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Herten, Burstein, Sheridan, Cevasco,
Bottinelli, Litt, Toskos & Harz, LLC
REPORT FROM COUNSEL
Fall 2006 ISSUE
KUDOS TO TOM HERTEN & AL BURSTEIN
Thomas J. Herten and Albert Burstein again have
been recognized for their contributions to the legal community by
their selection as recipients of two prestigious awards.
Al Burstein has received the Daniel J. O'Hern
Award, which is presented annually by the New Jersey Commission on
Professionalism in the Law. The award is given to one attorney
State-wide, who is a senior member of the Bar, has demonstrated
years of outstanding character and career achievement, and continues
to display a firm commitment to the ideals of professionalism as
epitomized in the Commission's aspirational code, the Principles of
Professionalism. To be considered for this award, the attorney must
be well-respected in the legal community for integrity, high ethical
standards and the pursuit of professional excellence. In addition,
he must demonstrate outstanding service to the bar and to the
community. This award is named for the Honorable Justice Daniel J.
O'Hern, a former Associate Justice on the New Jersey Supreme Court
whose professionalism is renowned and who served as an advisor to
the Commission on Professionalism since its inception in 1996.
In continuing the tradition of excellence within
the firm, Tom Herten, will receive the Lawyer Achievement Award,
presented annually by the Bergen County Bar Foundation. This award
recognizes an attorney whose endeavors have served to encourage and
promote local, state and national efforts to improve and modernize
our legal system. The Award will be presented to Tom on September
25, 2006 at the annual Bar Foundation Awards Dinner. It is with
great pleasure that we share with you this recognition of the
excellent work of Tom and Al and congratulate them both on their
outstanding achievements. Their hard-work, dedication, and
professionalism have brought them to the forefront of the legal
community and to the highest levels of achievement. They deliver
this same commitment to excellence to our clients on a daily basis
and serve as role models in that regard to the entire firm.
DEDUCTING THE BUSINESS USE OF YOUR HOME
The federal income tax deduction for the business
use of a home has a good dollars-and-cents upside for those who
qualify. Some detailed questions have to be answered correctly to
get to that point, however. Not surprisingly, the IRS publication on
the subject makes use of a complex flowchart filled with "yes or no"
questions to guide taxpayers to a determination of eligibility for
the deduction.
Qualifying for the Deduction
To pass the threshold for use of the home business
deduction, a taxpayer must satisfy the following two basic sets of
requirements. The first set concerns the nature of the business
activities, while the second set relates more to the place itself.
First, the use of the business part of the home
must be exclusive (with exceptions to be discussed below), regular,
and for the business. Second, the business part of the home must be
one of the following: the principal place of business--the place
where the taxpayer meets or deals with patients, clients, or
customers in the normal course of business--or a separate, detached
structure used for business.
The exclusive use factor means that the area is
used only for business, not for a mixture of business and personal
uses. However, the exclusive use requirement need not be met when a
part of the home is used for storage of inventory or product
samples, or for a day-care facility. When the IRS says that the use
of the home must be for a trade or business, it does not mean any
activity that makes money for the taxpayer. If you use a computer in
your den for day-trading of stocks or online gambling, do not count
on taking the deduction. As for what constitutes a "regular" use for
business, that essentially means business conducted on a continuing
basis, not occasionally. Even if a taxpayer has a place in the home
used exclusively for business, the deduction is not available if the
business activity is only sporadic.
As for the requirements relating to the place
itself, the area in the home used for business is a "principal place
of business" if it is used exclusively and regularly for the
administrative or management activities of the business, and there
is no other fixed location where substantial activities of that kind
are carried out. If some business is transacted at more than one
location, determining whether the home location is the principal
place of business requires consideration of the relative importance
of the activities at each location. If that does not provide an
answer, the time spent at each site should be considered. Remember
that the deduction is available if either the home is the place for
meeting with patients, clients, or customers, or a separate
structure on the premises is dedicated for business.
If the taxpayer is an employee using part of a
home for business, the deduction is available if all of the
requirements described above are met, plus two additional tests. The
business use must be for the convenience of the employer (not just
appropriate or helpful), and the employee may not rent all or part
of the home to the employer while using the rented portion to
perform services as an employee.
What Is Deductible?
Deductible expenses for a business use of the home
include items such as the business portion of real estate taxes,
deductible mortgage interest, rent, casualty losses, utilities,
insurance, depreciation, painting, and repairs. This is not likely
to be an all-or-nothing proposition, though. Generally, an expense
is fully deductible if it is direct, that is, incurred only for the
business part of the home. An indirect expense, incurred for running
the home as a whole, is deductible based on the percentage of the
home used for business. Any reasonable method for determining that
percentage is acceptable, such as dividing the square feet used for
business by the total square feet, or dividing the number of rooms
devoted to business by the total number of rooms. If an expense is
unrelated to the business part of the home, it is not deductible at
all.
If the taxpayer's gross income from the business
use of the home is lower than the total business expenses, the
deduction for certain expenses will be limited. But those expenses
that cannot be deducted because of such a limitation can be carried
forward for the next year's home business expenses.
INADEQUATE NOTICE OF TAX SALE
Gary bought a house that he and his wife lived in
for 26 years. When the couple separated, Gary moved out, but he
continued to pay the mortgage for another four years until it was
paid off in full. The loan was gone, but not the property
taxes--they went unpaid when the mortgage company that had
previously been paying them was out of the picture.
The state attempted to notify Gary of the
delinquency and of his right to redeem the property. It mailed a
certified letter to him at the address of the subject property.
Since nobody was home to sign for the letter, it was returned to the
state marked "unclaimed." Two years later, and only weeks before the
property was sold to pay the taxes, the state published a newspaper
notice of public sale of the property. A buyer came forward, and the
state sent Gary another certified letter stating that his house
would be sold if the taxes were not paid. It, too, was returned
unclaimed to the state. Only when the new owner served a notice on
Gary's daughter at the house did Gary finally learn about the tax
sale, but it was after the fact.
Gary sued the state, arguing that the state had
sold his property for taxes without first affording him procedural
due process, and the United States Supreme Court agreed with him.
The Court did not lay down an ironclad rule on what procedures are
to be followed in all cases. It did say that, upon the return of a
notice as undeliverable, the government must take additional,
reasonable steps to attempt to provide notice before it takes the
drastic step of extinguishing someone's interest in his or her
property.
While the extent of what is required will vary
with the particular circumstances, the Court's comments indicate
that it hardly expects the government to put a detective on the case
of a "missing" property owner. Open-ended requirements, such as
searching a telephone book or other government records, are not
required of the government. But it is not too much to ask the
government to do, in the Court's words, "a bit more." There were
some follow-up options that the state should have explored and used.
They include such simple measures as sending a notice by regular
mail, for which no signature is required, posting the notice on the
front door, or addressing the otherwise undeliverable mail to
"occupant." Presumably, even a nonowner occupant would alert the
owner of such a notice.
The Court drew an analogy to a state official
handing notices meant for delinquent taxpayers to a mail carrier,
then watching as they were accidentally dropped down a storm drain.
One would expect new notices to be prepared and sent again. Just as
it would be unreasonable for the official under those circumstances
simply to shrug his shoulders and say "I tried," the state in Gary's
case owed him more than inaction when the notices meant for him were
returned "unclaimed."
NONOWNER CAN BE LIABLE UNDER FHA
Among the kinds of conduct prohibited by the
federal Fair Housing Act is the making of any statement with respect
to the sale or rental of a dwelling that indicates a preference,
limitation, or discrimination based on race, religion, sex,
handicap, familial status, or national origin. The most common
violators of this law are the actual owners of dwellings or
individuals acting as agents for owners. A federal appellate court,
however, reinstated a lawsuit brought by the United States against
an individual who had spoken neither as an owner nor as an agent for
an owner.
The defendant worked as a housing information
vendor, compiling information from classifieds and providing
assistance to prospective tenants looking for rooms to rent. In the
episode that got the attention of the authorities, a deaf man used a
relay services operator to call the defendant for assistance. The
defendant flatly told the caller that he did not provide assistance
to disabled people. When the caller persisted, the defendant
responded with profanity and hung up. Similar inquiries from
"testers" were met with essentially the same response. In fact, the
jury heard "a virtual tsunami of evidence" that the defendant
routinely treated disabled people differently from those not
disabled, often using profanity to underscore the point.
The court rejected the reasoning that applying the
prohibition on discriminatory statements only to owners or their
agents would be in keeping with the purposes of the statute. On the
contrary, the statute was meant to protect against the "psychic
injury" done by discriminatory statements made in connection with
the broader housing market, not just statements that directly affect
a housing transaction. The limitation argued for by the defendant is
not in the statute itself, which broadly refers to "any"
discriminatory statement.
As for a First Amendment argument put forward by
the defendant, it may be available for some forms of speech, such as
a private individual's vocal opposition to having children living on
his block. The defendant's speech, however, was commercial in
nature, giving it less protection from government regulation.
QUALIFIED PERSONAL RESIDENCE TRUST
Federal estate tax law provides a method by which
families can reduce the tax consequences of transferring the family
home to the younger generation. The device for accomplishing this is
called a qualified personal residence trust (QPRT).
An individual may create a QPRT by transferring
his or her residence to a trust (usually for the benefit of family
members), while retaining for a particular period of time the right
to live in the residence for free. The tax laws treat the
transaction as a gift of the remainder interest in the trust, rather
than as an outright gift of the residence itself. There is a tax on
that gift, but there is no later tax on the value of the whole
residence at the time of the grantor's death, as there otherwise
could be but for the use of the QPRT. As a rule, the more that a
home can be expected to appreciate over the term of a trust, the
more beneficial is the use of a QPRT.
A QPRT results in tax savings only if the grantor
outlives the period of the retained interest. Even if the grantor
does not survive the period established for the trust, the worst
that could happen is that the full value of the residence would be
taxed. The result is the same as if there had been no QPRT in the
first place.
The QPRT has two generally recognized drawbacks.
While the grantor, usually a father or mother of a family, can
continue to occupy the residence after the period of retained
interest has run, he or she must pay rent to avoid inclusion of the
residence in his or her estate. Some individuals may not like the
prospect of being their children's rent-paying tenants. Second, the
QPRT does not provide a "step-up" in the cost basis of the residence
as there normally would be if a residence is inherited. If a QPRT is
used, the gain on the sale of the residence is measured against the
price that the grantor paid for the property originally, rather than
against the value of the residence at the time of the grantor's
death. The result could be higher income tax liability when the
residence is sold.
As with most estate planning issues, the advice
and guidance of a qualified professional is recommended before
establishing a QPRT.
FINANCIAL PLANNING FOR A DISASTER
When a natural or man-made disaster strikes, be it
a hurricane affecting an entire region or a gas leak affecting one
house, it is only natural and appropriate to think first of the very
basics of life: safety, shelter, food, and water. But it also makes
sense, in the quiet of normal daily living, to make plans for money
matters in the immediate aftermath of a disaster. As the saying
goes, the best time to fix a leaky roof is on a sunny day. If you
have only minutes to leave your home, advance planning for keeping
your head above water financially can pay big dividends.
Here are a few pointers:
* Keep the following items in a place that is
easily available to you in an emergency, but not so apparent as to
invite theft: forms of identification, such as driver's licenses,
insurance cards, Social Security cards, passports, and birth
certificates; enough checks and deposit slips to last a month, or at
least a checking account number; ATM cards, debit cards, and credit
cards; telephone numbers and account numbers for providers of
financial services; the key to your safe-deposit box; and some cash.
* Make copies of your most important documents,
ideally on disks, and keep the copies well outside of your home
area.
* Use a safe-deposit box for items that you are
not likely to need in a hurry, such as birth certificates and
originals of contracts. Other items can go in a sturdy safe at home.
* In the same waterproof, portable "evacuation
bag" in which you can keep medications, first-aid kits, flashlights,
and so forth, keep some of the up-to-date financial papers mentioned
above. But secure it well, lest you inadvertently provide a treasure
trove of your financial information to a thief.
* Choose automated services over dependency on
writing and mailing checks and trips to your bank. You can weather a
storm financially more easily with direct deposit, automatic bill
payments, and Internet banking services.
THE DANGERS OF EMPLOYEE INTERNET USE
By some accounts, a large majority of employees
access the Internet on company computers for personal reasons while
at work. The obvious adverse effects of this on productivity are
only the tip of the iceberg with regard to the potential headaches
that such activities can cause for employers. Personal Internet
activity by employees can pose security risks to the company's
computer network itself, such as by exposing a network to a computer
virus.
Less immediate but just as serious is the threat
of legal liability of the employer to injured third parties. In a
recent case, one such nightmare scenario was all too real for an
employer that had to defend itself against the alleged victims of an
employee who used a workplace computer for conduct that was
criminal, not just indicative of poor judgment. This case may be the
first reported decision on the matter of an employer's liability to
a third party for having failed to take action to stop an employee
from using a company computer in a manner that harmed the third
party. It most certainly will not be the last such case.
The case involved an employee who used his
company's computer at work to visit pornographic sites, including
some relating to child pornography. Over a period of time, a
supervisor and some coemployees became aware of this activity and
complained to management. Eventually, the offending employee was
confronted and was told to stop such use of the computer, but, a few
months later, he was again discovered to have accessed pornographic
sites.
Eventually, the employee was arrested on child
pornography charges, including allegations that he had transmitted
nude pictures of his 10-year-old stepdaughter over his office
computer to a child pornography site. The employee's wife, who
divorced him, sued the employer for failing to investigate and for
failing to report the employee's viewing of child pornography. The
case was settled, but not until a precedent was set when the lawsuit
survived attempts to have it dismissed before trial.
There are limits to what companies can or should
do to prevent improper use of company computers, but it is only
prudent to take at least some basic measures. It makes sense to have
a written e-mail and Internet use policy that clearly informs
employees of what, perhaps, they should already know--that the
employer has and reserves the right to monitor employees' use of the
company's computers and to discipline violators. In addition, there
needs to be even-handed enforcement of the policy. Even the best
written policy will do little to convince a jury, if it comes to
that, that a company has done all it reasonably could have done, if
the evidence is that the policy was toothless or rarely enforced.
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