Women Business Enterprises

Ladies and . . . ladies.  Do you own and run your own business?  If so, you may be eligible for certification as a Women-Owned Small Business (“WOSB”) or Women Business Enterprise (“WBE”).

Women-Owned Small Business

Pursuant to 15 U.S.C. § 637(m), the Federal Government is empowered to restrict competition for any contract for the procurement of goods or services by the Federal Government to small businesses owned and controlled by women.  15 U.S.C. § 644(g) further provides that the government goal for participation by small businesses owned and controlled by women for procurement contracts is at least 5%.  The requirements for qualifying as a WOSB are set forth in 13 CFR Part 127 and are, in summary:

1)      The business must meet the definition of a small business;

2)      The business must be not less than 51 percent owned and controlled by one or more women who are United States citizens (without regard to community property laws);

3)      The management and daily business operations of the business must be controlled by one or more women;

4)      A woman must hold the highest officer position in the business and must have managerial experience of the extent and complexity needed to run the business;

5)      The woman who holds the highest officer position of the business must manage it on a full-time basis and devote full-time to the business during the normal working hours of the business; and

6)      Women must control the general partnership interests of a partnership, control the management decisions of an LLC, or control the board of a corporation.

Accordingly, if you own and run a business that meets the foregoing requirements, you may be eligible for WOSB certification thereby enabling you to bid on select Federal Government contracts.  Also, in case you were wondering, and despite the introduction to this article (sorry guys), men are not excluded from being involved in the business. Without contradicting the above requirements, men are permitted to be involved in the management of the business and may have ownership interests.

Women’s Business Enterprise

If you are not in the business of seeking Federal Government contracts, then WOSB certification is likely not right for you.  That said, many private companies and state and local governments regularly award contracts to certified Women Business Enterprises.  WBE’s are essentially subject to the same classification requirements as a WOSB except that the business does not have to qualify as a small business. 

Closing Thoughts

Certification as a WOSB or WBE is not right for every business and it is definitely not a guarantee of lucrative contracts.  They are also document intensive processes which require the business to essentially open up all of its business records, including tax and financial information, to third-party certification agencies.  However, if you satisfy the requirements and are willing to jump through the hoops, you may be able to distinguish your business from competitors and open up many doors that would otherwise be unavailable to you.      

Written by: Doug Mitchell


Qualified Opportunity Zones and Funds - What’s the Big Deal?

The Tax Cuts and Jobs Act added the concept of “Qualified Opportunity Zones” to the tax code on December 22, 2017.  In short, a “Qualified Opportunity Zone” is a low-income community that has been nominated by the state and certified by the US Treasury.  The State of California’s Department of Finance has published a list of over 800 tracts of land across 57 counties within California that have been designated as Qualified Opportunity Zones. 

So, what’s the big deal?

Investment in a Qualified Opportunity Zone has significant tax benefits.  To be eligible for these benefits the investment must come from capital gains[1] stemming from the sale to, or exchange with, an unrelated person (20% rule) of any property held by the taxpayer (e.g., stock, real estate, etc.).  The investment must also be made within 180 days of the date of the prior sale or exchange. 

Okay, so assuming I hit those requirements, what are the benefits?

First, the tax that would otherwise be due on the invested capital gains is deferred until the earlier to occur of (1) the date the investment is sold or exchanged or (2) December 31, 2026 (as applicable, the “Tax Date”).

Second, at the Tax Date, the taxable gain recognized will be equal to the lesser of (1) the gain previously excluded or (2) the fair market value of the investment as of the Tax Date. 

Is that all?

No.  If the taxpayer holds the investment for five years, the taxpayer’s basis in the investment is automatically increased so that only 90% of the previously excluded gain is taxable.  If the investment is held for seven years, the taxpayer’s basis in the investment is automatically increased so that only 85% of the previously excluded gain is taxable. 

For example, say taxpayer Tim invests $1,000,000 into a Qualified Opportunity Zone, all of which represents gain from the prior sale of other investment property.  Tim makes the investment on July 1, 2019 and holds the investment through December 31, 2026.  In 2019, he recognizes no gain from the prior sale and his basis in the new investment is treated as $0.  On July 1, 2024, Tim’s basis in the investment is automatically increased to $100,000 (equal to 10% of the deferred gain - meaning that, at most, only $900,000 remains taxable).  On July 1, 2026, Tim’s basis in the investment is automatically increased by another $50,000 to a total of $150,000 (meaning that, at most, only $850,000 remains taxable). 

 Using the above, consider the following scenarios:

 Scenario 1: On December 31, 2026, the fair market value of the investment is only $900,000.  Therefore, on December 31, 2026, Tim must recognize gain of only $750,000 ($900,000 fair market value (which is less than the original $1,000,000 of deferred gain) less $150,000 of increased basis).

 Scenario 2: On December 31, 2026, the fair market value of the investment is $2,000,000.  Therefore, on December 31, 2026, Tim must recognize gain of only $850,000 (original $1,000,000 of deferred gain (which is less than the fair market value) less $150,000 of increased basis

Okay, is that all?

No.  Following recognition of the applicable gain as of the Tax Date, if the taxpayer holds the investment for at least 10 years from the date of investment, the investment effectively grows tax free

Using Scenario 1 from our prior example, Tim recognizes $750,000 of gain on December 31, 2026 at the time that the investment’s fair market value is worth $900,000.  Tim’s basis in the investment is increased at such time to $900,000.  On December 31, 2029, Tim sells the investment for $5,000,000.  At the time of such sale, Tim may elect to have his basis in the investment increased to the sale price of $5,000,000.  The result is that Tim pays no tax on the increase. 

One important caveat is that the proposed regulations provide that the investment must be sold no later than December 31, 2047 in order to benefit from the foregoing. 

Okay! I’m in!

Not so fast.  There are entry barriers and obligations.  First, the only way to participate in a Qualified Opportunity Zone is through a “Qualified Opportunity Fund” meaning a corporation or partnership organized for the purpose of investing in “Qualified Opportunity Zone Property.”  “Qualified Opportunity Zone Property” essentially means (1) property within a Qualified Opportunity Zone (for purposes of this article, “Option 1”) or (2) interests in a business of which substantially all of its tangible property is located within a Qualified Opportunity Zone (for purposes of this article, “Option 2”).[2]

Option 1: If the fund proceeds under Option 1, 90% of the assets held by the fund must be “Qualified Opportunity Zone Business Property” (i.e., tangible property within a Qualified Opportunity Zone used in a trade or business, acquired after December 31, 2017, and to which the original use commenced with the Qualified Opportunity Fund or to which the fund makes substantial improvements).  

The primary scenario at this point is one in which the fund acquires already developed property and proceeds to improve the structures thereon.  Pursuant to Revenue Ruling 2018-29, the fund is not required to improve the land and, by implication, it appears that the land itself counts towards the 90% asset rule so long as the structures are improved.  That said, the fund must make substantial improvements to the structures on the property within any 30 month period beginning at the date of acquisition.  In short, the fund must double the amount invested into the structures on the property to satisfy the substantial improvement requirement.    

Using and expanding upon our prior example, Tim invests $1,000,000 into Qualified Opportunity Fund A (“Fund A”).  Fund A, after obtaining other investors, spends $10,000,000 on a factory within a Qualified Opportunity Zone.  $3,000,000 of the purchase price is allocated to the underlying land.  $7,000,000 of the purchase price is allocated to the actual factory building and improvements.  Accordingly, in order for Fund A to be eligible for the tax benefits described above, Fund A must, within any 30 month period, spend another $7,000,000 improving the property.     

It is important to note that the rules are not yet well-defined regarding how unimproved land is treated and what would therefore constitute “substantial improvement.”  One reasonable interpretation would be that at least 90% of the assets of the fund be utilized to build improvements upon the unimproved land, thereby satisfying the 90/10 requirement.          

 Option 2: If the fund proceeds under Option 2, the rules vary.[3]  Although 90% of the fund’s assets must still be in Qualified Opportunity Fund Property, the fund can satisfy this requirement more easily by ownership of stock or partnership interests in a business that holds Qualified Opportunity Zone Business Property.  The underlying business is then obligated to satisfy the requirements discussed above, including but not limited to substantially improving the structures on the property.  This model does, however, currently provide more flexibility in satisfying the requirements.  Curiously, and as an example of such flexibility and one of the substantial differences between Option 1 and Option 2, the underlying business is only required to have 70% of its assets as Qualified Opportunity Zone Business Property.        


The foregoing article provides a basic overview of the ups and downs related to investments in Qualified Opportunity Funds.  The fact remains though that this is an entirely new area of the law and one that is still pending final regulations.  Accordingly, the rules are subject to change and related IRS interpretations. 

In closing, there is still much regarding Qualified Opportunity Funds that we do not yet know.  However, as of the date of this article, the evidence surrounding them indicates that the IRS wants them to work and as such, they may be a very lucrative investment vehicle for individuals who also desire to make a positive impact on less fortunate areas. 

[1] Other funds may be invested but they do not qualify for the benefits described herein.

[2] There is no requirement that a fund choose one option over the other, or to the exclusion of the other option.

[3] A full analysis of the variations between Option 1 and Option 2 is beyond the scope of this article.

Written by: Doug Mitchell


Forming a Business - Deadlocks, Disputes, and Transfer Restrictions

Forming a business with your business partner is an exciting time and one during which most people avoid thinking about what may go wrong.  As exciting as it is, the parties should still take some time to think through the issues that might arise.  Here are a few things the parties should consider:

1)         Approval Requirements and Deadlocks

For partnerships, corporations, and limited liability companies, a number of issues can arise depending on the number of owners.  If there are two equal owners, or multiple owners with ownership interests that can easily add up to a 50/50 dispute, deadlocks can occur.  If there are owners with minority interests, the majority interest holder(s) can likewise overrule the minority if the voting requires simple majority.  Accordingly, the parties should consider (1) certain actions which require approval of a specified percentage of owners (or percentage interests) and (2) deadlock provisions. 

Approval Requirements

Approval requirements are centered on the business deal of the parties.  If one party holds all the cards, they are most likely going to make all of the decisions.  However, assuming that there is room for negotiation, the parties should consider acts that require approval of all of the owners or at least a super-majority (usually defined as 66.67% or 75%).  A few areas in which the parties should consider unanimous or super-majority approval include:

  1. Any amendment to the operating documents;

  2. Any requirement that any owner make additional financial contributions;

  3. Incurring of any contractual obligation or the making of any capital expenditure with a total cost in excess of a specified amount;

  4. Incurring of any debt, or debt refinance in excess of a specified amount;

  5. The purchase, exchange, or sale of major assets;

  6. Dissolution of the business;

  7. Approval of cash distributions;

  8. Settlement of any lawsuits or claims; and

  9. Filing for bankruptcy.


Deadlocks naturally arise in settings where the parties have equal rights. These deadlocks can be resolved through various means. It may sound silly, but for small disputes (think very minor), I recommend a coin flip. For others, you can give the authority to cast the deciding vote to a third-party tiebreaker. Similarly, you can engage in regular arbitration or “baseball arbitration,” meaning that the parties each submit their proposal and the arbitrator selects one without adjustment. Further, you can mandate the dispute be resolved through the formal dispute resolution method described below. The list goes on and on and the parties are even free to come up with their own method (I’d love to draft a rock-paper-scissors provision!). Regardless, the point is that the parties can sort through these issues now.

 2)         Dispute Resolution

Even the best business partners find themselves in business disputes.  Although it is impossible to predict when or if such a dispute will ever arise, the parties can agree how they will handle one should the situation arise. 

If left unspecified, the default is litigation unless the parties agree otherwise.  What that means in practice is the filing of a complaint, service of process, an answer by the defendant (and any cross-complaints), discovery, experts, motions, settlement conferences, mediation efforts, and, if all else fails, trial.  Beyond the dispute, what that also means is $$$$$$$, psychological damage, and wasted time. 

As an anecdotal tale, early in my career I was involved in a dispute between business partners/husband and wife.  Skipping the juicy details, I was shocked during a meeting when the senior attorney on the case told our client that he could expect to spend at least $500,000 (!!) to get the matter to trial.  Even the smallest matters I worked on in my prior life as a litigator, meaning the ones that were just letter campaigns pre-filing of a lawsuit, usually came with $10,000 attorney fee price tags.  The fact is that disputes are costly.

So, how should you handle it?  There is no perfect method because we are talking about something that may arise in the future and you never know what side you may be on.  That said, my main recommendation is to include a “Dispute Resolution” clause which requires that the parties meet and confer first, mediate second, and litigate or arbitrate third.[1]  The hope is that by forcing the parties to meet and confer first and then mediate, the business parties may be able to reach an amicable solution early on when costs are low and disruption to the business is still minimal.  As an added bonus, mediating the matter early on gives the parties the benefit of a third-party opinion regarding the merits of their position.  Without such a provision, mediation does not normally occur until the parties are gearing up for trial.  At that point most of the expenses have already been incurred by the parties (note the placement of “mediation efforts” above). 

If mediation fails, litigation or arbitration comes next.  With that comes significant fees.  To counter this I recommend a broad attorneys’ fees provision for the prevailing party (which means the loser pays the winner’s attorneys’ fees and costs).  This alone can provide a disincentive for frivolous litigation. 

That said, there is no perfect method but at least with a contractual agreement among the parties you have certainty about how the dispute will progress - control the things you can. 

 3)         Restrictions on Transfer; Buy-Sell Provisions 

The next big area that owners can agree upon is what we call the Restrictions on Transfer and Buy-Sell provisions.  These provisions govern the rights of the business and the other owners to essentially control the parties with whom they are in business and also force other owners to sell on the occurrence of specific events.  Think of it this way.  You start a business with an individual named Clark Griswold.  Years later Clark decides he needs a vacation and wants to sell his interests to his cousin who we will call Eddie.  The Restrictions on Transfer and Buy-Sell provisions protect you from having to run your business with Eddie.

Restrictions on Transfer clauses state that an owner may not sell his or her interest without the other owners’ consent unless to a pre-approved category of buyer.  For instance, your goals may be to transfer the business to your kids one day or, for estate planning purposes, it may become beneficial to have your interests held in trust. 

Buy-Sell provisions state that on the occurrence of certain specified events the business and/or the other owners have the right to buy the ownership interests of another owner, at a specified price or pursuant to a pre-determined formula, and on specified payment terms.  Typical events that trigger the Buy-Sell provisions include:

  1. Transfers and sales of ownership interests (e.g., Clark’s attempted sale to Cousin Eddie);

  2. Retirement/Withdrawal;

  3. Death;

  4. Disability;

  5. Dissolution of Marriage (think about doing business with your partner’s angry ex-spouse); and

  6. Bankruptcy.     

As mentioned above, these provisions should include how the purchase price is determined should a Buy-Sell event occur and what payment terms will be utilized.  Should there be a discount for an owner that skips town and leaves the other owners struggling to maintain the business?  Should there be a discount for minority interests?  Should the price be paid in cash, under a promissory note, or through some combination? 

Like most matters in an agreement, the specifics are subject to discussion and the parties may ultimately decide that they do not want any Restrictions on Transfer or Buy-Sell provisions.   

Closing Thoughts

Forming a business is an exciting time and one that is almost always hectic.  Let’s be honest though – the contractual side of it may not be your first priority.  As such, in my opinion, the goal of any attorney should be to provide their clients with a complete understanding of the issues that may arise, possible solutions, and ultimately, an agreement that embodies the business deal of the parties.

[1] California law mandates that mediation efforts are confidential absent an agreement to the contrary. 

Written by: Doug Mitchell


New Treasury Guidance for 20% Deduction for Rental Activity

The Treasury recently delivered clarity and good news for owners of rental real estate regarding available deductions for rental income under the 2017 Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act introduced many significant changes to the tax code. One of the most notable provisions was IRC section 199A, which provides an income tax deduction for many non-corporate taxpayers equal to 20% of income from a “qualified trade or business.” Although many types of commercial activity clearly fall within this definition, it was unclear whether income from rental real estate would qualify.

Under newly issued IRS Notice 2019-7, owners of rental real estate are provided the following list of “safe harbor” conditions which, if met, will ensure the rental income will be considered coming from a “qualified trade or business” eligible for the 20% income tax deduction:

(1)   Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

 (2)   At least 250 hours of rental services are performed each year;

 (3)   Taxpayer maintains contemporaneous records, including time reports, logs, or similar documents regarding the nature of the rental services (who performed the service, hours spent, description of services), and such records made available for IRS inspection upon request.

The Treasury Regulation further provides that the 250 hours of “rental services” will include services performed by owners, their employees, and their independent contractors for property maintenance, repairs, rent collection, payment of expenses, provision of services to tenants, and efforts to rent the property. Not included are investment-type activities, such as obtaining financing, making capital improvements, acquiring property, evaluating financial performance, and commuting to rental properties.

Taxpayers who meet the above conditions will fall within the “safe harbor” meaning their rental income will be considered income from a qualified trade or business. However, there are two major exceptions to the safe harbor:

(1)   Real estate used by the taxpayer as a residence for any part of the year is not eligible for the safe harbor;

(2)   Real estate subject to a “triple-net” lease is not eligible for the safe harbor.

Even if the conditions of the safe harbor are not met, it is possible the rental income can still be considered from a qualified trade or business. As a technical matter, under IRC section 199A (the statute providing the 20% deduction), a “trade or business” will have the same meaning as a “trade or business” under IRC section 162 (the statute regarding deductions of business expenses). This definition was the subject of the U.S. Supreme Court case Commissioner v. Groetzinger, where the court held that a gambler making wagers on greyhound races was engaged in a “trade or business” since the gambler was gambling full-time and was motivated by profit in the activity. The IRS website currently memorializes this reasoning simply as: “a trade or business is generally an activity carried on for a livelihood or in good faith to make a profit.” Taxpayers who do not meet the conditions of the “safe harbor” will bear the burden in proving their particular rental activity constitutes a qualified trade or business.

While the safe harbor offers clarity, it may prove more valuable for owners of rental real estate in coming years, presuming many taxpayers will not have kept “contemporaneous records” of their rental activities during 2018 and will be better positioned to document their rental activity moving forward. Also, it should be noted that meeting the “trade or business” requirement (whether under the safe harbor or otherwise) is only one of several conditions for the 20% deduction under IRC section 199A, which includes limitations or phase-outs based on taxpayer’s income, W-2 wages paid, and basis of property.

GVM Law LLP has assisted clients with estate planning, business, and tax matters for over 40 years. For more information please contact Jeffrey Stephens or one of the other attorneys in the Roseville or Napa Valley offices.

Written by- Jeffrey Stephens


Proposition 65 and You

As you may already be aware, new rules under Proposition 65 take effect on August 30, 2018 that significantly change the warnings that must be displayed to retail customers on many products sold in California.  If you have not done so already, we strongly recommend that you evaluate and, if necessary, change the warnings you’re currently providing to your customers.  Failure to comply could expose you to monetary risk and attorney’s fees.

In short, Prop 65 prohibits retailers and manufacturers from “knowingly and intentionally” exposing California consumers to chemicals “known by the State to cause cancer or reproductive toxicity”, regardless of where the product was made, unless a “clear and reasonable warning” is provided.  The state provides example warnings that are “clear and reasonable” under the new regulations, meaning that, although a retailer or manufacturer may create their own warning, use of the “safe harbor” examples provided by the state satisfies the new requirements.  Alcohol beverage and cannabis products have their own, particular warnings. 

As noted, the new rules apply to producers, importers, and distributors and certain retailers may also be required to provide warning notices.  In particular, alcohol retailers with more than 9 employees must post the new alcohol warnings, including notices about BPA (which is found in some synthetic corks).  So, retailers, restaurants, bars, hotels, DTC sales, tasting rooms, and even internet commerce sites selling to a buyer with a California address should all evaluate whether they’re required to label.

Significantly, Prop 65 provides a private right of action.  This means that a private citizen may serve a notice of violation, with penalties of up to $2,500 per day and the plaintiff’s lawyer being able to recover attorney’s fees.  The private right of action significantly increases the chances of being caught for non-compliance.

If you have not yet educated yourself about Proposition 65’s requirements and how they might affect you and your business, please feel free to reach out to your GVM lawyer for more information.

This information is only a summary and provides only general information about Proposition 65. It does not constitute legal advice, and you may not and should not rely on it.

By: Marc Hauser