e- NEWSLETTER

November / December 2004

Cameron R. Monti
Editor-in-Chief

Taxation Law

IRS Streamlines Procedure for
Late S Corp and Late Corporate Classification Elections
Rev Proc 2004-48, 2004-32 IRB

Timothy M. Hughes

           A new revenue procedure carries a simplified method for requesting relief for a late S corporation election and a late corporate classification election which was intended to be effective on the same date that the S corporation election was intended to be effective.
Background. An eligible entity that wants to be classified as an S corporation must elect to be classified as an association under Reg. § 301.7701-3(c)(1)(i) by filing Form 8832 (Entity Classification Election) and must elect to be an S corporation under Code Sec. 1362(a) by filing Form 2553 (Election by a Small Business Corporation). Often, an entity timely files Form 2553 but fails to file Form 8832. Reg. § 301.7701-3T(c)(1)(v)(C) deems an eligible entity that timely files Form 2553 to also have filed Form 8832. However, in other situations, an eligible entity fails to file a timely Form 2553. Here, Reg. § 301.7701-3T(c)(1)(v)(C) does not apply and the entity would be required to obtain relief in a letter ruling. ( Rev Proc 2004-48, Sec. 3.01 )
           

            Rev Proc 2004-48 provides a simplified method for requesting relief for those situations not covered by Reg. § 301.7701 3T, if the conditions highlighted below are satisfied. The simplified method is in lieu of the letter ruling process ordinarily used to obtain relief for late elections under Code Sec. 1362(b)(5) , Reg. § 301.9100-1 , and Reg. § 301.9100-3 . As a result, user fees don't apply to corrective action under Rev Proc 2004-48 . An entity that doesn't qualify for (or is denied) relief under Rev Proc 2004-48 may request a letter ruling. (Rev Proc 2004-48, Sec. 3.02

            Qualifying for relief. An entity may request relief under Rev Proc 2004-48 it meets all of the following requirements:
o it is an eligible entity as defined in Reg. § 301.7701-3(a) and intended to be classified as a corporation as of the intended effective date of the S corporation status;

o it fails to qualify as a corporation solely because Form 8832 was not timely filed (or was not deemed to have been filed under Reg. § 301.7701-3T(c)(1)(v)(C);

o it fails to qualify as an S corporation on the intended effective date of the S corporation status solely because the S election was not filed timely under Code Sec. 1362(b); and
o it has "reasonable cause" for its failure to file timely the S corporation election and the entity classification election. (Rev Proc 2004-48, Sec. 4.01)

            How to request relief. Within 6 months after the due date for the tax return, excluding extensions, for the first year the entity intended to be an S corporation, it must file a properly completed Form 2553 carrying the following at the top of the document: "FILED PURSUANT TO REV. PROC. 2004-48." An attached statement must explain the reason for the failure to file timely the S corporation election and the reason for the failure to file timely the entity classification election. (Rev Proc 2004-48, Sec. 4.02)

            IRS will determine whether the requirements for granting additional time to file the elections have been satisfied and will notify the entity of its determination. An entity receiving relief under this revenue procedure is treated as having made an election to be classified as an association taxable as a corporation under Reg. § 301.7701-3(c) as of the effective date of the S corporation election. ( Rev Proc 2004-48, Sec. 4.03 )

            Effective date. The new procedure is effective July 20, 2004, but any entity that meets the above requirements as of July 20, 2004 may seek relief under Rev Proc 2004-48 . The new procedure also applies to requests pending with IRS on July 20, 2004.

            RIA Research References: For late S elections, see FTC 2d/FIN ¶ D-1571; United States Tax Reporter ¶ 13,624.01; TaxDesk ¶ 612,014; TG ¶ 4748.

Taxation Law

Work Product Doctrine in Tax Cases
Kerry M. Lavelle
 

            As you may know, taxpayers and tax practitioners are becoming increasingly conscious of the importance of raising the attorney-client privilege and work product doctrine when the Internal Revenue Service seeks information about the taxpayer’s transactions. In tax cases, the privilege is governed by federal law. As a benefit to a taxpayer, generally, information obtained from an attorney is protected by the “attorney-client privilege” and nondiscoverable by the Internal Revenue Service. The general definition is: “When legal advice is sought, from a professional legal adviser in that capacity, the communication relating to that purpose, made in confidence, by the client, are at the client’s instance, permanently protected from the disclosure by himself or by the legal adviser except when the protection is waived.”

            The attorney-client privilege exists for the purpose of encouraging full and truthful communication between an attorney and his or her client. An attorney’s advice to a client is privileged only to the extent that the disclosure of that advice would disclose the client’s confidential communications. The privilege does not extend to communication between the taxpayer and an attorney relating to the preparation of a tax return. There are many exceptions to the attorney-client privilege and the work product doctrine.  Information communicated to an attorney to someone other than the client is generally not privileged.

            That is why in the event of any anticipated controversy with the Internal Revenue Service, clients must have their attorney hire all outside consultants, accountants, etc. and then the work product of the accountant and consultants have a high probability of being deemed “work product” and nondiscoverable by the Internal Revenue Service. As I stated above, the communications between the client and anyone relating to the preparation of a tax return is not privileged.

            There is no accountant/client privilege under the federal common law. This rule has been modified somewhat under I.R.C. § 7525 which creates a limited privilege for nonattorney tax practitioners by extending the common law attorney-client privilege to “tax advice” for taxpayer communications with a “federally authorized tax practitioner.”

            Beware, the I.R.C. § 7525 privilege does not apply to corporate tax shelters and criminal tax matters.

            The recent cases brought before the circuit courts have found that the identity of a client and the fact that he has become a client are matters that attorneys may not normally refuse to disclose.

            Currently, in litigation involving tax shelters, subpoenas issued to law firms that rendered legal opinions on certain tax shelters have proven to be fruitful for the IRS and the courts have ordered the law firms to turn over client lists relating to the tax shelter.

            Notwithstanding the above, the IRS honors the privilege related to general tax advice and tax planning for taxpayers.

            If you have any further questions in this matter, or may potentially be faced with these exact issues, don’t hesitate to e-mail me at klavelle@lavellelaw.com  for further clarification on this subject matter.

Intellectual Property Law

Protecting Your Intellectual Property
Theodore M. McGinn

            Today’s business world is as competitive as ever. Any successful business can be assured that sooner or later other firms will attempt to duplicate your business in an attempt to divert customers and profits away. If you are unable to protect your customer to adapt, your business will not succeed. One way to protect the customer base is to register a trademark with U.S. Patent Trademark Office.

A trademark is any mark or phrase that differentiates your product or services from that of your competitors. Once your business is successful in providing services or selling products, consumers will begin to identify your product or services with the respective mark. Consumers use such relations in making decisions on who to hire or which products to purchase in the future. Trademark rights allow you to prevent a competitor from exploiting your success by copying your trademark, or in other words attempting to fool the consumers into buying their products instead of yours. Without trademark registration, a business may have difficulty in enforcing their trademark rights.

Trademark rights derive by operation of law. Once a business has used a mark in commerce, then such businesses have rights with respect to such mark in the geographical region and for the product associated with such mark. Without registration however, bringing an infringement suit can be difficult. Litigation is very costly and time consuming and many times the prospect of a costly lawsuit discourages one from bringing the lawsuit in the first place.

Registration with the U.S. Patent and Trademark Office allows the party to recover all costs and attorney fees that is incurred in connection with such infringement suit. Furthermore, the damanged party has the right to recover punitive damages in certain instances. Those additional rights may often be the difference in preventing a party from infringing upon trademark rights.

In any lawsuit for infringement, the deciding issue usually is who was the first party to use such mark in commerce. Registration with the U.S. Patent and Trademark Office provides a prima facie case that you are entitled to such trademark. The burden is upon the infringing party to demonstrate they were the first to use their mark in commerce. This important shifting of the burden of proof may be crucial in any infringing suit. Without the registration with the U.S. Patent and Trademark Office, it may be difficult to prove when the mark was first used in commerce.

Although trademark rights often derive by operation of law, it is in your best interest to register with the U.S. Patent and Trademark Office. Registration provides you with the right to recover attorney fees and punitive damages. It also makes it easier to prove your case. Simply investing a few hundred dollars for registration is a very inexpensive insurance policy to protect valuable rights for your business.

Litigation

Attorney Fee Provisions - Watch Out!
Matthew J. Sheahin

           Obviously, most people know when they retain an attorney they will have to pay attorney fees for all of the work that their attorney performs on their behalf. However, many people do not understand that they may, in certain circumstances, be liable for their opponents attorney’s fees.

            Fortunately, Illinois is not a mandatory fee shifting state. Some jurisdictions have a fee shifting or “loser pays” policy for all cases, which means that whichever side you are on, if you do not prevail, you will be liable for payment of the winning party’s attorney fees, in addition to your own fees and any other damages awarded at trial. Although Illinois is not that type of jurisdiction, you still may be liable for your opponent’s attorney fees pursuant to either a specific federal or Illinois statute or by contractual agreement.

            There are a variety of federal and state statutes (i.e. ERISA, as well as many employee and consumer protection statutes) which specifically provide that the losing party pays the winning party’s attorney fees. If you are involved in a lawsuit involving one of these statutes, you must factor in your opponent’s potential attorney fees when assessing your exposure or risk in pursuing such a lawsuit. There are also statutes which provide for fee shifting in certain situations. For example, if an insurance company unreasonably delays processing your insurance claim, it may be liable for your attorney fees, in addition to the amount of your claim. Additionally, if a party is granted leave to pursue punitive damages and prevails on that particular claim, attorney fees are usually included in the award of punitive damages.

            The most common type of fee shifting occurs by operation of a contract. If you have a mortgage, you have agreed to assume the risk of your lender’s attorney fees. Therefore, by signing the Note and Mortgage, you agree that if you default on the loan and your lender is forced to file litigation to foreclose on the loan, you will be responsible for your lender’s attorney fees in addition to any arrearage, late fees and other charges that may be recovered by your lender. Most bank loans and business loans contain these type of fee shifting provisions. Therefore, if you default on the loan, you not only owe what is due on the note, but also whatever the lender must spend on attorneys in order to collect the outstanding amount.

            Frequently, in hotly contested trials for breach of contract, the losing party may be liable for more dollars in an opponent’s attorney fees than the underlying economic or compensatory damages. In most commercial loans, you will not obtain the loan unless you agree to the fee shifting, but you should be aware of the consequences. Furthermore, in private contracts, it is extremely important to be aware and receive legal advice about what occurs if one party breaches the contract and whether attorney fees are recoverable or whether such a provision should be integrated into the contract.  If you have any questions pertaining to this article, please feel free to direct your questions to msheahin@lavellelaw.com.

Contract Law
 

The Truth About Verbal vs. Written Contracts
Cameron R. Monti
           

            The caveat that states if you are going to enter into a contract "get it in writing" is excellent advice. However, it should not be misconstrued to mean that verbal or oral agreements are unenforceable in Illinois courts. Because of the Statute of Frauds, a small number of contracts must be in writing to be valid and enforceable. In Illinois, some common illustrations of contracts that must be in writing include agreements for the sale of real estate, leases for a term longer than one year, a promise for the sale of goods of $500 or more, and a promise perform under a contract that cannot be completed within one year, to name a few. Even these contracts, and others that generally must be in writing, nevertheless may be enforceable under various exceptions to the written-contract rules.

 
            For example, if you did what was required of you under an agreement that should have been in writing, the other party to the oral agreement generally cannot avoid enforcement of the contract even though it should have been in writing.

 
            If you performed your obligations, the other party typically cannot object just because the contract never was reduced to writing. Fairness may still play a role in enforcement. The so-called “technical defense” does not always prevail. That being said, in virtually all situations, it is in your best interest to create a written contract. The terms of an agreement, including the rights and duties of all parties to it, are more easily determined.
 

            With oral agreements, one person's word often collides with another's regarding important terms, or whether there was an agreement at all. Therefore, as you may see, even though an oral contract is often legally binding, one may run into evidentiary problems in proving the agreed upon terms or existence of the contract. A prudent person would direct his or her questions regarding the validity of any agreement to an experienced attorney that specializes in contract matters.
If you have any questions regarding an agreement or contract for which you are involved, please feel free to address your questions to cmonti@lavellelaw.com.

For past e-newsletter articles of interest, please visit the Lavelle Legal Services, Ltd. website at:         http://www.lavellelaw.com/newsletters/newsletter.htm.

 

This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.