Friday, June 14, 2013

Decided case: Johnson v Johnson

Lillian R. Johnson, an elderly widow, sued her son, Randy L. Johnson, arising from a deed that was prepared in 2005.

Lillian owned a 100-acre family farm in Delta County, Michigan. In April 2004, she secured a mortgage on five acres of the parcel as collateral for a loan to provide funds for Randy to construct a barn. Because that improvement increased the value of her farm, resulting in higher property taxes, Lillian wished to take steps to remedy the situation.

She and her son traveled to a lawyer’s office (without an appointment) to speak with an attorney. Lillian testified:
  • The purpose of the consultation was to prepare a deed conveying the five acres to Randy
  • She did not go in to see the lawyer, but waited in the car while Randy spoke to the lawyer.
  • The lawyer prepared a deed.
  • A legal secretary came out to the car to obtain her signature and to notarize it.
There apparently was no evidence that there was any discussion between Lillian and Randy about the deed or the import of what she was signing. It turned out that the deed that was prepared conveyed the entirety of the 100-acre farm to Randy, while reserving a life estate to Lillian. (The interest conveyed to Randy is legally called a "remainder.") It also appears uncontested that the lawyer told Randy that the transaction would have the greatest flexibility if the deed were not recorded until after Lillian passed away.

The opinion relates that the deed remained in Lillian’s safe for some period of time. She asserted that Randy thereafter removed the deed from her safe without her permission. It was recorded in March 2006. Lillian learned in 2009 that she no longer held the fee interest in the farm, but rather held only a life estate.

She filed a quiet title action in the circuit court. The claims raised included fraud, unconscionability, and lack of delivery of the deed. Under Michigan law, a deed must be “delivered” to the grantee in order to become effective.

The Court of Appeals agreed with the trial court that delivery requires more than having the deed in the grantee’s hands. It cited a number of earlier Michigan cases that establish that the purpose of the requirement of delivery is to demonstrate an intent by the grantor to convey the property, to “perfect the transaction.” The Court noted that the fact that Lillian continued to manage the property and continued to pay all of the expenses, as well as the fact that she had included it in her will, were evidence of a lack of intent to make a present conveyance of the remainder interest at the time that the deed was signed or thereafter.

The Court of Appeals held that the trial court had failed to consider the recognized principle that recording a deed gives rise to a presumption of delivery. With such a presumption, Lillian would have the burden of proving that there was no intent of delivery. The Court of Appeals remanded the case to the trial court for a further hearing on that issue.

Lessons to be learned from this case include:
  • Preparing a deed but instructing the client not to record it is a strategy that is fraught with peril.
  • Even if it could be shown that the son's later steps to obtain the deed and to record it were done without the permission of the mother, the presumption in favor of delivery still applied and made it more difficult to enforce the transaction as intended.
  • Whether or not he is regarded as representing the grantor, a lawyer who is requested to prepare a deed to convey land from a grantor to a grantee should at the very least speak with the grantor to ensure that the deed as written accomplishes the result that she wants to achieve.

Johnson v Johnson, unreported decision
Michigan Court of Appeals, May 28, 2013

Sunday, June 9, 2013

The ACA and the tax penalty

On February 1, 2013, the Internal Revenue Service released a proposed regulation and sought comments. 78 FR 7314. The subject is how to calculate the penalty under the Affordable Care Act for not purchasing health insurance for a taxpayer or for any of his dependents.

The proposed rule confusingly refers to the penalty to be paid as the taxpayer's "shared responsibility payment." The terminology becomes muddled because the amount that an employer is required to pay, if it does not provide health coverage, is also called its "shared responsibility payment." See this IRS page for information about that requirement.

The French word for puzzle is "casse-tete," literally "headbreaker." That phrase would apply to this proposed regulation. The proposal is dense and impenetrable, the calculations are complex, and following tradition for the IRS, the proposal is filled with confusing jargon and newly manufactured phrases:

- flat dollar amount
- excess income amount
- applicable dollar amount
and, of course,
- shared responsibility payment (SRP)

(To be fair, at least two of these phrases were created and filled out in the Affordable Care Act. Blame Congress, not the IRS.)

To comply with the requirements and to calculate the SRP, the taxpayer must separately determine, for each month of the year and for each member of his family,
  • whether that person has proper medical coverage
  • whether that person is exempt from the requirement
  • whether health coverage is available to that person
  • what the cost to the family would be to buy health coverage for that person, and
  • whether that cost would exceed 8% of the total family income
For each member of the family, for each month in the year for which (1) he or she has no coverage and (2) he or she does not meet an exemption, the taxpayer will have to calculate what the monthly penalty amount would be. At the end of the year, he will need to determine how many months it would apply, and pay the corresponding amount with his Federal income tax return.

For a single person with steady employment and income, the calculation may not be too difficult. For spouses filing jointly, each of them is regarded as the taxpayer and they bear this responsibility jointly. For a single parent or a couple with children, the calculation can end up being extremely complex, particularly when household income changes based on different events.

The statute and the proposed regulations require that these determinations be made from month to month. This means that the calculations will need to be redone if conditions change from one month to the next:
  • if there are new additions to the family
  • if a child moves out
  • if a child moves back in
  • if anyone takes on a new job, loses a job, or otherwise experiences a change in income
  • if a child living with his parents takes on a summer job
  • if employer-provided health insurance is offered, withdrawn, or the cost to the employee changes
  • if the cost of commercially-available health insurance changes
One of the possible difficulties with the proposal is the fact that the drafters appear to assume that, for each individual in the family, spending up to 8% of the total household income on health insurance is "affordable." This may be true for very small families. The larger the family gets, the more untrue that assumption becomes.

Family size        "Affordable" figure
1                          8%
3                          24%
6                          48%
8                          64%
10                        80%
12                        96%


(It should be noted, though, that the examples that are provided include one which suggests that a different calculation methodology would apply - the employee's 8% is to be compared, for self-only coverage, and then the cost of insuring the rest of the family is considered together and compared to the household income.)

We have posted a document which displays some of the calculations that would be involved in applying the proposed regulation. This will provide an appreciation for how dense and difficult the proposal is.

One thing that we can predict: beginning in 2015, when the taxes for the tax year 2014 are going to be figured, many more Americans will find the need to have their documents done by a professional tax preparer.