Protect Your Assets

The following are a few tips on protecting your assets from financial disaster:

1)  Hold property in an entity.

A properly established and administered entity can protect your assets from lawsuits and claims made against you.  It is necessary, however, to be sure to follow all formalities necessary in administration of the entity; otherwise, you risk a court “piercing the veil” and attaching your assets to a claim or lawsuit.

2)  Never enter into a General Partnership.

A general partnership will form as the default entity of a mutual business agreement.  Without a proper business entity, all of your assets are liable to be lost in a lawsuit.

3)  Subdivide Property Holdings into Separate Entities

By creating separate entities for each unit of real estate, you protect each individual parcel from suits on the other.

4)  Consider the tax impact.

Holding real estate in a C-Corp, for instance, is a poor idea due to the tax costs of liquidation under subchapter C of the Internal Revenue Code.  Any appreciating asset should be held in an LLC to avoid any great tax burden upon sale and liquidation.

5)  Carry adequate insurance.

This is one of those “duh” kind of things.  Insure your assets, as there is no greater protection from depletion.

6)  Dilute ownership

By removing 100% ownership of an entity, any suit against you personally will be sure to protect a portion of the companies assets.  For closely held businesses, a family estate plan may be utilized to help dilute assets through separate classes of stock and annual gifts.

7)  Buy-sell agreements with fellow shareholders, partners or members.

Purchase life insurance on one another and enter into an agreement that any remaining business partners will purchase your share in the company with the value of the life insurance.  This eliminates what otherwise could be a giant headache.

8)  Consider creating a trust.

There are a vast number of trust planning strategies that allow for the protection of assets.  What kind of trust to use depends greatly on your particular circumstance.

9)  Create a QPRT.

Placing your personal residence in a Qualified Personal Residence Trust can help protect yourself from judgments and creditors and prevent you from homelessness.

10)  Invest in exempt assets.

An IRA, 401(k), SEP and annuities are all examples of exempt assets that will be protected from creditors.

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The IRS is coming!

It’s tax season, you’ve filed your taxes and owe the federal government a decent chunk of change without the means to pay in full the amount due.  What do you do?

There are a few different options to pay your tax bill:

1.  Offer in Compromise

In pursuing an Offer in Compromise, you offer an amount considerably less than the total amount due and request that the IRS accept that amount as full satisfaction of the tax debt owed.  You’ll want to show that you cannot pay the full amount due and their collection efforts will be relatively fruitless in order to have the greatest success in this measure.  This is often a common step taken to reduce the amount of debt owed.

2.  Installment Plan

The IRS often attempts to get their taxpayer into a payment plan that results in you paying the entire amount over a period of time.  This should probably be your last choice, as you won’t catch a break.

What if you don’t think you owe the full amount?

Contest the amount.  There are various ways to do this depending on the type of tax owed.  It is important to have a professional experienced in this field review your case in order to determine whether the IRS is wrong in their position.  Often times, a professional will be able to abate any penalties, reduce interest and potentially eliminate the principal.  You will surely want someone advocating for your side if contacted by the IRS so that you may even the playing field.

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Modifying Child Custody in Indiana

Modifying child custody in Indiana involves a two-pronged test.  First of all, there must be a substantial change in one of a number of factors provided by statute that the court may take into consideration.  Those factors are:

1)  The age and sex of the child.

2)  The wishes of the child’s parent or parents.

3)  The wishes of the child, with more consideration given to the child’s wishes if the child is at least fourteen (14) years of age.

4)  The interaction and interrelationship of the child with:

A)  the child’s parent or parents;

B)  the child’s sibling; and

C)  any other person who may significantly affect the child’s best interests.

5)  The child’s adjustment to the child’s:

A) home;

B) school; and

C) community.

6)  The mental and physical health of all individuals involved.

7)  Evidence of a pattern of domestic or family violence by either parent.

8)  Evidence that the child has been cared for by a de facto custodian.

If a substantial change can be shown in one of these eight factors, the first prong of the custody modification test has been met.

Secondly, the petitioner must indicate that it would be in the best interests of the child to have custody changed.  The default rule is to maintain stability for the child, thus, custody changes have a high burden to prove.  Yet, if the petitioner can show that the custodial parent’s actions are indicia of neglect, instability, inability to provide for the child and a number of other actions, the best interests of the child prong may be met.

While changes in custody are often difficult to achieve, they are far from impossible.

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Court of Appeals says you can now be drunk AND annoying

Interesting decision from the Indiana COA striking down the portion of the Public Intoxication statute that made it illegal to be both drunk AND annoying.

Click to access 02131403par.pdf

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February 17, 2014 · 5:54 pm

Real Estate Transactions

What is the Role of a Real Estate Attorney?
The Purchase or Sale of your home is one of the most important transactions you will ever make. The process of buying a home requires attention to numerous details, many of which require extensive knowledge of local real estate laws. Therefore, it is advisable to consult with and enlist the services of a knowledgeable real estate attorney.
The role of an attorney is particularly important in the following matters:
A. Purchase and Sale Agreement
To avoid potential complications, it is advisable for both the buyer and seller to enlist the services of a real estate attorney prior to signing a Purchase and Sale Agreement. By doing this, each attorney can help make his/her client aware of the legal ramifications of each clause in the Purchase and Sale Agreement.
B. Title Search
This is accomplished by examining the records at the Registry of Deeds and, in some cases, the Registry of Probate of the county in which the property is located to insure that the owner does in fact have a good, clear record and marketable title to the property. The title search will also reveal any encumbrances, rights of way, easements, restrictions and any other matters or conditions which may affect the property.
C. The Closing
This is the final financial settlement. The buyer, the seller, their respective attorneys and the attorney for the mortgage holder meet to finalize and execute all the closing documents. These include, among many others:
  1. The Deed
  2. Discharges of Mortgages
  3. Promissory Note and Mortgage
  4. The Truth in Lending Statement which documents all finance charges
  5. Survey or Mortgage Plot Plan
  6. Final Accounting which involves a prorating of property taxes, water bills, etc.
D. After the Closing
After the closing, the title examination is updated and the Deed, Mortgage and other miscellaneous documents, including a Municipal Lien Certificate from the town or city in which the property is located are recorded in the Registry of Deeds, at which time title to the property is transferred to the new owner.
The attorney’s role is to make sure that his/her client is informed and protected through the transaction. When choosing an attorney, keep in mind that many specialize in certain aspects of legal practice. You should take the time to make sure that the attorney you choose is familiar with local real estate laws and practices.

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The Power of Attorney

People often mistakenly believe that the only way they may be able to make important decisions for their loved ones when a loved one becomes incapacitated is if they are their spouse.  This is categorically untrue and much of it stems from uninformed statements collaborated by influential outlets.  Whether you’re married, divorced, single, widowed or have a long-term significant other, you may designate that person as your attorney-in-fact at any time.  The medium by which you accomplish this is the Power of Attorney.

Generally, the Power of Attorney comes in two forms: 1) a Durable Power of Attorney and 2) a Health Care Power of Attorney (or Advanced Health Care Directives.)  Both serve different purposes, and will be explained further below.  Before giving a brief explanation of the two, however, it is important to note that these documents are generally drafted with your Last Will and Testament, a document that all individuals should strongly consider having (see earlier blog post).

The Durable Power of Attorney

The DPOA is a document that appoints an individual as attorney-in-fact over your financial affairs.  Under Indiana law, a DPOA can include the following specific powers:

real property transactions; tangible personal property transactions; bond, share and commodity transactions; retirement plans; banking transactions; business operating transactions; insurance transactions; transfer or payable on death transfers; beneficiary transactions; gift transactions; fiduciary transactions; claims and litigation; family maintenance; benefits from military service; records, reports and statements; and estate transactions.

Furthermore, the DPOA includes a grant of broad powers pursuant to IC 30-5-5-19.  This allows the DPOA to essentially handle all of your matters for you, in the event that you become incapacitated.

This document is paramount to your financial well-being in the event that you become incapacitated.  If you fail to have a Power of Attorney, your family will find themselves in a situation in which they must petition the court for a guardianship over you and your financial matters.  These can often be strung out and expensive, and financial matters may not be handled as quickly as they need be handled.  The added stress of this situation can all be alleviated by simply planning ahead with an estate plan and power of attorney.

Health Care Power of Attorney

The Health Care Power of Attorney gives authority to an individual to make important medical decisions in the event that you become incapacitated.  The power authorized by IC 30-5-5-16 include:

To employ or contract with servants, companions or health care providers to care for you; To consent or to refuse health care for you; To admit or release you from a hospital or health care facility; To have access to records, including medical records, concerning your condition; To make anatomical gifts on your behalf; To request an autopsy; and To make plans for the disposition of your body.

This is a rather morbid topic, however, planning for this can relieve a great amount of stress and weight from your family’s shoulders.  This simple document can allow an individual to make decisions tantamount to your health, that otherwise may not be available to that individual.  This is a subject you must discuss with your attorney-in-fact for your advance health care directives, and be clear about what you want done.

There really is no reason to put these planning documents off.  Every day they are put off, which happens all too often, is another day you risk not having a decision-maker in place for you in the event that you become incapacitated.

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Administrative Dissolution

Imagine moving along day-by-day, business as usual, when you receive mail from the Indiana Secretary of State notifying you that your company has been administratively dissolved.  Some would panic, some would throw the notice away without reading it and some would call their registered agent and/or attorney to figure out just what was going on.  We strongly suggest the latter, understand the panic and advise you to read your mail.

Indiana Code 23-1-46-1 provides:

The secretary of state may commence a proceeding under section 2 of this chapter to administratively dissolve a corporation if:

1) the corporation does not pay within sixty (60) days after they are due any franchise taxes or penalties imposed by this article or other law;

2) the corporation does not deliver for filing its biennial report to the secretary of state within sixty (60) days after it is due;

3) the corporation is without a registered agent or registered office in this state for sixty (60) days or more;

4) the corporation does not notify the secretary of state within sixty (60) days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or

5) the corporation’s period of duration stated in its articles of incorporation expires.

Failing anyone of these options will result in the Secretary of State dissolving the corporation administratively.  This means that your company is not legally allowed to carry on any business except that business which involves winding up and dissolution.

If you timely respond to the notice provided by the Secretary of State and correct each ground for dissolution to the reasonable satisfaction of the Secretary of State within 60 days, you can avoid this administrative dissolution.  Many small business (if not all) will struggle to survive if they cannot produce revenue over time and may lose clients permanently due to this administrative dissolution.  Once the dissolution is completed, however, there is a reinstatement process that can take up to two to three months.

The reinstatement process is relatively simple and can be completed by you, your registered agent or attorney.  The process includes the following:

Step 1:

Complete forms AD19 Reinstatement Affidavit and ROC-1 Responsible Officer Information forms.  Mail these forms to the Indiana Department of Revenue, and allow at least four weeks for processing.  Once you receive your Certificate Clearance stating that no tax is owed by the entity, continue forward.

Step 2:

Complete State Form 4160 Application for Reinstatement.

Step 3:

Complete State Form 48725 Business Entity Report and pay the filing fees ($15.00 for for-profit entities, $10.00 for non-profit entities) for all years owed.

Step 4: Mail all forms with the Certificate of Clearance from the Department of Revenue to the Secretary of State, along with all fees ($30.00 Reinstatement fee plus all business entity report filing fees.)

Everything must be mailed together and a check or money order must be sent.  No Cash!

Once everything is processed and the Secretary of State is satisfied with your application, your corporation will be reinstated.

What is the lesson from all of this?  Stay on top of your company.  Be organized and practice ordinary business diligence.  Be sure to stay informed, and have a knowledgable registered agent that can assist you with your corporation’s legal maintenance.

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Modern Families Taking On The IRS?

Very well put. Certainly true that the earlier you get a professional involved, the more money you could save on fees!


The opening screen depicts the three families ...

Thinking about a family member taking on the IRS on your behalf might bring a smile to your face, but it might be better than doing it yourself. According to a well-worn phrase, a lawyer who represents himself has a fool for a client. Representing yourself can occasionally make sense, but it rarely does in tax disputes. Of course, you should make sure your lawyer or accountant is armed with all of the documentary support relevant to your case.

But when it comes to sitting down with the IRS audit staff, IRS Appeals Officer or arguing in court? It’s generally a mistake. There’s too much that can wrong and you aren’t objective. What’s more, you put yourself in a position where you may have to answer questions your representative could dodge.

But what about a family member? Can someone appear on your behalf, say your father, mother, spouse, son or daughter?…

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Willful and Responsible – The IRS Test

When seeking to collect certain withholding taxes, the Internal Revenue Service will attach any individual who may be responsible, in any manner, for the collection and turning over of said tax.  This can be quite the wide net cast by an entity whose resources are effectively limitless and who does not have much incentive to back off of their collection attempts.  Because of this, it is important to know the test which the IRS will use to determine whether an individual is liable for the certain tax that is owed.

To start, the Internal Revenue Code, at section 6672, imposes the following duty:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Two conditions must be met before an individual can be held liable under this provision: (1) she must be responsible for the collection and payment of withholding taxes, and (2) she must willfully fail to collect and pay them over.  See Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976); Pacific National Ins. V. United States, 422 F.2d 29 (9th Cir. 1976).  The test of responsibility under section 6672 is a functional one, which focuses upon the degree of control and influence which the individual exercised over the financial affairs of the corporation and, more specifically, over the disbursement of funds.  See Taubman v. United States, 499 F.Supp. 1133 (E.D. Mich. 1978).  Liability attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government.  Scott v. United States, 354 F.2d 292, 296; see also Gefen v. United States, 400 F.2d 476, 482 (5th Cir. 1968), cert. den’d, 393 U.S. 1119, 89 S.Ct. 990, 22 L.Ed.2d 123.

The Court in Benoit v. Commissioner of Revenue specifically sets out indicia of responsibility as follows:

1)    ID of officers, directors & stockholders;

2)    Ability to sign checks on behalf of the corporation;

3)    ID of individual who hires and fires employees;

4)    ID of individual who was in control of financial affairs; and,

5)    Those with an entrepreneurial stake in the corporation.

Benoit v. Commissioner of Revenue, 453 N.W.2d 336, 344 (Minn. 1990).   Federal law treats the person with effective power to pay the tax as the “responsible person.”  Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983).  Courts read the term “responsible person” expansively.  O’Callaghan v. United States, 943 F.Supp. 320, 324 (S.D.N.Y. 1996).  An “employee with the power and authority…to direct the payment of taxes is a responsible person within the meaning of section 6672.”  Feist v. United States, 221 Ct.Cl. 531, 607 F.2d 954, 960 (1979).

In the responsible person analysis, the answer often pivots on whether the person had power to make tax payments in light of the enterprise’s financial organization and decision-making structure.  O’Connor v. United States, 956 F.2d 48, 51 (4th Cir.1992).  This is fact-intensive; in some instances, employees who perform clerical functions of collecting and paying taxes are not responsible persons.  Feist, 607 F.2d at 957, 960.

While that sums up the responsible person analysis, what of the willful person?  A number of courts have addressed the “willful” component of section 6627.  These courts have defined the term “willful” in this context to mean voluntary, conscious and intentional (as opposed to accidental) decisions not to remit funds properly withheld to the Government. Spivak v. United States, 370 F.2d 612, 615 (2d Cir. 1967), 499 F.2d 90, 94 (4th Cir. 1962); Hewitt v. United States, 377 F.2d 921, 924, 22 A.L.R.3d 1 (5th Cir. 1967); Flan v. United States, 326 F.2d 356, 358 (7th Cir. 1964); Bloom v. United States, 272 F.2d 215, 223 (9th Cir. 1959).  The Court in Kizzier v. United States stated that

“A responsible person acts willfully within the meaning of [section] 6672 if he acts in such a manner that he knows or intends that, as a consequence of his conduct, withheld employment taxes belonging to the government will not be paid over but will be used for other purposes.”

Kizzier v. United States, 598 F.2d 1128, 1132 (CA 8 1979).

Therefore, to be held liable for certain withholding taxes not withheld, the individual must both be responsible (i.e. be required to withhold and pay over certain taxes) as well as willful (i.e. intentionally carry out conduct that brings about a certain known consequence).  Failing to meet one of these criteria will alleviate an individual from the penalties imposed by the IRS concerning withholding.

Internal Revenue Service Circular 230 Disclosure: In compliance with IRS requirements, you are on notice that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Operating Agreements in your Business Plan

We are often asked about how easy it is to “set-up” a Limited Liability Company in Indiana.  The response, in all reality, is easy.  Really easy.  By filling out a few forms for the Secretary of State, you can have an LLC within a few days of application.

But the true reason entrepreneurs seek an attorney for their start-up is not to simply create the LLC.  If that’s all the client wanted, they would buy “Incorporating for Dummies” and go along with their business venture as they see fit.  The purpose for seeking an attorney is to draft a complete Operating Agreement that acts as your business’s governing document.

The Operating Agreement can be as simple as a one page document to as complex as the Internal Revenue Code.  The following are a few provisions, however, that every Operating Agreement should have, regardless of complexity, size or business purpose.

Dissolution and Winding Up

It is important to hash out prior to the creation of your entity how you will dissolve that entity if the entity fails or runs it’s course.  The reason behind this is pretty obvious; when the time comes that the business is failing, the last thing on your mind will be an orderly, responsible dissolution of the company.  Planning ahead for this will save time, money and relationships between business partners.

Transfer of Membership

You may need to discuss the transfer of ownership in any entity.  Often times, Members of an LLC will wish to have first rights of refusal over any transfer of membership.  These provisions will help protect the distribution of future interests to certain individuals, and allow for the already vested Members to have an opportunity to buy out the share of membership attempting to be transferred.

Qualified Income Offset Provision

The Qualified Income Offset (or “QIO”) provision saves Members of an LLC a lot of tax grief and expense.  The purpose of the provision is to protect the Member from unanticipated distributions of expenses and deductions that drive the Member’s capital account below zero.  This provision forces the accounting to automatically apply revenue and income to the Member’s account first until his account reaches, or goes above, zero.

But why is this necessary? 

If your LLC’s Operating Agreement does not include a QIO, then come tax day you’ll be in for a rude awakening.  Without the QIO, your allocations may not have substantial economic effect, and without substantial economic effect, the IRS will not respect your allocations.  This can throw your entire accounting plan out the window, and require you to pay an inordinate amount in taxes that you otherwise were not expecting to have to pay.  This, of course, will be avoided if you choose to be taxed as a corporation under Subchapter C of the Internal Revenue Code.

Minimum Gain Chargeback (“MGC”)

If you’re going to pledge collateral for a loan that you will not be personally guaranteeing (often times advisable), then you will need an MGC provision.  This provision is required to be included in your agreement if you want to allocate in any other manner other than the default allocation method based on your interest in your entity.

These four provisions can save you a lot of headaches when it comes to your business entity.  Without them, you risk large problems in the future that could potentially cripple all of your hard work.

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