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HOMEOWNERS’ INSURANCE: THE DEVIL RESIDES IN THE DETAILS

Reading and understanding all of the language in a homeowners’ insurance policy are not formalities to be skipped over while searching for the signature line. As with any contract, the fine print can have real and lasting consequences, and its contents will control over any contradictory verbal assurances. Taking the time to understand the terms of their policies might have headed off bad outcomes for homeowners in two recent cases.

Business Purposes Exclusion

Joan bought property consisting of a home, two barns, and other outbuildings. She also purchased a homeowners’ insurance policy that excluded coverage for any nondwelling structure that was rented out “unless used solely as a private garage.” Joan rented the barns to a commercial marina, which used them for winter storage of customers’ boats. When one of the barns collapsed due to snow and ice on its roof, Joan submitted a claim for loss of the barn.

The insurer denied coverage, prompting Joan to point out that the rental exclusion should not apply because the marina was using the barn as a “private garage.” Her point made sense as far as it went, but the insurer won because of a separate exclusion from coverage for any nondwelling “used in whole or in part for business purposes.” Joan’s main occupation was as a financial analyst, and she brought in only a few thousand dollars by renting out the barn. But all that was necessary for the business purposes exclusion to apply was that the insured regularly engage in the conduct with an intent to profit.

It was significant for the court that, by failing to disclose her conduct, Joan had prevented the insurer from knowing the risks it was insuring. The purpose of a business pursuits exclusion, after all, is to rule out coverage for a whole set of risks and liabilities flowing from business activity. It did not matter that the damage to the barn was not caused by the boats that were stored there for profit.

“Household” Defined

At the heart of another dispute over homeowners’ insurance coverage was what turned out to be an erroneous assumption by the homeowners that “residents of your household” meant any persons living on the same parcel of land, even if in a different house from that occupied by the insureds. Ken and June lived in one house and their daughter and 10 year old grandson lived rent free in another house that was only 20 feet away and had the same mailing address. The close knit family often shared meals and activities, and Ken and June regularly cared for their grandson.

When the grandson accidentally shot a playmate with a rifle, Ken and June submitted a claim under their homeowners’ policy, which covered “residents of your household who are your relatives.” The insurance company succeeded in arguing that it had no obligation to defend the grandson in a suit for his friend’s injuries because he was not a resident of Ken’s and June’s household.

In legal terminology, a “household” is a collection of persons living together as a unit under one roof or within a single “curtilage.” “Curtilage” is a technical term for the area next to a house that is inside the same enclosure, is used for the intimate activities of the house, and is protected from observation by passers by. The house where the grandson lived did not meet any of these criteria so as to make the grandson part of Ken’s and June’s “household.” The four individuals in this case probably constituted a household in many respects and for many purposes, but not in the context of interpreting the homeowners’ insurance policy.

“CYBERSMEAR” LAWSUITS
The free wheeling give and take in various online forums is leading to more defamation claims by individuals and businesses. Given that so many online speakers are anonymous, however, Internet service providers sometimes become trapped between the speaker and his offended subject. Before the alleged victim can seek redress, the perpetrator must be identified, and providers often resist divulging such information. Courts are still in the early stages of setting rules for these legal contests.

An electronics company brought an action in California against an anonymous individual who allegedly had trashed the company’s publicly traded stock on an Internet message board. Among other comments, the secretive critic had said that the company produced “low tech crap” and that its president was manipulating stock prices. In its efforts to identify the speaker, the company discovered that his online name was registered with a service provider with headquarters in Virginia.

When the plaintiff sought permission from a Virginia court to examine the provider’s records, the request was met with stiff resistance. The provider argued that it would infringe on the constitutional right to speak anonymously if it were forced to reveal subscriber information. Citing the principle that the courts of one state generally should respect court orders from a sister court, the Virginia court allowed the review of the provider’s records. The right to free speech was not an impediment to the court’s ruling, as “the constitutional guarantees of free speech afford no more protection to the speaker than they do to any other tortfeasor who employs words to commit a criminal or civil wrong.”

Wounded by disparaging comments posted anonymously on an Internet message board, another company similarly sought to unmask its detractors by forcing information from a provider. In that case, the court saw more merit in the free speech defense raised by the provider, but it did not completely block the request for subscriber information. The court balanced the right to speak anonymously with the right of the injured company to protect its proprietary interests and its reputation.

The result was a compromise of sorts: The company could gain access to the speakers’ identities only if it first showed to the court’s satisfaction that it could make out a plausible defamation case against them. This meant exactly identifying the offending statements and demonstrating how they harmed the plaintiff. In this case, the critics remained safely in the dark because the company could not substantiate its claims that the comments adversely affected its stock price and its hiring practices.

AGE DISCRIMINATION IN EMPLOYMENT
The combined effects of an aging population and a sluggish economy have led to an increase in lawsuits alleging age bias in the workplace. The Age Discrimination in Employment Act (ADEA) prohibits age discrimination in the employment of persons who are at least 40 years old. The ADEA covers most private employers of 20 or more persons. It forbids age discrimination in advertising for employment, hiring, compensation, discharges, and other terms or conditions of employment. Retaliation against a person who opposes a practice made unlawful by the ADEA or who participates in a proceeding brought under the ADEA is a separate violation.

The ADEA takes into account that sometimes there is a correlation between age and the ability to fulfill the requirements of a job, and that even older workers must comply with employers’ rules and requirements that have nothing to do with age. An employer does not violate the ADEA if it takes an otherwise prohibited action where age is a “bona fide occupational qualification” necessary to the operation of a particular business. Nor is it a violation to differentiate among employees based on reasonable factors other than age or to fire or discipline an employee for good cause.

Before suing in court, an aggrieved person first must allege unlawful discrimination in a charge filed with the Equal Employment Opportunity Commission (EEOC) and then wait 60 days to allow the EEOC an opportunity to resolve the dispute informally before taking further legal action. Court remedies include injunctions (court orders stopping a discriminatory practice), compelled employment, promotions, reinstatement with back pay and lost benefits, and an award for attorney’s fees and costs of bringing the suit. If a court finds that an employer’s violation of the ADEA was willful, it may also award liquidated damages equal to the out of pocket monetary losses of the plaintiff.

It is not essential to an ADEA lawsuit that there be a “smoking gun” in the plaintiff’s favor in the form of derogatory age based comments about older employees. In fact, remarks of that kind will not support liability if they have no connection to the challenged employment decision. In a recent lawsuit brought by an on air television reporter who was fired, a boss’s comment that “old people should die” was an insignificant stray remark because it was made about the boss’s own father. On the other hand, it was very helpful to the plaintiff’s case that the same boss had stated repeatedly that she wanted to “go with a younger look” and she did not like having an older man appearing on the news.

Employers sometimes select older workers to be terminated as a money saving measure, given their generally higher compensation and perhaps their being close to vested retirement benefits. There is no ADEA violation in a decision that treats employees differently because of something other than age, such as money. An employer will not be liable under the ADEA for terminating an employee solely to prevent his pension benefits from vesting. (That conduct might very well violate ERISA, however.) Such a scenario is distinguishable from situations in which employers face ADEA liability because they have made decisions based on the stereotype that productivity and competence always decline with old age.

FREELANCERS’ ARTICLES ARE NOT FREE
The U.S. Supreme Court has given a victory to freelance authors of newspaper and magazine articles, and a defeat to some major publishers of their work. The publishers hired the authors as independent contractors who would contribute articles to what is known in copyright law as a “collective work,” that is, a newspaper or magazine. Under federal copyright law, the publishers were the owners of the copyright in the collective work, giving them the right to reproduce and distribute the contributions as part of the collective work or any revision of that work. The writers themselves, however, retained the rights to their individual articles.

The dispute arose when the publishers, without obtaining the authors’ permission or agreeing to provide extra compensation to them, licensed the rights to copy and sell articles to a computerized database of periodicals and to the producer of CD ROM products. When the authors claimed an infringement of their copyrights in their articles, the publishers defended by arguing that making the articles available on line or in a CD ROM form constituted simply a “revision” of the collective work that was within the copyright of the collective work held by the publishers.

The Supreme Court sided with the writers. The newly created databases no longer presented and distributed the articles as part of the collective work in which they first appeared, or as part of a revision of that work. Instead, the articles stood alone and out of their original context. Each article had become merely a minuscule part of an ever expanding database. As the Court put it, “The database no more constitutes a `revision’ of each constituent edition than a 400 page novel quoting a sonnet in passing would represent a `revision’ of that poem[.]” Therefore, the electronic reproduction of the authors’ works could not be allowed without their permission.

THE MARITAL DEDUCTION: A VALUABLE ESTATE PLANNING TOOL
The federal estate tax marital deduction is one of the most important estate planning tools available to a married couple. The basic marital deduction rule is that, upon the death of the first spouse, the value of any interest in property passing to the surviving spouse is deducted from the decedent spouse’s gross estate. This means that the amount passing to the surviving spouse escapes taxation in the decedent spouse’s estate.

There is no limitation on the value of property that can qualify for the marital deduction. By transferring sufficient assets to the surviving spouse in the proper manner, estate tax liability upon the first spouse’s death can be completely avoided.

At first view, the estate tax marital deduction may seem to be a government giveaway. It is not. The advantage afforded is not the total avoidance of estate tax on the transferred property but, rather, the deferral of such tax. The marital deduction requires that the transfer of assets to the surviving spouse be made in such a way that those assets are exposed to estate tax liability in the surviving spouse’s estate.

The obvious advantage of deferring the estate tax liability is that the surviving spouse will have the use of the tax dollars that would otherwise have been paid to satisfy the tax liability of the first spouse’s estate. The deferral of tax liability also postpones the possible need to sell off assets that the surviving spouse might wish to preserve in order to obtain funds to satisfy the tax liability.

Transfer by Will

A key decision is the selection of the type of transfer to be made to the surviving spouse. The simplest form of transfer that qualifies is the outright transfer of assets by will. The problem with such a transfer is that it saddles the surviving spouse with the responsibility of managing the assets and also exposes him or her to possible pressures from relatives, creditors, or charities to transfer the property for their benefit.

Transfer by Trust
The marital deduction law permits, with no loss of the deduction, the transfer to the surviving spouse in trust. There are two basic types of trusts that have become the standard means for taking advantage of the deduction without burdening the surviving spouse with the problems of outright ownership of the first spouse’s estate.

The first type of trust is known as a “power of appointment trust.” The property is placed in trust under the will, giving the surviving spouse a life interest in the income generated by the trust and a power to give the assets in question to anyone, including to himself or herself or to his or her estate. This power can be restricted so as to be exercisable by the surviving spouse only by will and still qualify for the marital deduction.

The second type of trust, rather than giving the surviving spouse the power to ultimately dispose of the assets, permits the decedent spouse to designate the ultimate recipients of the property qualifying for the marital deduction. This trust is known as the Qualified Terminable Interest Property (QTIP) trust. The surviving spouse must receive a lifetime income interest in the property. No one other than the surviving spouse may have any rights in the trust assets during the surviving spouse’s lifetime. The decedent spouse’s personal representative must elect QTIP treatment on the estate return. The crucial feature of the QTIP trust is that the decedent spouse retains the ability to control the course of ownership of the assets qualifying for the marital deduction.

Coordination with the Lifetime Credit
It has become standard estate planning practice to coordinate the estate tax marital deduction with the unified credit against the estate tax. The unified credit against the federal estate tax allows an individual to pass a certain amount of assets free from estate tax liability regardless of the identity of the recipients. The basic credit is now $5,000,000, adjusted for inflation. For decedents who died in 2013, the amount is $5,250,000. For decedents dying in 2014, the amount is 5,340,000. In a will, the amount allowed to pass tax free is normally transferred under what is known as a “credit shelter” or “by pass” trust. Then, the transfer under the marital deduction rules is made so as to prevent the taxation of the remaining assets.

Clearly, in the case of a married couple owning sufficient assets to make estate taxation a possibility, estate planning must take into account the marital deduction rules and the associated tax savings. Given the complex nature of the many rules involved, you should always seek the guidance of a qualified attorney for any estate planning needs.

CAPPED COMMISSIONS
As a sales representative for a computer software company, Richard received an annual salary and sales commissions as determined by a compensation plan that was part of his contract. There was a specific formula for how commissions were to be calculated, but language in the plan gave the company broad authority to make a final decision about compensation and to change the plan at any time. For sales commissions, in particular, the employer reserved the right to review any transaction generating a commission beyond a salesman’s annual quota and to determine the “appropriate treatment” of it.

When Richard scored an especially large sale, the company decided that its “appropriate treatment” was to cap Richard’s commission at an amount that was less than he expected under the usual formula. The company’s position was that the large commission expected by Richard was not justified because it arose from a single transaction on which Richard had not done as much work as he claimed, and because he had only been employed by the company for eight months. Richard quit and sued for breach of contract.

A federal court ruled in favor of the employer. The language in the compensation plan was broad, but it was not ambiguous. The whole thrust of the document was to leave determination of the commissions to the employer’s discretion, notwithstanding that the plan identified some forms of appropriate treatment of commissions.

When a contract leaves a decision up to one party’s discretion, it is nearly unassailable in court. A court may intervene if that party is guilty of fraud, bad faith, or a grossly mistaken exercise of judgment, but Richard did not make those arguments. Despite the fact that it was arguably unfair, the court ruled that such a decision was “out of our reach.”

 

BEFORE YOU START A BUSINESS . . .

Both heart and mind must be working well if the owners of a new small business are to experience success. While it is only human nature--not to mention fun--to indulge one's imagination about what a new business started from scratch could be like, would-be entrepreneurs need to engage in some cold, hard thinking and planning before taking the plunge. At the risk of pouring cold water on some of the anticipation and excitement, what follows is a guide for how to plan for, and think through, the many decisions that must be made well before you have that "Grand Opening" sign made.

Why?

This may seem obvious, but you should know just what your reasons are for wanting to start a new business. If the motivations are weak, odds are the business will be a bust, whereas well-founded reasons can help a business persevere through good times and bad. Some common reasons for starting a new business include escaping the whole nine-to-five routine (though it may be replaced by an eight-to-eight routine), answering to no one else, upgrading your standard of living, and being convinced that you can provide a needed product or service.

Why Me?

Let's face it, not everyone is cut out to be a captain of industry, or even captain of a small business. Maybe you need not subject yourself to an intensive psychological and life-experiences evaluation, but be honest with yourself about whether you have the necessary characteristics, skills, and experience. A few examples give you the idea:

  • Can you make yourself pull the trigger on an important decision?
  • Do you see competition as exciting or just stress-inducing?
  • Are you willing and able to plan ahead?
  • Do you like interacting with people you don't know?
  • Do you have the perseverance, not to mention the physical stamina and health, to put in long hours if that's what is needed to make the business succeed?
  • Are you, and anyone else financially dependent upon you, prepared to risk your savings in pursuit of the business dream if that's what it takes?
  • Unless you are planning a one-man band of a business, are you comfortable with hiring, supervising, and possibly having to fire other people?
  • Are you reasonably well organized?
  • Do you know anything about the paperwork and legal side of running a business, such as payroll and accounting, the permits or licenses you will need, or the regulations and laws that may apply to the business?

Why This Business?

You may have the best motives and a skill set that would be the envy of any MBA graduate, but if there is no niche for your planned business or, simply put, if not enough people will want to buy what you are selling, the new business will fail. The variables here include timing, location, and simply whether your business is feasible or practicable, so that you can be the one to fill that niche that you have first identified. Don't make your business the equivalent of carrying coals to Newcastle.

In economic terms, you want to do some investigation to determine whether there is some currently unmet demand for the product or service you want to supply. Then you want to meet that demand with a product or service that is competitive in quality, selection, price, and/or location.

In short, learn as much as you can about the market you will be in. Learn who your customers will be, and try to understand their needs and desires. Anticipate how your fledgling business will compare with any established competitors. What can you do in setting up and running the business to make sure you get your share of whatever market there is for your product or service?

How?

Turning the idea into bricks and mortar (literally or figuratively) involves a lot of decisions, some of which are best made only after getting professional advice. Still, you should acquire at least a layperson's understanding of the pros, cons, and consequences of each decision.

Choose a name for the business that you find appealing but also one that is informative for someone hearing it for the first time. Select the most appropriate business form, such as a sole proprietorship, a partnership, or a corporation. Investigate which local, state, and federal laws and regulations will apply to the business. This will run the gamut from laws of universal application (e.g., taxes) to laws specific to your business.

Make an unflinching and detailed examination of your financial picture. How much do you have now, how much will you need to start the business, and how much will you need to stay in business? Projecting cash flow into the future means taking into account such variables as seasonal trends in sales, the amount of cash taken out of the business for personal expenses, whether and when to expand the business, and the rate at which customers will pay off accounts if credit is extended to them.

Find a location for the business that is convenient for customers, appropriate in size and configuration, and zoned so as to allow your type of business. When you have settled on the product or service you will sell, calculate the inventory you should create, and maintain and locate reliable suppliers.

Finally, if you go to all the trouble and expense involved in creating a small business, don't forget to think about protecting against losing the business from such threats as fire, theft, robbery, vandalism, and liability for an accident. This means taking measures to provide security but also arranging for the appropriate types and levels of insurance.

ESTATE PLANNING--POWERS OF APPOINTMENT

A power of appointment is the power given to someone to allow that person to designate who will receive property or an interest in property. The creator of the power is called the donor, the individual having the power is the powerholder, and the possible recipients of the property are permissible appointees.

Powers of appointment used for estate planning have many variable forms. The powerholder may hold the power in a fiduciary capacity (such as the trustee for a trust) or nonfiduciary capacity. The power may be presently exercisable by the powerholder or may be exercisable only in the future, such as by the powerholder's will. The powerholder may or may not be the creator of the power. There may be multiple powerholders who must act jointly or a single powerholder. The persons in whose favor the power may be exercised may be unlimited, including the powerholder (sometimes called a general power of appointment), or may be limited. The beneficial interests that may be created in the appointees in whose favor the power may be exercised may be unlimited or limited. Various legal consequences in regard to powers of appointment will be affected by the restrictions imposed on the powerholder.

The trustee of a trust, a common type of powerholder, may be given discretion by the donor to invade principal for a life income beneficiary or for some other person, or discretion to pay income or principal to a named beneficiary, or discretion to allocate income or principal among a defined group of beneficiaries.

In short, the discretion given to the trustee gives the trustee the power to designate beneficial interests in the trust property as future developments indicate. This discretion in the powerholder underscores the primary advantage of using powers of appointment--they provide flexibility to adjust an estate plan to deal with circumstances that may arise years, or even decades, after the estate plan is created. The flip side to this flexibility is the power of appointment's main disadvantage for some--it means that the donor must give up some control over the ultimate disposition of assets in the estate.

There are other potential ramifications for powers of appointment that should be taken into account. For example, assets subject to a general power of appointment will be included in the estate of the powerholder, which could create unfavorable tax consequences. In addition, an improperly exercised limited power of appointment may become a general power of appointment under the law. All in all, whether to use a power of appointment and, if so, with what characteristics, are questions best answered with the advice of a lawyer well versed in estate planning.

PUBLIC USE REQUIRED FOR EMINENT DOMAIN

"Eminent domain" is the power of the federal, state, or local governments (and, in some limited circumstances, private parties, such as utilities and railroads) to take, or to authorize the taking of, private property for a public use without the owner's consent and upon payment of just compensation. That right to compensation is rooted in the federal and state Constitutions. While the delegation of the power of eminent domain is for legislatures, the determination of whether the condemnor's intended use of the land is for "the public use or benefit" is a question of law for the courts.

The public use or public benefit issue has spawned countless legislative and judicial reactions, especially since a controversial U.S. Supreme Court decision on the topic in 2005. In that case, owners of condemned property challenged a city's exercise of eminent domain power on the ground that the takings were not for a public use but, rather, for the benefit of private developers.

The Court held that the city's exercise of eminent domain power in furtherance of an economic development plan satisfied the constitutional "public use" requirement even though the city was planning to lease the condemned land to private developers for execution of the city's plan. The plan nonetheless served a public purpose, in the form of enhanced economic development, including such beneficial effects as the increased tax revenues and new jobs expected to come with such redevelopment.

Recently a city withstood a similar challenge to its use of eminent domain to acquire an easement on a private landowner's property in order to expand a sewer system by connecting city-owned property to a sewer pump station underneath the landowner's property. The taking was for a public use even though the city ultimately planned to sell its property to a private affordable housing developer, because the sewer easement area would be available to the public at large in accordance with the appropriate rules, regulations, and standards of a metropolitan sewer district.

Apart from the constitutional requirements, the taking of the easement satisfied a state statutory mandate that a taking by a governmental entity must be for a "public use or benefit." Under the public benefit test for eminent domain, the city's desired use of the condemned property was for "the public use or benefit" because that use would contribute to the general welfare and prosperity of the public at large, not just particular individuals or estates.

In the case before the court, extending the sewer lines would allow development of the city's neighboring property, which the city sought to sell to the private developer to construct affordable housing. The existing pump station had sufficient capacity to service the city's land, and requiring the city instead to construct a sewer pump station on its land would have resulted in wasteful and unnecessary duplication of the city's resources. These facts added up to a public use or benefit justifying the taking, notwithstanding some benefits undeniably accruing to private parties as well.

TAX-FREE GAINS FROM HOME SALES

One of the most significant tax advantages to owning a home comes at the back end of ownership, when you decide to sell it for a profit. A homeowner can exclude up to $250,000 of such profit from the federal capital gains tax. For married couples filing a joint tax return, the exclusion jumps to $500,000.

This big tax break does come with some basic requirements. It applies to the sale only of a principal residence, not of a vacation home or investment property. With some limited exceptions for poor health, job changes, and unforeseen circumstances, the taxpayer must have owned and used the home as a primary residence for at least two of the five years preceding the sale of the home. (But the two years need not be an uninterrupted time span.)

If the history of the home includes some business use, the owner cannot exclude that part of the gain that is equal to the depreciation claimed while the house was used as rental property. This scenario could arise when the owner rents out the house for a period of time but then moves back in, sells it, and otherwise qualifies for the exclusion related to that sale.

There is another two-year rule that comes into play after a taxpayer claims the home-sale exclusion. There is no limit to the number of times that the exclusion can be claimed for multiple sales, but, as a rule, once the exclusion is claimed, the taxpayer must wait two years before claiming another such exclusion.

For a married couple to qualify for the exclusion, it is sufficient if either spouse meets the ownership requirement. However, both spouses must meet the use requirement. Neither spouse is rendered ineligible for the exclusion because he or she had already excluded the gain on a different primary residence during the two years preceding the date of the current sale.

RECREATIONAL-USE IMMUNITY FOR GOLF INJURY

The purpose of recreational-use tort immunity statutes, which are common across the country, is to encourage private and public landowners to make their property available for public recreational use. To advance this public interest, these laws usually immunize the owners or occupants of real property from negligence liability toward people entering the land for recreation, often on the condition that the property is made available for use free of charge.

Typically the statutory immunity stops short of protecting defendants from liability for greater degrees of wrongdoing, such as acts or omissions that can be characterized as willful, malicious, or grossly negligent. Originally the perceived need for immunity arose because of the impracticability of keeping large tracts of mostly undeveloped land safe for public use, but the concept has evolved so that it need not necessarily involve vast expanses of wilderness.

The conditions for recreational-use immunity can vary somewhat with the wording of the states' statutes, requiring case-by-case rulings depending on the facts before a court and the wording of each state's law. In keeping with a commonly recognized rule of statutory construction, because recreational-use immunity statutes limit common-law liability that predates such laws, a court must strictly construe language in the statutes in order to avoid any overbroad statutory interpretation that would give unintended immunity and take away a right of action for injured persons.

When a golfer at a city-owned golf course slipped and fell on a walkway leading to a tee box, he claimed that the walkway was dangerously steep and narrow, causing his injuries. The city defended on the basis of a state recreational-use immunity law. Before an intermediate appellate court, the city prevailed on one issue, about the golf course's coming within the statute, but the case was sent back to the trial court for resolution of a second issue, concerning the legal status of the injured golfer.

The golf course was sufficiently similar to "park" lands to be included in the definition of "premises" under the recreational-use immunity statute even though there is no express mention of golf courses by the legislature. The golf course fit within the common definition of a "park," as it was a parcel of property kept for recreational use that was designed and maintained for the primary purpose of allowing users to engage in a recreational activity. Not only that, but the statute's list of types of land uses constituting covered "premises" includes a catch-all reference to "any other similar lands."

However, for the immunity to apply to the city, it was also necessary for the golfer to have been a "recreational user" under the law. This, in turn, meant that the golfer must have paid either no admission fee or no more than a "nominal fee," to use the term from the statute. In this case, there was no question that a fee was paid to play golf, but since the lower court had not reached the question of whether that fee was "nominal," it would have to decide that issue.

Generally a nominal fee is one charged only to offset the cost of providing the educational or recreational premises covered by the immunity statute. Some of the factors affecting this issue might include, for example, the amount of the fee, the extent to which it approximates the value of the service received in exchange for it, and the fees charged for similar recreational uses in the community.

In something of an ironic twist, if it were to be found that the golfer had paid no more than a "nominal fee," then in exchange for that inexpensive round of golf, the golfer will have ultimately paid a higher "price" in the form of being precluded from recovering damages from the golf course owner for negligence.

AMERICAN TAXPAYER RELIEF ACT OF 2012

At the eleventh hour, Congress averted the tax side of the ominous "Fiscal Cliff" that it faced as 2012 drew to a close. The end result of the intense negotiations was the American Taxpayer Relief Act of 2012 (ATRA).

The most publicized part of ATRA prevented scheduled federal tax rate hikes from going into effect for most taxpayers in 2013, while raising taxes on America's highest earners. ATRA also keeps in place many expiring income tax breaks and revives some tax increases that had expired over the past several years.

Individual Tax Rates

For tax years beginning after 2012, ATRA makes permanent almost all of the federal income tax rates first put into place in 2001. Those rates otherwise would have increased in 2013. For high-income taxpayers, a new top tax rate of 39.6%, as opposed to the previous 35%, applies beginning for tax years after 2012.

The new 39.6% rate applies to taxable income above a specified threshold (subject to future adjustments for inflation): $450,000 for married taxpayers filing jointly, $425,000 for heads of households, $400,000 for single taxpayers, and $225,000 for married taxpayers filing separately. The rate schedule is graduated, so taxpayers whose income falls within the 39.6% rate bracket still benefit from the extension of the Bush-era rates in the lower rate brackets.

Capital Gains and Dividends

In recent years, individual and other noncorporate taxpayers have benefited from a maximum rate of 15% on net capital gains (net long-term capital gains minus net short-term capital losses). To the extent the net capital gains would have been taxed at the 10% or 15% tax rate if they had been ordinary income like wages, the net capital gains tax rate has been 0%.

These net capital gains rates for noncorporate taxpayers had been scheduled to be replaced after 2012 by rates up to 20%. ATRA operates to make the 2012 net capital gains rates of 0% and 15% permanent for most taxpayers. A new 20% maximum net capital gains rate applies to taxpayers whose income exceeds the levels mentioned above concerning the 39.6% income tax rate.

In 2012, qualified dividends from domestic corporations and certain foreign corporations were subject to the same maximum rates as net capital gains in 2012 (15% for most taxpayers, 0% if the income would otherwise be taxed in the 10% or 15% income tax brackets). These dividends were to have been taxed as ordinary income starting in 2013, resulting in substantially higher taxes, but ATRA intervened to retain the 2012 dividend rates of 15% and 0% for most taxpayers. As with capital gains, higher income taxpayers whose income exceeds the thresholds set for the 39.6% income tax rate now have a maximum rate of 20% on qualified dividends.

Personal Exemption Phaseout and Limitation of Itemized Deductions

Before 2010, the personal exemptions available to higher income taxpayers were gradually reduced when their adjusted gross income (AGI) exceeded a specific threshold amount. Those higher income individuals also had their allowable itemized tax deductions for the year reduced by up to 80%. By law, the personal exemption phaseout and itemized deduction limitation were gradually reduced, until they were completely removed in 2010. The exemption phaseout and deduction limitation were set to return in 2013. ATRA revives them, at higher threshold levels than had been in place. The end result is that the personal exemption phaseout and itemized deduction limitation will likely affect many more people than just those in the new 39.6% top tax bracket.

ATRA also includes extensions of a variety of individual tax benefits that either expired at the end of 2011, or would have at the end of 2012. Just a few examples of these many benefits are the Child Tax Credit, the State and Local Sales Tax Deduction, the Earned Income Credit, the Coverdell Education Savings Accounts, IRA Distributions to Charities (by persons age 701/2 or older), and the Energy Credit.

Estate and Gift Tax

For 2012, the maximum federal estate-tax rate was 35%, with an exclusion amount of $5.12 million ($5 million indexed for inflation) that shelters an aggregate amount of transfers at death and lifetime gifts from estate and gift tax. But for ATRA, this top rate and exclusion amount were set to expire after 2012, resulting in a highest tax rate of 55% and an exclusion amount of only $1 million (not indexed for inflation).

ATRA permanently sets the top federal estate tax and gift tax at 40% with an exclusion of $5 million (inflation adjusted) for decedents dying and gifts made after 2012. ATRA also permanently allows "portability" of a decedent's unused exclusion between spouses.

Included among the other parts of ATRA are provisions that extend the estate-tax deduction for state estate taxes, qualified conservation easements, and the installment payment of estate tax on closely held businesses. ATRA repeals the 5% surtax on estates larger than $10 million.

 

ARBITRATION AGREEMENTS CAN GO TOO FAR

Strong public policies support the appropriate use of arbitration over litigation in settling legal disputes and, in fact, such policies underlie the Federal Arbitration Act. That said, an agreement to arbitrate disputes is subject to well-established principles rooted in the law of contracts. This means, among other things, that courts will step in and declare void an ostensible agreement to arbitrate if its effects are too heavily weighted in one party's favor. Two recent examples of this overreaching by the more powerful party illustrate the point.

In the first case, a former employee sued his former employer under the Fair Labor Standards Act for overtime wages. A federal appellate court prevented the employer from enforcing an arbitration agreement that was in the company's employee handbook. The fatal flaw in the arbitration provision was that rather than being a legitimate contract, the bargain was "illusory," a legal term meaning that one party, the employer, could effectively avoid its promise to arbitrate by amending the provision or even terminating it altogether.

Although the employer was required to provide an official written notice of any changes to the handbook, a change-in-terms clause gave the employer the "right to revise, delete, and add to the employee handbook" with retroactive effect. There was no savings clause excepting pending disputes from any changes made by the employer.

In the second case, the lopsided bargain that led a court to declare an arbitration agreement unenforceable was more a matter of dollars and cents. A couple purchased a home, contingent upon a satisfactory home inspection. They engaged the services of a home inspection company, which had an arbitration clause in its standard contract. The couple signed the contract, but its most objectionable parts were tucked away in the contract, either in fine print, or hidden among other clauses, or both.

The contract's provisions relating to arbitration were so one-sided in favor of the home inspection company that it effectively "exculpated" the company from liability in a way that violated public policy. In particular, the contract limited the clients' recovery from the inspector for a negligent inspection to the $285 contract fee; it also required binding arbitration of any dispute, even requiring the party seeking arbitration to pay, among other costs, an initial arbitration fee of $1,350, plus $450 per day after the first day of a hearing.

In short, clients could well end up paying out in fees and costs many times the maximum amount they could recover from the company. Also influencing the court's decision were the facts that home inspection services are generally thought suitable for public regulation and that the services provided by home inspectors are a matter of practical necessity for their clients and are crucial to the clients' decision to purchase a home.

To top it off, the court noted that the wife, who had been primarily responsible for the house purchase, had only a high school diploma and no expertise or experience in home construction and that the couple had never purchased a home and were entirely at the mercy of the inspector, without any means of protection if the inspector performed a careless inspection.

 

FACEBOOK POSTING LEADS TO AN "F"

We all know that the right of free speech has its limits. There is no right to shout "Fire!" in a crowded theater. Those limits apply even in settings most closely associated with the free exchange of ideas, such as colleges and universities. In that academic setting, limits also exist even for speech that takes place off campus, such as on a social networking website, but that is connected to a student's academic program.

A student in a state university's mortuary science program learned these constitutional law lessons the hard way when the university gave her a failing grade in an anatomy class and imposed other sanctions against her for comments she had posted, to hundreds of her "friends," on her Facebook account.

The hard lesson for the student continued when a state high court rejected her lawsuit asserting that the disciplinary measures were invalid because they were an infringement of her right to free speech. Of course, words matter, so what the student had actually said was pivotal to the outcome of her case.

While she was taking an anatomy lab, the student posted what she thought were humorous comments about a cadaver she had been assigned to dissect. That was bad enough, but the student also posted a comment about wishing to "stab a certain someone in the throat" with an embalming instrument.

Not surprisingly, university officials were not amused when they learned of the postings, though the student portrayed her remarks as "satirical." But the university's defense of the subsequent disciplinary actions rested on more than just the sensibilities of the university officials--though, to be sure, the whole story caused much embarrassment and a public relations problem for the school.

The student's postings, in which she gave the cadaver a name derived from a comedy film about a corpse and wrote about "playing" with the cadaver, taking her "aggression" out on it, and keeping a "[l]ock of hair" in her pocket, resulted in letters and calls to the university's anatomy bequest program from donor families and the public.

Most importantly from a legal standpoint, the student's conduct violated clear program rules prohibiting both disrespectful conversational language outside the laboratory about cadaver dissection and Internet blogging about cadaver dissection or the anatomy lab. In order to be in the mortuary science program, the student was aware of, and had to agree to abide by, such rules. There is no free speech infringement when the conduct in question, as in this case, violates academic program rules that are narrowly tailored and directly related to established professional conduct standards.

Even as it rejected the student's First Amendment contentions, the court acknowledged some settled principles of law that could allow free speech claims by students to succeed when based on more defensible factual scenarios. A university's interest in academic freedom does not immunize the university altogether from First Amendment challenges.

For example, a university generally cannot use a code of ethics as a pretext for punishing a student's protected speech; nor can it impose a course requirement that forces a student to agree to otherwise invalid restrictions on her free speech rights. But a university can discipline students for violation of professional conduct standards that are in keeping with the academic environment of the student's particular program of study.

 

FINANCIAL FRAUD AGAINST THE ELDERLY

It is a sad and sobering reality that scam artists intent on committing financial fraud or the outright stealing of money, property, or valuable information prey upon vulnerable senior citizens. The threats can take many forms, but the elderly and those watching out for them can have some measure of protection by taking a few basic precautions.

  • Do your homework when selecting a professional advisor, even if the advisor comes highly recommended by a friend or family member. This means confirming that the person is registered or licensed and has not left a trail of mistreatment of other clients.
  • Powers of attorney (POA) are helpful, maybe even essential, as age takes its toll on an individual's capacity to handle financial matters. But the potential for misuse of a POA is great, since the appointed person generally has free rein to do whatever the elderly person could do on his or her own. The selected person must be trustworthy, and it is a good idea to have an attorney review the POA document.
  • The array of account numbers, Social Security numbers, pins, passwords, and other such sensitive information that most of us accumulate over time can serve as a thief's key for raiding your savings and investments. Guard this information carefully.
  • It may be an after-the-fact measure, but check your credit card and bank account statements carefully for any unauthorized or suspicious transactions. If you see one, contact the financial institution right away.
  • Reverse mortgages allow homeowners who are at least 62 years old to borrow money from the equity in their homes. This device has its place under the right set of circumstances, but a reverse mortgage can also become a device for scam artists. Be wary of deceptive, too-good-to-be-true offers and high-pressure tactics.

 

 

EMPLOYERS COMBAT FMLA ABUSE

The federal Family and Medical Leave Act (FMLA) gives eligible employees the right to up to 12 weeks of leave per year, which may be taken intermittently for certain specified reasons, including the care of designated family members with serious health conditions.

The FMLA also prohibits an employer from interfering with, restraining, or denying the exercise of or the attempt to exercise any right given under the FMLA. One of the bases upon which an employer can defeat an FMLA "interference" claim is a showing by the employer that an employee did not, in fact, take leave for a purpose authorized under the FMLA. Naturally, the availability of this defense has prompted some employers to undertake investigations of (some might say "spying on") employees suspected of abusing the rights afforded by the FMLA.

At least two federal courts of appeals have effectively allowed at least some degree of employee surveillance by holding that in order to defeat an FMLA interference claim based on an employee's asserted right to reinstatement, an employer need only show that it refused to reinstate the employee based on an "honest suspicion" that the employee was abusing his or her leave. Sometimes the basis for such a suspicion is produced by detective work of the kind engaged in by private investigators.

In one such case, the employer had an honest suspicion that an employee had misused his FMLA leave and, therefore, the employer's decision to terminate the employee did not interfere with the employee's right to reinstatement. The employer suspected that based upon the employee's prior absenteeism, the employee was misusing his FMLA leave, so the employer hired a private investigator to observe the employee on a day for which he had requested FMLA leave to care for his mother. Video surveillance revealed that the employee did not appear to leave his house that day.

When the employer questioned him, the employee could not recall what he had done on that day, but he asserted that he had not misused his FMLA leave. Although the employee later provided supportive documentation from his mother's nursing home and doctor's office, the paperwork did not clear the air but, rather, only raised further questions for the employer, as the documents were facially inconsistent and conflicted with the employer's internal paperwork.

In a second case, an employer was found to have had an honest belief that an employee had committed disability fraud in taking FMLA leave and, therefore, his termination for such fraud was found not to have been a pretext for FMLA retaliation.

It was not disputed that the employee suffered from a herniated disc and sciatica. However, although the employee had been approved for disability leave based upon his having reported excruciating pain and an inability to stand for more than 30 minutes, coworkers saw him at an Oktoberfest festival a few days later without any indication that his movements were painful or restricted. In fact, he was also able to walk 10 blocks and remain at the crowded festival for 90 minutes.

The employer's investigation included interviews with the coworkers, and the employee was permitted to submit documentation and other evidence in his defense. Still, when the dust settled, the court ruled that the employer had acted within its rights in terminating the employee. Importantly, the decisive question that sealed the employee's fate was not whether he had actually committed fraud, but whether his employer reasonably and honestly believed that he had.

ADA PRIMER FOR SMALL BUSINESSES

The Department of Justice (DOJ) recently revised its regulations implementing the Americans with Disabilities Act (ADA). This revision clarifies some issues that have arisen over the past 20 years and contains some new requirements, including the 2010 Standards for Accessible Design. DOJ has published a document, ADA Update: A Primer for Small Business, which provides guidance to assist small business owners in understanding how the new regulations apply and how to comply with them. The Primer can be viewed by going to www.ada.gov.

 

Public Accommodations

Title III of the ADA, on "public accommodations," applies to both the built environment and to policies and procedures that affect how a business provides goods and services to its customers. The Primer can help small businesses avoid the unintentional exclusion of people with disabilities, and it will also help them know when they need to remove barriers in their existing facilities.

Practically all types of businesses that serve the public are covered by the ADA, regardless of the size of the business or the age of its buildings. Covered businesses must make "reasonable modifications" to their business policies and procedures when necessary to serve customers with disabilities. They must also take steps to communicate effectively with customers with disabilities. It is a business's responsibility to provide a sign language, oral interpreter, or video remote interpreting (VRI) service, unless doing so in a particular situation would result in significant difficulty or expense in light of the business's overall resources. If a specific communication method would be an undue burden, a business must provide an effective alternative if there is one.

Businesses must allow people with disabilities to use mobility devices in all areas in which customers are allowed. Public accommodations must permit individuals who use these devices to enter their premises, unless the business can demonstrate that the particular type of device cannot be accommodated because of legitimate safety requirements that are based on actual risks, not stereotypes.

The ADA mandates that businesses remove architectural barriers in existing buildings and make sure that newly built or altered facilities are constructed to be accessible to individuals with disabilities. Commercial facilities such as office buildings, factories, warehouses, or other facilities that do not provide goods or services directly to the public are subject to the ADA's requirements only for new construction and alterations.

Regarding the built environment, the ADA strikes a careful balance between increasing access for people with disabilities and recognizing the financial constraints many small businesses face. Flexible requirements allow businesses with limited financial resources to improve accessibility without excessive costs.

 

Updated Standards

The ADA's regulations and the ADA Standards for Accessible Design, originally published in 1991, set the standard for what makes a facility accessible. While the updated 2010 Standards keep many of the original provisions in the 1991 Standards, they do contain some significant differences. The 2010 Standards are the key for determining whether a small business's facilities are accessible under the ADA, but they are used differently depending on whether the small business is altering an existing building, building a brand-new facility, or removing architectural barriers that have existed for years.

Since March 15, 2011, businesses have had to comply with the ADA's general nondiscrimination requirements, including the provisions related to policies and procedures and effective communication. The deadline for complying with the 2010 Standards, which detail the technical rules for building accessibility, is March 15, 2012. The delay was meant to give businesses enough time to plan for implementing the new requirements for facilities.

 

FELINE FRIEND 1, IRS 0

Some say the world is divided between dog lovers and cat lovers. Jan is the latter.

She has seven cats of her own that live with her in her modest California home. But Jan also puts her modest financial means where her mouth is. As a volunteer for a local IRS-approved charity, she has taken care of some 70 stray cats at her home while adoptive homes were being found for them. The charity's mission is to trap stray cats, neuter them, and then place them in homes temporarily until they can be adopted or released.

Jan's unreimbursed expenses for so many cats had a way of adding up fast. In a recent tax year, she claimed a deduction on her income tax return for that year's expenses of more than $12,000, for everything from food and vet bills to kitty litter. The IRS took a dim view of the deduction, contending that the expenses were all personal nondeductible expenses and disallowing the deduction.

Representing herself because she could not afford to hire a lawyer, Jan handled her case all the way to the U.S. Tax Court, which sets precedents sometimes having broad application nationally. In that venue, she won on the most important issues, thereby improving the financial prospects for volunteers nationwide, especially those who incur unreimbursed expenses that can be shown to further the missions of groups like Jan's. There are more than 1.5 million IRS-recognized charities in the United States.

The Tax Court judge agreed with most of Jan's contentions. He permitted her to deduct most of her bills for feral cats, since such bills had been incurred to help a charitable group fulfill its mission. A couple of items were disallowed, such as the cost of cremating a cat and of repairing Jan's wet/dry vacuum. The deductible expenses included 90% of Jan's vet bills and 50% of her cleaning supplies and utility bills.

The total deduction was reduced somewhat for a reason that should be noted by others who might follow Jan's example--she didn't have a valid letter from the charity acknowledging her volunteer work for expenses of $250 or more. In addition to getting such a letter, the taxpayer needs to keep good records of the pertinent expenses.

In Jan's case, the court ruled that the regulatory requirements for money contributions governed her expenses of less than $250. Her records for such expenses were acceptable substitutes for canceled checks, under the "substantial compliance" doctrine.

 

FCRA AND PREEMPTION OF STATE LAW CLAIMS

With a view toward getting a full measure of justice for debtors who may have been wronged by a violation of the federal Fair Credit Reporting Act (FCRA), attorneys often will add to their pleadings claims under state law arising under the common law (court-made law) or state statutes.

Any time there is such a combination of federal and state causes of action, there is the potential for a defense based on federal preemption--the principle that when Congress passed federal legislation, it meant for such a remedy to take the place of and preclude any state law claims. In two recent cases, courts reached opposite results when this issue arose in lawsuits brought by debtors.

 

Welcome to My Credit Card

In the first case, the plaintiff's hospitality was punished when his houseguest took his credit card and racked up over $7,000 in unauthorized charges. Upon discovering this, the plaintiff contacted the bank that had issued the card. The bank acknowledged that the charges had not been authorized and that the plaintiff was not personally liable for them. However, it then proceeded to refer the account to a collection agency.

Among the claims asserted by the plaintiff in the litigation that ensued were claims for libel, credit libel, and violation of a state consumer protection law. The bank's argument that the FCRA prevented these state law claims was rejected by a state supreme court. There are some specific preemption provisions in the FCRA, and one of them applies to the responsibilities of persons who furnish information to consumer reporting agencies. The bank's reliance on this provision for its preemption defense was misplaced.

The bank had been a furnisher of information, but the party to whom it had given that information was not a "consumer reporting agency"; it was instead just a debt collection agency. The agency collected the information on the plaintiff simply for the purpose of collecting an alleged debt, not to enable it to furnish a consumer report to another end user of that information.

 

You May Not Proceed

In the second case, a major bank allegedly told credit agencies that the plaintiff was behind on payments on a loan, even though the bank knew that she was not. When the plaintiff brought suit in federal court under the FCRA, she added state law causes of action for defamation, invasion of privacy, and negligence. After the FCRA claim had been dismissed for an unrelated reason, a federal appeals court ruled that the plaintiff was also precluded from going forward with her state law claims.

A pertinent provision in the FCRA states that no requirement or prohibition may be imposed under the "laws" of any state, but the lower court read this to refer only to state statutes, not to the common law of a state. The appeals court reversed the lower court. "Laws," as used in the FCRA provision, must be read to embrace all sources of law, whether derived from the legislature or state court decisions. As the court put it, "what reason would the legislature have had for preempting state statutes regulating information to credit bureaus, while not preempting state common law regulating the same subject?"

 

CAR HORN HONKING AS FREE SPEECH

When Helen was reported to her homeowners association by a neighbor for violating a restrictive covenant against keeping chickens, she picked a rather odd way of getting even with the neighbor. She had to borrow a friend's car to do it, but she stopped the car in front of the neighbor's house at 6 a.m. and laid on the horn for 10 minutes.

The neighbor called the police, who first spoke with Helen and then went to get the neighbor's statement. Unable to leave well enough alone, Helen then drove past the neighbor's house and let out three more loud horn blasts for good measure. This promptly led to her arrest by the police officer and her subsequent conviction for violating the local noise ordinance barring the sounding of a horn except for public safety purposes or at officially sanctioned parades or public events.

Helen's conduct hardly summons up comparisons with grand orations on vital issues of the day, but her conviction was overturned by a state supreme court. More specifically, the county noise ordinance under which she had been arrested was struck down as being impermissibly overbroad, in violation of free speech protections of the federal and state constitutions, because horn honking could clearly be a form of expressive conduct in certain circumstances and the ordinance swept into its prohibition many such instances of "protected honking."

The court stated that the facts of the case were not critical in an overbreadth challenge. The larger principle was that there was a realistic danger that the ordinance would significantly compromise recognized free speech rights of parties not even before the court. Horn honking as a way to vent anger about a rather petty dispute between neighbors may not ring true as speech worthy of protection, but the court advanced some other, more plausible scenarios of honking as protected speech: a driver for a carpool toots the horn to let another worker know it is time to go; a driver responds to a sign saying "honk if you support our troops"; wedding guests celebrate the newlyweds' departure from the church with their car horns; or a driver honks in support of an individual picketing on a street corner.

Because these actions were swept within the ordinance's prohibition, as well as any other forms of car horn honking that did not involve public safety or an officially sanctioned parade or public event, the ordinance and Helen's conviction could not stand. The court suggested that a properly tailored ordinance, prohibiting, say, disturbing horn honking that is meant to annoy or harass, might have survived, but that was not the ordinance that led to Helen's arrest. In short, you might say that Helen had the last "honk" after all.

 

ESTATE PLANNING: PRIVATE REVERSE MORTGAGES

Reverse mortgages, usually obtained from financial institutions, allow people who are at least 62 years of age to convert their home equity into cash, which is received by the homeowner either as a lump sum, a line of credit, or monthly payments. The loan becomes due, with interest, when the borrower dies, moves out of the home, sells it, or fails to pay property taxes or homeowners insurance. The end result is often that heirs of the owner sell the house, pay off the loan, and keep the difference.

Since an institution involved in a reverse mortgage is advancing money without knowing for sure when it will be repaid, there are high up-front costs for commercial reverse mortgages. Fees can be as much as 5% of a home's value, and required mortgage insurance premiums can range from 0.1% for loans with a low payout to 2% for those with a higher payout.

In large part because of these high fees and costs in the commercial sector, but also to reduce paperwork and to increase the amount of equity an owner can tap, some families set up private reverse mortgages. A private reverse mortgage is basically a private loan to the homeowner, usually from a family member, that is secured by a mortgage on the senior's house.

 

Advantages

For the senior homeowner, a private reverse mortgage can have these advantages:

* The costs of having an attorney set up the mortgage should be reasonable and a lot less than the costs of a conventional reverse mortgage with a bank, and there are no ongoing mortgage insurance costs. Also, the interest rate, set each month by the IRS, should be less than the rate on a commercial mortgage.

* Since there is no limit on the percentage of the home equity that can be borrowed, the owner can tap into more of that equity and put farther off the day when he or she has to move for financial reasons.

* A private reverse mortgage need not be paid back until the house is sold, leaving open the option of the owner's moving to a nursing home but keeping the house.

* The owner can continue to receive payments on the mortgage if needed to maintain the house or to pay for extra care at a nursing home.

For the lending family members, the arrangement can have these advantages over a reverse mortgage with a financial institution:

* The financial benefits for the senior family member carry forward to the whole family, because savings on mortgage costs should translate into a bigger estate ultimately passing on to surviving family members.

* The flexibility to tap into more equity in the home could give family members the option to hire more paid caregivers or even to pay themselves for providing such care.

* Even though interest rates for private reverse mortgages set by the IRS are pretty low, they still return more than can be earned in money market accounts or certificates of deposit. In other words, it beats having money just sitting in a bank.

 

Caution

There are some cautionary aspects to private reverse mortgages. Lending family members need to anticipate that the money they advance may not come back to them for a long time. It is also prudent to consider that there is some risk that the entire loan may not be paid back, if the ultimate proceeds from the sale of the home are insufficient to pay off the loan, with interest. Of course, these and any other concerns should be fully aired and taken into account when the private reverse mortgage is being contemplated in the first place and when its terms are set.

 

THE MYSTERY OF THE OLD BANK ACCOUNT

Keeping track of personal finances can become like detective work when there is scant evidence of items such as an old bank account or a receipt for a safe-deposit box. This situation arises most commonly for executors of estates or for someone who is taking care of financial matters for an ill or elderly friend or relative.

The first job is to determine whether the financial institution is still open, has closed, or has merged with another entity. The Federal Deposit Insurance Corporation (FDIC) maintains "Bank Find," an online database that allows you to trace the history of any FDIC-insured institution and to find contact information for open institutions.

Once the bank is located, you can ask whether the account is still there in your name or in that of a loved one. For inquiries about someone else's account, expect to be asked to produce appropriate documents, such as a death certificate, a court appointment as an executor, or a power of attorney or similar directive from a living person.

If the account was classified as abandoned under state law, its contents would have been transferred to the unclaimed property office in the state of the owner's last known address. You can check to see whether any property is being held by the state by using a website maintained by the National Association of Unclaimed Property Administrators (www.unclaimed.org).

When the account is tracked down, you can collect the assets by presenting satisfactory proof of ownership. If the assets wound up with the state, it is possible that the state will have sold off the assets because of lack of storage space. In that event, in most instances the original owner or heirs would still have the right to claim the proceeds from that sale.

CRIMINAL BACKGROUND CHECKS ON EMPLOYEES

CRIMINAL BACKGROUND CHECKS ON EMPLOYEES

It is not a new development in employment law that many employers take into account an applicant's or employee's criminal history information, including arrests or convictions, when making employment decisions. Nor is it unprecedented for the federal Equal Employment Opportunity Commission (EEOC) to come out with policies and guidance on the subject.

But in light of technological changes that have made criminal background checks easier to do, the passage of the Civil Rights Act of 1991, which codified the "disparate impact" theory of liability, and even some prodding from a federal court of appeals, the EEOC has recently issued an updated Guidance on employers' use of criminal background checks in employment decisions under Title VII of the Civil Rights Act of 1964.

Title VII does not directly regulate or speak to the acquisition of criminal history information. (Some state employment discrimination laws, however, give protections to individuals concerning inquiries by employers about criminal histories.) Still, there are two ways in which an employer's use of criminal history information can violate Title VII.

The first theory, called "disparate treatment" discrimination, occurs when an employer treats job applicants with the same criminal records differently because of one of the prohibited bases for discrimination in Title VII: race, color, religion, sex, or national origin.

The second concept, known as "disparate impact" discrimination, refers to the situation in which an employer applies criminal record information to its employment decisions uniformly, but the exclusions still operate to disproportionately exclude people of a particular race or national origin. Under this second theory, the employer can be found liable for discrimination unless it can show that the application of the criminal history information is "job related and consistent with business necessity" for the position in question.

The new Guidance is the culmination of the EEOC's examination of a wide array of information. However, there are no substantial changes in the EEOC's positions on the fundamental issues raised by employer use of criminal background data. These EEOC policies are unchanged:

  1. An arrest alone does not establish that criminal conduct has occurred, although an employer may act based on evidence of conduct that disqualifies an individual for a particular job.
  2. Convictions, on the other hand, are considered reliable evidence that a crime was committed.
  3. Nationally, studies show that exclusions from employment due to criminal histories have a disparate impact on the basis of race and national origin, prompting the EEOC to investigate charges of this kind.
  4. A blanket policy of excluding every person with a criminal record from employment, unless such exclusion is required by other federal law, will not satisfy Title VII's requirement that the application of criminal history information be job related and consistent with business necessity.

The legality of an employer's use of criminal histories is highly dependent on the facts of a particular decision, making it difficult to generalize. Still, the Guidance includes the following nonexhaustive list of some "best practices" for employers considering criminal record information when making employment decisions:

  • Eliminate policies or practices that exclude people from employment based on any criminal record.
  • Train managers, hiring officials, and decision makers about Title VII and its prohibition on employment discrimination.
  • Develop a narrowly tailored written policy and procedure for screening applicants and employees for criminal conduct.
  • Identify essential job requirements and the actual circumstances under which the jobs are performed.
  • Determine the specific offenses that may demonstrate unfitness for performing such jobs.
  • When asking questions about criminal records, limit inquiries to records for which exclusion would be job related for the position in question and consistent with business necessity.
  • Keep information about applicants' and employees' criminal records confidential. Use it only for the purpose for which it was intended.

 

LOTTERY WINNINGS AND GIFT TAXES

If records were kept about such things, Tonda Lynn, a waitress at a pancake house, may have received the largest tip in history when a customer gave her a lottery ticket that turned out to be worth $10 million. As the U.S. Tax Court put it in a heading in its opinion resolving gift tax issues arising from subsequent events, suddenly "She's Got a Ticket to Ride."

From the start, Tonda Lynn knew she wanted to share her good fortune with her family. With no shortage of advice and guidance, especially from her father, she settled on setting up a corporation that would claim the lottery proceeds. She and her spouse owned 49% of the stock, with family members owning the remaining 51%.

Similar arrangements, some set up before a lottery win and some after, are commonly made to share lottery winnings while trying to avoid gift taxes. However, the IRS will scrutinize shared lottery arrangements and assert gift taxes when such arrangements do not pass muster. Tonda Lynn and her relatives found this out when the IRS, backed up by the Tax Court, ruled that there had been no binding contract to share the lottery proceeds and that there was a taxable gift as to the 51% of the winnings that went to family members.

In principle, there was nothing wrong with what Tonda Lynn was trying to do after her big win. The problem was that the purported contract among the family members was too vague and indefinite to enforce under state law, and thus her contribution of the winning ticket to the newly formed corporation constituted a taxable, indirect gift to the family members.

The court focused on these factors: There was no requirement for each family member to buy lottery tickets, no established pattern of buying lottery tickets, no pooling of money, no predetermined sharing percentages, and no definition as to the meaning of "substantial" winnings to which the agreement would apply. In addition, who was party to the agreement was unclear, and the agreement was essentially imposed by the taxpayer's father rather than arrived at by family discussion. All in all, the arrangement was not a joint effort.

In Tonda Lynn's loss may be found some lessons for other regular players in lotteries who want to achieve what she set out to do, should their ship come in. These elements may help avoid the fate of Tonda Lynn's effort to share the wealth without gift taxes taking a big chunk of it:

  • regular and consistent purchases of lottery tickets;
  • a clear agreement to share winnings;
  • common knowledge of the ticket purchases on the part of all participants; and
  • joint decision making about what to do with winnings.

In fact, the Tax Court that ruled against Tonda Lynn cited a successful sharing arrangement from another case in which the evidence established the existence of an agreement between two men to share equally in the proceeds of any winning lottery ticket, in view of a long-standing course of conduct in which the men would jointly purchase tickets and jointly "scratch" them to reveal any winnings. The mutual promise exchanged by the two men to share in the proceeds of a winning lottery ticket amounted to adequate consideration for a valid contract.

 

FAIR HOUSING ACT DOESN'T APPLY TO ROOMMATES

An online roommate matching website helps compatible roommates to find each other. Part of the process requires users of the service to answer questions about their gender and sexual orientation and whether children will be living with them. Users are asked to give their preferences as to those same characteristics so that like-minded individuals can be matched. This process came to the attention of some nonprofit housing rights organizations that unsuccessfully sued the roommate service, alleging violations of the federal Fair Housing Act (FHA).

The FHA prohibits discrimination based on sex or familial status in the sale or rental of a "dwelling." The FHA defines "dwelling" as essentially a living unit designed or intended to be occupied by a family. The lawsuit against the roommate service failed because a federal court reasoned that "[i]t makes practical sense to interpret 'dwelling' as an independent living unit and stop the FHA at the front door." It would be difficult to divide a single-family house or apartment into separate "dwellings," and, in any event, the court concluded that when it passed the FHA, Congress did not mean to interfere with relationships inside a single home.

The court also found that constitutional concerns tipped the balance away from applying the FHA to roommate decisions. Because of the role of certain intimate human relationships in safeguarding individual freedom, choices to enter into and maintain such relationships must be secured against undue intrusion by the state. The right of intimate association is not restricted exclusively to family members, and that right also implies a right not to associate.

To determine whether a particular relationship is protected by the right to intimate association, courts look to size, purpose, and selectivity and to whether others are excluded from critical aspects of the relationship. The roommate relationship easily qualifies: People generally have very few roommates; they are selective in choosing roommates; and nonroommates are excluded from the critical aspects of the relationship, such as using the living spaces.

In the court's view, aside from immediate family or a romantic partner, it's hard to imagine a relationship more intimate than that between roommates, who share living rooms, dining rooms, kitchens, bathrooms, and even bedrooms. Because of a roommate's unfettered access to the home, choosing a roommate also implicates significant privacy and safety considerations.

 

LAND PURCHASERS GET MONEY BACK

When a couple bought a lot for $1.7 million in what was to become a luxury golf course community, one of the selling points for them was the involvement of a prominent real estate management company. Before committing to the purchase, the buyers received assurances from the developer that the management company could not just "walk away" from the project and that the company was legally bound to the development for 30 years. Two years after the lot was purchased and before any house was built on it, the management company and the developer parted ways, ending the involvement of the company that had drawn the couple to the property.

The buyers sued under the federal Interstate Land Sales Full Disclosure Act. The Act requires that the prospective purchaser receive from the seller timely notice of its rights under the Act, as well as a property report. It was undisputed that these two requirements had not been met, but the developer sought to defend the lawsuit on the basis of a statute of limitations and an exemption in the Act that is based on the size of the development. Neither of these defenses was successful.

There is a two-year statute of limitations in the Act for automatic revocation by right that, had it been applied, might have made the buyers' claim untimely. But the federal court ruled that another, three-year limitations period in the Act was to be applied. Under that provision, the claim by the purchasers of the lot to rescind the sale was timely.

As for the exemption defense, the Act states that it does not apply to the sale of lots in subdivisions containing fewer than 100 undeveloped lots. The Act also does not apply to "the sale or lease of lots to any person who acquires such lots for the purpose of engaging in the business of constructing residential, commercial, or industrial buildings," the so-called sales-to-builders exemption.

The sales-to-builders exemption is to be applied before the lot count is made; however, the developer could not include future sales in determining the number of sales that fell under the sales-to-builders exemption. Without subtraction of those future sales, the calculation did not bring the development under the 100-lot threshold, making the developer subject to liability for its violations of the Act.

In ruling for the purchasers, the court essentially canceled the contract of sale for the property, rendering it as though it did not exist. Thus, the remedy for the failure of the developer to disclose objectively material information was the return of the property title to the developer and the return of the purchase price, plus interest, to the purchasers.

 

 

LLC MEMBER PERSONALLY LIABLE

The owner of a lot on which a four-unit condo complex was to be built contracted with a small residential construction company to build the condos. The construction company was formed as a limited liability company (LLC), the only members of which were a licensed home builder and his wife. The licensed builder served as general contractor on the project, overseeing subcontractors that the LLC had selected.

A couple of months into construction, some structural problems surfaced. At first the builder's assurances that the problems would be fixed calmed the tensions with the owner, but over time, old defects weren't fixed and new ones arose, and the relationship deteriorated. Eventually the builder walked off the project, leaving dozens of defects unremedied. When the owner sued for damages, based on negligence and breach of warranties, he named as defendants not only the LLC but one of its individual members, the licensed builder.

One of the appealing characteristics of a limited liability company, as its very name indicates, is that a member of the LLC generally is not personally liable for the LLC's liabilities. In fact, the state LLC statute that applied in this case states that a "member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager."

As the individual builder discovered when he was found personally liable for a judgment of nearly $1 million, the LLC shield against personal liability is not impenetrable. The state supreme court ruled that the protection against personal liability applies only to vicarious liability for nontortfeasor members. An individual who has done nothing wrong will not be held liable simply by virtue of being a member or manager of the LLC. Where, as in this case, the individual is guilty of negligence, the protection of the LLC business form is lost.

The court acknowledged that, at least at first blush, its decision appeared to strip away one of the main reasons why a person chooses to form an LLC. But it was satisfied that there are other unaffected benefits to choosing to start a business as an LLC. The controlling rationale is akin to the concept of "piercing the corporate veil," that is, under some circumstances holding an individual corporate officer liable for wrongful conduct. Or as the court put it: "You don't buy immunity from suits for your torts by being a member of a business corporation."

 

UMBRELLA INSURANCE POLICIES

As insurance prices continue to rise, many people are looking for more and better insurance coverage for less money, and "umbrella policies" are often a good option for increasing coverage. Umbrella policies get their name from the coverage they offer: Like an umbrella, they provide expansive coverage for you and your assets. Umbrella policies act as a kind of backup for your primary insurance and can provide a cost-effective way of increasing your insurance coverage.

Most of us carry several kinds of liability insurance policies: car insurance, homeowner's insurance, renter's insurance, etc. All of these different policies do essentially the same thing: They cover us for the different careless acts we might commit. However, the coverage available under these different policies varies, and their cost is often very expensive compared with the coverage they provide.

Umbrella policies begin where other insurance ends. They provide additional coverage--coverage that is available only after the underlying liability policy has been exhausted. Umbrella policies are often surprisingly inexpensive, given that they can provide additional coverage in amounts up to $1 million or more. The reason umbrella policies are relatively inexpensive is that they are asked to cover only the largest of claims. Because of this, the number of claims brought against umbrella policies is lower than the number of claims brought against "regular" policies.

As with any kind of insurance, the coverage offered by umbrella policies and the rates charged for them can vary greatly. Consider the possibility of buying an umbrella policy. You may find that it is right for you.

 

CAR SAFETY

What if Your Brakes Fail?

Although rare, total brake failure can be a terrifying and perilous experience. As in all emergency situations, remaining calm is the first and most important step. In addition to that:

  • Shift into a lower gear if your car has an automatic transmission. If it has a manual transmission, downshift.
  • Engage the emergency brake.
  • Turn on your emergency flashers and carefully pull off onto the side of the road.
  • Turn off the engine and call for help.

U.S. SUPREME COURT: ARBITRATION IS THE NEW EMPLOYMENT LAW

The employment law component of the docket during the most recent term of the U.S. Supreme Court was dominated by decisions on arbitration. Some of the cases have the potential to affect large numbers of employers and employees.

 

Allocation of Power

In the most significant of these decisions, the Court determined the allocation of decisionmaking powers under the Federal Arbitration Act (FAA), where an agreement to arbitrate includes an “agreement within the agreement,” delegating to the arbitrator the power to determine the enforceability of the arbitration agreement.

If a party specifically challenges the enforceability of that particular “delegation” agreement, the district court considers the challenge before ordering compliance with the agreement. However, if a party challenges the enforceability of the agreement as a whole, such as by a contention that it is unconscionable, as in the case before the Court, that challenge is for the arbitrator. In other words, in the latter situation, the courts must give effect to the agreement according to the terms agreed upon by the parties, by putting the matter before the arbitrator.

This is in keeping with the FAA’s general rule that agreements to arbitrate “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The Court also relied on its previous recognition that parties can agree to arbitrate “gateway” questions of “arbitrability,” such as whether the parties have agreed to arbitrate in the first place, or whether their agreement covers a particular controversy.

 

Contract Formation

All was not lost for those predisposed to have courts, not arbitrators, decide as many employer employee disputes as possible. In another case, an employer sued an international union and a local union, alleging that the local’s strike breached a no strike clause in a collective bargaining agreement (CBA). The employer also alleged that the international union had engaged in tortious interference with a contract by promoting the strike and that both defendants were liable for claims under the federal Labor Management Relations Act.

Resolution of the claims against the unions was affected by a dispute over the ratification date of the CBA, which contained an arbitration clause. The Court ruled that the dispute was a matter to be resolved by the federal district court, rather than by an arbitrator. The argument over the formation or existence date fell outside the scope of the arbitration clause, which was limited to claims “arising under” the CBA. The Court applied the prevailing general rule that where the matter at issue concerns contract formation, such a dispute is generally for the courts to decide. In addition, a court may order arbitration of a particular dispute only where the court is satisfied, as it was not in the case before the Court, that the parties had agreed to arbitrate that dispute.

 

Class Action Arbitration

In another case, the Court was concerned with when parties can be made to submit to arbitration for an entire class of claims, and its answer was, in short, not unless they clearly consent to it. There are fundamental differences between the more typical bilateral arbitration and class action arbitration. In the latter case, an arbitrator chosen according to an agreed upon procedure no longer resolves a single dispute between the parties to one agreement but, instead, resolves many disputes between hundreds or perhaps even thousands of parties.

The presumption of privacy and confidentiality that applies in many bilateral arbitrations does not apply in class arbitrations, thus potentially frustrating the parties’ assumptions when they first agreed to arbitrate. The arbitrator’s award no longer purports to bind just the parties to a single arbitration agreement but adjudicates the rights of absent parties as well.

The commercial stakes of class action arbitration are comparable to those of class action litigation, even though the scope of judicial review is much more limited. In a case involving antitrust allegations against shipping companies by some of their customers, these differences between bilateral arbitration and class action arbitration were too great for arbitrators to presume that the parties’ mere silence on the issue of class action arbitration constituted consent to resolve their disputes in class action proceedings.

 

TAKING LAND FOR ECONOMIC DEVELOPMENT

A city negotiated with property owners to acquire a strip of land and some temporary easements for the purpose of installing a deceleration lane for traffic that would access a new development. Included in that development was a building to be occupied by a well known national retailer of consumer goods. After initial negotiations to acquire the real property failed, the city filed a petition in state court to condemn the property.

The owner of the property subject to being taken tried to capitalize on the fact that the state legislature had recently subjected the power of eminent domain to a new additional limitation. In 2006, after the U.S. Supreme Court had determined in a controversial ruling that the transfer of land to a third party for the purpose of furthering a city’s economic development plan was a sufficiently public use to permit the constitutional exercise of eminent domain, the legislature passed a new law to prohibit the use of eminent domain “if the taking is primarily for an economic development purpose.”

The property owner argued that the deceleration lane primarily served the economic development purpose of providing vehicles access to the nearby retailer. He reasoned further that the addition of the deceleration lane would ultimately cause the expansion of the city’s property and sales tax bases by providing the retailer’s customers easier access to the retailer’s parking lot.

A state appellate court upheld the taking. Although the collateral consequences of the addition of a deceleration lane might include some enhancement to economic development, the primary purpose of the new lane clearly was the same as for any other road project— simply to promote traffic safety and the efficient flow of traffic on the city’s streets. The court acknowledged that many permissible uses of eminent domain provide collateral benefits to private industry. When land is acquired by eminent domain for a public building, such as a school, nearby convenience stores or restaurants may also benefit. Using eminent domain to install utilities likewise can be beneficial to surrounding businesses. There are countless other instances where the exercise of eminent domain indirectly enhances economic development, but such situations do not come within the newly enacted prohibitions on the use of condemnation by the government, because such takings do not have as their primary purpose the stimulation of economic development.

Four reasons offered by the court for upholding the condemnation provide some criteria for gauging whether any other such challenges by property owners have a chance of succeeding on a similar theory: First, the city did not take the property primarily for the “use” of a commercial enterprise in any traditional sense. The city will be the owner of title to the land, and the primary users will be members of the public at large.

Second, the city’s acquisition of the real property did not serve the primary purpose of increasing tax revenue because the actual land acquired will not contain any entity that will generate sales or property taxes.

Third, the city’s acquisition of the land was not primarily serving the purpose of increasing employment. Construction of the deceleration lane will require the temporary use of labor, but the purpose of a deceleration lane is unrelated to the creation of additional jobs, as opposed to traffic control.

Finally, the use of the property cannot be construed as primarily related to general economic conditions, because there was no evidence that this affected the city’s determination to exercise its eminent domain powers. The decisionmaking body, the city’s engineering department, acquired the property at issue to allow traffic to proceed in an orderly and efficient fashion and to limit the potential collisions as a result of cars decelerating on the right of way. There also was no evidence that the nearby retailer in some way used economic pressure to convince the city to install the deceleration lane.

 

BANK ACCOUNTS ARE A CHANGING

In the last year, new Federal Reserve Board rules have reined in the ability of banks and other financial institutions to impose charges and fees for some of their services. Issuers of credit cards generally cannot increase the interest rate on a card for one year after the account is opened. Consumers will no longer be charged a fee when a transaction causes an account to exceed its credit limit, unless the consumer has agreed in advance. For “subprime” cards, held by those with a limited or bad credit history, the total initial fees cannot exceed 25% of the card’s initial credit limit, with the exception of fees for late payments, for exceeding the credit limit, or for returned payments due to insufficient funds.

With these and other tightened regulations, it is predictable that financial institutions will gravitate toward other means of enhancing revenues through new or increased fees, and with new or more demanding requirements placed on consumers. In such a climate, consumers are well advised to brush up on some strategies for minimizing the financial hits from the institutions:

  • If your bank decides to add or raise a minimum balance requirement for your account, consider whether you would do just as well with a “no frills” account that would have no such requirement, and likely no maintenance fee. The tradeoff may be a monthly limit on the number of checks that you can write, or on the number of ATM or debit card transactions.
  • The return from interest bearing accounts today is barely an improvement on keeping your money under the mattress. It might be smarter to use a free account that pays no or very little interest, instead of an account that pays a slightly higher interest rate but also comes with a monthly fee. The monthly fee could well be greater than the meager return on the interest bearing account.
  • It is not exactly riveting reading material for most people, but make yourself promptly check your accounts online or check your paper account statements for errors, or for fees or account changes you may not have been expecting. In the same vein, monitoring the activity on your debit or ATM card will help you promptly report a problem if the card is lost or stolen, thereby limiting your liability.
  • Many banks offer a free “alert service,” meaning that the bank will send you an e mail or text message notifying you when there has been a significant transaction on your account or if your balance drops below a certain threshold. Such a “heads up” could allow you to shift funds among your accounts to avoid overdrawing an account.
  • If overdrawing an account is a recurring event, consider changing from overdraft coverage to cheaper alternatives, such as linking a savings account to a checking account, arranging for an overdraft line of credit, or, for a short term shortage of cash, applying for a small loan.
  • ATM fees may not be crippling, but they can add up. Try to stick mainly with your own institution’s ATMs, where there generally is no charge. If your bank allows getting some cash back on a debit card transaction at no charge, that is an alternative to an ATM for getting small amounts of cash.

 

SEASON TICKETS CANNOT BE SEIZED

When a taxpayer failed to pay his federal income taxes, the IRS issued a levy against him. Among his possessions was a block of 16 season tickets for a professional sports team. He also had paid a deposit per seat as a “personal seat license,” on top of the cost each year for the season tickets themselves.

The IRS wanted to seize and sell the season ticket renewal right, treating it as a form of “property or rights to property” under federal law. The sports team objected but did say that if it received a levy it would pay out the taxpayer’s deposit for the personal seat licenses. The team’s policy provided that the right to renew season tickets was not transferable and that if a ticket holder did not renew, the tickets would pass to the next person on a very long waiting list of people seeking season tickets.

In issuing an Advisory Opinion in favor of the sports team’s position, the IRS found no precedents on the precise issue, but it borrowed from bankruptcy cases in which the bankruptcy trustee sold the taxpayer’s season ticket renewals as property of the estate. In that context, the decisive factor was the team’s policy—if the team treated a right to renew as transferable, it was “property,” but if, as in the case at hand, it did not allow transfers, the right to renew was not a property right that could be sold.

As a result, the IRS could not touch the taxpayer’s right to renew his tickets to satisfy the taxes owed, but it could go after the personal seat licenses for which the taxpayer had paid a deposit. A tax lien would attach to them, putting the IRS into the taxpayer’s shoes and allowing the IRS to terminate the season tickets and receive a refund of the personal seat licenses deposit. The people next in line on the waiting list were no doubt very pleased.

 

JUNK FAX EXEMPTIONS

A self styled “business to business media company” that publishes trade magazines and sponsors industry specific trade shows sent a fax advertising a trade show to a civil engineering and design firm. That simple act prompted a federal lawsuit by the fax recipient. As the court put it, in this case, as in most other junk fax cases, the facts were “not especially juicy.” The same design firm had apparently adopted a combative policy regarding unsolicited communications of this kind. According to the court, the firm had filed over 100 similar suits under the federal Telephone Consumer Protection Act (TCPA).

The design firm was among the more than five million subscribers to the media company’s publications. Over a 10 year period, it had subscribed to three of the media company’s publications. For each subscription, the design firm’s president and sole shareholder filled out the subscription card. On at least two of the subscription cards, he provided the design firm’s fax number as part of the required contact information.

The single fax that set the lawsuit in motion had been sent to the attention of the design firm’s president, using the fax number he had provided in his subscription requests. In addition to information about the trade show, the fax included a notice inviting the recipient to write “remove” on the face of the advertisement and fax it back to a toll free number if he believed that he had received the fax in error or if he wished to unsubscribe. Instead of accepting that invitation, the design firm filed a class action lawsuit.

The media company was able to fend off the lawsuit by establishing the “established business relationship” (EBR) defense. In 2005—after the media company had sent the fax, but before the design firm had filed suit—Congress passed the Junk Fax Prevention Act (JFPA), which amended the TCPA to exempt from the ban on unsolicited fax advertisements any faxes sent from a sender with an established business relationship with the recipient.

Although the pre JFPA version of the TCPA applied in this case, even at that earlier time the business relationship exemption appeared in FCC reports and orders implementing the TCPA. An FCC 1992 Report and Order stated that a “facsimile transmission from persons or entities who have an established business relationship with the recipient can be deemed to be invited or permitted by the recipient.”

The plaintiff design firm tried without success to persuade the court that the EBR defense, as laid out in FCC edicts, was meant to apply only to communications with residential, not commercial, customers. It pointed to an FCC order using language to that effect, but that order was limited to telephone solicitations directed at residences and was geared toward preventing people from being peppered with annoying solicitation calls in their homes. The provisions that were specific to faxed advertisements did not confine the EBR defense to residential customers, and it was therefore available in the case of the fax to the design firm.

The relationship between the recipient design firm, as subscriber, and the media company, as publisher, fell well within the scope of the EBR defense under the TCPA. Their relationship came under the broad definition used in the Act—a prior existing relationship formed by voluntary two way communications, which relationship had not previously been terminated by either party.

LITIGATION OVER NONCOMPETE AGREEMENTS

Agreements between employers and their employees prohibiting or restricting competition by a departing employee are nothing new, but their use is growing—and not just for the highest levels of management. This trend makes it all the more important to understand the limits that courts have placed on such agreements, with a view toward balancing employers’ interests with policies favoring competition and unfettered opportunities for individuals to pursue their livelihoods. While courts have sometimes struck down noncompete agreements in their entirety, occasionally they effectively have rewritten parts of an agreement, a practice known as “blue penciling,” so as to fix offending parts while retaining acceptable provisions.

In employment contracts, restrictive covenants, as they are sometimes called, are from the outset suspect as restraints of trade that are disfavored at law, and they must withstand close scrutiny as to their reasonableness. For the same reason, they generally are not to be construed to extend beyond their proper import, or farther than the contract language absolutely requires. In cases of ambiguous language, to borrow a term from baseball, the “tie” goes to the former employee.

The requirements for enforcing a noncompete agreement may vary some from state to state, but a typical set of conditions requires that the agreement (1) be necessary for the protection of the employer that is, the employer must have a protectable interest justifying the restriction imposed on the activity of the former employee; (2) provide a reasonable time limit; (3) provide a reasonable territorial limit; (4) not be harsh or oppressive as to the former employee; and (5) not be contrary to public policy. In keeping with the law’s predisposition against such agreements, generally the employer has the burden of proving the reasonableness of a noncompete clause.

In a recent case involving a company that distributed novelty items to convenience stores and similar businesses, a noncompete clause that prohibited a route salesperson from interfering with or attempting to entice away customers—who were customers of the employer during a one year period before the employee’s termination, and whom the employee had serviced, dealt with, or obtained special knowledge about during his employment—was found by a court to be reasonably necessary and enforceable to protect the employer’s business. The employer had a legitimate interest in prohibiting solicitation of its recent past customers and in winning back their business, and, as to such customers, the former employee would be in a far better position than an ordinary competitor, with a distinct advantage were it not for the noncompete restriction.

The case of the novelty items business resulted in a split decision for the employer. A separate clause in the agreement, referred to as the “business” clause, prohibited a former employee, for 24 months following his or her termination, from engaging “in any business which is substantially similar to” the employer’s business. The court concluded that this provision went too far. It did not protect a legitimate business interest and was thus unenforceable. The engagement of a former employee in a similar, but noncompetitive, enterprise posed little, if any, additional danger to the employer.

When a tax return preparation firm sued a former employee for breach of a noncompete agreement, the court used a standard providing that an agreement of that kind will be enforced only if the business interests the employer seeks to protect and the effect the covenants have are reasonable as to (1) duration; (2) the capacity in which the former employee is prohibited from competing against his or her former employer; and (3) the geographic territory in which the former employee is restricted from working. The court held that the noncompetition clause in the tax preparer’s employment contract was overbroad for failing to properly limit the territory to which it applied, making the entire covenant unenforceable. The clause purported to limit the former employee from working for any employer whose business included the preparation and electronic filing of income tax returns, if that employer was located, conducted business, or solicited business in the geographic district where the former employee had previously worked or within 10 miles of the district’s borders, even if the former employee did not propose to work in or near that district. Such a clause cannot stand, because, as the court put it, it “overprotects” the employer at the expense of a former employee’s right to earn a living.

 

TAX BREAKS FOR COLLEGE COSTS

Persistently increasing college costs may have joined death and taxes as inevitable facts of life. Still, it is usually possible to soften the blow of escalating costs of higher education by taking advantage of an assortment of income tax breaks provided by the federal government. The options and their ramifications for your tax bill are not as simple as they might be, so it may be prudent to get some professional advice. Given the large sums of money at stake, you do not want to leave any smart moves unmade for lack of information and timely advice.

 

American Opportunity Tax Credit

This year, the American Opportunity Tax Credit effectively replaces the Hope Scholarship Credit. Taxpayers spending at least $2,000 for tuition, fees, books, and materials for higher education can save $2,000 in taxes with a dollar for dollar credit. Expenses over $2,000 bring an additional tax credit of 25 cents on the dollar, and, if expenses reach $4,000, there is a maximum credit of $2,500. The credit is available per student, so that a family with more than one college student can achieve even larger total benefits. Up to 40% of the American Opportunity Tax Credit is refundable, so that some of the tax credit may be received as a tax refund if the credit for which the taxpayer qualifies exceeds his or her income tax liability. This credit phases out for taxpayers with a modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married couples filing jointly).

 

Lifetime Learning Credit

While the American Opportunity Tax Credit is limited to the first four years of education after high school, the Lifetime Learning Credit, as the name suggests, may be claimed for any year of higher education, such as years spent in graduate or professional schools. Another distinction between the two credits is that the Lifetime Learning Credit is available for any course of study relating to job skills at an accredited school, whereas the American Opportunity Tax Credit requires that the student be enrolled at least on a half time basis. The phaseout income ranges are lower than for the American Opportunity Tax Credit, by margins of $30,000 for individuals and $60,000 for married couples filing jointly.

Calculated at 20 cents on the dollar, the Lifetime Learning Credit maxes out at $2,000, for $10,000 in tuition and related expenses. It is not refundable. Unlike the American Opportunity Tax Credit, which is determined per student, the Lifetime Learning Credit is calculated per taxpayer, so any one taxpayer has the above maximum no matter how many individuals in a family are studying at the postsecondary level. A taxpayer may not use both credits for the same student in the same year, but different credits may be used for different students’ expenses in the same year.

 

Tuition and Fees Deduction

A tax credit, by shaving off the actual tax bill, does more for a taxpayer’s bottom line than a deduction, which only reduces the income on which the tax will be imposed. Still, there is a third option in the form of a tax deduction for tuition and related fees, although it cannot be used in the same year for the same student as either of the tax credits previously described. This deduction, which is available even for taxpayers who do not itemize deductions, can be as large as $4,000 for modified adjusted gross incomes up to $65,000 ($130,000 for married couples filing jointly). The deduction is cut in half for even one dollar above those incomes, and disappears altogether when the income levels top $80,000 ($160,000 for married couples filing jointly). Another limitation on this deduction is that it cannot be claimed for expenses paid with money from a Section 529 plan or withdrawals from a Coverdell Education Savings Account.

 

LENDER MUST RETURN DEBTOR’S VEHICLE

Theodore entered into an installment contract with a corporate creditor for the purchase of a new automobile. A few years later, he defaulted on his installment payments, and the creditor repossessed the vehicle. Not long after that, Theodore filed for bankruptcy in federal bankruptcy court.

Needing his car to commute to work, he requested that the creditor return the vehicle to his bankruptcy estate. When the creditor refused to return the vehicle, absent what it deemed “adequate protection” of its interests, Theodore moved for sanctions under a Bankruptcy Code provision, claiming that the creditor had willfully violated the automatic “stay” provision in the Bankruptcy Code. The stay provision forbids a creditor from committing any act to obtain possession of property from the bankruptcy estate, or to “exercise control” over the property of the estate, once the debtor has filed for bankruptcy.

In Theodore’s case, the creditor could not be said to have acted to obtain possession of the vehicle after the bankruptcy filing, because it already possessed the car at that point. Thus, one issue was whether it could be said to have “exercised control” over the vehicle by simply keeping it and refusing to return it to the debtor, as opposed to selling or doing something else with it.

A federal appellate court answered this question in the affirmative. It held that, upon the request of a debtor that has filed for bankruptcy, a creditor must first return an asset in which the debtor has an interest to his or her bankruptcy estate and then, if necessary, seek adequate protection of its interests in the bankruptcy court. To hold that “exercising control” over an asset refers only to selling or otherwise destroying the asset would not be logical, given the central goal of reorganization bankruptcy. That goal is is to gather together all of the debtor’s property in the bankruptcy estate, so that the debtor may rehabilitate his or her credit and pay off his or her debts. This applies to all property, even property (such as Theodore’s car) that is lawfully seized before the filing of a bankruptcy petition.

The court essentially ruled that the creditor’s position had put things in the wrong order. Instead of being permitted to hang on to the vehicle until it felt satisfied that its interests would be protected, the creditor had to first return the asset to the bankruptcy estate. Then, if the debtor failed to show that he could adequately protect the creditor’s interests, the bankruptcy court was empowered to condition the right of the estate to keep possession of the asset on the provision of certain specified adequate protections to the creditor.

Some other considerations also weighed in favor of placing the onus on the creditor, rather than on Theodore, to seek relief from the court if it believed that its interests were not adequately protected. First, the whole purpose of reorganization bankruptcy, be it corporate or personal, and of the stay in particular, is to allow the debtor to regain his financial foothold and repay his or her creditors. Properly implemented, a stay allows a debtor free use of his or her assets while the court works with both the debtor and the creditors to establish a rehabilitation and repayment plan. In theory at least, these assets generate money that could contribute to paying down the debtor’s obligations. In Theodore’s case, if his car remained in the hands of the creditor, it could hamper him from going to work (or, in other cases, from finding work), which is crucial for getting the funds necessary to pay off his debts.

Second, allowing a creditor to maintain possession of an asset until it decides on its own that adequate protection is in place, or until the debtor moves for the asset’s return, gives the creditor an unfair bargaining advantage over other secured creditors.

Finally, requiring the debtor, rather than the creditor, to bear the costs of seeking court relief hurts not only the debtor but all of the debtor’s other creditors by draining the value of the bankruptcy estate. The court reasoned that it makes more sense for all creditors to move before the court in a consolidated proceeding to have their assets adequately protected than for a debtor to file multiple motions piecemeal in an attempt to recover assets that may be scattered among many creditors.

 

MEDICAID BENEFITS AND SPECIAL NEEDS TRUSTS

A permanently disabled Medicaid recipient residing in a nursing home challenged an informal rule issued by the federal Department of Health and Human Services which requires that, for purposes of determining the benefits due to a Medicaid eligible individual, states must consider income placed in a Special Needs Trust for that individual’s benefit. (Medicaid provides joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs.) The challenged rule effectively prevents Medicaid recipients from using Special Needs Trusts to shelter their monthly Social Security Disability Insurance (SSDI) income from certain Medicaid determinations. In the case before the court, the plaintiff’s legal guardian had created a Special Needs Trust on the plaintiff’s behalf and had been depositing into it the plaintiff’s monthly SSDI benefits, minus some income deductions that were not at issue.

The end result of applying the challenged agency rule is that income placed in a Special Needs Trust is not considered in making the first determination of eligibility for Medicaid, but is considered in making the second determination of the extent of benefits to which an eligible individual is entitled. Relying on the agency rule, appropriate officials may count the income that an institutionalized individual places in a Special Needs Trust when determining how much of the individual’s income he or she must contribute to the cost of his or her care.

In his class action lawsuit, the Medicaid recipient, on his behalf and that of similarly situated persons, unsuccessfully argued that the rule conflicts with the express language of a part of the Medicaid laws. A federal appeals court rejected the plaintiff’s reading of the pertinent statute, instead concluding that Congress did not speak to the precise question presented by his claim. Under accepted principles of administrative law, this meant that the federal agency was free to “fill the gap” left by Congress. When it did so, that was an appropriate exercise of the agency’s authority, to which the court deferred.

 

GOLFER CAN’T BE SUED FOR ERRANT SHOT

Azad and Anoop were friends and frequent golf partners. The friendship was no doubt strained when they became adversaries in litigation arising from an injury to Azad during a golf outing. A shot struck by Anoop hit Azad in the eye, causing a serious injury. There was a factual dispute as to whether, when he saw his wayward shot heading for Azad, Anoop yelled “fore” or some other warning, as golf etiquette would dictate. Anoop said he did call out something, while Azad and another witness said they heard no warning at all.

In the end, whether or not a verbal warning had occurred made little difference in the case, because the court ruled that Anoop had no legal duty to give such a warning under the circumstances. Anoop did not owe his fellow golfer a duty to give a warning about a shot, where Azad was out ahead of Anoop but at least 50 degrees away from the intended line of flight. Some courts have spoken of a duty to warn those within the “foreseeable danger zone” of a golf shot, but even they recognize that, at some point, the distance and angle are great enough to take the injured person out of the danger zone. Ironically, you could say that the worse the shot (and, thus, the more unexpected the path that the ball takes), the less likely it is that there could be a duty to warn.

An even more basic flaw in the lawsuit stemmed from the court’s conclusion that, from the time he stepped onto the first tee, Azad had assumed the commonly appreciated risks of playing golf, one of which is that golfers hit lots of misdirected shots. The risks that participants in sporting or recreational activities are deemed to have consented to are those which are inherent in participation in the sport. Relieving a participant from liability furthers a policy of facilitating free and vigorous participation in sporting and recreational activities. While Azad’s case was unsuccessful, this should not be taken to mean that a golf course is lawless terrain, where golfers can do whatever they please with impunity. Reckless or intentional conduct, or concealed or unreasonably increased risks, can still result in liability for injuries, but hitting a lousy shot and not yelling “fore” is not enough to make a duffer pay damages to another golfer unlucky enough to be in the line of fire.

CAREGIVER BIAS IN EMPLOYMENT

Today, it is commonplace for workers to handle both work and caregiving responsibilities for spouses and children, parents and other older family members, or relatives with disabilities. Women still are disproportionately more likely to exercise primary caregiving responsibilities but, in increasing numbers, men also have assumed the dual roles of caretaker and breadwinner.

Our society may be evolving toward more individuals simultaneously sharing the duties of an employee and a caregiver, but old stereotypes in the workplace sometimes die hard. The result is a steady rise in claims of employment discrimination based on what is sometimes called “family responsibility discrimination.” You would search in vain for a federal law that expressly prohibits discrimination at work against caregivers, but complaining employees have been able to pursue claims under other employment discrimination statutes, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act (ADA), and the Family and Medical Leave Act (FMLA).

The cases brought under Title VII tend to allege sex discrimination or gender stereotyping. A classic example is the pregnant woman who is let go or passed over for a promotion because the employer's decisionmaker assumes that with the baby will come a diminished commitment to the employer and a failure by the employee to meet all of the obligations of her job. Such was the case in a recent litigation in which a mother of triplets was denied a promotion because, in the employer's words to her, “you have a lot on your plate right now.” When a federal appellate court reinstated the lawsuit after its dismissal by the trial court, the employer likely came to the belated conclusion that it should concern itself only with the employer's portion of the employee's “plate.”

The ADA can come into play as a vehicle for caregiver discrimination claims because the phrase “discriminate against a qualified individual on the basis of disability” in the statute includes “excluding or otherwise denying equal jobs or benefits to a qualified individual because of the known disability of an individual with whom the qualified individual is known to have a relationship or association.”

The FMLA may be the existing federal statute that by its terms most directly addresses caregiver rights in employment, but it affords employees more restricted protection than do Title VII and the ADA. The FMLA provides that covered employers (private sector employers with at least 50 employees in a 75 mile radius) must provide up to 12 weeks of unpaid medical leave during a 12 month period to eligible employees (those who have worked for the employer for at least 12 months or 1,250 hours) for childbirth and newborn care, adoption or foster care placement, care for immediate family members with a serious health condition, or to handle the employee's own serious health condition.

In its recently published guide to the best practices for employers on this subject, the Equal Employment Opportunity Commission (EEOC) touts the benefits and advantages of employers adopting flexible workplace policies that help employees achieve a satisfactory work life balance. According to the EEOC, employers taking that approach may not only experience decreased complaints of unlawful discrimination but, according to many studies, may also benefit their workers, their customer base, and even their financial picture. Flexible workplace policies also aid recruitment and retention efforts, helping employers to keep a talented, knowledgeable workforce and save the money and time that would otherwise have been spent recruiting, interviewing, selecting, and training new employees.

 

BONUS PLAN MAY TRIGGER OVERTIME

The federal Fair Labor Standards Act (FLSA) provides that employers may not require their employees to work more than 40 hours per workweek unless those employees receive overtime compensation at a rate of not less than one and one half times their regular pay. The FLSA contains certain exemptions from the overtime compensation requirement, one of which is for employees working in a “bona fide executive, administrative, or professional capacity.” In other words, if an employee works in such a capacity, the employer is exempt from the general requirement of paying overtime pay. Under the FLSA regulations, an employee's position must satisfy three tests to qualify for this exemption: (1) a duties test, (2) a salary level test, and (3) a salary basis test.

The issue before a federal appeals court recently was whether the compensation plans used for management level employees of a health club chain satisfied the salary basis test.

Under its bonus plan, in particular, the employer could deduct bonus plan “overpayments” if an employee did not meet certain performance levels. The legal outcome for the employees was affected by the time frame in which the compensation plan was in effect. For the period after August 23, 2004, when a new Department of Labor regulation on the salary basis test went into effect, employees were entitled to compensation for pay periods in which actual deductions from pay were made. The regulation provided that “[a]n actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.”

Other employees also were entitled to overtime compensation for some pay periods before the regulation's effective date, even when the employer made no actual deductions, but the employer had in place a policy that made such deductions significantly likely to occur. Under a then controlling United States Supreme Court ruling, an employee was not paid on a salary basis, and thus was eligible for overtime compensation, if (1) there was an actual practice of salary deductions, or if (2) an employee was compensated under a policy that clearly communicated a significant likelihood of deductions.

In the case before the court, the policy fit within the “significant likelihood of deductions” category. The employer's compensation plan targeted specific members of management; its policy set out a particularized formula whereby their pay would be in jeopardy; the employer took affirmative steps to demonstrate that the pay deduction plan would be enforced (including the creation of a “performance pay committee” that made the case by case decisions); and it took actual deductions from employees' salaries not long after the employees stopped meeting their performance goals.

Employers desirous of avoiding a similar outcome, in which overtime pay ultimately is owed to employees generally considered by the employer to have been “salaried employees,” should be cautious about making any alterations to the predetermined pay for such employees. An employee will be considered to be paid on a “salary basis” within the meaning of the regulations only if the employee regularly receives a predetermined amount constituting all or part of the employee's compensation, and such amount is not subject to reduction because of variations in the quality or quantity of the work performed.

 

LIFE INSURANCE POLICY RESCINDED

A business executive was answering questions for an application for a $3 million life insurance policy that named as the beneficiary a company he had started with others. He answered in the negative when asked the common question as to whether he “[e]ngaged in auto, motorcycle or boat racing, parachuting, skin or scuba diving, skydiving, or hang gliding or other hazardous avocation or hobby.” In fact, on about 20 occasions, the executive had gone heli skiing, which involves skiing down remote mountain trails after being dropped off by a helicopter.

Only three months after the policy was issued, the executive was killed in an avalanche while heli skiing. The tragedy for his survivors and former business partners was compounded in the courtroom when a federal appeals court upheld the life insurer's rescission of the life insurance policy on the ground of a misrepresentation on the application.

A reasonable person in the position of the life insurance policy applicant would have known that his heli skiing avocation constituted a hazardous activity, as that term was used in the application. The applicant clearly was aware of the heightened avalanche risks associated with heli skiing, as compared to resort skiing. He had routinely signed waivers to that effect whenever he engaged a company that made arrangements for such excursions. It was hardly necessary for the insurer to point out, in making this argument, that heli skiing commonly involves rescue and survival training and the use of specialized lights and breathing devices meant to increase one's chances of surviving an avalanche.

About three weeks after the executive had completed the insurance application by telephone, an underwriter making calls for the insurer called him with some follow up questions, including the same inquiry about “any hazardous activities.” This time, the executive mentioned in the conversation that he enjoyed skiing and golf, among other things, but still there was no mention of heli skiing. Nor did the executive show any concerns or confusion over what the term “hazardous activities” meant. The beneficiary under the rescinded policy unsuccessfully sought to use this exchange to argue that the life insurer was chargeable with knowledge of the insured's concealment of his heli skiing avocation, and thus was precluded from seeking rescission.

The court ruled that the insured's “skiing” statement, when combined with the negative responses to the general question of whether he engaged in hazardous activities, would not have put a prudent underwriter on notice of the need to investigate further. Otherwise, any report by an applicant of a generally low hazard recreational activity, such as wrestling, juggling, or fishing, would unreasonably require the insurer to investigate the myriad possible “extreme” variants of such activities.

Instead, to make an insurer legally chargeable with knowledge of an undisclosed fact, generally it must be shown that it had knowledge of evidence indicating that the applicant was not truthful in answering a particular application question. In this case, there was no such “red flag” that might have allowed the policy beneficiary to avoid the consequences of the executive's untruthfulness.

 

$200,000 FOR IDENTITY THEFT VICTIM

Nicole discovered that someone with a name very similar to hers had stolen her identity and opened fraudulent accounts in her name and under her Social Security number. This was only the beginning of a long and arduous saga in which she took all of the recommended steps to rectify the problem, but nonetheless was beset by financial and emotional stresses over several years before the matter was finally resolved. Ultimately, she secured some relief in the form of a substantial jury verdict against a credit reporting firm. The firm bore no responsibility for the identity theft itself, but it had repeatedly compounded the impact of the theft by mishandling information about Nicole. Nicole sued the firm under the federal Fair Credit Reporting Act (FCRA).

Although it did not do so intentionally, the credit reporting firm had caused Nicole's ordeal to be more protracted, and to have more consequences for her finances and general well being, by mistakenly putting her address and Social Security number on credit files set up by the identity thief. What is worse, the firm did this a few times over several years, even after having been informed of the problem. Because of the erroneously adverse credit files, Nicole was sometimes denied credit, such as for a home mortgage. On other occasions, she was offered credit only on very disadvantageous terms because she was perceived as such a high risk. Nicole did have some previous credit problems of her own making, but the “infection” of her credit information by the files created by the identity thief made her look even worse to lenders.

A key issue in the firm's unsuccessful appeal from the jury verdict was whether Nicole had shown enough to recover a large sum not just for out of pocket losses, but also for emotional distress. The federal appellate court left the verdict undisturbed. The jury had not indicated what portion of its total award was attributable to emotional injuries, but, in any case, the court was satisfied that the award was not excessive in light of the evidence offered at trial.

Nicole had been made to spend literally hundreds of hours, often while having to miss work, trying to undo the tangled mess created by the firm. The record showed that as she dealt with the credit reporting service and tried to cope with the rippling effects of its errors, Nicole often was uncharacteristically upset with friends, family members, and co workers. She was beset by frequent headaches, sleeplessness, and even such symptoms as bad skin and hair loss. In short, Nicole became a wreck emotionally and even physically. For its role in causing it all, the credit reporting firm had to pay.

 

CHARITABLE REMAINDER TRUSTS

As the name implies, a charitable remainder trust involves the transfer of assets to a trust with the income going to an individual or individuals (which can include the owner of the assets) and with a charity receiving the assets at the expiration of the trust period. Such a trust device benefits the individuals who are the objects of the property owner's generosity, it transfers assets to the property owner's preferred charities, and it yields tax savings for the property owner.

If the trust is created during the property owner's life, there is a charitable tax deduction equal to the present value of the charity's remainder interest, and the transferred property will escape federal estate tax. If the trust is established under a will, the charitable tax deduction will remove the property from the taxable estate.

There can be other, not so obvious, benefits. Where appreciated assets are transferred, especially where the assets have a low cost basis and there is a likelihood that the property owner would have sold the assets at some point had he not transferred them to the trust, the property owner avoids a capital gains tax that would be imposed upon an outright sale. If the trust sells the assets, it will have no capital gains tax liability because the trust is a tax exempt entity.

If the property owner has established the trust in his lifetime, the fact that the trust can sell the property tax-free maximizes the income base for the income beneficiary, which can be the property owner himself. Moreover, if the trust is a charitable remainder unitrust (CRUT), under which the income is measured as a percentage (no less than 5% of the value of the trust property in a given year), the trust serves as a hedge against inflation for the income beneficiary because as the trust property appreciates in value the income paid out increases. This is not true under the other type of charitable remainder trust, the charitable remainder annuity trust (CRAT), under which a fixed amount of income is paid out each year.

A CRUT can be used as a retirement plan. Although a CRUT usually pays a percentage of the trust's annual value, it can provide that income distributions may not exceed the amount of income actually earned by the CRUT in a given year. Any shortfall in income can then be made up when there is sufficient income. During the property owner's preretirement years, the CRUT can be invested in growth stocks, thus producing little or no income. Upon retirement, those assets can be sold, with the proceeds invested in income producing assets that will yield the agreed upon income percentage, plus a “make up” portion to compensate for the earlier shortfalls. Thus, income distributions from a CRUT can be minimized during the preretirement years and then maximized for the retirement years.

It is important to remember that a charitable remainder trust must meet a series of technical requirements and therefore should be drafted only by an experienced professional.

 

FDIC INSURANCE UPDATE

In October 2008, Congress increased the basic limit on federal deposit insurance coverage from $100,000 to $250,000. The limit is scheduled to return to $100,000 on January 1, 2014.

The temporary limit now in effect has not changed the fact that a customer has various means by which to effectively raise the applicable limit for the customer's collection of deposits at any one institution. The basic limit applies separately to different ownership categories. A single account in one name is insured up to $250,000; a joint account for two or more people is insured up to the same limit, per owner; certain retirement accounts, such as IRAs, are covered up to the limit; and deposits meant to pass on to named beneficiaries on the death of the owner can be protected up to $250,000 for each named beneficiary. This last category of deposits is a revocable trust account.

There also are other recent changes that favor depositors in insured institutions. For example, it used to be that the only beneficiaries under a revocable trust account who qualified for additional deposit insurance coverage were the account owner's spouse, child, grandchild, parent, or sibling. Now an account owner can name almost any beneficiary, such as a more distant relative, a friend, or a charitable organization, and each beneficiary will still benefit from the additional coverage.

E-MAILS CAN MODIFY CONTRACTS

We send e-mails so casually and with such informality, even in the business environment, that it is easy to forget that they may carry significant legal consequences. It is only prudent to bear in mind that even e-mails written in the most conversational style may create legal obligations no less binding than a more conventional written agreement laden with legalese and signed with all formalities.

If a business wants to entirely avoid the possibility of having e-mails treated as binding amendments to existing contracts, the best approach is to be as clear and direct as possible on the subject by including language in contracts to the effect that e-mails do not count as signed writings for purposes of any contract amendments.

 

Cautionary Case

A recent cautionary case on point involved an individual who sold his public relations firm to a global communications company. The deal included an employment contract under which the seller was to continue as chairman and CEO of the new company for three years. Soon, the new company was losing money and the seller was presented with the option of either leaving or taking on new responsibilities.

E-mail then entered the picture when an employee of the communications company sent yet another option to the seller in an e-mail that spelled out how the seller would allocate his time. The seller replied by e-mail that he enthusiastically accepted that proposal. For his part, the representative of the communications company replied by e-mail that he was thrilled with the seller's decision to accept the new offer. In both e-mails the sender had typed his name after the message.

The seller later had a change of heart and sued to enforce the terms of the original employment agreement. An appellate court ruled against him on the ground that the exchange of e-mails on the new employment proposal constituted a binding amendment to the employment agreement. This was so even though the original agreement required that any changes had to be in the form of signed writings.

The court reasoned that the e-mails effectively were signed writings because the parties' names appeared at the end of the e-mails, signifying an intent to authenticate the preceding contents of the messages. Likewise, the e-mails also were signed writings for purposes of the Statute of Frauds, which requires certain contracts to be in writing in order to be enforceable. In short, when the seller and his e-mail correspondent clicked "send" and "reply," they were sealing a new deal that the seller could not avoid even though it was in an electronic form.

 

ROTH 401(K)S

It has become more common for employers to offer not only conventional 401(k) retirement plans, but, since they became available in 2006, also Roth 401(k) plans.

For 2009, an employee can put away a total of up to $16,500 in a 401(k) plan. If the employee is at least 50 years old or will be before the end of the year, the maximum contribution rises to $22,000 because of a "catch-up" contribution of up to $5,500. The total contribution may be allocated between 401(k) and Roth 401(k) accounts. In fact, the prevailing view is that it is a good idea to have some money in both types of plans because doing so will yield benefits from a diversified exposure to taxes.

From an income tax standpoint, a 401(k) and a Roth 401(k) are mirror images. Contributions to a traditional 401(k) come from pretax earnings, and tax is deferred on that money and the income earned by the account until money is withdrawn. By contrast, a Roth 401(k) is funded up front with taxable earnings, but then all withdrawals are tax-free after the account exists for 5 years and the account holder reaches the age of 59-1/2.

If the tax bracket were to stay constant throughout a taxpayer's working life and into retirement, there would be little or no financial advantage of one plan over the other. In most cases though, either through changes in the Tax Code or due to changing income levels, or both, over the years a taxpayer moves among the various tax brackets. The direction in which the taxpayer is headed on this scale largely determines whether a conventional 401(k) or a Roth 401(k) makes more sense.

If you anticipate that your tax rate is now higher than it will be in the future, a traditional 401(k) is probably the right choice. A typical example involves the person nearing retirement who is currently in the last few peak earning years, but who soon expects to have lower income during retirement. On the other hand, a young adult worker just getting started may well be in higher tax brackets in later years, making the Roth 401(k) more attractive. For that individual, the future tax-free withdrawals from the Roth 401(k) will bring greater benefits.

 

NEW IDENTITY THEFT RULES AFFECT BUSINESSES

Faced with the reality that identity theft continues to cause billions of dollars in losses for individuals and businesses each year, the Federal Trade Commission (FTC) has issued "Red Flag Rules" that are intended to fight the problem by requiring businesses to implement procedures designed to detect and respond to identity theft.

 

Covered Accounts

The rules apply to financial institutions and creditors with "covered accounts." The category of financial institutions includes entities such as banks, savings and loans, and credit unions holding "transactional accounts," meaning a deposit or other account from which the owner makes payments or transfers.

The creditor category has raised some eyebrows because it embraces some businesses that in everyday parlance may not have been considered to be creditors. Basically, a "creditor" is broadly defined as any entity that regularly extends, renews, or continues credit. For example, this means finance companies, automobile dealers, mortgage brokers, and utilities, but it also means nonprofits and governmental entities that defer payment for goods or services.

An account is a "covered account" for purposes of coverage of the new rules if it is used mostly for personal, family, or household purposes, or if it is an account for which there is a foreseeable risk of identity theft, such as small business and sole proprietorship accounts.

Entities subject to the rules must develop a written policy to identify and detect the warning signs--the "red flags" of identity theft. Detection should involve the regular review of accounts, at a minimum. The plan must describe appropriate responses to prevent or mitigate the effects of the crime. There also must be training for staff members, oversight for any service providers, and overarching management of the plan by the board of directors or senior employees of the financial institution or creditor. How extensive a plan must be will vary depending on the size of the entity and the kind of credit accounts it maintains. The new rules also mandate an annual update of the plan.

 

Red Flags

So just what are those red flags for possible identity theft? An exhaustive list may not be possible, but a supplement to the Red Flag Rules identifies and describes 26 separate red flags. They fall into five broader categories: (1) alerts, notifications, or warnings from a consumer reporting agency; (2) suspicious documents, including any that have signs of having been altered or forged; (3) suspicious personal identifying information, such as personal information that does not match information from external sources; (4) unusual use of, or suspicious activity relating to, a covered account, such as the use of an account that has been inactive for a long time or, more generally, any sudden and unexplained change in the patterns of activity for an account; and (5) notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts.

The consequences for not complying with the Red Flag Rules are significant. The FTC itself has provided for the potential imposition of monetary sanctions and an FTC enforcement proceeding. An even more far-reaching incentive for compliance is not to be found in the fine print of the rules but is no less real: The Red Flag Rules are likely to become the prevailing standard of care for what preventive measures companies are expected to take if they hope to be able to defend themselves successfully in civil lawsuits arising out of identity theft.

 

RELIGIOUS LAND-USE LAWSUITS

The land-use portion of the federal Religious Land Use and Institutionalized Persons Act (RLUIPA) was enacted to prevent discrimination by the government against the use of real property by religious organizations. On its face, the wording of the statute may appear to apply to circumstances that arise infrequently, but many churches and other religious institutions have used the RLUIPA to get their way in zoning standoffs with local governments.

The RLUIPA prohibits the government from imposing or implementing a land-use regulation in a manner that imposes a "substantial" burden on the religious exercise of a person, including a religious assembly or institution, unless the government demonstrates that imposition of the burden is in furtherance of a compelling governmental interest and is the least restrictive means of furthering that interest. Thus, a complaining party has the considerable initial burden of showing that the land-use regulation substantially burdens the exercise of religion, and is not merely expensive or inconvenient. If that hurdle is crossed, however, the government may well have a difficult time showing both the "compelling" governmental interest and that it has selected the least restrictive means to advance that interest.

In one RLUIPA case, a village zoning board violated the RLUIPA when it denied an application for a special-use permit allowing a private religious day school to construct a classroom building on its campus. The expansion project was a building on, and conversion of, real property for the purpose of a religious exercise, within the meaning of the RLUIPA, given that the rooms that were planned and the facilities to be renovated would all be used, at least in part, for religious education and practices.

Even while ignoring a substantial burden imposed on the school's religious exercise, the zoning board did not act to further any compelling state interest, as was shown by the lack of evidence for its stated reasons for denying the permit. Instead, the board had acted with undue deference to the opposition of a small group of neighbors. Even if some compelling state interest was involved, the board refused to consider approving the application subject to conditions, and thus had not used the least restrictive means available to it.

Of course, religious organizations have not batted a thousand when they have invoked the RLUIPA. Sometimes even similar cases have had opposite outcomes, making any predictions difficult. In another case of a growing church that had plans to expand the church facilities, including a school on its property, a federal appellate court upheld a township's decision to deny the church's application for a special-use permit. The court found that the township's denial of the church's application to build a structure in excess of 25,000 square feet on its property did not impose a substantial burden on the church's religious exercise, so as to violate the RLUIPA.

The denial would require the church to incur increased expense to accomplish its goal of building a significantly larger church and school, and to endure increased inconvenience if it were not able to build a facility of the desired size, but, in the court's view, nothing the township had done required the church to violate, modify, or forgo its religious beliefs or precepts, or to choose between those beliefs and a benefit to which the church was entitled. That the church was still free to carry out all of its missions and ministries, just not on the scale it desired, foreclosed any finding of a "substantial" burden.

 

COLD FEET COST GROOM $150,000

Sometimes even the best laid marital plans go astray. Usually when that happens, litigation does not ensue, but there are precedents for a cause of action for breach of a contract to marry. In one such recent case, a jilted bride-to-be recovered a substantial jury verdict from her fiancé after he called off the planned wedding. It was the second time that the same man had balked at marrying the same woman. This time, he had asked her to pull up stakes in Florida, where she then lived and worked, and move to live with him in Georgia. He also offered her a diamond ring and agreed to pay off about $40,000 in debt that she had accumulated. Only two weeks into the new arrangement, the man called off the wedding, citing his poor health and apologizing for making promises he would not be keeping.

Despite the canceled wedding, the couple stayed together for a few more months. Then the last straw came for the former bride-to-be when she found her boyfriend with another woman. He claimed that he had started his romance with the second woman only after the wedding was canceled, but this claim was belied by evidence that he had given that woman $500 just before his ill-fated marriage proposal to the plaintiff.

The plaintiff sued for breach of contract, seeking damages for financial and emotional harm. While it may seem that the most obvious injury in such cases is emotional in nature, in this case all but a small amount of the jury verdict was attributable to the value of the employment package that the plaintiff had given up to be with her fiancé. After coming to Georgia, she had struggled to find work and ultimately settled for a much less attractive job after the breakup.

No doubt it did not make a good impression on the jury that the boyfriend had broken the news that there would be no wedding by leaving his fiancée a note in the bathroom. This fact dovetailed nicely with the woman's attorney's closing argument, which could be summed up as "He's a cad."

 

ESTATE PLANNING FOR VACATION HOMES

Whether it is a palatial estate where Rockefellers and Vanderbilts would feel at home or a rustic cabin in the woods complete with an outhouse, a family vacation home often carries sentimental value that doesn't show up on financial ledgers. That is all the more reason why owners of such homes should plan for the orderly transfer of the home for future generations. With the help of some professional guidance, owners can choose from a variety of options tailored to particular situations and priorities.

* Outright sale of the property to a third party is simplest, but be prepared for substantial capital gains if the property has been in the family long enough to appreciate in value.

* A simple bequest can be used to keep the home in the family, but, by itself, it may not address issues such as use and maintenance.

* A trust, in particular a Qualified Personal Residence Trust, has some tax benefits. The grantor gifts the property but retains a right to use it for a definite term. The value of the gift is calculated as the value of the property, less the retained interest. However, if the grantor does not outlive the retained term, the property will be included in the grantor's estate.

* A limited liability company (LLC) has the benefit of protecting assets generally. If someone is injured on the property, the owner's liability would be confined to the ownership interest in the property.

* A partnership has the advantage of a formal structure, but each partner would have to contribute.

The issues that arise most often for second and subsequent generations concern how to allocate both the benefits and the burdens of the vacation home, that is, the use of the home and the expenses of the home, including maintenance, insurance, and taxes. The benefits and burdens can be spelled out in writing in as much detail as is desired, but it is not advisable to leave these matters to chance. There is the potential for discord and bruised feelings in even the most congenial families if, for example, one sibling is left out of the prime vacation times while shouldering more than his or her share of costs for maintenance and repair. Parents might head off at least some of these issues by setting up an endowment to cover ongoing expenses for the home.

Looking a bit farther down the road, whatever legal forms are used should provide a means by which one or more of the family members can sell his or her interest in the home to the remaining family members. Considering that there may be honest disagreement as to the property's value, it makes sense to look for consensus by using two separate appraisals, one arranged for by the selling family member and one by the remaining owner or owners.

REAL ESTATE ROUNDUP

No-Show Mover Must Make Mortgage Payments

A family hired a moving company to pack up their belongings in their home and move them to a new house in another state. The mover packed up everything, but failed to come back for the loading and moving. This was more than merely inconvenient, because the family's sale of their old house was contingent upon delivery of a vacant house. When the purchasers arrived to find a house full of packed boxes, the sale fell through.

The family sued the moving company for breach of contract and negligence. Their attorney wrote to the mover demanding reimbursement for lost profits when the family had to regroup and find a new buyer, and for the additional mortgage payments, utilities, and taxes they had to pay during that time. The letter stated that it was not possible to give an exact dollar amount on the damages until the home was actually sold to a new buyer.

Under a federal law known as the Carmack Amendment and accompanying regulations, a carrier must issue a receipt or bill of lading, under which it may be liable for loss or injury to property if the claimant makes a timely claim for the payment of a specified or "determinable" amount of money. The Amendment preempts any state law claims such as the family had alleged in their lawsuit.

The mover argued without success that the family could not recover the mortgage payments and other forms of damages under the Carmack Amendment because the letter from the family's attorney, lacking a dollar amount for the claimed damages, had not sought a "determinable" sum of money. A federal court ruled that valid claims against a carrier are "determinable," not because they include some dollar amount, but because they provide enough information about the nature and extent of the carrier's liability to allow the carrier to understand its potential exposure to liability. The attorney's letter satisfied that requirement. Although a valid claim against a carrier will often include an estimate of the shipper's damages along with enough factual information to inform the carrier of the basis for the claim, a dollar amount is not an absolute requirement under the Carmack Amendment.

 

Economic Loss Rule Bars Misrepresentation Claim

Where parties have entered into a contractual relationship and damage occurs occasioning merely economic losses, the economic loss rule bars the complaining party from asserting tort remedies and limits that person to the contract remedies that were bargained for and agreed upon. Economic losses are distinguished from physical harm or damage to property other than the defective property itself. The rationale for the rule is that parties to a contract should resolve disputes emanating from that contractual relationship under the legal remedy that is most appropriate and most in keeping with their expectations when they signed the contract.

After a couple purchased a home, they discovered that the home had some leaks in its roof, despite what they said were assurances given both verbally and in disclosure forms that the sellers had never had a problem with the roof. When the new owners experienced water damage to interior ceilings, walls, and flooring due to the leaky roof, they sued the sellers for negligent misrepresentation. That theory ran aground on the economic loss rule, notwithstanding an argument against its application. The buyers argued to no avail that the rule should not apply because the claim was not for damage to the leaky roof itself, but to the resulting damage inside the home.

The court declined to split up the house, figuratively speaking, for purposes of the economic loss rule. As the court put it, the buyers purchased a finished home from the sellers, not a collection of component parts. Both the roof and the other damaged parts of the house were under the umbrella of the sales contract. Accordingly, any assurances that had been given by the sellers had to be examined and evaluated through the agreement, not on tort principles.

 

Religious Icon Removed from Condo

A condominium association adopted a rule forbidding the placement of any signs or symbols on doors or in hallways outside condominium units. When a Jewish resident placed a religious symbol on the doorpost of her unit, the association had it removed without her consent. The resident sued the association under the federal Fair Housing Act (FHA), claiming religious discrimination, since she maintained that her religion required that she place the symbol outside the entrance to her residence.

The tenant's claim under the FHA failed. That statute does prohibit discrimination based on religion, but, in contrast to disability discrimination, it does not require a "reasonable accommodation" of religious beliefs and practices. The challenged association rule did not target any particular religion, but instead was a religiously neutral, exception-free regulation adopted for reasons unrelated to religion. Under pertinent precedents of the United States Supreme Court, that neutrality made the rule valid as nondiscriminatory and consistent with preserving the constitutional right to exercise one's religion freely. Under similar reasoning, the rule also withstood the challenge brought under the FHA.

 

WEBSITE TERMS OF USE

The terms for using websites, often taking the form of legalese to which many users pay little attention, are more important than they are interesting to read. The terms restrict how the public can use a website to obtain information, purchase goods and services, or take part in web-based social networking. Largely because of the federal Computer Fraud and Abuse Act (CFAA), the terms of use can now be used offensively either by prosecutors charging individuals with wrongdoing emanating from a violation of the terms, or by website owners themselves seeking civil remedies for legal injuries to them from what amounts to a breach of contract.

The growing and evolving body of court decisions concerning terms of use and the CFAA should prompt owners of websites to adopt and regularly review the terms for using their sites, giving special attention to the following considerations:

  • Instead of using just any boilerplate legal language, the terms of use should be tailored to fit the particular risks posed to the business and users of the site;
  • The terms of use must be easily seen and understood to have their intended effect. This means that they should be conspicuous on the site and written so as to clearly indicate conduct that is and is not authorized. There may be no one fail-safe approach, but one court has said that there is adequate communication of the terms of use if the terms can be accessed from all pages on the site;
  • Website owners may want to make explicit the agreement to abide by the terms of use by including "clickwrap" or "browsewrap" agreements that make consent to the terms a condition of using the site. If the user clicks on "I accept," but then violates the terms of use, this essentially nails down the fact, which may be pivotal in later criminal or civil court cases, that the user lacked the necessary authorization for his actions. For example, in a recent criminal case in which a university student secured access to a university computer site and stole Social Security numbers and other confidential data, the prosecution was aided by the fact that the student had signed an "acceptable use" computer policy that prohibited the very actions which led to the criminal charges;
  • Putting the terms of use in place is one thing, but then monitoring compliance and notifying users of suspected or confirmed violations result in enhanced protection. In the case of the university student who was improperly gathering sensitive personal information, the university had on three occasions detected that the student's computer was performing unauthorized and suspicious functions, and had informed him of its discoveries. When the student nonetheless continued to scan and infiltrate computers without authorization, adding to his database of stolen information, his fate in the ensuing criminal case was sealed.

 

EMPLOYERS AND JOB REFERENCES

Whether an employer-employee relationship ends on good terms or with acrimony, a common final act--the employee's request for a reference for a new job--is increasingly leading to litigation.

From the former employer's standpoint, it can be a case of damned if you do and damned if you don't. A candid, negative response to the request can invite a suit by the former employee. A glowing recommendation that omits some serious shortcomings in the employee's performance, or that declines to say anything about the employee except perhaps dates of employment, could result in litigation brought by the new employer, who would have preferred to be warned about a subpar employee. The prevalence of such disputes only figures to increase in the current economic downturn.

The growing dilemma is such that some employers are telling their employees from the outset that they will get no job reference--good, bad, or indifferent--when they leave. Under such a policy, inquiring prospective employers would get only the employment equivalent of "name, rank, and serial number." Other employers are willing to give a reference, but only after they have in their files documents in which an employee consents to having prospective employers find out all there is to know, and waiving their right to sue over anything that is said in the reference.

The good news for businesses is that their exposure to liability to disgruntled former employees who requested references is constrained in most states by statute. These laws generally provide immunity to the givers of references, so long as their actions were not motivated by malice. Of course, former employees, perhaps hurting while in between jobs and inclined to blame former employers for their predicament, are quick to argue that a negative response to a reference request was malicious.

In one such case, a nurse sued her former supervisor for defamation when the supervisor responded to a request for a job reference by stating on a form, without elaboration, that the nurse had "unacceptable work practice habits." A court ruled that the statement came within a statutory privilege or immunity for former employers' communications to prospective employers concerning former employees, because it was information provided about a former employee's work performance at the request of both the former employee and a placement agency.

Although the nurse made the general argument that the immunity was lost because the statement about her was made with malice, she was unable to back up that contention with factual evidence of ill will or spitefulness directed toward her. She argued, to no avail, that if the former employer considered her work habits to be acceptable enough not to fire her, then it was reasonable to infer that the later negative inference must have been motivated by malice.

 

HARASSMENT POLICY VIOLATES FREE SPEECH

When a male graduate student pursuing a degree in military history was inclined to speak his mind in classroom discussions about women in combat and women in the military more generally, he felt inhibited by the university's broadly worded policy on sexual harassment.

In pertinent part, the policy stated that "all forms of sexual harassment are prohibited, including . . . expressive, visual, or physical conduct of a sexual or gender-motivated nature, when . . . such conduct has the purpose or effect of unreasonably interfering with an individual's work, educational performance, or status; or such conduct has the purpose or effect of creating an intimidating, hostile, or offensive environment." The student sued the university to prohibit the enforcement of the policy on the ground that it had a chilling effect on the exercise of his right to free speech.

A federal appeals court sided with the graduate student. The sexual harassment policy's prohibition of expressive conduct of a "gender-motivated nature" that had the purpose or effect of either unreasonably interfering with other individuals or creating an intimidating, hostile, or offensive environment was unconstitutionally overbroad under the First Amendment. It impermissibly swept within its reach speech that should not be subjected to restrictive regulation.

Regarding the "gender-motivated" characteristic of speech, the court wondered: "Whose gender must serve as the motivation, the speaker's or the listener's? And does it matter? Additionally, we must be aware that 'gender,' to some people, is a fluid concept. Even if we narrow the term 'gender-motivated' to 'because of one's sex,' we are far from certain that this limitation still does not encompass expression on a broad range of social issues."

The term "gender-motivated" also necessarily required an inquiry into the motivation of the speaker, so that the policy punished not only speech that actually caused disruption, but also speech that merely intended to do so. To protect core forms of speech, there should have been a requirement in the policy that the conduct at issue objectively and subjectively create a hostile environment. A school must show that, before prohibiting it, targeted speech is so severe or pervasive that it will actually cause material disruption, and the university's policy was fatally deficient for not having such a requirement.

It was important to the court's decision that the challenged harassment policy was that of a university, as opposed to an elementary school or a high school. It is well recognized that, in the words of United States Supreme Court decisions, "[t]he college classroom with its surrounding environs is peculiarly the 'marketplace of ideas,'" and "[t]he First Amendment guarantees wide freedom in matters of adult public discourse."

Discussion by adult students in a college classroom should not be restricted, while certain speech which cannot be prohibited to adults may be prohibited to public elementary and high school students. This is particularly true when considering that public elementary and high school administrators have the unique responsibility to act in the place of parents, a disciplinary and protective role not shared by their counterparts in colleges and universities. Thus, in the case of the plaintiff graduate student, the court kept in mind that the university's administrators were granted less leeway in regulating student speech than are administrators responsible for younger and more vulnerable students.

 

ESTATE PLANNING: A GIFT OF DEBT

If you inherit property, of course you should be grateful and count your blessings. Still, consider the possibility that the gift may come with a big string attached--a debt linked to the property, such as is particularly common with real estate or a car. In that event, the question arises as to whether the debt must be satisfied from the particular asset or from the decedent's estate more generally. How this question is answered can cause a big swing in the respective gift amounts for beneficiaries of an estate.

Historically, the law presumed that the debt was not to be paid from the property that was connected to it. The reasoning was that a true gift should not come laden with such a burden. Over time, as taking on debt became commonplace, this thinking changed and statutes flipped the conventional assumption. Increasingly, these laws start from the premise that the property left to someone includes the debt on the property, unless the decedent in his or her will clearly indicated a different intent. That is where careful estate planning, with professional guidance, comes in.

It is best to leave no doubt for the ordinary lay reader of a will. A general directive in the will to pay all debts of the testator is too nebulous. Instead, if the intent is not to keep the asset joined to the debt, language something like this should be used in a will: "If [the specific asset] is subject to a mortgage, security interest, or other lien, I direct that my executor pay the debt from other property of my estate which is not given to a specific person or entity."

This scenario was played out recently in a case in which a farmer left to his (favored?) son three different farms, each of which was encumbered by debt. To his other son he left the residue of the estate. When the father died, the executor used part of the estate proceeds to pay off the loans to the farms, so that the first son would receive them debt-free. Not surprisingly, the second son, whose inheritance was thereby diminished, brought the matter to court.

The second son prevailed, forcing payment of the debts for the farms to come from the farms themselves. The father's will directed in a general way that debts were to be paid from the estate. However, under the relevant state statute, that was not a sufficiently explicit indication of intent to satisfy the debts on the farms from the residuary estate. In other words, the will had not clearly shown an intent that the first son was to receive the farms debt-free. As a result, the first son got the three farms, but he, not the second son, also got the responsibility for paying off the attached encumbrances, which totaled almost a quarter of a million dollars.

BUSINESS START UP CHECKLIST

Both heart and mind must be working well if the owners of a new small business are to experience success. While it is only human nature, not to mention fun, to indulge one’s imagination about what a new business started from scratch could be like, would be entrepreneurs need to engage in some cold, hard thinking and planning before taking the plunge. At the risk of pouring cold water on some of the anticipation and excitement, what follows is a guide for how to plan for and think through the many decisions that must be made well before you have that “Grand Opening” sign made.

Why?

This may seem obvious, but you should know just what your reasons are for wanting to start a new business. If the motivations are weak, odds are the business will be a bust, but well founded reasons can help a business persevere through good times and bad. Some common reasons for starting a new business include escaping the whole 9 to 5 routine (though it may be replaced by an 8 to 8 routine), answering to no one else, upgrading your standard of living, and being convinced that you can provide a needed product or service.

Why Me?

Let’s face it, not everyone is cut out to be a captain of industry, or even captain of a small business. Maybe you need not subject yourself to an intensive psychological and life experiences evaluation, but be honest with yourself about whether you have the necessary characteristics, skills, and experience. A few examples give you the idea:

  • Can you make yourself pull the trigger on an important decision?
  • Do you see competition as exciting or just stress inducing?
  • Are you willing and able to plan ahead?
  • Do you like interacting with people you don’t know?
  • Do you have the perseverance, not to mention the physical stamina and health, to put in long hours if that’s what is needed to make the business succeed?
  • Are you, and anyone else financially dependent on you, prepared to risk your savings in pursuit of the business dream if that’s what it takes?
  • Unless you are planning a one man band of a business, are you comfortable with hiring, supervising, and possibly having to fire other people?
  • Are you reasonably well organized?
  • Do you know anything about the paperwork and legal side of running a business, such as payroll and accounting, the permits or licenses you will need, or the regulations and laws that may apply to the business?

Why This Business?

You may have the best motives and a skill set that would be the envy of any MBA graduate, but if there is no niche for your planned business, or, simply put, if not enough people will want to buy what you are selling, the new business will fail. The variables here include timing, location, and simply whether your business is feasible or practicable, so that you can be the one to fill that niche that you have first identified. Don’t make your business the equivalent of carrying coals to Newcastle.

In economic terms, you want to do some investigation to determine if there is some currently unmet demand for the product or service you want to supply. Then you want to meet that demand with a product or service that is competitive in quality, selection, price, and/or location. In short, learn as much as you can about the market you will be in. Learn who your customers will be and try to understand their needs and desires. Anticipate how your fledgling business will compare with any established competitors. What can you do in setting up and running the business to make sure you get your share of whatever market there is for your product or service?

How?

Turning the idea into bricks and mortar (literally or figuratively) involves a lot of decisions, some of which are best made only after getting professional advice. Still, you should acquire at least a layperson’s understanding of the pros, cons, and consequences of each decision.

Choose a name for the business that you find appealing, but also one that is informative for someone hearing it for the first time. Select the most appropriate business form, such as a sole proprietorship, a partnership, or a corporation. Investigate which local, state, and federal laws and regulations will apply to the business. This will run the gamut from laws of universal application (e.g., taxes) to laws specific to your business.

Make an unflinching and detailed examination of your financial picture. How much do you have now, how much will you need to start the business, and how much will you need to stay in business? Projecting cash flow into the future means taking into account such variables as seasonal trends in sales, the amount of cash taken out of the business for personal expenses, whether and when to expand the business, and the rate at which customers will pay off accounts if credit is extended to them.

Find a location for the business that is convenient for customers, appropriate in size and configuration, and zoned so as to allow your type of business. When you have settled on the product or service you will sell, calculate the inventory you should create and maintain and locate reliable suppliers.

Finally, if you go to all the trouble and expense involved in creating a small business, don’t forget to think about protecting against losing the business from such threats as fire, theft, robbery, vandalism, and liability for an accident. This means taking measures to provide security, but also arranging for the appropriate types and levels of insurance.

BANK VIOLATES TRUTH IN LENDING ACT

 

A husband and wife who operated a day care business out of their home decided to take out a new mortgage on the home. Over the 10 years that they had owned the business they had taken corresponding deductions and depreciation on their tax returns to account for the business run from the home. As calculated for tax purposes, approximately 17% of the home was devoted to the day care business, even though during the hours when the day care business was open about 52% of the home’s square footage was devoted to that use.

The homeowners came to realize that their lender had dramatically increased their monthly payments and had sent the loan documents to them when it was too late by law for them to change their minds (more than three days after they signed the papers). They sued the bank under the federal Truth in Lending Act (TILA), asking that the loan transaction be rescinded. Among other things, TILA requires lenders to provide particular disclosures to borrowers of “high rate” loans when points and fees exceed 8% of the amount borrowed. The bank had not made these disclosures to the borrowers at least three days ahead of the transaction, as required by TILA.

The bank’s response was two pronged. First, it argued that TILA did not even apply to the case because of an exemption in the law for extensions of credit primarily for business or commercial purposes. Second, the bank took the position that the points and fees that the homeowners were required to pay could not count toward the 8% threshold because the homeowners had folded those costs into the loan instead of paying them up front in cash. A federal trial court sided with the homeowners on both points, allowing their case to go to trial.

Regarding the bank’s claim that the “business purposes” exception in TILA should apply, the key fact was that, properly calculated, only a small percentage of the home was devoted to the business, thus defeating any attempt to argue that the loan was primarily for business or commercial purposes. As for the fact that the points and fees were financed, not paid in cash, this method of payment was of no consequence for purposes of meeting the 8% threshold. The applicable statutory language says only that the points and fees must be “payable” by the consumer at or before closing. The borrowers did bear the costs of the points and fees at the time of closing, no matter whether they were being paid then, deducted from loan proceeds, or, as happened here, added to the amount to be financed over time.

Working in favor of the borrowers on both points was the fact that TILA is a remedial statute to be construed and applied so as to achieve its goals of assuring the meaningful disclosure of credit terms and avoiding the uninformed use of credit.

AGE DISCRIMINATION IN EMPLOYMENT

 

When the federal government required one of its defense contractors to reduce its workforce, the contractor first evaluated its employees based on the criteria of “performance,” “flexibility,” and “critical skills.” After adding points to scores for years of service, the employer arrived at a list of 31 employees to be laid off. On their face, the criteria were age neutral, but all but one of the employees chosen to receive a pink slip were at least 40 years old, within the age group protected by the federal Age Discrimination in Employment Act (ADEA).

The laid off employees sued their former employer under the ADEA, alleging the disparate impact form of age discrimination. Disparate impact refers to the use of policies or criteria by an employer in making employment decisions that are not overtly based on age, but which, when applied, allegedly have a disproportionate impact on older individuals. (The other type of employment discrimination, known as “disparate treatment,” asserts that the employer intentionally treated applicants or employees differently because of their age.)

The plaintiffs first established, using statistical experts, that such a skewed result against older workers under the layoff criteria would rarely happen by chance, and that the same factors that were most closely linked statistically to the older employees—flexibility and critical skills—were also the factors most influenced by the discretion of the contractor’s supervisors.

The contractor countered that it was not liable because the ADEA provides that an employer action is not unlawful if differentiation among employees is based on “reasonable factors other than age” (RFOA). A jury returned a multimillion dollar verdict for the plaintiffs. Ultimately, the case reached the United States Supreme Court, which upheld the judgment for the plaintiffs.

The critical issue determined by the Supreme Court was whether the RFOA element needed to be proven by the plaintiffs or by the defendant employer. In other words, did the plaintiffs have to prove that there were no reasonable factors other than age underlying the employer’s decision, or did it fall to the employer to present an “affirmative defense” and prove the existence of the other reasonable factors? Examining the language of the ADEA and taking note of a previous ruling where a similar provision in the law was in the nature of an affirmative defense, the Court ruled that RFOA is an affirmative defense that the employer must prove and, in this case, had not.

The Court’s opinion anticipated criticism, which, in fact, was forthcoming, that its decision could open the floodgates for similar claims and make it too easy for plaintiffs to prevail. It pointed out that, even before the RFOA affirmative defense comes into play, the plaintiff in an ADEA disparate impact case must isolate and identify specific performance practices by the employer that are responsible for statistical disparities disfavoring older workers. As the Court put it, “[t]his is not a trivial burden.”

However, concerns about tilting the scales too far against employers should be directed at Congress, according to the Court, since it created the RFOA concept and made it a defense to be proven by employers.

ALL IN THE FAMILY—FATHER WINS $4 MILLION FROM DAUGHTER

 

A jury has returned a multimillion dollar judgment for the plaintiff in a case that is likely to make for strained relationships for one Michigan family. The winner, Richard, was the retired founder of a large automobile dealership. The loser was his daughter, Gail, to whom he had sold a controlling interest in the dealership. The jury agreed that Gail had made decisions that had hurt the dealership to such an extent as to cause the value of its stock to plummet, and eventually to put it into bankruptcy. The financial distress of the dealership had come to a head when it was discovered that the dealership had sold millions of dollars worth of vehicles that it had not paid for, a practice called “selling out of trust” in the automobile sales industry.

The main transgression by the second generation ownership was the use of funds derived from shares in the dealership to buy two new car dealerships, one of which was located just across the street from the original business. Even though the dealerships sold different brands of vehicles, the competitive disadvantage caused by the new competition was clear. Not only that, but a clause in the agreement between Richard and Gail had restricted Gail from acquiring competing dealerships.

While the bulk of the jury verdict was attributable to breach of the noncompete provision, there were additional amounts awarded for a monthly consulting fee that Gail was supposed to have paid her father after she took over the business, for interest due on a loan under a “shareholder oppression” claim, and, for good measure, for sanctions.

GENERATION SKIPPING TRUSTS

 

If you have heard of generation skipping trusts (GSTs) at all, you probably think of them as a way for wealthy families to shield their fortune from estate taxes. That is true as far as it goes, but GSTs can also have benefits for the less well off by protecting assets from ex spouses and creditors and by serving as a place for appreciable assets to grow outside of taxable estates.

Although the phrase “generation skipping” sounds like an arrangement which leaves out children altogether in favor of the grandchildren, in fact what a GST “skips” is the taxation of assets put into children’s estates by their parents. In a typical scenario, grandparents who are satisfied that their children are financially secure may decide to set up a GST in favor of all of their descendants as possible beneficiaries. Successive generations eventually receive the assets without the repeated imposition of estate taxes when each preceding generation dies. The assets are taxed only once, at the time of the initial transfer to the trust.

The first generation of children can be made to benefit as well. Although they technically won’t own the assets in the trust, they can be given a right to distributions for their reasonable needs, meaning not only their support and maintenance, but also “comforts, conveniences, pleasures, and happiness.” However, discretion over whether trust funds may be used for the benefit of the child must be exercised not by the child, but by a “disinterested trustee,” that is, someone who is not a related or subordinated person as defined in the Internal Revenue Code.

There is a limit on the amount that can be transferred into a GST. Currently, the limit is $2 million for each person setting up the trust. In other words, a married couple could place up to $4 million in a GST. In 2009, the per person amount is set to rise to $3.5 million. Any amount that is transferred in excess of the limit is subject to gift or estate tax when the older generation passes along the assets, and an additional “generation skipping tax” is imposed when the children die and the property is transferred to the grandchildren. The potential estate tax benefits of a GST are easy to see when it is considered that each dollar over the limit is taxed at the highest estate tax rate, which currently is 45%.

If there are downsides to a GST for some people, they may be found in the fact that someone outside the family (the trustee) will become intimately involved in the family’s money matters, and that it will be necessary to file an income tax return for the trust each year. Still, under the right circumstances and with proper planning under the guidance of a professional, these and any other drawbacks for a GST could pale next to the bottom line advantages realized as assets are passed from generation to generation without Uncle Sam taking his cut.

NEW NONPROFIT TAX FORMS

 

The Internal Revenue Service recently published new draft instructions for a revamped version of Form 990, used by nonprofit organizations. The new rules will go into effect when nonprofits file their 2008 tax returns.

In the interests of greater transparency and accountability, more information now must be divulged about the inner workings of the nonprofit. There are some detailed questions about such matters as compensation for officials, fund raising sources, and whether the organization has an ethics policy.

Whereas previously nonprofits with gross receipts of less than $25,000 were exempt from filing requirements, now all nonprofits must file some version of Form 990.

GET IT IN WRITING

When an Internet executive held a meeting with the chairman of a telecommunications company, the agenda was a new business idea that the Internet executive had. The discussion was transformed into a recruitment when the telecommunications executive suggested that the idea should be pursued within the company he headed. For two men in the upper echelons of high tech businesses, they then chose a decidedly low tech way to memorialize their agreement. The end result, however, shows how substance can sometimes triumph over form in the law of contracts formation.

At the end of their meeting, the telecommunications executive simply wrote out the agreement by hand on two notebook pages, and both men signed it. The writing included specifics as to how the newly hired executive would be compensated, the terms on which he could quit if he became unhappy, and what would happen if intellectual property involved in the deal could not be transferred to the telecommunications firm. It also included the statement that “[t]he parties will complete formal contracts as soon as possible but this is binding.” This would turn out to be pivotal language in the litigation that followed.

Unfortunately, the new arrangement quickly went downhill, and after about six months the new employee was fired. The relationship ended with the “formal contracts” never having been drafted and executed. When the former employee sued for breach of contract and other wrongs, more than six years of litigation ensued, with two trials and two appeals.

Much of the case focused on whether the handwritten agreement that started everything was a valid, binding contract. The telecommunications company argued that it was merely an “agreement to agree.” However, a jury eventually ruled that the agreement was valid, and that the telecommunications firm had breached the terms of the contract represented by the two notebook pages.

Four factors are usually considered in determining whether a “preliminary agreement” is binding. In this case, the first two clearly favored the fired executive: There was no explicit reservation of a right not to be bound (in fact, the handwritten agreement said the opposite) and the executive had partially performed the contract. The third factor is whether all of the terms of the alleged contract were agreed upon. On that point, the agreement, although it may have lacked some details, addressed all of the essentials for a binding contract.

The final factor is whether the agreement was a type of contract that is usually committed to writing in a formal manner. When millions are at stake, as was the case here, it may be unusual to seal the deal with a handwritten document, in outline form, and drafted on the spot by one of the principals without benefit of legal counsel. The agreement was not much to look at, barely surpassing in formality the proverbial agreement scribbled on a cocktail napkin. Still, that it was unorthodox did not mean that the method was unprecedented. In the end, this factor, balanced against the other three, was not enough to discard the agreement and deprive the departed executive of the benefits of his bargain.

EMPLOYERS: DON’T LET TIPS TRIP YOU

Employers in service industries are well advised to pay close attention to their practices and policies affecting customers’ tips for their employees. There are a variety of ways in which missteps can run afoul of federal or state laws, including the federal Fair Labor Standards Act (FLSA).

Employees might contend, for example, that the employer is effectively reducing their tip income by imposing various fees or other charges on customers. Or, contrary to a requirement in the FLSA, employees who are paid less than the minimum wage might not be getting enough in tip income to make up the difference between their hourly rate and the minimum wage. Recent cases in the news involved yet another alleged violation, sometimes taking place on a very large scale, where employees are made to share tip income with fellow employees who supervise them.

In one of the tip sharing cases, a state court ruled in favor of a class of plaintiffs consisting of baristas, or coffee counter servers, whose tips were required to be shared with their shift supervisors, in violation of state law. Change left for tips apparently adds up, as the judgment for the tens of thousands of servers, for about an eight year period, topped $100 million, including interest.

The case was not cut and dried, as the supervisors were themselves hourly workers who had customer service duties in addition to the responsibility of scheduling workers and giving directions to the baristas. It was not a case of highly paid bosses dipping into the tip jars filled by customers they never saw in person.

When a shift supervisor hands a customer his latte and muffin, and the customer responds with a tip, the customer may assume that the money, or at least part of it, goes to the supervisor. Instead, under the ruling, the supervisors must now keep their hands off the tips, and the employers must ensure such an outcome.

In the wake of this case, similar lawsuits have been filed against the same employer, a national chain, and against other employers in other states. Companies in the restaurant, hotel, gaming, transportation, and delivery businesses face the largest risks for mishandling the treatment of tips. There is another pending case in which casino dealers have complained that an employer’s new policy illegally requires them to share tips with floor supervisors.

The legal issues surrounding the treatment of tips are murky enough in any one state, but further complicating the matter is the fact that there are variations among the states and between the statutes for a state and for the federal government. This makes it especially risky for national employers to assume that a one size fits all policy on tips will be sufficient for all of their locations.

“Back room” personnel, shift supervisors, hostesses, greeters, drink servers, and other similar positions could be treated differently depending on what state you are in. Employers should regularly assess their job descriptions and tip sharing policies against applicable state and federal laws. This kind of audit is useful not only for detecting or avoiding possible violations, but for laying the groundwork for a potential “good faith” defense under the FLSA if litigation ensues.

LANDOWNER GETS SETTLEMENT FOR “TAKING”

When the government takes aim at private property to be taken for some public purpose, more often than not any resulting litigation is a contest over how much the property owner should be paid, rather than whether the exercise of the power of eminent domain was appropriate in the first place.

From the landowner’s standpoint, it is important to realize that adequate compensation is not determined simply on the basis of the current use of the property. Instead, the landowner is entitled to the value of the property based on its “highest and best” use (whether that use already exists or is only in the eye of a developer), so long as such a potential use is not too speculative or otherwise foreclosed by applicable laws and regulations.

The importance to a property owner of negotiating compensation on the basis of a best case, but realistic, development scenario for the property is illustrated by a recent case in which the owner of a vacant, 22,000 square foot lot settled with a town for compensation in an amount that was about 27 times higher than the amount initially offered by the town.

The lot was zoned for residential use, although at the time of the condemnation action the owner had no building or development plans. Appraisers hired by the town offered an opinion that the vacant lot’s best use was only as open space, or as a buffer for an abutting lot. They reasoned that compliance with the town’s lot area and frontage requirements, as well as with its road standards for improving the dirt road on which the lot was located, would be so burdensome as to make any development of the property prohibitively expensive. They also indicated that extensive development costs would preclude development even if the lot was considered to have grandfathered status that would protect it from certain town requirements.

For its part, the landowner retained experts who opined that the lot was, in fact, suitable for residential purposes and should be valued as such when arriving at a compensation figure for the taking. As the town’s experts had noted, there were various requirements on the books that, in theory, could be costly to comply with. However, an examination of past rulings by the town’s zoning and conservation officials showed that the lot was likely to be exempted from some of the requirements. Moreover, improvement of the dirt road, which would have been an especially big ticket item, was not likely to be required.

Both sides were necessarily looking into the future to some extent, but the landowner was able to depict a scenario for the lot that was optimistic enough to bring about a favorable monetary settlement with the town.

CYBER INSURANCE FOR BUSINESSES

Businesses have been dependent on computerized information for some time now, but it has been only relatively recently that insurance companies have devised and offered insurance policies specifically tailored to the potential losses from a variety of problems that can affect a computer system.

An early impetus for cyber insurance was anticipation in the late 1990s of losses associated with the coming of “Y2K.” That concern turned out to be overblown, but the threats that have spurred cyber insurance offerings since then are real enough, including viruses, hackers, and legal injuries to others from information on a company’s website. One study has found that the average annual technology related financial loss for United States companies more than doubled just from 2006 to 2007.

Another development that prompted more cyber insurance policies was the realization, which sometimes came as a surprise to insured businesses, that general liability policies did not cover computer problems. Cyber insurance is a good idea for all of the usual reasons associated with insuring against business losses. But it also makes sense because of the particular costs associated with responding to a computer data breach, especially now that many states have adopted data breach notification laws.

This kind of postmortem after a breach could include such measures as notifying affected customers, paying for credit monitoring for those customers, replacing compromised credit or debit cards, and undertaking forensic analyses of affected databases. All in all, there are some expensive scenarios to insure against.

Categories of Losses

The losses covered by cyber insurance generally fall into two categories: first party losses, meaning those affecting the business itself; and third party losses, meaning incidents mainly affecting outside parties, including the customers of a business. Of course, the same underlying problem can cause both kinds of losses, such as when unauthorized access to a computer system shuts down the computer system of a company whose customers or clients rely on that system through an extranet.

A comprehensive cyber insurance policy should encompass both kinds of risks. These are the typical categories of coverage:

  • First party business interruption, covering lost revenue experienced during downtime due to accidents or security breaches (but typically not losses due to catastrophic regional power outages);
  • First party electronic data damage, such as the compromise of data from a virus infection;
  • First party extortion, including the demands made by hackers;
  • Third party network security liability, arising from compromise and misuse of data stemming from identity theft and credit card fraud;
  • Third party network liability in the form of court judgments obtained by persons harmed by problems originating with a business’s computer system; and
  • Third party media liability, aimed at the full range of potential liability from matter published in interactive online communications.

LLC RULING FAVORS TAXPAYERS

Anna was the mother of three children and the widow of the man who invented the heart defibrillator implant. In 1992, she created a trust for each of her daughters and gave a portion of her substantial interests in patent licenses to the trusts. In 2001, she created a limited liability company (LLC), to which she made some large transfers. She then gave a 16% interest in the LLC to each of the trusts, keeping a 52% interest to herself. Only four days later, Anna died suddenly and unexpectedly.

The IRS claimed a deficiency of millions of dollars in estate taxes. It pointed to a part of the Internal Revenue Code that provides that all property is to be included in a decedent’s estate to the extent that the decedent has transferred an interest in the property while retaining for life the possession or enjoyment of, or income from, the property. There is an exception to this general rule in cases of a bona fide sale for full and adequate consideration in money, but the IRS argued that the exception did not apply in the case of Anna’s estate.

In a somewhat surprising decision, given a recent trend favoring the IRS in such disputes, the United States Tax Court sided with the estate and kept the LLC assets out of the gross estate for estate tax purposes. The court ruled that the bona fide sale exception applied, notwithstanding that the LLC activities were not in the nature of a “business.” It was sufficient that Anna had “legitimate and significant nontax reasons” for creating and funding the LLC, including joint management of family assets, pooling family assets to maximize investment opportunities, and providing for each of her daughters on an equal basis.

Some practical lessons for minimizing estate tax liability while using family LLCs emerge from the case of Anna’s estate. They include the following: (1) document the legitimate and significant motivations, unrelated to estate taxes, for forming such an entity; (2) continue the entity after the decedent’s death, to avoid the appearance of an ordinary trust; (3) if, as in Anna’s case, the donor dies unexpectedly a short time after the gifts, be prepared to demonstrate that the death was unexpected; and (4) keep sufficient assets outside of the entity to cover the donor’s living expenses, to avoid the possibility that the donor will treat the assets of the entity as her own. The planning, drafting, and advice associated with a family LLC entails resolution of complex issues and requires the guiding hand of a knowledgeable professional.

FEDERAL ESTATE TAX

The federal estate tax credit, currently at $2 million, is set to increase to $3.5 million in 2009. This means that in 2009 you can leave up to $3.5 million to your heirs without any federal estate tax liability.

If Congress takes no action, the federal estate tax will be repealed altogether in 2010. While this is an unlikely scenario, it does underscore the uncertainty involved in estate planning over the next few years. Make sure to meet with a professional to review your plan.

BICYCLE SAFETY

When a car or truck has a collision with a bicycle, the bicycle rider usually loses, no matter who legally had the right of way. Bicycle riders should take extra care to obey the following safety tips:

Remember: Bikes Are Vehicles, Too

Legally, bicycles traveling on a road are required to be treated in the same way as any other vehicle traveling on the road would be. This means that, as a bicyclist, you must obey the same laws as other drivers do. Do not run red lights, change lanes without signaling, or commit other infractions. If you would not do it in a car, don’t do it on a bike.

Wear a Helmet

The easiest way to protect yourself is to always wear a helmet when you ride. Some jurisdictions require all riders to wear helmets, but even where it is not required, wearing an approved helmet can significantly reduce the chance of serious head injuries in the event of an accident.

Be Visible

Because bicycles are so much smaller than cars and trucks, it is important to make sure that others using the road can see you. Make sure that your bicycle has reflectors on the front and back and even on the wheels. When riding at night, wear light colored clothing and use a light.

Be Aware

The best safety advice is to be aware of the conditions around you and be careful when riding. Always look both ways when entering a street and stay on the correct side of the street when riding. Keep a lookout for drivers who may not be looking out for you. Like other drivers, bike riders should ride defensively.

REAL ESTATE ROUNDUP

Flood Zone Fraud

A jury recently gave a hefty damages award to homeowners who sued a real estate company for falsely representing that the home they were buying was not located in a flood zone. When the rains came after the homeowners had moved in, the front yard, backyard, and a patio were under three feet of water. The house itself was never flooded. While this was fortunate, it limited the economic damages that a lawsuit would yield, prompting the homeowners to use an unusual legal theory.

The homeowners successfully argued that the realty company had committed fraud. The use of fraud as a cause of action allowed the homeowners to recover noneconomic damages of the kind not commonly awarded in litigation between the buyers and sellers of real estate. In addition to recovering damages for the difference between what they paid for the property and its real value, the homeowners also received a significant award for mental anguish, and an even larger amount as punitive damages.

The company and, in particular, its manager knew about the flooding problem and kept that fact from the home buyers. There was evidence that others who bought nearby property from the same company had battled flooding and had complained about the flooding to the realty company. Moreover, real estate agents testified that sales contracts with prospective buyers for the very property that was in dispute had fallen through when those buyers became aware of the potential for flooding.

The failure to disclose continued in the time after the purchase, when the company manager unsuccessfully tried to get the new homeowners to sign a drainage release, which would have absolved the company of liability for any damage from flooding.

Condemnation Action Dooms Business

When the District of Columbia condemned property on which it planned to construct a municipal office building, the corporation that owned the land received an award compensating it for the property, "including all interest therein." The quoted phrase was relevant, because the property had been occupied by the owner of a gas station and convenience store business under a franchise agreement with the landowner. Unfortunately for the holder of the franchise, the agreement's terms heavily favored the landowner insofar as the impact of a condemnation was concerned.

First, in the event of a condemnation, the agreement would terminate 10 days before the effective date of the condemnation. This meant that the agreement ended before the condemnation, leaving the business with no remaining legal interest in the property for which it could receive compensation. Second, the agreement provided that the landowner would receive all of the money awarded in the condemnation proceedings.

Left without a share of the condemnation award for the property itself by the terms of its agreement, the owner of the business argued that, as part of the condemnation action, it nonetheless should receive compensation for the business's losses, for its goodwill, and for other consequential damages that flowed from the condemnation. The argument failed.

It could have been within the power of the District of Columbia to authorize such an award for nonowners situated on condemned property but, in fact, the relevant statute contained no such provision. As a result, the claim by the business fell under the rule, announced by the United States Supreme Court in a previous case, that "absent a statutory mandate the sovereign must pay only for what it takes, not for opportunities which the owner [or, in this case, franchise holder] may lose."

Mold Exclusion Enforced

Among the well-settled rules for interpreting insurance policies is one requiring courts to apply a policy according to what it says, not what regulators or individual insurers thought it said. While ambiguities in policy language generally are settled in favor of consumers, the ambiguity must be present in the policy itself, not from extraneous considerations such as other policies, an agency's interpretation, or the fact that the harm in dispute is part of a broader "crisis." All of which is to say that consumers need to understand and agree to all of the language in their insurance policies, and that it is folly to assume that in a dispute the policy language will always be given a loose reading in favor of coverage.

This lesson was demonstrated in a case in which insured homeowners sought coverage under their homeowners policy for mold contamination that was caused by small roof and window leaks in their home. The policy did cover "water damage," so the homeowners argued that there was coverage for the mold because it resulted from water getting into the house. Yes, mold is caused by water, but it is not a loss from "water damage," as that term was used in the policy.

The even bigger problem with their argument lay with another provision that expressly excluded coverage for "loss caused by mold." The court was hard-pressed to find any ambiguity that would warrant ignoring this clear exclusion:

Mold does not grow without water; if every leak and drip is "water damage," then it is hard to imagine any mold, rust, or rot excluded by this policy, and the mold exclusion would be practically meaningless.

CAREFUL WHAT YOU CLICK

A Texas online purchaser used her daughter-in-law's credit card to order some automobile seat covers and have them delivered to the daughter-in-law in Alabama. When they were delivered, it was discovered that the covers were the wrong color. The daughter-in-law sent them back to the company and reversed the charge on her credit card. The company claimed that it never received the seat covers, and eventually sued the purchaser and the daughter-in-law for breach of contract.

The lawsuit against the customers was reason enough for heartburn, but adding to the problem was the fact that the action was filed in a state court in Indiana, far from either of the defendants' homes. The defendants' attempt to avoid having to defend the suit in Indiana failed. The "clickwrap" agreement that the customer had accepted with a click of the mouse when she purchased the items included a requirement that any legal proceeding between the purchaser and seller had to be filed in Indiana and governed by Indiana law.

It may be that most customers only skim the language in a clickwrap agreement, if they read it at all, while looking for the "I accept" button. However, the agreement, and everything in it, is no less binding because of that. Both the customer and the owner of the card she used were bound to litigate the dispute in Indiana.

The court emphasized that the online agreement gave reasonable notice of its terms. Its full text was immediately visible to the customer, who had to take the affirmative step of clicking on the "I accept" button. Not only that, but the heading for the "litigate only in Indiana" section was in bold print and capital letters.

In most cases and for most people, the legalese in clickwrap agreements is of little practical consequence, but online customers should be on notice that agreeing to buy a product may also entail agreeing that any dispute will be litigated on the other side of the country and be decided according to another state's laws.

THE POWER OF A POWER OF ATTORNEY

A power of attorney is an instrument that authorizes an "agent" to act on behalf of someone else (the "principal") in a legal or business matter. When an elderly woman executed a power of attorney that gave her younger sister certain powers, a dispute arose when the younger sister used her power to name herself as the beneficiary of the elderly woman's life insurance policy. The dispute was with the elderly woman's children and grandchild, who had been beneficiaries under the policy until the younger sister with the power of attorney put herself in their place.

The children and grandchild argued to no avail that the terms of the power of attorney instrument did not give the younger sister the authority to name herself as the beneficiary of the life insurance policy. Unfortunately for them, the instrument language was broad enough to authorize the agent to change the beneficiaries of the principal's policy, where it authorized the agent "to transact all insurance business on [principal's] behalf, to apply for or continue policies, collect profits, file claims, make demands, enter into compromise and settlement agreements, file suit or actions or take any other action necessary or proper in this regard."

It was significant that the power of attorney did not incorporate by reference the various powers listed in the Uniform Durable Power of Attorney Act. In cases in which the powers listed in the Act are incorporated by reference into the power of attorney, an agent is not authorized to change the beneficiary of the principal's life insurance policy unless the principal has expressly authorized the agent to do so within the power of attorney. Since there was no mention of the Act in the instrument in question, but only a broadly worded grant of authority, the sister had not exceeded her powers.

Although the children and grandchild lost on the issue of how to interpret the agent's powers, they were still free to raise other arguments if they had factual support. These included arguments that the elderly woman did not have the mental capacity to execute the power of attorney, that her execution of the instrument was not of her own free will but was rather the result of the duress, coercion, control, and/or undue influence exercised by her sister/agent, and that the sister/agent's action in changing the beneficiary of the policy to herself was a violation of her fiduciary duty to the principal.

A power of attorney can be a valuable tool in estate planning, but it should be properly drafted to ensure that the powers contained therein are appropriate. Always consult with a qualified professional before executing a power of attorney.

IS IT "WORK" TO DRESS FOR WORK?

Six times a day, for 6 to 10 minutes each time, workers at a chicken processing plant were required to put on, take off, and clean safety and sanitary clothing that they had to wear while on the job. The special gear consisted of smocks, hairnets, gloves, earplugs, and safety glasses. When a dispute arose between the workers and their employer over whether the employees were entitled to be paid during this time, the workers claimed a right to compensation under the federal Fair Labor Standards Act (FLSA).

A jury initially ruled against the workers on the ground that the dressing, undressing, and cleaning activities were not "work" within the meaning of the FLSA. The jury had been instructed that, under the FLSA, the activities were not work without a sufficiently laborious degree of exertion, such as may be required if the gear were cumbersome, heavy, or required significant concentration to put on and take off.

An appellate court disagreed with the "exertion" standard and ruled in favor of the workers. Under the FLSA, it is not appropriate to focus on whether an activity requires a certain level of exertion in deciding whether it is "work." Instead, the key for treating an activity as "work" is finding that it is an integral and indispensable part of the primary activities undertaken for the employer's benefit, and that it is controlled or required by the employer.

Even though the dressing, undressing, and cleaning jobs done by the poultry workers were, in a sense, peripheral to the main tasks, they still were an essential part of the job, for which the workers had a right to compensation. (Do not expect a similar result if you are a white-collar worker hoping to be paid for the time taken to put on a coat and tie in the morning.)

INTRAFAMILY LOANS SUBJECT TO TAX LAWS

For parents with the financial means to do so, there may be a natural impulse to help a child get started in his or her adult life by making a loan to the child, on terms that are favorable to the child. Notwithstanding the virtues of such generosity, the cold reality is that, if the terms are too favorable to the child, the loan could end up with some undesirable tax consequences.

The better choice may be to go forward with the loan, but with the child repaying the loan with enough interest to avoid the tax bite. Think of this approach as generosity tempered with practicality and as a borrowing position for the child that is closer to the "real world" marketplace.

For a loan from a parent to a child, the IRS measures the interest rate on the loan against a benchmark interest rate, the "applicable federal rate" (AFR), which it sets each month. Currently, that rate is about 5%. To the extent that the interest due on the loan is less than the interest calculated with the AFR, that amount will be "imputed" income to the parent, even though it was not in fact collected by the parent. The IRS will also treat the same amount as a gift to the child, requiring the filing of a gift tax return. (There would be no gift tax due, however, unless the parent had used up the $1 million lifetime gift tax exclusion.) From the standpoint of the child's taxes, he or she may be able to deduct the amount of the imputed interest on a loan secured by a residence.

Exceptions

There are two important exceptions to this scenario. If the amount of the loan to a relative does not exceed $10,000, and the loan is not used for an income-producing investment, the IRS will not impute any interest. In addition, loans of up to $100,000 do not lead to imputed interest if the borrower's net investment income in a given year does not exceed $1,000.

To avoid the income tax or gift tax ramifications for all kinds of intrafamily loans, the simplest approach is to use an interest rate that is at least as high as the AFR. Also, although it may seem unduly formal among relatives, it is advisable to set forth the terms of the loan in a written agreement, signed by all parties. Not only does this protect against faulty memories, but it decreases the odds that the IRS will consider the entire transaction to be a gift rather than a loan.

BASEBALL STRIKES OUT ON STATS

Millions of sports fans participate in fantasy sports games in which the participants "draft" the names of real professional athletes and compete against other teams based on the actual statistical performances of the athletes during their seasons. In the case of baseball, until several years ago a fantasy sports company licensed the use of the names and information about big league players from the Players Association for Major League Baseball (MLB). When that deal expired, the Association instead gave an exclusive license to an online arm of the MLB, which operated its own fantasy baseball business.

The excluded company sued the MLB, seeking a ruling that it could use the names and statistics of the players, even without a license. Essentially, the question was whether the players themselves, or the public at large, own that information. A federal court sided with the excluded company. Simply put, the information at issue was already placed in the public domain, and there is a First Amendment right, available to everyone, to make use of it.

The court rejected an argument by the MLB that the names and information about the players are not "speech" at all. On that issue, the names and statistics in a fantasy game are not appreciably different from the constitutionally protected pictures, graphics, concept art, sounds, and other components of video games.

Fantasy baseball may not represent the purest form of protected speech--it is mainly about entertainment more than informing the public--but the information comes within the protection of the First Amendment. There is some informational value to the information in the fantasy games, since, as the court put it, "[t]he records and statistics remain of interest to the public because they provide context that allows fans to better appreciate (or deprecate) today's performances."

QUOTABLE

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.
Winston Churchill

FAMILY RESPONSIBILITIES AND THE WORKPLACE

There is no federal law called the "Family Responsibilities Discrimination Act" or the "Caregiver Discrimination Act." Nonetheless, there has been an increase in claims brought under a variety of federal statutes on behalf of job applicants or workers who assert discrimination by an employer on the basis of family-related decisions. Relevant federal statutes include the Americans with Disabilities Act (ADA), Title VII of the Civil Rights Act of 1964, and the Family and Medical Leave Act (FMLA). If the employer is a government entity, the claim may be couched in terms of a violation of constitutional rights.

The trend is clear enough that the federal Equal Employment Opportunity Commission (EEOC) recently published an extensive "Enforcement Guidance" on the subject. (Go to www.eeoc.gov.) In it, the EEOC sets out to assist investigators, employees, and employers in determining whether a particular employment decision affecting a caregiver may unlawfully discriminate under federal law.

Recommendations for Employers

Some basic recommendations may be gleaned from the EEOC Guidance and relevant court cases. For example, when an employer interacts with, or makes decisions about, a job applicant or an employee, the employer should focus on the requirements for the job, not on the individual's family circumstances. It is also important for an employer to avoid any tendency to assume that a decision made for the employee's "own good," even if made in good faith, can only be seen as benevolent. It could well be considered discriminatory, since an action that an employer sees as generous may be seen by a court as paternalistic and resting on stereotypical thinking.

The EEOC Guidance includes a collection of 20 examples of prohibited discrimination, each of which falls within 1 of 6 categories: (1) sex-based disparate treatment of female caregivers; (2) pregnancy discrimination; (3) discrimination against male caregivers; (4) discrimination against women of color; (5) unlawful caregiver stereotyping; and (6) hostile work environment.

A few of the prohibited scenarios from the examples are illustrative:

* An employee, who is the mother of two preschool-aged children, is passed over for an executive training program, where some of those chosen were not as qualified, and the only people chosen who had young children were men.

* An employer refuses to temporarily relieve a pregnant worker of the part of her job that requires lifting heavy objects, despite her doctor's advice to avoid such lifting. An investigation shows that the employer previously had allowed the reassignment of lifting duties for both male and female workers due to injuries or other medical conditions.

* Although he is subject to a union contract allowing up to one year of unpaid leave to care for a newborn child, a male teacher is denied his request for such leave, with an explanation that "[w]e have to give childcare leave to women." The male teacher is told to request the shorter-lasting unpaid emergency leave instead.

* A previously good relationship between an employee and his supervisor deteriorates rapidly when it is learned that the employee's wife has a severe form of multiple sclerosis. Despite his history of good performance, the employee is removed from projects, subjected to unrealistic deadlines, yelled at in front of his co-workers, and told by the supervisor that the co-workers doubt his ability to do his share of the work, "considering all of his wife's medical problems."

In the Courts

In one of the leading-edge court decisions, a school psychologist who was denied tenure in her position with an elementary school sued the school district and school officials, alleging that she was subjected to employment discrimination based on gender stereotypes. The employee was terminated after her maternity leave.

A federal appellate court ordered that the case proceed to a trial and, in so doing, it set an important precedent in some of its pronouncements. For example, "sex plus" or "gender plus" discrimination, involving a policy or practice by which an employer classifies employees on the basis of sex, plus another characteristic, such as motherhood, is actionable in a civil rights case brought by a public employee. In other words, it is possible to support a claim based on discrimination against a sub-class of men or women, and not just the class of men or women as a whole.

In addition, the court confirmed that gender-based stereotyped remarks can be evidence that gender played a part in an adverse employment decision. This principle applies as much to the supposition that a woman will conform to a gender stereotype (and therefore will not, for example, be dedicated to her job when she has young children) as to the supposition that a woman is unqualified for a position because she does not conform to a gender stereotype.

The school psychologist claimed that her supervisors repeatedly told her that her job was "not for a mother," and that they were worried that, as the mother of "little ones," the employee would not continue her commitment to the workplace. Such decision-making-by-stereotype runs counter to the relevant federal statutes.

THE MURKY WATERS OF WETLANDS PROTECTION

It has been over a year since a splintered United States Supreme Court issued a decision on the scope of the federal government's jurisdiction under the Clean Water Act to regulate wetlands. In that time, confusion has reigned as lower courts have interpreted the decision. The Act, now 35 years old, prohibits dumping certain pollutants into the "waters of the United States," which are defined as "navigable waters." Property owners of isolated wetlands have the "murky" task of determining whether their property is protected or not.

The question before the Court was whether wetlands into which fill material was deposited were "navigable waters." The Court set forth a confusing standard to guide the analysis. On the one hand, it said that the term "navigable waters" includes only relatively permanent, standing, or flowing bodies of water, not intermittent or ephemeral flows of water, and that only those wetlands with a continuous surface connection to such waters are covered by the Clean Water Act. At the same time, it said that wetlands may be protected by the Act if they have a "significant nexus" to navigable waters or could "affect the chemical, physical and biological integrity of other covered waters." Lower courts have been split as to which standard to apply.

In an effort to clarify, the Environmental Protection Agency and the U.S. Army Corps of Engineers have published a Guidance that identifies those waters over which the two agencies will assert jurisdiction categorically and on a case-by-case basis. (Go to www.epa.gov.) Essentially, the agencies have not picked one of the competing standards from the Supreme Court over another, but instead will use both of them.

There definitely will be assertion of Clean Water Act authority over wetlands that abut tributaries that come within the "relatively permanent" standard. This refers to tributaries that typically flow year-round or that have continuous flow at least seasonally. Wetlands adjacent to waters not fitting in the "relatively permanent" category will be assessed on a case-by-case basis, using the "significant nexus" test. Perhaps eager to make some kind of pronouncement that is unequivocal, the authors of the Guidance also state that Clean Water Act authority will not be stretched so far as to cover swales, gullies, and ditches that drain only uplands and do not carry a relatively permanent flow of water.

SMALL BUSINESS--MAINTAINING A SAFE WORKPLACE

In theory, and often in practice, the safety of the workplace is a top priority for any business. But while large companies may have personnel devoted exclusively to the subject, safety is but one of many responsibilities for the owners of small businesses. In some cases, the matter of keeping workers safe slips down the list of priorities. There to make sure the issue is not neglected is the federal Occupational Safety and Health Administration (OSHA).

OSHA has written very detailed standards for maintaining workers' safety. It also has an expansive mandate to enforce those standards and the various provisions of the Occupational Safety and Health Act. Removing dangerous conditions is only common sense from any point of view, including employer-employee relations and a calculation based solely on dollars and cents.

The first step for any small employer is to be informed and educated as to workplace dangers, not all of which may be obvious. OSHA maintains an extensive website (www.osha.gov) that includes information that is especially pertinent to small businesses and guidance about specific threats to safety. Insurance companies provide another good source of information, since these companies have a vested interest in enhancing workplace safety and thereby minimizing insurance claims.

While exotic threats such as anthrax or Legionnaires' disease capture headlines, the leading causes of serious workplace injuries are more ordinary. They include overexertion, such as excessive lifting, pushing, pulling, holding, carrying, or throwing an object; falls on the same level (as distinct from falls from a height); and "bodily reaction," which covers injuries from bending, climbing, slipping, or tripping without falling. Regular inspections and repairs, not to mention a vigilant workforce, can head off many such injuries.

Apart from monetary penalties that may follow an OSHA investigation, many billions of dollars each year are paid by employers in medical costs, wage payments, and insurance claims management as a result of workplace injuries. Small businesses get some breaks from OSHA, in the form of smaller monetary penalties and some exemptions from recordkeeping requirements for employers with 10 or fewer employees. Still, given their smaller financial reserves, small businesses, in particular, are well advised to live by the truism that an ounce of prevention is worth a pound of cure.

LLC OWNER LIABLE FOR EMPLOYMENT TAXES

Sean was the sole owner of an accounting firm that was set up as a limited liability company (LLC) under state law. When the firm went out of business, it had not paid any payroll taxes for the preceding 18 months. Perhaps thinking that an accounting business, of all things, should have stayed current in its payment of payroll taxes, the IRS went after Sean personally for the $65,000 in unpaid taxes. A federal court upheld a judgment against him.

The authority of the government to look to the business owner in his personal capacity for satisfaction of the tax liability went back to the formation of the business. Treasury Regulations allow an individual who is the only owner of an LLC to elect to have the business classified as either an "association" or a "sole proprietorship." In the former situation, the entity is treated like a corporation. In the latter case, which had been selected by Sean, the business is not considered an entity separate from the owner.

Sean challenged the tax assessment against him, but to no avail. The court rejected his argument that the Regulation imposing liability on him as an individual was invalid because the legislation itself, the Internal Revenue Code, does not expressly authorize imposing personal liability on the sole owner of an LLC. The Regulations, like many others issued by the Treasury Department, are intended as a means to "fill in the gaps" left by the Internal Revenue Code.

Notwithstanding the ultimately onerous effect on Sean of his earlier selection under the Regulations, they are not arbitrary, capricious, or unreasonable. When he checked the box on a form choosing treatment of his company as a sole proprietorship, he effectively agreed to be liable for the company's debts, but he also had benefited by avoiding the double taxation--once at the corporate level and once as an individual shareholder--that comes with treatment as a corporation.

MISCONCEPTIONS ABOUT FDIC INSURANCE

Misconceptions about the nature and extent of deposit insurance from the Federal Deposit Insurance Corporation (FDIC) can be risky. Especially to be avoided is a depositor's false impression that all of his funds in a bank are insured when, in fact, some of the money is over the insurance limits, thus exposing it to loss if the bank fails. Here are some of the most prevalent erroneous beliefs about FDIC deposit insurance:

* The most any consumer can have insured is $100,000. In fact, accounts at different FDIC-insured institutions are separately insured, so the same consumer may qualify for up to $100,000 at each institution. Furthermore, the same consumer may qualify for more than $100,000 in coverage at each bank if accounts are owned in different "ownership categories."

* The FDIC insures any product sold by a bank. Dispelling this idea is especially important now that banks, directly or through other companies, have branched out into such financial products as stocks, bonds, mutual funds, annuities, and other insurance products. The FDIC insures the more conventional bank products, such as checking accounts and certificates of deposit.

* Revocable trust accounts are always insured up to $100,000 for each beneficiary. Generally, the owner of a revocable trust account is insured up to $100,000 per beneficiary, but that is only for "qualifying beneficiaries," meaning the depositor's spouse, child, grandchild, parent, or sibling. Portions of the trust payable to any nonqualifying beneficiaries would be insured as the personal funds of the owner, only up to a total of $100,000, along with any deposit accounts the owner may have alone at the same bank.

* Depositors could have to wait up to 99 years for their money in insured accounts if a bank fails. The origins of this falsehood are sketchy, but, in any event, federal law requires payment "as soon as possible" after a bank failure. In the past, this has meant no more than a few days.

* Changing the order of names or Social Security numbers can increase coverage for joint accounts. This practice is of no consequence whatsoever. The FDIC will just add each person's share of all joint accounts at the same institution and insure the total up to $100,000.

VACATION HOME TAX TREATMENT

An owner of a second home that is both rented out and put to personal use at different times in any given year should bear in mind the considerable differences in income tax liability that flow from how the two types of uses are allocated. Each year, for tax purposes, the home will be considered as either a residence or rental property, with important differences in the resulting tax calculations. The bottom line is that treatment of the home as rental property is advantageous for the owner, and keeping down the personal use of the property allows it to be so characterized.

If personal use of the second home is less than the greater of 14 days or 10% of rental days, the home will be considered rental property. Flowing from this classification is the ability to deduct repairs, maintenance, insurance, and depreciation costs. In addition, if the expenses exceed the income from the property, the taxpayer can deduct the loss, subject to passive loss rules. Generally, passive losses up to $25,000 may be deducted if the adjusted gross income (AGI) is under $100,000. The ability to deduct passive losses declines as the AGI increases, eventually phasing out at an AGI of $150,000.

If the owner exceeds the personal use threshold for treatment as rental property, the home is treated as a "residence." In that case, the owner can deduct expenses only up to the amount of rental income, and no loss deductions are allowed. In addition, before there can be any deduction for operating expenses, the owner must use up the property's share of mortgage interest and property taxes to offset the rental income, which effectively wastes deductions.

In short, if as an owner of a second home you rent the home for a substantial part of the year, but you also just cannot stay away from the place (that's why it's called a vacation home, isn't it?), enjoy the time away but be prepared for tougher treatment by the IRS.

QUOTABLE

"A lie can travel halfway around the world while the truth is putting on its shoes."

Mark Twain

COMPUTER FRAUD AND ABUSE ACT UPDATE

The federal Computer Fraud and Abuse Act (CFAA) is most closely associated with criminal prosecutions brought by the Department of Justice. But the CFAA also provides for a civil cause of action for anyone who suffers damage or loss because of a violation of the statute. In light of the expansive reading that some courts have given to the law, victimized companies should give consideration to taking the civil route. A civil lawsuit gives the wronged party more control and may provide a quicker fix. By means of such a lawsuit, the victim can retrieve stolen data, enjoin illegal access to data, and even get compensatory damages for the theft and destruction of data.

The CFAA applies to all companies and all computers that are connected to the Internet. Potentially, there are multiple, distinct types of violations of the statute that could support a civil action. On a recurring issue in such cases—whether the defendant had authorization for his actions—the courts look at several factors:

  • whether the defendant was an agent of the plaintiff’s, with particular powers;
  • whether an employment contract, such as may have been embodied in company rules and policies, was breached; and
  • whether the defendant’s use of the computer exceeded normal use that was expected by the plaintiff.

Recent Court Decisions

A real estate business was allowed to proceed with a civil action against a former employee for violations of the CFAA. In violation of his employment contract, the employee decided to quit and start a competing business. Before he returned the company's laptop, he deleted all of the data in it, including data that would have revealed his misconduct. Knowing that "deleted" files can be retrieved, he erased the incriminating data by loading into the laptop a secure-erasure program.

All of this, if proven in court, violated the CFAA as "transmission" of a program that damaged the computer (defined to include files in the computer), and as intentionally accessing the computer without authorization. Although the employee had not yet left his job when he installed the program, by law any authorization he might have had evaporated as soon as he violated the duty of loyalty to his employer.

In another case brought under the CFAA, a tour company secured an injunction against a competing company run by one of its former employees. The ex-employee improperly used confidential information from his former employer to enable his new company to glean pricing data from his former employer's website, so that his new enterprise could effectively undercut those prices.

Although the website was open to anyone, the unauthorized use of the confidential information, combined with the use of a "scraper" software program, violated the CFAA. On top of the injunction, the plaintiff could recover, as a compensable "loss" under the CFAA, the thousands of dollars it had paid in computer consultant fees for diagnostic work after the defendant's conduct was discovered.

IRS GETS TOUGH ON DEFERRED COMPENSATION

The much-anticipated and much-delayed rules from the IRS on the income tax treatment of deferred compensation are now available. At almost 400 pages, the rules are not exactly light reading for the average taxpayer. Taxpayers have until the end of 2007 to make any necessary changes to their deferred compensation plans.

The Internal Revenue Code has special tax rules for "nonqualified" deferred compensation plans. These are not to be confused with "qualified" employer retirement plans, like a 401(k) plan, or with bona fide vacation leave, sick leave, compensatory time, or disability pay or death benefit plans. The new regulations expand the already broad definition of what constitutes deferred compensation. Essentially, a plan provides for deferred compensation if an employee has a legally binding right during a taxable year to compensation that has not been actually or constructively received and included in gross income, and that is, or may be, payable under the plan in a later year.

The impetus for the new rules was a growing concern that some individuals were deferring money over which they still had control, and which they could receive basically whenever they wanted it. The memories are still fresh of top Enron executives cashing out their deferred compensation early and leaving the company financially floundering. In a nutshell, the new rules accomplish the following:

  • limit the flexibility for the timing of elections to defer compensation;
  • restrict distributions during employment to fixed dates, certain changes in control, or extreme hardship;
  • prohibit acceleration of distributions of deferred compensation;
  • prevent key employees of public companies from receiving deferred compensation due to severance from service until six months after severance; and
  • require that deferrals of distribution dates or changes in the form of payment be made at least one year in advance of the scheduled distribution date.

If the rules are not followed, the tax consequences are significant. The participant is immediately taxed on the value of the deferred compensation once it is no longer subject to a substantial risk of forfeiture. On top of that, there is a 20% excise tax on the amount that is included as income. For good measure, there is also an interest penalty. To avoid such a scenario, employers and employees with deferred compensation plans should promptly come up to speed on the new rules and get appropriate professional help with making sense of, and responding appropriately to, the new IRS rules for deferred compensation.

EXCLUDED HEIRS MAY STILL INHERIT

When Elizabeth was born out of wedlock in the 1950s, she was adopted soon afterwards by another family. As a young adult, she located her birth mother and formed a long-lasting relationship with her. Elizabeth also discovered that, through her mother, she was related to the beneficiaries of a large fortune. Two multimillion dollar trusts had been established to provide income to Elizabeth's mother during her lifetime. The remaining principal was to go to her "descendants," according to one trust, and to "each then living child of hers," according to the other trust.

Following a long battle, a court has found that Elizabeth is entitled to share in the fortune, notwithstanding the argument by her mother's other heirs that she was not her mother's "child" or "descendant" because she had been adopted out of the family. Looking at the applicable state law when the trusts were created, the court determined that, at such times, nonmarital children could be included as descendants or children of their biological parents for purposes of inheritance. There also was an overarching constitutional issue, as some courts have held that treating children born out of a marriage differently from marital children is a denial of equal protection of the law.

In Elizabeth's case, the issue would have been more clear-cut in her favor had the trust instruments simply included her as a beneficiary, either by more inclusive language or by using her name. Of course, up to a point, the creator of a trust or will has leeway in deciding which of his or her children to include as beneficiaries. But the law has been known to step in on behalf of children to achieve a measure of justice and fairness.

A case in point, which has yet to play out to a resolution, concerns the estate of Anna Nicole Smith. In her will, Smith left all of her estate, which could be greatly enhanced by many millions of dollars from her late husband's assets, to her son. Only months before both Smith and her son died, she gave birth to a daughter. Whether the omission of any future children from Smith's will was intentional or merely a drafting error, it is probable that Smith's daughter will inherit the estate.

Under the "omitted child" doctrine followed by a majority of courts, when a parent has a will and then has children, those children are treated as if they were born prior to the will, and they are afforded the same treatment as any other siblings. If, for whatever reason, the Smith estate passes outside of the will, the daughter still will likely receive the estate.

Update Your Estate Planning Documents

Your estate planning documents should be reviewed with a professional on a regular basis and kept current with your life changes. Birth, death, marriage, and divorce are but a few life changes that can significantly affect your estate planning. Don't wait until it's too late to revise your plans to reflect your wishes and circumstances.

"ARM" BORROWERS BEWARE!

After a period in which eligibility criteria for prospective borrowers were stretched to the breaking point, the chickens are coming home to roost in what is sometimes euphemistically called the "subprime" home mortgage market. Millions of new homeowners who got an adjustable-rate mortgage (ARM) with terms that they could handle in the early years now face sharply higher payments as the interest rates are reset at higher levels.

While it may be human nature to want to lay low and take cover when the financial strains mount and you begin to make late payments or miss them altogether, the better course is to be up front about your situation--first, with a legitimate housing counselor, and then with the lender. Communication is the first essential step in climbing out of the hole.

Foreclosure occurs when the borrower defaults on the loan and the lender asserts its right to sell the home to raise money to pay the borrower's debt. It is an outcome to be avoided by the borrower if at all possible. Not only is it an obvious setback to lose one's home, but the negative ramifications of a foreclosure reach far into the future. A foreclosure likely will wreak havoc with your credit rating, and it could also create an impediment to getting a job or insurance.

Among other things, a legitimate housing counselor can offer advice and assistance on avoiding foreclosure. The emphasis should be on "legitimate," because, unfortunately, there are many credit-repair scam artists out there preying on people who can least afford to be ripped off. Consumers can steer clear of such outfits by consulting a list of reputable housing counselors that is maintained by the federal Department of Housing and Urban Development. The advice should be either free or at a low cost.

As for communication with the lender itself, do not give in to any temptation to ignore the lender's telephone calls or to toss its letters. Borrowers under stress may be surprised to learn that prompt and forthright communications with the lender could open the way to refinancing or restructuring the loan with terms that are more manageable and that will allow the borrower to stay in the home. After all, the lender, no less than the borrower, has an interest in seeing that the loan is paid off, one way or another. In the bargain, you just may get to keep the home of your dreams.

CAN YOU TRADEMARK A FLAVOR?

When a pharmaceutical company filed an application with the U.S. Patent and Trademark Office (PTO) for a trademark for the orange flavor used in its antidepressant tablets, it was trying to break new ground. Certainly, there are precedents for trademarks apart from the traditional forms consisting of words and logos. There are trademarks derived from the use of certain colors--think of the familiar pink fiberglass insulation or an orange home improvement store. There are even some trademarks associated with certain smells and sounds, such as sewing thread with a floral fragrance, strawberry-scented lubricants, and the familiar chimes used by one of the major television networks. But the attempt to trademark a flavor ran into obstacles that the company was unable to surmount.

Federal trademark law broadly defines a "trademark" as any word, name, symbol, or device, or any combination thereof, that identifies and distinguishes the goods of a person from those of another and indicates its source. Still, according to the PTO, there were two basic problems with attempting to trademark an orange-flavored medicine. First, the orange flavor did not serve as a source identifier, as it did not identify or distinguish the goods of the applicant from the products of others.

Orange flavoring is a common additive in orally administered medicines. The idea, which is not new, is to make the drug more palatable, thereby increasing patient compliance. In the language of trademark law, the applicant could not show that the public associated the orange flavor with the applicant's product to such an extent as to show distinctiveness or "secondary meaning."

Second, it is basic trademark law that a characteristic of a product cannot result in a trademark when it serves an essential functional purpose for the product. An example is the use of a color to make a product more visible. The rationale for this "functionality" doctrine is the goal of maintaining a balance between trademark law and patent law. Trademark law is intended to promote competition by protecting a company's reputation, but it is not the purpose of trademark law to diminish competition by allowing a producer of a product to seize control of a particularly functional product feature. A business should apply for a patent, not a trademark, if its goal is to monopolize a new product design or function for a limited time.

In the case of the orange-flavored pill, the flavor was all about function. At least indirectly, the flavor made the drug work better, because it increased patients' willingness and ability to take it as prescribed. The company's own website was part of the evidence weighing against the application. It touted the fact that the "pleasant orange taste" improved the efficacy of the medication by masking the inherent bitterness found in many therapeutic agents.

Apart from the particular application before it, the PTO expressed doubts as to how any particular taste or flavor could acquire the status of a trademark. Unlike color, smell, and sound, a consumer generally has no access to a product's flavor prior to purchasing the product. As a result, it is difficult to fathom how a flavor can serve as a source identifier, at least in the classic sense, given the definition of a trademark as something that identifies and distinguishes goods and that lets the consumer know their source.

"HOURS OF SERVICE" UNDER THE FMLA

To be eligible for leave under the federal Family and Medical Leave Act (FMLA), an employee must have been employed by the employer for the preceding 12 months, and the employee must have put in at least 1,250 "hours of service" during that time. Neither the FMLA nor the Fair Labor Standards Act (FLSA) defines "hours of service."

When a hospital determined that a nurse it employed was about seven hours short of the 1,250 hours threshold, and therefore denied the nurse FMLA leave in connection with her surgery for carpal tunnel syndrome, the circumstances required a federal appellate court to construe the proper meaning of "hours of service."

Both sides agreed that, in terms of actual hours spent on the job, the nurse came up just short of the FMLA threshold. But the facts were not that cut and dried. Under a "Weekender" compensation program devised by the hospital to provide an incentive for nurses to work undesirable weekend shifts, for every two-week period during which the nurse worked 48 weekend hours, she was paid as if she had worked 68 hours instead. If the hospital had calculated the nurse's hours in her first year using the "bonus hours" in addition to the hours the nurse was at work, she would have been eligible for FMLA leave.

The court upheld the hospital's decision and declined to find it liable under the FMLA. While the legislation itself provided little guidance for the court, an FMLA regulation on the subject of the requirement of 1,250 hours does state that "[a]ny accurate accounting of actual hours worked under FLSA's principles may be used." Another regulation states that "all hours are hours worked which the employee is required to give his employer." In this case, the court reasoned that the bonus hours for which the nurse received extra compensation could not count as "hours of service" because she was not required to "give" them to her employer, but rather could spend that time for her own purposes.

The nurse argued to no avail that her case should have had the same outcome as another case decided by the same court, in which the court held that an employee's "hours of service" under the FMLA did include some hours not actually worked. In that case, however, the employee requested FMLA leave after successfully suing for wrongful termination and obtaining a remedy that included full service credit and back pay for the hours she would have worked but for the termination. Thus, the employee could use these hours that would have been worked in calculating FMLA eligibility.

WHAT HAPPENS TO YOUR E-MAIL AFTER YOU DIE?

When a young Marine died in Iraq and his parents wanted to retrieve his e-mail as a memorial to him, they came up against the privacy policy of the Internet service provider (ISP), which declined to provide the information. Ultimately, a probate court ordered that the parents be allowed to retrieve the e-mails.

When a prominent poet died without leaving the password for his e-mail account, where he kept virtually every significant piece of personal information, his daughter had no means of gaining access to that information so that she could notify others of her father's death. Citing privacy concerns, the ISP for the account refused to divulge the information to the daughter.

These real-life stories are the leading edge of what may become a wave of litigation concerning ownership of e-mail information upon the death of the account holder. The competing interests are the privacy of the account holder, coupled with the ISP's interest in preserving that privacy, and the survivors' rights to the property of the deceased.

Most of us think of e-mail as the modern equivalent of a box of letters belonging to us, when, technically, e-mail is an intangible form of property owned by the ISP. Nonetheless, if it is possible to spot an early trend on the issue, that tendency is to treat e-mail information as the account holder's property upon his or her death. In most states, the issue is still unresolved and without clear case precedents. At least one state has passed a law directing ISPs to turn over the e-mail of a decedent to the personal representative for the decedent's estate.

Steps to Take Now

It will be some time before legislatures and courts catch up with the reality that millions of people use their e-mail accounts as repositories for all sorts of information having sentimental, historical, or economic value. In the meantime, there is some practical advice for facilitating access to e-mail information "left behind":

* Read your ISP's privacy policy to determine what your survivors may have to contend with to get access to your e-mails. The policies run the gamut from providing e-mails to next of kin upon showing a power of attorney over the account and a death certificate, to treating e-mail accounts as non-transferable and with no right of survivorship.

* As strange as it may sound, consider dealing directly with the issue in your estate planning by including e-mails specifically in your will, especially if they have monetary value. In connection with this, you should archive the information to your hard drive and be sure that your survivors have any necessary passwords. Conversely, if you want to take your e-mails with you, in effect, stipulate in your will that no one is to have access to your account.

* Get good legal advice, including information as to whether there are any new laws in your state on the subject. They could trump, or at least affect, whatever arrangements you have made or may be considering for disposing of your e-mails after your death.

BEWARE OF FAKE CHECKS

You have responded to a work-at-home offer in which you will be an account manager for a foreign company, depositing checks from its U.S. customers. It seems simple: You deposit the checks, take your pay out of them, and send the remainder to the foreign company. Or . . . you have reason to believe you have won a sweepstakes or lottery prize. You receive a check for your winnings, with instructions to cash it, then return a portion of the money to cover taxes or other fees. Or . . . having sold something through a newspaper ad or online, you receive a check for much more than the purchase price. Calling it an accounting error, the buyer apologizes for the mistake and asks that you return the excess amount.

If these scenarios activate your fraud antennae, there is a good reason for that. Each is a typical example of circumstances in which people are victimized by fake checks. This is a growing problem, perhaps because of the ways in which strangers are brought together for transactions by new technologies and the Internet. If there is a single best piece of advice for not becoming a victim, it is to accept no check if it is accompanied by a request that you return some of the money.

Of course, the sting from the scam occurs when the victim deposits the check he receives, then withdraws funds and sends off money or merchandise before his bank discovers that the deposited check is fraudulent. Even when the bank is vigilant, that discovery could take days, or even weeks. Your first reaction might be to blame the bank, but, generally, the depositor is on the hook, as he is considered to have taken responsibility for the funds spent or sent before the fraud is discovered.

In addition to the big red flag in the form of being asked to return part of the money sent by check to you, here are some more warning signs and protective measures:

* Upon receiving a check from a stranger, explain the situation to your bank manager and ask the manager when the check is likely to be considered "good." Then wait until you get the go-ahead before using the funds. If, in the meantime, the check writer pesters you about the delay, that may just be one more sign that you were targeted to be a fake check victim.

* Scam artists are often clever and skillful, making it difficult to detect a false check from the check itself. This makes it all the more important to pay attention to, and to be guided by, suspicious circumstances. Some of these include offers that defy common sense (if you really won a prize, wouldn't they just deduct taxes or fees from the check for your winnings?); being asked to send money outside of the U.S. (thus making it harder to find the culprit and the money); and being warned not to discuss the transaction with anyone else.

* Consider accepting payment not by personal check, but only in the form of a money order or a cashier's check drawn on a local bank, so that you can take it there to ensure that it is legitimate. Another option is a money order from the U.S. Postal Service.

* Especially when dealing with a stranger over the Internet, try to confirm the person's name, address, home phone number, and work number through some independent means, such as directory assistance or an online database.

If the worst happens, and you have reason to believe that you have been had by the writer of a fake check, contact your bank and the local office of the FBI. Then resolve to keep an eye out for the red flags next time.

DOES THE ADA APPLY TO WEBSITES?

Recently a federal trial court became the first court to find that a commercial website must be accessible to the disabled, and to blind customers in particular, because of the prohibition against disability discrimination by places of public accommodation contained in the Americans with Disabilities Act (ADA). Whether the retailer would, in fact, be liable on the particular facts of the case remained to be decided, but the court declined to dismiss the class action complaint.

Requiring businesses to make their websites fully accessible by the blind will likely involve adding computer code for "alternative text" that permits screen-reading software used by blind individuals to vocalize the text and describe the contents of the webpage. Using this code when the site is initially designed is less expensive than retrofitting a website later.

The retailer argued to no avail that the demands of the ADA do not apply, because a website, since it is not really a physical place at all, is not a "place of public accommodation" within the meaning of the ADA. The court reasoned that the ADA requires full and equal enjoyment of the services "of" any place of public accommodation, not services "in" a place of public accommodation. The ADA is not only about physical access to places.

The court found that the retailer's many brick-and-mortar stores constituted the "places" of public accommodation. The retailer's website serves as a "gateway" to such stores, especially for blind customers. If the website is not fully accessible to them, it impedes those customers from coming through the gateway, that is, from having the "full and equal enjoyment" of the stores' goods and services that the ADA mandates. The court drew an analogy to a case in which a telephone screening process for prospective contestants for a television game show violated the ADA by discriminating against the hearing disabled, even though the discrimination took place away from the studio where the show was produced.

Although the decision broke new ground in ADA jurisprudence, the court's "gateway" reasoning relied on the connection between the business's website and its many retail stores. The court did not have occasion to address the variation on the same issue posed by the websites of retailers who have no brick-and-mortar stores. Such a situation presents a closer question as to whether the ADA applies. For a website-only business to come within the ADA, a court would have to find that a "place of public accommodation" does not have to include a physical place at all, but can, instead, be the virtual world in which website transactions occur.

WATCH YOUR LANGUAGE, DEBT COLLECTORS

In a letter to a debtor intended to prompt payment of $250 in debts, a collection agency's choice of words entangled it in protracted litigation under the federal Fair Debt Collection Practices Act (FDCPA). The theme of the dunning letter was honesty, or the lack thereof, on the debtor's part. In all capital letters, the letter informed the debtor: "YOU ARE EITHER HONEST OR DISHONEST YOU CANNOT BE BOTH." It proceeded to question the debtor's good intentions in allowing the account to become past due and in supposedly ignoring all prior requests for payment.

The debtor struck back with a lawsuit under the FDCPA that was at first dismissed by a federal trial court, but then reinstated when the debtor appealed. The letter violated the FDCPA in more than one respect. A debt collector may not falsely represent or imply, in order to "disgrace" the consumer, that the consumer committed any crime or other misconduct. It was true that a check written by the consumer did not clear, but there was no evidence as to why this happened, or that the debt collector had, in fact, previously made communications to the consumer that were ignored.

Since there could have been an innocent, or at least honest, explanation for the unpaid bills, the letter's comments impugning the consumer's honesty and claiming that other collection attempts were ignored could be shown to be both false and intended to shame the debtor into payment. This violated not only the letter of the FDCPA, but also its underlying rationale that even defaulting debtors deserve to be treated in a reasonable and civil manner.

The same letter also ran afoul of the prohibition in the FDCPA against using "unfair or unconscionable" means to collect or to attempt to collect a debt. By way of example, the Act lists eight forms of conduct that constitute unfair or unconscionable means. The letter in question did not fit neatly into any of the examples, but the debtor's claim could still proceed because the list was not meant to be exhaustive.

It was conceivable that impugning a debtor's honesty and good intentions could be regarded as an unfair or unconscionable collection method. Since, by law, a court views a claim under the FDCPA through the eyes of an unsophisticated debtor, the plaintiff was planning to support her claims by conducting a consumer survey to determine if such debtors would find the letter she received to be false, misleading, unfair, or unconscionable.

The practical lesson to be derived from this case is that debt collectors should steer away from any inclination they may have to try to enhance the impact of collection communications by casting aspersions on the debtor's character and intentions. Collection letters should stick to the provable facts and should be direct and simple. Opting for spicy language over plain vanilla only invites legal indigestion.

ZONING LAWS AND THE EXERCISE OF RELIGION

The federal Religious Land Use and Institutionalized Persons Act of 2000 (RLUIPA) provides that the government may not implement a land use regulation in a manner that imposes a substantial burden on the religious exercise of a person, including a religious assembly or institution, unless the government demonstrates two things: that imposition of the burden on that person, assembly, or institution is both in furtherance of a compelling governmental interest, and is the least restrictive means of furthering that interest.

In applying the standards of the Act, courts have held that various activities, whether or not central to an individual's belief system, are a "religious exercise" within the meaning of the RLUIPA. If individuals are forced to modify the religious exercise, courts have tended to find that the governmental regulation has created a substantial burden within the meaning of the Act. Nevertheless, where an individual is still left with the ability to choose another method that will not seriously affect the religious practice, or the action taken only tangentially impacts the religious exercise, courts have held that there is no substantial burden.

Compelling Interest?

In deciding whether or not to uphold the governmental regulation, courts have analyzed the interest the governmental unit had in creating the regulation to see if it is a compelling one. For example, significant health and safety considerations may be found to be compelling public interests. Even a finding of a compelling interest does not end the analysis. The regulation employed must be the least restrictive means to meet that interest, as required by the Act.

The governmental entity may change its regulations to alleviate the burden on religious exercise and thereby avoid the prohibitory effects of the Act. For example, the government may escape the prohibitions by retaining most of its land use policies or practices, but adding exemptions for applications that substantially burden the exercise of religion. In addition, the RLUIPA will not apply in the first place if the governmental unit acted pursuant to some authority other than a law on zoning or the designation of landmarks.

In the Courts

A recent case demonstrates that it is not enough to invoke the protections of the RLUIPA that a proposed land use is connected in some way with a church or religious group. A church brought an action under the RLUIPA challenging a municipality's refusal to permit it to operate a day-care facility with a component of religious instruction in a low-density residential neighborhood.

According to the federal court that decided the case, the RLUIPA does not require the religious activity that was substantially burdened by the land use regulation at issue to be "fundamental" to a religion. Still, the church's claim failed because the jury found that the church did not prove that it was engaged in a "sincere exercise of religion" in seeking a variance to operate the day-care center.

The church's case was hurt by its bishop's admissions, in a letter responding to the church pastor's request for help, that the day-care center appeared to be more of a traditional commercial venture and less of a religious function.

UNSIGHTLY APPEARANCES

A property owner operated a business variously described as a flea market, a second-hand store, and a repair service for lawnmowers and tillers. After the city inspected his property, it cited him for violating a public nuisance ordinance, listing a variety of items ranging from baby strollers to automobile seats. The property owner argued that the city ordinance against an "unsightly appearance" was so hard to pin down as to be unenforceable. The state supreme court, however, rejected his argument.

The challenge to the ordinance rested on the contention that the term "unsightly" is so vague that a reasonable person could not know which conditions were prohibited and which were not. The city's winning response to this argument was that the court was not to look at the ordinance section on "unsightly appearance" in a vacuum, but was required to consider it in the context of the entire public nuisance ordinance.

The city had the power to prohibit conditions that debase the appearance and character of its neighborhoods. An ordinance regulating aesthetic conditions must use some general terms because it is impossible to describe every conceivable circumstance that the ordinance is meant to address.

Ugliness, like beauty, is in the eye of the beholder.

DOING BUSINESS ON THE WEB--CLICKWRAP AGREEMENTS

Every day, more and more business transactions are conducted over the Internet. Many of these transactions begin with a "clickwrap agreement." Clickwrap agreements are variations on "shrinkwrap" agreements, those printed terms and conditions usually found in the packaging for software. Clickwraps basically work the same way, but the user agrees to the terms by clicking a button on his computer, instead of by opening the package and using the product. While clickwrap agreements are still widely associated with software licensing, their use has spread to a wide range of business settings, such as advertising services, telecommunications, and banking, to name only a few.

Given that clickwraps have become ubiquitous, it is prudent for businesses to consider their advantages and to be informed as to the desirable characteristics that any clickwrap agreement should have. As compared with their paper predecessors, clickwraps are easier and quicker for a customer to accept, and more difficult for the customer to attempt to change. They provide a measure of control that is to the business's advantage. Depending on the size of the business and its market, clickwraps can be the means by which countless relationships are formed and deals are struck, so it is vital for any business using them to get all of the details correct. To ensure enforceability and to head off later legal problems to the greatest extent possible, companies should seek and use the advice of legal counsel as they create clickwraps tailored to particular businesses.

Once a business decides to use a clickwrap agreement, there are certain traits that should be considered:

* Put the steps in the right order. Before a customer is expected to pay for the product or service, or is allowed to receive it, he should be given the chance to review the entire clickwrap agreement and the option to accept or reject all of its terms and conditions.

* Identify the user. If the party who comes to a company's clickwrap represents another company, it is especially important to get identifying information that will show that the user is authorized to bind his company to the agreement. To this end, the clickwrap should have places for the user's name, the company's name, the user's title, and both e-mail and physical addresses. Of course, aside from its value for such verification purposes, the identifying information can be useful in other ways.

* Do not make the user hunt. The clickwrap should be readily apparent to a user, and the "install" or "download" button should appear only after the clickwrap is set out in its entirety. In the same vein, a checkbox indicating that the user has agreed to the terms of the clickwrap makes good sense. The idea is to prevent anyone from claiming in a later dispute that there were parts of the agreement that he could not have easily seen, and to which he did not give his assent. As for any terms that are weighted in favor of the business, making them hard to find is an especially bad idea. On the contrary, these terms should stand out, maybe even with their own "I agree" checkbox.

* Drop the legalese. As is true for any contract, a clickwrap should use clear, plain English. It is well settled in law that a court will construe ambiguous terms against whoever wrote them, that is, the business whose clickwrap is being deciphered.

* Make the clickwrap control. If there are any other dealings with the user, whether oral or written, that conceivably could be said to constitute a separate agreement, they all should explicitly defer to the clickwrap agreement. Likewise, the clickwrap itself should have language indicating that its terms override any conflicting terms in other agreements relating to the transaction.

* Keep the final word for your business. What if a user navigates successfully and accepts the clickwrap agreement, but your business determines for some reason that it wants no business relationship with that user? The business should provide itself with an escape hatch, with language in the agreement to the effect that the business must confirm the agreement before it becomes enforceable, or that the business can cancel the agreement at will.

Clickwrap agreements have gained acceptance as valid, enforceable contracts, albeit in an unconventional format. This point is illustrated by a recent federal court decision. In a breach-of-contract dispute between two software companies concerning the use of licensed software, the court hardly paused at the question of whether a clickwrap agreement constituted a valid contract. In answering "yes," the court also relied on an extensive list of prior court decisions that had reached the same conclusion. The clickwrap agreement has become a permanent part of the legal landscape for businesses and individuals alike.

REAL ESTATE LAW UPDATE

Rentals Allowed Under Restrictive Covenant

After a couple bought property in a subdivision, they were surprised to learn that several homes near theirs were going to be offered as vacation rental property. Strangers on vacation were not the neighbors the couple had in mind. All of the properties in the subdivision were subject to a set of restrictive covenants, one of which required that lots be used for "single-family residential purposes only." The couple sued to get a court to declare that renting a home, even to one family, violated that restriction, but the couple came out on the losing end of the litigation.

In the plaintiffs' view, to derive rentals from a home was to convert the property from single-family residential use to a prohibited commercial or business use. The court disagreed. Citing statistics showing that in most states over 30% of homes are rented rather than owned by the families living in them, the court reasoned that an owner's receipt of rental income does not detract from or change the "residential" use of the property.

The plaintiffs' position was undercut by a separate covenant that permitted delegation of certain owner rights to "tenants," thus obviously contemplating the rental of property. The plaintiffs argued that only long-term rentals were allowed, not short-term vacation rentals, but they could point to no language supporting such a distinction.

Seller's Duty to Disclose

Before building a home on property it owned, a developer obtained a study of the soil conditions in the area that included the lot for the home. The study was prompted by the fact that a church that formerly owned adjoining land had abandoned plans to build a church structure on that land because of its own study indicating that there was too much collapsible soil to support the building. After receiving the soil study of the neighboring land, the developer dug out some soil on the lot for the home, reducing its grade by about six feet, and built the new house.

That there were any concerns over soil suitability came as news to the buyers of the new home when, not long after the purchase, cracks appeared in the foundation, doors would not open or close, and, as the court later put it, "[e]vidence of excessive settling abounded."

The developer had not disclosed the contents of the soil study to the buyers. A state supreme court ruled that the buyers' lawsuit for fraud should go to a jury. The court reasoned that a developer/builder may owe his buyer a duty to disclose information known to him concerning real property, including property not being conveyed to the buyer, when that information is material to the condition of the property being purchased. To be material, the information must be "important." Importance, in turn, is measured by the degree to which the information could be expected to influence the judgment of a person buying property.

In the case before it, the court found that a jury could well conclude that the buyers would have wanted to know about collapsible soil on adjacent land before they bought their home. In the court's view, a property boundary should not be considered a perimeter outside of which, as a matter of law, nothing is material to a prospective buyer.

ESTABLISHING PATENT PRIORITY FOR INTERFERING PATENT APPLICATIONS

Under the United States patent system, patents are awarded to inventors who are the first to invent, as opposed to the first to file a patent application. Unless another inventor can show that he conceived of an invention first, and was reasonably diligent in later reducing the invention to practice, the inventor who first reduces the invention to practice is entitled to the patent. "Reduction to practice" can be either constructive, such as by filing a patent application, or actual, such as by constructing a working model or prototype of a product, carrying out the steps of the invented method, or producing the composition of an invented material.

In litigation over competing, sometimes called "interfering," patent applications for the same invention, evidence of actual reduction to practice is pivotal in establishing the priority of an invention. Such evidence is the "meat on the bones" of a legal case for establishing priority in an interference proceeding. The winning party will have to show that it constructed the claimed embodiment or performed the claimed process, that the embodiment or process functioned for the intended purpose, and that there is sufficient evidence to corroborate the inventor's testimony as to the first two requirements.

The importance of unassailable evidence of reducing an invention to practice is illustrated by a case in which two companies were competing for a patent for making an active ingredient in an allergy medication. Neither party relied on a date of conception, so the case turned on who first reduced the invention to practice. One company had the earlier filing date on its application, but the second company claimed that it had earlier reduced the invention to practice.

Given the subject matter of the invention, the second company's evidence was in the form of laboratory data and notebooks kept by individuals closely associated with the inventive process. Unfortunately for that company, flaws in this evidence greatly diminished its weight and led the court to rule in favor of the first company. Essentially, the evidence lacked sufficient corroboration, such as by signing notebooks, using witnesses to vouch for their authenticity, or having individuals testify as to the genuineness of the notebooks' contents. Such shortcomings likely would have been enough by themselves to tip the balance, but evidence of fraudulent backdating of notebook entries was another fatal blow to the second company's case.

Make Sure to Carefully Document Evidence

There is no single, exclusive method for marshaling and authenticating evidence for use in a patent priority battle, but the case of the allergy medication ingredient suggests that a meticulous approach is prudent. Examples of practices that should be in place include bound notebooks for inventors, with each page signed and dated in permanent ink not only by the creator of the notebook, but also by a disinterested but informed noninventor; placement of entries in chronological order; and initialing and dating of any corrections. Inventors should record as much detail as possible about their activities and conclusions relating to the invention, and there should be a full explanation for any supplementary materials. Finally, all of this attention to detail and following of procedures could be for naught unless the information is kept in a secure place to which there is authorized access only.

Just as scientific methods must be followed in the very work that leads to a patented invention, a company should adopt and rigorously follow procedural guidelines for recordkeeping in connection with any of its work that could lead to a patent. Otherwise, there is a great risk of wasted effort and the loss of what could be very valuable intellectual property.

TAX CONSEQUENCES OF SELLING COLLECTIBLES

Collectibles, such as gold and silver coins, works of art, antiques, and stamps, have seen significant appreciation in value lately. As the buying and selling of collectibles pick up, it is important to be familiar with the tax consequences of such transactions.

If collectibles are sold at a profit, the price increase is treated as a capital gain for income tax purposes. For a holding period of more than one year, the gains are long-term. The downside for sellers is that long-term gains on collectibles are taxed at 28%, not the 5% or 15% rate likely to be used for gains from the sale of other forms of property. To establish the basis, which is the cost of an item for tax purposes, owners of collectibles should keep records of the price paid for items, as well as records of any expenses related to the items, such as insurance or storage costs. The expenses may be added to the basis, thus decreasing the taxable capital gain when the property is sold.

Someone who inherits valuable collectibles will receive a "step-up" in basis to market value at the time of inheritance, rather than using a basis determined by the earlier cost of acquiring the property. The new, higher basis means a reduced tax when the property is eventually sold. Inherited collectibles should be appraised right away, so as to establish the value to be used for the stepped-up basis.

ESTATE PLANNING 101: WHAT IS A TRUST?

A trust is a legal instrument that transfers title to designated property from the owner, called the donor or grantor, to a trustee, who holds the property for the beneficiaries of the trust. The grantor can also serve as the trustee, thereby enhancing control over the trust during the life of the grantor. In such a case, a successor trustee is usually named in case the grantor dies or is incapacitated. Depending on the size or complexity of the trust, the trustee, or cotrustee, might be an institution, so as to bring more expertise to the position.

Testamentary Trust

A testamentary trust, created in a will, takes effect when the grantor dies. It names the beneficiaries and gives directions for payment of the income from the trust and for disposition of the assets. The testamentary trust has the advantage of increasing the odds that an inheritance is used prudently. The trustee can manage the assets of the trust until such time as the beneficiaries are prepared to do so, as opposed to an immediate transfer of assets to the beneficiaries.

Living Trust

The second category of trusts is the living, or inter vivos, trust, which is created during the grantor's lifetime. An important decision for a living trust is whether the trust will be revocable by the grantor or irrevocable. In either case, the assets are retitled in the name of the trust. As the name suggests, a revocable trust may be dissolved entirely by the grantor. But short of that, the grantor may also change beneficiaries, replace the trustee, or change the composition of the assets in the trust. Revocable trusts do not remove assets from the grantor's estate. The trust pays taxes on its income, and if any assets remain in the trust at the death of the grantor, they are part of his estate and at least potentially taxable as such. A revocable trust has few tax advantages.

An irrevocable trust permanently takes assets out of the grantor's estate and puts them into the trust. While tax savings can be realized with an irrevocable trust, this type of trust is not to be entered into lightly, as it will take action by a court to alter it later. For tax purposes, the trust becomes a separate entity. Assets in the trust generally are not subject to estate taxes on the death of the grantor, but the transfer of assets into the trust may be subject to gift taxes.

When the grantor for a living trust dies, the trust assets pass directly to the beneficiaries. This is a distinct advantage over having to go through probate, the often costly and time-consuming process of administering a will. A living trust also maintains the privacy of the estate, because bypassing probate also means that no public record is created, as occurs with probated wills.

Effective use of trusts in estate planning requires not only awareness of these trust basics, but familiarity with specialized trusts that might be a good fit for particular cases, such as those involving life insurance policies and charities. To decide on and implement the best option, use the services of qualified professionals.

EMPLOYMENT DISCRIMINATION AND RETALIATION BY EMPLOYERS

For as long as federal law has prohibited discrimination in the workplace, it also has separately prohibited punishing, or “retaliating against,” an employee who opposes the prohibited discrimination. Employment discrimination can occur on the basis of factors such as race, sex, and religion. Usually, there is an anti retaliation provision found in the same laws that prohibit the underlying discrimination.

There are dozens of federal statutes with anti retaliation provisions. The policy of protecting those who object to what they perceive as unlawful discrimination is so ingrained in federal civil rights law that it has even been read into laws by implication, even though it was not there in black and white. In 2005, the United States Supreme Court ruled that Title IX, which prohibits sex discrimination in educational programs or activities receiving federal financial assistance, also implicitly prohibits retaliation against individuals who oppose conduct that allegedly violates Title IX.

Court Expands Retaliation Claims

In the 2006 term, the Court took the additional step of articulating an expansive standard for determining what types of employer conduct, when accompanied by a retaliatory motive, can support a cause of action for retaliation. The underlying case concerned a claim of sexual harassment, but the ruling has ramifications for all claims based on retaliation for opposing civil rights violations. As the 2006 case itself demonstrated, with the right set of facts it is possible for a plaintiff to be successful on a claim of retaliation, even though the underlying claim of discrimination has failed. The two types of wrongful conduct are independent of one another.

In this case, the plaintiff was the only woman working in the track maintenance department of a railroad. She asserted that she was subjected to sexual harassment by her supervisor, in the form of insulting and inappropriate remarks. Because the employer took prompt corrective action, including punishment of the harassing supervisor, it had no liability for the harassment claim itself.

However, even as the employer took its corrective action, it also reassigned the plaintiff from her job as a forklift operator to a harder, dirtier, and generally less desirable job. Later, the railroad also suspended the plaintiff for over a month without pay for alleged insubordination, although, in time, the railroad's own grievance committee found no insubordination and awarded her back pay for the period of the suspension.

In a unanimous decision, the Court rejected requirements that some lower courts had imposed for showing prohibited retaliatory conduct, and allowed a jury verdict for the plaintiff on her retaliation claim to stand. Under the now-abandoned tests, the conduct either had to amount to failing to hire, failing to promote, or termination, or it at least had to materially change the "terms and conditions" of employment. Instead, the Court adopted a rule by which any adverse retaliatory action may support a retaliation claim, as long as it is reasonably likely to dissuade employees from engaging in protected conduct.

Context Is Significant

As the Court put it succinctly, in determining when an employer action constitutes prohibited retaliation, "context matters." In a hypothetical example mentioned by the Court, while a change in the schedule of many employees may have little impact, such a change as a form of retaliation may be so significant to the mother of school-age children that it would deter her from complaining about discrimination at work. Similarly, an employer's failure to invite an employee to lunch is normally not the stuff of retaliation, unless it was a weekly lunch meeting that was important to any employee's advancement in the company.

A petty slight or minor annoyance is still not enough to support a claim for retaliation. That said, the risk of confusing such behavior with more significant adverse action is significant enough that employers are now well advised to give their managers the following straightforward direction: Do not do anything to punish someone for having opposed an employer practice that is alleged to be discriminatory.

ROTH IRA CONVERSIONS

A traditional individual retirement account (IRA) is funded with before-tax contributions and grows tax-deferred, but not tax-free. (Taxpayers with a 401(k) plan provided by their employers, and who fall into higher income tax brackets, generally cannot deduct an IRA contribution.) Beginning at age 70-1/2, the individual must take minimum distributions from a traditional IRA, which are taxed in full at the income rate then applicable to the taxpayer.

By contrast, contributions are made to a Roth IRA with after-tax money. If the account has been held for at least five years, the accumulated principal and interest in a Roth IRA may be withdrawn tax-free once the individual reaches 59-1/2. Unlike a traditional IRA, there are no mandatory minimum distributions for a Roth IRA.

The ability to make contributions to a Roth IRA is phased out for couples with a modified adjusted gross income of between $150,000 and $160,000 ($95,000 to $110,000 for individuals). While those contribution restrictions will remain in place, a new law that goes into effect in 2010 will open up the Roth IRA to higher-income taxpayers by allowing them to convert a traditional IRA account into a Roth IRA account, thereby benefiting from the Roth features when money is withdrawn. A current provision limiting Roth conversions to those taxpayers with adjusted gross incomes of under $100,000 will no longer be in effect.

When a conversion occurs, the individual withdraws funds from the traditional IRA account, reports those funds as income, and transfers them to a Roth IRA. The conversion must be done before December 31 of the current tax year. If the earlier IRA contributions were taken as deductions, taxes will be due on both the principal and the earnings. Otherwise, taxes will be due only on the earnings. In any event, funds can be converted from a traditional IRA to a Roth IRA without incurring the 10% penalty for early withdrawals.

Why worry now about a law that will not go into effect until 2010? Because proper planning and saving in a traditional IRA between now and then can result in a significant nest egg that can be converted into a Roth IRA when the income restrictions are lifted in 2010. For example, given current and projected limits on contributions to a traditional IRA, a married couple in their fifties, with at least one spouse working, could contribute over $50,000 to a traditional IRA over the next few years, then convert those funds to a Roth IRA, and thereafter reap the benefits of that type of retirement fund. Since some taxes will be due whenever the conversion takes place, it also is advisable to save up some funds outside of the account for that day of reckoning with the IRS.

A tax professional can help you determine whether and when to convert a traditional IRA into a Roth IRA, considering factors such as your current and future tax brackets and income, when you want to begin making withdrawals, and your estate plans in general.

COMMERCIAL LANDLORD SUED FOR UNSAFE CONDITIONS

A silkscreen printing company with one employee rented a building from a commercial landlord. The employee suffered permanent injuries after falling from the stairs leading to the basement of the building. In the ensuing lawsuit against the landlord, the employee alleged that the fall happened because the stairs were wobbly, had no handrail, and had low ceiling clearance. The court found that the landlord had no liability.

Bearing in mind that there was no direct contractual relationship between the employee and the landlord, there could be a duty of care running from the landlord to a third party (such as the employee) only in one of two circumstances: if the landlord bound itself by contract (i.e., in the lease) to make repairs and then did so negligently, or if the dangerous defect was in an area over which the landlord retained control, such as a common area. The case before the court presented neither of these circumstances.

The fall occurred in an area clearly leased and controlled by the tenant. In unambiguous language, the lease provided that the tenant would have exclusive control of the premises and that the tenant had the obligation to maintain the building at its own expense. It was necessary under the terms of the lease for the landlord to approve of repairs made by the tenant, and the landlord reserved the right to come onto the premises to make repairs that were "compatible with the lessee's use of the premises." Nonetheless, the result of the negotiations between the landlord and tenant, which were small entities with equal bargaining power, was that the responsibility for maintaining the building in a safe condition fell to the tenant, not the landlord. The employee's remedies for his injuries were effectively limited to workers' compensation benefits, for which he was qualified and which he had begun to receive.

It made all the difference to the outcome that the lease was commercial, rather than residential. A commercial lease is essentially a business transaction, a contract for possession of property, and the "ancient" common-law rule is still observed, in keeping with the maxim "let the buyer (tenant) beware." In such a case, the terms of the agreement are most important.

By contrast, with regard to residential leases, the law has evolved more favorably for tenants, for various public policy reasons, including disparity in bargaining power between the parties. A duty of care for residential landlords need not be found in the fine print of a lease. Rather, a residential landlord is bound to act as a reasonable person would under all of the surrounding circumstances, including the likelihood of injuries, the probable seriousness of such injuries, and the burden of reducing or avoiding that risk. In short, the employee would have fared better in court if the stairs from which he fell had been in a rented apartment.

COMPUTER FRAUD AND ABUSE ACT

Since 1994, the federal Computer Fraud and Abuse Act (CFAA) has provided civil remedies to complement the original criminal sanctions for the theft and destruction of computer data, fraudulent use of passwords, and various means of committing fraud by unauthorized access to computers. For a typical claim under the CFAA brought against a defendant who violates the statute in an attempt to gain a competitive advantage over the plaintiff, there must be a financial loss of at least $5,000 in order to maintain a civil cause of action.

The ability to obtain injunctive relief under the CFAA is at least as valuable to an injured party as the recovery of damages. To win an injunction, however, the plaintiff must be in a position to prove not just the unauthorized intrusion into the plaintiff's computers, but also specifics as to what information was taken by the defendant and how it was used to harm the plaintiff.

In a recent case, a former officer and an employee of a party supply store were alleged to have gathered information from their former employer's computer without authorization, so as to get a leg up on the plaintiff in their new, competing business. The elements for the claim were in place, except for the critical proof as to what data records of the plaintiff's were accessed and whether such records had been downloaded, copied, or printed by the defendants. The plaintiff business was denied an injunction in federal court because of this gap in its proof.

The case of the competing party-supply businesses offers object lessons for how businesses can best put themselves in a position to take full advantage of the Act if they have been victimized. One advisable technical step is to include an auditing function in a computer system that automatically records what documents have been accessed and what happens to the documents when they are accessed. The resulting "audit trail" can be a valuable piece of evidence in an action under the CFAA. When employees are allowed to work at home on their computers, employers should have policies allowing them to inspect those computers when the employment ends and to retrieve any of their data.

Although technical measures and policies on computer technology are important, simple use of imagination can also produce relevant noncomputer evidence for a CFAA claim. The court in the unsuccessful action by the party-supply store observed that the plaintiff could have presented evidence that the defendants had taken particular actions to the competitive disadvantage of the plaintiff very soon after their unauthorized access to the plaintiff's computers. This would have allowed an inference that secrets had been taken from, and then used against, the plaintiff.

EMPLOYEE OR INDEPENDENT CONTRACTOR?

The legal distinction between an employee and an independent contractor may seem like a subject suitable only for a law school exam, but it has real-life significance for both employers and employees.

Considering just federal taxes, for example, if a worker is an employee, the employer must withhold income tax and the employee's part of Social Security and Medicare taxes. The employer also is responsible for paying Social Security, Medicare, and unemployment taxes on wages. An employee can deduct unreimbursed business expenses if the employee itemizes deductions and the expenses are more than 2% of the adjusted gross income.

If the worker has independent contractor status, however, there is no withholding, and the contractor is responsible for paying the income tax and self-employment tax. In that situation, it also may be necessary to make estimated tax payments during the year. An independent contractor can deduct business expenses, but on a different schedule of the tax return than is used by an employee.

So how do you tell the difference between an employee and an independent contractor? There is no single, quick answer. The particular facts of each case must be examined. However, relevant facts can be grouped into three general categories: behavioral control; financial control; and relationship of the parties.

Behavioral Control

The focus here is on who has the right to control how a worker does the work, rather than simply on the end result of the work. If a business has that right, the worker is an employee; if the worker retains that right, he is an independent contractor. The more that a worker gets instructions or training on how the work is to be done--such as determining what equipment to use, hiring assistants, or deciding where to get supplies--the more likely it is that the worker is an employee.

Financial Control

Apart from the actual performance of work, there is the question of a right to control the dollars-and-cents part of the work. Rather than having a direct financial stake in the business, an employee essentially works for a paycheck and maybe some reimbursed expenses. Some factors pointing more toward an independent contractor status include a worker's significant investment in the work, his or her lack of a right to reimbursement of even high business expenses, and his or her potential to realize a profit or suffer a loss.

Relationship of the Parties

This factor considers how the parties themselves perceive their relationship. While an independent contractor, as the term suggests, is on his own concerning benefits, a worker who is provided insurance, retirement benefits, or paid leave is probably an employee. Sometimes the clearest picture of a worker's status is to be found in a written contract. The parties' intent, as shown in a contract, can be decisive, especially if the other factors do not lead to a conclusive answer.

DID YOU KNOW?

The IRS recently began a pilot project that uses private debt-collection agencies to collect back taxes. The controversial program will employ three private collection agencies to target 40,000 delinquent accounts of taxpayers who are in the red to Uncle Sam for $25,000 or less. The agencies get to keep up to 25% of what they collect.

Criticism of the program includes the fear that tax delinquents will be harassed illegally, even though the agencies will be subject to fair debt collection laws. There is also concern about turning over sensitive personal and financial information to private companies.

If you are one of the 40,000 accounts targeted, the IRS must inform you in writing. However, you will be allowed to opt out at that time and deal directly with the IRS.

DEDUCTING THE BUSINESS USE OF YOUR HOME

The federal income tax deduction for the business use of a home has a good dollars-and-cents upside for those who qualify. Some detailed questions have to be answered correctly to get to that point, however. Not surprisingly, the IRS publication on the subject makes use of a complex flowchart filled with "yes or no" questions to guide taxpayers to a determination of eligibility for the deduction.

Qualifying for the Deduction

To pass the threshold for use of the home business deduction, a taxpayer must satisfy the following two basic sets of requirements. The first set concerns the nature of the business activities, while the second set relates more to the place itself.

First, the use of the business part of the home must be exclusive (with exceptions to be discussed below), regular, and for the business. Second, the business part of the home must be one of the following: the principal place of business--the place where the taxpayer meets or deals with patients, clients, or customers in the normal course of business--or a separate, detached structure used for business.

The exclusive use factor means that the area is used only for business, not for a mixture of business and personal uses. However, the exclusive use requirement need not be met when a part of the home is used for storage of inventory or product samples, or for a day-care facility. When the IRS says that the use of the home must be for a trade or business, it does not mean any activity that makes money for the taxpayer. If you use a computer in your den for day-trading of stocks or online gambling, do not count on taking the deduction. As for what constitutes a "regular" use for business, that essentially means business conducted on a continuing basis, not occasionally. Even if a taxpayer has a place in the home used exclusively for business, the deduction is not available if the business activity is only sporadic.

As for the requirements relating to the place itself, the area in the home used for business is a "principal place of business" if it is used exclusively and regularly for the administrative or management activities of the business, and there is no other fixed location where substantial activities of that kind are carried out. If some business is transacted at more than one location, determining whether the home location is the principal place of business requires consideration of the relative importance of the activities at each location. If that does not provide an answer, the time spent at each site should be considered. Remember that the deduction is available if either the home is the place for meeting with patients, clients, or customers, or a separate structure on the premises is dedicated for business.

If the taxpayer is an employee using part of a home for business, the deduction is available if all of the requirements described above are met, plus two additional tests. The business use must be for the convenience of the employer (not just appropriate or helpful), and the employee may not rent all or part of the home to the employer while using the rented portion to perform services as an employee.

What Is Deductible?

Deductible expenses for a business use of the home include items such as the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, painting, and repairs. This is not likely to be an all-or-nothing proposition, though. Generally, an expense is fully deductible if it is direct, that is, incurred only for the business part of the home. An indirect expense, incurred for running the home as a whole, is deductible based on the percentage of the home used for business. Any reasonable method for determining that percentage is acceptable, such as dividing the square feet used for business by the total square feet, or dividing the number of rooms devoted to business by the total number of rooms. If an expense is unrelated to the business part of the home, it is not deductible at all.

If the taxpayer's gross income from the business use of the home is lower than the total business expenses, the deduction for certain expenses will be limited. But those expenses that cannot be deducted because of such a limitation can be carried forward for the next year's home business expenses.

THE DANGERS OF EMPLOYEE INTERNET USE

By some accounts, a large majority of employees access the Internet on company computers for personal reasons while at work. The obvious adverse effects of this on productivity are only the tip of the iceberg with regard to the potential headaches that such activities can cause for employers. Personal Internet activity by employees can pose security risks to the company's computer network itself, such as by exposing a network to a computer virus.

Less immediate but just as serious is the threat of legal liability of the employer to injured third parties. Some scenarios are not difficult to imagine. An employee uses his computer as a tool for sexually harassing fellow workers by visiting pornographic websites. Or, an employee embroiled in a bitter domestic dispute uses his office computer to communicate threats to his spouse, and the employer fails to take action.

In a recent case, one such nightmare scenario was all too real for an employer that had to defend itself against the alleged victims of an employee who used a workplace computer for conduct that was criminal, not just indicative of poor judgment. This case may be the first reported decision on the matter of an employer's liability to a third party for having failed to take action to stop an employee from using a company computer in a manner that harmed the third party. It most certainly will not be the last such case.

The case involved an employee who used his company's computer at work to visit pornographic sites, including some relating to child pornography. Over a period of time, a supervisor and some coemployees became aware of this activity and complained to management. Eventually, the offending employee was confronted and was told to stop such use of the computer, but, a few months later, he was again discovered to have accessed pornographic sites.

Eventually, the employee was arrested on child pornography charges, including allegations that he had transmitted nude pictures of his 10-year-old stepdaughter over his office computer to a child pornography site. The employee's wife, who divorced him, sued the employer for failing to investigate and for failing to report the employee's viewing of child pornography. The case was settled, but not until a precedent was set when the lawsuit survived attempts to have it dismissed before trial.

There are limits to what companies can or should do to prevent improper use of company computers, but it is only prudent to take at least some basic measures. It makes sense to have a written e-mail and Internet use policy that clearly informs employees of what, perhaps, they should already know--that the employer has and reserves the right to monitor employees' use of the company's computers and to discipline violators. In addition, there needs to be even-handed enforcement of the policy. Even the best written policy will do little to convince a jury, if it comes to that, that a company has done all it reasonably could have done, if the evidence is that the policy was toothless or rarely enforced.

INADEQUATE NOTICE OF TAX SALE

Gary bought a house that he and his wife lived in for 26 years. When the couple separated, Gary moved out, but he continued to pay the mortgage for another four years until it was paid off in full. The loan was gone, but not the property taxes--they went unpaid when the mortgage company that had previously been paying them was out of the picture.

The state attempted to notify Gary of the delinquency and of his right to redeem the property. It mailed a certified letter to him at the address of the subject property. Since nobody was home to sign for the letter, it was returned to the state marked "unclaimed." Two years later, and only weeks before the property was sold to pay the taxes, the state published a newspaper notice of public sale of the property. A buyer came forward, and the state sent Gary another certified letter stating that his house would be sold if the taxes were not paid. It, too, was returned unclaimed to the state. Only when the new owner served a notice on Gary's daughter at the house did Gary finally learn about the tax sale, but it was after the fact.

Gary sued the state, arguing that the state had sold his property for taxes without first affording him procedural due process, and the United States Supreme Court agreed with him. The Court did not lay down an ironclad rule on what procedures are to be followed in all cases. It did say that, upon the return of a notice as undeliverable, the government must take additional, reasonable steps to attempt to provide notice before it takes the drastic step of extinguishing someone's interest in his or her property.

While the extent of what is required will vary with the particular circumstances, the Court's comments indicate that it hardly expects the government to put a detective on the case of a "missing" property owner. Open-ended requirements, such as searching a telephone book or other government records, are not required of the government. But it is not too much to ask the government to do, in the Court's words, "a bit more." There were some follow-up options that the state should have explored and used. They include such simple measures as sending a notice by regular mail, for which no signature is required, posting the notice on the front door, or addressing the otherwise undeliverable mail to "occupant." Presumably, even a nonowner occupant would alert the owner of such a notice.

The Court drew an analogy to a state official handing notices meant for delinquent taxpayers to a mail carrier, then watching as they were accidentally dropped down a storm drain. One would expect new notices to be prepared and sent again. Just as it would be unreasonable for the official under those circumstances simply to shrug his shoulders and say "I tried," the state in Gary's case owed him more than inaction when the notices meant for him were returned "unclaimed."

NONOWNER CAN BE LIABLE UNDER FHA

Among the kinds of conduct prohibited by the federal Fair Housing Act is the making of any statement with respect to the sale or rental of a dwelling that indicates a preference, limitation, or discrimination based on race, religion, sex, handicap, familial status, or national origin. The most common violators of this law are the actual owners of dwellings or individuals acting as agents for owners. A federal appellate court, however, reinstated a lawsuit brought by the United States against an individual who had spoken neither as an owner nor as an agent for an owner.

The defendant worked as a housing information vendor, compiling information from classifieds and providing assistance to prospective tenants looking for rooms to rent. In the episode that got the attention of the authorities, a deaf man used a relay services operator to call the defendant for assistance. The defendant flatly told the caller that he did not provide assistance to disabled people. When the caller persisted, the defendant responded with profanity and hung up. Similar inquiries from "testers" were met with essentially the same response. In fact, the jury heard "a virtual tsunami of evidence" that the defendant routinely treated disabled people differently from those not disabled, often using profanity to underscore the point.

The court rejected the reasoning that applying the prohibition on discriminatory statements only to owners or their agents would be in keeping with the purposes of the statute. On the contrary, the statute was meant to protect against the "psychic injury" done by discriminatory statements made in connection with the broader housing market, not just statements that directly affect a housing transaction. The limitation argued for by the defendant is not in the statute itself, which broadly refers to "any" discriminatory statement.

As for a First Amendment argument put forward by the defendant, it may be available for some forms of speech, such as a private individual's vocal opposition to having children living on his block. The defendant's speech, however, was commercial in nature, giving it less protection from government regulation.

QUALIFIED PERSONAL RESIDENCE TRUST

Federal estate tax law provides a method by which families can reduce the tax consequences of transferring the family home to the younger generation. The device for accomplishing this is called a qualified personal residence trust (QPRT).

An individual may create a QPRT by transferring his or her residence to a trust (usually for the benefit of family members), while retaining for a particular period of time the right to live in the residence for free. The tax laws treat the transaction as a gift of the remainder interest in the trust, rather than as an outright gift of the residence itself. There is a tax on that gift, but there is no later tax on the value of the whole residence at the time of the grantor's death, as there otherwise could be but for the use of the QPRT. As a rule, the more that a home can be expected to appreciate over the term of a trust, the more beneficial is the use of a QPRT.

A QPRT results in tax savings only if the grantor outlives the period of the retained interest. Even if the grantor does not survive the period established for the trust, the worst that could happen is that the full value of the residence would be taxed. The result is the same as if there had been no QPRT in the first place.

The QPRT has two generally recognized drawbacks. While the grantor, usually a father or mother of a family, can continue to occupy the residence after the period of retained interest has run, he or she must pay rent to avoid inclusion of the residence in his or her estate. Some individuals may not like the prospect of being their children's rent-paying tenants. Second, the QPRT does not provide a "step-up" in the cost basis of the residence as there normally would be if a residence is inherited. If a QPRT is used, the gain on the sale of the residence is measured against the price that the grantor paid for the property originally, rather than against the value of the residence at the time of the grantor's death. The result could be higher income tax liability when the residence is sold.

As with most estate planning issues, the advice and guidance of a qualified professional is recommended before establishing a QPRT.

FINANCIAL PLANNING FOR A DISASTER

When a natural or man-made disaster strikes, be it a hurricane affecting an entire region or a gas leak affecting one house, it is only natural and appropriate to think first of the very basics of life: safety, shelter, food, and water. But it also makes sense, in the quiet of normal daily living, to make plans for money matters in the immediate aftermath of a disaster. As the saying goes, the best time to fix a leaky roof is on a sunny day. If you have only minutes to leave your home, advance planning for keeping your head above water financially can pay big dividends.

Here are a few pointers:

  • Keep the following items in a place that is easily available to you in an emergency, but not so apparent as to invite theft: forms of identification, such as driver's licenses, insurance cards, Social Security cards, passports, and birth certificates; enough checks and deposit slips to last a month, or at least a checking account number; ATM cards, debit cards, and credit cards; telephone numbers and account numbers for providers of financial services; the key to your safe-deposit box; and some cash.
  • Make copies of your most important documents, ideally on disks, and keep the copies well outside of your home area.
  • Use a safe-deposit box for items that you are not likely to need in a hurry, such as birth certificates and originals of contracts. Other items can go in a sturdy safe at home.
  • In the same waterproof, portable "evacuation bag" in which you can keep medications, first-aid kits, flashlights, and so forth, keep some of the up-to-date financial papers mentioned above. But secure it well, lest you inadvertently provide a treasure trove of your financial information to a thief.
  • Choose automated services over dependency on writing and mailing checks and trips to your bank. You can weather a storm financially more easily with direct deposit, automatic bill payments, and Internet banking services.

STEER CLEAR OF BIG RIGS

With more and more tractor-trailer trucks on the roadways, it is prudent to be extra cautious when you encounter a big rig.

Remember that a large truck has a large blind spot. If you are driving in the truck's blind spot, the truck driver cannot see you. Either stay behind the truck or else pass it quickly.

Do not follow a big rig too closely. Large trucks block your view of hazards further down the highway, and a tired trucker might not brake soon enough to give you the warning you need to avoid a collision.

If in doubt, give the truck a wide berth. A car almost always loses in a collision with a large truck. The best way to avoid such accidents is to avoid the trucks.

SHOULD YOU INCORPORATE YOUR BUSINESS?

Following fast on the heels of a decision to go into a particular kind of business is the decision about what kind of legal form it should take. The most common options are a sole proprietorship, a partnership, or a corporation. You may lean toward the corporate route because you like the sound of having "Inc." after the company's name, but there are some more practical, business-like considerations to take into account.

More so than with some of the other structures for a business, starting a corporation means complying with formalities required by state laws. Once the shareholders (owners) of the business agree on some basic matters, such items are embodied in articles of incorporation that must be filed with the appropriate state agency. These essentials usually include:

a corporate name;
the number of shares that can be issued;
the number of shares each owner will buy and for what contribution of cash or property;
the nature of the corporation's business; and
the identity of the directors and officers of the corporation who will handle day-to-day operations.

The fledgling corporation will also need bylaws, which constitute a procedural rule book for the company.
Decisionmaking

The bottom line here is that whoever holds a majority of the shares of a corporation has ultimate control over it. Usually it takes a majority of the shares to elect the board of directors, which is charged with making the "big picture" decisions. If a decision is momentous enough for the company's future, such as a change in the articles of incorporation or whether or not to merge with another company, the shareholders usually have a more direct role in that they themselves must approve the decision by a certain margin of votes.

The board elects the officers of the corporation, typically including a president, vice-president, secretary, and treasurer. The officers may or may not be salaried employees or shareholders, and in some cases one person may hold more than one office.
Accountability

At or near the top of the list of characteristics favoring the corporate structure is the fact that, since the corporation is treated as a legal "person" separate from the people who own and run it, the shareholders as a rule are not personally liable for the corporation's debts. Instead, their risk is confined to their investment in the company. To every rule there is an exception, however, and here the exception has the colorful legal name of "piercing the corporate veil." If the owners do not comply with the statutory requirements for running a corporation, or if they blur the lines too much between corporate and personal finances, the legal fiction of the corporation as a separate entity is ignored and the owners are on the hook for the corporation's losses.
Transitions

As a separate entity in the eyes of the law, a corporation does not go out of existence if one or more of its owners dies. Instead, a corporation stays alive until its owners decide otherwise. Transfer of the ownership of the corporation is accomplished by selling its stock. New owners are added either when existing owners sell some of their stock or the corporation itself sells more shares of stock. The smaller the enterprise, the more likely it is that the owners, for whom the corporation may be both their property and their employer, may agree to restrict the sale of the stock in order to maintain control.

The particular circumstances of each new business and the differences in the governing laws of the states make generalities difficult. That said, the factors on the debit side of the ledger for corporations include the costs of setting up the corporate entity, the need for a separate tax return, and the burden of "double taxation." Double taxation means that the corporation is taxed on its profits, and the shareholders are then taxed on their dividends. On the credit side are limited liability for the owners and easy transfer of ownership.

Making the appropriate choice for a business form is one of the first, and one of the most important, decisions a new business will make. Whether choosing a corporate structure or some other form, make sure to consult with a qualified attorney.
SPORTS INJURIES
Lightning Strikes Golfer

Patrick and his friend Christopher decided to get in some late-afternoon golf on a summer day that had seen periods of turbulent weather, but also some clear skies. As Christopher held the flag for Patrick to putt, a golf course employee sounded a horn to warn of lightning in the area. Patrick putted out to finish the hole. Then the two friends started walking back to the clubhouse, which was about a quarter of a mile away. On their way, they were struck by lightning. Christopher was rendered unconscious for a few moments, but Patrick suffered serious injuries, and he now needs total care.

A negligence suit by Patrick's parents against the golf course owner was unsuccessful. For an owner of property to be liable for injuries to someone on the property, the injury must have been foreseeable. Without that, no duty of care arises in favor of the injured person. Practically everyone knows that lightning is dangerous, but that is quite different from being able to foresee that a particular lightning strike may occur.

Even assuming that the golf course operators owed a duty to Patrick, they did not breach that duty. Patrick and Christopher were given notice that lightning was in the vicinity by means of the horn, which sounded about 10 minutes before the strike that injured Patrick. That would have been enough time to get back to the clubhouse had the boys immediately heeded the warning. Aside from the specific audible warning, a prominent sign at the course warned all golfers that they were playing at their own risk and that when lightning was in the area they were to return to the clubhouse.

The sobering lessons from this case are that golfers themselves bear the most responsibility for protecting themselves from lightning, and that to delay in seeking shelter when lightning is near is to risk a tragic outcome.
Fan Hit by Foul Ball

Practically since our national pastime was in its infancy, operators of baseball stadiums have benefited from a more limited duty to spectators than that which generally applies to businesses that invite the public to come onto their property. Alone among spectator sports, baseball has fans who actively try to catch errant balls, sometimes even risking life and limb to get one. Even if fans would just as soon avoid the batted or thrown balls, the law has assumed that they are aware of the risks from these balls when they take their seats in the stands. The limited duty favoring fans generally is met if seats with protective screening are provided for as many people as normally would want them.

But what of the unsuspecting fan who is clobbered by a foul ball when he has left the sanctuary of his screen-protected seat to get a beer from a vendor? That was the misfortune of a fan who overcame the limited-duty rule when he sued a minor league baseball team for his injuries. A state supreme court ruled that his lawsuit could proceed under ordinary negligence principles.

The limited-duty rule for baseball fans loses its rationale when an injury from a flying ball occurs somewhere other than in the stands. In other areas of a stadium, it is foreseeable and predictable that fans will let down their guard. They may not even be paying attention to the game at such times and places, nor should they have to for their own safety. In the case at hand, when he was struck by the ball, the fan was chatting with other people in the line for concessions, and he could not have seen the batter hit the ball even if he had tried.

The court's concern for fans was heightened by some changes in baseball as a spectator sport. Children and seniors frequently attend professional baseball games. Today's players hit baseballs harder and farther. In keeping with the notion of the sport as multifaceted entertainment, ballparks today present what one observer has called "a sensory overload of distractions." As the court observed, "the beauty of common law is the ability to adapt to the times."
VALUATION DISCOUNTS FOR ESTATE AND GIFT TAXES

Upon the death of the owner of stock in a closely held corporation, the fair market value ("FMV") of the stock must be determined before an estate tax return can be filed. For gifts of such stock, it is also necessary to ascertain the value of the stock for gift tax purposes. Unlike publicly traded stock, the value of which can be determined easily on the Internet or in a newspaper, stock in a closely held business has a value that is more difficult to nail down. By definition, the shares are held by a much smaller number of people and are not widely traded.

Fair market value means the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have a reasonable knowledge of relevant facts. Calculating the FMV of closely held stock generally starts with an estimate of the total value of the closely held company itself. Application of discounts (or premiums) to account for the specific circumstances of the company then reduces (or increases) the FMV of the stock.

The process is highly focused on the particulars of each business. For example, in a recent decision by the United States Tax Court, the starting point in valuation of a decedent's minority interest in a closely held family corporation was easier to figure, because the corporation was a holding company with a portfolio of widely traded securities that had readily ascertainable values. But that market value was discounted by 10% to take into account a buyer's lack of control over the company and by another 15% for lack of marketability of the shares.

The Internal Revenue Service likes to keep an eye on valuation discounts, since they lead directly to a reduction in estate tax liability. Federal statutes, regulations, and Revenue Rulings have shed light on the use of valuation discounts. IRS Revenue Rulings have identified the following list of some primary criteria for determining the valuation discounts for closely held stock:

nature and history of the business;
outlook for the economy and the specific industry;
book value of the stock and financial condition of the business;
earning and dividend-paying capacities of the company;
goodwill or other intangible value of the enterprise;
sales of the stock and size of the block of stock to be valued; and
market price of publicly traded stocks of corporations in the same or similar line of business.

THE HAZARDS OF RÉSUMÉ SCREENING

It is popular now for employers to use screening tests, often administered on the Internet, to weed out a large portion of applicants for job openings before making the more difficult selections from among those who survive that first cut. Such tests are supposed to measure cognitive ability, personality characteristics, or, in fewer instances, the ability to perform in a simulation of the duties that the job requires. The easily administered and scored screening tests have their appeal, especially if you are charged with filling, say, 10 positions from 100 people who have submitted résumés.

A downside to screening tests is the risk that rejected applicants may persuade a court that the tests essentially were a tool to accomplish prohibited discrimination, even though that may not have been the employer's intent. For example, an employment test that impacts racial minorities or women disproportionately could lead to liability unless the employer can show that the test is sufficiently related to the job and is necessary to the employer's business.

Another potential pitfall stems from the prohibition in the Americans with Disabilities Act (ADA) against medical testing of job applicants. There sometimes is a fine distinction between acceptable personality or psychological tests and prohibited medical tests. The screening of applicants also could run afoul of some state statutes that protect against invasions of privacy.

When individuals adversely affected by a personality test challenged the test in federal litigation under the ADA, an appellate court struck down the test. The test, at least in some of its 502 questions, was a prohibited examination of the applicants' mental health. Its true or false questions went much farther than the acceptable lines of inquiry about matters such as working well in groups or in a fast-paced office. Instead, they ventured into the realm of psychiatric disorders. In this case, a prospective manager of a rent-to-own store could not be required to give true or false answers to statements such as: "I see things or animals or people around me that others do not see"; "At times I have fits of laughing and crying that I cannot control"; or "My soul sometimes leaves my body."
EMINENT DOMAIN UPDATE
Landowner Loses the Battle but Wins the War

In one of the most controversial eminent domain decisions ever, the United States Supreme Court ruled in 2005 that a city's exercise of its eminent domain powers to take private property in furtherance of an economic development plan satisfied the constitutional requirement that such power be used only for a "public use," even though private developers stood to profit handsomely from the city's actions. In reaction to that ruling, some state legislatures have been busy crafting legislation to limit the use of condemnation powers in such circumstances. For their part, the owners of property targeted for condemnation have considered how they still might fend off the taking, or, failing that, how to maximize the compensation that the government must pay.

In a recent case, a landowner was not able to defeat a condemnation initiated by a city so that a new hotel could be built on the property, but he did receive maximum compensation from an obviously sympathetic jury. The landowner was an immigrant who had spent two years and a lot of money renovating a warehouse and building a mail-order cigar business. When two private developers were unsuccessful in negotiations to buy the property as a site for a hotel, they instead reached an agreement with the city whereby the city would condemn the property for their desired use and the developers would pay the costs and fees associated with the condemnation.

When the city was first attempting to buy the property, it sent the landowner a toxic waste notice requiring him to investigate whether any toxins existed in the ground. The landowner tried to comply, but after spending many thousands of dollars he found no toxins. The city would later admit in the litigation that such an investigation was not really feasible so long as a building remained on the property. The toxic waste notice, and especially its suspicious timing, came to be seen as a tactic to put pressure on the landowner during the negotiations leading up to the condemnation.

Although the trial court ruled that the city could condemn the land for the hotel, in the subsequent trial before a jury for damages, the landowner fared much better. The jury awarded him the entire amount he had sought. The award included several million dollars each for the value of the property itself and for the loss of the goodwill associated with the cigar business. Damages for loss of a business are not typical in condemnation cases, but the landowner was able to show that there was no suitable alternative location for the business, so that he would have to start over from scratch. For good measure, the jury also awarded damages equal to the cost of the dubious toxicity study that the landowner had been forced to undertake.
SMOKE ALARMS: INEXPENSIVE GUARDIAN ANGELS

If you could pay $10 and, in return, get a guard who would warn your family if your house caught fire, would you? Of course you would. Despite this, most people do not have enough smoke detectors in their homes--detectors that will stand guard over your family's lives 24 hours a day. The evidence shows that using even an inexpensive smoke detector increases your family's chance of surviving a house fire by 50%, making it one of the best investments you can make for your family's safety.

Experts recommend installing smoke detectors, the cheapest of which start at about $10, throughout your house. At a minimum, install one detector for every floor and one outside of each bedroom. Test your smoke alarms once a month, and replace the batteries once a year. Make sure that every member of your family knows (1) what to do when the smoke alarm sounds, and (2) the fire escape route from each room. A little advance planning can help make sure that you and your family have a better chance if a fire should start in the night.

WHERE TO SUE? WEBSITES CAN AFFECT JURISDICTION

In a nation of 50 different systems of state courts and a highly interconnected national economy, the issue of when one state's courts can assert jurisdiction over a nonresident person or business has always been fertile ground for litigation. State legislatures have addressed the matter with laws that are the civil counterparts to the notion that criminals cannot escape the "long arm of the law." But "long-arm statutes," as they are known, do have their limits. Essentially, nonresidents can be sued in the courts of any state where they have had such contacts inside the state that it is reasonable to conclude that they have submitted themselves to the authority of the courts in that state. The principle is vague, but it has to be to cover the almost endless ways in which we conduct business.

In the business world, conventional arguments over the application of long-arm statutes have involved questions such as whether a party sought to be sued had an office or personal representative in the forum state, or whether a contract was signed by the parties in that state. Those issues still arise, but in the information age, courts increasingly have had to adapt the rules to business conducted over the Internet. Just because a company's website is accessible by customers in a given jurisdiction does not necessarily mean that the company can be sued there. The emerging rule of law is that the more that a customer can have online interactions with a business based elsewhere, the more likely it is that if things go wrong the business can be forced to play an "away game" in court.

Close, but No Cigar

Examples make the point better than statements of rules of law. A Vermont furniture store used a trucking company to deliver furniture to a customer in North Carolina. When the buyer was injured during unloading, he tried to sue the furniture company in a North Carolina court. In this case, the "long arm" was not long enough to reach the Vermont company. The furniture had been bought and paid for in Vermont. The only respect in which the store had any connection to North Carolina was that its website could be accessed there, like anywhere else. But it was a passive site, giving information about products, but not allowing purchases through the site.

When an Oklahoma resident bought a laptop computer from a Georgia company, then returned it for repairs, never to see the laptop again, he was unable to sue the company in Oklahoma. The customer had learned about the computer from the Georgia company's website, but he had ordered it by telephone and had not used the website to make the transaction.

Caught by the "Long Arm of the Law"

At the other end of the spectrum are cases in which businesses could be sued in the states where their customers lived because the businesses had a more substantial online "presence" in those states. A dog breeder in Illinois could make a similar Oklahoma business defend a lawsuit in Illinois because the Oklahoma business operated an interactive website and also used chat rooms to reach potential customers all over the country.

A California customer of a hotel run by a Nevada casino was able to haul the casino into a California court to defend allegations that it had imposed an energy surcharge on customers without notice. The plaintiff alleged that nothing in the casino's promotional activities, including its website, informed customers of the charge. It was important to the ruling that the casino used an interactive website where out-of-state customers could get quotes and book rooms. In addition, there was a close connection between the alleged wrong--the misleading promotions--and the casino's website that targeted millions of California residents.

PROPERTY TRANSFERS AND MEDICAID ELIGIBILITY

An applicant for Medicaid may have eligibility for benefits delayed if he or she has recently transferred real property to an individual for less than the fair market value of the property. A penalty period is imposed if the transfer took place during a span of time known as the "look-back" period. This provision is meant to prevent duplicitous gaming of the Medicaid system, but, as a court recently noted, the provision does not justify viewing every property transfer with skepticism and disapproval merely because it precedes Medicaid eligibility.

In the case before the court, a 67-year-old who suffered from Alzheimer's disease and other ailments applied for Medicaid assistance. The state agency that oversaw Medicaid rejected the application on the ground that the applicant had transferred real property for less than its value within the look-back period. The applicant, in fact, had conveyed the home where she lived to her three children as a gift, and the deed to the property was recorded shortly before she applied for Medicaid.

Nonetheless, the court overturned the agency decision because the agency had not properly pegged the point in time when the property transfer became effective as a matter of law. For various reasons, there had been a lengthy delay in getting the executed deed recorded, but the deed had been executed and delivered to the children well before the look-back period began. The court favored a "benevolent" interpretation of the family's well-intentioned but haphazard attempts to follow up more promptly with recording the deed, rather than seeing it as part of a scheme to delay the transfer until it was apparent that the mother needed nursing home care and Medicaid money to pay for it.

It is a well-settled principle of property law that a transfer of real property is complete upon the execution and delivery of a deed and its acceptance by the recipient of the property, and nothing in the Medicaid regulations contradicts that principle. In the case at hand, there was no reason to suspect that the mother did not mean to convey the property as soon as the deed was executed and delivered. Since the transfer of the property was effective when the deed was transferred, the transfer occurred outside the look-back period and the applicant was eligible for Medicaid assistance.

ADA PROTECTS EMPLOYEES WITH CANCER

Now 15 years old, the Americans with Disabilities Act (ADA) protects disabled persons from discrimination in employment settings. When you first think of individuals with disabilities, the millions of Americans who have some history of cancer may not immediately come to mind. But, as the Equal Employment Opportunity Commission (EEOC) discusses in a recently published guide, a cancer victim may well be entitled to the protections afforded by the ADA.

Cancer as a Disability

Cancer is a "disability" within the meaning of the ADA when the cancer itself or its effects substantially limit one or more of a person's major life activities. The limiting condition needs to be more than just temporary in nature. Just what constitutes a major life activity is difficult to succinctly describe, but an exhaustive list would be a long one. Interacting with others, sleeping, eating, and walking are but a few examples. As with other types of conditions, cancer will be treated as a disability if it does not, in fact, significantly affect a major life activity but an employer treats the individual as if it does. This reflects the ADA's goal of attacking discriminatory stereotypes and assumptions when they motivate an employer's decisionmaking.

Information Gathering

During the time period before any offer of employment has been made, an employer may not ask an applicant if he or she has (or has had) cancer, or about cancer-related treatments. The employer is permitted to ask if an applicant can perform particular job requirements. If an applicant has volunteered the information that he or she has (or has had) cancer, the employer still may not question the applicant about the cancer or the applicant's prognosis, but the employer may ask questions about whether the applicant will need an accommodation and, if so, what kind.

Once a job offer has been made, the employer may ask health-related questions and require a medical exam, as long as the employer treats all applicants for the same type of position in the same manner. The discovery that an applicant has (or has had) cancer cannot be used to withdraw a job offer if the applicant can perform safely all of a job's fundamental duties, with or without reasonable accommodation. When an offer has been accepted, the employer can ask questions about the employee's health or require a medical exam only when it has a legitimate reason to believe that the cancer may be affecting the employee's ability to do the job, and to do it safely. With a few exceptions, an employer must keep confidential any medical information learned about an applicant or employee.

Reasonable Accommodations

Within reason, the ADA requires employers to make adjustments or accommodations to enable people with disabilities to enjoy equal employment opportunities. An employer is not required to subject itself to undue hardship (that is, significant expense or difficulty) in order to accommodate someone. Nor must an employer remove an essential function from a job, although it may choose to do so. As for cancer-related disabilities, some individuals may need, and are entitled to, reasonable accommodations because of the cancer itself, the effects of cancer medication and treatment, or both. A request is necessary to trigger the duty to make a reasonable accommodation, but no "magic words" are required and, in fact, the request may come from someone acting on behalf of the disabled person. The guidance is available on the EEOC's website at www.eeoc.gov/facts/cancer.html.

SOCIAL SECURITY NUMBER VERIFICATION FOR EMPLOYERS

The Social Security Number Verification Service (SSNVS), set up by the Social Security Administration (SSA), allows employers to use the Internet to match their records of employee names and Social Security numbers with those of the Government's before preparing and submitting W-2 forms. You can access the SSNVS at www.socialsecurity.gov/bso/bsowelcome.htm. This is a faster and easier method to use than submitting requests to the SSA by other means, including the telephone verification option.

Verification of data is important for both the employer and its employees. Correct names and numbers are critical to successful processing of wage reports, and unmatched records can cause additional processing costs for the employer. From the employees' standpoint, verified names and numbers allow the Government to properly credit employees' earnings records. Any uncredited earnings can adversely affect future eligibility for Social Security's retirement, disability, and survivors programs.

AEDS HELP TREAT HEART ATTACKS . . .

But Can Cause Legal Headaches

An automated external defibrillator (AED) is used to treat people suffering sudden cardiac arrest whose hearts have an irregular heartbeat. Since September of 2004, when the Federal Food and Drug Administration approved over-the-counter sales of AEDs, it has been possible for individuals and businesses to have AEDs on hand, instead of waiting for them to be brought by medical personnel.

The greater availability of AEDs has been a mixed blessing from a legal standpoint. Businesses most likely to put an AED to use (and what business cannot foresee that a customer might have a heart attack on its premises?) are now in the position of having to decide whether they should have an AED at their facilities. If they do not, there is a risk that a customer who needed an AED could cite the failure as negligence in a lawsuit. That is the "damned if you don't" part, but the rest of the saying may apply as well.

If a business--for example, a fitness center--decides that it would be prudent to have its own AED, it may be commended for preparing for an emergency, but it also may have created a legal headache. Under the right set of facts, the business could be liable for a range of acts or omissions, such as not training its personnel to properly use the AED, or even something as simple as not keeping fresh batteries in the AED. There are already lawsuits in which such allegations have been made, and court cases from the period before over-the-counter sales began suggest that businesses can be held liable if the AED is not kept in good working order or if the use (or non-use) of the AED is especially negligent.

Businesses with AEDs on premises should think in terms of having a comprehensive AED program, not just the piece of equipment. With a view toward quick and effective use of the AED, the program should include:

  • good means of communication about emergencies requiring an AED;
  • training of workers in the use of the AED;
  • procedures for regular checking and maintenance of the AED, and;
  • storage of the AED in an accessible location, identified by clear signs.

NEW 401(K) INVESTMENT OPTION

As of January 1, 2006, employers are able to offer a new retirement savings option, the Roth 401(k). The new account allows the features of a Roth IRA to be incorporated into the setting of a 401(k) account, but without the income restrictions that limit a Roth IRA. Contributions will be made with after-tax dollars, but the account will grow tax-free, and withdrawals taken in retirement will also be tax-free, assuming an individual is at least 59-1/2 years old and has held the account for at least 5 years.

Roth 401(k) accounts will be subject to the same contribution limits as regular 401(k)s. In 2006, this means a contribution limit of $15,000, or $20,000 for individuals 50 and over. The contribution limits apply to regular and Roth 401(k) plans combined, so, for example, an individual could not put $15,000 in a regular 401(k) and $15,000 in a Roth 401(k). Still, the opportunity to put more money into a retirement account that will have tax-free withdrawals will be enhanced, given that in 2006 the contribution limits for a regular Roth IRA will be $4,000, or $5,000 for those 50 or older. If an employer matches the employee's contributions to a Roth 401(k), the matches will be made with pre-tax dollars in a regular 401(k) account that will be taxed as ordinary income at withdrawal.

Although it is only now becoming available, the Roth 401(k) originated in a big piece of tax legislation that was enacted in 2001, with a sunset provision to take effect in 2010. Thus, it remains to be seen whether over the long run the Roth 401(k) will be seen as an option that was available in a small window of time, or a permanent fixture in retirement planning.

LANDLORD/TENANT

Insurer May Sue Renter for Fire Damage

Unless there is a contract or lease that provides otherwise, a tenant generally is liable to a landlord for negligently damaging the landlord's property, such as by accidentally starting a fire. But, depending on the language in the landlord's fire insurance policy, the tenant could end up defending himself against a powerful insurance company rather than the landlord.

Many insurance policies provide for subrogation, meaning that if the insurer pays a claim from the landlord for losses due to a negligently started fire, the rights of the landlord a

COURTS BEGIN PUTTING THE BRAKES ON "TAKINGS"

The power of government to take private property for a public use, with payment of fair compensation, has been nearly unassailable in our legal system. In most condemnation cases, the right to take the property is a foregone conclusion, and the parties litigate only the amount of compensation. Courts generally have deferred to the government's articulation of a public purpose for the taking, even when private parties also benefit.

In recent years, there has been a trend toward closer scrutiny of a proposed condemnation to find a paramount public purpose, and even to stop the proceedings where one is lacking. Property owners targeted for a taking are receiving a more sympathetic hearing when they contend that the true beneficiary of the proceedings is not the public but simply another private party with designs on the property.

Although they were largely unsuccessful, challenges to takings as lacking a public purpose first arose in urban renewal cases. The government would condemn blighted property so that it could be redeveloped, usually by private developers. The government could point to the overriding public benefits from such revitalization of property and could successfully argue that benefits to private parties were incidental.

In successful attacks on use of the condemnation power, it is harder to find the public use and easier to see private profit as the motivation for the taking. For example, in one case, the developer of an automobile racetrack wanted some neighboring land for a parking lot, but the company that owned the land did not want to sell it. The developer reached an agreement with a regional authority that had condemnation powers, by which the developer would pay for proceedings to condemn the land in return for getting the property from the authority immediately after the condemnation. A state supreme court found that this transparent arrangement to take land so that it could benefit the racetrack developer was a misuse of the eminent domain power. As the court put it, that power "is to be exercised with restraint, not abandon."

In another successful challenge to a condemnation, a city tried to take land owned by a church in order to turn the land over to a major discount retailer. The property had been vacant for a decade, despite having been declared a blighted area. The city tried to use blight removal and redevelopment of the property to justify its actions. This reasoning was undermined by the city's denial of permits sought by the church for more church buildings on the property, even though such a use would have eliminated blight just as well as the commercial use favored by the city.

The more believable motive for the city was its desire to generate more revenue by putting a taxable business on what had been tax-exempt church property. But the city had other ways to generate revenue. As to both of the city's ostensible goals--blight removal and generation of revenue--the city was "using a sledgehammer to kill an ant." In issuing an injunction against the condemnation proceedings, the court characterized the condemnation as resting only on "the desire to achieve the naked transfer of property from one private party to another."

CASE BY CASE

Long-Arm Jurisdiction Falls Short

Robert found just the excavator he wanted advertised on an Internet auction site. Before making the successful bid, he contacted the seller through e-mail and received assurances from her that the product was in good condition. Robert then traveled to the seller's home, which was several states away, and bought the excavator. When the equipment did not perform as expected and the seller did not respond to Robert's request for a partial refund, Robert sued the seller in his home state.

Robert's lawsuit failed because the seller was not subject to the jurisdiction of the courts in Robert's home state. For a nonresident to bring herself within the reach of a state's "long-arm" jurisdiction, she must purposefully have benefited from the privilege of doing business in that state. Perhaps the seller could have foreseen that residents of any state might bid on the excavator, but that was insufficient to bring her into the courts in Robert's state. She had no control over who would ultimately be the winning bidder, nor could she exclude bidders from particular jurisdictions.

Also weighing against subjecting the seller to litigation was the isolated nature of the transaction and the fact that she was not a commercial seller and was using a third party's site. A different result might have been achieved against a business that used its own website to advertise itself and make transactions across state lines.

Liability for Independent Contractors

In another case, a manufacturing company contracted with a security firm to provide a security guard. The guard shot and killed an individual who was trespassing, but not for criminal purposes, on company property, after the person had obeyed the guard's order to lie on the ground. The company argued that it could not be held liable for the negligent acts of an independent contractor, but a state supreme court ruled otherwise.

The court agreed that the security firm and its guard were independent contractors. The manufacturing company's downfall was an exception to the rule of no liability for acts of independent contractors. If the work to be performed is inherently dangerous, the work can be delegated to an independent contractor, but the duty to use reasonable care cannot be avoided by the employer. Work is inherently dangerous when it involves a foreseeable risk of physical harm to others and requires special precautions.

In the case of the trigger-happy security guard, who was armed and instructed to "deter" thieves and vandals, dangerous confrontations between the guard and persons entering the property were contemplated. In the context of such danger, the independent contractor status of the guard became a mere legal technicality that did not shield the manufacturing company from liability.

ADA AND SMALL BUSINESSES

The Americans with Disabilities Act (ADA) prohibits disability discrimination in employment for employers with 15 or more employees. The prohibition is far-reaching and covers hiring, firing, and everything in between, such as promotions, benefits, and harassment in the workplace. The smallest of businesses are not affected by the ADA because of the 15-employee threshold for coverage. The ADA does apply, however, to many of the roughly 25 million small businesses in the nation.

Who Is Protected?

The ADA protects three categories of individuals: those with a physical or mental impairment that substantially limits one or more major life activities (like sitting, standing, or sleeping); those with a record of such an impairment, such as a person who had debilitating cancer but is now in remission; and those who are regarded by employers as having such an impairment, even though the individuals otherwise are not so impaired as to be "disabled" under the ADA. Regardless of the category, the ADA protects only persons who are qualified, that is, they meet job-related requirements and can perform essential functions for the job, with or without a reasonable accommodation.

Hiring

While an employer can ask an applicant a wide range of questions concerning job qualifications, the ADA does not allow medical examinations or questions about disability until the employer has made the applicant a conditional job offer. An exception is recognized for questions directed to an apparently disabled applicant about whether a reasonable accommodation will be required.

After a job offer is made, an employer can ask any disability-related questions and require medical examinations, so long as these requirements apply to everyone in the same job category. For example, if, during a medical examination required of all employees in a job involving the use of dangerous machinery, it is revealed that an applicant has frequent and unpredictable seizures, the employer can withdraw a job offer to that individual.

Medical Information

Once a person is on the job, the ADA allows required medical examinations or questions about a disability only where there is a reasonable belief, based on objective evidence, that a particular employee will not be able to perform essential job functions or will pose a direct threat because of a medical condition. As an example, if a normally reliable employee has told her employer that a new medication she takes makes her lethargic, and she begins to make many mistakes, the employer can ask her how long the medication can be expected to affect job performance.

Reasonable Accommodation

The ADA differs from most other employment discrimination laws in imposing an accommodation duty on employers. If a disabled person needs a reasonable accommodation in order to apply for, or perform, a job, the employer generally must provide it unless to do so would create an undue hardship. An undue hardship means significant difficulty or expense, based on an employer's resources and operations.

Most accommodations are not expensive or burdensome. A diabetic employee may need regular breaks to eat properly and monitor blood sugar and insulin levels, or a blind employee may need someone to read information posted on a bulletin board. If more than one accommodation will work, the employer may take the option that is less costly or easier to provide.

In addition to the undue hardship defense, an employer need not provide an accommodation which:

* assists an individual off the job;

* removes or alters the essential functions of a job;

* lowers production or performance standards; or

* excuses violations of rules on good conduct.

Helpful Handbook

The Equal Employment Opportunity Commission, which is charged with enforcement of the ADA, has issued a new handbook to help small businesses comply with the ADA. The handbook provides many examples of factual situations with which small businesses could be confronted. The ADA primer can be accessed online at http://www.eeoc.gov.

SOLO 401(K) RETIREMENT PLANS

As a result of recent tax law changes, a new retirement savings account is now available for "owner-only businesses." An "owner-only business" is either a business that employs only the owner and immediate family members or a business that employs only the owner and employees who by law may be excluded from participation in retirement plans. Excludable employees include employees under age 21, employees with less than a year of service or who work less than 1,000 hours per year, certain union employees, and certain nonresident alien employees.

The new plan, sometimes called an Individual (k) plan, can be set up both by incorporated businesses or unincorporated businesses such as sole proprietorships and partnerships. When compared with other types of business retirement plans, an Individual (k) plan allows more flexibility in its funding and larger contribution amounts.

The two components of an Individual (k) plan are a profit-sharing contribution from the employer (up to 25% of compensation) and an employee salary deferral (up to $12,000 in 2003). Combining those two components, the maximum contribution on behalf of any one business owner is a whopping $41,000 in 2003. Contributions are discretionary each year.

The maximum salary deferral amount will increase by $1,000 per year through 2006. In addition, for individuals who are age 50 or older, the Individual (k) plans, like 401(k) plans for larger businesses, allow "catch-up" contributions in amounts that will increase annually through 2006. For 2003, the maximum catch-up contribution is $1,000.

Business owners are eligible to take personal loans from Individual (k) plans, so long as the plan document allows for plan loans. They may borrow as much as $50,000 in cash, or 50% of the balance in their account, whichever is less. Borrowing from an Individual (k) plan carries the same downside as with conventional 401(k) plan borrowing, however, making this move a last resort for many. Aside from undermining the accumulation of a large balance growing tax-free in the account, a loan, if not paid back on time, will be considered a distribution by the IRS, triggering income taxes and a 10% penalty.

CREDIT REPORTING AGENCY HELD ACCOUNTABLE FOR ERRORS

Judy discovered that her credit report from a large credit reporting agency erroneously included about a dozen accounts for a different person, also named Judith. The report identified Judy as using that person's name as an alias. Unfortunately, the "other" Judith, who did exist, had a checkered debt-paying history that was erroneously presented as Judy's in the credit report.

Judy's own spadework revealed that the credit reporting agency had merged her information with that of the second Judith because they had similar first names, were born in the same year, were from the same part of the country, and, most importantly, their Social Security numbers differed by only one digit. This initial computer mistake was bad enough, but what ultimately led to a very large damages verdict for Judy was the inadequate response of the reporting agency once Judy had brought the errors to its attention.

The agency deleted some of the accounts that did not belong in Judy's report, but it kept most of them after supposedly verifying them with creditors. This "verification" was very superficial and did not convey to the creditors the information Judy had provided. In effect, the agency simply asked each creditor, "Is this what you reported?" Fully three years after Judy notified the reporting agency of the erroneous information in her report, some of it remained, and the undeserved stain on her credit was as obvious as ever. To add insult to injury, some of the deleted information from the second Judith even reappeared on Judy's report.

The situation came to a head when the erroneous credit report caused Judy to be denied a mortgage. By supplying still more information to the agency, including a supportive letter from the "other" Judith, and contacting creditors herself, Judy eventually cleaned up her credit report and got out from under the shadow of a stranger's unpaid debts. By then, however, she was a wreck emotionally, and the damage to her credit reputation was only beginning to be restored. A jury verdict made the credit reporting agency pay for these injuries, but sent an even louder message in a large award of punitive damages.

The success achieved in Judy's lawsuit was largely due to her own diligence. The steps she took are practically a blueprint for what someone should do when credit reporting errors are made and then left uncorrected by an agency. It took years in her case, but Judy prevailed in the end by making telephone calls, keeping notes and documents, contacting creditors directly, and even enlisting the aid of the debtor whose poor credit history had appeared in Judy's credit report.

ONLINE BANKING

Banks that rely on the Internet and other low-cost ways to provide service, as opposed to "bricks and mortar" branch offices, can save on expenses and pass the savings along to customers in higher returns on deposits and lower interest rates on loans. Online banking also gives customers the convenience of being able to monitor their accounts and complete transactions around the clock, without waiting for mailed statements or being limited by office hours.

The flip side of online banking is that, if a problem arises, you cannot sit down face-to-face with someone from the bank to resolve it. There is also a premium on doing research to check out the legitimacy of an unfamiliar and remote institution before you entrust it with your money and private information. A good place to start is the "About Us" section of a bank's website, which should at least give basic contact information. If it does not, that in itself should raise suspicions. Other warning signs include names or websites that are only slightly different from those of well-known institutions and rates of return that are far out of line with what other banks are offering. It is a good idea to confirm that an institution is federally insured by contacting the Federal Deposit Insurance Corporation or searching its "Institution Directory" at www3.fdic.gov/idasp.

Like any bank customer, users of online banking institutions are well-advised to safeguard private identification information, keep good records, and monitor transactions and balances regularly. Online banking customers also have the protection of federal laws such as the Equal Credit Opportunity Act, the Truth in Lending Act, and the Truth in Savings Act. Those who decide to do their banking solely in front of a computer screen especially should know about the Electronic Fund Transfer Act, which deals with consumer rights involving electronic banking transactions.