DBTC Law Firm

Jack Butt

Practicing law has changed radically since the “good old days”

A retrospective compiled from our current staff and attorneys shows just how much things have changed. Our firm’s senior partner started practicing 55 years ago, but even our junior-most associate has seen big changes in the last two years.  Remember rotary dial telephones, onion skin carbon copies, pink slip telephone messages and ashtrays in every office? Read on for this review of “Oh my, how things have changed in the law practice!”

Docket Calls. Not so long ago, lawyers had to attend “docket call” in order to obtain a trial date or a hearing on a motion. Every circuit judge – and every chancery judge, too, before circuit and chancery courts merged – called his docket on a specified date each month or quarter. All lawyers with a pending case were required to attend in person in order to request a trial date or to advise the court of the status of the case. While lawyers complained that attendance at docket calls took precious time away from their offices, these mandated appearances actually fostered a sense of collegiality among members of the bar and often resulted in settlement of disputes.

Electronic filing and online access to court records. The federal courts, including bankruptcy courts, were the first to require all pleadings and other documents in a case to be filed electronically, rather than in paper form. Now, our state courts are beginning to follow suit. All Pulaski County Circuit Court case filings must now be made electronically. Washington and Benton Counties are not yet set up for electronic filings but it is only a matter of time before they, too, are on board. And, although all filings are not yet made electronically, court records in most Arkansas counties are accessible online.

Social media. Social media has changed the face of litigation. Its impact in domestic relations and juvenile cases, in particular, has been huge. Parties and witnesses will have been fully vetted by opposing counsel through searches of Facebook, Twitter, and Instagram accounts, and embarrassing and incriminating posts may well come back to haunt them. In Donley v. Donley, 2015 Ark. App. 496, the Arkansas Court of Appeals held that the trial court did not abuse its discretion in admitting into evidence screenshots of Facebook comments and photos. Undoubtedly, new rules of civil procedure and evidence will eventually be implemented to govern the discoverability and admissibility of various forms of social media.

Technology. Nothing has caused the practice of law to change more profoundly than advances in technology. Communication by email, instead of “snail mail”, is now the default means of communicating with clients, other lawyers, and court personnel alike. Facetime and Skype often make in-person meetings with clients and witnesses unnecessary. Video depositions and attendance at depositions by video conferencing are commonplace. Discovery responses are now provided in digital formats – DVDs and flash drives – instead of on paper. And, of course, word processors have made those old memory typewriters and floppy disks obsolete!

Alternate dispute resolution. Mediation and arbitration are being utilized more and more often as a less expensive and less time-consuming method of resolving disputes. Only in recent years have certified mediators been available to assist parties in resolving cases. Arkansas courts have embraced the concept and many judges now require the parties to attempt mediation before going to trial.

Dress code. Even styles of dress have changed over the years! In the “old days”, lawyers routinely wore suits to work, whether they were due in court that day or not. When “casual Fridays” became popular, many lawyers followed the trend and dressed down on Fridays. Now, attorneys in many offices are as likely to wear jeans on a Monday as on a Friday – as long as they are not in court!

Although much about the practice of law has changed since the “good old days”, much also remains the same. As we adapt to the fast changing world around us, the Davis Law Firm continues to strive to provide the extraordinarily high quality of legal services which our clients deserve. We still abide by the ethical rules and principles which have long governed our profession. And, as always, our loyal clients remain our singular focus.

 

 

 

 

 

Straight from the Horse’s Mouth

In its release “IR 2015-124” on November 5, 2015, the IRS provides comprehensive advice on how to select and evaluate tax return preparers, and ensure that their work is competent. The entire text of the IRS release is set forth below:

IR 2015-124

Noting that there is still some time before the next tax filing season, IRS has advised taxpayers to make use of that time to consider the appropriate options in choosing a tax return preparer.

Basic advice. IRS provides some basic tips that taxpayers can keep in mind when selecting a tax professional and filing their returns:

  • Select an ethical preparer; taxpayers entrust some of their most vital personal data with the person preparing their tax return.
  • Check on the service fees up front; avoid preparers who base their fee on a percentage of the refund or those who say they can get larger refunds than others.
  • Ask the preparer whether he has a current Preparer Tax Identification Number (PTIN); paid tax return preparers must have a current PTIN to prepare a tax return.
  • Research the preparer’s history; check with the Better Business Bureau, or, for the status of an enrolled agent’s license, check with the IRS Office of Enrollment. For certified public accountants, verify with the state board of accountancy, and, for attorneys, check with the state bar association.
  • Ask for IRS e-file; any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically.
  • Provide records and receipts; do not use a preparer who, against IRS e-file rules, is willing to e-file a return using the latest pay stub instead of Form W-2.
  • Review your tax return and ask questions before signing; taxpayers are legally responsible for what’s on their return, regardless of whether someone else prepared it.
  • Never sign a blank tax return; the preparer could put anything they want on the return, even their own bank account number for the tax refund.
  • Ensure the preparer signs and includes their PTIN; the preparer must also give the taxpayer a copy of the return.

 

To help taxpayers determine return preparer credentials and qualifications, IRS offered the following information:

  • Any tax professional with an IRS PTIN is authorized to prepare federal tax returns.
  • Enrolled Agents—licensed by IRS—are subject to a suitability check and must pass a three-part Special Enrollment Examination, which is a comprehensive exam that requires them to demonstrate proficiency in federal tax planning, individual and business tax return preparation and representation. They must complete 72 hours of continuing education every three years.
  • Certified Public Accountants—licensed by state boards of accountancy, the District of Columbia and U.S. territories—have passed the Uniform CPA Examination and completed a study in accounting at a college or university and also met experience and good character requirements established by their respective boards of accountancy. In addition, CPAs must comply with ethical requirements and complete specified levels of continuing education in order to maintain an active CPA license. CPAs may offer a range of services; some CPAs specialize in tax preparation and planning.
  • Attorneys—licensed by state courts, the District of Columbia or their designees, such as a state bar—generally have earned a degree in law and passed a bar exam and have on-going continuing education and professional character standards. They may also offer a range of services; some attorneys specialize in tax preparation and planning.

Representation rights. Taxpayers can designate their paid tax return preparer or another third party to speak to IRS concerning the preparation of their return, payment/refund issues and mathematical errors. The third party authorization checkbox on Form 1040, Form 1040A and Form 1040EZ gives the designated party the authority to receive and inspect returns and return information for one year from the original due date of the return (without regard to extensions).

Enrolled agents, certified public accountants and attorneys have unlimited representation rights before IRS. Tax professionals with these credentials may represent their clients on any matters including audits, payment/collection issues, and appeals.

Preparers without one of these credentials (also known as unenrolled preparers) have limited practice rights. They may only represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service. They cannot represent clients whose returns they did not prepare and they cannot represent clients regarding appeals or collection issues even if they did prepare and sign the return in question.

For tax return preparers that have an active PTIN (PTIN holders) but no professional credentials and do not participate in IRS’s Annual Filing Season Program (AFSP, a voluntary program requiring a certain number of continuing education hours), this is the final year that they will have those limited representation rights for returns they prepare and sign. For returns prepared beginning January 1, 2016, only AFSP participants will have those limited representation rights.

 

Government got your money?!

Billions of dollars in assets have been confiscated, or “escheated,” from individuals and private businesses by state governments in the United States. This property is subject to being reclaimed by the original owners. In Arkansas alone, $220 million is still waiting to be claimed in the “Great Arkansas Treasure Hunt,” with $103 million having already been claimed since 1980. Could you have some cash waiting on you?

The assets held by the government are called “unclaimed property” and can come from a variety of sources. These include savings accounts, checking accounts, unpaid wages or commissions, stocks, dividends, proceeds, refunds, money orders, paid-up life insurance policies, utility deposits, and even the contents of safety deposit boxes, which can include items like jewelry, coins, baseball cards, or stamps, which, according to various standards, have not been accessed for some period of time by their owners. Abandoned property of this nature becomes unclaimed and is turned over to the state for a variety of reasons, which can include moving without providing new contact information, moving and failing to reclaim deposits, forgetting accounts that have been left open, failing to cash checks, neglecting to cash final paychecks from employers, or heirs not leaving contact information necessary to receive proceeds from decedents’ estates. Possibly the most important issue regarding unclaimed property is the fact that there are no statutes of limitation in place. Because of this, those entitled to unclaimed property that was escheated decades ago still have the ability to retrieve that property.

It is easy to find out if you or a family member have unclaimed property. The National Association for Unclaimed Property Administrators, or NAUPA, oversees unclaimed property. You can search its website, www.unclaimed.org, for free. Arkansans can also search for unclaimed property on the State Auditor’s website, http://auditor.ar.gov. Once on the site, simply type in your name to determine if you have unclaimed property. If you find your name, you can then initiate a claim that will be followed up on by the State. Legitimate proof has to be submitted in order for a claim to be validated, including proof of address and name at the time of the escheatment. Documents like tax returns or utility bills are great for providing this information.

Because of the ease of checking whether you have unclaimed property, it is well worth visiting one of these websites to see if you are lucky enough to have some unclaimed cash waiting for you. A woman from Kansas City, whose family invested in an obscure company many years ago, claimed $6.1 million in 2011. Maybe your fortune is waiting on you!

“Let us never negotiate out of fear. But let us never fear to negotiate.” – John F. Kennedy

“Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser — in fees, and expenses, and waste of time. As a peace-maker the lawyer has a superior opportunity of being a good man. There will still be business enough.” – Abraham Lincoln

Mediation has changed the face of litigation in recent years and substantially reduced the costs of resolving legal disputes. What is mediation?

Mediation is a form of conflict resolution involving the use of a mediator or neutral person to facilitate the exchange of information and positions between parties with the ultimate goal of reaching a resolution of the conflict between the parties. The mediator does not decide the case or make any rulings regarding the case, but serves purely as a neutral to help the parties work out the issues in their particular dispute. Mediation is often voluntary but is sometimes ordered by a court. To encourage open discussion, any statements made during the mediation are completely confidential and cannot be used by either party at a later date, such as a trial or hearing. Confidentiality is critical to the mediation process and is further supported by Arkansas statute prohibiting the use of any statements made during the mediation process in subsequent litigation.

The first stage of mediation usually involves a session where the parties meet together with the mediator and are able to openly discuss the facts and circumstances of the case from their respective viewpoints. After the initial opening session with all parties present, the parties typically break into caucuses to meet privately with the mediator. Again, confidentiality is critical and the mediator does not share any statements made by a party in a private caucus with the other parties involved unless he or she has permission to do so. Sometimes the parties will reconvene in additional joint sessions and other times remain in their private caucuses and share information and settlement offers back and forth in an effort to reach common ground. The goal is to reach a settlement agreement between the parties at the end of the day.

Why is mediation successful? Mediation is successful in large part due to the impartial nature of the process which allows the parties themselves to determine how to resolve their case as opposed to a judge or jury deciding the case for them. Thus, the parties are empowered to reach a resolution that is agreeable to them without having another entity dictate the result of their case. The confidentiality is also critical to the success of mediation in allowing parties to share information without fear of that being used against them at a later date. Further, mediation encourages the parties to explore various options and ways to resolve the case and sometimes encourages creative resolutions that could not be considered by a court or jury within the confines of the jury trial system.

The Davis Law Firm is proud to have three certified mediators. Don A. Taylor is certified in the areas of civil and probate litigation, Josh McFadden is certified in the area of civil litigation, and Brian Lester is certified in the area of family law litigation. With these areas of certification, the Davis Law Firm is uniquely positioned to mediate a large range of cases for litigants in an effort to achieve amicable resolutions of disputes.

Getting Paid for Getting Revenge: THE IRS Whistleblower Provisions.

It was recently announced that an individual had collected $38 million from the IRS as a reward for information about a tax dodge involving a large corporation. The IRS does provide cash rewards for tips that lead to recovery of taxes otherwise lost from tax cheating. Referred to as the Whistleblower program, this is an interesting dynamic for businesses of any size. Almost always, low to mid level employees (bookkeepers, secretaries, administrators) are a necessary part of the “cheat” in order to process false paperwork. Armed with that sensitive information, they thus become a ticking time bomb against the employer if they are ever fired, demoted, as a paramour jilted, or otherwise offended by the boss – not only can they get revenge, they can get rich – legally!

26 United States Code, Section 7623 provides an award of 15% to 30% of amounts recovered from tax underpayments based upon information provided by individuals leading to that recovery. The reward can be reduced if the IRS has already developed other principal sources of information leading to that recovery. This process has been available for decades, but the process was completely overhauled in 2006.

The program requires an annual report to Congress. The 2014 report reflected that the IRS Whistleblower Office had received 14,365 claims during 2014. Because Whistleblower claims cannot be paid until the taxpayer audit is completed as well as all related appeals and refund claims have been made or expired, it is typically five to seven years before a Whistleblower claim is paid. The first awards under the 2006 Act were made in 2011, and included the $38 million dollar award first mentioned above. In that case, the audited corporation was never aware its audit was the result of a Whistleblower claim, much less who the Whistleblower was.

In 2014, the IRS paid 101 claims totaling over $52 million, representing about 16% of the monies recovered from Whistleblower claims. There are obviously many more claims, worth many times more than that, in the pipeline.

Property Owners Beware of “Squatter’s Rights” That Create Easements Across Your Property.

The lay term “squatter’s rights” is dignified in the law by the term “adverse possession.” In Arkansas, a person can establish legal rights to your real property if for a period of seven years he continuously uses it in a way that is obvious and adverse to the rights of the real owner, such as fencing it, farming it or building on it. Besides being a path to outright ownership which would deprive the title owner of his property, the doctrine of adverse possession can be used to establish easements across property: paths, roadways, drainages or rights-of-way for power lines. While often these circumstances occur to untended rural property, they can also arise literally in your front yard, as illustrated in the recent case of Bingham vs. C&L Electric Cooperative. If the use is “permissive” versus “adverse,” no ownership rights are obtained. Frequently, cases turn on whether the owner had granted permission for such use or whether it was really adverse and without permission. Owners, even in dense, urban areas, need to be specifically aware of their boundaries and control whether any use by third parties is indeed permissive, or might be adverse, causing them to lose property rights.

In the case of Bingham vs. C&L Electric Cooperative, 2015 Ark. App. 237, decided on April 15, 2015, Mr. Bingham lived in his home on 32 acres which had been in his family for over 50 years. Power lines which served his house and neighbors ran across his property. When the electrical company came in to substantially remove the trees under the line for safety reasons, Bingham objected to the cutting of trees on his property.

The Electric Cooperative asserted that they had maintained those lines for over 30 years, and had periodically trimmed the trees under them. There were no documents establishing any kind of easement in favor of the Electric Cooperative. Bingham claimed that the use was permissive–he and his family had allowed the Electric Cooperative to maintain the lines in order to get service to their house and to accommodate their neighbors. The Electric Cooperative demonstrated that they had been trimming the trees on a regular basis for more than the seven years required for adverse possession.

The Court ruled that the power lines were visible, running across the front of Mr. Bingham’s property, and Mr. Bingham had no proof that he had ever granted permission or consent to the Electric Cooperative to place the lines there. The Court found that he acquiesced in the use of his land by his silence and passive assent, confirming the right of the Electric Cooperative to maintain both the lines and the ground beneath them as necessary.

A word to the wise: To the extent any part of an owner’s property is used by a third party for any purpose, the owner needs to have direct, clear and provable communications with that third party on a periodic basis that confirms that such use is voluntary and permissive and can be withdrawn at any time. This will defeat the doctrine of adverse possession coming into play after such use is continued for more than seven years. Placing a locked gate for a few days per year over a well-used roadway or path through properties, or periodic certified letters to an adjacent neighbor whose fence or garden may infringe an owner’s property confirming that permission is granted for the infringement, are illustrative of how an owner can protect his property rights to his titled real estate.

When Frugality Does Not Pay: Divorcing the Spendthrift Spouse

One might presume that in a divorce between the proverbial spendthrift grasshopper and save-for-the-winter ant, the frugal partner would be entitled to some consideration when their marital property is divided in the divorce. A recent court decision makes it clear that foolish, extravagant and excess expenditures by one spouse do not preclude them from receiving in a divorce their full one-half share of all remaining property accumulated during the marriage– despite the frugal and thrifty saving habits of the other spouse.

Arkansas law provides that all property accumulated during the marriage, regardless of which spouse earned it and regardless of whose name it may be held in, is marital property. The law further provides that all marital property will be divided one-half to each party in the divorce unless that is inequitable, taking into consideration specified considerations, such as the length of the marriage; the age, health and station in life of the parties; the parties’ occupation; the amounts and sources of income; vocational skills; employability; and opportunities of each party, etc. (Arkansas Code Annotated §9-12-315). If indeed a Court makes an unequal distribution of property, the Court must state its basis and reasons for not dividing the property equally, and it is not unusual for trial courts to be reversed by the appellate courts for failing to explain an unequal distribution.

In the case of Wainwright vs. (Wainwright) Merryman, decided early in 2014 (2014 Ark. App. 156), the Arkansas Court of Appeals considered the arguments of a disappointed ex-husband that he should have greater share of the division of marital property in his favor because he saved considerable amounts of his own income while his ex-wife spent or concealed hers.

The Court ruled that a spouse does not lose their right to 50% of what is left by making pre-divorce transfers of all their property, even for free, and even though that strips them of all means of supporting their spouse and leaves their spouse without the means of subsistence. The court’s only consideration was that such expenditures be in good faith and without intention of defrauding the other spouse’s estate.

Will You Be Audited?

Will You Be Audited? Where You Stand With The IRS: The IRS annually publishes a “data book” providing extensive data on IRS activities. It provides clues as to what would flag a return for audit. For the fiscal year ending 9/30/13, about 1% of all individual income tax returns were audited. Certain areas indicate they are at higher risk for audit selection than others. While a detailed review of the 2013 data book is beyond the scope of this article, certain highlights are noted.

Of those returns audited, an extremely high 34% claimed “earned income tax credit,” making this among the highest audit risks on personal tax returns. With the average audit rate being 1%, 3% of individual tax returns which showed business gross receipts of $100,000-$200,000 were audited, while only .4% of farm income returns were audited. The rate of audit for returns showing total positive income of $200,000- $1,000,000 was 2.5%, and for returns showing positive income of $1,000,000 or more was 10.8%. In summary, claiming earned income tax credit, individual business returns showing gross receipts of $100,000-$200,000, and high income individuals were the highest targets for audit.

Other highlights: 83% of the 146,000,000 individual income tax returns were e-filed, refunds were paid to 118,000,000 of those 146,000,000 returns, with refunds exceeding $312 billion. The IRS spent 41 cents to collect each 100 dollars in tax revenue during the fiscal year.

An electronic version of the 2013 Data Book can be found on the Tax Stats page of the IRS website, www.IRS.gov.

A Jewel Falls from the Crown of Qualified Retirement Plans– Inherited IRAs are No Longer Immune from Creditor Claims.

Since the mid-1970’s, qualified retirement plans in all forms (profit-sharing, pension, IRA, SEP, 401K, etc.) have been the crown jewels of financial planning: funded with before-tax dollars, compounding rapidly in tax-deferred investments, and protected in bankruptcy from creditors.  What could be better?  A recent Supreme Court decision took one of the jewels from the crown when it found that inherited IRAs are not protected from creditors.

In the approximately 40 years since qualified retirement plans took center stage, their favored status  has been proven by the fact that they now own close to a majority of the publicly traded stocks in the United States, trillions of dollars’ worth.  Available in many forms, they allow earned income to avoid income taxes when first invested in the plan; the plans then grow rapidly because the  earnings  compound annually without income taxes being assessed against the growth; and finally, in the payout years, when income taxes are assessed, tax brackets are typically much lower than the years when the contributions and earnings were accruing.  As if this weren’t enough, such plans are flexible, allowing transfers from one plan to another, or rollovers to an IRA, and permit one spouse to inherit them from another spouse without paying either estate or income taxes.  All of this is significantly enhanced by the fact that such plans are generally immune from the claims of creditors, even when the owners of those funds file bankruptcy.  In recent years, it has become legally possible to inherit IRAs, so that succeeding generations may continue the deferral of income on these growing assets.

Finally, one jewel has fallen from this many-faceted crown of the investment world.  In its decision of June 12, 2014, the United States Supreme Court decided in Clark v. Rameker that inherited IRAs are not exempt from the claims of creditors.  Pointing out the many, significant differences between an inherited IRA and one that has been created by a person’s own earned income, the Supreme Court refused to make such assets immune from creditors’ claims in bankruptcy.  In that case, Ruth Heffron died and left her IRA of $450,000 to her daughter.  Her daughter had drawn it down to about $300,000 when she was compelled by her debt situation to file bankruptcy.  The exemption of inherited IRAs from bankruptcy claims had been a topic of much speculation and contradictory rulings in lower courts.  The daughter argued that the IRA funds should be preserved to her through the bankruptcy because they were retirement funds.  The Bankruptcy Court agreed  with creditors that the funds could be seized; the United States District Court for the Western District of Wisconsin reversed the Bankruptcy Court, and was reversed in turn by the U.S. Court of Appeals for the 7th Circuit, landing the long-pending question before the U.S. Supreme Court.  It is now clear and final that inherited IRA funds are not exempt in bankruptcy from the claims of creditors.

That is not the end of the story.  There remain ways to continue the deferral of income tax on such funds for the benefit of successor generations, after the contributor’s death, while protecting such funds from creditors (see our April 7, 2014 post on Spendthrift Trusts). However, this is a far more complex arrangement than simply naming your heirs as beneficiaries of your IRA, and requires specialized legal assistance and planning.

Discovery Process Required

Failing To Effectively Participate In Pretrial Discovery Can Lose Your Case, Regardless Of Its Merits.  In civil litigation, there are detailed rules which allow both sides to make extensive inquiry of the other side’s information, documents, and knowledge of the case. This can be done through written questions (“interrogatories”), requests for documents (“requests for production”), and questioning, taken before a reporter who transcribes the questions and answers, under oath (“depositions”). In many cases, especially in commercial and business litigation, the inquiries can seem overwhelming and take a vast amount of a client’s resources to truthfully, fully respond. Clients often resist this perceived offensive and costly intrusion into their knowledge and data bank. However, it is required, and courts will strictly enforce a party’s right to have this information. The Arkansas Supreme Court case of Ross Systems vs. AERT, decided in November 2011 (2011 Ark.473),determined that the defendant in business litigation had “thumbed its nose” at the court, flagrantly violating discovery rules, and as a result, the formal answer that it had filed in court was stricken, leaving it in default, and being denied the opportunity to contest the significant claims for damages that had been alleged against it for deceit, deceptive trade practices and breach of contract– regardless of what merit those defenses may have had.

Actually, the discovery rules give a party several bites at the apple before serious sanctions are imposed, but this case illustrates that it is not a matter to be taken lightly. In this case, the plaintiff was required to spend a fair amount of time and money giving the defendant ample opportunity to make discovery responses. The first responses were deemed evasive and incomplete, and as required by the discovery rules, the plaintiff’s lawyer attempted to resolve the discovery issue through a letter. However, the defendant did not respond to that. Subsequently, the plaintiff filed a motion to compel responses to the discovery, again, a procedure contemplated by the discovery rules. A hearing resulted, in which the court directed that supplemental responses be filed within 21 days. Though responses were filed, it was alleged they provided little additional information.

At this point, the plaintiff filed a motion for sanctions (again, as permitted by the rules) for failure to comply with the court’s order. Though some additional material was provided the day before the hearing on that motion, the court found that even though a significant number of documents had been provided, the response was incomplete. The fact that they were not in the defendant’s possession was of no consequence, because the defendant made no effort to determine and specify which documents there were, had taken no steps to provide complete discovery, and was in essence “just thumbing its nose at the court’s order,” which was a flagrant discovery violation.  With the defendant’s answer stricken by the court, it was technically in default and had no right to further participate in the proceedings, giving the plaintiff a free shot to make its case without any opposing evidence.

Moral of the story: However bothersome discovery must be, courts take seriously a party’s obligations to participate in good faith in the discovery process.