Do your due diligence to maximize the terms of your real estate deal


When purchasing a commercial property, there is a lot of “homework” that a buyer should do, both before and after signing an agreement of sale. When buyers do preliminary due diligence before signing an agreement of sale, they can avoid costly negotiations for an unsuitable property and negotiate more favorable and appropriate deal terms. Additional due diligence, which is completed during a contingency period after the agreement is signed, can help buyers determine not only if they wish to proceed, but if the deal makes economic sense or if additional modifications to the deal terms are in order.

“The more you know about a property before you commit, and the more you learn about a property before you can’t turn back, the better off you are,” says Catherine Marriott, a member of Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Marriott about how buyers can protect themselves by doing appropriate due diligence before and after an agreement is signed.

What types of due diligence can a buyer begin before signing a letter of intent or an agreement of sale?

Before making any type of binding commitment, buyers should do some preliminary due diligence to determine if any modifications may be required to conform the space to their needs and if desired financing will be available for the project. Buyers should consult with the local zoning office to determine if their use is permitted under the local zoning classification for the property as well as the procedure for any intended improvements. In addition, many commercial property listings will include some pertinent information regarding lease revenue (if occupied) and operating expenses that will be helpful in analyzing the economic outlook for ownership. This can assist buyers with establishing an offering price.

What further due diligence will a buyer do once an agreement of sale is signed?

Just about every agreement of sale will include a contingency for any due diligence that a buyer will want to complete, including, without limitation, property-related inspections and document review, title and financing. Buyers and their team of professionals will negotiate a reasonable time period, usually anywhere from 30 to 90 days, but sometimes longer with new construction or development, to determine if they are satisfied with any and all aspects of the property and terms of the deal. During that time, buyers should examine everything from the physical condition of the property to its financial viability, including physical and environmental inspections, title examination and survey review, lease and operating expense examination, evaluation of the municipal zoning file and any requirements related to development, construction or improvements, and any other due diligence that may be unique to the property or the deal itself. If financing is desired, buyers will also work with their lender to confirm that suitable financing options are available. These inspections could result in a modification of the financial or other business terms of the deal, or ultimately a termination if there are insurmountable issues.

What if the deal is “as-is?”

Even if a property is listed ‘as-is,’ it doesn’t mean that a buyer can’t do inspections or have a right to terminate. Many properties are listed ‘as-is’ to indicate to a buyer that the seller doesn’t wish to negotiate repairs and credits after the business terms have been agreed upon. Buyers should still insist on a contingency period during which they will complete the necessary examinations. Even if they won’t seek to renegotiate the deal, they will be protected from losing their deposit or other potentially costly losses associated with terminating an otherwise binding agreement to purchase the property.

Potential buyers of commercial real estate should do some preliminary homework before making any verbal or written commitments. Also, any eventual agreement should provide a buyer with further opportunities to examine any and all aspects of the property and deal terms, allowing a buyer to walk away or make appropriate modifications to the business terms. Prudent buyers will allow legal and real estate professionals to assist with this process, which can help them avoid costly mistakes.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC


Open dialogue, respect are key to working well with municipalities

Municipal leaders must evaluate a number of factors when faced with a company pursuing a development project within their borders, says Charles A. Nemer, a Principal at McCarthy, Lebit, Crystal & Liffman. Business leaders who are willing to work with the community to address these details in a constructive fashion demonstrate a level of respect that can often help it move forward more quickly.

“When a business is looking to expand, it has typically studied the situation and crafted a plan that will allow it to capitalize on a particular opportunity,” Nemer says. “This type of project, however, is also likely to impact the municipality to some degree. Thus, it is imperative that company leadership describe the thought process behind the plan and show what it would mean for the community’s future.”

Smart Business spoke with Nemer about how building a stronger working relationship with municipal leaders can lay the groundwork for cooperation on important projects.

Where do companies run into trouble when undertaking capital improvement projects?
Zoning is the most common point of conflict. When a property/business owner seeks a variance for a particular use that is not permitted under the current zoning ordinances, it sets up a debate between the applicant and the municipality.

On the business side, the company can talk about how the new development will create jobs and therefore, strengthen its own market and industry positions. If the company has been around for a long time, it’s an opportunity for community leaders to reaffirm their commitment to the business. When it’s a new business, it could mean an influx of jobs as well as the chance to diversify the local economy. These are all worthy points for the company to make as it attempts to sell the project.

There is another side of the equation, however. What is the effect on the municipality? What would be the larger consequence of rezoning a particular parcel of land? How would it impact traffic? Does this location have the necessary roads, sewers and water lines to support this plan? How would the new development fit in with the other properties in that part of town?

In addition to physical changes, there are economic considerations when a business wants to build or expand. Tax abatements are desirable for businesses that want to minimize expenses, but they take valuable funding away from schools that rely on tax revenue to operate. What is being offered to ensure the schools are not harmed by this change? The burden is on business leaders to prove the worthiness of their plan and to craft it in such a way that the community benefits as well.

What can a business leader do to help this process along?
Business leaders need to show a willingness to sit down and talk about the details of their plan. Ideally, this is done before any applications for variances are filed with the municipality.

The company should work with its legal counsel to put together a presentation that highlights the benefits that would be realized for both the business and the community if the plan is approved. At the same time, it should not attempt to gloss over points that may be a concern to municipal leaders.

The purpose of the meetings is to discuss these potential hardships and benefits of the project and determine if solutions can be found. Open dialogue is an important part of this effort, as is the ability to see the project from other points of view.

Local government leaders are elected or appointed to represent their constituents, which includes business owners as well as the people who live in the community. Business representatives need to understand this dynamic and be mindful of it as they strive to get their project approved.

What role can legal counsel play in this process?
The company should work with an attorney that has experience in municipal law and can rely on that experience to initiate the dialogue between the business and the municipality. This is not something that will happen quickly. It’s about building relationships and patiently working toward a conclusion that benefits both parties. The company’s approach to this dialogue can go a long way toward determining the ultimate outcome.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Federal law and LGBTQ+ employee workplace discrimination protections

Many states have discrimination laws that provide protections against discrimination on the basis of sexual orientation. For example, New Jersey’s Law Against Discrimination (LAD) specifically prohibits it and, although the Pennsylvania Human Relations Act does not set forth specific protections against discrimination for LGBTQ+ employees and individuals, the Pennsylvania Human Relations Commission (PHRC) has issued guidance that takes the position that it will accept and investigate sex stereotyping claims filed by LGBTQ+ individuals.

Title VII, however, only prohibits employment discrimination on the basis of race, color, religion, sex and national origin. As a result, there is no federal law that expressly prohibits employment discrimination against LGBTQ+ individuals. Nevertheless, certain federal courts have been interpreting Title VII to prohibit employment discrimination on the basis of sexual orientation or transgender status.

Smart Business spoke with Frank P. Spada Jr., an attorney with Semanoff Ormsby Greenberg & Torchia, LLC, about how courts are interpreting employment discrimination for LGBTQ+ individuals.

What are the courts using as a basis to determine what constitutes discrimination?

A 7th Circuit decision, Hively v. Ivy Tech Community College of Indiana, along with recent decisions in the 2nd and 6th Circuit Courts, extended protection from employment discrimination based on sexual orientation. The 2nd Circuit decision in Zarda v. Altitude Express held that sexual orientation discrimination is motivated, at least in part, by sex and should be considered discrimination for the purposes of interpreting Title VII. The Court reasoned that an individual’s sexual orientation cannot be defined without identifying that individual’s sex and therefore ‘sexual orientation is a function of sex.’

In March 2018, the 6th Circuit issued a decision in EEOC v. R.G.& G.R. Harris Funeral Homes, which involved a worker that claimed her former employer terminated her employment because she was transgendered and, at that time, undergoing gender transition. The 6th Circuit held that because the defendant’s decision to fire the worker was based on sex stereotyping and gender discrimination that it would be ‘analytically impossible to fire an employee based on that employee’s status as a transgender person without being motivated, at least in part, by the employee’s sex.’

In which cases has Title VII protection fallen short in the eyes of the courts?

In March 2017 the 11th Circuit, in Evans v. Georgia Regional Hospital, declined to extend Title VII protection to the claims of a lesbian employee who alleged she was terminated based on her sexual orientation. The Court held that a claim under Title VII alleging sexual orientation is not cognizable.

The U.S. Supreme Court denied an invitation to hear an appeal of the Evans case, but in May 2018, the 11th Circuit affirmed a lower court’s dismissal of a gay plaintiff’s claim of sexual orientation discrimination in Bostock v. Clayton County, Georgia. Bostock has again filed a petition with the Supreme Court for a writ of certiorari to decide the issue. The Supreme Court may now be forced to take up this issue to resolve the conflict.

What do these decisions mean for employers in Pennsylvania?

At present, the 3rd Circuit, which covers Pennsylvania, New Jersey, Delaware and the Virgin Islands, has not extended Title VII protections to LGBTQ+ individuals for workplace discrimination. But it is important for employers to understand that they must still comply with state law. Also, New Jersey’s LAD specifically protects employees against sexual orientation or gender identity discrimination and the PHRC has stated that it will accept and investigate sex stereotype claims filed by LGBTQ+ individuals under the Pennsylvania Human Relations Act.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Questions for business owners to consider when estate planning

There is a lot to think about when business owners begin estate planning.

As they think through what to do with what is often the most valuable asset in their estate, they’ll need to determine whether the company will be passed on or sold. In both cases, there are questions that need to be answered to ensure a smooth transition. Otherwise, owners risk devaluing their greatest asset, leaving little to their heirs.

“Regardless of whether the owner decides to maintain the business or sell it and divide the profits, the time to consider and lay plans is early on,” says Kimon P. Karas, a shareholder at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Succession planning shouldn’t start at death or disability. That’s too late.”

Smart Business spoke with Karas about the many considerations business owners should make when determining their estate plan.

What are some of the questions family business owners should ask as they prepare their estate plan?
An early question is whether the owner wants the business to continue, or would rather cash out. Assuming that the owner wants to perpetuate the business within the family, he or she needs to determine how engaged the family is in the business and if they are able to manage and operate it.

It’s important to have a plan for the division of roles. In a situation in which there are multiple children and in-laws, delegation of duties and buy-in are critical.

Sometimes, however, there are children and in-laws who are fine not being in the business. The decision then is how to allow each family member to benefit equally from the business — those who are active in operations and those who aren’t.

How is planning affected when there is ownership or management outside of the family?
When a family business is owned in part by people who are not related, it is important for the owners to discuss early on the terms of that ownership. There should be buy-sell agreements in place as well as a succession plan. Have conversations about what happens if one of the owners would become disabled or die, or when or whether children from any of the owners’ families can join the business, and how ownership transfers as the current owners leave the business.

When the owner’s family is not capable of running the company or the non-family management doesn’t want to report to family members who are not actively involved in the business, ownership needs to take that into consideration.

The decision then is whether to sell the business or plan for the non-family management team to control the business. The owner could create a business advisory committee or trust comprising an accountant, lawyer and business consultants to oversee the company. Whatever is decided, the management team needs to be part of the conversation and comfortable with the decision.

What mistakes do business owners tend to make when it comes to estate planning?
The biggest obstacle is not making a decision. That can lead to conflict as the heirs are left to determine their roles and who deserves what share of the profits without the guidance of the owner.

In the case that the surviving members of the family realize that they can’t run the business and they need to sell, they will be selling from a position of weakness. Word will spread quickly and buyers will know what’s going on and why the company is being sold, and that will hurt the sale price.

Generally, business owners ought to be thinking about how to pass on their business when it becomes clear that the business is realizing steady, continued success and is becoming a significant part of the estate. At that point, collaborate with an accountant, attorney, financial adviser and family to create a plan.

Ultimately, whatever the owner decides shouldn’t be a surprise to the family — they should hear from the owner what roles each family member will have and how they’ll benefit from the business, if at all.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman Co. LPA

What to do when the golf course adjoining your home is redeveloped

Golf courses throughout the country are closing, and the land is being redeveloped for uses that not only destroy the adjoining owners’ “golf-course views,” but diminish the value of their properties. What, if anything, can the owners do to protect their investments?

Smart Business spoke with William J. Maffucci, an attorney with Semanoff Ormsby Greenberg & Torchia LLC, to find out.

Does paying a “lot premium” for a lot with a golf-course view give the purchaser control over future use of the golf-course land?

No. Payment of a lot premium does not ensure that the purchaser will enjoy a golf-course view for any amount of time.

I’m not saying such purchasers have no legal remedies to protect their investments. But if they do have such remedies, they arise from other facts, not from the mere payment of lot premiums.

For example, as part of the planning and promotion of golf-course communities, the developers often agree to include in the land records restrictions on the way in which the golf-course land could be used in the future. Those limitations are intended for the benefit of future owners of the neighboring lots, who, as a general matter, can enforce them.

But there’s an important distinction to note here: A deed or development-plan provision that restricts the use of land to certain categories of use (such as ‘recreational’) or that prohibits other categories of use (such as residential or commercial development) is not the same as a covenant (or promise) by the developer or golf-course operator to continue using the land as a golf course. Affirmative covenants to operate land as a golf course indefinitely or for any significant period are extremely rare, and it’s unclear whether they’re legally enforceable.

That distinction is important because it changes the legal remedies available to the adjoining or neighboring owners. An order enforcing an affirmative covenant to operate land as a golf course would literally prevent any change of use, but an order enforcing a generic use restriction (such as a prohibition on industrial use) would not preclude new uses (such as farming) that would not violate the restriction.

Is attempting to prevent a proposed change of use the only way adjoining or neighboring owners can protect their investment?

Sometimes the owners have another remedy. If they had been induced to pay premium prices by misrepresentations about the future use of the golf-course land, and if they reasonably relied upon those misrepresentations, they may be able to recover monetary damages through civil litigation against their sellers. The damages would be calculated as the difference between the actual fair-market value of the property and the value that the property would have had if the permitted uses of the golf-course land had actually been restricted in the way represented. The owners might be able to recover additional damages if they can prove that the sellers/developers made the misrepresentations intentionally, knowing that the buyers were certain or likely to lose their golf-course views soon.

Is litigation the only option?

Actually, no. In fact, litigation — which is lengthy, expensive, and uncertain — is sometimes the worst option.

The redevelopment of golf-course land often requires a variance from the municipality. Variances cannot be granted until the municipal land-use authority conducts a public hearing at which neighboring owners have the ability to provide input as to the impact of the proposed development. And owners may have other political avenues by which they may ensure that their concerns are brought to the attention of the local decision makers.

If a golf course is closed and the land is redeveloped in a way that reduces the value of neighboring residential lots, the owners of the lot can, in any case, try to lower their property-tax burdens by filing appeals of the property assessments with the county board of assessments. At the hearings on the appeal, the owners would present evidence (preferably through a professional appraiser) that, as a result of the closure and redevelopment of the golf course, the fair-market values of the appellants’ lots are now comparable to that of other local properties (not close to the former golf course) that have much lower assessments.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

The Supreme Court makes a significant ruling in favor of employers

On May 21, 2018, the U.S. Supreme Court issued its opinion in Epic Systems Corp. v. Lewis, which significantly undermined the power of workers to effectively assert discrimination and wage and hour claims against their employers.

“Epic Systems enables businesses to proactively address the wave of class action discrimination and wage and hour lawsuits that have inundated businesses in recent years,” says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia LLC.

Smart Business spoke with Goldblum about the Epic Systems decision and the impact it will have on both businesses and employees.

What is the background of the Epic decision?

Epic Systems involved three consolidated cases, and tens of thousands of employees at three companies: Epic Systems Corp., Ernst & Young LLP, and Murphy Oil USA Inc. The employees had signed agreements related to their employment that required them to arbitrate, not litigate, work-related claims and prohibited them from joining with other employees in class-action lawsuits against their employers.

The workers argued that their right to file class-action lawsuits over alleged wage and hours violations is protected by the National Labor Relations Act (NLRA), which was passed in 1935 to offer employees greater leverage to collectively challenge unjust treatment on the job, and which made the agreements unenforceable.

The court, in a 5-4 decision, however, sided with the employers, and Justice Neil Gorsuch wrote in the majority opinion that the 1925 Federal Arbitration Act, which favors the right to privately arbitrate disputes, supersedes the NLRA, and therefore the challenged agreements were enforceable.

What is the impact of the Epic decision?

The practical import of the Court’s decision is that private-sector employees may be contractually barred by employers from the right to enter into class-action lawsuits to challenge violations of federal labor laws. Employers may lawfully require employees, as a condition of employment, to enter into agreements that compel arbitration of work-related disputes and that preemptively bar them from pursuing class action claims in court or in arbitration. Employees who enter into arbitration agreements with class waivers may only litigate claims against their employers in an individual arbitration.

How should employers proceed?

While the Supreme Court’s decision in Epic Systems puts to rest facial challenges to the enforcement of class action waivers in arbitration agreements on the basis that they conflict with the NLRA, employees may still challenge such agreements under generally available contract defenses such as ‘fraud, duress or unconscionability.’ To be sure, the plaintiffs’ bar and employee advocacy groups will attempt to expand these and other arguments to challenge the enforceability of arbitration agreements and class action waivers.

One reaction to class action waivers that has already occurred is the filing by plaintiffs’ lawyers of dozens of individual arbitrations at once against a particular company, for which the company is often required to pay.

These continual challenges to the enforceability of arbitration agreements place an increased premium on employers’ careful drafting, implementation and maintenance of agreements and class action waivers. Moreover, although arbitration has traditionally been seen as a low cost alternative to litigation, that is not necessarily the reality. Arbitration can be a costly and time-consuming process.

Employers should also anticipate that Congress may attempt, at some time in the future, to exempt certain claims, such as those for sexual harassment or discrimination, from mandatory arbitration and class action waivers.

The Epic Systems decision resolves certain long-standing issues regarding arbitration and class action waivers, however significant questions and issues remain that employers must confront when determining whether to implement or maintain an arbitration agreement or a class action waiver. Consult with experienced employment counsel to ensure your company’s program is implemented and maintained in a manner that will support its enforceability.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Identify your intellectual property or risk losing it

Intellectual property (IP) protection is a critical task that enables companies to safeguard the hard work, expertise and ingenuity of their employees, says Kristen M. Hoover, a patent attorney at McCarthy, Lebit, Crystal & Liffman.

But, to be effective, a plan must be crafted to fit the way an organization functions.

“Each business must create a strategic plan that protects its unique intellectual assets everywhere they’re used,” Hoover says. “To do this, companies need to understand what IP they have and how those assets are deployed both inside and outside their walls.”

Smart Business spoke with Hoover on how to formulate a plan to ensure a company’s valuable IP resources are protected.

What constitutes IP and what assets might companies overlook when designing a protection program?
Many companies think IP protection is exclusive to patents. For some businesses, particularly those involved in innovation, manufacturing or R&D, patents will be a key component to their IP protection strategy. However, patents are not the only form of IP protection. IP can also be protected with trademarks, copyrights, trade secrets and contracts.

Trademarks often don’t receive the level of attention they should. Many companies put off seeking protection or do not think about it until a problem arises. Logos, slogans and business names are all items that should be protected. Trademarks are source identifiers and a key component to a company’s brand identity. They allow companies to be instantly recognizable to consumers and build their reputation in the marketplace.

Copyright protection is often overlooked, too, because copyrights are associated with artistic works. However, there are many business assets such as websites, internal manuals and handbooks that are copyrightable.

Additionally, companies that provide consulting work may have prepared materials or give presentations that should be protected. A trade secret is any confidential business information that gives a business a competitive advantage.

This could be any number of things, such as marketing strategies, data compilations, manufacturing processes, purchasing information, personnel information or customer lists. It’s a term that can be applied broadly and cover a multitude of assets, and often companies are not aware of all the assets that could be protected as trade secrets.

Trade secret protection, however, is dependent on companies handling this information appropriately. An IP protection plan should include proper procedures for handling this confidential information.

How can confidential information be protected?
To maintain confidential information, and therefore trade secret protection, companies must have internal policies that restrict access to confidential information, dictate how employees with access handle this information, and require the use of nondisclosure and confidentiality agreements. All employees should be made aware of these company policies and be required to follow them.

Contracts such as nondisclosure and confidentiality agreements are useful tools to maintain confidential information and protect trade secrets. For instance, nondisclosure agreements provide protection when discussing a potential business venture with another company or potential business partner.

While it may be necessary to share protected information in order to explore potential business ventures, it’s critical to take steps to ensure that information is not shared or used beyond the meeting. The nondisclosure agreement allows parties to share information while keeping it safeguarded and providing a means to seek restitution if it is not.

How can companies effectively assess and shore up their IP vulnerabilities?
Companies should talk with a patent attorney who has experience developing effective strategies to protect these valuable business assets.

This should include a review of all aspects of the company’s day-to-day business in order to gain a clear understanding of what IP the company has that should be protected. By working with an experienced professional who can provide guidance at each step, the process of establishing an effective IP protection plan becomes more affordable and manageable.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

It’s never too early to begin crafting your business succession plan

Succession planning can be a difficult task for business owners whose sole focus has always been the growth of the company, says Steven P. Larson, an attorney with McCarthy, Lebit, Crystal & Liffman. However, taking steps to secure your company’s future is the best way to protect yourself, your family and your employees following your departure.

“Every business transition strategy, even within the same industry, is going to follow a different path,” Larson says.

“Every approach is unique because it is based on what you want to accomplish and the legacy you wish to leave behind. There are always options, but the sooner you develop a plan, the more choices you will have. Ultimately, your efforts will provide a great deal of relief and guidance to your family and your employees, knowing that there is a plan in place.”

Smart Business spoke with Larson about how to initiate the succession planning process and the importance of starting early.

Where is a good place to begin your succession planning?
There are two primary areas of focus. The first step is to review your basic estate plan, which should include your will, revocable trust, financial power of attorney, health care power of attorney and living will.

These documents provide baseline protection to ensure that upon your death or incapacitation, a trusted individual is ready to step in and manage your affairs. Along those lines, it’s a good time to consider what protective measures you have in place, such as life insurance and disability insurance to cover you in the event of death or incapacity.

The other area of focus is to develop your ideal business succession plan. Here, the options are vast and highly customizable. While some business owners choose to transfer control of the business to a family member, others may elect to remain with the company in a reduced capacity.

Further options include selling the company to a third party or arranging for a management buy-out, either immediately or over a period of time. Typically, this is a lengthy process that can take years to fully develop and implement from beginning to end. It is never too early to begin thinking about the future of your business and what you want your legacy to be.

How does insurance tie in with both estate planning and business succession planning?
Insurance is important for any business owner, but it becomes particularly significant if you own a business that is highly dependent on your presence to succeed or a service business, such as an architectural firm, law firm or medical practice.

These types of businesses cannot function without you. Thus, you need to formulate a plan that clearly spells out what should take place in the event that you are unable to continue due to your incapacity or death. If you wait until this worst-case scenario occurs, it will be too late to get the insurance coverage needed to protect your business and any stakeholders.

Life insurance is utilized frequently during the estate planning process, particularly for business owners. It may be used to fund a buy-sell agreement, pay estate taxes or provide liquidity to your family.

How prepared are most business owners to deal with succession planning?
It’s one area of the business that is often put off for another day.

Succession planning involves asking and answering difficult questions, including when you should step away, if there is someone in the family or business who has what it takes to lead the company, if you have the time to transfer your knowledge to that person, and ultimately, what is your legacy.

Often business owners have a general idea of what they envision the transition looking like, but it takes work to craft the final version of their succession plan.

Business owners, especially those who built the company from scratch, have a deep knowledge of their business. They also recognize the value of the company, but they may not know what it takes to monetize that worth.

It can be eye-opening to go through a business valuation and determine what needs to be accomplished in order to find the right buyer, if that’s the chosen path. It is important to engage the right team of advisers and give yourself time to complete the process to ensure you achieve your end goals.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to navigate the new IRS audit rules of LLCs, joint ventures and partnerships

On January 1, 2018, IRS audits under the Bipartisan Budget Act (BBA) of 2015 became effective. The new BBA rules, which replace the Tax Equity and Fiscal Responsibility Act (TEFRA) rules, significantly streamline the IRS audit and adjustment process, allowing the IRS to assess and collect underpaid taxes, penalties and interest at the partnership level as opposed to the partner level, making it much easier for the IRS to audit LLCs and Partnerships and assess and collect taxes.

Smart Business spoke with Jeffrey G. DiAmico, a member at Semanoff Ormsby Greenberg & Torchia, LLC, about the implications of the new rules, who it applies to and relief provisions.

Who do the BBA rules apply to?

The BBA applies to all partnerships — including limited liability companies that have elected to be treated as a partnership, and almost any other unincorporated joint business operation, which includes joint ventures — except for certain qualifying partnerships that affirmatively elect out of the BBA rules.

Generally, a qualifying partnership must:

  • Have 100 or fewer qualifying partners.
  • Have only eligible partners, which include individuals, the estate of a deceased partner, S-corporations, C-corporations or foreign entities treated as a C-corp.
  • Attach an annual election statement to a timely filed tax return.

Ineligible partners include: partnerships (tiered structures), trusts (including grantor trusts) and disregarded entities (including single member LLC entities).

How could the new rules impact organizations that file as partnerships?

Under the old TEFRA rules, IRS audits performed at the partnership level resulted in any adjustments being assessed against each partner, each of whom were entitled to participate during the audit process. These rules were an administrative nightmare for the IRS, which is presumably why it audits less than one percent of partnerships.

Under the BBA, IRS audits for the reviewed year are still at the partnership level. However, the BBA authorizes the IRS to assess any ‘imputed underpayment’ at the partnership level (generally at the highest individual rate of tax), and then to collect any underpaid taxes, penalties and interest from the partnership in the year the audit is completed (the adjustment year). If there are different partners in the adjustment year than in the review year, partners can be responsible to pay for someone else’s income tax liability. This radical outcome should be discussed and addressed through updated indemnification provisions in your partnership or operating agreement.

How will partners be notified of an audit?

Alarmingly, the IRS is not required to provide notice to individual partners of a partnership audit — the individual partners have no statutory right to participate in the IRS audit or any resulting appeal, or raise partner-level defenses. There will no longer be a tax matters partner. Instead, the partnership must designate a partnership representative (PR) for each tax year who is the only person permitted to deal with the IRS. The PR will have the sole authority to act on behalf of and bind the partnership and its partners. Accordingly, your partnership or operating agreement must be amended if you want to impose obligations upon the PR to apprise the partners of an IRS audit and provide them with additional protections.

Are there any relief provisions?

For partnerships that are subject to the BBA and cannot elect out, there are two options to mitigate the damage at the partnership level. The partnership can make a ‘push-out’ of the additional tax liability from the partnership to the partners who were owners during the reviewed year; or the partnership can seek a modification of the imputed amount by following specific rules published in the regulations. Partnership or operating agreements should be amended to include a mechanism for making such an election and obtaining partner consent.

What actions should be taken?

Thoroughly examine your ownership structure and amend your partnership or operating agreement. If you are a multimember LLC, partnership, or joint venture, contact you attorney to discuss what changes are required to your partnership or operating agreement.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

The deficiencies of online legal services

The 21st century has been marked by a generation of resourceful self-starters. With the advancement of technology and widespread social media outlets, there are unlimited resources available with how-to instructions for just about anything.

The do-it-yourself concept has spilled over to legal services. LegalZoom, among other online services, attempts to streamline the process of creating legal documents while drastically reducing the cost compared to working with an attorney. However, you are getting what you pay for: free or low-cost, canned legal documents.

Smart Business spoke with Lisa A. Shearman, a member at Semanoff, Ormsby, Greenberg & Torchia, LLC, about the tradeoffs of producing legal documents through a website instead of an attorney.

What does a person sacrifice by having legal documents created through a website?

A software package is not going to provide you with the necessary tools to ensure your estate plan is set up correctly. Certainly a will or a power of attorney form can be created through one of these sites, but you’re missing the ‘out of the box’ benefits an attorney can provide.

For instance, your will designates who should receive your property when you die. However, if the beneficiary designations on your financial accounts, life insurance policies and retirement accounts are inconsistent with your will, those designations will override the directions in your will. Estate planning involves more than just a set of written documents. It includes proper planning of all assets and coordination with other advisers, such as life insurance agents, accountants and financial advisors. It involves building a relationship for you and your family.

What can an attorney provide that a website can’t?

LegalZoom’s job is to deliver a generic product. If needed, its site will connect you with an anonymous attorney who isn’t working for you, but rather LegalZoom. An attorney’s job is to assess a client’s individual circumstances, make recommendations based on those circumstances, and create a plan with that information. They work for you and are interested in assisting you with a legal need, not just selling you a product.

Estate planning attorneys assess information about their client’s family, assets and financial situation, including identifying areas of concern, such as beneficiary issues, future incapacity, health care decision making, long-term care planning, asset protection, and minimizing costs, time delay and taxes. Attorneys want to develop a relationship with their clients and the clients’ families so that in the event of a loss, they will be able to provide some comfort and guide them through the legal process.

There is no ‘one size fits all’ in estate planning, especially when there are unique circumstances. DIY programs do not address the various issues that can come up in a second marriage, same sex marriage or special needs situations. Furthermore, with the constant changes in laws, it is important to understand how these changes may affect planning. LegalZoom and other document preparation services are not lawyers and offer no assurance that they keep up with changing laws.

What is the risk of getting legal documents through a website?

The disclaimer on LegalZoom’s website provides in part, that ‘[they] are not a law firm [ ] or a substitute for the advice or services of an attorney. We cannot provide any kind of legal advice, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies.’ Their ‘terms of use’ is pages long, in small print, and essentially provides a complete disclaimer of any legal responsibility to you.

Attorneys are very familiar with these products because they have seen their ineffectiveness, which has been an increasing source of litigation. The savings your family member or business partner may have obtained on the creation of the documents is lost in the first consultation with an attorney when things go wrong. Litigation will cost beneficiaries thousands of dollars, years of time in court and ultimately will leave a family divided. The death of a family member is stressful enough. Without proper planning, that stress will only be compounded as families try to navigate through the administration process with conflicting documents and directions.

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