Summary: Winter 2002

IT’S THE ECONOMY

It’s official
According to the National Bureau of Economic Research, the U.S. economy officially entered a recession in March, 2001.  This ended the longest economic expansion in the nation’s history exactly 10 years after it began.  Government forecasters expect the current recession to last about 11 months, which is roughly average duration.  Forecasters project that gross domestic product in 2001 grew about 1.1%, and will grow about 1.3% in 2002.

It’s a pitfall
With the recent economic downturn, many workers are seeking new employment. In a recent survey by a large employee placement firm, 44% of responding executives said the most common interview

pitfall for interviewees is little or no knowledge of the company to which they are applying.  The second most common complaint (23% of respondents) is that interviewees were not prepared to discuss their career plans and goals.  With more applicants in the job market, companies are being choosier about finding the best fit.

IRS  MILEAGE RATES INCREASED FOR 2002      

The IRS has increased its standard mileage rate for computing the deductible costs of using an automobile for business purposes.  As of January 1, 2002, the new rate for transportation expenses incurred for business purposes is 36.5¢ a mile.  The rate for 2001 was 34.5¢ a mile.

IRS TRAVEL RATES INCREASED FOR 2002

Rather than keeping track of receipts to substantiate deductions, many companies use the IRS-approved per diem rates.  For 2002, the IRS has raised the per diem rate to $204 for travel to any high-cost locality (up from $201 in 2000 and 2001) and to $125 for travel to any other locality (up from $124 in 2000 and 2001) within the continental United States.  But the 2002 meal and incidental expense (M&IE) rates under the high-low method remain the same as in 2001: $42 for high-cost localities and $34 in other localities.  For the transportation industry, they are $38 for any location within the U.S. and $42 for any location outside the U.S.  For 2002, the IRS also added several cities to its high-cost, year-round list.

FLY FREE, REALLY

The IRS recently announced that it will not consider frequent flier mileage awards earned on business trips to be taxable compensation to employees who are allowed to use the mileage for personal purposes.  This treatment, however, does not apply to any travel benefits that are paid in cash, or to compensation paid in the form of travel benefits. 

This is the IRS’ first formal policy on the tax treatment of frequent flier points.  The IRS could change its position in the future, but has stated that it would not apply any change retroactively. 

Social Security payments
In 2002, monthly Social Security and Supplemental Security Income (SSI) benefits will increase 2.6%.  This means the average monthly Social Security benefit amount for all retired workers rises from $852 to $874.  The maximum federal SSI monthly payment rises from $531 to $545 for an individual and from $796 to $817 for a couple.

IRA CHANGES FOR 2002                              

Social Security taxes
Based on the increase in average wages, in 2002, the maximum amount of earnings subject to Social Security tax increases to $84,900, from $80,400 in 2001.  As a result, the maximum Social Security tax paid by employees and employers increases by $279 for each.  For self-employed workers, it increases by $558.

Year 2001 contributions to IRAs of up $4,000 for married couples and $2,000 for single taxpayers can be made until April 15, 2002.  Depending on your income and situation, contributions may be partially or fully deductible.  Contributions are fully deductible if neither you nor your spouse participates in a qualified retirement plan.  For 2002, IRA contribution limits for both traditional and Roth IRAs will increase to $6,000 for married couples and $3,000 for single taxpayers.

WE’RE FROM THE GOVERNMENT

The U.S. Small Business Administration (“SBA”) has a new website to assist businesses in accessing federal legal and regulatory  information.  SBA designed the site, which is found at www.businesslaw.gov, to cut agency red tape and serve as a central business compliance resource.  It also includes connections to the federal code and regulations, and state laws.

EMPLOYERS MUST DEAL WITH MILITARY CALL-UPS

Due to increased security needs and the war on terrorism, members of the National Guard and Reserves are being called to active duty.  The federal Uniformed Services Employment and Reemployment Act provides certain employment and reemployment rights with which employers must comply, and includes specific technical and time limitations.  State statutes may impose further requirements.  For instance, the Illinois Local Government Employees Benefits Continuation Act mandates that units of local government provide “differential pay” to make up the gap between an employee’s military and regular compensation.  It applies unless 20% or more of the employees of a unit of government are mobilized.  One website that provides helpful information about an employer’s responsibilities is www.esgr.org.

NEW LAW ASSISTS EMPLOYEES WHO ARE NURSING

Under a new Illinois law called the Nursing Mothers in the Workplace Act, Illinois companies that employ more than five people, not including family members, must provide reasonable unpaid break time each day and a private room or location to employees who need to express breast milk for an infant. This mandatory break time may coincide with any unpaid break time an employee already receives, but employers must make “reasonable efforts” to provide a private location.  Bathroom stalls do not satisfy this requirement.

The law does not require an employer to provide nursing breaks where they would “unduly disrupt an employer’s operations.”  This rather vague exception might spawn litigation regarding the scope of the exception.

DOING BUSINESS VIA WEBSITES   

Before a person or business can be sued in a particular state, the defendant must have some “minimum contacts” with the state. Laws that describe the contacts necessary for a state court to obtain jurisdiction are called “long-arm statutes,” since they extend the reach of the court’s jurisdiction. 

The extent of “long-arm” jurisdiction is always being tested under different business circumstances.  One of the latest issues is whether a court may exercise jurisdiction based on an out of state defendant’s website activity.  Since some websites essentially are electronic advertisements while others provide customized information or actually process customized orders, courts generally focus on the extent of interaction when considering jurisdictional issues. 

For example, in a New York case for trademark infringement, the court determined it had jurisdiction over an out of state bank because defendant’s website allowed potential customers in any state to apply for loans online, chat with a bank representative, or submit e-mail questions.  The court held that defendant’s significant and clearly commercial internet activity brought defendant within the jurisdiction of the New York court. 

In a Texas case, the court relied on the fact that customers could purchase products with a credit card on defendant’s website and arrange for shipping on the site.  The court found that jurisdiction existed in Texas even though the computers that hosted defendant’s website were not located in the state. 

Businesses that use websites may limit their exposure to long arm jurisdiction by limiting interaction with users of the site, having the site reject orders from certain states, posting notices that the business won’t sell or ship to particular states, or using a “clickwrap agreement” designating a specific state for litigation purposes.

IRS ALLOWS TAX-FREE REVERSE “LIKE KIND” PROPERTY SWAPS          

For a number of years, the Internal Revenue Code has allowed taxpayers to exchange “like kind” property without recognizing capital gain on the transaction.  While “like kind” includes most property (other than securities and inventory), it most frequently involves  real estate. And while “like kind” means like in character, it does not have to be like in quality.  In the classic transaction, a taxpayer sells her property then buys a replacement, or “target,” property soon thereafter.  This is a tax free transaction that avoids taxes that might be owed if these were considered to be separate, independent transactions. 

It was uncertain whether a “reverse exchange,” in which a taxpayer first buys a property then sells one of his other properties, would qualify for like kind tax free treatment.  But the IRS now has a “safe harbor” allowing such “reverse exchanges” (or “parking exchanges”), which provides important flexibility.  This allows a taxpayer to acquire a target property if it becomes available before he has secured a buyer for his own parcel.  And if construction or remodeling is necessary, the taxpayer can continue operating out of his old property while the work is done on the new property.   

The rules and technicalities for both regular and reverse exchanges are detailed and time limitations are short.  For example, a taxpayer only has 180 days to close on the purchase or sale of the like kind property.  But the benefit of not having to part with 20% of the gain to Uncle Sam makes proper planning well worthwhile. 

There are no limits on how many exchanges a taxpayer can do.  And even if the estate tax is eventually reinstated, no gain would be recognized on property held at death because the property gets a stepped up basis to fair market value at that time. 

We would be happy to explore with you the possibility of taking advantage of this enhanced tax benefit.

BREACH OF DUTY OF GOOD FAITH         

In a prior issue of Summary, we reported that an Illinois appellate court had allowed a homeowner to sue a lender for breach of the duty of good faith and fair dealing.  The case arose after the lender had refused homeowner’s monthly payments, then filed a foreclosure action and reported the filing to credit agencies.  

But there was a quick end to this new cause of action.  In Voyles v. Sandia Mortgage, the Illinois Supreme Court reversed the appellate decision and refused to recognize the breach of implied duty of good faith and fair dealing as an independent claim.  The Court noted that the law implies this duty to assist in interpreting contracts, not to provide a basis for damages when a contract is breached.  The Court reaffirmed that the only exception is the narrow case involving an insurance company’s breach of its obligation to settle a claim against the insurer’s policyholder.

BEFORE WE GO...

Starting the first of the year, Tom Varner, a longtime partner in the Firm, assumed “Of Counsel” status.  While no longer a partner, Tom continues to remain affiliated with the Firm and available to the Firm’s clients.  His telephone number, email, and address remain the same. 

We welcome new associate Wayne J. Paschke to the Firm.  Wayne concentrates in employee benefits and corporate tax, and brings with him several years of management and business experience as Director of Operations for Aramark Corporation in Chicago.  We are pleased that he is aboard. 

NOW THE FINE PRINT

Summary is intended to provide only general information for our clients and friends, which information may not be suited to your particular circumstances.  Please consult with us about your specific needs.