REPORT FROM COUNSEL

FALL 2006 ISSUE

CARL E. ANDERSON JOINS CGA LAW FIRM

CGA Law Firm is pleased to announce that Carl E. Anderson has joined the firm in their downtown York location. Attorney Anderson provides general counsel to various companies and public entities. Most notably, he provides expertise in the area of Equity Management and Diversity. He counsels business clients on corporate matters, government contracts, intellectual property and real estate. He is a seasoned litigator, employing his skills to aggressively defend client interests and also leveraging his expertise to help them avoid liabilities. Additionally, he has served as bond/underwriters counsel to numerous public entities on financing transactions.

"We knew Carl would be an excellent fit for our firm. His professional achievements are exemplary," said senior shareholder, Larry Young. "We are pleased that he recognized our sincere desire to diversify our practice and promote business diversity in York. We shared common goals and now we have the opportunity to work together to achieve them." Larry Young is a member of the Diversity Committee of the York County Bar Association.

Attorney Anderson grew up in York and returned to Central PA in 2003 to serve as Chief Counsel in the PA Department of Banking. Prior to relocating, he was a partner in the Ohio firm of Walter & Haverfield, LLP. He also served as Chief Counsel to former Ohio Governor, Richard Celeste. Most recently, attorney Anderson operated a successful solo practice serving clients throughout the region with offices in both York and Harrisburg.

"I have always been committed to promoting equity," attorney Anderson noted. While he was heartened by the support of the Bar Association, the local Chamber and other area businesses to embrace diversity, he notes that he was even more encouraged by the support of CGA Law Firm. "I expect great things from myself," he said. "I know I can expect great things from CGA, as well. This is a marriage of goals and I am excited about what we can accomplish working together with our clients and our community."

DEDUCTING THE BUSINESS USE OF YOUR HOME

By Timothy J. Bupp

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.

Timothy J. Bupp is a shareholder concentrating on business, tax and estate planning matters. He holds his LL.M. in Taxation from Temple University. For specific questions about allowable deductions and other tax matters, please contact CGA directly at 717.848.4900.

FIRM UPDATES

Events and Speaking Engagements

Larry V. Young is a course planner and presenter at the Pennsylvania Bar Institute's 11th Annual Bankruptcy Institute. Larry is the only consumer bankruptcy specialist in York to be certified by the American Board of Certification.

Ben L. Pratt has spoken at several Pennsylvania School Boards Association events. He is on the faculty of the PSBA's Institute for Collective Bargaining and Labor Relations, where he recently taught the second session in a three-part series. He also gave a presentation on preparation techniques for collective bargaining at the PSBA Summer Workshop. The Keystone Chapter of Associated Builders and Contractors (ABC) also asked Ben to present on hiring and firing during their "Building Your Business" program.

Honors, Awards and Appointments

Carl E. Anderson was appointed Chairman of the Board of Directors of the York Community Progress Council in July. The Community Progress Council is a community action agency that promotes self-sufficiency among low-income residents of York County.

Pennsylvania Super Lawyers, a joint publication of Philadelphia Magazine and Law & Politics, recently included Larry V. Young on its list of the most outstanding lawyers in the state. Super Lawyers represent the top 5% of attorneys in the state who have attained a very high degree of peer recognition and professional achievement.

Tina H. Fox was recently named as the Vice President of the Board of Directors for the York Chapter of Habitat For Humanity.

Professional Development

Frank H. Countess attended a Business Succession Planning seminar provided by the York County Estate Planning Council. He also recently attended the Security Title Real Estate Symposium in New Cumberland, PA. The symposium covered annual updates on title insurance issues and recent case law decisions affecting real estate matters.

Charitable Giving and Sponsorships

Tina H. Fox, Michelle Pokrifka and Benjamin L. Pratt supported the York Habitat For Humanity "Legal Build" in Dover by spending a day on-site helping to build a home.

CGA Law Firm was a proud sponsor of the 2006 York Cadillac Invitational Golf Tournament to benefit the National Kidney Foundation of the Delaware Valley.

CGA Law Firm was proud to sponsor the Crispus Attucks 75th anniversary celebration "Soul of the City" in August. Funds raised by this event will be used to help the organization achieve its mission to build a center that strives to impact the community with positive changes by helping the neediest people in our neighborhood, city, and county.

Other News

Congratulations to attorney Timothy J. Bupp and his family. They welcomed their son, Charlie, on July 28, 2006.

CGA attorney Frank Countess hosted a fundraising dinner for Rep. Todd Platts at his home in July. Senator John McCain was an honored guest and speaker for the evening.

MECHANICS' LIENS IN PENNSYLVANIA

By Christian J. Dabb

What Is a Mechanics' Lien?

Home buyers and construction contractors often hear the term "mechanics' lien" and probably have a limited understanding of exactly what it is. A mechanics' lien is a construction or building repair debt that has attached to real estate. The real estate cannot be sold or transferred to a new owner unless the debt is paid in full or unless the new owner agrees to accept the real estate with the attached debt.

Since virtually no new owners are willing to take on the debts of the prior owners, a mechanics' lien must be paid off, at the latest, at the time of sale of the property. Mechanics' liens have the ability to jump to the head of the line of liens on a property, even ahead of the first lien mortgage.

The Background

Although contemporary usage of the term "mechanic" implies a worker who uses or works on a machine, just about any contractor or subcontractor involved in construction qualifies to file a mechanics' lien if he or she completes work and is not paid. Mechanics' liens arose in the law to level the playing field between construction workers and property owners. Construction workers invest their time, effort, and materials in buildings and repairs located on land owned by someone else. An owner who refuses to pay has the upper hand, since the work has been completed and the property is now in the control of the owner.

Enter the mechanics' lien. The law gives the worker a powerful response by providing the opportunity for the worker to file a lien in the case of nonpayment. An unpaid builder, plumber, electrician, or material supplier who is owed more than $500 can file a mechanics' lien in the courthouse. He or she simply has to give the property owner notice and file a fairly simple document announcing the lien. The lien attaches to the real estate where the work was done or where materials were supplied.

If properly filed, a mechanics' lien for new construction dates back to the day when "visible commencement" of the work began. Liens for repairs and alterations are effective only from the date of the filing of the lien.

The Details

But mechanics' liens are quirky. Contractors have only four months from their last day on the job to file the lien. The lien attaches to the property described on the document filed. If the contractor does not clearly and accurately describe the property, the lien will not attach. If the lien document is not promptly and properly served on the owner, the lien fails. Where subcontractors seek to establish a lien, the requirements are even more stringent, requiring a notice of intent to a file a lien forwarded tot he owner prior to filing a claim.

Because mortgage lenders live in dread of mechanics' liens, they are very careful to require that contractors sign broad waivers of liens prior to starting any new construction. The waiver does not only apply to the general contractor. If properly filed and indexed at the courthouse, the mechanics' lien waiver also prevents the filing of any mechanics' liens by all subcontractors.

If you are purchasing a home that has not yet been constructed, your lender will want to be sure that construction does not commence until the general contractor signs and files a mechanics' lien waiver. Even lot-clearing, grading, and excavation can give rise to liens, and both lenders and title insurance companies can insist that all work start only after your mortgage is signed and recorded in the courthouse, and that a mechanics' lien waiver be filed.

If you are a construction contractor or subcontractor, you should regularly expect to be asked to sign a waiver of liens as a condition of your customers' entitlement to borrow mortgage money and to purchase title insurance. When doing business with an owner who is not borrowing to finance a home-improvement project, you should consider refusing to sign a waiver of mechanics' liens. When no lender or title insurer is involved in the transaction, a contractor should do his or her best to preserve the entitlement to file a mechanics' lien, since it is a powerful tool to secure full and final payment. In the case of either party, it is in the best interest to consult a legal professional to determine the proper filing requirements and secure your rights.

Christian Dabb practices in the Litigation Department at CGA. For questions about mechanics' liens or other remedies, contact him at 717.848.4900.

THE DANGERS OF EMPLOYEE INTERNET USE

By Anne E. Zerbe

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. Some scenarios are not difficult to imagine. An employee uses his computer as a tool for sexually harassing fellow workers by visiting pornographic websites. Or, an employee embroiled in a bitter domestic dispute uses his office computer to communicate threats to his spouse, and the employer fails to take action.

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.

Finally, enforcement of the written policy is key. Employers who become aware, or who should be aware of employee internet use that is criminal or harrassing are obligated to take both preventative measures and appropriate disciplinary action.

For questions about employer liability or about establishing a corporate internet policy, please contact Anne directly at 717.848.4900.