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
Tax
Pass-Through Entities in Bankruptcy-Beware of Phantom Income
Recently I discussed the tax issues created by the inadvertent inclusion of partnership tax provisions in an operating agreement for a LLC taxed as an S-corp. Today we have a different problem – not following what the operating says regarding dissolution and the potentially serious adverse tax consequences that can create. This is a bankruptcy case with important income tax lessons for members of pass-through entities. LeClairRyan PLLC was a law firm in Virginia that was taxed as an S-corporation for federal and state income tax purposes. In 2019 LeClairRyan filed bankruptcy (initially Chapter 11 (reorganization) but converted to Chapter 7 (liquidation). On July 29, 2019, the firm voted to dissolve. On July 31, 2019, Mr. LeClair terminated his employment with the firm. Three years later, he was in bankruptcy court, asking the court to order the bankruptcy trustee to remove his name from the list of equity security holders (members of the law firm) on the ground he had terminated his interest. Under Virginia’s LLC act, an LLC “is bound by its operating agreement, which regulates the conduct of its business and the relations of its members.” Most, if not all, state LLC acts contain similar provisions. Here, the law firm’s operating agreement provided that a member’s interest terminated on the date the member’s employment with the firm ceased. For Mr. LeClair, this was July 31, 2019. But the firm’s operating agreement also provided that as long as a member-owned shares (instead of a membership interest, the law firm used common and preferred shares), no member could withdraw prior to dissolution and winding up of the [law firm]. Because the law firm voted to dissolve on July 29, 2019, two days before Mr. LeClair attempted to terminate his employment, the bankruptcy court ruled Mr. LeClair’s termination was ineffective based on this provision of the operating agreement. Had it been the other way around, that is, had Mr. LeClair terminated his employment before the firm voted to dissolve, then he would not have been a member as of the date of dissolution. So why was Mr. LeClair trying to do this, and what difference does all this really make? The reason: Taxes. The difference it makes: Potentially a big one, and here’s why. Under the Bankruptcy Code, when an individual files bankruptcy, the bankruptcy estate is its own tax entity, meaning it, not the debtor (the individual who filed bankruptcy), is responsible for paying any taxes associated with the income from the bankruptcy estate. See IRC § 1398. However, this rule does not apply to corporations or partnerships. IRC § 1399. In the case of a C-corporation, this is no big deal because C-corporations are separate tax-paying entities anyway. But…where a pass-through entity (PTE) is involved (entity taxed as an S-corporation or partnership)…it can be a big (taxable) problem for the partners/shareholders/members. Recall, with PTEs, items of profit and loss flow through to and are taxed at the shareholder/member/partner level. In bankruptcy, if the PTE has assets that continue to produce income, the bankruptcy estate–not the shareholders/members/partners–gets the income, but and this is a BIG BUT because the income flows through to the individual shareholders/members/partners, they, not the PTE, must pay the taxes associate with that income. Ouch!! So, coming back to Mr. LeClair’s case, that meant that as the bankruptcy trustee collected the law firm’s receivables (which are income), the bankruptcy trustee got to keep the money to pay the firm’s creditors, but for tax purposes, the income was allocated to the members of the now bankrupt firm who had to pay income taxes on money they never received. I know what some of you are thinking. Would the result have been different if the firm had made an election to pay tax at the entity level instead of at the shareholder/member/partner level? After all, Virginia has adopted pass-through entity tax (PTET) as a SALT workaround. Highly doubtful. PTET legislation, at least in Virginia as well as most states, does not create or define a property interest (IRS looks to state law to determine whether a taxpayer has a property interest, then federal law governs how that interest is taxed). Maybe a closer call in Connecticut, where PTET is mandatory but still doubtful, in my opinion. Let this be a cautionary tale that if you are a shareholder/member/partner of a PTE that is contemplating bankruptcy, you should seek not only competent bankruptcy counsel but competent tax counsel as well, lest you wind up with phantom income for which you, not your now defunct PTE, will have to pay income taxes. Offit/Kurman PA counsels clients on bankruptcy and insolvency matters, 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 16, 2022
Labor and Employment
Affirmative Action v.2022
The argument continues on whether affirmative action is legal in the academic admissions setting. In October, the Supreme Court will hear arguments in two cases challenging university affirmative action programs. This is the first affirmative action case heard by the Court since the conservative majority was seated. Management of some major corporations believes that the implications of those decisions could be far broader than their effects on schools’ admissions. It could affect businesses’ hiring, too. The cases are brought by a group called Students for Fair Admissions against Harvard and the University of NC, arguing that the school’s affirmative action admissions policies unconstitutionally harm Asian-American and white students. The universities maintain that race is only one of many factors considered in admissions, including geography, military service, and socio-economic status. Almost 80 companies, including Meta, Apple, Lyft, Uber, Verizon, and Alphabet, filed briefs supporting the schools’ affirmative action programs. Their attorneys assert that corporate diversity, equity, and inclusion efforts “depend on university admissions programs that lead to graduates educated in racially and ethnically diverse environments.” Their position is that only by allowing universities to use affirmative action will there be enough highly qualified future workers and business leaders, especially given the increasingly global nature of the economy. The brief also states that “[E]mpirical studies confirm that diverse groups make better decisions thanks to increased creativity, sharing of ideas, and accuracy.” Do you think workers trained or educated in a racially diverse environment are better employees?
August 15, 2022
Marriage on the Rocks
Marriage on the Rocks: How to (not) Ruin Your Case
Offit Kurman family law attorneys explore lessons from the Johnny Depp and Amber Heard Trial and other ways to ruin your case. Emily Shank, who is featured in this video, is no longer affiliated with Offit Kurman.
August 12, 2022
Tax
Self-Employed and Deducting Car Expenses? – Document or Else!
An internet search of “Schedule C filers” will yield a bevy of sites warning of the increased audit risk and audit red flags for Schedule C filers. As a reminder, Schedule C of Form 1040 is used by sole proprietors, and LLCs taxed as disregarded entities. The recent Tax Court case of Eze v. Commissioner, T.C. Memo. 2022-083 (Aug. 4, 2022) serves as a potent reminder of the need for taxpayers not only to document their business expenses but, when it comes to cars and trucks, to make sure the strict substantiation requirements of IRC § 274(d) and Temp. Treas. Reg. § 1.274-5T(c) are satisfied. Plain English, please. This means keeping records of car and truck expenses, i.e., where you go, the purpose of the trip, miles traveled, who you saw, etc… and make those records close in time to when the expenses were incurred. In Eze, the taxpayer, who’s return was selected for audit (this means the automated system flagged it because his expenses were so high), created his records months, if not years after the fact, created and used a calendar solely for the purpose of the IRS examination, offered no clear explanation when he made the entries, and could not explain how he could have remembered the minute details months and years after the fact. Other things the Tax Court had trouble believing: (1) the taxpayer made the same trip to the same client on the same day of each year; (2) recorded mileage was inconsistent (some trips from his home to New York he recorded as 354 to 362 miles, others he recorded as 448 to 450). There may have well been good reason for that. If I travel to our home office in Baltimore, my mileage each way, will range from 329 to 383, depending on the route. Like most others, I map the route when I am leaving and take the one that suits me the best. But if the taxpayer did that here, he did not offer a plausible explanation why. With the other issues involving his auto expenses records, the Court found the taxpayer’s testimony was not credible. Other things the Tax Court had trouble believing: (1) he took four round trips to Buffalo, New York, and three round trips to Charleston, South Carolina (the taxpayer lived in or around Baltimore, Maryland), all in one month, but could not explain why he needed to visit the same client that many times in one month; and (2) In 2015 the taxpayer showed some personal mileage, but none in 2016. Consistency matters! So, if you are entitled to deduct business mileage, keep accurate records. At a minimum, this should include: (1) miles driven; (2) date; (3) place; and (4) business purpose. These records should be made close in time to when the miles were driven. Have trouble remembering to do that? There’s an app (actually several) for that. Just remember to do period downloads or printouts so if your return is selected for audit, you can substantiate your business mileage deduction. Offit/Kurman PA counsels clients in business and corporate matters, including tax planning and advocacy. The views expressed herein are solely those of the author, are not intended as, and do not constitute legal or tax advice.
August 11, 2022
Tax
Legal Fees – Deductible as Ordinary Business Expenses or Capitalized?
This is the question currently on appeal from the Tax Court to the Third Circuit. In Myland, Inc. v. Commissioner of Internal Revenue (Case No. 22-1193, 1194 & 1195) the IRS appealed the Tax Court’s ruling that Mylan (the taxpayer) was entitled to deduct, as an ordinary business expense under IRC § 162(a), approximately $50 million in legal expenses it incurred to defend patent infringement actions in connection with its manufacture of generic drugs. The Service contended Mylan’s $50 million in legal expenses should be capitalized under IRC § 263(a) because, in its mind, the expenses were related to the acquisition of a capital asset. Okay, so what difference does this make? A big one. If Mylan establishes the legal fees were ordinary business expenses, it gets to deduct those fees as they are incurred (which they did on their timely filed tax returns for the years at issue). If not, Mylan must recover its legal fees over a fifteen-year period, through amortization and depreciation deductions (Ouch!). Because Mylan deducted the fees currently as an ordinary business expense, if the Service ultimately prevails and those deductions are denied, Mylan will also incur interest and penalties (salt in the wound). What is it, an ordinary business deduction or a capital expense? The answer all depends on whether the expense either: (1) creates or enhances a separate and distinct asset; or (2) otherwise generates significant benefits for the taxpayer extending beyond the current taxable year. Yep. About as clear as mud. To provide clarity the Service promulgated Treas. Reg. § 1.263 to provide additional guidance. Without getting too deep into the weeds, if a taxpayer incurs expenses (including legal fees) to create or improve an intangible asset, which includes “rights obtained from a governmental agency,” i.e., trademark, trade name, copyright, license, permit, franchise, or similar right granted by that governmental agency,” those expenses are capital expenses that may only be recovered over the useful life of the asset through amortization and depreciation deductions. Treas. Reg. § 1.263(a)-4(d)(9)(l). Although most businesses do not have patents, many do have other intangibles such as trademarks, trade names, and copyrights, to name a few. The deductibility of legal expenses depends on the nature of the underlying claim for which the legal expenses were incurred, so businesses must look to the substance of the claim or transaction that gave rise to the legal fees to determine whether the expenses are ordinary business expenses (and, therefore currently deductible) or a capital expenditure, recoverable over the useful life of the asset. With intellectual property becoming ever more important and valuable to businesses of all types and sizes, business owners need to be mindful of how and when legal fees (and other expenses) incurred to create or defend rights in intellectual property are treated for federal income tax purposes-deductible currently as an ordinary business expense or capitalized over the life of the asset. As for how the Third Circuit will rule? My money is on Mylan. Offit Kurman PA counsels clients on creating, enhancing, and protecting intellectual property, including the tax aspects and effects of those transactions. The views expressed herein are solely those of the author, are not intended as, and do not constitute legal or tax advice.
August 5, 2022
Contractor's Corner
Workplace Compliance: Avoiding Costly Mistakes
When you get down to brass tax, the fundamentals of running a successful FedEx operation are having operational trucks and employees to run the routes. Like most other businesses, employees are the organization’s lifeblood but can also be the most troublesome from a compliance perspective. This is especially true for FedEx contractors who, in managing their workforce, must work to remain in compliance with state, federal, and local laws and with FedEx requirements. One of the main struggles with maintaining workplace compliance is that there is a federal baseline related to wage and hour, discrimination, and leave laws, but states and local governments are free to require employers to provide additional benefits beyond the federal system offers. This means that states and local governments all over the country have different laws that employers must follow regarding employees. Generally speaking, the east coast states, California, and major cities have the most favorable laws and protections for employees, and southern and mid-west states have minor employee regulations and benefits. Sometimes, whether a state or local law is applicable is based on the size of the employer, meaning that small businesses, like a small FedEx contractor, would be exempt from compliance, while other state and local laws apply no matter the size of the company. Often, through speaking with other contractors and because they are on good terms with FedEx, contractors wrongly assume that they are following all relevant employment laws. However, given the patchwork of federal, state, and local laws, it is easy for contractors to overlook what they may see as nominal wage and hour violations or fail to provide employees with required federal, state, and local notices or protections. These oversights can be costly, both from a retention and an economic standpoint. For instance, many wage and hour laws, including the Fair Labor Standards Act, have expensive penalties for non-compliance, including double or treble damages and paying the employee’s attorney’s fees. Ultimately, different states have different employment laws, and compliance with these laws is an integral part of running a FedEx business. Contractors should ensure their policies and procedures meet all state, federal, and local legal requirements and that their practices align with what is required of them under their FedEx contract.
August 1, 2022
Bankruptcy
Crypto Frame Taking Shape in Real Time
In 2022, CNBC reported on the EthCC conference in Paris, a gathering for hardcore Ethereum developers and technologists. A special spinoff event was a limited invitation only rave party in the Catacombs of Paris, labyrinth of centuries-old tunnels 65 feet underground, which hold the skeletal remains of around six million Parisians.[1] Visiting the Catacombs is considered illegal, although it appears to be tolerated. The CNBC report portrayed the event as surrounded by secrecy. Multiple teams were assembled via an anonymous Telegram group and gathered across the 14th arrondissement of Paris to sneak into the underground landmark. Meanwhile, on this side of the Atlantic Ocean, the crypto world navigated a different kind of labyrinth – those of a chapter 11 reorganization in U.S. bankruptcy courts. In July 2022, two crypto players filed chapter 11 petitions in the Bankruptcy Court for the Southern District of New York– Voyager Digital, LLC, and its affiliates, and Celsius Network LLC and its affiliates. WHY IS THIS SIGNIFICANT? Voyager Digital operates a cryptocurrency brokerage that allows customers to buy, sell, trade, and store cryptocurrency on an easy-to-use and “accessible-to-all” platform. In addition to providing brokerage services, Voyager offers custodial services for customers who store cryptocurrency on Voyager’s platform. Voyager provides loans, typically in the form of a specific type of cryptocurrency, to counterparties in the cryptocurrency sector to facilitate liquidity or trade settlement. Interest earned from the Company’s loans is passed along to customers, who earn a “yield” on their stored cryptocurrency. See Declaration of Stephen Ehrlich, Chief Executive Officer of the Debtors in Support of Chapter 11 Petitions and First Day Motions, Doc. No. 15. Celsius is a cryptocurrency-based finance platform that provides financial services to institutional, corporate, and retail clients across over 100 countries. According to the filings, Celsius was created in 2017 to be one of the first cryptocurrency platforms to which users could transfer their crypto assets and (a) earn rewards on crypto assets and/or (b) take loans using those transferred crypto assets as collateral. Headquartered in Hoboken, New Jersey, Celsius has more than 1.7 million registered users and approximately 300,000 active users with account balances greater than $100. See Declaration of Alex Machinsky, Chief Executive Officer of Celsius Network LLC in Support of Chapter 11 Petitions and First Day Motions, Doc. No. 23. The bankruptcy court was flooded with letters from individuals who feel robbed by the debtors and call for return of their deposits. The treatment of crypto is not addressed in the Bankruptcy Code and the bankruptcy courts are just starting to grapple with the treatment of cryptocurrency as an asset in bankruptcy proceedings. In fact, cryptocurrency, for more than ten years, has been characterized by price volatility and uncertainty regarding its legal status. Yet, in 2021, the crypto market’s value skyrocketed from $965 billion to as much as $2.6 trillion, according to a Morningstar analysis. After many years of debating whether cryptocurrency should be considered security or commodity and which federal agency should be the primary regulator, the more important question for the retail customers is whether they could recover in kind from a crypto brokerage like Voyager or a platform like Celsius whose model resembles bank operations – take deposits and use the deposit to make loans, but without the regulatory oversight that banks experience and without FDIC protection. For customers of securities brokers, there are regulatory mechanisms that provide certain protections. Securities brokers regulated by the Securities and Exchange Commission are subject to a net capital rule—they must cease operations before their assets fall below the level that allows customer claims to be met. In addition, broker-dealers must belong to the Securities Investor Protection Corporation (SIPC), which provides an insurance scheme whereby customers of failed broker-dealers may receive up to $500,000 from the SIPC fund. For customers dealing with futures, section 4d(a)(2) of the Commodity Exchange Act (C.E.A.) provides certain protections as it requires that customer funds received by a future commission merchant to margin, guarantee, or secure a customer’s futures contracts be held in segregated accounts, and not be commingled with the funds of the future commission merchant itself, nor used to guarantee the trades or contracts of any person other than the customer. Futures commission merchants must compute daily the amount of segregated funds on hand and the amount required to be held. Any shortfall must be reported immediately to the Commodity Futures Trading Commission. 17 C.F.R. Section 1.32. None of these protections would be available in these recent filings at first glance. These crypto reorganization proceedings could potentially chart the way forward and address critical questions like – Would cryptocurrency be treated as a commodity or currency, and when could it be treated as a security? How can the cryptocurrency be used in the marketplace to generate recovery, and what’s the proper timing for valuation of crypto assets? Would withdrawals of accounts within the 90-day period before the filing be subject to avoidance actions? [1] https://www.cnbc.com/2022/07/19/ethcc-paris-crypto-developers-gather-as-turmoil-grips-industry.html For further information, please feel free to reach out to Albena Petrakov
July 29, 2022
Business
Executive Playbook: Alternative Solutions for Recruiting and Retention
Recruiting and retention continues to be a challenge for employers. While employers could always pay employees more, that is not a particularly attractive solution and, in many cases, is not a solution at all. In this episode of the Executive Playbook, Mike and Russell discuss strategies that employers can implement to attract new employees and retain existing employees.
July 28, 2022
Labor and Employment
Please Release Me
I have been dealing with a lot of claims recently from unhappy clients who have either been charged with employment discrimination or threatened with suit by disgruntled former employees. What to do? One word: release. I’m begging you have your outgoing employees sign a release of all claims and promise not to sue. This requires a good form and a payment to the outgoing employee. The payment is required to create an enforceable contract: you pay them, and they release your business from claims. A lot of employers are understandably reluctant to pay severance to people they’ve let go. However, it can be a very small payment. Employees appreciate the gesture as well, and this may decrease the chances that they bad-mouth the business. (A good release also includes a promise not to disparage the business, however.) It can cover all potential claims arising up to the time of signature and can also alert employers to any potential claims (for example, a workplace accident.) A smattering of recent examples: The minority employee who charged the employer with race discrimination (the same person hired and fired the employee, obviously making it far less likely that the decision-maker was biased.) The employee who charged the employer with disability discrimination and failure to accommodate disabilities (the person never reported any disabilities, the decision maker had no knowledge of any, and the person never requested accommodations). The employee who claimed to have reported a financial discrepancy to the employer (they don’t recall this employee ever discussing financial matters), and thus, they claim that they were discharged in retaliation for whistleblowing. The list goes on; these are just a few recent examples. Don’t be afraid to let an underperforming employee go, but give them a week’s severance and get that release signed. Check with an employment attorney to be sure that your release covers all potential legal issues.
July 27, 2022
Franchise Law
"Not So Fast" – Maryland Gas Station Operator Obtains Injunction Stopping Franchise Termination
On May 25, 2022, the U.S. District Court in Greenbelt, Maryland issued a preliminary injunction ordering PMIG 1025, LLC and Petroleum Marketing Group, Inc. ("PMG") to continue its franchise relationship with the operators of the “Airport Shell” retail gas station and convenience store near Baltimore Washington International Airport during the pendency of the operators' case that PMG did not have good cause to end their petroleum franchise relationship under the U.S. Petroleum Marketing Practice Act (the "PMPA"). The Court, through highly respected veteran jurist Paul W. Grimm, ruled that the operators had a reasonable chance of prevailing on the merits of their claims that PMG improperly terminated the Franchise Agreement for the operation of Airport Shell. The Court further found that the harm to the plaintiffs without an injunction issuing, namely losing control over their business, was greater than the potential harm to the defendants with such an injunction. The PMPA, which begins in Title 15 of the U.S. Code at Section 2801, protects franchisees by limiting the circumstances under which a petroleum franchisor may terminate or “fail to renew” a motor fuel franchise. Mac's Shell Serv., Inc. v. Shell Oil Prods. Co. LLC, 559 U.S. 175, 177 (2010) (citing 15 U.S.C. §2802). The PMPA provides protections against termination or non-renewal to motor fuel dealers that are superior to the typical provisions of the franchise and lease agreements between petroleum sellers and operators, or indeed between typical business format franchisors and their franchisees. The particular factual circumstances of the BWI Airport Shell case are quite complicated, as the site at issue is subject to a master lease with the Maryland Aviation Administration. However, the essence of the dispute is whether PMG acted in good faith (meaning “subjective good faith” based on an “honest evaluation of the franchisor’s own business needs”) and in the ordinary course of its business in demanding substantial rent increases and property improvements as a condition of continuing the franchise, or whether it imposed those conditions as pretext or "poison pill" to force out the operator and begin operating the location through employees. This is a scenario familiar to business format franchising, particularly where the franchisor also controls the real estate on which the franchised business operates. The injunction issued is just for the operators' case, as it proceeds through the U.S. district court to trial before a federal jury (likely in the summer of 2023). However, it is notable that to demonstrate its legal right to end the franchise relationship, PMG will be required to prove that the increased rent and burdens it demanded as a condition of franchise renewal were "the result of determinations made by the franchisor in good faith and in the normal course of business, and . . . franchisor's insistence upon such changes or additions [were not] for the purpose of preventing the renewal of the franchise relationship." While the PMPA does not apply to non-petroleum business format franchises, veteran business format franchisees being confronted with commercially unreasonable demands to renew their franchise should consider whether decisions under that law, used by analogy, can help their cause. The case decision described is Fursyth Petroleum Foundation Inc., et al., Plaintiffs v. PMIG 1025, LLC, et al., U.S. District Court, D. Maryland, Southern Division. Case No. PWG 21-cv-2433 (Dated May 25, 2022).
July 27, 2022
Family Law
Mediation Tips from A Mediator and Retired Judge Sandy Brooks’ interview with Retired Judge Michael Mason
Sandy: How long have you been a mediator, and approximately how many matters do you mediate a year? Judge Mason: I’ve been mediating since approximately January 2019. Last year, I did just short of 80 mediations. Sandy: Of the cases you mediate, how many are family law matters? And of the family law matters, how many do you estimate reach a settlement through mediation? Judge Mason: Around 40% of the cases I mediate are family cases. I would estimate approximately 85% are resolved through mediation. Sandy: Do you believe your background as a Circuit Court Judge benefits you as a mediator in family law cases? Judge Mason: Yes. I think frequently, the attorneys for both parties have a reasonable sense of where the case should settle. Often the problem is getting the clients to accept that outcome is reasonable. I think coming to the mediation with years of experience as a judge who’s seen a lot of these cases can help convince the clients the result is a reasonable one, even if not one they are particularly happy with. Sandy: What are some of the most complex family law issues to mediate? Judge Mason: The most difficult cases to mediate are relocation cases and cases that involve allegations of abuse that are not independently corroborated. It’s very difficult in those matters to find some middle ground the parties can accept. The other difficult ones are those where the economically dominant spouse is self-employed and his/her income varies significantly from year to year, frequently taking a downturn once the divorce is anticipated. Also, those where the parties’ assets include a business which requires valuation. The valuations are normally miles apart. Sandy: Do you have any advice for attorneys prior to mediation? Judge Mason: Yes, always talk to the mediator and let them know what you honestly think might get the case settled. If there is a problem with the client, let them know. Also, make sure you’ve shared any important documents you intend to rely on at the mediation with the other side in advance so they have a chance to review it. Usually, the other side will totally discount any information they are seeing for the first time at the mediation without an opportunity to check it. As well, they typically resent it being given to them at the last moment, and that can affect their view of the other attorney. Sandy: Do you have any pointers for the parties to maximize their success at mediation? Judge Mason: Be prepared. Don’t wait until the morning of the mediation to prepare your joint property statement unless there is none to speak of. Get your pre-mediation statement to the mediator in time, so they have a chance to review it and any exhibits in enough time to speak to you in advance of the mediation. Have the key documents that support your position readily available during the mediation and share them with the other side in advance. Understand the attorney on the other side is generally not your enemy or being a jerk. Their client has a very different view of the relationship, which they have communicated to the attorney. The attorney is typically acting based upon those facts, which are very different from the ones that guide you. Sandy: What are some strategies for moving the parties past an impasse? Judge Mason: Sometimes, when the parties feel they’ve reached an impasse, I’ve found it helpful to recess the mediation for a few days/weeks. Often after the parties have a chance to get away from the immediate negotiations for a while, they will reassess their positions. On occasion, I’ve also found it helpful to offer the parties a mediator’s suggestion to help bridge a gap. I propose a solution which they are free to accept or reject. Neither party is told if either accepts the proposal unless both do. Judge Michael Mason began practicing law in Maryland in 1974. He spent ten years in the Montgomery County State’s Attorney’s office. He was the head of the Career Criminal Unit when he left in 1984 to set up a small general practice with two other prosecutors, Judy Catterton & Paul Kemp. They were later joined by a third, Martha Kavanaugh. He was in private practice for about ten years, and they did a little bit of everything that involved going to court. In January of 1994, he was appointed by Governor William Donald Shaefer as an Associate Judge of the Circuit Court for Montgomery County. He was sworn in as judge in March of 1994. He served full-time as an Associate Judge until December 2018, when he retired. He continues to sit as a Senior judge on an as-needed basis. He served numerous rotations as a family judge during his almost 25 years full-time on the bench. He occasionally hears some matters as a family judge. Beginning in January of 2019, he began a private mediation practice and has since mediated well over 200 cases. The largest single segment of the cases he mediates are family cases, but he does a wide range of other civil cases.
July 18, 2022
Family Law
Alternatives To Court
Litigation can be scary and expensive, emotionally as well as financially. But you do not necessarily have to go to Court to resolve issues in a divorce. The first step in determining how best to proceed is to discuss your options with experienced counsel who specialize in family law. Family law is a unique area of the law, and only those lawyers with experience have the level of knowledge and sophistication to evaluate your options with you. Often, cases can be resolved by negotiation through counsel. But there are other options available, and since divorce can be complex and complicated, one should consider all of them. Mediation is often used in family law, even if the parties are already engaged in litigation. Trained mediators facilitate agreements. They do not impose their position on either of the parties. Rather, a good mediator will challenge both parties not to expect their “best day in Court.” Reality often sets in, and parties recognize the pros and cons of their positions. Mediation often leads to an agreement, which can be incorporated into a Judgment of Divorce. Many attorneys who specialize in family law are now trained to handle cases in a collaborative process. This process permits the parties to evaluate their goals and explore options in a joint meeting setting. Another option is arbitration, where an arbitrator more or less substitutes for a Judge. However, unlike in a Court situation, the parties are able to select their arbitrator, determine what issues will be presented, set time limits, and control the amount of evidence that must be formally presented. In addition, there is some degree of privacy that is not typical in divorce situations.
July 15, 2022
Labor and Employment
Overturning Roe v. Wade : Potential Effects on the Workforce (Not a Political Speech)
I started thinking of some questions which might occur in the employment context after Dobbs v. Jackson Women’s Health Organizationoverturned Roe v. Wade and all cases following it since 1973. Here are a few. Are people protected from employment discrimination if they end or refuse to end a pregnancy? The Pregnancy Discrimination Act and Title VII of the Civil Rights Act of 1964 should continue to protect employees of companies with more than 15 employees from reproductive health-related discrimination and harassment even after the Supreme Court’s decision, regardless of their state of employment. Some states also have explicit abortion nondiscrimination statutes and/or a fewer employee number threshold. The Third, Fifth, and Sixth Circuit federal Courts of Appeals have held that an employer can’t discriminate based on the employee obtaining an abortion. The EEOC will continue to take this position. But the best course is not to inquire about employees’ health care decisions in the first place. Can an employer fire a person based on religious grounds for having an abortion? Courts generally have held that private employers can’t discriminate based on sex even if the policy purportedly is based on their religious beliefs. However, an exception to Title VII’s discrimination provision bars clergy members from bringing an employment discrimination claim against religious institutions. Can a pregnant person or one who had an abortion be protected from employment discrimination based on the Americans with Disabilities Act? Pregnancy itself isn’t a disability under the ADA unless the person is experiencing complications or aftereffects of pregnancy that impact one or more “essential life functions”; for instance, the mother develops long-term high blood pressure, affecting her ability to work at a broad variety of jobs. It’s also feasible that the aftereffects of an abortion could be an ADA disability if it impacts those functions. There will be more claims of disability and requests for accommodations due to pregnancy. How will this decision impact our current labor shortage? An immediate reduction in the labor force is a logical conclusion. The more pregnancies there are, the more pregnancy-related health issues will exist – leading to more absenteeism, reduced work hours, and disability leaves. Mothers will be out on maternity leave; paid maternity leave is legally mandated in some states. Workers sometimes leave the workforce because of pregnancy. That’s a few thoughts I’ve mulled over. What questions do you have about the effects of the Dobbs decision?
July 14, 2022
Labor and Employment
Time to Care Act
The Time to Care Act has passed, and beginning on January 1, 2025, most Maryland employees can apply for paid leave from a state fund. Fortunately, while this law took effect June 1, 2022, it isn’t functional until October 1, 2023, when employee and employer contributions start, and employees will not be eligible to take leave until January 1, 2025-allowing employers time to prepare. Essentially, employees who worked at least 680 hours over the 12 months immediately preceding the date on which leave is to begin are entitled to 12 weeks of paid leave for health and caretaking reasons. This leave can run concurrently with FMLA leave and, in many cases, essentially makes FMLA paid leave. That said, for employers who do not fall under the FMLA, it is important to note that the Time to Care Act does contain job protection similar to FMLA. While employers should start to consider next steps related to implementing new leave laws, they have some lead time. While employees won’t be eligible to take leave until 2025, employers should start communicating with employees about the new law next year since they will see contributions to the fund deducted from their paychecks beginning October 1, 2023. There are also a few unanswered questions based on how the law is drafted that I expect we will get answers to over the next 12-18 months.
July 13, 2022
Contractor's Corner
FedEx Purchase Agreements-More Than Just Legal Mumbo-jumbo
Often, when I first speak with prospective FedEx contractors, they are chomping at the bit to get started. They have learned about the industry and are excited about the opportunity to own a part of the booming logistics industry. This excitement often causes them to gloss over the purchase agreement in favor of moving forward quickly, viewing the purchase agreement as merely an obstacle to moving forward with the deal. However, failure to give the purchase agreement the attention it is due can yield complicated and expensive outcomes. The purchase agreement is more than just legal jargon and is the pivotal document dictating any verbal agreement the parties have reached and governs when the parties can terminate the deal, when the buyer gets their deposit back, and what the obligations of the seller between the execution of the purchase agreement and closing and after the sale. Outside the FedEx industry, businesses will often sign the purchase agreement and close on the same day. However, in the FedEx industry, because the sale depends on FedEx approval, the parties sign the purchase agreement and close weeks, if not months, later. This process, which is colloquially referred to as a “sign and delayed close,” leaves a lot of room for issues to arise between the time the parties sign the purchase agreement and closing, including, among other things: Seller failing to keep up the business in the ordinary course, leading to the buyer not getting what they were expecting on the closing date; A buyer failing to obtain or maintain financing; Physical assets falling into disrepair or becoming nonoperational; Employees leaving and the seller failing to hire new ones; and Seller improperly disposing of assets. Additionally, given the need to move forward quickly to start the process of getting FedEx approval, buyers are typically performing due diligence between signing the purchase agreement and closing, which can lead to buyers discovering unsavory details about the seller’s business that make them want to terminate the contract. While these are all real risks of “sign and delayed close” deals, they are palatable risks as long as the parties have a firm understanding of the risk they are each taking on, and the seller’s obligations between signing and close and the purchase agreement contains contingencies and reasonable outs for the buyer. Without proper protections in the purchase agreement, a buyer may have no choice but to move forward with an unexpectedly unsavory deal or risk losing their deposit. The moral of the story is: Don’t gloss over the purchase agreement! It governs the entire transaction, including what the buyer is entitled to between signing and closing and when the parties will go their separate ways.
July 10, 2022
Labor and Employment
Revisit Your Non-Disclosure Agreements or Risk #MeToo Issues
As you probably know, non-disclosure agreements signed by employees are legally binding. These may prevent workers from speaking out about workplace practices, including #MeToo issues. Newly introduced federal legislation targets NDAs that silence employees reporting sexual harassment. This is already a matter of law in some states, including California and Washington. Lift Our Voices, a pro-worker policy group headed by former Fox News anchor Gretchen Carlson, has spurred the House introduction by a Democrat of the SPEAK OUT Act (H.R. 8227). As with the last #MeToo related law passed, SPEAK OUT is backed by several GOP representatives already. Lift Our Voices expects an introduction of a similar Senate bill, apparently to be backed by Republican senators, including Lindsey Graham. Lift Our Voices supported another #MeToo-related bill, H.B. 4445, through its passage. That law nullifies provisions that force workers to arbitrate #MeToo claims rather than have their day in court. The SPEAK OUT Act applies to pre-dispute non-disclosure agreements signed before an issue arises. However, if a business is sued by an employee alleging sex discrimination or harassment, it would still be legal to include an NDA in a settlement agreement or release. Take a look at NDAs you’re using. It might be a good time to revise them, given the bipartisan support of this bill and state bills. I’m speculating here, but a court could go on to invalidate other provisions of the NDA if it contains this type of provision.
July 8, 2022
M&A Nuggets
M&A Nuggets: Be Prepared … for Due Diligence, Before You Seek to Sell Part 1 – Sales Tax
The due diligence process, during which the purchaser requests and analyzes large volumes of information, requires a huge time commitment from the sellers’ personnel. Unknown issues and issues which are known but have not been dealt with in the past, can rear their head during the due diligence process, interrupt the otherwise smooth flow of information exchange and, in turn, cause unnecessary pauses and extensions of the deal. To avoid this, it is wise to address these issues prior to seeking to sell the business. Routine items that are easily buttoned down before negotiations begin include making sure corporate documents are in place, that employment policies are up to date and that intellectual property, such as trademarks, have been properly protected. Other issues are not so routine. This article will focus one of those more unusual, or less thought of, issues – sales tax. The issue is – has the business properly collected, paid and reported all required sales tax. Unfortunately, this issue often arises for the first time during the due diligence process, when the purchaser asks about it. Many states have expanded the application of their sales tax statutes to more and more activities, particularly services, and to more ways that products or services are delivered, particularly on-line and out-of-state sales. Many sellers are surprised to learn during the due diligence process that sales tax had not been properly accounted for. The sales tax number not accounted for, when added to interest and potential penalties owed to state governments, can be a significant number and could result in part of the purchase price being held back at closing. This all can be avoided by conducting a sales tax analysis prior to entering into negotiations. The following questions should be answered: 1) which services and products the company provides are subject to sales tax, 2) are the means by which the company provides the services and products (on-line sales, shipments out-of-state) taxable, and 3) are any of the company’s customers (nonprofits, for example) are exempt from the payment of sales tax. The sales tax analysis can be laborious, given that the laws vary state by state. However, being up to speed on the issue and ensuring that the company is in compliance beforehand can save a lot of time, money and worry during the negotiation process. Look for the next issue – change of control provisions.
July 7, 2022
Labor and Employment
Is the Company’s Non-Compete Enforceable?
There’s a lot of fuss nationwide about whether agreements signed by employees not to compete after their employment are allowable. The FTC has now said that it is going to pursue a regulation banning non-competes. I have reviewed and written many non-compete agreements over the course of my career. Many of them are likely unenforceable under existing law. Here are some possible reasons (this list is not exhaustive): Agreements may be overbroad. For example, it may be that an agreement trying to ban someone from working worldwide when they only had a U.S. role is unenforceable. Depending upon where the person lives or is sued, the court might not let the employer revise the scope to make it enforceable. It would simply be thrown out, in that case. Employers: don’t overreach! Agreements may apply to employees who can’t be restricted. If the person is working in a state in which non-competes are void, even if the person is brought into a different state court, they might not be held to the agreement. D.C. passed an ordinance banning non-competes last year. Agreements don’t protect a legitimate business interest. Is there a legitimate business interest in disallowing a person (who has signed a confidentiality agreement) from working in the mailroom of a competitor? Agreements may restrict a person’s right to free speech. Just try to enforce an agreement not to disparage a company (and its employees, services, products, etc.) forever. Agreements don’t offer the employee any type of consideration for signing. In some states, merely letting someone continue to work for an employer is not enough value to the signer to enforce the non-compete. Most employees think nothing of signing these agreements – they want their jobs – or are not allowed to receive valuable things such as stock options if they don’t. But when the employee is moving on, they are faced with this dilemma: will I be sued if I ignore the non-compete? My advice is to consult a lawyer experienced in non-competes and non-solicitation agreements to learn more about yours. And employers, beware of the above common problems with non-competes; the law is changing very quickly on this subject. It’s wise to have your agreements reviewed often, given the number of recent court decisions and many new state laws limiting these provisions.
June 30, 2022
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