Who’s Afraid of the Big Bad IRS? Corporations, Partnerships, LLC’s and other family business entities….That’s Who!

November 30,2016

By Stephanie A. Henrick

What did the IRS do now?

Internal Revenue Service sign with a traffic signal in the foreground indicating a red light.

The IRS issued proposed regulations under IRC §2704 in August of 2016 that may eliminate certain discounts commonly used in valuing intra-family transfers of interests in family businesses. The IRS claims that these proposed regulations are “necessary to prevent the undervaluation” of these transferred interests, but they may have reached too far in attempting to effectuate this purpose. Notably, these proposed regulations are aimed at transferability restrictions and lack-of-control discounts.

What are the valuation discounts now?

A transferability restriction, also known as restriction on the right to liquidate an interest or a lack of marketability discount, restricts the right to sell or transfer the assets.

A lack-of-control discount applies to non-voting minority interest, because the holder of that interest has no control over the business. That person has “no say” in the management, distributions, investments or integral operations of the business.

For example:

Don owns a $10 million dollar real estate corporation. In order to reduce his taxable estate, he gives his daughter Ivy, 10% (non-voting shares) of the corporation. However, Ivy is not permitted to sell or transfer (i.e. liquidate) her shares. In addition, Ivy has no say in how the business operates. Because Ivy’s shares are a minority interest and less marketable, the value of these shares are discounted for transfer tax purposes. Therefore, instead of Don reporting a gift of $1 million dollars (10% of $10 million), the above discounts would reduce the value of this gift by about 25% to 40%. Essentially, Don would report a gift of about $600,000, resulting in a large tax savings.

This makes sense. Would you pay full price for a slice of pumpkin pie that you couldn’t eat or give to someone else? I think not.

What happens if the proposed regulations take effect?

The IRS may ignore the valuation discounts and assess the value of the transferred interest in the corporation at “fair market value”. Thus, in the above example, the IRS will value the 10% at $1 million dollars.

The proposed regulations seek to expand the definition of “family members”. In effect, your wife’s sister’s husband’s third cousin once removed, may be included under the definition of “family members”.

The entities subject to these rules will be expanded to include LLCs, S Corporations and other business arrangements, in addition to Partnerships and C Corporations which are already covered.

Transfers of minority interests to non-family members (employees, charities, etc.) may be ignored for the purposes of valuing the transfer.

Transfers made within 3 years of death may come back into the estate and the value of any discounts taken will be considered an additional “phantom asset”, subject to inheritance, estate and generation skipping transfer taxes.

When do these proposed regulations take effect?

The hearing on the proposed regulations is scheduled for December 1, 2016. It is unknown when or in what form these proposed regulations will become final. There are about 8,000 comments which will need to be addressed before the regulations are made final. It is rumored that the IRS has “fast-tracked” these regulations to become final in the beginning of 2017.

Whenever the proposed regulations do become final, they generally will only be applicable to transfers occurring after that date. However, if the 3 year look-back period applies, that may claw back the asset into the transferor’s estate, even if the transfer was completed before the regulations are final.

What should you do now?

Don’t panic. If you have an interest in a family business, you should review your estate plan and determine what assets are available for payment of the potential transfer tax. You may consider making transfers now, whether by gift or intra-family sale, but understand that those transfers could fall within the 3 year rule and still be subject to tax.

If you have any questions, contact Stephanie A. Henrick at 610-275-0700 or via email at shenrick@highswartz.com.

 

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

 

Alert: Federal Judge Prevents Implementation of New Overtime Rule

November 23, 2016By James B. ShrimpThe word "overtime" seen through a magnifying glassLast evening, a Federal Judge in Texas issued a nationwide injunction to prevent the implementation of the new overtime rules on December 1, 2016.  It is possible that the Judge’s injunction will be overturned by next Wednesday, however, such a decision would have to come from the Fifth Circuit Court of Appeals which is a politically conservative Circuit.In his decision in the case State of Nevada, et al. v. U.S. Department of Labor, et al, Judge Amos L. Mazzant III, of the Eastern District of Texas, concluded that the Department of Labor exceeded its authority in issuing regulations raising the salary test from $23,660 to  $47,476 per year.   Specifically, the Judge ruled that the salary test of $47,476 is such a significant increase, it effectually eviscerates the executive, administrative and professional (“EAP”) duties test.  In other words, salary becomes the critical test not the duties test.Judge Mazzant, an Obama appointee, hinted that given the language of the Fair Labor Standards Act, the salary test itself may not be permissible.  Notably, the FLSA only references EAP positions/duties, not salary.Judge Mazzant’s decision puts employers in limbo for a couple of reasons.First, at this point, Judge Mazzant’s decision is only a temporary stay of the implementation of the new overtime rule until he makes a final decision.  However, a temporary injunction may only be entered by a judge if he/she believes that there is a likelihood of success on the merits.Second, although the injunction is appealable, the politically conservative Fifth Circuit is unlikely to overturn Judge Mazzant’s injunction.  The injunction would then be reviewable by the U.S. Supreme Court, however, the Supreme Court is currently in a 4 to 4 conservative/liberal split.  Thus, Judge Mazzant’s decision is likely to endure.As an employer, whether you have or have not made changes to your employee’s classifications and schedules to comply, I recommend not reacting to this decision until we see how any appeals play out next week.  If Judge  Mazzant’s decision/injunction stays in place, employers then have to manage and work through employee morale issues related to reverting back to the prior system.If you have questions about employment law, contact James B. Shrimp at 610-275-0700 or via email at jshrimp@highswartz.comThe information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation. 

Subrogation: The Lien is Absolute (or Is It…)

November 17, 2016By Thomas E. PanzerEmployers and their Workers’ Compensation Insurance Carriers (“Employer”) need to be aware that the Employer’s right to subrogate to a Claimant’s third party action is under attack.Section 319 of the Pennsylvania Workers’ Compensation Act provides the statutory authority for the Employer to subrogate to a third party action.  The Employer’s subrogation interest is a creature of statute, as opposed to an equitable or contractual right to subrogation.  No equitable exceptions eliminate the Employer’s right to subrogation.  As such, while litigants and the courts discuss contractual and equitable doctrines, at the end of the day, the Workers’ Compensation Lien is absolute.Workers’ Compensation subrogation applies as follows.  An injured worker is hurt while in the course and scope of his employment.  The claim is compensable.  Compensation benefits are paid, sometimes on an ongoing basis for an indeterminate period of time.  The injured worker sues a third party, like a negligent driver in a motor vehicle accident.  The Claimant makes a recovery from the third party civil action.  The Workers’ Compensation carrier asserts its right to subrogate to the recovery, in order to recoup monies paid through the Workers’ Compensation claim.In a perfect world, the Employer receives from the civil action, repayment of the bulk of the wage loss and medical benefits paid through the Workers’ Compensation claim.  The Plaintiff attorney is paid for securing the funds returned to the Employer.  The Claimant receives some measure of recovery from the third party action, but does not double-recover wage and medical benefits.Notably, if the third party recovery is greater than the Workers’ Compensation lien, and the Workers’ Compensation carrier remains responsible for future wage loss and medical benefits related to the work injury, the Employer is entitled to reduce the amount of the future payments by a calculated percentage (see Bureau Form LIBC-380).As long as §319 has been a part of the Pennsylvania Workers’ Compensation Act, attorneys for injured workers have attempted to reduce the amount returnable to the Employer.  The most recent attack is an attempt to exclude future medical payments from the definition of compensation, and thereby exclude them from the application of the pro-rata reduction.In essence, the Claimant seeks to recover the third party monies, but not provide to the Employer a corresponding reduction in future medical payment obligations.  The issue was recently addressed in the matter of Whitmoyer v. Mountain Country Meats.  In that matter, the Workers’ Compensation Appeal Board rejected the Claimant’s argument attempting to exclude future medical benefits from the definition of compensation, and further rejected contractual and equitable principles as a basis for extinguishing the Employer’s absolute right to subrogation.  The matter was further appealed by Claimant and is pending before the Pennsylvania Commonwealth Court.While the Employer’s statutory Section 319 subrogation right has been time honored by the Courts, and has withstood multiple assaults, the principals articulated by the Claimant in Whitmoyer, underscore that the Employer must be vigilant in identifying subrogation opportunities, appropriately document the subrogation lien, and vigilantly pursue and secure return of the lien, including assuring credit versus future payments, where appropriate.  Knowledgeable Workers’ Compensation defense counsel can provide appropriate guidance and assistance in assuring that the lien remains absolute.If you have questions about workers’ compensation law in Pennsylvania, contact Thomas E. Panzer at 215-345-8888 or via email at tpanzer@highswartz.comThe information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Employers: An Applicant’s Past Salary Soon May Be None of Your Business

November 11, 2016By James B. Shrimphigh swartz, moneyA day may soon be coming when hiring managers are so limited in their ability to ask questions of a job applicant that they will have to gather their feelings and use the Force to pick the applicant that best fits the open position.  I may be being a little facetious – but only a little.Many of you may know that over the last few years, a handful of states and many cities have passed or amended laws to prohibit employers from asking about a job applicants’ criminal history, until after a conditional employment offer is made to the applicant.  In March 2016, a law took effect in the City of Philadelphia that prohibits nearly all employers from asking about a job applicant’s criminal background prior to a conditional offer being made by the employer. For more details please see my prior blog on the subject.  [hyperlink]Now, states and cities are taking aim at prohibiting questions regarding a topic that is a nearly universal area of inquiry for employers – past salary history of the job applicant.Advocates in support of the salary inquiry prohibition believe that such inquiries are a factor in the wage disparity between men and women/minorities. According to the U.S. Census Bureau, women are paid 79 cents for every $1 that men earn.  Although other factors affect that 21-cent disparity, economists believe that a significant portion of it is related to discrimination.Advocates concede that the pay disparity often is not intentional, but they believe it is a legacy of lower entry pay for women and minorities versus men.  Therefore, if women and minorities are required to disclose their prior salary during the application process, their pay will never “catch up.” The prohibition is meant to compel the employer to set the pay to the job and its duties/requirements and not to the past pay of the applicant, which in theory would drive up pay.In August, Massachusetts became the first state to pass a law making it unlawful to ask an applicant during screening (e.g., an application) or during an interview about his/her past salary history. Effective July 2018, the Massachusetts law prohibits employers from compelling job applicants to disclose their pay at previous employers. The Massachusetts law also prohibits employers from preventing current employees from sharing with each other how much they are paid.In late September, legislation was introduced before the Philadelphia City Council that, if approved, would prohibit employers in the City from asking job applicants about their salary history and it would prohibit employers from finding out the salary information on their own. A violation of the proposed law would lead to a civil fine and other possible damages. For employers in the City it is worth keeping an eye on this legislation and perhaps contacting your Council representative to express your opinion.A similar bill has also been introduced in Harrisburg for the entire state, but I do not anticipate that bill will become law, given the Republican-controlled legislature. A similar bill also has been introduced in New York City.If you have questions about employment law in Pennsylvania, contact James B. Shrimp at 610-275-0700 or via email at jshrimp@highswartz.com.The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.  

5 Tips for a Successful Estate Planning Meeting

November 3, 2016While it is a matter often ignored for many years, preparing a Will, Power of Attorney and Advanced Healthcare Directive is  very important for any adult. In order to have a successful initial estate planning meeting, here are some questions to think about:
  1. Why do I need an estate plan? An estate plan is more than just a Will; it is a process that you undertake, with the assistance of an attorney, to be sure that all of your assets are directed in a way that you choose. It also allows you to plan for the tax consequences your heirs may encounter upon your death. It is a way to assist your family at a difficult time by planning ahead to make things easier for them.
  2. What do I have? In order to best be able to plan, your attorney will need to know what types of assets you have – real estate, retirement accounts, life insurance, investments and other personal items. Knowing the value of these accounts and collections or other personal items is also helpful. Sharing this information will allow your attorney to evaluate the whole picture and make recommendations.
  3. Who are the key people? It is important to think about who your beneficiaries will be – this could be a spouse, children, siblings, charities or others. Deciding who will handle the necessary paperwork upon your death or during your lifetime is also important. Who will you name as executor? Who will your medical agent be? Who will you name as your agent under your Power of Attorney?
  4. How will my estate be distributed? Will you leave your assets to a spouse? Will you leave your assets to children? Are there others who depend on you for financial support that you should consider in your Will? How will assets such as retirement accounts and life insurance, that are not directed by your Will, be distributed? These are questions to consider and discuss at your initial meeting with one of our estate planning attorneys.
  5. When will my children, or other beneficiaries, receive their inheritance? If your beneficiaries are minors, it may be wise to consider a testamentary trust . This allows you to retain some control over how the assets are spent and the time the assets are fully distributed, even after your death. For parents, this is especially important to ensure someone is available to guide your children and manage the proper spending of their inheritance.
When you meet with one of the attorneys at High Swartz LLP about your Estate Plan, these are questions that will be discussed and answered. If you don’t have a Will or Power of Attorney, or you haven’t updated your estate plan recently, now would be a good time to schedule an estate planning meeting to discuss these questions. For more information, contact us at 610-275-0700 or via email at main@highswartz.com.The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.  

U.S. News – Best Lawyers Names High Swartz 2017 ‘Best Law Firm’

Full-service law firm honored for family, municipal and environmental lawblf-badge-2017NORRISTOWN, Pa. (Nov. 1, 2016) – Full-service law firm High Swartz has been named a “Best Law Firm” for 2017 by U.S. News – Best Lawyers®, achieving a Philadelphia-area Metropolitan Tier 1 ranking for family and municipal law and additional rankings for environmental law and litigation.To be eligible for a Best Law Firm ranking, a firm must have at least one lawyer included in The Best Lawyers in America®. Attorneys are neither required nor allowed to pay a fee to be listed. Four attorneys from High Swartz have been named Best Lawyers for 2017: Melissa M. Boyd and Mary Cushing Doherty, in family law; Eric B. Smith in litigation; and Gilbert P. High in municipal law.With offices in Norristown and Doylestown, High Swartz represents individuals, companies, and municipalities throughout the Philadelphia region. The firm offers a broad range of legal services including business and corporate law, employment law, environmental law, family law / domestic relations, franchise law, intellectual property, litigation, municipal and government law, personal injury, real estate law, education law, Social Security disability, wills, trusts and estate law, and workers’ compensation.The Best Law Firms rankings are based on a rigorous evaluation process that includes the collection of client and lawyer evaluations, peer review from leading attorneys in their field and review of additional information provided by law firms as part of the formal submission process.The highest honor, a Tier 1 ranking, is based on a firm’s overall evaluation, which is derived from a combination of its clients’ impressive feedback, the regard that lawyers in other firms in the same practice area have for the firm, and information that the firm provided to Best Lawyers via a survey.