Clients involved in litigation want to be sure that their attorneys are representing their best interests and have no conflicting loyalties. Thus clients are understandably uneasy if their attorney and opposing counsel are too friendly. Clients have an image—reinforced by television and movies–of attorneys as a part of a “good old boys and girls” club—socializing together and swapping stories about clients. An attorney is obligated to have absolute loyalty to his or her client, and clients are often understandably anxious that friendship with opposing counsel might get in the way of that unequivocal obligation. Yet it is in clients’ best interest that opposing counsel maintain a relationship of trust. Without trust between attorneys, litigation becomes more contentious, time consuming and costly. During litigation there are countless issues that could be disputed or agreed upon—some that are important to the outcome of a case, but most that are not. For example, if an attorney asks for a postponement of a status conference because of a conflict with his or her schedule, opposing counsel should be able to trust the other attorney’s representation about the scheduling conflict, and consent to the postponement. Otherwise, time—and attorneys fees–will be spent objecting to the postponement, which will likely be granted anyway. Personal animosity toward another attorney, no matter how much it may seem justified, never helps the client or the client’s case. For example, if an attorney is obstructionist every step of the way in litigation, it does little good to be obstructionist in response. Objections from opposing counsel to requests for postponements, for example, should not be met with an attorney’s own objections to their requests for postponements, unless the objections are fully justified. The temptation is often great to respond in kind, but attorneys have a greater loyalty to a client’s best interest, which includes minimizing litigation costs and unnecessary disputes. Moreover, judges have little tolerance for disputes between attorneys. It does not help a client’s case if the judge perceives there is a personal conflict between attorneys. And, as much as an attorney would wish a judge would reprimand opposing counsel for bad behavior, it will rarely, if ever, happen. Judges consider such claims as unnecessary distractions, and often assume that either the accuser is, or at best, both attorneys are, at fault when there is a issue brought up before the court about another attorney’s misconduct. Thus lawyers who litigate must not only set aside personal animosities towards opposing counsel, but also actively attempt to be cordial and accommodating. That does not conflict with an attorney’s zealous representation of his or her client; it is in harmony with representing a client’s best interest.

15 V.S.A. Section 664 defines legal parental rights and responsibilities as follows:

“ ’Legal responsibility’ means the rights and responsibilities to determine and control various matters affecting a child’s welfare and upbringing, other than routine daily care and control of the child. These matters include but are not limited to education, medical and dental care, religion and travel arrangements.”

This statue went into effect in 1985.  Prior to that, one parent or the other was awarded sole “custody” with no distinction between legal and physical parental rights.   So when the provision was first put into the Vermont statutes,  parties often agreed that one parent would have sole physical parental rights and responsibilities, and the parties would enjoy joint legal parental rights and responsibilities.  It seemed like a good way for  parents to feel as if they had a say in their children’s lives, and the agreement of the  parent who had sole physical parenatal rights to share legal responsibilities often resulted in settlement of contested custody cases.

Joint legal parental rights and responsibilities has proven to be problematic, however if the parents disagree regarding any legal issues involving their children.  If a parent has sole legal rights and responsibilities, that parent can make any decision about his or her children’s school, medical care, or religion without input from the other parent.  While this can cause friction, it does not result in court intervention, because the noncustodial parent has no legal rights in this area.

On the other hand, parents who enjoy joint legal parental rights and responsibilities and who disagree about a legal issue involving their children have no recourse except to go to court.  Moreover, the rules require mediation prior to filing any motions with the court, which often delays decisions on vital legal issues.  In the most common example,  parents who disagree as to where their children should go to school often are delayed for months while they go through a mediation process, and then have to wait for a court hearing date, then a decision from the court after the hearing is concluded.  This process often results in no decision until after the school year starts, resulting in a chaotic and stressful situation for the family.

Children with special needs or talents are often the victims of this system, as parents disagree on whether and what kind of special schooling should be put in place to meet the children’s needs.  And the agreement to share legal rights and responsibilities is often made without much thought about issues like this which may arise in the future.

In my experience, some of the most contentious court hearings have been between parents who share legal parental rights and responsibilities, and are disputing how a child is educated.

Finally, disagreeing about a legal issue involving children is often not considered by the courts to meet the “ substantial unanticipated material change in circumstances”  that would allow the court to modify joint legal parental rights and order  sole legal parental rights to one parent.   The court must find that the disagreement between the parties is a “substantial unanticipated” change in the way the parents have historically interacted with each other, and if their disagreement over schooling is merely a continuation of ongoing disputes the parents have had, then the court will likely conclude that there is not a change in circumstances.  In addtion, if the parties are continuing to agree in other aspects of their children’s lives, then the court will likely conclude that there is no need for change in joint legal parental rights and responsibilities.

So, if parents agree to joint legal parental rights and responsibilities, then they will likely have to live with that decision during their children’s minority, and risk having the court making major decisions about their children’s education, medical care, and other legal issues.

There are some ways to mitigate the risks of disagreements between parents who enjoy joint legal parental rights.  First, the parties can agree that legal rights be apportioned to one parent or the other.  For example, one parent may retain sole legal rights to determine their children’s education,  but the parties may agree to joint legal rights to all other issues concerning their children.  Parties can agree to even more detailed detailed decisionmaking scenarios, such as one parent having sole decisions over certain school activities, or agreeing to certain travel restrictions. Second, parents may enjoy joint legal responsibilties, but if there is a disagreement, one parent would make the final decision–either about all legal decisions, or about one in particular, such as education.   This suggestion was made recently during mediation by mediator and  Attorney Brice Simon, of Breton & Simon  .  Hats off to Brice for the creative solution.

Mediation can also be helpful, if the parties have a skilled mediator, and both are willing to work out a solution.  Mediation should be set up as early as possible, however, since many of these decisions, such as schooling, are time sensitive, and parents should not be rushed into making a hasty decision.   In addition, the parents should be prepared to present at mediation all the facts about their proposal, including information about the proposed school, medical or mental health  treatment, or travel arrangements.  It is respectful to the other parent if you have factual information to present, and that in turn will facilitate agreement.

In conclusion, joint legal parental rights and responsibilities can work if parents can work together to resolve their differences.  However, parents should be thinking carefully about the risks of sharing legal parental rights, and carefully fashion an agreement that will reduce the risk of court involvement if the parties disagree, while retaining as much joint decisionmaking as possible.

What is the difference between enforcement of Vermont Family Court orders and those in New Hampshire?  Let’s look  at the rules.   Vermont Family Rule 16 provides that a court can initiate contempt proceedings on its own motion or by motion of a party.  In my 33 years of practice, I have never seen a Vermont court issue a civil contempt proceeding on its own motion. Courts are reluctant to do so because they must not only be impartial, but they must also seem to be impartial to the parties in court.  A judge who issues a contempt citation on its own motion necessarily will seem not to be impartial to the litigant who is the subject of the contempt.

Rule 16 also provides that if a litigant files a motion for contempt, it must be accompanied by an affidavit, and the motion and affidavit, along with the notice of hearing, must be served by sheriff (or by certified mail, if the case involves minor children).  Rule 16 provides that alleged contemnor has at least 15 days to respond prior to a hearing.  This rule applies in both ongoing cases, and in closed cases.

Rule 16 also provides as follows: ”The court shall issue an order initiating a proceeding only if the alleged contempt, if proven, would be a clear and substantial violation of a previous order of the court.”   Emphasis added.

Thus the rule not only requires  costly service of process of the motion on the violator, but also requires a high bar for the victim to prove contempt -and allows judicial  discretion on what is  a “clear and substantial”. violation.  As a practical matter, then, the person who is the victim of an opposing party’s defiance bears a heavy burden to bring before the court the violation and prove that the violation is clear and substantial.    Here is where I believe the Vermont rule needs to be changed.   The victim of the violation should not have such a heavy burden to prove that the alleged contemnor violated the order.  Why? Two reasons:  First, because as the survey respondents indicated,  the public believes that following court orders is of the highest priority, and shifting the burden to violators would send a message that the courts take violations of court orders seriously.  Second, when courts are reluctant to enforce orders, victims of violations of court orders must police the violators themselves, compromise their positions, or simply allow the violation to continue because of the expense and uncertainty of filing motions for contempt.  Litigants should not be put in that position.

New Hampshire’s   Family court contempt rule has less onerous procedures than Vermont’s.   Both allow punishment only after an opportunity to be heard, and require motions and affidavits in any post judgment proceeding.   However, if there is an ongoing proceeding, a New Hampshire litigant  need only file a motion with no affidavit, and service need only be by first class mail.  There is no provision for a period of time for the alleged contemnor to answer.

Substantively, there is also a large difference between the rules concerning a finding of contempt.  New Hampshire’s enforcement and contempt rule provides that the court may find a litigant in contempt  ”upon a finding of the violation of any Court order”.  Thus the litigant need not prove a “clear and substantial violation”, as he or she must in Vermont;  merely that the order has been violated.

New Hampshire’s rule makes more sense.  First, if litigants are in the middle of divorce or other family law proceedings, any motion may be filed without an affidavit and served by first class mail in either state–except for a motion for contempt in Vermont.  To require  an affidavit and service for contempt motions as if the case were just starting adds an unnecessary burden on the victim of the violation, and provides no added protection for the violator.  Second, New Hampshire’s standard for a finding of contempt comports with how the public feels about violations of court orders.   Americans believe strongly that court orders should be strictly enforced.  After all, as one client said to me, if a court won’t enforce its own orders, who will?

Litigants in Vermont Family Court who are the victims of a violator of court orders deserve to have their orders enforced and to have the violator punished,  without having to shoulder the heavy  burdens  imposed by Vermont Family Rule 16.

In a contested hearing held in Vermont Family Court, Mother and Father each request sole parental rights and responsibilities of their minor children.

 Mother brings with her pictures of Father partying, drinking, and in compromising poses with the opposite sex, along with comments about how much he enjoys his night life, all posted on Facebook.

 Father is appalled, first because he doesn’t know how Mother got those pictures, and second because he is afraid that they will negatively impact his case for custody of his children. He had never “friended” Mother on Facebook; so he thought he was safe.

 This scenario is being played out more and more in the courts. Facebook has taken on an important role in many disputes, and lawyers have found Facebook postings can contain information that is useful in a court proceeding.

 For those of you involved in divorce or parentage proceedings regarding parental rights, you can be rest assured that your mutual friends and your relatives—many of whom are your “friends” on Facebook, have taken sides, and some will inevitably take the other parent’s side in any custody dispute.

 In addition, those “friends” who have taken the other parent’s side will be eager to let the other parent know about  your postings on Facebook, especially the ones that make you look like a bad parent.

 The first lesson is, then, for any litigant:  imagine the item you are posting being presented as an exhibit in court—because if it is online, it will likely be easily accessible by your courtroom opponent.  If you would be embarrassed to have a judge see what you are about to put online, do not click “post”.

 Father’s second concern—the impact of the Facebook pictures and commentary on his case—turned out to be groundless. Why? Because under Vermont law, what your nightlife is like is not admissible in evidence unless it impacts your children.

 Title 15, section 667 (a) provides as follows:

 ” Evidence of conduct of a parent not related to the [parental rights and responsibilities] factors in section 665 of this title shall only be admissible for the purposes of determining parental rights and responsibilities if it is shown that the conduct affects the parent’s relationship with the child.”

 Thus if a parent goes out partying, that evidence will only be admissible if it can be shown that the children are neglected or otherwise adversely impacted as a result.

 Facebook and other online social networks can be dangerous for any litigant.  However, if the information is only about a person’s social life not related to the care of their children, the information will not be admissible in any custody action in Vermont.

The Dram Shop Act is a statute prohibiting the sale or furnishing of intoxicating liquors to minors, to persons apparently under the influence of intoxicating liquor, to a person after legal serving hours or to a person who :it would be reasonable to expect would be under the influence as a result of the amount of liquor already served or to that person.   Typically, the Dram Shop Act is applied to bars and restaurants that are caught either over serving patrons or serving alcohol to those under the age of 21.  But the statute provides a civil cause of action to persons who are injured as a consequence of someone else being intoxicated against the person who “have caused in whole or part such intoxication by selling or furnishing intoxicating liquor.”  The statute specifically excludes social hosts so long as they are not furnishing liquor for compensation or profit.  But (and this is a very important “but” to consider)  the Dram Shop Act does impose liability on a social host who “knowingly furnishes intoxicating liquor to a minor if the host knew, or should have known under the circumstances, that the person receiving the liquor was a minor.” The liability of a social host is not limited to just personal injuries caused by an intoxicated teen.  Under the Dram Shop Act social host liability extends also to property damage and injury to someone’s “means of support.”

“Furnishing” under the Dram Shop Act (and under the common law) requires that the host had actual possession or control or otherwise took some affirmative act- such as purchasing- in providing the liquor to the guest. In an unreported case the Vermont Supreme Court affirmed the dismissal of a case in which the guest brought his own beer to a party, got drunk, and later caused a car accident that resulted in serious injuries to his passenger. Because the host had not supplied the beer to the guest it could not be said that the host had the “control” necessary to hold the host liable for the injuries caused by the guest’s intoxication. 

Because the liability of social hosts is significantly limited under the Dram Shop Act, persons injured by others who are intoxicated will frequently bring a claim against the social host under the common law theory of “negligence.” To prove a negligence claim of any sort, there must first be a legally recognized duty  of the defendant to conform to a certain standard of conduct so as to protect the plaintiff from an unreasonable risk of harm.  A defendant  who fails to live up to that duty is said to be “negligent.”

In 1986 the Vermont Supreme Court ruled that social hosts do not owe a “duty” toward intoxicated adults.  In the case of Langle v. Kurkul the plaintiff was a social guest who became inebriated at a party, left the party and went to someone else’s house where he climbed a swimming pool railing with the intent of diving into the pool.  The railing broke, he fell headfirst into the pool, broke his neck and became a quadriplegic.  The guest then sued the host of the party claiming that the host was negligent in allowing a party guest to become intoxicated. The Superior Court granted the hosts motion to dismiss which asserted that the guest had failed to state a legal cause of action against the host, and the guest appealed.

The Supreme Court reasoned that while drunkenness, in itself, is a social problem, there was no compelling social policy reason that justified imposing responsibility on a social host for injuries the drunk caused to himself. However, the Court -looking to other jurisdictions- found that the common law did indeed recognize a duty of social hosts to third parties, but in limited circumstances.  Where it was (or should have been) foreseeable that an intoxicated guest would drive an automobile when leaving the party the social host could be held liable for injuries the drunk caused to others.  (While this issue was not integral to the case actually being decided, subsequent cases confirmed that in Vermont a social host can be held liable under such circumstances.) The “take away” is that social hosts need to make sure that drunk drivers are not leaving their party. If a drunk driver leaves your party and winds up harming someone else, you can be responsible.  This is true even if the drunk goes to another party before getting into an accident- you will be in the chain of people who are sued.  The question will come down to whether you knew, or should have known in light of the circumstances, that the individual was intoxicated when they drove off.

In the same case the Vermont Supreme Court recognized a common law duty of social hosts to third parties for harm caused by underage drinkers where the host either furnished the alcohol or had reason to know that underage drinking was going on. Allowing underage drinking to take place at your holiday festivities is illegal and can in serious fines and even jail time. It can also result in your being sued for harm caused by an intoxicated teenager even if that teenager wasn’t driving when he/she harmed a third party.  Although there are no such recorded cases in Vermont, there are cases in other jurisdictions where social hosts are found liable for intoxicated teenagers who leave the premises, get into a fight and hurt someone else. (And as noted earlier, a social host can be liable under the Dram Shop Act when the harm caused is damage to property.)

The duty of social hosts  generally doesn’t extend to the homeowner whose house is used for an underage party while the homeowner is away. In cases involving underage drinking out of sight of adults the courts will look to what the owner of the property could have reasonably foreseen. Where the party takes place with the property owner having no knowledge of the party and/or underage drinking, liability will not be imposed. In the case of Knight v. Rower the Vermont Supreme Court rejected the imposition of liability for injuries resulting from underage drinking on the individuals who owned the property where the drinking took place.  The owners of the property (a camp) were not present at the party, had no knowledge that a party was taking place on that particular date, and in no way “furnished” or otherwise controlled the alcohol the teens drank.  At best the property owners were aware that underage drinking had occurred at the property occasionally in the past.  This was not enough to establish that the owners had been negligent on the date in question.

At the other end of the spectrum, however, is the situation where the parent buys a keg of beer for the party and then leaves for the weekend.  Imposition of liability is much more certain in this case.  Falling in between are those cases where the owner perhaps had allowed underage drinking at the home while the owner was there, or where the owner knew that the property- used for underage drinking in the past- was going to be the sight of another party on a particular date.  Each of these factors suggest that it was reasonably foreseeable to the owner that underage drinking was likely to take place on the property.  If the owner knew the teens were regularly raiding the liquor cabinet, but did nothing to stop it, liability will likely be imposed on the owner even if the owner wasn’t home when the party took place.

The holidays should be a time of relaxing with friends and family. But enabling or otherwise allowing underage drinking is clearly a risky business that should be avoided at all costs (during the holidays and at any other time of year.)  Likewise, drunk driving is an activity that should be avoided and, where possible prevented.  A little common sense- and an understanding of your legal obligations as the party host- will keep the happy in your Happy Holidays!

 As new businesses begin to produce products and services, and old businesses produce new products or services, they should consider registering the trademarks or service marks (“marks”) associated with them.

Both trademarks and service marks can be registered at the federal level. Only goods – not services – can be registered at the state level in Vermont (Title 9, Ch. 71 of Vermont Statutes Annotated).   Federally registered marks are protected throughout the United States – state registered marks are only protected in Vermont.

What is a trademark or service mark?

According to the U.S. Patent and Trademark Office, “A trademark is a word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others.”

A trademark can take many forms which identify and distinguish specific goods or services. These include letters and words, logos, pictures, slogans, colors, distinctive product shapes; sounds, or a combination of the above.

As stated on the Vermont Secretary of State’s website, “Trademark is different from a business or trade name. The mark identifies the goods; the name identifies the entity which does business, such as selling the goods.”

How do you establish a trademark?

One approach is to establish use in the market and notice your claim to a mark by the use of the “™” symbol and other notices.  Another approach is to directly register the mark with Vermont Secretary of State, or the U.S. Patent and Trademark Office to establish “first use.”

Why register?

For the consumer,  trademarks make it easier for them to identify the source of a product.  For the businessperson,  a trademark protects against the unauthorized use of a confusingly similar mark. While, as indicated above, you do not need register a mark to establish its use in the marketplace, it is generally better practice to register your mark, particularly if you plan to use it extensively and for a long period of time.  In addition, registering the mark will ensure that your mark is not infringing on other owner’s marks.  As part of the registration process, the USPTO researches to make sure the trademark being registered is not currently in use.

How does the public recognize your trademark or service mark?

A trademark or service mark is identified by the use of the “™” trademark symbol on goods, or the “^SM” service mark symbol when applied to services. These symbols place a viewer on notice  that you are claiming the possession and use of these marks.

By registering a mark at the federal level, you increase your trademark rights.  The “®” registration symbol indicates that a mark has been registered with the United States Patent and Trademark Office (“USPTO”). Section 43(a) of the Lanham Act, 15 U.S.C. 1125(a)(1), provides federal protection against infringement of unregistered marks and trade names and many other forms of unfair competition.

How do you determine whether your mark has been infringed?

A mark is considered to have been infringed upon when someone other than the owner uses the mark in such a way as to cause confusion as to whose goods or services they are.

What are your rights if your mark is infringed upon?

First, you have common law rights to your mark even if you have not registered it, and you can file suit to protect those rights.  However,  federal registration of a mark brings the owner the right to initiate and infringement suit in federal court and may result in the owner’s recover of treble damages, attorney’s fees, and other awards.

Vermont registration also provides that an mark owner may bring suit to enjoin the use of the mark, and to be awarded damages.  Vermont statutes do not provide for attorneys fees or treble damages, but they do provide that the state may file criminal charges against an infringer of the mark.

How to register?

Generally trademark rights can be acquired (1) by being the first to use the mark in commerce; or (2) by being the first to register the mark with either the Vermont Secretary of State (for a Vermont only mark) or the U.S. Patent and Trademark Office.

Applications for trademark registration are subject to approval by the USPTO and may be rejected for a number of reasons.

Examples of reasons why a trademark might be rejected are:

•  It is likely to cause confusion with an already registered mark (such as McDonald’s” Hot Dogs)

• It simply contains a generic term (such as “Hot Dogs”).

• It primarily describes the geographic origin of the goods or services (such as “St. Johnsbury”).

• It is primarily a surname (such as “Smith’s”), etc

As stated on the USPTO website:

“For advice about trademarks and the USPTO registration process, you should consider hiring a private trademark attorney (not associated with the USPTO) to help you.  Although not required, most applicants use private trademark attorneys for legal advice regarding use of their trademark, filing an application, and the likelihood of success in the registration process, since not all applications proceed to registration.

“A private attorney may save you from future costly legal problems by conducting a comprehensive search of federal registrations, state registrations, and “common law” unregistered trademarks.  Other trademark owners may have protected legal rights in trademarks similar to yours that are not federally registered; therefore, those trademarks will not appear in the USPTO’s Trademark Electronic Search System (TESS) database.

“A private attorney can also assist in the policing and enforcement of your trademark rights.  The USPTO only registers trademarks.   You as the trademark owner are responsible for any enforcement.”

[http://www.uspto.gov/trademarks/basics/index.jsp]

On-line sources:

U.S. Patent and Trademark Office page on trademarks

Cornell Law School list of trademark materials

U.S. Patent and Trademark Office www.uspto.gov.

Intellectual Property Law Association of Chicago www.iplac.org.

American Intellectual Property Law Association www.aipla.org.

In my previous tax planning article I discussed how graduated tax rates worked and how to save on income taxes by deferring taxable income to later years. The saving results from the fact that (1) a portion of income isn’t taxed at all, due to exemptions and deductions, and (2) income is taxed in segments, at graduated rates. Even the wealthiest individual only pays 10% on his first $16,750 of taxable income. This article discusses payroll taxes and the new income surtaxes that will apply in 2013.

Once upon a time only a small portion of wages and self employment earning were subject to payroll taxes. In the last forty years payroll taxes have increased more than income taxes, by increasing the portion of earnings to which they apply. OASDI (Social Security) payroll taxes are 12.4% (employer and employee share combined) of compensation up to $106,800 (the 2011 taxable wage base), and an HI (health insurance) tax of 2.9% (combined) applies to all compensation. The taxable wage base is indexed for inflation, and increases almost every year. For 2011 only, a 2% tax holiday for employees was enacted as an economic stimulus.

Payroll taxes are imposed on gross wages or self employment income, unreduced by adjustments to gross income, exemptions or deductions. Income taxes, on the other hand, are imposed upon taxable income, after adjustments to gross income, exemptions, and deductions (standard or itemized). For example, if a married taxpayer has a salary of $26,000, $14,600 of personal exemptions, and the standard deduction of $11,400, he will pay no income taxes. However, he and his business will pay a combined $3,978 in payroll taxes.

If in the same example his income is increased to $94,400, his income taxes will be $9,363. His payroll taxes will be an astonishing $14,443. His greatest tax liability does not come from income taxes; it’s from payroll taxes. Payroll taxes can’t be totally avoided, but they certainly can be reduced.

The most obvious way to avoid unnecessary payroll taxes is to avoid having to pay payroll taxes on employee benefits. Take health insurance, for example. My annual premium is $12,000. If the $12,000 is paid by my corporation it’s a tax free benefit to me, deducted by my corporation on its tax return. The same payment if I was a self employed individual would be subject to payroll taxes, and would be deducted on my Form 1040 as an adjustment to gross income. If my self employment income were below the taxable wage base, my health insurance would cost me $1,836 in unnecessary payroll taxes.

The same result occurs with retirement plan funding. If $20,000 is funded into a profit sharing plan for me by my corporation, there are no payroll taxes on this plan funding and the corporation deducts the $20,000. If I were self employed the $20,000 of plan funding would be considered self employment income subject to payroll taxes. It could not be deducted as a business expense but would be deducted, instead, on my Form 1040. If my self employment income were below the wage base, the payroll tax on my $20,000 of plan funding would be $3,060. Between health insurance and plan funding that’s $4,896 down the drain.

I have $100,000 invested in my business between furniture, fixtures, and equipment. I am certainly entitled to at least a 10% ($10,000) return on my investment. If my business is incorporated as an S corporation I am entitled to receive that return as pass through income – not subject to payroll taxes. If I were self employed and my income was under the taxable wage base, that’s another $1,530 down the drain, for a total of $6,526 of unnecessary taxes.

The pain is not limited to those with self employment income under the taxable wage base. Assume that I am self employed, that my earnings are well in excess of the taxable wage base and that I am funding my plan to the maximum ($49,000). The sum of my plan funding, health insurance and return on investment is $71,000. The HI tax on this amount is $2,059 (2.9% x $71,000).

Taxpayers have a civic duty to pay their taxes, but certainly not to overpay them because Congress taxes different business structures differently. The additional accounting costs of doing business as an S corporation, instead of as a sole proprietor, LLC, or partnership are very small. Just ask your accountant. Instead of a complex, personal return you report the same information on a corporate return and have a simple personal return (and a lower tax profile). Your accounting fees will increase by less than $1,000 while your tax savings will be much greater. If you are doing business with others as a partnership or an LLC there is no increased reporting expense for changing to an S corporation because you are already filing a separate return. The bottom line is that most small businesses could avoid paying unnecessary payroll taxes by doing business as an S corporation.

But Wait, There’s More

Additional ways of avoiding payroll taxes involve how you structure the ownership of your office building, who owns office equipment, and who pays for leasehold improvements. The most advantageous structure will vary from state to state, but the goal is to make certain that the return on your investment in your business is not subject to payroll taxes.

The .9% Medicare Surtax

The Patient Protection and Affordable Care Act of 2010 (PPACA) added a .9% Medicare tax on wages and self-employment income in excess of $200,000 ($250,000 if married). This new tax is effective in 2013 and is imposed on the employee only (no employer share). Assume that my self employment earnings are well in excess of the $250,000 and that I am funding my profit sharing plan to the maximum ($49,000). The sum of my plan funding, health insurance and my $10,000 return on investment is $71,000. The HI and Medicare Surtax on this amount will be $2,698 (.038% x $71,000) down the drain.

The 3.8% Medicare Tax on Unearned Income

PPACA also added a Medicare tax on the lesser of net investment income or the excess of adjusted gross income over the threshold amount, effective for 2013. The threshold amount is $250,000 for a married taxpayer and $200,000 for a single taxpayer. Basically, it means that if your adjusted gross income is over $250,000, you are going to pay an additional tax on your investment income.

There are two exceptions to what is considered unearned income. (1) income from a qualified retirement plan is not unearned income; and (2) pass through earnings from S corporations in an active trade or business are not unearned income. There are three ways to avoid this tax. (1) Fund your retirement plan to the maximum so that your earnings on investments will not be subject to the surtax (when withdrawn); (2) shift income to family members; and (3) when investing in an active business make certain that it is operated through an S corporation.

Did Anyone Say C Corp?

Although I have focused above on the difference between conducting business in an unincorporated structure versus conducting business as an S Corporation, I personally do business as a C corporation. The reason for this is that I have $10,000 of medical expenses (including dental, eye care, and items not covered by insurance) which are paid for by my corporation’s medical reimbursement plan. This saves me $1,530 in payroll taxes, $2,500 in federal income taxes, and $900 in Vermont State Income Tax, for a total tax savings of $4,930. It also allows me to lower the premium on my high deductible health insurance policy by more than my out-of-pocket cost for items otherwise covered. In my situation it’s a no brainer.

Conclusion

Businessmen can avoid paying unnecessary payroll taxes, and in 2013 avoid paying unnecessary Medicare surtaxes, by tailoring the structure of their business and investments to their specific situation, and by maximizing their retirement plan funding. The time to look at their structure is as soon in a calendar year as possible, and whenever contemplating a significant capital expenditure related to their business or investments.

For further information, comments, or questions, contact me at jcole@erisajd.com

In My Next Article: The Magic of Tax Free Compounding

By John H.W. Cole, Esq.

This article and several that will follow explore the elements of tax planning.  Because a tax plan can be overwhelming when it is all put together my memos will develop the components one at a time.  The first component is taking advantage of graduated tax rates.

Federal Income Taxes are imposed upon Taxable Income – Taxable Income is Gross Income less allowable deductions and exemptions.  Gross Income is your income from all sources, most commonly wages and investment income.

Example:  Ken and Barbie had a combined Gross Income of $212,700 in 2010.  They had two dependent children which translates into $14,600 of personal exemptions.  They file a joint return, and claim the standard deduction of $11,400.

Their Taxable Income for 2010 was $186,700 ($212,700 of Gross Income reduced by the standard deduction of $11,400 and personal exemptions of $14,600).

For 2010, the tax rates were as follows for married taxpayers filing jointly.

Taxable Income

•                                                                                                                            of the
•     But Not                                                      Base                   % on              amount
•      Over                        Over                          Tax                Excess                over—
• $         0                    $   16,750                           $0                     10%                    $0
•   16,750                         68,000                 1,675.00                     15%             16,750
•   68,000                       137,300                 9,362.50                      25%            68,000
• 137,300                       209,250               26,687.50                      28%          137,300
• 209,250                       373,650               46,833.50                      33%          209,250

Ken and Barbie’s 2010 taxes were determined as follows:

•                             Income                 Tax                        Rate                                                            
• On their first   $   26,400                      0                           0% (offset by exemptions & deductions)
• On their next       16,750                1,675                         10%
• On their next       51,250                7,688                         15%
• On their next       69,300              17,325                         25%
• On their next       49,000              13,720                         28%
• Totals:           $  212,700           $ 40,408

Suppose that Ken had set up a qualified plan and deferred $49,000 into it.  Ken and Barbie’s federal taxes would now be determined as follows:

•                            Income                  Tax                         Rate                                                          
• On their first   $  26,400                       0                           0% (offset by exemptions & deductions)
• On their next      16,750                1,675                         10%
• On their next      51,250                7,688                         15%
• On their next      69,300              17,325                         25%
• Totals:           $ 163,700           $ 26,688

By deferring $49,000 into a qualified plan, Ken and Barbie would avoid paying $13,720 in federal income taxes.   If they lived in a state with a state income tax, like Vermont (9%), they could save another $4,410 in state income taxes.  By avoiding paying payroll taxes on the $49,000 they would save another $1,421.  Their total tax savings would be a combined $19,551.

Flash forward to 2011 when Ken and Barbie retire.  Assume the same exemptions and the use of the standard deduction.  They withdraw the $49,000 from the plan.  Their taxes are determined as follows:

•                                           Income                           Tax                Rate                                                           
• On their first              $       26,400                               0                   0% (offset by exemptions & deductions)
• On their next                      16,750                        1,675                 10%
• On the remaining                5,850                            878                 15%
• Total                          $      49,000                     $  2,553

The $49,000 of retirement plan income would not be subject to payroll taxes.  In Vermont it would not be subject to state income taxes because it is below the state income tax threshold. Accordingly the tax savings from delaying a year would be $16,998.  In Virginia, which imposes a state income tax on this amount of income, the tax savings would be slightly less, at $15,698.

Of course, Ken and Barbie may have other sources of income when they retire. However, the above example assumed retirement the following year, so a similar amount of outside income would have been present in both 2010 and 2011.  An additional $40,000 of investment income would change their top bracket to 33% in 2010, while in 2011 an additional $40,000 would still be taxed at only 15%.

Furthermore, the example does not take into account the fact that tax brackets are indexed and that any increase in tax rates would only take place at very high income levels.  In 1993 the 28% bracket for joint filers was $36,900 of taxable income.  Today the 28% bracket starts at $137,650 of taxable income.

Let’s go back to the beginning and assume that Ken and Barbie did not defer the $49,000.  Instead they paid their payroll taxes, and state and federal income taxes, and invested the money for 20 years, and enjoyed a 6% return.  At the end of 10 years they would have accumulated $66,496, after taxes.

Sheltered in a qualified plan, the same $49,000 would have become $112,596, almost double.

Assume they took the entire $112,596 out at once, as their only income for the year, and that brackets never went up (although in fact they do).  Their taxes would be determined as follows:

•                            Income                             Tax                         Rate                                                           
• On their first   $   26,400                                 0                           0% (offset by exemptions & deductions)
• On their next       16,750                          1,675                         10%
• On their next       51,250                          7,688                         15%
• On their next       18,196                          4,549                         25%
• Totals:            $ 112,596                     $ 13,912

They would have $98,685 in after tax dollars to live on for the year, compared with $66,496 from investing on the outside.

The first lesson of this example is that some of your income isn’t taxed at all.  Secondly, that which is subject to tax is taxed progressively starting with low tax rates.  Third, significant taxes can be saved by shifting income from high tax rate years to lower tax rate years.  The tax planning objective is to move income out of the 25%-33% federal bracket and 9% state bracket into the 15% federal bracket and 0-4% state income tax bracket.

The final lesson is that because of reduced income, rising brackets, or both, the low tax bracket years for most of us lie further down the road, when we retire, or at least slow down.  The way to retire with the greatest amount of income is to take advantage of tax deferral vehicles, such as IRAs, SEPS, and qualified retirement plans.

For further information, comments, or questions, contact me at jcole@erisajd.com

In my next Article:  Payroll taxes and the new Medicare Surtaxes

 John H. W. Cole is an attorney licensed to practice in Vermont, Florida, the District of Columbia New York and Virginia.  He is also admitted to practice in the U.S. Tax Court and U.S. Court of Claims.  His office is located in South Burlington, Vermont

He formerly practiced as an attorney in the Chief Counsel’s Office of the Internal Revenue Service (1970-1973), and since then has been in private practice. He is a member Vermont Bar Association; The Florida Bar; Virginia State Bar; District of Columbia Bar and American Society of Pension Actuaries

 He practices in the areas of design and implementation of Cash Balance Pension Plans, Profit Sharing Plans, and 401(k) Plans.  He also advises clients on Plan Administration including reporting and disclosure; Employee Benefits Consulting; ERISA Litigation; Tax Litigation; Tax Planning; Formation of Business Entities; Estate Planning for Plan Distributions. 

John will be writing articles on those topics.

He is editor of the 401k Advisor and contributor to Pension Plan Administrator.  He has been a speaker at AICPA Employee Benefit Conferences; Accountant’s Satellite Television Network; Vermont Tax Institute; Florida and Virginia Bar Associations, and  CPA Institutes in Florida, Virginia, and Maryland.

Attorneys, actuaries, accountants, HR managers and business owners will benefit from the information John will be providing in his upcoming articles. 

If you have any issues or concerns in the areas of law in which John concentrates, here is his contact information: