It’s election time!  Our article this month discusses the two eminent domain propositions.  We summarize the changes to the Do Not Call Registry rules and the new Vehicle Code prohibiting cell phone use while driving.  And, we report on some interesting real estate related court decisions.  Finally, please note a correction at the end of the article regarding the new C.A.R. forms.

EMINENT DOMAIN PROPOSITIONS

In response to the 2005 U.S. Supreme Court decision, Kelo v. City of New London, a number of states have enacted legislation to rein in what many voters saw as a potential for eminent domain abuse.  The June 3, 2008 California Statewide Direct Primary ballot has two such propositions that deal with eminent domain and are of interest to real estate professionals -- Proposition 98 and Proposition 99.  The California Association of REALTORS® supports Proposition 98 and opposes Proposition 99.  Here are the reasons for your consideration prior to going to the poles:

Proposition 98 is in response to a growing trend by local governments to take private property to make room for commercial and residential development that will generate higher tax revenue.  Proponents of Proposition 98 believe this is an inappropriate, and abusive use of eminent domain.  Proposition 98 would impose an outright ban on the use of eminent domain to take any private property (not just homes, but also businesses and farms) for another private use.  It would prohibit government from imposing inclusionary zoning ordinances or rent control (rent controls would be lifted as units are vacated).  It would prohibit future land use restrictions that act as a “taking” for the benefit of another private interest.  It would prohibit government from taking private property to be used for the same purpose, for example replacing private residential housing with government housing.  Governments would not be allowed to seize family farms and open space to takeover the property’s natural resources.  If passed, full and just compensation would have to be paid where eminent domain is allowed for public uses, such as freeways, parks, and schools.  That would include compensating owners for temporary business losses, relocation expenses, business reestablishment costs and other reasonable expenses.  For more information on Proposition 98 go to www.YesProp98.com.

Proposition 99 was prepared in response to Proposition 98.  Its proponents claim it is designed to maintain the status quo by only offering protection from eminent domain to owner-occupied single-family residences if the owner has lived there for at least one year.  It will prohibit the government from using eminent domain to take a home to transfer to a private developer and will protect against eminent domain abuse.  To get more information on Proposition 99 go to www.no98yes99.com.

If both propositions pass and Proposition 99 gets more votes, it will cancel out Proposition 98.

NEW LAWS

“Do Not Call” Registry

Two changes have been made to the Do Not Call laws:

The “Do-Not-Call Improvement Act of 2007” makes changes to the rules for removing telephone numbers from the list.  Previously, registered telephone numbers were automatically removed from the registry five years after the registration date.  Under the new law, the person to whom the telephone number is assigned may request its removal.  The FTC is not charged with periodically checking the numbers in the Registry to confirm the accuracy of the numbers.  A number may also be removed if it is invalid, has been disconnected, or reassigned.

The “Do-Not-Call Registry Fee Extension Act of 2007” allows the FTC to raise the Registry fees in proportion to the rise of the Consumer Price Index, so Congress does not have to enact legislation to annually adjust the Registry fees.  New fees are set for telemarketers accessing the Registry for 2008-2009:  $54/area code during the first 6 months of registration ($27 for the final six months) or $14,850 for the whole list.  The first 5 area codes remain free.

Cell Phone Use While Driving

Real estate professionals should be aware of the requirements of Vehicle Code section 231123 that take effect on July 1, 2008.  We reported on these new rules previously, but here is a recap of the rules for using cell phones while driving:

• Drivers may not use a handheld wireless phone

• Drivers over age 18 may use a hands-free device.

  • Dialing is not prohibited but is strongly discouraged

  • Blue Tooth or other earpiece is allowed, but not on both ears

  • Texting is not prohibited, but could result in a citation for being distracted and not operating the vehicle safely and is strongly discouraged

• Drivers under age 18 may not use either a wireless phone or hands-free device

• Exceptions for emergencies (to call law enforcement, medical provider, fire department, or other emergency services agency) and commercial trucks (not pickups) for “push-to-talk” two-way radios.

• Fines:

      1^st offense                     $20 ($76 with Uniform Bail and Penalty Schedule assessments)

      Subsequent offenses     $50 ($190 with Uniform Bail and Penalty Schedule assessments)

• Conviction will be on driving record, but no violation point will be assigned

COURT CASES

Search of Travelers’ Laptop Data Allowed

Real estate professionals who travel should take note of the case of U.S. v. Arnold, which has been followed with great interest by privacy advocates and airline travelers.  A federal appellate panel recently found that customs officials have the right to boot up and view data on passengers’ laptop computers, even without reasonable suspicion of a crime.

Mr. Arnold, a U.S. citizen, was returning from a trip to the Philippines.  A U.S. Customs and Border Patrol officer selected him at Los Angeles International Airport for secondary questioning.  The agent told Arnold to turn on his computer so she could check if it was working.  She and another agent then clicked on desktop icons titled “Kodak Pictures” and “Kodak Memories.”  The files contained photos of nude women.  Officers from the Department of Homeland Security then searched further and found child pornography.  Arnold was charged with three felony counts and moved to suppress the evidence. 

The panel of three judges, two 9^th U.S. Circuit Court of Appeals judges and a presidential appointee from the district court in Oregon, reversed the Los Angeles district judge’s grant of a motion to suppress the evidence.  The panel suggested travelers should not expect privacy and rejected arguments that it is an unconstitutional invasion of privacy for officials to view innocent travelers’ laptop contents at airports.  The panel equated laptop computers to closed containers that courts have long held to be subject to border search without particularized suspicion under the Fourth Amendment.

In the wake of this decision, companies will need to review their corporate travel policies and business practices to protect sensitive and privileged information from seizure and downloading. 

$850,000 Sexual Harassment Settlement

The ad says “What happens in Vegas, stays in Vegas.”  Well, after EEOC v. Caesars Entertainment, what happened at a Las Vegas hotel/casino became very public.  In 2005, the Equal Employment Opportunity Commission (“EEOC”) filed a suit for employment discrimination against Caesar’s Palace, a Las Vegas hotel/casino (“Caesar’s”).  The federal agency responsible for administering the federal anti-discrimination law claimed that a class of Spanish speaking Latina kitchen workers at Caesar’s were severely sexually harassed since 2000.  The harassment included unwelcomed sexual conduct, forced physical touching, lewd conduct and exposing private parts, showing nude pictures, and offers of favorable treatment in exchange for sex.  The claim also charged that Caesar’s management illegally retaliated against the women for complaining about the abuse.  The retaliation took the form of demotions, loss of wages, further harassment, discipline or discharge.  After failed attempts to reach a voluntary settlement with Caesar’s, the EEOC filed suit under Title VII of the Civil Rights Act of 1964.  The case had an August 20, 2007 court date.  Settlement was finally reached.  Caesar’s agreed to pay $850,000 to the 8 workers and to provide training to all employees in English and Spanish, to provide semi-annual reports to the EEOC regarding its employment practices for 3 years, and to revise its employment policies and procedures to confirm to its obligations under the Title VII.

Unfortunately, the number of harassment and discrimination claims continue to rise.  Brokers and agents should be aware of their responsibilities to have anti-discrimination policies, to train their staff regarding the law and the company’s policies, to enforce their policies, and to never, never, never retaliate against a person who reports that he believes he is a victim of harassment or discrimination.

IRS Targets Single Member LLC

Limited liability companies (“LLCs”) are a popular form of business for real estate investment and development.  According to a report from RealtyTimes (April 24, 2008), there are 1.2 million limited liability companies (“LLCs”) in the United States today.  LLCs can provide legal protection, limit personal liability of business owners, and simplify record keeping and tax reporting.  The LLC is chosen by many because it is the only business structure that can choose how it wants to be taxed.  Unless the LLC makes an election otherwise, the IRS treats an LLC as a sole proprietorship and assigns a default tax status based on the number of owners:  partnership treatment if there are two or more owners; “single-member disregarded” status if there is only one owner or a couple filing a joint tax return. 

Some important court decisions have raised concern among business attorneys and business owners who are operating in the form of a single-member LLC.  These decisions illustrate the importance of how a single-member LLC is classified for tax purposes.

In a Colorado case a few years ago, an LLC owner filed for bankruptcy protection and attempted to protect the assets in his single-member LLC from the bankruptcy trustee.  He lost that argument in court. 

In a recent Kentucky case, Littriello v. United States, the owner of a nursing home formed an LLC.  Instead of using the “check the box” tax decision, he decided to operate his company under the “default” tax schedule.  He then left the operation of his business to hired staff, and an employee embezzled from the company and failed to pay payroll taxes for the employees.  When the IRS came calling, Mr. Littriello was surprised to learn that he was personally responsible for the unpaid payroll taxes.  The IRS treated the business as a sole proprietorship in all aspects because the owner had not selected “disregarded entity status” for the LLC.

A third case from the Supreme Court held that a company in Ohio could be taxed on money earned from its subsidiary’s sale in Illinois.  This ruling increased state’s rights to tax income made in another state.  The Ohio parent company considered the Illinois company to be an investment, not a subsidiary.  The two companies did not share management, offices, or resources and did not offer each other discounts.  The Ohio parent company claimed that the Illinois company was no different than a piece of real estate and that under the law, states cannot reach across state lines to tax passive income.  However, the court applied the “unitary business principal” (interstate parts of a business together make up a whole business).  The Supreme Court explained that the characteristics of a unitary business include “functional integration, centralized management, and economies of scale.”  A company that handles management from a home office could be held to have a unitary business.  The court then looks at the type of investment activities at issue and determines whether they are operational or passive.  If the real estate investments are passive, the gains will probably not be taxable in two states. 

Real estate professionals who are operating under a single-member LLC should consult with a tax professional to confirm that the appropriate tax classification has been elected.  Businesses that invest in or operate in multiple states should consult with an attorney to discuss whether the assets of the LLC should be held on a state-by-state basis.

CORRECTION:  In our last Courtside Newsletter, we reported on new and revised C.A.R. forms issued in April 2008.  we stated in error that “The NODPA form has been eliminated.”  That should have read:  “The HEAA form has been eliminated.”  The Home Equity Explanation and Agency Agreement was eliminated, and the Notice of Default Purchase Agreement was revised. We apologize for any confusion.

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The writer of this month’s article is  Sylvia J. Simmons, Attorney, Giardinelli & Duke, APC.  She can be reached at Sylvia@gdlawoffices.com, or 951/ 244-1856.