What is the CAN-SPAM Act and How Does it Affect Your Business?

The CAN-SPAM Act (Controlling the Assault of Non-Solicited Pornography and Marketing Act) establishes requirements for sending commercial e-mail.  The Act spells out penalties for any person or business that violates the law, and gives consumers the right to opt-out of any email solicitation. 

The penalties for violating the CAN-SPAM Act can be severe, ranging up to $16,000 or more per person per violation. Therefore, it is important to understand the requirements of the Act if your business uses e-mail for marketing and advertising purposes.  

Click here to view The CAN-SPAM Act: Compliance Guide for Business. 

Does a Corporation Really Protect its Shareholders Against Personal Liability?

Not always.  A recent Michigan Court of Appeals decision (New Properties vs. Lakes of the North Association) held that money owned by a corporation could be seized to satisfy the debts of its owners. 

In most cases, a corporation's assets cannot be seized to satisfy a judgment against its owners (and vice versa) because the corporation and its shareholders are considered to be separate parties.  However, in some cases a corporation's assets may be seized to satisfy the debts of its owners.  This is known as "piercing the corporate veil". 

The Court in the New Properties case reviewed numerous factors which led to the conclusion that the corporation should not be treated separately from its owners:

1. The owner never kept a minute book
2. The owner did not treat corporation accounts separately
3. Financial arrangements between the corporation and owner were not documented
4. Shareholder or director meetings were not held by the owner
5. No stock certificates were issued
6. The company owned no property or capital

The bottom line is that the owner of the corporation did not treat the company as a separate entity, so the Court found no reason to do so either.  As a result, the plaintiffs were entitled to recover their judgment against a corporation that was even not a party to the case. 

The lesson learned for all business owners is to respect the formalities of corporate structure.  Otherwise, a corporation (or limited liability company) may not provide the protection from creditors that they expect.

Mixing Pleasure and Business: Are Vacations in the 21st Century Deductible?

Technological developments of the 21st century have been transformative.  Anyone can be in constant contact with their offices and clients, even while away on vacation.  Technology has essentially erased the physical boundaries between a place of work and almost any vacation location on the planet. The deductibility of business expenses while away from the office is explored in this article.

When it comes to vacations and taxation, several Internal Revenue Code Sections come into play. First, Section 262 declares that "no deduction shall be allowed for personal, living, or family expenses." Accordingly, on the face of it, any and all expenses incurred while away on vacation should not be deductible.

But Section 162, which permits the deductibility of ordinary and necessary business-related expenses, relaxes the strict limitations imposed by Section 262.  Specifically, business expenses incurred while on vacation open the door to possible tax deductions.

Most technology-related expenses (cell phones, connectivity charges, printing, fax charges, and the like) are deductible to the extent that they are necessary to maintain contact with staff and clients while away from a place of business. Nevertheless, vacationing taxpayers should not be lulled into thinking that because they log on to their computers on a daily basis to check their e-mails, or regularly call into their offices, their vacation expenses are now entirely deductible. Likewise, taxpayers should not think that even some part of the vacation expenses they incur are now deductible based on the ratio of the hours spent doing business-related work vs. being away from home on vacation.

The main reason that such expenses are not deductible is due to the scope of Section 162, as defined by a long line of case law that addresses travel expenses incurred while away from home. The U.S. Supreme Court set the standard for deductibility of travel expenses in Commissioner v. Flowers, 326 US 465 , 66 S. Ct. 250, 90 L Ed 203 (1946). The Court held that the following three conditions must be met before a travel expense is deductible:

1. The expense must be a reasonable and necessary "travel expense," as that term is generally understood.
2. The expense must be incurred "while away from home."
3. The expense must be incurred in pursuit of business. This means that there must be a direct connection between the expenditure and the carrying on of the trade or business of the taxpayer or of the employer. Moreover, such expenditures must be necessary or appropriate to the development and pursuit of the business or trade.

For most vacationing taxpayers, satisfying the third Flowers condition of deductibility is likely to be the most problematic. Taxpayers must prove there is a "direct connection" between the vacation expenses they incur and the furtherance of their business enterprise.  But there is nothing about being away from the office that enhances the prospects that the business issues under discussion will be more successful simply because the taxpayer, for example, is relaxing in a hammock in the Bahamas rather than being stressed out in her regular office.  To the contrary, the IRS may argue that the prospects for successful business endeavors are diminished while the taxpayer vacations because the taxpayer lacks immediate access to the resources typically found in an office environment, such as management advice, secretarial assistance, photocopy machines, and the like.

The fact is that the vast majority of vacationing taxpayers incur expenses first and foremost specifically to get away from their businesses. This is evident for most people when they are accompanied on vacation by their families, friends, or significant others but not by their business associates or colleagues. As a result, under the Flowers decision, the Service and the courts would likely deny that all or even a portion of the most common expenses that taxpayers incur while on vacation (e.g., transportation, lodging, meals, and entertainment) are deductible.

Nevertheless, Flowers does not preclude the deductibility of all expenses while away on vacation. While away on vacation, for example, a taxpayer might have a crisis back at the office requiring his full-time or significant attention.  In these limited instances, when the fundamental nature of the trip has been transformed from pleasure to business, there may be a justification to deduct many of the taxpayer's expenses while he is away from home. These occasions are likely to be rare, however, and the fact that a taxpayer, while on vacation, voluntarily chooses to spend even two to three hours daily checking her e-mail and/or reaching out to customers and clients does not fundamentally transform the nature of her trip to make it business-oriented.

The vast majority of vacationing taxpayers incur expenses first and foremost specifically to get away from their businesses. As a result, under the Flowers decision, the most common expenses that taxpayers incur while on vacation (e.g., transportation, lodging, meals, and entertainment) are likely nondeductible.

Court of Appeals Denies Estate Tax Reduction for Family Limited Partnership

The Ninth Circuit has affirmed a Tax Court decision that assets transferred by an individual to two family limited partnerships (FLPs) were includible in her gross estate under Code Sec. 2036. This decision is instructive on the planning requirements for FLPs to achieve estate tax savings.

 

Background.  Individuals typically transfer assets to FLPs in the hope of achieving large valuation discounts for the assets that would not otherwise be available if the assets were retained in outright ownership. The valuation  discounts, in turn, could result in substantial estate tax savings. However, in order to achieve the desired results, a number of legal hurdles must be overcome.

Facts.  Erma V. Jorgensen (Ms. Jorgensen) was a resident of California when she died with a will on April 25, 2002. In 1995, Ms. Jorgensen and her husband, who died a year later, formed an FLP called the Jorgensen Management Association (JMA-I) by each contributing marketable securities valued at $227,644 in exchange for 50% limited partnership interests. Other family members were given interests in the partnership.

A second FLP, JMA-II was formed by Ms. Jorgensen on July 1, 1997 when she contributed about $1.8 million of marketable securities in exchange for her initial partnership interest. Children and grandchildren received interests in JMA-II. Because the value of each of these interests exceeded the then available $10,000 annual exclusion, gift tax returns should have been but weren't filed.

Neither JMA-I nor JMA-II operated a business. The FLPs held passive investments only, primarily marketable securities, and neither maintained formal books or records. Although the partnership agreements stated that withdrawals could only be made by general partners, Ms. Jorgensen was authorized to write checks on the JMA-II checking account, and she wrote checks on both the JMA-I and JMA-II accounts. Some withdrawals were used to make gifts, some of which should have been, but weren't, reported on gift tax returns.

In 2003 through 2006, JMA-I and JMA-II sold certain assets, including stock that Ms. Jorgensen had contributed to the partnerships during her lifetime. In computing the gain on the sale of those assets, the partnerships used Ms. Jorgensen's original cost basis in the assets, as opposed to a step-up in basis equal to the fair market value of the assets on Ms. Jorgensen's date of death under Code Sec. 1014(a). The JMA-I and JMA-II partners reported the gains on their respective Forms 1040 and paid the income taxes due.

Tax Court's Decision. The Tax Court determined that Ms. Jorgensen's estate included the value of the securities which she contributed to both of the FLPs. The court rejected the estate's argument that the transfers of securities weren't “transfers” under Code Sec. 2036(a). The estate's claim that the transfers were bona fide sales for full and adequate consideration, because Ms. Jorgensen had several nontax reasons for making the transfers, including management of her assets and financial education of family members, was overcome by circumstances surrounding the formation, funding, and management of the partnerships.

The court also concluded that there was an implied agreement at the time of the transfers that Ms. Jorgensen would retain the economic benefits of the property, even if the retained rights were not legally enforceable.

Ninth Circuit Affirms. The Ninth Circuit agreed with the Tax Court's decision to include the transferred amounts in Ms. Jorgensen's estate. The estate argued on appeal that, although Ms. Jorgensen retained some benefits in the transferred property, the amounts for which benefits were retained should be considered de minimis or should be limited to the actual amount accessed by decedent. However, the Ninth Circuit rejected these arguments, finding that the $90,000 in checks personally written by Ms. Jorgensen and the use of $200,000 FLP funds to pay her personal estate taxes weren't de minimis.

The Ninth Circuit also agreed with the Tax Court's conclusion that there was an implied agreement that Ms. Jorgensen could have accessed any amount of the transferred assets, and the fact that she only accessed a specified amount doesn't undermine that conclusion. Additionally, it found no clear error in the Tax Court's conclusion that the transfer wasn't a bona fide sale for adequate consideration. Noting that transfers to FLPs are subject to heightened scrutiny, the Ninth Circuit agreed that the nontax reasons advanced by the estate were either weak or refuted by the record.

Planning Lessons.   FLPs can be still be used to achieve large assset valuation discounts that result in significant estate tax savings.  However, the IRS scrutinizes these transactions very carefully - especially among family members.  Great care must be taken to ensure that the FLP has a legitimate business purpose, appropriate gift tax returns are filed, detailed management records are maintained, and that the FLP owners don't use the partnership assets as though they were still personally owned by themselves.  

Protect Your Assets from Creditors and Lawsuits!

I am frequently asked whether a living trust is an effective way to protect assets from creditors. A living trust does protect the trust assets against claims by the creditors of the trust beneficiaries, but it does not protect the assets against claims by creditors of the owner of the trust.

I have drafted an article with 10 Tips to Protect Your Asset From Creditors and Lawsuits, and posted it on my website. These tips are simple things you can do to reduce your exposure to lawsuits and creditors. I hope you find this information useful.