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The modern American family has changed, and with that change, so has how we purchase and hold title to real estate. Now, almost 60% of real estate is owned by more than one unmarried persons. From straight to same-sex couples, to siblings inheriting real estate from a deceased parent—the complexity of how we hold title to real estate in our society has grown in recent times. When a dispute arises in these unmarried arrangements—whether it be a parting of ways, disagreement over management or operation of the property, or otherwise—a divorce action cannot be filed to compel the sale or division of the assets. Instead, we must look for a different remedy. One such remedy which has become increasingly useful in these changing times is a “Partition Suit”.

The “Partition Suit” traces its origin to old English common law. Centuries ago, in the English feudal system, the majority of landowners held their real estate in farmland, with very few permanent building structures. When co-owners of a farm could not come to a mutually agreeable solution for dividing the property, they could petition the King’s Court for relief. The Chancellor (a type of English Judge) then would simply order that the farmland be divided according to the each owner’s particular interest in the property, a process which came to be known as “partitioning” the property. Thus, if two individuals held equal ownership interests in the property, the court would partition the property in half, with one half going to each individual. Likewise, if three individuals co-own a piece of property in equal interests, each would receive one-third of the property in a partition. Although the power to partition is very effective when dealing with the land itself, the same cannot be said in modern times because most real property is covered with houses, apartments, and other permanent building structures, which cannot be so easily divided in equal portions. This difference in the times has led to an added element in modern-day property disputes—the partition by sale. Now, the party seeking partition will petition the court to force a sale of the property and then divide the proceeds of that sale according to each owner’s interest in the property.

A partition by sale is a particularly effective course of action for beneficiaries of an estate who cannot agree on what to do with a house they jointly inherited. Often, a brother and sister will inherit the family house from their deceased mother. Sister had been living with mom for the last couple of years caring for her, prior to her death. Now that mom has passed, sister wishes to continue living in the family home. However, brother, having a family of his own, wishes to liquidate his portion of the inheritance by selling the house. It is a story as old as the parable of the prodigal son. One beneficiary wants to keep and use the family house exclusively, while the other wishes to reduce his inheritance to cash for use as he sees fit.

When applied to this situation, the partition by sale suit is a particularly effective tool for settling the dispute. Under the pressure of the partition suit, the siblings have four options available to them: (1) Sister can buy out brother; (2) Brother can buy out sister; (3) Brother and sister can agree that sister will continue living in the house; and (4) the house can be sold to a third party. If brother and sister cannot agree, he always has the ability to petition the court to force a sale of the house and division of the proceeds.

In addition to a forced sale, the partition suit permits one party to seek contribution from the other for expenses associated with maintaining the property. For example, if sister had been maintaining the property and paying property taxes and insurance on the property prior to its sale, she can make a claim for contribution from her brother for his portion of those expenses, which would then be deducted from his share of the proceeds. Thus, the proceeds can also operate to balance the equities between the parties. Notably, the contribution amount may exceed the value of a party’s interest in the property. For example, assume that the house sold for $100,000 and had an outstanding loan balance of 50k. After the outstanding loan is satisfied from the proceeds, brother and sister would each be entitled to $25,000. However, sister may allege that brother owes $30,000 in contribution for his portion of property repairs, which she incurred prior to the sale. The $30,000 in contribution would exceed his $25,000 equity interest. Thus, assessing the following three factors is imperative when considering a partition by sale suit to settle a property dispute: (1) the value of the property; (2) any debt against the property; (3) the likelihood and amount of any contribution claim by other parties with an ownership in the property. A party considering a partition action should consult with an attorney to develop a strategy and to set out the possible upside as well as the downside in pursuing such a remedy.

Jeffrey D. Katz Esq. is the founding partner in the law firm JDKatz, P.C. Formerly with KPMG’s Mid Atlantic tax practice, Mr. Katz’s practice focuses on tax, estate planning and real estate matters. Mr. Katz is admitted to practice in the State of Maryland, US Tax Court, US District Courts for Maryland and the District of Columbia, and before the United States Fourth Circuit. Mr. Katz routinely lectures on estate and corporate law issues in Washington, DC and suburban Maryland. Mr. Katz lives in Montgomery County, Maryland. He may be reached at 301-913-2948.

Issue

Whether, pursuant to D.C. Code Section 42-1903.16, the declarant has a duty to warrant against structural defects in a condominium which arose and were claimed by the unit owners two months after the posted letter of credit had been returned to the declarant by the Condominium and Cooperative Conversion and Sales Branch?

Applicable Rules

D.C. Code Section 42-1903.16(b) states that the “declarant shall warrant against structural defects in each of the units for 2 years from the date each unit is first conveyed to a bona fide purchaser, and all of the common elements for 2 years.”

D.C. Code Section 42-1903.16(e)(1) states that “Prior to the declarant’s first conveyance of a residential unit to a purchaser, the declarant shall post a bond or letter of credit with the Mayor in the amount of 10% of the estimated construction or conversion costs. The bond, letter of credit, or other security shall be reduced at the declarant’s request in pro rata segments (based on the residential unit’s percentage interest in the residential portion of the condominium) 2 years after the conveyance of each unit; provided, however, that in no event shall the security be reduced below 50% of the original amount of the security until one year after transfer of control of the residential executive board of the condominium association to purchasing residential unit owners other than the declarant. For purposes of this subsection, “transfer of control” shall have occurred when 51% or more of the residential executive board is composed of residential unit owners other than the declarant, or successor declarant, or the declarant’s selections or nominees.”

Brief Statement of the Facts

As required by D.C. Code Section 42-1903.16, the declarant posted a letter of credit with the Mayor, which bore an issuing date of March 3, 2004 and an expiration date of March 3, 2006. The declarant sold the first condominium unit on May 28, 2004 and by June 24, 2004 he had sold the last unit. The Letter of Credit was returned to the declarant by the Condominium and Cooperative Conversion and Sales Branch on March 6, 2006. The claims regarding structural defects arose on or around May 3, 2006.

According to our investigation, the declarant did not request that the letter of credit be returned to him. The Condominium and Cooperative Conversion and Sales Branch returned the letter of credit based on expiration date set forth on the letter by the issuing bank and made no requests of any kind.

Analysis

The sale of the last unit was on June 24, 2004.  Based on D.C. Code Section 42-1903.16(b), the required warranty is to exist until two years after the sale of the last unit, i.e., June 24, 2006.  However, the letter of credit was returned to the declarant on March 6, 2006.

In his letter of March 6, 2006 to the declarant,  Mr. Bradford does not inquire as to the date when the last condominium unit was sold to determine whether the letter of credit should have be returned to the declarant, nor does he request that an alternate letter of credit be obtained by declarant in the event there was a gap between the expiration date on the letter of credit and the date the required warranty was to end – at the conclusion of the two year statutory period following the last sale of a unit.

Conclusion

It is possible that the Condominium and Cooperative Conversion and Sales Branch returned the letter of credit because it was misguided by the expiration date of March 3, 2006 listed on the letter by the issuing bank.  Nevertheless, it is our opinion that based on Section 42-1093.16(e)(1), the Condominium and Cooperative Conversion and Sales Branch should, at a minimum, have inquired as to the date the last unit may have been sold, or direct the declarant to post a new letter of credit in the event there was any gap between the expiration date on the letter of credit and the two year statutory period.

Due to the oversight of the Condominium and Cooperative Conversion and Sales Branch, the declarant reasonably relied on the government’s authority and did not post a second letter of credit. Had the Condominium and Cooperative Conversion and Sales Branch informed the declarant of the need to post a new letter of credit, the declarant would have furnished one immediately.

Accordingly, it is our Client’s position that he should not be responsible for any structural defects which arose two months after the letter of credit was returned to him.  On the other hand, the declarant is amenable to meeting with the Director of the Condominium and Cooperative Conversion and Sales Branch in order to thoroughly discuss the owners’ claims of structural defects.

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In our practice, we are often asked what formalities need to be followed to ensure that corporate liability doesn’t pass to individual shareholders or officers. Maintenance of corporate formalities is essential to maintain the limit’s of liability, By way of example, in the District of Columbia, a Court will consider piercing a corporation’s veil when any or all of the following factors are present:

1- Unity of interest and ownership.

  1. Whether corporate formalities have been disregarded, like issuance or subscription of stock.
  2. Whether there has been intermingling of funds, staff and property.
  3. Domination and control of a Corporation (ex: Parent – subsidiary).
  4. Extensive commingling of personal funds with corporate funds.
  5. Substantial disregard for corporate formalities, like keeping the minutes and records of the corporation.
  6. Inadequate initial capitalization.
  7. Whether corporate funds and assets were diverted to non-corporate used, such as personal use.

2- Fraudulent use of a Corporation formed to protect business from claims of creditors.

  1. a. The Courts have modified this part of the test as follows: It is no longer necessary to prove fraud. Instead of fraud, the Court may consider justice and equity in their determination.

3- Control and breach of duty set forth in the first two elements is what caused the injury or unjust loss complained of.

  1. This element is rarely ever used by the DC Courts. However, it has been mentioned in some D.C. cases which deal with piercing the corporate veil.

NOTES:

1- Because piercing the veil is a doctrine of equity, the factor that predominates will vary in each case and the decision to pierce will be influenced by considerations of who should bear the risk of loss and what degree of legitimacy exists for those claiming the limited liability protection of a corporation.

2- Before a Corporate entity can be disregarded and acts of a corporation can be legally recognized as a particular person, it must appear that the corporation is not only controlled by the persons, but also that the separateness of the persons and corporation has ceased and facts must be such that adherence to fiction of separate existence of the corporation would sanction fraud or promote injustice.

3- Piercing the corporate veil is an equitable doctrine, but the issue of whether the corporate veil should be pierced is properly submitted to a jury.

Sources:

1- Simon v. Circle Associates, Inc. 753 A.2d 1006, (2000)

2- Vuitch v. Furr 482 A.2d 811, (1984)

3- Camacho v. 1440 Rhode Island Avenue Corporation and Arven Plumley 620 A.2d 242, (1993)

Peter Antonoplos is a Partner at the law firm, JDKatz, P.C.. He specializes in corporate, tax, and real-estate law and frequently lectures in the Washington D.C. metro area.

Consumption taxes

February 5, 2012 — Leave a comment

35 States have an additional sales tax on soda, which can be compared to the ‘sin’ tax added to cigarettes and booze. However, will higher soda tax rates have the same effect as other ‘sin’ taxes at preventing unhealthy behavior?

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2012 Tax Rate Card

January 26, 2012 — 1 Comment

How taxing will taxes be this year? Here are the 2012
Individual, corporate and estate and trust income tax rates,
Estate tax rates,
Capital gains tax rates
Standard deduction and personal exemption amounts
FICA rates and MACRS percentages
Social Security earnings limitations for retired workers
Contribution limits for various retirement plans

AMT rates, exemptions and phaseouts
HSA contribution limits
Long-term care insurance deduction limits
Coverdell ESA contribution limits and phaseouts
Section 179 expensing limit and phaseout threshold
Depreciation classes, methods and 200% DB schedules
Social Security benefits.

Need a tax attorney?

Good news, there are now two extra days to file federal income tax returns (April 17) because of the weekend and Emancipation Day. However, this should not deter a taxpayer from preparing their returns in a timely manner. The chance of errors on their returns significantly increases when waiting until last minute to file them with the IRS and the faster a return is filed, the faster a refund is obtained. The IRS has made new accommodations to tax returns this year that may ease the whole process for the individual taxpayer.

The IRS Free File program is a completely free electronic tax return system that has been instituted this year. In order to be eligible, the taxpayer must earn under $57,000 or less annually (which covers 70% of taxpayers). However, if he/she earns more or prefers an alternative method of filing his/her tax returns, there are plenty of other options to choose from. Some notable programs such as Turbo Tax and H&R Block at Home offer some free programs depending on the simplicity of the returns or first-time usage. Further, senior citizens, military personnel, and low-income households may be eligible for free tax preparation around their respective communities.

This year, the IRS will accept all e-filed tax returns, regardless of what program was used. However, the IRS has become increasingly stricter regarding the Preparer’s Tax Identification Number (PTIN) on the returns. Be sure there is a PTIN on the returns prior to filing.

Some are other key issues to note are taxpayers that converted their traditional retirement accounts to Roth accounts in 2010. They were given the option of spreading the tax payments over 2011 and 2012, thus the final payment on their Roth is due this year. Furthermore, stockbrokers must report how much investors paid for their common stocks to determine how much an investor owes or deducts based on profit or loss.

J.D.Katz, P.C. encourages everyone to file his or her tax returns in the most effective manner possible and with plenty of time to spare.

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