocable for two years. HB 5376 generally requires estimated tax payments for the passthrough entities, and can impose penalties and interest if not paid, but will not pursue such penalties and interest for the 2021 tax year if the tax is paid by April 15, 2022. Please note, however, that for cash basis taxpayer entities, payment must be made by December 31, 2021 to deduct such taxes on its federal passthrough tax return. The cap is currently slated to expire after 2025, but there is substantial discussion about potentially altering the timing of this. 

With a significant amount of opposition to HB 5376 in Michigan as well as concerns by federal legislators facing the SALT workarounds, Varnum is continuing to monitor developments related to HB 5376. We also expect the State of Michigan to issue additional guidance with respect to the SALT workaround and will be reviewing all such guidance to provide up-to-the-minute guidance to our clients. Given the short-term deadlines and the complexity of the SALT workaround, we recommend that you contact us as soon as possible to determine whether this election is right for you and what actions are necessary to be timely.