BizLawBuz …. The Power of Know

Beginning in 2008, the Michigan state legislature passed a large tax reduction for personal property classified as Industrial Property. As a result, personal property classified as Industrial Property receives an approximate 50% tax reduction when compared to personal property classified as Commercial Property. Thus, some assessing jurisdictions are reviewing the personal property tax reports of taxpaying businesses and are re-classifying tax-favored Industrial Property as Commercial Property on the assessors’ internal records.

Lee Flaherty

As you probably have heard, the federal estate tax rules changed radically in 2010 and will change radically again in 2011 unless Congress passes new legislation. This article will discuss what some of the changes can mean for you.

First, a little background:
The 2001 Tax Act. In 2001, Congress passed legislation which significantly increased the federal estate tax exemption and lowered tax rates. Among other things, the 2001 Act provided:

• In 2009, the estate tax exemption increased to $3.5 million per decedent, with a reduced 45% tax rate on any excess assets.
• In 2010, the estate tax is repealed for one year. In addition, the step-up in basis (which gave a “fresh-start” fair market basis for most assets of a decedent) is replaced with a more complex adjusted carry-over basis system.
• In 2011, the estate tax will be reinstated. However, the tax exemption will drop down to $1 million and the tax rate will jump up to 55%. In addition, carry-over basis will disappear and the step-up in basis will once again be the law of the land.

What Happened in 2009? Estate planners universally expected Congress to extend the favorable 2009 estate tax rules through 2010. However, unexpectedly in December, the House failed to enact a one-year extension and instead sent the Senate a bill to make the 2009 rules permanent. Because the Senate was focused on health care and there was broad disagreement in the Senate on what to do with estate taxes, it did nothing. Thus, effective January 1, 2010, there is no federal estate tax and the adjusted carry-over basis rules apply.

Estate Planning Is Now in Chaos. Congress’s failure to act in 2009 and the possibility that it will not act this year make for an unpredictable planning environment in which any number of radically different changes may occur.

Here are some of the possibilities:
Congress may do nothing this year. While you probably will not die in 2010, you still need to consider planning for that possibility because not doing so could be disastrous. For example:

• Trust language that allocates your estate tax exemption to a “family trust” could disinherit or place undesirable restrictions on a surviving spouse or other heirs.
• Conflicts could arise on asset basis issues.
• Passing assets directly to your spouse may result in higher estate taxes after 2010.
• Congress may retroactively adopt legislation to carry the 2009 rules over 2010. If a retroactive law is adopted, it will most likely be challenged as unconstitutional and it could take years for the Supreme Court to rule on the issue. Until such a ruling, uncertainty will prevail. In any event, your estate plan should contemplate your dying both before or after a potential retroactive enactment.

Congress may act to address the tax issues, in which case it may:

• Adopt a permanent estate tax exemption. If so, most commentators anticipate the tax exemption will fall between $2-5 million and tax rates will range from 35% to 45%.
• Adopt a temporary estate tax exemption.

What Should You Do? Uncertainty makes it difficult to plan, but waiting to see what happens next is not a good idea. The earlier you can implement flexible tax and estate planning to respond to these changes the better. Please call us to schedule a time to go over your current estate plan and determine what changes need to be made to minimize taxes and to reduce the possibility of future family conflicts in these chaotic times.

Lee Flaherty

New Blog Added to Our Cottage Law & Cottage Succession Planning Website!

We’ve added a new blog to our cottage law website to post additional information about cottage succession planning, and for cottage family members to post their favorite memories of time spent at the family cottage. Please stop by and share your own favorite cottage memories!

Visit our new Cottage Law website at www.Cottage-Law.com for important information on sale, purchase, tax and succession planning issues for cottages, second homes and similar properties.

Visit www.Cottage-Law.com Today!

We’d love to know what you think of the new cottage law website and value your comments and input of additional information that would be of value to you to add to our new Cottage Law website!

Dan A. Penning

The HAITI Assistance Income Tax Incentive Act has recently been enacted into law to provide tax payers who give to charities providing earthquake relief in Haiti an opportunity to deduct their tax deductible donations on either their 2009 or 2010 tax returns. Only cash contributions are eligible as opposed to contributions of property. Tax payers must itemize deductions on their tax returns in order to benefit from the Act. Qualifying contributions must be made to an organization that is assisting with the relief efforts as approved by the IRS which are listed in IRS Publication 78.

If you have questions, please feel free to contact us.

Dan A. Penning

You will soon be receiving your 2010 Notice of Assessment for your Michigan real property. We pursue tax appeals both at the local Board of Review and before the Michigan Tax Tribunal.

We can help with . . .

* What to do with my assessment notice?
* When can I file an appeal?
* How do I get through the appeal process?

We can help answer these questions and more. Please contact us.

Dan A. Penning

In today’s difficult economic climate, businesses and their owners face increase risk of being sued. Given this risk, business owners should do all they can to minimize exposure of their personal assets with respect to possible liability resulting from these lawsuits.

Typically, incorporating a business is an effective means of protecting a business owner’s personal assets from exposure to claims against his/her business. However, simply incorporating the business alone will not protect personal assets if the business has not complied with the formalities and requirements that the law requires of a corporation. When a business owner neglects those requirements, courts sometimes “pierce the corporate veil” allowing a business owner’s personal assets to be exposed in satisfying claims against the business. Essentially, when the courts allow piercing of a corporate veil, the business owner has lost all protection of the corporation entity form.

The term “piercing the corporate veil” basically means that the law treats the business owner and the business owner’s assets as one complete entity, making the owners personal assets subject to liabilities incurred by the company. In those situations, the corporation is basically seen as a mere alter ego of the business owner.

Michigan courts look to three elements needed to pierce a company’s corporate veil:

1. Is the corporate entity operating as a mere alter ego of another entity or individual, meaning the business is being used in furtherance of another purpose rather than its stated mission?
2. Is the corporate entity being used to commit fraud or wrong doing?
3. A plaintiff in a lawsuit suffered an unjust loss or injury if recovery is limited only to the business and cannot extend to a business owner’s personal assets.

Fortunately, under Michigan law, only extraordinary circumstances justify a disregarding of a corporate entity exposing the owner to personal liability; however, that is not to say that a business owner will never be subjected to such a claim, especially in these unprecedented economic times.

Historically, Michigan courts in evaluating the aforementioned prerequisites look to a number of factors to decide whether these factors have been met and a corporate veil should be pierced.

The court looks to whether:

• the corporation is under capitalized (lacks sufficient funds to pay its bills);
• corporate books have, or have not, been maintained;
• there is a separation between individual and corporate finances;
• the corporation is used to support fraud or illegality;
• the corporation formalities have been honored especially with respect to complying with the terms and conditions of the Michigan Corporation Act, and
• the corporation has paid excessive dividends to its shareholders.

Where the court decides that a plaintiff’s claim meets the prerequisites to pierce the corporation, the court will find an abuse of the corporate form and allow a claim against the corporation to pass through and attach to a business owner’s personal assets.

A business owner, in order to protect himself/herself from potential claims to pierce a corporate veil, can initiate steps to protect themselves.

First, a business owner should always keep personal and business assets separate from one another. This can be accomplished by using separate bank accounts and books for personal expenses and for the separate expenses of the business.

Secondly, always observe and follow corporate legal formalities such as holding the required number of meetings, keeping track of meeting minutes and maintaining a comprehensive stock ledger regarding the ownership of the corporation.

Third, usually an owner of a business will be an officer, agent or employee of the corporation. In business dealings on behalf of the corporation with third parties, business owners should always portray himself/herself as acting in the role of as an officer, agent or employee on behalf of the business as opposed to dealing with third parties on an individual basis. When the business enters into transactions or agreements with any outside party, that person must be aware and understand that he or she is transacting business with the corporation and not with the business owner personally. This can be accomplished when the business owner executes contracts, the business owner should list the name of the business and the business owner should sign in the capacity as an officer on behalf of the business.

In this difficult economic environment, people with claims against businesses are often more willing to make the extra effort to make a claim for piercing the corporation to obtain a judgment against the business owner’s personal assets. If you have questions regarding this issue or would like assistance with conducting an audit of your corporation’s records to assess your risk of the possibility of a plaintiff being able to pierce your corporate veil, please do not hesitate to contact us.

Dan A. Penning

Reminder:

You will soon receive your “2010 Notice of Assessment for Michigan Real Property”

This notice provides valuable information to determine whether a Property Tax Appeal is appropriate.

We can help answer your questions ….

“What do I do with my assessment notice?”

“When can I file an appeal?”

“How do I get through the appeal process?”

We can help answer these questions and more!

Please contact us to assist you in reviewing your Michigan property assessment.

You’re invited!

Please visit our new Cottage Law website at www.Cottage-Law.com for important information on sale, purchase, tax and succession planning issues for cottages, second homes and similar properties.

Visit www.Cottage-Law.com Today!

We’d love to know what you think of the website and value your comments and input of additional information you would like added to our new Cottage Law website!

Thanks,

Dan Penning

One of Michigan’s premier business journals, DBUSINESS, recently announced its 2010 “Top Lawyers” in metropolitan Detroit. Dan Penning, Dirk Beamer and Lee Flaherty – all principals with Wright Penning & Beamer – made the list. Penning was recognized for his business planning acumen; Beamer for his expertise in business and commercial litigation; Flaherty for her work with non-profits and charitable organizations.

DBUSINESS compiles its list as a resource and reference guide for its readers. Selection criteria include: legal knowledge, analytical capabilities, judgment, communication ability, and legal experience. The list was published in the journal’s November/December 2009 edition. According to the publication, selected lawyers “possess the highest professional ability and ethical standards.”

Penning is a founding shareholder of the firm and works primarily in succession planning for individuals, families and business owners. Dan’s practice focuses on planning for business entities including family businesses, estate planning for business owners, individuals, families with special needs children, and succession planning for family cottages and farms. He has also established himself and the firm as a leading resource for individual and business clients in property tax appeals and related matters.

Beamer oversees our firm’s diverse litigation practice, focusing primarily on business and commercial litigation. He spearheads the firm’s efforts in insurance law, unfair competition, trademark infringement, employment matters and contract disputes. Dirk has litigated in state and federal courts across the country. He also counsels business owners and managers concerning employment practices and management.

In addition to her work with non-profits, Lee Flaherty is well versed in real estate, business law, estate planning and probate. Lee’s business expertise encompasses the support of ongoing businesses, business purchases and sales, and representation in commercial real estate transactions. Her estate planning practice focuses on the preparation of a wide variety of trusts and other documents to assist clients in avoiding probate, preserving assets and minimizing taxes.

We take pride in our colleagues’ accomplishments, and we continue to strive daily to deliver the highest quality legal services to our clients throughout Michigan and beyond.

If you’re like me, you received any number of gift cards this past holiday season. Looking at the handful of gift cards I received, it occurred to me that I might just hold onto them until I needed something from a particular store. But, having heard that the sales reports for this past holiday season didn’t quite meet projections, I quickly asked myself, “What happens to my card if a store goes out of business or files bankruptcy?” Doing some quick research, I learned that consumers lost an estimated $8-10 billion in gift cards due to stores going out of business in 2008. How does this happen?

I discovered that the purchaser of a gift card is essentially loaning the issuing store money in the amount of the card. The issuing store, however, is not required to give the purchaser collateral as security for the loan in the amount of the gift card or do anything else for that matter to insure that the card continues to have value. As a result, the holder of the gift card is nothing more than an unsecured creditor. If the store goes out of business by filing for bankruptcy or by simply shutting its doors, the holder of the gift card will likely receive nothing for the gift card, or, at most, a few cents for each dollar of value (and then only years down the road at the end of the bankruptcy proceeding).

There are stores that have continued to accept gift cards while in bankruptcy proceedings, but there is no law that requires them to do so. For example, when Sharper Image declared bankruptcy in 2008, it had approximately $20 million in outstanding gift cards. Sharper Image stores continued to accept the gift cards but only on one condition: the shopper had to spend double the amount of the gift card to redeem it.

While bankruptcy courts should be able to provide some protection, that protection is often illusory. In one bankruptcy case, a Chicago law firm was successful in gaining class certification from the bankruptcy court for gift card holders, treating the entire group as a single creditor with combined claims of approximately $19 million. But the process takes a long time, and the secured creditors get paid before general unsecured creditors. There is no guarantee that any money will remain to pay the unsecured creditors like the card holders.

Consider also the positive effect that unredeemed gift cards have on the financial reports of the merchants. Fewer than 30 percent of store gift cards are redeemed within a month of purchase. The amount of each gift card may seem small, but in total, unredeemed gift card balances can add up to millions of dollars per retailer. Best Buy (BBY), which had approximately $471 million in unspent balances shown on its books in one recent year, added $135 million in unspent gift cards to its total operating income of $3.6 billion.

According to First Data, a website that compiles gift card statistics, through the 2009 holiday season, merchant branded (”closed loop”) gift card sales increased 2.1 percent compared to 2008. Most closed loop cards don’t have charges and fees in connection with the purchase because retailers can more than recoup their money from gift card sales. According to the National Retail Federation, shoppers spend 15 to 40 percent more than the gift card value.

Open loop gift cards, on the other hand, are not tied to specific merchants but are sold by banks or credit card companies (Visa, American Express, etc.). Recipients may use them at any business that accepts that particular card. However, hidden fees and expiration dates are common with open loop cards. Earlier in 2009, Congress passed reforms relative to the credit card industry that included regulations for open loop gift cards. The rules, which take effect in August of this year, prohibit dormancy fees unless the card has not been used for at least a year. The rules also require at minimum, a five-year expiration date.

If you have unspent gift cards in your pocket, consider spending them right away. Otherwise, keep informed about the retailers’ financial strengths (and weaknesses) if you choose to keep them for later use.

Heather Brenneman Miles