FEDERAL TAX RELIEF
On June 7, the President signed into law a $1.3 trillion tax-cut bill. The Economic Growth and Tax Relief Reconciliation
Act of 2001 is the largest tax reduction in the last 20 years, although it will not do much for the cause of tax
simplification. Taxpayers should bear in mind two time-related characteristics of the Act. First, the tax cuts are phased in
over a period of years, with some of the most significant reductions occurring closer to 2010 than 2001. Second, due to
arcane federal budget rules, the tax-cut provisions in the Act are set to expire on December 31, 2010, unless Congress
takes action before then. The effect of the Act's many provisions on individuals and small businesses will have to be
sorted out with the help of professional tax advisors, but the following are some of the key components.
Individual Income Tax
The Act phases in a reduction in tax rates, eventually lowering the 28%, 31%, 36%, and 39.6% brackets to 25%, 28%,
33%, and 35%. The existing 15% bracket will be split into 10% and 15% brackets. The creation of the new 10% bracket
has generated the retroactive relief that will come to taxpayers this year in amounts ranging from $300 for singles to $600
for married couples.
Before the new law, married couples whose income was split more evenly than 70% to 30% were likely to pay more in
taxes than if they were not married. Relief from this "marriage penalty" will come in the form of an increased standard
deduction for joint filers to twice that of singles and a widening of the 15% tax bracket for joint filers to twice that of
The child tax credit gradually will be increased from its current level of $500 to $1,000 in the year 2010. The child credit
will continue to phase out above $75,000 for single individuals and those filing as head of a household, and above
$110,000 for married couples filing jointly.
Education provisions in the Act are intended to help both families and individuals through direct tax and savings
incentives. For example, the exclusion from gross income for employer-provided educational assistance, which would
have expired after 2001, has been extended permanently. Contribution limits for individual retirement accounts for
education have been increased from $500 to $2,000. There is a new deduction for qualified higher education expenses,
but taxpayers may not take this deduction and the Hope or Lifetime Learning credits in the same year with respect to the
same student. The deduction of student loan interest has been expanded beyond the first 60 months in which interest
payments are required.
Like many other aspects of the Act, the reduction and eventual repeal of the estate tax is phased in over a period of years.
The top estate tax rates drop slowly from 55% to 45%, while during the same period the exemption jumps from the
current $675,000 to $3.5 million. Eventual repeal of the federal estate tax suggests that estate planning will also
eventually be simpler, but until that day arrives planning could actually be more complicated. For the rest of this decade
the estate tax will be changing virtually every year.
||Estate Tax Exemption|
The Act makes changes affecting both individual participants in retirement plans and employers that sponsor such plans.
For individuals, the benefits are increased limits on contributions to plans, greater security for funds in the plans, and
more flexibility concerning withdrawals, rollovers, and continuation of plans. As for businesses, the Act encourages the
establishment of retirement plans, increases the deductibility of contributions, and generally makes the administration of
plans more streamlined. Similar changes are in the Act for plans overseen by state and local governments, tax-exempt
organizations, and colleges and universities.
The Act could well have been called the Economic Growth and Individual Tax Relief Reconciliation Act, because 99% of
the benefits from the Act will go to individuals. There are, however, a few provisions that will directly affect businesses.
As noted above, the Act should simplify pension law, and it makes permanent the exclusion from gross income for
employer-provided educational assistance, while expanding it to cover graduate studies. Employers can receive a tax
credit equal to 25% of qualified expenses for employee child care (such as facility costs) and a credit equal to 10% of
qualified expenses for child-care resource and referral services. Finally, the Act delays the due date for certain corporate
estimated tax payments.
CASE BY CASE
Overtime Pay for On-Call Duties
Three utility workers responsible for monitoring security systems in the utility's buildings were essentially on the job 24
hours a day, 7 days a week. When they were not working their regular shifts, they had to be ready to receive and respond
to alarms, using computers at their homes. If they did not respond to an alarm within 15 minutes, they could be
disciplined. The utility paid overtime for the time spent actually responding to an alarm, but not for the rest of the on-call
time, which consumed all of the employees' waking (and sleeping) hours.
The employees were successful when they sued under federal law for around-the-clock overtime for everything beyond 40
hours per week. On-call time usually does not qualify as compensable overtime, but the issue is highly dependent on the
facts of each case. Key factors include any agreements between the parties, the nature and extent of the restrictions, the
relationship between the services rendered and the on-call time, and, perhaps most importantly, the degree to which being
on call interferes with the employee's personal pursuits.
In this case, the employees on average were required to respond to three to five emergency calls per on-call period. They
generally did not have to report to the plant when called, but the requirement that they take some action by computer
within 15 minutes of a call made the on-call commitment more burdensome. For the court, this was all the more reason to
award overtime pay for the workers who were on call during all of their off-premises time.
Guidance Counselor Liability
In his senior year in high school, Bruce was a star on the basketball court who caught the attention of college coaches. He
was on-track academically, having registered for courses that would allow him to satisfy core eligibility requirements
established by the National Collegiate Athletic Association (NCAA). Bruce became dissatisfied with an NCAA-approved
English literature class. With the help of a guidance counselor, he dropped that class and replaced it with another English
class. According to Bruce, the counselor told him that the new course was also approved by the NCAA.
Late in his senior year, Bruce accepted a full basketball scholarship from a university. After graduation, the bottom fell
out of his plans when the NCAA informed Bruce that the English class he completed did not satisfy its core requirements
because it had not been submitted by the school for approval. This left him short of the minimum NCAA requirements
and caused the university to revoke his scholarship.
Bruce sued the school district on a theory of negligent misrepresentation by the guidance counselor. The state supreme
court allowed Bruce's lawsuit to continue. Unlike most educational malpractice claims, the majority of which fail, Bruce's
claim did not challenge classroom methodology or theories of education. The claim was more akin to those brought for
misrepresentation by clients against professionals who have been sought out for their expertise. While the claim of
negligent misrepresentation usually arises in a commercial context, the court saw no reason not to extend it to anyone,
including a high school counselor, who is in the business or profession of supplying information to others.
TO COMPETE OR NOT TO COMPETE
It is nothing new for employers to require employees to sign noncompetition agreements, but such agreements are now
more commonly used by all types of employers and for a broader range of employees. They are especially popular among
high-tech and Internet businesses, where the risks of being at a competitive disadvantage are most significant when a
departing employee exploits the former employer's "trade secrets." In these fields, the traditional criteria used by the
courts in judging the reasonableness of an agreement--the geographic and time limits of the restrictions--may have
reduced relevance. As a result, the strategies used by employers to protect their interests, and by employees to protect
theirs, are still evolving.
Employers can enhance the prospects for court approval of a noncompetition agreement by customizing it to fit the
particular business and job in question. The agreement should restrict the former employee no more than is necessary to
protect the employer's legitimate business interests. Requiring noncompetition agreements only of employees with access
to sensitive information may also improve their enforceability. Given the variation in the states' treatment of such
agreements, employers with a presence in more than one state should draft agreements very carefully.
The scope of a noncompetition agreement generally depends on its terms. Courts in some states, however, have accepted
the argument that, even if an employee is not barred from working for a competitor by the language in the agreement,
such competition should be prohibited on the ground that the employee inevitably will make use of a trade secret of the
former employer. Other courts have been less willing to make that assumption. For example, in one case a court held that
an agreement did not apply to a departed employee because the new employer was not a "competitor" as defined in the
agreement. Finding no prohibition against the former employee's new job in the noncompetition agreement itself, the
court refused to rewrite the agreement or to let the former employer "make an end-run" around the agreement in the guise
of preventing the disclosure of trade secrets.
From an employee's perspective, the argument can often be made that a noncompetition agreement should be enforced for
a shorter time period than used to be considered reasonable. This is especially true in information technology, where the
technology itself and the competitive dynamics change rapidly. As for the secrets that the employer may be attempting to
protect by enforcing the agreement, the employee sometimes can counter that the information is already in the public
domain, giving the former employer no right to prevent the former employee from using it in a new job.
BEWARE OF IDENTITY THEFT
Intent on taking a free ride on the good name and reputation of others, identity thieves obtain personal information and
then essentially impersonate their victims as they open credit-card accounts, make purchases, or take out loans. It can take
a while for the victim to know that he has been wronged, and even longer to sort out and to clean up the damage. In the
meantime, the innocent party may be denied financial and employment opportunities.
While there is no way to have complete protection against identity theft, these common-sense measures can decrease
theodds of becoming a victim:
* Jealously guard personal information like your Social Security number and account numbers and passwords, divulging
it only in a communication that you initiate. Use this information sparingly online and only if it will be encrypted.
* Keep your wallet from becoming a gold mine for potential thieves by carrying the minimum in checks, credit cards, or
other bank items, and do not keep your Social Security number there.
* Retrieve your mail promptly and do not leave outgoing mail in your doorway or home mailbox.
* Tear up private papers like bank statements, receipts, and credit-card applications before throwing them away. It is not
just archaeologists who sift through old garbage in search of valuable information.
* Store valuable financial information at home in a place that is not available to prying eyes.
* Review bank account and credit-card records regularly, as well as your own credit report prepared by a credit bureau, so
that you can pick up the first signs of trouble, such as a missing payment or an unauthorized withdrawal.
TOWNS VS. TOWERS
When it passed the Telecommunications Act of 1996, Congress intended to expand wireless services and increase
competition among providers by reducing the regulatory burden. At the local level, this meant limiting the traditionally
broad powers of local governments to restrict land use through the zoning power. Under the Act, local governments retain
some control over the placement of "personal wireless service facilities," the most controversial of which are tall
telecommunications towers for cell phone service. However, Congress placed limits on that authority. For example, local
authorities may not unreasonably discriminate among providers of similar services, nor prohibit personal wireless
services in their localities. They must respond with reasonable speed to any request to build facilities. If an application is
denied, the denial must be in writing and must be supported by substantial evidence in a written record.
When a provider of wireless telecommunications services was denied permission by a town zoning board to build a
150-foot-high telecommunications tower, it sued the town in federal court. The provider argued that the town exceeded
its authority under the Act by basing its decision on citizens' statements of general opposition to cell towers, not
"substantial evidence." The court ruled in favor of the town, allowing it to prohibit the tower even though the decision
was based largely on an aesthetic judgment.
The tower stirred opposition because of its location. It was to be built on top of a 50-foot hill in the middle of a cleared
field, in the geographic center of the small town. Visible during all seasons, the tower would be seen daily by about one
quarter of the town's population. It was close to three schools and two residential subdivisions.
The telecommunications provider argued to no avail that the town could not deny the application without showing that
there was a suitable alternative site with less visual impact. However, the unmet burden had been on the provider to prove
the absence of any other feasible site in the town, in which case the provider might have been able to win by showing that
the town's denial effectively prohibited personal wireless services in the area.
(OVER)REGULATION OF WETLANDS
The federal Clean Water Act authorizes the Army Corps of Engineers to require permits for the discharge of dredged or
fill material into "navigable waters." Under the "migratory bird rule," the Corps asserted its jurisdiction over even isolated
intrastate waters if they provided a habitat for migratory birds.
A consortium of municipalities mounted a challenge to the legality of the migratory bird rule when it posed a hurdle for
the consortium's plan to use an abandoned sand and gravel pit for a solid waste disposal site. The site was far from any
navigable waterway, but migratory birds used some trenches that had evolved into permanent and seasonal ponds. The
U.S. Supreme Court ruled that the Corps had overstepped the limits of its regulatory authority. No longer may the Corps
regulate the development of isolated wetlands and waters that are not adjacent to navigable waterways. By some
estimates, such isolated wetlands constitute 20% of all wetlands in the country, and thousands of applications pending
before the Corps could be affected by the ruling.
Landowners and developers with isolated wetlands on their lands should pause, however, before firing up the bulldozers.
Questions remain about whether the Corps retains jurisdiction over smaller streams, creeks, and tributaries that do not
empty directly into a navigable waterway. In addition, the Supreme Court ruling was confined to federal law, and some
states and local governments have their own restrictions on development of wetlands.