Mutual Consent: A Faster Way to Get Divorced in Maryland, but Beware

By:  Aidan F. Smith

Married couples with a property settlement agreement who do not have minor children are now allowed to obtain divorces without any waiting period. This is a wonderful change from the previously required one year separation period, where spouses would have to live separate and apart from one another for a year or more prior to being permitted to file for divorce.

This change in the law has created a new ground for divorce in Maryland called Mutual Consent.  This new ground will expedite divorces where the two people can mutually agree on the division of their property and alimony.

The only requirement to obtain a divorce based upon Mutual Consent is that you have an agreement regarding the division of marital property and alimony.  Great care should be taken in drafting this agreement, as it could have a long lasting impact on your financial future.

Please make sure to consult with an attorney before entering into an agreement, and obtaining a divorce based upon Mutual Consent.

Aidan Smith is an attorney at Pessin Katz Law, P.A. (PK Law).  Aidan focuses his practice on general litigation, criminal defense and family law matters.  His ability to listen to his clients, assess their issues and concerns and use his knowledge and experience of the criminal and civil judicial systems to help them resolve their situations has been recognized and praised by many of his clients.  Aidan can be reached by phone at 410-339-6764 and by email at asmith@pklaw.com

Purchasing a Corporation in Maryland? “Mere Continuation” Rule Just Became Clearer

The Maryland Court of Appeals (the “Court”), the state’s highest court, in Phillip Martin, v. TWP Enterprises Inc. (No. 1855, Sept. Term, 2014, decided Feb. 24, 2016, Leahy, J.) addressed what it identified as the third exception to the general rule that a corporation which purchases assets is not responsible for the liabilities of the selling corporation.  That exception provides, under common law, that the purchasing corporation is a “mere continuation” of the selling corporation and is therefore liable for the liabilities of the selling corporation.  The Court’s holding approved and reiterated two new factors to analyze under the “mere continuation” exception.

Best & Brady Components, LLC (“B&B”) was a lumber manufacturing company that opened for business in March of 2010.  Phillip Martin (“Martin”) was a minority owner and assumed management of B&B’s daily operations under a two-year employment contract.  B&B was never profitable, and ran out of cash.  TWP Enterprises, Inc., (“TWP”) bought B&B’s assets. Martin sought compensation under his employment contract from B&B and TWP.   A default judgment was entered against B&B.  Martin pursued TWP for satisfaction of the judgment.  Martin claimed that TWP was a mere continuation of B&B and, therefore, liable under the “mere continuation” exception to the general rule that successor corporations do not assume the liabilities of selling corporations. The circuit court disagreed, finding that TWP was not a mere continuation of B&B and, therefore, was not liable for the default judgment against B&B.

The Court stated that the function of the “mere continuation” exception is to prevent corporations from purchasing assets solely for the purpose of placing those assets out of the reach of the predecessor’s creditors.  In this case, it examined two new factors to weigh in the “mere continuation” analysis: the purpose of the asset sale and the adequacy of [its] consideration.

The facts at the trial court level indicated that TWP continued in the business of B&B, for a time doing business under that name.  Its former owner became an employee of TWP, but not an owner of that corporation. TWP continued to provide administrative support to B&B. TWP relied on independent salesmen, of which Martin was one, in carrying on its business.  Some of B&B’s former employees worked for TWP.  TWP sold to some of the same clients as B&B.  TWP continued to use the same software as B&B and the same sales reporting format.  Martin, who had an independent business, continued to be a vendor to TWP.

TWP argued at the trial level that TWP was not a mere continuation of B&B.  Martin argued that because TWP continued operating B&B after the purchase from the same location, with the same employees, under the same trade name, that TWP was a mere continuation of B&B and assumed the liabilities of B&B, including the default judgment entered against it.

The trial judge believed the “mere continuation” exception did not apply because (1) there was no evidence that the [asset sale and purchase] transaction was for the purpose of avoiding liability to Martin; (2) TWP provided B&B adequate consideration in the asset purchase; and (3) while there was substantial overlap in management, control, and ownership, this overlap was not determinative because historically overlap had always existed between B&B and TWP.  Martin appealed the trial judge’s ruling.

The Court stated the general rule that “a corporation which acquires the assets of another corporation is not liable for the debts and liabilities of the predecessor corporation”.  Baltimore Luggage Co. v. Holtzman, 80 Md. App. 282 (1989).  It stated that the rule has applied when asset transfers were made in good faith for fair consideration, to foreclose actions for damages for breach of contract.

Four exceptions to the general rule that a predecessor corporation’s debts and liabilities do not become the obligation of a successor corporation are enumerated in the Court’s opinion: (1) there is an expressed or implied assumption of liability as codified, in the case of the former, in Maryland Code Corporations and Associations (“C&A”), § 3-115(c)(1) (1975, 2007 Repl. Vol.) and, in the case of the latter, in Isle of Thye Land Co. v. Whisman, 262 Md. 682 (1971).; (2) the transaction amounts to a consolidation or merger as codified in C&A §3-114(f)(1); (3) the purchasing corporation is a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape liability for debts as codified in C&A §3-114(f)(1)

The third exception has not been codified in Maryland.  The Court’s opinion recites that it is “designed to prevent a situation whereby the specific purpose of acquiring assets is to place those assets out of reach of the predecessor’s creditors.”  In Maryland, only three cases had addressed the “mere continuation” exception to the general rule against successor liability:  the seminal case, Baltimore Luggage, Nissen Corporation v. Miller, 323 Md. 613 (1991), and Academy of IRM v. LVI Environmental Services, Inc., 344 Md. 434 (1997).  In none of those cases did the Court conclude that the successor corporation was a mere continuation of the predecessor corporation.

The trial court found that the purpose of B&B’s sale of assets to TWP was not to place the assets beyond Martin’s reach, but rather to “salvage . . . a failing business,” and, therefore, the “mere continuation” exception did not apply.  This “purpose” test was added by virtue of the Academy of IRM opinion.

Baltimore Luggage, Nissen, and Academy of IRM, when taken together, contain analysis of the following factors: (1) change in ownership and management, (2) continued existence of the selling corporation, (3) adequacy of consideration, (4) transfer of any “instrumental” employees from the predecessor to the successor, and (5) purpose of the asset sale.  In all three cases, the courts assessed the adequacy of consideration as a factor and consistently found the exception did not apply where consideration was adequate, although none of the cited cases relied solely on the adequacy of consideration in their conclusions.

In the case before it, and in reviewing the new factors of “purpose” and “adequacy of consideration”, the Court stated that even though Martin managed B&B’s sales, the company had difficulty completing orders on time. A loan from TWP senior employees and a subsidiary could not overcome B&B’s cash flow problems. Martin had actively opposed B&B’s bankruptcy and eventually consented to the asset sale to TWP.  If B&B had filed for bankruptcy rather than sell its assets, Martin likely would never have received the approximately $300,000 that TWP paid him as a trade creditor as part of the asset purchase.  All of these factors highlighted the fact that the purpose of the asset sale was not to escape creditors, and particularly any obligation to Martin, but to attempt to salvage B&B.  Moreover, the consideration involved in the transaction was adequate.

Considering all of the factors of the case, and particularly the factors of purpose and adequacy of consideration, the holding of the trial court that TWP was not a “mere continuation” of B&B was affirmed.  TWP was not responsible for the liabilities of B&B.

The Martin decision points out that the importance of the new factors it examines.  It also points out the necessity of corporate transactional documents containing clear statements of purpose and consideration in asset purpose transactions.

To contact a PK Law Corporate and Real Estate  Attorney click here or contact information@pklaw.com.

 This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

 

Does Anybody Really Know What Time It Is?

In Notice 2016-27, 2016-15 IRB 1, the IRS has again delayed the initial due date for providing statements to the IRS and to beneficiaries under the “consistent basis reporting” rules for estate and income tax purposes until June 30, 2016.  The action follows upon the heels of at least one comment to the IRS that the income tax filing season for the year ending in 2015 and the new reporting requirements imposed too much of a burden on tax practitioners.

The executor or administrator of a decedent’s estate must file the estate’s federal estate tax return, as required by law.  If the executor or administrator is unable to make a complete return with respect to any part of the gross estate, that person must include in the return all the information the person possesses, including a description of such part and the name and address of every person holding a legal or beneficial interest in such part.  If they are notified by IRS, such legal or beneficial owners must then file returns as to their parts of the estate. (Internal Revenue Code (“IRC”) §6018)

On July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (P.L. 114-41; the Act). Section 2004 of the Act enacted IRC §1014(f) and IRC §6035. Under the Act, effective for property with respect to which an estate tax return is filed after July 31, 2015, the basis of any property to which IRC §1014(a) (i.e., the rules for determining basis of property acquired from a decedent) applies can’t exceed:

  • In the case of property, the final value of which has been determined for purposes of the estate tax on the estate of the decedent, such value.
  • In the case of property not described above, and with respect to which a statement has been furnished under new IRC §6035(a) (see below) identifying the value of such property, such value. (IRC §1014(f)(1))

IRC §6035 imposes new reporting requirements with regard to the value of property included in a decedent’s gross estate for federal estate tax purposes.  IRC §6035(a)(1) provides that the executor of any estate required to file an estate tax return under IRC §6018(a) must furnish, both to IRS and the person acquiring any interest in property included in the decedent’s gross estate for federal estate tax purposes, a statement identifying the value of each interest in such property as reported on such return and such other information with respect to that interest as IRS may prescribe.

Under IRC §6035(a)(2), each person required to file a return under IRC §6018(b) must furnish, both to the IRS and each other person who holds a legal or beneficial interest in the property to which such return relates, a statement identifying the information described in IRC §6035(a)(1).

IRC §6035(a)(3)(A) provides that each statement required to be furnished under IRC §6035(a)(1) or IRC §6035(a)(2) must be furnished at such time as IRS may prescribe, but in no case at a time later than the earlier of: (i) the date which is 30 days after the date on which the return under IRC §6018 was required to be filed (including extensions, if any); or (ii) the date which is 30 days after the date such return is filed.

The Notice marks a change in the reporting date, originally set at the end of February, then changed to the end of March, and now set for the end of June.

To contact a PK Law Wealth Preservation Attorney click here or contact information@pklaw.com.

 This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

 

Tax Court Scrutinizes Transfer of Assets to Family Limited Partnership

In Estate of Sarah D. Holliday, TC Memo 2016-51TC Memo 2016-51, (the “Estate” and the “Court”, respectively) the Court revisited a common factual pattern in the use of a family limited partnership to reduce estate tax. The use of such partnerships is employed to remove assets from an estate and secure, in connection therewith, a discount in their valuation. In Holliday, the facts led the Court to the conclusion that the Estate lacked a significant nontax reason for a transfer of investment assets by the decedent to a limited partnership and an implied agreement existed that the decedent retained the right to possession or enjoyment of, or the right to the income from, those assets. Therefore, the Estate was required to include the transferred assets in full in the value of the Estate. (See, IRC §2036 and Reg. §20.2036-1(c)(1))
A “bona fide sale for full and adequate consideration” will not cause the transfer to be included in an estate. (IRC §2036(a)). Estate of Bongard, 124 TC 951 (2005) held that the “bona fide sale” rule is satisfied in the context of a transfer to a family limited partnership where the facts reflect the existence of a “legitimate and significant nontax reason” for creating the family limited partnership, and the transferors received partnership interests “proportionate to the value of the property transferred”.

In the instant case, the decedent, Sarah D. Holliday, formed or caused to be formed, (1) Oak Capital Partners, LP, a limited partnership (“Oak Capital”); (2) OVL Capital Management, LLC, a limited liability company (“OVL Capital”); and (3) the “2006 Holliday Irrevocable Trust” (the “Trust”). Oak Capital’s limited partnership agreement stated that one of its purposes was to provide “a means for members of the Holliday family to acquire interests in the Partnership business and property, and to ensure that the Partnership’s business and property was continued by and closely held by members of the Holliday family.” OVL Capital was created for the primary purpose of being Oak Capital’s general partner.

The decedent funded Oak Capital with nearly $6 million in marketable securities, with a portion of this contribution being made “on behalf of” OVL Capital. The decedent received a 99.9% interest in Oak Capital as a limited partner, and OVL Capital received a 0.1% interest as a general partner. The limited partnership agreement provided that limited partners did not have the right or power to participate in Oak Capital’s business, affairs, or operations. However, the partnership agreement did provide that “to the extent that the General Partner determines that the Partnership has sufficient funds in excess of its current operating needs to make distributions to the Partners, periodic distributions of Distributable Cash shall be made to the Partners on a regular basis according to their respective Partnership Interests.” On the same day as the making of her transfer, Ms. Holliday assigned her interest in OVL Capital to her two sons, Joseph H. Holliday III (Joseph) and H. Douglas Holliday (Douglas) in exchange for $2,960 from each. This price equaled the gross value of 0.1% of Oak Capital’s assets on that date, without a discount or other adjustment.

At the same time, the decedent also transferred 10% of her limited partnership interest in Oak Capital to the 2006 Holliday Irrevocable Trust. Following the transfer, the decedent possessed an 89.9% limited partnership interest in Oak Capital, which she held until her death.

Joseph, Douglas and the decedent’s attorney determined the manner in which the limited partnership’s assets were held by it. At all times before the decedent’s death, on the day she died, and on the alternate valuation date, Oak Capital’s assets consisted solely of investment assets, such as marketable securities, and cash.
Three years after the above planning was put in place, the decedent died. The fair market value of all of the assets owned by Oak Capital, without discount or other adjustment, on July 7, 2009 (the alternate valuation date selected for the Estate) was approximately $4 million. The value of decedent’s interest in Oak Capital was reported on her estate’s tax return as $2.4 million as a result of discounts that were applied to her 89.9% limited partnership interest.

On audit, IRS issued a notice of deficiency determining a $785,019 deficiency in estate tax. The Tax Court upheld the deficiency. It reasoned that the right to distributions under the limited partnership agreement was the retention of possession, enjoyment or right to the income from the investment assets under IRC §2036. Although only one distribution had been made to partners prior to her death, the testimony of Joseph was to the effect that had the decedent required additional distributions they would have been made to the partners. In addition to those salient factors, the Court pointed out that the assets in the limited partnership were not actively managed and were thinly traded.

Although the Estate argued that a fear of lawsuits, the “undue influence of caregivers”, and the preservation of assets all pointed to legitimate and significant nontax reasons for the transfer of assets to the limited partnership, the Court was not persuaded. The decedent had never been sued; she held other assets which could be pursued as well in a lawsuit; she was confined to a nursing home at which she was visited regularly by Douglas on a weekly basis; her assets were managed by her sons; and she acquiesced, without any meaningful input or without any discussion at all, to the decisions of Joseph, Douglas and her attorney in setting up the limited partnership. The Court also cited the facts that the decedent was the sole contributor to the limited partnership; she received 100% of the partnership interests immediately thereafter; and on the same day she assigned her interest in the limited partnership to her sons.

As to the formalities of the operation of the limited partnership, it maintained no significant books and records. There were no partnership meetings or documentation of any meetings. There were no periodic distributions as required by the limited partnership agreement and no compensation was paid to OVL Capital as the general partner. The absence of all of the foregoing factors led the Court to conclude that no legitimate, significant nontax reason existed for the limited partnership’s existence.
PK Law Tax Attorneys can assist with tax issues and controversies and PK Law Wealth Preservation Attorneys can assist with your estate planning needs. To contact a PK Law Attorney for additional information or to schedule an appointment go to information@pklaw.com.

This information is provided for general information only. None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.

5 Reasons Not to Put off Your Estate Planning

By:  Cheryl A. Jones, Esquire                                                        cjones@pklaw.com

                As the tabloids reveal that Prince died without a Will, and his family heads to court to divvy up the estate, here are five reasons you should make a thorough inventory of your assets and set up an estate plan now:

1)            It will be easier for family members to help you.  Estate planning covers disability as well as death.  If you are faced with a medical crisis or a nursing home situation, your family members will need to know your financial information and your wishes regarding your medical care – and be able to act upon them.  A properly-drafted Financial Power of Attorney and Advance Health Care Directive will let them act on your behalf, and an inventory of your income and assets will allow them to do everything from pay your mortgage to feed your dog.

2)            It saves family members from playing detective.  Don’t make your loved ones spend precious time trying to piece together your financial situation by digging through shoe boxes in your closet filled with old bank statements, piles of mail, and tax returns.  Make it easy for them – keep a simple notebook listing your bank accounts, CDs, investment accounts, and retirement plans, along with information about your sources of income and the names of your financial advisor, tax preparer, and lawyer.  And be sure to let your family know where the notebook, along with your important papers, can be found.

3)            It can save you – and your family members – time and money.  By sitting down and making a comprehensive list of all of your assets, you can see how complicated (or not) your financial picture may be.  Do you have assets in three different banks and two different credit unions? Time to simplify! Close out the smaller accounts and consolidate.  Still have old 401(k) money spread out in several brokerage accounts? Consolidate those accounts and rebalance your portfolio.  Holding individual stock certificates or savings bonds in a safe deposit box? Transfer the stock to your brokerage account and register the bonds on the US Treasury website, so that you and your loved ones can manage them more easily.  By managing these things now, you can simplify your life and save your loved ones the time and expense of doing it if you become incapacitated or die.

4)            It can ensure that your assets are disposed of the way you choose.  By preparing a Will and reviewing your assets with your advisor, you ensure that you decide where your assets wind up – not the court system.  Also, be sure to review and update the beneficiary designations on assets such as retirement accounts, 401(k) plans, and life insurance policies, since those assets are disposed of by beneficiary designation, rather than your Will.   

5)         It can help you minimize, or even eliminate, certain taxes.  Let’s be honest – none of us likes to pay taxes.  And although most of us won’t have to worry about estate taxes when we die (under current law, there are no federal estate taxes imposed until an estate is above $5.45 million, although Maryland imposes taxes on estates above $2 million), a thorough asset list and proper estate plan can address any estate tax risks as well as take into consideration inheritance tax, capital gains tax, and even some charitable tax planning, for those of us who are philanthropically inclined.  So remember: a good estate plan is a lot like flood insurance – if you don’t have it when you need it, it’s too late.  Make the time to invest in peace of mind for yourself and your family.

 

Cheryl A. Jones is an attorney in the Wealth Preservation Department of PK Law in Towson, MD.  She can be contacted by email at cjones@pklaw.com or 410-769-6141.

 

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy