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The Ins and Outs of Cottage Succession Planning in Michigan (Part Two)

This is part two of a two-part blog post series on cottage succession planning in Michigan.

As summer winds down, the second-home market continues to heat up in Michigan. One of the issues many second-home owners face is determining the best way to keep a family cottage in the family for generations to come. In this series on cottage planning in Michigan, we are addressing that very issue.

In part one, we discussed the reasons why a cottage owner may want to develop a cottage plan (including Michigan’s complicated real estate tax framework). This article deals with the mechanics of cottage succession planning in Michigan—specifically, utilizing a limited liability company or trust structure to allow a cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes, thereby increasing the likelihood that the cottage will be part of the family for years to come.

What is a Cottage Plan?

A cottage plan is an agreement that describes how a cottage will be shared, managed and passed on to future generations of family members. Cottage plans typically cover a range of issues that can impede the succession of a cottage if left unaddressed, including:

- - Who should own the cottage?
  - Who should manage it?
  - Who should pay for it?
  - What if an owner wants/needs out?
  - Who gets to use it?
  - How should use be scheduled?

By working through these issues in a cottage plan, an owner (or “founder” in cottage-planning lingo) can achieve various goals that are commonly shared by those who desire to keep the cottage in the family. Those goals include:

- - Keeping the cottage in the family for future generations so that it can continue to serve as a gathering place for extended family
  - Giving children equal shares of the cottage (while avoiding “trapping” an inheritance in the cottage)
  - Keeping interests in the cottage out of hands of in-laws and creditors
  - Reinforcing family interests versus any one individual’s interests

An effective cottage plan can and should also address the objectives of the family members (or “heirs”) who will enjoy the cottage beyond the owner’s lifetime. Such objectives include:

- - Protecting the cottage from a divorce
  - Developing decision-making structures and control mechanisms
  - Developing consequences for failure to abide by rules—financial and behavioral
  - Developing a fair, flexible scheduling system
  - Provide an exit strategy where desired or necessary by providing the ability to sell interests back to family

Cottage Planning Solutions

Most husbands and wives who own a cottage hold title as joint tenants with rights of survivorship, which means that title to the property automatically passes to the survivor on the death of the first co-owner regardless of any provision in a will or trust. Upon the death of the survivor, and in the absence of a cottage plan, the cottage will pass to heirs as tenants in common.

A tenancy in common can be problematic for a number of reasons, including:

- - Each tenant in common (“TIC”) has a right to partition
  - Each TIC may use the cottage at any time
  - A TIC may transfer his interest to any person at any time – including his/her spouse.
  - A TIC does not owe rent to the other owners for using the cottage.

A better approach, which helps avoid the issues that often arise when heirs are tenants in common, is to have title to the cottage held either by a limited liability company (“LLC”) or a trust. Under an LLC structure, a management committee, which serves a function similar to a board of directors, is formed to manage the cottage’s affairs. With a trust, co-trustees are appointed to make decisions. In either case, if the family and entity is structured by branches, it is advisable to have one representative from each branch of the family involved in decision making.

Through the cottage planning process, the founders decide who may be a “member” (under an LLC) or beneficiary (under a trust). Virtually all cottage plans restrict participation to lineal descendants of founders, which ensures the cottage remains in the family—in other words, preventing in-laws from becoming members or beneficiaries.

One of the primary advantages of having a cottage plan utilizing an LLC or trust structure is that it provides a mechanism for transferring membership or beneficial ownership interests. Plans typically include a “put option” which requires the LLC or trust to purchase the interests of members or beneficiaries who want to sell their stake, and a “call option” that allows for the forced buy-out of difficult members or beneficiaries. Valuation and payment term guidelines for purchases are defined in the plan. This provides a predetermined exist strategy for those who do not wish to participate in the cottage or those who do not or are unable to contribute their fair share to cottage costs and expenses. The predetermined terms established for the buy-out provisions offer the opportunity for a graceful exit.

Plans also address issues related to expenses, such as taxes and maintenance, for the cottage. Expenses are typically allocated according to a predetermined sharing ratio among the members and beneficiaries. Often, an annual budget is prepared and an annual assessment is determined at the beginning of each year or season. Failure to pay expenses can be dealt with through an escalating series of sanctions, from the imposition of late fees and interest all the way to the forced buy-out of the delinquent member or beneficiary.

In many instances, founders choose to offset the ongoing expenses of a cottage by establishing an endowment, which is a dedicated sum of money for a specific use. For example, a $500,000 endowment invested at a five percent rate of return will create a pre-tax return of $25,000 per year, which is a sum sufficient to operate many cottages. The endowment may be held and managed by a bank trustee or by the LLC. If a cottage is sold, the endowment distributes to the founder’s descendants. One way to fund the endowment is to purchase a “second-to-die” life insurance policy.

Finally, a cottage plan typically addresses issues related to the use of the cottage—that is, who can use the cottage at any given time. Two common approaches include a “rooming house” structure in which any member or beneficiary can use it any time, and a “time share” structure in which members and beneficiaries are allocated specific time slots for use.

Take Action to Create a Cottage Plan

There are significant advantages to having a cottage plan that utilizes an LLC or trust structure. There is no single option that is best for all families, so it’s important to consult with an experienced cottage law attorney to determine what option is right for you. With a bit of planning, you can help ensure that your cottage will be a source of enjoyment for your family for generations to come.

If you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

The DHS / CDC “September Surprise” – The Order to Temporarily Halt Residential Evictions

Introduction:

Effective upon publication in the Federal Register on Friday, September 4, 2020, the Acting Chief of Staff of the Centers for Disease Control and Prevention, a division of the U.S. Department of Health and Human Services (HHS), announced an Order that purports to temporarily halt all residential evictions in the United States and US Territories. The Order includes tribal lands but excludes American Samoa. The stated purpose is to prevent the further spread of COVID-19.

The Gist:

Under this Order a residential landlord or other entity with a legal right to evict is prevented from evicting “any covered person from any residential property in any jurisdiction to which this Order applies.” The duration of the Order is through the end of 2020. This Order does not apply in any State, local, territorial, or tribal area with a moratorium on residential evictions that provides the same or greater level of public health protection than are provided in this Order.

Because Michigan’s eviction moratorium has expired as of July 15, 2020 (even though some district courts enforced it through August 15, 2020), this Order applies in Michigan. Some media outlets were reporting that some Michigan district courts are halting eviction procedures until the legality and enforceability of the Order is worked out.

This Order is intended to be temporary and it does not “relieve any individual of any obligation to pay rent, make a housing payment, or comply with any other obligation that the individual may have under a tenancy.” Landlords can still charge and collect of fees, penalties, and interest as a result of the failure to pay rent, assuming they are allowed for under the lease. Landlords can still evict for reasons other than non-payment caused by Covid-19, such as where a tenant is:

“engaging in criminal activity”;
“threatening the health or safety of other residents”;
“damaging or posing an immediate and significant risk” to property;
“violating any applicable building code, health ordinance, or similar regulation relating to health and safety”; or
“violating any other contractual obligation” other than payment of rent or associated fees.

The Tenant Declaration:

The Order attaches a sample declaration that a Tenant must sign, under penalty of perjury, in order to qualify for protection under the Order. “Each adult listed on the lease. . . should. . . provide a declaration.” The Declaration must state that the tenant:

Has used best efforts to obtain all available government assistance for rent or housing;
Earns less than $99,000 annually ($198,000 if filing a joint tax return), or was not required to report any income in 2019 to the IRS, or received an Economic Impact Payment (stimulus check) pursuant to Section 2201 of the CARES Act;
Is unable to pay the full rent due to substantial loss of household income;
Is using best efforts to make timely partial payments that are as close to the full payment as the individual’s circumstances may permit; and that
Eviction would likely render the individual homeless or force them into a new congregate or shared living setting.

Under the terms of the Order, if a tenant cannot so attest, the protections are not available to the tenant.

The Stick:

The Order comes with stiff criminal penalties and fines for violators. A person violating this Order may be subject to a fine up to $100,000 if the violation does not result in a death, one year in jail, or both. If the violation results in death the fine can rise to $250,000 plus one year in jail. Institutional violators may be subject to a fine of no more than $200,000 per event if the violation does not result in a death or $500,000 per event if the violation results in a death. The U.S. Department of Justice is the only department or person that can initiate court proceedings seeking to impose these criminal penalties.

Federal Authority and What this Likely Means:

The authority for this Order is Section 361 of the Public Health Service Act, codified at 42 U.S.C. §264, along with a related regulation, being 42 CFR §70.2. This Order represents, at a minimum, creative use of the enabling authority. Others (including judges and attorneys for landlords)would argue that the statute and regulation cited as authority for this Order do not, on their face, grant the authority for its issuance. Until a federal court strikes the Order, however, landlords would be advised to heed it – particularly due to the severe penalties associated with a violation.

The underlying statute, 42 U.S.C. § 264, authorizes the Surgeon General, with approval of the DHHS Secretary, “to make and enforce such regulations as in his judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases from . . . one State or possession into any other.” For that purpose the Surgeon General “may provide for. . . inspection, fumigation, disinfection, sanitation, pest extermination, destruction of animals or articles found to be so infected or contaminated as to be sources of dangerous infection to human beings, and other measures, as in his judgment may be necessary.” Id. (emphasis added). Editorially, this Order appears to rely completely on (or arguably stretch) the “other measures” language.

From there the statute authorizes actions such as apprehending and forcibly detaining infected people, foreign nationals and others entering the country, and conduct of that sort. Nothing remotely appears to provide authority to the CDC or jurisdiction to the CDC over people that are well and otherwise unaffected by the disease in question.

Similarly, “Nothing in this section or. . . the regulations promulgated under such sections, may be construed as superseding any provision under State law (including regulations and including provisions established by political subdivisions of States), except to the extent that such a provision conflicts with an exercise of Federal authority under this section.” 42 U.S.C. § 264(e). On the face of it, local ordinances can take precedence over this federal statute if they are not in conflict with what appear to be the enforcement powers under this statute. A court could find that the general common law of contracts and court eviction-governing statutes could be the exact laws that shall not be preempted by the federal scheme.

The Order also relies on 42 CFR § 70.2 for its authority. Under this regulation, which by title addresses “measures in the event of inadequate local control,” the CDC Director must determine that measures taken by state or local health authorities “are insufficient to prevent the spread of any of the communicable diseases from such State. . . to any other State.” Once local or state inadequacy is determined, the CDC Director “may take such measures to prevent such spread of the diseases as he/she deems reasonably necessary, including inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection.” Under the regulation, there is no “other measures” language as appears in the statute. However, the powers “include” an express list of items and may well contain related implied powers. That said, an eviction moratorium seems to be quite a departure from fumigating and exterminating pests as listed in the express powers.

Because the Order arguably exceeds the authority of the CDC in this instance, there are reasons to believe that this Order, though enforceable on its face and applicable in Michigan under its terms, may not survive a rigorous judicial examination. That is not a reason to disregard it, however, unless and until a court of competent jurisdiction strikes it or enjoins the enforcement of it.

Ambiguity – Are Land Contracts and Possessory Writs Covered?

Under the definition of “evict” in the Order, the eviction prohibition “does not include foreclosure on a home mortgage.” Thus, unless there is a foreclosure moratorium in place covering the mortgagor-homeowner, it appears that this Order, at a minimum, does not halt the foreclosure process. To wit:

“Evict” and “Eviction” means any action by a landlord, owner of a residential property, or other person with a legal right to pursue eviction or a possessory action, to remove or cause the removal of a covered person from a residential property. This does not include foreclosure on a home mortgage.

This “other person with a legal right to pursue . . . a possessory action” language might, on its face, include a land contract vendor-seller or even a mortgagee-lender and prevent them from obtaining the final eviction order or “Writ of Restitution” which completes the foreclosure or land contract forfeiture process where the purchaser remains in possession of the property. Certainly the language excluding foreclosure from the Order would support a position that a foreclosing mortgagee-lender can obtain that final possessory writ (which is basically finalizing an eviction). But, land contract vendor-sellers are not expressly excluded. The answer for land contract vendor-sellers may lie in the definition of the “residential property” to which the eviction moratorium is intended to apply. That states that:

“Residential property” means any property leased for residential purposes, including any house, building, mobile home or land in a mobile home park, or similar dwelling leased for residential purposes, but shall not include any hotel, motel, or other guest house rented to a temporary guest or seasonal tenant as defined under the laws of the State, territorial, tribal, or local jurisdiction.

This “leased for residential purposes” language would appear on its face to exclude land contract sales. While mortgagor-borrowers and land contract vendee-purchasers might have arguments against eviction based on the “right to pursue possessory action” language, it appears that the bulk of the Order supports the argument that the Order does not impact the right to recapture possession after a failed sale, either land contract or mortgage. As of the time of writing, however, there does not appear to be any scholarship or judicial opinions on the matter.

If you have any questions, please contact your Fraser Trebilcock attorney.

Jared Roberts is a shareholder at Fraser Trebilcock who works in real estate litigation and transactions, among other areas of the law. Jared also “walks the walk” as a landlord and owner of residential rental properties and apartments in Downtown Lansing. He may be reached at jroberts@fraserlawfirm.com and (517) 482-0887.

New York Federal Court Strikes Down Key Provisions of FFRCA Final Rule

In response to a lawsuit by the State of New York, a New York federal district court judge struck down aspects of a U.S. Department of Labor (“DOL”) final rule (the “Rule”) providing guidance on interpretations of the Families First Coronavirus Response Act (FFCRA). The court’s ruling, which was made on August 3, 2020, strikes down the Rule’s “work availability” requirement, the “health care provider” definition, portions of the employer consent requirement for intermittent leave, and the advance documentation requirements for taking FFCRA leave.

It is unclear whether this decision applies only to New York or on a nationwide basis. An appeal of the decision to the U.S. Court of Appeals for the Second Circuit is expected.

Background

The FFCRA, which was enacted on March 18, 2020, requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to COVID-19 through two separate provisions: the Emergency Paid Sick Leave Act (“EPSLA”) and the Emergency Family and Medical Leave Expansion Act (“EFMLA”).

The EPSLA applies to virtually all private employers with fewer than 500 employees and to virtually all public agencies employing one or more employees. Under section 5102(a) of the EPSLA, employers shall provide employees with paid sick time if they are unable to work (or telework) due to a need for leave because:

The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
The employee has been advised by a health care provider to self-quarantine due to concerns relating to COVID-19;
The employee has COVID-19 symptoms and is seeking a medical diagnosis;
The employee is caring for an individual subject to quarantine or isolation or advised to self-quarantine as described in paragraphs (1) or (2) above;
The employee is caring for his/her child if the school or place of care has been closed or the child care provider is unavailable due to COVID-19 precautions; and
The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

Pursuant to the EFMLEA, which is a temporary amendment to the Family and Medical Leave Act (FMLA), eligible employees (those employed for 30 calendar days or longer) receive up to 12 workweeks of leave to care for their child whose school or place of care has been closed, or whose childcare provider is unavailable, due to COVID-19 precautions.

On April 1, 2020, the DOL issued the Rule implementing and interpreting the FFCRA. On April 14, New York filed a complaint for declaratory and injunctive relief against the DOL and the Secretary of Labor in the U.S. District Court for the Southern District of New York, and moved for summary judgment.

Work Availability Requirement Under the FFCRA

The Rule clarified that employees are not entitled to paid leave under the FFCRA if their employers “do not have work” for them to do. This “work availability” requirement was significant because, as the district court explained, COVID-19 has caused the temporary shutdown or slowdown of many businesses nationwide, resulting in a decrease in work available to employees.

In its complaint, New York asserted that “[t]he Final Rule imposes a new ‘work availability’ requirement that permits employers to deny their workers emergency family leave or paid sick leave, with no statutory basis.” The DOL argued that the Rule is consistent with the statute because employees are not “unable to work (or telework)” (due to one of six reasons listed above) if their employer has no work available for them to perform.

The Court disagreed, concluding that the work availability requirement exceeded the DOL’s authority because it applied only to three of six qualifying reasons for EPSLA leave, which the court found inconsistent with the language of the FFCRA. The court also found the DOL’s “barebones explanation” for the work availability requirement to be “patently deficient,” particularly in light of its “enormously consequential” impact of narrowing the scope of the FFCRA.

Definition of “Health Care Provider”

The FFCRA permits employers to exclude a “health care provider or emergency responder” from paid leave benefits. New York argued that the Rule’s definition of a “health care provider” exceeds the DOL’s authority under the FFCRA. The DOL defined “health care providers” as employees of a broad group of employers, including, in part, anyone employed at “any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institutions, Employer, or entity.”

The court determined that the FFCRA “unambiguously forecloses” the DOL’s definition. The court found the definition to be “vastly overbroad” because it included individuals whose roles bore “no nexus whatsoever” to the provision of healthcare services and “who were not even arguably necessary or relevant to the healthcare system’s vitality.”

Intermittent Leave Provisions

The Rule permits employees to take leave intermittently (i) upon agreement between the employer and employee and (ii) only for a subset of qualifying conditions. New York took issue with both aspects of the Rule. The court upheld the DOL’s limitation of leave to qualifying reasons that are not logically correlated with a higher risk of viral infection. However, the court determined that the DOL “utterly fails to explain why employer consent is required for the remaining qualifying conditions.” Therefore, the district court vacated the requirement for employer consent.

Documentation Requirements

New York also challenged the Rule’s requirement that employees submit to their employer, prior to taking FFCRA leave, documentation explaining their reason for leave, the duration of leave, and, to the extent relevant, the authority for the isolation or quarantine order qualifying them for leave.

The district court noted that the FFCRA contains notice requirements but no documentation requirement for taking leave. It concluded that the requirement that employees furnish documentation in advance of leave imposed different and more onerous standards inconsistent with the FFCRA’s unambiguous notice provisions. The district court stated: “The documentation requirements, to the extent they are a precondition to leave, cannot stand.”

Conclusion

As noted above, it is unclear whether this decision applies only to New York or has nationwide impact. We will continue to monitor and keep you informed as to further developments, which could include an appeal of the decision or new guidance being issued by DOL. If you have any questions about this case, or FFCRA issues more broadly, please contact your Fraser Trebilcock attorney.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

The Ins and Outs of Cottage Succession Planning in Michigan (Part One)

This is part one of a two-part blog post series on cottage succession planning in Michigan. You can view part two here.

The family cottage is a place for fun and relaxation in Michigan. It’s where different generations gather and form lifelong memories. When purchasing a cottage, it’s often the intent of the owner to pass the cottage on to future generations to enjoy. Unfortunately, that vision may not become a reality due to challenges such as high property taxes, differing objectives among heirs and resulting family disputes that result in the cottage being sold upon the owner’s death. Common issues that prevent the passing of a cottage to future generations in Michigan can be addressed through careful cottage succession planning.

Michigan is a Market for Second Homes

When the COVID-19 crisis hit, many predicted calamitous economic consequences. With record-high unemployment and a plunge in gross domestic product, there has been a severe plunge in economic activity across the United States. However, few anticipated that a mere four months after the pandemic took hold in Michigan and across the country, we would see record home sales driven by low mortgage rates and flight from dense urban areas.

In 2020, the Wall Street Journal reported that in New York City the luxury real-estate market has been delivered a “stunning gut-punch” due to the COVID-19 crisis. Meanwhile, the Detroit Free Press reported that Michigan’s “Up North” cottage market has “become a red-hot market this summer, and not just despite COVID-19, but perhaps because of it,” with sale prices up as much as 10% from a year ago in some areas.

With plentiful access to fresh water and beautiful natural landscapes, Michigan has always been a desirable place to own a cottage. In fact, the National Association of Home Builders estimates that 50 percent of second homes in the United States are located in eight states, with Michigan being one of them.

With so many second homes in Michigan, it’s natural that there is a great deal of interest among homeowners in succession planning issues that allow second-home cottages to remain within their families for generations to come. The goal of cottage succession planning is to set up legal ground rules that provide the best chance to keep a cottage in the family and prevent intra-family squabbles that may arise in the absence of a plan.

Reasons to Develop a Cottage Succession Plan

There are a number of reasons why a cottage owner may want to develop a cottage plan, which usually addresses concerns about successorship through the creative use of a limited liability company (LLC) or a trust (typically used for more favorable treatment associated with the uncapping of taxable value), tailored specifically for ownership of the cottage property. Here are ten common reasons why a cottage plan may be advisable.

1. 1. Prevent a joint owner from forcing the sale of the cottage through an action for partition
  2. An alternative to allowing common law rules to dictate how the cottage operates
  3. Prevent transfer of an interest in the cottage outside the family
  4. Protect owners from creditor claims
  5. Establish a framework for making decisions affecting the cottage
  6. Provide sanctions for nonpayment of cottage expenses
  7. A vehicle for an “endowment” (money set aside to fund cottage expenses)
  8. To require mediation or arbitration of family disputes
  9. Allocate control of the cottage between or among generations of owners
  10. May help delay (or avoid) the uncapping of Michigan property taxes

Michigan Real Estate Taxes

Cottage succession planning in Michigan has unique aspects due to its complicated real estate tax framework. Pursuant to Proposal A, a 1994 amendment to the Michigan Constitution, a property’s annual assessment increase is “capped” and cannot exceed the lesser of five percent or the rate of inflation during the preceding year. However, when ownership of property is “transferred” to a new owner, the property value is “uncapped” for purposes of calculating property taxes, and the value is adjusted to the current fair market value.

Prior to Proposal A, it was common for cottage planning to involve the use of a limited liability company (“LLC”) to enable successive generations to use and manage a family cottage. But the Michigan legislature, in revising real property tax laws to address Proposal A, did not include LLCs as a means of “transfer” that would prevent the uncapping of property taxes.

Pursuant to Michigan Compiled Laws, Section 211.27(a), transfers of ownership do not include (and therefore do not give rise to uncapping) the following:

- - Transfers to a spouse or jointly with a spouse
  - Transfers to a “qualified family member”
  - Transfers subject to a life lease retained by grantor.
  - Transfers to a trust if the settlor, settlor’s spouse or a “qualified family member” is the present beneficiary of the trust
  - Transfers from a trust, including a beneficial interest in a trust, to a “qualified family member”
  - Transfers from an estate to a “qualified family member”

A “qualified family member” includes:

- - Transferor
  - Spouse of the transferor
  - Transferor’s or transferor’s spouse’s:
  - Mother or father
  - Brother or sister
  - Son or daughter, including adopted children
  - Grandson or granddaughter

The Trust Approach to Cottage Succession Planning

Although the manager and member structure and the limited liability protection afforded LLCs make them the ideal entity to be used for cottage succession planning, in Michigan, the favorable treatment associated with trusts as a means to prevent the uncapping of real estate taxes upon transfer of a cottage to the next generation, have resulted in trusts being the entity of choice in Michigan. Part two of this series will discuss in further detail the aspects of using a trust in cottage succession planning in Michigan allowing the cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes and accordingly increases the likelihood that the cottage will be part of the family for generations to come.

If you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

New Guidance for Employers on W-2 Reporting for Sick and Family Leave Wages Paid Pursuant to the Families First Coronavirus Response Act

On July 8, 2020, the Internal Revenue Service (“IRS”) and the U.S. Department of Treasury (“Treasury”) released guidance to employers regarding the requirement to report the amount of qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (“FFCRA”). The guidance was provided in Notice 2020-54 (the “Guidance”).

Background

The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
The employee has been advised by a health care provider to self-quarantine due to concerns relating to COVID-19;
The employee has COVID-19 symptoms and is seeking a medical diagnosis;
The employee is caring for an individual subject to quarantine or isolation or advised to self-quarantine as described in paragraphs (1) or (2) above;
The employee is caring for his/her child if the school or place of care has been closed or the child care provider is unavailable due to COVID-19 precautions; and
The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

An employee who is unable to work or telework for reasons related to COVID-19 described in (1), (2), or (3) above is entitled to paid sick leave at the employee’s regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $511 per day and $5,110 in the aggregate. An employee who is unable to work or telework for reasons related to COVID-19 described in (4), (5), or (6) above is entitled to paid sick leave at two-thirds the employee’s regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.

Pursuant to the EFMLA, expanded FMLA leave applies to employees who have been employed at least 30 days by employers who employ fewer than 500 employees (and public agencies) if those employees are unable to work (or telework) because they need to care for their children due to the closure of schools or unavailability of day care due to a government declared COVID-19 public health emergency. The first 10 days of the 12-week job-protected leave is unpaid. However, subsequent days must be paid leave in an amount of not less than two-thirds of regular pay, capped at $200 per day with a maximum cap of $10,000 per employee.

Form W-2 Reporting

Pursuant to the Guidance, employers must separately state the total amount of qualified sick leave wages paid pursuant to paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, qualified sick leave wages paid pursuant to paragraphs (4), (5), and (6) of section 5102(a) of the EPSLA, and qualified family leave wages paid pursuant to the EFMLEA.

With respect to paid sick leave under the EPSLA, in addition including qualified sick leave wages in the amount of wages paid to the employee reported in Boxes 1, 3 , and 5 of Form W-2, such amounts must be separately reported either in Box 14 of Form W-2 or on a separate statement. In labeling wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, employers must use the following (or similar) language: “sick leave wages subject to the $511 per day limit.” For wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA, employers must use the following (or similar) language: “sick leave wages subject to the $200 per day limit.”

When reporting family leave wages under the EFMLEA, in addition to including such wages in the amount of wages paid to the employee reported in Boxes 1, 3, and 5 of Form W-2, employers must separately report to the employee the total amount of qualified family leave wages paid in either Box 14 of Form W-2 or on a separate statement. In doing so, employers must use the following (or similar) language: “emergency family leave wages.”

According to the Guidance, if a separate statement regarding sick leave wages and/or family leave wages is provided to the employee and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 provided to the employee. If the employee receives an electronic Form W-2, then the statement shall be provided in the same manner and at the same time as the Form W-2.

Model Language for Instructions

The Guidance provides model language that employers may include for instruction to employees related to wages reported in Box 14 of Form W-2 or in a separate statement:

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:

Sick leave wages subject to the $511 per day limit because of care you required;
Sick leave wages subject to the $200 per day limit because of care you provided to another; and
Emergency family leave wages.

If you have self-employment income in addition to wages paid by your employer, and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return and reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.”

Conclusion

The law and guidance regarding employer requirements related to wages for sick leave and family leave are rapidly evolving. We will continue to keep you informed of new developments. Please contact your Fraser Trebilcock attorney with any questions you may have about your obligations.

Worker Payroll Tax Payment’s Delayed By Executive Order

On Saturday, the President issued an executive order to defer the withholding, deposit, and payment of certain payroll taxes paid from September 1st through December 31, 2020, although the President indicated that it could end up being applied retroactive to August 1st.

The deferral applies to any employee whose pretax wages or compensation during any bi-weekly pay period is less than $4,000. The tax payments are deferred without any penalties, interest, additional amount, or addition to the tax.

The deferral applies to the employee’s portion of Social Security and Medicare taxes (a combined rate of 7.65%). (The deferral also applies to Railroad Retirement Act Tier 1 tax).

The IRS has the authority under the Internal Revenue Code to delay tax payments for up to a year during a presidentially declared disaster. The president declared the coronavirus pandemic a national emergency on March 13th.

Guidance on implementing the order and to ultimately eliminate the obligation to pay the deferred taxes is expected in the near future. That said, while the president has authority to delay the collection of taxes, only an act of Congress can eliminate them altogether.

While the deferral on collecting these taxes should result in bigger paychecks, if and when employees see a boost in their take home pay remains to be seen. First, because the relief is only a temporary deferral, employees, or their employers as their withholding agent, will have repay the deferred taxes next year. Second, many payroll companies will find it challenging to make programing changes to their payroll systems by September 1st. Finally, because the taxes are not forgiven, employers and payroll companies need guidance and further assurances from the IRS, that they will not have to foot the bill for their employees deferred taxes. As a result, it is possible that some employers will continue to withhold payroll taxes from there employee paychecks to minimize the risk both to themselves and their workers.

All of this means that over next few weeks, employers will need to explain to their employees why their take-home pay is or is not going up, and how that could be possibly reversed next year.

Stay tuned for further updates as new information emerges.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Michigan’s New Executive Orders 2020-160 & 2020-161

On July 29, 2020, the Governor signed Executive Orders 2020-160 and 2020-161, amending Michigan’s Safe Start Order and issuing revised workplace safeguards.

Starting July 31, 2020, statewide indoor gatherings will be limited to 10 people and certain bars will be closed for indoor service across the state. While this was the case previously for most of Michigan, the new order applies these restrictions to Regions 6 and 8, northern lower Michigan and the Upper Peninsula. Outdoor gatherings are still restricted to 100 people unless located within Regions 6 and 8. For these regions outdoor gatherings are limited to 250 people.

Remote work, which previously looked to be strongly encouraged is now being required if an employee can perform their duties remotely (EO 2020-160, p 3, par 1.).

Stay tuned for more developments as new information is released.

The Importance of a Well-Crafted Ownership Agreement for Your Business During the COVID-19 Pandemic

When times are good, many business disputes between shareholders, partners, or LLC members tend to work themselves out. If business is strong, the promise of profits brings parties to the table to settle their disagreements. To the extent one party wants out, it’s easier to come up with an equitable division of assets when business is humming. When times are tough, discord more frequently leads to business disruption. Accordingly, it’s in times like these, when the COVID-19 pandemic is wreaking havoc on the economy, that it’s important to make sure that your company’s operative documents are up-to-date and address key issues that may arise if your business experiences distress and the relationship among its owners is put to the test.

The Importance of an Ownership Agreement

You’ve heard the age-old advice before: Get it in writing. It’s imperative for every multi-owner business, no matter its structure, to have a written agreement in place that provides a framework for operating the business, making decisions, and navigating disputes among the owners.

Such an agreement, called an operating agreement, a partnership agreement, or a shareholders’ agreement depending on the business’ structure (this article will refer to such agreements, collectively, as “ownership agreements”), covers a range of important issues, including voting on important decisions, capital contributions to the company, guidelines for admitting new owners, splitting profits and debts, and the manner in which disputes between owners are to be resolved.

When a business is founded, optimism between owners is high and many overlook the importance of having a written agreement in place to address future contingencies. In some instances, owners simply use a form agreement that doesn’t address their unique circumstances.

For many business owners, operating according to a handshake deal or a poorly conceived ownership agreement works fine—until it doesn’t. Business conditions worsen. Relationships between owners deteriorate. Conditions change. And without a clear, thoughtful, and written agreement in place, owners have few means by which to resolve their differences. They are left to operate according to default rules established by state statutes, and often end up in litigation.

An ownership agreement is like an insurance policy—you don’t think you will need it, but it’s irresponsible, and potentially ruinous, not to have one in place to mitigate against risks. Once a dispute about important business issues arises, it’s too late to start thinking about conflict resolution procedures, such as those that are found in a strong, well-crafted agreement. Indeed, without an agreement in place, a dispute is much more likely to devolve into litigation since there’s no clear mechanism for brokering a resolution.

Common Provisions in an Ownership Agreement

It is important for business owners to work with an experienced business attorney to create an ownership agreement or revise an existing one. Doing so helps ensure that the agreement reflects the parties’ intent and the unique characteristics of the business. While every agreement is (or at least should be) customized to cover a business’ particular circumstances, common provisions address issues such as:

Management of the Business: Who is responsible for the management of the business? How are decisions to be made? An ownership agreement should ensure that the roles and responsibilities of the owners are clearly defined.
Meetings of the Owners: When are meetings to be held? What rules govern voting? What notice is required? By establishing clear processes and procedures for information sharing and decision making, a business can avoid disputes that often arise when an owner feels that he or she is being left in the dark.
Capital Contributions and Ownership Division: An ownership agreement should clearly identify how much capital each owner contributes to the business and how ownership of the business is allocated among the parties.
Profit Distribution: Not surprisingly, many disputes between owners result from disagreements over how and when profits are distributed.
Transfers of Ownership Interests: One of the most important provisions in any agreement is determining how ownership interests may be transferred. Often, agreements will provide that purported transfers that do not adhere to the ownership agreement are treated as void under the agreement. Many agreements also include buy-sell provisions that determine the process of buying out an owner and how the purchase price for an owner’s interest is calculated.
Termination of Ownership: Ownership Agreements should detail the terms on which the business can be terminated and how assets are distributed upon termination.
Resolving Disputes: To help avoid litigation in the event of a dispute, many agreements provide for alternative dispute resolution such as mediation and arbitration.

Is Your Business Ready for the Unexpected?

These are volatile times. It’s hard to run a multi-owner business under any circumstances, and the COVID-19 pandemic has further complicated life for all of us. It’s not uncommon for business owners to experience disharmony, but keep in mind that a dispute does not mean a business breakup is inevitable. A well-crafted ownership agreement can provide parties with a framework for resolving disputes and getting back to business. And if a separation is inevitable, an agreement can allow owners to move forward in an organized and efficient manner, without public scrutiny or costly litigation.

If your business does not have an ownership agreement in place, now is the time to focus on this important priority. If your business has an agreement but it has not been reviewed in years, now is the time to dust it off. We have significant experience assisting clients in fashioning agreements that allow their businesses to run smoothly and help them to resolve disputes without resorting to litigation. For more information, please contact one of the Business & Tax department attorneys.

Edward J. Castellani is an attorney and CPA who represents clients involved with alcohol beverages as a manufacturer, wholesaler, or retailer. He may be contacted at ecast@fraserlawfirm.com or 517-377-0845.

Tax Sales Proceeds In Excess Of The Tax Owed Must Be Returned To The Taxpayer

On July 17 2020, the Michigan Supreme Court ruled in Rafaeli, LLC v Oakland County (the “County”) that the proceeds for a tax sale in excess of the tax owed must be returned to the taxpayer. The ruling stems from a lawsuit filed in Oakland County Circuit Court (the “Circuit Court”), that challenged one part of Michigan’s tax foreclosure law contained in the Michigan General Property Tax Act (the “GPTA”). That provision, which dates back to 1999, allows county treasurers – who collect delinquent taxes on behalf of communities – to pocket all of the proceeds of auctioned properties, regardless of the amount of the delinquent tax debt. But the Supreme Court unanimously ruled that this aspect of the GPTA was an unconstitutional taking under the Michigan Constitution.

The case originated back in 2011 when Uri Rafaeli’s business — Rafaeli, LLC (“Rafaeli”) purchased a modest rental property in Southfield. Rafaeli inadvertently underpaid its property taxes by $8.41, that over time due to interest and penalties grew to $285.81 in unpaid property taxes. In a companion case, Andre Ohanessian (“Ohanessian”) owed approximately $6,000 in unpaid property taxes, interest, and penalties from 2011. The County, foreclosed on both properties and sold the properties at public auction, Rafaeli’s for $24,500 and Ohanessian’s for $82,000. The properties were sold in accordance with the requirements of the GPTA. The County retained the surplus proceeds and distributed them to various governmental entities.

Rafaeli and Ohanessian sued the County alleging the actions of the County violated the due-process and equal protection clauses of the US and Michigan Constitution, as well as an unconstitutional taking. The Circuit Court ruled in favor of the County reasoning that the property was properly forfeited and did not constitute a “taking” in violation of the US or Michigan Constitution. The Michigan Court of Appeals affirmed, relying on precedent from the US Supreme Court in regard to civil-asset taking resulting from criminal activity. The Michigan Supreme Court (the “Court”), reversed holding “defendants’ [Oakland County] retention of those surplus proceeds is an unconstitutional taking without just compensation..”

The Court noted that upon sale, the foreclosing governmental unit deposited all of the sales proceeds from all foreclosure sales into a unified tax sales proceeds account. The proceeds are used to cover the costs for all foreclosure proceedings for the year of tax delinquency with the excess distributed to appropriate governmental units. Michigan is one of nine states that requires the foreclosing governmental unit to disburse the excess proceeds to someone other than the former owner. The Court distinguished the civil-asset forfeiture of criminal statutes in that the purpose of such statutes was, in part, to punish the owner of the property. Conversely, the purpose of the GPTA is to encourage the timely payment of taxes, not to punish the former property owner.

The Court took an exhaustive review of common law and prior cases revealing that a Taking Clause violation will occur when the surplus is retained by the taxing authority and not returned to the former property owner. Further “(T)he GPTA does not recognize a former property owner’s statutory right to collect the surplus proceeds.” The Court conclude that the common law of the State of Michigan recognized that right. The purpose of the GPTA is not to seize property and retain proceeds in excess of the taxes owed,

Accordingly, when property is taken to satisfy an unpaid tax debt, just compensation requires the foreclosing governmental unit to return any proceeds from the tax-foreclosure sale in excess of delinquent taxes, interest, penalties and fees reasonably related to the foreclosure and sale of the property – no more, no less.

The case is now headed back to the Circuit Court to determine a remedy. However, an appropriate remedy may involve changing the GPTA. Complicating matters further is the possibility that former foreclosed property owners may come back looking for any surplus proceeds that were collected and distributed to the various government units. Some counties make a considerable sum in auction profits that they use to boost their delinquent tax revolving funds, which some counties then use to fill their budget holes.

Norbert T. Madison, Jr. is a highly regarded corporate and real estate attorney with more than three decades of experience. Primarily focused on real estate matters, Norb represents clients in all facets of the practice, including the purchase, sale, leasing, and financing of various types of real estate, as well as the development of industrial, office, retail, condominium and residential real estate. Contact Norb at 313.965.9026 or nmadison@fraserlawfirm.com.

Recent Amendments Place Creditors in a Stronger Position to Defend Against Chapter 11 Bankruptcy Preference Lawsuits

As the bankruptcy wave continues to build, more businesses are being forced to deal with bankrupt customers. What’s worse—and which often comes as a big surprise—is when a business gets sued by the debtor or bankruptcy trustee seeking to recover payments made by the debtor before the bankruptcy. Such lawsuits, which attempt to recover “preferential payments,” cost businesses time, require the expenditure of legal fees, and often result in the business paying a settlement amount to make the matter go away.

With more companies filing for bankruptcy, the likelihood that businesses will face preference lawsuits is growing. Fortunately, the Bankruptcy Code provides creditors with certain defenses they can use to ward off a preference lawsuit, and Congress recently took action that strengthens those defenses. The “Small Business Reorganization Act of 2019” (SBRA), which went into effect in February, 2020, contains amendments to Chapter 11 bankruptcy preference law that are not limited to small business reorganizations.

What is a Preference Lawsuit?

Section 547 of the Bankruptcy Code allows a debtor or bankruptcy trustee, subject to certain defenses, to recover payments made to creditors within 90 days of the filing of the petition. The look-back period for payments is increased to one year for “insiders.” The policy behind preference actions is that they prevent aggressive collection action against a debtor that might force a debtor into bankruptcy, and they also help ensure equal treatment of creditor claims.

For example, if one creditor receives payment on a debt in the days leading up to a bankruptcy filing due to aggressive collection action, but another similarly situated creditor doesn’t receive payment because it did not engage in collection action, then the latter would only be left with a claim in the bankruptcy. The preference provisions allow the pre-petition payments made to the aggressive creditor to be clawed back, allowing each creditor’s claim to receive equal treatment in the bankruptcy. That’s how the system is supposed to work.

In reality, all kinds of creditors, including those who have valid defenses to preference claims, typically get sued regardless of their defenses. Prior to the recent amendments, the Bankruptcy Code did not explicitly require debtors to conduct any due diligence as to defenses prior to filing a preference lawsuit. Historically, debtors simply sued all creditors who received payments within the 90-day period before the bankruptcy, and creditors were left to deal with such lawsuits, often filed in far-flung jurisdictions, on a one-off basis. The recent amendments to the Bankruptcy Code’s preference provisions address these issues.

Amendments to Preference Provisions

The SBRA created a new “subchapter V” to Chapter 11 of the Bankruptcy Code, which provides small business debtors an easier path through bankruptcy. Less discussed is the fact that the SBRA contained two amendments to preference laws that strengthen defenses against preference lawsuits in all Chapter 11 cases.

Prior to the amendments, debtors had to meet a low bar to file a preference lawsuit. It was relatively easy for debtors to meet their burden of proof, and once they did the burden shifted to creditors to establish defenses. The SBRA places an additional hurdle in front of debtors. Now, a debtor or trustee must consider a creditor’s statutory defenses before filing a lawsuit “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses….” Previously, the Bankruptcy Code stated that a debtor or trust “may” do so.

Accordingly, there is now an affirmative obligation that a debtor or trustee investigate whether a creditor has a “subsequent new value”, “ordinary course of business” or other defense before moving forward with a preference action. Failure to do so may result in the dismissal of a case and/or an assertion of bad faith filing. Of course, one of the questions that will be sorted out over time in the courts is what constitutes “reasonable due diligence.”

Another welcome change for creditors included in the SBRA relates to the venue in which preference cases may be brought. Prior to the recent changes, the Bankruptcy Code provided that preference claims under $13,650 were to be brought in the district where the defendant resides, rather than where the bankruptcy case was pending. The SBRA raises this threshold amount to $25,000. This change will have a big impact, because it lessens the likelihood of preference claims of less than $25,000 being filed at all, given the costs associated with bringing an action in a distant jurisdiction.

In sum, the SBRA is good news for preference defendants. In fact, many creditors who would have otherwise been sued prior to the amendments will never become a “defendant” in the first place, given the additional obstacles debtors and trustees must overcome.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Jonathan T. Walton, Jr.’s legal practice focuses on cases arising from commercial transactions, the Uniform Commercial Code, the federal and state securities laws, banking laws and bankruptcy litigation. In the areas of banking, commercial, construction and real estate litigation, he represents lenders, contractors and owners on construction-related claims, and lenders and borrowers in commercial and residential foreclosure matters, large loan defaults and collections, lien priority disputes, and title insurance company liability. He can be reached at (313) 965-9038 or jwalton@fraserlawfirm.com.