REPORT FROM COUNSEL

SUMMER 2008 ISSUE

INTRAFAMILY LOANS SUBJECT TO TAX LAWS

By Andrew M. Paxton, Esquire

For parents with the financial means to do so, there may be a natural impulse to help a child get started in his or her adult life by making a loan to the child, on terms that are favorable to the child. Notwithstanding the virtues of such generosity, the cold reality is that, if the terms are too favorable to the child, the loan could end up with some undesirable tax consequences.

The better choice may be to go forward with the loan, but with the child repaying the loan with enough interest to avoid the tax bite. Think of this approach as generosity tempered with practicality and as a borrowing position for the child that is closer to the "real world" marketplace.

For a loan from a parent to a child, the IRS measures the interest rate on the loan against a benchmark interest rate, the "applicable federal rate" (AFR), which it sets each month. Currently, that rate is about 5%. To the extent that the interest due on the loan is less than the interest calculated with the AFR, that amount will be "imputed" income to the parent, even though it was not in fact collected by the parent. The IRS will also treat the same amount as a gift to the child, requiring the filing of a gift tax return. (There would be no gift tax due, however, unless the parent had used up the $1 million lifetime gift tax exclusion.) From the standpoint of the child's taxes, he or she may be able to deduct the amount of the imputed interest on a loan secured by a residence.

Exceptions

There are two important exceptions to this scenario. If the amount of the loan to a relative does not exceed $10,000, and the loan is not used for an income-producing investment, the IRS will not impute any interest. In addition, loans of up to $100,000 do not lead to imputed interest if the borrower's net investment income in a given year does not exceed $1,000.

To avoid the income tax or gift tax ramifications for all kinds of intrafamily loans, the simplest approach is to use an interest rate that is at least as high as the AFR. Also, although it may seem unduly formal among relatives, it is advisable to set forth the terms of the loan in a written agreement, signed by all parties. Not only does this protect against faulty memories, but it decreases the odds that the IRS will consider the entire transaction to be a gift rather than a loan.

EMPLOYEE BENEFITS AND CHILD SUPPORT

By Michélle Pokrifka, Esquire

Pennsylvania has a complex body of law that requires that separated parents pay child support. The laws involved include statutes passed by the Pennsylvania legislature, rules established by the Pennsylvania Supreme Court, and a set of economic guidelines written and regularly revised by a committee appointed to the task by the Pennsylvania Supreme Court, as well as, a significant body of case law regarding how such rules are to be implemented.

A parent's income is usually calculated from at least a six-month average of the party's income. Bonuses and overtime are included if they regularly occur. All of a parent's financial resources, which can include potential earning capacity, income, and income producing property, must be considered in fixing a support obligation. Wages, inheritances, lottery winnings, second jobs, undistributed profit in a parent's business, and all other sources of income or assets can be considered in the analysis.

"Perks" of employment such as automobile expenses, travel, entertainment, transportation, and insurance benefits can be "added back" into a party's income for purposes of establishing a support order. Additionally, non-mandatory retirement contributions are added back to a parent's income for support purposes as well.

This is because most 401(k) contributions are discretionary and the employee can borrow against the plan, the contributions are considered income. However, mandatory contributions to pensions or retirement plans are not included in income calculations in child support cases. Vested stock options generally are reportable on W-2's when exercised and will constitute income for support purposes.

Generally, the value of employer-paid health insurance does not constitute additional income. Less clear is how to treat "flex credits", given as health insurance benefits by some employers. With flex credits, employers pay employees a monthly benefit that each employee can then "spend" on an array of benefits, including medical, dental, eye care, disability, and/or life insurance. In a case involving a mother who received flex credits from her employer for health insurance, the Pennsylvania court held that the money that the mother received for flex credits should not be considered income, even though it was reported with her gross pay on her paystubs. Instead, the court ruled that only the net amount remaining to a parent after the parent spends flex credits should be treated as income available for support.

Such flex credits can also be considered in reviewing whether a parent has paid their required out-of-pocket expenses related to unreimbursed medical expenses for children.

ANNOUNCEMENTS

Attorney Andrew M. Paxton completed the Graduate Tax Program at the University of Baltimore School of Law earning his LL.M., Master of Laws in Taxation. He concentrates his legal practice in real estate, business and tax law with a focus on intellectual property, technology and emerging business matters.

FIRM UPDATES

Honors, Awards and Appointments

The 2008 Pro Bono Award was recently presented to attorney Craig Sharnetzka by the Pennsylvania Bar Foundation. An honor to be nominated by the York County Bar Association and MidPenn Legal Services, Craig received the statewide award for his Pro Bono work performed in 2007.

Best 50 Women in Business--Attorney Anne E. Zerbe is among a distinguished list of women who have been named as one of the "Best 50 Women in Business" for 2008 by the Pennsylvania's Department of Community and Economic Development. Through her professional accomplishments, community involvement and advocacy for women in Central Pennsylvania, Anne is making significant strides in the legal profession.

Thomas D. O'Shea was elected to the Executive Committee of the Board of Governors of the York Little Theatre as Vice President of Artistic Support after a four year hiatus from the Board where he previously served as President.

Glenn J. Smith was elected Vice President to the Board of Directors for the Roses Athletic Club, a non-profit organization spanning York and Lancaster counties.

Speaking Engagements and Events

Frank H. Countess attended the annual Updates in Real Estate Law and Title Insurance seminar presented by Security Title Company of Baltimore.

Tina H. Fox attended a CLE on Trial Evidence.

Jeffrey L. Rehmeyer II and Margaret "Mieke" Driscoll recently presented on the topic of "Municipal Procurement" at the Pennsylvania State Association of Boroughs.

Jeffrey L. Rehmeyer II participated in the Spring Legal Roundup Seminar addressing current issues in School Law.

Lawrence V. Young recently presented at the 2008 Third Circuit Judicial Conference on the topic of "Bankruptcy and Real Estate Developers" to attorneys. At the recent 10th Annual Middle District Bankruptcy Bar Conference, MDBBA, attorney Young presented on the topic of "3rd Circuit Review & US Supreme Court". He also presented recently at the Pennsylvania Bar Association's Annual Meeting on the topic of "Intersection of Divorce and Bankruptcy". In addition, he spoke on the topic of "Trying a Case in Bankruptcy Court" recently for the Pennsylvania Bar Institute.

Anne E. Zerbe was a recent presenter for Quest Behavioral Health & Employee Assistance Programs on the topic of "2008 Employment Law Compliance Updates and Practical Implications for Employers". She was also a presenter at the Pennsylvania Bar Institute course on "Hiring and Firing" in Philadelphia.

PRO BONO

The Pro Bono Program partnered with MidPenn Legal Services for a successful Pro Se Custody Clinic earlier this year. Volunteer lawyers from the pro bono program of the York County Bar Association provided free legal assistance to low income clients who wanted help filing for custody. The volunteer lawyers met with the clients at CGA Law Firm, so that each lawyer and client could meet privately and discuss their individual situation. Clients were assisted with filling out custody complaints and other paperwork required to file for custody in York county. Another client was assisted with drafting a custody agreement. Other clients decided it was in the best interest of their children not to file for custody at this time. The participants were very pleased with the assistance provided. One client commented "This workshop was very helpful. Everyone was very courteous. I thank you for providing this service." The Pro Bono Program, along with the Domestic Relations Section of the York County Bar plan to partner with MidPenn Legal Services again in the future to provide this service.

LEGISLATIVE UPDATE

There are over 100 bills pending in the Pennsylvania house and senate that could impact employers in Pennsylvania. One of those pending bills, House Bill 1155 would mandate paid sick time for certain employees. Other legislation, House Bill 1779 would prohibit random drug testing.

To learn more about pending legislation that could impact you as an employer, you won't want to miss the York County Chamber of Commerce, Breakfast Plus - Small Business Seminar Series on Friday, July 25, 2008 from 7:30 - 9:00 a.m. where attorney Anne E. Zerbe will present on 2008 Employment Law Updates & Practical Implications in the Workplace. Contact the York County Chamber of Commerce to register for the seminar.

THE POWER OF A POWER OF ATTORNEY

A power of attorney is an instrument that authorizes an "agent" to act on behalf of someone else (the "principal") in a legal or business matter. When an elderly woman executed a power of attorney that gave her younger sister certain powers, a dispute arose when the younger sister used her power to name herself as the beneficiary of the elderly woman's life insurance policy. The dispute was with the elderly woman's children and grandchild, who had been beneficiaries under the policy until the younger sister with the power of attorney put herself in their place.

The children and grandchild argued to no avail that the terms of the power of attorney instrument did not give the younger sister the authority to name herself as the beneficiary of the life insurance policy. Unfortunately for them, the instrument language was broad enough to authorize the agent to change the beneficiaries of the principal's policy, where it authorized the agent "to transact all insurance business on [principal's] behalf, to apply for or continue policies, collect profits, file claims, make demands, enter into compromise and settlement agreements, file suit or actions or take any other action necessary or proper in this regard."

It was significant that the power of attorney did not incorporate by reference the various powers listed in the Uniform Durable Power of Attorney Act. In cases in which the powers listed in the Act are incorporated by reference into the power of attorney, an agent is not authorized to change the beneficiary of the principal's life insurance policy unless the principal has expressly authorized the agent to do so within the power of attorney. Since there was no mention of the Act in the instrument in question, but only a broadly worded grant of authority, the sister had not exceeded her powers.

Although the children and grandchild lost on the issue of how to interpret the agent's powers, they were still free to raise other arguments if they had factual support. These included arguments that the elderly woman did not have the mental capacity to execute the power of attorney, that her execution of the instrument was not of her own free will but was rather the result of the duress, coercion, control, and/or undue influence exercised by her sister/agent, and that the sister/agent's action in changing the beneficiary of the policy to herself was a violation of her fiduciary duty to the principal.

A power of attorney can be a valuable tool in estate planning, but it should be properly drafted to ensure that the powers contained therein are appropriate. Always consult with a qualified professional before executing a power of attorney.

QUESTIONS & ANSWERS

Question: Can I recover my attorney fees and costs when I sue someone?

Answer: The general rule is that the parties to litigation are responsible for their own counsel fees and costs unless otherwise provided by statutory authority, agreement of parties, or some other recognized exception.

Pennsylvania's consumer protection laws provide an example of statutory authority whereby a victorious consumer may be reimbursed for his or her litigation costs by the violating party. Alternatively, a well crafted agreement may contain language awarding a non-breaching party its litigation costs. As stated above, in the absence of one of these exceptions, the ability to recover your attorney fees and costs will likely be barred.

Please contact Glenn J. Smith, Esquire to discuss whether one of these exceptions may apply in your instance or if your agreements and contracts permit the recovery of attorney fees and costs.

Do you have a question you'd like to ask? Send your questions to Toby Gwinn at tgwinn@cgalaw.com and watch for the answer in an upcoming issue of our newsletter.

HOME IMPROVEMENT SCAMS

Your home is your castle . . . and it is also probably your most valuable investment. Unfortunately, many homeowners unwittingly hire crooked contractors to improve or repair their castles, and they wind up being cheated out of money or paying for inferior work. The home improvement business is crawling with cheats. Before signing on the dotted line, remember the following:

* Be wary of a salesman who comes to your home uninvited, especially if he claims he was doing some work for your neighbor or was just "in the neighborhood."

* Ask for references, with names and telephone numbers--nothing drives away a swindler quicker than a request for references.

* Beware of the low-ball bids or offers that seem too good to be true, because they usually are.

* Beware of people who ask for a large "deposit" or ask to be paid in full before the work is done.

* Read everything carefully before you sign it, and make sure you understand all of the terms.

* Do not sign a contract with blanks in it.

* Beware of a salesman who claims that his offer is for a "limited time" or is "today only," especially where he is pressuring you to sign before you have read the contract.

If you have a complaint about your home improvement project, begin by trying to resolve it with the contractor. Honest mistakes can occur and can be easily corrected. Make sure to follow up with a letter that you send by certified mail and keep a copy for your records. If this approach is unsuccessful, contact your local or state consumer protection office.

WHAT IS A TRADEMARK?

A trademark can be a distinctive mark, word, design, picture, color and even a sound that a seller uses in conjunction with a product in order to help consumers to identify the product with its producer.

Product trademarks, which are most familiar to consumers, are affixed to a good, its packaging, or its labeling. Service marks are used in connection with a service. Collective marks identify producers as belonging to a larger group, such as trade unions. Certification marks, like the famous "Good Housekeeping Seal of Approval," are licensed by groups that set specific criteria for their use.