The National Law Journal

May 21, 2012

In a case at the intersection of law and modern reproductive technology, the U.S. Supreme Court on Monday ruled that state inheritance laws will determine whether children conceived after their fathers’ death are eligible for Social Security survivors benefits.

The justices in a unanimous decision said twins conceived by Karen Capato through in vitro fertilization after her husband’s death from cancer did not qualify for survivor benefits because of Florida’s intestacy law.

http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202555444343#

A hedge fund compliance officer who was fired shortly after confronting his boss about allegedly improper trades is an at-will employee with no common law protection against wrongful termination, a fractured Court of Appeals held yesterday.

The nonresident alien estate tax is a tax on the right of certain individuals
to transfer property within the U.S. at death. The tax, reported on Form 706-NA,
United States Estate Tax Return – Estate of Nonresident Not a Citizen of the
United States, is applied to estates of non-U.S. citizens residing abroad who
owned at least $60,000 worth of property within the U.S. at time of death. The
estates of U.S. citizens and residents are subject to the laws of the regular Federal estate
tax.

For your trusts & estate issues, contact Damien Bosco, Esq. at (212) 201-1908 or email him at dbosco@boscolegal.com

Jobs Act: The SEC Releases Q&A Guidance

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012, a qualified business will be able to raise cash without meeting all the usual SEC requirements for initial public offerings.

The new law allows a qualified business to use crowdfunding to attract investments that are limited to the lesser of $10,000 or 10 percent of the income of an investor earning less than $100,000 a year.

While the new law makes it easier for a qualified business to attract investors, the process is not as simple as you might think. It will still take time and resources in order to qualify for “emerging growth company” status and take advantage of crowdfunding.

Before jumping in, business owners should ask questions including:

• Is it better to borrow money from traditional sources, rather than raise it from investors? Bringing in investors means giving up some control and debt financing may cost less in the long run.
• Will you be able to comply with the requirements involved in crowdfunding, including complying with state laws that govern companies with shareholders?
• Will revealing your plans and business details on the Internet lead to a loss of trade secrets?

New Q&A Guidance

In a series of questions and answers, the SEC’s Division of Corporation Finance recently provided guidance on the implementation and application of the law, in light of existing rules, regulations and procedures.

The SEC notes that the Q&As are not rules, regulations or statements of the Commission. They address questions of general applicability under Title I of the JOBS Act, which provides scaled disclosure provisions for “emerging growth companies.” These provisions include, among other things, two years of audited financial statements in the Securities Act registration statement for an initial public offering of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting.

Title I also enables emerging growth companies to use test-the-waters communications with qualified institutional buyers and institutional accredited investors and liberalizes the use of research reports on emerging growth companies.

Here are just a few Q&As, edited for length and clarity.

Question: How can an issuer determine whether or not it meets the revenue test for an “emerging growth company”?

Answer: An “emerging growth company” is defined in the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year.

The phrase “total annual gross revenues” means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).

If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues for purposes of this test should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year.

Question: How can an issuer determine whether it qualifies as an “emerging growth company” as of the effective date for the definition of that term?

Answer: Under the JOBS Act, an “issuer shall not be an emerging growth company for purposes of [the Securities Act and the Exchange Act]…if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.”

The phrase “first sale of common equity securities” in the JOBS Act is not limited to a company’s initial primary offering of common equity securities for cash. It could also include offering common equity pursuant to an employee benefit plan on a Form S-8 as well as a selling shareholder’s secondary offering on a resale registration statement.

Even if the issuer had a registration statement declared effective on or before December 8, 2011, as long as the first sale of common equity securities occurs after that date, an issuer may qualify as an emerging growth company, assuming the other requirements of the definition are satisfied.

Question: How should an emerging growth company identify itself as an emerging growth company in a draft registration statement submitted on a confidential basis and in the subsequent electronic filing of the registration statement on EDGAR?

Answer: The issuer should disclose that it is an emerging growth company on the cover page of its prospectus.

Question: Can an issuer that qualifies as an emerging growth company amend its registration statement to provide the scaled disclosure available to emerging growth companies if the registration statement was initially filed prior to April 5, 2012?

Answer: Yes. The emerging growth company may provide the scaled disclosure available to emerging growth companies in a pre-effective amendment to a pending registration statement or in a post-effective amendment.

Question: How many years of audited financial statements are required to be included in an emerging growth company’s registration statement other than the registration statement for its initial public offering of common equity securities?

Answer: The provision permitting the filing of only two years of audited financial statements is limited to the registration statement for the emerging growth company’s initial public offering of common equity securities. Although the provision is limited to the initial public offering registration statement, the SEC will not object if, in other registration statements, an emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities.

The complete Q&As from the SEC can be accessed here http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm”>http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm

For more information about whether crowdfunding would be appropriate and beneficial in your situation, consult with Damien Bosco, Esq. at (212) 201-1908 or email him at dbosco@boscolegal.com

 Introduction

             Foreign investors want to limit liability and avoid paying estate taxes on their U.S. properties.  The best ways to limit liability and to avoid paying estate taxes is to use both a foreign and domestic corporate structure to protect the individual foreign investor.  Also, the foreign investor may want to consider life insurance placed in a irrevocable trust to help pay estate taxes.  This article addresses some of ways that non-resident aliens can invest in New York real estate without paying U.S. or New York estate taxes upon their death, and to limit their liability. 

Investors tend to forget about the heavy estate tax, which can deplete the value of their assets.  It is better to protect yourself now than to ignore the issue.  It is prudent to take action now, than to wait until it is too late.  You should be fully aware of your options to avoid estate taxes prior to any purchase.  A foreign investor should set up the proper legal structure prior to making a purchase to avoid paying estate taxes.

How Estate Taxes Effect Your Investment

 Generally, the estate tax is a tax on the assets of an estate of a deceased person prior to any transfers to heirs or beneficiaries.  A foreign person could be exposed to U.S. estate tax [IRC section 2103; Treasury Regulations section 20.2103-1(a)(1) as well as U.S. gift taxes if the real property is gifted inter vivos (during life) [IRC section 2511(a); Treasury Regulations section 25.2511-1(b)].

Although U.S. residents do not have to pay federal estate taxes on the first $5.12 million in assets (for 2012), generally non-residents have to pay estate taxes for any estate valued at $60,000 or more in U.S. gross assets.  As a result, foreign investors who own U.S. real estate may have to pay up to 35% of the value of their estate over $60,000 of the property at the time of death. 

Also of note is that a non-resident spouse does not qualify for estate tax exemption upon the death of a resident spouse, unless there is a transfer into a qualified domestic trust for the benefit of the non-resident spouse.  Therefore, without proper estate planning, the value of your estate could decline as a result of payment of estate taxes since there is no marital deduction without proper estate planning.

Additionally there are New YorkState estate taxes.   New York imposes a non-resident tax pursuant to Section 960 of the New York Tax Law.  Section 960 taxes the transfer of real and/or tangible property located in New York which is owned by a non-resident of the state.  As noted by the New York State Bar Association, “all real estate investments by nonresidents may be subject to very high estate taxes if title is taken in individual or joint name.  There is an estate tax even if the property is worth less than its original cost.”

Limiting Legal Liability is an Important Issue

 If a foreign investor is willing to take title in their own name but wants some protection against liability, the non-resident can take title in the name of a UnitedState’s limited liability company (“LLC”).  A reason why a foreign investors is concerned with owning New York property directly is because of the risk of lawsuits against them individually and the possibility  that a New York Court could enter a judgment against them.  Moreover, some non-resident investors want to protect their privacy when they purchase real estate in New York.  Purchasing in an investors own name will require disclosure of certain personal information.  By purchasing real estate through an LLC, a non-resident can limit legal liability and have some anonymity.  

There may be situations where an investor should purchase real estate directly.  One situation is if the non-resident plans on using his New York property as a primary residence.  If so, the foreign investor owning the property directly may be able to take certain tax deductions on the real estate.  In addition, when the property is sold, the foreign investor may be able to claim that the home is a principal residence and possibly exclude some of the gross proceeds from tax.  This article does not cover detailed transfer or income tax issues.  However, with regard to estate taxes, the foreign investor should consider purchasing life insurance to cover estate taxes that may occur upon death.

            Another situation is if the foreign investor is buying an apartment for a child attending school in New York.  The foreign investor should consider purchasing the property in the child’s name if eligible.  When the child finishes school, the child may be able to sell the at a lower capital gains tax rate.  Upon receipt of the proceeds, the child could make a gift of the proceeds to the non-resident parents.  A foreign investor should look closely at the tax consequences in this situation.

A foreign investor who plans on purchasing several properties in the U.S. should consider purchasing each property through separate LLCs, to limit the liability of each property.  This protects the foreign investors against lawsuits or judgments based on one piece of property but not on the other property.  Also, there could be adverse tax consequences upon the sale of some properties all held in the same LLC.  

How to Use a Corporate Structure to Avoid Estate Taxes

A foreign corporation does not have to pay estate tax.  Therefore, by forming a foreign corporation in conjunction with a U.S. LLC, you limit your liability through the use of the LLC and obtain the tax advantages of a foreign company.  In effect, the foreign corporation would own the share of the LLC and the LLC would purchase the New York real estate.  The foreign investor therefore would only own shares in the foreign corporation and not the LLC.  Neither would the foreign investor own directly the real estate.  Upon the foreign investor’s death, there would be no estate taxes because the foreign investor does not own U.S. domestic stock; nor would the foreign investor pay estate taxes on the real property.  Any transfer of stock can occur without any U.S. estate taxation.  If the foreign investor owned shares of the LLC or the real property directly, these U.S. assets would be subject to U.S. estate taxes and/or probate at the time of death.

Off Shore Trusts

 The foreign investor could also hold the shares of the foreign corporation in an off shore revocable trust, depending on the laws of the country of residency.  The terms of the trust could set forth how the trustee should distribute the shares of the foreign corporation and in turn, distribute the ownership of the New York real estate to named beneficiaries. An off shore trust provides the foreign investor additional flexibility in distributing assets upon death.

Estate Tax Treaties

Prior to forming the foreign corporation, it is important for foreign investors or their legal counsel to review any tax treaty the U.S. may have with the foreign investors’ country of residency.  The United States has estate tax treaties with 18 countries:  Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, the Republic of South Africa, Sweden, Switzerland and the United Kingdom.  The tax treaties may provide their own definition of what constitutes U.S. property for tax purposes.  The tax treaties may involve providing tax breaks on purchases of U.S. real estate and property.  Other jurisdictions may have gift tax treaties with the United States, such as Australia and Japan, which may provide gift tax credit but may not provide estate tax credit.

Tax Havens

 If the tax treaty does not look favorable to the foreign investor, the non-resident could form the foreign corporation in another jurisdiction that may have more favorable tax rules such as the Cayman Islands, the Bahamas, the British Virgin Islands or Bermuda.  These jurisdictions do not impose taxes on transactions related to the corporations.  The foreign investor must carefully consider income taxes when contemplating the acquisition of U.S. real property through a foreign corporation. 

Life Insurance

   If the foreign investor plans on purchasing New York real estate directly or through an LLC, the non-resident could purchase life insurance to offset estate taxes.  The foreign investor could form a irrevocable trust to purchase life insurance, most likely term insurance in an amount equal to what is the estimated US and New York estate taxes that may occur upon death.  Because the insurance proceeds would be in an irrevocable trust, there could be no estate taxes on the proceeds. 

Valuing Property for Estate Tax Purposes

 For estate tax purposes, generally, the government assesses an estate tax based on the real estate’s fair market value at either the time of death, or within six months after death if the value of the estate.  One way a foreign investors want to reduce the value of their U.S. property for estate tax purposes prior to their demise, is to obtain a non-recourse mortgage on the property. 

Irrevocable Trusts

 A foreign investor could form an irrevocable trust to purchase the real estate in order to avoid the estate tax.  The federal government taxes a trust at personal rates. If the trust is revocable or the grantor retains some interest, reversion, or power, the trust will be subject to estate taxes.  Note that the irrevocable trust may be subject to certain taxes, such as a capital gains tax upon the sale of the property, but nevertheless does not pay estate taxes.

Probate Issues

The primary administration of the decedent’s estate occurs where the foreign investor is domiciled.  If the foreign investor owns New York property at the time of death, there must be an ancillary proceeding conducted in New York because foreign fiduciaries do not have the power to act in New York.  New York requires copies of authenticated or exemplified documents of the foreign jurisdiction.  Additionally, the New York Department of Taxation and Finance is always a party that must be served with notice of the proceeding.  In New York, real property held in a trust passes outside of the probate process, eliminating the need for primary or ancillary administration.[1]

Conclusion

            The foreign investor in New York real estate must take into consideration estate tax issues.  Foreign investors should evaluate their alternatives to determine the best way for them to limit liability and to avoid paying estate taxes when it is unnecessary for them to do so.  Non-residents should make sure they obtain legal advice prior to making any investment in real property in New York, especially when it involves estate planning issues.[2]  Call Damien Bosco, Esq. at (212) 201-1908 or email him dbosco@boscolegal.com for a consultation.

The changing demographics in the United States and the desire of baby boomers to
work longer than earlier generations has led to a larger percentage of older
employees in the workforce. This growing population of older employees has led
to more claims of age discrimination being filed against employers. Consider
that in fiscal year 2011, the EEOC received 23,465 charges of age
discrimination. A decade earlier in 2001, the EEOC received only 17,405 age
discrimination charges.

For employers, these trends mean that preventing age discrimination in the
workplace needs to be a priority. The federal Age Discrimination in Employment
Act (ADEA) prohibits employers from discriminating against employees and
applicants who are age 40 and older when it comes to any aspect of employment
including: Hiring; Firing; Pay; Job Assignments; Promotions; Training; and
Fringe benefits.

The ADEA applies to employers with 20 or more employees. It does not protect
workers under the age of 40 or properly classified independent contractors.
(Many states have their own laws prohibiting age discrimination.)

To help prevent age discrimination at your organization, here are some DO’s and
DON’Ts to consider:

Don’t allow employees to tease co-workers because of age (as
well as race, sex, national origin or other protected status). For example, in
one court case, an employee’s co-workers frequently made fun of his memory,
baldness and certain speech habits. When he was terminated at the age of 58 and
replaced with a 36-year-old, he filed a claim of age discrimination.

In other EEOC cases, a 56-year-old was told by managers that she was exhibiting
signs of Alzheimer’s disease and a terminated 52-year-old was referred to by
his supervisor as “old man.” The cases illustrate why it’s best to
maintain a respectful workplace and never allow joking at any one’s expense.

Do take appropriate action to address discrimination issues as
soon as they arise. A single incident of one employee teasing another is not
likely to lead to a lawsuit if the employee is disciplined and the behavior
immediately stops. But allowing continuous discriminatory behavior creates a
hostile work environment that can lead to legal claims.

Don’t ask age-related questions during job interviews. Even in
cases when it might be legal to ask an applicant’s age, if you hire a younger
candidate and the decision results in a charge of age discrimination, it can be
difficult to prove that your choice had nothing to do with age.

Do make age-neutral decisions when training and promoting
employees. Emphasize skills and performance. Apply standards equally to all
employees.

Don’t base decisions about employees or job applicants on
stereotypes, such as older people are not energetic or able to understand the
latest technology.

Do examine decisions to terminate employees to ensure they are
based on performance. Decisions must be based on legitimate business reasons
and be able to withstand the scrutiny of the EEOC or a jury. Keep
contemporaneous records of employees with poor job performance. Make sure there
is a paper trail throughout employment. Provide written warnings when
performance is unsatisfactory.

Don’t retaliate against an employee who makes a claim of
discrimination or reports that a co-worker is being discriminated against. It
is illegal to fire, demote, harass, or otherwise “retaliate” against
employees or applicants because they filed a charge of discrimination,
complained to their employers about discrimination, or participated in an
employment discrimination proceeding (such as an investigation or lawsuit).

For example, let’s say an employee files a charge of age discrimination with
the EEOC claiming he was passed over for promotion because of his age. It is
illegal for the employer to terminate the employee in retaliation for the
reporting the conduct — even if the EEOC later determines that no
discrimination occurred.

Do provide training for managers and supervisors about the
types of behavior that constitutes illegal discrimination, harassment and
retaliation. Establish a comprehensive age discrimination policy. Post it on
bulletin boards and feature it in company media.

Don’t use employees’ ages as a basis for discriminating
against them when it comes to benefits. This violates the federal Older Workers
Benefit Protection Act.

Do consult with an attorney if you receive a notification from
the EEOC that a complaint has been filed against your organization.

Don’t approach layoffs based on age. In some cases, employers
start layoffs with the highest paid employees (who tend to have seniority) or
the oldest employees (because they figure they will be retiring soon).

In one case, the EEOC filed a lawsuit against a Michigan manufacturer for
laying off three employees on the basis of their ages. According to the lawsuit
filed January 20, 2012, Hutchinson Sealing Systems selected its oldest
engineers for layoffs. The EEOC is seeking monetary compensation,
reinstatement, and other relief. (Case No. 2:12-cv-10264)

Do follow the letter of the Older Workers Benefit Protection
Act if you ask employees to sign waivers in connection with severance or early
retirement programs. While employers can ask employees to give up their rights
to file age-bias suits, federal law rigidly governs the terms of those waivers.

Don’t place advertisements looking for “recent college
graduates.” In one EEOC lawsuit, a company offered its employees a bonus
for the referral of a “friend’s younger brother or sister.”

Do be aware that employers generally can’t terminate employees
when they reach a certain age. With rare exceptions, employees cannot be forced
to retire at age 65, 70 or other age.

The aging of the labor force makes it important for employers to ensure their
policies don’t discriminate against older employees. Consult with us for more legal information in your situation. Call Damien Bosco, Esq. at (212) 201-1908 or email him at dbosco@boscolegal.com