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Report
From Counsel - Summer
2004 Issue:
INNOCENT SPOUSE TAX RELIEF
ROUGH
DAY AT THE GOLF TOURNAMENT
FAMILY
AND MEDICAL LEAVE ACT UPDATE
DEVELOPMENT
DITCHED
MEDICAID
AND NURSING HOME BENEFITS
REVERSE
PIERCING OF CORPORATE VEIL
- Spring,
2004: Buy-sell Agreements for Small Businesses; Review Your
Credit Report; When Noncompetition Agreements Cross State Lines;
Commercial Landlord Must Mitigate Damages; New Identity Theft
Disclosure Law.
- Winter,
2003-2004: Federal
Privacy Rule Protects Health Information; Debtors and
Creditors; Highlights of the New Federal Tax Act; Telecommuting
and Unemployment; Estate Planning with Long-Term Care
Insurance; "Just Say No" to Unsolicited Credit-Card
Offers.
- Fall
2003: Homeowners'
Insurance: the Devil Resides in the Details; "Cybersmear" Lawsuits;
Age Discrimination in Employment; Be Careful What
You Fax; The Marital Deduction: A Valuable Estate
Planning Tool; Capped Commissions
- Summer,
2003: Federal
Advertising Guidelines for Business Courts; Case
by Case: Bait and Switch Credit Card Offer; Arbitration
Clauses in Employment Contracts; Employment
Law Guidebook; Life
Insurance Can be Part of Your Estate Plan
- Spring, 2003: Courts
Begin Putting the Brakes on "Takings"; Case
by Case: Long Arm Jurisdiction Falls Short ; ADA
and Small Business; Solo
401(K) Retirement Plans; Credit
Reporting Agency Held Accountable for Errors; Online
Banking
- Winter,
2003 Topics: Limited
liability Companies- The Best of Both Worlds?; No Privacy for
Home Computer; Beware of Predatory Home Loans; An Expensive Tee
Shot; IRS Makes It Easier to Settle Tax Debts; Is it Time for
an Estate Planning Check-Up?; They Said It
- Fall,
2002 Topics: When Military Duty Calls Employees; New Estate
Planning Technique; Cybersquatting; Tax Credits for Historic Preservation;
CASE BY CASE: Joint Bank Accounts; Lost Healthcare Coverage
-
Summer,
2002 Topics: Estate Planning with the Family limited Partnership;
Clickwrap Agreements; Fair Labor Standards Act; Starting a Business?
Get an EIN; Landlords and Credit Checks; Case by Case.
- Winter
2002 Topics: Small Businesses and Job Discrimination, Case
by Case: Baseball bat injury,saving for
college can be an estate planning tool, Less paperwork for employees,
Landlords, Tenants, and satellite dishes; Freelancers' articles
are not free.
- Fall
2001 Topics: Federal Tax Relief; Case by Case: On-call duty;
Guidance Counselor Liability; To Compete or Not to Compete;Beware
of Identity Theft;Towns vs. Towers; (Over)regulation of Wetlands
- Summer
2001 Topics: What is Intellectual Property?, Case by Case:
Homeowners are covered, Golf win!, Employee or Independent Contractor?;
Websites and Jurisdiction; Estate Planning: New Rules for IRA
Withdrawals; Tax Treatment of Vacation Homes.
- Spring
2001 Topics: Home is Where the Business Is; Cases by
Case: Employee Benefits, UPS, EPA; New Lead Paint Rules;
Disability
Guidance for Employers; Estate Planning: Stretch Your IRA
- Winter
2001 Topics: Contingent Workers, Real Estate: Appraiser Liability,Charitable
Remainder Trusts, Credit Reporting, Electronic Signatures,To Err
is Human, To Forgive is Taxable, Legal
Lingo
- Fall
2000 Topics: Business Entity Basics, Digital Audio Recording,
Sexual Harrassment in Employment, OSHA Telecommuting Rules, Estate
Planning, Assumption of Risk, FDIC Insurance Pitfalls
- 1998-2000
Archives: Report from Counsel
- Spring
1999 Topics
- Wills & Trusts
Seminars
- Legal
News
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INNOCENT
SPOUSE TAX RELIEF
For most
married couples, filing federal income taxes jointly rather
than separately results in a lower tax bill. However, this “all
for one, one for all” approach can have a downside if
questions arise about the accuracy of the return. The general
rule is that both taxpayers will be responsible, individually
as well as collectively, for any taxes, interest, and penalties
owed, even if only one spouse was earning the income. It may
be that in a couple's division of labor only one spouse is
in fact responsible for understating income or erroneously
claiming deductions, but by law each spouse can be made to
answer to the IRS.
It is always good advice for anyone signing a tax return to
do so only after carefully reviewing and understanding every
line of it. But even such common-sense
measures cannot prevent mistakes and/or deception from happening. To avoid unfairness
in such circumstances, the Tax Code has provisions designed to protect “the
innocent spouse.”
Under this general heading, there are three kinds of relief: innocent spouse
relief, relief by separation of liability, and equitable relief. To request relief,
a taxpayer must file the appropriate form with the IRS no later than two years
after the IRS first tries to collect the tax. An attached statement must explain
why the taxpayer believes he or she qualifies for relief. If the IRS rejects
the claims for the first two types of relief, it will automatically determine
whether equitable relief is warranted.
Innocent Spouse Relief
An innocent spouse must meet the following conditions to qualify for relief:
(1) a joint return understated taxes because of erroneous claims by the requesting
party's spouse, such as unreported or underreported income, or unjustified
deductions or credits; (2) when the return was signed, the innocent spouse
did not know or have reason to know that there was an understatement of tax.
If the spouse knew, or should have known, that there was an understatement,
but did not know by what amount, partial relief may be given; and (3) in
light of all of the surrounding circumstances, it would be unfair to hold
the requesting party liable for the understatement of tax. Among the factors
taken into account by the IRS are whether the taxpayer benefited from the
erroneous return in the form of a higher standard of living and whether the
joint filers later were divorced or separated.
Separation of Liability
Separation of liability means an allocation between the spouses of unpaid liabilities
resulting from the understatement of taxes owed. Either of the following
requirements must be met: The parties filing the joint return are no longer
married or are legally separated, or the joint filers were not members of
the same household at any time during the 12-month period before the relief
is sought. This relief is not available if spouses transfer assets between
themselves to avoid tax or as part of a fraudulent scheme. Another disqualifying
factor is actual knowledge of the other spouse's erroneous items on a return
that gave rise to the deficiency.
Equitable Relief
As a last resort, equitable relief may be available when there has not been
any fraud and, all things considered, it would be unfair to hold the spouse
seeking relief liable for the understatement or underpayment of tax. A broad
range of “fairness” factors may be considered by the IRS. There
is no exhaustive list, but some examples include separation or divorce, economic
hardship if relief is not granted, and the fact that the tax for which relief
is sought is attributable to the other spouse. Weighing against equitable
relief would be factors such as knowledge of the items causing the understated
tax, receiving a significant benefit from that understatement, or not making
a good-faith effort to comply with federal income tax laws for the tax year
in question.
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ROUGH
DAY AT THE GOLF TOURNAMENT
More
than most athletic endeavors, golf is known for being a setting
for the mixture of business and pleasure. Many business relationships
have been formed or strengthened, and many deals have been closed,
somewhere between the first tee and the eighteenth green. That
aspect of the game played a part in a recent court decision in
which an employee was held to be entitled to workers' compensation
benefits based on injuries he sustained while taking part in a
golf tournament.
Kenneth worked as a shipping supervisor for a furniture manufacturer. A trucking
company invited Kenneth and some other managers to play in its annual golf tournament,
free of charge. Participation was voluntary, but you do not need to twist a golfer's
arm to get him to play golf on what otherwise would have been a regular workday.
Unfortunately, the fun stopped abruptly for Kenneth when the golf cart in which
he was riding struck a tree and he was injured.
When Kenneth tried to get workers' compensation benefits, his employer challenged
his claim. Its argument was that Kenneth was taking part in a voluntary recreational
activity that made him ineligible for benefits. There is such an exclusion in
the law, but it did not apply to bar Kenneth's claim. The golf tournament was
voluntary, but it was not “recreational,” in the sense of being unrelated
to Kenneth's employment. Under the “mutual benefit doctrine,” even
an activity that is generally regarded as recreational will fall within the workers'
compensation laws if some advantage to the employer results from the employee's
conduct.
Kenneth's participation in the golf tournament was at least equal parts business
and pleasure. His employer benefited because Kenneth was able to meet with and
establish better relationships with the trucking company representatives whom
he had previously only talked with by telephone. |
FAMILY
AND MEDICAL LEAVE ACT UPDATE
Margaret
worked in a clerical position for a hospital. During the first
three years of her employment, she was disciplined several
times for unexcused absences, and she risked termination if
her absenteeism continued. Then, Margaret slipped and fell
while at work, fracturing her elbow and ankle and aggravating
an existing wrist condition. Over the next 10-day period, she
worked only one complete workday. Margaret missed parts of
the remaining workdays because she had medical appointments,
or was not feeling well, or both.
The hospital, seeing these absences as the straw that broke the camel's back,
fired Margaret for excessive absenteeism. Margaret sued her ex-employer, contending
that her absences after her fall were protected leave under the federal Family
and Medical Leave Act (FMLA). A federal court ruled that the hospital was free
to fire Margaret without running afoul of the FMLA.
The outcome in Margaret's case turned on a fine distinction about language
in the FMLA and a regulation issued under it. The FMLA provides that an eligible
employee can take up to 12 workweeks of leave during any 12-month period because
of a “serious health condition” that makes the employee unable
to perform the functions of the employee's job. After taking such leave, an
employee must be reinstated to the position held before the leave. Part of
the statute's definition of “serious health condition” is a condition
that involves “continuing treatment by a health care provider.” That
phrase is not defined in the FMLA itself, but a Department of Labor regulation
describes it as including “a period of incapacity . . . of more than
three consecutive calendar days.” Incapacity refers to the inability
to work or perform other regular daily activities.
Margaret argued to no avail that she had been incapacitated for more than three
consecutive calendar days, and that she therefore had taken only protected
leave for a “serious health condition.” The problem was that she
missed work for only a part of all but one of the days in question. The court
reasoned that a “calendar day” is commonly understood to mean a
whole day, from midnight to midnight. Thus, to be afforded protection under
the FMLA, the period of incapacity must last for more than 3 whole days, that
is, 72 consecutive hours. In addition to parsing the language from the regulation,
the court ruled that the incapacity either extends for over 72 straight hours,
or it does not. By contrast, under the interpretation argued for by Margaret,
more issues would arise about how much incapacity on a given day is enough
for that day to count toward the requirement in the regulation. The court was “loathe
to adopt a strained interpretation of a regulatory provision that would result
in employers, employees, and courts facing an uncertain and ever-shifting legal
landscape.”
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DEVELOPMENT
DITCHED
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Developers bought 12 acres in a hilly,
rural area, with plans to build homes on the property. Because surface
water pooled on a large central part of the land after heavy rains,
the owners channeled the excess water into a roadside ditch. The
roadside ditch was connected to a series of waterways that eventually
reached a river eight miles away.
The developers' plan hit a major snag when they were sued by the United States
Army Corps of Engineers. The Corps contended that the roadside ditch was a waterway
of the United States that fell under the protection of the Clean Water Act and
the jurisdiction of the Corps. With that premise, the developers first needed
a permit from the Corps before digging the drainage ditch on their property.
While the Corps exercises no control over isolated wetlands, it has jurisdiction
over wetlands that are adjacent to navigable waters and their tributaries. In
particular, the Clean Water Act requires a permit from the Corps for the discharge
of fill material into waters that are in the Corps' jurisdiction. When the contractors
piled the excavated dirt on each side of the 1,100 foot-long drainage ditch,
this constituted the “discharge” of fill material into wetlands without
a permit.
A federal court took the side of the Corps in holding that a permit was required.
First, the court deferred to the Corps' interpretation of the regulation under
which the tract to be developed was regarded as having wetlands. Second, the
adjacent roadside ditch was a tributary of navigable waters, even though water
from the ditch flowed through several other nonnavigable watercourses before
reaching the river and later the Chesapeake Bay. The court accepted the Corps'
interpretation of “tributary” as encompassing all of the streams
whose water eventually flows into navigable waters.
The court required the developers to fill in the drainage ditch on their property
and restore their wetlands to their pre-violation condition. It rejected the
developers' argument that a more reasonable remedy would have been to allow the
ditch to stay by removing the fill to a nonwetlands part of the property.
Developers are well advised to carefully evaluate whether any existing ditches
or drainage swales are linked to navigable water, however indirectly, before
dredging or filling what might appear to be an isolated wetland beyond the jurisdiction
of the United States Army Corps of Engineers.
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MEDICAID
AND NURSING HOME BENEFITS
Medicaid is
a governmental program that provides health insurance coverage
for low-income children, seniors, and people with disabilities.
As the baby boomers age, Medicaid's other role, as a source of
nursing home benefits, is getting more attention. Each of the
states operates its own Medicaid program, subject to some overriding
rules set up by Congress and the federal Centers for Medicare
and Medicaid Services. The following is an overview of some of
those rules. Be aware that the specific requirements can vary
from state to state, and must be checked before making decisions.
Asset Rules
An individual may have no more than $2,000 in “countable” assets
to be eligible for Medicaid nursing home benefits. Assets that are not counted
in this calculation include personal possessions, one motor vehicle (valued
up to $4,500 for an unmarried recipient and of any value for the resident's
spouse), a principal residence in the same state where benefits are sought,
prepaid funeral plans and a small amount of life insurance, and assets deemed
to be inaccessible. To promote the independence of the nursing home resident's
healthy spouse, usually referred to as the “community” spouse,
that spouse may keep one-half of the couple's countable assets, up to a maximum
of $92,760 in 2004. The least that a state may allow the community spouse to
retain in 2004 is $18,552. The couple's assets are totaled as of a “snapshot
date,” which is when a spouse enters a long-term facility in which he
or she then stays for at least 30 days.
Transfer Penalty
To avoid giving benefits to those who present a false picture of poverty, there
is a transfer penalty that is imposed when people transfer assets without
receiving fair value in return. The Government divides the amount so transferred
by the average monthly cost of a nursing home in the state in question. The
person is then ineligible for Medicaid during the resulting number of months.
Several provisions limit the impact of the transfer penalty. First, Medicaid
officials can consider only transfers made during the 36-month “look-back
period” preceding the application for Medicaid (or 60 months for transfers
made to certain trusts). As a result, it is prudent not to apply for benefits
in the three years after a large transfer. Second, the transfer of assets
to particular categories of individuals, such as spouses and blind or disabled
children, will not bring about a penalty. Finally, a penalty can be completely
wiped away, or “cured,” if the transferred asset is returned,
or the penalty may be reduced to the extent that the asset is partially returned.
Treatment of Income
The starting point for dealing with income under Medicaid is that nursing home
residents pay all of it, less certain deductions, to the nursing home. The
types of deductions are as follows: a $60 per month allowance (subject to
some variations among the states) for the resident's personal needs; a deduction
for any uncovered medical costs, including premiums for medical insurance;
for married applicants, an allowance for the spouse at home if he or she
needs income support; and a deduction for any dependent children living at
home. Income attributable solely to the community spouse is off-limits. It
is not taken into account in determining eligibility and the community spouse
will not have to use his or her income to support the spouse receiving Medicaid
benefits in a nursing home.
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REVERSE
PIERCING OF CORPORATE VEIL
Generally,
business entities such as corporations or limited partnerships
are legally separate and distinct from the shareholders and
members who compose them. When justice requires it, however,
courts have ignored the separation of the business and the
individual and have allowed a creditor of the business to
satisfy the debt from the assets of an individual closely
connected to the business. This concept is known as “piercing
the corporate veil.” A variation on the idea, called
reverse piercing of the corporate veil, allows someone to
reach the assets of the business entity to satisfy a claim
or judgment obtained against a corporate insider. In both
instances, a court disregards the normal protections given
to a business structure in order to prevent abuses of that
structure.
Neither type of “piercing” is done lightly. There must be such a
blurring of the lines between a business and an individual that the separate
personalities of the two no longer exist. Moreover, while a court's analysis
is highly dependent on the facts of each case, typically the party seeking to
disregard the distinction between a business and an individual associated with
it must show that the individual controlled or used the business so as to evade
a personal obligation, perpetrate a fraud or a crime, commit an injustice, or
gain an unfair advantage.
Recently, a state supreme court approved the use of “reverse piercing” to
allow two creditors of an individual to use the assets of a limited partnership
controlled by that individual to satisfy his personal debts. The businessman
owned or controlled various business entities. The creditors showed that revenue
from the largest of these, a limited partnership, was transferred to a corporation
owned by the same individual. Then the funds were used to pay for the businessman's
lavish lifestyle, including such items as a second home, a country club membership,
a luxury vehicle, credit card bills, and college tuition for the businessman's
son. Under these circumstances, the legal distinction between the partnership
and the person controlling it had become a fiction to be ignored in the interests
of justice.
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