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Analysis The Inversion Virus Spreads as Burger King Seeks to Flee to Canada

ABI Bankruptcy Brief | August 26, 2014
 
  

August 26, 2014

 
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ANALYSIS: THE INVERSION VIRUS SPREADS AS BURGER KING SEEKS TO FLEE TO CANADA

Has President Obama's tough talk on corporate inversions started a mad rush by companies to complete these deals before they're outlawed? Miami-based fast-food chain Burger King confirmed on Sunday that it is negotiating just such a move with smaller Canadian restaurant chain Tim Hortons, and there is also evidence that some companies in the pharmaceutical industry, which has been the biggest user of corporate inversions, have been spurred on by Obama's harsh comments about the practice. But the move by Burger King confirms that the maneuver is spreading to more corners of the business world as the administration and Congress look for ways to stop it, according to an analysis in the L.A. Times yesterday. Inversions happen because the U.S. has the highest corporate tax rate in the developed world — 35% — and is the only country to tax income earned outside its borders. An inversion reduces the tax a U.S. company faces not only on foreign profits but also on U.S. profits through an accounting maneuver called "earnings stripping." In the latter technique, revenue is shifted from the U.S. unit to its corporate siblings in lower-tax countries by having the former borrow heavily to pay the latter. Although the total number of inversions is still small — fewer than 80 in 31 years, according to the Congressional Research Service — the pace has quickened substantially over the last two years. The maneuver appeals mainly to companies that generate a lot of revenue overseas, which they can't put to work in the United States without it being taxed here. Lawmakers from both parties have denounced inversions as they've gained steam, but they disagree sharply over what to do about them. Click here to read the full analysis.

COMMENTARY: CONGRESS MUST ACT TO GET ECONOMY BACK ON TRACK

A few years back, Federal Reserve Chairman Ben Bernanke gave a speech at the annual Fed gathering in Jackson Hole, Wyo., that devoted a good deal of attention to U.S. fiscal policy. The speech was important not only because it was on target — Bernanke recommended reforming U.S. tax and spending policies in a gradual way to control the debt without creating "fiscal headwinds" on the recovery (in other words, a Simpson-Bowles-like plan) — but also because he stepped beyond the world of pure monetary policy to address legislative issues, according to a commentary in today's Wall Street Journal. Even then, Bernanke held back from being overly prescriptive because there is such a strong firewall between policies from the Fed and those on Capitol Hill. Efforts from the Fed alone will not be sufficient to stimulate growth and ensure that growth translates into more and better jobs, according to the commentary. The larger lift will have to come through sensible federal policies. However, given today's divided, polarized and broken Congress, they are exceedingly unlikely to happen, according to the commentary. Click here to read the full commentary.

U.S. CONSUMERS MORE OPTIMISTIC ABOUT ECONOMY, JOBS

U.S. consumers are viewing the economy with more optimism this month, according to a report released today, the Wall Street Journal reported. An upbeat view on jobs hints at a solid August payrolls report, some economists say. The Conference Board, a private research group, said its index of consumer confidence increased to 92.4 in August from a revised 90.3 in July. The July number was first reported as 90.9. The August index is the highest since October 2007, before the last recession started. Economists surveyed by the Wall Street Journal had forecast the index to fall to 88.5. The present situation index, a gauge of consumers' assessment of current economic conditions, jumped to 94.6 from a revised 87.9 in July following an original estimate of 88.3. "Consumer confidence increased for the fourth consecutive month as improving business conditions and robust job growth helped boost consumers' spirits," said Lynn Franco, director of economic indicators at the board. However, consumers' future expectations for jobs and paychecks is more mixed. The share of respondents anticipating more jobs in the future fell to 17.0% in August vs. 18.7% a month ago, while the share anticipating fewer jobs also declined, to 15.8% from 16.6%. Click here to read the full article (subscription required).

MILLENNIALS STRUGGLE TO FIND FINANCIAL SWEET SPOT

When it comes to money woes, there's no such thing as too old or too young. In fact, a new report from TD Bank finds that the oldest millennials — those ages 24 through 34 — say that while they feel able to manage their finances, they are under extreme financial stress, Fox Business News reported yesterday. More than half of millennials (55%) report that they feel as though they are able to manage their money, but can't seem to find financial happiness. One-fourth of all millennials report that they are under extreme financial stress. TD Bank polled more than 1,000 millennials and found that two-thirds wish that they were more financially prepared for major life events — specifically going to college (31%), having a child (27%) and starting a new job (21%). The things that stressed out millennials the most in the survey were paying bills (45% overall), having a lack of funds or poor financial situation, (33%) or basic cost of living (7% overall). Click here to read the full article.

ANALYSIS: REGULATORS STRUGGLE WITH CONFLICTS IN CREDIT RATINGS AND AUDITS

Few businesses have more obvious conflicts of interest than those that involve the issuing of "objective" and "independent" reports and opinions about companies that pay for those reports and opinions. If the opinions are to be worth paying for, those issuing them have to have some credibility. But too much independence can also be fatal to a business, according to an analysis in Thursday's New York Times. Those who pay for an opinion are not going to hire someone known to be excessively tough. Two such businesses are credit ratings agencies and auditors. It was not until the 21st century that either industry was subjected to any real government regulation. Now, a dozen years after passage of the law regulating audit firms and four years after passage of the one subjecting credit agencies to new rules, signs are emerging that each industry is having some trouble adjusting to regulation — and that regulators are having some trouble deciding what to do about them. Last week, the Public Company Accounting Oversight Board, which was created by the Sarbanes-Oxley Act in 2002, released its third annual report on audits of brokerage firms. Of the audits performed by 101 auditing firms, it found that only 13 percent had been done correctly. One reason is that until passage of the Dodd-Frank financial overhaul law in 2010, the board had authority to review only audits of public companies. Brokerage firms were required to be audited, but no one could review that work. The good news is that there are some indications that the situation is improving. The bad news is that there are still many audits that the board is not permitted to review, including those of companies that do not issue public securities and of nonprofit institutions. Unless and until the board is authorized to review those audits, we may never know if they are similarly sloppy, according to the analysis. Click here to read the full analysis.

U.S. CREDIT CARD LATE PAYMENTS DOWN IN Q2

Americans are doing a better job of making timely credit card payments, even as many lenders increasingly extend credit to more people with less-than-stellar credit, according to ABC News today. The rate of U.S. credit card payments at least 90 days overdue fell to 1.16% in the April-June quarter — the lowest level in at least seven years, credit reporting agency TransUnion said today. The second-quarter credit card delinquency rate is down from 1.27% in the same period last year and 1.37% in the first three months of this year. The late-payment rate peaked in the first quarter of 2009 at 3.12%, TransUnion said. Average card debt per borrower was up slightly in the second quarter, rising about 0.2% to $5,234 and 1.4% from the first quarter of this year. Americans still have a limited appetite for debt after gorging themselves on sub-prime mortgages and credit cards before recession seized the country in late 2007. Credit card borrowing started rising again in 2011, but the increases have lagged far behind other types of debt, including auto and student loans. All told, U.S. credit card debt has increased 1.3% over the past year, reaching $873.1 billion in June, according to the Federal Reserve. Click here to read the full article.

NEW TO THE LAW PROFESSION? LAW FIRM RECENTLY ADD NEW ASSOCIATES TO THE RANKS? BE SURE TO PRE-ORDER ABI'S SURVIVAL GUIDE FOR THE NEW LAWYER!

Available now for pre-order in ABI's Bookstore is the Survival Guide for the New Lawyer: What They Didn't Teach You in Law School. The Survival Guide provides real-world guidance on the everyday aspects of practicing law, with a special emphasis on bankruptcy law. Full of anecdotal examples and hard-earned advice, this Guide is perfect for the aspiring lawyer fresh out of law school, or for any firm that wants to give its associates a leg up on the competition. Click here to pre-order, and be sure to log in first to obtain the ABI member discount!

NEW CASE SUMMARY ON VOLO: GRAHAM MORTGAGE CORP. V. GOFF (IN THE MATTER OF GOFF; 5TH CIR.)

Summarized by Paul Stewart, Stewart Robbins & Brown, LLC

The Fifth Circuit affirmed a lower court's decision that (a) the creditor was entitled to partial summary judgment under § 727(a)(3) because the debtor failed to adequately maintain his books and records, (b) the debtor was not entitled to reconsideration of a summary judgment ruling on account of "new" evidence that was in his control at the time of the original ruling, and (c) the debtor's failure to adequately maintain books and records was not justified under the circumstances of the case.

There are more than 1,400 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: NON-DISCHARGEABLE TAX DEBT NOT SPECIAL CLASS OF UNSECURED CREDITORS

A recent post discusses the creative ways that debtors have tried to classify their non-dischargeable debt as a separate, special class of unsecured creditors.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

SARE cases should not be allowed in chapter 11.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

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