.png)
Updated Wednesday, February 19, 2025, 3 PM ET
From the IRS’s proposed regulations relating to corporate transactions qualifying for nonrecognition of gain to simplified Supplemental Security Income applications and a new court ruling allowing enforcement of the Corporate Transparency Act (CTA), we have recently seen significant developments in estate planning, elder and special needs law, and business law.
To ensure that you stay abreast of these changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.
Estate Planning
IRS Issues Proposed Regulations Regarding Corporate Separations, Incorporations, and Reorganizations Qualifying for Nonrecognition of Gain or Loss
Guidance Regarding Certain Matters Relating to Nonrecognition of Gain or Loss in Corporate Separations, Incorporations, and Reorganizations, 26 C.F.R. pt. 1 (Jan. 16, 2025); Multi-Year Reporting Requirements for Corporate Separations and Related Transactions, 26 C.F.R. pt. 1 (Jan. 16, 2025)
On January 13, 2025, the Internal Revenue Service (IRS) issued proposed regulations to provide comprehensive and authoritative guidance regarding core provisions of the Internal Revenue Code (I.R.C.) addressing corporate mergers and acquisitions transactions. The proposed regulations address certain matters relating to corporate separations, incorporations, and reorganizations that qualify for full or partial nonrecognition of gain or loss, including
- distributions and retentions of controlled corporation stock,
- assumptions of liabilities by controlled corporations,
- exchanges of property between distributing corporations and controlled corporations, and
- distributions and transfers of consideration to distributing corporation shareholders and creditors.
The substantive proposed regulations are intended to increase taxpayers’ certainty regarding the US federal income tax treatment of corporate merger and acquisition transactions without needing a private letter ruling.
The IRS also proposed reporting requirements requiring certain filers to attach a new annual report for each I.R.C. § 355 transaction (i.e., divisive reorganizations and section 355(c) distributions) using Form 7216 (draft version) attached to the filer’s federal income tax return.
Takeaways: According to the IRS, the proposed regulations are intended to improve the current regulatory framework, which is “incomplete, outdated, and not reflective of their importance to the Federal corporate income tax system, given the trillions of dollars of corporate transactions governed by these statutory provisions” and replace the current “patchwork of caselaw, IRS revenue rulings and revenue procedures, and non-authoritative IRS documents [taxpayers and the IRS must currently rely on] to discern the current state of the law with respect to these core provisions of subchapter C.” Guidance Regarding Certain Matters Relating to Nonrecognition of Gain or Loss in Corporate Separations, Incorporations, and Reorganizations, 26 C.F.R. pt. 1 (Jan. 16, 2025), https://www.federalregister.gov/d/2025-00321/p-89.
Inherited Property Should Be Considered in Determining Divorcing Spouse’s Need for Alimony
Woodward v. Woodward, No. 2D2023-0529, 2025 WL 258917 (Fla. Dist. Ct. App. Jan. 22, 2025)
Deborah Woodward appealed a trial court’s final judgment awarding permanent alimony to her former husband, Russell Woodward, and certain other determinations related to alimony, including consideration of Russell’s inherited property. On appeal, the Florida District Court of Appeals determined that the final judgment must be reversed because the Florida legislature had eliminated permanent alimony for all initial petitions of dissolution of marriage pending or filed on or after July 1, 2023. The court held that because Deborah had timely filed an appeal to the trial court’s February 2023 final judgment, the petition was still pending on July 1, 2023. Accordingly, the court reversed the final judgment because Russell was not entitled to permanent alimony. The court also held that the lower court should reconsider Russell’s request for alimony on remand because the alimony award was not permitted to exceed what he actually needed, and his proven need was less than the $1,750 per month he had been awarded. As part of the analysis determining Russell’s need, the inheritance from his grandmother should be considered.
Takeaways: Inherited assets are generally not taken into account as community property or for equitable distribution (absent commingling/transmuting into community/marital property), but they should be considered when assessing the need for purposes of calculating alimony. However, nothing in the opinion suggests that the inheritance was anything but outright, so it is possible that consideration of inherited assets could be minimized or prohibited if the assets were held in continuing trust. For example, in a recent case, In re Marriage of Smith, 559 P.3d 662 (Colo. Ct. App. 2024), the Colorado Court of Appeals determined that the trial court had not erred in determining that the divorcing wife’s beneficiary interest in an irrevocable family trust was neither a property interest subject to division nor an economic circumstance that could be considered in the division of marital property. The wife’s father’s power of appointment as the primary beneficiary of the trust rendered the wife’s discretionary trust interest revocable, precluding it from the court’s consideration in the division of the marital estate because it was not an interest in the property but a mere expectancy. To maximize protection for trust beneficiaries in a divorce, practitioners may wish to avoid trust language requiring mandatory distributions and distributions for the beneficiary’s health, education, support, and maintenance: fully discretionary distributions are the most protective.
Elder Law and Special Needs Law
Social Security Administration Simplifies Supplemental Security Income Applications
In December 2024, the Social Security Administration (SSA) launched the first step in a multiyear effort to simplify the application process for individuals applying for Supplemental Security Income (SSI). The initial step, called iClaim expansion, is generally available to adults who
- are 18 years old to 64 years and 10 months old and applying for SSI and Social Security Disability Insurance (SSDI),
- have never been married,
- have never applied for SSI for themselves or a child, and
- are US citizens or noncitizens.
Applicants can now apply online using a more streamlined application process by answering as few as 12 questions rather than the 54 questions previously included. The SSA plans to expand iClaim to all applicants by late 2025.
Takeaways: Note that individuals have already been able to apply online for SSDI. The streamlined SSI application process will benefit future SSI applicants. Eligible clients who wish to apply for SSI benefits online can do so here.
Attorney’s Letter to Care Facility in Connection with Alleged Personal Injury and Malpractice Is Claim as Defined in Insurance Policy
Church Mutual Ins. Co. v. Frontier Mgmt., LLC, 124 F.4th 1047 (7th Cir. Jan. 2, 2025)
In January 2021, Bertrand Nedoss, an 87-year-old resident of a care facility, wandered out of the facility in 32-degree weather, developed hypothermia, and died of cardiac arrest. Nine days after Bertrand’s death, an attorney for his family sent a written notice that his firm had been retained in connection with personal injury and related malpractice at the care facility. The letter claimed an attorney’s lien and demanded that evidence be preserved. In October 2021, Bertrand’s estate filed suit in state court alleging negligence and wrongful death claims against Welltower Tenant Group (Welltower) and Frontier Management, LLC (Frontier), its operator.
Welltower and Frontier were insured by Church Mutual Insurance Company (Church Mutual) under a “claims made” policy, which covers claims made against the insured during the policy period, which in this case was July 1, 2020, through July 1, 2021. The primary policy covered claims “first made . . . during the policy period.” Church Mutual Ins. Co. v. Frontier Mgmt., LLC, 124 F.4th 1047, 1049 (7th Cir. Jan. 2, 2025). The policy defined claim as a “suit or demand made by or for the injured person for monetary damages.” Id. at 1050. Although Bernard’s estate filed suit more than three months after the expiration of the policy period, his attorney’s letter was within the policy period. As a result, Welltower and Frontier tendered the suit to Church Mutual.
Church Mutual filed suit in federal district court seeking a declaratory judgment that it owed no duty to defend or indemnify Welltower and Frontier. It asserted that the letter sent by the Nedoss family’s attorney was not a claim as defined in the policy. Welltower and Frontier counterclaimed for declaratory judgment, breach of contract, and breach of the implied covenant of good faith and fair dealing. The court ruled that the attorney’s letter was a claim under the policy and entered partial summary judgment in favor of Welltower and Frontier. This triggered Church Mutual’s duty to defend its insureds in the underlying state lawsuit. Welltower and Frontier moved to stay the federal case pending the resolution of Bertrand’s estate’s case in state court. The federal district court granted the stay, and Church Mutual appealed the stay order. However, because Welltower and Frontier entered into a settlement with Bertrand’s estate and the state court dismissed the case, the Seventh Circuit Court of Appeals dismissed the appeal of the stay as moot.
Takeaways: The Church Mutual case highlights the importance of timely letters from attorneys notifying care facilities of claims that will be filed in connection with alleged claims such as personal injury, negligence, and malpractice. The letter sent by the attorney for Bernard’s estate to Welltower and Frontier during the policy period—within a few days after Bernard’s death—enabled the lawsuit to proceed. However, the lawsuit was not filed until after the policy had expired.
Business Law
US Supreme Court: Preponderance of Evidence Standard Applies to Prove Applicability of FLSA Exemptions
E.M.D. Sales, Inc. v. Carrera, No. 23-217, 2025 WL 96207 (S. Ct. Jan. 15, 2025)
Several sales representatives brought an action against E.M.D. Sales, Inc. (EMD), a distributor of food products, asserting that the company had violated the Fair Labor Standards Act (FLSA) by failing to pay them overtime. The district court found that EMD was liable for overtime because it had failed to establish by clear and convincing evidence that the sales representatives fell within the FLSA exemption for outside salesmen (29 U.S.C. § 213(a)(1)). EMD appealed, asserting that the court should have applied the preponderance-of-the-evidence standard. The Fourth Circuit Court of Appeals affirmed the district court’s judgment based on Fourth Circuit precedent.
The United States Supreme Court granted certiorari to resolve a conflict among the courts of appeals, noting that every court of appeals that had addressed the issue other than the Fourth Circuit had held that the preponderance-of-the-evidence standard applies to prove the applicability of FLSA exemptions. After analyzing relevant case law, the Court agreed with the majority of circuits that the preponderance standard, which is the default standard of proof in civil litigation, should be applied. The US Supreme Court has primarily only applied a heightened standard in three circumstances: (1) where the applicable statute establishes a higher standard; (2) where the US Constitution requires it; or (3) in certain uncommon cases involving unusual coercive action by the government against an individual, for example, the denaturalization of a US citizen. Because the FLSA does not specify a heightened standard, no constitutional rights were implicated, and no unusual coercive action by the government was involved, the Court ruled that the preponderance-of-the-evidence standard applies when an employer seeks to establish that an employee is exempt from the overtime and minimum wage requirements of the FLSA. The Court reversed and remanded the case for a determination of whether or not EMD had proven by a preponderance of the evidence that the FLSA exemption for outside salesmen applied to its sales representatives.
Takeaways: The Court’s decision resolves a conflict among the circuits regarding the standard of proof in cases involving the applicability of FLSA exemptions. Employers in the Fourth Circuit—Maryland, Virginia, North Carolina, and South Carolina—no longer have to meet a heightened standard of proof in such cases but must instead prove that FLSA exemptions apply by a preponderance of the evidence.
Corporate Transparency Act Once Again Enforceable Pending Appeal in Fifth Circuit
On February 17, 2025, in Smith v. U.S. Department of the Treasury, No. 6:24-cv-00336 (E.D. Tex. Feb. 17, 2025), the US District Court for the Eastern District of Texas stayed the nationwide injunction it had issued January 7, 2025, halting enforcement of the Beneficial Ownership Information (BOI) Reporting Rule implementing the Corporate Transparency Act (CTA) in light of the US Supreme Court’s January 23, 2025, order in Texas Top Cop Shop v. McHenry (formerly Texas Top Cop Shop v. Garland). In Texas Top Cop Shop, the US Supreme Court stayed the preliminary injunction blocking enforcement of the CTA pending disposition of the appeal in the Fifth Circuit Court of Appeals and disposition of the petition for the writ of certiorari. Oral arguments are scheduled for March 25, 2025, in the Texas Top Cop Shop case.
Takeaways: FinCEN issued an announcement that reporting companies are once again required to file BOI reports. For most reporting companies, the new deadline to file an initial, updated, or corrected BOI report is March 21, 2025. Several other district court cases involving the CTA are currently on appeal in various circuit courts of appeals. Cmty. Ass’n Inst. v. Yellen, No. 24-2118 (E.D. Va. Oct. 24, 2024) (4th Cir.); Firestone v. Yellen, No. 24-6979 (D. Or. Sept. 20, 2024) (9th Cir.); Nat’l Small Bus. United v. Yellen, No. 24-10736 (N.D. Ala. Mar. 1, 2024) (11th Cir.). Please see our December 2024 and January 2025 monthly recaps for additional background information about the Texas Top Cop Shop case. Please also note that on January 15, 2025, the Repealing Big Brother Overreach Act was reintroduced in the US Senate and House of Representatives. If enacted, the bill would repeal the CTA. In addition, on February 10, 2025, the House of Representatives passed the Protect Small Businesses from Excessive Paperwork Act of 2025, which, if enacted, would extend the deadline for filing BOI reports to January 1, 2026. WealthCounsel members may visit the CTA page on the member website for additional information and updates.
Forfeiture-for-Competition Provision Requiring Repayment of Proceeds from Sale of Stock Enforceable Against Former Middle Manager Pursuant to Employee Choice Doctrine
LKQ Corp. v. Rutledge, No. 110, 2024, 2024 WL 5152746 (Del. Dec. 18, 2024)
In 2009, Robert Rutledge began working as a plant manager for LKQ Corporation (LKQ), an auto salvage and recycled parts business. LKQ designated Robert as a key person eligible for restricted stock units (RSUs) through an RSU agreement, which awarded stock units to him based on a vesting schedule. Robert also signed a restrictive covenant agreement stating that the RSUs “shall be forfeited” by Robert if he left LKQ and competed with it within nine months after his departure. LKQ Corp. v. Rutledge, No. 110, 2024, 2024 WL 5152746, at *2 (Del. Dec. 18, 2024). In addition, the agreement stated that Robert would be obligated to repay LKQ the proceeds of LKQ shares received and sold pursuant to the RSU agreement.
In 2021, Robert resigned from LKQ and soon began employment with one of its competitors. LKQ filed suit in an Illinois federal district court. In part, it sought to enjoin Robert from working for the competitor and demanded that he repay the proceeds from selling LKQ stocks received under the RSU agreement. The RSU agreement was governed by Delaware law. Based on its interpretation of Delaware law, the federal district court conducted a reasonableness review and concluded that the restrictive covenants were unreasonable restraints on trade and, thus, were unenforceable. LKQ appealed to the Seventh Circuit Court of Appeals.
During the appeal, the Delaware Supreme Court decided Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024), holding that a Delaware limited partnership provision permitting the partnership to withhold distributions from a partner who withdraws from the partnership and competes with it is not a restraint on trade subject to a reasonableness review. Rather, the court endorsed the employee choice doctrine, finding that the forfeiture-for-competition provision should be treated as an enforceable term subject only to ordinary breach of contract defenses. The Seventh Circuit Court of Appeals noted some distinctions between Cantor Fitzgerald and the present case, including that Robert was a middle manager earning a relatively modest salary rather than an executive and that instead of forfeiting distributions Robert had not yet received, LKQ sought to have him repay eight years of stock award proceeds worth hundreds of thousands of dollars. Because the court was uncertain about Delaware law governing forfeiture-for-competition provisions outside of the limited partnership context, it certified two questions of law to the Delaware Supreme Court:
(1) Whether Cantor Fitzgerald precludes reviewing forfeiture-for-competition provisions for reasonableness in circumstances outside the limited partnership context?
(2) If Cantor Fitzgerald does not apply in all other circumstances, what factors inform its application?
Id. at *1.
The Delaware Supreme Court determined that the employee choice doctrine is not limited to the context of limited partnership. Rather, it noted that its decision in Cantor Fitzgerald was partly based on prior decisions upholding the freedom of contract and public policy favoring voluntary agreements between sophisticated parties. It determined that the employee choice doctrine was equally applicable in the present case, holding that “courts do not review forfeiture-for-competition provisions for reasonableness so long as the employee voluntarily terminated [their] employment.” Id. at *5. Because forfeiture for competition provisions do not deprive the public of the employee’s services, the policy concern surrounding restraints of trade is diminished. In addition, if a reasonableness review were required, businesses would be discouraged from offering employees additional benefits such as stock grants for fear the courts would not respect their contracts. Further, enforcing an employee’s contractual obligation to repay an employment benefit did not restrain the employee’s freedom of employment. Nevertheless, the court noted that a reasonableness review may be required in a case with other facts involving a forfeiture-for-competition provision requiring the repayment of employee benefits that is so extreme in duration or causes such severe financial hardship that it could preclude employee choice by an unsophisticated party.
Takeaways: Traditional noncompete agreements have been subjected to heightened scrutiny in many jurisdictions. In addition to the Federal Trade Commission’s attempt in 2024 to ban noncompete agreements for most workers (see Non-Compete Clause Rule, currently blocked by a nationwide injunction in Ryan LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024)), multiple states have recently enacted statutes imposing strict restrictions on noncompete agreements. Attorneys and clients should consider alternatives such as forfeiture-for-competition provisions that are not extreme in duration or financial hardship. In addition, nondisclosure agreements should be considered if there is a risk that an employee whom a competitor later employs could cause harm to the business by disclosing confidential or proprietary information to the competitor.
