Real Estate:
SELLERS BEWARE, THE ILLINOIS REAL PROPERTY DISCLOSURE ACT IS EFFECTIVE OCT. 01, 1994

Following a growing trend in jurisdictions around the United States, Illinois has adopted the RESIDENTIAL REAL PROPERTY DISCLOSURE ACT which will become effective October 1, 1994. The Act requires sellers to disclose, to the best of his or her actual knowledge, the condition of the property. The form that has been adopted by the Legislature is a 22 point questionnaire that inquires about flooding in the crawlspace or basement of the home, the basement foundation, material defects in the roof, walls, electrical system, plumbing system, etc. The seller also must disclose material defects in well equipment, drinking water, heating and ventilation systems, wood boring insect problems, and environmental problems on the property. Lastly, the disclosure asks about potential boundary line disputes and violations of the property with local, state or federal laws.

Remember, the seller's responses are only representations as to the condition of the property of which the seller is aware. The fact that the seller is not aware of a particular condition or problem is no guarantee that it does not exist. Further, this disclosure report does not mitigate the purchaser's right to an inspection of the premises by a qualified professional inspector.

Lastly, this does not stop a seller from listing his home on an "as is" basis. However, if the seller decides to disclose the material defects in this report, the seller will be under a continuing obligation to keep the disclosure report current prior to the time of closing.

What should not be forgotten with regard to this new law is that this disclosure should not be required when the seller is a lender who has recently taken ownership after a default, or if the property has been occupied by a tenant when the seller is not really familiar with the condition of the premises. In such cases, sellers will be better off protecting themselves with a properly drafted disclaimer, and an "as is" provision in the disclaimer. Then, unless the buyers can prove fraud, misrepresentation, or fraudulent concealment, the purchaser would have no cause of action against sellers who simply remain silent.

Tax Planning:
TAX IMPLICATIONS FOR FAMILY LOANS

Common transactions between family members or closely held business entities may provide individuals with favorable tax benefits if properly planned, and with unfavorable consequences if improperly structured. The Internal Revenue Code ("Code") allows the Internal Revenue Service ("IRS") to reallocate income and deductions of taxpayers to reflect the "true" nature of the transaction. Accordingly, income and expense items may be allocated to provide favorable tax advantages by increasing the basis of capital gain property, thereby reducing the taxable gain. The possible favorable tax benefits, such as an increased tax basis or allowable bad debt deduction, could be forgone if the transaction is not properly structured.

Any transaction between closely related parties should be structured so as to resemble an arms length transaction to insure that the "price" (interest) is properly set and documented so as to determine each party's income and expense. While the arms length standard is a benchmark for evaluating a transaction's fairness, the IRS will allow taxpayers limited leeway in their transaction. This is in recognition that in an open market there may be, at any time, various prices offered for certain goods or services. Accordingly, the IRS will not challenge each and every transaction but will only contest those that deviate substantially from the norm and are outside the scope of the Federal Regulations.

Finally, a taxpayer planning on making a simple loan or commitment to provide goods or services for a family member or controlled company should recognize the underlying economic reality of the transaction and work to structure the transaction so as to maximize any potential tax benefit for the two entities.

Debt Restructuring:
TRANSFERS BECOME FRAUDULENT IF TRANSFEROR IS INSOLVENT

Oftentimes, as sales begin to slip and cash becomes tight in a new or growing business, business owners, prior to consulting an attorney, begin to "restructure their assets" so that the corporate entity or individual has very few assets in its name. The obvious value of these transfers is to "judgment proof" the entity so that any judgments against the individual or the business entity cannot be collected.

Individuals should be cautioned that any transfer made with the actual intent to hinder, delay or defraud any creditor or if the transfer is made without receiving a reasonably equivalent value in exchange for the transfer, such transfer can be deemed fraudulent.

The Illinois Statutes create an eleven part test for determining whether or not actual "intent" existed which would give rise to a fraudulent transfer. An example of such factors considered in determining whether actual intent exists is whether or not the transfer was to an insider, such as a family member; whether or not the debtor retained actual possession or control of the property purportedly transferred; whether the transfer was concealed; whether the debtor was threatened with a lawsuit to collect a debt; if the debtor absconded; and the proximity in time between the transfer and when the debtor incurred the new debt.

When we meet with clients prior to our representation of them in Bankruptcy Court, the same issue is discussed with respect to pre-bankruptcy transfers. In bankruptcy law, such transfers are called "preferences" and such preference payments made within ninety days prior to the filing of the bankruptcy (or one year to insiders such as family members) can be reversed by the bankruptcy court and be required to be paid back by the person who received the preference payment. There are a narrow set of exceptions to these preference rules of which creditors must be aware.

In summary, pre-bankruptcy or insolvency planning must be carefully considered when handling the assets of the individual and business.

Business Liability:
BUSINESS OWNERS HAVE GREATER TORT LIABILITY THAN MUNICIPALITIES

Article III of the Illinois Tort Immunity Act imposes on a public entity a duty to maintain its property in a reasonably safe condition. As to recreational property, there is no duty to protect against risks and hazards which are open and obvious and which can be readily appreciated by an individual. Recent cases have held that a six-year-old child could appreciate the risk of falling from a slide placed on an asphalt surface. Also a plaintiff who was injured due to exposed tree roots had no claim against a Municipal Golf Club since the club had no duty to warn of the condition of exposed tree roots on the golf course. Similarly, the estate of a fourteen year old who drowned in a drainage ditch while inner tubing had no claim against the township since rushing floodwaters were an obvious danger and thereby sufficient warning to the plaintiff of its inherent danger.

Compare this to recent cases occurring at retailers' places of business. In one case, the retailer was found liable when a customer walked into a concrete pole while carrying packages. The court held that a business owner is not liable for injuries caused by a known or obvious danger unless the business owner should anticipate the harm, despite such knowledge or obviousness. Since the business owner could anticipate a customer being momentarily distracted by carrying a bundle of goods, the business owner was liable. Similarly, a construction worker who was injured when he stumbled in a rut when exiting a portable bathroom was able to recover his damages. The court held that it was foreseeable that the worker would be momentarily distracted by looking overhead for falling debris, and not have seen the known hazard.

Real Estate Taxation:
UNDERSTANDING YOUR REAL ESTATE TAX BILL

Twice each year every County in the State of Illinois sends out property tax bills. The dates of the mailing of the bills and the due dates of the taxes vary according to counties. However, all counties are similar in that the bill reflects the prior year's tax liability, and that the tax year's assessed valuation is based on the property's assessed valuation as of January 1st of that tax year.

When you receive a tax bill, you should review the bill immediately for accuracy and reasonableness as to the assessed valuation. If you do not receive a property tax bill, this does not relieve you of the obligation of paying your property taxes on time. If your bank or mortgage company receives your tax bill and pays the bill, you may obtain a duplicate bill by calling the County Treasurer's Office and requesting a copy.

The tax bill will show the current year's taxing bodies/agencies, their tax rate and tax amount for both the current year and the prior year. This detail allows you to identify where your tax dollars are being allocated, and also provides an easy reference to see which taxing bodies are increasing your tax burden.

After verifying the factual details of the bill, it is then necessary to review the computation of your tax bill. The major component of the calculation is your property's current market value. The market value of your tax bill is what the Assessor believes your house was worth on the first day of the last tax year (not the date you receive the bill).

The Assessor estimates the market value of your home based on what homes similar to yours are selling for in your neighborhood. Accordingly, if you are aware of comparable properties that have sold for considerably less than what the Assessor has identified your property's current market value, it may be worthwhile to contest the Assessor's appraisal. Also, if you recently purchased your home at a price substantially lower than the current market value, it may be grounds for lowering the assessed valuation. Please note that if you purchased your home from a family member, the Assessor may not concede as readily to your valuation.

The current market value of your home is then reduced to its assessed value (16% of market value for residential property, and a higher percentage for commercial and industrial properties in Cook County; and one-third of its market value for all other counties). This assessed valuation number is then multiplied by a state equalization factor. The state equalization factor is the number used by the Illinois Department of Revenue to provide uniformity statewide in assessments. Note, in Cook County this number is usually greater than 2.0, and in the collar counties it has recently exceeded 1.0. Then the assessed valuation is adjusted for a homeowner's exemption amount and senior citizen exemption amount, if applicable, arriving at a net equalized value. The net equalized value times the tax rate is then payable in two installments, the date and amount are identified on the tax bill.

As shown above, your tax liability is a function of your property's current market value. Accordingly, if you can convince the County Assessor that he has overvalued your property, you will be able to have your property's tax liability lowered. Such action would not only result in an immediate tax savings in the current year, but would also provide a potentially strong basis for tax savings in future years in that future tax increases would be based on a percentage of a smaller amount (your current market value of your home). Finally, whether you have or have not contested such valuation for several years, there is a procedure which may allow you not only to contest the current tax bills' validity, but also the bills for the two prior tax years.

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.