Header graphic for print

Wisconsin Business Law Blog

Providing in-depth discussions, thought, creative, and innovative insights on Business Law innovative insights

Feds Resort to 1789 Law to Stop Apple

Posted in Operating a Business, Other Legal Issues, Technology Related Topics

I read an article noted on the ABA Journal Weekly Newsletter entitled, “Feds say 1789 law requires Apple to help government get encrypted smartphone data.” I’ve always been a proponent of individual liberty (and privacy), and I wanted to see what the government was arguing to support its case that they are entitled to snoop on everything we say or do on our smartphones.

The above article cites two further articles, one from Ars Technica’s Law & Disorder, and the other from Wall Street journal’s Digits.

In essence, the government is saying that a court can order anyone to cooperate with the government to get at data the government needs to enforce laws. The 1789 law, as amended, now reads:

28 U.S. Code § 1651 – Writs

(a) The Supreme Court and all courts established by Act of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.

(b) An alternative writ or rule nisi may be issued by a justice or judge of a court which has jurisdiction.

The article points out that the real purpose may be to stop technology companies from making smartphones or other devices that the government cannot get into.

The comments following the blog are outstanding. As is usually the case, many say that if the government wins this case, the “bad guys” will be the only ones left with good encryption, and the rest of us well face constant government surveillance, harassment, arrest and prosecution for things that shouldn’t be anyone else’s business. While I agree, I’ll let you decide.

Dropbox Passwords Hacked

Posted in Business Formation, Business Litigation, Buying, Owning and Selling a Business, News and Recent Decisions, Operating a Business, Other Legal Issues, Technology Related Topics

We learned this morning about another data breach, this time relating to the widely used Cloud Service called Dropbox.

Steve Kovach, of BusinessInsider.com reported yesterday that over 7 million Dropbox passwords have been compromised.

After the Target, Home Depot and other recent breaches, this isn’t a big surprise. However, since many lawyers use dropbox to share confidential information with their clients, it may certainly startle many.

If you haven’t considered encrypting the messages you send, now may be the time.

We thank our friends at Abacus Data Systems, Inc. for getting us word of the above news!

Can I Crowdfund in Wisconsin Yet?

Posted in Business Formation, Operating a Business, Technology Related Topics

Wisconsin’s equity crowdfunding law, which was unanimously passed by the legislature and signed by Gov. Walker last November, officially took effect on June 1, 2014.  Wisconsin is one of 11 states that has “taken matters into its own hands” by passing its own crowdfunding laws while the federal rules are still pending.

President Obama signed the JOBS Act back in April of 2012, which was intended to make it easier for small businesses to raise capital.  One provision required the SEC to implement rules for a new crowdfunding exemption from the SEC requirements by the end of 2012.  Despite this requirement, no federal rules have been issued yet.

While securities law is normally a federal issue, the SEC has a longstanding “intrastate offering exemption” that allows companies to sell securities within their home state without registering the offering with the SEC.  States, like Wisconsin, have used this exemption to make their own crowdfunding laws ahead of the federal rules.  However, these state crowdfunding laws apply only to intrastate offerings.  This means that Wisconsin’s crowdfunding law can only permit companies formed in Wisconsin to solicit Wisconsin investors.  Interstate investments, such as an Illinois resident investing in a Wisconsin company, are still governed by federal law and thus are impermissible until the federal rules are released.

The SEC’s Compliance and Disclosure Interpretations from April 11, 2014 (“CDIs”) highlights some of the challenges of intrastate offerings.  For one, the intrastate exemption requires that securities are only offered and sold to in-state residents.  The CDIs note that it would likely be a violation of the intrastate exemption to use the company’s home website or social media sites, such as Facebook and Twitter, to advertise the offering, since these mediums will almost certainly reach residents of other states, and thus be an “offer” to an out-of-state resident.  Eliminating free modes of advertising such as Twitter and Facebook for intrastate offerings could lessen the appeal of crowdfunding until the federal rules are released (and thus interstate investments are permissible) since the primary purpose of crowdfunding is to eliminate the expense of raising capital.

So, at present, crowdfunding puts those who use it at high risk of violating laws until the SEC issues some additional rules.

This article was prepared with the help of Kelsey O’Gorman.

Easier Tax-Exempt Status: New IRS Form 1023-EZ

Posted in Business Formation, Operating a Business, Other Legal Issues, Tax

Good news for those of you starting new exempt organizations: the IRS just released a new form, called the 1023-EZ, which will make applying for tax-exempt status for some smaller organizations much easier.  The new form is only three pages long, compared to the lengthy 26 page standard 1023 form.  The simplified form will substantially reduce the legal expense of starting a 501(c)(3) and hopefully speed up the IRS approval process.

The IRS hopes that simplifying the approval process for smaller organizations will also reduce delays for larger organizations by freeing up more resources to review the lengthier applications.  Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months or longer.

The IRS estimates that as many as 70 percent of all applicants will qualify to use the new 1023-EZ.  Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

However, the new application processes is still not without complications.  For example, you will still have to decide whether your organization will be a public charity or private foundation.  Further, certain types of organizations, such as churches, are categorically excluded from using the new form, even if they are small in size.

Therefore, it is still important that you confer with an attorney who can help determine if you qualify to use the 1023-EZ and to help you make other important decisions related to your non-profit organization.  If you need assistance in this area, one of our business attorneys would be happy to assist you.

Thanks to our law clerk, Kelsey O’Gorman, who assisted in the post.

The Innocent Owner Defense: Wait! That’s My Car!

Posted in Buying, Owning and Selling a Business, Operating a Business, Other Legal Issues

One of my partners, Eric Raskopf, who practices criminal and traffic defense work, recently posted to his blog, On Legal Ground, an article about someone losing their car as a result of being stopped while involved in criminal activity. Before you say, “Wait, that’s never going to happen to me,” read about what your kids, or maybe your employees, friends or neighbors may unintentionally do to your property, when you are not adequately supervising. Enjoy the read!

Proposed Federal Legislation is Likely to Raise Legal Fees

Posted in Operating a Business, Tax

How is Washington going to raise legal fees? Quite simple: just raise the costs for lawyers to do business by raising taxes substantially on many law firms.

The Federal Government has two bills pending, each of which would require law firms with gross receipts in excess of $1 Million to report for tax purposes using the accrual method of accounting. Most such law firms currently report on a cash basis. Consequently, if passed, all such law firms would have to report as taxable income monies which were billed, but not yet received. That would have the effect of causing a large amount of taxes to be paid by all such firms, which essentially means that in order to continue to meet all their other expenses, including payroll, such firms would be left with one option: raise fees.

If you may be opposed to such action, please consider writing your Senators and Representatives, mentioning the Tax Reform Act of 2014 and Section 51 of a similar Senate draft bill.

What do Clients Feel about the NSA Evesdropping on Attorney-Client Phone Conversations?

Posted in Other Legal Issues

The American Bar Association’s annual technology conference was held in Chicago last week, and one session was entitled, “Tools for lawyers worried that NSA is eavesdropping on their confidential conversations.” While I think most of the conversations I hold with my clients would be pretty boring stuff for the NSA, there are a few occasions where a client consults with me as to whether certain behavior or actions may be construed as criminal in nature. When that happens, I believe both my client and I presume such conversations are protected as “attorney-client privilege.” But is that really true anymore?

The ABA session and article linked above point out that the law is so vague and changes from day to day, such that lawyers really are not certain what the law is.

I’d love to hear the thoughts of others on this topic, whether lawyers or clients. How do you feel about your government snooping? If you or your attorney took measures to stop such snooping, do you think it would make you even a larger target, giving the government the idea that you have “something to hide?”

I have to admit that the whole thing gives me the creeps. The past few years have seen an increased erosion of private citizen rights in this country. Is this just another one? When the President can broadcast to the nation that he doesn’t need to follow the law and in fact will make laws himself, does that thinking then extend to others in government who then want to control others, maybe those being you and me?

My biggest question is this: If government can snoop, then can they also plant incriminating evidence? I’m sure the answer is “yes.” If that’s the case, then no one is safe. What then makes this the land of the free? What makes this country any different than those other countries which deny human rights?

This is just too important to ignore. I think it is time to enter the conversation. Your comments would be greatly appreciated!

Obamacare’s New 3.8% Sales Tax on Real Estate

Posted in Buying, Owning and Selling a Business, Other Legal Issues, Real Estate, Tax

Starting in 2013, a new 3.8% federal tax, known as the “Medicare Tax,” may apply to some gains on the sale of real estate, including even sales of personal residences. However, this is not a general tax and there are some exceptions. It is best to know the rules and seek competent tax advice.

The tax is calculated upon the lesser of:

1.  Net investment income; or

2.  The amount modified adjusted gross income exceeds: $250,000 for married couples filing a joint return or surviving spouses, or $125,000 for a married individuals filing a separate returns. The excluded amount is $200,000 for all other taxpayers.

Married couples filing jointly may still exclude up to $500,000 and singles up to $250,000 of the gain on the sale of a personal residence, thereby avoiding the tax. Consequently, persons selling homes may be subject to the new tax if their gain: 1. exceeds the exempt amount ($250,000 for individuals, $500,000 for married couples) and 2. causes taxable income to increase above the $125,000/$250,000/$200,000 limit.

While I’m focusing on the sale of real estate in this short article, I want to point out that this tax applies to all investment income, including dividends and interest, as well as gains on the sales of many other things, including the sale of a business.

If you find yourself in such a situation, be sure to confer with your tax advisor.

When the Contract says, “It is all in the contract,” is it?

Posted in Operating a Business

The Wisconsin Bar Association has a number of different sections for its various members. One such section is the Business Law Section. This section puts out periodic newsletters. In the December, 2013, edition of the Business Law News, Attorneys James M. Ledvina and Brick N Murphy, both of the Law Firm of Conway, Olejniczak & Jerry, S.C., of Green Bay, tackled an interesting topic raised by an unpublished, but none-the-less important, Wisconsin Court of Appeals decision. This deals with what is commonly known as an “integration clause.”

In the case of C&M Hardware, LLC v. Ture Value Co., 2013 WI App 84, 348 Wis. 2nd 761, 833 N.W.2d 872 review denied, 2013 WI 87, 350 Wis.2d 727, 838 N.W.2d 635, the Court of Appeals looked at the issue of whether a contract clause which purports to say that the contract includes all matters between the parties, really does, thereby stopping a party from bringing in evidence outside the contract?

In this case, C&M alleged that provisions in the contract that said it was “the entire agreement” were not conspicuous nor did they specify the specific tort claims that C&M would be releasing if it signed such a contract. The Court of Appeals agreed with C&M.  As a result, Ledvina and Murphy suggest adding the following language to all such clauses:


While this is an unpublished opinion, and is only useable for argument sake, it still doesn’t make a lot of sense. Parties that sign contracts should read them. If they sign them, we should be able to rely on the fact that they did read them. If we even put in a paragraph that says, “this is the whole agreement,” we should all be able to rely on it. This decision basically says, you now have to provide a very visible paragraph that sets forth what someone is giving up if they sign a contact that says, “this is it.” Extend this further: maybe we need such a paragraph for each and every term of a contract. Maybe we should just get opinion letters from the other side indicating their clients have read and understand the contract. Isn’t that what they hired their lawyers for to begin with?

Thoughts on Final IRS Regs Re: Capitalization vs. Write-off

Posted in Operating a Business, Tax

One of my favorite legal publishers, Thomson-Reuters, to whom I subscribe to their newsletter, “Checkpoint,” recently released an extensive report entitled, “NAVIGATING THE FINAL REGS ON DEDUCTION VS. CAPITALIZATION OF TANGIBLE PROPERTY COSTS.” In it, they say:

The IRS recently issued long-awaited final regs providing guidance on the application of Code Sec. 162(a) and Code Sec. 263(a) to amounts paid to acquire, produce, or improve tangible property. There is much for businesses to be pleased with in the final regs. For example, a substantially revised and expanded de minimis safe harbor election—effectively a book-tax conformity election—will allow many businesses to currently deduct their outlays for lower-cost assets, materials, and supplies. Building owners will be able to use a new safe harbor election allowing a current deduction for routine maintenance. This Special report provides an overview of the most widely applicable rules in the new regs and how they are to be applied in practice.

As I see it, the important points in this report for all business and property owners to now consider are these:

1. I feel the current scheme about what gets included in a capitalized asset hasn’t changed much. What it takes to put it in service is what gets capitalized. The new regs do let us write off compensation and overhead incurred to do so. Per the report, “unless the expense qualifies as a material or supply, or the de minimis safe harbor election applies, a taxpayer must capitalize amounts paid to acquire or produce a unit of property (UOP), whether real or personal property, including leasehold improvement property.”

2. Repairs made to get something into service are to remain capitalized.

3. Costs that are “inherently facilitative” in getting something into service are also capitalized. They may fall into 11 categories: shipping, moving or appraising property, application fees, sales and transfer taxes, finder’s fees, architectural, engineering, environmental or inspection services related to specific properties, brokers’ or appraisers’ fees, and services provided by a qualified intermediary in a Code § 1031 exchange.

4. These rules general apply to tax years beginning on and after January 1, 2014.

5. The de minimus safe harbor election rules allow taxpayers to write off certain lower cost business assets that they expense for book purposes under a written policy. This is called a “book tax conformity election.” To be elgible, the UOP can’t cost more than $5,000 if a business has an Applicable Financial Statement (AFS) and $500, if not. Acceptable financial statements for purposes of the de minimis safe harbor election are:

(1) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (10-K or the Annual Statement to Shareholders).

(2) A certified audited financial statement accompanied by the report of an independent certified public accountant (or in the case of a foreign entity, by the report of a similarly qualified independent professional) that is used for:

(A) Credit purposes

(B) Reporting to shareholders, partners, or similar persons; or

(C) Any other substantial non-tax purpose

(3) A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency (other than the SEC or IRS). (Reg § 1.263(a)-1(f)(4))

Code Section 179 Rules still apply, though they are currently up in the air. Per the Thomson report:

Under Code Sec. 179, eligible taxpayers may deduct (in lieu of depreciation) the cost of most tangible personal property, and certain other property, used in the active conduct of a trade or business. For tax years beginning in 2013: (1) the dollar limitation on the expensing deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $2,000,000 (the investment ceiling). For tax years beginning after 2013, the maximum expensing limit is scheduled to drop to $25,000, and the investment ceiling is scheduled to drop to $200,000 (although Congress may not allow the expensing limit and investment ceiling limit to drop this drastically).

Making the election, while not complex, is daunting, considering all possible risks. Thomson continues:

The Reg § 1.263(a)-1(f) election, which is irrevocable, is made by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the tax year in which amounts eligible for the election are paid. The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer’s name, address, taxpayer identification number (TIN), and a statement that the taxpayer is making the de minimis safe harbor election under Reg § 1.263(a)-1(f).

Routine maintenance for building owners is also affected. Routine maintenance keeps the building in its “ordinarily efficient operating condition.” Activities are routine if they can, at the time the UOP is being placed into service, be expected to need to be done more than once in the 10 ensuing years. Routine maintenance for non-building UOP’s is designed to keep them in their “ordinarily efficient operating condition,” and examples include, inspection, cleaning, and testing; and the replacement of parts of the UOP with comparable and commercially available and reasonable replacement parts.

Expenses that are ineligible for the routine maintenance safe harbor include:

(1)    For a betterment

(2)    To replace a component

(3)    To restore damage to a UOP for which the taxpayer has taken a basis adjustment

(4)    To return a UOP to its former ordinarily efficient operating condition, if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;

(5)    To adapt a UOP to a new or different use

(6)    For repairs, maintenance, or improvement of network assets; or

(7)    For repairs, maintenance, or improvement of rotable and temporary spare parts to which the

taxpayer applies the optional method of accounting for rotable and temporary spare parts.

Finally, there is a per-building safe harbor election for qualifying small taxpayers, those with $10 Million or less average annual gross receipts in the past 3 years. Such taxpayers may elect not to treat as capitalized expenses, improvements made to an eligible building property, which is one with an unadjusted basis of $1 Million or less, if the total paid during the tax year for repairs, maintenance, improvements, and similar activities does not exceed the lesser of $10,000 or 2% of the building’s unadjusted basis.

I have highlighted just the main considerations of this new and promising set of regulations. See the Thomson Report for more details and be sure to get the advice of your qualified tax expert when attempting to deal with these new rules.