What Shark Would You Be?

As the child of a marine biologist, I find the Discovery Channel’s shark week especially entertaining. As this year’s shark week winds to a close, I wanted to leave you with this funny post from another funny legal blog.

We were debating in the office which sort of shark we would be – I was leaning towards Hammerhead (“If ever there were a shark that could fill out Schedule K, it would be the hammerhead.”), but then the transactional attorney vs. litigator debate came up and Victoria suggested that the angel shark might be more appropriate (“Although this shark is a bottom-dweller and appears harmless, it can inflict painful lacerations if provoked, due to its powerful jaws and sharp teeth. It may bite if a diver approaches the head or grabs the tail.”). Really, on behalf of tax attorneys everywhere, I’ll take that as a compliment.

What kind of shark would you be? Discovery channel has provided a handy-dandy quiz for your entertainment.

Have a great weekend all!


How do I Choose the Right Lawyer? Part 1: Finding a Lawyer

At last count, Oregon had around 12,000 active resident lawyers. This is a little over 30 lawyers for every 100,000 residents in the entire state. So, you wouldn’t think that it should be difficult to select a lawyer to help you with your legal questions. However, this is a question that people ask us all the time, because it’s hard to pick the lawyer that’s right for you, your business, and your family.

Let’s say that you already have decided that you need to retain the services of a lawyer. (Perhaps after reading this helpful gem from our blog archives). You still have to find the best lawyer for you. In this occasional series on WealthLawBlog.com, we’re going to first look at common ways that clients find lawyers to represent them. Then, we’ll look at things that you should think about when you are interviewing lawyers to work on your project. Finally, we’ll look at some of the things to keep in mind when you need a specialized type of attorney.

1. The Internet and other paid ads

We’ve all done it – let’s say that you need a plumber. So you Google “Plumber” or maybe you go to Angie’s List or Yelp to look for reviews on plumbers in your area. This is an increasingly common, but unpredictable way to select a lawyer. Unlike a leaky pipe, online reviewers will almost never disclose all of the facts of their case. Therefore, you can’t really tell if the lawyer would do a good job for you or not. Additionally, many of the most experienced lawyers started practicing law at a time when the rules of professional conduct didn’t allow lawyers to advertise in any way other than a small posting in the phone book. Law firms of all sizes are investing more into their internet presence (like WealthLawBlog.com) as a way to communicate with clients, and advertising in general. However, we have heard that it is hard for firms to distinguish themselves online so all of the law firms start to look the same.

2. State Bar Referral Line

Most state bar associations have a phone number that you can call and they will refer you to an attorney. These are services that attorneys subscribe to in order to generate business. They say generally what area of law they practice in and where they are willing to meet clients. The advantage to these lists is that the lawyers agree to only charge a nominal amount for the initial discussion. Also, if you don’t know any lawyers, this may be a way to find someone. The disadvantage is that you never know what quality of attorney you are going to get. The folks that work at the referral lines rotate through the lists of attorneys in the practice and geographic areas as potential clients call in to the phone number. You might get a great attorney, or you might get someone who is not so great. Many attorneys also don’t like this list, because it is not the way to get the very best clients – i.e., those who are easy to work with and pay their bills on time.

3. Family and Friends

Most of us have friends and family who have had to hire a lawyer in the past. You can ask them how their experience was and what advice they would have. If their case was similar to yours, you can ask them if they think that you should hire the lawyer they worked with. You have to keep in mind though, that they may not be comfortable sharing all the details of what they worked with the lawyer on and their lawyer won’t be able to discuss it because of client confidentiality, which we’ll talk about next time. Similarly, you may not want to go into specifics with your family or friend. We deal with very sensitive matters in this office, and clients often want to keep things confidential. This may mean that you, your friend, or family member may be acting without the complete picture when they refer you to an attorney. In that case, I’d recommend that you get referrals from a number of different folks.

If you are fortunate enough to be related to, or friends with, an attorney (Hi Mom!), that person may be able to help you with your concern or can help you figure out what kind of attorney should be able to help you best and then refer you to a couple of attorneys. Lawyers who are active in an area will generally hear things about the best and worst lawyers out there and can help you find someone. We get referrals all the time from other lawyers who have a client that needs some specialized help or that needs a lawyer with a presence in Portland or Hood River.

4. Referrals from other professionals

Finally, lawyers get many of our best referrals from other professionals in the area. Your accountant, doctor, or financial advisor probably knows you very well. They also almost certainly know a variety of lawyers who practice in the area and may be able to refer you to a lawyer that can help you solve the problem in front of you but that may also be a good fit for you and your situation. A financial advisor, for example, will generally only refer a client to someone that they really believe will be a good fit for the client, as they often believe that it would reflect poorly on them if it didn’t work out.

That said, an accountant may refer a client to lawyers who have different approaches to problem solving. For example, we often see referral lists in litigation cases where one of the lawyers is settlement-oriented, another of the lawyers is a take-no-prisoners-fight-to-the-death-oriented, and the third lawyer is somewhere in between the two.

Lawyers like referrals from other professionals that they trust. The most effective business owners, litigants, and consumers of legal services are also those who have good teams of professionals around them. So, if your accountant and tax lawyer communicate well, then it will save you time and money.

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Once you have found an attorney, you have to figure out if they are the right person to represent you. Our next article in this series will discuss how to interview a lawyer (once you’ve found them) to see if they’d be a good fit for your team.

Linden Dollars, Bitcoins, and the brave new (taxable) assets

It is a truism in the world of tax planning that dollars are fungible. That is, if I have two dollars in my wallet, there isn’t much between the dollar that I took out of the bank yesterday and a dollar that I took out of the bank today. If I use them to buy a cup of coffee, I don’t have to worry about whether one dollar was more valuable than the other dollar. Similarly, if I convert my US Dollars to Japanese Yen, I don’t necessarily have to worry about a recognizing gain because forms of money are freely exchangeable for other forms of money.

Assets, in comparison with money, have characteristics that are unique to that asset and that increase or decrease the value of that particular item relative to other items. The tax code, however, works in terms of dollars and the IRS has a dim view of unreported barter transactions. We know that a taxpayer’s gross income can come in many forms including money, property, or services. This was the basis for the IRS’s war during the 1970s on barter transactions. So, if I have a chicken and exchange that chicken for dental services, the IRS will say that the value of the chicken on the day that I exchanged it for dental services was $X and I exchanged it for $X of dental services. Depending on how I acquired the chicken and how long I had it, I might have to recognize gain on the disposition of the chicken. My dentist would have to recognize the receipt of income on that day in the amount of $X.

Several years ago, the tax community began to mull over the idea of virtual assets. The debates started with the online gaming community where players had items that they could transfer to other players. Eventually, players began to sell online items in real life (usually via online auction sites) for US Dollars. This implicated a lot of real-world tax questions – specifically, what is your basis in your virtual asset and when do you have a recognition transaction.

In May, 2013, the GAO released a report called “Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks.” This report distinguished between “Closed-flow” systems (where virtual assets, services, and currencies could not be exchanged for “real” assets, services, and currency) and “Open-flow” systems (where they can be exchanged). The report also noted “Hybrid” systems which would have elements of the other two systems. An example of a hybrid system would be a popular online game where you exchange real dollars for virtual goods – like buying a cow in a virtual farm. You can’t sell the cow for US Dollars, so the flow of dollars is entirely into the online platform.

The GAO and the IRS are particularly concerned about the recent rise of virtual, alternative currencies such as Bitcoin. Bitcoin is designed to exist as a substitute for government-backed currencies, such as the US Dollar or Japanese Yen. Bitcoins are initially generated by computer algorithms that “mine” for them. Merchants can accept Bitcoins in exchange for goods or services. However, similar to the tulip mania that captivated 17th Century Holland, investors have been purchasing bitcoins on the secondary market in the hopes that the currency will increase in value. Reputable financial publications were commenting on the investment potential of bitcoins.

On March 25, 2014, the IRS finally issued guidance on how it will tax virtual currency transactions. Notice 2014-21 states that virtual currency that has an equivalent value in “real” currency will be treated as property and not as currency. The general tax principles that apply to property transactions (like barter transactions) will apply to virtual currency transactions. So, if I have ten virtual coins and use them to purchase dental services in the real world, the IRS will look at what the dentist usually charges for those services in US Dollars ($X) and say that the fair market value of my ten virtual coins on that day is $X. My dentist would take a basis in the virtual coins of $X. Of course, if I traded my chicken (worth $Y) for the virtual coins for a month ago, the difference between the two is my gain on the transaction.

The IRS guidance also clarifies that the character of the gain or loss depends on the character of the currency in my hands. If I’m in the business of trading virtual currency, such currencies may be inventory in my hands.

The 1099 reporting rules apply, so if I pay someone with virtual currency worth, on the date of payment, more than $600, I have to issue them a IRS Form 1099-MISC. Similarly, the rules regarding self-created income and self-employment tax will apply to the first tier of virtual currency holders. So, if I mine bitcoins, I have to recognize the fair market value of the coins on the date that I receive them. That income will be subject to self-employment tax.

The March 25 IRS guidance is silent about the treatment of virtual currency for estate and gift tax purposes, but the lawyers of Samuels Yoelin Kantor, LLP have been advocating for clients to address disposition of virtual assets in their estate plan. The recent guidance suggests that, while some of these assets (e.g., passwords, online social networking profiles) may not be includable in your gross estate when you die because they have no economic value, other “Open-flow” assets might be includable. Similarly, if things that we don’t think of as having intrinsic value develop a market they may become a part of your taxable estate.


Refund Opportunities and Joint Returns for Same Sex Couples

Several months ago, I wrote a quick post to alert our readers to potential refund opportunities if the Supreme Court found in favor of Ms. Edie Windsor’s argument that she should be entitled to receive a refund for estate taxes that she had to pay. Ms. Windsor had married her long-time fiancée, Thea Spyer in Canada before Ms. Spyer’s death in 2009. Earlier this week, in an historic opinion, the Supreme Court ruled that Section 3 of the federal Defense of Marriage Act (“DOMA”) is invalid. At the time of the original blog post, I encouraged taxpayers to consider filing protective refund claims if they were married and filing separately or as individuals due to DOMA. Although several federal agencies have issued statements in the last 24 hours, we have yet to receive guidance about when the IRS anticipates paying out the refunds it owes to taxpayers who filed protective refund claims for years as far back as 2009. The initial filing deadline for 2009 has passed; however, many of our clients do elect to extend the deadline to file their tax returns. So, if you filed your 2009 personal income tax return on extension, it may still be worthwhile to investigate whether filing a joint 2009 personal income tax return would allow you and your spouse to claim a refund.

Also, if you were married in a state that recognizes same sex marriage and have since moved to another state that does not (e.g., Oregon), a 1958 revenue ruling may support your filing a joint federal income tax return. In Rev. Rul. 58-66, the Internal Revenue Service looked at common law marriages to determine how the taxpayers should file their personal income tax return. In that ruling, it considered the situation of a couple that establishes a common law marriage in a jurisdiction that recognizes common law marriage. The couple later moves to a state that does not recognize common law marriage, where a ceremony is required to initiate the marital relationship. The IRS ruled that it would continue to recognize the couple as husband and wife. It’s important to note that there are some cases that look at the domicile jurisdiction of the taxpayer to determine whether they are entitled to file joint personal income tax returns. However, those tend to focus on whether a taxpayer’s divorce was final under state law by the last day of the tax year. So they may not apply to the case of a same sex couple who are married and have not gotten divorced in any jurisdiction.

The Supreme Court’s opinion in United States v. Windsor only addressed married, same sex taxpayers’ rights for federal purposes. I expect that we will see activity at the state level to evaluate whether the equal protection and due process arguments that Justice Kennedy articulated in Windsor are applicable to state tax filings and rights under the due process and equal protection clauses contained in most states’ constitutions. We also anticipate that the courts will be called upon address questions related to the full faith and credit clause (Article IV, Section 1) of the United States Constitution. This clause requires states to respect the “acts, records, and judicial proceedings” of other states. Specifically, to the extent that a marriage in one state is deemed valid, will another state be able to disregard that marriage?

It will be very interesting to see how these questions are answered and how the issues evolve. Stay tuned – we’ll update you as developments occur.

Community Service: Junior Achievement

When I was a student at Lake Oswego’s Lakeridge High School, we were required to take a mandatory class on balancing a checkbook. I also had the benefit of learning other personal finance skills from family members, mentors, books, or by trial and error — and through the part time jobs I held in high school.

A few years ago, however, I realized that even the very basic intro to personal finance is something that has gotten squeezed out of the average curriculum as schools struggle to find funding for reading, writing, and arithmetic.  Given the difficult economy in the last few years, many low- and middle-income students have not been able to find the part time jobs that my friends and I had growing up. Often, due to family or economic circumstances, they don’t have good mentors to model behavior.  And many children don’t even have bank accounts until they graduate from high school, when they are suddenly expected to be financially independent. 

I joined the board for Junior Achievement of Oregon and Southwest Washington (JA) a few years ago because I believe very strongly in its mission: “To inspire and prepare young people to succeed in a global economy.”  Just as all politics is local, I believe that the foundation of a strong economy lies in financial and civics education for individual children so that they have the tools they need to be successful.  Junior Achievement chapters around the world work to accomplish the organization’s mission by focusing on financial literacy, entrepreneurship, and workplace readiness. JA is an amazing organization, with fantastic staff and a really dynamic, positive board of directors.  I feel so fortunate to have the opportunity to serve as part of the board of directors and as a member of the finance committee. 

Our local JA chapter has a variety of diverse programs.  Thousands of classroom volunteers around the state teach personal finance and civics to children of all ages using modules designed by Junior Achievement teams. The organization also produces a podcast that is designed to teach parents how to talk to their kids about money and financial decisions.  Junior Achievement BizTown is an interactive experience for Fifth Graders where the students learn about having a job and participating in the economic life of a city. 

This month, Junior Achievement of Oregon and Southwest Washington unveils its newest learning experience – Finance Park. This is an interactive, iPad-based experience that is designed to teach junior high students about budgeting and personal money management. 

The JA board of directors and design team made a decision early on in the process to make Finance Park  mobile so that it can go to students in communities all over Oregon.  In the first couple of months, over a thousand Oregon students will have the chance to experience Finance Park in communities as diverse as Klamath Falls, Medford, Eugene, Bend/Redmond, and Portland!  If it comes to a community near you, you may want to check it out.

I would encourage anyone to learn more about, and get involved with, this amazing organization!

Possible refund opportunity: Windsor v. United States

As many of our clients know, the United States Supreme Court is hearing two cases related to the federal Defense of Marriage Act (“DOMA”) next week. The high Court will hear oral arguments in Windsor v. United States on Wednesday, March 27, 2013. If the plaintiff, Edie Windsor, prevails, she will be entitled to a $363,000 refund (plus interest) of estate tax imposed on the estate of her spouse Thea Spyer, who died in 2009. Ms. Spyer’s estate incurred this tax expense because DOMA dictates that the one hundred percent spousal exemption under IRC section 2056(a) is unavailable to same sex couples.

The deadline to file individual income tax returns was on Wednesday, April 15 for 2009. Even if Ms. Windsor prevails and DOMA is ruled unconstitutional, we do not anticipate that the Court will issue an opinion before April 15, 2013, when the statute of limitations to file amended returns for tax year 2009 expires. Same sex couples who were legally married in 2009 under the laws of their state and would have been entitled to a tax refund in that year if they were eligible for the “married filing jointly” status, may consider filing a protective refund claim for that period. The IRS’s policy where there is ongoing litigation or the law is uncertain, is to collect the properly filed protective refund claims and either pay them or deny them when the law in the applicable area is settled. Even if Ms. Windsor does not prevail or if her case is dismissed on procedural grounds, such filings may eventually result in significant payments if DOMA is ultimately held unconstitutional. These refunds would be paid with interest calculated from the original due date of the return.

Are you paying too much property tax?

This is the time of year that most of our clients receive their property tax statements. These statements will show a “Maximum Assessed Value” (“MAV”) and a “Real Market Value” (“RMV”). Oregon taxpayers pay real property taxes based on the lower of MAV or RMV. The MAV number is typically 3% more than MAV for the prior year, unless the taxpayer made improvements to the property. RMV is the value that the assessor estimates that the property would sell for on the open market. The assessors don’t usually look at each individual property to determine RMV – instead, they may group similar properties and apply a trending ratio to all of those properties. So, what the assessor estimates the RMV on your property is may not be what it would actually sell for. It has been our experience that our clients often have a more realistic idea of what their property is worth. If the real RMV listed on a taxpayer’s tax statement is below the number on the tax statement and MAV, then it may be worthwhile to appeal the value of that property and get a tax refund.

Depending on the type of property, a taxpayer would either appeal to the Magistrate Division of the Oregon Tax Court or to their local board of tax appeals. The deadline to appeal the value of most properties is December 31st. If you’d like to appeal, it is very important to start gathering documents early. Please let us know if you have any questions or if there is anything we can do to assist with an appeal!