Enforcing Trademark Rights Online Through The
ICANN Domain Name Dispute Resolution Policy &
The Anticybersquatting Consumer Protection Act[1]

Henry J. Fasthoff, IV[2]

May 2000

I. Introduction[3]

The hottest commodity in Cyberspace is the domain name. Between 1996 and 1999, the number of domain names registered in the United States exploded from 1 million to more than 6 million.[4] As a result, more than 97% of the words in Webster’s Dictionary have been registered.[5] Given the critical importance that a catchy, memorable domain name has for the success of a website, some people have been able to make significant sums of money by selling domain names. For example, the domain name “business.com” sold for $7.5 million in 1999, and “America.com” is currently on the auction block for a minimum bid of $10 million.

These facts demonstrate a momentous increase in competition for securing the right domain. Noticing this trend, many entrepreneurs have taken advantage of the domain name boom. These entrepreneurs fall into two categories—domain name traders and cybersquatters.[6] Domain name traders typically register generic names, such as business.com or wine.com, that were not at the time of registration or sale trademarks owned by third parties.[7] Domain name traders seek to sell their registered domains to other Internet entrepreneurs seeking to build and identify their Internet businesses.

Cybersquatters, on the other hand, routinely register and hold hostage domain names that are either identical or confusingly similar to trademarks owned by third parties, in an effort to block a trademark owner from using the domain until the owner agrees to pay what is often an exorbitant sum for the domain. The explosion of cybersquatters has spawned a significant amount of trademark infringement litigation.

II. Protection & Enforcement of Trademark Rights Online

It is a truism that the law develops much slower than technology. When widespread commercial use of the Internet began, there existed no laws or policies that specifically addressed Internet legal issues. With the Internet developing at warp speed, and new legal issues seemingly being raised on a weekly basis, lawmakers, regulators, and the courts have struggled with trying to apply laws which are not adapted to the technological marvels of the Internet.

In 1999, two new mechanisms were implemented to provide trademark owners with improved methods for protecting and enforcing their trademark rights in the context of domain name disputes. On October 24, 1999, the Internet Corporation for Assigned Names and Numbers (“ICANN”), a non-profit corporation which administers the domain name system,[8] implemented its Uniform Domain Name Dispute Resolution Policy (“UDRP”).[9] In addition, on November 29, 1999, the Anticybersquatting Consumer Protection Act (“ACPA”),[10] a U.S. federal law, took effect.

III. ICANN Uniform Dispute Resolution Policy

The UDRP is not a law; rather, it is a policy which is enforced through a contractual agreement, i.e., via the registration agreements entered into by each person who registers a domain name with a registrar (“Registrar”).[11]

The UDRP is designed to give trademark owners an alternative to litigation against cybersquatters. Upon a Registrar’s receipt of a complaint from a third party (“Complainant”) that a registered domain infringes upon the Complainant’s trademark rights, the UDRP requires the registrant of the domain name at issue (“Respondent”) to submit to a mandatory administrative proceeding.[12] A neutral administrative panel (“Panel”) is appointed by an ICANN-approved dispute resolution service provider, such as the World Intellectual Property Organization (“WIPO”)[13], to attempt to resolve the dispute.[14]

Importantly, only disputes that involve top-level domains ending in .com, .net, and .org are covered by the UDRP. Other country code domains, such as .co.uk for the United Kingdom or .ru for Russia, are not governed by the UDRP. Accordingly, as it currently stands a trademark owner whose rights are infringed by a domain ending in anything other than .com, .net, or .org must enforce its rights through other avenues, such as litigation.

During the pendency of an administrative proceeding, neither the Complainant nor Respondent are prevented from instituting court proceedings in a court of mutual jurisdiction, defined as a court in the location of (a) the principal office of the Registrar (provided that the Respondent submitted to the jurisdiction of the courts where the Registrar is located in the Respondent’s agreement with the Registrar), or (b) the domain-name holder’s address as shown in the WHOIS database[15] at the time the complaint is submitted.[16]

A. Elements Of A Claim Under The UDRP

The burden of proof is on the Complainant. A Complainant must prove each of the following elements in the mandatory administrative proceeding:

(1) the domain is identical or confusingly similar to a trademark or service mark in which the complainant has rights;

(2) the Respondent has no rights or legitimate interests in respect of the domain name; and

(3) the domain name has been registered and is being used in bad faith.

1. Evidence Of Bad Faith Registration and Use Under The UDRP

To prove evidence of registration and bad faith, the Panel may take into consideration each of the following:

(1) circumstances indicating that the Respondent has registered or acquired the domain name primarily for the purpose of selling, renting, or otherwise transferring the domain name registration to the Complainant who is the owner of the trademark or service mark or to a competitor of that Complainant, for valuable consideration in excess of your documented out-of-pocket costs directly related to the domain name; or

(2) the Respondent has registered the domain name in order to prevent the owner of the trademark or service mark from reflecting the mark in a corresponding domain name, provided that the registration has engaged in a pattern of such conduct; or

(3) The Respondent has registered the domain name primarily for the purpose of disrupting the business of a competitor; or

(4) By the using the domain name, the Respondent has intentionally attempted to attract, for commercial gain, Internet users to the Respondent’s website or other on-online location, by creating a likelihood of confusion with the Complainant’s mark as to the source, sponsorship, affiliation or endorsement of the Respondent’s website or location or of a product or service on the Respondent’s website or location.

2. Evidence Of Legitimate Interest In Domain Name

The Panel may consider any of the following circumstances by the Respondent to demonstrate the Respondent’s rights and legitimate interests in the domain name:

(1) before any notice of the dispute, the registrant’s use of, or demonstrable preparations to use, the domain name or a name corresponding to the domain in connection with a bona fide offering of goods or services; or

(2) the Respondent (as an individual, business, or other organization) has been commonly known by the domain name, even if the Respondent has acquired no trademark or service mark right; or

(3) the Respondent is making a legitimate noncommercial or fair use of the domain name, without intent for commercial gain to misleadingly divert consumers or to tarnish the trademark or service mark at issue.

B. Remedies Under The UDRP

The Panel is vested with only limited authority—it can require either the cancellation of the domain name or the transfer of the domain name to the Complainant.[17] If the Panel determines that a Respondent’s domain name registration should be canceled or transferred, the Respondent has 10 business days[18] within which to file a lawsuit and provide evidence of the filing to ICANN, such as a file-stamped copy of the complaint. If within the 10-day period ICANN receives evidence that a lawsuit has been filed, ICANN will take no further action until it has received (1) evidence satisfactory to ICANN that the parties have settled the lawsuit, or that the case has been dismissed, or (2) a copy of a court order dismissing the lawsuit or ordering that the Respondent no longer has the right to use the domain name. If no lawsuit is filed during the 10-day period, ICANN will implement the Panel’s decision.[19]

IV. Anticybersquatting Consumer Protection Act

Like the UDRP, the Anticybersquatting Consumer Protection Act (“ACPA”) gives a trademark owner a mechanism by which to protect and enforce its trademark rights on the Internet. Unlike the UDRP, however, the ACPA is not a policy enforced through a contractual arrangement. Instead, it is a U.S. federal law, the violation of which can impose severe consequences on one who violates the law.

A. Elements Of A Claim Under The ACPA

The ACPA applies to all marks that are protected under Section 43 of the Lanham Act, which includes both registered and unregistered trademarks.[20] The ACPA distinguishes the between protection that is available for distinctive[21] marks and famous[22] marks.[23] If the mark is distinctive, the plaintiff must prove[24] that the person (1) has a bad faith intent to profit from the mark, (2) and either “registers, traffics[25] in, or uses” a domain name that is identical or confusingly similar to that mark.[26] If the mark is famous, the plaintiff must prove that the person (1) has a bad faith intent to profit from the mark, and (2) either “registers, traffics in, or uses” a domain name that is either identical or confusingly similar to that mark, or is dilutive of that mark.[27]

1. Evidence Of Bad Faith Intent To Profit From A Mark Under The ACPA

The ACPA identifies are nine nonexclusive factors which a court can consider in determining whether there exists a bad faith intent, including:

(1) the trademark or other intellectual property rights of the person in the domain name;

(2) the extent to which the domain name consists of the legal name or other name commonly used to identify the person;

(3) the person prior use of the domain in connection with the bona fide offering of any goods or services;

(4) the person’s bona fide noncommercial or fair use of the mark in a site accessible under the domain name;

(5) the person’s intent to divert consumers from the mark owner’s online location to a site accessible under the domain name that could harm the goodwill represented by the mark, either for commercial gain or with the intent to tarnish or disparage the mark, by creating a likelihood of confusion as to the source, sponsorship, affiliation, or endorsement of the site;

(6) the person’s offer to transfer, sell, or otherwise assign the domain to the mark owner or any third party for financial gain without having used, or having an intent to use, the domain name in the bona fide offering of any goods or services, or the person’s prior conduct indicating a pattern of such conduct;

(7) the person’s provision of material and misleading false contact information when applying for the registration of the domain name, the person’s intentional failure to maintain accurate contact information, or the person’s prior conduct indicating a pattern of such conduct;

(8) the person’s registration or acquisition of multiple domain names which the person knows are identical or confusingly similar to mark of other that are distinctive at the time of registration of such domain names, or dilutive of famous marks of others that are famous at the time of registration of such domain names, without regard to the goods or services; and

(9) the extent to which the mark incorporated in the persons’ domain name registration is or is not distinctive and famous within the meaning of 15 U.S.C. § 1125(c) [the Trademark Dilution Act].[28]

If the court determines, however, that the person believed and had reasonable grounds to believe that the use of the domain name was a fair use or otherwise lawful use, the court cannot find that there was a bad faith intent to profit from the mark.[29]

B. Remedies

The ACPA entitles a successful plaintiff to temporary and permanent injunctive relief,[30] lost profits,[31] actual damages,[32] costs of court,[33] and attorney’s fees.[34] In addition, if the mark at issue is registered with the U.S. Patent & Trademark Office, the plaintiff may also be entitled to treble damages. Alternatively, instead of going to the expense of proving actual damages, a plaintiff may choose at any time before final judgment in rendered by the court to recover statutory damages of between $1,000 and $100,000, as the court considers just. The option of choosing statutory damages applies only to cases where the domain name was registered after the November 29, 1999 effective date of the ACPA. Finally, the remedies available to a plaintiff under the ACPA are in addition to any remedies that may otherwise be available to the plaintiff.[35]

C. Protection for Individual Names

The ACPA also provides cybersquatting protection for the names of individuals in certain circumstances.

1. Elements of a Claim for Individual Name Cyberpiracy

Specifically, 15 U.S.C. § 1129 of the Act provides that any person who registers a domain name consisting of

(1) the name of another living person, or a name substantially and confusingly similar thereto;

(2) without that person’s consent; and

(3) with the specific intent to profit from the name by selling the domain name for financial gain to that person or any third party,

shall be liable in a civil action to the person whose name consists of the domain name.[36] Section 1129 only prohibits the selling of the domain name itself; it does not prohibit a cybersquatter from using the individual’s name to profit by, for example, operating a gambling or pornographic website located at the subject domain name address. To stop such activities, an individual would be forced rely on other claims such as defamation or violation of rights of publicity, among others. If, however, the individual’s name is protected as a mark under federal trademark or unfair competition laws, i.e., Elvis Presley or Cindy Crawford, regardless of whether they are a “living person” as required by § 1129, that person would have a remedy under the ACPA as discussed in sections IV(A)-(B) above.

2. Exception to Liability

There is an exception to liability for registration of an individual’s name as a domain name if the registrant registers a domain name consisting of a living person’s name, or a name substantially identical and confusingly similar thereto, if

(1) the name is used in, affiliated with, or related to a work of authorship protected by federal copyright law;

(2) the registrant is the copyright owner or licensee of the work;

(3) the registrant intends to sell the domain name in conjunction with the lawful exploitation of the work; and

(4) the registration is not prohibited by a contract between the registrant and the named person.[37]

The exception set forth above applies only to claims brought under § 1129, and does not limit protections afforded under the Trademark Act of 1946 or other provisions of federal or state law.[38]

For example, assume that BMG Records (Britney Spears’ record label) owns the copyright in the sound recordings of the masters contained on the Britney Spears’ album “Oops…I Did It Again”, and that there exists no contractual provision between Spears and BMG prohibiting BMG from registering her name as a domain name. Section 1129 would not prohibit BMG from registering and selling the domain name www.britneyspears.com, as long as it was done “in conjunction with the lawful exploitation” of the album. If, however, Spears objected to BMG’s registration and sale of the domain name, she would be able to invoke other remedies available under the Trademark Act and other federal and state laws.

3. Remedies for Cyberpiracy of Individual Names

Under § 1129, a court is limited to awarding injunctive relief, including the forfeiture or cancellation of the domain name, or the transfer of the domain name to the plaintiff.[39] Additionally, a court has discretion to award attorney’s fees and costs to the party prevailing in an action brought under § 1129.[40]

D. In Rem Jurisdiction Available In Certain Cases

Recognizing that obtaining personal jurisdiction over a defendant in Japan, for example, would often be exceedingly difficult, and sometimes impossible, Congress wisely included a provision in the ACPA authorizing in rem jurisdiction (Latin for “jurisdiction over the thing”) in certain cases. In rem jurisdiction allows trademark owners to file suit against the domain name itself. In rem jurisdiction is available only when the court finds that the mark owner (1) is not able to obtain personal jurisdiction over the registrant of the domain, or (2) has exercised due diligence by following statutorily specified procedures[41] but been unable to locate the registrant. In these limited circumstances, a lawsuit may be brought in the judicial district in which the domain name registrar that registered or assigned the domain name is located.[42] In an in rem proceeding, a plaintiff’s remedies are limited to the forfeiture or cancellation of the domain, or transfer of the domain name to the owner of the mark.[43]

V. Conclusion

The United States’ and international laws are struggling to keep up with the breakneck speed at which the Internet is forcing a rewrite of the legal landscape. The UDRP and the ACPA are critical first steps in providing trademark owners with a mechanism for enforcing their intellectual property rights online. Other laws on the horizon, such as the Uniform Computer Information Transactions Act,[44] will undoubtedly have important ramifications on Internet intellectual property issues. Buckle down—it’s going to be a long, bumpy ride.

For further information regarding this subject, or if your rights as a trademark owner have been violated and you would like to discuss the options available to you to protect and enforce your trademark rights, please feel free to contact:

Henry J. Fasthoff, IV

Stumpf Craddock Massey & Pulman

1400 Post Oak Blvd., Suite 400

Houston, Texas 77056

713-871-0919

713-871-0408

hfasthoff@scmplaw.com

www.scmplaw.com

[1] Copyright Ó 2000 Henry J. Fasthoff, IV. All Rights Reserved.

[2] Mr. Fasthoff is an attorney with Stumpf Craddock Massey & Pulman, a Houston-based full service law firm with additional offices in Austin, San Antonio, and Beaumont, Texas. Mr. Fasthoff’s practice encompasses the areas of Internet & e-commerce law, intellectual property law, entertainment law, telecommunications law, and business litigation. Mr. Fasthoff is licensed by the State Bar of Texas. Not Certified By The Texas Board Of Legal Specialization.

[3] The information provided in this article is not intended to be, and should not be construed as, legal advice or opinion. The information in this article is provided for informational purposes only. The transmission and receipt of any information contained in this article does not form or constitute an attorney-client relationship.

[4] C-NET News.com, Net Names Glitter for Entrepreneurs, December 28, 1999.

[5] Id.

[6] For purposes of this Article, “Cybersquatters” includes both cybersquatters and cyberpirates.

[7] Due to the inherent generic nature of many one-word domain names like business.com or wine.com, such names may not qualify for trademark protection. It is critical for business owners to seek advice from a qualified attorney before selecting domain names to determine whether they will infringe upon the trademark rights of third parties, or whether the proposed domain names may even qualify for trademark protection.

[8]See ICANN website, About ICANN. http://www.icann.org/general/abouticann.htm

[9] The UDRP was adopted pursuant to a report issued by the World Intellectual Property Organization (“WIPO”). See ICANN Board Resolution 99-81. http://www.icann.org/santiago/santiago-resolutions.htm#anchor16725

[10] 15 U.S.C. § 1125(c).

[11] A “Registrar” is an ICANN-accredited entity through whom domain names are registered. Examples of Registrars include Network Solutions, Inc., and Register.com, Inc.

[12] Uniform Dispute Resolution Policy ¶ 4(a).

[13] Four dispute resolution providers have been approved by ICANN: the World Intellectual Property Organization, the CPR Institute, Disputes.org/E-Resolution Consortium, and the National Arbitration Forum. Each dispute resolution provider adheres to its own set of supplemental rules.

[14] The Complainant selects which dispute resolution provider shall preside over the dispute. Uniform Dispute Resolution Policy ¶ 4(d).

[15] The WHOIS database is a compilation of the names, addresses, and other contact information for each registered domain name. See www.whois.org.

[16] One wonders what would happen if the registrant did not submit to jurisdiction at the location of the Registrar and he had moved from, say, Maine to California since her registered the domain name. Would the UDRP require any lawsuit to be brought in Maine even though Maine had no connection to the issues at hand? Presumably, forum non conveniens doctrine would allow any case brought in Maine to be transferred elsewhere.

[17] Uniform Dispute Resolution Policy ¶ 4(i).

[18] The “10 business days” that count are those which business days which are observed at ICANN’s principal office, which as of May 10, 2000 was 4676 Admiralty Way, Marina Del Ray, California, United States. Upon receiving a notice of a decision from the Panel, a practitioner would be well-advised to contact ICANN and determine whether any legal holidays as observed in the location of its principal office would have any effect on the timeline for filing a lawsuit. See Uniform Dispute Resolution Policy ¶ 4(k).

[19] Uniform Dispute Resolution Policy ¶ 4(k).

[20] 15 U.S.C. § 1117(a) (identifying persons entitled to relief).

[21] “By definition, all ‘trademarks’ are ‘distinctive’. . . . 4 McCarthy on Trademarks & Unfair Competition § 24:91, at 24-149 (4th ed. 1997). To be distinctive, “the word must serve to identify and distinguish the seller, not merely to describe a characteristic of the product.” 2 McCarthy on Trademarks & Unfair Competition § 11:18 (4th ed. 1997).

[22] A “famous” mark is a mark that is “instantly recognizable to the consuming public.” Gideons Int’l, Inc. v. Gideon 300 Ministries, Inc., 1999 WL 262451 (E.D. Pa. May 3, 1999) (No. Civ. A. 97-7251). In determining whether a mark is distinctive and famous, a court may consider factors such as, but not limited to—

(A) the degree of inherent or acquired distinctiveness of the mark;

(B) the duration and extent of use of the mark in connection with the goods or services with which the mark is used;

(C) the duration and extent of advertising and publicity of the mark;

(D) the geographical extent of the trading area in which the mark is used;

(E) the channels of trade for the goods or services with which the mark is used;

(F) the degree of recognition of the mark in the trading areas and channels of trade used by the marks’ owner and the person against whom the injunction is sought;

(G) the nature and extent of use of the same or similar marks by third parties; and

(H) whether the mark was registered under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register.

15 U.S.C. § 1125(c)(1).

[23] The ACPA also applies to a trademark, word, or name protected by reason of 18 U.S.C. § 706 (providing civil and criminal penalties for unauthorized use of the Red Cross words, insignia, or emblem), and 36 U.S.C. § 220506 (providing civil penalties for unauthorized use of the words or marks of the United States Olympic Committee, the International Olympic Committee, the Pan American Sports Organization, and other related words and symbols.

[24] A plaintiff must also prove the elements of a ownership of the mark and that the mark is otherwise protected under the section 43 of the Lanham Act.

[25] As defined in the ACPA, “traffics in” refers to “transactions that include, but are not limited to, sales, purchases, loans, pledges, licenses, exchanges of currency, and any other transfer for consideration or receipt in exchange for consideration.” 15 U.S.C. § 1125(d)(1)(E).

[26] 15 U.S.C. § 1125(d)(1)(A)(ii)(I).

[27] 15 U.S.C. § 1125(d)(1)(A)(ii)(II).

[28] 15 U.S.C. § 1125(d)(1)(B)(i)(I)—(IX).

[29] 15 U.S.C. § 1125(d)(1)(B)(ii).

[30] 15 U.S.C. § 1116(a).

[31] 15 U.S.C. § 1117(a).

[32] Id.

[33] Id.

[34]Id.

[35] 15 U.S.C. § 1125(d)(3).

[36] 15 U.S.C. § 1129(1)(A).

[37] 15 U.S.C. § 1129(1)(B).

[38] Id.

[39] 15 U.S.C. § 1129(2).

[40] Id.

[41] 15 U.S.C. § 1125(d)(2)(A)(ii)(II)(aa)—(bb).

[42] 15 U.S.C. § 1125(d)(2)(A) and (C).

[43] 15 U.S.C. § 1125(d)(2)(D)(i).

[44] As of the writing of this Article, only one state, Virginia, has adopted some form of the Uniform Computer Information Transactions Act. As with the Uniform Commercial Code, the remaining states are sure to follow in adopting some form of the UCITA.

Let’s face it, we all hate to pay taxes. Filing our tax returns is often painful and time-consuming, not to mention expensive. Unfortunately, many people encounter some type of tax problem during their lifetime. Whether it is failing to file their taxes on time, not having the money to pay taxes that are owed, or failing to file a tax return for years at a time. Tax problems are common.

The best way to avoid tax problems is, obviously, to file and pay your taxes on time. The next best way to avoid problems is to file your tax return or extension on time, even if you do not yet have the money to pay outstanding taxes. The filing of the tax return will stop hefty penalties from being assessed against you.

The penalty for failure to file your return on time is 5% of the amount owed for each month the return is late to a maximum of 25%! For example: If the amount of tax owed is $10,000 and you file your return six months late, you will be liable for the $10,000 tax plus $2,500 in failure to file penalties plus interest. This is a rate that would make most loan sharks foam at the mouth. Thus, even if you cannot afford to pay your tax, you can save yourself a significant amount of money by simply filing your return on time.

Potential solutions where you owe taxes

Most individuals and small businesses that encounter IRS problems are not aware that there are several potential options available to reduce their IRS debt. Like most things in life, even IRS taxes are negotiable.

Before the IRS will consider any negotiations you must be up to date by filing all delinquent returns. Once your returns are up to date you can negotiate with the IRS to abate penalties, interest and even reduce significant tax liabilities if payment is beyond your means. Penalties

The IRS, where appropriate, will “abate” penalties. If a taxpayer can show “good cause” any penalties that have been incurred may be wiped out and the taxpayer will not be responsible to pay them. There is no hard and fast definition of “good cause” for which to abate penalties. All sorts of problems can fit under this term. Thus, it is important to consult with your tax professional to discuss your options.

Payment Plan

Instead of paying the IRS everything that you owe in one big chunk, the IRS may agree to accept regular payments to pay back taxes. A payment plan can help you avoid embarrassing wage garnishments and inconvenient levying of your bank account by the IRS

Offer in Compromise

Another alternative for paying off a large tax liability is the Offer in Compromise. This is where you make a lump sum payment to the IRS to resolve all outstanding taxes owed. Generally, this occurs where you are simply unable to pay back taxes. Often, an Offer in Compromise can be made for a percentage of what you owe.

It is important to take care of your tax problems as soon as possible. Procrastinating only results in more penalties and interest being assessed against you. You can deal directly the IRS, or have an attorney or other tax-preparer represent you.

Article written based on California Law

As small business owners are well aware, we live in a time where anyone who feels that they have been wronged files a lawsuit. Now, more than ever, it is important that small businesses examine their options to determine the correct type of business entity in which to operate. Choosing the right type of business type can save your home and other personal assets being at risk if you are named in a business-related lawsuit.

Sole proprietorship

Most individual owners of small businesses operate what is called a sole proprietorship. For example: George, a printer, opens George’s Print Shop. This is the cheapest way to operate with no special state filing requirements to start the business. The major problem with operating as a sole proprietorship is, of course, the personal vulnerability of the owner’s assets.

Running as a sole proprietorship means that George, the owner, is personally liable for any and all debts and claims made against George’s Print Shop. Personal liability is something to be steadfastly avoided if possible. It is better to do avoid the potential for personal liability before any lawsuits have been filed against a business.

Partnership

A partnership is where two or more people operate a business in concert with a common goal, e.g. George and Fred, open George and Fred’s Print Shop. The partnership differs from the sole proprietorship in that there is more than one person that owns and is responsible for the business.

There are tax advantages to using a partnership in that income and losses of the partnership are generally passed through to the partners’ tax returns directly. However, a partnership carries the same potential for personal liability of each partner as a sole proprietorship, i.e., personal assets are at risk.

An additional potential problem is that each partner can bind the partnership and other partner(s) to contracts. Thus, a partnership carries the risk that your partner can put your personal assets at risk. If the print shop fails, both George and Fred’s personal assets are at risk for creditors to use to satisfy debts owed by George and Fred’s Print Shop. It is very important before entering into a partnership that you know AND trust your partner(s).

Limited partnership

Another type of partnership is called a “limited partnership”. A limited partnership has at least one “general partner” with full personal liability for all partnership debts. However, the limited partnership also has “limited partners” who have liability and participation in the business limited to their investment in the partnership.

Corporation

A Corporation is a separate entity such as George and Fred’s Print Shop, Inc. Use of a corporation limits the liability of all of the owners (stockholders) of the corporation. Provided the corporation is set up correctly and initially has adequate capitalization and maintains the separateness of the corporate entity there is no personal liability for the stockholders.

Formation of a corporation is not nearly as simple as with a partnership. There are specific filings that must be made with the State and certain corporate formalities that must be maintained in order to preserve the corporate status and limited liability. Additionally, a corporation is more expensive since yearly fees and taxes must be paid.

The major advantage to the corporate entity is, of course, its limited liability. With a limited partnership, only the general partner would still be liable for the damages to the injured party. In a corporation, generally only the corporation is liable, not the officers, directors or shareholders.

Limited Liability Company (LLC)

An LLC is a hybrid type of entity that has characteristics of both partnerships and corporations. An LLC has the “pass through” income and loss treatment of partnerships. However, an LLC also has liability limitations of corporations. An LLC can have fewer formal requirements such as regular meetings. However, the LLC, like the corporation has to pay yearly fees and taxes to the State making it more expensive than a partnership or sole proprietorship.

The LLC and small closely held corporations are typically two entities that have similar characteristics that should seriously be considered by the small business owner. Knowing what type of entity to choose to do business under is a very important decision for the small business owner. Most small businesses should consult with an attorney before making the decision on how to operate. However, speaking with an attorney to discuss the available options is very important.

I have had many business clients come to me after a former client or employee has sued them. Their question always seems to be, “How could I have avoided this lawsuit”? I have also had many inquiries from individuals who want to know if they can sue a business for incidents that range from defective products to rudeness.

What I have learned in my practice is that poor public relations can often be the catalyst for a bitter lawsuit. The resulting lawsuit costs both sides to the dispute thousands of dollars in legal fees and countless hours of anxiety.

I was recently reminded of the importance of public relations on a family vacation. While waiting to check into a well-known hotel, a heavy brass stanchion fell over and hit my three-year-old daughter in the head. She was crying and her head was bleeding. Needless to say my wife and I were upset and extremely worried that my daughter might have a concussion.

Immediately the hotel’s employees took action. They administered first aid to my daughter, reviewed a list of local physicians with us and arranged for a doctor to come to our hotel room to examine my daughter. Throughout the rest of our stay they continued to call to see how my daughter was feeling. They even sent up a pitcher of chocolate milk and a basket of cookies with well wishes from the staff.

Fortunately, it appears that my daughter is fine and although my wife and I are still upset by the incident, the immediate action taken by the hotel employees to help our daughter made a big difference and allowed us to enjoy the rest of our vacation without too much anxiety.

“The most cost-effective way to avoid a lawsuit is simply to be nice to people.”

Had the hotel not been as courteous and concerned about our daughter’s welfare, our vacation might have been an unhappy memory and the hotel would have lost us as guests and/or be contending with a lawsuit. Instead, the hotel’s good public relations helped alleviate some of the anger and tension we were feeling.

A growing trend is for people to sue when they are offended.

In my years of practice I have noticed a growing trend in people that want to litigate over principle regardless of the amount of money at stake. This perceived increase in litigation might be the result of the technological age we live in. It is easy to understand a customer’s frustration when they have to navigate through a sea of electronic options over the telephone to obtain the simplest, most basic information. Often a customer is not even able to talk with a real person. It is easy to feel isolated and disenchanted. These feeling often become the seeds of a lawsuit motivating the individual to seek legal counsel.

The most cost-effective way to avoid a lawsuit is simply to be nice to people. This may sound like common-sense advice. It is. However, too often we lose sight of common sense when someone acts belligerent or angry when we feel that his or her anger is undeserved. The old adage that the customer is always right is not necessarily true. However, all service-oriented businesses should certainly act like the customer is always right.

If you do so you will defuse the situation and give the customer a reason not to want to sue you. You will then be much more likely not only to keep existing customers but also to gain more customers since word will get around that you are customer oriented.

An Overview

The Qualified Personal Residence Trust (often referred to by its acronym, “QPRT”) can be an effective estate planning technique for a high net worth individual. The concept is simple: the owner of a personal residence transfers it to a trust, but retains the right to live in the residence for a specified period of years. At the end of that period of years, the children (or other designated beneficiaries) become the owners of the residence. Thereafter, the residence will no longer be a part of the former owner’s taxable estate.

How This Technique Works

The tax advantage of the technique comes primarily from the way in which the value of the gift to the trust is calculated. The value of the gift is not the value of the residence on the date of the gift. Instead, the gift is only the value of the children’s right to take possession of the residence at the end of the specified period of years, which can be far less than the current value of the property. For example, a $1,000,000 home can be gifted to a QPRT, removing $1,000,000 from the grantor’s taxable estate, but the taxable gift may be as little as 10 or 20 percent of the value of the residence. By keeping the gift tax value of the QPRT transfer below the $675,000 in 2000 and 2001 exemption from federal gift tax, the grantor can avoid paying federal gift tax on the gift. If the value of the residence is so large that even the reduced value of the transfer to the children would trigger a gift tax, the use of the QPRT will still be valuable and the payment of the gift tax may actually prove to be advantageous. Any gift tax paid now will reduce the estate tax due at death, provided the grantor lives at least three years after the tax is paid. Although the concept of a QPRT is simple, the decision to created one should not be made without a fairly complex tax calculation to determine the value of the taxable gift which will be made. This value is a function of (i) the age of the grantor; (ii) the number of years during which the grantor will retain the right to occupy the property; (iii) the current appraised value of the property; and (iv) the current IRS actuarial tables and interest rates used to calculate future values.

The QPRT trust document may contain provision such as these:

A. The Grantor could be the sole Trustee of the QPRT, and make all management decision.
B. The QPRT would continue for a specified number of years, after which the property could be transferred either outright to the children or in a further trust for their benefit. The number of years that the QPRT is designed to continue requires careful thought since the tax benefits are lost if the grantor dies before the QPRT ends. A longer trust term increases the tax advantages, but also increases the risk that premature death will erase those advantages.
C. During the term of the QPRT, the grantor would be entitled to all rights of occupancy, and would be responsible for all costs of maintenance.
D. If the residence is sold during the term of the QPRT, another home can be purchased. If a replacement home of equal value is not purchased, the unused cash proceeds must either be distributed back to the grantor (thus forfeiting the tax benefit), or the cash must be invested and the grantor will be paid an annuity for the balance of the QPRT term (thus reducing, though not necessarily entirely eliminating, the tax benefit), after which the remaining trust assets will be distributed to the children.
Tax Implications of the QPRT

A. The objective of the QPRT is to reduce estate taxes by removing the property from the grantor’s estate. If the grantor’s death occurs after the QPRT has ended, the grantor’s taxable estate for federal estate tax purposes will include only the value of the children’s future interest in the residence when the trust was created, and all appreciation in value after the date of the gift will have been removed from the grantor’s estate.
B. On the down side, if the grantor has survived the QPRT term, the residence will not receive a “step up” in its income tax cost basis to estate tax value because the residence will not have been taxed in the grantor’s estate. For this reason, the QPRT is best suited for a home likely to stay in the family until the children’s deaths, when the residence will get the desired step-up in basis. However, even if the property is later sold by the children, the capital gains tax (at least under current tax law) will be far less than the inheritance tax that otherwise would have been due had the QPRT not been created.
C. During the QPRT term, the grantor will be treated for income tax purposes as if he or she were still the owner of the property; ie., the grantor can deduct real estate taxes, take advantage of tax elections on the sale of the property, etc. If the property is sold by the QPRT, a capital gains tax will be due in the same amount as if the grantor still owned the property. Additionally, the grantor must pay the capital gains tax out of his or her own funds, which often produces a good estate tax result because payment of the tax reduces the grantor’s taxable estate.
D. If the grantor dies before the completion of the term of years specified in the QPRT, the trust will end and the property will be distributed to the grantor’s estate and be disposed of by the grantor’s Will. The tax advantages will be lost, but there will be no tax detriments - taxes will be calculated as though the QPRT had never been created.

COMMONLY ASKED QUESTIONS

Q: How Long Should The QPRT Last?

A: Generally, the QPRT should be planned to last as long as possible so as to make the value of the taxable gift to the children as small as possible - but not so long that the grantor dies before the QPRT ends, which would lose the tax benefit because the property would be included in the grantor’s taxable estate.

Q: Can I Still Use My Residence After the QPRT Ends And The Children Become the Legal Owners?

A: That is entirely up to the family. If the property continues to be the grantor’s residence, presumable an agreeable rental arrangement will be worked out.

Q: Can I Use a Vacation Home Or Condominum For My QPRT?

A: Yes. A QPRT can hold either your primary residence or one other residence that you occupy.

Q: May I Use My Spouse’s Unified Credit (Lifetime Exemption Of $675,000 in 2000 and 2001) To Shelter My QPRT Gift If The Value Of My Gift Exceeds My Own $675,000 in 2000 and 2001?

A: Yes. However, it is risky (and probably unwise) to do so, because if you die before the QPRT ends, your spouse’s exemption will have been wasted. This unfavorable result can be avoided by giving your spouse a one-half interest in the residence first, and then creating two QPRTs, one for each of you.

Q: What Happens If I Wish To Stop Using The Property In The QPRT As A Personal Residence?

A: There are two choices. The trust agreement can provide that the trust will end and the property is to be given back to you. This may be unattractive, for if the cash proceeds are distributed to you, the tax shelter ends. Alternatively, the trust agreement can provide that the property is to be sold and either (a) a new residence purchased for you, or (b) the cash can be invested and you will receive a cash annuity - for example, if the net proceeds are $1,000,000, you might receive $100,000 per year until the termination of the trust. This will continue the tax shelter.

Q: What Are The Costs Of Managing a QPRT?

A: Little or none. If the grantor or a family member or friend is the sole trustee, which commonly is the case, there are no Trustee’s fees. Usually no court costs or court supervision is involved. If the grantor is also the Trustee, the trust does not file tax returns. There are costs involved in establishing the trust, however, such as attorneys’ fees for preparing the trust agreement and deeds of transfer and accountants’ fees for preparing the gift tax return.

Q: Can My (Wife) (Husband) Have The Right To Live In Our Home After My Term Expires?

A: Yes. Taxes are not affected.

This memorandum is intended to convey to you the principal considerations of qualified personal residence trusts as they apply to common situations. For that reason I have deliberately simplified the technical aspects of the tax law in the interest of clear communication. Under no circumstances should you rely on the contents of this Memorandum for technical advice nor should you reach any decisions with respect to qualified personal residence trusts without further discussion and consultation with your legal counsel and tax advisors.
Courtesy of: Steven W. Tarta, Attorney at Law. 45 N. Broad Street Ridgewood, NJ 07450 PHONE 201-444-8448 E-MAIL: TARTALAW@ATT.NET Fax 201-612-0827Please be sure to check out www.tartalaw.com for estate planning learning center information.

A charitable remainder trust (CRT) funded during the grantor’s lifetime can be a very effective financial planning took, providing the grantor valuable lifetime benefits.

Take the case of 72 year-old Phillip Philanthropist who has $1,000,000 of highly appreciated tech stock. Phillip has charitable inclinations, but is worried about the rising cost of health care. He feels he cannot afford to give away $1,000,000 during his lifetime as he may need to sell the stock in the future to meet nursing home expenses. However, Phillip plans to leave any stock remaining at his death to his favorite charities. While this plan is of enormous benefit to Phillip’s name charities, there is no financial benefit for Phillip during his lifetime.

Now take a look at what happens if Phillip gifts the stock to a CRT paying a 6 percent annuity payment each year. The immediate benefits to Phillip will be a substantial income tax deduction, increased income and diversification of risk with a deferral (or complete avoidance) of any capital gain tax.

The trustee will sell the low basis tech stock and build a diversified portfolio that can generate the necessary payout requirements while reducing the specific risk of having a largeconcentrated position in one stock. For the rest of Phillip’s life, the $1,000,000 of stock that previously paid no dividends will now provide an annual income of $60,000.00. As a further planning strategy, a portion of the distribution and the current income tax savings may be used to purchase life insurance to replace the gifted stock.

Phillip may structure his CRT as a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT). The difference is in the method of calculating the income.

The CRAT will pay a fixed amount each year which may be expressed either as a fixed dollar amount or a percentage of the value of the assets on the date the trust is funded. The CRAT will protect Phillip in down markets. In contrast, the payout from a CRUT is variable and is expressed as a percentage of the trust assets, redetermined annually. This will allow Phillip to “enjoy” the trust’s appreciation.

Funding a CRT during the grantor’s lifetime maximizes the benefits to the grantor. In addition to the financial benefits, there is the intangible benefit of rewarding the grantor’s altruism. Many charities are happy to immediately “recognize” the donors who have named the charity as the beneficiary of a CRT.

This article only touches on the basics of this sophisticated concept and is not intended to provide legal advice. It is imperative that you consult with an attorney specializing in advanced estate planning as well as a knowledgeable financial planner, insurance agent or certified public accountant.

An Overview

Dynasty Trusts are specialized irrevocable trusts designed to shelter assets from transfer taxes over multiple generations, while at the same time allowing your heirs to enjoy the fruits of those assets.

Typically, after estate taxes and other settlement costs are paid, most people leave the bulk of their estate outright to their children. The children then either consume or invest their inheritance over their lifetime.

Assuming they are financially successful and grow their estate to the point where it will be subject to estate taxes, the process is repeated generation after generation with estate taxes being paid each time wealth is transferred to the next generation.

The government likes it this way. They like to take their share each time wealth is passed from one generation to the next. If you try to skip a generation and give assets directly to your grandchildren or great-grandchildren, they have set a limit on how much you can give without incurring what is know as the generation-skipping transfer (GST) tax.

This tax is in addition to the regular estate tax is currently set at the highest marginal estate tax rate (55 percent).

For 2000, each of us has a $1,030,000 GST exemption that can be used during lifetime or at death. The key to the Dynasty Trust technique is to leverage the GST exemption by transferring assets to the trust during your life, and electing to have the transfer covered by your GST exemption.

The trust is set up for the benefit of your children and grandchildren and perhaps even your great-grandchildren.

You heirs can serve as trustees of the trust and can still have access to trust income during their life as well as limited access to principal.

If an independent trustee is used, even greater flexibility can be drafted into the trust language.

Another benefit of the Dynasty Trust is that the principal is protected from attachment by creditors of your heirs

- this can be particularly useful in the event of a lawsuit or a divorce. By combining the use of your applicable exclusion amount (which currently allows the lifetime transfer of $675,000 of assets into trust without incurring any gift tax) with the GST exemption, you can establish a Dynasty Trust without incurring any transfer taxes. A married couple can thereby transfer $1,350,000 into such a trust.

Ideally, this money should be invested in assets with long term growth potential since the growth of these assets will not be included in your estate or your heir’s estates for tax purposes.

This article only touches on the basics of this sophisticated concept;. To avoid costly mistakes, it is imperative that you consult with an attorney specializing in advanced estate planning as well as a knowledgeable financial planner or insurance agent or certified public accountant

REVOCABLE TRUST: An Overview

Why Should I consider a Revocable Living Trust as a planning tool?

A Revocable Living Trust is a legal document that allows you to make instructions about the management and control of your property while you are alive and the distribution of your estate after your death. This is the important benefit of a Living Trust over a Durable Power of Attorney which terminates at death. You will serve as the initial trustee; if you want, family members, friends, trusted advisors, banks or trust companies can also be named as trustees, either now or after you decide you do not want the job anymore or after your death or disability. You will be the primary beneficiary of the trust while living. Once your Revocable Living Trust is created, title to your assets should be transferred to it. You will transfer your bank accounts, certificates of deposit, real estate, investments, etc. into your Revocable Living Trust. When this process is complete, you, as an individual will no longer technically own the transferred property. Your Revocable Living Trust will be the legal owner, but you will retain complete control of your trust and the assets in it.

Can I change my Revocable Living Trust?

Your Revocable Living Trust can be modified whenever you wish; at any time (while you are alive and competent), you may alter, amend, or even revoke your Living Trust.

Why does a Revocable Living Trust avoid Death Probate while a will does not?

A will is a legal document which takes effect only upon your death. A will is designed for one purpose: to dispose of your assets upon your death. Probate and administration are the legal process of proving that your will is valid, paying your creditors, and transferring property to your heirs. A will must go through some type of probate proceeding even if the probate procedure is simplified because the estate is small.

A Revocable Living Trust allows you to “self-probate” your assets while you are alive and competent. The funding or retitling component of the Revocable Living Trust process allows you, as the trust maker, to transfer your assets into your Revocable Living Trust and consequently avoid the probate process.

What is “Death Probate”?

Death Probate is a legal proceeding ultimately controlled by the probate court. For the most part, Death Probate and the administration of an estate are comprised of six basic tasks:
1. Admitting the will to probate and determining its validity
2. Notifying the decedent’s heirs and beneficiaries
3. Inventorying and appraising the decedent’s assets
4. Paying creditors
5. Making sure any state inheritance tax has been paid
6. Distributing assets to the beneficiaries or heirs

The probate process often can be expensive and time-consuming. Studies indicate that the average cost of probate is anywhere between 3 and 10 percent of the value of the gross estate. The gross estate is the full appraised value of the estate without any reduction for debts and expenses. The average length of probate is between 1 and 2 years, although even the probate for a small, uncomplicated estate sometimes lasts several years. The probate process is also a matter of public record. Any person can access a decedent’s probate file and discover personal estate planning and financial information about the deceased person and his or her family. If you die owning assets in your own name, your will must be probated in order to convey legal title of your assets to beneficiaries named in your will. Consider your house: How are your heirs going to be able to do anything with the house? Your will must go through probate in order for the probate court to change the title on all your assets, including your house, into the names of your beneficiaries.

What types of property pass outside the probate process?

Examples include funds in 401(k) plans, individual retirement accounts, other types of pension plans, annuities, property held in joint tenancy, property held in certain trusts, and property held as tenants by the entirety.

Does a Revocable Living Trust avoid Federal Estate taxes?

Your Revocable Living Trust, if written correctly, will take maximum advantage of each person’s federal estate tax exemption. By structuring a Revocable Living Trust correctly, a married couple can pass up to a total of $1.350 million (in the calendar years 2000 and 2001) completely free of federal estate tax. A single person can pass $675,000 federal estate tax-free during this time period.

How Does a Revocable Trust Benefit My Estate Plan?

If you become disabled or are unable to manage your financial affairs, your Living Trust will eliminate the need for a court-appointed guardian to take control of your assets. Also, with a Living Trust your assets will go directly to your beneficiaries after your death. There will be no court interference. There will be a significant reduction in attorney’s fees and no court costs. In most situations, there will be no delay in distributing assets, and all your estate planning goals will be completely private.

A Living Trust creates no adverse lifetime income tax consequences. Because your Living Trust is revocable, the income generated by the assets in your trust is taxed to you as an individual and is reported on your personal income tax returns. This means that your personal income tax situation is exactly the same after the creation of your Living Trust as it was before. A Living Trust is difficult for disgruntled heirs to attack. A Living Trust is not part of the probate process and is also not governed by the complex rules surrounding a will, and this makes a Living Trust less prone to attack.

Can I sell assets owned by my Living Trust without complications?

You sell assets in the same way you currently do. You will, however, add the word trustee after your signature.

If I have stocks and bonds, how difficult is it to transfer these individual securities into my Revocable Living Trust?

The procedures for transferring your stocks and bonds into your Revocable Living Trust will vary for each security. There is a consistent system that you can use to facilitate all such transfers. Generally, when you have individual securities, you need to send the original certificates along with a letter of instruction to the transfer agent for that particular security or instruct your broker/account executive of your intentions to transfer the security to your Revocable Trust.

When transferring assets into my Revocable Living Trust, do you recommend that I change the ownership of my IRA to the name of my trust?

Qualified plans such as IRAs, 401(d)s, pensions, thrift plans, Keoghs, SEPs, and other plans where tax has been deferred should not have your Revocable Living Trust as owner. If you were to transfer the ownership of your IRA or other qualified plan into the name of your Living Trust, the transfer would be classified as a distribution and as such it would generate a taxable event in the year you made the transfer. You can change the primary beneficiary of the retirement plan to your spouse and make your secondary beneficiary your children.

Do I need a will if I have a Revocable Living Trust? For the most part, a Revocable Living Trust will enable your trustee to immediately direct assets to your beneficiaries upon your death. However, a Will must be prepared along with your Living Trust. The purpose of the Will is to allow your personal representative to “pour-over” to your Living Trust those assets which may not have been transferred to your trust during your lifetime.

This memorandum is intended to convey to you the principal consideration of a Revocable Trust as it applies to most estate planning. For that reason I have deliberately simplified technical aspects of the tax law in the interest of clear communication. Under no circumstances should you rely on the contents of this Memorandum for professional advice nor should you reach any decisions with respect to a Revocable Trust without further discussion and consultation with your legal counsel and tax advisors.

When considering whether there can be a repeal of the estate tax it is important to understand that politics, as well as economics, govern the system. The pure essence of this tax is to redistribute the wealth among the classes.

The IRS is able to obtain a much greater rate of return auditing estate tax returns than income tax returns. Ten to twenty trillion dollars is anticipated to be passed over the next several years to future generations.

The U.S. Treasury collected more than $23.5 billion in estate tax revenue in 1999. In the year 2000, the total is expected to exceed $26 billion.

However, last summer the press reported that Congress passed a massive tax reduction bill that included the future elimination of the estate and gift law on January 1, 2009. What was not reported is that the estate and gift tax law was returned to our present system on October 1, 2009. This repeal was only scheduled for nine months.Before a true change in the federal estate and gift tax law occurs it is important to understand the repercussions: Will the step up in basis be eliminated at death, which would cause greater tax revenue? As recently as June 10, 2000, it has been reported that the U.S. House of Representatives voted to repeal the estate tax. This proposed legislation is reported to face major hurdles in the U.S. Senate without bi-partisan cooperation and the likelihood of that cooperation between the democrats and the republicans diminishes each day as the presidential election draws nearer.

It is interesting to note that a new report discloses that when analyzing the value of an estate ranging from $650,000 to $5,000,000, the resulting estate taxation has statistically been 51.3% taxation of the estate. It is also interesting to note that the U.S. Treasury collected in excess of $20 billion in estate taxation.

Virtually all attorneys encounter clients who are eligible for disability benefits from the Social Security Administration. Regrettably, few tell their clients about these benefits. It is crucial to begin the application process right away since it can take several years to complete.

The SSA administers Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs. SSDI requires that the claimant worked for five of the ten years prior to the onset of disability. SSI instead has income and asset limits. Both require that the claimant suffer from medically determinable impairments that are expected to prevent the claimant from working for at least one year.

The initial application is ordinarily completed without the help of an attorney. The claimant calls the SSA main phone number — (800) 772-1213 — conducts a telephone interview, completes SSA forms, and is usually denied. Sometimes there is a level of appeal called “Reconsideration”. Next, when a hearing is requested, is when the lawyer must come in.

Before the hearing, the lawyer can help the client in several ways. Make sure the client is getting all the appropriate treatment. An ALJ will never believe testimony without a thick medical file. Advise the client on all free treatment available, including mental health providers. Make sure that the client appeals within the 60-day window. All correspondence with SSA should be certified return receipt requested. Also, request that the ALJ subpoena the SSA doctors. (See Hallex I-2-578).

Finally, consult with an expert in this field for appeals to the Appeals Council and finally the federal courts. If you fail to raise an issue to the Appeals Council you will be barred from raising it in district court.

With tens of thousands of dollars in the balance, the process is frustrating but worthwhile.