Page Tag: Fine Print

We mourn the passing, and celebrate the life, of our beloved friend and a leader of our Samuels Yoelin Kantor family.

Senior Partner Merritt Yoelin passed away on October 15 after a long and brave battle with cancer. He was a respected member of the Samuels Yoelin Kantor family, and was a partner of the firm for more than 40 years. He was well known throughout the Pacific Northwest for his legal skills and tireless commitment to his clients, a deep understanding of the complexities around taxation, and his dedication to community service.

We feel fortunate to have known Merritt as a loyal friend, talented attorney and esteemed colleague. We will always be inspired by his legacy of service — to his clients, his colleagues and associates, his community and his family.

To read more about Merritt’s life and professional career, please visit the memorial page at www.samuelslaw.com. Also on the page, you are invited to post a comment about Merritt and any favorite memories you may want to share.

On January 1, 2013, one day after the “fiscal cliff” deadline, Congress passed the American Taxpayer Relief Act (H.R. 8) (“ATRA”). ATRA made a number of permanent changes to the structure of income and estate taxes. This article summarizes those provisions and provides a brief explanation of some of the new health care taxes.

Federal Estate Tax Rate Increase.

The $5,000,000 federal gift, generation skipping and estate tax exemption was extended and made permanent, but the estate tax rate was increased from 35% to 40% beginning January 1, 2013. The $5,000,000 federal exemption that became the law in 2011 will continue to be adjusted for inflation. The combined federal gift, estate, and generation skipping tax exemption for 2013 is $5,250,000. Also the portability provision, which allows a surviving spouse to use the deceased spouse’s unused exclusion amount, was extended permanently.

Federal Income Tax Changes

The federal income tax rate changes were significant for taxpayers with higher incomes; however, for married joint filers with less than $250,000 in combined income and for single taxpayers with less than $200,000 in income, very little has changed, because the Bush tax cuts were extended.

Some of the more notable tax increases are:

Income, Dividend and Capital Gains Tax Rate Increases

Joint filers with income over $450,000 and single filers with income over $400,000 (the “39.6 % thresholds”) will now have to pay taxes at the rate of 39.6% for income in excess of these amounts. In addition, the tax rate on capital gains and qualified dividends for taxpayers with income above the 39.6% thresholds has increased from 15% to 20%. Ordinary dividends above the 39.6% thresholds will be taxed at 39.6%. These 39.6% threshold amounts will be adjusted for inflation for tax years after 2013.

The 39.6% threshold amount for trusts and estates in 2013 is $11,950. As a result, any trust with taxable income in excess of $11,950 will be subject to the 39.6% tax; in addition, capital gains in excess of the threshold amount will be subject to the 20% tax.

Personal Exemption Phaseout (“PEP”)

Joint filers with income over $300,000 and single filers with income over $250,000 (the “PEP/Pease thresholds”) will be subject to a personal exemption reduction equal to 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income exceeds the PEP/Pease thresholds. Under this formula personal exemptions will be completely phased out at $375,000 for single individuals and at $425,000 for married joint filers.

Itemized Deduction Limitation

Itemized deductions for single filers and joint married filers with incomes above the PEP/Pease thresholds will be reduced by 3% of the amount by which their adjusted gross income (“AGI”) exceeds the PEP/ Pease thresholds. This reduction will not exceed 80% of the otherwise allowable itemized deductions. The PEP/Pease thresholds are also indexed to inflation.

0.9% Healthcare Tax and 3.8% Surtax Increase

In addition to the ATRA tax increases described above, the Patient Protection and Affordable Care Act, that became law on March 23, 2010, added a new 0.9% Healthcare tax and a 3.8% Surtax beginning on January 1, 2013.

The 0.9% Healthcare tax is imposed on wages and self-employment income over $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for single taxpayers. There is no employer match for this tax, and the thresholds for this tax are not indexed to inflation.

The 3.8% Surtax applies to individuals, trusts and estates that have certain types of passive investment income. This tax is imposed on the lesser of (a) net investment income (“NII”) for the taxable year, or (b) modified adjusted gross income (“MAGI”) above a “threshold amount.” The threshold amount for this tax is $250,000 for married couples, $125,000 for married couples filing separately, and $200,000 for single taxpayers. For trusts and estates, the threshold amount is the beginning of the top income tax bracket ($11,950 in 2013) (the “Surtax thresholds”). The Surtax thresholds are not indexed to inflation for future years.

If a taxpayer’s MAGI is less than the Surtax threshold, no Surtax is due. A taxpayer with no investment income will not be subject to the 3.8% Surtax, even if his income is above the Surtax threshold. If a taxpayer has NII and the MAGI is greater than the Surtax thresholds, a 3.8% Surtax is due on the lesser of NII or the amount of the MAGI over the Surtax threshold. A taxpayer with income in the 39.6% tax bracket with an additional 3.8% surtax would have a marginal rate of 43.4%.

“Net investment income” (NII) (that is, income subject to the 3.8% Surtax) includes interest, dividends, annuities, rents, royalties, income derived from a passive activity, and net capital gains derived from the disposition of property (other than property held in an active trade or business), reduced by deductions properly allocable to such income. “Net investment income” (NII) does not include income from the following (that is, the following are not subject to the 3.8% Surtax): income derived from an active trade or business; distributions from IRAs or qualified plans; self-employment income; trusts for charity (except Charitable Lead Trusts), gain on the sale of an active interest in a partnership or S corporation (but note that C corporation dividends would be subject to the Surtax); or items which are otherwise excluded or exempt from income under income tax law, such as interest from tax-exempt bonds, capital gain excluded under IRC §121 (sale of the principal residence exception), and veteran’s benefits.

Because the Surtax threshold amount for trusts and estates is so low ($11,950 in 2013), taking effective tax planning measures for trusts is especially is very important. Simple trusts require all income to be distributed currently, so undistributed net investment income would generally be zero unless the trust has undistributed capital gain income. If the trust beneficiaries would not be subject to the Surtax on distributions, then tax savings can be realized by distributing enough of the trust’s net income to reduce the undistributed trust or estate NII below the threshold amount ($11,950 in 2013).

Although the Surtax is not imposed directly on retirement distributions such as distributions from IRAs, these distributions may increase income in a way that could trigger a Surtax. For example, a married individual with $250,000 of NII would not be subject to the Surtax, but if that individual is required to start taking required minimum distributions from a retirement account (such as an IRA), those required minimum distributions would increase his or her MAGI above the $250,000 threshold amount, and any amount of NII over the threshold amount will be subject to the 3.8% Surtax.

That outcome could be avoided or reduced with careful tax planning. It may be advisable to save within an annuity until after retirement. Income deferred within the annuity will not be subject to the Surtax. Then, at the time of retirement, assuming that the taxpayer’s MAGI will be lower, the probability that withdrawals from the annuity will raise MAGI above the threshold amount is less likely.

The reduction of “net investment income” can be accomplished through a variety of means, including the shifting of assets to such tax exempt bonds, IRAs and qualified plans, tax deferred annuities, life insurance trusts, leveraged real estate, and oil and gas investments.

Another means of effective tax planning is to reduce MAGI. This can be accomplished through a variety of means, including incremental Roth conversions, non-grantor charitable lead trusts, charitable remainder trusts, installment sales, and above the line deductions such as contributions to qualified plans and traditional IRAs and charitable contributions. Now an individual of any age can convert their retirement account to a Roth account. Taxpayers subject to these new tax changes face some pretty complicated challenges.

Other Important Provisions

Besides tax rate increases, ATRA included a number of other important provisions. During 2013, a taxpayer who is 70 1⁄2 or older can direct up to $100,000 from his or her IRA to a qualified charity without having to include the distribution in gross income. Permanent Alternative Minimum Tax (“AMT”) relief was provided by raising the exemption amounts for 2012 and indexing the exemption amounts for inflation in future years. The larger standard deduction and larger income amount in the 15% tax bracket for married couples has also been extended. ATRA extended a number of provisions for individuals and businesses, including several energy tax extensions. There are a number of other changes beyond the scope of this short summary.

These tax changes are permanent; however, further changes could be made during the Congressional debate over spending reductions. As a final note taxpayers who pay estimated taxes need to adjust their tax deposits to take these additional taxes into account.

The author wishes to thank Robert S. Keebler, CPA for permission to use his publications on the 3.8% Medicare Surtax as a resource for this article, and Elizabeth Savage for her contributions to this article.

This is my last edition of the Managing Partner’s Corner, as my time as Managing Partner came to a close on January 1, 2013. I am pleased to announce tha Tim Resch of our firm became Managing Partner as of that date. Tim has extensive litigation experience, both here in Oregon and abroad, when he was a war crimes prosecutor at The Hague. Tim also has knowledge and experience in employment law and business and medical practice issues. This makes him uniquely suited to lead a firm with such strong links to small business and the owners of small businesses, helping them navigate litigation issues and other matters.

Our change in Managing Partner is also an example of a situation that many businesses now face. As baby boomers like me continue to mature and continue their evolution from baby boomer, to flower child of the 60s, to grandparents of the 21st century, the reins of their businesses are handed on to the next generation. I am confident Tim will steer Samuels Yoelin Kantor well.

Transition has been the key element of my four years at the helm. Physical transition, including moving our firm back to downtown Portland from the Johns Landing area. We also added Ed Cunningham, our first Executive Director, an Victoria Blachly as our first woman partner. (Yes, we admit we were well behind the curve!) We have expanded our capabilities by adding Don Hull,Denise Gorrell,Valerie Sasaki an Christine Costantino. Judge Hull brings a broad range of experience and the perspective of a 22-year Judgeship and mid-Columbia region practitioner. Denise expands and supports our capability to deal with young emerging businesses and brings particular familiarity with the wine industry, as well as capabilities as a resolute and effective litigator. Valerie, who joined the firm a few months ago, brings great tax skills and experience both in the accounting and legal areas of tax analysis and client advocacy. Our newest addition, Chris contributes years of family law expertise to Samuels Yoelin Kantor.

With the addition of Judge Hull — as well as Steve Seymour’s expanding practice near his home community of Mosier, and Denise Gorrell’s wine industry clients —we have also taken the step of opening a satellite office in Hood River. We are very excited about the opportunities there.

The last point of transition was the passing of our longtime partner Merritt Yoelin on October 15, 2012. He died after a long and brave battle with cancer. He was a lion in the legal practice and in our office. We will miss his tireless work ethic, feisty spirit and utter devotion to client service.

As I leave my role as Managing Partner, I look forward to focusing my day-to-day efforts more on work for clients and supporting Tim and the rest of the Samuels Yoelin Kantor family. My thanks to all of my colleagues here at the firm, lawyers and non-lawyers, for their support during my tenure as Managing Partner and my thanks to all our clients and friends for your continuing support of our firm throughout.

Alan may be contacted directly at AMS@SamuelsLaw.com.

On January 1, 2013, I stepped into the Managing Partner role at Samuels Yoelin Kantor. I’ll also be taking over the Managing Partner’s Corner column in the future. I first want to thank Al Spinrad for his tireless dedication, thoughtful consideration, and endless patience while serving as Managing Partner over these past four years. Al has been generous to a fault with his time in helping me prepare for the transition to managing partner. Al’s term (some might call it a sentence) is now up, and we hope he enjoys the transition back to practicing law full-time (and playing the guitar, and traveling, and enjoying grandparent-hood).

This is also my opportunity to share some thoughts about Merritt Yoelin, who passed away on October 15. I first met Merritt in 1996, when I started with the firm as a law clerk. I think I called him “Mr. Yoelin” when I first met him – and was promptly corrected. He wasn’t one for that sort of formality in the office, despite his status as our Senior Partner. Merritt was a teacher, mentor, colleague, and a friend. I was fortunate to have had the opportunity to work with him over these past 16 years, and I am a better lawyer for his supervision and training. One of Merritt’s defining qualities was his commitment to his clients. I’m confident we can continue that commitment to our clients, in the best tradition that Merritt set for us over the years.

I’m not sure what the next four years (my term as Managing Partner) will bring, but I have no doubt they will be interesting years. Other than a few years spent prosecuting war criminals in Europe, my only home in private practice has been at Samuels Yoelin Kantor. I’ve worn a few different hats here — law clerk, associate, junior partner, and now Managing Partner. Hopefully those experiences will help me in this new endeavor. I look forward to continuing to work with our excellent staff and my colleagues. To our clients, my door and phone line are always open if you have issues you want to discuss. My commitment is to help our firm provide our clients with the excellent legal services they’ve come to expect since our firm’s founding in 1927; and to do what I can to make sure we do so while enjoying the practice of law.

Timothy J. Resch is a civil litigator with an impressive local and international history helping employers and small businesses find success in federal and state court litigation matters. You can contact Tim directly at tresch@samuelslaw.com.

For details, please email events@samuelslaw.com

We are pleased to announce that two attorneys,Christine Costantino an Valerie H. Sasaki, have joined Samuels Yoelin Kantor LLP.

• Chris, a new Partner, will head up the firm’s expanding Family Law practice group. She works with families and family-owned businesses, helping them navigate the complex and emotionally challenging territory of family law. She supports clients on a number of legal issues including dissolution of marriage and domestic partnerships; prenuptial and domestic partner agreements; contested custody, child and spousal support; grandparents’ rights, and other family-related legal matters. She also specializes in contested guardianships and conservatorships, as well as trust litigation. She is active in the community, and is a member of the Family Firm Institute, Executive Women’s Golf Association and the Northwest Business For Culture and the Arts. If you ever need assistance with family law issues, please feel free to contact Chris directly a ccostantino@samuelslaw.com

• Valerie is an Associate Attorney in our Tax Law Group. An energetic and talented tax attorney, Valerie is passion-ate about adding value to her clients’ businesses and having an immediate, positive influence. When working with individual clients, she strives to improve their lives by taking complex tax situations and breaking them into manageable pieces with achievable outcomes. She specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax and planning issues in Oregon or Southwest Washington. She has earned Oregon Super Lawyers Rising Star recognition for the last four years, and was named a 2011 Up and Coming Lawyer in the Daily Journal of Commerce. You’re invited to contact Valerie directly a vsasaki@samuelslaw.com.

• Congratulations to firm Partner Steve Kantor, who was recently selected by his peers for inclusion in The Best Lawyers in America® 2013 in the field of Trusts and Estates. Selection for Best Lawyers is based on an exhaustive and rigorous peer-review survey comprised of more than four million confidential evaluations by the top attorneys in the country.

• In July, three of the firm’s partners, Merritt Yoelin , Stephen Kantor , and Jeff Cheyne, were named to the Oregon Super Lawyers list, ranking them among the top attorneys in Oregon for 2012. Anthony Dal Ponte , Eric Wieland and Valerie Sasaki received recognition in the Oregon Rising Stars list of top Oregon attorneys for 2012.

• Victoria Blachly , Jeff Cheyne and Michael Walker are heading up the Oregon State Bar’s virtual assets work group, which has drafted a legislative proposal for statutory changes. Victoria has conducted numerous media interviews about the uncertainty surrounding digital assets when we die or become incapacitated.

• Congratulations go out to Glen Goland and his wife Krissy who celebrated the birth of their son Jude on July 7, 2012.

• In October 2012, Samuels Yoelin Kantor attorneys and staff were joined by vendors and friends for a day-long volunteer effort for Habitat for Humanity. The development, at Southeast 171st and Division Streets in Portland, will be the largest Habitat build in Oregon. The first 22 homes are scheduled for completion by March of 2013.

It is not uncommon in today’s economic climate for children to move back in with their parents. One challenge that arises, however, is when the parent passes away and the personal representative/successor trustee (PR), often a sibling, is left with the task of having to get his or her brother to move out of the house to market and sell the property.

Under the best circumstances, a month-to-month lease will be in place and the brother will be paying rent on time. This is the traditional landlord-tenant relationship. In this situation, provided the PR does not want to market the property with the brother-in-residence, the PR can issue a thirty- or sixty-day no-cause termination notice (depending on the circumstances). If the brother does not willingly move out prior to the expiration of the notice, it may be necessary for the PR to file a Forcible Entry and Detainer lawsuit (otherwise known as an “FED” or “eviction” lawsuit). These residential evictions are fast-tracked by the court. In Multnomah County, the PR’s first court day in an eviction trial is generally 8 days after the lawsuit is filed (as opposed to several months in a typical civil case). During this first court appearance, provided both the PR and the brother show up, the judge strongly encourages the parties to come to an agreement and avoid a trial. In this scenario, this may mean that the brother gets an additional two weeks to move out. It is also not unheard of to offer some financial assistance to the tenant to expedite and facilitate the move out process. If no agreement is reached, a trial is scheduled.

Under Oregon law, the trial is to take place no later than 15 days after the first court appearance. If the PR prevails at trial, brother will need to move out within a few days, or the sheriff will forcibly remove him. Brother will also owe the estate or trust, the PR’s reasonable attorney’s fees. These fees can be surprisingly high. A relatively straightforward residential eviction lawsuit, through trial, can cost upwards of $5,000. I have personally had two particularly challenging evictions, once as the landlord’s attorney and once as the tenant’s attorney, where the prevailing party attorney fees and costs exceeded $30,000.

A word of caution, Oregon landlord-tenant law is very tenant friendly and many a wary landlord finds himself running afoul of the law. If the landlord has not dotted all his “i”s and crossed all his “t”s, he may find himself as the losing party and owing thousands of dollars to the lawyer of the tenant he was trying to evict.

As daunting as the FED process above sounds, evicting a brother Mom never established a tenancy with, may be even costlier and more time consuming. Numerous Oregon cases have found that family members were not tenants, due to the specific circumstances under which the family members came to live in the house. In some of these cases, it was necessary to file an ejectment lawsuit. Ejectment lawsuits are heard on the regular civil court docket. This means that it may be several months before the case goes to trial and likely tens of thousands of dollars will be spent in motion practice and preparing for trial.

If you find yourself as a PR needing to evict a family member from estate property, please consult with me or another experienced landlord attorney before you take any action. Please also contact me if you find yourself in any other real estate disputes or are seeking counsel in advance to avoid finding yourself in a real estate dispute.

Denise represents clients on real estate disputes, business dissolutions, and trust contests. She also helps hospitality and wine industry clients navigate complex, important issues such as business formation, real estate agreements, trademarks, OLCC rules and other governmental regulations. Please contact Denise directly at denise.gorrell@samuelslaw.com.

Recent legal events may encourage more settlement of residential trust deed foreclosures or lead more lenders to sue borrowers whose real estate loans are in default, rather than proceed with trustee’s sales. These events include the Mortgage Electronic Registration Systems, Inc. (“MERS”) cases and the imposition of mandatory mediation statutes. Before discussing the impact of those events, let’s look at a few basics about mortgages and trust deeds.

1. Mortgages and Trust Deeds

Both mortgages and trust deeds are used to secure loans with real property. Trust deeds are more flexible, in Oregon, because a trust deed can be foreclosed in a lawsuit, like a mortgage, or by the trustee’s advertisement and sale. As a result of this flexibility, trust deeds have been the instrument of choice for loans in Oregon for decades. The chart below contrasts foreclosures by judicial proceeding or advertisement and sale.

Generally, at times when lenders have the capacity to deal with foreclosed property, lenders prefer predictability and a quick timetable. That favors proceeding with a trustee’s advertisement and sale pursuant to a trust deed. To the extent a lender is concerned that the value of the property is insufficient to recover the amount of the debt and the lender believes that the borrower has other sources of repayment of the balance of the debt, the lender may wish to pursue a judicial sale so that the lender will have the opportunity to pursue the deficiency against the debtor. For residential loans, because there is no deficiency allowed, that is never an issue.

Until recently, the low cost and quick speed of a foreclosure by advertisement and sale were factors that weighed heavily in lenders proceeding that way. What has changed?

2. MERS

MERS was created by the mortgage banking industry. Before MERS, a trust deed would recite that the borrower conveyed the property to the trustee who held title to the property as security, only, for the beneficiary, who was the lender. The lender often sold the note and trust deed. A document reflecting the assignment of the note and trust deed to the assignee would then be recorded. Any person could check the real estate records and see that the note originally given in favor of the lender and the trust deed had been assigned by the lender to an assignee. The assignee could reassign the note to others, with similar assignments recorded to reflect each reassignment. MERS changed this.

With MERS, the trust deed now generally reflects that the borrower conveys the property to the trustee as security for a note that the borrower gave to the lender. But the trust deed does not identify the lender as the beneficiary. It identifies MERS as the beneficiary, as the nominee for the lender Assignments of the trust deed do not occur. MERS keeps track of who owns the note. The MERS system enabled easier sales of the notes without any recording, in the state recording systems, of who had acquired the note. This reduced recording fees. However, it made it difficult, if not impossible, for the borrower or any other person to be able to track who holds the note.

3. MERS Foreclosures

As noted earlier, foreclosing by advertisement and sale is generally quicker and cheaper than a lawsuit. The particulars with regard to a trustee’s advertisement and sale are controlled by statutes in the state where the property is located. Those statutes vary somewhat from state to state. But the beneficiary decides whether to proceed with advertisement and sale. Traditionally, the holder of the note was either the original beneficiary or a successor beneficiary by virtue of a recorded assignment.

In order for MERS to be able to use advertisement and sale to foreclose, MERS’ position is that although it is not the person to whom the debt is owed, it is the beneficiary. This position has been rejected in Oregon and Washington. As a result, MERS cannot instigate foreclosures by advertisement and sale in those states. The Oregon Court of Appeals, on July 18, 2012, in Niday v. GMAC Mortgage, held that the beneficiary is the person to whom the monies are owed. That is the person for whose benefit the trust deed is given. The Oregon Supreme Court is reviewing that decision and has also been asked to determine if MERS is an appropriate beneficiary under the Oregon Trust Deed Act in a request from the US District Court for the District of Oregon.

The Washington Supreme Court in Kirstin v. MERS, decided on August 16, 2012, held that MERS is not a beneficiary because it is not the holder of the note. In essence, the decision is the same as the Oregon Court of Appeals. However, with the Washington Supreme Court being the highest court in that state, that decision is the law in Washington unless and until the Washington legislature passes a new law. In Oregon, we await our Supreme Court’s decision.

Other states don’t yet have a final decision. There are states where the ability of MERS to proceed with foreclosures on an advertisement and sale basis has not yet been halted and may not be. Nationally, the picture is muddy. Since the decisions are based on state law and the state statutes vary, we will likely face a myriad of decisions.

MERS loans are still “foreclosable,” but not by advertisement and sale. Both the Oregon Court of Appeals and the Washington Supreme Court, while concluding that MERS is not a beneficiary who can proceed with foreclosure by advertisement and sale, have expressly stated that that does not mean that the loans in which MERS is involved cannot be foreclosed judicially. Judicial foreclosures of mortgages are not creatures of statute like foreclosures by advertisement and sale. It appears very likely that MERS can foreclose judicially.

But, as discussed above, judicial foreclosure means more time and more expense. For assigned notes, which is most cases, if there are business records kept which reflect the assignments of the notes, judicial foreclosures could proceed, with records establishing the assignments being part of the evidence in the case. However, there may be situations where some of the intervening assignments have not been well documented. That may result in more witnesses or other evidence and, of course, even more time and expense, to make the required proof.

In the end, a process that would have required preparing and filing and serving documents and waiting 120 days to do an oral auction on the steps of the courthouse becomes a process of preparing and serving a lawsuit, dealing with discovery, filing a motion for summary judgment, perhaps having to go through trial, then obtaining a judgment which grants a short period (e.g. 30-60 days) for the debtor to pay off the debt, then allows the sheriff to sell the property, followed by the debtor having six months more to redeem the property. The additional cost and time and risk of adverse decision, depending on the facts of each case, makes judicial foreclosure far more burdensome to lenders.

4. Mandatory Mediation

To add to the situation, states have been enacting measures requiring mandatory mediation before a trustee can foreclose residential trust deeds by advertisement and sale. In Oregon, Senate Bill 1552 created a mandatory residential trust deed foreclosure mediation system. It affects lenders who have commenced more than 250 foreclosures of residences by advertisement and sale in the prior year. The lender and borrower meet with a mediator, with various documents required to be provided as part of the mediation. The lender must pay an additional $100 fee for filing of the notice of default. The Bill exposes a lender to fines for failure to comply. It adds time and expense. In short, it decreases the incentive for a lender to proceed non-judicially. This adds to the pressure from the MERS problems, for large scale lenders to simply go direct to judicial foreclosure, though it may also push lenders to the alternatives discussed below.

Mandatory foreclosure mediation statutes have an intended and very direct and substantial impact on large scale lenders. However, small lenders get caught, too. Lenders who lend occasionally and take trust deeds on homes of their borrowers may still have to deal with burdens from the mandatory foreclosure mediation program. While lenders who do not do 250 foreclosures by advertisement and sale in a year are exempt from the program, they must prepare exemption documents and file them appropriately and timely. If they fail to timely or appropriately file or make a mistake in the document, the foreclosure may not be valid. As a result, title insurers may be unwilling to insure title to property foreclosed by exempt lenders without some proof of the proper filing of the exemption document. What constitutes such proof remains to be established.

So, even for the small lender, the burden of proceeding with foreclosure by advertisement and sale has become greater and a judicial foreclosure may give the small lender more confidence.

5. Alternatives/Opportunities

If Lenders have to proceed with judicial foreclosures, their costs increase dramatically, both in terms of out-of-pocket expenditures and delay in being able to offer foreclosed homes to new purchasers. That should lead lenders to look for means to resolve these troubled loans and avoid that cost and delay. Lenders might be expected to be more open to short sales and to deeds in lieu of foreclosure. To the extent possible, they may also be more open to adjustment of loans. But the volume of loans in default, for a large lender, could, notwithstanding the additional time and cost, lead a large lender to conclude that it is easier to start foreclosure lawsuits and then particularly address only those where the borrower is motivated enough to appear and defend.

6. Conclusion

The impact of the MERS cases in Oregon and Washington, and mandatory mediation, dramatically reduces the opportunity for large lenders to foreclosure residential loans by advertisement and sale. It remains to be seen whether the effect is to encourage alternative resolutions of defaulting residential loans, or a massive increase in the number of lawsuits seeking foreclosure.

Alan brings more than 30 years of experience as an attorney, arbitrator and mediator to serve his real estate industry clients. A skilled mediator, he also works to bring opposing parties together to resolve disputes outside of the courtroom. You can contact Alan directly a AMS@SamuelsLaw.com.

It was the best of times, it was the worst of times… For business owners, the last few years have felt more like the worst of times than anything else. With sales down, many taxpayers have implemented innovative marketing and delivery strategies to meet their customers’ needs during the down economy. Indications are that the economy is slowly picking up and we’re starting to see more taxpayers with taxable income. The two threshold questions of state tax are: (1) does the taxpayer have nexus with a particular state? and (2) is what the taxpayer is doing/selling taxable in that state? This short article focuses on the first question. A future article will examine how the states’ definitions of taxable activities and products are changing.

In part due to the down economy, taxpayers have gotten more creative. Often taxpayers have expanded into new markets over the last few years and may not be aware that their increased “footprint” – or the geography where they do business – has created new tax and filing obligations. Add to that the fact that many states have modified the rules that govern when a taxpayer is taxable, and we’re sailing into a perfect storm of audit risk. This year, we saw a high-profile, local furniture company run afoul of the Washington Department of Revenue large number of questions from clients about their sales and activities. Therefore, I thought it would be worthwhile to go over a few of the basic rules governing state taxable nexus – defined as when a taxing jurisdiction can tax an out-of-state entity or individual.

We know from various constitutional cases in the last half of the twentieth century that a state government can only tax the economic activity of a business where there is “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” A bright line test is whether or not the taxpayer has a physical presence in the jurisdiction. The case of Quill Corp. v. North Dakota confirmed that, for purposes of sales and use taxes, the taxpayer must have a physical presence in the state for the state to be able to impose its sales tax on transactions with customers inside that state.

There is a well-publicized trend for state taxing jurisdictions that have a sales tax to implement so-called “Amazon”, or affiliate nexus, laws. Several jurisdictions noted the trend for internet retailers to have in-state affiliates direct e-commerce traffic back to the retailer’s site in exchange for a commission under a contract.

 

These states passed laws or interpreted existing laws to hold that the physical presence of the non-employee affiliate in their taxing jurisdiction was enough to create taxable nexus for the retailer. Although Amazon, the initial entity opposing these laws, has stopped fighting in many instances, we are seeing many other retailers weigh the risks and benefits of affiliate relation-ships to market their products.

The nineteenth century saw the rise of the door-to-door salesman. These “drummers” (since they drummed up business) would go from town to town selling products. Congress decided that it wanted to encourage interstate commerce and so it created a nexus safe harbor, now known as Public Law 86-272, which says that a state may not impose a tax based on net income on sales of tangible personal property where orders are sent outside the state for approval and are fulfilled from outside of the state.

There are a lot of misconceptions about how Public Law 86-272 works. I once had a client tell me that they didn’t have tax nexus anywhere other than Oregon because of Public Law 86-272, despite the presence of a sales force on the ground in 37 states. It is important to note that this only protects taxpayers against net income taxes and only in the case of sales of tangible personal property. So, a taxpayer who is protected under this law for income tax purposes may still be liable for sales or use taxes because they have sales personnel physically going into the state. Also, the Washington business and occupation tax, similar to other states’ gross receipts or franchise taxes, is not a net income tax. Thus, taxpayers who have sales employees going into Washington may also be subject to the state business and occupation tax.

Public Law 86-272 also only protects companies that sell tangible personal property. Most service providers are excluded from this protection. The Multistate Tax Commission, an organization of state revenue authorities, has advocated for the expansion of nexus standards to “economic nexus thresholds. In 2010, the State of Washington also adopted economic nexus standards that made businesses subject to its business and occupation tax if they had $250,000 in Washington sales or more than 25 per-cent of their total sales in Washington – even where they did not have a physical presence in Washington. As an example of how this plays out, many states (including Oregon) are asserting economic nexus against taxpayers that are in the financial services industry. These companies are not usually based in Oregon, but may have substantial cardholder or depositor activity in the state. Oregon would argue that this constitutes “doing business” in the state and should subject these financial institutions to Oregon tax.

I want to conclude with two cautions for our clients. One of the most common mistakes I see is taxpayers filing tax returns only in the jurisdictions they filed in last year. Since the way businesses sell goods and services has evolved in the last few years, and since the law in this area is constantly changing, I strongly recommend that taxpayers review their taxable footprint on an annual basis and evaluate whether the taxpayer wants to begin to file in any new jurisdictions or if it makes sense to keep filing in all the historic jurisdictions. It has been my experience that it is safer, and less costly in the long run, to know where your business may be taxable than to find out in the context of an audit.

Additionally, I recommend that taxpayers who receive nexus questionnaires from state revenue authorities consult with their attorney or accountant on the best way to answer the questions. Many times the questions on these letters are ambiguously worded. An answer that creates the idea with the state revenue authorities that you are subject to tax in a jurisdiction can be very difficult to refute later in the audit or appeal process.

Valerie is passionate about adding value to her clients’ businesses and having an immediate, positive influence. When working with individual clients, she strives to improve their lives by taking complex tax situations and breaking them into manageable pieces with achievable outcomes. You can contact Valerie directly at vsasaki@samuelslaw.com.