Suttons Bay Law

Like many business professionals, your laptop and cell phone have become a corporate archive of important and confidential business information about your company. Smart phones have allowed sensitive data to be available at your fingertips that can be carried most anywhere. Identity thieves can have an easy time of accessing data that is legally protected if you don’t address security issues in your overall Information Technology plan. Many businesses find it more cost-effective to secure the information they have rather than try to repair the damage and rebuild consumer confidence after a data loss or breach. Moreover, federal and state laws require companies to implement reasonable information security practices. Depending on your business and the type of information you keep, these laws may apply to you.

A single basic standard for data security
The Federal Trade Commission has tried to develop a single basic standard for data security that strikes the balance between providing concrete guidance, and allowing flexibility for different businesses’ needs. The standard is straightforward: Companies must maintain reasonable procedures to protect sensitive information. Whether your security practices are reasonable will depend on the nature and size of your business, the types of information you have, the security tools available to you based on your resources, and the risks you are likely to face.

Simple security tips
High standards of data security should be implemented on portable electronic devices that store or provide access to sensitive information, such as employee and customer information. Many smartphone and laptop users, however, ignore simple security measures. Here is a list of simple security tips that will help keep your data confidential

Passwords.
Avoid jotting down your passwords on a sticky note in your laptop bag. Don’t use shortcut keys to program passwords, access codes, or credit card numbers. Find ways to memorize your passwords and use strong passwords that consist of numbers and letters.

Don’t collect and keep data unnecessarily.
If you don’t have a valid business reason to collect personal information, don’t ask for it in the first place. Review the forms you use to gather data — like credit applications and fill-in-the-blank web screens for potential customers — and revise them to eliminate requests for information you don’t need. Before traveling, check your carry on, smartphone, and laptop for data that shouldn’t go with you. Unless you have a legitimate business justification, don’t hold onto customers’ credit card information, including account numbers and expiration dates. Keeping sensitive data longer than necessary creates an unwarranted risk for fraud. Don’t use Social Security numbers as employee identification numbers or customer locators.

Keep things in sight.
According to a company that insures personal computers, 10% of laptop thefts occur in airports. Keep your eye on your electronic devices when going through airport screening. Don’t put your cell phone or computer on the conveyor belt until the person directly ahead of you has made it through the metal detector.

Laptop and smartphone screens.
Consider buying a filter for your laptop/smartphone screen if you work on confidential documents while you travel.

Hotel business center. Don’t inadvertently leave printed documents on the printer/copier/fax machine.

Cell phone conversations.
Sensitive information can be blurted out during loud cell phone conversations. Remind yourself to keep your guard up in public.

Home computers.
Companies with a diligent IT department may keep the companies computers and other electronic devices up-to-date with the latest firewall, anti-virus, and anti-spyware protection and the latest security patches, but if your home computer is used even occasionally for business, robust security software should be installed and kept up-to-date on home computers as well.

Storage.
When discarding or recycling old computers and cell phones, deleting files using keyboard commands is not sufficient because data remains in a device’s memory. Ideally, you should destroy the hard drive or memory device.

Have a written policy in place.
If you must keep information for business reasons or to comply with the law, develop a written records retention policy to identify what must be kept, how to secure it, how long to keep it, who’s authorized to access it, and how to dispose of it securely when you no longer need it.

For more information, see the FTC’s guide Protecting Personal Information: A Guide for Business.

Dan A. Penning

Tags: Asset Protection, Business Management/Law, Know it Now // Add Comment »

More and more checking account owners are using their debit cards or online bill paying methods. With these rising trends, checkbooks are left unaccounted for, for periods of time. Check fraud can occur in one of many ways, such as (1) the victim writes a check but it is intercepted by a third party who fraudulently alters the check, (2) a third party creates an entirely new fraudulent check from the information on the real check, or (3) checks are stolen from the victim and the third party writes fraudulent checks, forging the victim’s signature. For purposes of this article, the victim is a customer of the bank that charges the payor’s (the victim’s) account.

An important defense
Safeguarding your checkbook is an important defense if the financial institution insists upon you, as the victim, being responsible for the fraudulent charges. The Michigan Uniform Commercial Code makes the bank strictly liable to make the victim whole but an exception typically applies. If the victim’s failure to exercise ordinary care “substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument,” and the bank paid the instrument in good faith, the victim will have difficulty succeeding on a claim against the bank. If the bank also “substantially contributes to the loss,” the loss is apportioned between the bank and the victim. Each party has the burden to show that the other party failed in its exercise of ordinary care.

Hazard of keeping your checkbook in plain sight
For example, if you have caregivers, other domestic help, or contract workers that enter your home to perform various duties, and your checkbook is kept in plain sight or in an unlocked drawer or cabinet, the bank will generally assert that you failed to exercise ordinary care in the safeguarding of your checkbook and therefore, the bank will argue that it is not liable to restore your account balance the amount of the fraud. The victim is then left with the options to sue the bank or attempt to arrive at a settlement amount that will allow the victim to recover a portion of the fraudulent charges, including overdraft fees.

Exercising ordinary care
Significant sums have been stolen from victims in a short period of time because they did not properly safeguard their checkbooks. The law provides that a bank is strictly liable for paying on instruments that are not properly payable, i.e. forged, but the exception of the victim not exercising ordinary care is typically applicable and therefore, the victim can be responsible to restore all or a portion of the fraudulent amount to their checking account or risk collection proceedings and possible litigation.

Dan A. Penning

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Planning for the succession of ownership and operation of the family business for next generations presents many tax and non-tax challenges for the family business owner. Oftentimes, keeping the family business in the family involves having to choose between implementing strategies to accomplish tax benefits at the expense of implementing other strategies that may provide a greater likelihood the business will continue to prosper and be managed properly in the future.

Substantial yet limited opportunity
Well, as is addressed in the article below, Congress presented family business owners an unprecedented planning opportunity by enacting the legislation extending the Bush era tax cuts and expanding the estate and gift tax credits at the end of last year. While the opportunity is substantial, it’s limited and likely to undergo changes and possible repeal at the end of a short 2 year window with the current law set to expire at the end of next year, 2012.

Take advantage now
The new law and tax planning opportunities it has made available should have even more family businesses considering planning opportunities even earlier in the current generation/owners’ lifetime. As a result, even relatively young family business owners should at least be initiating discussions with their financial and legal advisers on developing a strategy to take advantage of current opportunities that may not be there a few years from now.

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Family Businesses Catch a Big Break

By Anne Tergesen
Wall Street Journal

It is the gift tax that keeps on giving.

Families now have the chance to pass a substantial stake in their businesses to the next generation—even before handing over the reins. But transferring ownership can raise complicated succession and estate-planning issues that families need to address before giving away so much as a share of stock.

To recap: As part of the tax deal passed by Congress late last year, the gift-tax exemption jumps to $5 million from $1 million for individuals and to $10 million from $2 million for couples in 2011 and 2012.

Yes, that means people can give away that much now without paying a penny in taxes.

“We have a golden opportunity to move wealth at no tax cost,” says Mark Nash, a partner in private-company services at PricewaterhouseCoopers. And those who make a gift now, tax-free, also shield future appreciation from taxes.

But the two-year window raises difficult questions for family-business owners. While those in charge don’t necessarily have to give up control, they may need to make some momentous decisions. Among them: who will eventually lead the business, how to treat other beneficiaries fairly and how to pass down wealth without jeopardizing their own retirement security.

The answers may determine which estate-planning techniques make the most sense for a family to use, says Patrick Ungashick, president of White Horse Advisors, an Atlanta financial-advisory firm that specializes in small businesses. Because decisions of this magnitude “cannot typically be made in weeks or even months,” he adds, “those who want to take advantage of the new gift-tax ceiling shouldn’t wait to start planning.”

Over the next two years, Terry Davis, 53 years old, says he plans to transfer to his two sons a portion of his stake in The Wire Shop Inc., a Fort Valley, Ga., manufacturer of wiring used in heating and air-conditioning units, among other products. Because Mr. Davis, who also is the CEO, doesn’t intend to step down for eight years, he plans to give his sons nonvoting shares. “I’d like to keep control,” he says.

By giving away some of his stock now, Mr. Davis says, he won’t have to worry that his sons could be forced to take on debt or sell the company at a “fire-sale price” to satisfy the estate-tax bill they otherwise may incur upon his death.

Yet such a move causes a new anxiety for Mr. Davis: Before his oldest son, Austin, 28, joined the company in 2006, his “exit plan was to build up the value of the business and sell it.” Now, with most of his assets tied up in the business, he says, “it’s a challenge to see how to fund my retirement.”

Mr. Davis says he recently upgraded his company’s retirement plan from a Simple Individual Retirement Account plan to a 401(k). As a result, he will receive a company match and can contribute a maximum of $22,000 this year, versus $14,000 with a Simple IRA.

He also may exercise an option to purchase the building his company rents. That way, he can lease it back to the company for an amount that will leave him with an income after covering the mortgage.

For those in Mr. Davis’s shoes, other possible solutions include establishing a profit-sharing or defined-benefit pension plan, or staying on the job as a salaried employee, consultant or paid chairman. Those who paid themselves below-market salaries during lean times may be entitled to recover “lost wages.”

Some family businesses even establish “salary continuation plans” to provide one or more key employees with a regular paycheck for a set number of years in retirement. To pass muster with the Internal Revenue Service, such programs should generally be established well ahead of an owner’s retirement and pay “reasonable” amounts, White Horse’s Mr. Ungashick says.

Another option to generate retirement income: Rather than give away shares—either outright or in a trust—you can sell them to a so-called defective trust for the benefit of children or grandchildren.

These complex arrangements come with many tax benefits. They typically involve the sale of shares in a privately held company at a discount, and a loan—plus a gift—from the business or its owner to finance the purchase. Since the trust purchases the shares at a discount, the beneficiaries can keep the excess value, plus any appreciation, estate-tax-free. And if structured properly, the business owner won’t owe any capital-gains tax on the sale’s proceeds, which can be used to fund his or her retirement.

However the gift is made, business owners should consider it in the context of an overall estate plan, consultants say. A decision to transfer assets to some children now can raise awkward questions about the timing, nature and size of gifts to others.

Consultants frequently advise families to earmark assets outside a company for those who aren’t on the payroll. That way, the child who takes over can manage the business without having to consult siblings, some of whom may press for fat distributions.

If you don’t have other assets to give away, some experts recommend you or the business purchase a life-insurance policy in a trust in order to shelter the death benefit from the estate tax.

Email: familyvalue@wsj.com

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Dan A. Penning

Article Source: Wall Street Journal. Click here to visit the Wall Street Journal

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Budget Proposal Includes Anticipated Proposals to Change Both Tax and Spending Policies

Michigan Governor Rick Snyder called the consideration of his proposed Executive Budget a “defining moment” for the state this week as the Executive Budget was submitted to state legislators for the 2011-2012 fiscal year. Snyder commented on his budget as an opportunity to “stop living in the past and start looking to the future.”

As expected, the lynch pins of Snyder’s plan call for the reduction of business taxes by in excess of 1.8 billion and a significant reduction in spending on public schools, universities, local governments and prisons. If passed, the plan will have an immediate impact on the state’s businesses by providing a replacement of the existing Michigan Business Tax with a 6% flat tax on corporate income with some exemptions for designated small businesses. Other parts of the proposed Executive Budget call for an elimination of various business tax credits and replacing the credits with grants from the Michigan Development Corporation.

The Executive Budget also provides for maintaining the already scheduled reduction in the state’s individual income tax rate from 4.35% to 4.25% which is set to go into effect October 1, 2011. Further scheduled reductions to the individual tax rate would be eliminated. In addition, the proposal calls for the elimination of many other existing credits, deductions and exemptions.

While the proposed Executive Budget is far from being a reality and enacted into law, the stage has been set for the debate of how the new administration in Michigan will seek to solve the state’s economic difficulties.

Please stay tuned for more updates on these matters as the debate and ultimate actions to be taken unfold.

Dan A. Penning

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New Year – New (Extended) Tax Laws

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. (The “Act”)

After great speculation and debate, Congress has now passed and President Obama has signed a tax package which gives individuals and businesses some predictability for the next two years through December 31, 2012. The Act extends the Bush-era tax cuts, provides estate tax relief, an “AMT” patch, a reduction in employee paid payroll taxes and provides businesses with new incentives to make capital investments by extending depreciation and tax credits.

Individual Provisions

The following is a summary of certain individual provisions addressed in the new Act. This summary is not all inclusive and everyone should consult his/her tax advisor to review the full extent of the Act and its impact on your specific circumstance.

• Income Tax Rates
  Current rates will continue for the next two years (2011 & 2012). The top rate will remain 35%. Most individuals in the 15, 25, and 28% rate brackets would have seen their rates increase by 5% or more without passage of the new Act.
• Payroll Tax
  Individuals and employees or those who are self-employed will receive a reduction in their tax equal to 2% reducing employees tax contributions from 6.2% to 4.2% and self-employed individuals from 12.4% to 10.4%.
• Capital Gains/Dividends.
  The rate on capital gains was scheduled to increase to 20% but under the new Act the rate will remain at 15%. (Zero percent for taxpayers in the lowest brackets of 10% and 15%). The tax on certain qualified dividends would have increased and reverted to the tax on ordinary income at the increased rates referenced above. The Act also extended special rules for the excludable gains on the sale of small business stock, collapsible corporations and accumulated earnings tax.
• Tax Extenders/Itemized Deductions
  Tax incentives including state and local sales tax deductions, higher education tuition deduction, teacher’s classroom expense deduction, charitable contributions of IRS proceeds and charitable contributions of appreciated property for conversation purposes. The prior repeal of certain limitations on the use of itemized deductions by higher income individuals has also been extended.
• Alternative Minimum Tax (AMT)
  The two–year AMT patch will prevent in excess of an estimated 20 million middle income individuals from paying increased tax. The exemption from AMT for 2010 is $47,450 for individuals and $72,450 for married taxpayers filing jointly. For 2011, the exemptions increase to $48,450 for individuals and $74,450 for married taxpayers filing jointly.
• Tax Credits
  Several child and educational credits were also extended including child tax credits, earned income credit, adoption credit, dependent care credit, employer-provided child care credit and deductions, credits and exclusions under the Educational Assistance Exclusion, Student Loan Interest Deduction and Coverdell Education Savings Accounts and Scholarships.
• Federal Estate Tax
  After a one-year period with no estate tax, the tax will resume beginning in 2011 with a maximum rate of 35%. There is an exclusion (credit) in the amount of $5 million for individuals and $10 million for married couples who implement certain planning techniques to utilize the first spouse to die’s credit. The act also reinstates the “stepped up basis rules” for property acquired from a decedent’s estate providing for the ability to avoid a tax on property that appreciated in value over a decedents’ lifetime. The Act also provides additional benefit and flexibility by allowing a surviving spouse to take advantage of the unused portion of the estate tax exclusion of his/her deceased spouse. The Act also provides for a Gift tax exclusion of $5 million for individuals but this amount, as was the rule before, reduces the estate tax exemption dollar-for-dollar for qualified gifts made by individuals during their lifetime.
• Homeowner Credits/Deductions
  The Act extends the deduction for certain premiums paid for qualified mortgage insurance for acquisition indebtedness on a residence for a period of one year subject to certain other limitations. The Act also provides for continued tax credits for energy efficiency home improvements.

Business Provisions

Businesses also received extended and other benefits under the Act. These benefits included the ability by businesses to write off 100% of their equipment and machinery purchases and additional 50% first year depreciation. The Act also provides for work opportunity tax credits, research tax credits and business tax extenders including a 15 year recovery period for qualified leasehold improvements, restaurant building, retail improvement credits and tax incentives for empowerment zones.

Penning to Attend National Estate Planning Conference
45th Annual Heckerling Institute on Estate Planning

Your planning needs remain our top priority. In furtherance of our commitment to maintain our expertise on estate, tax, business and succession planning, Dan Penning will attend the University of Miami’s 45th Annual Heckerling Institute on Estate Planning the week of January 10, 2011 to hear presentations by nationally-regarded experts on the planning implications of the new tax act for 2011 and beyond. In addition, the conference will host presentations with updated information and strategies focusing on planning for lifetime transfers of individual wealth/assets and business interests.

Allocating our resources to the investment of time and expense in attending these types of conferences ensures that our clients and the professionals we work with have access to the most current and extensive information available to assist in the preservation of personal and business assets.

Please stay tuned for future estate planning updates resulting from the conference.

Dan A. Penning

Tags: Asset Protection, Business Management/Law, Business Succession, Estate Planning, Know it Now, Personal Management // Add Comment »

“Christmas reminds us we are not alone. We are not unrelated atoms, bouncing and ricocheting amid aliens, but are a part of something, which holds and sustains us. As we struggle with shopping lists and invitations, compounded by December’s bad weather, it is good to be reminded that there are people in our lives who are worth this aggravation, and people to whom we are worth the same. Christmas shows us the ties that bind us together, threads of love and caring, woven in the simplest and strongest way within the family.” -Donald Westlake

As many of us prepare to spend the Christmas holidays with family, we may find that we have several names left on our lists for whom we have yet to find the perfect gift. Supporting local stores in our communities is like giving a Christmas gift to our neighborhoods and downtowns, in addition to the individual who is actually receiving the gift. Consider seeking out local merchants with whom to make connections and from whom to make purchases for our gift lists.

According to www.buylocalthinkglobal.com, local Michigan businesses:

• produce jobs for local communities
• are more likely to utilize local ads, banks and other services
• donate more money to nonprofits and are more accountable to their local communities
• preserve the economic diversity of our communities and the unique character of our neighborhoods.

Buying from small businesses is so important to our communities because it helps keep jobs in town. The local gift shop is unlikely to close its doors for the purposes of moving elsewhere. If a local store shuts its doors, it is usually for good. Money spent in our local towns means more money stays in our communities because it circulates within the local economy. In 2004, a study concluded that $100 spent in local businesses meant that $68 remained in the local community, compared to $43 for the big-box stores. That is a difference of $25 for every $100 that we spend. It helps keep our downtowns in business which are also apt to sponsor little league teams and support community and local events.

Supporting local shop-owners is a way to be mindful of where we are spending our money and where the money goes after we purchase a gift. Moreover, the person behind the counter is, on many occasions, the shop-owner who is eager to help us and answer our questions. It may, at times, feel more “comfortable” to walk into a big-box store, shop anonymously, pay for our goods with hardly a word exchanged aside from the rehearsed and repetitive phrases the clerks are required to say, and leave with a big shopping bag, having done most of our shopping in one stop. But Christmas is about connecting with people, and connecting with people by shopping in our local businesses helps spread the joy of the holiday season to our communities while keeping more money in our own downtowns and neighborhoods.

Dan A. Penning

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A problematic trend seems to be emerging with banks failing to properly discharge liens of previous property owners. Recently when I’ve been assisting clients in the sale of both commercial and residential real estate we’ve encountered significant problems caused by banks that failed to properly discharge liens of previous owners after my clients purchased the property. These lien discharge problems have in some instances almost caused sales to be terminated and have caused significant delays resulting in hardship and increased costs for the parties to the transaction.

The Problem
When you, as a purchaser of real estate, close on the purchase of property, most often a seller has an existing mortgage that must be paid off with closing proceeds. This is typically done by the title company as the closing agent or perhaps an attorney who is handling the acceptance of funds from a purchaser and disbursing those funds to pay various liens on a property that must be satisfied to give the purchaser clear title. The problem arises when loans and mortgages are paid with closing proceeds and the bank receiving the funds fails to record a “Discharge of Mortgage” or lien document evidencing the loan has been paid in full. This problem has been further complicated recently with the chaos in the banking industry including the multiple acquisitions and requisitions of certain bank entities. A bank that received a mortgage payoff five years ago may have been sold as an entity several times making it next to impossible to determine the location of loan records.

Real estate sellers then list their properties for sale – not realizing the mortgage of the seller that sold them the property still has a lien on the property – resulting in a severe complication of not being able to provide clear title to the next purchaser. Not being able to produce a clear title to the next purchaser in a timely manner results in providing a purchaser with the right to terminate the transaction. This problem, and the possible loss to the seller, cannot be readily fixed because it could take several weeks to obtain a discharge of a mortgage that was actually paid several years before. In one instance, a colleague of mine represented a client selling a residence that was foreclosed on and almost lost the ability to avoid the foreclosure by selling the property and paying the balance owed on the foreclosed mortgage within the redemption period. In addition, with the glut of both commercial and residential inventory on the market, it is risky to give any hard-to-find purchaser the smallest of excuses to terminate a transaction based on an objection to the condition of your property’s title.

The Solution
Before or at the time of listing your property for sale, ask your real estate professional to assist you in causing a title search. Conducting a title search first will help you determine whether there are any undischarged mortgages or liens that you are not aware of. Once armed with this information you can initiate, sooner rather than later, the process of obtaining all discharge documents that should have been recorded at the time of the previous sale of the property. Many County Register of Deeds offices have records available online so you may be able to check your property’s title yourself as well.

The bottom line is to avoid surprises when trying to sell your real estate in these challenging times.

Dan A. Penning

Tags: Asset Protection, Commercial Real Estate, Know it Now, Real Estate // Add Comment »

Recent oral arguments presented by attorney Dan A. Penning, before a Michigan Court of Appeals panel of judges, resulted in a unanimous 3-0 vote in which the Appeals judges upheld the trial court’s decision dismissing the case.

Penning argued in support of a Circuit Court’s decision dismissing a lawsuit against Penning’s client for trespass, nuisance and other claims relating to the client’s development of property filed by another property owner.

The case involved many unique and complex issues involving new arguments of long-standing property law decisions. In the end, the Appeals judges, by a unanimous 3-0 vote, upheld the trial court’s decision dismissing the case. This case represents the latest of many cases in which The Penning Group attorneys have successfully defended their trial court victories on behalf of the firm’s clients in the Appellate Court.

The Penning Group

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Virtually any newscast or newspaper continues to talk about the “tax increases” that will become effective January 1, 2011. While the general concept is widely reported there seems to be little attention being given to the specific taxes that will increase if no action is taken by the lame duck congress by the end of the year. The following information is not being offered as any political objection or endorsement but rather just factual information that I wanted to share with everyone for the express purpose of understanding the increases and encouraging everyone to consult with their tax consultants and legal counsel to determine whether any planning before the end of the year makes sense for you.

Please note the following three phases of taxes will roll out

First Phase: Expiration of 2001 and 2003 Tax Relief

In 2001 and 2003, the GOP Congress enacted several tax cuts for investors, small business owners, and families. These will all expire on January 1, 2011:

Personal income tax rates will rise.
The top income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent. All the rates in between will also rise. Itemized deductions and personal exemptions will again phase out, which has the same mathematical effect as higher marginal tax rates.

The full list of marginal rate hikes is below:

The 10% bracket rises to an expanded 15%

The 25% bracket rises to 28%

The 28% bracket rises to 31%

The 33% bracket rises to 36%

The 35% bracket rises to 39.6%

Higher taxes on marriage and family.
The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. The standard deduction will no longer be doubled for married couples relative to the single level. The dependent care tax credit will be cut.

The return of the Death Tax.
This year, there is no death tax. For those dying on or after January 1, 2011, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savings and investments.
The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The top dividends tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013.

Second Phase: Health Care Taxes.

There are over twenty new or higher taxes in the new healthcare law. Several will first go into effect on January 1, 2011. They include:

The Tanning Tax.
This went into effect on July 1st of this year. It imposes a new, 10% excise tax on getting a tan at a tanning salon. There is no exemption for tanners making less than $250,000 per year.

The “Medicine Cabinet Tax.”
Americans will no longer be able to use health savings account (HSA), flexible spending account (FSA), or health reimbursement (HRA) pre-tax dollars to purchase non-prescription, over-the-counter medicines (except insulin).

The HSA Withdrawal Tax Hike.
This provision increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Brand Name Drug Tax.
Starting next year, there will be a multi-billion dollar tax imposed on name-brand drug manufacturers. This tax, like all excise taxes, will raise the price of medicine, hurting everyone.

Economic Substance Doctrine.
The IRS is now empowered to disallow perfectly-legal tax deductions and maneuvers merely because it judges that the deduction or action lacks “economic substance.” This is obviously an arbitrary empowerment of IRS agents.

Third Phase: The Alternative Minimum Tax and Employer Tax Hikes

When Americans prepare to file their tax returns in January of 2011, they’ll learn the AMT won’t be held harmless, and many tax relief provisions will have expired.

The major items include:

The AMT will ensnare over 28 million families, up from 4 million last year.
According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families – rising from 4 million last year to 28.5 million. These families will have to calculate their tax burdens twice, and pay taxes at the higher level. The AMT was created in 1969 to ensnare a handful of taxpayers.

Homeowner Paperwork Tax Burden.
President Obama recently signed a small business bill which has several tax hikes and tax breaks. One of the tax hikes requires the 10 million homeowners who rent out second homes and vacation homes to issue burdensome “1099-MISC” forms to everyone with whom they do more than a small amount of business. This will result in millions of wasted hours filling out paperwork and being chased by the IRS. 90% of people who rent out homes make less than $200,000 per year.

Taxes will be raised on all types of businesses.
There are literally scores of tax hikes on businesses that will take place. The biggest is the loss of the “research and experimentation tax credit,” but there are many, many others. Combining high marginal tax rates with the loss of this tax relief will cost jobs.

Tax Benefits for Education and Teaching Reduced.
The deduction for tuition and fees will not be available. Tax credits for education will be limited. Teachers will no longer be able to deduct classroom expenses. Coverdell Education Savings Accounts will be cut. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed.
Until this year, a retired person with an IRA could contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.

Please feel free to pass this information along. Everyone needs to understand that the increase in taxes will affect many of us.

Dan A. Penning

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The Perils of Internet Searches Using the Names of Job Applicants

Exposure to Liability
Many employers, in the interest of finding information about applicants or current employees, periodically or routinely conduct internet searches with the name of the person about whom the company desires more information. Many employers discover positive information about the applicant that was not evident on the applicant’s resume and application; however, employers also happen upon other valuable information as well, that indicates an applicant’s faults that may affect job performance if the applicant were to begin work for the company. Facebook, Twitter, Google profiles, MySpace, and LinkedIn can be goldmines for discovering indicators that will not be apparent in the application materials submitted by the applicant to the employer. Although these searches are commonly conducted by employers, the use of internet searches to make hiring decisions regarding certain applicants for a position can expose an employer to liability under Anti-discrimination Laws, whether federal, state or local, Privacy Rights, and the Fair Credit Reporting Act, amongst other laws.

Avoiding discrimination claims
If an employer locates a picture of an applicant on the internet, the picture may make evident the applicant’s race, gender or other indicator of a protected class of individuals under, for example, the Equal Employment Opportunity Laws. Companies routinely discourage or prohibit applicants from submitting photographs of themselves with their application materials for the very reason that it could subject the employer to discrimination claims if they do not hire the applicant. If the employer locates a photo of the applicant by other means, the employer has continued to expose themselves to a potential discrimination claim. Furthermore, if an applicant has flagged certain organizations or comments on Facebook with the “Like” (thumbs-up) designation, these facts could point to protected classifications that could also lead to a discrimination claim if the applicant is not hired. Also, it is not unusual for an applicant’s religious affiliation or whether or not they served in the armed forces to be evident in their profiles on social media and networking sites.

Reasonable expectations of privacy
Privacy-related rights can also be an issue for employers who navigate the internet for information on potential hires. An individual must prove that he or she has a reasonable expectation of privacy to prove a claim for invasion of privacy. Individuals who post personal information on the internet for the public to view will likely have a difficult time proving that he or she had a “reasonable expectation of privacy.” The applicant, however, may have protected his or her personal information with a password or other privacy controls that limit access to the information. If the employer poses as a “friend” of the applicant or uses a third party with certain privileges to gain access to the personal information about the applicant, it may subject the employer to liability. The applicant may have postings of particularly relevant information, such as sleeping at work, goofing off, disparaging the former employer, etc., but it could be considered private. The employer may also be in violation of certain software licenses, terms of use requirements, and other conditions imposed upon the users of the particular site.

Searching in compliance with Fair Credit Reporting Act
Many employers require applicants to agree to certain background checks, such as criminal background checks, credit checks, etc. However, background checks such as these are not protected under the Fair Credit Reporting Act unless the investigation is conducted by a third party reporting agency. If the employer conducts its own background checks on applicants, the employer does not enjoy the protections of the Fair Credit Reporting Act. Using a third party is not without risk, however, because the third party search must be conducted in compliance with the Fair Credit Reporting Act.

Search for one, search for all
If an employer makes the decision that it is important for their purposes, at some point in the hiring process, to conduct internet searches of applicants, the employer’s policy should include the requirement that once an internet search is conducted on one applicant, it must be conducted on all remaining applicants. A seemingly brief and innocent internet search of John Doe or Jane Doe who has applied to work at your company can expose your business to discrimination claims, privacy violations, and Fair Credit Reporting Act violations. Please contact us if you have additional concerns or for further guidance in the area of establishing policies and guidelines for internet searches of applicants who are applying for a position with your company.

Dan A. Penning

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