e- NEWSLETTER

June/July 2005

Jessica M. Kirsch
Editor-in-Chief

Tax Law

SALES TAX CAN TAKE A BITE OF YOUR BUSINESS IF YOU FAIL TO PAY!
By: Cameron R. Monti
 

    Ahhhhh...the joy of owning your own business. There is nothing better than being your own boss, setting your own hours, and reaping the benefits you sew. However, as many business owners know, with great power comes great responsibility - one of which is the registration of your business with the Illinois Department of Revenue ("IDOR") and the payment of Illinois business taxes.

    Under the Illinois Administrative Code, it is unlawful for any person to engage in the business of selling tangible personal property at retail within the state without a Certificate of Registration from the IDOR. “Persons” include many types of businesses, including, but not limited to, sole proprietorships, corporations, limited liability companies, partnerships, and the like.

    Any business that is required to register for sales tax remittance is vulnerable to having its business registration revoked for failure to pay any tax it may owe over $1,000.00 in arrears. Those who continue to operate their business despite a revocation of business registration can be arrested and charged with a Class A misdemeanor.

    For business taxpayers who receive a notice of threatened business registration revocation, but believe the Illinois Department of Revenue is in error, the business owner may be granted a hearing date to adjudicate the potential revocation. That being said, it is clearly important to stay abreast of the payment of your Illinois business taxes.

    If you have any questions concerning this article, or you have an IDOR business tax issue for which you need assistance, please contact cmonti@lavellelaw.com.

Estate Planning

TRUST-OWNED LIFE INSURANCE
By: Kerry M. Lavelle

    Inevitably, the irrevocable life insurance trust (“ILIT”) is brought up in the estate planning process. The ILIT ranks just behind wills and revocable trusts in the frequency of its use. Unavoidably, questions that come up regarding the ILIT, include (i) who can be my trustee?; (ii) can I eventually change the trustee?; and, (iii) what are the trustee’s duties?

    Naming someone, or being named, as the trustee of an ILIT cannot be taken lightly. In recent years, a series of mechanisms that offer standards of care for ILITs, as well as other particular assets, include the Uniform Prudent Investor Acts. Also, the Office of the Comptroller of Currency has recently set up standards for the purchase of life insurance. In short, such laws set standards for trustees in the duty of managing and investing trust assets as any prudent investor would. Further, the trustees must act in what is known as a “fiduciary capacity,” in effect bearing the burden of carrying out the trust’s objectives for all beneficiaries, not just one.

    With these new standards, are trustees exposed to potential lawsuits involving trust-owned life insurance?

    Very possibly.

    The trustee could be held liable for insurance policies that are not performing as illustrated, policies that are not sufficient for current needs, and for the failure to exchange policies for newer products that may be more cost efficient.

    Clearly, the trustees are exposed to many potential suits regarding trust-owned life insurance.

    In terms of the question, “what happens if I want to dismiss my existing trustee?” remember the clients wishing to retain absolute power to remove and replace trustees, whether or not related or subordinate, are likely to face a challenge by the IRS.

    In Rev. Rul. 79-353, the IRS took the position that the settlor’s power to remove the trustee without cause was equivalent to the settlor retaining the trustee powers. Possibly, the adverse tax consequence of Rev. Rul. 79-353 could have been avoided had the trustee’s discretion to distribute income and principal been limited by an ascertainable standard.

    In 1992 (Estate of Wall v. Commissioner), 1993 (PLR 9303018), and most recently in 1995 (Rev. Rul. 95-58) it is now well settled that even if the insured (settlor) has possessed the power to remove the trustee and appoint an individual or corporate successor trustee that was not related or subordinate to the insured, the trustee’s power would not be attributed to the insured. Of course the operative language is whether or not the replacement trustee is “related” or “subordinate” to the insured.

    Therefore, careful drafting is necessary to avoid this potential pitfall. If you have any questions on this subject or if you need your existing wills or trusts reviewed by the attorneys at Lavelle Legal Services, Ltd., please do not hesitate to email me at klavelle@lavellelaw.com to set up an appointment.

Living Wills
 

Living Wills vs. Health Care Power of Attorney - Which is right for you?
By: Julie M. Dombrosky

   In the wake of the highly-publicized Terri Schaivo case, many clients have inquired about living wills; however, the Illinois statutory living will (755 ILCS 35/1 et seq.) is much narrower than the popular conception of a “living will”. Illinois also provides a form for a power of attorney for health care (HCPOA) (755 ILCS 45/4-1 et seq.), which is far more broad than the living will. In Illinois, the HCPOA trumps a living will, whereas in other states, the precedence is reversed.
 

    The main distinction between an Illinois living will and an HCPOA is that the living will places medical treatment decisions in the hands of your attending physician, whereas the HCPOA puts decision-making authority in the hands of a person or persons designated by you.
 

    A living will applies only when you suffer from a terminal condition and offers guidance as to your wishes regarding death delaying procedures for your physician to follow when making decisions on your behalf.

    On the other hand, the HCPOA applies in any instance, permanent or temporary, when you are unable to make your own decisions regarding medical treatment. When you execute an HCPOA, you appoint an agent (along with successors to act if your primary agent is unwilling or unable to act) to make decisions on your behalf should you become incapacitated and unable to make medical decisions for yourself. The HCPOA also allows you to express whether or not you would like to make an anatomical gift (be an organ donor), and allows you to choose among statements reflecting your wishes as to the withholding or removal of life-sustaining treatment.
 

    Accordingly, is it generally adequate to have either a living will or an HCPOA, and for most people, it is preferable to have only an HCPOA. If both documents exist and there is a contradiction between them, the HCPOA supercedes the living will unless there is no agent named in the HCPOA who is willing and able to act on your behalf. If the two documents are drafted together, a living will may give additional guidance to the agent under the HCPOA and may need to be invoked by your physician if your agent is unavailable.
 

    If you have neither a living will nor an HCPOA or any other advance directive for medical treatment, then the Illinois Health Care Surrogate Act (HCSA) (755 ILCS 40/1 et seq.) may come into play. The HCSA sets forth a list of "surrogate decision makers" who are authorized to make medical decisions on your behalf if you have a terminal condition, an incurable or irreversible condition, or are permanently unconscious. The persons authorized to act as surrogates are listed in the statute in the following order or priority: (1) your guardian of the person, (2) your spouse, (3) any adult child, (4) either of your parents, (5) any of your adult siblings, (6) any of your adult grandchildren, (7) a close friend, and finally, (8) your guardian of the estate.
 

    Your wishes regarding life-sustaining measures are very personal; accordingly, the execution of any advance medical directive should be followed by a conversation with the persons you choose as your agents to make clear your feelings on the matters contained in the directive. This can ease the strain on your loved ones if the day comes when they face difficult decisions about your medical treatment. Most importantly, never assume that your family members or friends know your thoughts on this matter. Have these conversations right now, and put your wishes in a legally binding writing. This creates peace of mind – both for you and for those who may one day have to make decisions on your behalf.
 

    If you would like to prepare a living will or an Illinois statutory power of attorney for health care, or if you have other questions about this or other estate planning issues, please feel free to contact jdombrosky@lavellelaw.com.

Corporate Law
 

Protecting Your Intellectual Property From Piracy
By: Ted McGinn

    From time to time, we all have ideas that, if given the proper amount of resources, could become a highly profitable product or service. How do you go from the idea to a successful-product or service on the market without having your ideas stolen by a larger corporation? The best way to protect yourself is to have a confidentiality agreement executed prior to disclosure of your idea.

    A confidentiality or disclosure agreement is an agreement whereby you agree to disclose your idea in exchange for their agreement to keep such idea confidential and to consider the idea only for purposes of determining whether or not to enter into a licensing agreement or purchase agreement. The agreement should contain provisions that acknowledge that the idea belongs to you and entitles you to the right to a permanent injunction upon their breach and for the recovery of damages including punitive damages and attorney fees.

    In order to enforce the agreement, a court of law will have to review the agreement and determine whether or not it as been breached. Critical to such determination would be a clear and concise description of the idea or intellectual property in question. If the idea is a patent, you should have a prototype. If the idea is a trademark or trade secret there should be a clear and concise description of the idea in writing and attached to the agreement. Without such prototype or description of the idea, a court will not be able to determine if there has been a breach and therefore, may refuse to enforce the terms of the confidentiality agreement.

    Being a small player with a large corporation does not mean you will be run-over. A confidentiality agreement will go a long way towards protecting your rights and preventing the piracy of your idea.
 

CIVIL CASE
 

A Case of Civil Arrest
By: Matt Sheahin
 

    Most business people deal with their legal issues in a timely manner. However, on occasion, some people may ignore certain legal proceedings because they believe it is only a civil matter and it cannot possibly harm them personally. Although you certainly would not expect to be arrested in a civil case, it can happen to you if you do not address your legal matters in a timely manner.

    If a creditor previously secured a judgment against you and/or your corporation, and you have not satisfied the judgment by paying the creditor in full or pursuant to some negotiated settlement, the creditor will, in all likelihood, institute supplementary proceedings in an effort to collect on its judgment.

    Supplementary proceedings generally involve a creditor issuing and serving you with a citation to discover assets. Essentially, you must come to Court at the appointed time and submit documents which identify your assets, liabilities, financial accounts, etc. The creditor or their attorney may also examine you under oath regarding your finances. The purpose of the proceeding is to identify any and all assets which can be liquidated to pay the judgment. If the assets are limited, you can frequently negotiate a payment plan for a compromised amount and dispose of the proceeding in that manner. However, some people ignore the citation completely. This is a mistake.

    If you fail to appear for the hearing on a citation to discover assets, the Court will issue a Rule to Show Cause why you should not be held in contempt of the Court. This step requires that you appear in Court at the next scheduled date and time and explain to the Court why you were unable to appear for the citation hearing. If you fail to appear at the Rule to Show Cause hearing, you may be subject to arrest.

    Once you do not appear for the hearing on the Rule to Show Cause, the Court will issue a body attachment and direct the Sheriff’s office to arrest you and bring you to Court. It is basically a 3 strikes and you’re out rule. Although it is not a criminal matter, there are serious repercussions for ignoring Court orders, which may even include your arrest.

    The lesson here is to seek legal advice from a professional as soon as you are served with any legal document. In this manner, you can protect yourself and avoid the many pitfalls that lie ahead in the litigation process.
 

TAX REFUNDS
 

Court Found That Statute Of Limitations Did Not Apply To Bar Refund Of Taxes Erroneously Paid More Than Three Years Ago
By: Tim Hughes
 

    A federal district court has allowed a refund of erroneously paid taxes even though the claim for refund was received after the expiration of the three year period for filing refund claims under Code Section 6511. The court allowed the refund in the case of Wachovia Bank v. U.S. (DC FL 3/18/2005), 95 AFTR 2d 2005-817 because it found that Section 6511 does not apply where a return is not required.
 

    Background Facts. Wachovia Bank was trustee of a trust that was exempt from tax under Code Section 664(c) as a charitable remainder trust. Wachovia erroneously filed returns and paid tax for the trust for 1997 and 1998. After realizing its error, it sought refunds, which IRS denied because the requests were received after the expiration of the three year period for filing administrative refund claims under Section 6511(a). Wachovia then sued in district court to recover the erroneously paid taxes.
 

    Taxpayer argument. Wachovia contended that the three year limitations period for filing refund claims in Code Section 6511(a) did not apply to its claim because of the language of Section 6511(a) which states a "[c]laim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid." Wachovia argued that the effect of the italicized language is to restrict the application of Section 6511(a)'s first sentence to refund claims filed by taxpayers who are required to file a return for the particular tax they paid. Since the trust was not required to file a return, Wachovia argued that the timeliness of its administrative refund claim was not governed by Code Sec. 6511(a).
 

    Wachovia also pointed out that its claim was made within the six years allowed generally for the bringing of "civil actions against the United States." (28 USCS 2401(a)) It contended that the district court should apply the six year statute of limitations to its claim.
 

    IRS argument. IRS argued that Wachovia's failure to file a timely refund claim deprived the court of jurisdiction to consider the matter. It said that the 3-year limitations period in Section 6511 applied to the case because the first sentence of Section 6511(a) cannot be read in isolation from the second sentence, which pertains to refunds of taxes payable by stamp. Under the IRS view, the two sentences, read together, reflect a division of administrative refund claims into: (1) claims for taxes payable by return, and (2) claims for taxes payable by stamp. Therefore the IRS argued that because income taxes are payable by return, the refunds for overpayments of income taxes are governed by the limitations set forth in the first sentence of Section 6511(a , regardless of whether a return was required for the income taxes erroneously overpaid.
 

    Court ruled with taxpayer. The federal district court agreed with Wachovia because it found the language of Section 6511 to be unambiguous. It interpreted the phrase "in respect of which tax the taxpayer is required to file a return" as meaning that the statute applies only to taxpayers who are required to file returns. Since Wachovia was not required to file a return, the Court held that its refund request was not governed by the three year limitations period in Code Sec. 6511. Accordingly, it ordered a refund.
 

    Conclusion. The court's reasoning may open the door to vast new opportunities for refunds that might previously have been thought to be barred by Code Section 6511. For example, under the court's reasoning, taxpayers who weren't required to file because their income was below the filing threshold for a particular year may be able to get a refund of tax paid through withholding or estimated tax payments even after the Section 6511 limitations period has expired. That's because, since a return was not required, Section 6511 would not apply under the court's reasoning. However, because the court's reasoning could open up many new refund claims, it would seem likely that IRS would appeal. Indeed, the First Circuit has already sided with IRS on this issue (See Little People's School Inc v. U.S., (1988, CA1) 61 AFTR 2d 88-931). Which split in the federal districts leaves the opportunity for claiming old refunds questionable. Do you have an old refund that you have given up on? If yes, please contact me at thughes@lavellelaw.com to discuss.
 

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.