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The dischargeability of taxes in bankruptcy is a very complex topic. However, many clients are surprised to learn that under certain circumstances, income tax debt can be discharged in bankruptcy.

When can income taxes be discharged in bankruptcy?

An individual’s income tax liability for any particular tax year is dischargeable in bankruptcy if ALL the following apply:

  1. A “return” was filed. (A “substitute for return” filed by the IRS is not considered a return).
  2. The return was actually filed more than 2 years prior to filing bankruptcy.
  3. The return was due (with extensions) more than 3 years prior to filing bankruptcy.
  4. Taxes were assessed more than 240 days prior to filing bankruptcy.
  5. No fraud or willful evasion exists.

The waiting periods to qualify tax liabilities for dischargeability in bankruptcy do not begin to run until the client files the tax returns. It is counter-productive to put one’s head in the sand to avoid filing tax returns. It will prolong the time a client will have to wait to obtain the discharge of potentially large tax liabilities.

Even if tax liabilities result from filing a return, the IRS has many consumer-friendly payment plan options that do not affect the waiting periods to discharge the tax debt. A payment plan may be necessary while weighing bankruptcy options.

Chapter 7 income limitations do not apply in “non-consumer” cases. A “non-consumer” case is one in which more than half of the client’s debt is essentially business related. Tax debt is considered “non-consumer” in nature. Therefore, even high income earners may qualify for a “non-consumer” Chapter 7 bankruptcy to discharge unlimited amounts of qualifying income tax liability.

Even if a client cannot discharge tax debt in a Chapter 7 (such as liability from recent years), a Chapter 13 reorganization can be used to allow orderly payment of the tax debt while discharging other dischargeable debts.

Sometimes the IRS files tax liens. Liens generally pass through bankruptcy unaffected.  This means that although bankruptcy will discharge a debtor’s personal liability for the tax debt, the lien will remain. But the lien only attaches to property of the debtor that existed when the bankruptcy petition was filed. The IRS is then able to sell certain property to satisfy its lien. It is therefore best to weigh all bankruptcy options before a tax lien is filed.

 

January 25th, 2021

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Things you want to know but might be afraid to ask.

Why is there bankruptcy? Bankruptcy has been around for hundreds of years. It provides a fresh start, allowing bankruptcy clients to get back on their feet and contribute once again to the economy. Bankruptcy places all similar creditors on equal ground. It sometimes allows certain creditors to be repaid in part or in full, and allows businesses to reorganize.

Chapters of Bankruptcy:

Chapter 7 is the most common type of bankruptcy. It is a liquidation bankruptcy. Chapter 7 debtors must turn over their non-exempt assets to a bankruptcy trustee, who then sells them and pays the creditors according to certain priorities set by the Bankruptcy Code. Many individuals do not have any non-exempt assets, so they lose nothing.  In exchange for turning over any non-exempt assets, clients receive a “discharge” of their debts. Chapter 7 has certain income limitations, so not everyone is eligible for this type of bankruptcy. However, the income limitations do not apply if more than half of a person’s debts are business-related.

Chapter 13 is reorganization type of bankruptcy for individuals or sole proprietorships, but not corporations. It is generally (but not always) used for people that do not qualify for Chapter 7. Under a Chapter 13 Plan, debtors pay their excess monthly disposable income to a Chapter 13 trustee for 3-5 years, after which most remaining debts are discharged. Chapter 13 has certain debt limits.

Chapter 11 is a larger scale reorganization for individuals or corporations. Usually, a trustee is not appointed, and the debtor is “Debtor in Possession.” Chapter 11 cases are more complex but also more flexible. Creditors must vote for the plan, which can extend beyond the 5-year maximum plan duration of Chapter 13.

January 25th, 2021

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Our many small business clients are experiencing the effects of the COVID-19 pandemic on commerce —locally, nationally, and especially globally. The pandemic has presented unprecedented challenges to commercial landlords and tenants alike, either enforcing contractual lease provisions or in meeting those obligations. Only time will tell how courts and other alternative dispute resolution forums will ultimately decide the resulting pandemic related lease issues—namely, the application of force majeure clauses, and other contractual defenses such as impossibility of performance and frustration of purpose.

What is a force majeure clause?

A force majeure clause is “[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” Force-Majeure Clause, Black’s Law Dictionary (11th ed. 2019). Force majeure clauses are often included in contracts, and –at least until COVID-19 — may have been considered essentially boilerplate language to protect the parties from unforeseeable or uncontrollable events. Depending on the exact wording of such provisions, they may excuse performance when an “act of God” or other unforeseeable event like fire, war or riots occur—but normally would not extend to buffer a party against the normal risks of a contract.

So does a force majeure clause cover pandemics, such as COVID-19?

Sometimes carefully drafted force majeure clauses include disease, illness or quarantine, for example. Rarely do they include any specific viruses, but it will be no surprise to see more specifically drafted clauses in the future—both to limit a tenant’s exposure and to protect the landlord—each side vying for the upper hand. But even where a particular event is not expressly mentioned in a force majeure provision, COVID-19 could trigger another act that is specified such as governmental act or order that renders performance illegal or impossible. Some courts could decide that the list of events in the governing lease or contract reflects an intent to exclude other events. Some courts will be likelier than others to agree that a particular event is “unforeseen”. After COVID-19, contract drafters will think differently about this clause: a provision that includes specific reference to COVID-19 or other epidemic or pandemic will be easier to enforce than one that does not.

Might other lease or contract defenses apply to excuse nonperformance?

Even if a lease or other contract does not contain a specific force majeure provision, other defenses could apply, such as impossibility of performance or frustration of contractual purpose. According to case law, after a contract is made, if a party’s principal purpose is substantially frustrated or impracticable (without his fault), his remaining duties to render performance can sometimes be excused or at least delayed. Similarly, if performance is rendered illegal, performance may be excused as well.
While these legal issues are novel and interesting in the context of COVID-19, as a small business client experiences these challenges, the most important goal is to develop innovative legal solutions to “stop the bleeding” for each party. Especially with so much suffering in all sectors of business and society in general, courts will be looking for parties to creatively resolve their disputes.

August 7th, 2020

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Sometimes we can control our financial situations. Sometimes we cannot. The reality of Arizona bankruptcy is that most people never intended to end up there. Many fight as long as possible to avoid it. In these trying times, many people are losing their jobs, confronting unexpected medical bills and job losses. As a result, many people find themselves with a debt burden they cannot overcome.

The federal and Arizona bankruptcy laws are designed to protect people from unreasonable debt burden. No matter how you got there – job loss, medical bills, mortgage underwater, skyrocketing expenses, divorce, job loss, or health issues – you may be able to find relief by filing for bankruptcy. The first step is to consult with an experienced bankruptcy attorney who will help you make a plan for a better future.

Early legal consultation is important. It may be that you need to stop making payments on debts that you cannot repay, such as credit cards and mortgages on properties you plan to surrender. Planning is important. You cannot simply give away your valuables and home contents to relatives and friends, expecting to hide them. In bankruptcy, people can keep most of their possessions, but full disclosure about your assets and any transfers must be made. We will be able to counsel you regarding allowable and prohibited transfers as well as property that is exempt from the claims of your bankruptcy trustee.

Allowable bankruptcy planning can protect some of your assets.

Understand that your credit score is probably already damaged. While a bankruptcy filing will have an adverse effect on your credit, you will be able to rebuild your credit faster than you may think. More importantly, the discharge of your debts will allow you to build a better future.

Once your bankruptcy petition is filed, all the collection phone calls and letters will stop, allowing you to regain your peace of mind.

Try to make peace with your situation. The federal bankruptcy laws exist to allow honest people to get a fresh start.

April 1st, 2020

Posted In: Uncategorized

Most attorneys, whether or not they practice bankruptcy law, are familiar with the “automatic stay” of 11 U.S.C. §362(a). Amongst other things, it operates to stay collection actions, service of process, lien perfection, and judgment enforcement, upon the debtor’s filing of a bankruptcy petition. Creditors and their attorneys alike, however, are less familiar with the provisions of 11 U.S.C. §108(c), which extends certain non-bankruptcy time limitations for taking actions that are prohibited while the automatic stay is in effect. Section108(c) provides, in pertinent part:

“If applicable non-bankruptcy law . . . fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, . . . and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of — (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 30 days after notice of the termination or expiration of the stay under section 362 . . . of this title . . . with respect to such claim.”

The extension applies equally to co-debtors (individuals jointly obligated with the debtor on a consumer debt) under chapter 12 or 13.

While the language of section 108(c) appears relatively straight-forward, it can be a trap for those unfamiliar with the provision. The most common example of section 108(c)’s applicability is when a statute of limitations expires while a debtor is in bankruptcy. Because of the automatic stay, the civil action cannot be commenced. However, section 108(c) extends the period to bring the action until 30 days after the stay is lifted, usually via court order or because the bankruptcy is dismissed. Many, unfamiliar with section 108(c), wrongly assume that a bankruptcy case tolls any applicable statute of limitations. This is incorrect. Under section 108(c), if the statute of limitations ran while the bankruptcy case was pending, then a creditor has only 30 days to bring its claim once the stay is lifted. This is true regardless of how long the creditor was “stayed” by virtue of the bankruptcy filing.

Similarly, the deadline is not tolled if it expires after the automatic stay has been lifted. Rather, a creditor has until the expiration of the deadline itself, unless such deadline expires less than 30 days after the lifting of the stay, in which case the 30-day extension of sub-section (2) applies. Put another way, a creditor gets the longer of the expiration of the statute of limitations or the 30-day extension.

Most Chapter 7 bankruptcies proceed swiftly to a discharge providing a creditor with certainty about the effect on its claim. In those cases, the creditor’s claim is likely lost and any applicable statute of limitations becomes moot. Many Chapter 13 bankruptcies, however, are active for several years before eventually getting discharged or dismissed. If dismissed, pre-petition creditors once again have the ability to try to enforce their claims through collection or litigation. But, they must act swiftly if the deadline to act ran while the bankruptcy was pending.

If you represent creditors, make sure to properly advise your client about any applicable statute of limitations and the effect thereon of section 108(c). Failure to do so could result in your client losing its right to collect on its claim.

April 26th, 2018

Posted In: Uncategorized

Most people know very little about what bankruptcy really is. People from the “old school” may tend to view filing bankruptcy as a shameful act by those irresponsible who do not know how to manage their money. Or, even worse, an easy escape from debt they ran up intentionally and simply do not care to pay. But to the contrary, in reality, I find that my bankruptcy clients have often done almost everything possible to avoid bankruptcy–unfortunately sometimes to their own detriment.

As partner at Radix Law, most of my bankruptcy clients, including business owners, have tried their best in life and have done most things right. They have tried to manage their risks. They have tried to make responsible investment decisions. They have worked hard, become educated, grown businesses, saved money for retirement and have taken care of their health and their families. Some have been wildly successful but one thing no one has is a crystal ball.

Even the most successful businesses can fall flat in a struggling economy. People guarantee business debt because banks require them to, never thinking their carefully researched and well-structured business could fail. House and land values can plummet, like in the recent recession. People lose even the most seemingly secure high-paying jobs—even in a recovering economy. Those sorts of jobs can be the most difficult to replace. People get very sick and they also get divorced.

When things start to take a turn for the worst, most people wait longer than they should to consider bankruptcy options. For example, money saved in qualified retirement plans, like 401K accounts and IRAs, is protected in bankruptcy. Most people can keep their homes and their equity. Some (but not all) inheritances are also protected. But some people will go through their entire nest egg or sell their homes to avoid the perceived shame or stigma of bankruptcy, leaving them extremely financially vulnerable and emotionally spent.

So, while bankruptcy should remain something people should want to avoid, it is not always something they should avoid. It is intended to help honest, but unfortunate people who need a fresh start. Often that fresh start is a new business through which people can begin to contribute once again to the economy. Sometimes people or businesses reorganize their debt through a Chapter 13 or 11 because they just need a little breathing room. Considering bankruptcy is often the most responsible thing a person or a business can do.

May 8th, 2017

Posted In: Uncategorized

PHOENIX – The Frutkin Law Firm has become the first Arizona practice to take advantage of the state bar’s trade name rule. It announced it will rebrand as Radix Law on Jan. 1 2017.

There is a long tradition in the practice of law: the name of a firm includes the surnames of the most prominent partners. As law has become such a big business over the past decade, the largest practices in the world are names of partners who have long since passed away.

This tradition was also required by the Arizona Bar until recently. Now, firms can ditch the commas in favor of a more universal trade name.

Radix, in Latin, means “root.” It can mean the root of a tree, the root of knowledge or the root of a number. While the firm’s attorneys come from all over the world, they have decided to be rooted in Arizona.

“Our new name reflects our values,” says Principal Jonathan Frutkin. “We are a business law firm that helps our clients pursue opportunities and fights for them when challenged – and we are rooted right here in Arizona. It is also an acknowledgement that we have grown from being a solo legal practice into a business law firm with almost a dozen lawyers.”

The Frutkin Law Firm was formed in 2007 and now has 11 attorneys with decades of experience. They serve companies, individuals and families throughout Arizona in business and corporate law and related areas, ranging from taxation and asset protection to bankruptcy and estate planning. Radix Law leads the Valley of the Sun in estate planning and trust administration law. Radix Law’s attorneys are respected sources in their field and contribute to local and national media.

About Radix

Radix Law, formerly The Frutkin Law Firm, was founded in 2007 by attorney Jonathan Frutkin with the goal of providing exceptional legal representation to clients throughout Arizona in business and corporate law and related areas. Radix helps businesses, individuals, and families in Phoenix and throughout Arizona with their corporate and business law, bankruptcy, taxation, asset protection, wills, trusts, and estates, and litigation needs. The firm is located at the Kierland Commons in Scottsdale. For more information, visit radixlaw.com

December 30th, 2016

Posted In: Uncategorized

For the first time in four years, the Arizona Department of Health Services is opening applications for medical marijuana dispensary licenses this summer. Commercial landlords will have a golden opportunity to lease space to marijuana businesses, which have plenty of capital and a high demand for their product. But these businesses pose unique challenges to a commercial landlord.

The federal government regulates drugs through the Controlled Substances Act, which does not recognize the difference between medical and recreational use of marijuana. Under the CSA, it is illegal to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance. Marijuana is designated as a Class One Controlled Substance, just like heroin, and under federal law is not approved for sale or distribution in the State of Arizona. Marijuana production and distribution continue to be federal crimes even in Arizona, where in November of 2010, voters passed the Arizona Medical Marijuana Act (“AMMA”). This conflict between state and federal law has created significant amounts of litigation in practice areas ranging from real estate to bankruptcy. This is because an exemption from prosecution under state law does not obstruct the federal government’s ability to investigate and prosecute an individual for a violation of federal law.

Federal law has not been strictly enforced for several years. This has been due to temporary moratoriums on federal funding for enforcement as well as federal policies outlining conditions under which the federal government will not interfere with state marijuana legalization programs. Federal enforcement of what is otherwise the legal production, distribution and sale of marijuana at the state level has been a low priority. This qualified “hands off” approach may be comforting to those inclined to lease facilities to a marijuana business.

But there is a definite balancing act—does the landlord determine the risks of civil forfeiture of its property or other penalties are too great and choose not to engage in any cannabis related business, or does the landlord calculate that risk into the costs it charges to the marijuana entrepreneur? There are many factors that must go into this decision, with just a few discussed below.

First, most commercial mortgages prevent tenants from operating illegal businesses on a subject property. This can reduce the pool of potential lessors to the small minority of properties that carry no commercial bank loan. Also there are certain commercial landlords who for moral reasons will not consider leasing to a marijuana business. As a result, the industry’s demand is concentrated into a small percent of the otherwise available market. Some research shows that rents for a cannabis based business can be three to five times higher than market levels. In this regard, the commercial landlord can reap huge rewards. Another consideration is whether marijuana operations violate use restrictions in other leases, declarations or other recorded covenants that affect the property.

Because banks are federally regulated, and in spite of some recent easing of certain restrictions, most marijuana businesses still do not have access to financial services and tend to do business entirely in cash. A commercial landlord should expect to receive its rent and other charges in cash, and normal boilerplate lease language will need to be drafted to permit this mode of payment.
Also, water and energy bills will be large if a grow facility is involved. As a commercial landlord, the allocation of these costs must be considered as well as other costs unique to a marijuana business, such as security. Additionally, if there are common areas, issues such as ventilation, waste products and use of marijuana on-site must be addressed.

As a commercial landlord, it would be advisable that any lease relating to a cannabis related business contain clauses that specifying the selection of venue and applicable governing law. It is important to provide that interpretation of the lease and adjudication of the parties’ rights be limited to current state law, to avoid the argument that the lease should be considered void as against public policy or contrary to existing law.

To be fair, a landlord might expect a savvy tenant to address what would happen in the unlikely but potentially catastrophic event of federal intervention. It might indeed be fair to expect a negotiated provision for an early termination event permitting the tenant to cancel the lease without any further financial obligation, if the federal government attempted seizure or other intervention.

Suffice it to say that assuming a commercial landlord determines it wants to both assume the risks and enjoy a possible lucrative lease with a marijuana business, simple boilerplate leases are simply not sufficient. Both the tenant and landlord have to navigate carefully through this changing landscape.

May 4th, 2016

Posted In: Uncategorized

Be careful what you tweet. With the growth of social media outlets come more opportunities not only to express oneself but also to defame others. Let’s face it, Twitter has made posting potentially defamatory comments so very easy. The universe of potential publishers on Twitter is virtually everyone. The spreading of defamatory content can be instantaneous.

“Twibel” is a libelous tweet, and making this social media blunder can have serious legal consequences.

A California appeals court recently upheld a jury‘s verdict determining that Courtney Love Cobain did not defame her former attorney in a tweet. The case was filed by an attorney who formerly represented Love. The case is remarkable because it appears to be the first of its kind—involving “Twibel”- to actually go to trial. After the death of Love’s husband, Kurt Cobain, she hired an attorney, Rhonda Holmes, to investigate and file a lawsuit involving fraud in connection with Cobain’s estate. Love and Holmes had serious disagreements regarding the handling of the case. In fact, they even disagreed about whether the attorney eventually quit or was told by one of Love’s representatives to discontinue the representation. In the context of this strained relationship, Love sent a tweet to two individuals, which she deleted less than 10 minutes later. It suggested that Holmes had been “bought off.” Specifically, the tweet stated: “@noozjunkie I was … devastated when Rhonda J Holmes Esq of San Diego was bought off @fairnewsspears perhaps you can get a quote.”

According to the appellate court, Love testified at trial that she never meant to suggest that Holmes had actually taken a payment in the nature of a bribe, but believed at the time, based on the attorney’s explanation of the delay in filing suit, that Holmes, “had been ‘gotten to’ or ‘compromised’ in some manner.” Considering the evidence in the light most favorable to Love, the appellate court said the jury could well have found that Holmes failed to prove by clear and convincing evidence that Love knew her tweet contained false information or had serious doubts about its truth.

Under traditional common law notions of defamation, a plaintiff need only prove a statement was a 1) defamatory statement, 2) made about another person by someone who had the intent to publish without any applicable privilege, or at least was negligent in publishing, and 3) this statement resulted in damages and/or harm to the subject’s reputation. After the 1964 Supreme Court case of New York Times v. Sullivan, defamatory statements about those classified as public figures must meet an actual malice standard requiring clear and convincing evidence for liability to attach. This higher standard for celebrity Courtney Love undoubtedly contributed to her victory.

Social media is now considered a legitimate form of publishing. Libel law only requires that a statement was published to a third party, and whether it was seen by one person or many does not matter. Additionally, a tweet is not protected by the fact that it only existed for a few minutes and can be removed, like the one in Love’s case.

The Twitter user, not the social media site, is liable for any defamatory statements made. Social media sites like Twitter are protected by Section 230 of the Communication Decency Act and are not liable for defamatory content that people post using its site. The bottom line is that the user is responsible for his tweets and is not immune to liability simply because he is not a professional journalist. Courts appear willing to apply traditional defamation principles to potentially libelous tweets from all social media users. Private individuals publishing content in non-traditional forums, such as on Twitter, should not expect to be treated differently from traditional publishers simply because the use of social media is thought of as fun and informal communication. While courts do consider the context of a tweet and surrounding circumstances, a court’s interpretation of a tweet may not coincide with the intention of the person who tweeted in a spontaneous moment. Although recent decisions suggest that tweets typically contain protected opinions rather than actionable statements of fact, as more courts are asked to consider claims arising from statements made through social media, it is possible that any initial bias in favor of the casual Twitter user may change. So, think before you tweet.

March 1st, 2016

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December 3rd, 2016

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