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Reprinted with permission from the April 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.


The Supreme Court’s decision in Encino Motorcars, LLC v. Navarro interprets a very specific exemption to the overtime rules imposed by the Fair Labor Standards Act, 29 U.S.C. 201, et seq. (“FLSA”), but the Court’s language and reasoning have game-changing ramifications.  The Court’s rejection of the principle that courts should narrowly construe exemptions to the FLSA turns decades of FLSA caselaw on its head.

The facts of Encino Motorcars are deceptively narrow.  Employees classified as service advisors for a car dealership challenged the car dealership’s classification of the service advisors as exempt from the FLSA.  The FLSA requires that employers must pay overtime to employees who work more than 40 hours in a week.  29 U.S.C. § 207(a).  The dealership claimed the exemption under a statutory exemption that applies to car dealerships.  29 U.S.C. § 213.  Specifically, the section in question exempts from overtime pay requirements:

Any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks, or farm implements, if he is employed by a nonmanufacturing establishment primarily engaged in the business of selling such vehicles or implements to ultimate purchasers.

Prior to the tax act, taxpayers who required additional cash for a variety of reasons, including buying our their spouse’s interest in the residence,  would regularly refinance the mortgages on their residence for a larger amount.  The benefit was that the mortgage interest on the refinanced mortgage could be deducted up to a $1,000,000 cap.  

The passage of the Tax Cuts and Jobs Act has effected a huge change limiting the mortgage deduction in this scenario, which may have a significant impact on parties going through a divorce.  The new law limits the amount of the mortgage to funds needed to acquire a residence, construct a residence or substantially improve a residence.  So, if you are refinancing for one of these allowable expenses, and stay below the $1,000,000 cap, the interest would still be deductible.   However, in a divorce that is often not the case.

In a divorce, the party retaining the residence will have to refinance the loans related to the residence to remove the other party’s name.  Often, this will be both a mortgage and a home equity line of credit.  Moreover, the party retaining the residence often has to refinance for a larger amount to make a cash payment to the other party to “buy out their interest” in the house.  With the new law, the parties refinancing the marital residence to take cash out to pay off the other spouse will be limited to the principal balance prior to the cash out refinance in terms of the interest that can be deducted.  For example, if the principal mortgage balance is $300,000 and the party retaining the residence is refinancing for $500,000 to pay off the other spouse, they will be limited for purposes of the deduction to the interest on the $300,000.  Interest on the additional $200,000 cannot be deducted.  In addition, there will be no deduction when the mortgage is refinanced to now include the home equity line of credit.  Parties are going to have to give more consideration to the tax consequences and resulting true cost of retaining the residence.

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