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Herten, Burstein, Sheridan, Cevasco,
Bottinelli, Litt, Toskos & Harz, LLC
REPORT FROM COUNSEL
WINTER 2005/06 ISSUE
AN INTRODUCTION TO COLLEGE SAVINGS PLANS
The steady rise in the cost of attending college
may have become one of those few absolute certainties in life, along
with death and taxes. Tuition and fees for public and private
institutions alike can seem overwhelming, especially if parents have
done little financial preparation ahead of time. Some solace can be
taken in the fact that there is a wide variety of approaches for
saving for college. For parents who have some foresight, the use of
a plan that is tailored to their circumstances can at least soften
the blow of financing a college education.
529 College Savings Plans
With mutual funds as the primary investment
option, state 529 plans are best for those looking to contribute
substantial amounts to a college fund. Earnings are tax-free, as are
later withdrawals for qualified education costs. These plans
generally are in the parents' names, which means that the plans have
minimal effects on the family's eligibility for financial aid. The
drawbacks are limited investment options and relatively high fees.
529 Prepaid Plans
A prepaid tuition plan makes the most sense for
families that are reasonably certain that their child will attend
one of the schools in a state's plan, and that are satisfied with a
rate of return that equals the inflation rate for the costs of
schools in the plan. Under prepaid tuition plans, you are buying
future tuition at a state's public colleges at today's prices. On
the downside, payouts from these plans reduce eligibility for
financial aid on a dollar-for-dollar basis. In addition, states
dealing with especially tight budgets have been raising the costs of
participating, and in some cases have been temporarily closing off
enrollment.
For a group of approximately 250 private colleges,
there are independent 529 plans. They work like state prepaid plans,
including the dollar-for-dollar reduction in financial aid
eligibility when funds are distributed. Money from such a plan can
be rolled over to a state 529 savings plan or a state prepaid plan
without penalty.
Coverdell Education Savings Accounts
If you want the most variety in investment options
and lower fees, a Coverdell account may make sense. Joint income tax
filers with adjusted gross incomes of up to $220,000 can save up to
$2,000 a year, tax-free, for education expenses. No plan is without
its weaknesses, and for the Coverdell accounts it is the adverse
effect on financial aid eligibility because the accounts are in the
student's name, not the parents' names.
Custodial Accounts
A custodial account is appropriate for those who
want to transfer assets, including securities, to a young
beneficiary in order to reduce taxes. However, be forewarned that
the beneficiary will have control over the account upon reaching the
age of majority. Funds can be taken from the account at any time and
for any purpose benefiting the child, not just educational expenses.
Withdrawals are taxed at the child's rate.
Savings Bonds
If the 529 plans are the showhorses of financing
in higher education, savings bonds are the workhorses. Returns on
savings bonds are usually modest, but the investment could not be
safer. Savings bonds may be especially attractive to middle- and
low-income households that fall within certain income restrictions.
For Series EE bonds issued after 1989, and all Series I bonds, at
least some of the interest earned on the bonds is tax-free if used
for higher education expenses.
These approaches to saving for college are not
exhaustive, and the descriptions here only scratch the surface.
Professional advice can help a family craft a plan that is best
suited to its needs and priorities.
GOLF BALLS CAN BE TRESPASSERS
Joyce had nothing against golf or golfers. In
fact, she was a regular golfer herself and a member of two different
golf clubs. But when her home in a subdivision adjoining a private
golf course was continuously pelted with errant golf balls, she and
a neighbor with the same predicament eventually took the matter to
court and won.
The golf course began operating in the late 1980s,
and Joyce moved into her home in the late 1990s. But the fact that
she "came to the problem" did not prevent Joyce from winning an
injunction to stop, or at least minimize, incoming golf balls and
the golfers in search of them. No doubt the court was impressed by
the evidence showing the extent of the problem, which went well
beyond an occasional Titleist in the flower bed. Among other
effects, there were five damaged window screens, one large broken
window, dented siding, and a dimpled car hood (only the golf balls
are supposed to have dimples). At least one wayward shot struck the
house hard enough to trigger a burglar alarm. It got so bad that
Joyce all but gave up on using her rear deck, and her young son was
instructed to play only in the part of the yard that was shielded
from the golf course by the house. The clincher piece of evidence
may have been the 1,800 golf balls that Joyce had retrieved from her
yard during the five years she had lived in her house.
The winning legal theory for Joyce was continuing
trespass. The common conception of a trespass is of someone walking
across another's property without permission, but the concept is
broader than that. A trespass is any invasion of a landowner's
interest in exclusive possession of the property. Propelling
physical objects onto someone's property regularly, frequently, and
without the owner's consent is a continuing trespass.
As for the appropriate remedy, the court in
Joyce's case offered some guidance. If the golf course operators
were determined to keep the course as it was, they either would have
to acquire the adjacent land, or the right to use such land, for the
purpose of accommodating all of those wayward golf shots. More
realistically, the defendant could solve the problem by shortening
the hole that adjoined Joyce's property, thereby removing the
property from the landing area for all those bad shots. This would
be somewhat burdensome for the golf club, but it was not such a
hardship as could relieve the club of its obligation to end the
continuing trespass and give Joyce back the "exclusive possession"
of her home.
FLSA OVERTIME UPDATE
Unless an employee falls within an exempt category
of workers, the federal Fair Labor Standards Act (FLSA) requires the
employer to pay the employee overtime at a rate of one and one-half
times the regular rate of pay, for hours worked in excess of 40
hours per week. To be exempt is to be ineligible for overtime. The
exemption commonly called the "white collar" exemption is for
professional employees.
Federal regulations in place since August 2004
have simplified the test for determining which employees come within
the white collar exemption. An employee is a professional if each of
the following elements is present:
(1) The employee has the primary duty of
performing work requiring advanced knowledge, that is, work that is
mainly intellectual in nature and which includes the consistent
exercise of discretion and judgment;
(2) The employee has advanced knowledge in a field
of science or learning; and
(3) The employee has advanced knowledge that is
customarily acquired by a prolonged course of specialized
intellectual instruction.
Recent Cases
In one recent case, a company refused to pay
overtime to some of its employees who were licensed pharmacists.
Much to the dismay of the employees, the company's reliance on the
white collar exemption held up in federal court. All of the parties
agreed that the second and third parts of the exemption test were
met by the pharmacists, leaving a dispute only over whether the
pharmacists' work required the consistent exercise of discretion and
judgment. The court found that this element also was present.
The pharmacists, with little supervision,
routinely made discretionary decisions about dispensing prescribed
drugs to patients, and sometimes the process required consultation
with the physicians who prescribed the drugs. The only factor
suggesting a lack of discretion was the fact that the employees, as
a rule, were expected to follow standard operating procedures from
their employer. But this argument by the pharmacists was undermined
by the fact that they regularly were asked to consult with the
employer about the standard procedures and to review them for any
suggested improvements. The pharmacists also had the employer's
blessing to stray from the procedures if, in their judgment, it was
necessary for a patient's health.
Assuming an employee is eligible for overtime pay,
questions can arise as to what comprises an employee's regular rate
of pay for purposes of calculating the overtime obligation. It is
not always as simple as using an employee's base hourly rate or
salary. For example, in another recent case, a federal court ruled
that the regular pay of municipal firefighters included payments
made to them under a city's sick leave buy-back program. A
firefighter who had built up a certain amount of sick leave had the
right to "sell" it back to the city for a lump-sum payment. Whenever
this happened, the employer effectively was paying the firefighters
a bonus for good attendance and for work they had already done. It
was as much a part of the firefighters' regular compensation as
their base hourly wage, so it had to be taken into account in
calculating overtime wages.
JUNK FAX PROTECTION ACT
There may be some finality to the formerly
unsettled picture on federal regulation of junk fax transmissions.
Since the first federal legislation on the subject, in 1991, there
has been an "established business relationship" exception allowing
the sending of commercial advertising by fax under certain
conditions. In 2003, the Federal Communications Commission issued a
regulation that would have effectively removed the exception,
requiring express written permission from the recipient for sending
any commercial ads by fax. Opposition from business groups prompted
the FCC to put off enforcement of that rule three times.
Before the restrictive FCC regulation ever became
effective, new legislation has reinstated the established business
relationship exemption. It is still illegal to send unsolicited fax
advertisements to anyone who has requested that they not be sent.
However, unsolicited faxes can be sent if the sender has an
established business relationship with the recipient and the fax
itself has a conspicuous notice on its first page informing the
recipient that it can request not to be sent more such faxes. To
combat the sale of fax lists to mass marketers, the law requires
businesses to obtain fax numbers either directly from the recipient
or from a published source, such as a directory, an advertisement,
or a website.
"POP-UPS" ANNOY BUT DON'T INFRINGE
An Internet marketing company provided a free
software application that keeps track of computer users' activity on
the web in order to deliver targeted advertising for its clients.
The software uses an unpublished internal directory with thousands
of website addresses and keywords for particular interests of
consumers. When the computer user types in particular terms in a
browser or search engine, a relevant "pop-up" ad is delivered to the
computer.
A company in the contact lens business learned
that its website was in the internal directory and that the software
caused pop-up ads for competing contact lens retailers to appear on
the screens of individuals who visited the company's website. The
contact lens company sued the marketing firm on the theory that the
marketing firm had infringed upon a trademark in violation of
federal law. From the plaintiff's standpoint, the actions of the
marketing firm were allowing competitors to take a free ride on the
plaintiff's website.
A federal court ruled against the plaintiff
contact lens company. A successful trademark infringement lawsuit
requires a showing of a protected trademark and a use of that
trademark in commerce in connection with the sale or advertising of
goods or services, without the plaintiff's consent. The use of the
mark by the defendant also must be such as to likely cause confusion
between the plaintiff and the defendant. The action brought by the
plaintiff failed primarily due to the court's ruling that the
defendant had never "used" the plaintiff's trademark in a manner
like that in a typical infringement case. First, the defendant
reproduced the plaintiff's website address, which was similar, but
not identical, to its trademark. In addition, the pop-up ads, which
appeared in a separate window prominently branded with the marketing
company's mark, had no discernible effect on the functioning of the
plaintiff's website.
It was not enough for a successful claim that the
defendant and its clients were trying to take advantage of the
plaintiff's goodwill and reputation, which had led people to the
plaintiff's website in the first place. What the defendant was doing
was no more legally objectionable than the low-tech counterpart of
chain drug stores placing their own store-brand products on shelves
next to the higher-priced and trademarked versions of the same
products, so as to capitalize on their competitors' name
recognition.
DO YOU HAVE RESIDENCES IN MORE THAN ONE STATE?
If you spend time in any given year in residences
in different states, somewhere in your travels you also may want to
schedule an appointment with your professional tax advisor. One
topic for discussion would be the legal concept of domicile.
In simplest terms, a person's domicile is the
place where he or she intends to return after leaving another
location. The special significance of where a domicile is
established is in tax planning. An individual's domicile determines
which state's income, gift, and estate tax laws apply, and in which
state or states a person, trust, or estate is taxable. The rules
that will govern the administration of an estate also depend on the
state of domicile. Inadequate attention to establishing and
documenting an intended state of domicile could mean that even the
best-laid estate plan might go awry because the laws of a different
state could apply. The end result could be an unexpected tax burden
that otherwise could have been avoided.
Although the basic definition of "domicile" is
simple enough, many different criteria may be taken into account in
pinpointing a state of domicile. No one factor is controlling, and
the states differ in the criteria that they use. The address
included in a person's will may be a good indicator of the person's
domicile. A nonexhaustive list of other factors would take into
account in what state a person votes, registers an automobile, has a
driver's license, keeps important personal property, pays state and
local income and personal property taxes, last applied for a
passport, and keeps the bulk of his or her money. Contrary to the
old saying, you can go home again, and it is a good idea to make
sure that you and the government agree on where that home is.
CONTRACTOR SHIELDED FROM LIABILITY
A business hired architects for a renovation
project involving a parking lot, a retaining wall, and a loading
dock. The plans, as drawn up by the architects, did not call for a
guardrail along the top of the retaining wall. A construction firm
completed the project according to the architects' plans. The
contractor had not broken ground until a building permit was in
hand, and when the work was done a building inspector gave it his
blessing with a certificate of occupancy.
When a pedestrian fell from the retaining wall and
injured his knee, he sued the contractor for negligently failing to
put up a guardrail. The issue for the court was whether the
contractor could defend against liability on the ground that it was
"just following orders (or plans, in this case)." A state supreme
court sided with the contractor. The court reasoned that builders
and contractors are justified in counting on the experience and
skill of architects and engineers. To subject contractors to
liability under the circumstances of this case would be to unfairly
require contractors to follow architectural plans at their own risk
and, in effect, to ensure the correctness of specifications given to
them, not just their own workmanship.
Of course, there are limits on the extent to which
contractors can use the plans as a shield from liability. If the
results called for by the plans are so obviously dangerous that no
competent contractor would follow them, the contractor can be held
liable for building according to those defective plans. The
individual who fell off of the retaining wall made this argument,
but the court concluded that there was not enough evidence that the
wall, even though it had no guardrail, was obviously dangerous.
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