2015 SECTION NEWS JANUARY From Undertaker to Litigator and ...

2015   SECTION NEWS
JANUARY
The Paralegal eLearning Program Presents All-New Topics for 2015
IN THIS ISSUE TE paralegals and legal assistants should register for the all-new Paralegal
eLearning Program entitled, From Undertaker to Litigator and Steps in Between:
Section News The Role of the Paralegal in Estate Administration, Distribution and Resolution. It
features ten 60-minute webinars taught by leading industry professionals.
Attendees can register for the entire series or individual sessions at
ambar.org/RPTEparalegal.

Articles of Interest: There's Still Time to Register For the Fundamentals of Commercial
  Real Property Real Estate eCLE Series
  Trust & Estate
  Practice Alert Even though this year's Fundamentals of Commercial Real Estate eCLE series
has already started, it's not too late to register! When you purchase the entire
Technology & Law series, you will be registered for all remaining webinars and receive recordings of
Practice Management any sessions that have already occured. Don't miss this excellent program
covering topics like purchase and sale agreements, leasing, financing, title
Upcoming Programs insurance, and zoning. Find out more and register at
ambar.org/RPTEfundamentals .

Young Lawyers Think Spring!
Network We will be back in Washington, DC for the 2015 Spring Symposia, April 30 – May
1, so save the date for what promises to be an informative and engaging
Law Students meeting. If you’re interested in Symposia sponsorship opportunities, contact
Bunny Lee for more information.
Group & Committee
News   Share the Gift of Free ABA and RPTE Membership

Featured RPTE Encourage friends and colleagues to join and experience the benefits of
Book of the Month membership in the ABA and RPTE. Hurry — this offer ends January 31! Visit
ambar.org/gift for full details.

Download this issue And the Winners Are…
The editors of Probate & Property are pleased to present the 2014 Excellence in
Learn About and Writing Awards to a group of outstanding authors. View this year’s winners and
Contribute to the read their articles
eReport
ABA Tech Show
www.ambar.org/RPTE Mark your calendars to join the ABA Law Practice Division for the ABA
Techshow, April 16 – 18, in Chicago. This is your chance to hear — and meet —
the industry’s top technology experts. For more information, visit
www.techshow.com

Fall 2014 Real Property, Trust & Estate Law Journal
The Fall edition of our member-only journal will be mailed soon — be sure to
check your mailbox! In the meantime, get a preview of the featured articles by

  checking out the synopses.

  Reports from the Heckerling Institute

Visit our website to view daily reports containing highlights from the 49th Annual
Heckerling Institute on Estate Planning, which was held January 12-16 in
Orlando.

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  ARTICLES OF INTEREST

 

A Checklist for Giving Legally Effective   Have Your Cake and Eat it Too!
Notices (Estate of Adell)
Josh Stein Lance S. Hall, ASA
Don't take giving notice lightly. Joshua Stein This article provides a summary of another recent
explains why and how to avoid missteps. case which addresses the valuation of "personal
goodwill" and its overall effect on the fair market
Buying and Selling Property in Italy value of a company.
Donald Carroll and Christine Marciasini
Italy calling? Before you purchase that villa of your  
dreams, read this article with helpful insights for a
smooth transaction. La Dolce Vita! PRACTICE ALERT

The Top New Developments in 2014 For State of the Union Surprise: President
Real Estate Finance Targets Inherited Assets in Middle Class
Brook Boyd Tax Reform; Family Owned Businesses
What's new in real estate finance? Read Brook Spared
Boyd's summary of recent developments and find Bill Sanderson
out. The Business Planning Group provides an update
on President Obama's budget proposals relating to
the step-up in basis and the effect they would have
on family-owned businesses.

   

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  TECHNOLOGY & LAW PRACTICE MANAGEMENT

Smartphones for Lawyers 4.0
Robert D. Steele and Tony Gjata
The eReport editor Rob Steele is back for a fourth report, joined by Tony Gjata, on smartphones and how
different platforms and smartphones impact lawyers today.

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  UPCOMING PROGRAMS

eCLE PROGRAMS

Powers of Attorney in Disability Planning: Silver Bullet or Landmine?
February 3

REITs for Real Estate Lawyers
February 4

Domestic Asset Protection Planning: Jurisdiction Selection Series
Alaska, Oklahoma, South Carolina, Wyoming
February 10

Gift Tax Returns: A 30,000-Foot Overview
February 17

Commercial Real Estate Leasing
Fundamentals of Commercial Real Estate: Session 2
February 25

WEBINARS

The Uniform Powers of Appointment Act: Straightforward Default Rules to Fill a Vacuum

Professors' Corner
February 11

Immediate Post-Mortem Estate Planning
Paralegal eLearning Program: Session 2
February 12

LIVE IN PERSON

27th Annual Spring Symposia & Leadership Meeting
April 30 – May 1
Washington, DC

Skills Training for Estate Planners
July 13 – 17
New York, NY

To view a complete list of upcoming programs, visit www.ambar.org/rpteCLE

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  YOUNG LAWYERS NETWORK

YLN Update
The ABA and the Section provide a wide variety of educational materials for young lawyers. In addition to our
regular YLN column in Probate & Property magazine, the YLN encourages members to check out the Section's
monthly Fundamentals of Commercial Real Estate eCLE series, which begins in January. As always, YLN chair
Robert Nemzin ([email protected]) encourages young lawyers interested in writing an article or becoming
more involved with YLN and the RPTE Section to contact him.

Going to the ABA Midyear Meeting?
Be sure to attend the YLD’s program Moving Up and Moving Out: Appointments, Scholarships, and Fellowships
within the ABA and the YLD on Thursday, February 5, at 4 p.m.

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  LAW STUDENTS

Free Webinars
Did you know that many RPTE eCLE webinars are free for law students? Check out our upcoming programs at
ambar.org/RPTEcle.

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  GROUP AND COMMITTEE NEWS

 

Real Estate Financing Group   Litigation, Ethics, and Malpractice Group

This Group's three Committees offer unique Learn about this Group and its efforts in trust, estate

opportunities to get involved in the area of real and fiduciary litigation matters.

estate financing. Read more. Back to Top

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JOIN A GROUP OR COMMITTEE TODAY!

Group and Committee membership is free to all RPTE members! Learn more about our nine Real Property
Groups and seven Trust and Estate Groups. For questions regarding membership, contact Bunny Lee at
(312) 988-5651 or [email protected].

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  FEATURED RPTE BOOK OF THE MONTH

  Fundamentals of Title Insurance

James L. Gosdin

An introduction to the basics of title insurance law and title insurance
coverage, this new guide offers a broad overview of what title insurance
does and does not do. Written in a user-friendly manner, it provides
illustrative examples and practice pointers throughout the text. The book
discusses the variations and common features of U.S. title insurance,
common coverage and issues the real estate lawyer needs to be aware
of, and standard requests the real estate lawyer should consider.
Includes a series of checklists for the real estate lawyer.

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Purchase this book today!
Regular price: $149.95
RPTE member price: $119.95

 

  DOWNLOAD

Back to Top The materials contained herein represent the opinions of the authors and editors and should not be construed
to be those of either the American Bar Association or The ABA Section of Real Property, Trust and Estate Law
  unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered as the
rendering of legal advice for specific cases and readers are responsible for obtaining such advice from their
own legal counsel. These materials and any forms and agreements herein are intended for educational and
informational purposes only. The authors and other contributors to the RPTE eReport are solely responsible for
the content of their submissions, including the accuracy of citations to legal resource materials.

JANUARY 2015

Section News

Fall 2014 Articles - Real Property, Trust and Estate Law Journal

American Dream in Flux: The Endangered Right to Lease a Home
By Andrea J. Boyack
Homeownership in the US is on the decline and the percentage of the population that rents their residence is
growing. Renters present a distinct demographic compared to owners, and most of the more vulnerable
segments of society rent their homes. But the law prohibits renting a home in some neighborhoods.
Occasionally, zoning provisions hamper the ability of would-be tenants and would-be landlords to rent. More
typically, however, community restrictive covenants are what block rentals. Zoning prohibitions on rentals have
been attacked as violations of property rights. But in condominiums and other privately governed
neighborhoods, segregation of renters from owner occupants has been continually upheld by the courts and has
been consistently promoted as policy by government and quasi government entities. These policies and legal
structures harm not only the rights of would-be landlords but also would-be tenants in such communities.
Community rental restrictive covenants perpetuate broader social harms as well. It is time to rethink the
desirability of these restrictions, even in the "private" context of neighborhood covenants.

A Tale of Two Privities: Conflict Among the Circuits on the Role of Privity of Contract and Privity of Estate in the
FDIC's Assignment of Failed Bank Leases
By Shelby D. Green
This Article explores whether privity of contract is required for a landlord to have standing to show privity of
estate and hold an assignee liable for rent. Central to the discussion are two rulings by the Second Circuit and
the Fifth Circuit regarding the failure of Washington Mutual Bank, and the resulting uncertainty concerning the
enforceability of the terms of subsequent lease assignments. Although the facts in each case were nearly
identical, the circuits' decisions split on the issue of privity of contract. The circuits disagreed as to whether
privity of contract is required for a landlord to have standing to show privity of estate and hold an assignee
liable for rent. The author explores this divergence and reasons that based upon the principles of property law, it
is not necessary to establish privity of contract to show privity of estate. Ultimately, the author concludes that
proving privity of estate is a matter of evidence, not a matter of standing.

A Critical Research Agenda for Wills, Trusts, and Estates
By Bridget J. Crawford & Anthony C. Infanti
The law of wills, trusts, and estates could benefit from consideration of its development and impact on people of
color; women of all colors; lesbian, gay, bisexual, and transgender individuals; low-income and poor individuals;
the disabled; and non-traditional families. One can measure the law's commitment to justice and equality by
understanding the impact on these historically disempowered groups of the laws of intestacy, spousal rights,
child protection, will formalities, will contests, and will construction; the creation, operation and construction of
trusts; fiduciary administration; creditors' rights; asset protection; nonprobate transfers; planning for incapacity
and death; and wealth transfer taxation. This Article reviews examples of what the authors call "critical trusts
and estates scholarship" and identifies additional avenues of inquiry that might be fruitfully pursued by other
scholars who are interested in bringing an "outsider" perspective to their work in this area.

Onus Fiduciae Est Omnis Divisa in Partes Tres: A Statutory Proposal for Partitioning Trusteeship
By James P. Spica
This Article proposes an adaptation of Uniform Trust Code provisions expressly to authorize settlors to partition
trusteeship into separately acceptable, unblended trust relations pertaining to investment, dispositive
discretions, and the residuum of trustee functions. The resulting fiduciary regime is entirely distinct from a
cotrusteeship for purposes of determining each "separate trustee’s" authority and liability, separate trustees are

statutorily disabled from accepting one another's fiduciary duties, interpretive difficulties are avoided by the
requirement of an express reference to the statute, and the regime overlies whatever facility for directed
trustees and excluded cotrustees may already exist under the adapting jurisdiction's version of the Code. Thus,
fiduciary responsibility for a given res may involve two or more separate trustees, viz., a separate "resultant
trustee" and either a separate investment trustee or one or more separate discretionary distributions trustees,
and any of those separate trusteeships may itself comprise a cotrusteeship or be subject to the direction of a
trust protector.

Mandatory Arbitration Clauses in Donative Instruments: A Taxonomy of Disputes and Type Differentiated
Analysis
By Jessica Beess und Chrostin
Arbitration clauses have become increasingly more common in wills and trusts as a means to avoid the court
system, and as a way to benefit from the alleged advantages of alternative dispute resolution. The majority of
current literature on this topic focuses on whether the beneficiary has consented to arbitration. However, this
article poses a different question - even if mandatory arbitration clauses in testamentary instruments are
enforceable, should they be enforceable as a matter of public policy? The author asserts that analyzing
testamentary disputes by type - validity disputes and administrative disputes - reveals that the benefits of
arbitration do not translate to either type of dispute.

Return to the January eReport

Published in the RPTE eReport, January 2015. © 2015 by the American Bar Association. All rights reserved. This
information or any portion thereof may not be copied or disseminated in any form or by any means or stored in
an electronic database or retrieval system without the express written consent of the American Bar Association.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either
the American Bar Association or The ABA Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of
the Association. Nothing contained herein is to be considered as the rendering of legal advice for specific cases and readers are
responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are
intended for educational and informational purposes only. The authors and other contributors to the RPTE eReport are solely
responsible for the content of their submissions, including the accuracy of citations to legal resource materials.

JANUARY 2015

Group and Committee News

Real Estate Financing Group

Legal Opinions in Real Estate Transactions Committee
At the RPTE Spring Symposia in Washington, D.C. on May 1, 2015 the Legal Opinions in Real Estate
Transactions Committee is sponsoring a program entitled "Risky Business: Who Gets Sued over Opinion Letters
and How Can You Reduce Your Chances of Being Next?" The program will feature a litigator who regularly
defends lawyers in lawsuits over opinions and other matters, as well as in-house counsel to a leading insurance
carrier for law firms and experienced real estate opinion practitioners. Last year, the Committee embarked on
the preparation of a report on local counsel opinions. The local counsel report was undertaken jointly with the
respective legal opinion committees of ACREL and ACMA. That effort is on-going. Last year the Committee
also submitted comments to the Department of Housing and Urban Development on HUD’s form of legal
opinion in FHA-insured multifamily housing loans. HUD had solicited public comments on all of its loan
document forms in the FHA-insured loan program, and the Committee provided extensive comments on the
form of legal opinion which HUD requires borrower’s counsel to issue without any changes whatsoever (other
than transaction-specific information). For further information regarding the activities of this Committee, contact
Chair Charlie Menges at [email protected] or Vice Chair David Kochanski at
[email protected].

Mortgage Lending Committee
The Mortgage Lending Committee continues to be active in various forms of mortgage lending, including
mortgage servicing, workouts, distressed assets, and banking regulations. Once again, the Committee is
supporting a CLE program at the 26th RPTE Symposia in May, 2015 in Washington, DC. Committee Chair
Wogan Bernard and Committee Vice Chair Joy Barrist are taking a lead in this program, which will address
commercial loan amendments or modifications taking into consideration the point of view of the lender and the
borrower to consider from a due diligence, documentation, title and attorney opinions. The committee is also
planning small projects for the benefit of all mortgage lending attorneys. Please watch for upcoming Committee
conference calls on relevant topics. For more information regarding the activities of this Committee, contact
Chair Wogan Bernard at [email protected] or Vice Chairs Joy A. Barrist at [email protected] or
Anna Mahaney at [email protected].

Workouts, Foreclosures and Bankruptcy Committee
Over the past year, this Committee was actively involved in the planning and presentation of programs in 2014,
including an eCLE presentation regarding fundamentals of real estate financing. The Committee’s Chair, David
Campbell, has been an ABA advisor to the Uniform Law Commission’s Drafting Committee on a Home
Foreclosures Act, and the Committee will make a presentation on the Act when the ULC releases a draft of it.
The Committee is also in the process of planning regular conference calls over the next year for participation by
the membership covering topics of interest in the loan workout and enforcement and bankruptcy arena. Those
interested in being more involved in or finding out more about this Committee should contact Chairperson David
Campbell at [email protected] or Vice chair Tiffiany Harper at [email protected].

To learn more about the Real Estate Financing Group, contact Group Chair, Ed Levin at [email protected], or
Group Vice Chair, John Trott at [email protected].

Return to the January eReport

Published in the RPTE eReport, January 2015. © 2015 by the American Bar Association. All rights reserved. This

information or any portion thereof may not be copied or disseminated in any form or by any means or stored in
an electronic database or retrieval system without the express written consent of the American Bar Association.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either
the American Bar Association or The ABA Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of
the Association. Nothing contained herein is to be considered as the rendering of legal advice for specific cases and readers are
responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are
intended for educational and informational purposes only. The authors and other contributors to the RPTE eReport are solely
responsible for the content of their submissions, including the accuracy of citations to legal resource materials.

JANUARY 2015

Group and Committee News

Litigation, Ethics and Malpractice Group

The Litigation, Ethics and Malpractice Group devotes it efforts to issues involving trust, estate and fiduciary
litigation matters. These include: probate disputes; will and trust construction; accounting disputes; breach of
fiduciary duty claims; and other disputes involving the administration of individual and charitable estates and
trusts. The Group also addresses ethics issues affecting trust and estate lawyers and malpractice issues
(including malpractice avoidance).

The Group is comprised of two committees: the Probate and Fiduciary Litigation Committee; and the Ethics and
Malpractice Committee.

The Group remains focused on educating members on national trends in these areas through efforts such as
CLE program and articles. Where appropriate, the Group assists other Section Groups in analyzing litigation,
ethics or malpractice disputes that may effect estate planning, administration or any other litigation or
controversy issue germane to the Section's mission.

In this regard, the Group has quarterly calls. For example, in the last call on Wednesday, January 21, Dana
Fitzsimons Jr., Senior Vice President & Fiduciary Counsel with Bessemer Trust, reviewed the most significant
fiduciary litigation cases of 2014 and current trends in fiduciary risk.

The Group is also proud to be presenting three programs for the 2015 Section Spring Symposia: ethics in
technology and estate litigation; the use and abuse of exculpatory clauses; and writings intended as wills,
harmless error, and substantial compliance.

Return to the January eReport

Published in the RPTE eReport, January 2015. © 2015 by the American Bar Association. All rights reserved. This
information or any portion thereof may not be copied or disseminated in any form or by any means or stored in
an electronic database or retrieval system without the express written consent of the American Bar Association.

The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either
the American Bar Association or The ABA Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of
the Association. Nothing contained herein is to be considered as the rendering of legal advice for specific cases and readers are
responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are
intended for educational and informational purposes only. The authors and other contributors to the RPTE eReport are solely
responsible for the content of their submissions, including the accuracy of citations to legal resource materials.

A Checklist for Giving Legally Effective Notices

Joshua Stein

To give notices that work—and don’t create problems—do it more carefully than
might seem necessary and get it right the first time.

Joshua Stein, sole principal of Joshua Stein PLLC, has written several books and over
200 articles on commercial real estate law and practice. For information and reprints of
previous publications, visit www.joshuastein.com. Copyright (C) 2015 Joshua Stein. An
earlier version of this article appeared in The Practical Lawyer.

CLIENTS OFTEN ASK attorneys to help them give formal notices under leases, loan
documents, or other agreements. Failure to give timely and correct notices can have
devastating consequences for the client, hence for the attorneys who were supposed to
be helping them. Once the notice deadline has passed, an erroneous notice cannot be
repaired. You won’t get a “do-over.” If a notice relates to exercise of an option, failure to
do it right can mean outright loss of the option. If a notice relates to a default and
triggers a cure period, then a defective notice could cost a lender or landlord months of
delay and create substantive leverage for the borrower or tenant. So the guiding
principle for notices is the same one that applies to just about everything else that
matters: Do it right the first time.

When a client asks attorneys to help give a notice, there are only two possible
outcomes:
 The notice will be given correctly and no one will pay much attention to any issues
relating to the actual giving of notice; or
 The attorneys will find a way to mess it up, taking advantage of one of the many
available opportunities to make mistakes in giving even the most “trivial” notice.
This checklist seeks to help you achieve the first outcome and avoid the second.

Very little on this checklist is substantive or “legal.” But the process demands the
same level of care, precision, and attention to detail that you would bring to any legal
problem. Practical and logistical exercises like giving notices can and do raise legal
issues at any point along the way. The easiest way to screw up a formal notice is to
assume that it doesn’t require much “legal” attention and that it’s impossible to screw
up.

1

1. Context

Start by reviewing the document under which you are giving notice. Does it include
any information about when and how to give notices? Make sure that it’s the final signed
document, not a near-final draft that might not be entirely accurate. Also look at any
related amendments, assignments, assumptions, consents, estoppel certificates, and
previous formal notices (e.g., change of address notices from the other party). Tracking
down all the relevant documents may require some detective work. Once you’ve done it,
organize what you’ve found and save it so the next person can easily find it.

Does any informal correspondence indicate that a notice recipient may have moved
without giving formal notice of a change of address? Does the client know of any such
relocation, even if not properly documented or not documented at all?

Understand why the client wants or needs to give the notice. It may affect how you
approach the process and what you say. For example, if it’s a notice of default, you may
need to describe the default and the paragraph of the governing agreement under which
it arises.

Any notice – but particularly a notice of default - must also consider the environment
where the client may later need to enforce its rights. New York landlord-tenant courts,
for instance, will seize any possible opportunity to invalidate a notice from a landlord,
including alleged issues with corporate authority of whoever signed the notice. And, of
course, if the contemplated notice recipient is in bankruptcy or similar proceedings, ask
whether your client is even legally permitted to give the notice in the first place, or needs
to proceed in some other way.

Do any related agreements exist that will require similar notices at the same time?
Must your client satisfy any conditions – such as getting someone else’s approval –
before giving the notice? Does giving the notice create any unexpected consequences
(e.g., a buyout right under a joint venture agreement or an obligation to remove
important communications facilities from a floor that, pursuant to the notice, will be
returned to the landlord)? Try to answer these questions before rather than after giving
the notice.

Have you or anyone else involved given any similar notices in the past? Take a look
at them. See if they suggest answers to any questions raised, or new concerns not
mentioned here.

One question you shouldn’t ask is whether the notice recipient will try to object to the
validity or timeliness of the notice. This question should be utterly irrelevant, because its
answer should not affect anything you do. Assume the notice recipient will object to the
notice, even if the parties are on the best of terms. It’s your job from the beginning to
ensure that any such objections will be futile.

One exception to this rule might arise if the parties are on such good terms that they
can sign a letter agreement waiving the notice requirement and deeming the notice
given. In that case, get the letter agreement signed and exchanged long before the
notice deadline. But don’t run afoul of any agreement that requires notice to (or consent
by) a third party regarding whatever’s going on.

2

2. Timing

When must the notice be given? Everyone knows you shouldn’t wait until the last
minute to give a notice. But when is the last minute? Before you get too far down the
road, figure out exactly when the client must give its notice. Ideally, the documents will
identify a specific deadline date for giving notice.

Often, though, a document will define the notice deadline as a certain number of days
before some date that is a certain number of years after a date that’s not immediately
obvious. You may need to do some detective work just to figure out the notice deadline.

That exact problem often arises in leases contemplating that the landlord will perform
construction for the tenant, or for some other reason deliver the space at some
undefined time after the parties sign their lease. Everything in the lease, including the
notice deadline, refers back to the commencement date, but the commencement date
depended on when the landlord delivered the space, or perhaps when the landlord gave
notice of that delivery – if the landlord remembered to give that notice. The lease usually
requires the parties to enter into a letter agreement to confirm the commencement date,
but they tend to forget, making it tricky to figure out the lease renewal notice deadline
lease or even when the lease expires.

Problems like these are best identified and solved well before the last minute. Clients
can help avoid them by planning ahead and having a continuing relationship with a
single attorney or law firm as opposed to engaging the cheapest, fastest attorney –
usually at the last minute – every time some issue arises. Conversely, if you are the
attorney with whom the client maintains a long-term relationship, help the client identify
notice deadlines well in advance, as part of the “preventive practice of law” and a gentle
reminder of the benefits of a long-term relationship with a single attorney or law firm,
i.e., yourself.

With enough lead time, you might be able to obtain an estoppel certificate to confirm
any unknown or certain dates. Or an earlier estoppel certificate in the file may resolve
the mystery.

In any case, always try to give your notice early enough that you have time to fix it
and give it again if you realize it was somehow defective.

3. Signature Mechanics

Who will sign your notice? Identify the right officer or authorized signer in advance. It
seems to be an immutable law of the universe that the signer will always be traveling
when you most need him or her. And don’t assume just anyone can sign. Use a
corporate officer or someone else with actual authority to bind the giver of the notice.
You don’t want to give the notice recipient the chance to argue that the notice was
invalid because it didn’t really bind the notice giver, i.e., that whoever gave it was just an
interloper having some fun. New York courts have sometimes invalidated notices on
grounds like these.

3

Prepare an appropriate signature block, including name of entity, by some other
entity, by some other entity, by some signer, and anything else the circumstances
dictate. Don’t fudge the signature block or assume someone else will fill in the blanks. If
you do that, you create a significant risk that when the signer finally pulls out a pen and
gets ready to sign, they just won’t be able to proceed. Getting the signature block right
is part of the job of preparing a notice.

To prevent last-minute problems with signing, you might want to have the notice
signed before you’ve even figured out its final substance and worked through all the
necessary details. You can break the signature block for your notice into a stand-alone
signature page, with just a few straggling lines of text followed by the signature block.
Have the signature block signed (get enough originals!) as soon as you can.

This type of signature page has, however, created opportunities for fraud – it might
end up attached to the wrong document. Thus, some careful attorneys and clients now
like to include a legend at the top of the signature page identifying the document to
which it belongs.

4. Consents, Joinders, and Confirmations
Does anyone else need to confirm, consent to, or join in the notice you are giving?

For example, to give a notice of termination of a ground lease, you may need the
leasehold mortgagee’s consent, which might first require a formal notice to the
leasehold mortgagee, raising once again most of the issues in this article.

If you identify any third parties who will need to be involved, let them know as early as
possible. If your client is an entity with significant internal approval procedures, think
about whether you need to obtain your own internal approvals in order to give the
notice. What will those internal approval procedures require from you? How long will
they take? You don’t want the recipient to be able to argue that the notice was invalid
because it violated internal approval procedures.

Do any statutory or regulatory requirements control whether and how your client can
give this particular notice or take the action the notice contemplates? What must your
client do to satisfy those requirements?

5. Sender
Who should give the notice? Look at the underlying document. But also consider the

effect of any transfers. Did the notice sender change its name? Change its signature
block? Transfer its position to someone else? If the party giving the notice was not
originally a party to the agreement, how should you explain the change? Should the
client have given any notice of that change—perhaps joined in by the original party to
the agreement? Problems with the authority and identity of the party giving the notice
can be difficult to solve, especially at the last minute, if they involve third parties.
Therefore, ask the questions as early as possible.

4

6. Notice by Attorney
The New York Court of Appeals has invalidated notices given by attorneys on behalf

of their clients. Some attorneys treat this as a non-issue and do it anyway. Don’t be
tempted. Do you want your client to become the test case giving the state’s highest
court an opportunity to overrule the (in)famous Siegel v Kentucky Fried Chicken case?

Likewise, don’t assume some other agent can sign the notice on behalf of the party
giving it. If you cut corners, you create very convenient opportunities for a
hypertechnical court to throw out your notice and force you to start all over again.

7. Recipient
The documents will tell you who must receive the notice: a particular party, their

attorney, perhaps a guarantor. But do you know whether any notice recipient has
transferred their rights? If so, you should probably to give the notice to both the original
notice recipient and their successor. If you received a formal notice of the assignment,
though, don't worry about the original recipient. Just deal with the assignee or
transferee.

Should any other parties receive the notice, even if not listed in the primary
document? Guarantors? Lenders? For a lease or hotel management agreement, think
about nondisturbance agreements and leasehold mortgagees. Did your client agree to
give any third parties copies of any notices? Does your client have any reporting
obligations within its own investor group? Third-party notice requirements often won’t
appear in whatever “main” document is the basis for the notice. You have to figure out
what other documents exist out in the world and might require third-party notices.

Can you identify any third parties who you simply think should know about notice,
perhaps because you want them know about a budding problem or concern? Before
you give copies of notices to any extra parties, though, ask yourself if that’s a precedent
you want to set. For a one-time notice it might not matter. But for a continuing
relationship where you will give similar notices regularly, you may want to state that you
are giving the additional notices only as a courtesy, and don’t intend to give them every
time.

8. Letterhead
If the client will use its own letterhead, set up the notice so it can easily be transferred

to letterhead. If the client won’t use its own letterhead, or doesn’t care, create simple
letterhead for the client, built into the notice. Either way, the notice should include the
client’s letterhead, whether real or computer-generated for this particular occasion. It
helps prevent the notice recipient from claiming that the notice was overly mysterious or
they had no way to know what it was or from where it came.

5

9. Means of Delivery
Determine the correct means of delivery by carefully reviewing the “notices” clause of

your document. State the delivery method immediately above the recipient’s address in
the notice letter. For example, if a document says notices must be given by certified
mail or Federal Express, include: “BY CERTIFIED MAIL AND FEDERAL EXPRESS.” If
the document provides for multiple means of notice, seriously consider using at least
two, for every notice recipient and every copy recipient.

Don’t try to improve on the method the document prescribes. If it says “regular mail,”
then use regular mail. Don’t “upgrade” to certified mail. If you really want to, though,
send a second copy by certified mail.

Once in a while, of course, lawyers who give formal notices also have to think about
the law. Does any law govern how notice must be given? If so, comply.

10. Date
Any notice should be dated, reflecting the date it was sent. Don’t try to give a notice

“as of” some other date, or date it a few days before you actually sent it. Use the actual
date of sending. That’s true even if the terms of the notice clause dictate that the notice
will only become effective later.

11. Reference to Agreement
In the opening paragraph of your notice, refer to the underlying agreement by its

correct name and date. If amendments occurred, you may want to recite them,
particularly if they affect the notice you are giving.

12. Contents of Notice
Review the provisions in the agreement for which you are giving the notice. But don’t

just review the notices clause. Look for any other language in the agreement that might
play a role. Does the notice need to say anything in particular? Specify any additional
information? Remind the recipient of any response time? Include any enclosures?
Include a check or a copy of something? Follow any particular format or template?

Comply with any and all requirements to the letter. Review any relevant provisions of
the agreement and any related documents. The notice should say or include everything
it needs to, but typically nothing more.

If you go beyond the literal requirements of the document, you’ll create opportunities
for issues and arguments. Don’t do this lightly. If you absolutely must add something,
say it with as much clarity and specificity as possible. Don't leave any opening for a
court to accuse you of vagueness or decide the recipient could not understand what you
said. Don’t give the recipient any excuse to not take your notice seriously.

6

For example, if the client wants to exercise a renewal option just in case some
pending renewal negotiations break down, you may be tempted to refer to those
negotiations and somehow say your notice is just a preventive measure. Don’t. Keep it
simple. Exercise the option and keep negotiating, but don’t confuse the two of them.
You are only asking for trouble.

If you anticipate arguments about the validity or contents of the notice, you’ll usually
find it doesn’t make sense to cover those arguments preemptively in your notice. Just
give a good, simple, effective notice first and argue later.

If you feel you absolutely must say something more than the bare minimum, consider
sending a second notice to supplement the first. The second notice should make clear
that it doesn’t limit or vitiate the first, but instead just implements it or addresses
uncertainties. For example, if your client intends to exercise a right of first offer or first
refusal under a ground lease or joint venture agreement, the exercise notice should just
exercise the right. If any uncertainties or further procedures exist, try to discuss them in
a separate notice, making clear that the notice of exercise remains effective no matter
what.

13. Contents and Clarity

Make the notice absolutely clear and unambiguous. You usually don’t need to include
copies of related documents, so don’t. And don’t ask the recipient to do anything that
might vary from the documents. Variation will just confuse things and may even make
the notice defective. For example, if the documents don’t require the notice recipient to
acknowledge receipt, think long and hard before asking them to do so. They might be
able to argue that the request somehow made the notice “conditional” or took it beyond
what the parties contemplated.

If you are concerned about acknowledgment of receipt, you can either establish a
clear paper trail or request an appropriate estoppel certificate immediately after giving
notice, if the document provides for estoppel certificates. But you don’t want to
complicate the notice in any way that might create an argument.

If you have any specific demands for the notice recipient, make them absolutely
crystal clear. Leave no opening for the recipient to argue that the notice just looked like
an interesting discussion of something without legal consequences or implications.
Demand and inform and take action; don’t ask or request or share ideas or discuss what
you might decide to do later.

14. Proof of Mailing

If at all possible, obtain proof of dispatch and proof of delivery. Sometimes these
items take a few days to come back. Make sure they do come back. Look at them when
they come back. If the recipient refused delivery, what should you do next? Don’t just
file away the papers without thinking about them. Keep a copy of the notice as given.
Prepare a certificate of mailing if necessary.

7

Think about who you might call as a witness if you had to prove any facts about the
notice. If that person is a transient mailroom employee or someone else who might not
be easy to locate, you may want to have them sign an appropriate affidavit now and
include it in the file. Or consider whether to use someone who will be easier to track
down later.

15. Copies
Distribute copies of the notice to anyone who should know about it, including the

client. Include a cover note that mentions whether the notice was actually given, and
when and how. If the date of effectiveness of the notice will matter, explain what the
document says about that.

16. Filing
Keep an official file copy of the notice, with proof that it was given correctly and on

time. When the return receipt arrives, file it with the copy of the notice letter. Distribute
copies of the whole document set to everyone involved in seeing that the notice was
properly given. Consider whether to record the notice, either because a statute requires
it (e.g., California trustee’s sale procedures) or for clarity and the historical record. When
you circulate copies of the notice, include the proof of delivery.

CONCLUSION ● Notices aren’t just bread-and-butter documents that you can throw
together at the last minute without much thought. They must fully reflect the underlying
relationship and all relevant documents, context, and history. Notices require clarity,
precision, and absolute attention to detail, and a clear record of validity. The attorney
needs to assure any notice does 100% of what the client wants it to do – not just 95% of
it.
4839-2327-8855, v. 13

8

BUYING AND SELLING PROPERTY IN ITALY

A Team Endeavor

By: Donald Carroll and Christine Marciasini

A dynamic couple from Chicago found a villa in Montepulciano, Italy they wanted to buy.
Their real estate agent there had them sign an Proposta di Acquisto (offer to purchase) to
send to the seller giving the price they wanted to pay and had them make out a check for
Euro 5000 in the name of the seller. The seller accepted, collected her check, and the
deal became irrevocable. The agent asked the couple for his fee of 3% of the purchase
price and they paid.

The couple then learned that the lovely upstairs study with fireplace had been added to the
main house without a building permit. There would be fees to pay to the geometra
(surveyor) and tax to the local municipality to get the permit and the study would need to
be torn down if the permit was not granted. The seller had no intention of taking care of
this and there was no recourse for the couple. They were stuck and yet the outcome could
have easily been avoided.

Buying a property in Italy can be either a gratifying or distressing experience. As a
foreigner seeking the former, there is no substitute for having the right team of advisors
working for you.

A geometra will let you know about the integrity of a building’s structure, whether permits
have been obtained and the costs for putting things right if needed. An attorney will
examine title, review all contracts, help you negotiate the deal and make sure your rights
are protected. Italian law requires that all land sales be completed before a notary. A
notary will ensure that the transfer of title is made according to law, that all state and city
fees are paid and that the deed of sale is properly recorded in the land evidence registry.

Phase One: Preparing for the purchase and sale

Seller: Gather ownership and other key documents, including:

A. Atti di provenienza: demonstrating how you obtained the property and showing
your good title.

- Atto notarile (notarial deed)
- Dichiarazione di Successione (estate tax return): if received by inheritance
- Sentenza di usucapione: court judgment awarding title to property through

adverse possession

B. Additional documents
1. Demonstrating compliance with registry and zoning:
- Planimetria: map of property as it appears in the catasto fabbricati (registry for
buildings)
- Condono edilizio: certificate showing grandfathered permission on works
originally done without a permit
- Certificato di destinazione urbanistica: certificate showing the "use", e.g.
residential, agricultural, etc. designation for the property
- Certificato di Abitabilità: certificate acknowledging the habitability of the property
1

- Certificazione energetico: certificate showing the building’s energy use
- Visura catastale: land registry certificate showing a lack of encumbrance or liens

on the property

2. If also selling land:
- Mappe catastali: inventory of all parcels of land comprising the property with tax

coefficients
- Coltivatori Diretti: list of any tenant farmer(s) who work the bordering land

Phase Two: Proposta di Acquisto (offer to purchase) and Contratto Preliminare di
Vendita, (preliminary purchase and sales contract also commonly referred to as the
“Compromesso” )

This is a critical legal phase of the transaction. Buyers are often instructed that a purchase
should be a two step process. That they should first make an offer with a purchase price
that becomes binding on them upon acceptance by the seller; and second, enter into a
preliminary purchase and sales contract which details the terms of the deal.

This traditional approach may be followed. However, without proper legal review of the
offer, there is a risk of consequences similar to those suffered by our Chicago couple.

An efficient alternative to this approach is an offer that includes all the terms of the deal
including conditions to be met before the offer becomes binding. Such an offer, once the
conditions have been met, will constitute the preliminary purchase and sales contract
(“preliminary contract”) and allow the parties to proceed to the final deed of sale with one
unified agreement.

Conditions may include the examination of seller’s title, having all buildings checked for
structural integrity, absence of any encumbrances or liens, or obtaining a waiver of the
state’s preemption rights on buildings on the Ministry of Cultural Heritage culturally
protected list. If a condition is not met then the buyer will have the right to ask for his or
her deposit to be returned.

The preliminary contract should also include a full legal description of the property,
including rights of way, sale price, terms and method of payment of deposit(s) and the final
payment, date by which the sale is to be closed and identification of the notary.

Execution of the preliminary contract legally binds the parties to go forward to complete the
sale assuming all conditions are met. Failure to close after this point is considered a
breach a can be resolved through the deposit provisions in the contract as discussed
below, or by filing suit in court to enforce specific performance.

The terms of the preliminary contract are the basis upon which the notary will draft the
deed to be signed at the closing.

Deposits: a deposit is paid by the buyer to the seller at the time of signing of the
preliminary contract in an amount ranging from 10% to 30% of the sales price. The
deposit which may be paid at the time of signing the preliminary contract of sale is
technically referred to as a “Caparra Confirmatoria”. Should there be default on the part of
the buyer, that party loses the entire deposit. Should instead the seller default, the seller
must pay the buyer twice the amount of the deposit.

2

Commissions: Many realtors also seek to receive their full commission at the signing of
preliminary contract, or if the traditional approach is used at the acceptance of the offer.
Seek to negotiate the timing of the commission payment with the realtor at the time of
entering into a realtor contract so that 50% of the commission is paid at the time of the
signing of the preliminary contract and 50% at closing.
Phase Three: Closing
Both parties appear before a notary to sign final deed of transfer. However, either party
can be represented by a third party pursuant to a power of attorney. Attorneys regularly
act on behalf of their clients at closings.
At this time the seller is paid the balance of the purchase price and title to the property is
transferred to the buyer. If the buyer is taking out financing to purchase the property a
bank representative may also be present.
Recommendation
A real property purchase in Italy is a serious investment and often the fulfilment of a
dream. Italy’s unique real estate, tax and immigration laws and local customs all lead to
the recommendation to having the right team of advisors assist in making those both
successful realities.
Donald Carroll ([email protected]) and Christine Marciasini
([email protected]) are attorneys with Pirola Pennuto Zei and Associati,
Viale Castro Pretorio 122, Rome 00185, tel: 06 570281.

3

THE TOP NEW DEVELOPMENTS IN 2014 FOR REAL ESTATE FINANCE

By Brook Boyd1

This article summarizes the top legal developments in 2014, relating to real estate
finance, for lenders and borrowers.

Table of Contents
2014 DEVELOPMENTS AFFECTING LENDERS .......................................................... 2

Federal Credit Risk Retention Rule & Its Impact on Real Estate Finance.................... 2
2014 Amendment of SEC Reg. AB - Asset-Backed Securities Disclosure and
Registration.................................................................................................................. 4
New Risk Management for Federally Regulated Lenders. ........................................... 4

[i] Interest Rate Risk Management............................................................................ 4
[ii] Risk Management for Large Banks. ..................................................................... 5
[iii] Regulated Loan Sellers Must Supervise Loan Buyers of Consumer Loans. ....... 5
[iv] Cybersecurity Requirements Applicable to Lenders & Third Party Service
Providers Such as Lawyers. ..................................................................................... 6
Accounting and Regulatory Requirements Applicable to Federally Regulated Lenders.
..................................................................................................................................... 6
[i] Loan Sale or Secured Borrowing? ........................................................................ 6
[ii] Whether a loan is a TDR may depend on the interest rate. ................................. 7
[iii] Subsequent Restructuring of an Existing TDR .................................................... 7
How to Strengthen Intercreditor Agreements. .............................................................. 8
How to Strengthen “Bad Boy” Guarantees................................................................... 9
Risk of Lender’s Mortgage Being Cut Off By “Super Priority” Condo & HOA Liens. .... 9
Issue of Enforceability of Extension of Statute of Limitation for Loan Seller’s Reps... 10
Risks of Appraisals of Land Development Projects Based on Total Net Value Method.
................................................................................................................................... 10
Miscellaneous ............................................................................................................ 10
Need to Update References to LIBOR in Loan Documents.................................... 10

                                                           

1 Brook Boyd is Counsel at Meister Seelig & Fein LLP in its New York office, and practices in
the area of real estate and corporate transactions. He is the author of Boyd, Real Estate
Financing (Law Journal Press, 35th ed. 2014), which can be viewed online at
http://www.lawcatalog.com His professional website is at
http://www.meisterseelig.com/attorneys/Brook-Boyd

Terrorism Risk Insurance Act Was Renewed Through 12/31/20. ........................... 10

Homeowner Flood Insurance Affordability Act of 2014 Changed Flood Premium
Escrows. ................................................................................................................. 11

Tenant’s Right To Remain In Possession Despite Mortgage Lender’s Section 363
Sale ........................................................................................................................ 11

Incentive to Do Loan Modification Before Deed in Lieu. ......................................... 11

IRS Ruling Facilitating Loan Modifications by REITs .............................................. 11

IRS Proposed Regs. Removing 36-month nonpayment rule for 1099-C ................ 12

2014 DEVELOPMENTS AFFECTING BORROWERS ................................................. 12

Proposed Restrictions on Guarantees and Allocation of Debts for Tax Purposes. .... 12

How to Structure Developments to Maximize Deferral of Gain from Home Sales...... 13

IRS Regulations Recognizing That S Corp. Shareholder Has Basis in Loan to S Corp.
................................................................................................................................... 13

Foreclosure Sale May Trigger Recognition of Passive Losses. ................................. 13

Treat Mezz Loan Like Mortgage Loan for Election to Reduce Basis to Avoid COD... 14

Miscellaneous. ........................................................................................................... 14
Extension for 2014 of Exclusion From Gross Income Of Discharge Of 1st-2d Home
Loans...................................................................................................................... 14

Extension for 2014 of Mortgage Insurance Premiums Treated As Qualified
Residence Interest.................................................................................................. 14

2014 DEVELOPMENTS AFFECTING LENDERS

Federal Credit Risk Retention Rule & Its Impact on Real Estate Finance.

In 2014, the federal banking agencies, the SEC, and HUD issued a final rule1 providing
that each sponsor of a securitization, or its majority-owned affiliate, must generally
retain not less than five percent of the credit risk of the securitized interests.2 Sponsors
may hold either (1) “vertical” interests consisting of 5% of each class of interests, (2)
“horizontal” residual interests (excluding noneconomic REMIC residual interests) that
are subordinated to all other securitized interests, (3) a residual cash reserve account in
lieu of such “horizontal” interests, or (4) a combination thereof.3 Sponsors are not
allowed to satisfy risk retention obligations through unfunded third-party credit support,
such as insurance policies, guarantees, liquidity facilities, or standby letters of credit.4
Such sponsors also generally cannot transfer or hedge the retained interests, or obtain
nonrecourse financing secured by such interests.5 In the case of a commercial
mortgage loan securitization, the sponsor can satisfy its risk retention requirements if a
third party purchases an “eligible horizontal residual interest” in such securitization from

the sponsor. However, the seller-sponsor, or another party that has an interest in the
securitization other than as an investor, cannot provide purchase money financing for
such purchase. In addition, the securitization documents must provide that, once the
balance of the horizontal residual interest is reduced to 25% or less of its original
principal balance, then the special servicer must consult with an independent “Operating
Advisor” regarding any (A) material modification or waiver of a loan or security
agreement, or (B) any foreclosure; and the “Operating Advisor” may recommend the
replacement of the special servicer.

Securitizations of “qualified residential mortgages,” or “qualifying commercial real estate
loans” (also called “qualifying CRE loans”), are exempt from the risk retention
requirements.6 A “qualified residential mortgage” means a ‘‘qualified mortgage’’ as
defined in the Truth in Lending Act7 and its regulations.8 A “qualifying CRE loan” must,
inter alia: (1) be secured by a first lien on the collateral, (2) satisfy specific underwriting
requirements, such as “debt service coverage” and “loan to value” ratios, (3) prohibit
any transfer of the collateral or any portion thereof, (4) provide for at least 30 days
advance notice to the lender of any change to the name, location or organizational
structure of any borrower, operating affiliate or other pledgor, (5) prohibit any material
modification of any applicable leases, franchise agreements, condominium declarations,
and other documents and agreements relating to the operation of collateral for the loan,
without the consent of the originator or any subsequent holder of the loan, or the
servicer; (6) require loan payments to be made under the loan agreement based “on
level monthly payments of principal and interest (at the fully indexed rate) to fully
amortize the debt over a term that does not exceed 25 years, or 30 years for a
qualifying multifamily loan” but that is at least 10 years, and (7) if the loan has an
adjustable interest rate, then the borrower, prior to or concurrently with the origination of
the CRE loan, obtained a derivative or cap that effectively results in a fixed interest
rate.9

Obviously, sponsors of securitizations will have a strong incentive to securitize only
“qualified residential mortgages” and “qualifying CRE loans,” so lenders and their
counsel will need to become familiar with all of the specific requirements for such
exemptions. However, it is estimated that only 2%-8% of current CMBS would
constitute “qualifying CRE loans,”10 which demonstrates how restrictive these new
exemptions are.

“Commercial real estate loans,” for the purpose of the risk retention rule, do not include
(i) any land development and construction loan (including 1- to 4-family residential or
commercial construction loans), or (ii) any other land loan.11 This reflects the intent to
limit securitized commercial real estate loans to financings “where the primary source of
repayment would come from the proceeds of sale or refinancing of the property or
underlying rental income from entities not affiliated with the borrower.”12

Compliance with the rule, with respect to securitizations of residential mortgage loans, is
required beginning December 24, 2015. Compliance with the rule, with regard to all
other classes of asset-backed securities, is required beginning December 24, 2016.13

2014 Amendment of SEC Reg. AB - Asset-Backed Securities Disclosure and
Registration.

The SEC issued a final rule in 2014 amending its Regulation AB. This 2014 final rule
requires that, with some exceptions, prospectuses for public offerings under the
Securities Act of 1933, and ongoing reports under the Securities Exchange Act of 1934,
of asset-backed securities backed by real estate related assets, must contain specified
asset-level information about each of the assets in the pool. The asset-level information
is required to be provided according to specified standards, and in a tagged data format
using eXtensible Markup Language (“XML”). New forms - named Form SF–1 (for non-
shelf offerings) and Form SF–3 (for shelf offerings) - must be used for any sales of a
security that is an asset-backed security (“ABS”), as defined in Item 1101 of Regulation
AB. These forms will require all the items applicable to ABS offerings that are currently
required in Form S–1 and Form S–3 as modified. The final rules also repeal the credit
ratings references in shelf eligibility criteria for ABS issuers and establish new shelf
eligibility criteria.14

Detailed disclosures are required with respect to the underlying securitized loans, even
with respect to the workout strategy in the case of a loan in default.15 In the case of a
shelf offering pursuant to Form SF-3, there are also detailed requirements for pooling
and servicing agreements, such as (1) the appointment of an independent “asset
representations reviewer” that is “responsible for reviewing the underlying assets for
compliance with the representations and warranties on the pool assets,” and (2) other
provisions confirming investor rights to require repurchase of noncompliant loans.16

New Risk Management for Federally Regulated Lenders.

[i] Interest Rate Risk Management.

Federal bank regulators have greatly emphasized17 the likelihood of rising interest rates,
the potentially negative impact that this will have on banks in 2015, and the steps that
banks should be taking now to manage their “interest rate risk” (“IRR”). Regulators are
particularly concerned that if a bank has extended the maturity date of its fixed rate
loans in order to generate additional business from borrowers, then it “may experience a
negative impact to earnings in a higher-interest rate environment as funding costs
increase.”18 According to the FDIC, “[an] IRR mitigation technique is off-balance sheet
hedging. Hedging strategies for IRR typically involve the use of derivative instruments
(e.g., forwards, swaps, caps, floors, swaptions, and collars) and can be effective in
curtailing undue IRR if used in a safe and sound manner. . . . If derivatives hedging is
determined to be an appropriate tool for a given institution, the board and senior
management should develop a thorough set of policies and procedures covering
allowable derivatives contracts, risk and maximum loss limitations in terms of capital,
pre-purchase analysis (including modeling) and ongoing monitoring procedures,
authorized transactional parties, and accounting standards.”19

[ii] Risk Management for Large Banks.

The Office of the Comptroller of the Currency (“OCC”) has issued a final rule creating a
risk governance framework for large insured national banks, insured Federal savings
associations, and insured Federal branches of foreign banks, with average total
consolidated assets of $50 billion or more, although the OCC has reserved its discretion
to apply such rule to smaller banks.20 The following risks are subject to the rule: “Credit
risk, interest rate risk, liquidity risk, price risk, operational risk, compliance risk, strategic
risk, and reputation risk.”21 These large institutions are required to add an additional
layer of corporate bureaucracy, devoted to risk management, including the hiring of one
or more “Chief Risk Officers” who are accountable to, and compensated by, the board
of directors of the bank.22 Obviously this will complicate the loan approval process at
such banks, and related actions such as interest rate hedges.

[iii] Regulated Loan Sellers Must Supervise Loan Buyers of Consumer Loans.

Federal bank regulators intend to monitor closely all sales of consumer debts by banks,
once such debts have been charged off, to debt buyers who intend to collect such
debts. Banks have been warned not to ignore compliance risks, such as selling such
debts to buyers who engage in illegal collection practices, or who fail to safeguard the
debtors’ privacy rights and confidential information. In some cases, bank sellers have
given debt buyers access to customer files so they could assess credit quality before
the debt sale, without the banks first making proper customer disclosures, which was
inconsistent with the banks’ internal privacy policies and applicable laws and
regulations. In other cases, bank sellers have failed to turn over to debt buyers all
material information, resulting in the buyers pursuing collection on a debt that was
previously discharged in bankruptcy or after the applicable statute of limitations. Bank
regulators therefore have instructed bank sellers to provide at least the following
information to each debt buyer:

o “A copy of the signed contract or other documents that provide evidence
of the relevant consumer’s liability for the debt in question.

o Copies of all, or the last 12 (whichever is fewer), account statements.
o All account numbers used by the bank (and, if appropriate, its

predecessors) to identify the debt at issue.
o An itemized account of all amounts claimed to be owed in connection with

the debt to be sold, including loan principal, interest, and all fees.
o The name of the issuing bank and, if appropriate, the store or brand

name.
o The date, source, and amount of the debtor’s last payment and the dates

of default and amount owed.
o Information about all unresolved disputes and fraud claims made by the

debtor. Information about collection efforts (both internal and third-party
efforts, such as by law firms) made through the date of sale.
o The debtor’s name, address, and Social Security number.”

Further, the bank regulators believe that the sales of the following types of debt are
not appropriate:

o “Debt that has been otherwise settled or is in process of settlement.
o Debt of deceased account holders.
o Debt of borrowers that have sought or are seeking bankruptcy protection.
o Debt of account holders currently in litigation with the institution.
o Debt incurred as a result of fraudulent activity.
o Accounts lacking clear evidence of ownership.”

In addition, bank regulators have warned debt sellers to refrain from the sale of the
following additional types of debt because the sales of these types of accounts may
pose greater potential compliance and reputational risk:

o “Accounts eligible for Servicemembers Civil Relief Act protections.
o Accounts of minors.
o Accounts in disaster areas.
o Accounts close to the statute of limitations.”23

[iv] Cybersecurity Requirements Applicable to Lenders & Third Party Service
Providers Such as Lawyers.

Financial regulators have repeatedly emphasized the importance of cybersecurity to
their regulated financial institutions, and the responsibility of such institutions to manage
third party service providers. According to the Federal Financial Institutions
Examination Council (“FFIEC”), “Before executing a contract, it is important for
management [of a financial institution] to consider the risks of each connection and
evaluate the third party’s cybersecurity controls. In addition, financial institutions should
understand the third parties’ responsibility for managing cybersecurity risk and incident
response plans.”24 Similarly, the OCC emphasizes “the importance of identifying the
connections [a financial] institution has with third-party service providers and ensuring
formal controls are in place to secure the ways these providers transmit, access, and
store data.”25 President Obama has also strongly endorsed the need for financial
institutions to improve their cybersecurity defenses.26 Further, Superintendent Lawsky
of the New York State Department of Financial Services has advised that regulated
financial institutions may be required to obtain representations and warranties from their
third-party service providers with respect to the third parties' cybersecurity standards
and policies.27 Therefore, law firms need to have appropriate cybersecurity safeguards
in place in order to meet the needs of clients that are regulated financial institutions.28

Accounting and Regulatory Requirements Applicable to Federally Regulated Lenders.

[i] Loan Sale or Secured Borrowing?

Should a loan “purchase” be accounted for as a purchase of the loan or as a secured
borrowing? In order to qualify as a sale, then the following conditions must be met: (1)
unless the transfer is of the entire loan, the transferred portion of the loan must meet the
definition of a participating interest, and (2) the transfer must meet all of the conditions

set forth in ASC Subtopic 860-10 (“Transfers and Servicing - Overall”) to demonstrate
that the transferor has surrendered control over the transferred loan.29

Some lenders have entered into mortgage loan purchase programs, which function like
traditional warehouse lines of credit to the actual loan originators. However, the
mortgage loan transfers may be legally structured as “purchases” by the funding party,
rather than as pledges to such funding party of collateral to secure such funding.
Nonetheless, the funding party may provide the funds to the mortgage loan originator
that are actually advanced to the borrower, while the funding party simultaneously
obtains a security interest in the mortgage loans subject to a takeout commitment. A
takeout commitment is a written commitment from a funding party to purchase one or
more mortgage loans from the loan originator. The funding party should generally
account for such a mortgage purchase program as a secured borrowing with a pledge
of collateral (i.e., a loan by the funding party to the loan originator secured by the
mortgage loans), rather than as a purchase of mortgage loans.30

[ii] Whether a loan is a TDR may depend on the interest rate.

The FFIEC has recently issued guidance that will help lenders and their lawyers
determine whether a loan modification will be classified as a “troubled debt
restructuring” (“TDR”). If a lender agrees to a loan “concession” that is not “market,”
and the borrower is also experiencing “financial difficulties,” then this must be treated by
the lender as a TDR for accounting and regulatory purposes.31 According to the FFIEC,
a reduction in the interest rate on a restructured loan does not necessarily mean that
the restructuring is a TDR, since a lender may lower the interest rate on a loan to
maintain a relationship with a borrower that can readily obtain funds from other sources.
On the other hand, merely because the interest rate charged under the restructuring
agreement has not been reduced, does not mean that the restructured loan is not a
TDR. Any determination by a lender, that a loan has been modified at a market interest
rate, should be based on documents demonstrating the borrower’s current financial
condition and why the rate on the modified loan is comparable to rates the lender would
charge customers with similar financial characteristics on similar types of loans.
Likewise, the evaluation of whether or not a borrower is experiencing financial
difficulties, is based upon individual facts and circumstances, and should be supported
by the lender’s records.32

[iii] Subsequent Restructuring of an Existing TDR.

The FFIEC has also recently clarified when, if a loan has previously been modified in a
TDR, the lender may report a subsequent restructuring agreement as not being a TDR.
If, at the time of the subsequent restructuring, the borrower is not experiencing financial
difficulties, and no concession has been granted in such agreement by the lender to the
borrower, then, according to the federal banking regulators, such loan is no longer
deemed to be a TDR.

When assessing whether a concession has been granted by the lender, the regulators
consider any principal forgiveness, on a cumulative basis, to be a continuing
concession. Therefore, if a lender is willing to give a financial concession, it should
consider applying such concession against interest (or fees) rather than principal, if it
has the discretion to do so.33 The lender's assessment of the borrower's financial
condition and prospects for repayment, after the restructuring, should be supported by a
current, well-documented credit evaluation.

If there have been charge-offs prior to the subsequent restructuring, then no recoveries
should be recognized until collections - on amounts previously charged off - have been
received. Similarly, if interest payments were applied to the recorded investment of the
lender in the TDR loan prior to the subsequent restructuring, then the application of
these payments should neither be reversed nor reported as interest income at the time
of the subsequent restructuring.34

How to Strengthen Intercreditor Agreements.

In a case popularly called “Momentive,”35 an intercreditor agreement (“ICA”) barred a
subordinate secured creditor from contesting, or supporting the contest by another party
of, an application by any prior secured creditor for adequate protection. The court held
that this provision was not violated by a subordinate secured creditor since it never took
a position in court adverse to the prior creditors. The court noted that the ICA allowed
the subordinate creditors to take action to the extent they were unsecured.
Further, although the prior creditors claimed that the subordinate creditors had
breached the ICA by opposing the request by the prior creditors for a “make-whole”
premium (with respect to the prepayment of their debt), the court stated that the
subordinate creditors could not be liable under the ICA for objecting to invalid claims.
Therefore, the prior creditors acknowledged that their claim would not survive the entry
of an order by the court denying the “make-whole” right of the prior creditors.

The court stated that the primary purpose of the ICA was to establish the rights of the
parties with respect to the shared collateral that secured both the prior and the
subordinate creditors. The court further stated that the ICA “is not a claim or debt
subordination agreement. Its focus . . . is . . . not on the amount of the lenders' claims.”
The court contrasted the ICA with the intercreditor agreement in “In re Erickson
Retirement Communities LLC, 425 B.R. 309, 313 (Bankr. N.D. Tex. 2010), which
contained very tight language prohibiting the junior lien holders from taking almost every
action against the general interests of the senior secured party -- where the junior lien
holders would, in the court's phrase, be "silent seconds" and yield in all respects to the
senior lien holder until the claim of the senior lien holder was fully satisfied.”

In addition, the court ruled that the ICA did not prevent the subordinate creditors from
receiving (1) a $30 million payment for backstopping new exit financing for the debtors
for an extension period (since this payment was on account of an unsecured obligation
of the debtors to the subordinate creditors), and (2) new stock in the debtors, since
these items were not part of the shared collateral or its proceeds.

How to Strengthen “Bad Boy” Guarantees.

In CP III Rincon Towers, Inc. v. Cohen,36 a loan holder sued the guarantor to enforce a
guaranty of the carveouts to the nonrecourse provisions. The guarantor was fully liable
for the loan in the event of any “indebtedness,” “voluntary lien,” or “transfer,” as defined
in the loan documents. The loan holder argued that, because the mortgaged property
became encumbered by an owners’ association lien, several mechanic's liens, and one
judgment lien, therefore these constituted either indebtedness, voluntary liens, or
transfers. Accordingly, pursuant to the guaranty, the guarantor was fully liable for the
entire loan. However, the loan documents failed to define “voluntary lien,” so the court
ruled that the liens were involuntary, based on the common meaning of “involuntary.”
Further, the court refused to accept that a lien could be a “transfer,” since it believed this
would make the definition of “voluntary lien” meaningless. Finally, because the
borrower did not need the lender’s consent in order to incur liabilities for the owners’
association lien, mechanic's liens, or judgment, therefore the court ruled that they did
not constitute “indebtedness.” Accordingly, the court granted summary judgment to the
guarantor and against the loan holder. One drafting lesson is that, even if a complex
provision literally makes sense, however, it might not be enforced if it is counter-
intuitive, and could be construed to conflict with another separate provision of the loan
documents.

Risk of Lender’s Mortgage Being Cut Off By “Super Priority” Condo & HOA Liens.

First mortgage liens have been cut off by “super priority” condo association liens, for
relatively small amounts of common charges, that arose after the first mortgage was
recorded. In one case, after a condo unit owner defaulted on both his $280,000 deed of
trust loan, and $9,415 of common charges owed to the condo association, the condo
association gave notice, to the holder named in the deed of trust, of a foreclosure sale
with respect to the condo’s lien. The notice stated that the sale would not be subject to
any existing deed of trust. The deed of trust had been assigned to JPMorgan Chase,
which did not receive such notice, since such assignment was not recorded. The only
bidder at the sale bought the unit for $10,000. D.C. Code § 42-1903.13 provides that a
condo association has a “super priority” lien for any unpaid common charges against a
unit, from the time such common charges become due, with priority over any deed of
trust lien that is subordinate to the condo declaration, to the extent of six months’ of
common charges. The court therefore ruled in favor of the condo association, but
remanded the case to address JPMorgan’s argument that the association’s lien
foreclosure sale should be invalidated based on the fact that the price ($10,000) paid by
the buyer at the foreclosure sale was unconscionably low. The court also noted that
JPMorgan failed to argue “that the lack of a [statutory] notice requirement [in favor of
subordinate lien holders] renders D.C. Code § 42-1903.13(a)(2)unconstitutional either
facially or as applied to JPMorgan in this case.”37

Issue of Enforceability of Extension of Statute of Limitation for Loan Seller’s Reps.

Some courts have ruled that a breach by a seller - of its representations and warranties
regarding loans that the seller has sold - will accrue at the time of such breach, and that
the statute of limitations begins to run upon such breach. Therefore, such courts may
refuse to extend the statute of limitations in order to enforce some customary provisions
to the effect that the purchaser’s cause of action does not accrue until (1) the purchaser
has discovered such breach, (2) the seller then fails to cure such breach or repurchase
the loan that caused such breach, and (3) the seller finally demands that the purchaser
comply with the sale agreement.38

Risks of Appraisals of Land Development Projects Based on Total Net Value Method.

According to a U.S. District Court, the “total net value” appraisal method determines “the
value of master-planned real estate communities based on ‘the sum of the market value
of the bulk lots of the entire planned community, as if all of the bulk lots were complete...
and available for sale to merchant builders, as of the date of the appraisal.’”39 The “total
net value” appraisal method can result in appraised values that are much higher than
the appraised values determined by more traditional methods. For example, even
though Credit Suisse had obtained, in 2004, an appraisal from Cushman & Wakefield,
valuing the Yellowstone Mountain Club at $420 million, however Cushman & Wakefield
boosted its valuation in 2005 to $1.165 billion, using the total net value method.40 The
court also noted that the 2005 Cushman & Wakefield appraisal opinion noted that the
$1.165 billion valuation was, "not the Market Value of the [Yellowstone Club] as the
standard valuation deductions for the time value of money and profit are not
reflected...[and that] [t]he As Is market value would be lower than the Total Net Value. .
. . In addition, [the Cushman & Wakefield] appraisal noted that, because it did not use
an ‘as is’ market value to estimate the value of the Yellowstone Club, the appraisal did
not comply with the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA").”41 An investor in loans arranged by Credit Suisse, based on
appraisals using the “total net value” method, was awarded in 2014 a $40 million
judgment against Credit Suisse for improperly inflating the value of the properties
(including the Yellowstone Mountain Club) that were mortgaged to secure such loans.42

Miscellaneous

Need to Update References to LIBOR in Loan Documents.

On February 1, 2014, ICE Benchmark Administration took over the administration of
LIBOR. Loan documents that determine the interest rate based on LIBOR should be
revised accordingly.43

Terrorism Risk Insurance Act Was Renewed Through 12/31/20.

Although the Terrorism Risk Insurance Act of 2002 expired on December 31, 2014, it
has been renewed through December 31, 2020 by the Terrorism Risk Insurance
Program Reauthorization Act of 2015.44

Homeowner Flood Insurance Affordability Act of 2014 Changed Flood Premium
Escrows.

The “Homeowner Flood Insurance Affordability Act of 2014”45 lowered some flood
insurance rate increases, repealed other rate increases, and even provided for some
refunds. Although federally regulated lenders are generally required to escrow for flood
insurance premiums, with respect to loans made or modified on or after January 1,
2016, however, there are exceptions for: (1) lenders with less than $1 billion in assets
that, on or before 7/6/12, were not escrowing for flood insurance premiums, (2) junior
loans (if the senior loan is covered by flood insurance), (3) loans secured by units in a
condo, coop or similar owners’ association which has obtained flood insurance, with the
premiums being paid as common expenses, (4) business loans, (5) home equity loans,
(6) nonperforming loans, and (7) loans with terms not exceeding 12 months.46

Tenant’s Right To Remain In Possession Despite Mortgage Lender’s Section 363 Sale.

The lender should bear in mind that a lease provision, to the effect that the lease is
subordinate to the lender’s mortgage, is still subject to the bankruptcy laws. In one
case, after a borrower filed under Chapter 11, its mortgage lender proposed a plan
pursuant to which the mortgaged property would be sold, pursuant to Section 363 of the
Bankruptcy Code, free and clear of a subordinate lease, which was deemed to be
rejected. The tenant objected. The court then ruled that the tenant was entitled both (1)
to retain, pursuant to Section 365(h) of the Bankruptcy Code, its rights under its lease,
including its right of possession, and (2) to “adequate protection” pursuant to Section
363(e) of the Bankruptcy Code, which was deemed to include its right of continued
possession of the leased premises. The buyer could not take the property free of the
lease since it was deemed to have notice of the lease.47

Incentive to Do Loan Modification Before Deed in Lieu.

If a deed in lieu is given for a property located in a jurisdiction with a mortgage recording
tax, then the grantee of the property should be aware that a mortgage recording tax
may apply with respect to any mortgages against the property that are assigned,
modified or otherwise transacted after the deed in lieu.48 Therefore, ideally the grantee
should enter into any such transaction well before the deed in lieu is delivered.

IRS Ruling Facilitating Loan Modifications by REITs

IRS Revenue Procedure 2014-5149 will facilitate modifications of loans held by REITs.
This Revenue Procedure specifically addresses a defect, in an earlier revenue
procedure, that arose when the value of the mortgaged real property (securing a loan
held by the REIT) decreases, but later increases. Each REIT must comply with various

tests, in order to maintain their special tax status, including the 75% Asset Test, which
provides that, at the close of each quarter of the REIT’s taxable year, at least 75 percent
of the value of the REIT's total assets must be represented by real estate assets
(including mortgage loans), cash and cash items (including receivables), and
Government securities.50 Revenue Procedure 2014-51 provides that, for purposes of
the 75% Asset Test, if a loan secured by a mortgage on real property is modified, and
that modification meets the requirements of the safe harbor (in Rev. Proc. 2014-51),
then the REIT is permitted to treat the loan as a “good” real estate asset in an amount
equal to the lesser of: (1) the value of the loan or (2) the greater of (a) the current value
of the real property securing the loan or (b) the value of such real property as of the
original loan commitment date.

IRS Proposed Regs. Removing 36-month nonpayment rule for 1099-C

The IRS has proposed regulations removing the rule that a deemed discharge of
indebtedness, for which a Form 1099-C, “Cancellation of Debt,” must be filed by a
creditor, occurs at the expiration of a 36-month non-payment testing period.51

2014 DEVELOPMENTS AFFECTING BORROWERS

Proposed Restrictions on Guarantees and Allocation of Debts for Tax Purposes.

The IRS proposed regulations in 2014 that would radically change the rules relating to
allocation of indebtedness.52 Generally, a partnership would be allowed to allocate
recourse liabilities to a partner (other than an individual or estate) only to the extent of
the partner’s “net value”.53 Further, a partner or a related person should: (1) maintain a
commercially reasonable net worth during the term of the payment obligation, or be
subject to commercially reasonable restrictions on asset transfers for inadequate
consideration,54 (2) periodically provide commercially reasonable documents regarding
its financial condition,55 and (3) receive commercially reasonable consideration for
assuming the payment obligation.56 The primary obligor (and any other obligor) must
not be obligated to hold money or other liquid assets exceeding the reasonable needs
of the obligor.57 Also, the term of the guarantee or other payment obligation must not
expire before the term of the partnership obligation.58 Further, “excess nonrecourse
liabilities” would have to be allocated based on the partners’ “liquidation value
percentages.”59

Since a guarantee would be recognized, pursuant to the proposed 2014 IRS
regulations, only if it is for 100% of the partnership liability, the IRS is proposing that it
will no longer recognize “bottom” guarantees, which guarantee only the least risky
portion of the partnership debts.60 A partner is not deemed to bear the economic risk of
loss for a liability to the extent the partner has a right of reimbursement from any party,
including an unrelated third party. If there is an indemnity by one partner, with respect
to another partner’s guarantee of a partnership debt, for a fixed percentage, then this
would mean that the indemnified partner’s guarantee would not be recognized.61

How to Structure Developments to Maximize Deferral of Gain from Home Sales.

In Shea Homes62, the Tax Court upheld the right of developers to use the completed
contract method of accounting (“CCM”)63 to defer income, with respect to sales of
homes, until the later of (1) the date of the final completion of the entire development, or
(2) the date that 95% of the costs, relating to such development, have been incurred.64
In Shea Homes, the final completion of the development “did not occur until the final
bonds were released and the final road paved.”65

In order for a development to be eligible for this income deferral, the acquisition and
financing of the development should be structured as a whole, instead of merely as the
sale of individual homes on the separate lots for such homes. The purchase agreement
for each home should incorporate or reference the material documents relating to the
entire development, such as “public reports, CC&Rs, publicly recorded plats and maps,
public resolutions or conditions of approval, and homeowners association documents.”66
Further, the marketing of the homes should emphasize the benefits of the “common
improvements to the development.”67

IRS Regulations Recognizing That S Corp. Shareholder Has Basis in Loan to S Corp.

New IRS regulations have been issued confirming that an S corporation shareholder
has basis, in indebtedness owed by the S corporation to the shareholder, so long as the
indebtedness is bona fide.68 However, an S corporation shareholder does not have
basis, in indebtedness of an S corporation, merely by guaranteeing such indebtedness.
With respect to guarantees, the final regulations retain the economic outlay standard by
adopting the rule that S corporation shareholders may increase their basis of
indebtedness only to the extent they actually perform under a guarantee.69 If and to the
extent that a shareholder of an S corporation makes a payment on its indebtedness,
then, to that extent, such shareholder will have basis in such indebtedness.70
Therefore, “[o]wners of S corporations generally may not deduct losses financed by the
corporation’s debt except to the extent that the shareholders are the lenders; instead of
guaranteeing a corporation’s bank loan, S corporation shareholders should borrow from
the bank and then loan the proceeds to the corporation to deduct the loss.”71

Foreclosure Sale May Trigger Recognition of Passive Losses.

A foreclosure sale of mortgaged real property, that is treated as a passive activity,
constitutes a fully taxable disposition of the entire interest of the taxpayer (such as the
borrower or its partners) in the activity. This triggers recognition of all passive losses of
the taxpayer or its partners that had been suspended or disallowed.72

Even if the foreclosure sale results in “cancellation of indebtedness” (“COD”) income for
the taxpayer, however, this will not prevent the recognition of such passive losses.
Since such losses are no longer treated as passive, as a result of the foreclosure sale,
therefore such losses are no longer a tax attribute and are not reduced pursuant to the
COD provisions.73 Reductions to tax attributes such as passive losses are made only

once the taxpayer’s income taxes are determined for the year in which the COD
occurs.74

Treat Mezz Loan Like Mortgage Loan for Election to Reduce Basis to Avoid COD.

The IRS has announced that mezzanine financing will be deemed to be secured by real
property, for purposes of the election by the owner of such property to avoid recognizing
cancellation of indebtedness income by reducing the basis of such property, pursuant to
§ 108(c)(3)(A) of the Internal Revenue Code.75

Miscellaneous.

Extension for 2014 of Exclusion From Gross Income Of Discharge Of 1st-2d Home
Loans

The exclusion from gross income of any discharge of “qualified principal residence
indebtedness” has been extended for any discharge occurring during 2014.76 This
generally applies to the taxpayer’s principal residence and another residence selected
by the taxpayer, to the extent securing an acquisition or construction loan.77

What about any discharges during 2015? The IRS has issued a letter stating that a
loan to a California homeowner, to finance the acquisition of the home, is treated as a
nonrecourse loan, because of California’s antideficiency statute. Therefore, if, in
connection with a foreclosure or a lender-approved short sale, any portion of the loan is
cancelled, then such cancellation will not be “cancellation of indebtedness” income.
Although the cancellation of such portion of the loan will constitute gain for income tax
purposes, however, such gain may be excluded from income to the extent permitted by
I.R.C. § 121.78

Extension for 2014 of Mortgage Insurance Premiums Treated As Qualified Residence
Interest

The deduction for mortgage insurance premiums has been extended for premiums that
were paid or accrued in 2014.79

                                                           

1 Credit Risk Retention, 79 Fed. Reg. 77602 (Dec. 24, 2014). The federal agencies will codify
the rule as follows: 12 CFR part 43 (OCC); 12 CFR part 244 (Regulation RR) (Board); 12 CFR
part 373 (FDIC); 17 CFR part 246 (Commission); 12 CFR part 1234 (FHFA). Because the final
rule exempts the programs and entities under HUD’s jurisdiction from the requirements of the
final rule, HUD did not codify the rule into its title of the Code of Federal Regulations.
2 In the case of CMBS, this retention must continue until the latest of (1) the date on which the
unpaid principal balance of the securitized loans, and the unpaid principal amount of the
interests, have been reduced to 33% of their respective original principal amounts, and (2) the 2d
anniversary of the closing of the securitization. 79 Fed. Reg. at 77753 (see § _.12(f)(1) of the
credit risk retention rule).

                                                                                                                                                                                               

3 79 Fed. Reg. at 77742-43 (see § _.4 “Standard risk retention” of the credit risk retention rule).
4 79 Fed. Reg. at 77613. An exception is made in the case of guarantees from FNMA and

FHLMC in certain cases. Id.
5 79 Fed. Reg. at 77753 (see §_.12 “Hedging, transfer and financing Prohibitions” of the credit

risk retention rule).
6 79 Fed. Reg. at 77748 (see §_.7(b)(6) of the credit risk retention rule).
7 15 U.S.C.1639c.
8 79 Fed. Reg. at 77754 (see §_.13(a) “Exemption for qualified residential mortgages” of the risk

retention rule).
9 79 Fed. Reg. at 77757-59 (see §_.17 “Underwriting standards for qualifying CRE loans” of the

risk retention rule).
10 “Credit Risk Retention Final Rule: Steering CMBS through the Regulatory Wake” (Dechert

LLP Oct. 2014), available at http://sites.edechert.com/10/3895/october-2014/credit-risk-

retention-final-rule--steering-cmbs-through-the-regulatory-wake.asp?sid=ed435717-4db4-4c5a-

896a-c368afd8ca66
11 79 Fed. Reg. at 77754-55 (see §_.14 “Definitions applicable to . . . qualifying commercial real

estate loans”).
12 79 Fed. Reg. at 77679. 
13 79 Fed. Reg. at 77602.
14 “Asset-Backed Securities Disclosure and Registration; Final Rule,” 79 Fed. Reg. 57184 (Sept.

24, 2014). Registrants must comply with the new rules, forms, and disclosures no later than

November 23, 2015, provided that offerings of asset-backed securities, if they are backed by

residential mortgages or commercial mortgages, must comply with asset-level disclosure

requirements no later than November 23, 2016. Id.
15 79 Fed. Reg. at 57325 (to be codified as Appendix to 17 C.F.R. § 229.1125—Schedule AL

[Item 2. Commercial Mortgages. - (j)]).
16 79 Fed. Reg. at 57337-38 (to be codified as 17 C.F.R. § 239.45(b)(ii)). See also 79 Fed. Reg.

at 57339, 57341 (Form SF-3).
17 For example, all four articles in a recent FDIC bulletin are devoted to interest rate risk

management. 11 Supervisory Insights at 2-32 (FDIC Winter 2014), available at www.fdic.gov.
18 E.g., id. at 9. However, there will be a strong regulatory incentive for loan terms of at least 10

years, in order to comply with the requirements for “qualifying CRE loans.” 79 Fed. Reg. at

77757-59 (see §_.17 “Underwriting standards for qualifying CRE loans” of the risk retention

rule).
19 11 Supervisory Insights at 8-9 (FDIC Winter 2014) (footnotes omitted).
20 OCC Guidelines Establishing Heightened Standards for Certain Large Insured National Banks,

Insured Federal Savings Associations, and Insured Federal Branches; Integration of Regulations,

79 Fed. Reg. 54518, 54546 (to be codified as 12 C.F.R. Part 30, App. D(I)(A)). “A covered bank

with average total consolidated assets . . . equal to or greater than $750 billion as of November

10, 2014 should comply with these Guidelines on November 10, 2014.” 79 Fed. Reg. at 54546.

Covered banks with assets of at least $100 billion, but less than $750 billion, must comply within

6 months thereafter; and covered banks with assets of at least $50 billion, but less than $100

billion, must comply by May 10, 2016. Id. App. D(I)(B).
21 79 Fed. Reg. 54518, 54547 (to be codified as 12 C.F.R. Part 30, App. D(II)(B)).
22 79 Fed. Reg. 54518, 54546 (to be codified as 12 C.F.R. Part 30, App. D(I)(E)(7)).

                                                                                                                                                                                               

23 OCC Bull. 2014-37 (Aug. 4, 2014), available at www.occ.gov See also B. Boyd, Real Estate
Financing §§ 21.04[25][a], 22.02[3][c][ix] and 22.02[4][ff] (Law Journal Press, 35th ed. 2014).
24 “FFIEC Cybersecurity Assessment General Observations” (Nov. 3, 2014), available at

http://www.ffiec.gov/press/PDF/FFIEC_Cybersecurity_Assessment_Observations.pdf
25 Testimony of Valerie Abend of the Off. Of the Comp. of the Curr. (“OCC”) at 11 (Dec. 10,

2014).
26 J. Davis, “Obama Calls for New Laws to Bolster Cybersecurity,” N.Y. Times, Jan. 14, 2015 at

A15.
27 K. Rashbaum et al., “Cybersecurity: Business Imperative for Law Firms” New York Law

Journal, Dec. 10, 2014.
28 Id.
29 See ASC Topic 860, “Transfers and Servicing” (Financial Accounting Standards Bd.).
30 See generally “Supplemental Instructions” at 7-8 (FFIEC Third 2014 Call, N. 269), available

at https://www.fdic.gov/news/news/financial/2014/fil14050a.pdf
31 FASB Accounting Standards Codification (“ASC”) ¶ 310-40, available at https://asc.fasb.org

See also (ASU) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a

Troubled Debt Restructuring,” (Financial Accounting Standards Bd.). See generally

“Supplemental Instructions” at 9-11 (FFIEC Third 2014 Call, N. 269), available at

https://www.fdic.gov/news/news/financial/2014/fil14050a.pdf
32 Id.
33 See B. Boyd, Real Estate Financing § 22.02[4][n] (Law Journal Press, 35th ed. 2014) regarding

the application of partial loan payments to either interest or principal.
34 “Supplemental Instructions” at 4-5 (FFIEC Third 2014 Call, N. 269), available at

https://www.fdic.gov/news/news/financial/2014/fil14050a.pdf
35 BOKF, N.A. v. JP Morgan Chase Bank, N.A. (In re MPM Silicones, LLC), 518 B.R. 740

(Bankr. S.D.N.Y. 2014). See generally B. Goodstein, “'Momentive' Provides a Reminder About

Intercreditor Agreements,” New York Law Journal, Dec. 4, 2014.
36 13 F.Supp.3d 307 (S.D.N.Y. 2014).
37 Chase Plaza Condo. Ass’n, Inc. v. JPMorgan Chase Bank, N.A., 98 A.3d 166 (D.C. Ct. App.

2014). See also SFR Invs. Pool 1, LLC v. U.S. Bank, N.A., 130 Nev.Adv.Op. 75 (2014).
38 See Lehman XS Trust, Series 2006-4N, by U.S. Bank, as Trustee v. Greenpoint Mortgage

Funding, 2014 WL 108523 (S.D.N.Y. 2014); Home Equity Asset Trust 2007-1 v. DLJ Mortgage

Capital, 42 Misc.3d 1213(A), 984 N.Y.S.2d 635 (Sup. Ct. 2014); Home Equity Asset Trust

2006-5 (Heat 2006-5) v. DLJ Mortgage Capital, 42 Misc.3d 1206(A), 984 N.Y.S.2d 632 (Sup.

Ct. 2014). See generally Glas, “Courts Limit Exposure for Breach of Warranties,” N.Y. Law

Journal, July 14, 2014. See also B. Boyd, Real Estate Financing §§ 21.03[3][a] & 22.02[1][f]
(Law Journal Press, 35th ed. 2014).
39 Blixseth v. Cushman & Wakefield, No. 12-cv-00393-PAB-KLM, slip op. at 2 (D. Colo. 2013).
40 Id. at 2-3. See also the discussion of the 2005 “total net value” appraisal in Gibson v. Credit

Suisse AG, No. CV 10-1-EJL-REB (D. Idaho July 31, 2014) (Report and Recommendation of

Magistrate Judge Bush). Such Report and Recommendation were then adopted and incorporated

in Gibson v. Credit Suisse AG, No. 1:10-cv-00001-EJL-REB (D. Idaho Sept. 19, 2014).
41 Blixseth v. Cushman & Wakefield, No. 12-cv-00393-PAB-KLM, slip op. at 2 (D. Colo. 2013).

See generally Gibson v. Credit Suisse AG, No. 1:10-cv-00001-EJL-REB (D. Idaho Sept. 19,

2014), which declined to grant summary judgment against Credit Suisse, on the issue of whether

                                                                                                                                                                                               

FIRREA applied to the 2005 “total net value” appraisal, on the ground that this was a factual

issue.
42 P. Fitzgerald, “Jury Awards Highland Capital $40 Million in Suit Against Credit Suisse,” Wall

St. J., Dec. 19, 2014. See also J. Checkler & P. Fitzgerald, “Emails Over Loans Plague Credit

Suisse,” Wall St. J., Dec. 3, 2014, p. C1.
43 B. Marsh, “LSTA Market Advisory On LIBOR,” ABA Commercial Law News at 2-3 (Spring

2014).
44 “Terrorism Risk Insurance Program Reauthorization Act of 2015,” Pub. L. No. 114-1 (Jan. 12,

2015).
45 Pub. L. No. 112-89, 128 Stat.1020.
46 Pub. L. No. 112-89 § 25, 128 Stat.1020 (codified as 42 U.S.C. § 4012a(d)(1)).
47 Dishi & Sons v. Bay Condos LLC, 510 Bankr. 696 (S.D.N.Y. May 28, 2014).
48 TB-MR-575 Mortgage Recording Tax on Mortgage Transactions After a Deed in Lieu of

Foreclosure (N.Y.S. Dept. of Tax’n & Fin. Jan. 6, 2014), available at

http://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/mrt/deed_in_lieu.htm.
49 Rev. Proc. 2014-51, 2014-37 I.R.B. 543 (Sept. 8, 2014).
50 26 U.S.C. § 856(c)(4)(A).
51 “Removal of the 36-Month Non-Payment Testing Period Rule,” 79 Fed. Reg. 61791 (Oct. 15,

2014).
52 “Section 707 Regarding Disguised Sales, Generally,” 79 Fed. Reg. 4826-4839 (Jan. 30, 2014).

See generally P. Fass, “Proposed Regulations on Allocations of Partnership Liabilities,” New

York Law Journal, June 4, 2014, p. 3; Dyckman & Stahl, “Rock Bottom: Proposed Partnership

Regulations,” Aug. 27, 2014.
53 Proposed Treas. Reg. §1.752-2(b)(3)(iii)(B).
54 Id. §1.752-2(b)(3)(ii)(A).
55 Id. §1.752-2(b)(3)(ii)(B).
56 Id. §1.752-2(b)(3)(ii)(E).
57 Id. §1.752-2(b)(3)(ii)(D).
58 Id. §1.752-2(b)(3)(ii)(C).
59 Id. § 1.752–3(a)(3).
60 Id. §1.752-2(b)(3)(ii)(F); §1.752-2(f), Ex. 10-11.
61 Id. §1.752-2(f), Ex. 12.
62 Shea Homes, Inc. v. Comm’r, 142 T.C. No. 3 (2014).
63 26 U.S.C. § 460(e)(1)(A), (6)(A).
64 Id. at 44, 49, 72-73. In this case, once the 95% test was met, the developer reported “income

for that tax year from homes that had closed in escrow up to that date.” Id. at 28. See Treas.

Reg. § 1.460-1(c)(3)(i).
65 142 T.C. No. 3 at 72.
66 Id. at 49.
67 Id. at 76. Contrast Shea Homes with Howard Hughes Co., LLC v. Comm’r, 142 T.C. No. 20

(2014), where the developers did not construct residential dwelling units on the lots that they

sold. Accordingly, the Tax Court ruled that the developers did not enter into “home construction

contracts” within the meaning of I.R.C. Sec. 460(e), and the developers could not report gain and

loss from its sale contracts using the completed contract method of accounting.

                                                                                                                                                                                               

68 Treas. Reg. § 1.1366-2(a)(2)(i). Prior to the issuance of the 2014 IRS regulations, some courts

had concluded that an S corporation shareholder was not poorer, in a material sense, as the result

of a loan by the shareholder to the S corporation. Accordingly, they imposed an “actual

economic outlay” standard on S corporation shareholders, which prevented such shareholders

from having any basis in indebtedness that was created when such shareholders borrowed funds

from a related entity and then lent those funds to such S corporation. Oren v. Commissioner, 357

F.3d 854 (8th Cir. 2004), aff’g, T.C. Memo. 2002–172. However, the 2014 regulations remove

the “actual economic outlay” requirement in the case of such loans by S corporation

shareholders.
69 Treas. Reg. § 1.1366-2(a)(2)(ii).
70 Id.
71 S. Gorin, “Gorin's Business Succession Solutions Newsletter - Third Quarter 2014” (Nov. 19,

2014), available at

http://tcinstitute.com/rv/ff001b6a2c0e13d15fecbc826241be15565c3858/p=3879220
72 26 U.S.C. § 469(g)(1)(A); IRS Chief Counsel Memo No. 201415002 (Apr. 11, 2014).
73 26 U.S.C. § 108(b)(2)(F).
74 26 U.S.C. § 108(b)(4).
75 Rev. Proc. 2014-20, I.R.B. 2014-09 (Feb. 5, 2014). See B. Boyd, Real Estate Financing §
22.03[7][d] (Law Journal Press, 35th ed. 2014) regarding the election to reduce basis instead of

recognizing COD income.
76 Act of Dec. 19, 2014, Public Law 113-295, § 102, 128 Stat. 4010 (amending 26 U.S.C. §

108(a)(1)(E)).
77 26 U.S.C. § 108(h)(2).
78 Apr. 29, 2014 letter from Off. Of Chief Counsel of the IRS to Senator Boxer, No. 2014-0018.

See also Apr. 25, 2014 letter from Off. Of Chief Counsel of the IRS to Congressman Barber, No.

2014-0015 (regarding a home in Arizona).
79 Act of Dec. 19, 2014, Public Law 113-295, § 104, 128 Stat. 4010 (amending 26 U.S.C. §

163(h)(3)(E)(iv)(I)).

Have Your Cake and Eat it Too!
(Estate of Adell)i

By Lance S. Hall, ASA*

In a twisted morality tale involving questionable non-profit company practices, the
person getting fabulously wealthy from the non-profit wins!

Background

In 1999, STN.Com was formed with the sole purpose to “broadcast an urban religious
program channel” called “The Word Network” or “The Word.” The Word was also
incorporated in 1999 as “World Religious Relief.” The son of the decedent did not own
any shares in STN.Com or The Word. The Word was formed exclusively for charity and
“no part of its assets or net earnings could inure to the benefit of or be distributable to its
directors, officers, or other private persons.” The Word had two employees, the
decedent and his son. The Word signed an operating agreement with STN.Com to run
The Word. “The Word agreed to pay STN.Com a monthly programming fee equal to
‘the lesser of actual cost or ninety-five percent of net programming revenue received by
… [The Word] in a one month period.’ The parties agreed that the programming fee
would not exceed STN.Com’s ‘actual direct costs and allowable indirect costs.’” The
Word was the only client of STN.Com and STN.Com received 95 percent of its revenue
from The Word.

Because of the non-profit nature of The Word, it was able to sign up many prominent
inner-city clergy. Moreover, as the channel was focused on the urban market, Direct TV
was soon signed up to distribute its programming.

While the decedent was alive, he and his son each received only $50,000, annually, as
compensation from The Word. However, by 2006, the decedent was making over $7
million annually from STN.Com, while his son made over $1 million. Moreover,
expenses of STN.Com included loans to family members, high-end furnishings on a
condo, Bentleys, Rolls Royces, personal home expenses and legal expenses including
a legal settlement for a $6-million judgment against the son. Revenue and profitability of
STN.Com continued to grow after the date of death.

As a result of intra-family litigation over the estate of the decedent, sometime in 2010,
approximately four years after the date of death, the son formed International
Broadcasting (“IB”) as the sole owner and transferred all of the assets of STN.Com to IB
for no consideration. All but one STN.Com employees went to work for IB. The Word

signed a new operating agreement with IB, identical to the STN.Com agreement, and
STN.Com ceased operations.

The Taxpayer’s Valuation

The initial valuation firm hired by the estate determined that because of the strong
earnings of STN.Com, the Company should be valued using an income approach.
Based on discussions with Company management, the taxpayer’s expert produced a
forecast and utilized a discounted cash flow approach to value the Company. Some of
the adjustments to income made by the taxpayer’s expert was an adjustment to reflect
fair market salaries. To compensate for the risk of having only one client, the taxpayer’s
valuation expert added a 3-percent company risk adjustment. Overall, the weighted
average cost of capital discount rate was 20 percent.

Because the son was the driving force behind the success of STN.Com and did not own
shares in the Company or have an employment agreement or a non-compete
agreement, an adjustment was made. The taxpayer’s valuation expert determined that
an “economic charge” (ranging from 43.7 percent to 44.1 percent of revenue) must be
applied to the projections. This economic charge reflected the personal goodwill of the
son’s contribution to the success of the Company. As a result of these adjustments, the
taxpayer’s expert arrived at a value of $9.3 million. This value was used by the estate
for estate tax filing purposes.

Before trial, but after the dissolution of STN.Com and the transfer of its business to IB,
the taxpayer’s expert recognized that he had failed to consider correctly the agreement
between STN.Com and The Word. The agreement specifically stated that a monthly
programming fee paid to STN.Com would be equal to ‘the lesser of actual cost or
ninety-five percent of net programming revenue received by … [The Word] in a one
month period.” Also, the “parties [had] agreed that the programming fee would not
exceed STN.Com’s ‘actual direct costs and allowable indirect costs.’”

Because the actual costs of providing programming were substantially lower than the 95
percent of revenue received by the Company, STN.Com had been overcharging The
Word. Accordingly, the taxpayer’s expert argued that, if STN.Com were to correctly
follow the agreement with The Word, that an income approach is invalid and only a net
asset value approach is appropriate and, using that approach, lowered the fair market
value of STN.Com to $4.3 million from $9.3 million.

The IRS’s Valuation

The IRS’s valuation expert took the forecast used by the taxpayer’s expert and, like the
taxpayer’s expert, made adjustment for fair market salaries but, instead of applying an
“economic charge” to reflect the significant contributions of the son, the IRS’s valuation
expert doubled the son’s otherwise fair market salary. Interestingly, the IRS’s expert
also used a 25.5-percent discount rate which was substantially higher than the 20-
percent used by the taxpayer’s expert.
The Court’s Decision

In forming its decision, the Court recognized that STN.Com was receiving considerably
more from The Word than it was entitled to. However, the Court noted that such over-
payments continued after the date of death and there had not been an objection from
The Word. The Court further stated, “The biggest risk to profitability and STN.Com's
value was The Word's ability to choose a different uplink provider for any reason,
thereby terminating STN.Com's contract with its only customer. This risk, however, did
not make STN.Com unprofitable and could be accounted for by applying a company risk
adjustment.” As a result, the Court rejected the use of a net asset value approach and
approved the use of a discounted cash flow approach.

Regarding the adjustment to value to reflect the substantial contributions (i.e., personal
goodwill) of the son, the Court stated,

… [the son] did not transfer his goodwill to STN.Com through a covenant not to
compete or other agreement. [The son] was free to leave STN.Com and use his
relationships to directly compete against his previous employer. If [the son] quit,
STN.Com could not exclusively use the relationships that [the son] cultivated; thus,
the value of those relationships should not be attributed to STN.Com.

Accordingly, [the taxpayer’s expert] properly adjusted STN.Com's operating
expenses to include an economic charge of $8 million to $12 million [annually] for
[the son’s] personal goodwill at an amount high enough to account for the
significant value of [the son’s] relationships. [The IRS’s expert], on the other hand,
not only failed to apply an economic charge for [the son’s] personal goodwill but
also gave too low an estimate of acceptable compensation for [the son], i.e., $1.3
million in 2006. This was especially so because [the son] had stepped into the
position of [the decedent], who had previously made between over $2 million and
$7 million of compensation in each of the five years before his death.

Accordingly, the Court concluded that “the basis of the Court's review of all of the
valuation evidence, giving due regard to our observation at trial of the witnesses for both
parties and considering their testimony and the expert reports, the Court concludes that
the fair market value of the STN.Com stock owned by the estate on August 13, 2006,
was $9.3 million.”

Observations

In the old days, we considered “key-person risk” when the value derived for a company
might be negatively impacted from a possible departure of a key employee. With the
Court’s recent decision (June 5, 2014) in Bross Truckingii (which focused on the
personal goodwill of a non-shareholder) and, now, Estate of Adell, valuation
professionals need to consider how personal goodwill of the non-shareholders could
potentially affect the fair market value of a company. Historically, key-person-risk
discounts were small (typically below 15 percent). In Bross Trucking the discount was
one-hundred percent. In Adell, the after-tax “economic charge” discount ranged from
$24 million to $33 million, greatly exceeding the concluding value of $9.3 million.

While this is a great and, in many respects, a total win for the taxpayer, given the non-
profit goal of The Word, it is a case that leaves a bad taste in one’s mouth. Somehow, it
just does not feel right that the taxpayer’s son managed … to have his cake and eat it
too.

                                                           
i T.C. Memo. 2014-155 (August 4, 2014)
* Mr. Hall is a Managing Director of FMV Opinions, Inc., a national valuation and investment banking firm with
offices in New York, San Francisco, Irvine, and Dallas. Mr. Hall heads up FMV’s estate and gift tax valuation
practice. He may be reached at [email protected]. Additional information regarding FMV Opinions, Inc. can be
accessed at www.fmv.com.
ii Bross Trucking v. Commissioner – T.C. Memo. 2014-107 

State of the Union Surprise: President Targets Inherited Assets in Middle Class
Tax Reform; Family Owned Businesses Spared

After the American Taxpayer Relief Act of 2012, many in the estate planning community
thought that tax law dealing with estates and trusts was settled for some time. Advisors
to closely held and family owned businesses counselled clients on the impact of transfer
taxes on business operations. President Obama’s earlier budget proposals calling for a
higher rate and a lower exemption (among other changes) and the Republican support
for the repeal of the estate tax were seen by many as pro forma budgetary proposals.
But on January 17, 2015, President Obama released his tax relief proposal for middle
class families. Included in the plan are expanded child care, education, and retirement
tax benefits and other tax credits to support working families. To pay for these
provisions, the President proposes to:

 Eliminate the “stepped-up” basis rules in the Internal Revenue Code, treating
bequests and gifts as realization events subject to capital gains tax;

 Increase top capital gains and dividend tax rates; and
 Impose a fee on the liabilities of large U.S. financial firms.

This new proposal comes at the start of a new legislative session, with both the House
and Senate controlled by Republicans unlikely to give such a plan any room on the
agenda. While passage of the proposal is not expected in the current Congress, the
proposal demonstrates that family and closely held businesses continue to hold favor
with the President and legislators. Recognizing the importance small businesses play in
the economic and political landscape, the President included measures that would
lessen the impact the proposed new tax would have on them.

Deconstructing the Trust Fund Loophole

The White House fact sheet describes Internal Revenue Code section 1014 as the
“trust fund loophole” and goes on to suggest that it may be “the largest single loophole
in the entire individual income tax code.” This Code section provides that “the basis of
property in the hands of a person acquiring the property from a decedent or to whom
the property passed from a decedent…be the fair market value of the property at the
date of the decedent’s death…” The basis of an appreciated asset is said to be
“stepped-up” at death.

The fact sheet describes a situation where a person inherits stock worth $50 million.
Working with that example, if at a mother’s death she passes that stock in a closely held
business to her daughter, the daughter’s basis in the stock will be $50 million. Under
current law, if the daughter immediately sells the family business no capital gains tax
will be paid because the basis was stepped-up at the mother’s death. The fact sheet
fails to point out that the estate of the mother would pay somewhere between $15.6
million and $20 million in federal estate tax at a 40% rate, depending on the availability
of the deceased mother’s unified credit against estate tax available. And in any one of
19 states (and the District of Columbia), the mother’s estate would owe state estate tax

as well. Under President Obama’s proposal, the mother’s death would not only trigger
the payment of estate tax, but it would be a realization event giving rise to possible
capital gains tax.

Revenue by Realization Event

Under current law, capital gain is treated as income and taxed only when property is
disposed of or sold. The regulations under IRC section 1001 identify capital gain income
(or loss) as “the gain or loss from the conversion of property into cash, or from the
exchange of property for other property differing materially either in kind or extent.” Gifts
are not sales, and unless the transfer of stock is in fulfillment of a specific bequest or
dollar amount, transfers at death are not realization events. Under current law, no
capital gains tax is paid when those transfers occur.

In order to raise more revenue and to raise it immediately, the President’s proposal
must change this rule and treat the transfer of assets by gift or at death as realization
events. If the proposal alone eliminated the stepped-up basis regime, no capital gains
tax would be due until assets were sold. A stated goal for new regime would be to
unlock this capital. To unlock capital, and to raise revenue immediately, the capital
gains must be realized at the time of these transfers. And if transfers by gift and at
death are realization events, capital gains taxes would be owed on the appreciation –
the difference between the basis and the fair market value – at the time of the transfer,
regardless of whether the asset is in fact sold or exchanged.

The Administration’s proposal may also increase taxpayers’ exposure to state income
tax in those states that tax capital gains based on federal revenue.

Two provisions included in the fact sheet indicate that some relief would be available for
business owners. The release suggests that the transfer of “inherited small, family-
owned and operated businesses” would not be a realization event, or that no tax would
be due, unless and until the business was sold. This suggests that as long as business
owners keep the ownership in the family, the capital gains tax could continue to be
deferred. And separately, the release provides that “any closely-held business would
have the option to pay tax on gains over 15 years.” This loosely resembles the
provisions of Internal Revenue Code section 6166, providing for a period of deferral of
estate tax, for closely held business interests.

Increasing the Tax Rate

Having restored the tax on earned income to higher rates, this proposal seeks to do the
same for tax on on capital gains. In addition to imposing the capital gains tax on these
transfers, the President proposes to increase the total top capital gains and dividend tax
rate to 28 percent.

Middle Class Protection

The President intends this proposal to target “those at the top” and provides exemptions
that are designed to benefit middle-class taxpayers.

 The fact sheet implies that transfers between spouses would be exempt from the
realization treatment. Like the marital deduction eligible for gifts or transfers at
death, this exemption would effectively defer the payment of capital gains tax
until the death of second spouse unless the asset is sold in the interim.

 The fact sheet states that gifts at death of appreciated assets to charity would be
exempt from this capital gains tax.

 Each married couple would be allowed to transfer up to $200,000 of capital gains
($100,000 for an individual taxpayer) free of capital gains tax. The exemption is
described as automatically portable between spouses.

 In addition to the basic exemption (described above), each married couple would
have an additional $500,000 exemption for personal residences (or $250,000 for
an individual taxpayer).

 Tangible personal property (other than “expensive artwork and similar
collectibles”) would be exempt from capital gains tax, freeing families from the
burden and expense of creating inventories and appraisals for income tax
purposes.

 Tax on inherited family owned and operated businesses would not be due unless
the business was sold, and closely-held businesses would have the option to
defer tax on capital gains over time.

Continuing the example from above highlights the impact of this proposed rule on
taxpayers. The transfer at death, from mother to daughter, would be a realization event.
In addition to the estate tax paid by the mother’s estate, an estimated $11 million in
capital gains tax would be due at the time of transfer. If the closely held stock
transferred by the mother qualified as a “small, family-owned and operated business,”
no capital gains tax would be due unless and until the business was sold. And
otherwise, the tax may be eligible to be deferred and paid in installments. But if tax is
due, the proposal is unclear if the capital gains tax will be paid by estate of the mother
(or the transferor, if it had been a gift) or the daughter. No matter who pays, additional
tax will be due. This proposal resembles the current Canadian system of taxing capital
gains at the death of each decedent. Canada replaced its estate tax system, in part, by
enacting the system of taxing capital gain any time an asset is transferred (by gift, at
death, on sale, or upon removal from Canada) in 1971.

What’s Next for Taxpayers

The fact sheet released by the White House falls short of a detailed legislative proposal.
More details on how the plan would be implemented are expected when the budget
process starts in February, including more detail on the requirements for “small, family-

owned businesses” and “closely-held businesses” described in the proposal. What is
clear now, however, is that the proposal will face strong objection in the 114th Congress.

While it is unlikely to be part of any comprehensive tax reform, this proposal will join
other proposals from the Obama Administration, including limitations on grantor trusts
and a minimum term for GRATs, in the library from which ideas for raising revenue may
be drawn in the future. It will also form part of the tax reform debate for both Democrats
and Republicans headed into the 2016 election cycle.

Smartphones for Lawyers 4.0

By: Robert D. Steele and Tony Gjata

This is an update of Smartphones for Lawyers published in this column the past
three years. Once again, for the most part, change in the past year has been
incremental, not revolutionary. The significant change is in the data networks, not the
phones. The 3G platform, first introduced in 2002, is becoming obsolete as 4G LTE
dominates throughout the United States. All of the phones across all platforms
discussed here are 4G LTE network phones, with significantly improved download
speeds. For example, you can watch videos and live television programs on your
phone, but be sure to check your plan for data limits with regard to streaming radio,
television, and video usage.

We continue to focus on the three dominant platforms -- Apple’s IOS, Google’s
Android (usually referred to simply as “Droid”), and Blackberry, and the phones that run
on those platforms. The Apple phones that we discuss are the iPhone 6 and 6 Plus,
which have become the market leaders. We look at the BlackBerry Passport since it is
one of the few remaining phones with a physical keyboard, and the BlackBerry Z30,
which has a large touch screen. Lastly, we include the increasingly popular Droid
phones by Samsung -- the Galaxy S5 and the Galaxy Note 4.

2014 saw the introduction of the Apple iPhone 6 and 6 Plus. The iPhone 6 and 6
Plus are only modest improvements over the iPhone 5S in functionality, but they do
have significantly larger screens (especially the 6 Plus) for those valuing that attribute.
Due to its severely diminished presence, we will not discuss the iPhone 5 or 4S, or the
5C, which is not attractive to the business market.

In the Droid arena, the Samsung Galaxy S5 has replaced the Galaxy S4. Due to
its diminishing popularity, we have dropped from discussion the HTC Droid DNA and
have added the Samsung Galaxy Note 4. They are significant upgrades from prior
models.

There is no doubt that the advent of the smartphone, and now the overwhelming
presence of smartphones, has changed every day life for most Americans. This trend
continued unabated this past year. While all lawyers use smartphones as everybody
else does, there are a few aspects of smartphones that are particularly important in the
legal environment. For example, lawyers must be especially aware of the ability to lock
or wipe a phone’s data remotely if it should be lost or stolen. Clearly, email and
calendar functions are key for most lawyers. These and other features will be
examined.

The importance of smartphones in both law and society in general can be
summed up by the case decided by the Supreme Court of Queensland, Australia, In Re
Yu.1 In this remarkable case, the court decided that a document written by a decedent
on his iPhone which he intended to be his last will and testament would be treated as
such and admitted to probate. The court concluded, “I am therefore satisfied that the
deceased intended the document which he created on his iPhone to form his Will. I am
prepared to make the orders sought.”

For reference as a benchmark, we again report our firm’s usage. Our law firm
has more than 70 lawyers in three states. All are connected to our main email and word
processing servers in New York via smartphones, as is the technology staff and others.
As with many law firms, the lawyers are required to have smartphones for such access.
Although this is clearly not a scientific sample, we note that our firm this past year now
services only 14 BlackBerrys, but has 47 iPhones and 15 Droids.

Security is a key issue for all law firms. For firms that use the BlackBerry
Enterprise Server (BES), the BlackBerry has been the most secure of the smartphones,
since BES allows the firm to control and host all of the data transmitted. There are also
options that are new in the marketplace. BlackBerry Mobile Fusion is a universal device
service which provides administration and management options for iPhone and Android
devices.2 In addition, Good Technology Inc. has recently unveiled a BES-like server
platform, mobile device management, for securing non-BlackBerry smartphones.3 Also,

-2-

an IT administrator can issue a remote device wipe command from Microsoft Exchange.
Users can issue their own remote device wipe commands from the Microsoft Office
Outlook Web App user interface.4

The ABA has issued a formal ethics opinion on issues surrounding the
confidentiality of electronic communication and it should be kept in mind when
considering security options.5 For firms connecting BlackBerrys without BES, the
security is then dependent on your carrier, and is comparable to the connections
available with the iPhone and Droids not running the new Mobile Fusion or Good
Technology products. Until the technical and legal issues surrounding “cloud”
computing and storage are worked out, we urge lawyers to investigate a service closely
before storing any client or sensitive documents in the cloud, whether in iCloud or other
cloud based systems. The reality is that cloud storage – despite its mystical sounding
moniker -- is just someone else’s server not under your direct control.

A note in switching from a physical keyboard to one of the virtual keyboards – it
takes time to get used to the difference. It is significant. You must weigh this against
the advantages of the phones with virtual keyboards, whether it is the availability of well
over one million apps, the seamless integration with iTunes, or the ability to show high
definition quality video. It may well be worth the learning curve, but expect there to be a
transition. Note, of course, that the larger screens have larger keyboards, so make sure
that you give due consideration to the iPhone 6 Plus and the two Droids reported on
here, since they have the largest screens and keyboards.

Spell check is also very important for lawyers. The BlackBerry spell check
comes on after typing a message when you click Send. It then goes over each word it
does not recognize. The iPhone spell check works as you type. Be careful! It may put
out some strange results if you do not look back at what you have typed. Once you hit
Send, it is gone and there is no second chance. For more on this problem (and a good
laugh) see http://damnyouautocorrect.com/

-3-

Battery life on smartphones varies tremendously and there have been widely
reported complaints of short battery life for iPhones. This issue has been written about
extensively elsewhere and we will not cover this. Portable iPhone and Droid chargers
are that extend battery life up to 12 hours and can also be used as a case. Using your
smartphone as a mobile hot spot is an interesting feature. Enabling this feature and
paying the additional monthly fee enables your phone to act as a small Wi-Fi hotspot,
enabling other devices, such as an iPad or e-reader, to connect via Wi-Fi if they do not
have a cellular connection.

For this article, we examine the BlackBerry Passport and the BlackBerry Z30.
The iPhones and Droids all have full touch screens. The Galaxy S5 and Note 4 are
greatly improved over prior models and market share is growing. The Droid platform
(and the phones built around it) is clearly a significant force in the smartphone universe.
Once again, these are the Droids you’re looking for.

BlackBerry Passport and Z30

Blackberry clearly was the early leader in smartphones for business and lawyers, but
was overtaken several years ago by the flexibility and vast app library the other
platforms offer. BlackBerry simply cannot compete with the app array. The BlackBerry
physical keyboard is still an attraction to many, so we have included the Q10 in this
article. For large firms, control of the data and security via the BlackBerry Enterprise
Server remains a top priority.

Security – The BlackBerry Enterprise Server is excellent for securing the devices and,
wiping out information if the phone is lost. If a firm is small and does not have BES,
then consider McAfee WaveSecure, which can remotely track and lock a lost phone.

Microsoft Outlook – BlackBerrys integrate very easily with Microsoft Outlook data via
Microsoft Exchange, providing full access to email, contact, and calendar functions, and
almost immediate synchronization with the desktop data. Individual Contact groups
transfer to the BlackBerrys without any problem.

Applications – At the latest count, there were only 234,500 plus apps, clearly a
significant disadvantage compared to the iPhone or Droid.

-4-