One of the original provisions of the Shipping Act, 1916 was former Section 17 (which became section lO(d)(l) of the 1984 Act and was recodified in 1998 as 46 U.S.C. §41102(c)). This section provided that no regulated entity could "fail to establish, observe and enforce just and reasonable regulations relating to or connected with receiving, handling, storing or delivery of property." And, for over 90 years, this section was interpreted to mean that in order to find that some allegedly unreasonable action had violated the Act, those actions had to be the normal, customary, or repeated practice of the vessel operator, ocean forwarder, or NVOCC. Consequently, a single unreasonable or inappropriate practice by a carrier or OTI would not be a violation of the Act, even if it might otherwise be actionable civilly as a breach of contract or was negligent.

However, over the past several years, a majority of the FMC Commissioners took a more expansive view of this section and, in a series of cases, held that a single act by a regulated entity could constitute an unreasonable practice. These Commission decisions were issued notwithstanding lengthy and vigorous dissents by Commissioner, now Acting Chairman, Khouri, who took great pains to explain why this change of policy was both inconsistent with the intent of Congress and unfair to carriers, NVOCCs and forwarders.

To address this, the Commission issued a notice of Proposed Rulemaking on September 6, 2018 seeking public comment about issuing an interpretive rule to reverse this trend. The NPRM proposed that a challenged practice would need both to be unreasonable and be the normal, customary and continuous practice of the carrier or OTI in order to be found to be a violation of the Act.

Due to the importance of the issue, we filed extensive comments on behalf of the National Customs Brokers & Forwarders Association of America supporting the NPRM. We pointed out that the proposal was consistent with both the legislative history of former Section 10(d)(1) as well as almost 100 years of unbroken precedent. In doing so, we also analyzed the more recent decisions and highlighted the unfairness of making a dispute over a single incident become the basis for awarding substantial damages under the Shipping Act, especially since those damages might well have otherwise not been available to the complainants under normal principles of contract and commercial law. For example, a claimant could bypass the provisions of COGSA by claiming the loss, damage or delay of cargo was an unreasonable practice and seek damages above the $500 per package limitations or even use it to avoid the 1-year limitation period for initiating suit under that statute. Or, claimants could contend, as was the case in one of the more expansive decisions, that the exercise of the contractual lien in an OTI' s terms and conditions was unreasonable and accordingly subject the OTI to an award of damages and attorneys' fees.

In a decision issued and effective December 18, 2018, the FMC agreed with our comments and found that the proper reading of former Section 10(d)(l) requires that a regulated entity must engage in an unjust or unreasonable practice on a normal, customary and continuous basis before being held to have violated the Shipping Act.

This is an important decision because it could reverse the growing trend of having shippers using the expansive view of Section 10(d)(l) to hold forwarders and NVOCCs liable for normal commercial disputes. And, by doing so, avoid limitations in terms and conditions and other statutes and provide a basis for obtaining awards of attorneys' fees that could not otherwise be granted by courts.

The decision was issued in the FMC's Docket No. 18-06, Interpretive Rule, Shipping Act of 1984 and can be viewed on the Commission's website at www.fmc.gov.

On December 10, 2018, the Internal Revenue Service (“IRS” or “Service”) issued Notice 2018-99 and Notice 2018-100 which interpret and provide administrative guidance and transition rules relating to new Internal Revenue Code (“Code”) §§ 274(a)(4) and 512(a)(7)—the dreaded parking benefit addition to unrelated business income taxes.  These notices provide the first published guidance available to exempt organizations about these new provisions to the Code that have caused a significant amount of consternation amongst tax-exempt organizations. Although the new Code provisions may be harmful to exempt organizations that provide employees with the benefit of free parking, the recently published guidance is generally favorable to such organizations. This December 10 guidance applies to:

• Apportionment of Parking Facility Expenses to UBTI
• Form 990-T Reporting Threshold
• Waiver for Unpaid Quarterly Payments of UBTI

Background

The tax reform act passed in December 2017 (“Act”) added Code § 274(a)(4), which generally provides that no deduction is allowed for the expense of any qualified transportation fringe benefit (“QTF”) expenses (as defined in section 132(f)) provided by taxpayers to their employees.  Section 132(f)(1) defines QTFs to include: (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (2) any transit pass, and (3) qualified parking. 

As they are exempt from federal income tax, historically, Code § 274 has not been applicable to tax-exempt organizations except with regard to determining their deductions connected with unrelated trades or businesses.  However, the Act added a new section 512(a)(7) which provides that an organization’s unrelated business taxable income (“UBTI”) is increased by any amount for which a deduction is not allowable for an expense by reason of section 274 and which is paid or incurred by such organization for: (1) any QTF as defined in § 132(f), (2) any parking facility used in connection with qualified parking as defined in § 132(f)(5)(C), or (3) any on-premises athletic facility as defined in section 132(j)(4)(B)

Basically, if an organization provides any QTF, including on-premises parking, then the total amount of the organization’s UBTI is increased by the amount of the expense that would not be deductible under Code § 274(a)(4).  As such, an organization that does not have any unrelated business income may none-the-less be subject to tax on the amount of its expenses related to providing employees with non-deductible QTFs. 

Specific Guidance

The purpose of Notice 2018-99 was to offer guidance relating to the calculation of the additional UBTI attributable to non-deductible employee parking expenses, and to clarify the Form 990-T filing requirements on organizations who incurred UBTI as a result of Code § 512(a)(7).  The purpose of Notice 2018-100 is to waive the penalties related to the failure to make required estimated tax payments for certain tax-exempt organizations affected by section 512(a)(7).

• (a) Notice 2018-99

Apportionment of Parking Facilities Expenses to UBTI

Most significantly, Notice 2018-100 provides that, for taxpayers that own or lease parking facilities where their employees may park, “the § 274(a)(4) disallowance may be calculated using any reasonable method.” 

In addition to expressly permitting “any reasonable method,” the notice offers one method upon which taxpayers may rely.  Under the “reasonable method,” taxpayers can allocate parking facility expenses by: (1) attributing expenses to the proportion to the number of parking spaces reserved for organization employees (ex., if 1% of the parking spaces are reserved, then 1% of the parking lot expense should be included in the 512(a)(7) UBTI addition); (2) attributing expenses based on the primary use of the non-reserved parking spaces (ex., if the primary use of less than 50% of the unreserved parking spaces are used by employees during the normal hours of the organization’s activities, then no amount of the proportionate expenses of the unreserved parking spaces should be included in the 512(a)(7) UBTI addition); (3) attributing expenses to the proportion of the number of parking spaces reserved for non-employees (ex., if 3% of the parking spaces are reserved for non-employees, then 3% of the parking lot expense should be excluded from the 512(a)(7) UBTI addition regardless of the facility’s other uses); and (4) attribute the expenses related to any remaining spaces based on a reasonable determination of the use of those spaces.

In addition to providing one reasonable method of calculating the Code § 512(a)(7) addition to UBTI, the notice further provides that, for years beginning on or after January 1, 2019, any “method that fails to allocate expenses to reserved employee spots cannot be a reasonable method.”  Thus, organizations that own or lease parking facilities with any reserved parking spaces for employees will be required to report some increase in UBTI for each tax year beginning on or after January 1, 2019. 

The January 2019 effective date is significant for two reasons: (1) it means that it may be reasonable for organizations to attribute no expenses to reserved parking spots in calculating their UBI for tax years beginning in 2018; and (2) the notice provides organizations that currently have reserved parking spaces for their employees until March 31, 2019 to eliminate the reserved parking spaces and the related increase in UBTI.  Pursuant to the notice, reserved parking spots that are no longer reserved by March 31, 2019 will be characterized as unreserved retroactively up to fifteen months back to January 1, 2018.

Form 990-T Filing Threshold

The notice also clarifies that organizations that report less than $1,000 in UBTI are not required to file a Form 990-T regardless of whether the UBTI is derived from an unrelated business activity or due to an increase in UBTI pursuant to Code § 512(a)(7).  Thus, an organization that is not otherwise required to file a Form 990-T will only be required to file that return if the section 512(a)(7) UBTI addition increases the organization’s total UBTI to an amount greater than $1,000.

Finally, for organizations that own their parking facilities, Notice 2018-99 provides that depreciation is not an expense for purposes of calculating the Code § 512(a)(7) UBTI addition.  Organizations will not incur any tax based on the depreciation of parking facilities that they own.

• (b) Notice 2018-100

Waiver for Unpaid Quarterly Payments of UBTI

Generally, organizations subject to tax on their unrelated business income are required to make quarterly payments on the estimated amount of the taxes that will be due at the end of the year, and an organization’s failure to make the full amount of the required estimated payments is subject to a penalty pursuant to Code § 6655.  Notice 2018-100 provides relief from the section 6655 penalties for certain organizations subject to the section 512(a)(7) UBTI addition that failed to make the required estimated payments in 2018.

The notice waives the Code § 6655 penalties for any tax-exempt organization that: (1) provides QTFs resulting in additional UBTI, pursuant to section 512(a)(7), for which estimated income tax payments would have been required; and (2) was not required to file a Form 990-T for the preceding tax year.  Finally, the relief is only available to organizations that timely file their Form 990-T and pay the amount of tax due for the tax year for which the relief was granted.

Next Steps

Both Notice 2018-99 and Notice 2018-100 are significant to exempt organizations providing QTFs which may be subject to Code § 512(a)(7), and it is strongly advised that each organization’s review take advantage of the notices by implementing and documenting a reasonable method of apportioning any expenses which may be subject to the section 274(a) limitation.  The protections afforded by establishing a reasonable method of calculating any section 512(a)(7) additions to UBTI are particularly important in light of the uncertainty of the Service’s interpretation and future enforcement of this provision.

Effective at 12:00 a.m. Eastern Standard Time, November 5, 2018, the U.S. fully re-imposed the primary and secondary sanctions on Iran that were in place prior to the Joint Comprehensive Plan of Action (“JCPOA,” or the “Iran Nuclear Agreement”).  In addition, the U.S. government has designated numerous additional entities in the financial, shipping, and energy sectors of Iran’s economy as Specially Designated Nationals and Blocked Persons (“SDNs”) subject to secondary sanctions.  Any non-U.S. companies that contemplate possible transactions with Iran in the future should ensure that their compliance strategies account for the re-imposition of secondary sanctions and the designation of new Iranian banks and shipping companies.  All told, the U.S. Department of the Treasury’s action includes the designation of more than 700 entities, including almost 250 parties that had been placed on the “EO 13599” or “Non-SDN” list after JCPOA implementation; 50 new Iranian banks and affiliates; and over 400 additional targets, including over 200 targets in Iran’s energy and shipping sectors.  It also includes the re-imposition of broad secondary sanctions on a number of SDNs in Iran as well as certain sectors of Iran’s economy.

As you may recall, on May 8, 2018, President Trump announced the U.S. withdrawal from the Joint Comprehensive Plan of Action (“JCPOA,” or the “Iran Nuclear Deal”).  The U.S. government granted a 180-day wind-down period for U.S. and non-U.S. companies to complete the provision of services contracted for before May 8, 2018, receive any required payments from Iranian parties, and otherwise divest themselves of most activity in Iran.  Certain activities related to sovereign debt, metals, Iran’s automotive sector, and U.S. imports of Iranian-origin foodstuffs and textiles were given a shorter 90-day wind-down period that expired on August 6, 2018.

1) The End of General License H

Beginning on January 16, 2016, U.S. owned or controlled foreign companies were authorized to engage in certain transactions with Iran that would be prohibited for U.S. companies under General License H.  As of November 5, 2018, General License H and its corresponding wind-down authorization have been revoked.  As a result, U.S.-owned or controlled foreign affiliates are now subject to the full range of Iran-related prohibitions applicable to U.S. companies and should adjust their compliance policies accordingly.

2) Sanctions on Iran’s Financial Institutions

With the imposition of sanctions on Iran, virtually all Iranian financial institutions have been re-added to the SDN List.  In addition, the vast majority of large banks in Iran are now subject to secondary sanctions.  Importantly, Parsian Bank, which has historically been a preferred Iranian financial institution for U.S. and non-U.S. companies because it was free from secondary sanctions, was designated with secondary sanctions on October 16, 2018. 

U.S. and non-U.S. companies are both prohibited from engaging in transactions with Iranian banks subject to secondary sanctions.  Additionally, if an Iranian bank is subject to secondary sanctions, that means that the bank is ineligible for participation in licensed transactions unless OFAC provides specific approval otherwise.  If an Iranian bank is listed as an SDN but is not subject to secondary sanctions, then non-U.S. companies would be authorized to transact with that bank provided that the underlying transactions are not otherwise prohibited.  Similarly, U.S. companies would be authorized to engage in licensed transactions with Iranian banks not subject to secondary sanctions.

OFAC also released guidance emphasizing that OFAC may impose secondary sanctions on the remaining Iranian banks in the near future.  See OFAC FAQ #645.  Accordingly, we recommend that U.S. and non-U.S. companies engaged in business with Iran screen any involved Iranian banks against the SDN List before each financial transaction, even where the underlying activity is authorized by general or specific license.

3) Sanctions on Iran’s Shipping Sector

A major component of the pre-2015 U.S. sanctions strategy for Iran involved targeting Iran’s shipping sector.  Those sanctions snapped back into place on Monday, and OFAC has taken additional steps to target Iran’s shipping lines and ports.  The new sanctions on Iran’s shipping sector include:

• SDN designations subject to secondary sanctions on Iranian port operators, shipping lines, vessels, and other actors in Iran’s shipping sector;
• General secondary sanctions on “significant"¹ transactions with Iran’s shipping sector and ports; and
• The risk of SDN designation for anyone knowingly providing “significant” support to activity on behalf of SDN port operators and other actors in Iran’s shipping sector.

First, Monday’s action included the re-designation of numerous actors in Iran’s shipping sector, including the Islamic Republic of Iran Shipping Lines (“IRISL”), 65 IRISL subsidiaries and associated individuals, and 122 IRISL vessels.  Additionally, OFAC re-designated National Iranian Tanker Company (“NITC”), 37 of its affiliates and vessels, and 52 other vessels in which NITC has an interest.  OFAC also designated a number of Iranian port operators on Monday, and the remaining non-SDN Iranian port operators are subject to designation at any time.  All of these SDN parties are subject to secondary sanctions, and both U.S. and non-U.S. companies would be prohibited from engaging in business with them.

Second, OFAC has re-imposed sector-wide secondary sanctions on Iran’s shipping industry.  Any company that knowingly sells, supplies, or transfers “significant” goods or services to Iran in connection with Iran’s shipping sector may be subject to secondary sanctions penalties.  These penalties can range from restrictions on the ability for companies to obtain loans involving the U.S. financial system, to being denied any exports from the U.S., to the full range of blocking measures applicable to SDNs.  As OFAC has not provided any guidance on whether routine transactions with Iranian shipping lines and ports would be “significant,” we believe any unlicensed shipments to Iran would be problematic for U.S. and non-U.S. companies.

In addition, foreign financial institutions are also prohibited from facilitating any significant transactions in connection with Iran’s shipping sector.  As a result, we expect many foreign financial institutions will impose strict risk management policies that will prohibit Iran-related transactions by its customers.  In the past, foreign financial institutions have often applied internal policies that are stricter than the sanctions rules themselves.  If companies intend on continuing to do business with Iran, then those companies should coordinate with their banks to ensure that such business will not impact the banking relationship. 

Third, we expect that OFAC will continue to designate Iranian parties in the near future in order to demonstrate the U.S. government’s strict stance on Iran.  As OFAC identifies additional Iranian port operators and actors in Iran’s shipping sector, OFAC will likely also be seeking to identify parties that are knowingly providing significant support to the shipping industry.  Accordingly, there is a serious risk of designation for non-U.S. companies that maintain long-standing relationships with Iran’s shipping sector.

Under the primary sanctions, U.S. companies and foreign companies owned or controlled by U.S. persons are prohibited from engaging in any unlicensed shipments to Iran.  See § 560.206.  With the new secondary sanctions, non-U.S. companies now also face significant risk when engaging in transactions with Iran’s shipping sector.  Arrangements for transshipments through Iran would be problematic for the same reasons.  Even where no SDNs are involved, non-U.S. companies could be the target of OFAC’s secondary sanctions.  In particular, if the EU, Russian, and Chinese government continue to support major business with Iran, it is possible that the U.S. may enforce secondary sanctions to deter the private sector. 

Please also note that as a general rule, parties subject to secondary sanctions for operating in the shipping sector are not eligible to participate in licensed transactions unless OFAC specifically approves of the involvement of that sanctioned party.  This rule does not apply to humanitarian shipments of agricultural commodities, food, medicine, and medical devices, which are exempt from the secondary sanctions on Iran’s shipping sector, as explained more fully in the next section.  See § 1244(e), IFCA.

4) Humanitarian Shipments to Iran Still Authorized

Humanitarian shipments of medicine, medical devices, and agricultural commodities (e.g., food; animal feed) to Iran by U.S. parties are still eligible for general and specific licenses under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”).  The U.S. government has been exceedingly clear that these types of licensed humanitarian exports will not be prohibited under the post-JCPOA sanctions.

In addition, OFAC has provided guidance to non-U.S. companies that may be involved in humanitarian exports to Iran that have no nexus with the U.S.  Non-U.S. companies are generally authorized to export non-U.S. origin agricultural commodities, food, medicine, and medical devices to Iran as long as the transactions do not involve any SDNs designated for terrorism, proliferation of weapons of mass destruction, or connection with the Islamic Revolutionary Guard Corps (“IRGC”).  If the goods are U.S. origin, then the shipments would need to abide by the terms of the TSRA general licenses or move under a specific license.

Accordingly, SDNs that were designated solely for operating in Iran’s shipping sector would not be considered prohibited parties for non-U.S. shipments of humanitarian goods. These transactions require careful due diligence, given the multi-layered sanctions designations and programs on Iran. 

5) Additional Wind-Down Authorizations for Non-U.S., Non-Iranian Companies

Although the 180-day wind-down period has expired, OFAC has extended the wind-down authorization for non-U.S. companies to receive payment or other compensation from Iran related to certain activities that took place during the 180-day wind-down period or before the U.S. withdrawal from the JCPOA.

Specifically, OFAC authorizes non-U.S. companies to receive payments for previous activity with Iran if:

• The goods or services for which payment is owed were fully provided or delivered to an Iranian counterparty prior to August 6 or November 4, 2018, depending on the applicable wind-down period;
• The goods or services were provided pursuant to a written contract or agreement entered into prior to May 8, 2018;
• The goods, services, and payment were consistent with U.S. sanctions in effect at the time of delivery or provision;
• The post-wind down payment would not involve U.S. persons or the U.S. financial system unless licensed or authorized to do so; and
• The transactions and payments did not and would not involve any party that was re-added to the SDN List following November 4, 2018.

In cases where the parties involved with the transaction were re-designated on November 5, 2018, OFAC requests for parties to seek further guidance from OFAC or the State Department, as appropriate, before moving forward with the payment.  Accordingly, non-U.S. companies continue to have some authorizations to receive outstanding payments subject to the conditions above, but OFAC may suspend this authorization in cases where re-designated parties are involved.

6) Specific Licenses for U.S. Companies to Receive Outstanding Iran-related Payments

U.S. companies are now prohibited from receiving payments related to Iran-related goods and services provided prior to November 5, 2018 without a license from OFAC.  OFAC will review requests for specific licenses on a case-by-case basis, which is a far more favorable standard of review than the presumption of denial afforded most Iran-related specific license applications. 

If a U.S. company wishes to apply for a specific license to receive outstanding payments that could not be obtained prior to November 5, 2018, then U.S. companies can apply to OFAC with the relevant details demonstrating that (1) the underlying activity was authorized at the time of delivery; (2) that the activities were conducted pursuant to a written contract or agreement entered into prior to May 8, 2018; and (3) that the U.S. company was unable to obtain payment during the wind-down period despite undertaking reasonable efforts to do so.

7) Remember the 50 Percent Rule

Please remember that OFAC’s designations do not simply target the SDN party, but also any entities in which SDNs, in the aggregate, own a 50 percent or greater interest.  This imputed blocking also extends down-stream to any entities in which a blocked subsidiary owns a 50 percent or more interest.  This rule also applies to the new secondary sanctions, meaning non-SDN entities would be subject to the same secondary sanctions as their beneficial or intermediate owners.  These blockings and secondary sanctions apply regardless of whether the subsidiaries are identified on the SDN List.  Accordingly, companies should screen for prohibited beneficial ownership of Iranian parties, where feasible.

8) Recommended Steps for Non-U.S. Companies

Following the re-imposition of secondary sanctions, it would be prudent for non-U.S. companies to take the following steps to assess U.S. sanctions applicability to existing business relationships.

First, we recommend that non-U.S. companies identify any contracts or other transactions that involve Iran (directly or indirectly).

Second, non-U.S. companies could review their current and future performance obligations under those contracts (i.e., delivery of cargo, payments, etc.), and the extent to which U.S. sanctions may impact those obligations.

Third, non-U.S. companies may want to analyze the contract terms to determine their legal position in the event that the new sanctions prevent performance.  For example, contracts containing sanctions, force majeure, frustration, or illegality clauses may provide some cover for the company to withdraw from prohibited Iran-related business.

Fourth, non-U.S. companies could notify customers and counterparties of the company’s corporate policy with respect to future Iran-related transactions, where applicable.

9) Conclusion

We will provide an update if OFAC provides any additional guidance regarding sanctionable activity related to Iran’s shipping sector.  Nonetheless, at the present time, shipments to Iran should be considered extremely high risk, even where no SDNs are involved.  Please contact GKG Law with any questions related to this alert.