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.
Denise Bowman & Patricia Collins, Partners of Antheil Maslow & MacMinn, LLP in Doylestown, will be presenters on Tuesday, May 8th, 2018 at the Bucks County Bar Association’s Second Annual Business Law Institute. Ms. Bowman focuses her practice on commercial litigation, and her program will highlight contract litigation disasters and how business attorneys may avoid such pitfalls in contract drafting. Ms. Collins is an employment law attorney; her segment covers employment law issue spotting for business attorneys.
Serving the Philadelphia surrounding communities, Antheil Maslow & MacMinn, LLP is a full-service law firm that offers sophisticated, proactive, timely and cost-effective legal advice. With its broad range of practice areas in Business & Finance, Commercial Litigation, Family Law, Tax & Estates, Real Estate, Employment, and Personal Injury, Antheil Maslow & MacMinn, LLP has the depth of resources and knowledge to satisfy its clients’ evolving needs for legal advice and representation and help them reach their ultimate goals.
Susan Maslow, Vice-Chair of the ABA Business Law Section Working Group to Draft Human Rights Protections in Supply Contracts, participated as Program Chair and one of six panelists in a CLE program at the ABA Business Law Spring Meeting in Orlando, Florida on Friday, April 13, 2018 entitled “Protecting Human Rights in Supply Chains: Moving from Policy to Action.” Speakers included practitioners in private firms, industry representatives from multibillion-dollar international businesses, and academics.
The program focused on the Working Group’s draft of a report with model contract clauses to protect the human rights of workers in international supply chains. The hope is that adopting the suggested text in supply contracts, purchase orders, and delivery documents will be more effective at preventing the kind of abuses that have recurred with horrifying frequency over the last few years, resulting in hundreds of deaths and countless injuries. The CLE program and materials include research and summary of recent and pending litigation in the context of violations of employee human rights, forced labor and child labor, domestically and abroad. The program drew on the knowledge and skill of those who have worked in the area, with perspectives from private practice, in-house lawyers, and law professors. The Working Group has been gathering feedback on the current draft of the report and model clauses and took the opportunity to gather more input from other business practitioners at the CLE program. The Working Group held a session following Friday’s program to discuss and digest the comments, to finalize the report and clauses, and to form a plan of national implementation.
Finally, Spring is here! It has certainly been a long, cold, snowy, and relentless winter. I want to take this opportunity to wish all of you a snow-free, warm and sunny Spring. As an employment lawyer, I'd like to do my part to help all of you employers maintain a care-free Spring mood by offering the following Spring cleaning checklist, which can protect your business from litigation and compliance risks.
Elizabeth J. Fineman has been named a Partner of the law firm of Antheil Maslow & MacMinn, LLP. According to Managing Partner, Bill MacMinn, “Liz is a an impressive lawyer, her work ethic, skill and professionalism make her well deserving of Partner status with AMM”
Ms. Fineman concentrates her practice on domestic relations matters and handles a variety of issues, including divorce, child support, alimony/spousal support, marital taxation, equitable distribution and child custody matters. She has handled many high-income support cases and complicated divorce matters involving an intricate knowledge of both family law and complex tax and financial issues. Elizabeth Fineman holds an LL.M. in taxation.
In my prior installment of this series (Family Law Tip #2), I discussed the substantial reduction in the allowable amount of mortgage interest which is now tax deductible on any mortgage taken out after December 15, 2017. The 2017 Tax Cuts and Jobs Act reduced the deductible amount by $250,000 on homes purchased after the cut off date - capping the allowable interest deduction to mortgage principal of $750,000 (reduced from $1,000,000 prior to December 15, 2017). Beyond the lower mortgage cap, another big change is that, in general, the interest on home equity lines of credit is no longer deductible (with some very limited exceptions). This is true regardless of whether the home equity line of credit was taken out before or after the change in tax law.
These changes to the allowable mortgage interest deduction will have a bearing on the decision of divorcing parties as to whether to keep their second residence post-divorce. In the past, people often kept the second residence, in part knowing that they were able to deduct the mortgage and home equity line of credit interest on their tax returns and the maximum amount of $1,000,000 in indebtedness allowed for flexibility. In the advent of the Tax Cuts and Jobs Act, some will have to rethink this decision. If the expenses related to their vacation homes cannot be deducted, the cost to maintain the home will be higher.
While there was some back and forth in the various drafts of the tax code revisions, ultimately the deductions for the mortgage interest apply to both the primary residence and a second home as well. However, as stated above, the $750,000 cap makes it more likely that parties will not be able to deduct all of the interest on the mortgages for the primary residence and secondary residence when those amounts are combined. Consulting your attorney and accountant will help you to determine the actual increase in the cost of maintaining your vacation home so that you can make an informed decision.
Nearly every business has valuable confidential information, and many derive substantial value from this information, making it a dominant asset of the entity. It follows that protection of proprietary information within an organization is a vital business priority. Non-compete, non-solicitation, non-disclosure and confidentiality agreements are critical tools to protect value and form a core part of the intellectual property of a business.
Employers and employees must evaluate the enforceability of restrictive covenants. Many factors are considered when courts determine whether such agreements are valid. Antheil Maslow & MacMinn employment attorneys can help employers draft enforceable documents that protect the business. We can also act swiftly and effectively to enforce employer rights under such agreements. This may mean filing an injunction, seeking damages for a breach, or negotiating an alternative resolution, but in any event, we offer employers timely recourse to secure their vital confidential information and business assets.
Our attorneys can also counsel employers on proactive risk management strategies to safeguard trade secrets and protect their rights. This may include advice on steps to pursue with new hires or when employees who have signed restrictive covenants leave the company.
Our attorneys can assist employees in negotiating these agreements, navigating their restrictions, and defending claims brought by employers.
Reprinted with permission from the Spring 2018 Issue of the Pennsylvania CPA Journal
My partners and I were retained for a recent case that highlighted the value of tax and accounting expertise in litigation. We represented shareholders in a precious metals business who were embroiled in a difficult intrafamily dispute. The work illustrated a successful marriage of lawyers and accounting experts in a very complicated commercial case.
A platinum recycling company owned by three brothers – I’ll call them O, S, and K – acquired an interest in a company in Gibraltar and another company in the United Arab Emirates (UAE). Their creditor was a South African platinum company.
Trouble started in 2008. The company fell behind in payments to its South African creditor, and the brothers fought over their company’s future and strategies to repay their creditor. Litigation ensued.
Suits erupted in four different jurisdictions: in the London Court of International Arbitration (LCIA) in the High Court of Justice, Chancery Division (Chancery case), venued in London, England; in Bucks County, Pa.; in Burlington County, N.J.; and in federal court in the Eastern District of Pennsylvania.
Brother S and the company sued Brother K in New Jersey for failure to pay funds due under a loan from the company. The loan was to permit Brother K to purchase the UAE and Gibraltar companies, and then to transfer half of his interest to Brother S.
In the Chancery case, Brother S sued Brother K for K’s conduct in the transactions to purchase the UAE and Gibraltar companies.
Brother O sued Brothers S and K and the company in Bucks County for failure to make distributions to him, for mismanagement, and for self-dealing. Brother K, as an owner of the UAE and Gibraltar businesses, filed on behalf of those entities against the brothers’ company for failure to return metal or pay funds due.
In London, the South African company sued the brothers’ company for $200 million in loans owed to it. It filed the same action in the Eastern District of Pennsylvania.
The brothers eventually settled the Bucks County, London, and New Jersey actions, as well as one of the federal court actions. However, the dispute with the South African company in the LCIA went to trial. The South African company won a judgment for slightly more than $200 million.
The South African company then filed a new action in federal court, alleging that the earlier settlements amounted to fraudulent conveyances made to avoid the $200 million claim while the brothers’ company was insolvent and without fair value exchanged.
The dispute required forensic accounting experts on both sides to present on several issues, including maintaining the entity’s status as an S corporation, evaluating the solvency of the entity, providing insight into whether certain transactions amounted to fraudulent conveyances, and assisting counsel with cross-examination.
The accounting experts evaluated whether settling the Bucks County case to preserve an S election was a viable defense under the fraudulent conveyance statute, and provided advice, reports, and testimony to explain the S election, the steps the company could properly have taken to preserve the election, and the consequences of losing the election.
The parties sought expert opinions regarding the company’s insolvency, and the date it became insolvent. With a $200 million judgment looming, the issue of insolvency was a matter of “when,” rather than “whether.” The lawyers and accountants worked together to determine the date on which insolvency occurred and how to present that to the jury.
The most daunting issue in the case was the lack of professional recordkeeping by the brothers’ company. This issue is too common in family businesses, even among those that have been successful. Experts were required to recreate financial information from the reports generated related to the insolvency and tax issues. The forensic accountants provided support in cross-examination aimed at challenging those recreated reports.
The jury was called upon to answer the following question: Did the settlements amount to fraudulent conveyances? The jury answered “yes” with regard to the Bucks County settlement, but “no” to the settlement of the dispute with the UAE and Gibraltar entities. The jury found that the shareholders did not engage in actual fraud. It returned a verdict of $16 million in favor of the South African company.
The creditor portion of this case required extensive use of forensic accounting experts who expressed opinions on both sides of the Subchapter S and insolvency issues. They assisted in devising strategies to present highly technical topics to the jury. Accounting experts on both sides recreated financial records, and wrote reports addressing the issues. They assisted in devising strategies for cross-examination, and they testified. Together the lawyers and accounting experts were able to present very complicated evidence in a way that kept the jury engaged.
Antheil Maslow & MacMinn, LLP is pleased to announce the addition of Denise M. Bowman as a Partner of the firm. Denise will join AMM’s Business & Commercial Litigation practice groups.
A highly effective and experienced negotiator, Ms. Bowman brings an impressive skill set and strong strategic advocacy to every client engagement. Her focus on business and commercial services has afforded her a comprehensive understanding of the complex forces at play across multiple industry sectors. With a particular passion for reaching practical resolutions to complex business disputes, Denise Bowman is dedicated to achieving the best possible outcome for her clients.
Ms. Bowman concentrates her practice in the area of commercial litigation, both at the trial court and appellate levels. She represents businesses, individuals and municipalities in civil litigation matters, including fraud and breach of contract actions, suits involving protection of intellectual property, construction matters, negligence and strict liability actions, title insurance and other real property disputes, shareholder disputes, business “divorces,” fraudulent transfer actions, and general business and commercial matters. Ms. Bowman also handles Orphans Court Litigation. Denise is a formally trained mediator.
The Tax Cuts and Jobs Act includes a substantial change to the allowable amount of mortgage interest which is tax deductible. For those who are contemplating purchasing expensive homes and taking out a mortgage with a principal balance of more than $750,000, the interest on the amount over $750,000 will not be tax deductible. For mortgages issued prior to December 15, 2017, the mortgage interest is deductible for principal mortgage amounts of up to $1,000,000. However, after December 15, 2017, that amount is reduced to principal amounts of up to $750,000. This only applies to properties purchased after December 15, 2017. Absent any extension of this law, the amount reverts to $1,000,000 in 2026.
Another big change relates to home equity lines of credit on your residence. In the past, the mortgage and home equity line of credit could be lumped together, and the interest on both deducted up to the maximum allowed loan amount. That is no longer the case. It does not matter if the home equity line of credit was taken out before or after the change in tax law. In general, the interest on home equity lines of credit is no longer deductible. There are some limited exceptions to this where the funds are used to substantially improve the residence, but even this exception requires very specific requirements to be met. This tax change could have a large impact on those who intentionally took out a home equity line of credit rather than refinance their mortgage to a larger amount. Without this deduction, taxable income will be higher.