Articles by Our Attorneys

Department of Labor Announces New Standards Affecting Overtime Pay for Salaried Employees

October 30, 2019 by Jeffrey P. Burke, Esq.

The Department of Labor recently announced new overtime rules under the Fair Labor Standards Act (FLSA) that the Department estimates will make over 1.3 million salaried U.S. workers eligible for overtime pay. The FLSA generally requires employers to pay employees who work more than 40 hours in a week overtime pay of at least 1.5 times the regular rate of pay. The FLSA contains various rules and regulations that dictate whether salaried employees are entitled to overtime pay. Effective January 1, 2020, several significant changes in the FLSA regulations will go into effect that will affect salaried employees. These include:

Under the FLSA, if an employee earns below a set threshold salary level, the employee is never exempt from overtime pay. Since 2004, this salary level has been set at $23,660 ($455 a week). The new rules will raise the minimum salary level to $35,568 annually ($684 a week).
The FLSA exempts employers from having to pay overtime to “highly-compensated” executive, administrative or professional employees. The new rules raise the “highly-compensated” threshold from $100,000 to $107,432 annually.
Non-discretionary bonuses and incentive payments, including commissions paid annually or more frequently, may be applied to satisfy up to 10 percent of the standard salary level.

Each of these changes will expand the number of U.S. workers who are eligible to receive overtime pay. Determining which employees are impacted by the new rules will require a clear understanding of FLSA rules and regulations.

The full rule change can be found at: https://www.dol.gov/whd/overtime2019/overtime_FR.pdf.

Who’s Your Daddy? In Pennsylvania It Might Not Matter

October 25, 2019 by Lance J. Nelson, Esq.

One of the most joyous times in a person’s life is often when their child is born. But, within a marriage, what happens if the husband is not actually the biological father of the child? In Pennsylvania, the law of presumptive paternity is applied.

Under the law of presumptive paternity (the “Presumption”), generally, a child conceived or born during the marriage is presumed to be the child of the marriage despite the possibility that a husband may not be the true biological father of the child. This Presumption is one of the strongest presumptions of the law of Pennsylvania. The Presumption applies where the underlying policy of the Presumption, i.e., to preserve marriages, would be advanced by its application.

Facts that have led Pennsylvania courts to apply the Presumption include the husband being present at the child’s birth and being named on the birth certificate, the husband participating in the child’s baptism, and overall supporting the child. Other examples include the husband and wife maintaining their joint relationship, marital and financial, despite the wife having an affair that could have produced a child. Specifically, in one instance, when the husband had not become aware of the extramarital affair until after the child’s birth.

Overall, Pennsylvania courts will apply the Presumption when there is a dispute about the identity of the child’s biological father, there would be harm to the husband and wife’s relationship, and the application of the Presumption would protect the child.

Although the Presumption can be implemented, Pennsylvania courts have not applied the presumption in every situation. If the evidence fails to support that the child’s parents remain in an intact marriage, then the Presumption will not be applied.

Facts that have led Pennsylvania courts to not apply the Presumption include, the wife having an affair while still being married; the wife leaving the marital home after learning that she was pregnant; the husband and wife separating; the husband and wife filing for divorce; and a third-party male, other than the husband, being listed as the father on the child’s birth certificate. Typically, more than one of these instances will need to be present before the court makes a determination.

In conclusion, in order to forward the public policy of preserving marriages, Pennsylvania courts may apply the presumption of paternity when appropriate, even if the DNA of the child would yield a different result.

Law Clerk, Ryan Messina, contributed to this article.

Like the families we serve, matters of family law come in all shapes and sizes—and our Pennsylvania and Delaware Family Law attorneys are equipped to manage and resolve a variety of legal issues. Our attorneys cover all aspects of family law, from drafting prenuptial agreements before parties marry to negotiating divorce settlements when a marriage ends, as well as helping parents resolve child custody disputes. Learn more about our family law practice.

Lance Nelson, chair of MacElree Harvey’s family law practice, has over 25 years of experience representing clients in family law matters such as divorce, marital agreements, adoption, custody, and support.

Post-Mortem Estate Planning

September 23, 2019 by Joseph A. Bellinghieri, Esq.

Estate Planning ID 123046008 © Designer491 | Dreamstime.com

By Joseph A. Bellinghieri, Esquire-

While many people may think that one plans his or her estate during life, there are numerous circumstances where estate planning continues after someone has passed away. This is why it is so important to pick the proper person to be an executor of an estate. There are numerous elections available to an executor that need to be analyzed. This is especially the case with high net worth clients. The type and level of activities required for settling an estate will depend on a host of factors, including the nature of assets and the state of planning that existed at the time of one’s death.

Some of the elections available to an executor include an Alternate Valuation Election. This election allows the estate to take a second snapshot of the asset value six (6) months after the date of death and, if applicable, to elect to use this alternate valuation in filing its returns. To be able to use the alternate valuation date, two conditions must be present. The value of the estate’s assets must have declined since the date of death and the use of the alternate valuation must result in the reduction in taxes.

Another election available to an executor is the decision to deduct administrative expenses. If no estate tax is payable, either because the decedent’s property falls below the exemption equivalent or because the unlimited marital deduction is being used, or by a combination of these, administration expenses such as executor and attorneys fees which are deducted on an estate tax return should be deducted on the estate’s income tax return to offset income.

A QTIP (Qualified Terminable Interest Property) election is another election an executor has the ability to make. This is done where a decedent provides his or her surviving spouse with a life estate or lifetime income interest in specific property. In this case, the executor may elect to have the property underlying such interest treated as QTIP thereby making such property eligible for the federal estate tax marital deduction.

There are other decisions that an executor must make such as whether any beneficiary would want to file a disclaimer. A disclaimer must be made within nine (9) months. A qualified disclaimer is an irrevocable and unqualified refusal to accept an interest in property which satisfies certain conditions under the Internal Revenue Code. There are numerous reasons why one would want to file a disclaimer including the utilization of the exemption amount or the increase in the marital deduction.

Another decision that an executor must make is the selection of a fiscal year-end for the estate. This is very important as the executor has the ability to defer income to future years. There are also numerous tax decisions that need to be made by an executor, such as managing distributions to minimize overall tax and claiming an estate tax deduction for any income in respect of a decedent. There is also a decision that needs to be made in regard to any distributions from qualified plans that should be considered during the post-mortem process.

As you can see the decision of whom to appoint as one’s executor is extremely important. In the event you need any assistance, please contact Joseph A. Bellinghieri at 610-840-0239 or [email protected].

Joseph A. Bellinghieri represents individuals and businesses with a variety of estate, tax, real estate, and business issues. With over twenty years of experience, Joe is a seasoned attorney.

Taxation of Foreign Investment in Delaware Entities

September 4, 2019 by Andrew R. Silverman, Esq.

taxation ID 136274785 © Pattanaphong Khuankaew | Dreamstime.com

Foreign investors and entrepreneurs who would like to do business in the United States are confronted with a number of legal decisions to make and, if not familiar with the local law, these decisions can be quite daunting. One question that invariably comes up for foreign investors who desire to form a Delaware entity is this: how will it be taxed?

Is the income taxable?

Your entity will be taxed if two conditions are present: (1) the entity is engaged in the sale of goods and services in the United States (referred to as “engaged in trade or business” or “ETB”); and (2) the entity earns income that is effectively connected with United States sources (such income, is often referred to as “effectively connected income” or “ECI”).

TIP: If your entity is subject to taxation in the United States, you may be able to offset the taxes by carefully planning how distributions will be made to the ultimate beneficial owner (i.e., the foreign shareholders or partners) and by taking advantage of the numerous tax treaties to which the United States is a party.

Taxation of Delaware C-Corporations

Federal Taxation

If your entity is a corporation and is subject to tax in the United States, it will be subject to double taxation. This means that the ECI will be taxed once upon receipt by the corporation and then a second time if it is later distributed to stockholders (such as through a dividend or liquidation). The current federal corporate tax rate is 21 percent of the ECI.

Delaware Taxation

Generally, Delaware will only assess a tax on ECI that is attributable to Delaware sources or if it has assets, employees, or activities in Delaware.

Taxation of Delaware LLCs and Partnerships

Federal Taxation

Generally, the federal government does not impose a tax on ECI that is received by the LLC or partnership but it does tax the members or partners directly. Thus, while an LLC or partnership can avoid double taxation, the members or partners will be exposed to federal and state and local taxes and will need to file US tax returns that report worldwide income. This may not be ideal for various reasons.

In such cases, each member or partner may form a “blocker” corporation to hold its membership or partnership interest. In such cases, the blocker corporation and dividends to its ownership will be taxed but reporting requirements on the ultimate beneficial owner will be reduced.

Delaware Taxation

Delaware does not impose income taxes upon LLCs and partnerships; however, the state will impose a gross receipts tax on income from Delaware sources.

Any foreign person or entity that desires to do business in the United States through a Delaware entity is advised to partner with US-based lawyers and accountants who are familiar with the legal and tax requirements.

Andrew Silverman is an attorney in the firm’s Business Department whose practice includes complex corporate governance and financing matters. If you are a Delaware business owner and desire guidance, call (610) 840-0286 or email [email protected].

The Pennsylvania Tax Benefit Rule Compared to the Federal Rule

August 27, 2019 by Joseph A. Bellinghieri, Esq.

Tax Benefit Rule ID 11188653 © Marius Scarlat | Dreamstime.com

By Joseph A. Bellinghieri, Esquire-

One of the questions I am often asked by clients is why does Pennsylvania impose tax on income in one year when I have had losses in the same investment for years which Pennsylvania has not allowed me to take. The federal government does not do that. Doesn’t the Pennsylvania tax benefit rule help me?

The tax benefit rule is a product of federal common law, created by federal courts in response to anomalies arising out of application of the annual accounting system for taxes contained in the Internal Revenue Code (“IRC”), and was eventually codified by Congress in Section 111 of the IRC. As the Pennsylvania Supreme Court summarized: In general, the rule applies when a deduction of some sort for a loss is taken by a taxpayer in one year, only to have the amount previously deducted recovered in a following tax year. Normally, the taxpayer would be responsible for including the recovered income on his personal income tax return for the year in which recovery occurred. The tax benefit rule states, however, that the recovery of the previously deducted loss is not includible to the extent that the earlier deduction did not reduce the amount of the tax owed in the year the initial deduction was taken. Put differently, the rule permits exclusion of the recovered item from income in a subsequent tax year so long as its initial use as a deduction did not provide a tax saving.

The Pennsylvania Supreme Court has recognized that the Pennsylvania Department of Revenue has seemingly adopted the tax benefit rule in its personal income tax guide and that the tax benefit rule is a complicated doctrine, with many different applications in varying factual scenarios. Unfortunately, there is no state statute or court opinion ensconcing the tax benefit rule in Pennsylvania law. However, Pennsylvania tax law is clear that income and losses must be segregated by class under §7303(a) of the Tax Reform Code of 1971. Furthermore, losses may only be used to offset income of the same class in the same tax year (i.e., they may not be carried over as they can be for federal tax purposes).

The Commonwealth Court of Pennsylvania has recognized that if the tax benefit rule could even arguably apply in some context in Pennsylvania, the unused deduction in the prior year would at least have to have been eligible to offset the subsequent year gain. In other words, under Pennsylvania law, the deduction would have to be an allowable offset against the gain had both been booked in the same tax year. Unlike federal tax law, which taxes income as a single class, Pennsylvania law recognizes eight separate classes of income subject to tax. Furthermore, Pennsylvania Regulations expressly prohibit taxpayers from offsetting or netting, income and losses across classes.

The classes of income under the Pennsylvania law include (1) compensation, (2) net profits, (3) net gains or income from disposition of property, (4) net gains or income derived from or in the form of rents, royalties, patents and copyrights, (5) dividends, (6) interest derived from obligations which are not statutorily free from State or local taxation, (7) Gambling and lottery winnings, and (8) net gains or income derived through estates or trusts.

In a series of cases discussing the only substantive tax benefit law case decided in Pennsylvania to date, the Supreme and Commonwealth Court of Pennsylvania determined that the tax benefit rule cannot be applied to exclude accrued but unpaid interest from the amount realized from sale or disposition of property at foreclosure. In those cases, the Taxpayers invested in a limited partnership which owned a building worth $360 million in the city of Pittsburgh. The Partnership financed $308 million with a nonrecourse Purchase Money Mortgage Note secured only by the Property. Interest on the Note accrued on a monthly basis at a rate of 14.55%. The accrued but unpaid excess would be deferred and, thereafter, compounded on an annual basis subject to the same interest rate as the principal amount of the Note.

Over the years, the Partnership’s net income from operations did not keep pace with projections. The Partnership actually incurred losses from operations for financial accounting, federal income tax, and Pennsylvania tax purposes every year of its existence. For Pennsylvania purposes, the Partnership allocated its annual losses from operations to each partner. Because of the Partnership’s dismal operations, the Partnership paid less monthly interest on the Note than it had projected. The property went into foreclosure in 2005.

At the date of foreclosure, the Partnership had an accrued but unpaid interest obligation of approximately $2.6 billion. The Partnership had used approximately $121.6 million of this amount to offset its income from operations that would otherwise have been subject Pennsylvania tax. The partners did not obtain any Pennsylvania tax benefit from the remainder of the losses. Also, neither the Partnership nor its individual partners received any cash or other property as a result of the foreclosure. That same year, the Partnership terminated operations and liquidated.

In 2008, the Pennsylvania Department of Revenue assessed Taxpayers for their pass-through share of the Partnership’s income realized from the foreclosure of the Property and the cancelation of debt. The class of taxable income at issue, in that case, was the “net gains or income from disposition of property” under Section 303(a)(3) of the tax code.

The court refused to apply the tax benefit rule. While it was true that each partner received no tax benefit from the loss in prior years, each Partner’s lack of offsetting income of the same class in those prior years (or in general) precluded the court from applying the tax benefit rule in those cases.

Overall, it is generally understood that “taxpayers seeking to avail themselves of the exclusionary aspect of the tax benefit rule must establish three requirements: First, there must be a loss that was deducted but did not result in a tax benefit. Second, there must be a later recovery on the loss. Third, and the one that most taxpayers fail is there must be a nexus between the loss and the recovery. This means that the loss must be from the same class as the income that would otherwise have to be reported on the taxpayer’s tax return.

Joseph A. Bellinghieri represents individuals and businesses with a variety of estate, tax, real estate, and business issues.

To schedule an appointment with Joe, call (610) 840-0239 or [email protected].

What is Mediation?

August 22, 2019 by Timothy F. Rayne, Esq.

By Timothy F. Rayne, Esquire-

Mediation is a form of Alternative Dispute Resolution, which means another way of resolving a legal controversy, like a Personal Injury Case, without negotiating a direct settlement with the other side or having a Jury Trial in Court.

In Mediation, the parties agree to use a neutral person, usually a senior or retired litigation attorney or Judge, to evaluate a case and try to help the parties reach a voluntary negotiated resolution. Nobody is forced to settle and either party can end the Mediation process at any time. The Mediator’s job is not to decide the case, but instead to help bring the parties to a negotiated settlement agreement.

The Mediation Process

The following is the usual step-by-step Process:

Pick a Mediator – The parties need to choose someone who they both trust and respect.
Educate the Mediator – Each party submits detailed descriptions of the case to the Mediator including documents and evidence that are important to the case.
Attend the Mediation – The Mediation itself is usually a day or half-day and takes place at the Mediator’s office, one of the lawyers’ offices or some other neutral location. The lawyers and clients are present and, in a Personal Injury case, a representative of the insurance company is either present or available by phone with authority to negotiate a settlement.
Joint Session – The Mediation begins with a Joint Session where the Mediator explains the Process. Often during the session, the lawyers will give Opening Remarks about the case.
Separate Sessions – After the Joint Session, the parties are sent to separate rooms and the Mediator travels between the two rooms discussing the merits of the case and working on negotiating a settlement.
Mediation Ending – A Mediation ends one of two ways, with a settlement or with one or both sides deciding that there cannot be a resolution.
After the Mediation – It’s common for the Mediator to stay involved in unsettled cases after the date of the Mediation and to continue to work with the lawyers to attempt to guide them to a resolution.

The Benefits of Mediation

Saves time, stress and expense – Mediation can save litigation time, stress and expense. It provides the opportunity to try to settle the case before the parties spend the time, effort, emotion and expense of trying the case in court.
Mediation is a Final Resolution – Mediation ends the case. It avoids the delay involved in a trial and eliminates the possibility of an appeal because it’s a final resolution.
Get insight and opinions of an experienced expert – At the Mediation you will get the opinions and insight of the Mediator who is an experienced and wise lawyer. The Mediator can evaluate the probability of each side winning the case as well as the fair value of the case. Although both parties must be aware that the Mediator’s job is to settle the case so he/she is always working towards that end, the Mediator often provides valuable feedback on the strengths and weaknesses of the case. This can help to settle the case or help us make the case stronger if it has to be taken to trial.

If your Personal Injury case cannot be settled directly with the defense, it is often advisable to consider the mediation process before taking a case to trial. Unless it is clear that the case has a very low probability of settling, the benefits of mediation are usually worth the time, effort and cost.

Tim Rayne is a Personal Injury Lawyer with the Pennsylvania law firm MacElree Harvey. Tim has law offices in Kennett Square and West Chester Pennsylvania. For over 25 years, Tim has been helping injured victims of accidents receive fair compensation from insurance companies. To learn more about Tim’s practice, visit timraynelaw.com.

To schedule your free consultation, call (610) 840-0124, or email [email protected].

Department of Labor Announces New Standards Affecting Overtime Pay for Salaried Employees

Who’s Your Daddy? In Pennsylvania It Might Not Matter

Post-Mortem Estate Planning