The United States Supreme Court issued a landmark decision in Windsor, holding that if a couple is married and resides in a state (or province) that allows same sex marriage, then that couple is married for purposes of federal law (including the Internal Revenue Code).  A question left unanswered by the Supreme Court in Windsor was, if a couple got married in a state that allows same sex marriage (the state of celebration), but resides in a state that does not allow same sex marriage (the state of residence), how is the couple treated under the Internal Revenue Code?

Luckily for planners, the IRS jumped into this definitional void.  In Revenue Ruling 2013-17, the IRS makes it clear that it will administer the Code looking solely to the state of celebration.  So if a same-sex couple marries in Massachusetts (a state that recognizes same-sex marriage), and then moves to Wisconsin (a state that does not recognize same-sex marriage), for federal tax purposes, the couple is married.  Of course, for state tax purposes, the couple will not be treated as married, leading to challenges for planners who will need to consider state tax consequences that differ from federal tax consequences in planning for their same-sex married clients.

On July 14, 2014, the U.S. Equal Employment Opportunities Commission (“EEOC”) issued updated enforcement guidance regarding the Pregnancy Discrimination Act (“PDA”) and the Americans with Disabilities Act (“ADA”) as they apply to pregnant workers. The EEOC’s guidance discusses a number of issues related to pregnancy discrimination and other pregnancy related issues and provides insight into the agency’s interpretation of those issues and employers’ obligations under the PDA and ADA relative to pregnant employees. The EEOC also issued a question and answer sheet about the EEOC’s enforcement guidance and pregnancy related issues and a fact sheet for small businesses.

Among a number of other issues, the EEOC’s guidance discusses:

•The PDA’s coverage as it relates to current pregnancy, past pregnancy, and a woman’s potential to become pregnant or intended pregnancy.
•Discrimination based on lactation and breastfeeding and other medical conditions related to pregnancy or child birth.
•When employers may be required to provide light duty for pregnant employees.
•The prohibition against forcing an employee to take leave because she is pregnant and other issues related to parental leave.
•When employers may have to provide reasonable accommodations to employees with pregnancy-related impairments.
•Other legal requirements affecting pregnant workers, such as the Family and Medical Leave Act and Section 4207 of the Patient Protection and Affordable Care Act (requiring employers to provide “reasonable break time” for breastfeeding employees to express breast milk).
•The EEOC’s proffered best practices for employers in handling pregnancy-related matters in the workplace.

The EEOC’s updated guidance provides a clear indication of the EEOC’s position and interpretation relative to the PDA and ADA as they relate to pregnancy discrimination and other pregnancy related issues in the workplace. While this guidance may provide some insight into the agency’s position and likely enforcement efforts, employers should remember that it is merely guidance and does not have the force and effect of law.

One of the more controversial elements of the EEOC’s new guidance arises from the EEOC’s position that employers’ failure to treat pregnant employees the same as non-pregnant employees similar in their ability or inability to work is a violation of the PDA. This becomes problematic for employers who have traditionally reserved light duty positions for workers with restrictions resulting from an on-the-job injury while not providing light duty to employees who have similar temporary restrictions. The EEOC takes the position that the PDA requires employers who offer light duty work to employees who have restrictions resulting from injury on the job to offer that same light duty work to a pregnant employee with the same restrictions.

In light of this new guidance, employers should reevaluate their practices and policies related to pregnancy and pregnancy-related issues, especially with regard to requests for accommodation, and more carefully consider each and every employment action and decision involving pregnancy in the workplace.

2010, as part of the Job Creation Act, Congress allowed a surviving spouse to utilize a previously deceased spouse’s unused estate tax exclusion.  This planning technique is known as “portability.”  In 2012, as part of the American Taxpayer Relief Act, portability became permanent (or as permanent as any federal statute can be).  One of the requirements for portability is that the first spouse to die (the “decedent spouse”) needs to file a Form 706 estate tax return and elect portability, prior to death; based on the value of the estate, filing an estate tax return would not otherwise be required.  In other words, if the first spouse to die did not file a 706 prior to death, portability is lost.

At least that is what planners thought until the IRS issued Revenue Procedure 2014-18.  In that Revenue Procedure, the IRS states that:

1. If a decedent died after 2010 and before 2014,
2. That decedent was a citizen or resident of the US upon his or her death,
3. The decedent’s estate was not required to file an estate tax return based on the value of the estate (and taxable gifts), and
4. The decedent’s estate did not file a timely return electing out of portability then, prior to December 31, 2014, the estate can file a form 706 and that return will be deemed properly filed.

The federal tax code (the “Code”) offers several benefits (and a few burdens) to married couples.  In 1996, the United States Congress passed a statute known as the Defense of Marriage Act (“DOMA”).  Under DOMA, with respect to any federal statute, a married couple meant a husband and wife; a man married to a woman.  Because the Code is a collection of federal statutes, same-sex couples legally married under the laws of a state that provided for same-sex marriage received none of the benefits provided to married couples under the Code.

One of these benefits the Code provides is the unlimited marital estate tax deduction: Under the Code, one spouse can leave an unlimited amount of property to the other spouse without the imposition of estate tax.  Edith Windsor and Thea Spyer were a lesbian couple married in Ontario, Canada in 2007.  In 2009, Spyer died and left her entire estate to Windsor.  At the time of Spyer’s death, both Windsor and Spyer were residents of New York, a state that, at that time, had legalized same-sex marriage and legally recognized same-sex marriages entered into in other states and countries.  So, at the time of Spyer’s death, under New York law, Spyer left her entire estate to her spouse.  But under DOMA, Spyer did not leave everything to her spouse; Windsor could not qualify under the Code as Spyer’s spouse as they were both women.  Windsor filed her tax return, paid the estate tax and then sued for a refund, arguing that DOMA was unconstitutional.  The District Court and the Second Circuit Court of Appeals agreed with Windsor.

The case was then argued in front of the United States Supreme Court.  In a landmark decision, the Supreme Court determined that DOMA violated Windsor’s and Spyer’s constitutionally protected right to equal protection.  In essence, the majority opinion held that historically, the definition of marriage is a matter left to the states.  In passing DOMA, Congress violated that tradition of state-defined marriage.  That departure was due to Congressional bias, and that bias violated the equal protection clause of the US Constitution.

The majority opinion answered this question: If a same sex couple is married in a state that defines same sex marriage as marriage, how is that couple treated for federal purposes (including the tax code)?  The answer is clear: The same as any other married couple.   But the decision leaves at least two other critical planning questions unanswered: (1) If a couple gets married in a state that allows same sex marriage, but moves to a state that does not, how are they treated for federal purposes, married (consistent with the laws of the state where the marriage took place, or what sometimes is called the state of “celebration”) or unmarried (consistent with the laws of the state of domicile which does not allow same sex marriage?) (2) Can a state disallow same sex marriage if, in fact, that disallowance is a violation of equal protection?  Hopefully, these questions are resolved in the future.

So after Windsor, estate planners should handle planning for a same-sex married couple in exactly the same fashion they handle planning for a heterosexual married couple.  The planner should help the couple build a plan that takes care of the people they care about.  The plan will accomplish that goal by getting the right property to the right people at the right time.  The plan will ensure that the right people are making the right decisions.  And the plan will be allowed to take advantage of the tools provided under the Code to married couples including (but not limited to) the unlimited marital deduction, income tax free transfers, and the ability of an inheriting spouse to treat the transferring spouse’s IRA as his or her own.

Beginning in the 2014 tax year, when a taxpayer’s Adjusted Gross Income (“AGI”) exceeds a threshold amount, the taxpayer will be subject to a 3.8% tax on his or her net investment income.  Net investment income includes income from a business in which the taxpayer does not “materially participate.”  The section of the Internal Revenue Code (the “Code”) dealing with the tax on net investment income (specifically Code section 1411) borrows its critical material participation definition from Section 469 of the Code which deals with the rules on deductibility of losses from passive activities.  Under Code section 469, while the rules for measuring the material participation of a human being are straightforward, when the taxpayer who owns an entity is a non-grantor trust, the guidance is conspicuously absent.  In fact, Section 1.469-5T(g) of the Treasury Regulations entitled “Material Participation of Trusts and Estates,” has no information; it is simply blank.  In the regulations to Section 1411, the IRS admits it provides no guidance on material participation by trusts, but states that it hopes to provide future guidance through Regulations promulgated under Code section 469.

So, in essence, when a business is owned by a non-grantor trust, the taxpayer is left without guidance on whether the business’ income is subject to the net investment income tax.  However, a recent case does provide insight into the IRS’ and Tax Court’s position on the matter.  In Frank Aragona Trust v. Comm’r., the IRS posits that, under Code section 469, a trust cannot materially participate.  If the IRS succeeded in that argument, all income from an active business owned by a non-grantor trust would be subject to the 3.8% tax.  The IRS also argued, in the alternative, that if the Tax Court held that a trust can materially participate, it is the services that the trustee provides as the trustee and not the services the trustee provides as an employee of the business that can be counted towards the material participation standard.

The Tax Court disagreed with the IRS on both counts.  It held that a trust can materially participate, and the services of the trustee, whether as an employee of the business or as trustee count towards meeting the material participation standard.  This ruling should provide some comfort for taxpayers who utilize non-grantor trusts for estate planning and asset protection purposes to hold businesses, as the Tax Court gives a framework for meeting the material participation standard.  At the same time, it should serve as a cautionary tale that holding business assets in that way might lead to IRS scrutiny and challenge.

The law firm of O’Neil, Cannon, Hollman, DeJong and Laing S.C. is pleased to announce that Grant C. Killoran recently was elected by the State Bar of Wisconsin to serve a two-year term as one of its five Delegates to the American Bar Association House of Delegates.

The House of Delegates is the policy-making body of the ABA.  Control and administration of the ABA is vested in the House of Delegates.   Established in 1936, the House of Delegates has over 500 members and its actions become the official policy of the ABA, the nation’s largest lawyer association.

Mr. Killoran previously served as a Delegate to the ABA House of Delegates from 1997-1999 and 2003-2009.

Mr. Killoran is a shareholder with and the Chair of O’Neil, Cannon, Hollman, DeJong and Laing’s Litigation Practice Group.  He has diverse trial experience, focusing on complex business and health care disputes.

Earlier this year, we alerted employers when the U.S. Supreme Court heard oral arguments in National Labor Relations Board v. Noel Canning, a case involving the President’s appointment of three members to the National Labor Relations Board (“NLRB”) without U.S. Senate approval while the U.S. Senate was on break.

Today, Thursday, June 26, 2014, the U.S. Supreme Court unanimously held that the President exceeded his authority in appointing those three members to the NLRB while the U.S. Senate was on an extended holiday break. Although the Supreme Court ultimately found that the President does indeed have the power under the U.S. Constitution to make “recess appointments” during breaks between formal sessions of the Senate and also during breaks in the midst of a formal session, the Senate breaks during which the President made his appointments to the NLRB were not considered to be in a formal “recess” within the meaning of the Constitution.

The Supreme Court’s decision in Noel Canning opens the door for both employers and unions to call into question hundreds of decisions issued by the NLRB in recent years. This could force the NLRB to revisit certain of its decisions and may force the Board to issue new decisions in those matters. We will continue to keep you informed of the latest developments and effects of the Supreme Court’s decision in Noel Canning.

M Magazine (July 2014) just listed its “Leading Lawyers” in the Milwaukee area, and the list includes the following nine attorneys from O’Neil, Cannon, Hollman, DeJong and Laing S.C.:

•  Jim DeJong (Business)
•  Pete Faust (Corporate/Incorporation)
•  Grant Killoran (Health Care)
•  Dean Laing (Litigation)
•  Greg Mager (Family)
•  Patrick McBride (Insurance)
•  Randy Nash (Litigation)
•  Peter Walsh (Estate Planning)

In selecting the “Leading Lawyers” in the Milwaukee area, M Magazine utilized the services of Avvo, a Seattle-based company that rates all attorneys on a 10-point scale, factoring in peer endorsements, experience, education, training, speaking, publishing, and awards.

On June 12, 2014, the United States Supreme Court held that funds in an inherited individual retirement account (IRA) are not “retirement funds” within the meaning of the Bankruptcy Code, and therefore such funds are not exempt from creditor claims in bankruptcy proceedings.

Ordinarily, when a debtor files for bankruptcy relief, his or her legal and equitable interests in property become part of the bankruptcy estate available to satisfy valid creditor claims. However, the Bankruptcy Code exempts debtors’ interests in certain property in order to help debtors obtain a fresh start. Pursuant to 11 U.S.C. § 522(b)(3)(C), debtors are allowed to protect “retirement funds” to the extent they are held in a fund or account exempt from taxation under specified provisions of the Tax Code, such as an IRA.

According to the Court, “retirement funds” are sums of money set aside for the day an individual stops working. Consequently, the Court looked to the legal characteristics of inherited IRAs—as opposed to debtors’ personal IRAs—to determine whether such accounts contain funds set aside for the day when the account owner stops working.

The Court held that three legal characteristics of inherited IRAs prevent the funds from coming within the meaning of “retirement funds.” First, the owner of an inherited IRA cannot contribute additional money to the account. Second, an owner of an inherited IRA is required to withdraw funds from the account no matter how far he or she is from retiring from the workforce. Third, the owner of an inherited IRA may withdraw all of the funds in the account without incurring a penalty under the Tax Code. If inherited IRAs were exempt under the Bankruptcy Code, a debtor could obtain bankruptcy relief and immediately thereafter withdraw all funds from his or her inherited IRA to purchase a new home, take an extravagant vacation, or go on a shopping spree, even while valid creditor claims went unsatisfied in the bankruptcy proceedings. Since inherited IRAs are not “retirement funds” exempt from a debtor’s estate in bankruptcy proceedings, such funds may be used to satisfy valid claims of creditors.

The Court noted that its holding is consistent with the purpose of the Bankruptcy Code’s exemptions, and balances the interests of debtors and creditors.