• 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
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• Legal News

Sexual Harassment by Supervisors

When courts considered sexual harassment cases in the past, their analysis began with which of the two recognized types of harassment was before them. "Quid pro quo" harassment refers to employment decisions based on unwelcome sexual advances or other sexual conduct directed at an employee. "Hostile environment" harassment occurs when severe and pervasive conduct of a sexual nature has no tangible effect on an employee's job but subjects an employee to an intimidating, hostile, or abusive working environment. 

In a pair of cases recently decided, the U.S. Supreme Court has diminished the importance of categorizing harassment in this manner. Quid pro quo harassment and hostile environment harassment remain as helpful descriptions of two types of scenarios in which harassment may violate federal and state employment discrimination statutes. However, on the important issue of whether an employer can be held liable for harassment by a supervisor, the Court has announced a new set of criteria. In some respects, the Court has left employers more exposed to liability, but it has not left them defenseless. 

The Court set out to balance and advance two public goals: holding employers responsible for harassment of employees that results from abuse of supervisory authority, and encouraging employers to set up, and employees to use, antiharassment policies and procedures. The bad news for employers is that they will now be held liable for harassment by a supervisor with authority over the victim, regardless of whether the employer was guilty of negligence or any other degree of wrongdoing. If the harassment also culminates in a tangible detriment to the harassed employee, such as termination, demotion, or an undesirable reassignment, there is no defense available to the employer. 

If there is good news for employers in the Supreme Court rulings, it concerns the situation in which a supervisor has harassed an employee but the harassment never results in a tangible job detriment. There, the employer can defend itself from liability if it can prove both: (1) that it exercised reasonable care to prevent and correct promptly any sexually harassing behavior, 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 by other means. 

While adoption of an antiharassment policy will not be essential to the first part of the defense in every case, the Court intimated that having and applying such a policy that is tailored to the employment circumstances will go a long way in building a defense. Similarly, while the second part of the defense can be supplied with evidence on various ways in which an employee did not act reasonably to avoid harm, an employee's unreasonable failure to use the employer's complaint procedure will usually be sufficient by itself. 

It is important to bear in mind that in its two recent decisions the Court was only concerned with harassment committed by someone who is either the victim's immediate supervisor or has a higher rank than the victim in the chain of command. With regard to conduct between fellow employees of equal rank, an employer will be liable for sexual harassment only where it knows or should have known of the harassment and failed to take immediate and appropriate corrective action. Harassment of an employee by a lower-level fellow employee is not as easily attributed to the employer because the employer is less likely to know about and be able to stop the offending conduct. Thus, a showing of employer liability requires more in such cases than when the harasser is a supervisor. 

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Like a sequel to a popular movie, the "Taxpayer Bill of Rights 3" (TBOR3) has been enacted as the latest measure by Congress to improve the fairness with which taxpayers are treated in their dealings with the Internal Revenue Service. 

Some of the more significant changes brought about by TBOR3 are as follows: 

Burden of Proof 

For the first time, a taxpayer can shift the burden of proof to the IRS in court proceedings, but only if he first (1) introduces credible evidence concerning income tax liability; (2) substantiates any items as required by the Tax Code; (3) maintains required records; (4) "cooperates" with "reasonable" requests by the IRS for gathering information; and (5) exhausts all administrative remedies, including appeals. 

This burden-shifting, intended to benefit individuals and smaller businesses, does not apply to corporations, trusts, and partnerships with a net worth over $7 million. To take advantage of the change, taxpayers will have to keep thorough records and be prepared to meet the five preconditions, interpretation of which may itself require a hearing of some kind before a trial on the substantive tax issues. 

Innocent Spouses

Taxpayers who are no longer married, are legally separated, or have not lived with their spouse for the past year have a new way to shield themselves from liability for their spouse's cheating on taxes. In what is likely to become a standard part of divorce proceedings, taxpayers can elect not to be jointly liable for a joint income tax return, and instead be liable only for deficiencies attributable to them. Such an election must be claimed not later than two years after the date when the IRS first asserts that there is a tax deficiency. 

Accountant-Client Privilege 

The confidentiality of a taxpayer's communications with tax professionals has been expanded from attorneys to any individual authorized to practice before the IRS (usually accountants). The new privilege will apply to any noncriminal proceeding before the IRS or a federal court. Even in a civil matter, criminal issues may arise, raising the possibility that the accountant-client privilege may be lost at whatever point that happens. The law also provides that the privilege is not applicable to any written communication between a tax advisor and a corporation concerning the promotion of a tax shelter. 

Attorney's Fees and Damages

A taxpayer can recover attorney's fees from the IRS when the position of the IRS is not substantially justified. TBOR3 provides that, when determining whether the IRS position is substantially justified, a court must consider whether the IRS has already lost on similar issues in the courts of other federal circuits. If the IRS carries on a protracted fight despite a string of losses elsewhere on the same issue, it is more likely to be forced to pay the taxpayer's attorney's fees. The recovery of fees also has been extended to the fees of nonlawyers authorized to practice before the Tax Court or the IRS. 

Negligent Conduct

Under prior law, a taxpayer could sue the IRS only for reckless or intentional wrongdoing, but now negligence in a tax collection action will be enough for a civil lawsuit against the IRS. Damages are capped at $100,000 for negligence and $1 million for reckless or intentional misconduct. 

Other Measures 

TBOR3 is only one part of the Internal Revenue Service Restructuring and Reform Act of 1998. That Act also creates an Internal Revenue Service Oversight Board to oversee the IRS in its administration of federal tax laws. The Board will review the strategic planning, operational functions, high-level personnel decisions, and budget requests of the IRS. Each year, the Board will report to the President and Congress. 

Congress also has declared that electronic filing should be the preferred and most convenient means of filing tax returns. By the year 2007, Congress wants no more than 20% of returns to be filed on paper. A strategic plan will be devised to eliminate barriers, provide incentives, and use competitive market forces to increase paperless filing without lengthening the processing times for paper returns. 

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The Environmental Protection Agency has issued a new rule designed to give notice to owners and tenants of renovated property concerning the hazards of lead paint. The rule, which becomes effective June 1, 1999, covers virtually all houses and apartments built before 1978, when lead paint was banned. 

A "renovator," defined broadly as anyone who performs a renovation for compensation, must distribute notification pamphlets to owners warning about the hazards of lead paint before performing any work. Renovators must give notice to the owner of the affected dwelling unit and, if the owner does not live there, to an adult occupant of the unit. These are the same pamphlets that must be given to buyers of pre-1978 property. 

A "renovation" can be much less than a complete overhaul of a building. The rule applies to any work that disturbs painted surfaces, such as modification of painted doors, sanding or scraping painted walls, re-plastering, re-plumbing, and removal of walls or ceilings. On the other hand, if two square feet or less of painted surface are affected, the rule does not apply. The notice requirement also will not come into play for emergency work or for renovations where a certified lead inspector first has determined that no lead paint is present. Getting such a certification at the outset will be a good way for renovators and owners to protect themselves. 

Up to $25,000 in criminal and civil penalties may be imposed for violations of the rule. While it is not clear that the rule authorizes civil suits, plaintiffs will probably bring negligence cases against renovators, arguing that the rule has established a standard of care against which the renovator's actions should be judged. 

The pamphlet, entitled "Protect Your Family from Lead Paint in Your Home," is available by calling the Government Printing Office at (202) 512-1800. 

While the Court may have accurately interpreted the will of Congress as expressed in then-existing law, sentiment on Capitol Hill was decidedly different by the time of the Court's decision. Within weeks of that ruling last winter, the legislative process began moving swiftly toward passage of amendments that were necessary to clarify that credit union membership requirements were to be opened up as they had been in the recently invalidated NCUA policy. A legislative reversal of the Supreme Court was signed into law. 
The new legislation was enacted by wide margins in both Houses of Congress over the protests of banking groups. They maintained that the law sets up unfair competition by forcing banks to compete against larger credit unions that enjoy exemptions from taxes and community lending requirements. Supporters countered that the legislation was necessary to make credit unions available for the first time to millions of employees. 
There are now three types of federal credit unions, based on categories of membership: 
(1) a single common-bond credit union, comprised of one group having a common bond of occupation or association; 
(2) a multiple common-bond credit union, with more than one group, each of which has a common bond and no more than 3,000 members; and 
(3) a community credit union, made up of persons within a well-defined local community, neighborhood, or rural district. The multiple common-bond credit union, in particular, is Congress's response to the Supreme Court ruling. 
If certain conditions are met so as to establish that an area is underserved, the new law opens up membership in multiple common-bond credit unions even more broadly to any person or organization in the local community. The locality must be an "investment area," as defined in another federal banking statute; it must be underserved by depository institutions; and the credit union must set up and maintain an office or facility in the area to be served. 
In the same legislation, Congress also addressed a number of other matters affecting credit unions. The legislation establishes new capital standards for federally insured credit unions, requires annual independent audits for insured credit unions having $500 million or more in assets, and limits the total amount of outstanding member business loans that a credit union can have at any one time. 

Advantages of Life Insurance 

In the case of a person having a relatively modest estate, life insurance can be an important aspect of estate planning for the obvious reason that it can substantially increase the value of the estate. Where the death of a person is premature and a young family is in need of support, life insurance may be the primary means for the family's financial survival. 

Even in larger estates, life insurance can be useful by providing the liquidity necessary to pay the estate's taxes and expenses without the necessity of selling off assets that the family would prefer to keep intact. Additionally, life insurance, unlike many other assets, does not have to go through a time-consuming administrative process before it becomes available to the beneficiaries. Therefore, life insurance can be an immediate source of funds for the surviving family. 

Estate Taxes and Life Insurance

As is true of any aspect of estate planning, one objective is to minimize the federal estate tax effect that life insurance can have. The primary tax issue that arises is whether the insurance proceeds are included in the estate for federal estate tax purposes. Including the proceeds would generate additional estate tax liability and reduce the amount of the proceeds that are available to the decedent's heirs. 

The fundamental rule is that the gross estate will include the value of life insurance proceeds if (1) the proceeds are payable to the decedent's estate and are thus receivable by the executor, or (2) the proceeds are payable to other beneficiaries, but the decedent possessed at his or her death any of the "incidents of ownership" with respect to any policy. 

The term "incidents of ownership" is defined more broadly than to be limited to the legal ownership of the policy. The term includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy or pledge it for a loan, and to obtain a loan from the insurer against the surrender value of the policy. There are other indirect ways that the decedent can be found to possess incidents of ownership. For instance, if the decedent is the controlling shareholder of a corporation that possesses an incident of ownership, such possession is attributed to the decedent. 

Another scenario that will result in the inclusion of life insurance proceeds in the decedent's estate arises under certain circumstances where the decedent was the initial owner of the policy but transferred such ownership to another person or entity within three years of his or her death. Thus, even where the decedent has rid himself or herself of all incidents of ownership in the policy, there is still the possibility of inclusion under this three-year rule. 

Keeping Life Insurance Proceeds Out of the Estate 

A common device for handling the life insurance aspect of an estate plan is the life insurance trust. Typically, the decedent would initiate the life insurance coverage by acquiring the policy. He or she would then transfer all incidents of ownership of the policy to a previously created irrevocable trust, which would be the named beneficiary on the policy. Assuming that the decedent survived until at least one day more than three years after the transfer of the policy to the trust, there would be no inclusion of the proceeds in the settlor's estate. If a policy is transferred within three years of death, the proceeds are included in the estate. 

If the trust itself acquired the policy, the decedent would never be the owner and the three-year rule would not apply. The problem would be that the decedent could neither direct nor require the trust's acquisition of the policy without risking the possibility that he or she would be regarded as the original owner of the policy for purposes of applying the three-year rule. Therefore, it is important that the trustee be completely independent of the decedent. 

An insurance trust can also have the practical effect of serving as a means of coordinating the collection, investment, and distribution of the proceeds of several policies. An insurance trust can hold other assets that the decedent transferred to it during his or her life. The trust can also receive assets "poured over" to it by the decedent's will. 

If life insurance is to be an element of your estate plan, it should be carefully integrated with the other aspects of the plan. Such planning requires competent, professional assistance. 

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