Report From Counsel - Summer 2005

Report From Counsel

SUMMER 2005 ISSUE

EMAIL USERS SHOULD BEWARE OF "PHISHING" SCAM

Many states have issued a consumer alert to emails users. The consumer alert warns citizens to beware of email messages from familiar companies that are actually the bait in a fraudulent scheme known as "phishing."

Phishing is a scheme in which Internet scammers lure consumers to a fake, but legitimate-looking website and then seek sensitive financial information from the consumer.

How Phishing Works

The Internet scammer send consumers emails that are disguised to look like memos from well-known retailers, banks, credit card companies, and government agencies. These unsolicited messages often convey a sense of urgency or warn of account termination. They encourage consumers to click on the provided web address, which supposedly links directly to the website of the legitimate business or agency. But it doesn't. Instead, consumers are linked to the scammer's look-alike website, which the scammer intentionally created to mimic the legitimate website.

The scammer makes subtle changes to these look-alike websites to lure consumers into entering sensitive information, usually to protect their account or to win a free gift.

Consumers are directed to enter such data as their Social Security number, credit card information, bank account numbers, passwords, and other personal information.

Phishing is one of the ways that cyber criminals perpetrate identity theft. Within minutes after an unsuspecting consumer enters personal information and account numbers, the criminals use that information to attempt to make credit card purchases and to withdraw or debit funds from the victim's accounts.

"Phishers" also sell this personal account information to other criminals. These fraudulent transactions are done very quickly so that victims do not have time to check on their account balances or consult with their banks or online merchants.

Know the Warning Signs

Many companies and agencies that have been "spoofed" are aware of these scams and have posted warnings and alerts on their website main pages.

Legitimate businesses, banks, and government agencies will not require consumers to send personal, account and financial information via email.

If you receive an urgent email or pop-up message directing you to visit a website where personal information is requested, that should be a big red flag that it is a scam.

Opening phishing emails and clicking on their counterfeit web links pose the danger of infecting your computer with a virus. Some viruses contain spyware programs that can track your personal computer use and monitor web surfing. Hidden spyware programs also can covertly change computer settings, promote unwanted pop-up ads, and cause your computer to malfunction, lose data and even crash.

Take Action if You've Been "Phished"

Upon receiving unsolicited, suspect emails with attachments, consumers should simply delete them -- and should never provide any personal or account information.

If you have submitted sensitive information in response to such an email message you should immediately contact your bank or credit agency to check the status of your accounts, and consider taking any further actions these agencies may suggest to secure your accounts and information.

ONLINE BANKING FRAUD

Consumers must be aware that along with the availability and ease of online banking comes risk. Criminals have devised schemes that trick or mislead online banking customers into revealing their used ID and password.

When such information is revealed to a criminal, the criminal can get access to the online customer's bank account and records, including the customer's Social Security number. This criminal activity can cause an online bank customer to lose money and credit standing and could perhaps lead to identity theft.

By using so called "online" banking, a bank customer can determine account balances and transfer and withdraw funds. Banks that offer online services should provide online customers with a secure connection so that unauthorized persons cannot access online customers' bank accounts. Most banks' security devices require a customer to provide a user ID (usually the bank customer's name) and a password in order to access their bank account.

Because online banking is relatively new, many people who participate in online banking are unfamiliar with the protocols and techniques of online banking.

The current ploy being used by criminals is to email a message to an online customer asserting that "there has been some unusual activity in your account," that "access to your account will be limited" until the "problem has been resolved," and that failure to "take the steps necessary to restore your account" may lead to closing your account. The criminals' message then politely tells the online customer to furnish the customer's user ID and password so that the problem with the online account can be fixed.

Do not provide anyone with your user ID or password unless you are certain that you are accessing your bank account through a legitimate online connection with your bank. If you receive emails stating that some online account problem exists, communicate directly with your bank. Do not provide your user ID or password to anyone who emails you and requests such information. Report to your bank all efforts made to obtain such information from you.

ENVIRONMENTAL LAW UPDATE

Wetlands Inspection

Paul owned waterfront property that included some tidal wetlands that were subject to state regulation. When he decided to extend his existing dock and add another boat lift, he submitted the necessary application to the state, but he refused to consent to a land-based inspection of the premises. Nevertheless, following the usual procedure, an inspector went to the property to make sure that plans submitted with the application accurately reflected existing conditions and to evaluate the possible impact of the project on the wetlands.

When the inspector arrived and no one answered the door, she passed through a gate with a "No Trespassing" sign on it to get into the backyard that led to the dock area. With a video camera rolling, Paul confronted the inspector, who identified herself and explained the reason for her visit. Paul told the inspector that she was trespassing, threatened to have her arrested if she did not leave immediately, and then escorted her off the property. The whole encounter took about three minutes.

Paul sued the state inspector for violation of his right not to be subjected to unreasonable searches or seizures. It is true as a general rule that an inspection of a private dwelling by a local or state officer, without either a warrant or the consent of the owner, is unreasonable absent certain exceptional circumstances. Unfortunately for Paul, his case fell within one of those exceptions, causing his lawsuit to fail. Under the "special needs" doctrine applied by the court, a weighing of several factors can justify a warrantless administrative inspection undertaken as part of a regulatory scheme.

In Paul's case, he had a diminished expectation of privacy since the outside areas around his home could be viewed by the public. Paul's privacy interest was also weakened by his having submitted the application that prompted the inspection in the first place. The intrusion by the inspector was minimal and was hardly different from the kind of observation of the property that anyone could have accomplished from the water behind Paul's house. The court emphasized that each case would turn on its particular facts, but in Paul's case the state's interest in regulating construction on tidal wetlands overrode any expectation of privacy.

No Help for Toxic Waste Cleanup

A company bought an aircraft engine maintenance business and operated the business for a few years. It then discovered that the property on which the business was located was contaminated with toxic waste, both because of the company's activities and the activities of the previous owner. The company reported itself to a state environmental agency, which told the company that it was in violation of state laws and directed that the site be cleaned up. However, neither the state agency nor its federal counterpart, the Environmental Protection Agency, ever brought a proceeding to force the cleanup.

Under the state's supervision, the company cleaned up the property (incurring costs in the millions of dollars) and unsuccessfully sued the previous owner that had contributed to the contamination, in hopes of getting a contribution to the cleanup costs as well. This case is a study in how a few words in a statute can control the outcome in a dispute where large sums of money are at stake.

The claim for a contribution to the cleanup costs rested on a part of the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). That statute states that any person "may" seek contribution from any other person who is or may be liable under CERCLA, "during or following any civil action" under CERCLA. The U.S. Supreme Court interpreted the statutory language as meaning that the company could not seek contribution from the previous owner (and fellow polluter) because no proceeding under CERCLA was ever instituted against the company that cleaned up the toxic waste.

The use of "may" by Congress meant that an action for contribution was authorized only if the conditions that followed were present, including a civil action under CERCLA. Appeals by the company based on the underlying purposes of CERCLA fell on deaf ears before the Court. As the Court put it, "It is ultimately the provisions of our laws rather than the principal concerns of our legislators by which we are governed."

NEW TAX DEPOSIT RULES FOR SMALL BUSINESSES

As of January 1, 2005, the IRS increased the minimum threshold for Federal Unemployment Tax Act (FUTA) deposits. Under the previous rule, employers were required to make a quarterly deposit for unemployment taxes if the accumulated tax exceeded $100. Now the threshold is $500.

The IRS estimates that this change will lighten the load for more than 4 million small businesses. Assuming an employer makes timely state unemployment tax payments, the most that the IRS will collect from employers per employee is $56 per year. Before the threshold was increased, most employers with two or more employees had to make at least one federal tax deposit a year. Now employers with eight employees or fewer will be freed from the requirement of making as many as four FUTA deposits per year.

FAMILY LIMITED PARTNERSHIPS DRAW IRS SCRUTINY

A family limited partnership (FLP), like other limited partnerships, is a form of business consisting of one general partner and one or more limited partners. In an FLP, however, the individuals involved usually are members of different generations of the same family. One of the advantages of a well-executed FLP is a reduction in federal estate and gift taxes. Instead of transferring assets directly to beneficiaries, an individual may transfer interests in a limited partnership. Since interest in an FLP is not marketable and since a limited partner does not control management of the enterprise, the value of interests in an FLP usually can be discounted by anywhere from 25% to 50%, with a corresponding reduction in tax liability.

As with many transactions among family members, the IRS has a history of casting a skeptical eye on FLPs. Essentially, the IRS is intent on assuring that the tax advantages of any particular FLP are not the be-all and end-all for its existence. If the FLP is deemed to be a sham, the IRS may challenge the valuation discount and perhaps even the very existence of the partnership.

In one recent case, a federal appeals court found an FLP to be legitimate despite some circumstances that had aroused IRS suspicion. A 96-year-old woman put about $2.5 million into an FLP, keeping $450,000 for her personal expenses. She died two months later. The fact that the transfer included interests requiring active management and that no personal assets, such as a house or car, were involved weighed in favor of the FLP. Also, the person making the transfer into the FLP did not manage the FLP. Perhaps most importantly, oil and gas operations provided an essential legitimate business purpose for the FLP.

In another case that was similar in many respects, including the age of the individual transferring the assets to the FLP, the assets were found to be subject to the estate tax because the FLP had not been formed for a valid business purpose. Transactions made by the FLP never went outside the family circle and amounted to financing the needs of individual family members.

Emerging from the cases are a few rules of thumb for setting up and running an FLP so as to realize its tax benefits without attracting the attention of the IRS:

* Articulate real business reasons for the FLP that can be substantiated by persons outside the FLP;

* Do not let the person transferring assets into the FLP transfer all of his or her assets or use the FLP to pay personal expenses;

* Assign control over the FLP to a general partner who is not the same person who funded the FLP. Often the general partner is an entity, such as a limited liability company;

* Have some "actively" managed assets in the FLP; and

* Follow the formalities for setting up and operating the FLP, including separate accounts and scrupulous adherence to formal accounting practices.

VETERANS' BENEFITS IMPROVEMENT ACT

A new federal law has enhanced the rights of members of the armed services during active duty and on their return to the civilian workforce. The Veterans' Benefits Improvement Act makes two significant additions to the Uniformed Services Employment and Reemployment Rights Act (USERRA). USERRA is intended to encourage non-career uniformed service by balancing the needs of individuals in those services with the needs of civilian employers who also depend on those same individuals.

Notice Requirement

The first provision requires that civilian employers inform employees of their rights and obligations under USERRA annually. The notice requirement may be met by posting a notice where employers customarily place notices for employees. This part of the new law became effective on March 10, 2005.

Extension of Benefits

The second change is an extension of employer-sponsored health care from 18 to 24 months, beginning with the person's absence from employment because of duty in the armed services. USERRA gives the individual the right to elect to continue coverage under the employer's health plan, even though the coverage otherwise would end because of the individual's absence. A "health plan" encompasses an employer's health, dental, vision, and prescription drug plans, as well as health reimbursement arrangements and flexible spending accounts. The employee, not the employer, pays for the coverage during the employee's absence. This health-care provision went into effect on December 10, 2004.

USERRA, the comprehensive legislation that was changed only in part by the Veterans' Benefits Improvement Act, is far-reaching in its impact, as it applies to private and public employers alike, regardless of size. It is subject to various conditions and exceptions that make a full reading of the law, not to mention professional guidance, advisable. USERRA affects the following areas:

* Reemployment--Employers must grant military leave for employees called to active duty or National Guard or Reserve training. On their return, the employees must get their jobs back or jobs with comparable seniority, status, and pay.

* Payroll--USERRA does not require an employer to continue to pay employees who are away on military duty (though some state laws do).

* Time Off--Employers cannot force employees to use vacation and sick days during military service, but neither do employers have to let vacation and sick days continue to accrue during the employee's absence. If the employer awards vacation days based on length of employment, the returning employee must receive vacation time that would have been given but for the military service.