Family Law
Can My Spouse Take My Business?
The law may differ slightly from jurisdiction to jurisdiction. Generally, businesses started during the marriage will be determined to be marital property to be divided upon divorce. If the business is a partnership or a corporation, ownership by title will be determined. Suppose a spouse owns 100% of the business because of the stock ownership or the partnership interest or because of other evidence of ownership. In that case, the Court will generally require that the business be valued, and then a determination will be made as to whether the spouse who does not have an interest in the business will receive a buyout or an offset from other assets. Business valuations are performed by experts. Often the parties will agree to use one business valuation expert as a neutral. However, in the spouses cannot agree on one valuation expert, there may be substantial variance in the opinions of the experts representing the interest of the parties. Those situations require the assistance of an attorney who has specific knowledge regarding business valuations and who has the ability to work with experts in the field. Often there is a determination of personal goodwill. In those cases, an expert may opine that the value of the business is, in whole or in part, attributable to the owner of the business. In that case, the personal goodwill will not be divided upon divorce. This determination can be hotly contested in a divorce situation. If the spouses each own an interest in a business, it is often partitioned in some way by a transfer of ownership between the spouses, with an offset for other assets or a buyout. When dealing with businesses that began prior to the marriage, the entire business is not necessarily marital. Once again, a business valuation may be hired to determine the value of the business at the time of the marriage and the current value of the business. The spouse who does not own an interest in the business may argue that the increase in value is marital and should be divided equitably or equally between the parties, depending upon the applicable statutes and case law.
October 28, 2022
Business
Executive Playbook: The Challenges of Hiring and Recruiting
On this month’s episode of the Executive Playbook, Mike Cammarata and Russell Berger discuss the practical challenges of making strategic hires and recruiting. Mike and Russell focus on the different leading indicators that should prompt business owners to move forward with a hire and then, once that decision is made, where to recruit and how best to interview. Listen in to learn more.
October 27, 2022
Intellectual Property
USPTO Shortens Time for Response to Office Actions
On December 3, 2022, the US Patent and Trademark Office (USPTO) is making a big change to the requirements to respond to rejections or requirements for further information. Background: When a business files an application for trademark registration in the US, it is (eventually) examined, and the examining attorney will either approve the application or issue an Office Action. The Office Action is a letter that will either refuse to accept the application (because of a prior similar registration or other ground for refusal) or require amendments to a part of the application (such as the description of goods) before the application can be accepted. Throughout recorded history, the USPTO has given the applicant six months to respond to the Office Action. Big Change: For Office Actions issued on or after December 3, the USPTO will require a response within three months of the date of issue of the Office Action. It is possible to extend this time for an additional three months with payment of a fee. The fee will need to be paid before the 3-month deadline; it will not be automatic and cannot be paid after the fact. What this means for applicants: Your attorney handling the application will notify you when an Office Action issues and will let you know the deadline to respond or request the extension. It will be important to review the issues with your attorney and make a plan for responding without delay. Additional considerations: For now, this change only applies to Office Actions issued in pending applications. For Office Actions that might issue in response to a post-registration renewal or declaration of use, the same change will take effect on October 7, 2023. For more information about this rule change or any issues related to trademark protection or registration, please contact Laura Winston.
October 17, 2022
Estates and Trusts
Case Study on Estate Tax Reduction Strategies: Business and Investment
In the following case study for business owners, Offit Kurman attorneys Herbert Fineburg and Charles “Max” McCauley illustrate an estate and gift planning strategy for removing your business from your taxable federal estate. This tax planning also works for your stock portfolio. The presentation was delivered at the Philadelphia chapter of The Exit Planning Exchange’s monthly conference.
October 14, 2022
Business
Forwarding Email to Hotel Front Desk for Printing Waived Privilege!
Normally I write about recent and interesting tax cases in this blog, but every now and then, I come across a case so important I just have to share it here. Fourth Dimension Software v. Der Touristik Deutschland GMBh is such a case with an important cautionary tale. Fourth Dimension Software (“FDS”) is embroiled in a dispute with Der Touristik Deutschland GMBh (“DTD”) regarding DTD’s alleged overuse of a software license for software developed by FDS and licensed to DTD. Prior to the litigation, in preparation for a meeting with DTD in Berlin to discuss the licensing agreement, FDS’s former outside counsel emailed the president of DTD regarding certain issues for the meeting. As people sometimes do, FDS’s president wanted a hard copy of the email for his notes. Having no printer, FDS’s president forwarded the email to info.berlin@hilton.com with a note in the subject line “Please print one copy. I’m waiting at the front desk. Thanks.” How DTD got its hands on a copy of the email was not discussed. What was discussed was the waiver of the attorney-client privilege as a result of FDS’s president forwarding the email to the front desk of the Hilton in Berlin for printing. When the email came to light, FDS sought to exclude it as an attorney-client communication protected by the attorney-client privilege. As a reminder, the attorney-client privilege applies to any communication in which legal advice is sought or communicated, not just communications in the context of litigation. Because the parties were in federal court because they were from different states, and not because the case concerned a question of federal law, California law, not federal law, applied. Under California law, if a client discloses an attorney-client communication to unnecessary third parties, the client manifests an intent to waive the privilege. DTD successfully argued that was exactly what happened here. FDS pointed out that under California law, the privilege is not lost solely because the communication is by electronic means (e-mail) or because persons involved in the delivery, facilitation, or storage of electronic communications may have access to the content of the email. The Court dryly noted, “That statute does help FDS here.” The Court went on to point out the hotel desk clerk was an unnecessary third party to whom FDS’s president knowingly disclosed the communication. Though not mentioned in the court’s order, under the court’s analysis, merely forwarding the email to an unnecessary third party would have resulted in a waiver of the privilege as well. Other states’ laws may not be the same as California, but remember that forum selection clause in that contract you signed that said would only be brought in California? But why risk it? Think twice before forwarding that email to or from your lawyer. Like FDS, you may end up waiving the privilege.
October 14, 2022
Estates and Trusts
Empower Your Loved Ones with a ‘Power of Appointment’
Preparing an estate plan means having a say in what happens to your wealth after you are gone. Through a Last Will and Testament, you can name the important people in your life who will inherit your assets. You can also specify whether they should receive these assets immediately upon your death or over time through a trust. Looking even farther ahead, you can give your loved ones a “power of appointment,” enabling them to say where any remaining trust assets should go when they themselves are out of the picture. With a power of appointment at their disposal, your loved ones can direct their inheritance to subsequent generations wisely and effectively. Trusts — A Primer First, a little explanation. A trust is an arrangement under which money or other property is managed by one person, called the “trustee,” for the benefit of another person, called the “beneficiary.” Trusts can be especially useful if your loved ones include a young person, someone with special needs, or anyone who has trouble managing money. In placing their inheritance into a trust, you create a gatekeeper—the trustee. This person is a fiduciary who manages the trust assets and makes distributions only in your beneficiary’s best interests. With a power of appointment at their disposal, your loved ones can direct their inheritance to subsequent generations wisely and effectively. Some distributions could be discretionary. For example, the trustee could be authorized to cover expenses related to your loved one’s health, education, and support as the trustee deems advisable. This authority could be broadly defined to include things like paying for a wedding, buying a house, purchasing a business, or entering a trade or profession. Other distributions from the trust could be mandatory. A trust for a young person might say the beneficiary is entitled to withdraw half of the principal upon reaching the age of 25 and the balance when he or she turns 30. Some people like to include provisions that encourage the beneficiary to achieve certain life goals. The trust could state, for example, that the beneficiary is to receive a large distribution upon graduating from college. Trusts can also discourage harmful behavior by pausing distributions if the beneficiary falls prey to addiction or alcoholism—apart from payments for rehabilitative treatment. By including a “spendthrift clause” in the trust, you can prevent a creditor from placing on lien on the principal to satisfy your child’s unpaid debts. If your children are adopted, placing their inheritance into a trust can ward off possible intrusions from their birth family. Unscrupulous “friends” seeking a loan can also be kept at bay. Powers of Appointment In addition to protecting a loved one’s inheritance, a trust can say what happens upon the death of the beneficiary. Many trusts simply state that any remaining trust property goes to the beneficiary’s children in equal shares. With a power of appointment, however, you can give the beneficiary greater flexibility and control. A power of appointment is the legal right to designate the new owner of property. How can this be useful? Consider a beneficiary who has two children, one with special needs. The beneficiary could exercise the power by appointing half of the trust property in a special-needs trust for the disabled child and half to the other child, outright and free of any trust. In different circumstances, the beneficiary could effectively disinherit an estranged child. Or multiple children could be left different amounts of the trust property, based on their financial needs or how close they have been to the beneficiary. Under a “special power of appointment,” the potential appointees could be limited to a select group of people, such as the beneficiary’s spouse and children. Or the power could be “general,” meaning there are no restrictions on the beneficiary’s power to appoint (think unmarried partners, friends, or charities). Either way, the power could be exercised under the beneficiary’s own Will, which should specifically reference the power of appointment and name the new owners. A power of appointment has been called estate planning’s secret weapon. Consider including one in a trust for your loved ones. It will help them adjust your estate plan to their circumstances long after you are gone. To get started, call an Estates & Trusts lawyer for help.
October 11, 2022
Estates and Trusts
Historic Increase to Your Lifetime Exclusion from Federal Estate Taxes for 2023
Ironically, there is good news for some families due to rising inflation for gift and estate planning purposes. As a result of inflation adjustments built into federal estate tax laws, your lifetime exclusion from federal estate taxes is set to rise from $12.06 million per person in 2022 to almost $13 million in 2023. This is a total exclusion amount of almost $26 million per married couple [The inheritance tax rules, if any, for the state where you reside vary from state to state and are not discussed in this article]. Specifically, according to recent reports, in 2023 the estimated inflation adjustment will be $860,000, resulting in an aggregate exclusion amount of almost $13 million per person ($12,060,000 plus $860,000 = $12,920,000). This is a remarkable increase when compared to the 2022 inflation adjustment increase of $360,000, at that time the largest on record. By comparison, the inflation adjustment for 2016 was a mere $20,000. Additionally, the annual gift tax exclusion is set to rise from $16,000 per donee in 2022 to $17,000 per donee in 2023. This means you can gift up to $17,000 to an unlimited number of individual recipients without incurring gift tax consequences or reducing your estate tax lifetime exclusion. High-net-worth individuals will benefit from the inflation adjustments because they can move significant assets out of their taxable estates before the scheduled reduction of the exclusion amount on January 1, 2026, when the exclusion amount will drop by a staggering 50%. For example, in 2026, a married couple will go from being able to gift nearly $26 million free of federal estate tax to only being able to gift $12 million (adjusted for inflation) free of federal estate tax. Acting now to take advantage of the historically high exemption could save your family millions in federal estate taxes. Note: If you die before 2026, under the portability rules, your surviving spouse can carry over your unused exclusion to the surviving spouse’s federal estate tax return; otherwise, your exclusion is permanently lost. An individual who wants to take advantage of the current tax laws before they expire may loan their stock portfolio to an intentionally defective grantor trust for the benefit of the individual’s spouse or children in exchange for a promissory note that can be forgiven in 2025 — the eve of the tax law changes — using the exclusion amount before it disappears. Couples will typically consider a trust for a spouse to preserve access to the trust portfolio during the spouse’s lifetime as the trust beneficiary. In conclusion, if you expect that your taxable federal estate will be more than $6 million (adjusted for inflation) for a single individual or $12 million (adjusted for inflation) for a married couple, you should consider the federal estate tax benefits to your heirs by engaging in estate and gift tax planning. Please get in touch with Danielle Friedman or Herb Fineburg with any questions or additional estate planning techniques to reduce your taxable estate and preserve your lifetime exclusion.
October 10, 2022
Intellectual Property
Defamation: Five Key Questions for Any Potential Claim
Defamation has been in the news lately thanks to the Depp v Heard Trial. But what is defamation exactly? Has someone ever posted an untrue statement about you or your organization online? Untrue statements are published every day but not every untrue statement rises to the level of defamation. Consider the following elements of Defamation: What is defamation? A false, malicious communication of fact to a third-party causing injury to one’s reputation. In Virginia, defamation encompasses libel (written recorded statements) and slander (oral statements). Watch: Spider-Man: The Difference between slander and libel – YouTube What is required to prove defamation? Publication (the statement is seen or heard by a third party); A false statement tending to harm the reputation of another; & The requisite intent. (actual malice for public figures; negligence for nonpublic figures).Gaz, Inc. v. Harris, 325 S.E.2d 713, 725 (Va. 1985). What is a defamatory statement? The statement or communication must be more than an unpleasant statement. The subject of the statement must appear odious, infamous or ridiculous. A statement will not be actionable as defamation unless it has a “sting” injuring the subject’s reputation. However, defamation can be proven by inference, implication or insinuation. Can opinions constitute defamation? No – statements of pure opinion are not defamation. “The First Amendment and the Constitution of Virginia protect the right of every individual to express any opinion or idea, however ill-founded.” Tharpe v. Saunders, 737 S.E.2d 890, 893 (Va. 2013). Note – adding qualifiers such as “in my opinion” will not diffuse an otherwise defamatory statement. How can a statement be published? Any communication by any method to one or more persons who can understand its meaning. Newspaper articles, statements aloud to others, books, Twitter posts, Facebook statements, and other social media mediums. If you or your organization are the subject of a potentially defamatory statement or a defamation lawsuit is threatened against you or your organization, don’t make any decisions about how to proceed before talking with a trusted attorney in your area. Offit Kurman attorneys are available to advise on defamation and other issues. Reach out to Anders Sleight today to discuss your specific situation.
October 6, 2022
Labor and Employment
Monitoring Employee Email for Unionization Activity
We’re all noticing that increased unionization is the national trend. With new Democratic-appointed National Labor Relations Board members, the Board is no longer all Republican, and employers are closely watching the effects of this political shift in favor of unionization rights. On September 30, a panel of two Republican members and one Democratic member decided that T-Mobile US, Inc. broke the National Labor Relations Act by disciplining a customer service worker for sending a union-related email following a court battle appealing its initial decision. This reversed a 2020 decision by an all-Republican panel that T-Mobile had the right to discipline the worker for using its email for non-business-related purposes. The Board found that T-Mobile had broken labor law by “selectively and disparately” using company policies to silence the pro-union worker. However, this finding was specific to the facts of this case. Other employees had been permitted to use T-Mobile’s email for non-business purposes without being disciplined. Other employees sent mass emails about non-work issues such as hockey tickets, bowling parties, and “Nacho Day” in the cafeteria—but weren’t punished, said the decision. T-Mobile appeared to be targeting the worker who was promoting unionization. Employers may still restrict workers’ email use for non-work issues, including union organizing, as long as they don’t target union communications specifically. So, if employers want to prevent unionization emails on their servers, they need to monitor the servers for other uses and shut them down, too.
October 3, 2022
Bankruptcy
When Bad Things Happen To Good People: Good Faith Is Not Enough When Investing in (What Later Turns Out To Be) a Ponzi Scheme
What happens when a good faith investor learns it invested in a Ponzi scheme and is presented with a claim to return money it withdrew from its account and fights the good fight to protect its investment? On September 20, 2022, the Court of Appeals for the Second Circuit affirmed the district court’s decision granting a motion for summary judgment in favor of Irving Picard, the S.I.P.C. appointed trustee liquidating Bernard L. Madoff Investment Securities L.L.C. (“B.L.M.I.S.”) and ruling that defendants J.A.B.A. Associates L.P. (“J.A.B.A.”) and the general partners of J.A.B.A.: Audrey Goodman, Bruce Goodman, Andrew Goodman, and the estate of James Goodman, were required to pay to the trustee the amount of $2,925,000 together with 4% pre-judgment interest. Considering that the litigation started in 2010 and went through three levels of the court system, the award of pre-judgment interest adds a material amount to the total due to the trustee. Who Are The Parties? J.A.B.A. is a former customer of Bernard L. Madoff who had no knowledge of his fraudulent conduct. Irving H. Picard, the trustee, sued it, alleging that it received voidable transfers from B.L.M.I.S. in the last two years of his operation, from December 11, 2006, to December 11, 2008. The initial claim filed on December 10, 2010, asserted against the defendants, was for $6,065,000 of withdrawals that J.A.B.A. allegedly received in the six-year period prior to the bankruptcy filing. However, in an earlier decision, the Court of Appeals for the Second Circuit ruled that the trustee is limited to recovery of the Two-Year Transfers. See Sec. Inv. Prot. Corp. v. Bernard L. Madoff Inv. Sec. L.L.C. (“Ida Fishman”), 773 F.3d 411, 423 (2d Cir. 2014). As set forth in the Second Circuit’s and the underlying district court’s decision, B.L.M.I.S. was a securities broker-dealer through which the infamous Bernard Madoff operated three business units: (1) a proprietary trading business; (2) a market-making business; and (3) an investment advisory business (the “I.A. Business”). B.L.M.I.S. collected funds from brokerage customers and purported to invest those funds on behalf of the customers, but it did not actually invest the money. Instead, it sent its customers fabricated statements using historical trading activity and returns that had never been generated and therefore were reflecting fictitious trades and gains. When customers sought to withdraw money from the accounts, B.L.M.I.S. satisfied those requests with the proceeds of other customers’ investments that were held in a commingled checking account. See, e.g., In re2 Bernard L. Madoff Inv. Sec. L.L.C., 773 F.3d at 415. The scheme collapsed in 2008. Analysis The finding that the trustee was allowed to claw back the amount transferred out of the B.L.M.I.S. money is not surprising. It is well settled that when a corpus of customer property is insufficient to pay customer claims, a S.I.P.A. trustee may recover certain transfers by the debtor pursuant to Section 548(a)(1)(A) of the Bankruptcy Code. 15 U.S.C. § 78fff-2(c)(3) and 11 U.S.C. § 548(a)(1)(A). A trustee may avoid and recover transfers of fictitious profits where (1) a transfer of an interest of the debtor in property, (2) was made within two years of the bankruptcy petition date, (3) and the transfer was made with “actual intent to hinder, delay, or defraud” a creditor. Adelphia Recovery Tr. v. Bank of Am., N.A., Nos. 05-cv-9050, 03-MD-1529, 2011 WL 1419617, at *2 (S.D.N.Y. Apr. 7, 2011), aff’d sub nom.Adelphia Recovery Tr. v. Goldman, Sachs & Co., 748 F.3d 110 (2d Cir. 2014). Defendants claimed that the S.I.P.C. trustee did not have the standing to pursue the claims and that the account out of which the money was transferred was held in the name of Madoff, not B.L.M.I.S. Both the District Court and the Court of Appeals found these arguments unpersuasive. The novelty here is the somewhat harsh determination concerning pre-judgment interest. The defendants sought to overturn the award of pre-judgment interest as an abuse of discretion because they were innocent victims of fraud and should not have been penalized for defending themselves in court. J.A.B.A. argued that (1) there was no statutory basis for an award of pre-judgment interest under 11 U.S.C. § 548; (2) pre-judgment interest was inappropriate where the defendants did nothing wrong; (3) the trustee was responsible for any delay; and (4) the district court’s award of 4 percent interest was excessive and punitive. The Court of Appeals found that the lack of explicit authorization in the Bankruptcy Code for an award of pre-judgment interest was not dispositive, and that pre-judgment interest had been awarded against other similarly situated six defendants in related S.I.P.A. litigation. See, e.g., Securities Investor Protection Corp. v. 7 Bernard L. Madoff Investment Securities L.L.C., No. 08–01789 (S.M.B.), 2018 W.L. 8 1442312, at *15 (S.D.N.Y. Bankr. March 22, 2018), report and recommendation adopted, 9 596 B.R. 451 (S.D.N.Y. 2019 aff’d, 976 F.3d 184 (2d Cir. 2020); Picard v. Nelson, 610 B.R. 197, 238 (Bankr. S.D.N.Y. 2019); Picard v. BAM, L.P. , 624 B.R. 55, 65-66 (Bankr. S.D.N.Y. 2020). The court further held that wrongdoing by the Defendants was not a pre-requisite to an award of interest. While defendants certainly had a right to litigate their case, they benefited from other customers’ stolen property and had not returned it for over a decade. The Court of Appeals was satisfied that the district court appropriately balanced the equities and surveyed other cases where pre-judgment interest was awarded, ranging from 9 percent to 4 percent. S.I.P.C., 528 F. Supp. 3d at 246. Takeaway The moral of the story here is that when presented with a settlement offer, litigants and their lawyers must carefully analyze how interest impacts the litigation strategy and decide whether it is worth spending money and time pursuing appeals, not just based on existing case law, but the trend in which the law is moving and the reasons behind it. For further information, please feel free to reach out to Albena Petrakov.
September 30, 2022
Marriage on the Rocks
Marriage on the Rocks: Prepping for Your First Meeting with Your Lawyer
Rachel Mech and Emily Shank discuss how to prepare for your first meeting with your lawyer. Emily Shank, who is featured in this video, is no longer affiliated with Offit Kurman.
September 30, 2022
Business
Executive Playbook: Maryland Saves Program
On this month’s episode of the Executive Playbook, Mike Cammarata and Russell Berger discuss the new Maryland Saves program. Under this program, almost all employers in Maryland are required to either offer a retirement plan of their own or to provide their employees with access to the Maryland Saves program. While this program should not cost employers any out-of-pocket funds, it is an opportunity for employers to ensure that they are taking strategic steps to not only comply with the law but to provide meaningful benefits to employees. Listen in to learn more about the financial and legal opportunities Maryland Saves presents for business owners.
September 29, 2022
M&A Nuggets
M&A Nuggets: Be Prepared for Due Diligence, Before You Go to Market Part 4 – Employee vs. Contractor Classification
This is Part 4 of a series on steps business sellers should take to make sure their house is in order before going to market. One of the hot button issues that buyers examine when conducting due diligence is whether the seller has properly classified a worker as an independent contractor versus an employee. The contractor versus employee issue has always been a target of the Internal Revenue Service and United States Department of Labor. If a worker improperly classified as a contractor is in fact an employee, the consequence can be a finding that the employer owes back payroll taxes, interest and penalties. Some employers stretch their classifications of workers as independent contractors to avoid having to pay payroll tax and provide coverage under the employer’s employee benefit plans, thereby saving costs that would be incurred if the person was classified as an employee. Regardless of an employer’s past practice, potential buyers are certain to examine the issue and, if a buyer believes that there is the potential for misclassification, a specific indemnification by the seller of the buyer will be required. Prior to going to market, sellers should review any classification of workers as independent contractors. The factors looked at to determine whether a worker is an independent contractor or an employee, although not crystal clear, depend in large part on whether the employer controls the worker’s schedule, provides all of the resources the worker needs to work and restricts the worker from engaging in competition. Independent contractor relationships should be properly documented with contractor agreements. The factors that determine worker status should be reviewed as they apply to each contractor and, if necessary, the relationship between the worker and the company should be adjusted to either make clear that the factors weighing in favor of a contractor determination will be satisfied, or to shift the worker to an employee. By examining the contractor versus employee issue proactively, a seller can not only provide comfort to interested buyers that this issue has been dealt with, but also avoid potential payroll tax and other regulatory issues later.
September 28, 2022
Contractor's Corner
Legal Considerations When Running a FedEx Business Webinar
Sarah Sawyer hosted a webinar to discuss the Legal Considerations When Running a FedEx Business. A few aspects that were covered during the webinar are: Legal issues related to pay structures and incentives Wage deductions, the do and don’ts Business formation and structure concerns Asset protection considerations The webinar can be found here. Passcode: G17$0WjE
September 26, 2022
M&A Nuggets
M&A Nuggets: Be Prepared for Due Diligence, Before You Go to Market Part 3 – Privacy Policies
This is Part 3 of a series on steps business sellers should take to make sure their house is in order before going to market. The Health Insurance Portability and Accountability Act, better known as HIPAA, was enacted in 1996 as one of the first laws to protect the privacy of personal identifiable information. The increase in attempts by cybercriminals to obtain or hold hostage private information, whether through ransomware, phishing attacks or other efforts, has been in part the reason for spurts in the enactment of additional privacy laws to protect personal information. As a result of the greater susceptibility of personal information to attack and the increase in the number of laws designed to protect the information, privacy laws and policies have become one of the due diligence areas most focused on by buyers. To be prepared, sellers must first understand which privacy laws apply to them. In the United States, HIPAA, which is designed to protect healthcare information, is the most significant federal law. At present, there is no overall federal law protecting privacy information in general. However, several States have enacted their own privacy laws, including California, Virginia, Utah, Colorado and Connecticut, and more are on the way. It is important to determine whether these laws apply to your business. A State’s law may apply to your business even though you do not do business in that State. Among the most important overseas laws is the General Data Protection Regulation, known as GDPR, which regulates the information of residents of the European Union. Again, just because your business does not operate in the European Union does not mean that your business is not subject to the GDPR, as that law applies to businesses that collect and process information of European residents. The privacy laws establish policies and standards that must be followed to protect personal information. Once it is understood what laws are applicable to your business, the next step is to determine whether your business has in place the policies and standards that are required, including whether its online privacy policies and terms of use are sufficient. Making sure that your business is in compliance with privacy laws will not only go a long way to protect the personal information of persons who do business with you (your employees, customers and members of the public who visits your website or app), but will provide comfort to potential buyers that you have adequately dealt with this area of high risk. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
September 22, 2022
Labor and Employment
Preparing for Potential Union or Organizing Activity
U.S. labor unions are becoming increasingly popular among Americans after years of relative indifference by rank-and-file employees. Approval ratings for unions and unionization efforts are at the highest point since 1965, according to a recent Gallup survey. Organizing activity is bubbling up in unexpected areas like gaming and the broader technology industry and in global organizations like Starbucks and Amazon. This workplace trend created an unsettling development for all employers as they contemplate their relationships with employees heading into 2023. Offit Kurman’s Labor & Employment group offers an informative 60–90-minute virtual presentation for business owners, HR professionals and managers, providing information crucial to mitigating risk and avoiding unionization in their organizations. The presentation covers applicable labor laws and regulations governing union activity, compliance requirements, proactive strategies to identify organizing warning signs, best practices for union-related communications and how to address organizing activity before it gains steam. There is also ample time allotted for Q&A. The presentation is directed only to management-level employees, not rank-and-file employees. If you would like to schedule a presentation or receive more information, please feel free to reach out.
September 22, 2022
Contractor's Corner
Potential Changes to Federal Overtime Pay Laws Loom
Currently, under the Fair Labor Standards Act (FLSA) Motor Carrier Exemption, FedEx contractors do not have to pay drivers overtime when driving trucks over 10,000 pounds. That could change. The Guaranteeing Overtime for Truckers Act, introduced in the U.S. House of Representatives on April 14, 2022, and in the Senate on September 12, 2022, would repeal the FLSA Motor Carrier Exemption. The legislation will significantly change how contractors schedule employees and manage their fleet if passed. The U.S. Department of Transportation recently recommended eliminating the exemption to improve the supply chain, and the bipartisan bill has a coalition of support from the Owner-Operator Independent Drivers Association, the International Brotherhood of Teamsters, the Institute for Safer Trucking, the Truck Safety Coalition, Citizens for Reliable and Safe Highways and Parents Against Tired Truckers. The introduction by Senator Markey and Padilla of the Senate version of the Guaranteeing Overtime for Truckers Act gives this bill new life and continues to move the efforts of these groups forward. While these developments in no way guarantee the elimination of the Motor Carrier Exemption, it is a significant development that contractors need to be aware of and prepared to address. We will continue to provide you with updates as we receive them.
September 20, 2022
Marriage on the Rocks
Marriage on the Rocks: Prenups- The Good, the Bad, the Funny
Rachel Mech and Emily Shank talk prenups – the good, the bad, and the funny. Emily Shank, who is featured in this video, is no longer affiliated with Offit Kurman.
September 9, 2022
Contractor's Corner
Wage Deductions: When Can You Make Them?
While wage deductions can effectively recoup costs and losses from an employee, deductions from wages are heavily regulated, and contractors should proceed with caution when making these deductions. Under the Fair Labor Standards Act, a federal law governing most contractors nationwide, wage deductions for items considered primarily for the benefit or convenience of the employer may not reduce an employee’s pay rate below minimum wage. For example, if an employer has an agreement with an employee to deduct from the employee’s wages costs to cover any damage to an employer’s property or lost equipment, the employer’s deductions cannot bring the employee’s pay below minimum wage. Alternatively, wage deductions for items considered for the employee’s benefit and do not benefit the employer, such as a personal loan to the employee, the wage deduction can reduce the employee’s effective rate of pay below minimum wage. The same general rule applies to wage deductions and overtime compensation, not bringing the employee’s wage below time and a half. In addition to federal laws regulating wage deductions, many states have stricter rules governing what, when, and how employers may make deductions from employees’ wages. For instance, in New Jersey, employers may not require an employee to pay for their uniforms or deduct the cost of uniforms from an employee’s paycheck, and in California, employers are generally prohibited from making deductions from an employee’s wages for vehicle damage caused by an employee’s negligence. As a general rule of thumb, contractors should always get express permission from employees to make any deductions from their wages and pay close attention to their state’s laws on deductions to ensure they are not running afoul of these regulations. To merely include a deduction policy in the employee handbook without seeking permission and vetting what deductions are allowable in your state and the laws governing those deductions is wholly insufficient. Out of all of the many areas of employment law that employers must comply with, wage and hour laws have some of the steepest consequences for noncompliance. Contractors who fail to comply with wage and hour laws, such as wage deduction regulations, may have to pay double to treble damages, the employee’s attorney’s fees, and individual penalties for noncompliance. Accordingly, contractors must pay special attention to these laws before implementing any policies or procedures related to payroll deductions.
September 8, 2022
Labor and Employment
The Turning Tide: How Americans Currently View the Supreme Court
Not too shocking: about half of Americans’ ratings of the Supreme Court are now as negative as – and more politically polarized than – at any point in three decades. According to the Pew Research Center’s report published September 1, the share of Democrats or Democrat-leaning participants who say they have a favorable opinion of the Court has dropped from 67% in 2020 to 28% in August 2022. Almost half of the respondents indicated their belief that the Court has too much power. In contrast, Republican and Republican-leaning approval ratings were very similar to 2020 at over 70%. The justices were once proud to say that they are apolitical, citing the fact that many of their decisions are unanimous, 8-1, or 7-2. But the percentage of those opinions dropped from 49% in 2016 to 28% in 2022, according to the authoritative empirical SCOTUS blog. I have been to the Supreme Court twice: once in 2015 and once in 2019. Our 2015 opinion was unanimously decided, and in 2019, the Court declined to review the lower court’s decision. This indicates – from my very small sample – cohesive views. Pew’s survey was much larger. It polled 7,647 adults, including 5,681 registered voters, from Aug. 1-14, 2022, using a national, random sampling of residential addresses. What do you think? Has the 6-3 “conservative” majority been that divisive? And isn’t it sad that we now commonly refer to the “factions” as “conservative” and “liberal”?
September 7, 2022
Bankruptcy
Splintering Door Frames (Almost) as U.S. Marshals Enforce Order of the Bankruptcy Court
Last month, Jim Hoffman of Offit Kurman, P.A., Counsel to Cheryl E. Rose, a Chapter 11 Bankruptcy Trustee, accompanied the U.S. Marshals and the Prince George’s County Police to the home of an uncooperative debtor to enforce a Bankruptcy Court order to seize his computers, computer equipment, books, records and other items that may assist Ms. Rose, as Trustee, to administer the Bankruptcy Estate (“Seizure Order”). Prior to that time, the Bankruptcy Court had the patience of Job – – month after month, the debtor broke promises to the Court and to the Trustee to cooperate when producing books and records for more than ten businesses that each own real estate. The debtor also liquidated and retained more than $150,000 of assets during the bankruptcy without Court approval. The Court issued orders to enforce contempt sanctions, but the debtor continued his obstructive behavior. Even a court-imposed detention with the Marshals for two days did not alter the debtor’s behavior. The Seizure Order drafted by Counsel was in the form of a Writ of Assistance. This relief is unusual and requires coordination among the Office of the U.S. Marshals, the Trustee, Counsel and others. The Marshals from the Greenbelt, MD, location were extraordinarily helpful. Ms. Rose coordinated the presence of a locksmith (to avoid splintering door frames), and the Marshals provided manpower and protection, although the debtor’s schedules stated that he had no firearms. The Marshals took no chances. Prior to the date of the seizure, the Marshals communicated with local police to determine whether outstanding warrants existed for the debtor. In fact, there was. So the Marshals, local police, a locksmith and Counsel appeared unannounced at the debtor’s residence worth more than $700,000. Counsel was told to stay far away as law enforcement approached the property. The Marshals called the debtor on two (2) different telephone lines and pounded on the door. No one answered. So the locksmith began drilling a lock behind a tactical shield, drilling – – later admitting it was not his best work under the eyes of so many spectators and the threat of gunfire. After the door was opened, law enforcement announced themselves. The debtor then appeared, claiming to be asleep (despite being fully dressed, television on). The local police arrested the debtor on a prior charge, and Counsel proceeded through the residence, gathering computers, thumb drives and 20 boxes of records. Counsel diligently searched looking for an external hard drive the debtor referenced at a hearing and for more thumb drives. Within the debtor’s nightstand, Mr. Hoffman found 20 rounds of ammunition – – right next to a thumb drive. After further searching, he located a handgun and two pellet guns. The Marshals called the local police again (they were processing the debtor on the prior charge). A policeman returned, took possession of the handgun and ammunition and then returned to the station to arrest, for a second time, the debtor on new charges. The debtor was a convicted felon and was not permitted to possess a weapon or ammunition. The Trustee and Counsel thank the Marshals, Prince George’s County police and others who bravely assisted in the enforcement of the Bankruptcy Court’s Seizure Order. Who said the practice of law was dull?
September 2, 2022
Real Estate
How do Shared Equity Agreements Work?
As discussed in the last edition of This Week in Real Estate, many homeowners are interested in shared equity agreements. Let’s discuss how those agreements work. Here are a few examples of shared equity agreements in action. Scenario 1: Securing a down payment Harry Homeowner wants to buy a home that costs $250,000. To avoid Private Mortgage Insurance (PMI), he needs to put down $50,000. He saved up $25,000 but is not sure how to get the rest. He hears about a shared equity investment company and finds out they will lend him the other $25,000. In exchange, they get an interest in his property and its future appreciation or depreciation. Harry’s agreement sets the term at 30 years. That means he won’t have to make a single repayment on the amount until he sells the home or thirty years have passed, whichever comes first. At the end of the agreement, Harry will repay the initial investment along with 35% of the property’s gain or loss over the span of the agreement. Note that the amount of the company’s interest in the gain is considerably more than the percentage of the initial investment. Repayment Fifteen years later, Harry is ready to sell his home. Depending on how the value of his home has changed, here’s what could happen. If Harry’s home has increased in value to $350,000, he will owe the investor the initial investment of $25,000 plus 35% of the $100,000 gain ($35,000). The total payment would be $60,000. If the value of Harry’s home stayed the same, he would owe the investor the initial investment of $25,000 and nothing more. What if Harry’s home value drops to $200,000?He’ll need to repay the difference between the initial investment ($25,000) and the investor’s percentage of the loss (35% of -$50,000=-$17,500). The total repayment amount would be $7,500. Scenario #2: Cashing out some home equity Ophelia Owner has a home worth $500,000. She still owes $300,000 on her mortgage and has $200,000 in home equity. She wants to cash out $50,000 and reaches out to an equity-sharing company to make it happen. Equity sharing agreement Ophelia agrees to sell $50,000 of her equity in exchange for a 25% stake in her home’s appreciation over the next ten years. Repayment When the 10-year term is up, it’s time for Ophelia to pay, here are three possible outcomes: If Ophelia’s home increases in value to $550,000, she will have to repay the initial $50,000 plus 25% of the $50,000 appreciation, for a total of $62,500. If she is not ready to sell her house, so she will have to pay out-of-pocket or refinance the debt. However, refinancing the debt will result in additional financing fees. And even if she sells her home, the $37,500 she gains from the appreciation won’t cover the full $50,000 repayment. This outcome could be problematic for some homeowners. Before making a shared equity agreement, check market trends and predictions to make sure you’ve got a good chance of gaining money instead of losing it. Next week, we will examine who would truly benefit from a share equity agreement.
September 1, 2022
Bankruptcy
Corporate Subchapter V Debtors Beware: Creditors May Object to Dischargeability of Fraud and Other Claims, at Least in Some Jurisdictions
On June 7, 2022, the U.S. Court of Appeals for the Fourth Circuit (“4th Circuit”) held that the discharge exceptions in Subchapter V of Chapter 11 (enacted as part of the Small Business Reorganization Act (“SBRA”)) apply to both individual debtors and corporate debtors. Cantwell-Cleary Co., Inc. v. Cleary Packaging, LLC (In re Cleary Packaging, LLC), 36 F.4th 509 (4th Cir. 2022). The 4th Circuit’s decision reversed the bankruptcy court’s “nicely crafted opinion,” which held that the exceptions to dischargeability incorporated into the Subchapter V provisions of Chapter 11 applied only to individual debtors. The 4th Circuit’s decision is a big deal in the bankruptcy world because it is the first decision to hold that corporate Chapter 11 debtors are subject to all discharge exceptions under Section 523(a) of the Bankruptcy Code. In this case, the debt at issue was a $4.7 million judgment against the debtor for intentional interference with contracts and tortious interference with business relations. Section 523(a) of the Bankruptcy Code is the section relied upon by creditors objecting to certain types of debts, including for fraud, breach of fiduciary duty and willful and malicious injury. That section refers to dischargeability exceptions of an “individual debtor.” Section 1192, which applies only in Subchapter V cases, excepts from discharge debts “of the kind specified in section 523(a).” In holding that the Section 1192 dischargeability exception applies equally to corporate debtors, the 4th Circuit found that Section 1192 referred to “kinds” of debts as opposed to “kinds” of debtors. This decision is controlling precedent only in Maryland, Virginia, West Virginia, North Carolina and South Carolina. Bankruptcy courts in Idaho and Michigan have held that the discharge exceptions in Subchapter V apply only to individual debtors. It will take time before there are any potentially conflicting circuit decisions on this issue that could result in review by the U.S. Supreme Court. In the meantime, this author understands that certain groups may lobby Congress for a legislative fix to the 4th Circuit’s decision, which some believe will lead to unintended consequences at odds with the legislative history of Subchapter V. What are the potential unintended consequences? In Cantwell-Cleary, the National Association of Bankruptcy Trustees (“NABT”) filed a brief in support of appellee’s petition for rehearing en banc, which the 4th Circuit denied. In that brief, the NABT argued that the purpose of the SBRA was to “streamline the bankruptcy process by which small business debtors reorganize and rehabilitate their financial affairs.” The NABT argued, among other things, that by allowing claims under § 523(a) to proceed against corporate, small business debtors, Subchapter V cases will no longer proceed in a timely, cost-effective manner, nor will it help these companies remain in business. This may be true. For example, in a hypothetical case in which a creditor has a $4.7 million claim (that is not subject to a discharge exception), the debtor could confirm a plan (over the objection of creditors) that pays unsecured creditors only $100,000 if the debtor’s assets are not worth more than $100,000 and if the debtor does not generate more than $100,000 in projected disposable income over the plan term. That debtor could obtain a fresh financial start. By contrast, if that $4.7 million claim is nondischargeable, the debtor will be burdened with collection efforts and may not actually be able to survive. Indeed, the creditor with a nondischargeable claim ends up with significant leverage against the Subchapter V debtor trying to negotiate a consensual plan. Only time will tell whether other courts will follow the 4th Circuit and/or whether someone can convince Congress to clarify whether the discharge exceptions in Section 523(a) of the Bankruptcy Code apply to corporate Subchapter V debtors. For information on this topic, contact Stephen Metz.
August 31, 2022
Labor and Employment
CDC Speaks Again: How Does it Affect Employees?
New COVID guidance from the CDC throws some of what we’ve learned about safe returns to work and prevention out the window. The CDC’s recommendation is now that anyone exposed to COVID is safe to be around others by wearing a well-fitted and high-quality mask for ten days. I’d suggest that the “well-fitting and high-quality mask” is a big factor. Employers should still require that employees inform them of exposure and intent to test and, at that time, let them know the new standard and that they may report in person. Keep a stock of KN95 or other tight-fitting masks on hand. Delaware still requires employers to provide masks, and these are readily available. All persons should still seek testing for active infection when they are symptomatic or if they have a known or suspected exposure to someone with COVID. Symptomatic or infected persons should isolate promptly, and infected persons should remain in isolation for at least five days (day 0 is the day of exposure) and wear a well-fitting and high-quality mask if they must be around others. Infected persons may end isolation after five days, only when they are without a fever for at least 24 hours without the use of medication and all other symptoms have improved. They should continue to wear a mask or respirator around others at home and in public through day 10. Don’t forget: employees at high risk for severe illness and those in contact with them (such as caregiving recipients and household members) may want to minimize risk if they learn they’ve been exposed. They may still ask to quarantine while they await test results. This may either be handled by telework, isolating onsite, or taking available paid or unpaid time off. Be cognizant of reasonable accommodations for workers with disabilities; this may fall into that basket. On another note, I am really happy to announce that I was voted into Best Lawyers in America for employment law. I joined 59 of my colleagues at Offit Kurman, who were included in the listing of the top 5% of American lawyers. Sincerely, thank you for your trust in me.
August 31, 2022
Executive Playbook: Buy/Sell Agreements
On this month’s episode of the Executive Playbook, Mike Cammarata and Russell Berger apply their knowledge as professional advisors and managers to advocate for the use of Buy/Sell Agreements between owners of a business. Mike and Russell discuss the need for a transition plan to ensure the ongoing viability of the business as well as a funding source for a buyout. They also discuss planning for potential disabilities of an owner. Listen in to learn more.
August 25, 2022
Tax
Virtual Currency and Virtual Transactions – Real Tax Issues in Real Dollars
Recently the IRS released a draft form of Form 1040 for the upcoming tax year. The biggest change is a more detailed question about virtual currency transactions. The new draft form asks, “At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset),” followed by a “Yes” or “No” box. You can see a copy of the draft form here. Although not as bad as some expected (Line A-How much did you make last year? Line B-How much do you have left? Line C-Send Line B.), this change shows the Service is increasing its scrutiny of virtual currency transactions and, not coincidentally, subjecting taxpayers to false statement penalties if they are not truthful in their answer. Although the question asking about virtual currency did not appear on the 1040 until 2020, as seen here, the Service began issuing guidance on virtual currency and transactions as early as 2014, as seen in Notice 2014-21. Five years later, in Rev. Rul. 2019-24, the Service issued further guidance to address “hard forks” and “airdrops.” So, what are the rules? First, despite the moniker, virtual currency or cryptocurrency, the Service considers virtual currency (Bitcoin, Dogecoin, Ethereum, as well as all other cryptocurrencies) to be personal property, not currency. Setting aside currency arbitrage transactions, the basis of currency is the face value of the currency. If I receive a $100.00 bill, my basis in that Benjamin is always $100.00 (I can’t depreciate it), and when I dispose of it (use it to buy, say $100.00 of Dogecoin), I have no gain or loss on the disposition of that bill. Now, because Dogecoin is treated as property and not currency if my $100.00 of Dogecoin grows to $300.00 and I use it to buy something else for $300.00, I have taxable gain, in this case, $200.00. Because my Dogecoin is considered property, not currency, the gain will be taxed either as ordinary income or as a capital gain. Whether the gain is taxed as a capital gain depends on whether the Dogecoin is a capital asset in my hands. See Q &A No. 7, Notice 2014-21. If I do not hold the Dogecoin in inventory for sale to others but hold it as an investment, much like stocks, bonds, and other investments, it should be treated as a capital asset and taxed at capital gains rates. If I satisfy the long-term capital holding period (more than one year, i.e., a year and a day), then I get the favorable long-term capital gain rates, which generally are lower than short-term capital gain rates. Let’s take the flip side. What if someone pays me in virtual currency? What is my basis in the virtual currency with which I was paid? My basis is the fair market value of the virtual currency on the date of receipt. See Q & A No. 4, Notice 2014-21. Transactions using virtual currency must be reported in U.S. dollars for U.S. tax purposes. If the virtual currency is traded on an exchange, the value can be determined simply by looking at the exchange rate on the date of receipt or payment. Where the virtual currency is not traded on an exchange, the taxpayer still must determine the fair market value based on all the facts and circumstances. What if I receive virtual currency in payment for services? If I am an independent contractor (I receive a 1099), the receipt of virtual currency is considered self-employment income, which means it is subject to self-employment tax. This also means that payment to an independent contractor using a virtual currency is subject to information reporting, i.e., reporting to the IRS payments of $600 or more in the same tax year to the same person, and the attendant penalties for not filing information returns. If I am an employee (I receive a W-2 from my employer), the payment of wages in virtual currency is subject to federal income tax withholding and, if I am the employer, to the employer’s share of employment taxes. If I am an employer, I must pay the taxes withheld and the employer’s share of employment taxes in U.S. currency, not Dogecoin or any other virtual currency. What if I “mine” virtual currency? If I mine virtual currency, the fair market value of the virtual currency as of the date of my receipt of it is included in gross income. What if I “mine” virtual currency as a trade or business? If I mine virtual currency for my own trade or business or as an independent contractor, the net earnings from that activity constitute self-employment income, but I am entitled to deduct my ordinary and necessary business expenses in determining my net income. You said something about hard forks and airdrops; tell me more. (For those unfamiliar with soft forks and hard forks, click here to read an Investopedia article containing a brief explanation). Typically, and grossly general terms, a hard fork results in the creation of a new cryptocurrency. After a hard fork, transactions involving the new cryptocurrency are recorded on a new distributed ledger, while transactions involving the old or legacy virtual currency continue to be recorded on the old legacy ledger. An airdrop is a way of distributing units of virtual currency to the distributed ledger addresses of multiple taxpayers. Hard forks are often, but not always, followed by airdrops. Generally, a virtual currency is received from an airdrop on and at the date and time it is recorded on the distributed ledger. For U.S. tax purposes, whether the taxpayer received the virtual currency on and at that date and time is determined by the dominion and control test. If the taxpayer has dominion and control over the virtual currency on the date and at the time it was airdropped, then the taxpayer, if on the cash basis of accounting, has gross income under IRC § 61(a)(3) on and at the date and time of receipt. On the other hand, if the hard-forked virtual currency is airdropped into a wallet managed by an exchange that does not support the newly created (hard forked) virtual currency, which means the taxpayer cannot transfer, sell, exchange, or otherwise dispose of it, then the taxpayer does not have dominion and control over the new hard fork airdropped virtual currency, and it would not be included in the taxpayer’s gross income unless and until the taxpayer later acquired dominion and control over it. The use of virtual currencies and transactions using virtual currencies can create real tax issues. If these tax issues result in federal tax liability, those liabilities must be paid with the U.S., not virtual, currency. If in doubt regarding the tax consequences of buying, selling, using, or mining virtual currency, taxpayers should consult their tax advisor regarding the implications of buying, selling, and using virtual currencies. Offit/Kurman PA counsels clients on intellectual property matters such as virtual currency and NFTs, including the tax aspects and effects of those matters. The views expressed herein are solely those of the author, are not intended as, and do not constitute, legal or tax advice.
August 24, 2022
Family Law
Separation? Where Do I Start?
If you are contemplating a separation, or if you believe that your spouse is, where do you begin? Collect and preserve financial information. This will include tax returns and information regarding income and expenses, such as check registers, checking account statements and credit card statements. You will also want information regarding assets and liabilities. If you have done a loan application for a mortgage or refinance, that will be a very helpful summary. You also want to secure information regarding 401K’s, retirement and investment accounts and the like. If there is a business involved, any documentation regarding the business would be an integral part of the information you will need. Information regarding real estate. HUD-1 forms from the purchase and sale of real estate are essential for tracing. If any assets were acquired using non-marital funds by either party, that information should be provided to your attorney. Non-marital asset tracing would include funds or assets owned by either party prior to the marriage, gifts from a third party, inheritances or anything traced to those funds. Consider available funds. You will need funds to retain counsel and experts and enough funds to pay ongoing bills for at least a short period of time. Familiarize yourself with bank accounts and investment accounts that would be accessible to acquire a new place to live and other expenses for at least a few months’ time. Consider options for living arrangements. Although you do not want to move before consulting with an attorney and considering all of your options, it will be beneficial for you to know whether you can afford to remain in your current home if that’s an option. And, if you must move, what kind of residence would be appropriate for you (and for your children)? Consult with a divorce attorney. Seek referrals from trusted friends who have had divorce experiences, estate and trust lawyers, accountants, therapists, and others who can give you names of competent attorneys. You may want to consult with more than one before making the decision as to who should represent you. Always consider peer evaluations, such as Super Lawyers, Best Lawyers, and, of course, the American Academy of Matrimonial Lawyers (AAML). Membership in the AAML is an organization of the top divorce lawyers in the country. Both Cheryl Hepfer and Sandy Brooks are Fellows of the AAML. Make your children your primary concern. For any parent contemplating separation and divorce, the best interest of their children is of great concern. An experienced divorce attorney can give you advice regarding the process options for you to consider and can provide information that will make this less frightening.
August 24, 2022
Labor and Employment
Take Notice: Required Postings
Recently, I was struck yet again by the huge number of laws requiring employers to provide notice to their employees of employment-related laws. Often laws require employers to provide notices over and over, too. For instance, Washington DC has a new law banning almost all non-compete provisions (which takes effect October 1). Not only do employers with one or more employees have to be aware that they may no longer ask their employees to sign non-compete agreements, but they must also remember to provide notice 1) ninety days after the law becomes effective (so they have to track that, too); 2) seven days after hire, and 3) within 14 calendar days of a written request for the text of the law. Who knew? I had to sit down and research this – and I’m an employment lawyer. From this example alone, it’s clear that keeping up with notification requirements is a pain. And it’s extremely burdensome if the company is operating in multiple states. All the remote working has increased this administrative burden on employers. Remember, the employment laws of the state in which employees are working are those applicable to them. I suggest that management – at those employers without HR personnel – take a look at the websites of each state as a beginning point. All of the notices are usually available there in a PDF to be posted. Caution: it seems even the Departments of Labor in some states can’t keep up with their own lawmaking because I’ve noticed some missing on their own websites. It’s a good starting place and also an education in laws applicable, as you’ll see when you read the notices. And, of course, don’t forget your federal law notices, either (DOL.gov)! Post in all brick and mortar sites and email notices to remote employees. Review once per year
August 24, 2022
Family Law
Should I File a Joint Tax Return with My Separated Spouse?
When it comes time to file tax returns, those of our clients who are separated but not yet divorced often ask our opinion. As with many issues, there are some benefits to filing a joint return. However, there may also be unexpected consequences. When spouses file jointly, they are each responsible for all of the reported information. Each spouse can be held responsible for tax liability, which can include interest and penalties. One concern, therefore, is whether the other spouse has had adequate withholding or has paid their quarterly tax obligation in full and on time. We do not recommend a client file jointly if they are concerned their spouse has not been honest about income or deductions. On the other hand, there are significant benefits of filing jointly, such as lower tax brackets. Filing jointly rather than filing married filing separately can save money. You may qualify for filing as head of household. You may need guidance from an independent accountant or a competent family law attorney. Concerns may include who can get certain deductions, how to divide resulting tax liability, and how a refund may be divided.
August 22, 2022
Tax
Harvesting Tax Credits Is Legitimate Business for Tax Purposes
If the sole purpose of a partnership is to harvest tax credits, is that a legitimate business for tax purposes? According to the Tax Court and the D.C. Circuit Court of Appeals, yes. In Refined Coal, LLC. V. Commissioner, No. 20-1015, (D.C. Cir. August 5, 2022), the answer is a resounding yes. But first, some background. In 2004, to stimulate the production of refined coal, which produces fewer emissions when burned, Congress created a tax credit for the production and sale of refined coal. But there was a catch – a producer could only receive the credit if it sold refined coal for 50% more than the market value of unrefined coal. Well, surprise, surprise, this went nowhere, so in 2008 Congress removed the 50% restriction and lo-and-behold, it worked. To take advantage of this change (and resulting tax credit), AJG Coal, Inc. launched a coal-refining facility at a power plant on Santee Cooper in South Carolina. Under the agreement, AJG, through a subsidiary, signed a lease that allowed it to build a coal refining facility inside the power plant. Next, the subsidiary entered into an agreement with the power plant to buy unrefined coal from the power plant, refine it, and sell it back to the power plant at $.75 less per ton. Finally, the sub entered an agreement with its parent to license the coal-refining technology. Wait a minute; they are reselling refined coal to the company from which they bought it for less money!? How could this ever make good business sense? The answer? Tax credits. The only possible way this was only profitable was through the application of the tax credit for refined coal. And we are not talking peanuts here. AJG projected that the sub would realize a $140 million after-tax profit over a ten-year period. Sadly, profits were much less than projected. In fact, the project had several lengthy shutdowns. Finally, in 2012, Santee shut down the coal-refining operation because of insufficient demand for local power, which caused two of the partners to suffer $ 2.9 million and $700,000 after-tax losses, which they wrote off on their respective federal income tax returns. Not so fast, the IRS said. To be a legitimate business, i.e., to write off expenses and losses, you must have a profit motive, and operating a business solely to harvest tax credits do not count, so the partnership was not a bona fide partnership; therefore, the losses are not deductible. Au contraire mon frère said the Tax Court. Yes, harvesting tax credits is a legitimate business purpose, and if the business would not be profitable, but for the tax credits, that is okay. It is still a legitimate business. Not content with the Tax Court, the Service appealed to the D.C. Circuit Court. The D.C. Circuit Court noted that due to special benefits the tax code affords partnerships, there is the ever-present temptation for an entity to appear as a partnership, even if it is not. The Court noted there are two requirements to be a partnership. The first requirement is the partners must intend to carry-on business as a partnership, i.e., the business must be undertaken for profit or other legitimate nontax purposes. Factors examined include the duration of the partnership and the business rationale for forming a partnership. The Court observed, “Taxpayers that structure their dealing to receive tax benefits afforded by statute are entitled to those benefits, no matter their subjective motivations.” The second requirement is the partners must intend to share in the profits or losses or both; that is, the partners’ interests must have the prevailing character of equity. If a partner is insulated from the upside and downside risks of the business, that partner looks more like a secured creditor, not a true partner. Applying these factors, the D.C. Circuit Court found the partnership was a true partnership and dismissed the Service’s objection that the partnership had no pre-tax profit motive and, therefore, was not a true partnership. The Court noted a partnership’s pursuit of after-tax profit, even one only made possible by tax credits, is a legitimate business activity. Finally, the Court held that even transactions that are only profitable on a post-tax basis can still have a nontax business purpose. The decision by the D.C. Circuit Court was unanimous. So, where does that leave us? Consider for a minute all the tax credits provided by the tax code. The Refined Coal decision confirms and affirms that a partnership organized solely to harvest tax credits is a legitimate business for tax purposes. The question is, what tax credits can your business harvest? Offit/Kurman PA counsels clients on business matters, including the formation and structuring of entities to maximize tax savings and tax credits. The views expressed herein are solely those of the author, are not intended as, and do not constitute, legal or tax advice.
August 19, 2022
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