6th Annual Kentucky Commercial Real Estate Conference

For all of my commercial real estate friends, the 6th Annual Kentucky Commercial Real Estate Conference will be held next week on Wednesday, November 2, 2016, at the Seelback Hilton Louisville, 500 S 4th St, Louisville, KY 40202.

KCREC is a conference for commercial real estate professionals and others who are affiliated with the commercial real estate industry. The conference focuses on changes and opportunities in commercial real estate and land use in Kentucky. KCREC provides attendees with the opportunity to earn continuing education credits that are necessary to meet licensing requirements, including attorney CLE credits required by the Kentucky Bar Association.

Conference check-in will begin at 8:00 a.m., with the breakfast/morning general session starting at 8:30 a.m., followed by educational sessions throughout the day starting at 9:00 a.m.

Please visit the CONFERENCE SCHEDULE for a complete schedule and list of presenters, some of Kentucky's most knowledgeable practitioners and experts in their fields.

The registration fee to attend KCREC is $169.00 per person before October 28, 2016, and $199.00 after October 28, 2016 and for on-site registration the day of the conference. You can register on the CCIM WEBSITE or by calling the Kentucky CCIM office at (502) 515-2246.

For more information, please visit the CCIM website at http://www.kycommercialre.com, or contact Anne Ray at aray@ar-hq.com, or you can call the Kentucky CCIM office at (502) 515-2246.

See you next week in Louisville!

KBA 2016 Securities Law Conference

As a former Chair of the Kentucky Bar Association Section on Business Law, I would like to invite my attorney friends to attend the KBA's 2016 Securities Law Conference on October 28th in Louisville, Kentucky.

 

This will be the KBA's first year hosting the biennial Securities Law Conference, previously sponsored by the University of Kentucky. We have a distinguished group of speakers lined up to update attendees on the latest developments in state and federal securities laws:
 

• Professor Rutheford B. Campbell, University of Kentucky College of Law 
• Professor Joan M. Heminway, University of Tennessee College of Law 
• Professor Dennis R. Honabach, Northern Kentucky University Chase College of Law 
• Alan K. MacDonald, Frost Brown Todd LLC 
• Professor Douglas Michael, University of Kentucky College of Law 
• Escum L. “Trey” Moore III, Moore & Moore PLLC 
• A.J. Singleton, Stoll Keenon Ogden PLLC 
• Professor Manning G. Warren III, University of Louisville Brandeis School of Law  

A seminar brochure (PDF) with the complete agenda, presenters, and driving directions is available by clicking on this link.

 

The full-day CLE program will be held on October 28, 2016 at the Hyatt Place Louisville - East, located at 701 South Hurstbourne Parkway in Louisville. The program has been accredited in Kentucky for 7.0 Continuing Legal Education (CLE) credits, including 1.0 Ethics credit. Registration is $135 and includes a copy of the seminar materials, continental breakfast (starting at 7:30 a.m.), and lunch at the program.

 

Registration

To attend the program, attorneys must register online at http://www.kybar.org/event/securitieslaw and pay by credit card (VISA, Mastercard, American Express, and Discover accepted). After completing the online registration information form, be sure to click the yellow “Save & Finalize Registration” button at the bottom of the page or your registration will not be recorded. You will then be taken to the payment page where you will enter your credit card information. After doing so, you must click the yellow “Proceed to Confirmation” button at the bottom of the payment page to finalize your registration. 

 

If you an attorney and are unable to log-in to the KBA website, please contact Machell Smith at msmith@kybar.org or (502) 564-3795 ext. 291. Other registration questions should be directed to Lori Alvey at lalvey@kybar.org or (502) 564-3795 ext. 253. 

 

Special Needs

 

If you plan to attend the program and will need special facilities or assistance relating to a disability, please mark the appropriate box during the online registration process or contact Lori Alvey at lalvey@kybar.org or (502) 564-3795. 

 

Make Your Plans Today!

 

Space is still available for the KBA's 2016 Securities Law Conference, and I hope you will take this opportunity to make your plans to attend. Registration for this program will close on October 21, 2016 or when the program reaches attendance capacity. See you there!

New HUD Guidance on Criminal Background Checks

Landlords and sellers that use criminal background checks to screen their tenants and buyers may be violating the U.S. Fair Housing Act. On April 4, 2016, the U.S. Department of Housing And Urban Development (HUD) issued a Guidance reviewing discriminatory housing practices based on an applicant’s criminal history. According to the new Guidance, housing decisions based arbitrarily on an individual’s criminal history can violate the U.S. Fair Housing Act. See Office of General Counsel Guidance on Application of Fair Housing Act Standards to the Use of Criminal Records by Providers of Housing and Real Estate-Related Transactions.

Background

As many as 100 million U.S. adults – or nearly one-third of the U.S. population – have some sort of criminal record. A discriminatory policy or practice can violate the U.S. Fair Housing Act where a denial of housing on the basis of criminal history has a negative impact on individuals of a particular race, national origin, or other protected class. According to the HUD Guidance, African Americans and Hispanics are arrested, convicted and incarcerated at rates disproportionate to their share of the general population, and thus criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers.

Substantial, Legitimate, & Nondiscriminatory Interest

To withstand muster under the Fair Housing Act, a discriminatory policy or practice must serve a “substantial, legitimate, nondiscriminatory interest” of the housing provider, and the interest can’t be served by another practice that has a less discriminatory effect. The Guidance discusses a number of practices that do not violate the Fair Housing Act. For example, Section 807(b)(4) of the Fair Housing Act does not prohibit discrimination “against a person because such person has been convicted … of the illegal manufacture or distribution of a controlled substance . . .” Section 807(b)(4) does not, however, allow housing discrimination against a person for a mere drug-related arrest, or for drug-related convictions such as possession. A discriminatory policy or practice must also take into account the nature and severity of an individual’s conviction, such as distinguishing between criminal convictions that indicate a demonstrable risk to the safety or property of other residents (such as convictions for rape, murder, assault, or arson), and criminal conduct that does not.

Arbitrary Bans on Arrests or Convictions

The Fair Housing Act prohibits both intentional housing discrimination and housing practices that have an unjustified discriminatory effect because of race, national origin or other protected characteristics. Under the Guidance, while the Fair Housing Act does not prohibit housing providers from appropriately considering an applicant’s criminal history, an arbitrary and overbroad criminal history-related housing ban is likely to lack any legally sufficient justification. Accordingly, a discriminatory effect resulting from a policy or practice that denies housing to anyone with a prior arrest, or to persons with any kind of criminal conviction, will violate the U.S. Fair Housing Act.

 

Additional information on the new Guidance is available from the U.S. Department of Housing And Urban Development (HUD) and the National Association of REALTORS^®.

 

Are You Liable for Your Company's Federal Tax Withholdings?

In March, the Internal Revenue Service issued Notice 784 entitled “Could You Be Personally Liable for Certain Unpaid Federal Taxes?” Of course, the answer to the IRS’s question is yes. The new IRS guidance attempts to clarify which individuals could be liable for a very serious Federal tax penalty known as the “trust fund recovery penalty.” 

 

Trust Fund Recovery Penalty

 

The IRS may impose the trust fund recovery penalty against any person who is responsible for and who willfully fails to collect, account for, or remit to the IRS any employee Federal tax withholdings. According to the Internal Revenue Manual, “responsibility is a function of duty, status and authority.” It’s called the trust fund recovery penalty because responsible persons are treated as holding the employee's taxes in trust until they are remitted to the IRS.
 

Employers are required to withhold federal income, social security, and Medicare taxes from their employees’ wages or salaries. These taxes are known as “trust fund taxes” and must be remitted by the employer to the Internal Revenue Service through electronic funds transfer of tax deposits or as payments made with the applicable tax returns.

If there is a willful failure to collect trust fund taxes, or if trust fund taxes are not truthfully accounted for and paid, or if the taxes are otherwise evaded or defeated in any way, the Internal Revenue Service may charge a trust fund recovery penalty and impose personal liability on any number of responsible persons. The penalty is equal to the amount of the trust fund taxes evaded, not collected, not accounted for, or not paid to IRS, and includes interest on the total amounts due.

 

Who Has to Pay the Trust Fund Recovery Penalty?

 

According to the IRS, any person or group who has the duty to perform and the power to direct the collection, accounting, or payment of trust fund taxes is personally responsible for the payment of trust fund taxes to the IRS. If the IRS can’t immediately collect the trust fund taxes from the employer or business, the IRS may take action against any responsible person or group if they acted willfully in failing to collect, account for, or pay the trust funds to the government.

For purposes of the trust fund recovery penalty, “willfully” means voluntarily, consciously, and intentionally. A responsible person acts “willfully” if the person was or should have been aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. No evil intent or bad motive is required. The IRS considers the payment of any other business expense instead of trust fund taxes, including the payment of compensation to employees, to constitute willful behavior.
 

The IRS may treat any person who had responsibility for certain aspects of the operations and financial affairs of the employer or business as a responsible person. Thus, it is possible for any of the following individuals to be a responsible person:

• An officer or an employee of a corporation
• A member or employee of a partnership or limited liability company
• A corporate director or shareholder
• A member of a board of trustees of a nonprofit organization
• Another person with authority and control over funds to direct their disbursement, which may include accountants, trustees in bankruptcy, banks, insurance companies, or sureties
• Another corporation or third party payer
• Payroll Service Providers (PSP) or responsible parties within a PSP
• Professional Employer Organizations (PEO) (employee leasing companies) or responsible parties within a PEO
• Responsible parties within the common law employer (client of PSP/PEO)

Once the trust fund recovery penalty has been assessed, the IRS may seize any of the assets of the person or business (except for certain exempt assets) and collect any trust fund taxes that are owed. Further, trust fund recovery penalties are entitled to priority status and are not generally dischargeable in bankruptcy. Thus, trust fund recovery penalties will remain a permanent financial obligation of a responsible person until the trust funds have been repaid to the IRS, or until the responsible person has paid off any offer in compromise agreement for a lesser amount they may have negotiated with the IRS.

 

Third-Party PSPs & PEOs

 

Many employers outsource some or all payroll duties to third-party payroll service providers (PSP), which help to ensure compliance with a company's IRS filing and deposit requirements. However, in the event the third-party PSP fails to remit the trust fund taxes to the IRS, the employer still can be responsible for the deposit of Federal employee withholdings and the timely filing of returns. Depending on the facts and circumstances, and the type of third-party arrangement, an employer who uses a third-party PSP to perform Federal employment tax functions on its behalf may still be liable for trust fund recovery penalties, even if the third-party PSP caused the violation that resulted in the IRS’s assessment of the penalty.

 

A professional employer organization (PEO), sometimes referred to as an employee leasing company, is a service provider that enters into an agreement with a client to perform some or all of the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client. A PEO also may manage human resources, employee benefits, workers compensation claims and unemployment insurance claims for the client.

 

Pursuant to the Tax Increase Prevention Act of 2014 (TIPA), a PEO that applies and is certified by the IRS may be considered the employer of any work site employee that performs services for any customer of the PEO. A certified PEO (and no other person) is treated as the employer liable for employment taxes with respect to wages paid by the certified PEO to a work site employee performing services for any customer of the certified PEO. The IRS's rules for its new certified PEO program are described in Revenue Procedure 2016-33.
 

Assessment of the Penalty

 

Once the IRS determines that a particular individual or company is a responsible person, the IRS will notify them of its intention to assess the trust fund recovery penalty. The individual or company then has 60 days (or 75 days for a person outside the U.S.) from the date of the IRS’s notice to appeal the assessment. If the individual or company fails to appeal the assessment within the required time period, the IRS will assess the trust fund recovery penalty and send the responsible person a notice and demand for payment. At that time, the IRS can begin collection efforts against the taxpayer’s property, including filing federal tax liens and commencing a levy or seizure action.

 

Avoid the Penalty

 

Business owners and other potentially responsible persons can avoid trust fund recovery penalties by making sure that all Federal taxes and other amounts withheld from employees' paychecks are collected, accounted for, and remitted to the IRS in a timely manner. Officers, directors, shareholders, members, managers and employees all have a vested interest and personal stake in making sure that all withholdings and other trust fund taxes are paid to the IRS. These individuals will not be protected by their organization’s limited liability shield under state law, and if the penalty is assessed, these individuals will not be able to file for bankruptcy protection to avoid personal liability for the trust fund recovery penalty.

Do You Need A Living Trust?

Every so often a client asks me to take a look at their living trust. You’ve probably heard how a living trust allows a person to transfer all of their assets into a trust to avoid costly probate proceedings and to keep their assets private. Where the living trust is revocable, the Internal Revenue Service generally ignores the living trust for tax purposes and treats the assets as being owned individually by the trust maker.

Despite these advantages, I typically discourage clients from using living trusts, especially where both spouses want to transfer their assets into a single trust. Managing one’s assets within a trust can be more complicated than most folks realize, and holding both spouse’s assets within a single trust can have unintended tax consequences.

 

Setting Up A Living Trust

 

Living trusts are usually created by signing a lengthy trust agreement, in addition to a will, a power of attorney, a living will, and other estate documents. (I have yet to meet a client that understands these lengthy living trust agreements.) Once the living trust document has been signed, the trust maker must then transfer all of his or her assets to the living trust. In the case of a joint living trust, the assets of both spouses must be transferred into the trust. To completely fund the transfer, new deeds, bills of sale, and vehicle transfer records will have to be drafted by an attorney and signed, and new bank and stock brokerage accounts will have to be opened. Depending on the size of the trust maker’s assets, this process can take quite a bit of effort and expense. If any substantial or important asset is missed, the executor or executrix of the first spouse to die will likely have to probate the deceased spouse's estate anyway, thus defeating one of the main reasons for having a living trust.

 

Joint Living Trusts

 

Significant tax issues can arise where spouses comingle their assets in a joint living trust, and this may jeopardize certain federal tax advantages and exemptions. For example, if the tax basis of each asset is not tracked separately for each spouse, a surviving spouse might not be able to claim a “step-up in basis” for any appreciation in the deceased spouse’s capital assets, such as real estate and stocks. Under Section 1014 of the Internal Revenue Code, the tax basis of a beneficiary in a decedent’s appreciated capital assets is usually the fair market value of the assets as of the date of death. (But there are always exceptions in the Internal Revenue Code.) It is difficult to claim this step up in basis if the surviving spouse has inadequate records and doesn’t know which spouse contributed which asset to the living trust and what they paid for each asset.

 

The IRS might also treat a transfer of assets of unequal value into a joint living trust as a taxable gift between spouses that does not qualify for the unlimited marital gift tax deduction. Further, where assets are commingled in a joint living trust, the IRS might choose to disregard a credit shelter trust and assign all of the assets in the living trust to one spouse or the other.

 

Credit Shelter Trusts

 

In estate planning, “portability” is the ability of a deceased spouse’s personal representative or executor to make an election on the decedent’s estate tax return (IRS Form 706) to transfer the “deceased spouse’s unused exclusion” (the “DSUE”) to the surviving spouse. For married couples, one of the main goals of estate planning is to maximize each spouse’s estate tax exclusions. Before Congress adopted portability of the marital estate exclusion in the American Taxpayer Relief Act of 2012, maximizing estate tax exclusions was usually accomplished by creating a credit shelter trust upon the death of the first spouse, because the deceased spouse’s estate tax exemption did not transfer to the surviving spouse along with the deceased spouse’s assets. With a credit shelter trust, the deceased spouse’s assets were held in trust during the life of the surviving spouse up to the amount of the federal estate tax exclusion, thus providing the surviving spouse with some benefit from the decedent’s assets without those assets actually being transferred to the surviving spouse’s taxable estate. However, the heirs of the surviving spouse lost any "step up in basis" on assets held in a credit shelter trust because the assets technically were never owned by the surviving spouse.

 

Many joint living trusts drafted before 2012 included credit shelter trusts to preserve the estate tax exemption upon the death of the first spouse. However, with the passage of the new portability rules, and the substantial increase in the federal estate tax exemption that occurred in late 2010, currently set at $5,450,000 per spouse, credit shelter trusts have largely become unnecessary except for couples with very large estates. However, many living trusts formed before 2012 still require the creation of a credit shelter trust upon the death of the first spouse, even for trusts with a relatively small amount of assets. This can create hardship for the surviving spouse -- not to mention the loss of any step-up in basis for the heirs of the second spouse for assets in the credit shelter trust -- because upon the death of the first spouse all of the assets in the living trust must be allocated into either the credit shelter trust or the trust for the surviving spouse. And given that assets in the credit shelter trust will typically be restricted, having a substantial portion of the surviving spouse's assets tied up in a credit shelter trust can increase the difficulty of managing those assets, and might also lead to a shortage of funds for the surviving spouse if a third party trustee or co-trustee has to approve whether or not the surviving spouse is allowed to have access to those funds.

 

Do You Need A Living Trust?

 

Unless spouses have a great and unusual need for privacy in order to shield their assets from disclosure in probate proceedings, living trusts are usually more trouble than they are worth. Probate proceedings become expensive when family members fight among themselves, and that can happen whether you have a living trust or a will. The expense of setting up a complex living trust, and then transferring all of your assets into the trust, and then managing all of your assets from within that trust, can greatly exceed the relatively simple modern process of probating one's estate after your death. And if the living trust has been drafted poorly, or if a joint living trust has been used, or if the surviving spouse does not maintain careful records, heirs can frequently find themselves with a host of tax problems that would not have existed had they used a simple will.

The ABC’s of Kentucky Business Entities

Clients constantly deal with a variety of business forms. Knowing something about business entities can make a difference, whether you are starting a new company or doing business with others. While federal tax issues drive many of the decisions about business forms, you should also know something about how they differ from one another under state law.

Sole Proprietorship

A sole proprietorship is the simplest form of doing business – one person sells a product or provides a service without operating in any particular business form. A sole proprietor is a person that works for himself or herself (i.e., a lawyer, accountant, doctor, freelance photographer, carpenter, etc.), and hasn’t applied to the Kentucky Secretary of State to operate as a particular business form. A sole proprietor can be nothing more than a person doing business under a name – Joe’s Auto Glass.

Joint Venture

A joint venture is a common enterprise undertaken for mutual benefit and for a particular transaction. A joint venture is not really a separate business form, but a loose common enterprise for a limited purpose. The individual co-venturers may or may not decide to form a separate business entity to conduct their venture. For example, a nonprofit hospital and a physician group might form a joint venture to purchase a new MRI machine, and agree to share their expenses and revenues for its operation. The hospital and physician group could own the MRI machine in both their names, or they could form a new LLC to own and operate the machine. Either way, it is the limited nature of the common enterprise that defines a joint venture.

General Partnership

A general partnership in its simplest form is much like a sole proprietorship with more than one owner. The partnership is not required to register with the Kentucky Secretary of State unless it uses an assumed name, and might not even have a written agreement among its partners. Unlike sole proprietorships, however, general partnerships are governed by very complex state organizational laws and federal tax laws. The most unique feature of a general partnership is the agency relationship that exists among its owners – each partner is an agent of the partnership for the purpose of its business. An act of a partner for carrying on the partnership’s business in the ordinary course binds the entire partnership, unless the partner had no authority to act for the partnership, and unless the person with whom the partner was dealing knew that the partner lacked authority to act.

Limited Liability Partnership

A limited liability partnership is a general partnership in which the partners have filed a statement of qualification with the Kentucky Secretary of State. The statement of qualification provides partners with partial limited liability while keeping the flexible business structure of a general partnership. In almost every other way, LLPs function as ordinary general partnerships.

Limited Partnership

Limited partnerships are partnerships formed by two or more persons with two separate classes of partners – general partners with full liability and limited partners with limited liability. Before the advent of LLCs, many horse syndications were formed as limited partnerships. A general partner has all the rights, duties, and obligations of a partner in a general partnership. The limited partners, however, do not participate in control or management of the limited partnership, may not contribute services, and have liability only to the extent of their contributions.

Corporations

A corporation is a legal entity created under the authority of the laws of its state of incorporation, where the ownership shares of the business are held by an individual or a group of individuals, or by an entity or group of entities, or some combination of these. The Kentucky Business Corporation Act vests corporations with “the same power as an individual to do all things necessary or convenient to carry out its business and affairs,” including the ability to “purchase, receive, lease, or otherwise acquire, own, hold, improve, use and otherwise deal with, real or personal property, or any legal or equitable interest in property,” unless otherwise specified by its articles of incorporation. KRS 271B.3-020(1)(d). A typical corporation is made up of shareholders, directors, and officers, each of whom play a different role in owning, supervising, or operating the business of the corporation.

Limited Liability Companies

Limited liability companies are the Swiss army knives of Kentucky business forms. Most closely held companies are now organized as LLCs. Members of LLCs have limited liability from the general business obligations of the company, but typically have liability for their own wrongful actions. LLCs are flexible, and can be organized to operate like other business forms. For example, an LLC can be set up with a board of directors and officers like a corporation, or with general and limited members like a limited partnership.

LLCs come in two main varieties – member-managed and manager-managed. A member-managed LLC operates like a partnership, where all owners vote in proportion to their ownership. A manager-managed LLC operates much like a limited partnership, where the managers exercise control and the members do not participate in management.

Tenants Beware of Commercial Lease Boilerplate

Commercial leases are tough for clients to read. And even the best of clients usually skip over the legal boilerplate. Everything in a commercial lease is important, and the long expanses of unreadable legalese are written to protect the landlord and not the tenant. Ignoring the "small print" in commercial leases can really put your company at risk.

Indemnification & Subrogation

A typical commercial lease usually requires a tenant to reimburse and hold its landlord harmless from losses from the tenant’s own negligence. Consider where a landlord carries property insurance on its building, paid for by the tenant's common area maintenance charge. Where a tenant’s employee accidentally causes a fire, the landlord will use the insurance proceeds to repair the building. However, without a waiver of subrogation rights, the insurance company can “step into the shoes” of the landlord and sue the tenant under the lease indemnity clause.

Tenant Relocation

Under a lease relocation clause, the landlord can require the tenant to move to another space. This gives the landlord flexibility to combine vacant space and attract new tenants. Relocation can be very expensive and inconvenient for existing tenants, causing an interruption in business operations and a host of unexpected costs. At a very minimum, the landlord should pay the tenant’s moving expenses and incidentals if the tenant is forced to move.

Subordination, Non-Disturbance & Attornment

A tenant subordination clause says that the tenant's lease rights are junior to the rights of the landlord’s bank. Among other things, this allows the bank to evict the tenant in a foreclosure suit against the landlord. With a non-disturbance clause, the bank agrees to not to evict the tenant in foreclosure. The attornment clause is the tenant’s agreement to recognize any new owner of the building after a foreclosure as the new landlord. Where all three clauses exist in a lease, the mortgage holder can foreclose with a clean title, the bank will not evict the tenant during foreclosure proceedings, and the tenant will recognize the new building owner as its new landlord.

Assignment & Subletting

Economic circumstances change, and a struggling tenant that is two years into a five year lease may find itself needing to get out of its existing lease. With an assignment, the original tenant transfers its lease to a new tenant, and it is a matter of negotiation whether or not the original tenant remains liable to the landlord under the lease. With a subletting, the original tenant leases its space to a new subtenant, while the original tenant continues to be primarily obligated to the landlord. Usually the landlord has the right to approve the new occupant. A subtenant should consider signing a side agreement with the landlord in order to preserve the subtenant's lease rights should the original tenant default under the lease.

 

Landlord Obligations

Finally, some commercial leases don't contain any obligations at all for the landlord other than to collect rent. This can really become a problem when the roof leaks, the sewer backs up, the parking lot needs repaving or snow removal, or the building needs repainting. Because commercial leases in Kentucky are almost pure creatures of contract, the lease should always spell out in detail what maintenance obligations the landlord is required to perform for the building and surrounding land.

Read the Boilerplate

Clients tend to think that most of their seventy page commercial lease is unimportant "boilerplate." To the contrary, most of these provisions have been specially written to protect the landlord, and can create substantial expense for a tenant at the worst possible time. Tenants need to read, understand, and negotiate their commercial leases before they sign them. Ignoring what looks like ordinary boilerplate can put a tenant’s company at serious risk.

 

*An earlier version of this article appeared in Business Lexington.