Imagine

After significant planning and exhaustive efforts to gather seed money, you are finally ready to start up your new business in Texas. You have come up with a clever name for your company, and the Secretary of State determined that it was available. You have invested in top-of-the-line signage, letterhead, business cards and broad-based advertising and promotion. Your business launches to great fanfare and public reception. Everything is progressing just as you hoped it would - until you receive a letter from an attorney advising that your company name infringes another entity's trademark rights and that you must change your name immediately. You look to your certificate of formation, your name reservation or name registration for answers, for proof that you are authorized to use your name - but find nothing. You learn that you must choose between starting over with a new name or fighting in court to keep using your first name.

Reality

Texas filings relating to company names, though accepted and approved by the Secretary of State ("SOS"), do not confer unfettered ownership or right to use the name. That is, a company name that is reserved, registered or filed in a certificate of formation by the Texas SOS, or is the subject of an assumed name certificate (also known as a "dba"), can indeed infringe someone else's trademark rights, and the owner of such reservation, registration or certificate might have no right at all to use his company name as he wishes. Most at risk for claims of trademark infringement are company names that are used for entities who provide goods or services to the public (as opposed to holding companies, investment companies and the like whose names are not typically used in connection with the public advertising and selling of goods or services).

The Cause of the Confusion

Company names can serve dual functions, only one of which is affected by Texas company name filings. One function is as a form of identification of the company, which is used for "official business" such as filings or records with state or federal agencies, entering contracts and the like. Texas company name filings pertain to this function of company names.

The other potential function of a company name is as a trademark. A trademark, sometimes called a brand, is a word, name or symbol that is used to identify and distinguish the goods or services of a company from those of other companies and to indicate the source of the goods or services. Trademark rights arise under different laws than those governing Texas company names. Trademark rights are not created or affected by Texas company name filings.

It is not always clear whether a company name functions as a trademark. The distinction between company name and trademark functions is sometimes easier to visualize in the context of companies that sell products. For example, The Procter & Gamble Company typically uses names other than its company name as its product trademarks, like CREST, MR. CLEAN, CHARMIN and TIDE. For companies that provide services, however, the company name itself is frequently (but not always) used as a mark to identify the company's services, such as GOOGLE, WELLS FARGO or TEXAS CHILDREN'S HOSPITAL. Likewise, dual usage as a company name and as a trademark may be more frequent for local, start-up or Mom & Pop companies who have not invested in extensive branding. Ultimately, the important question for any entity is whether its company name, in addition to identifying the company itself, is also being used as a brand name for a particular product or service. In such cases, companies and their attorneys must be cognizant of the dual function of their company names.

The Effect of the Confusion

Failure to appreciate the differing functions of company names can lead companies and their attorneys to misunderstand the meaning and import of Texas company name filings and leave companies exposed to future conflicts over their names. The Texas SOS exacerbates the problem somewhat by having a fairly comprehensive administrative framework for categorizing the degree of similarity of company names, correcting or avoiding unacceptable similarities with prior names, and making so-called "final determinations" of name availability when filings are made. Despite this manner of clearance and approval of company names, the resulting certificates of formation and name reservations or registrations with the Texas SOS do not grant ownership of that name, or the right to use it, as your public brand identity. Assumed name certificates likewise confer no rights and arguably are even less probative, as they are only mandatory notice filings that are not examined or approved by the Texas SOS.

To its credit, the Texas SOS attempts to warn filing entities about the issue. In addition to posting the pertinent statutes on its website, the "General Information" section on each of the forms for filing a certificate of formation or an application to reserve or register an entity name explicitly states that "the issuance of a certificate of reservation or formation under a name does not authorize the use of a name in violation of another persons' rights to the name" (underline in the form itself). The form for assumed name certificates contains a similar alert.

Nevertheless, the papers continue to provide examples of mistaken perceptions of Texas company name filings, such as the recent report of an Austin attorney who filed assumed name certificates for the expired assumed names of prominent Austin and Houston restaurants and then advised the restaurants they had to buy back the names (for thousands of dollars) in order to continue operating under those names. The fallacy of her scheme is clear when you understand that the restaurants are using their names as trademarks, and their right to continue using their names as trademarks is not dictated or affected by Texas company name filings.

The Bottom Line

Texas companies that provide goods or services to the public must be especially prudent in selecting and using company names, including assumed names. If you intend to use your Texas company name as your public identity or as a brand name for goods or services sold to the public, then clearing your company name only through the Texas SOS filing process will not ensure that the name is in fact available for your intended use. Furthermore, the approval of a certificate of formation or a name reservation or registration, or the filing of an assumed name certificate, does not absolve you if that name infringes another party's trademark rights. Before you invest your blood, sweat and hard-earned cash in your new business venture, you must secure a complete clearance of your company name from a qualified attorney.

This Looper Reed & McGraw Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice.

Copyright © 2009 Looper Reed & McGraw, P.C. All rights reserved.

On June 26, 2009, the Internal Revenue Manual, Section 9.5.11.9 was amended as it relates to the voluntary disclosure practice.

Under the amendment, it is currently the practice of the IRS that a voluntary disclosure will be considered along with all of the factors in the investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights to taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income.

A voluntary disclosure occurs when the communication is truthful, timely, complete, and when:

a. the taxpayer shows a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability; and

b the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.

A disclosure is timely if it is received before:
a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

The IRS normally expects the disclosure to be in the form of a letter explaining everything and identifying the taxpayer.

What does this mean for the CPA professionally? It means that the practice that has been going on for many years of making “quiet disclosures” has come to an end. A CPA who makes a quiet disclosure will run the risk of subjecting himself or herself to a malpractice case or an ethics violation before the State Board of Public Accountancy or before the IRS under Circular 230.

If a person comes in to visit you who has not filed the necessary returns or has filed fraudulent returns, you should not question them about the facts, but simply refer them to a tax attorney, preferably one who has criminal tax experience. The tax attorney will normally employ you to work for him or her in preparation of the returns under the terms of a “Kovel” letter to cover your work with his or her attorney/client privilege and work product privilege.

Suppose you recommend a voluntary disclosure to the client and the client refuses to move forward? What are your obligations under Circular 230? The IRS expects a taxpayer to seek qualified legal advice and representation in connection with considering and making a voluntary disclosure. If a taxpayer seeks advice of a tax practitioner, but nonetheless decides not to make a voluntary disclosure, despite the taxpayer’s noncompliance with United States tax laws, Circular 230, Section 10.21, requires a practitioner to advise the client of the fact of the client’s noncompliance and the consequences of the client’s noncompliance as provided under the Code and Regulations.

If the client refuses to follow your advice to do a voluntary disclosure, do not use the old procedure of doing a quiet disclosure. If you do decide to do a quiet disclosure and mail in the returns without doing a voluntary disclosure, and the client subsequently is indicted, you could find yourself on the wrong end of a substantial accounting malpractice case. It is simply not worth the risk.

In accordance with IRS Circular 230, the information on this web site is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.

About the Author: Claude R. Wilson, Jr. is a tax attorney with the law firm of Looper Reed & McGraw, P.C. He is a past president of the Texas Society of CPAs, and was formerly the Senior Trial Attorney nationally for the Internal Revenue Service in Washington, D.C. He is a member of the TSCPA Federal Tax Policy committee and the Relations with IRS committee.

Many people are looking for companies, real estate, and assets that, for any number of reasons, are "distressed," which normally means priced at less than market value. However, how do you determine whether an asset is really a bargain versus a disguised headache? Further, how do you make this call quickly enough to take advantage of it? This guide is a quick reference to help you make these decisions. It provides the key questions to ask before purchasing a distressed asset and gives you the tools needed to answer those questions.

The Basics

What is a distressed asset?

Most people know that an asset is anything of value owned by a person or a business. When the person or business needs immediate cash and wants to sell the asset at less than its value, it becomes a distressed asset. Distressed assets fall into three basic categories: personal property, equity ownership in a business (which is a form of personal property), and real property.

Personal property includes physical equipment, accounts receivable, intellectual property and inventory, as well as equity ownership in a business or a business entity such as a corporation, limited liability company or a partnership. Personal property in the U.S. is largely governed by the Uniform Commercial Code, or "UCC", which nearly every state has adopted. The UCC makes the laws in most states fairly uniform when it comes to buying and selling assets. Business ownership (equity) is also governed by the UCC, as well as individual state and federal securities laws. Real property includes actual land or dirt, as well as fixtures and improvements made to the land. Fixtures are a grey area, so they can either be personal property or real property. Individual state laws govern real property, so it is important to know the laws of the state where the property is located before you buy or sell a distressed piece of real estate.

What are the pros and cons of buying distressed assets? - The D.O.V. Method

The primary attraction of buying a distressed asset is its value. In other words, the buyer thinks the value of the asset is greater than the asking price. The trick, though, is to determine if the value really is that much higher than the asking price or whether buying the asset will be more trouble and cost than it is worth. So how is that determination made? The answer comes in a method called the D.O.V. Method (pronounced "Dove"), which stands for Debt, Ownership, and Value. The D.O.V. Method allows you to distinguish between hidden headaches and true gems before you buy them.

Debt Searching

Step 1 in the D.O.V. Method is Debt, meaning you must figure out what debt currently encumbers the asset. For instance, is there a bank loan or I.R.S. lien affecting the individual asset or is the company or person who owns the asset affected generally by an overriding debt or lien? If careful attention is not paid to this determination, the creditor that owns the debt might very well have superior rights to the asset.

Why do you have to verify debt?

The reason to verify the debt is to make sure the seller is telling the truth about the amount of the debt, and number of debts, affecting the property to be bought. You want to be sure that there are no other creditors lurking out there who can lay a claim to the property once you have acquired it. Keep in mind that the laws of many states allow a prior creditor to make claims against you if you purchase property with a prior lien affecting it. This is addressed further in the last section of this booklet.

What types of debts need to be examined?

There are three basic asset types, and each has its own type of debt. These asset types include real estate, equipment, and equity ownership in a business. The first debt category, real estate debt, is the easiest to search. For a creditor to secure a lien on real property, they usually must file a lien in the applicable real property records. Typically, a title company, or in some states an attorney, searches the debts and/or liens affecting real property, and you can search either by address, legal description, or by the owner of the property.

The second debt category, equipment debt, is almost as easy to search for as real estate debt. To have a secured lien against equipment, a creditor would file a UCC statement in either the office of the Secretary of State or the county records office where the equipment is located, or possibly both.

The third debt category, debt affecting equity in a company, is the hardest type of debt to search. Most creditors will file a UCC lien against a business or its owners when they claim a lien on equity interests, just like equipment. In that case, you can follow the same steps mentioned above regarding searching for debt on equipment. Additionally, there could be unsecured debt affecting the business that you are buying. Unlike real estate and equipment, which are normally only affected by debts specifically against those assets, a business can have a number of creditors who have never filed a searchable lien. For instance, a company could have a credit card with hundreds of thousands of dollars of debt unbeknownst to anyone except the business and that creditor. If that business is purchased, the buyer would own the business and could be subject to the paying back the debt.

Ownership

Step 2 in the D.O.V. Method is Ownership, meaning you need to verify that the party you are dealing with actually owns the asset. If they do not, it could mean that someone else really owns the asset and/or you could be participating in a scam to defraud the true owner from their asset.

How do I determine ownership of real property?

Real estate can be the easiest category to search for true ownership. Most property owners file their ownership of record in the county in which the property is located. Also, when acquiring real property, you nearly always engage a title company to insure a title, and title companies will not do that unless they perform their own search. One difficulty is when someone claims title outside of the chain of title, but that is exactly what title insurance companies are for, which is to reduce potential liability over such claims.

How do I determine ownership of equipment and other personal property?

Personal property ownership is almost as easy to search for as real estate. First, search for any liens secured by the personal property that you are buying. If the personal property is titled, like cars and other over-the-road vehicles or equipment, you can search the applicable motor vehicle or other similar governmental offices to ensure that the seller indeed owns the property. Having satisfied both of those criteria, the next place to check is the tax records. Nearly every state taxes personal property and you can also check to see who has paid the taxes on the equipment you are buying. Finally, if all of the above is satisfactory, the seller should provide a bill of sale and a representation that they own the equipment or the personal property in question. Many states have a common law feature that if the person buys the property for value and without notice, as these procedures should suffice for that qualification, this will often reduce claims from both the seller and third parties that could later claim ownership.

How do I determine ownership of a business entity?

To determine the ownership of a business entity, first search the lien and tax records just like you would for personal property. Then, a detailed analysis must be performed of the records of the entity. Next, you must determine the applicable secretary of state's office for all corporate filings made by the entity. Often, state taxes are forgotten or not filed which can cause the entity to forfeit its entity status. If that happens, the person who owns the entity becomes personally liable for its debts and liabilities. Finally, the seller must certify that the entity is in good standing, and they should represent the ownership of the entity to the buyer at closing. There are a variety of certifications and corporate documents that must be signed at the closing of the sale of such an entity to accomplish this correctly.

How do I know that the searches I made are sufficient?

Ultimately, reliance must be placed in the representations and indemnities given by the seller that he, she or it, in fact, own the asset in question. Those representations and indemnities are only as good as the value or net worth of the individual giving them. If that person has little or nothing of value after the transaction, such a representation or indemnity is worthless. That is why the word of the seller is never sufficient to warrant the purchase of a business without the additional searches mentioned above

Value

Step 3 in the D.O.V. Method is Value, which involves determining the actual value of the asset you are buying. Steps 1 and 2 above will help determine if there are others out there that have better rights to the asset, but if the value of the asset is not what you thought or if there are underlying problems with the equipment, business, or real estate that you are buying, it will be better left unpurchased.

How is a distressed asset's value established?

The value of any asset equals what someone else will pay for it. It is much easier to value an asset if there is a market for it. In real estate, that market exists, and using comparable, recent sales, one can put a relative dollar figure on its value. However, real estate is inherently more or less valuable depending on its location. Real estate also has many environmental issues to be researched or has improvements and leases or entitlements affecting the property. Finally, the potential buyer should review the relevant city and state codes and restrictions to ensure that the proposed or even the current use of the property is allowable.

What about personal property?

Personal property also has a market, and there are a variety of ways to measure its value using comparisons found at used car and equipment companies and websites. One of the keys to valuing equipment is its depreciable life. The IRS has a variety of charts and rules when it comes to whether or not and how to depreciate the life of a piece of equipment. This is a hugely important factor when buying an asset because you may or may not be able to deduct depreciation of the asset from your tax liability.

How do I determine the value of the equity in a company when there is no market?

Private companies do not have an easily determined market, which brings us to an alternate form of valuation - the income stream method. Using the income generated or available from an asset, you can measure its value outside of a pre-existing market. Under the income stream method, you calculate the expected profit of the asset over its foreseeable lifespan and then discount that amount by the time value of money. This is also known as the net present value, because it measures not just the income of the asset, but by discounting it by the time value of money, it inherently measures the cost of holding this asset as inflation occurs over time. There are many other valuation methods, such as the internal rate of return, the price to earnings or P/E ratio, the liquidation method, discounted cash flow method and many others. Ultimately, your business broker and your accountant will help determine the value of the asset if there is no ready market by which to value it. Additionally, reviewing all of these methods together will often yield a solid dollar value of the worth of the asset.

Are these the only factors in valuing company equity?

Many businesses own both real estate and personal property, so the value determinations mentioned above must be applied to the overall value of the business. Second, there are also personnel issues, referred to sometimes as the human capital aspect of running a business. Most require a significant amount of human beings for their operation. So in addition to all of the other issues and even beyond the dollar value of keeping those employees, there are personnel issues to be addressed. Add to this that in most business purchases, the current owner normally wants to keep the sale as quiet as possible to avoid losing its employees, so employee interviews are often not possible prior to the purchase. This is potentially a big risk when valuing the business to be purchased.

Fraud and Bankruptcy Claims

Can third parties interfere with the sale or hold me liable?

The answer is potentially YES. Other creditors of the seller (and potentially even the seller itself) can interfere with a sale of a distressed asset, which exemplifies the need to be very careful in your due diligence when buying distressed assets. This applies to all types of assets discussed here, whether the asset is real property, personal property, or business equity. Fraud is a very common and serious charge that can be made when an asset is sold to the detriment of others who claim to own rights to the asset being sold and/or have unpaid claims against the Seller. The most applicable laws are the Uniform Fraudulent Transfer Act or the UFTA and Section 548 of the Bankruptcy Code. Most states across the U.S. have adopted the UFTA.

If a creditor of the seller asserts fraud claims under the UFTA and prevails, that creditor can seek to avoid the sale, seek an injunction, seek money damages, and seek equitable relief. Especially if the buyer of the asset knew about the claims, the buyer could be subject to these types of damage claims. Whether the buyer knows about the other creditors or not, the sale can still be voided and litigation can ensue over the sale.

The UFTA generally applies when the seller is insolvent or is rendered insolvent by the transfer. This means that the seller either cannot pay his debts as they become due or the seller's assets are worth less than his liabilities. Also, a transfer for less than a "reasonably equivalent value" may be avoided. Thus, if the asset really is "distressed," meaning it is being sold for less than its fair market value, then the UFTA could apply. There is a laundry list of other "badges of fraud" that bring in the UFTA. These include, among others, actual intent to hinder, delay, or defraud present or future creditors or a transfer made to an insider. An insider is someone, like a family member or the director or officer of a business entity, who controls or is closely affiliated with the seller or person filing bankruptcy.

Can the seller reverse the sale after the fact? What bankruptcy issues exist?

Again, the answer here is potentially YES. The seller could potentially reverse the sale by filing bankruptcy. Once bankruptcy is filed, the bankruptcy court could authorize the avoidance of a fraudulent conveyance made by the debtor/seller within two (2) years prior to the bankruptcy filing. If the person filing bankruptcy transferred an asset to a creditor to cancel (in whole or in part) debt owed to that creditor and did so to the detriment of other creditors, the transfer could be considered a "preference," and the transfer is therefore potentially subject to being reversed. The good news here is that a bankruptcy reversal is inapplicable unless the purchaser was also a creditor of the person filing bankruptcy.

How much time do I have to wait to ensure that the sale is final?

Claims under the UFTA in many states can be made for as long as four years after the transfer of the asset was made or for one year after the person making the claim discovers that the sale occurred. The "preference" period, meaning the timeframe in which the court can reverse a transaction due to a preference item, is 90 days for non-insiders and one year for insiders.

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About the Author

Matthew Sanderson is a transactional attorney, focused on complex transactions in real estate, mergers and acquisitions of private companies, and intellectual property contracts. His client base spans numerous industries, both domestically and internationally, and the most served industries include technology, metal recycling, restaurant, and real estate.

Contact Information: msanderson@lrmlaw.com or call 214.237.6330

Check out DistressedAssetLaw.com, your source for legal guidance in the securitization, sale or purchase of distressed assets. In these troubling economic times, it is more important than ever to have good counsel when buying or selling your assets, and we strive to provide solid and to-the-point references to help you make these tough decisions. Whether you are securing, buying or selling, whether your assets are real estate, equity in a company or personal property, you came to the right place.

Document retention is a matter of growing importance for both lawyers and clients, but could be characterized as an 800 lb gorilla in the corner of the room that no one wants to talk about.  Lawyers and clients perceive document retention as time-consuming, expensive, and most importantly, difficult to understand.  Not so much because the subject itself is too complex, but because it involves computers and servers which are as much a mystery to most people as the inner-workings of their car. 

For this reason they avoid it, ignore it, and focus on more easily resolved problems.   Unfortunately, however, ignoring the problem can have serious consequences.  If lawyer and client refuse to face the issue until receiving a request for electronic data that is really important to the outcome of a case, they won't even hear the gorilla coming before it clobbers them.   

The Document Retention Guide provides a step by step approach to help avoid the problem.  It offers guidance for creating document retention policies, but also explains instituting litigation holds, and avoiding bad data.  The Litigation Hold Quick Reference Guide which is also linked below is a two page, information-packed, hot-list of points to follow when implementing a litigation hold.    

For most of the late 1990s and early 2000s, it was considered nearly impossible to have an enforceable non-compete in Texas. After clarification by the Texas Supreme Court in 2006, non-competition agreements in Texas found new life.

This April the Texas Supreme Court again affirmed that noncompetition agreements are alive and enforceable in this great State of Texas.

A Houston accountant argued the noncompetition provisions of his signed at-will employment agreement were unenforceable. Yes, he promised not to disclose confidential information. However, his employer made no express return promise to provide any confidential information. Two lower courts agreed with the accountant. The “Supremes” went with the employer.

The bottom line? Covenants not to compete are enforceable when properly implemented.  An employer does not have to make an advance promise to provide confidential information to an employee to create an enforceable non-compete. The employer must only actually provide confidential information pursuant to the employee’s promise to keep the information secret.
So, employees beware.   

See Mann Frankfort Stein & Lipp Advisors, Inc.,  MFSL GP, L.L.C., and MFSL Employee Investments, Ltd., v. Brendan J. Fielding, WL 1028051, 52 Tex. Sup. Ct. J. 616 (Tex. 2009)

See April 24, 2008, Tilting the Scales – Business Issues with a Legal Slant “Non-Compete Repeats in Texas” at http://lrmlawblog.com/tilt/2008/04/24/non-competes-repeat-in-texas.

The Texas Supreme Court has issued two important and related opinions affecting mineral owners and their lessees.  In Exxon Corporation v. Emerald Oil & Gas Co., L.C.,2  the Court held that a private cause of action may be maintained under Section 85.321 of the Texas Natural Resources Code for damages resulting from a violation of conservation statutes or Texas Railroad Commission rules, but limited the class of parties with standing to sue under the statute.  In Exxon Corporation v. Emerald Oil & Gas Co., L.C. and Laurie T. Miesch, et al,3  the Court interpreted the meaning of a continuous development clause, clarified the intent-to-induce element of fraud when the alleged misrepresentations are in reports filed with the Railroad Commission, and addressed the discovery rule on the accrual of a tort cause of action.

Whether you think the federal stimulus package is a great idea or a bad one, the American Recovery and Reinvestment Act of 2009 became law on February 17, 2009.  Of the many changes made by the Recovery Act, employers need to be aware of new obligations the law places on them with respect to COBRA.  If your business has 20 or more employees and a group health plan that was in place for 50% or more of your working days last year— meaning COBRA applies to you—please read on to see what quick actions are required on your part.

What COBRA Does

Passed in 1986, the Consolidated Omnibus Budget Reconciliation Act or “COBRA” provides former employees, their spouses, and their dependents the opportunity to keep health insurance coverage under an employer’s group health plan in the event of involuntary termination (except for gross misconduct), divorce, eligibility for Medicare, and certain other circumstances.   The premiums for this on-going coverage are generally borne by the beneficiary of the coverage.

 What The Recovery Act Changes

In a nutshell, the Recovery Act provides a subsidy for 65% of the premiums for COBRA coverage for employees and their families for up to 9 months if the employee was involuntarily terminated between September 1, 2008, and December 31, 2009.  The cost of this subsidy is to be initially paid by employers who may then take a credit on their federal payroll taxes. 

To be eligible for the subsidy, the former employee must meet the following criteria:
involuntary termination (except for gross misconduct) resulting in COBRA eligibility between September 1, 2008, and December 31, 2009 (the termination could have occurred before September 1, 2008);
not eligible for healthcare coverage under another plan, whether with a new employer, under a spouse’s group plan, or through Medicare; and
election to receive COBRA coverage following termination or during the additional election period created by the Recovery Act.

Eligible former employee or families who were already receiving COBRA benefits on February 17, 2009, may pay 35% of the required premium on the next date which premiums are due and for 9 months following that date.  Eligible former employees or families who elected not to receive COBRA benefits, but meet the above criteria, must be given notice of the change in the law by their former employer and allowed an additional period of 60 days to accept benefits. 
During the 9-month period of the subsidy, employers must make up the remaining 65% of the premium to the plan.  Employers may then claim reimbursement in the form of reduced federal payroll taxes.  The Secretary of the Treasury has been ordered to set out reporting guidelines for employers who wish to claim reimbursement subject to the minimum reporting requirements in the Recovery Act.  

The subsidy is available to all eligible former employees.  Persons with modified adjusted gross income over $150,000.00 ($250,000 if filing jointly) are subject to recapture of the subsidy in the form of an increased income tax equal to the value of the subsidy received.¹   Additionally, if a subsidy recipient becomes eligible for health care benefits under a different group plan while receiving the subsidy, they must give notice to the plan and cease receiving the subsidy (though they can maintain COBRA coverage). 

What You Need To Know
 
For most employers, COBRA is handled by the plan administrator of their group health plan.  While the burden of handling the Recovery Act changes will also fall largely to plan administrators, employers have payment\reimbursement obligations and need to know what is required of their plan to make sure that the Recovery Act changes are carried out properly. 

The biggest burden to employers will be payment of the 65% subsidized portion of the premium during the 9-month eligibility period.  The Recovery Act does not provide any mechanism for the process of paying the subsidy and it will likely be left to employers and their plan administrators to resolve.  Once payment is made, however, employers may then take a corresponding credit against their federal payroll taxes when filing Form 941 quarterly.  Form 941 has been revised to accommodate this credit and a copy of it is available at http://www.lrmlaw.com/pdf/IRS-Form-941.pdf. 

Next, employers (or their plan administrator) are resposible for sending out revised eligibility notices for any employees terminated after March 19, 2009. This model notice has just been released and may be obtained at http://www.lrmlaw.com/pdf/COBRA-General-Notice-Full.doc.  Additionally, employers must send out additional election period notices to former employees terminated after September 1, 2008 who are otherwise eligible under the conditions noted above that were previously offered COBRA but have not yet accepted or who have refused COBRA coverage.  A copy of the just-released additional election period model notice is at http://www.lrmlaw.com/pdf/COBRA-Extended-Election-Notice.doc, and must be sent by April 18, 2009.  This notice will allow those employees to elect COBRA coverage for a period equal to that which they could have received if they had timely requested COBRA at the time of termination, with the first 9 months at the discounted rate.  
 
Because the Recovery Act does not apply to COBRA benefits because of divorce, Medicare eligibility, or change in dependent status, employers only have to provide notice or notice of additional enrollment period to employees who were involuntarily terminated. 

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¹ A reduced rate premium reduction is available to eligible former employees and their families with modified adjusted gross income of $145,000 ($290,000 jointly) annually.

This Looper Reed & McGraw Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

In the fall of 2008, President Bush signed into law the Americans with Disabilities Act Amendment Act (the “Amendments”) which became effective January 1, 2009, and make changes to the Americans with Disabilities Act. In the Amendments, Congress literally calls out the United States Supreme Court for its narrow interpretation of what qualifies as a disability and rewrites the law to reverse the Supreme Court’s limiting trend.  The Amendments made it clear that the ADA covers an extremely broad range of disabilities and radically change the way employers must determine whether an employee is disabled and accommodate the disability. 

What the ADA does

Enacted in 1990, the ADA was designed to provide a clear and comprehensive national mandate to eliminate discrimination against employees with disabilities.  Under the ADA employers must not discriminate based on disability and they must make reasonable accommodations to employees or potential employees with disabilities so that the disability does not become a controlling factor in employees’ advancement, hiring, termination, or pay.

Specifically, employers cannot discriminate against qualified individuals with a “disability,” who can perform the “essential functions” of the job with or without accommodation.  Such discrimination is prohibited in the context of not only hiring and firing, but also advancement, training, compensation and any other term or condition of employment.   

What constitutes a “disability” is changed by the Amendments, but generally means a documented physical or mental impairment that substantially limits one or more “major life activities”, or being regarded as having that type of impairment.

What the Amendments changed

Simply put, Congress reversed the Supreme Court’s severe limits on what types of health issues may called a disability.  Under two previous Supreme Court cases, the meaning of “disability” was constricted, in part by interpreting “major life activity” very narrowly, and further by allowing employers to consider aids, such as medicine or a cane, in deciding whether a person is disabled.    

With the Amendments, limitations on the meaning of “major life activity” were broadened substantially.  Congress specifically said that caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, and working are examples of major life activities.  Congress further added that “major life activity” include operation of major bodily functions such as the immune system, cell growth, digestive system, bowel, bladder, brain, respiratory, circulatory, endocrine, and reproductive functions.  What is more, even if the individual is in remission or has an intermittent recurring condition they must still be considered as disabled. 

Also with the Amendments, employers may no longer consider mitigating aids in determining disability, which is to say, a person’s disability turns on their unassisted condition and not how they perform when taking medications or using other aids.  If Joe Employee has rheumatoid arthritis that impairs his ability to work unless he takes medicine, he is still disabled even though the medicine allows him to do his job. ¹
 
What you need to know

When the definition of “disability” was very narrow, there were fewer instances where employers had risk of discrimination.  Now that the definition of “disability” is wide open, employers must be very careful in two respects: (1) not to consider a person’s disability in hiring, firing, promoting, training, and maintaining them; and (2) to consider any possible disability and make accommodations to allow the prospective or existing employee to perform the job.

Employers should review or create an employee handbook or company policies to make sure that an interactive process is in place for employees to work with the employer to make reasonable accommodations for any disability or to report disability discrimination.  Employers should make sure that employees have a specific person to report disabilities or discrimination.  Too often, employees complain to their immediate supervisor who is unaware of potential disability issues and the problems go unresolved leaving open the potential for a future discrimination claim.   For this reason, it is also important to keep records of interactions and discussions related to disability so that the information is available for future reference should a dispute arise.

Employers should be careful not to consider a person’s outward appearance or actions as an indication of disability as the individual may be operating under the aid of medication or some other assistive device which can no longer be considered in determining a disability.

Employers should also remember that they are not required to completely give in to the demands of a disabled employee.  Employers are not required to accommodate an employee if: (1) a disability prevents them from being able to perform the essential functions of their job, or (2) the cost of accommodation is unreasonable.  That said, employers cannot use essential job functions as an excuse to refuse accommodation.  It is better to err on the side of accommodation because a wrong decision may result in costly litigation.

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¹ Employers may still consider eye glasses or contact lenses in determining whether the employee can perform the “essential functions” of their job.