Justice for the Rich; Slapdown for the Rest of Us

In a September 30, 2016 decision, Price v. Medicaid Director, 838 F.3d 739 (6th Cir. 2016), The U.S. Sixth Circuit Court showed its lack of compassion and understanding of those who have limited income and modest net worth. The court held that while nursing home residents may have their eligibility for care paid by the state backdated up to three months before they apply for Medicaid, assisted-living residents, whose benefits are generally much lower, may not. The court took pains to resolve ambiguities against the impoverished assisted-living residents in contrast to the court’s willingness to find loopholes that favor wealthy taxpayers in a very recent tax case.

The key ruling in Price is that federal law prohibits the state from extending eligibility for Medicaid assisted-living services under the Home and Community-Based Services Waiver, or simply “Waiver,” that are rendered before a beneficiary’s “service plan” is approved. The Medicaid application for nursing home residents is effectively a one-step process because they are determined eligible for the services when admitted. Application for Waiver benefits has two steps – financial eligibility determined by the Medicaid agency and physical need evaluated by a “Waiver Agent,” typically the Area Agency on Aging, which develops the service plan. Depending on the region, applicants might wait six months or more on a waiting list for the Waiver Agent to get around to evaluating them.

While nursing home applications can languish for months on a Medicaid worker’s desk, on approval the eligibility begins with the application date if the applicant was then factually eligible. It is even possible to apply for three months of benefits preceding the original application. Waiver applicants get no such treatment. According to the Price decision, eligibility for benefits begins, if at all, when the Waiver Agent signs the service plan.

Price and the other plaintiffs sued the Ohio Medicaid director, complaining that Waiver beneficiaries should be eligible for retroactive benefits the same as nursing home Medicaid beneficiaries. The operant provision in the Social Security Act reads, in part, as follows:

[S]tates must offer Medicaid assistance to all beneficiaries for care and services included under the [Medicaid] plan and furnished in or after the third month before the month in which [the beneficiary] made application … for such assistance if such [beneficiary] was (or upon application would have been) eligible for such assistance at the time such care and services were furnished. 42 U.S.C.A. § 1396a(a)(34).

According to the court’s rationale, the plaintiffs would have been entitled to Waiver reimbursement during the three months prior to their applications only if those services were provided, under 42 U.S.C.A. § 1396n(c)(1), “pursuant to a written plan of care.” “Pursuant” means “after,” in the court’s view. Thus, a prospective Medicaid beneficiary is eligible only after the service plan is signed. Price v. Medicaid Dir., 838 F.3d 739, 747-49 (6th Cir. 2016).

The court could have reached the opposite result if it had based its rationale on “or upon application would have been” eligible, which would relate backward, rather than its dubious reliance on the temporal aspect of “pursuant to.”

To buttress its holding, the court observed that a prospective applicant could request an evaluation and service plan in advance of applying for Medicaid. This is asinine. There would seldom be such an opportunity.

In the first place, the family would have no way of knowing that it would be necessary to ask for an evaluation that early unless they have an elder-law attorney on retainer and consult him or her almost constantly. Secondly, the need to apply for Waiver services generally comes close on the heels of the need for care.

Comparing this decision to a tax decision, Summa Holdings v. Commissioner, No. 16-1712, Slip Op. at 5 (6th Cir. Feb. 16, 2017), it is clear that the court cares deeply about preserving rich families’ millions and not a all about preserving poor families’ pittances.

The tax attorneys for the Benensons, a wealthy family near Cleveland, Ohio, concocted an ingenious tax strategy involving a “domestic international sales corporation” (DISC) and Roth IRAs. According to the decision:

Summa Holdings is the parent corporation of a group of companies that manufacture a variety of industrial products. Its two largest shareholders are James Benenson, Jr. (who owned 23.18% of the company in 2008) and the James Benenson III and Clement Benenson Trust (which owned 76.05% of the company in 2008). James Benenson, Jr. and his wife serve as the trustees, and their children, James III and Clement, are the beneficiaries of the Trust.

In 2001, James III and Clement each established a Roth IRA and contributed $3,500 apiece. Just weeks after the Benensons set up their accounts, each Roth IRA paid $1,500 for 1,500 shares of stock in JC Export, a newly formed DISC. The Commissioner did not challenge the valuation of these shares then and has not challenged them since. To prevent the Roth IRAs from incurring any tax-reporting or shareholder obligations by owning JC Export directly, the Benensons formed another corporation, JC Holding, which purchased the shares of JC Export from the Roth IRAs. From January 31, 2002 to December 31, 2008, each Roth IRA owned a 50% share of JC Holding, which was the sole owner of JC Export.

With this chain of ownership in place, the family, trust, and company were a few clicks away from the possibility of considerable future tax savings. Summa Holdings paid commissions to JC Export, which distributed the money as a dividend to JC Holding, its sole shareholder. JC Holding paid a 33% income tax on the dividends, then distributed the balance as a dividend to its shareholders, the Benensons’ two Roth IRAs. From 2002 to 2008, the Benensons transferred $5,182,314 from Summa Holdings to the Roth IRAs in this way, including $1,477,028 in 2008. By 2008, each Roth IRA had accumulated over $3 million.  Summa Holdings, Slip Op. at 5 (Feb. 16, 2017).

Each of these cases turned on subtle legal principles that could have been resolved either for or against the appellants. It is not coincidence or simple luck that the wealthy litigants won and the poor ones lost.

This is not to say that federal courts never issue decisions that disadvantage the rich or help the poor. However, studies clearly show that the courts have a marked proclivity to favor wealthy litigants over poor ones. Michele Benedetto Neitz, “Socioeconomic Bias in the Judiciary,” 61 Cleveland State L. Rev. 137 (2013); see also Ga. Supreme Court Comm’n on Racial & Ethnic Bias in the Court Sys., “Let Justice be Done: Equally, Fairly, and Impartially,” 42 Ga. St. U. L. Rev. 687 (1996).

Occasionally, a jurist is perceptive enough to comment on the disparity. Dissenting from the court’s decision in United States v. Pineda-Moreno, 591 F.3d 1120 (9th Cir. 2010), Chief Judge Alex Kosinski stated,“No truly poor people are appointed as federal judges, or as state judges for that matter. Judges, regardless of race, ethnicity, or sex, are selected from the class of people who don’t live in trailers or urban ghettos.” He termed this “unselfconscious cultural elitism” and observed that for him and his colleagues “the everyday problems of people who live in poverty are not close to our hearts and minds because that’s not how we and our friends live.” Pineda-Moreno at 1123.

There was a time when lawyers and judges were socially and economically closer to their clients and litigants. Abraham Lincoln, who attended school for less than a year was a case in point. In 50 years, the law has changed from a reasonable career choice for those on the lower rungs of the economic latter to all but unreachable even for the lower middle class. Prior to World War II, legal education in the United States was more haphazard. In Michigan, only two years of college were required before law school. By the 1970s, admission to law school in Michigan and most other states required a bachelor’s degree. Law school tuition was relatively affordable up until the 1990s. Since then, tuition has skyrocketed. The legal profession has become the province of the affluent.

We in the elder law and disability rights community cannot reverse decades of elitist self-selection in our profession. However, we must become aware of the “unselfconscious cultural elitism” in ourselves and the hearing officers and judges we practice before.

We can relate socially with most of the judiciary because we speak their language. Our kids go to school with their kids. We see them at PTSA meetings and civic events. What we must do is learn to relate to those who live in trailer parks and ghettos and truly accept their humanity. Then, perhaps, we can communicate what we have learned to the hearing officers and judges making crucial decisions about their liberty and property.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2016 John B. Payne, Attorney

Judicial OCD in Tennessee

In Frustrating the Intent of the Testator, I observed that many appellate courts seem to delight in invalidating wills that were clearly executed by the testator.  If judges take pleasure in destroying the estate plans of the recently departed, Hon. Kenny Armstrong of the Tennessee Court of Appeals should be rapturous to the point of wetting his pants in having pulled the rug out from under an unfortunate deceased testator, his attorney, and two well-meaning, but displaced, witnesses.  It is the epitome of formalism over substance. morris bill 1

On October 10, 2008, Bill Morris (“Decedent”) executed his Last Will and Testament.  In re Estate of Morris, 2015 WL 557970, 1 (Tenn. Ct. App. February 9, 2015).  The last two pages of the document show that the drafting attorney went to great lengths to establish that the testator intended to sign his will and, in fact, signed it.  However, the Tennessee Court of Appeals managed to find grounds to throw out the will as out of conformity with the Tennessee wills statute.

As is typical in these cases, the court first said that it would “endeavor to effectuate a testator’s intent.”  Id. at 4.  The court then invalidated the will because the word “affidavit” appears between the testator’s signature and the witnesses’ attestation.  According to the court, by signing below the “affidavit,” but not above it, the witnesses signed the affidavit, which, of course, was part of the document, but not the will, itself.

It is particularly ironic that the court stated, “There is no dispute that the testator properly signed his will at the end of the document.”  Id. at 2.  Thus, in a paroxysm of perversity, the court vitiated the testator’s signature by finding a hyper-technical error in the witnesses’ signatures intended to verify the testator’s signature.morris bill 2

In Frustrating the Intent of the Testator, I said:

An attorney should spend at least an hour gathering the facts for even the simplest estate, and at least an hour going over the documents with the client, before they are executed. Attorneys who rush through will executions do not serve their clients properly.

If only it were that simple.  It is clear that Bill Morris’s attorney, the witnesses, and Bill, himself, did their very best to execute his will correctly.  Sadly, best efforts are never enough when there is a judge determined to screw up the testator’s estate plan.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2015 John B. Payne, Attorney

All Crimes are Hate Crimes

As a Commie-symp, affirmative-action-loving, equal-rights-for-all, keep-your-narc-nose-out-of-my-pantry, gun-registering, my-sex-is-my-business, capital ell Liberal, I generally agree with The Pink Agendist. On hate-crime statutes, however, I dissent from his position in “UK changes hate crimes statute and doesn’t get it entirely right,”. His argument that hate-crime laws should be written as a general prohibition on committing crimes with a hateful mindset instead of including a laundry list of types of discrimination is misguided. Hate crime statutes are never right and there is no right way of drafting them.

Enhancing criminal penalties for a bigoted mens rea – guilty knowledge or intention – is a mistake. Prosecutors want such enhancements to give them more tools to extort guilty pleas – “Plead guilty to aggravated assault and I won’t add the hate-crime count.” – but they are fundamentally unfair, when not silly. After the murder of Matthew Shepard, there was an outcry for the passage of hate-crime legislation despite the fact that his murderers were already subject to the death penalty. How do you enhance the death penalty?

If Mugsy, a racist, attacks Terrapin, a racial minority, and gives him a black eye, a broken jaw, and lacerations requiring 26 stitches, he should receive the same sentence as Stymie, a racial minority, who attacked Turnbuckle, a member of Stymie’s racial group, and gave him a black eye, a broken jaw, and lacerations requiring 26 stitches. Imputing a racial, sectarian, gender or political animus to a crime is so speculative and subjective that there is no fair measure by which guilt could be judged. More generally, every crime is directed at a particular individual based on his or her social characteristics – gender, sexual orientation, race, religion, and social class.

Lucky, a rapist, is on the prowl in his racial ghetto, when he sees Emelda, a beautiful Latina wearing expensive shoes who is clearly out of place on Lucky’s turf. On the other side of the street is Filisha, a woman who lives in the neighborhood and is in Lucky’s racial group. Does Lucky attack Emelda or Filisha? He may attack Emelda thinking that she is out of her milieu and has no friends to protect or avenger her, or he may attack Filisha because he thinks that the police would investigate Emelda’s attack more vigorously than Filisha’s. Whether Lucky attacks Emelda or Filisha, there would be racial or social reasons.

It could be argued that crimes where hate is a motivation are more vicious. A robber who would demand the wallet and watch of a victim of his own racial or social group may run off with the loot without causing injury. However, the robber may administer a beating or worse with the robbery if there is social animus. That does not provide a rationale for adding “hate crime” enhancements. A robbery accompanied by injury should be punished more severely based on the behavior alone. It is not necessary to delve into the criminal’s socio-pathology and try to fathom the exact nature of his or her antipathy to the victim.

Forget the hate-crime issue. Crime should be punished based on the actus reus – the physcial components of the crime – and the resulting injury. Punishment should not be enhanced due to a hypothecated hateful mens rea.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2013 John B. Payne, Attorney
 
 

Do Not Trust a Trust Miller

Some attorneys have the attitude that everyone needs a revocable living trust for estate planning. They use every trick and argument they can dream up to sell you on the idea. That is because they can charge more for an estate plan that includes a trust than for one that consists of a will and a power of attorney. The document shops are called trust mills and the attorneys who run them are trust millers. There are many predatory trust flacks using various ploys and promises. I also wrote about this a year ago in “Do Not Get Suckered by the Asset Protection Racket.

These attorneys and many trust mills that are run by insurance agencies are like tattoo parlors. If you walk into a tattoo parlor and ask if you need a tattoo, they will tell you that without a tattoo you are ugly and boring. According to them, a tattoo will make you the toast of the town and reinforce your self-image, your id, your ego, your superego and your immune system. Are they biased? Of course! If you do not buy a tattoo, they do not make any money.

I am disgusted by attorneys who run their business like tattoo parlors – pushing trusts on everyone who walks in the door. I recently was approached by a retirement association with a referral book endorsing one attorney, one insurance agent, one “financial planner,” and a few unrelated businesses. The referral book is a transparent marketing scheme by the attorney and his cronies in financial services to sell trusts and insurance products. The section of the book devoted to estate planning is 24 pages aimed at convincing the reader he or she needs an RIVT.

The estate section contains numerous misrepresentations about tax law, arguing incorrectly that property that passes under joint tenancy on the death of the original owner is subject to capital gains tax, among other things. The prize, however, is the attorney’s statement that typical probate fees run from “3% to 8% of the probate estate.” He even provides a table showing grossly overstated amounts. The fees and costs in the table run three to 10 times the fees and costs of most probate estates in Michigan, Pennsylvania, and most other states.

Administering an RIVT-based estate generally costs at least as much as probate, when the price of setting up and funding the trust or trusts is included. Distributing the trust estate is somewhat easier than going through probate, but not by much. The primary difference is that some of the cost is paid earlier, when the trust is set up and funded.

An RIVT or another trust makes sense for many individuals and families. A large group of beneficiaries or beneficiaries with special needs, a complex or delayed distribution scheme, or an estate with a variety of personal and real property could make an RIVT desirable, despite the cost. Unfortunately, many trust millers are more concerned about their own bottom line than they are about the client’s best interests. Clients often show up in my office with expensive estate plans in slick binders that were totally inappropriate to their situations.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2012 John B. Payne, Attorney
 
 

Congratulations, You Are an Entrepreneur!

Rutt Gonad, a client, came to the office with a question about his employment as a ditch digger. His employer, Legree Construction, offered him a pay increase from minimum wage at $7.25 per hour to $8.00, if Rutt would agree to be an independent contractor, instead of an employee. If he agreed, Rutt would not have taxes taken out of his pay and he would receive a Form 1099 at the end of the year, instead of a Form W-2. Rutt wanted to know what the difference would be and whether it would be in his best interests to become an independent contractor.

An employee, even if the employee is “under contract” and receives no benefits, receives a paycheck from which taxes are withheld and at the end of the year he receives a W-2 reflecting wages and withheld amounts. An employer pays 5.2% Social Security tax and 1.45% Medicare tax on the employee’s wages. The employee pays the same amount. A self-employed person, however, has to pay both the employer’s share and the employee’s share of these taxes. Legally, the self-employed person, or independent contractor, is obligated to pay 13.3% on his or her wages, up to $106,800 per year. The self-employed person also must make quarterly payments on federal and state income tax obligations.

Rutt’s hourly wage of $7.25 is currently reduced by $0.48 for Social Security and Medicare and $0.60 for state and local income tax withholding. By taking the “deal,” Rutt would get $8.00 per hour in hand, but would have to pay $1.06 Social Security and Medicare taxes and make quarterly payment to the IRS for income tax. The employer saves the 6.65% employer portion of the payroll taxes on Rutt’s $7.25 per hour, $0.48, and avoids some of the payroll headaches of tax withholding. Being an independent contractor would only put more money in Rutt’s pocket if he does not pay his taxes. This makes him liable for prosecution for tax evasion, if caught. It also means that he is not contributing to Social Security, so his benefits would be reduced when he reaches retirement age.

Legree Construction is clearly a scofflaw company. Rutt goes to work at a specified time and uses company equipment to dig ditches. He is under the direction of a Legree Construction foreperson and is required to follow defined work rules to perform tasks as assigned. Rutt is now an employee and his circumstances would be unlikely to change if he became an “independent contractor.” For Legree Construction to call Rutt an independent contractor is contrary to tax law and regulation.

To be an independent contractor, Rutt would have to be paid by the job and be given considerable freedom in deciding how the job would be done. If Legree Construction assigned Rutt the task of digging a trench six feet deep and three feet wide from mile marker 100 to mile marker 101 on a certain highway, and gave him a deadline to complete the trench using his own equipment, Rutt could be an independent contractor.

At Rutt’s pay grade, there would be no advantage to being an independent contractor as opposed to an employee unless the pay for an independent contractor is much higher than the pay for an employee. However, there are some situations where it would make sense, particularly if the independent contractor formed a corporation or taxable limited liability company to perform the services.

If Lucretia Smith is a nursing assistant in a long-term care facility earning minimum wage, a 15 or 20% increase would not make it economically beneficial to form a corporation and have the corporation act as the independent contractor. However, if Pandora Mora is a nursing home administrator making $150,000 per year, it might be advantageous for her to form a C corporation, Pandora, Inc., or a taxable limited liability company, to contract with the facility for her services.

By acting as her own employer through a corporation, Pandora can reduce her employment taxes. If Pandora, Inc. receives $150,000 per year for Pandora’s services, but only pays her $50,000 per year, this would reduce the employment taxes by over 50%. If the other $100,000 is received by Pandora as corporate profits, she would not pay employment taxes on those receipts. This is not all peaches and cream because there would be corporate income tax on the profits, although there are a lot of deductions for such employee benefits as medical expenses, health and long-term care insurance, and pension funding. It becomes a very complicated trade-off.

If Pandora set up an S corporation or a limited liability company taxed as a sole proprietorship or partnership, there might be some savings on self-employment taxes. The profits after paying salary would not be subject to self-employment tax, but the medical expenses and various insurance premiums would not be deductible.

A low-wage worker is always better off as an employee than as an “independent contractor,” unless the worker is willing to duck income taxes and risk severe penalties, up to and including prosecution. If a low-wage worker is called an independent contractor, he or she probably is really an employee and is being taken advantage of by the employer. There may be tax benefits or other benefits to working as an independent contractor or under a corporate shell for higher-wage workers, but it is a complex set of factors that must be weighed and balanced.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2012 John B. Payne, Attorney