Spring 2009 Issue

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By Emily Murphy, associate at Rudolph Friedmann LLP

Just months before leaving office, former President Bush signed the Emergency Economic Stabilization Act of 2008. The Act, more commonly referred to as the 700 Billion Dollar Bailout, was enacted in response to the global financial crisis of 2008 authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets. While a great deal of attention has been focused on the true bailout provisions of the Act, as well as its broad economic implications, relatively little attention has been given to the tax law changes affecting individual taxpayers, as well as many businesses – both large and small. Some of the most noteworthy tax changes are summarized below.

Personal Tax Changes

One-year “Patch” for the Alternative Minimum Tax (AMT) The first part of the patch grants expanded AMT exemption amounts for 2008. The 2008 AMT exemption amount for individuals is raised to $46,200 for singles, $69,950 for married couples filing jointly and $34,975 for married couples filing separately. The Act also modifies the way the AMT refundable credit is calculated, generally making it easier for individuals to utilize any AMT credit that is carried over from prior years. (These exemptions are phased out for higher-income taxpayers.)

The second part of the patch allows you to offset your AMT amount with designated personal tax credits, including a child tax credit (up to $1,000 per child), Hope Scholarship education tax credit (up to $1,800) and Lifetime Learning education tax credit (up to $2,000) and an adoption tax credit.

Mortgage Debt Forgiveness Legislation passed last year allows tax-free treatment for up to $2 million of forgiven mortgage debt on your primary residence. The Act extends this provision, which was set to expire, through 2012 (making the provision available for qualifying mortgage debt forgiveness transactions that occur in 2007-2012).

Lower Property Taxes Homeowners who don’t itemize their deductions can deduct up to $500 ($1,000 for joint taxpayers) of person property taxes in addition to the standard deduction. This is effective for 2008 and 2009.

Energy Tax Credits The Act extends and modifies the energy efficient property credit through 2016, and allows the credit to offset AMT liabilities. The Act also removes the $2,000 maximum limit on solar electric property. Two new types of equipment are added that would qualify for the credit: wind energy equipment will produce a tax credit worth 30% of the cost of the equipment, with a maximum credit of $4,000, and geothermal heat pumps would qualify for a credit worth 30% of the cost, with a maximum credit of $2,000.

Charitable Giving The Act extends, through 2009, a provision allowing taxpayers 70 1/2 or older to transfer as much as $100,000 a year directly from an IRA to charity without owing income taxes on the money. This transfer is counted toward the taxpayer’s required minimum distribution for the year.

State and Local Taxes The new legislation revives a provision allowing taxpayers who itemize to deduct their state and local sales taxes, instead of state and local income taxes. You have a choice on how to calculate the deduction: you can claim the actual amount of sales tax you paid, or you can deduct the amount shown in tables issued by the IRS. The provision is extended through 2009.

College Tuition Deduction The Act extends for 2008 and 2009 the deduction for up to $4,000 of college tuition and related fees. If you qualify, you need not itemize to benefit.

Educator Expense Deduction The deduction for up to $250 of personal expenditures by elementary and secondary-school educators to provide supplies for their schools was extended for 2008 and 2009.

Business Tax Changes

Research Tax Credit The new law extends the research tax credit to qualified expenses paid or incurred in 2008 and 2009. It also modifies the credit, increasing the alternative simplified credit while repealing the alternative incremental research credit.

Leasehold and Restaurant Improvements The Act extends for 2008 and 2009 the favorable 15-year straight-line depreciation provision for qualified leasehold and restaurant building improvements. Similarly, Congress authorized a 15-year straight-line depreciation for certain qualified retail improvements placed in service in 2009.

Charitable Contributions The Tax Code gives businesses enhanced deductions for contributions of food to charitable organizations, as well as contributions of books and computer equipment to qualifying schools. The new law extends these tax breaks through 2009.

S corp shareholders are also eligible for special tax treatment when making charitable contributions of qualifying property. The new law extends the special rule allowing S corp shareholders to take into account their pro-rata share of charitable deductions even if such deductions would exceed such shareholders’ adjusted basis in the S corp through 2009.

New Markets Tax Credit The new law extends the New Markets Tax Credit through 2009. This tax credit encourages taxpayers to invest in or make loans to small businesses in economically distressed areas.

Banks The Act allows favorable ordinary loss treatment for losses when eligible financial institutions sell certain Fannie Mae or Freddie Mac preferred shares.


Whether an employer-employee relationship ends on good terms or with acrimony, a common final act–the employee’s request for a reference for a new job–is increasingly leading to litigation.

From the former employer’s standpoint, it can be a case of damned if you do and damned if you don’t. A candid, negative response to the request can invite a suit by the former employee. A glowing recommendation that omits some serious shortcomings in the employee’s performance, or that declines to say anything about the employee except perhaps dates of employment, could result in litigation brought by the new employer, who would have preferred to be warned about a subpar employee. The prevalence of such disputes only figures to increase in the current economic downturn.

The growing dilemma is such that some employers are telling their employees from the outset that they will get no job reference–good, bad, or indifferent–when they leave. Under such a policy, inquiring prospective employers would get only the employment equivalent of “name, rank, and serial number.” Other employers are willing to give a reference, but only after they have in their files documents in which an employee consents to having prospective employers find out all there is to know, and waiving their right to sue over anything that is said in the reference.

The good news for businesses is that their exposure to liability to disgruntled former employees who requested references is constrained in most states by statute. These laws generally provide immunity to the givers of references, so long as their actions were not motivated by malice. Of course, former employees, perhaps hurting while in between jobs and inclined to blame former employers for their predicament, are quick to argue that a negative response to a reference request was malicious.

In one such case, a nurse sued her former supervisor for defamation when the supervisor responded to a request for a job reference by stating on a form, without elaboration, that the nurse had “unacceptable work practice habits.” A court ruled that the statement came within a statutory privilege or immunity for former employers’ communications to prospective employers concerning former employees, because it was information provided about a former employee’s work performance at the request of both the former employee and a placement agency.

Although the nurse made the general argument that the immunity was lost because the statement about her was made with malice, she was unable to back up that contention with factual evidence of ill will or spitefulness directed toward her. She argued, to no avail, that if the former employer considered her work habits to be acceptable enough not to fire her, then it was reasonable to infer that the later negative inference must have been motivated by malice.


No-Show Mover Must Make Mortgage Payments

A family hired a moving company to pack up their belongings in their home and move them to a new house in another state. The mover packed up everything, but failed to come back for the loading and moving. This was more than merely inconvenient, because the family’s sale of their old house was contingent upon delivery of a vacant house. When the purchasers arrived to find a house full of packed boxes, the sale fell through.

The family sued the moving company for breach of contract and negligence. Their attorney wrote to the mover demanding reimbursement for lost profits when the family had to regroup and find a new buyer, and for the additional mortgage payments, utilities, and taxes they had to pay during that time. The letter stated that it was not possible to give an exact dollar amount on the damages until the home was actually sold to a new buyer.

Under a federal law known as the Carmack Amendment and accompanying regulations, a carrier must issue a receipt or bill of lading, under which it may be liable for loss or injury to property if the claimant makes a timely claim for the payment of a specified or “determinable” amount of money. The Amendment preempts any state law claims such as the family had alleged in their lawsuit.

The mover argued without success that the family could not recover the mortgage payments and other forms of damages under the Carmack Amendment because the letter from the family’s attorney, lacking a dollar amount for the claimed damages, had not sought a “determinable” sum of money. A federal court ruled that valid claims against a carrier are “determinable,” not because they include some dollar amount, but because they provide enough information about the nature and extent of the carrier’s liability to allow the carrier to understand its potential exposure to liability. The attorney’s letter satisfied that requirement. Although a valid claim against a carrier will often include an estimate of the shipper’s damages along with enough factual information to inform the carrier of the basis for the claim, a dollar amount is not an absolute requirement under the Carmack Amendment.

Economic Loss Rule Bars Misrepresentation Claim

Where parties have entered into a contractual relationship and damage occurs occasioning merely economic losses, the economic loss rule bars the complaining party from asserting tort remedies and limits that person to the contract remedies that were bargained for and agreed upon. Economic losses are distinguished from physical harm or damage to property other than the defective property itself. The rationale for the rule is that parties to a contract should resolve disputes emanating from that contractual relationship under the legal remedy that is most appropriate and most in keeping with their expectations when they signed the contract.

After a couple purchased a home, they discovered that the home had some leaks in its roof, despite what they said were assurances given both verbally and in disclosure forms that the sellers had never had a problem with the roof. When the new owners experienced water damage to interior ceilings, walls, and flooring due to the leaky roof, they sued the sellers for negligent misrepresentation. That theory ran aground on the economic loss rule, notwithstanding an argument against its application. The buyers argued to no avail that the rule should not apply because the claim was not for damage to the leaky roof itself, but to the resulting damage inside the home.

The court declined to split up the house, figuratively speaking, for purposes of the economic loss rule. As the court put it, the buyers purchased a finished home from the sellers, not a collection of component parts. Both the roof and the other damaged parts of the house were under the umbrella of the sales contract. Accordingly, any assurances that had been given by the sellers had to be examined and evaluated through the agreement, not on tort principles.


Our law firm has always employed a full time runner/law clerk. Often it is only a summer job, but for some students it has been a job they worked at during the school year. Pictured on the right at a recent Celtics game, with the NBA trophy, are six of our former runners, (Jonathan Richard, Billy Rudolph, Michael Friedmann, Jon Friedmann, Bobby Rudolph and David Mael). Jon Friedmann’s career path, from runner to name partner in our firm, is a great success story. He held this esteemed position while he was a law student at Suffolk University. Some of the partners still ask Jon to go and get their lunch, but now he refuses.

Jon was recently successful in a lawsuit in front of the Bankruptcy Court. In a case in which an alleged creditor had made a claim against our client for monies owed, Jon moved for a directed finding after the close of the creditor’s case. The Court allowed Jon’s motion, and the claim was dismissed even before our client presented his side of the case. After the creditor appealed, the Bankruptcy Appellate Panel for the First Circuit upheld the lower court’s decision. Zachary Tuck assisted Jon at the Bankruptcy Court.