Merging Businesses Beware: MD Court Case Demonstrates Importance of Signed Legal Corporate Documents


A recent decision by the Maryland Court of Appeals serves as a cautionary tale for business owners in Maryland.  In MAS Associates v. Korotki, the parties intended to merge their businesses with an existing limited liability company (LLC), but never signed the requisite corporate documents to solidify their intention. When a dispute arose, two of the owners claimed a partnership existed while one disagreed.  Taking their dispute to the courts, the Court of Appeals ultimately determined that, while intent can be explicit or based on the parties’ conduct and the surrounding circumstances, there was insufficient evidence of a partnership here. Thus, the failure to document the relationship proved fatal to the argument of the majority owners.

Background

During the economic recession of 2009, Harry Korotki sought to initiate a merger with the mortgage lending company he owned, Savings First Mortgage, LLC ("Savings First"), and two other licensed mortgage entities: Greentree Mortgage Corporation ("Greentree"), owned by Joel Wax ("Mr. Wax"), and MAS Associates, LLC d/b/a Equity Mortgage Lending ("MAS"), owned by Saralee Greenberg ("Ms. Greenberg") and Ken Venick ("Mr.Venick"). Post-merger, the three companies were to operate as one, with MAS absorbing Greentree and Savings First, and becoming the surviving entity.

In an effort to memorialize their merger, each party was represented by its own counsel.  However, due to complex regulations governing mortgage companies, the parties selected an independent regulatory counsel to navigate the merger process. At the time of the pre-merger negotiations, it would have been impossible to combine all 3 businesses without some interim steps for the purposes of licensing.  Accordingly, the independent regulatory counsel prepared an "Issues Outline," which served as an outline for an "Interim Agreement." It included arrangements, obligations, and the structure of the business prior to the completion of the merger.

During the fall of 2009, the independent regulatory counsel drafted a new agreement between the parties, memorializing their intention to "ultimately change the membership of [MAS] and the membership percentages . . ."  However, the parties intended for this agreement to take effect once the requisite regulatory approvals had been obtained, which was slated to be three years or more.  The agreement was intended to provide time for each jurisdiction to process such approvals, namely MAS’ change in ownership paperwork, and to act as a limitations period to insulate MAS from potential creditors.

The independent regulatory counsel circulated the initial draft agreement to the parties and their attorneys for review. Two days later, regulatory counsel forwarded the parties a draft Operating Agreement for the new MAS.  Negotiations over the terms of the agreement and the Operating Agreement lasted for several months. However, an agreement over the language of the documents was not finalized, and the parties decided to proceed with business operations without executing the agreement. The parties concluded, because they were not generating revenue, it was not financially sound to continue absorbing legal fees with the regulatory counsel. Rather, they decided to proceed without signing any documents (except for a lease between Wax Properties and MAS).

By summer 2010, the combined mortgage lending business had finally begun turning a profit. Shortly thereafter, the parties agreed to start receiving a salary of $10,000.00 per month each. At that time, they informally agreed that all business decisions and day-to-day executive functions of MAS were to be unanimously approved between them.

At the end of the year, the three men divided MAS's profits evenly among themselves, each receiving $120,000.00. The next week, they each made an additional contribution of $125,000.00 to the business. Then they drew a second profit distribution, totaling $64,500.00 each.  Thereafter, as MAS began to grow, so did its need to secure additional lines of credit. As collateral to secure a line of credit, Mr. Greenberg and Mr. Wax agreed to pledge their own, personal resources. However, Mr. Korotki refused to be personally liable for any amounts exceeding his one-third share; which eventually led to the unraveling of the venture.

In the spring, Mr. Korotki informed Mr. Greenberg and Mr. Wax of his decision to quit. When Mr. Greenberg and Mr. Wax allegedly refused to negotiate the terms of his departure and buyout, Mr. Korotki filed a complaint in the Circuit Court for Baltimore County for breach of contract and declaratory judgment under RUPA. After several years of litigation and the associated legal costs, the trial court ruled that the parties intended to form a partnership.

The appeal by MAS Associates was elevated to the Maryland Court of Special Appeals.  The ruling at the Court of Special Appeals affirmed the trial court.  Specifically, the Court of Special Appeals ruled that the parties entered a “joint venture” in the short period of time between not signing the agreement and when they couldn’t agree to the terms of the merger.  

MAS Associates appealed to the Maryland Court of Appeals and Judge Adkins reversed the lower court, holding: “The party asserting the existence of a partnership bears the burden of producing sufficient facts to conclusively demonstrate the parties’ intent to form a partnership. Intent can be explicit or based on the parties’ conduct and the surrounding circumstances. Sharing profits and losses, equal management authority, making capital contributions, and whether the parties were concurrently seeking to form another type of business entity can all be factors the courts consider when evaluating intent.

Here, the trial court made an error of law when it concluded that Harry Korotki’s $275,000 in payments to Saralee Greenberg were capital contributions for a new entity, and to the extent that it applied a presumption of partnership based on receipt of profits, it also made an error of law. As for the other factors and evidence, taken together, the record lacks competent material evidence to conclude the parties formed a partnership and the trial court was clearly erroneous in concluding that they did.”


The Court of Appeals concluded that the parties, throughout the course of their business relationship and dealings, demonstrated that they never abandoned their pursuit of acquiring the membership interest in MAS.  Specifically, the Court ruled that it is a contradiction of Maryland law to simultaneously sustain the dual intention of acquiring an existing LLC’s membership interest and of forming a partnership or joint venture. The Maryland Court of Appeals reversed the Court of Special Appeals (and the trial court).  

Important Factors for Businesses Considering a Merger

  1. Hire Business Law Counsel 
    The parties in this case hired independent regulatory counsel to guide them through the merger as well as personal business law attorneys.  The regulatory counsel devised a plan whereby the parties would eventually become members of the LLC. 

  2. Negotiate and Execute Agreements
    The regulatory counsel drafted documents per the instructions of the parties, the parties just couldn’t come to an agreement with certain aspects of the agreements – so instead of resolving them, they just never signed them and conducted business without certainty.

  3. Understand the Risk of Operating a Business Without Executed Agreements
    Independent counsel warned the parties and their representatives that it would be difficult to determine their rights and obligations without signed agreements.  While the parties disagreed over some points, namely liability, had they executed the agreements or more effectively communicated with regulatory counsel, it could have protected their interests as it related to their business relationship with one another.  Instead, the parties conducted business activities as though an agreement was executed – in other words, they didn’t let the lack of a signed business contract get in the way of transacting business.  Despite their regulatory counsel’s repeated recommendations and warnings, they ignored his advice. 

  4. Trusted Business Law Advice May Reduce Your Future Legal Fees
    The lesson here is that your actions and conduct today can potentially be used either against you, or in your favor, in the future.  In the absence of signed agreements, the Court had to look to the actions and conduct of the parties.  The parties ignored the independent regulatory counsel’s warnings and advice because they didn’t want to pay the legal bills (based on the testimony of one party).  A trusted business law attorney makes sure their clients understand that they are looking out for their best interests.  Clients are better served by paying legal fees to structure their business appropriately, rather than incur problems and costly litigation later.

Chris Young is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on corporate legal agreements, business formation, tax controversy work and helping clients deal with new tax regulations. He may be reached at 301-762-5212 or via email.  View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.

Michael Campbell
is a partner in the litigation group at Miller, Miller & Canby. He focuses his practice on commercial, real estate and construction litigation.  Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for an inquiry.  For more information about the firm’s litigation practice, click here. For more information about the firm’s business and contract law practice, click here.





Does Your Small Business Have a Succession Plan? 6 Key Factors to Consider


After years of blood, sweat, and tears, you have built a successful small business, but have you considered what will happen to your business when you retire or pass away, or in the event you become disabled? It is often hard to fathom an event that may not occur for many years, but it is critical to put plans in place in advance. Failure to plan for the inevitable could result in the eventual loss of the business. All small business owners should genuinely consider the following factors in making plans for the future of their business.

  1. Identify a successor. Many small business owners plan for the eventual transfer of their business to a child or children, or even grandchildren. If you have more than one child or potential successor to the business, it is essential to consider which of them has an interest in stepping into your shoes and whether the successor(s) has the skills needed to do so successfully. For example, you should not assume that control of the business should automatically go to the oldest child. The continued success of the business requires that the member(s) of the next generation who will take over the reins will have the business acumen and commitment needed to run it well.

  2. Train the successor. Consider participation in the business by the next generation before transferring ownership and management duties. For the continued success of the business, your successor(s) should know the ins and outs of the business and be able to run it before you depart. Training the successor can occur over several years, after which you can start the process of transferring management and ownership of the business. Some business owners choose to transfer management control of the business to the next generation first, while staying involved to a limited extent as an advisor. Then, after some time has passed, transferring ownership of the business can be completed.

  3. Determine whether to transfer the business by gift or sale. Each family must make its own decision about how the transfer should occur and the circumstances of when that might happen. Many business succession professionals recommend that the members of the next generation have an economic stake in the success of the business by purchasing at least part of their ownership interest. If your successor does not have the money to pay a lump sum for the business, the sale can occur as a buyout that happens over several years. Alternatively, the next generation can work for the company at a reduced salary to earn ownership interest in the business. Transfer of the ownership interest in the business can happen in several ways. If the transfer happens due to a sudden illness or death, have you considered the need for an income stream to support a surviving spouse?  The business and estate planning attorneys at Miller, Miller & Canby can help you explore options best suited to your particular circumstances.

  4. Create a structure for multiple successors.  If more than one successor is well-suited to run the business, put a business structure in place that enables a smooth transition to multiple successors with minimal conflict. Incorporate provisions facilitating a smooth transfer into your partnership agreement or LLC operating agreement. If one or more family members are not interested in participating in the ownership of the business, consider providing an inheritance for them from other assets or making them the beneficiary of a life insurance policy.

  5. Think about your own needs for your retirement. Will you need a continuous stream of income during your retirement years? If the answer is yes, consider continuing to play a limited ongoing role in the business, for which you receive a salary. Another option is to require the next generation to purchase the business; this would provide the funds needed for your retirement.

  6. Plan with an eye toward minimizing your tax liability. Many business owners choose to transfer ownership in the business gradually by making gifts of shares in the business to family members each year that are equivalent to the amount of the annual federal gift tax exclusion (currently $15,000). Our estate planning attorneys can help you establish a gifting plan to accomplish the transfer of your business in a way that minimizes your income, gift, and estate tax liability.

You have invested time, effort and collateral in making your business a success and it may be difficult to think about relinquishing ownership or control of it. Nevertheless, advance planning is of utmost importance in creating a lasting legacy for your family. Miller, Miller & Canby’s business, tax and estate planning attorneys can work with you to put a plan in place that helps you pass your business on to the next generation and takes into account your financial needs in retirement. Contact our office today to set up a meeting by clicking here.

David A. Lucas
is an attorney in Miller, Miller & Canby’s Estates & Trusts and Business and Tax Practice Groups. David has focused his practice on helping families preserve their financial wealth and legacies for future generations through the use of Trusts, Wills, Powers of Attorney, Advance Medical Directives, Living Wills, and other estate planning strategies. David is committed to providing his clients with a well-crafted estate plan so they may avoid probate, protect their assets and legacies, and provide for the security of their loved ones. He takes a special interest in ensuring that the dreams parents have for their children and grandchildren are not lost to taxes, poor planning, or procrastination. He speaks frequently on a variety of estate planning topics to both the general public and private groups.

Contact David
to discuss your estate plan to take advantage of the laws available today and ensure flexibility for future changes. For more information on Miller, Miller & Canby’s Business and Tax Practice Group, click here.
 





Maryland Holds the Line on Property Tax Rate; But Buyers Should Consider Total Tax Burden


Recently, the Maryland Board of Public Works voted to keep the state property tax rate at its current level.  The Board is composed of the Governor, Comptroller and State Treasurer.  Governor Larry Hogan, a fiscal conservative, announced that holding the rate was part of his commitment to “prudent capital spending.”  As a result, the state tax rate will remain at 11.2 cents per $100 of assessed value, or 0.112% of total value.  That means a property assessed at $1,000,000 will incur a state tax of $1,120 annually.

While this might suggest good news for Maryland property owners, the state property tax is only a small portion of the overall tax burden on properties.  Each non-exempt property is also subject to county property taxes and, in some jurisdictions, municipal property taxes as well.  For instance, in Montgomery County, a D.C. suburb and the most populated county in the State, the current county tax rate is 0.9927%, which adds another $9,927 in taxes for a $1,000,000 assessment.  Further, a person owning property in Takoma Park, located inside Montgomery County and on the D.C. border, would pay an additional municipal tax of 0.5291.  Consequently, a non-exempt property assessed at $1,000,000 in Takoma Park is subject to a total property tax rate of 1.6338%, equaling $16,338 in annual property taxes.

Other Maryland municipalities that impose a third layer of property taxes include Frederick City (0.73%), Hyattsville (0.63%), and Annapolis (0.54%). When considering the location and timing of purchasing property in the Maryland, buyers should consider the total property taxes imposed annually.  Moreover, if the pre-purchase assessment is lower than the purchase price, the buyer can generally expect the assessment to increase up to the purchase price for the next triennial assessment cycle. The local assessment offices track sales of properties and will pick up the sale price when issuing new assessments.

Miller, Miller & Canby has been challenging the assessments of various types of properties in Maryland for more than 30 years and has obtained substantial reductions in real property assessments for our clients. We have successfully appealed the assessments on office buildings, retail stores, senior living centers, warehouses, industrial sites, casinos, apartment buildings, golf courses and cemeteries. 
Michael Campbell
 is a partner in the litigation group at Miller, Miller & Canby.  In addition to trial and appellate advocacy, his practice focuses on real estate litigation and property tax assessment appeals.  Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for property tax guidance or to help reduce your commercial Maryland property tax assessment.  For more information about the firm’s Maryland property tax appeals practice and representative cases, click here.





Truly the Season of Giving: IRS Gives the Green Light for Gifting


As explained in a prior article, the sweeping tax reform bill, commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA), temporarily doubles the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption from $5 million to $10 million (adjusted for inflation after 2011). For 2018, the exemption is $11.18 million per person.  The exemption will increase to $11.4 million in 2019. This doubled exemption will adjust for inflation each year and will remain in effect until December 31, 2025. If Congress doesn’t act before 2026, the law will sunset and the exemptions will revert back to the $5 million level (adjusted for inflation).

Shortly after passage of the TCJA, questions arose regarding taxpayers who utilize the doubled exclusion during their lifetime and then die in 2026 or later, when the exclusion reverts to the former $5 million (adjusted for inflation). This could lead to inconsistent tax treatment arising as a result of the temporary nature of the increased exemption amount. Therefore, the statutory sunset of the higher exemption amount and reversion to the lower amount could retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to previous gifts. This scenario has been dubbed a “clawback” of the exemption.

“Clawback” Example
Jim is about to retire and has an estate worth $15.18 million. In 2018, Jim decides to gift $11.18 million to Dynasty trusts for his 3 grandchildren. Jim will rely on the remaining $4 million, social security payments, and his pension to get him through his retirement years. Jim would owe no gift tax in 2018 because his combined gift and estate tax exemption is $11.18 million.

Jim then dies in 2026, when the combined gift and estate tax exemption has reverted back to $5 million (adjusted for inflation). We can assume that the inflation adjusted exemption amount will be about $6 million in 2026. If Jim still has $4 million in assets at death, his gross estate would be $15.18 million after adding in the $11.18 million taxable gift that Jim made in 2018. Would Jim’s estate owe tax on $9.18 million, the difference between his taxable estate ($15.18 million) and the 2026 exemption amount ($6 million)?  If yes, then Jim’s estate would be hit with an estate tax bill of approximately $3.67 million! On November 23, 2018, the IRS published proposed regulations to address the “clawback” problem.  The Regulations indicate that the IRS will not seek to “clawback” into the estate the taxable gifts that the decedent made when the exemption covered those gifts.  These proposed regulations apply to gifts made after 2017 and the estates of persons dying after 2017.

So, in Jim’s example, his estate would not owe estate tax on the amount he gifted in 2018.  Of course, in 2026, he would not have any remaining exemption to use for his $4 million in assets, so his estate would owe tax on the entire $4 million remaining at death – a tax bill of about $1.6 million. It is easy to see that these new Regulations are quite favorable to the taxpayer!

Estate Planning Opportunities: What Clients Need to Know
With the uncertainty of “clawback” soon to be removed, we recommend that clients with taxable estates consider making large gifts to reduce the size of their estates and take advantage of the increased federal exemption amounts. This is especially important for clients in Maryland and the District of Columbia. These jurisdictions have stand-alone state estate taxes with exemption amounts lower than the federal exemption, and do not impose a gift tax; which makes these gifts of even greater importance.

However, prior to making any gift, it is vital to conduct an analysis of the income tax consequences of the gift. This is crucial because a recipient of gifted assets takes the donor’s basis for federal income tax purposes (a “carry-over basis”). Whereas, the basis of assets which are subject to the federal estate tax, and received as a result of a person’s death, is equal to fair market value at the date of the decedent’s death (a “stepped-up basis”).

Finally, clients should know that time is of the essence and should consider taking advantage of the increased exemption amount sooner rather than later because Congress could change the law again prior to the sunset date and those who have not used the larger exemption amount will have lost the opportunity to do so. Keep in mind also that large gifts often take some time due to planning, appraisals, and preparation of trusts and other documents.

David A. Lucas
is an Attorney in Miller, Miller & Canby’s Estates & Trusts and Business and Tax Practice Groups. David is committed to providing his clients with a well-crafted estate plan so they may avoid probate, protect their assets and legacies, and provide for the security of their loved ones. He takes a special interest in ensuring that the dreams parents have for their children and grandchildren are not lost to taxes, poor planning, or procrastination. He speaks frequently on a variety of estate planning topics to both the general public and private groups.

David has focused his practice on helping families preserve their financial wealth and legacies for future generations through the use of Trusts, Wills, Powers of Attorney, Advance Medical Directives, Living Wills, and other estate planning strategies.

Contact David
to discuss your estate plan to take advantage of the laws available today and ensure flexibility for future changes. For more information on Miller, Miller & Canby’s Estates & Trusts Practice, click here.





Actor Wesley Snipes Shows Us How Not To Settle an IRS Debt: The Importance of a Tax Attorney


Wesley Snipes Tax Case
Normally, U.S. Tax Court memorandum decisions do not garner media attention.  Typically, they involve issues of substantive or procedural tax disputes – not exactly drop-what-you’re-doing subject matter or material. However, last month, the Court was hit with a dose of celebrity, and in turn, some publicity. Indeed, movie fans of the late-1990s/early-2000s vampire hunter trilogy, Blade, likely found themselves confounded when the actor behind the title character and protagonist re-emerged into the headlines, but not for cinematic achievement or accomplishment. Instead, Wesley Snipes made news for losing his Tax Court petition.

Specifically, Mr. Snipes had racked up quite a tax debt with the IRS – to the tune of $23.5 million. Unable to pay the full amount, he submitted an offer in compromise (OIC) to the IRS, which was rejected and led him to Tax Court. For reference, an offer in compromise is a request submitted to the IRS where a taxpayer desires to settle a tax liability for a lesser amount than is owed. Mr. Snipes submitted his OIC as a doubt as to collectability submission.  In other words, he did not challenge the validity of his tax liability, but contended that the IRS would never fully collect the full amount, making it in their best interest to settle for a lesser amount. Indeed, his contention was clearly reflected on his OIC submission wherein he sought to settle his tax debt for $842,061, or less than 4% of his underlying tax liability.  

Given the staggering discrepancy between Mr. Snipes’ attempted OIC and his tax debt, it would seem as though the IRS’ rejection was a mere formality and that he should stop watching late night tax relief infomercials. However, the IRS’ rejection was not based on such a discrepancy.  Instead, the IRS bases its OIC decisions on the taxpayer’s quantifiable financial disposition, or what a taxpayer can afford to pay.   

Why OICs Are Rejected
Indeed, a taxpayer’s ability to pay will focus on their income/assets versus their expenses. While there are a variety of reasons that the IRS rejects OICs, the primary ones are for understating the value of assets/income and overstating expenses. For Mr. Snipes, he was caught attempting to move assets out of his name before and during his initial appeal, and he apparently didn’t do a particularly good job of it. The IRS attributed those assets to him as part of his overall net worth, and therefore concluded he was able to pay substantially more than he offered via his OIC. The IRS scrutinizes both the assets/income and expenses categories – especially if the expenses far exceed the taxpayer’s income or their assets appear to be substantially understated or they are out of line with income and lifestyle (see Wesley Snipes example).

In addition, the IRS will reject an OIC for failure to comply with specific procedures and guidelines or for a lack of cooperation with such procedures and guidelines. While the IRS will generally permit you to re-submit an OIC if it is rejected on procedural grounds, this will only delay and complicate the process, whereas a lack of cooperation can lead to an outright rejection.  When taxpayers are under IRS levy or garnishment, or are saddled or threaten with a federal tax lien, any delay or complication can impose unnecessary hardship and disruption.  

Accordingly, it is essential that the procedures and guidelines are followed precisely. For example, both Form 656 (Offer in Compromise) and Form 433-A or -B (Collection Information for Individuals and Businesses, respectively) must be fully completed and submitted. Taxpayers will oftentimes neglect to submit one of them due to the redundancy of information requested on these forms. In addition, taxpayers must fully complete the forms – especially the Form 433, which amounts to a full and exhaustive financial disclosure form. If incomplete, inaccurate or insufficient, the IRS will either reject the OIC or request further substantiation – which will lead to delays and complications. Taxpayers must also submit both the application fee and the initial offer payment. Taxpayers confuse the application fee as being the same as the initial offer payment, and vice versa. They are separate and they are both required.

How an Experienced Tax Attorney Can Help
An experienced tax attorney guides clients through this process so that an offer has the highest probability of being accepted and the debt resolved. Specifically, the information contained on Form 433 will dominate the IRS’ OIC analysis. Form 433 can be confusing and its rules/instructions can be complicated and deficient. In addition, different taxpayers have different circumstances which can necessitate experienced and professional assistance.

Some questions to consider include:
•    What if the liable taxpayer is married to an innocent spouse?
•    How are joint and separate assets as well as shared expenses reported?
•    How are fluctuating expenses calculated?  
•    Is an anticipated inheritance reportable?
•    Should trust distributions be reported?
•    How should you report the value of stocks?  
•    What about the value of life insurance?  

Taxpayers do not want to get caught misstating the value of assets/income, or the amount of expenses – such figures are subject to substantiation, at the IRS’ request. A misstatement can cause an OIC to be rejected, or (maybe worse) can put a taxpayer in a Wesley Snipes situation where they are deemed more wealthy than they, in fact, are. Accordingly, there are strategies for when and how to complete Form 433 that an experienced tax attorney can provide.

In addition, experienced tax attorneys can provide advice relating to penalty abatement. In limited circumstances, the IRS will agree to abate accrued penalties (and in very limited circumstances, grant interest waivers). This can drastically lower a taxpayer’s total balance due, and potentially make an OIC more palatable for the IRS to accept.

Not every taxpayer is a good candidate for an OIC. An experienced tax attorney will analyze the taxpayer’s situation, discuss alternatives, and determine the best strategy tailored to client needs.  Indeed, for some taxpayers, an installment agreement may make more sense or have a greater likelihood for approval. In addition, currently not collectible status may assist certain taxpayers as it will “pause” IRS collection activity for a limited period of time. However, before making any submissions, it is advisable to seek professional advice. In the event an OIC has already been submitted, and rejected, taxpayers have appeal rights at their disposal (see Wesley Snipes example) where a tax attorney can provide assistance.  

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on tax controversy work and helping clients deal with new tax regulations. He may be reached at 301-762-5212 or at clyoung@mmcanby.com.  View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.





Deadline Approaching to Reduce Property Taxes in Maryland


All properties in Maryland are assessed on a three-year tax cycle. If an appeal is not filed at the beginning of the cycle, a property owner loses the right to challenge the full three-year cycle but may still appeal the assessment for the remaining years. This appeal deadline is December 31. By filing a petition for review, a property owner can have a State assessor review whether a reduction is warranted. Typical grounds for requesting a reduction include tenant vacancies, decreases in rental income, sales of comparable properties at reduced values, and elimination of structures or improvements. An appeal might also be warranted where the owner simply missed the February deadline to appeal the assessment for the full three-year cycle.

At the end of December, the Maryland Department of Assessments and Taxation (SDAT) will issue new assessment notices to owners of one-third of all commercial and residential properties in Maryland. In Montgomery County, commercial properties in Kensington, Silver Spring and Wheaton will be reassessed. In Frederick County, commercial properties in Urbana, Ijamsville and parts of Frederick will be reassessed, while in Prince George’s County commercial properties in Greenbelt, College Park, Hyattsville and Riverdale can expect new assessments. Property owners have 45 days from the date of the assessment notice to challenge these new assessments.  

Miller, Miller & Canby has been challenging the assessments of various types of properties in Maryland for more than 30 years and has obtained substantial reductions in real property assessments for our clients. We have successfully appealed the assessments on office buildings, retail stores, senior living centers, warehouses, industrial sites, casinos, apartment buildings, golf courses and cemeteries.  

Michael Campbell is a partner in the litigation group at Miller, Miller & Canby.  In addition to trial and appellate advocacy, his practice focuses on real estate litigation and property tax assessment appeals.  Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for property tax guidance or to help reduce your commercial Maryland property tax assessment.  For more information about the firm’s Maryland property tax appeals practice and representative cases, click here.
 





Maryland Proposes New Sales Tax Regulations Following Supreme Court’s Wayfair Decision


Wasting (almost) no time and as a direct response to South Dakota v. Wayfair, the Maryland Comptroller of the Treasury has presented proposed regulations to enforce the state’s sales tax collection requirement to out-of-state sellers, irrespective of whether those sellers have a physical presence in Maryland.

In a prior article, I detailed how the U.S. Supreme Court reversed almost 50 years of precedent relating to state sales and use tax law. Indeed, with the stroke of Justice Anthony Kennedy’s pen, Wayfair lifted a key restriction in response to a twenty-first century problem – namely, how to capture sales tax revenue from our increasing dependency on online shopping. In this regard, Wayfair has provided a bright-line rule (at least until Congress decides to weigh in) – actual, physical presence in the taxing state is no longer the standard or required.

Many States Changing Sales Tax Regulations
In the wake of Wayfair, many state tax laws and regulations (including those in Maryland) which had modeled their sales tax laws after the physical presence requirement immediately became outdated.  Now, those states have the green light to expand their tax base to include revenues from beyond their borders.  Some states may take a conservative stance and promulgate laws identical or similar to South Dakota’s which required out-of-state sellers to collect the state’s sales tax if such seller has, within one year, over $100,000.00 of gross revenue from sales delivered to the state, or 200 or more separate sales delivered to the state; while other states may be more aggressive.  Maryland is among the first states to take the plunge and has taken the conservative approach.

Maryland Proposed Sales Tax Regulations
Maryland’s proposed regulation is identical to the minimum requirements set forth by South Dakota. Specifically, the Comptroller has proposed expanding the definition for an “out-of-state vendor” that is required to collect Maryland sales tax to include such vendors that have, within one year, over $100,000.00 of gross revenue from sales delivered to Maryland, or 200 or more separate sales delivered to Maryland.  In short, any out-of-state vendors meeting either of these thresholds will be deemed to have the requisite “substantial nexus” with Maryland. If approved, the new Maryland sales tax regulations go into effect beginning October 1, 2018. Click the download attachment link below to view the proposed Maryland sales and use tax code.

What Online Retailers Should Do
Out-of-state sellers delivering goods or services to Maryland residents or businesses need to be aware of this development and any other State sales tax regulations that may arise in the future. October 1 is approaching, and if the regulation is approved, businesses will find themselves with compliance issues thrust upon them. Any out-of-state businesses that are concerned with how this potential regulation will affect them (or any in-state businesses concerned with other states’ proposed laws/regulations) need to consider meeting with a tax professional to discuss the applicability and compliance of these laws/regulations on their operations. Maryland is among the first dominoes to fall in response to Wayfair. However, more states may soon follow and businesses need to be cognizant of new developments in any state where they deliver goods or provide services.

Indeed, unless Congress exercises its authority under the Commerce Clause to enact legislation to address these sales tax base expansions, it is only a matter of time before states start pushing the envelope on the substantial nexus requirement for how much contact a business needs to have in a particular state to expose it to that state’s taxing authority. Until that time, businesses need to monitor and comply with any new laws, or risk facing assessment or audit.

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on tax controversy work and helping clients deal with new tax regulations. He may be reached at 301-762-5212 or at clyoung@mmcanby.com.  View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.
 





New Maryland Law Imposes Liability on General Contractor for Subcontractor's Failure to Pay Wages


Maryland general contractors be alert!  Effective October 1, 2018, Maryland law imposes new liability on general contractors for unpaid wages on a project.  The General Contractor Liability for Unpaid Wages Act (the “Act”) is modeled on a recent District of Columbia law.  The law is designed to ensure that subcontractors comply with state wage laws and pay their employees in a timely manner. If the subcontractor fails to pay as required, the general contractor will now be jointly and severally liable for such failure in accordance with Maryland wage & hour laws, which can include punitive (treble) damages and attorney’s fees. The Act also applies to sub-subcontractors on down, which means a general contractor can be liable for wage violations at any tier of a project.

General Contractor Should Include Indemnification Clause in Subcontract

The Act requires the subcontractor to indemnify the general contractor for "any wages, damages, interest, penalties, or attorney's fees owed as a result of the subcontractor's violation," unless indemnification is provided for in a contract between the general contractor and the subcontractor, or if the subcontractor was unable to pay its employees because the general contractor failed to pay the subcontractor as required. An indemnification clause should be written into the subcontract for added security, although this will only be beneficial if the subcontractor is solvent and has the ability to reimburse the general contractor.  If the subcontractor goes out of business or declares bankruptcy, the general contractor is fully on the hook for damages.  

General Contractor Should be Selective with Subcontractors

In light of this new risk, the general contractor should be selective in awarding projects to subcontractors.  The general contractor would be wise to avoid contracting with unknown companies unless a bond or other security is posted by the subcontractor.  Additionally, the subcontract should require the subcontractor to produce on demand its certified payroll records to prove compliance with wage laws.

Michael Campbell
is a partner in the litigation group at Miller, Miller & Canby. He focuses his practice on commercial, real estate and construction litigation.  Please feel free to contact Mr. Campbell at 301.762.5212 or send him an email for an inquiry.  For more information about the firm’s litigation practice, click here. For more information about the firm’s business and contract law practice, click here.





E-commerce Businesses Beware: Supreme Court Ruling May Expose You to Sales Tax on Interstate Sales


Earlier this summer, in Justice Anthony Kennedy’s final opinion before announcing his retirement, the Supreme Court threw 50 years of precedent into the wind with a decision that underscores the rise of e-commerce in our daily activities.  

 

“I wish there was a way to know you’re in the good old days before you’ve actually left them.”
              -Andy Bernard, The Office

For online businesses that are not currently collecting sales tax on interstate sales, the above quote took on special meaning this summer.  Those businesses, whether they know it or not, are in the good old days right now as a recent Supreme Court ruling is likely to leave them exposed to new sales tax obligations as well as burdensome and cumbersome compliance requirements.

New Supreme Court Ruling on Sales Tax

The Supreme Court’s ruling is a response to a twenty-first century problem.  In short, the evolution of the Internet brought with it a new marketplace – a virtual one, where buyers can do everything from grocery shopping to annual birthday and holiday shopping, all from the comfort of their living room sofas.  Indeed, consumers are prone to laziness and, when given the choice, have generally opted against getting dressed and leaving their house to go to the store.  As such, the convenience of the online shopping experience, combined with the sales tax savings, has given shoppers the incentive (or justification) to change their purchasing habits.

However, the rules are changing and the playing field is leveling, albeit slightly.

In South Dakota v. Wayfair, 585 U.S. ___ (2018), the Court concluded that the long-standing rule for allowing states to compel out-of-state retailers to collect sales tax was not only “unsound and incorrect,” but antiquated by modern standards.  That long-standing rule?  Actual, physical presence in the taxing state.  In other words, a Maryland business that hasn’t stepped one foot in Virginia can ship sales across the Potomac and incur no obligation to collect sales tax from the Virginian that bought its products.  However, if that Maryland business shipped its sale to Ocean City, MD, the sales tax obligation kicks in.  An advantage?  Most likely the failing brick and mortar stores like Sears, Toys R Us, and Circuit City would say so.

However, the physical presence rule was fraught with issues almost from the beginning.  Indeed, limiting physical presence had generally been manageable, but with the dawn of the Internet and the rise of e-commerce, restricting physical presence has become easier and more prevalent.  In turn, states began losing tax revenue to the current tune of between “$8 billion and $33 billion every year,” according to the Court.  In response, states began enacting laws in an attempt to recapture as much of that money as possible.  In doing so, the states started stretching the definition of physical presence, or they began ignoring it altogether.  

In short, the Wayfair concluded that other connections or contacts with the taxing state are sufficient to meet with constitutional requirements. 

What Does this Mean for Your Online Businesses and Why You Need a Tax Attorney?

Now, not only is physical presence adequate, certain economic contacts or “virtual connections” are enough to expose an online business to a state’s sales tax regime.  

However, Wayfair leaves the issue unsettled.  Specifically, the Court failed to provide guidance for the type of contacts or connections, whether economic or virtual, or both, that will meet this new, constitutional standard.  But what happens in response to Wayfair is entirely predictable –legislatures will pass new laws, or expand old ones, to take advantage of this new revenue stream.  In doing so, they will push the boundaries to test the uncertainty created by Wayfair.  Accordingly, this issue will work its way back through the courts for further guidance on the type or amount of economic activity now required.

Presently, online businesses need to know how Wayfair impacts their business models and operations.  An experienced tax attorney can review the states and local jurisdictions where a business ships purchases or delivers services, or where it otherwise has any type of physical or economic presence or connection.  An in-depth analysis of the definitions for “sellers,” “vendors,” “dealers,” “retailers,” or the like, will help an online business understand its exposure to a particular sales tax regime.  If there is exposure, a review of that state or local jurisdiction’s sales tax code will be required to determine whether such exposure has ripened into an obligation.  Indeed, where a business has sales tax obligations, not only will collecting and remitting be required, but so will registration, reporting and filing; and most states have laws holding business owners or officers personally liable for failing to comply with its sales tax laws.  In addition, not only will businesses need to educate themselves with the legal and regulatory framework of multiple jurisdictions, but they will need to stay current with any new developments which may affect how and where they sell products or deliver services.  Accordingly, the good old days of sales tax being either a minor inconvenience or inconsequential are likely over for many unknowing and unsuspecting online businesses.  

Chris Young
is an associate in the Business & Tax practice at Miller, Miller & Canby. He focuses his practice on tax controversy work and helping clients deal with new tax regulations. He can be reached at 301-762-5212. View more information about Miller, Miller & Canby's Business & Tax practice by clicking here.
 





Miller, Miller & Canby Welcomes Attorney Christopher Young to Business & Tax Practice


Christopher Young has joined Miller, Miller & Canby as an Associate in the Business & Tax Practice Group, where he will focus his practice in tax law and business law.  Mr. Young works with business clients and individuals to resolve tax disputes with the Internal Revenue Service and state agencies. He works with corporate clients on issues related to corporate disputes, governance, formations and restructurings, as well as drafting and reviewing corporate documents such as contracts and purchase agreements, operating agreements and partnership agreements. He also advises clients on matters related to foreign financial account reporting and compliance.

Prior to joining Miller, Miller & Canby, Mr. Young worked for four years as an associate attorney at JDKatz, P.C., where he focused his practice in tax controversies and issues related to corporate disputes. He represented clients on business and tax law matters, and provided general corporate and tax counsel.

Mr. Young began his career as a State Tax Law Editor at Bloomberg BNA. While in law school, he worked as a law clerk with the U.S. Department of Justice, Tax Division, in the Financial Litigation Unit. There, he drafted legal documents and investigated and uncovered taxpayer assets to facilitate collection efforts. For his achievements, he was honored with a special commendation for his work on Fidelity International v. United States and Fidelity High Tech v. United States.

Mr. Young is admitted to practice law in Maryland and Virginia. He earned his Bachelor of Arts degree in History from Virginia Tech, and earned his Juris Doctorate from The Catholic University of America, Columbus School of Law.

Click the download button below to view the firm's formal press release. For more information about Miller, Miller & Canby’s Business & Tax Practice, click here or contact Chris at 301-762-5212.
 





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