In This Issue
- New Tax Benefits for the Down Economy
- Illinois Amends Mortgage Foreclosure Act
- Ten Steps to Protect Landlord in Tough Economic Times
- Attorneys in the Spotlight
New Tax Benefits for the Down Economy
John B. Beery
Recent legislation has affected at least two significant areas of change relating to the federal taxation of financially troubled businesses: an expansion of the ability of certain businesses to utilize Net Operating Losses, and the liberalization of rules permitting debtors to defer tax on income from the cancellation of certain debts. While these rules are fairly complex in practical application, it may be useful to learn the basics of their operation to see whether further inquiry is advisable.
Net Operating Losses
Generally, a net operating loss (NOL) may be carried back only two years, and then will be carried forward 20 years. However, under recent legislation, if an “eligible small business” so elects, an “applicable 2008 NOL” may be carried back three, four, or five years, whichever the taxpayer elects. This permits the eligible small business to carry the 2008 NOL back to three, four, or five years preceding the tax year of the NOL, as the eligible small business elects.
The increased carryback period applies to the portion of the taxpayer's applicable 2008 NOL that is an “eligible small business loss” (an “ESB”) —i.e., the smaller of: (a) the amount that would be the 2008 NOL if only income, gains, losses, and deductions attributable to ESBs were taken into account, or (b) the 2008 NOL. That is, the amount that may be carried back under Code Sec. 172(b)(1)(H) is limited to the lesser of:
(i) the taxpayer's items of income, gain, loss or deduction that are allowed in calculating the taxpayer's applicable 2008 NOL and are from one or more partnerships, S corporations or sole proprietorships that qualify as ESBs, or
(ii) the taxpayer's applicable 2008 NOL.
An eligible small business is any trade or business, whether conducted in or through a corporation, partnership, or sole proprietorship, whose average annual gross receipts for 2006 through 2008 are $15 million or less.
The regular two-year carryback period remains available for the 2008 NOL if the taxpayer does not elect the increased carryback period for it. Further, taxpayers that do not qualify as eligible small businesses because of their gross receipts still qualify to carry back the 2008 NOL for two years.
Cancellation of Debt Income
Under current law, the reduction of debt obligations by a lender results in taxable income to the borrower. This income, typically referred to as “cancellation of debt” (“COD”) income is generally treated as ordinary income in the year of the debt reduction or discharge. However, new law is more forgiving to the debtor.
For many types of COD income recognized in 2009 or 2010, the debtor will be able to defer the recognition of this income until the 5 year period from 2014 through 2018. During this period, the COD income will be ratably apportioned to the 5 tax years 2014 through 2018. This may allow for a 9 year deferral of some portion of the income taxes in many cases.
The new legislation addresses a number of corollary issues which are too numerous to fully address here. Many of these relate to circumstances which arise during the deferral period. For example, if a taxpayer passes away during this deferral period, the deferred COD income is recognized on his or her final income tax return. Also, in the pass-through context, partnerships and S corporations, whose income is passed-through to the owners, will be required to attribute this deferred COD income to the persons who owned interests when the COD income was recognized, even if they are no longer owners of the entity.
Summary
While many taxpayers are in the process of renegotiating the terms of their debt instruments and attempting to reduce costs, it would be wise to keep these new NOL carryback and COD deferral rules in mind, as there are significant economic benefits available through careful tax planning in these areas.
John Beery is an Associate in Gould & Ratner's Tax and Financial Group. He may be reached at 312.899.1699 or via email at jbeery@gouldratner.com.
Back To Top Illinois Amends Mortgage Foreclosure Act Michelle L. Selig This is somewhat good news for homeowners facing foreclosure because the length of action by the mortgagee has been extended, providing an additional 30- or 60-day grace period for the mortgagor to pursue a workout plan. The amended Act provides that: · For all mortgages delinquent more than 30 days, the mortgagee must now send a notice by first-class mail to the mortgagor advising that he or she may wish to seek housing counseling before any foreclosure proceeding can commence. No foreclosure action may be taken before this notice is sent, and legal action is stayed for 30 days after the notice is mailed. The amended Act defines what information must be contained in the notice, and it may be combined with a counseling notification required under federal law. The notice must be sent to the common address of the residential real estate secured by the mortgage. · If an approved housing counseling agency sends written notice to the mortgagee during the 30-day stay period, advising that the mortgagor is seeking its services, another 30-day stay is created after the date of that notice. During this new stay, the mortgagor or counselor or both may submit a loan workout plan to the mortgagee. If the mortgagee accepts this plan, it prohibits any foreclosure action as long as the mortgagor complies with the agreed upon plan. If the mortgagor does not comply with the plan, the mortgagee may enforce the contract. The plan and any modifications must be in writing and signed by both parties. It is important to note that housing counseling agencies must be approved by the U.S. Department of Housing and Urban Development. The amended Act also allows the Secretary of the Department of Financial and Professional Regulation to certify other persons or entities as approved counseling agencies if there are shortages in a particular geographic area. However, only not-for-profit housing counselors will be certified by the Department of Financial and Professional Regulation. Michelle Selig is a Partner in the Real Estate Group. She may be reached via email at mselig@gouldratner.com or at 312.899.1668. Back To Top Ten Steps to Protect Landlord in Tough Economic Times David M. Arnburg 1. Know Your Tenants' Financial Status. Meet with tenants to review their financial strength. Many leases require tenants to submit financial statements upon request. 2. Insurance Certificates. Make sure all tenant insurance certificates are current and consistent with the lease. 3. Interest and Late Fees. Bill and collect late fees and interest on late payments or risk waiving the right to collect these amounts at a later date. If Landlord has not collected these amounts in the past, notify tenants in writing that interest and late charges will be billed and collected per the lease on future late payments. 4. Default Notices. Promptly issue default notices. Certain tenant rights are conditioned upon default including rights to rent abatement, work allowances, lease assignments, subleases, and options to extend, renew or expand. Loss of these rights may further incentivize the Tenant to cure the default. 5. Security Deposits and Letters of Credit. Request and enforce security deposits. An irrevocable letter of credit from a financially solvent bank in lieu of a cash security deposit may provide better protection in a tenant bankruptcy. The letter of credit should automatically renew unless Landlord receives notice from the issuing bank. Negotiated reductions in the letter of credit should be in the lease and not part of the letter of credit with a reduction occurring by means of an amendment approved by Landlord. 6. Retail Tenants. Enforce the permitted use and hours of operation provisions. Review the gross sales reports as a reduction in sales may provide an early alert to potential problems. Consider auditing gross sales to determine whether tenants are reporting all gross sales. 7. Operating Expenses and Tax Billings. Accelerate tax and operating expense estimates and reconciliations, and consider midyear adjustments, to avoid large lump sum billings to tenants. Review expense and tax exclusions in leases in anticipation of increased tenant audits to reduce costs. 8. Subleases. Use a separate consent agreement to set forth the rights and obligations of the parties. The consent should permit Landlord to continue the sublease as a direct lease with the subtenant if the lease is terminated and to collect rent directly from the subtenant in the event of a default under the Lease. 9. Partial Rent Payments. If Landlord accepts a partial rent payment, Landlord should send a notice of default or advise tenant that partial payment is not a waiver of the tenant's obligation to pay the full rent amount or an accord and satisfaction. 10. Termination of Possession or Lease. If Landlord intends to terminate a lease or the tenant's possession of the premises for failure to pay rent, use the statutory notice of default. The default notice should be delivered in accordance with the notice provisions of the lease. During the cure period, Landlord may accept partial rent payments without invalidating the default notice. After expiration of the cure period, Landlord's acceptance of partial rent payment will invalidate the default notice. Notify the bank maintaining any lockbox to hold any checks from tenants who have received a default notice. In Illinois, unless the tenant has vacated the premises or cannot be located, Landlord may only obtain possession of the premises by a forcible detainer action. Entry by force or changing locks is not permitted. David Arnburg is a Partner in the Real Estate Group. He may be reached at 312.899.1600 or via email at darnburg@gouldratner.com. If you have any questions concerning the above matters or other landlord tenant matters, please feel free to contact David, Linsey Cohen or Joseph Marzo of our office. Back To Top Attorneys in the Spotlight Gerald Ratner will be awarded the alumni Service Medal of the University of Chicago at Rockefeller Chapel on June 6, 2009. Fred Tannenbaum will speak on "Earnouts" at a Chicago Bar Association seminar on June 11, 2009. In addition, Fred's recent article on "Earnouts" will be published in the October issue of The Practical Lawyer. John Washburn is Chairman of the Board of the Chicago College of Performing Arts at Roosevelt University, which presented its annual Gala Concert in April at the Auditorium Theatre. After joining the Cliff Dwellers Club in the fall of 2008, Virginia Harding is now leading its Burnham Program Committee which is charged with organizing Burnham Plan Centennial Programs for the Club throughout the year. Daniel Burnham was a founder of the Club. Steve Gustafson has been elected to the Board of the No Wooden Nickels foundation, a cancer research charity. No Wooden Nickels provides financial and other assistance to individuals who would otherwise have to choose between paying for cancer treatment and paying for other basic essentials such as food and rent. Back To Top The Gould & Ratner Review is a periodic update for clients and friends on business and legal trends, strategies, and news. The material contained in this newsletter is only a synopsis of recent cases and legislative developments and is not legal advice. If you have a question or an individual claim involving a topic covered in this newsletter, you should seek a legal opinion based on the law as a whole and the facts of your particular case. We encourage your comments, suggestions and questions - please e-mail us at info@gouldratner.com. FEDERAL LAW AND PROFESSIONAL RULES IN SOME JURISDICTIONS MAY TREAT THE GOULD & RATNER REVIEW AS ADVERTISING. ________________________________ TO UNSUBSCRIBE: IF YOU HAVE RECEIVED THIS MESSAGE IN ERROR AND/OR IF YOU WISH TO BE REMOVED FROM OUR LIST, PLEASE REPLY WITH "REMOVE" IN THE SUBJECT LINE OF YOUR EMAIL. 
The Illinois legislature amended the Mortgage Foreclosure Act on April 6, 2009 to provide additional safeguards for homeowners in Illinois who face foreclosure of their mortgages. This amendment applies only to residential real estate that is the primary residence of the mortgagor and the notice outlined herein is only required once during the term of any mortgage. In addition, this amendment does not impact loans made after the effective date of the amendment, nor if the mortgagor has sought relief under the Bankruptcy Code. These amendments are not permanent and will automatically terminate on April 6, 2011.
In this economy, many tenants are struggling not only to pay their bills but also to stay in business. Summarized below are ten steps landlords can take to enforce their rights and preserve rental income in today's economy.