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.

Fifteen attorneys from O’Neil Cannon have been selected for inclusion on the Wisconsin Super Lawyers 2010 list.

Super Lawyers is a peer-nominated award that recognizes the top 5% of outstanding attorneys across the state of Wisconsin. The Super Lawyers are selected using a rigorous, multiphase rating process. Peer nominations and evaluations are combined with third party research, and each candidate is evaluated based on 12 indicators of peer recognition and professional achievement.

Super Lawyers:

• James G. DeJong
• Seth E. Dizard
• Peter J. Faust
• John G. Gehringer
• Dean P. Laing*
• Gregory W. Lyons
• Patrick G. McBride
• Steven J. Slawinski

Rising Stars:

• Timothy C. Caprez
• Gregory S. Mager
• Chad J. Richter
• John R. Schreiber
• Robert J. Tess

*Top 50 Super Lawyers Recipient

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.

Attorney Jason Scoby of O’Neil Cannon was recently appointed to serve as Chair of the Corporate, Banking and Business Section of the Milwaukee Bar Association (“MBA”). In this role, Attorney Scoby will focus on providing continuing legal education presentations and resources, as well as networking opportunities for attorneys and other professionals in the corporate, banking, and business field.

Some of the topics to be addressed in upcoming presentations may include:

• Choice of Business Entity and the Associated Business and Tax Implications
• Various Subjects in Mergers and Acquisitions

vLending Issues:

• Ethical Issues Involved in Business Transactions
• Contract Drafting

If you would like further information regarding an upcoming MBA event, of if you are interested in making a presentation for the MBA’s Corporate, Banking and Business Section, please contact Jason.

Attorney Scoby is an associate at O’Neil Cannon, where he assists clients on a wide variety of corporate and business-related issues, including commercial transactions, mergers and acquisitions, franchising, business entity selection, and regulatory compliance.

O’Neil Cannon, founded in Milwaukee in 1973, is a full-service legal practice that primarily focuses on providing business law and civil litigation services to closely-held businesses and their owners. The firm represents corporations, institutions and partnerships at all stages of the business life cycle, helping them start, grow and transition from one generation to the next. We also assist business owners with their personal legal needs including tax and estate planning, family law and litigation—including personal injury litigation.

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.

The following O’Neil Cannon attorneys were selected for inclusion in the 17th edition of The Best Lawyers in America 2011 in the following practice areas:

• James G. DeJong—Corporate Law
• Seth E. Dizard—Bankruptcy and Creditor-Debtor Rights Law
• John G. Gehringer—Construction Law, and Real Estate Law
• Dennis W. Hollman—Real Estate Law
• Dean P. Laing—Personal Injury Litigation, and Product Liability Litigation
• Thomas A. Merkle—Family Law

The Best Lawyers in America “is the oldest and most respected peer-review publication in the legal profession,” and is based on more than 3.1 million detailed evaluations of lawyers by other lawyers.” Lawyers “are not required or allowed to pay a fee to be included in The Best Lawyers in America,” and “have no say in deciding which practice areas they are included in;” they are selected for inclusion in the publication, and assigned practice areas, based entirely on the votes they receive from their peers.

Given that less than 3% of all attorneys in the U.S. are included in The Best Lawyers in America, it is a true honor for O’Neil Cannon to have approximately 25% of its attorneys selected for inclusion in this highly-respected publication.

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%.

Randy Nash and Jason Scoby recently published an article in the Spring/Summer 2010 edition of the American Bar Association’s Health Law Litigation newsletter entitled “New Rules Dramatically Affect Health Care Expert Witness Disclosures.”

The article discusses the existing Federal Rules of Civil Procedure and a proposed change to Rule 26 involving the disclosure of expert witness draft reports and communications between the attorney and an expert witness in a case. This proposed rule change has the potential to impact expert witness disclosures before the federal courts. It is expected to go into effect on December 1, 2010.

Under the current rule, an expert witness’s entire file with regard to the matter in litigation, including any drafts of the expert’s report and any communications with the attorney, is discoverable by the opponent in the lawsuit.

The Committee on Rules of Practice and Procedure has recommended that the current rule be amended, stating that the rule has caused “significant practical problems.” The Committee described the problem as follows:

Lawyers and experts take elaborate steps to avoid creating any discoverable record and at the same time take elaborate steps to attempt to discover the other side’s drafts and communications. The artificial and wasteful discovery-avoidance practices include lawyers hiring two sets of experts—one for consultation, to do the work and develop the opinions, and one to provide the testimony—to avoid creating a discoverable record of the collaborative interaction with the experts. The practices also include tortuous steps to avoid having an expert take any notes, make any record of preliminary analyses or opinions, or produce any draft report. Instead, the only record is a single, final report.

Recognizing these issues, many have sought to change the discovery rules. The proposed amendment to Rule 26 attempts to avoid disclosure of experts’ draft reports and attorney/expert communications. The goal is to permit the attorney to communicate freely with the expert about the attorney’s thoughts and opinions relating to the case without fear of those communications being discovered by opposing counsel. The Rule also aims to avoid the unnecessary costs caused by hiring multiple experts and to prevent attorneys from taking other intricate maneuvers to evade the discovery of communications or drafts of expert opinions.

The Supreme Court recently approved these amendments to Rule 26 of the Federal Rules of Civil Procedure. It is expected that Congress will approve the amended Rule, and if it does, the amended Rule 26 will go into effect on December 1, 2010. A full copy of “New Rules Dramatically Affect Health Care Expert Witness Disclosures” can be found here.