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Report
From Counsel: Fall 2000 Issue
- Business
Entity Basics
- Digital
Audio Recording
- Sexual
Harrassment in Employment
- OSHA
Telecommuting Rules
- Estate
Planning
- Assumption
of Risk
- FDIC
Insurance Pitfalls
- Summer
2000 Topics: The
Domain Name Game, Estate Planning, Fraudulent Hiring, No Fault
Break-up, What is Title Insurance?, You May Not Already Be A Winner,
The Great Pretender
- Winter
2000 Topics: Drive Now, Talk Later, Insurance for Home Offices,
Sexual Harassment in the Classroom, When Calling Cards are Credit
Cards, Advantages and Disadvantages of Revocable Trusts
- Fall
1999 Topics: Have Website: Must Travel
(to court); Estate
Planning: Transferring Assets to Minors; Trademark Infringement;
Real Estate: Fair Housing Act; Elder Law: Protecting Nursing Home
Resident; Skybox Deductions
- Summer
1999 Topics: Real Estate: Reverse Mortgage; Estate Planning:
Family Owned Businesses; Reasonable Accommodation for Disabled
Employees; Family and Medical Leave; Technology: Digital Millennium
Copyright Act; Finders Not Keepers; Y2K and Bank Deposits
- Spring
1999 Topics: Technology and the Workplace; Homeowner's Insurance
Coverage; Home Office Tax Deduction; Y2K; Environmental Law; Federal
Estate Tax Exclusion; Estate Planning: IRA Conversions
- Winter
1999 Topics:Photocopying and Copyright Law, Private Mortage
Insurance, Estate Planning, Taxes on Tips, Credit Reports
- Fall
1998 Topics: Employment: Sexual Harrassment; Real Estate:
Lead Paint Hazards; Estate Planning & Life Insurance; IRS
Reforms; Credit Unions
- Summer
1998 Topics: Limited Liability Companies, Elder care, Commercial
Leases, Real Estate, Estate Planning
- Spring
1998 Topics: Employment
Law; Technology; Health Care; Drug Testing in Schools; Legal Protection
for Volunteers; Credit Card Fraud
- Wills
& Trusts Seminars
- Legal
News
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BUSINESS
ENTITY BASICS
Before even the most promising business can put down roots and
prosper, its owners must make the threshold decision about what
kind of legal entity it will be. Different options are available,
with each option having strengths and weaknesses. Legal requirements
may vary by state depending on the business form chosen. Following
are some general characteristics of the most prominent business
entities. As the variety of choices indicates, competent legal
advice is necessary to make the proper decision.
Sole Proprietorship
The greatest virtue of a sole proprietorship is its simplicity.
From a legal standpoint, the business and its owner are the same.
This allows the proprietor to avoid most of the formalities required
for some other business forms. For example, business income is
reported on the proprietor's personal tax return. One significant
drawback is that a sole proprietor has personal responsibility
for all business debts and court judgments.
General Partnership
A partnership is a business run by two or more persons, but the
"persons" can be individuals or business entities. In a general
partnership, all partners are "general partners," which essentially
means that their business fates are closely intertwined. Each
general partner has unlimited personal liability for partnership
debts, can incur obligations on behalf of the partnership, and
acts as an agent for the other partners and the partnership. The
partners usually share equally in managing the business and dividing
the profits, but they may set their own terms for these and other
matters in a written partnership agreement. Tax liability on partnership
income is "passed through" to the individual partners so that
each partner pays taxes on his or her individual share of the
profits.
Limited Partnership
In a limited partnership, there are general partners and limited
partners. General partners run the business's day-to-day operations
and have personal liability for partnership obligations. Limited
partners are usually passive investors in the business. They are
not personally liable for partnership debts and the most they
can lose is the amount invested in the partnership. A limited
partnership allows money to be raised for the business from the
limited partners, but the general partners do not have to share
with them day-to-day decisionmaking or comply with requirements
for creating a corporation and issuing stock. In contrast with
a corporation, a partnership dissolves and is liquidated upon
the death or withdrawal of a partner unless the partnership agreement
provides otherwise. For example, the agreement may allow a buyout
of a deceased or withdrawn partner, election of a new partner,
and continuation of the business. As a general rule, a limited
partnership carries on unaffected by the loss of a limited partner.
Corporation
A corporation is an entity that is separate from its owners, with
its own legal rights and responsibilities. The owners (the corporation's
shareholders) are not personally liable for debts of the corporation.
The shareholders elect a board of directors to supervise the corporation
and the board hires officers to manage day-to-day matters. The
major drawback for the corporate model is having its income taxed
twice: first on the corporation's income and then on any dividends
paid to the individual shareholders. The S corporation, a hybrid
creature of the Tax Code, has some characteristics of corporations
and some of partnerships. If specific tax rules are satisfied,
income in an S corporation is taxed only when it is passed through
to the owners. Also, the owners retain their insulation from personal
liability for corporate debts. Limited Liability Company
An increasingly popular form of business entity is the limited
liability company (LLC), another hybrid combining some of the
best traits of the other entities. The owners, called members,
are not limited in number or type, as are shareholders in an S
corporation. While LLC members generally have the kind of limited
personal liability associated with limited partners, they have
flexibility to participate in the management of the business if
the governing document, called "articles of organization," so
provides. The earnings of an LLC are given the same advantageous
passed-through treatment as are earnings of a sole proprietorship
or partnership, thereby avoiding double taxation.
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Computers,
the Internet, and intellectual property rights continue to clash
in courts as technology allows users to copy, transfer, and manipulate
copyrighted materials without the permission of the owners. Unauthorized
use of musical recordings has recently been at the forefront of
this controversy.
In the early 1990s, Congress took action to address one aspect
of the conflict between technology and intellectual property rights
in the music industry. The Audio Home Recording Act (AHRA) made
it unlawful to import, manufacture, or distribute a digital audio
recording device that does not conform to the Serial Copy Management
System or a similar system designed to prevent unauthorized serial
copying.
The AHRA is not broadly aimed at serial copying of copyrighted
music. Rather, it focuses on the means of recording through the
use of a "digital audio recording device."
The AHRA defines such a device as "any machine or device of a
type commonly distributed to individuals for use by individuals
. . . the digital recording function of which is designed or marketed
for the primary purpose of, and that is capable of, making a digital
audio recording for private use." A lawsuit recently was brought
against the manufacturers of the "Rio," a compact device that
allows the user to play an audio file after it has been downloaded
to the Rio. The Rio can store about an hour of music, is accessible
to the listener only by headphones, and has no duplication, transfer,
or upload capability. The court held that the statute did not
apply to the Rio and, therefore, could not restrict the sale and
distribution of it.
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SEXUAL
HARRASSMENT IN EMPLOYMENT
When
sexual harassment by a supervisor creates a hostile or offensive
environment in the workplace but results in no disciplinary action,
an employer can avoid liability by showing:
(1) that the employer exercised reasonable care to prevent and
correct promptly any sexually harassing conduct; and (2) that
the plaintiff employee unreasonably failed to take advantage of
any preventive or corrective opportunities provided by the employer
or to avoid harm otherwise. An important part of the first element
of the defense is the preparation and distribution of a well-drafted
policy prohibiting sexual harassment.
In fact, as a recent case illustrates, a policy that is unclear
or is not comprehensive could damage or destroy an employer's
ability to assert the second element of the defense. In that case,
Elizabeth was promoted to the position of a team leader at a bank.
Shortly thereafter, she began to report to a male supervisor.
He made Elizabeth's life miserable at work for over two years,
until she finally complained to management about his behavior.
While the supervisor's harassment did not involve sexual overtures
or other sexually provocative comments or actions, it was driven
by the supervisor's hostility toward women, generally, and Elizabeth
in particular. The supervisor's conduct was offensive and sometimes
threatening, ranging from stereotypical remarks about the deficiencies
of women as managers to an apparent reference to the O.J. Simpson
trial when the supervisor told Elizabeth that he could "see why
a man would slit a woman's throat."
The presence of a policy against sexual harassment and a victim's
lengthy delay before complaining will often help shield an employer
from liability.
In Elizabeth's case, however, the bank's policy against harassment
described only sexual advances, requests for sexual favors, and
other actions of a sexual nature. Although the conduct Elizabeth
was enduring was unlawful sex discrimination, the bank's narrowly
worded policy led her to think otherwise. The deficient policy
would not support a defense for the employer, and its incomplete
definition of prohibited harassment excused Elizabeth's delay
in complaining.
Although Elizabeth's case shows the importance of having an accurate
and complete policy against sexual harassment, that is only part
of a policy of prevention that will minimize the risk of employer
liability. Also contributing to the liability of Elizabeth's employer
was the inadequacy of its investigation after receiving the complaint.
The bank basically ignored the allegations of harassment, focusing
instead on the supervisor's objectionable management style. No
one at the bank actually asked the supervisor whether he had made
any of the sexually harassing remarks, nor did anyone follow up
on an allegation that another bank employee had left because of
sexual harassment from the same supervisor. The only consequences
for the supervisor had been a 90-day probation period and a directive
to improve his management style and "smile more."
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After
a trial balloon on the subject of regulating home offices caused
an uproar, the federal Occupational Safety and Health Administration
(OSHA) issued a formal directive that should soothe concerns about
possible intrusions into workers' homes. The directive is intended
to guide OSHA compliance officers charged with enforcing OSHA rules.
The crux of the directive is that OSHA will not inspect home offices
for violations of federal safety and health rules, and it does not
expect employers to do so either. The directive also states that
an employer is not liable for an employee's home office.
If OSHA receives a complaint about a home office and a specific
request from an employee, it may informally let an employer know
about the home office condition, but it will not follow up with
the employer or the employee. OSHA will conduct inspections of other
home-based worksites, such as home manufacturing operations, when
it receives a complaint or a referral indicating the presence of
a violation of a standard threatening physical harm or posing an
imminent danger.
An employer is responsible for hazards caused in home worksites
by materials, equipment, or work processes that the employer provides
or requires to be used in an employee's home. Examples of activities
that might prompt such an inspection include electronics assembly,
using unguarded crimping machines, or handling potentially hazardous
materials without adequate protection. Such an inspection, however,
would be confined to the actual work environment, not to an entire
dwelling.
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Medicaid
Look-Back Rules
Both "Medicare" and "Medicaid" are programs established by federal
law that are intended to assist individuals with the payment of
medical expenses. Normally, as a matter of entitlement, Medicare
is designed to assist older individuals based on their contributions
to Social Security. Medicaid is a medical benefits program only
for the aged, blind, and disabled who are in need. Medicaid covers
long-term nursing home costs while Medicare does not. In order to
qualify for Medicaid, an individual may own no more than a home,
personal belongings, a car, and a small amount of savings and can
have an income of only a few hundred dollars per month. The precise
levels of income and resources that a Medicaid applicant may maintain
and still qualify for Medicaid are set by individual states. If
an individual needs nursing home care and does not already qualify
for Medicaid, his assets may be quickly exhausted and his heirs
will not receive an inheritance.
Given these circumstances, it is understandable that the focus of
Medicaid planning has been on the reduction, or "spending down,"
of assets so that qualification for Medicaid is achieved. The primary
obstacle to such an "impoverishment" strategy is raised by the Medicaid
"look-back" rules. If an asset is given away or sold by the Medicaid
applicant for less than its fair market value, the Medicaid administrator
must still count the transferred asset along with the Medicaid applicant's
other assets if the transfer was made within 36 months (three years)
preceding the date of the application. The look-back period is 60
months (five years) for assets transferred to a trust for less than
fair market value.
When such transfers are added back to other countable assets owned
by the applicant, the total will often exceed the maximum level
allowable for Medicaid qualification and result in a period of ineligibility.
The rules for calculating the waiting period are complex, but are
generally intended to delay the application for Medicaid benefits
until the look-back period is free of transfers that were for less
than fair market value. The greater the value of the transfers that
have occurred during the look-back period, the longer the period
of ineligibility for Medicaid benefits. However, the transfer of
a homestead for less than fair market value would not be counted
if the transfer were made to the individual's spouse, to the individual's
child who is under 21 years of age or who is disabled or who provides
care to the individual, or to a sibling who has an equity interest
in the homestead. Assets other than the homestead are exempt from
the look-back/ineligibility period rules if they are transferred
to a spouse, to a child who is under 21 or who is blind or disabled,
or to a trust for the sole benefit of a disabled person who is younger
than 65.
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The
law of negligence is based on the principle that people have a duty
to use due care to avoid injury to others and that they may be held
liable if their careless conduct injures another person. In sports,
however, conduct or conditions that otherwise might be seen as dangerous
often are an integral part of the sport itself.
Accordingly, defendants are under no legal duty to eliminate or
protect a plaintiff against risks that are inherent in the sport,
but they do have a duty not to increase the risks to a participant
beyond those that may be expected. Albert was playing golf when
his partner's hooked shot ricocheted off of a wooden yardage marker
and struck him in the eye. Albert sued the golf course for negligence,
but a state appellate court dismissed his claim. The court found
that golf is an active sport, that Albert was injured because he
subjected himself to an inherent risk in golf, and that the golf
course had not increased the risks inherent in playing a round of
golf. An expert testified for Albert that the golf course increased
the risks because the marker should have been made of softer material
and placed farther from the fairway. The court disagreed. The fact
that safer materials or conditions were possible will not give rise
to a duty of care if the accepted standards for the sport were met.
The construction and location of the yardage marker were typical
of other courses. Moreover, there were no reports of prior injuries
caused by any of the many such markers located all over the golf
course.
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Depositors
of banks and savings institutions sometimes lose substantial sums
because they have not taken care to keep their deposits within the
Federal Deposit Insurance Corporation's (FDIC) insurance limit of
$100,000. Following are some typical situations that have caused
deposited sums to be left uninsured.
Overestimation of Coverage for Joint Accounts
A depositor does not have a "new" $100,000 insurance limit for each
joint account that he or she has with different parties. Instead,
the FDIC totals each person's shares in all joint accounts at one
institution and insures that sum up to $100,000.
Misunderstanding Coverage of Revocable Trust Accounts
The owner of a revocable trust account has the use of the money
during his or her lifetime, after which the funds pass to specified
beneficiaries. Each beneficiary's interest in such a trust is insured,
up to $100,000, separately from any other accounts at the institution,
but only if certain conditions are met. A beneficiary must be the
depositor's spouse, child, grandchild, parent, or sibling. In addition,
the $100,000 of insurance per beneficiary does not apply if the
account owner puts conditions on the interests of the beneficiaries,
such as requiring that they get a college degree or leaving payment
up to a trustee's discretion.
Third-Party Deposits
Typically, an account owner is aware of all deposits made into the
account. In some instances, however, such as the sale of a house
or receiving money from a lawsuit, someone handling funds for the
account owner will make a deposit into an escrow account at the
same institution. When added to other accounts, such a deposit could
put the account owner over the limit for insurance.
IRAs and Keoghs
It is a common misconception that retirement accounts are fully
insured regardless of the amount. Instead, IRAs and self-directed
Keogh funds are separately protected, up to a total of $100,000,
from any nonretirement funds at the same institution. The Roth IRA
is treated like a traditional IRA for purposes of deposit insurance.
The new Education IRA is treated like an irrevocable trust account,
not an IRA, for deposit insurance purposes. The coverage depends
on the terms of the document creating the Education IRA. It is prudent
to review account balances and applicable FDIC rules periodically,
or on the occurrence of events such as a death in the family, a
divorce, a deposit of proceeds from the sale of a home, or a merger
of two institutions in which the same person has accounts.
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