Wis. Stat. § 346.89(1) states “[n]o person while driving a motor vehicle shall be so engaged or occupied as to interfere with the safe driving of such vehicle.”

Until December 1, 2010 that was the major focus of the “inattentive driving” statute. On December 1, pursuant to 2009 Wisconsin Act 220, subsections (3)a-b were added to the statute stating that “[n]o person may drive, as defined in s. 343.305(1)(b), any motor vehicle while composing or sending an electronic text message or an electronic mail message.” Exceptions to the statute include (1) operators of emergency vehicles, (2) certain in-vehicle systems (On-Star) that transmit and receive emergency alert messages and messages related to the operation of the vehicle, including global positioning devices, (3) amateur radio operators who hold a valid license issued by the federal communication commission when using dedicated amateur radio 2-way equipment and observing proper operating procedures, and (4) users of voice-operated or hands-free devices if the driver of the motor vehicle does not use his or her hands to operate the device, except to activate or deactivate a feature or function of the device. The penalty for violating Wis. Stat. § 346.89(3) is a fine of not less than $20 nor more than $400, and, because it is a moving violation, 4 points on your drivers license.

What does that mean? It means that a person, while driving, cannot compose (write) or send text messages or e-mails while their car, van, truck, motorcycle, bus or any other motor vehicle is in motion. The focus of this new law has been on the texting aspect of it, but it does include a prohibition against composing and sending e-mails. However, it excludes times when the vehicle is stopped at a traffic light, a stop sign or in traffic due to congestion. It does not prohibit reading messages, or using or surfing the internet. Further, it does not prohibit dialing a phone number, making or receiving phone calls, scrolling through contacts, checking one’s electronic calendar, etc.

Of course, this does not permit inattentive driving. Captain Tim Carnahan of the Wisconsin State Patrol believes that driving distractions, such as texting, are simply dangerous and irresponsible. While state troopers usually give drivers 30 days before enforcing a new law, it will not be the case with the texting or e-mailing while driving ban. Carnahan stated “[t]he law becomes effective on [December 1] and it is entirely possible that someone who is violating that law and is witnessed by our law enforcement would be stopped for that violation.” However, State Patrol Superintendent David Collins noted that the state also has a law against inattentive driving, and that drivers could be ticketed under that law if they are distracted by reading text messages or talking on their cell phones. Collins stated “[t]o be very simple, it’s not illegal to read. But we’re not recommending that. We’re not saying that’s a flaw in the law. We’re just saying use common sense.”

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As part of 2009 Wisconsin Act 220, the Legislature added requirements to the driving curriculum for Technical College Systems, Wisconsin public schools, and Driving Schools that they “[a]cquaint[] each student with the hazards posed by composing or sending electronic text messages or electronic mail messages while driving and with the provisions of s. 346.89(3).”

It is estimated that more than 90% of all information created today is stored electronically.

The Federal Rules of Civil Procedure were amended in 2006 to address such electronically stored information, or “ESI”. Effective January 1, 2011, the Wisconsin Rules of Civil Procedures also are being amended to address ESI and confirm that discovery of ESI stands on equal footing with discovery of paper documents.

The Wisconsin rules have been changed to parallel the federal e-discovery rules and make it easier to utilize existing federal authority in discovery disputes in the Wisconsin courts. But Wisconsin did not adopt the 2006 federal amendments in their entirety. The new Wisconsin rules take a slightly different approach than the federal amendments in two ways: First, some federal rules do not have Wisconsin counterparts. For example, unlike FRCP Rule 26(a), Wisconsin’s new rules make no provision for mandatory disclosure. Second, the drafters of the new Wisconsin rules thought some portions of the federal amendments should be addressed by substantive Wisconsin law, rather than by a procedural rules change.

The new Wisconsin ESI rules are:

• Wis. Stat. § 802.10(3)(jm) (the Wisconsin counterpart to FRCP 16)

This rule is being enacted to encourage courts to be more active in managing electronic discovery. It adds the need for discovery of electronically stored information to the issues that a trial court may address in issuing a scheduling order.

• Wis. Stat. § 804.01(2)(e) (the Wisconsin counterpart to FRCP 26)

This rule is being enacted to help manage the costs of discovery of ESI. It creates a “meet and confer” obligation, and states that no requests for production or inspection of ESI under Wis. Stat. § 804.09 (or responses to interrogatories by production of ESI under Wis. Stat. § 804.08(3)) can be issued until after the parties confer on a number of discovery issues. However, it does not require parties to confer before commencing other types of discovery.

• Wis. Stat. § 804.08(3) (the Wisconsin counterpart to FRCP 33(d))

This rule gives parties the option to produce electronic business records in lieu of an answer to an interrogatory. It specifies that ESI is among the types of business records that a business may provide in response to an interrogatory. But, this is an option; it is not mandatory.

• Wis. Stat. §§ 804.09(1) and (2) (the Wisconsin counterpart to FRCP 34)

These rules are the heart of the new electronic discovery rules. They govern the formulation of electronic discovery requests and responses and establish the scope and procedures regarding the discovery of ESI. They treat ESI the same as paper documents.

• Wis. Stat. § 804.12(4m) (the Wisconsin counterpart to FRCP 37)

This rule provides a “safe harbor” for the good faith, routine deletion of ESI and gives limited “immunity” from certain spoliation sanctions.

• Wis. Stat. § 805.06 (the Wisconsin counterpart to FRCP 53)

This is not a new rule, but rather its use in ESI matters is suggested by the comments to the new Wisconsin rules. It allows for the use of discovery referees or “special masters” to handle complex and/or expensive discovery issues, including those involving ESI.

• Wis. Stat. § 805.07 (the Wisconsin counterpart to FRCP 45)

This rule adds ESI to the types of materials which may be discovered by subpoena.

For more information about these new amendments to the Wisconsin Rules of Civil Procedure, contact Grant Killoran at O’Neil Cannon at 414.291.4733 or grant.killoran@www.wilaw.com.

The President has signed into law the new tax legislation which recently passed through Congress. Generally, the new tax law extends the existing tax rates for two more years, provides a two percent reduction in the payroll tax, and increases the estate tax exemption to $5 million. An additional provision in the legislation, which has been given very little attention in the public media, increases the gift tax exemption to $5 million beginning in 2011. Prior to this, the gift tax exemption was $1 million. This change will give individuals significantly greater flexibility in their estate planning. The $1 million gift ceiling was a hindrance to many individuals who wished to do comprehensive estate planning. With this exemption raised to $5 million, $10 million per couple, the estate planning options become much more diverse and will allow significantly more freedom to individuals to do planning.

The term “buy-sell agreement” means any legally enforceable arrangement by and among a business entity or its owners prescribing limitations on the ability to own and to transfer equity interests. It is the linchpin between a business succession plan and the estate plans of the owners in determining the future ownership and control of a business. The terms of a buy-sell agreement can be included in an operating agreement of a limited liability company, a partnership agreement for general and limited partnerships, or in a close corporation agreement for corporate entities.

Most often the terms of a buy-sell agreement are set forth in a separate written document by and among the shareholders of a corporation and the corporation itself. This article focuses on separate written buy-sell agreements involving corporations, even though many of the concepts apply to other types of business entities.

When entrepreneurs are forming a business entity, or a new investor becomes a shareholder, the parties are optimistic that they will all benefit from the financial success of the enterprise. Introducing the topics of death, disability, termination of employment, and other negative possibilities is comparable to negotiating a prenuptial agreement for a couple about to be wed. Unfortunate but foreseeable events need to be addressed as soon as possible before irreversible commitments are made.

A buy-sell agreement is an integral part of a shareholder’s personal estate plan. The creation of a market to liquidate an otherwise nonmarketable asset is crucial to many estate plans. The shareholder’s will and trust must contain directions to the fiduciary to comply with and to implement the terms of the agreement. These documents may also direct the fiduciary to accept the provisions of the agreement (such as the valuation methods) without the necessity or duty to inquire as to the validity of the data on which the sale is based or the process by which it is made.

Control and ownership

In discussing business succession planning, it is advisable to focus on three separate elements:

(1) Income
(2) Control
(3) Equity ownership

While a buy-sell agreement may indirectly affect the income from a business entity, the arrangement more directly affects control and equity ownership.

The company’s capital structure and organizational documents determine the control of the enterprise through the election of the board of directors. The managers of the business and perhaps the other shareholders, however, do not want family members who happen to inherit stock to be involved in the management of the business. The separation of control from the equity ownership of the business and the extraction of the value of the equity ownership of the business should be agreed on in writing by the shareholders.

Who is the purchaser?

Entity Redemption

Cross-purchase

A hybrid

A redemption gives the corporation the right or option to purchase stock on the happening of stated trigger events. Cross-purchase agreements are merely agreements by and among the shareholders themselves to purchase the stock on the happening of trigger events. Hybrid agreements give the corporation the first option to purchase the shares, but if there are legal or financial impediments (such as bank covenants) then the shareholders have the option to purchase the shares.

The decision to use a particular type of agreement depends on many factors. The most important factors are the number of parties to the agreement and the type and complexity of funding. If there are fewer than three shareholders, a cross-purchase agreement is often preferable in giving the purchasers a stepped-up basis. If there are many shareholders and life insurance is the preferred method of funding the obligations, an entity redemption arrangement is more easily implemented.

Mandatory purchase or options?

Will a trigger event require the purchase of the shares or merely give a party an option? Does the shareholder have an option to “put” the shares? Some trigger events can call for a mandatory purchase and sale, while others can result in cross puts and calls. The purchase price and the terms of the sale can differ depending on the trigger event itself.

Transfers to third parties

A buy-sell agreement generally provides that if a shareholder attempts to sell or give his or her shares to a third party, the corporation or the other shareholders have a right of first refusal to purchase the shares for a given period. The optionees have the option to purchase the shares either at the price set forth in the agreement or at the price to be paid by the proposed transferee. If the corporation does not exercise its option to buy the shares, the other shareholders are generally allowed to purchase the stock pro rata.

Permitted transferees

In implementing an estate plan, an owner may wish to transfer shares to or for the benefit of his or her family. Should such a donative transfer trigger the right-of-first-refusal in the corporation or the other shareholders? If the transfer is allowed, will the shares still be subject to the arrangement on the death of the transferor? If the transferee dies, who has the right to purchase those shares—the transferor, the corporation, or the other shareholders? If the shareholder wishes to fund a living trust, the agreement should provide that the trustee is bound by the terms of the buy-sell agreement. Suppose a shareholder transfers shares to his or her spouse, and the couple subsequently divorces. Should the transferred shares be subject to the buy-sell agreement and thus purchased? Should the other shareholders purchase the shares, or should the divorced shareholder have the right to purchase the shares from his or her former spouse before the other shareholders?

Trigger events

In addition to voluntary transfers, the events that cause the terms of a buy-sell agreement to be implemented are generally:

• Death
• Retirement
• Involuntary transfers such as bankruptcy, foreclosure, and divorce
• Disability
• Termination of employment

Death. A shareholder’s death generally triggers a mandatory purchase of shares. Cross puts and calls give the parties the choice of continuing the equity ownership while allowing the successors to liquidate the holdings at a predetermined price and terms.

Involuntary transfers. Even if the shareholder is not an employee or otherwise involved in the operation of the business (e.g., a director or officer), any involuntary transfer due to judicial actions must be restricted. Bankruptcy trustees, creditors, and ex-spouses are never welcome as shareholders. The shares will be purchased at the lowest prices and severest terms that are conscionable.

Disability. For a shareholder who is also an employee, disability is often defined as the inability to perform the services that have been associated with the position for at least six months.

Termination of employment. The termination of a shareholder’s employment is classified as:

• Voluntary
• Involuntary for cause
• Involuntary without cause

The definition of “for cause” must be included in the agreement. Retirement can be defined as the voluntary termination of employment after attaining a given age. The price and terms on which a sale takes place depend on how the termination is classified. While the issue of competition may be included in the buy-sell agreement, it is preferable to include noncompetition, nonsolicitation, and nondisclosure issues in a separate employment agreement. The owners of closely held businesses often confuse the relationship between stock ownership and employment. The obligations of employees, such as the duty to maintain confidential information, should not be related to stock ownership. The duties of shareholders often overlap those of employees, but the remedies available to the entity in enforcing its rights should be contained in separate agreements.

S corporation considerations

Any transfer, voluntary or involuntary, to an ineligible transferee that would negate the ability of the corporation to be taxed as a “small business corporation” under Section 1361 must be prohibited. For example, if the transfer of the shares would violate the rules restricting the number of shareholders or if the shares would pass to an ineligible trust or person, the buy-sell agreement can negate the transfer.

Price

The price at which a sale takes place can be determined in several ways, including:

• Percentage of adjusted book value
• Multiple of adjusted earnings
• Weighted formula of the above two
• Appraisal
• Agreed value

If a balance sheet-based formula is used, the parties often agree to adjust the book value to fair market value of the assets (i.e., mark-to-market). Life insurance death proceeds are often excluded from the value of the business, but the cash value of any policy is generally included. Adjustments to income statement-based formulas could include add-backs for excessive compensation.

The parties may agree to set the value periodically. If a trigger event occurs within a specified time period, the agreed value will apply. While this approach is attractive, most parties fail to update the value routinely, and a default value must be used.

Terms of payment. The purchase price can be paid either in cash or with promissory notes. Often the transferred shares are pledged to secure the payment of the promissory notes. The terms of payment should set forth:

• The interest rate to be paid.
• The manner of amortizing the note.
• The amount that can be paid each year, subject to state corporation laws.

If a payment would be prohibited by state corporate laws (e.g., a payment that would render the company insolvent), the payments can accrue at a predetermined rate of interest. If the selling shareholder is concerned that the purchaser may become over-leveraged, the agreement can deny the purchaser the right to increase its level of debt.

If the purchaser needs to incur subsequent debt, the purchaser should obtain prior written approval from the note holder. Any subsequent lenders would have to agree to subordinate their debt to that of the selling shareholder. If the purchaser increased its level of debt without the selling shareholder’s consent, a default would occur, and the remaining payments on the note could either be accelerated or carry a premium rate of interest.

Optional liquidation

What if the other shareholders do not wish to continue the business in the absence of the deceased or withdrawing shareholder? The agreement can provide that within a given period after the death or the withdrawal of a shareholder, the other shareholders have the option to discontinue the business, liquidate the assets, and begin the winding-up process. Each shareholder would then participate pro rata in the liquidation proceeds.

Revaluation of shares

Many state laws prohibit a company from rendering itself insolvent. If the purchase of the shares by the corporation would render the entity insolvent, a revaluation of the company’s book value can be undertaken to revalue the assets at market value.

Bank covenants

If the company has a line of credit or outstanding loans from a financial institution, loan covenants will generally prohibit distributions to shareholders until the bank debt is paid or the consent of the bank is obtained. Such limitations may force the shareholders to adopt a cross-purchase arrangement.

Endorsements of stock certificate

State corporate law generally invalidates restrictions on the transferability of shares unless there is a legend on the stock certificates setting forth the terms of the agreement or stating that the stock is subject to transfer restrictions and that a copy of the agreement will be provided to an assignee within a particular number of days. The terms and conditions of any restrictions on the transferability of uncertificated shares must also be made available to would-be purchasers.

What if the seller does not sell?

The shareholder has a contractual obligation to sell after a trigger event. What if the seller refuses? What if the seller alleges fraudulent inaccuracies in the financial statements on which the appraisal is based? What if the agreed price is so old as to render it unconscionable? While the litigation is pending, who votes the shares? Can the family of a deceased shareholder that holds a majority of the shares operate the company and oppress the remaining minority shareholders?

Little guidance exists as to whether the holder of a deceased shareholder’s stock has the right to vote the shares or receive dividends pending the sale. Can the agreement dictate the voting of the shares after the trigger event? Would state laws involving voting trust agreements be applicable? Arguably the seller holds the stock in a constructive trust for the benefit of the buyer. Court proceedings in which such matters are disputed take years to resolve. While binding arbitration is an alternative, the proceedings can often be lengthy. During that time, the actual owner of the shares can undermine the value of the company by revealing company secrets and otherwise operating the company in an inappropriate manner.

To avoid these results, the agreement can provide that the shareholders can transfer ownership of the shares to a third-party trustee or escrow agent. The trustee or escrow agent can then hold the shares and purchase proceeds until the closing. Alternatively, the agreement can provide that each shareholder will hold the shares in transfer-on-death form with either the company or the other shareholders named as transferees. The agreement would contractually obligate the transferee to pay the former shareholder or a designated beneficiary the price on agreed terms. Rather than having the buyers chase the seller to force a sale, the designated beneficiary is forced to seek payment from the company or the remaining shareholders.

Tag-along and drag-along

The terms of the buy-sell agreement often contain “tag-along” and “drag-along” rights.

• A tag-along right prevents oppression of minority shareholders by giving them the power to force a sale of their shares at the same price and terms as a selling majority shareholder.
• If a majority shareholder receives an offer to sell his or her shares but the offer is contingent on the purchaser buying all of the outstanding shares, the majority shareholder can “drag-along” the minority shareholders and force them to sell their shares at the same price and terms.

Insurance funding

Many companies choose to fund their obligations under a buy-sell agreement with insurance on the lives of the shareholders. Buy-sell agreements often require the company to use the insurance proceeds received on the death of a shareholder as payment in full or as a down payment for the purchase. The cash value of a policy can also fund the purchase of the shares on the retirement or disability of a shareholder. If the company is the owner of the life insurance policies, the requirements of Section 101 must be followed to assure that the proceeds are exempt from income taxation.

If there are many shareholders, it is generally preferable to cast the buy-sell agreement as an entity redemption. The company can then purchase a policy on the life of each shareholder. The policies are, however, assets of the company and can be reached to satisfy the claims of creditors. If there are few shareholders, it may be preferable to consider a cross-purchase arrangement where each shareholder owns policies on the lives of the other shareholders. The agreement should provide that on the death of a shareholder, the other shareholders have the right to purchase the policies on their own lives from the deceased shareholder’s estate or trust.

Sinking fund alternative. As an alternative to life insurance funding, a corporation can create a separate fund that can be used only to purchase shares under the company’s buy-sell obligations. The unanimous consent of all shareholders is required before the fund can be used for any other purpose. While the fund is subject to the claims of the general creditors, the unanimous consent requirement assures that the fund will be intact when needed.

Professional corporations

State licensing requirements allow only professionals to own the stock of certain corporations. For example, agreements covering medical practices limit the ability of nonprofessionals to own stock in the professional corporation. Can the nonprofessional family member own the shares of the corporation pending the closing of the sale? What rights does the successor have as an owner of the corporation?

Transfer tax considerations

The IRS has historically viewed buy-sell arrangements for family-owned businesses with suspicion as being testamentary substitutes. The IRS regularly challenges values fixed under the terms of the agreement as not being bona fide arms-length market prices. For all transfer tax purposes, any option, agreement, right, or restriction on the transfer of a business interest is ignored for valuation purposes unless:

(1) It is a bona fide business arrangement.
(2) It is not a device to transfer property to members of the decedent’s family for less than full and adequate consideration in money or money’s worth.
(3) Its terms are comparable to similar arrangements entered into by persons in an arm’s-length transaction.

Income tax considerations

In a cross-purchase situation, the seller generally receives capital gains and installment sales treatments for the sale proceeds, and the purchasers obtains a step-up in the tax basis of the purchased shares equal to the purchase price. An entity redemption may not be eligible for capital gains treatment under some circumstances. At the present time, the tax on dividends, as well as the capital gains tax, are the same. If the transaction is not eligible for capital gains treatment, the benefit of any basis of the seller’s share is lost.

Conclusion

Business owners are often reluctant to negotiate a buy-sell agreement because it raises too many unpleasant issues. However, the two great motivators, fear and self-interest, can be used to provoke business owners to take action and address these issues while everybody is healthy and in agreement.

In keeping with the ghostly time of year, I submit the following legal advice for home sellers. The old rule of “buyer beware” has been eroded over the years by court cases involving less than candid sellers and disappointed buyers. These days, the basic rule in home sales is disclosure. A seller is expected and, in some instances, required to disclose to a potential buyer defects in the home, such as physical problems, environmental contamination and the like.

The duty of disclosure was elevated in a 1991 appellate case in New York State in which a buyer rescinded the purchase contract and sued the seller for a return of his earnest money deposit on the basis that the seller had not disclosed the fact that the home was haunted. The buyer contended that the seller should have disclosed the ghosts, and the seller defended under the legal doctrine of “buyer beware” and the theory that no duty of disclosure existed.

The Judge in the case summarized the tension between the two legal theories as follows:

From the perspective of a person in the position of plaintiff herein (the buyer), a very practical problem arises with respect to the discovery of a paranormal phenomenon: “Who you gonna’ call?” as the title song to the movie “Ghostbusters” asks. Applying the strict rule of caveat emptor to a contract involving a house possessed by poltergeists conjures up visions of a psychic or medium routinely accompanying the structural engineer and Terminix man on an inspection of every home subject to a contract of sale. It portends that the prudent attorney will establish an escrow account lest the subject of the transaction come back to haunt him and his client—or pray that his malpractice insurance coverage extends to supernatural disasters. In the interest of avoiding such untenable consequences, the notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin which should be exorcised from the body of legal precedent and laid quietly to rest.

Ultimately, the Judge reversed the ruling of the lower court and ruled that rescission was available to the buyer and that the money should be returned.

So, if you lie in bed and hear things going “bump” in the night or you have a “face to face” relationship with ghostly house guests, you should not remain silent as a tomb when you are trying to sell your house. Rather, you should consider making a disclosure to the buyer. You should let them decide for themselves if they want to share the home with the spirits; hopefully all of whom are like Casper, the friendly ghost.
HAPPY HALLOWEEN!!

Prenuptial Agreements are paradoxical. On one hand, you have a couple who is about to marry and commit to spend the rest of their lives with each other. On the other hand, the couple signs an agreement that spells out what legally happens when a divorce occurs. This paradox can produce tension and anxiety.

Prenuptial Agreements (or “Prenups” as they are sometimes called) are not for everyone. However, there are certain situations when it is recommended that they be strongly considered. Here is a list of some of those situations:

• There are children from a previous marriage. A prenup can protect the inheritance of those children as the agreements can clarify what happens in the event of a death.
• One or both parties have significant assets. A prenup can provide protection so that assets brought into the marriage, by either party, are subject to limited risk.
• One of the parties is a business owner. This is especially important if the party has a business partner because the business partner wants to know that a divorce will not negatively affect the business.
• One of the parties has significant creditor trouble. A prenup can help insulate the non-debtor spouse from the debts and creditors of the other.
• There is a large disparity in wealth of the parties. The greater the disparity of wealth the more that is at risk.
• There is a significant difference in age of the parties. Typically, the older spouse will have more in retirement savings which should be protected.
• There is an expectation of large financial gifts or inheritance. It is typically expected that an inheritance or gift should remain the property of the spouse who has inherited it. A prenup can help provide protection over those assets so they are not put at risk.

Prenups do not just address what happens in the event of divorce, but they can govern the property rights of the parties during the marriage, and may determine what happens to the assets of a party who dies. It is important to note that prenups are most likely to be enforced by a court if both parties have their own lawyer. And finally, it is best if the Prenuptial Agreement is signed well before the wedding day, usually a month or more, to take the tension and anxiety of executing the Prenuptial Agreement out of what should be a joyous occasion.

On September 23rd the House of Representatives passed H.R. 5297 Bill that provides tax breaks and other incentives to businesses. It is anticipated that the bill previously passed by the Senate, will be signed into law shortly. Some of the key provisions of the legislation are as follows:

• Capital gains exclusion. The bill temporarily increases the capital gains exclusion percentage to 100 percent for stock issued by some small businesses, through the end of the year. The gain is limited to 10 times the original investment or $10 million, whichever is greater. It is not subject to the alternative minimum tax.
• Built-in gains tax. Normally, when a company converts from a C corporation to an S corporation, it must retain its assets for at least 10 years, or pay a 35 percent tax on the built-in gains that occurred before the company made the conversion. Prior legislation reduced the holding period to 7 years for assets sold in 2009 and 2010; this bill reduces the period to 5 years for an asset sold in the 2011 tax year.
• Section 179 expensing. The bill temporarily increases the first-year write-off for business equipment under Section 179 from $250,000 to $500,000, and raises the cap on eligible expenditures that triggers a phase-out of the incentive from $800,000 to $2 million. These provisions expire after 2011.
• Accelerated depreciation of real estate. Certain investments up to $250,000 in “qualified real property” can now be expensed. “Qualified real property” includes certain leasehold improvements, certain restaurant property, and certain retail property.
• Bonus depreciation. The bill restores the generous 50 percent first-year depreciation for some kinds of property, through 2010. Bonus Depreciation was originally enacted in the first stimulus bill and in place for 2008 and 2009. The bill also makes a technical change that decouples bonus depreciation from the allocation of certain contract costs.
• Start-up deduction. The bill increases the deduction for start-up expenditures to $10,000, from $5,000 through 2010, and raises the cap on expenditures that triggers a phase-out of the deduction to $60,000, from $50,000.
• Deduction for health insurance costs. The bill allows self-employed business owners to deduct their family’s health insurance expenses from their self-employment tax income in 2010.
• Deducting cell phones. The bill makes it easier to deduct or depreciate cell phones by removing them from the category of “listed property.” Listed property, when it is not used by the business more than half the time, is subject to stringent limits on deductions and depreciation.
• SBA Loans. The bill extends the 90 percent guarantee level and waives borrower fees first enacted in the 2009 stimulus, through 2010. Note that these provisions largely expired in May. It also permanently raises the maximum loan size to $5 million, from $2 million. In addition, the bill temporarily—for one year from the date it is enacted—raises the maximum loan size to $1 million from $350,000. Moreover, it extends current legislation provisions that eliminated borrower fees, through 2010. This bill permanently raises the maximum loan sizes from a range of $1.5 million to $4 million, to a range of $5 million to $5.5 million. It temporarily—for two years after the date of enactment—allows 504 loans to be used to refinance some existing commercial mortgages.

More information about the legislation can be found here.

The grantor retained annuity trust (GRAT) has been a staple vehicle for estate planning since it was first introduced twenty years ago by the Revenue Reconciliation Act of 1990. A GRAT can effectively transfer property from a grantor to a beneficiary, while greatly reducing the amount of tax the grantor would otherwise owe on the gift, if the gift was transferred without a GRAT.

A GRAT is created by transferring property to a trust for a fixed number of years. During the life of the trust, the grantor is paid an annual annuity from that trust. Upon the expiration of the trust, any remaining property in that trust passes to the beneficiary. Tax savings are realized by placing property expected to greatly increase in value into the trust. Tax is then assessed by adding the value of the initial property plus a statutorily fixed interest rate based on the month the trust was created as found in Code Sec. 7520. The current fixed interest rate for August 2010 is 2.6%, according to Rev. Rul. 2010-19. Therefore, as long as the annuity payments over the fixed period of the trust equal the initial property value plus the fixed interest rate, there would be no gift tax assessed on any remaining property left in the trust upon expiration, which would be automatically transferred to the beneficiary.

In other words, if a GRAT is created this month with any type of property expected to appreciate more than 2.6% over the life of the trust, any profits greater than 2.6% would be considered a tax free gift by the IRS to the beneficiary without requiring the donor to utilize a portion of the standard $1,000,000 lifetime gift tax exemption. Currently, the minimum term of a GRAT is two years and there are no restrictions on the structure of annuity payments, effectively allowing a donor to have little to no tax burden if properly created.

Recently Congress has been considering limiting the effectiveness of GRATs. President Obama’s 2010 budget proposal and 2011 revenue suggestions sought to change the minimum term of a GRAT from two to ten years. Additionally, the House attempted to attach a similar curtailment of GRAT to a small business jobs bill and a supplemental spending bill. The Senate’s version of the small business jobs bill did not contain the GRATs provision, and ultimately the House was unsuccessful is attaching the provision to the supplemental spending bill. However, the Senate currently has a GRAT curtailment provision in a proposed COBRA extension act, S. 3548, to provide funding for the bill, an increasingly common trend for proposed anti-GRAT legislation.

The current Senate bill proposes to (1) raise the minimum GRAT term to ten years, (2) require the remaining interest, as calculated at the time of GRAT creation, to be greater than zero, and (3) prohibit the annuity payments from decreasing in value from the first year until after the initial ten years of the trust. These proposed changes have the potential to significantly alter GRATs as we know it. By raising the minimum term to ten years, a grantor increases the chances that he or she may pass away prior to the GRAT expiring. A GRAT that is ongoing at the time of the grantors death reverts back to the estate of the grantor, along with any appreciation, and does not transfer to the beneficiary. In this scenario, not only does the beneficiary get nothing, but the property is now taxable to the grantor’s estate. Furthermore, by disallowing decreased payments, the proposed bill shuts the door on scheduling high initial payments to reduce the amount of the trust that reverts back to the estate. Lastly, the bill creates great uncertainty about exactly how much “greater than zero” the gift must be, meaning that there will likely be disagreements between the IRS and GRAT creators until initial revenue rulings are proposed.

Currently, GRATs are functioning without any of the proposed limitations. However, as the above government actions indicate, that is likely to soon change. Therefore, if you have property that is likely to appreciate more than 2.6% over at least the next two years, and you wish to avoid using part or all of your lifetime $1,000,000 gift tax exemption to transfer that property, now is the time to create and fund a GRAT. Any GRAT created and funded prior to the enactment of any legislation, similar to what is described above, will be grandfathered in to the old GRAT tax laws and you will still receive the significant tax benefits that GRATs currently provide. However, if you wait too long, it is likely that you will miss out on fully capitalizing on one of the best intergenerational wealth preservation techniques currently available.

A recent Seventh Circuit Court of Appeals ruling makes clear that an employer’s obligation under Title VII of the Civil Rights Act of 1964 to provide employees with a discrimination-free workplace takes precedence over patient or customer preferences regarding the race of employees from whom they receive services. The court held, in Chaney v. Plainfield Health Center, that by accommodating a patient’s demand for white-only health-care providers, a nursing home maintained a racially hostile work environment in violation of Title VII. (The court also determined that issues of fact existed as to whether the defendant nursing home’s discharge of the plaintiff, a black nursing assistant, was motivated by race).

In Chaney, the defendant nursing home had a policy of honoring the racial preferences of its residents when assigning them health-care providers in order to avoid violating federal and state laws the nursing home viewed as requiring it to grant residents certain related rights to privacy, bodily autonomy and choice of providers. The court noted that, while allowing patients to choose the gender of their health care providers is permissible under Title VII, the patient-privacy grounds justifying employee assignment based on gender-based preferences are inapplicable to race-based preferences. The court further dismissed arguments that state or federal health laws otherwise permitted a policy of permitting patients to choose providers on racial bases, reasoning that laws requiring access to chosen providers did not necessitate race-based work practices and any state law otherwise conflicting with Title VII would be preempted.

The court also rejected the defendant’s contention that, as a practical matter, its race-based policy protected black employees from racial harassment from the residents, referencing several alternative means to accomplish such objectives. Calling the defendant’s willingness to accede to a patient’s racial preferences “the principal source of the racial hostility in the workplace” where the plaintiff allegedly experienced three specific incidents of racial harassment from co-workers, the court reasoned that barring such a policy was consistent with judicial precedence, which “now widely accept[s] that a company’s desire to cater to the perceived racial preferences of its customers is not a defense under Title VII for treating employees differently based on race.” The court concluded that the defendant nursing home’s status as a medical provider and permanent home to its residents did not exempt it from Title VII’s prohibitions of such race-based employment policies.

A full copy of the decision can be found here.

For the first time in nearly 100 years, extremely wealthy individuals who pass away this year will leave enormous estates to friends and family tax-free. Since 1916, the estates of America’s wealthiest individuals have been subject to a federal estate tax. Over the years the minimum value has fluctuated, but the tax has remained in effect. In 2009, for example, the tax applied to the portion of individual estates valued over $3.5 million, or the portion of a couple’s estate valued over $7 million. However, because of a law passed by Congress in 2001, the estate tax has been entirely repealed for the year 2010.

In March of this year the first American since 1916 was able to pass a multi-billion dollar estate to his children and grandchildren without paying an estate tax. Dan L. Duncan, a Texas pipeline tycoon ranked 74th wealthiest individual in the world, passed away from a brain hemorrhage in late March, leaving billions of dollars in assets behind. Had Duncan passed away in 2009, his $9 billion estate would have been subject to at least a 45% federal estate tax.

Supporters of the estate tax argue that it is unconscionable to allow the wealthiest Americans a tax break at a time when income gaps between the wealthy and poor are so large and deficits so high. Opponents of the estate tax, however, argue that taxing an individual when income is earned and then again at death is unfair and it forces the liquidation of family owned businesses and farms. Read the full New York Times article for a more detailed look at the Duncan estate and the implications of the estate tax repeal.

This window of opportunity for tax savings may be short lived as the current law has the estate tax returning in 2011 with an exemption of only $1 million for individuals and a top marginal rate of 55%.