Real Estate Law:
TITLE INSURANCE: WHAT IS IT? WHY DO YOU NEED IT

People buy title insurance because the lenders require it. Naturally, home purchasers want the loan to go though, so everyone buys title insurance. Except what is title insurance? When you buy a home you want to make sure that the people selling it actually have full and legal title. Title insurance is a one-time premium paid to a title company at the closing that guarantees ownership of a particular piece of property. It also guarantees that no one else has a claim to that property. One can't tell by looking at a property or at the deed whether the title to that property is good, and no one will require you to obtain title insurance, unless you are obtaining a mortgage. Title insurance pays for events that occurred before the policy's effective date and is the best protection you can have against any claims that may arise out of the past.

Prior to the arrival of title insurance, the conveyance of property did not include any form of guarantee or insurance. A purchaser had virtually no guarantees that the property he was buying was even owned by the person who was selling it. The first title insurance company was organized and opened in 1876 in Philadelphia. There was large consumer demand for greater security, as well as expedience in real estate transactions, and so the title insurance industry grew rapidly and spread to other major cities. Unlike other types of insurance (health, malpractice or auto) that protect against future occurrences, title insurance protects against losses arising from unknown or undisclosed defects in the past chain of title.

A policy of title insurance is like a pre-paid legal agreement. The title insurance company will provide legal defense against any challenges to an insured's title (depending, of course, upon the type of policy coverage) and will reimburse the insured financially for any losses as a result of hidden defects in ownership rights. Here are some of the more common possible title defects that title insurance covers: forged deeds, releases, or wills; liens for unpaid estate, inheritance, income, or gift taxes; disputed release of prior mortgage or lien, or ineffective release of prior mortgage; mistakes in recording of legal documents, or deeds recorded but improperly indexed and therefore not found through a title search; false impersonation of the true owner of the property; and deeds by minors, by persons of unsound mind, or by persons supposedly single but in fact married.

Although there are many unresolved issues that can arise after you have a deed to the newly purchased property, and recorded that deed at the County Recorder's office, title insurance protects you against those issues. Your lender wants to make sure you have the money to pay the note and that you are not forced to spend your money on legal fees defending your title. This is why lenders require purchasers to buy title insurance, and why purchasers should be happy to accommodate.

Personal And Business Tax:
ILLINOIS TAX AMNESTY PROGRAM - Pay Now or You'll Pay Later!

Beginning October 1, 2003 and ending November 17, 2003, most Illinois individual and business taxpayers can (and should) take advantage of a 45-day Illinois Tax Amnesty (ITA) program run by the Illinois Department of Revenue (IDR) that provides for a complete waiver of penalties and interest for taxpayers who voluntarily pay back taxes, in-full, owed to the IDR. No installment payments are permitted. The tax periods eligible for tax amnesty include those tax periods between July 1, 1983, and June 30, 2002. Moreover, those who have failed to file or incorrectly report liability due on previously filed returns, may participate in the program.

The ITA program does, however, have its limitations. Taxpayers who are party to a criminal investigation or who have civil or criminal litigation pending for any tax collected by the IDR are not eligible for ITA. Also, not all taxes, fees, and penalties are included under the program. Such excluded items under ITA are: (1) taxes not collected by the IDR; (2) lien filing and lien release fees; (3) bad check penalties; (4) Coin-Operated Amusement Device taxes; (5) International Fuel Tax Agreement taxes; and (6) and accepted Offer In Compromise.

Those taxpayers who elect not to take advantage of the ITA will be subject to harsh repercussions, as the ITA provides that penalties and interest charges will be doubled if an eligible taxpayer fails to pay his or her tax obligation during the amnesty period. Those who may fear that participation in the ITA program may "raise a red flag" to the IDR to trigger an audit, the IDR has stated that participating in the ITA does not increase an taxpayer's risk of an audit. In fact, the IDR website clearly states that taxpayers who accurately disclose all of their tax liabilities during the amnesty period will lower their chances of being identified for later audit by the IDR.

In sum, for those taxpayers who meet the eligibility requirements of the ITA program, it is in their best interest to participate and take advantage of the IDR's brief period of clemency. For more information, please feel free to contact Cameron Monti at 847/705.9654.

Tax And Estate Planning:
HOW LOW INTEREST RATES EFFECT TAX AND ESTATE PLANNING

Most homeowners have taken advantage of lower interest rates by refinancing existing mortgages, or purchasing larger homes that were otherwise unaffordable at previous interest rates. The lower rates also may have a significant impact on various tax and estate planing strategies. Lower interest rates effect the income, estate and gift value of many types of transfers.

The value of annuities, life estates, term interests, remainders and reversions for estate, gift and income tax purposes are determined under tables issued by the Internal Revenue Service. Valuation in any given month under these tables might be higher or lower than the value in the earlier or later month because the interest factor under the tables changes monthly.

Some strategies are benefited by lower rates.

For example, private annuities offer a number of income, gift and estate tax advantages. In a typical, private annuity transaction, a parent transfers his and her property to his child in return for that child's unsecured promise to pay the parent a fixed periodic income stream for life. If the fair market value of the property transfer equals the present value of the annuity that the child owes to the parent, there is no gift tax due. Entering into the private annuity when interest rates are lower results in a lower annual payment amount that the child needs to make to the parent to prevent gift tax from arising on the transfer.

Similarly, in grantor retained annuity trusts (GRAT), the parent retains an annuity interest for a specified term once the property is deposited in the GRAT trust. At the expiration of a specified term, the property goes to the child or other individuals named in the GRAT. Gift taxes may be due, but only on the present value of the remainder interest going to the child, which is the value of the property transferred to the trust, less the value of the retained annuity interest. Again, a lower interest rate increases the value of the annuity retained by the grantor and thus reduces the value of the gift of the remainder in the GRAT. Also, in a charitable lead annuity trust, a lower interest rate results in a larger charitable gift and a smaller value for any gift of the remainder interest going to the private beneficiary.

The opposite is also true.

Certain strategies are hurt by lower rates. For example, when the grantor/parent retains only income rights to the transfers (as opposed to annuity rights) many times the transfers could be unfavorable. Strategizing and timing needs to be analyzed before implementing sophisticated estate planning techniques.

Litigation:
OBTAINING JUDGMENT ONLY HALF THE BATTLE

Many clients involved in litigation as a Plaintiff are unaware that obtaining a judgment against a Defendant is frequently only part of the process. Obviously, if a Plaintiff sues a Defendant and obtains judgment by motion or trial, that Plaintiff is victorious. However, winning at trial does not put money in the Plaintiff's pocket. The ultimate goal is payment of money to compensate the Plaintiff for monetary damages caused by a Defendant. Many individuals and companies that are sued as Defendants will claim to have insufficient funds to pay a judgment. That is why we have supplementary proceedings in Illinois.

Supplementary proceedings are brought by a Plaintiff holding a judgment against a Defendant which has not been paid and, therefore, has not been released. The first step is to file a "Citation to Discover Assets" against the named Defendant. Once service is completed on the Defendant, that individual or a representative from the Defendant Company, must come to Court and answer questions under oath regarding their assets. At this point, the Plaintiff's attorney can explore any possible sources of payment including real estate, cash, bank accounts, personal and corporate holdings or interests etc.

A Plaintiff can also serve a citation on third parties, such as a Defendant's bank, and obtain a turn-over order from the Court which requires the bank to freeze the account and then pay that money to the Plaintiff. A plaintiff can also garnish a Defendant's wages at a certain percentage per paycheck to help pay the judgment.

If a Defendant or third party fails to appear in Court, after proper service of the Citation, then a Plaintiff can motion the Court to issue a "Rule to Show Cause". The Rule is served on the Defendant and requires the Defendant to appear in Court to explain why he/she was not present for the Citation proceedings. If a Defendant fails to appear in Court after service of the Rule to Show Cause then the Court can issue a "Body Attachment". A "Body Attachment" is an Order from the Court which requires the Sheriff's Office to actually arrest the non-responsive Defendant and forcibly bring that party to Court to participate in the supplementary proceedings.

Hopefully, if you are a Plaintiff and obtain judgment against a Defendant, you receive prompt and complete payment from that Defendant. However, if the Defendant "cries poor" or does not pay, the law allows you to completely examine the Defendant's financial holdings in order to obtain payment.

Corporate Tax:
TAXPAYER WITH REASONABLE CAUSE FOR LATE FILING OF S CORP ELECTION IS DENIED RELIEF BY IRS

In a recent private letter ruling (P. Ltr. Rul. 200333017) of the IRS, the IRS denied relief to a taxpayer seeking to have its corporate status change to an S corporation. An S corporation election allows a corporation to become a tax reporting entity as compared to a tax paying entity. The S corporation tax liability and/or tax benefits then flow through to its shareholders.

For a corporation to become an S corporation it must comply with Sections 1362(b)(2) and (3) which makes the S corporation election effective either for the tax year when made, if filed within the first two and a half month of the tax year, or for the following tax year if filed after the first two and a half month of the year. Further under Section 1362(b)(5) the IRS can treat a late filed election as timely filed if the taxpayer can establish the delay was due to reasonable cause.

The reasonable cause standard for acceptance of a late filing of an S corporation election has been routinely accepted by the IRS. This view of the IRS willingness to accept late filing is evidenced by years of favorable allowance to taxpayers shown in its private letter rulings.

However, in the recent Ltr. Rul. 200333017 the IRS invoked a provision of the Internal Revenue Code that limits the relief to be granted to a taxpayer provided it does not prejudice the interest of the government. Therefore in the denial of relief in the instant private letter ruling the government determined that its tax collection would be lower, (from both the corporation and its sole shareholder on a consolidated basis) and therefore denied relief to the taxpayer on a retroactive basis, despite the IRS acknowledgment that there was reasonable cause for the delay in filing. Of course the election could always be made prospectively under Section 1362.

This recent decision by the IRS stresses the importance of proper planning and execution of initial corporate documents to protect the intent of corporate shareholders in a new corporation.

Bankruptcy And Tax Law:
TAX LIABILITIES FOR RETURNS PREPARED BY THE IRS CANNOT BE DISCHARGED IN BANKRUPTCY

When an individual files a Chapter 7 petition, contrary to popular perception, certain taxes debts are discharged in bankruptcy. Income tax liabilities with respect to returns that were due three years prior to the filing of the petition, and which were assessed at least greater than 240 days may be discharged in bankruptcy. The United States Tax Court is now imposing a new requirement.. The taxpayer/debtor much have filed their tax return before the IRS prepares it for them.

The United States Tax Court recently determined that tax liabilities with respect to returns filed by the IRS are not dischargeable in bankruptcy. When a taxpayer fails to file its own tax return, eventually the IRS will take the information that it has received from third parties (employers, financial institutions, etc.) and prepare a tax return on behalf of the taxpayer. This is known as a Substitute Return. In order for a tax liability to be discharged in bankruptcy, one of the requirements is the taxpayer must have filed a return. The United States Tax Court has now held that a Substitute Return filed by the IRS is not sufficient in order for the taxes to be discharged in a subsequent bankruptcy. The tax court noted that the bankruptcy code does not define the term "Return." However, the court concluded that it does not include Substitute Returns prepared by the IRS. The lesson here is that it is taxpayers should file their returns, even if they are lacking the necessary funds to satisfy the tax liabilities, in order to preserve the option of discharging such tax liabilities in a subsequent bankruptcy.

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.