Employee Benefit Research Institute (EBRI) relaunches website

Fri, 09 Jan 2009 02:54:23 GMT

If you are in the business of benefits or otherwise need independent non-partisan research information, you should be pleased with the news that the Employee Benefit Research Institute (EBRI) has relaunched and updated its website. The improved site makes it easier to access EBRI's treasure trove of research made available free to the public. You can check it out here.

Redeem your stuff in bankruptcy

Fri, 09 Jan 2009 01:25:10 GMT

Chapter 7 debtors can keep personal property they have pledged as security for a loan by paying the present value of the item, rather than the balance of the debt. I did my first motion to redeem property this month and got an order allowing the client to get clear title to two vehicles he [...]

Dealing With Troubled Companies - Does Purchasing Assets Avoid Seller Liabilities?

updates@antitrustlawblog.com (Sheppard Mullin) — Fri, 09 Jan 2009 00:50:28 GMT

A common strategy for acquiring the business of a troubled company is to purchase assets rather than acquire all outstanding capital stock of the target, based on the general principle that a purchaser of assets is not responsible for liabilities of its seller absent an express or implied assumption. Does the strategy work? Depending on the liability and circumstances, the answers are "No" and "Maybe," and sometimes a qualified "Yes." In troubled economic times, buyers may reconsider whether they are willing to rely upon indemnity by the seller or its owners, particularly since doctrines of public policy may render such an indemnity unenforceable in certain situations.

State and Local Taxes. At least 25 of the 50 states impose successor liability on a purchaser of assets with respect to unpaid taxes of the seller, unless the purchaser either (i) withholds the taxes from the purchase price or (ii) obtains a clearance certificate from the government. Usually, but not always, the transaction must involve substantially all the assets of the business or a termination of business by the seller.
Bulks Sales Act. Failure to comply with a state bulk sales act, if applicable, generally results in liability for the purchaser to creditors of the seller.
Certain Product Liabilities. A buyer may inherit seller product liabilities pursuant to judicial doctrine.
Collective Bargaining Agreements. A purchaser of assets may be required to recognize and bargain with a union that represented the seller's employees
Certain Underfunded Pensions. If the seller participates in an underfunded multiemployer union pension plan, a sale of its assets results in immediate withdrawal liability. Some courts hold a buyer liable for a seller's delinquent contributions and withdrawal liability despite disclaimer in the asset purchase agreement.
Environmental Liabilities. A buyer may be liable for seller liabilities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or other environmental laws.
Regulated Industries. If the seller engages in a business subject to special governmental regulation, then additional issues arise concerning potential exposure of an asset purchaser to seller liabilities.
De Facto Merger or "Mere Continuation" of Seller. Pursuant to common law developed by the courts, a seller and buyer may be considered to have undergone a "de facto merger" or the buyer may be considered a "mere continuation" of the seller, with the result that the buyer is liable to creditors of the target.
Fraudulent Transfers. Obviously an actually fraudulent sale can create successor liability. However, both state and federal law may treat a transfer as "fraudulent" -- and thereby expose the buyer to liabilities of its seller –in various circumstances, most commonly where the seller is insolvent before or after the transfer.

Authored by:

John R. Bonn

(978) 594-0170

jbonn@sheppardmullin.com

Cramdown's A'Comin'

kjfunnell@gmail.com (Kevin Funnell) — Thu, 08 Jan 2009 22:59:57 GMT

To no one's surprise, (certainly not ours), first lien residential mortgage loan cramdowns will soon be coming to a bankruptcy court near you. Although we haven't seen the bill yet, Dick Durbin's office announced today that he, Chuck ("Bank Run") Schumer and Chris ("I Boinked Princess Leia") Dodd, had cut a deal with Citigroup on a bill that would permit such cramdowns in Chapter 13 bankruptcy proceedings. According to The Wall Street Journal, which broke the story, this "marks a surprising change of direction by the financial-services industry."

Banks have consistently fought such legislation, saying cramdowns would raise borrowing costs for all home buyers and jam courts with homeowners who wouldn't otherwise declare bankruptcy.

"This is the breakthrough we've been waiting for, to have a major financial institution support this legislation will create an incentive for others to come our way," Sen. Durbin said in an interview. "I want to congratulate Citi for being open-minded about this [and] playing a major leadership role."

I thought Barack Obama was the breakthrough we've been waiting for? I guess not.

The WSJ also reports other "open-minded" financial institutions support the bill, but did not identify them. I'd hate to think that Bank of America died and left Citi in charge of the US commercial banking biz. After all, when it comes to "open-mindedness," it's hard to beat BofA, which sometimes is so open-minded that its brains fall out.

Frankly, as described by the WSJ, the bill doesn't sound as bad as many might have feared, even though it goes beyond what the banking industry has been willing to support in the past.

The Democrats' proposal allows judges to force major reductions in home loans, after homeowners certify that they have attempted to contact their lenders about a mortgage reduction before bankruptcy proceedings begin. They do not however have to have engaged in negotiations with their banks.
The cramdown bill would apply to all mortgage loans, including but not limited to subprime loans, written any time prior to the bill's date of enactment. It allows judges the ability to lower principal or interest rate, extend the term of the loan, or any combination of the three. "Cramdown" refers to the ability of judges to lower a mortgage principal so that it is equivalent to the current market value of a home.

In a concession to lenders, if a lender is found to have violated the Truth in Lending Act during bankruptcy proceedings, the institution would be subject to fines, but would not have to forgive the loan, as is the case currently. Major violations would still be subject to full sanctions under the law. The TILA provisions would pre-empt any state lending laws.

I'm certain that many bankers who do not have the heft of major Mastodons like Citi and BofA will be critical. I can admit to a bit of mystification myself as to the fact that the cramdown right will apply only to loans made prior to the date of passage of the legislation. I thought the argument for extending cramdowns to first mortgage loans was to deal with those awful subprime and "exotic" loans made when real estate values were as high as the lenders and borrowers who based their lending decisions upon those values ever rising. Why not single out specific types of loans? Also, why not pick an effective date that is at least no later than mid-2008? Good arguments can be made that an even earlier date should be selected. You're going to effectively "rewrite" some conventional home mortgage loans that were initially prudently underwritten, to the disadvantage of the lender. That's done with second loans, auto loans, and commercial loans, but the lenders of those types of loans set pricing based upon the knowledge that there's the risk that cramdown could occur. That's not the case for first mortgage loans. Is that "fair," in light of the fact that the Democrats who support this bill are all about "fairness"?

We'll be interested to see the effect of this legislation on pricing of loans and loan servicing on pre-effective date mortgage loans. I wonder if prospective purchasers will drive harder bargains on bulk purchases of such loans from the FDIC due to this risk? You think?

At least the cramdown will not apply first loans going forward. Of course, any lender with a brain in his head has to assume that if Congress did it once, Congress could very well do it again, and price the risk accordingly. Moreover, this is likely not only to make first mortgage loans more expensive, but add even more impetus to restrictive underwriting standards. While many people believe that's not a bad effect, let's ask them again in a few years. As I observed when Durbin first started this push, the same folks who scream for cramdowns will be some of the first complaining that lenders aren't making enough loans to those with poor credit, who will likely be members of various classes of the perpetually aggrieved, and supporters of Senator Durbin and the rest of the Gang of Three.

Mortgage Modification Legislation Update: Citigroup Supports the Bill

Thu, 08 Jan 2009 21:48:47 GMT

Big news out of Washington, from the Washington Post: Financial giant Citigroup Inc has agreed to support a controversial rewrite of U.S. bankruptcy law aimed at helping troubled mortgage borrowers, three Democratic senators said on Thursday. Senators Richard Durbin of...

Big news out of Washington, from the Washington Post:

Financial giant Citigroup Inc has agreed to support a controversial rewrite of U.S. bankruptcy law aimed at helping troubled mortgage borrowers, three Democratic senators said on Thursday.

Senators Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut said the legal reform would help "millions of families save their homes."

Citigroup has agreed to support, under certain conditions, a rewrite of bankruptcy law. Under the change, known as "cramdown," bankruptcy courts could alter the terms of mortgages, subject to certain conditions, the senators said.

More here

Lipson

Thu, 08 Jan 2009 20:55:00 GMT

The Supreme Court released its decision in Lipson today: see Lipson v. The Queen, 2009 SCC 1. The CanLII link to the case appears to be down right now, but it’ll probably be fixed later.

Remove That Mortgage Entirely: Yes, We Can

Thu, 08 Jan 2009 20:14:54 GMT

You should soon be able to get rid of your mortgage altogether, based on a really sweet spot of the newly proposed Helping Families Save Their Homes in Bankruptcy Act of 2009 which is fast-tracked for a 01/21/09 enactment and retroactive applicability. A mortgage can be canceled if the closing documents are incomplete. See “Cancel That [...]

Canadian Bankruptcy Statistics, November, 2008

webmaster@bankruptcycanada.com (Earl Sands) — Thu, 08 Jan 2009 19:58:45 GMT

Canadian Insolvencies Increase by 15.3% for the Month of November, 2008 compared with the Same Month in 2007.

Madoff Ponzi Schemes, Securities Fraud and the Internal Revenue Service

Thu, 08 Jan 2009 19:41:22 GMT

Once investors get over their initial shock that they were being bilked by Bernard Madoff in a massive Ponzi scheme they will be looking for ways lessen the impact. One of those ways is through the tax laws. Our tax attorneys have identified at least two possibilities. The first is that investors may be entitled to a theft loss pursuant to Internal Revenue Code Section 165. Unfortunately the year the loss can be deducted will probably be the subject of a tax dispute. Generally theft losses are deductible in the year of discovery. However, if there is still a possibility of recovery the deduction may need to be deferred.

Another idea is filing amended income tax returns for the last three years, taking the position that the payments received which had been reported as capital gains, dividends or interest were in fact a return of capital, and therefore non-taxable. This position is supported by Greenberg v. Commissioner, a 1996 case decided by the United States Tax Court. The Internal Revenue Service ("IRS") believes, however, that the rule in Greenberg only applies in limited situations. IRS Legal Memorandum ILM 200305028. It is likely that those who file amended returns will be subjected to a tax audit, and that barring a change of heart by the Internal Revenue Service will need to hire a tax litigation attorney to assist them.

Generally the tax law allows only three years from the date the original tax returns were filed to file amended returns. For most taxpayers this means that if they act quickly they can file amended returns for 2005, 2006, and 2007.

If you have a tax problem call certified tax specialist Dennis Brager.

What do you need to do before you quit your job to form a startup company?

ytaku@wsgr.com (Yokum Taku ) — Thu, 08 Jan 2009 19:41:11 GMT

There are various things a potential founder of a new startup company needs to do before quitting their job. 1. Review all agreements with your current employer. Most employees may have signed an offer letter and a confidential information and invention assignment agreement, as well as other documents such as a stock option agreement. Depending [...]

There are various things a potential founder of a new startup company needs to do before quitting their job.

1. Review all agreements with your current employer. Most employees may have signed an offer letter and a confidential information and invention assignment agreement, as well as other documents such as a stock option agreement. Depending on the company and the employee, other relevant documents might include a employment agreement, employee handbook, conflict of interest policy or severance/separation agreement. These documents should be reviewed carefully for provisions that may inhibit the future startup company. Enforceability of some provisions in these documents, such as non-compete clauses, generally depends on the state where the employee is located.

Reviewing the documents for the following provisions is important.

Confidentiality. All technology companies require employees to sign a confidentiality agreement that prevents the employee from using or disclosing employer confidential information except for the benefit of the employer. These confidentiality provisions are typically for an indefinite period of time, as opposed to a finite period like five years. In any event, most states prohibit the misappropriation of trade secrets as a matter of law, regardless of whether the employee signed a confidentiality agreement or not. Thus, a potential startup company founder needs to ensure that he/she does not use former employer confidential information in connection with the new company.

Invention assignment. In addition, all technology companies require employees to assign inventions created during employment to the employer.

A typical invention assignment clause provides:

I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and agree to assign and hereby do irrevocably assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks, or trade secrets, whether or not patentable or registrable under patent, copyright, or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company (including during my off-duty hours), or with the use of Company’s equipment, supplies, facilities, or Company Confidential Information, except as provided in Section 3.F below (collectively referred to as “Inventions”).

In California, there is an exception to this requirement to assign inventions if the employee has made the invention on his/her own time not using company equipment and the invention does not relate to the business of the company or did not result from work for the company. California Labor Code Section 2870 provides:

(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the employer.

(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

However, an employee may still need to notify the company of an non-assigned invention under the terms of the invention assignment provision. Occasionally, I have seen invention assignment clauses that require the employee to assign inventions created for a certain period of time after termination of employment, from six months to a year. These clauses may be enforceable depending on the state and the facts and circumstances of the situation.

Invention disclosure. Even if an employer does not require post-termination invention assignment, some employers include provisions in standard documents that require the employee to disclose inventions created (or patents filed) for a certain period of time after termination of employment. This is less common and may be enforceable if it is reasonably necessary to protect the company’s business interests.

Non-compete. In many states, non-competes are enforceable if they are reasonable in scope and duration. However, non-competes are generally not enforceable in California except for limited exceptions, including in connection with the sale of a business. Therefore, most startup companies located in California do not have non-compete provisions in their standard employee documents. A typical non-compete clause provides:

A. During the term of my employment with the Company and period of twenty-four (24) months immediately following the termination of my employment relationship with the Company for any reason or any other amount of time as determined by the Company in accordance with the terms of my Employment Agreement thereafter (the “Noncompete Period”), I will not, directly or indirectly, for myself or any third party other than on behalf of the Company, without the prior written consent of the Company:

(1) engage in the “Geographic Area” (as defined below) as an employee, agent, consultant, advisor, independent contractor, proprietor, partner, officer, director, or otherwise of a Competing Business (as defined below);
(2) have any ownership interest (except for passive ownership of one percent (1%) or less in any entity whose securities have been registered under the Securities Act of 1933 or Section 12 of the Securities Exchange Act of 1934 or the securities laws of any other jurisdiction of the United States) in a Competing Business; or
(3) participate in the financing, operation, management, or control of a Competing Business.

B. “Competing Business” shall mean any firm, partnership, corporation, entity, or business that [___________].

C. The “Geographic Area” shall mean anywhere in the world where Company conducts business.

A potential startup company founder needs to review carefully the scope of the definition of Competing Business and the time period of the non-compete.

Non-solicit of customers and vendors. Some employment documents also include a prohibition on soliciting customers and vendors of the employer. In states like California where non-competes are generally not enforceable, provisions on non-solicitation of customers and vendors are likely to be considered a restraint on trade and not enforceable. A typical non-solicit clause provides:

I also agree that for a period of twelve (12) months immediately following the termination of my employment relationship with the Company for any reason, I will not directly or indirectly solicit, divert or accept business from, or otherwise take away or interfere with, any customer or vendor of the Company, including any person or entity who was a customer or whose business was being pursued by the Company on or prior to the date upon which my employment relationship with the Company terminated.

Non-solicit of employees. Most technology companies require employees to refrain from soliciting employees for a specified term, such as one year after termination of employment. Thus, startup companies where founders intend to hire their former co-workers need to carefully navigate the bounds of permissible action under these clauses. Please also keep in mind that key employees of company may be subject to fiduciary duties to the company and may be subject to claims of breach of fiduciary duty, fraud and intentional interference with contract for soliciting co-workers even in the absence of written agreements. A typical non-solicit of employees clause provides:

I agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether voluntary or involuntary, with or without cause, I shall not either directly or indirectly solicit any of the Company’s employees to leave their employment, or attempt to solicit employees of the Company, either for myself or for any other person or entity. I agree that nothing in this Section 8 shall affect my continuing obligations under this Agreement during and after this twelve (12) month period, including, without limitation, my obligations under Section 2A.

No moonlighting. Some employment documents contain explicit provisions that prevent employees from working on business activities unrelated to their employer, even if it is after hours. This may limit pre-resignation activities. A typical clause might provide as follows:

I agree that during the term of my employment with the Company, I will not engage in or undertake any other employment, occupation, consulting relationship, or commitment that is directly related to the business in which the Company is now involved or becomes involved or has plans to become involved, nor will I engage in any other activities that conflict with my obligations to the Company.

Some companies may have provisions that limit outside activities, whether related or unrelated to the employer’s business.

No conflicting stock ownership or directorships. Some company conflict of interest policies prevent an employee from investing or holding outside directorships in other companies. This may limit pre-resignation incorporation of a new company. A typical conflict of interest policy provides:

The following are potentially compromising situations that must be avoided:

Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company.

2. Return confidential information. Most employment-related agreements require employees to return all company property to the employer. A typical clause provides:

Upon separation from employment with the Company or on demand by the Company during my employment, I will immediately deliver to the Company, and will not keep in my possession, recreate, or deliver to anyone else, any and all Company property, including, but not limited to, Company Confidential Information, Associated Third Party Confidential Information, as well as all devices and equipment belonging to the Company (including computers, handheld electronic devices, telephone equipment, and other electronic devices), Company credit cards, records, data, notes, notebooks, reports, files, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, photographs, charts, any other documents and property, and reproductions of any and all of the aforementioned items that were developed by me pursuant to my employment with the Company, obtained by me in connection with my employment with the Company, or otherwise belonging to the Company, its successors, or assigns, including, without limitation, those records maintained pursuant to Section 3.C. I also consent to an exit interview to confirm my compliance with this Section 5.

Employees should carefully search all electronic and paper files for any employer material, including temporary internet files, emails sent to personal addresses, email contacts, and other types of information. The inadvertent retention of these materials can be used by the employer in future litigation.

3. Limit pre-resignation activities. Creating intellectual property related to the current employer’s business, or otherwise using the current employer’s time or resources can be problematic due to typical invention assignment clauses in employee documents. Employees must avoid using equipment (including employer-provided laptops), time, know-how, or other resources of their employer in connection with their new startup company. In addition, no customers should be solicited for the new company, and no co-workers should be invited to quit and join the new company before resignation.

However, some pre-resignation planning is permissible to some extent. In general, describing general concepts for a new company that fall short of intellectual property creation and meeting with potential investors is permissible subject to the potential contractual limitations described above. Investor presentations should be carefully drafted to avoid any inference that IP has already been created. Incorporating a company before resigning is probably also permissible subject to the same potential contractual limitations, keeping in mind that certain facts may seem bad in later litigation.

Keep in mind that key employees, such as officers, directors and managers) may owe a duty of loyalty to the company, regardless of whether there is a written agreement. This duty would prohibit an employee from doing anything to harm the employer, such as competing with the employer or usurping and business opportunities of the employer.

4. Prepare for the exit interview. Many employee documents require employees to submit to an exit interview. Prospective founders of a startup company should not lie in an exit interview if they are asked about their plans. While there is no particular obligation to tell the truth, even a slight misrepresentation may be used against the founder in future litigation to show dishonesty. Departing employees should prepare a high level, but truthful response to any direct inquiries by an employer regarding future plans. If the potential founder is going to form a competing company, the former employer will learn about it anyway if it is successful.

Departing employees must also be prepared to make written representations to their prior employers that they have returned all company information and material, and will continue to comply with confidentiality obligations. A typical representation is as follows:

This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, any other documents or property, or reproductions of any and all aforementioned items belonging to the Company.

5. Stay on good terms. Sometimes litigation arises simply because the former boss of a departing employee has a vendetta against the employee. Keeping on good terms with your former employer may also be helpful if the employer might be a potential investor, customer or supplier for the new startup company.

6. Don’t forget about stock options and benefits. Most stock options expire within 90 days of the last day of employment. In some cases, the time period is shorter than 90 days. If you want to exercise a stock option from your current company, you need to make sure that you do it within that time period. Of course, exercising a stock option will require the employee to pay the exercise price for the options, and in some cases, the aggregate exercise price may be significant. In addition, employees should make sure they understand COBRA insurance and how to transfer their 401(k) plans, along with other benefits issues.

7. Consult with an attorney. (I will write a post on “How do I find and hire a lawyer” in the near future.) Many of issues described above are fairly tricky and the advice of a competent attorney is recommended. In addition, if there are any potential issues regarding intellectual property ownership with former employers, consulting with an attorney is extremely important. In fact, a general corporate attorney (like me) is probably not the right person to deal with a situation where there may be an IP dispute. I typically get one of my IP litigation colleagues involved if there is any likelihood of a problem. IP issues will come up in due diligence in a future venture financing or a sale of company, so it is extremely important to make sure things are done correctly from the very beginning.

DePaul Law School and Commercial Law League of America Annual Symposium

tiffany@infra-strategy.com (Kevin Chern) — Thu, 08 Jan 2009 19:29:06 GMT

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HUD Delays Effective Date Of Builder Incentive Ban

updates@antitrustlawblog.com (Sheppard Mullin) — Thu, 08 Jan 2009 18:27:45 GMT

Since 1992, HUD has allowed all companies - including homebuilders, real estate brokers and mortgage lenders - to offer incentives to consumers as an inducement to the consumers to use the company's affiliated settlement service provider as long as the settlement service provider's service is separately offered and as long as the incentive is genuine, meaning it is not offset by higher prices elsewhere in the transaction. As part of its revisions to Regulation X implementing the Real Estate Settlement Procedures Act, HUD in November revised the rule effective January 16, 2009 to prohibit homebuilders from offering these incentives, while still permitting real estate brokers, mortgage lenders and other settlement service providers to offer certain forms of consumer incentives. On December 23, 2008, the National Association of Homebuilders ("NAHB") and certain of its members filed an action against HUD seeking to overturn the new consumer incentive rule.

HUD announced today that it has decided to delay from January 16, 2009 until April 16, 2009 the effective date of its new ban on homebuilder consumer incentives that are tied to the consumer's use of the builder's affiliated settlement service provider. HUD's stated purpose of the delay is to allow it time to vigorously challenge the NAHB's lawsuit on the merits of the case, and not on procedural grounds.

Authored by:

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com

Property tax task force comes out for municipal tax increases

jkristan@rothcpa.com (Joe Kristan) — Thu, 08 Jan 2009 16:49:25 GMT

The "special task force" on Iowa's property tax system has issued a report calling for more municipal taxes, including municipal...

The "special task force" on Iowa's property tax system has issued a report calling for more municipal taxes, including municipal income taxes. This would, of course, be a compliance nightmare for Iowans and for those doing business here.

The report says the new taxes are needed to reduce the property tax burden, but they give their game away by only requiring 75% of the new revenue to go to property tax relief. Of course, it would be less than that, as the municipalities would quickly learn to game the 75% rule.

"Given the size and complexity of this problem, it should be no surprise that these solutions won't please everyone," said former Rep. Phil Wise, D-Keokuk, who retired from the Legislature after 22 years. "But we have made tough choices, and we have solutions that will work."

How about some real tough choices - like merging the 99 horse-and-buggy era counties into, say, 15, displacing 74 redundant sets of sheriffs, county recorders, and so on? How many businesses continue to deliver services using the same structure they used in 1846? Besides, Iowa, that is. Instead they propose to take more taxpayer money to preserve their power base, and they call it a tough decision.

I haven't found a link to the report itself, but I will add it when I do.

By going for a fraud conviction, IRS blows chance to collect $700,000

jkristan@rothcpa.com (Joe Kristan) — Thu, 08 Jan 2009 14:46:52 GMT

Two Louisiana lawyers were working with a landowner whose property was being condemned by the EPA. The tax law provides...

Two Louisiana lawyers were working with a landowner whose property was being condemned by the EPA. The tax law provides a break for condemnations, allowing the taxpayers to avoid taxes by rolling the proceeds into new property. Working with a tax advisor, they tried to become partners with the taxpayer on the land as their fee arrangement so that they could qualify for this favorable treatment.

The IRS took violent exception to this arrangement. They didn't just disagree with the treatment; they decided it was fraud. A federal jury disagreed, acquitting the lawyers of criminal charges, and now the Tax Court has also sided with the lawyers.

How does this cost the IRS $700,000? Because the IRS didn't assess the deficiency for their 1996 returns until January 2007. The IRS started their audit of at least one of the lawyers' returns in plenty of time to meet the three-year statute of limitations, which would have expired no earlier than April 15, 2000. It's entirely possible that the underpayments were large enough to trigger the six-year statute for large underpayments. But by throwing all of their efforts into a criminal prosecution, they apparently neglected the normal procedural steps to assess the taxes timely. They apparently felt there was no urgency because there is no statute of limitations for collecting taxes from fraudulent returns.

But the Tax Court ruled that the returns weren't fraudulent. The taxpayers reported the transactions clearly, consulted appropriate tax advisors, and cooperated with the IRS exam. So even though the attorneys misreported the income, the IRS foot-faulted away their chance to collect $700,000. The bottom line:

As a result of the paucity of badges of fraud in this case, we find that respondent has failed to show by clear and convincing evidence that petitioners filed their 1996 returns with the intent to evade tax. Therefore, the 3-year period of limitations under section 6501(a) applies to petitioners' 1996 tax year, and respondent is barred from assessing any deficiencies in petitioners' tax for that year.

Usually the IRS doesn't pursue criminal charges unless it has a very solid case. Unless there's more to the case than what shows up in the Tax Court opinion, it's a mystery why they did so here. What a nightmare that must have been for the defendants. While they ended up with a tax break they shouldn't have gotten, that seems like rough justice for having to go through an unwarranted criminal prosecution.

Cite: Loeb, T.C. Memo 2009-6.

How to screw up your estate plan

jkristan@rothcpa.com (Joe Kristan) — Thu, 08 Jan 2009 14:23:48 GMT

Roger McEowen of Iowa State has a rundown of the most common mistakes he sees in estate planning: So, what...

Roger McEowen of Iowa State has a rundown of the most common mistakes he sees in estate planning:

So, what are some of the most common mistakes that are made in estate planning? There are many that could be listed, but here are my thoughts of what tops the list (in no particular order).
1. Too much property owned in joint tenancy (large estates) or too little
property owned in joint tenancy property (small estates).
2. Making the plan too complex.
3. Failure to review (and update if necessary) the plan.

And 14 more.

409A: the worst single tax provision of the Bush era

jkristan@rothcpa.com (Joe Kristan) — Thu, 08 Jan 2009 14:20:58 GMT

William Drennan, a law prof at good old Southern Illinois University-Carbondale, is exactly right about the execrable Section 409A deferred...

William Drennan, a law prof at good old Southern Illinois University-Carbondale, is exactly right about the execrable Section 409A deferred compensation rules:

Albert Einstein said "the hardest thing in the world to understand is the income tax." The new nonqualified deferred compensation rules are a testament to Einstein's brilliance. The new rules will fail to achieve their statutory purpose, will create traps for the unwary, and should be repealed retroactively.

Indeed they should. It won't happen, though, until somebody actually tries to enforce the section by imposing current tax, plus a 20% penalty, on income never received by employees as a result of a careless mistake made by an employer in administering the byzantine Section 409A rules. If the IRS ever gets serious about enforcing this mistake, it will make the efforts to get relief from the incentive stock option AMT rules look like a minor matter.

Meanwhile, small businesses, non-profits, and even school districts have to deal with this horribly-concieved response to the Enron and Worldcom scandals by shooting the remaining horses after one escaped the barn. That'll teach Ken Lay a lesson.

Via the TaxProf.

Rangel showing real leadership

jkristan@rothcpa.com (Joe Kristan) — Thu, 08 Jan 2009 14:09:24 GMT

House Ways and Means Chairman Charles Rangel retains his commanding lead in the race for the Tax Update 2008 Taxpayer...

House Ways and Means Chairman Charles Rangel retains his commanding lead in the race for the Tax Update 2008 Taxpayer of the Year. Mr. Rangel, who distinguished himself by needing to hire a forensic accountant to figure his own taxes, has 63% of the vote so far in a six-man field.

The nearest competitor is Randy Nowak, who chose to deal with an IRS exam by hiring a "biker" named "The Reaper" to murder the IRS agent. I mean, who better to deal with a tax problem? Things went awry when "The Reaper" turned out to be the FBI agent, and Mr. Nowak now faces something much uglier than tax problems.

Polls remain open through Friday.

New Jersey's Foreclosure Mediation Program

rdeluca@stark-stark.com (Stark & Stark) — Thu, 08 Jan 2009 13:07:29 GMT

This installment of the New Jersey Legal Update is an interview with Bari Gambacorta, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group, Allyson Cofran, member of Stark & Stark's Bankruptcy & Creditor's Rights group, and Kevin Wolfe, of the State of New Jersey's Civil Practice Division. The podcast is a discussion of the New Jersey Foreclosure Mediation Program which went into effect Monday January 5, 2009 in order to assist homeowner's throughout New Jersey who are facing foreclosure delinquencies.

You can download the full interview here. (15.5 MB)

Bankruptcy - Don’t make it a taxing experience!

Thu, 08 Jan 2009 12:53:38 GMT

Many people who are thinking about bankruptcy at this time of year forget that their income tax refunds are a valuable asset. If you file your bankruptcy case before you get your income tax refund, you may lose it. Your trustee in bankruptcy will certainly want to take it from you and use it to [...]

Who Else Wants a Bailout?

kelly.erb@b5media.com (Kelly Phillips Erb) — Thu, 08 Jan 2009 12:22:19 GMT

So let’s see. AIG gets a bailout. Banks get a bailout. The Big 3 automakers get a bailout. Who’s next? If Larry Flynt and our old friend and alleged tax evader Joe Francis have their way, it would be porn. Flynt and Francis have penned a (no jokes, please, remember that my mom is reading) [...]

So let’s see. AIG gets a bailout. Banks get a bailout. The Big 3 automakers get a bailout.

Who’s next?

If Larry Flynt and our old friend and alleged tax evader Joe Francis have their way, it would be porn.

Flynt and Francis have penned a (no jokes, please, remember that my mom is reading) letter to Congress asking for a $5 billion bailout to save the porn industry. I’m sorry, I meant the adult entertainment industry.

Neither Flynt nor Francis claim to be in financial trouble (despite Francis’ tax and other legal woes). They note that while DVD sales are down, growth on adult entertainment web sites has been steady. Yet, Flynt believes that a porn bailout would do the country good, saying: “People are too depressed to be sexually active. This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex.”

Francis released a statement that “the US government should actively support the adult industry’s survival and growth, just as it feels the need to support any other industry cherished by the American people.” Cherished? Really? He’s such a wordsmith.

Congress has not responded to the letter.

My take? You’re expecting me to be indignant, I’ll bet. Only I’m not. It’s rare that I find myself in Larry Flynt’s corner but today I do. I get the absurdity of it all - which is exactly the conversation that he’s trying to start. The string of bailouts at the expense of taxpayers (though I’m not thoroughly convinced that Francis can count himself among taxpayers considering his pending charges for federal tax evasion) is making us weary. The numbers are starting to blur. What’s $5 billion anymore? We don’t even blink at those kind of numbers now that Congress is handing out $700 billion “virtually no strings attached” checks - remember, that’s our money. Ours.

So maybe we should spend it on things that make us happy - the folks at AIG certainly did.

Or maybe we should think a little bit harder about where our money is going and why.

With that, if you need me, I’ll be sitting at my desk drafting my own appeal to Congress for the tax blogger bailout…

Who is the 2008 Taxpayer of the Year?
	Charlie Rangel
	Robert Beale
	Randy Nowak
	Helio Castroneves
	Ron Isley
	Bobby Fischer
	None of the above

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