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Volume 4 Issue 4, Fall 2003 (pdf)

• School's in Session

• Seminar Series

• Home School Sweet Home School

• University DREAMING

• The 4-1-1 on the (new) 529

• There are no quick picks, but it's still a lottery

• At a Meeting of One, Who Keeps the Minutes?

School's In Session!

Sharpen your pencils and dust off your bookbags... It's back-to-school season! In this edition of the newsletter, we offer a host of tips about educational savings, student reporting under the Patriot Act and more. There's the bell! See you next time!

Seminar Series

The first seminar of our series, The Continued Need for "Estate Planning Despite Uncertainties in the Tax Code" was a success. If you couldn't make it but are interested in receiving our free materials, call or send email and ask for our "EP packet". We'd be happy to send them out.

To receive a personal invitation to the second seminar of the series, "Section 529 Plans and More - Saving for College (and Private School!)" call Liz at 215.508.4419 or send an email to seminar@erblaw.com. The seminar will be held in late fall.

Home School Sweet Home School

by Kelly Phillips Erb

In September, millions of children will head back to the classroom - but not all of them will board a school bus or join the carpool...Some of them will just go downstairs. Home schooling is growing in popularity, with more children being taught at home than ever before.

As home schooling grows in popularity, so, too, do the questions surrounding the tax treatment of home schools. A number of bills have been introduced in Congress (many of which are still sitting in the House Ways and Means Committee) to specifically address the existing ambiguities in the Tax Code with respect to home schooling. Until those bills ultimately clarify the tax treatment home school teachers and students, we have to rely on interpretations of existing IRS Code sections.

The most controversial of the interpretations to date is whether home school teachers may properly claim the "educators credit" of up to $250, recently introduced as part of President Bush's 2002 Tax Act. The credit is only applicable to educators at "qualified public or private schools" who instruct at least 900 hours per year. In a number of states, including Delaware, the Board of Education classifies home schools as private schools. In those instances, the credit might be appropriate. However, in the remaining states, including Pennsylvania and New Jersey, home schools are not classified as private schools and thus, the credit clearly does not apply. If you determine that the credit is properly reportable by you, you may claim up to $250 for educational expenses. A word of warning: the jury's still out on this one! I've heard arguments both for and against the application of this credit for homeschoolers.

Less controversial is the applicability of the Coverdell Educational Savings Account ("ESA"). The Coverdell ESA is a tax-deferred savings account used to pay "qualifying educational expenses" for elementary, secondary and higher education. The definition of "qualifying educational expenses" is quite broad and includes books, uniforms, transportation, computers and software. The fund is tax-deferred for purposes until you withdraw the funds. If you use the funds for qualifying educational expenses, for which certain home schooling expenses may qualify, the funds can be withdrawn federal income tax free. Any withdrawals for nonqualifying expenses are subject to federal income tax plus an excise penalty of 10%.

There is one significant downside to ESAs, however, and that is contribution limits: the maximum contribution limit for ESAs is currently $2000 per year to age 18, and is subject to income limitations. Watch (but don't plan on!) this limit to potentially increase; the original limit was $500 per year.

In either case, you should check with your professionals before claiming expenses on your personal tax returns or establishing an ESA for home schooling. For more information about ESAs, Section 529 and other ways to save money of educational expenses, check out our upcoming seminar.

University DREAMING

by Matthew J. Archambeault

The Senate recently introduced a bipartisan bill called the DREAM Act (Development, Relief and Education for Alien Minors Act of 2003) which would amend the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA) to permit States to determine State residency for higher education purposes and to authorize the cancellation of removal and adjustment of status of certain alien students who are long-term United States residents. The House also passed an identical bill for consideration.

Every September recent high school graduates head off to fulfill their dreams of attending college. Due to the high price of tuition, many opt for state universities to take advantage of lower in-state tuitions. Every September there are a group of high school graduates whose dreams of attending university are not possible, due to economic factors. These are immigrant children without status here in the US In 1996 the Congress passed the IIRIRA which denied the States the right to determine who qualifies for in-state tuition. Accordingly, there are thousands of undocumented high school graduates who have lived in the US since they were very young, but are not considered residents of the states they live in for the purposes of receiving in-state tuition. These young people, denied access to higher education, are forced to either enter the work force in menial labor positions or turn to other less desirable lifestyles. Very few will seek to return back to their homeland to attend university there, as the economic opportunities will be usually be much less then here in the US

This bill returns to the States their authority to make such determinations as to residency of their undocumented residents. The bill also would legalize the status of those young people who meet certain criteria, including having good moral character and having lived in the US for at least five years preceding the Act's passage. If passed, this bill would give immigrant students more incentive than ever to pursue higher education. These students would not only receive all the benefits which come with a university degree, but will also be able to earn legal permanent residence status. The US will also benefit by gaining a much more productive and educated resource of young professionals. Furthermore, these young people, now with opportunities to succeed in the US will not have to turn to more destructive lifestyles.

While the DREAM Act is not yet law, analysts believe it has an excellent opportunityto be passed before the next school year.

The 4-1-1 on the (new) 529

by Madeline M. Martin

Beginning in September 2003, there are now three types of Section 529 educational saving plans that individuals can fund to save money for future higher education costs: state run "savings" programs; state pre-paid tuition plans; and effective in September, 2003, the Independent 529 tuition plans.

The new Independent 529 plans are similar to the state pre-paid tuition plans in that parents can purchase "certificates" toward their children's future college education; however certificates purchased under the new plan may be used to pay for tuition and mandatory fees at any participating private college/university. There are currently 220 institutions participating nation-wide, including Princeton, Amherst, Carnegie Mellon and 25 other schools in Pennsylvania & New Jersey, and the number is expected to increase to more than 300 by year end.

Certificates are purchased in certain amounts which represent a percentage of then-current tuition. In fact, participating schools are required to reduce their tuition by at least 1/2 a percent when calculating the "value" of the Certificate(s). For example, assuming that College A's adjusted tuition is presently $10,000, College B's adjusted tuition is $20,000 and College C's adjusted tuition is $30,000, if you buy a Certificate in 2003 for $10,000, that Certificate will be redeemable for one year's tuition at College A, 1/2 of one year's tuition at College B and 1/3 of one year's tuition at College C, regardless of any future increases in the respective College's tuition. Therefore, if when your child matriculates to College A, the annual tuition at the school is then $15,000 the Certificate can be used to pay the entire tuition bill, and you are not taxed, for federal income tax purposes, on the appreciation.

The initial investment can be as small as $25 (as long as at least $500 is invested within the first 2 years) or as large as the value of 5 years tuition at the most expensive program. Certificates are redeemable to pay tuition and fees after 36 months and up to 30 years after purchase. After one year the certificates can be refunded for purchase price (plus a limited "performance adjustment") to the purchaser or "rolled over" (income tax free) into another 529 plan.

Naturally, purchasing the Certificates with not guarantee that the beneficiary will be accepted to (or want to attend) a participating school. If your beneficiary attends a non-participating (fully-accredited) college/university, or if you intend to use the funds for school costs other than tuition and mandatory fees, you may take a refund. If you take a refund under such circumstances the withdrawal will still be eligible for federal tax benefits under Section 529, but the certificates would redeemable at face value, and you would, therefore, forfeit the guaranteed tuition and discounts that are available at member colleges. Withdrawals not used for qualified higher education expenses are subject to applicable income tax on any earnings and a Section 529 additional tax on any earnings.

The accounts will be managed by TIAA-CREF and distinguishable from the other 529 plans, it is the schools, rather than individual states which will be assuming the responsibility for the investment performance.

For more information about funding an Independent 529 Plan, check out the website http://www.independent529plan.com.

There are no quick picks, but it's still a lottery.

by Matthew J. Archambeault

Americans love gambling and someone in their infinite wisdom thought long ago it would be fun to raffle off permanent residence status in the US to the rest of the world. The program is called the Diversity Immigrant Visa Program (DV) and was designed to bring in peoples from all over the world into the US The annual DV program makes permanent residence visas available to persons meeting the simple, but strict, eligibility requirements. Applicants for Diversity Visas are chosen by a computer-generated random lottery drawing. The visas, however, are distributed among six geographic regions with a greater number of visas going to regions with lower rates of immigration, and with no visas going to citizens of countries sending more than 50,000 immigrants to the US in the past five years. Within each region, no one country may receive more than seven percent of the available Diversity Visas in any one year.

There are 55,000 recipients of permanent residence every year through the lottery. For DV-2005, natives of the following countries are not eligible to apply because they sent a total of more than 50,000 immigrants to the US in the previous five years: CANADA, CHINA (mainland-born), COLOMBIA, DOMINICAN REPUBLIC, EL SALVADOR, HAITI, INDIA, JAMAICA, MEXICO, PAKISTAN, PHILIPPINES, RUSSIA, SOUTH KOREA, UNITED KINGDOM (except Northern Ireland) and its dependent territories, and VIETNAM. Persons born in Hong Kong SAR, Macau SAR and Taiwan are eligible.

An applicant must have either a high school education or its equivalent, defined as successful completion of a 12-year course of elementary and secondary education; OR two years of work experience within the past five years in an occupation requiring at least two years of training or experience to perform. The US Department of Labor's O*Net OnLine database will be used to determine qualifying work experience. Applicants will also find a link to a Labor Department list of qualifying occupations at the Consular Affairs website: http:/www.travel.state.gov

All DV-2005 lottery entries must be submitted electronically at www.dvlottery.state.gov between Saturday, November 1, 2003 and Tuesday, December 30, 2003. No paper entries will be accepted. This electronic filing is new. Also new is the requirement that applicants' pictures be submitted electronically in the form of a JPEG and fulfill a bunch of other technical requirements that I will not pretend to know anything about.

Last year 10.2 million people applied for the Diversity Lottery. Of the 10.2, only 7.9 million were qualified or conformed with the procedural requirements. With the new technological requirements, the number of those who do not conform with the procedural requirements may indeed increase and the chances for those qualified who can comply with the new requirements may increase as well.

At a meeting of one, who keeps the minutes?

by J. Christopher Erb

My uncle used to say that, if he had it to do over again, he would have given his kids their college tuition in cash and let them start a business with the money instead of going to school. Whether you agree with him or not, there's no question that starting a business can be a real education in itself.

There are a number of reasons individuals entering into business may choose a corporation. One of the most important is protection from liability. The owner of a corporation can generally only lose the amount he or she has invested in the company. In the case of those shares of Enron stock, that may be a few hundred dollars, in the case of the small business you've nurtured from the ground up, it may be more money, blood, sweat, and tears than you care to think about. Either way, however, your house, car, and anything else you own personally is generally safe from creditors even if the business goes belly up. There are two general exceptions to this rule. The first is pretty straightforward - if you agree to be personally liable for the debts of the business (for example, for a line of credit), then those creditors (and only those creditors) can go after those assets in the event the debt is not repaid. Obviously, you should avoid signing any agreements for personal liability unless absolutely necessary, and always sign any agreements in your position as an officer of the corporation. That's one reason why you will often see a signature line preceded by the corporate name followed by the officer's name and title. Never sign on behalf of the corporation without reference to the company name and your title unless you intend to be personally liable.

The second exception is more complicated. With the corporate form come a host of formalities, including shares of stock, board and shareholder meetings, resolutions and a bunch of stuff generally guaranteed to make only your lawyer happy. In a small company, these requirements may seem superfluous, and are easy to skip or ignore. Don't. One way to ensure that you are personally liable for the debts of your company is to ignore the requirements imposed under the relevant law. Even in a one-shareholder corporation it is important to make sure that the necessary formalities are followed. Generally, under PA law, the corporate entity is respected unless unusual circumstances demand otherwise. Courts will only ignore the existence of the corporation (lawyers say "pierce the corporate veil") when the controlling corporation or individual wholly ignores the separate status of the corporation and use the corporation as an "alter ego." Some factors which courts consider in determining whether the corporate veil should be pierced include under capitalization, failure to adhere to corporate formalities, intermingling of corporate and personal affairs, use of corporate assets for personal interests, and use of the corporate form to perpetrate a fraud.

In truth, forgetting a meeting or two won't generally lead to personal liability (fraud probably will, and long-term neglect of corporate formalities may as well), but that's for a court to determine. The best practice is to be scrupulous in your actions on behalf of the corporation, holding all meetings at the proscribed time, documenting votes and objections, paying company expenses out of a separate corporate bank account, and steadfastly avoiding the use of corporate funds and/or accounts for personal expenditures.

The corporate form is a wonderful tool, but with it come obligations which are ignored at the owner's peril. Following the proper procedures may take a little effort now, but it should give you something much more valuable - peace of mind.