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                                                                    Kelo - Using Eminent Domain For Economic Development
                                                                                                                                By Kerry M. Lavelle

    The Supreme Courts recent decision in Kelo v. City of New London had divided the country as sharply as the issue divided the Supreme Court itself. In a 5-4 ruling, the Supreme Court upheld the use of eminent domain power for economic development purposes, concluding that the City’s development plan satisfied the “public use” requirement in the Fifth Amendment’s taking clause, even though the land will ultimately will be used for private development.

    The development reignited a national trend over condemnation of private property for private use. Some commentators believe that this is the most controversial decision in the 2005-2006 term of the Supreme Court.

    The City of New London, Connecticut approved the large-scale development project in the year 2006 after years of economic decline. The development plan, created by the New London Development Corporation (“NLDC”), was designed to create jobs, generate tax revenue, and build momentum for the city’s revitalization.

    The project encompassed 90 acres of land to develop a small urban village with a water front conference hotel, restaurants, shopping, and marinas for both commercial and recreation use. Other portions of the plan included a state park, public parking, office space, retail establishments, approximately eighty (80) new residences, and a pedestrian “river walk” connecting various components of the project.

    The NLDC successfully negotiated for the purchase of most of the real estate it needed and then initiated condemnation proceedings against landowners who are unwilling to sell. Nine property owners including Suzette Kelo, brought suit, claiming that the condemnation would violate the Fifth Amendment “taking clause”. The Connecticut Supreme Court upheld the proposed taking, and the U.S. Supreme Court granted certiorari to determine whether or not the city’s decision to take the property for purposes of economic development satisfied the “public use” requirement of the Fifth Amendment.

The “public use” requirement is obvious when the Government condemns the property and uses it for military base or a courthouse. The Court also recognized that the “public use” requirement is also met when property is transferred to a private party that makes the property available for the general public’s actual use such as with railroads, and public utilities. However, Kelo, has a more problematic element in that the Court had to determine whether or not the taking served a “public purpose”. The Court had to decide whether or not “public use” has the same meaning as “public purpose”.

After analyzing Justice Stevens’ opinion, and a concurring opinion by Justice Kennedy, Kelo established that economic development constitutes a permissible “public use” under the Fifth Amendment under certain circumstances. After analyzing Justice O’Connor’s and Justice Thomas’ descents as well as the Stevens’ opinion, the controversy is far from over. Justice Stevens stated, in his opinion, that States would be free to enact legislation and be more protective of private property rights. If you have any questions concerning this article, please contact Kerry Lavelle at klavelle@lavellelaw.com.

The biggest tax development in the past quarter was passage of the Tax Relief and Health Care Act of 2006, which retroactively extended key provisions that had expired at the end of 2005 and made other key changes. However, there were a number of other important tax developments that occurred in the past three months that may affect you, your family, and your livelihood. I have summarized these developments below. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

IRS explains how individuals claim three extended deductions on paper forms for tax year 2006 that it won't be updating. In November of 2006, when the IRS sent paper forms to the printer for tax year 2006, Congress had not yet retroactively extended the deductions for state and local sales tax, higher education tuition and fees, and educator expenses. As a result, these paper forms don't reflect these deductions, all of which were subsequently revived by the Tax Relief and Health Care Act of 2006, which was signed into law on Dec. 20, 2006. The IRS has said that it will not reprint the paper forms, such as Form 1040, for 2006. Instead, it explained that individuals using paper forms should claim the extended deductions on their 2006 returns as follows:

IRS highlights key charitable contribution changes for individuals. The IRS has alerted individuals to the following key charitable contribution changes made by the Pension Protection Act of 2006 that may affect the 2006 return and the 2007 tax year:

Full credit for all non-Toyota qualifying hybrids through Mar. 31, 2007, but dollar saving impact may be reduced by AMT wrinkle. Taxpayers who purchase new qualified hybrid motor vehicles may claim a tax credit that varies in amount with the car model, but the credit begins to phase out after the manufacturer sells a fixed number of hybrid vehicles. The IRS has announced that the full hybrid credit remains available through at least Mar. 31, 2007, for qualified hybrid vehicles manufactured by Honda, Ford, and GM. Qualifying Toyota hybrids bought after Sept. 30, 2006 yield a reduced credit for their buyers. However, the tax-saving impact of the hybrid vehicle credit may be lessened, or even eliminated, by a complex AMT rule. This rule says the hybrid credit can only offset the excess of the regular tax liability (reduced by certain credits) over the tentative minimum tax for the tax year. As a result, even a person who is not subject to the AMT may not be able to claim the maximum allowable credit, or any credit, for the qualified vehicle that he or she buys.

First Nissan vehicle eligible for hybrid credit. The IRS has announced that the 2007 Nissan Altima Hybrid vehicle is eligible for hybrid motor vehicle tax credit. The credit amount for the vehicle, which is the first Nissan product certified for the credit, is $2,350.

Simplified telephone excise tax refund for businesses. Last year, the IRS announced that certain long-distance telephone excise taxes had been unlawfully collected, and said that refunds could be claimed on the 2006 return. Instead of having to go through many records to determine the actual excise tax paid during the refundable period (after Feb. 28, 2003, and before Aug. 1, 2006) on long-distance telephone service, businesses (as well as tax-exempt organizations) may figure their refund amounts by using an IRS-approved Estimation Method (EM). The EM involves comparing two telephone bills to determine the percentage of telephone expenses attributable to the long-distance excise tax. The bills to use are those with statement dates in April 2006 and September 2006. An organization first figures the telephone tax as a percentage of its total April 2006 telephone bill (which included the excise tax for both local and long-distance service) and its September 2006 telephone bill (which included only the tax on local service). The difference between these two percentages is applied to the quarterly or annual telephone expenses to determine the refundable amount. The refund is capped at (a) 2% of the total telephone expenses during the refundable period for businesses and tax-exempt organizations with 250 or fewer employees; and (b) 1% for those with more than 250 employees. Note that the IRS had earlier announced that individuals may claim “safe harbor” long-distance telephone excise tax refund amounts, ranging from $30 to $60, on line 71 of Form 1040 (or by filing Form 1040EZ-T if they don't need to file a return for 2006).

2007 standard mileage rate for business auto use. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 48.5¢ for business travel after 2006, up 4¢ from the 44.5¢ amount for 2006. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. You may, however, claim separate deductions for parking fees and tolls connected to business driving. The standard mileage rate can be used for a purchased auto only if a number of conditions are met. For example, you can't use it if you previously depreciated the auto under the regular accelerated depreciation rules. Related business-auto mileage changes: For 2007, employers that require employees to supply their own vehicles may reimburse them at 48.5¢ a mile for employment-connected business mileage, whether the vehicles are owned or leased. The reimbursement will be tax-free to the employee if he or she substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company vehicles during 2007 ($15,100 for a car, $16,100 for a van or truck) may be valued at 48.5¢ per mile if certain conditions are met.

Other mileage deduction rules for 2007. For 2007, individuals who use a car to get medical care or in connection with a move that qualifies for the moving expense deduction may deduct 20¢ per mile (was 18¢ per mile for 2006). The mileage rate for driving an auto for charitable use during 2007 remains unchanged at 14¢ per mile.

If you have any questions regarding this article please contact Tim Hughes at thughes@lavellelaw.com.

For 2007, nearly 100 new laws went into effect in the State of Illinois on January 1, 2007. Below is just a sample of a few of the laws you should be aware:

• Illinois consumers will pay between 22 to 55 percent more for electric service starting this month, as a 10-year state-mandated rate freeze expires.

• Homeowners and landlords must now install carbon monoxide detectors in their residences and buildings. Owners of buildings that use fossil fuels to cook, heat or provide hot water or that are connected to an enclosed garage must install the detectors within 15 feet of all rooms used for sleeping.

• New law requires clear and convincing evidence that private land is necessary for a public use before it can be seized. The new law also requires governments to reimburse property owners for relocation expenses and, in some cases, legal fees. Additionally, the new legislation allows trial courts to reset the valuation date of the property if the trial begins more than two years after the filing. Currently, Illinois law only requires “just compensation” for property owners, which is the fair market value of the property plus any damage to associated property not taken through eminent domain.

• A new state law permits patrons to re-cork and take home wine from restaurants as long as it the wine is wrapped up in a tamper-proof bag.

• Copycat musical groups could face fines of up to $50,000, have their performance licenses suspended or be required to pay damages for misrepresenting themselves as the original artists. All live acts will have to advertise they're performing a salute or tribute if they use the name, songs and personas of another group.

• Autistic children will now receive access to new treatments by requiring all state and local insurance plans, as well as private insurance plans offered by many employers, to pay for the treatment of pervasive developmental disorders. It also requires group health benefit plans to provide coverage for 20 additional outpatient visits for speech therapy.

• Law enforcement agencies have more tools to protect Illinois families and communities from sex offenders. The law authorizes GPS monitoring of paroled sexual predators, includes stricter guidelines for sex offenders who are near child care facilities, prohibits custody or visitation by a father of a child who is convicted of sex crimes that resulted in the conception of the child, and requires clarification of disclosure of sex offenses in teacher endorsement or certification.

• People trained in first aid or medical responses are protected from being sued for trying to help injured people. The new laws aim to alleviate worries by “Good Samaritans” that they could be sued for helping someone who is seriously injured.

It is recommended that all persons apprise themselves of all newly enacted and adopted laws and legislation in Illinois. If you have any questions concerning the laws in the article or any other new laws, please email your questions to cmonti@lavellelaw.com.

    As one of its last official acts, the 109th Congress recently passed the Tax Relief and Health Care Act of 2006, a wide-ranging measure that preserves a variety of popular tax breaks for families and businesses, and includes new tax breaks as well. The new law is almost overwhelming "good news" for taxpayers, particularly, because it retroactively restores and extends key tax breaks that went off the books at the end of 2005. These include the election to deduct state and local general sales tax, the deductions for higher education expenses and for schoolteachers' books and supplies, and the research credit.

    However, the new law also will prove to be a chal¬lenge when the time comes to file 2006 returns. That's because the IRS had to send key forms and schedules for the 2006 year off to the printer before the new law extended these tax breaks. The IRS has said it will not reprint forms and schedules to reflect the new law, but will, instead, issue supplementary instructions. In other words, filing 2006 returns could be a real chal¬lenge for the uninformed, and refunds could be delayed because the IRS will have to retool its com¬puters and procedures to reflect the new law's changes.

                                                                                                New Law Changes Affecting Individuals
Here's a summary of the most widely applicable tax breaks for individuals that have been restored and/or extended and for how long:

... The tax deduction for qualified higher education expenses is restored for 2006 and extended through 2007. It allows individuals to deduct up to $4,000 (depending on their income) of higher education expenses instead of claiming the Hope or Lifetime Learning tax credits. The deduction is taken "above-the-line" (that is, it is subtracted to arrive at adjusted gross income), so it may be claimed by all individuals regardless of whether they itemize their deductions.

... The tax break allowing individual taxpayers to elect to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes is restored for 2006 and extended through 2007. You have two options for determining deductible sales tax: (1) actual sales tax paid if receipts are maintained for IRS verification; or (2) approximate sales tax paid as estimated in tables provided by the IRS plus sales tax on certain additional items (such as a boat or car) that may be added to the table amount. The IRS said it will be issuing a separate publication carrying optional sales tax tables for the 2006 tax year; these tables will not be in the Form 1040 instructions.

... The tax break permitting elementary and secondary school teachers and certain other school professionals to deduct up to $250 of out-of-pocket costs incurred to purchase books, supplies and other classroom equipment is restored for 2006 and extended through 2007. This deduction is claimed "above the line."

... The 30% tax credit for the purchase of residential solar water heating, solar electric equipment and fuel cell property is extended through Dec. 31, 2008. The maximum credit depends on the type of energy efficient property that you buy.

... The election to have excluded combat pay counted as income for purposes of calculating the earned income tax credit (EIC) is extended through 2007. This election could result in an otherwise eligible taxpayer claiming the EIC, a refundable credit, even if he or she doesn't have any other earned income.

... The tax break allowing first-time homebuyers in the District of Columbia to claim a tax credit of up to $5,000 on the purchase price of the home is restored for 2006 and extended through 2007.

... New contributions to Archer medical savings accounts (Archer MSAs) may be made through 2007. New contributions may be made after 2007 only by or for individuals who previously had Archer MSAs, and employees who are employed by a participating employer. Individuals may make tax-deductible contributions to an Archer MSA to pay for health care expenses. The distributions are tax-free if used to pay for eligible medical expenses.

The Tax Relief and Health Care Act of 2006 also include these new tax breaks for individuals:

... For the 2007 tax year only, there's a new itemized deduction for the cost of premiums for mortgage insurance on a qualified residence. The deduction is phased-out for taxpayers whose adjusted gross income exceeds $100,000.

... After 2006, a limited relief provision helps individuals who wound up with AMT (alternative minimum tax) problems because of their exercise of incentive stock options. The relief provision, which is complex, allows individuals to take advantage of a refundable credit with respect to certain long-term unused alternative minimum tax (AMT) credits existing before Jan. 1, 2013.

... The new law includes many changes for health savings accounts (HSAs), including: allowing one-time rollovers from health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) into HSAs (after the enactment date of the new law and before 2012); repeal of the annual plan deductible limit on HSA contributions (after 2006); expanded contributions limit for part year coverage (after 2006); and allowing one-time rollovers from IRAs into HSAs (after 2006).

New Law Changes Affecting Businesses
Here's a summary of the most widely applicable business-related tax provisions that have been restored and/or modified and extended, and for how long:

... The research and development (R&D) credit is restored for 2006 and extended for 2007. In addition, for tax years ending after 2006, the new law enhances the credit by (1) increasing the rates of the alternative incremental credit and (2) creating a new alternative simplified credit that does not use gross receipts as a factor (so that newer businesses can access the credit).

If you have any questions regarding tax relief and the Health Care Act of 2006 please contact Ted McGinn at tmcginn@lavellelaw.com.

    The term “Non-Voting Cumulative Preferred Shares” is something of a mouthful. Breaking it down piece by piece, though, may reveal this to be a great solution for your small businesses. If you need to raise new capital without giving away control of the company, this solution may be right for you.

    Anyone who has run their own business knows that, sometimes, you need some working capital. This is usually done by giving an investor stock in exchange for money. The investor is then a shareholder in the company, with the right to vote for the Board of Directors, attend annual shareholder meetings, and so on. Under this investment model, the investor gains a percentage of control within the company by purchasing “common stock”. Most small business owners would do anything to avoid giving away this control. But it is considered a necessary evil in order to grow a business.

    What many small business owners do not realize is that, often, their investors do not want the control they are given. The investor wants to earn a return on their investment, nothing more. For a busy investor, the prospect of attending board meetings and shareholder meetings is more of a hassle than a benefit. In other words, the owner does not want to give up control, but the investor may not want the control anyway.

    The solution is to give investors shares that entitle them to a potential return on their investment, but without giving them control of the company. Breaking down the term “Non-Voting Cumulative Preferred Shares” one word at a time will reveal how this goal is achieved, along with some major advantages, and a few important disadvantages.

    “Preferred Stock” One reason that people purchase stock in a company is to get dividends. When a company earns a profit and has cash available, the Board of Directors will vote on whether to “declare a dividend”. When that happens, the company pays out its available cash to each stockholder. Preferred stock gets paid a specific amount of money for each share. So someone holding 100 shares of “$10 Preferred Stock” would get 100 x $10, or $1,000. The other key advantage is that preferred shares always get paid first. Anyone holding common stock will only get a dividend if there is money left over after the preferred shares are paid. So many investors like preferred shares because 1) the amount they will get in dividends is pre-set, and 2) they are first in line for any dividend that is declared.

    “Cumulative” Notice from the paragraph above that preferred shares get paid first, but only if the Board of Directors declares a dividend. If there is no cash available for a dividend, or the Board decides to use the cash for something else, a normal preferred share gets paid nothing until a dividend is declared. However, this is not true for “cumulative” preferred shares. Just like regular preferred, these shares pay a certain amount for each dividend. So a share might read, “$10 Cumulative Preferred Share”. But with a cumulative share, if the company doesn’t declare a dividend, they actually accumulate a dividend anyway. For example, a company issues 100 shares of cumulative preferred $10 stock, but has no cash to pay a dividend in the first year. But in the second year, cash is available. Quite simply, the unpaid dividend is paid first. If any money is left over, then the dividend for the current year is paid. If many years go by without declaring a dividend, then the oldest accumulated dividend is always paid first when money eventually becomes available. This is a great solution for an investor that wants a certain return, but is willing to wait in necessary. Of course, there is still risk to the investor. If the company fails before ever having enough cash to pay a dividend, then the investment is lost.

    “Non-Voting” The simplest term to understand here is also the most important. Non-Voting Cumulative Preferred shareholders do not have the right to vote for the Board of Directors. This means that you, the business owner, can still run the company the way you see fit without daily interference from an investor who voted himself onto your Board. Maybe you are a one-man-operation and don’t want anyone else on the Board with you. Issuing non-voting stocks allows you to give value to your investor, without the need to include them in the management decisions of the business.

    So why not simply offer “non-voting common stock”? The answer is simple: supply and demand. The chance of finding any investor that would want that stock is very slim. If you are going to eliminate the right to control the company, you need to add in some other features to sweeten the deal. With preferred stock, the deal is sweetened by the fact that the investor gets a share that is 1) paid first, and 2) accumulates if it’s not paid. For many investors, the predictability and simplicity of figuring out the return on these shares is enough to outweigh any desire they might have to take a percentage of control.

    There are disadvantages to this system, though. The biggest is that an S-Corp can only have one type of stock. So as soon as you issue preferred shares, you lose your eligibility to operate as an S-Corp. This has important tax implications. But it is important to remember that S-Corp status can save on taxes, but without the capital to grow your business, the ability to save on taxes may not mean very much.

    You need to look at your business, the growth to be gained with an infusion of cash, and the cost associated with losing your S-Corp status. It is very possible that the benefit of the cash will outweigh the price of the corporate status change. There are also countless other options available to you as well. The stock you sell can be custom designed to come with any features or limitations you like. This article describes just one such design. Other options include an LLC, which can issue unlimited varieties of shares (called “units”) without affecting the tax status of the company. Give us a call to discuss the pros and cons, and which option is right for your small business.

    An important note: There are strict laws and rules about how you can offer stock in your company. Never promise an investor that they will get a return on their investment, and always remind them that their investment is at risk. Before you start to offer your new shares to anyone, especially if you plan to do so in writing, give us a call to be sure you obey all federal and state laws.

    We look forward to learning about your small business, and working with you to find the right solutions to create, fund, and maintain your growing business venture. If you have any questions please do not hesitate to contact James Voigt at jdvoigt@lavellelaw.com.

Power of Attorney For Health Care - What Is It and Why do you Need One?
By Lauren E. Schaaf

    The term “power of attorney for healthcare” is relatively new. Most people may recognize the document by the name “living will,” or a “do not resuscitate.” A power of attorney for healthcare is created, in Illinois, by the Illinois statute, 755 ILCS 45/3-3 (West, 2006). When creating your power of attorney for healthcare, you must decide who you want to give the responsibility of instructing any healthcare provider, who is providing treatment to you, that you do no wish to be kept alive by any extraordinary lifesaving measures should you be incapable of sustaining life on your own. This power you grant to a third party only becomes effective if you are not able to understand and appreciate the nature and consequences of health care decisions in order to reach an informed decision.

    Having a power of attorney for healthcare is necessary in the event you become injured, are suffering from an irreversible life threatening condition and do not wish to be kept alive on life support. In the absence of a properly executed power of attorney for healthcare, any health care physician providing treatment to you is required to keep you alive by any and all means necessary regardless of your quality of life.

    The most important consideration when having an attorney draft your power of attorney for healthcare is who you name as your agent. The agent is the person named to carry out your wishes by appearing before the physician providing treatment to you and submitting your power of attorney for healthcare document explaining your wishes regarding the administration of life support. When naming your agent the following considerations should be taken: is the person you name capable of carrying out your wishes? Sometimes, naming a third party you are extremely close with is a bad idea because the person may not want to let you go, and may circumvent your wishes with his or her own by hiding the fact that you ever executed a power of attorney for healthcare. Another consideration is the physical location of the agent you name. Does the person live nearby and could he or she appear in a timely fashion at the hospital where you are likely to be taken? Naming a person who lives out of state may present a logistical problem for the agent and should be taken into consideration. Finally, is it likely the person you name will outlive you? For instance, adult children are generally advised against naming their parents as their agents because it is likely the document won’t stand the test of time since most individuals’ parents pre-decease them.

    Have you considered whether you would want to be kept alive on life support should you be unable to sustain life on your own? If you are against the personal administration of life support have you executed a power of attorney for healthcare? Do you know an attorney who can help make sure you name an appropriate individual to carry out your wishes and make sure the document is properly executed? If not, contact Lauren E. Schaaf of Lavelle Law, Ltd. at lschaaf@lavellelaw.com for the assistance you need.

This newsletter is a publication of Lavelle Law, 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.