Posts in: April

Success in a Lawsuit

April 26, 2016 Asset Protection, Litigation Comments Off on Success in a Lawsuit

For many people, filing a lawsuit is tantamount to hitting your opposing party with the nuclear option.  Nevertheless, if the potential for litigation does arise, in most cases, your options will be to either litigate, settle, or walk away.   In most cases, trying to settle after a legal dispute has arose is challenging because the parties have already begun to draw their lines in the sand and fear the perception that they will be perceived as “weak” if they cave in to the other side.  On the other hand, to take the case from the initial complaint up to, but not including trial with minimal work can easily exceed fifty thousand dollars with no guarantees of success.  We have seen many clients who, because they were unprepared for this reality, ultimately walk away and do nothing thereby suffer huge losses.   In order to maximize your chance in the event of litigation, here are some tips  that will help your lawyer better  in the event you find yourself facing the possibility of litigation.

  1. Make sure you have solid written contracts specifically designed to protect your interests.We often see contracts that look like they were written on a napkin and are so simplistic that they don’t really provide much assistance at all in the event it needs to be enforced in court.  A good contract should be very clear and detailed on the rights and responsibilities of the parties and should, as best as possible, specify what will happen in the event any of the “what ifs” should occur in your transaction.  If there are any issues in your transaction that are important to you, it should be addressed early on in the negotiations when people tend to be more open to discussion, and then confirmed in the written contract.   Experience demonstrates that people are much less open to discussion once an event occurs that actually affect their legal rights.  In addition, every contract should have an attorney’s fees provision that states the prevailing party in a lawsuit shall recover their attorney’s fees.  Otherwise, you’ll likely have to pay your own attorney’s fees even if you end up winning.
  1. Document Important Events that Could Affect Your Rights. In a lawsuit, it is not about who is right or wrong, but what you can prove.  The best proof is often in the form of documentary or other visual evidence.   All of us have witnessed in today’s Youtube society the impact that visual evidence can impact a person’s opinion.  Therefore, it is important in your business or investment dealings to create evidence of events that may affect your legal rights (i.e. a paper trail).  For example, if an opposing party takes action contrary to the agreement, send out a written confirmation to document the breach.   If the issue is defect or damage to property, take pictures or videos of the defect and damage and also include the date and time.   Of course, circumstances may warrant additional action in addition to mere documenting the event, and when in doubt, consult with your attorney.  Keep in mind that when that time comes for you to consult with litigation counsel, the attorney will be less concerned with whether you were wrong or right, but what tangible evidence do you have to prove your case.   Therefore proper documentation will enhance your attorney’s ability to advocate on your behalf.
  1. Understand and Know Who You are Dealing with. Sometimes a little investigation into your opposing party can reveal helpful information about what you might be facing in the event a legal dispute arises.   For example, have they ever been a party in a lawsuit?  All federal court cases are available online using the Pacer system and many state courts also provide online capability to search by name.  Does the party have insurance or assets from which you can recover for any future judgment?    Is it advisable to secure personal identifying information such as a driver’s license or social security number in the event you have to try and track them down in the future?   Taking the time to get more information about who you are dealing with can be very helpful to your attorney in the event you need to enforce your rights in court.
  1. Get Legal Counsel Whenever You are In Doubt About Your Rights. Many lawsuits could have been avoided had the client decided to call an attorney for advice the moment an issue arose rather than allow the situation to get worse and now face the expenses of litigation not to mention possible loss of investment.  Is it better to spend half an hour speaking with your attorney now or would you rather spend tens of thousands of dollars later in court facing the unpredictability of litigation?

Let’s face it, only lawyers like being in a lawsuit and most people who end up in litigation did not expect that they would end up in court.  Nevertheless, sophisticated individuals and businesses recognize that litigation is always a possibility and, therefore, take the necessary precautions to preserve their rights.   As they say, negotiate like adversaries, but act like friends and the more steps you can take to maximize your success in the event of a lawsuit could actually have the effect of minimizing the actual chances that you would actually need to resort to litigation to resolve your dispute.

Do the “Panama Papers” Spell the End of Offshore Planning as We Know It?

April 19, 2016 Asset Protection, Business planning, Tax Planning Comments Off on Do the “Panama Papers” Spell the End of Offshore Planning as We Know It?

On April 3, 2016, 11.5 million leaked files from Panamanian law firm Mossack Fonseca (known as the “Panama Papers”) hit news outlets around the world.  Mossack Fonseca specializes in offshore planning in countries regarded as “tax havens.”  This torrent of leaked documents appears to show how Mossack Fonseca helped celebrities, business executives, and high-ranking government officials use offshore entities and accounts for several improper and even illegal purposes.

Contrary to what may be implied from some of the media coverage of the situation, the Panama Papers do not mark the end of offshore planning.  Given the tone of the media reporting, you may be surprised to know that while it is a relatively small percentage of what we do, KKOS Lawyers has and will continue to help clients with offshore planning.  We only engage in this type of planning in limited circumstances, and we have and will continue to do so in an open and honest manner.

So, why are Mossack Fonseca and their clients in such hot water, while KKOS and other legitimate practitioners can and do continue to help clients protect their assets through establishing offshore trusts and business entities?  The answer boils down making sure the reasons for the offshore planning are legitimate.  The folks exposed in the Panama Papers were using offshore planning as a means to improper and often illegal ends.

This gives us an opportunity to explore what potential motivations for offshore planning may or may not be obtained by legitimate means.  Let’s start with what is NOT legitimate:

  • Tax avoidance. The perception is that this is the number one reason why people go offshore, and I have spoken with some clients who came into the office hopeful that I would be able to help them save taxes by establishing a foreign entity.  However, the truth is that U.S. citizens are subject to tax on their worldwide income, and must report all income earned by assets held in offshore entities.  While some offshore planning may provide very limited legitimate tax savings, going offshore is typically “tax-neutral” – it will neither improve nor harm the client from a tax perspective.  I always tell clients interested in offshore planning the same thing: “Do not use an offshore entity or trust to try to hide assets or income from the IRS!!!”  This is not a legitimate goal of offshore planning, and when (not if) the IRS finds out, you will be looking not only at fines and civil penalties, but possible jail time.  It is simply not worth it.
  • Hiding Assets from Current Creditors. If you have a judgment against you or are in the middle of a threatened or ongoing lawsuit, then unfortunately the time for offshore, or any other type of asset protection planning, has passed.  Moving assets offshore at that point would be considered a fraudulent transfer.  Defrauding creditors is never a legitimate purpose for offshore planning.
  • Money Laundering. This one sort of goes without saying.  Money laundering is not a legitimate purpose for any trust, bank account, or business entity – regardless of whether it is offshore or not.  So, if your car wash businesses just aren’t cutting it in terms of laundering the profits from your meth-dealing activities, and you want to take it to the next level by going offshore, then neither you nor Walter White should come to our office looking for help.

So, what ARE some legitimate reasons for offshore planning?

  • Protecting Assets from Potential Future Creditors. For most people, setting up domestic business entities (corporations, LLC’s, limited partnerships, etc.) and possibly a Domestic Asset Protection Trust (“DAPT”), along with planning using homestead and retirement plan exemptions, can be effective and cost-efficient tools in the quest to protect assets from future creditors.  However, some clients feel more secure if some of their assets are held by offshore trusts or entities in jurisdictions that provide heightened protection from frivolous creditors (for example, Nevis).  The costs for this sort of planning are higher than those involved in more traditional asset protection planning, but some clients determine that the additional protection is worth the higher costs.  We can and do help those clients.
  • Estate Planning. Some clients hold life insurance as part of their investment portfolio, and may desire the added flexibility and options that offshore private placement life insurance policies can offer.

At the end of the day, I think there are two main takeaways from the Panama Papers saga:

  • You can’t hide forever. This is true even if you happen to be incredibly rich or powerful.  If you are thinking about going offshore, but your motivation is to hide (from the IRS, from current creditors, or from the authorities), then you are simply deceiving yourself about what offshore planning is and what it can do for you.
  • Offshore planning is not dead. The Panama Papers did not kill offshore planning.  However, they offer an important cautionary tale about what can happen when offshore structures and accounts are used improperly.

One of the Most Important Legal Principles That Every Small Business Owner Should Know

April 12, 2016 Business planning Comments Off on One of the Most Important Legal Principles That Every Small Business Owner Should Know

You may have heard the saying, “substance over form”.  In the legal context, this is an established principle that is used by judges and business regulators throughout the country, particularly in the tax arena.  As a small business owner, it is important that in all your business dealings, this phrase remains on the forefront of your mind.  Here are three common scenarios a small business owner may encounter in which the principle, “substance over form” applies:

  1. Employee v. Independent Contractor. Recently, the company, Lyft, a transportation company, was sued by its drivers.  In part, the lawsuit was centered on whether these drivers are independent contractors or employees.  In form, Lyft characterized these drivers as independent contractors, but the question was whether in substance, they were treated more like employees.  Typically, it is cost effective for a business to characterize its workers as independent contractors.  This means less paperwork and less in costs, e.g., employment taxes, workers compensation, unemployment, etc.  Therefore, the IRS is well aware that many small business owners will try to characterize a worker as an independent contractor rather than an employee.    There are a number of factors the IRS will look at to determine whether a worker is actually an employee or an independent contractor, and they will give very little regard to how you, the business owner, characterize them.  The main theme among issues the IRS looks at is control, e.g., how much control do you the employer, have over the worker.  The moral of the story is that if you are going to pay your workers as independent contractors, make sure your workers are independent contractors in substance and not just form, otherwise, there are penalties in addition to the taxes and interest owing for payroll withholdings that should have taken place.  See Internal Revenue Code § 3509 and also IRS Publication 1779.
  2. Investor v. Partner. Raising capital for your business can be one of the most important activities you do as a small business, and it is important that you understand the difference between a partner and an investor.  The SEC does not regulate the relations between business partners but it does regulate relations between an investor and an issuer.  If the person who is providing capital to your business is really an investor even though you call them a partner, the SEC will consider you an issuer of securities and you will be subject to securities law.  The more control you give the person providing capital to your business, the more likely they will be considered a partner.  But if that person provides capital to your business with the expectation of profit and they have no control or say in how the business is ran, that is the text book definition of a security.  See Williamson v. Tucker, 645 F. 2d 404 (5th 1981).  The issue is not that you have investors; rather, that you fail to realize you have investors and are subject to securities law.
  3. Licensor v. Franchisor. This last example comes up less frequently for my clients than the other examples in this article, but it is nevertheless an important one and a small business owner would be wise to know how the “substance over form” principle can affect this situation.  It is not uncommon for a business owner to want to receive a license to certain intellectual property rights or to grant a license to the same, particularly if the intellectual property rights include a trademark.  In that event, the licensor has a right to establish a certain amount of control over the licensee to ensure that the trademarks are being used appropriately in the licensee’s business.  But a line can be crossed such that if too much control is exercised, then even though the agreement may be titled a “Licensing Agreement”, a court could construe it as a franchise agreement.  The consequence of unintentionally creating a franchise relationship in which you are the franchisor is that you are now subject to a myriad of federal and state regulations and if you are under the impression you are not subject to them, the chances are slim to none that you are in compliance with them.  The Federal Trade Commission (FTC) defines a franchise as any continuing commercial relationship that contains (1) a right to use a trademark, (2) right to payment, and (3) significant controls are imposed upon the franchisee by the franchisor.  As these three factors establish, the only material difference between a franchise relationship and a trademark license agreement is the amount of control established by the one party over the other party.  The key is to establish no more control over the licensee than is necessary to protect the use of the trademark.  The issue is not that you enter into a franchise agreement; rather, that you unknowingly enter into a franchise relationship despite signing a trademark license agreement.

 

There are many other scenarios in which the principle, “substance over form” should be in the mind of a small business owner, but these are just a few of the main situations.  As a business owner, it is important to run your business in compliance with the established principle that in the law, particularly tax law, substance prevails over form.  If your situation involves any of the above scenarios, please contact our office.

Doing Your Due-Diligence in Real Estate Deals

April 5, 2016 Asset Protection, Business planning, Real Estate Comments Off on Doing Your Due-Diligence in Real Estate Deals

We are frequently called upon by clients to assist them with reviewing their real estate purchase transactions to ensure that their interests are adequately protected.

While every real estate purchase transaction is different, there are due diligence items that are common to most real estate purchases which we believe are important for investors to review in order to, as best as possible, identify the investment risks arising from the transaction.

Of course, there is never a guarantee that any particular investment in real estate will be profitable, but having a checklist of due diligence items will help you identify potential issues as early on as possible before it becomes “your” problem.  Common due diligence items may include:

  • Title Investigation – A current Preliminary Title Report (“Prelim”) should be obtained and reviewed as soon as you express interest in a property since the Prelim will show the liens, encumbrances, or claims that exist on the public record against the property.  Getting a prelim early on in the process can help the investor make an initial determinations whether there are issues that will require further investigation (e.g. tax or judgment liens, mortgages, easements, etc.), or instead, whether there are clouds on title that are so insurmountable that  there would be no point in wasting additional time or money on the property.   Keep in mind that in most cases, a Prelim is only an opinion, not a guarantee of the condition of title, and we have seen instances where Prelims even from reputable title companies turned out to be inaccurate.  However, as the name suggests, a Prelim merely provides initial information about the property and is a tool for determining what additional investigation or action may be needed.
  • Inspections and Contingencies – We all know we should be doing inspections on the property, but should we just do a physical inspection or are there areas that need to be explored?   The purpose of inspections is to identify defects that affect the value of the property,  and there are many potential defects that cannot be discovered by mere physical inspection alone.   In most states sellers are required to provide a written statement disclosing known defects relating to the Property and many states have specific forms for this purposes.  Having a disclosure form signed by the seller may be helpful down the line if a defect is discovered that the seller was aware of, but failed to disclose.   In addition, most buyers know that they should reserve a contingency that allows the buyer to cancel the contract if the buyer does not approve the physical inspection report.   However, depending on the circumstances of the property, additional inspections and contingencies may be necessary to protect the buyer’s interests.   For example, does the property have any environmental, natural, geologic hazard, pest,  or man-made hazards?   Are there any increased risks due to crime or other demographics?   If improvements were made to the property,  were they all permitted and built to code?    Is a survey necessary to address questions regarding the property boundaries or whether certain features on the property is your responsibility or the neighbors?  Are there zoning or other restrictions on your intended use of the property (for example, local restrictions on short term rentals?).    If the seller is an entity or a trust, have you confirmed that the seller you are dealing with is in good legal standing and has the actual authority to effectuate the sale?  Has the seller ever been, or currently in litigation?   These types of issues go far beyond the customary physical inspection, and the type and extent of investigation in any particular case will depend on the unique circumstances of the property.  Having a comprehensive checklist of due diligence items that you can selectively apply to each deal depending on the peculiarities of that particular deal can go a long way in mitigating investment risk.
  • Property Value – Everyone wants a property that will appreciate and so performing due diligence on the value of the property by evaluating comps or obtaining appraisals is a MUST in virtually every transaction.  Most investors in real estate will have a financial calculator or some form of matrix or method of analyzing the property’s return on investment.   For example, if the property is being acquired as a rental, appropriate due diligence may be needed on the fair rental value, vacancy rates, rental demand, economic conditions, demographics, and the strength of the rental market in that area?    If the property is currently used as a rental, you may need to obtain rent rolls, financial statements, or tenant estoppel certificates?    There are many resources available that can provide much of this information and don’t just take the seller at his/her word that the property is a good value, but verify.
  • Solid contracts – Of course no discussion of protecting your interests in a transaction would be complete without emphasizing the importance of having detailed written contracts. If a dispute ever arises during or even after the transaction, in most cases the focus will be on what terms and conditions were agreed upon in the contract.  While a detailed discussion of contracts is beyond the scope of this article, the contract should be detailed enough to address foreseeable issues that could arise during the transaction, and the expectations of the parties in the event the “what ifs” of the particular transaction occur.

One of the many virtues of investing in real estate, as compared to other asset classes, is that there is a lot of very specific due diligence and information that you can obtain to mitigate the risks for any particular real estate investment.

Of course there is always the possibility of a deal that go bad even after doing all appropriate due diligence, but getting into the habit of executing a designated due diligence plan will go a long ways in identifying those issues that could cause the deal to go bad before it ever becomes part of your investment portfolio.