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Ohio Tax Law: Ohio legislature taking up LLC transfer tax

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As reported by Eye on Ohio,  State Representatives Doug Green (R. 66th House District), and Mike Skindell (D. 13th House District), have put forth Ohio House Bill 449 in late December, seeking to capture conveyance taxes when entities owning real estate, are sold. Read the bill and follow its status here.

What is a “Drop and swap?

Called a “membership interest transfer” or “drop and swap,” conveying the entity that owns real property rather than simply selling the real property directly, allows buyers to avoid reporting the transfer as a sale of real property, and the value placed on the property as part of the transaction. County auditors and school boards in particular have complained that these conveyances cost public entities tax revenues that would have been generated had the parties engaged in typical real estate transactions.

New legislation to capture drop and swap sales

The current proposal would require that whenever more than 50%  of the ownership interest of an entity owning real property (either directly or indirectly) is conveyed, that the conveyance be reported to the county auditor and the value of the real estate be determined and taxed as part of the sale.

Membership interest transfers have come under increasing scrutiny as property owners perceive that these transfers distort the tax rolls and shift tax burden onto less sophisticated owners. Many property tax levies are for a fixed dollar amount (e.g. a levy to raise $10 Million). So that, as the value of one property increases, other owners pay a slightly smaller amount toward that fixed dollar tax, while the higher value property owner pays a slightly higher amount toward that fixed dollar tax. When one property is kept at a lower value via a membership interest transfer, those other owners continue to pay a higher amount toward that fixed dollar tax.

As news outlets such as Eye on Ohio report on this issue, public opinion is swaying in favor of taxing  these transfers.

As always, would be property investors should consider not only the current tax bill, but the likely tax bill after purchasing a property, and factor that into their purchase price.

Status of legislation

H.B 449 has been referred to the House Ways and Means Committee, on which sponsor Doug Green sits. At this time no hearings have been scheduled on the bill.

As we predicted nearly two years ago to the day, whether this particular bill goes into law or not, the effort to identify, value, and tax these conveyances will continue.

Upcoming tax presentation to REIA

This bill, and membership interest transfers generally, will be a part of our presentation with Hamilton County Dusty Rhodes to the Greater Cincinnati Real Estate Investors on February 6. Learn more about that event and how to sign up for a free ticket here.

Conclusion

The attorneys of Finney Law Firm have achieved literally hundreds of millions of dollars in property tax valuation reductions over the past 15 years.  Let us help you with your tax valuation challenge.  For more information on our property tax valuation practice contact Christopher P. Finney at 513.943-6656.

Pro Tip: Don’t lie on federal forms

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The Dayton shooting earlier this year was horrific and sad for the victims and their families. One friend of the shooter has found himself in legal jeopardy not for any involvement with the shooting, but for his willingness to assist the law enforcement investigation efforts.

In order to purchase a firearm from a federally licensed firearms dealer, one must complete ATF Form 4473, which asks, among other things, if you are addicted to, or a user of illegal drugs. Since at least October 2016, the form includes a warning that marijuana is still illegal under federal law regardless of whether states have legalized or decriminalized marijuana.

In helping law enforcement, Ethan Kollie allowed federal agents into his home and admitted to habitual use of marijuana and psychedelic mushrooms.  Review of Kollie’s Form 4473s revealed that Kollie had marked “No” in response to the illegal drug question. Thus, upon finding firearms and illegal drugs in Kollie’s home, the federal government had an open and shut case for (1) lying on ATF Form 4473 (18 USC § 924; and (2) being a user of unlawful drugs in possession of a firearm (18 USC § 922(g) & (n).

Kollie admitted that he lied about his drug use on the form because he knew he would not be able to purchase firearms had he answered truthfully.

Lying on Form 4473 is a felony punishable by up to ten year’s imprisonment. For being a user of unlawful drugs in possession of a firearm, the punishment is up to five years in prison.

Keep in mind that Mr. Kollie’s crimes have nothing to do with the shooting. He simply agreed to talk to law enforcement and allowed them into his home, and those discussions and the permitted search of his home resulted in these charges.

Mr. Kollie has plead guilty and is expected to be sentenced in early 2020.

Two major lessons from Mr. Kollie’s conviction: (1) don’t lie on federal forms; and (2) consult an attorney before you allow law enforcement access to your home. Mr. Kollie is learning these lessons the hard way.

Ohio’s Statute of Frauds – Get it in Writing!

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As discussed in a previous post, courts will only enforce contracts for the sale of real estate if the contract is in writing (and signed by the person against whom you seek enforcement). Click here to read that post.

The legal principle that requires certain contracts to be in writing is the Statute of Frauds. In Ohio, the Statute of Frauds is codified in Chapter 1335 of the Ohio Revised Code; and the Statute of Frauds covers more than just real estate contracts (both sales and leases). For example, R.C. 1335.02 requires loan agreements with financial institutions be in a signed writing to be enforced. However, “the use of a credit card results in the person using the card being bound by the card member agreement.” Citibank, N.A. v. Ebbing, 2013 -Ohio- 4761, ¶ 13, 2013 WL 5783722, at *3 (Ohio App. 12 Dist.,2013)

R.C. 1335.05 extends the Statute of Frauds to a promise to pay the debts of another person; an executor’s promise to pay the debts of the estate from her own funds; an agreement made in consideration of marriage; and for contracts that are not to be performed within one year.

R.C. 1335.11 further extends the requirements of the Statute of Frauds to sales commissions.

These same subjects are covered by Kentucky’s the Statute of Frauds at K.R.S. 371.010.

Despite the formal language of the statute, we see these in everyday life: a parent cosigning on a child’s student loans for instance. An agreement made in consideration of marriage includes prenuptial agreements (but not the agreement to marry itself).

When faced with oral agreements that are not to be performed within one year, courts will often engage in detailed analysis to determine if it is possible that the contract could have been performed within one year. For instance, in Jones v. Pouch, 41 Ohio St. 146, 1884 WL 84 (Ohio 1884), the Ohio Supreme Court ruled that an oral contract to construct a section of road in 1 year and 20 days was enforceable, because it was possible to have completed the work within one year, the additional twenty days were merely a precaution against contingencies. This case is still good law and was cited in the 2015 edition of Williston on Contracts despite being 131 years old.

Additionally with respect to agreements that are not to be performed within one year, Ohio’s courts have determined that the statute of frauds will not bar recovery where one party has fully performed their obligations under the contract but has not been fully paid. In another 19th century case, Towsley v. Moore, 30 Ohio St. 184, 1876 WL 176 (Ohio 1876) the mother of Olive Towsley, an 11 year old girl arranged for her to work in the home of Mr. Moore until she turned 18, in exchange for room and board, and, when she turned 18, Moore was to pay Olive the value of her services. The Court rejected Moore’s argument that the statute of frauds prevented Olive from recovering the value of her services. Ultimately, Moore was ordered to pay Olive $300.00 for her nearly 7 years of service.

Even where a contract fails to satisfy the requirements of the Statute of Frauds and a breach of contract claim cannot be brought, a claim for unjust enrichment or other equitable claims may allow you to obtain a just result.

Whether you are the borrower or the lender, employer or employee, you can avoid these questions by getting your contract in writing and signed by all parties.

St. Clair Township Sues for Property Tax Revenue Payments

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St. Clair Township in Butler County, Ohio has filed suit against the City of Hamilton, the Butler County Commissioners, Butler County Treasurer, and Butler County Auditor to recover lost tax revenue owed to it for properties that were annexed and excluded from the Township into the City of Hamilton.

Ohio Revised Code Section 709.19 provides that when property is annexed and excluded from a township, that township is entitled to be made whole via payments of a portion of the property taxes it would have collected over the next twelve years.

In 2016, the City of Hamilton and County Commissioners acted to exclude from St. Clair Township thousands of parcels that had previously been annexed from the township. This action triggered the obligation to make St. Clair Township whole. The City of Hamilton has thus far refused to comply with its obligations under Ohio law.

The complaint details the missteps along the way in excluding the property as well as the failure to make St. Clair Township whole.

The case has been assigned to Judge Craig Stephens of the Butler County Court of Common Pleas.

St. Clair Township is represented by Chris Finney of Finney Law Firm and Curt Hartman of the Law Firm of Curt C. Hartman. Mr. Hartman is lead counsel in the case.

The Journal News has coverage of the lawsuit here.

Read the complaint below or here.

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Steps To Help Shield Your Company from Online Doxing

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An aggravated consumer, industry rival, former employee or another person who is upset with your company may try to exact revenge by use of “doxing” — the practice of gathering a person or entity’s personal information and publishing it online. This may include sensitive information about the finances, health, residence, political affiliation, family and private lives of executives and employees at targeted organizations. Whether performed by an experienced hacker or an amateur sleuth, doxing can take a serious toll on a company, leaving it and its employees vulnerable to embarrassment and possible financial injury.

Doxing is distinguishable from defamation, which is the publication of false information about a person or entity. The danger from doxing is that the information released is true but sensitive. Unfortunately, there is a wealth of data that can be legally obtained online by clever searchers.

Fortunately, there are ways to help prevent hackers from finding the information they want. Cyber security professionals recommend the following actions:

  • Provide digital security training for employees — Create standard protocols for Internet activity and teach information-protection practices to employees. This helps prevent the release of information that should remain private.
  • Limit what is shared on social media — People with bad intentions can latch onto one detail your employee posts online and use it to uncover much more about the person’s life. Changing social media privacy settings can limit access to identifying data points — like addresses, employers, schools and email addresses — making it harder to track you on other platforms.
  • Use encryption tools — A hacker who accesses someone’s computer system may obtain important data and metadata from documents like Word, Excel and Powerpoint files. Documents and communications should be encrypted to keep their contents virtually inaccessible to anyone except the intended recipient.
  • Use strong passwords and vary them — Passwords are the keys to your data online, yet many users favor simple passwords that are easy to remember and, worse, include identifying information. Security experts recommend long passwords with a mix of numbers, symbols and upper- and lower-case letters. Also, use different ones for different accounts.
  • Update computer security — Internet firewall and antivirus software should be frequently updated. New versions are issued frequently to keep ahead of hackers that learn to exploit security weaknesses and mine hard drives for data.

Doxing may warrant civil legal action or criminal charges, depending on the type of information released, the means used to acquire the information, the intent of the publisher and the reputation damage or other harm inflicted.

About Finney Law Firm, LLC

Founded in 2014, FLF has grown to 15 attorneys located in offices in Eastgate and downtown Cincinnati with five major practice areas: Corporate Law, Real Estate Law, Employment Law, Commercial Litigation and Public Interest and Constitutional Litigation.  FLF has the unique claim to three 9-0 victories at the United States Supreme Court for its public interest practice along with breakthrough class action work.

FLF also has an affiliated title insurance company, Ivy Pointe Title, LLC, that closes and insures nearly a thousand commercial and residential real estate transactions annually.

For more information about Finney Law Firm, visit finneylawfirm.com.

Media Contact: Mickey McClanahan; [email protected]; 513.797.2850.

 

Fidelis Center

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Dear Friend of Nicholas Sandmann:

I wanted to let you know that the Fidelis Center for Law and Policy has agreed to raise money to help Nicholas and his family cover the costs associated with bringing lawsuits against the mainstream media outlets such as the Washington Post, CNN, and NBC Universal.  These costs include hiring experts, paying the costs to discover written and electronic records, the cost to take depositions, and travel costs.  The money raised in this campaign, net of expenses, will go directly to pay only costs.  My co-counsel, Lin Wood, and I are not paid by these funds. So, the money you contributed goes directly to reducing the Sandmann family’s costs.

Thank you for your support of Nicholas Sandmann and his family.

Sincerely,

Todd McMurtry

Legal Counsel for Nicholas Sandmann

 

City Files Motion to Dismiss John Doe Suit

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Lawyers for the City of Cincinnati filed a motion to dismiss the John Doe complaint regarding the Gang of Five Texts messages. The Gang of Five is the name Cincinnati City Councilmembers PG Sittenfeld, Wendell Young, Tamaya Dennard, Chris Seelbach, and Greg Landsman gave themselves when they were conducting city business via email, text message, and conference call.

Politics and apparently, litigation, makes strange bedfellows as the anonymous plaintiffs are suing not only the City, but also, a Finney Law Firm attorney, who sought public records on behalf of clients. And, curiously, the Plaintiffs, who in their filings with the Court claim to be personal friends of the Gang of Five, chose not to name the councilmembers themselves as defendants in the litigation.

The anonymous plaintiffs seek to have the Gang of Five’s text messages destroyed to avoid further public access to what are clearly public records.

If successful, the Plaintiffs will undo decades of public records law in Ohio and create a new avenue of litigation to prevent disclosure of public records. In short, efforts at government accountability would be stifled for years to come.

Read the Complaint here. 

Read the City’s Motion to Dismiss here.

Ohio Commercial Litigation: Using text messages to defeat a “home defects” case

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In a recent case, we defended a couple who were being sued by the buyers of their former home; alleging that my clients had engaged in fraud in completing the residential disclosure form. As has been discussed in previous blog posts here and here, Ohio law requires that the seller of residential property complete a disclosure form relating to potentially issues – chief among them water intrusion.

Our clients completed the disclosure form noting that they had experienced a water intrusion event when the sump pump failed; and that they hired a local water remediation firm for the clean-up.

Shortly after closing, Greater Cincinnati experienced record precipitation, and the basement flooded. The buyers filed suit claiming that the sellers had lied on the disclosure form.

Necessity of Justifiable Reliance

A claim for fraud requires that the plaintiff actually relied on the supposedly fraudulent misrepresentation, and that she was justified in so doing. This means that for instance, if the buyers were skeptical of the sellers’ disclosure form, or found their own evidence that contradicted the disclosure form, the buyers cannot be said to be “relying” or that their reliance is “justified.”

Additionally, in this instance our clients did disclose what they knew and therefore did not make any fraudulent misrepresentations at all. But simply disputing the allegations is not enough to win the day in court. We sought evidence to undercut all of the allegations.

 

Text Messages Undo the Buyers’ Claims

After the filing of the lawsuit, we conducted discovery, including requesting copies of text messages and emails between the buyers and their real estate agent. The text messages revealed that prior to even making an offer on the home, the buyers told their agent that they knew that water intrusion and mold was an issue. Indeed, the buyers “priced the risk into their offer.” In one text message the buyer stated: “A little concerned with the basement and flooding. They have had issues. Not sure it isn’t why these people are selling.” and “We love it. Just not for $300k . . . Especially with water damage . . . Don’t want to end up upside down or having to fix water damage etc.” And, true to their word, the buyers did not pay $300,000; they paid $275,000 for the home, pricing the potential cost of the anticipated water damage.

At one point the buyers asked their agent for a copy of the documents from the water remediation company the sellers had used. Unfortunately, the buyers’ agent never followed up and asked the sellers for those documents.

After signing the contract, the buyers hired an inspector and instructed him to conduct a mold test. For whatever reason, the inspector did not conduct a mold test, and the buyers did not follow up.

Summary Judgment

Armed with the buyers’ communications with their agent, and the disclosure form, we filed a motion for summary judgment. We argued that the disclosure form was accurate and put the buyers were on notice of water intrusion. Additionally we argued that the buyers’ communications with their agent proved that they were skeptical about the information the sellers provided (meaning they were not relying on the disclosure form) and priced the question into the purchase price.

The court agreed with our argument; “The [buyers’] personal notes and text messages with their real estate agent evince that they had ongoing, multiple concerns about water damage and mold based on the Disclosure Form and their own observations in inspecting the basement.” “Accordingly, the court finds that the [buyers] could not have justifiably relied on any fraudulent misrepresentation or concealment by the [sellers]. As such, their claim for fraud must fail, and summary judgment is appropriate as a matter of law.”

The Lessons

For attorneys defending these cases the lesson is clear, make ample use of discovery. Turn over every stone.

For the plaintiff’s attorney, ask more questions up front. Conduct your own “discovery” on your client, ask for those text messages before the defense attorney does. Don’t let your client waste your time litigating a bad claim.

For home sellers, make sure you complete the disclosure form to the best of your ability; knowing that there are brazen people out there who will file suit even though you disclosed issues and even when the are going to have to turn over the evidence that sinks their own case.

For buyers, remember in Ohio caveat emptor is the law. Make sure you get all the information you asked your agent to get you. Make sure your inspector conducts all of the inspections you asked for. And, when trouble arises in your new home (as it inevitably will) be honest with yourself about what you knew when you bought the house. Don’t bring lawsuits that are doomed to fail hoping the other side will roll over. Our civil litigation system only works when people do not abuse it.

Contact Christopher P. Finney at 513-943-6655 or using this form if you’ve sold a home and the buyer is now claiming that you did not disclose an issue.

Ohio Property Tax Valuation Reduction – Online auctions of bank owned property

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We’ve heard it said a million times (and said it ourselves a million more), “the recent sale price of a piece of real estate is the best evidence of its value.” And the concept of sales price as value is so ingrained in our minds that we sometimes forget that this is just shorthand, that the actual language of the statute is what matters; and, ultimately, what must be proven before the board of revision or the board of tax appeals.

“In determining the true value of any tract, lot, or parcel of real estate under this section, if such tract, lot, or parcel has been the subject of an arm’s length sale between a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor may consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes.” R.C. 5713.03

 

What is “Arm’s-Length”

What the actual language of the statute means is that the sale has to be arm’s-length: “A transaction between unrelated parties under no duress.” (Appraisal Institute). Boards of Revision and the Board of Tax Appeals look for the following factors when determining whether a sale price should be adopted as the true value:

  1. Buyer and Seller are typically motivated.
  2. Both parties are well informed or well advised and each is acting in his/her own best interest.
  3. A reasonable time is allowed for exposure in the open market.
  4. Payment is made in terms of case in U.S. dollars or financial arrangements comparable thereto and
  5. The price represents normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The Board of Revision

Recently Ohio’s Ninth District Court of Appeals upheld a decision by the Board of Tax Appeals to reverse the decision of the Summit County Board of Revision to adopt the online auction price as the true value.

In Green Local Schools Board of Education v. Manolakis, et al. 2019-Ohio-4250, the property owners initially filed a complaint with the Summit County Board of Revision seeking to lower the value of their home from $1,498,350.00 to $836,300 – the owners’ purchase price in an online auction. Before the Board of Revision, the owners explained that the property had been subject of a sheriff’s sale and that the foreclosing bank had purchased the property at that sale. A few months later, the bank placed the property for sale via an online auction site, hubzu. The owner’s put in a bid and won.

The Board of Revision accepted the owner’s testimony and adopted the sale price. However, the school board appealed to the Board of Tax Appeals and pointed to a lack of evidence supporting a finding that the auction was “arm’s-length.”

The Board of Tax Appeals

After the property owners prevailed at the Board of Revision, the local school board (which typically receive 60-70% of the property tax collections) filed an appeal arguing that the owners did not meet their burden to show that the sale was “arm’s-length.”

The owners testified at the Board of Revision that they had no relationship with the seller but were unable to provide any information about the bank’s motivation in selling. Notably, the owners were unable to show that the property had been marketed for sale other than via a sign in the yard of the property one week before the auction, or whether there was a minimum bid for the auction, or any other bidders.

Another problem for the owners is that they agreed to let the Board of Tax Appeals decide the case without putting on any additional evidence. So the owners forfeited the right to supplement the evidence to bolster their claim that the sale was arm’s-length.

The Board of Tax Appeals, looking only at what was before the Board of Revision found that there was not enough evidence in the record to show that the sale was arm’s-length. And, once the sale price was disregarded, the only evidence of value was the auditor’s original value. So the Board of Tax Appeals reinstated the auditor’s value $1,498,350.00.

The Court of Appeals affirmed the decision of the Board of Tax Appeals, finding that “we cannot say that the BTA was unreasonable in concluding that the evidence of value presented by Mr. and Mrs. Manolakis to the BOR was not sufficient.”

The Lesson

Don’t take the Board of Revision process lightly. This is a serious endeavor – particularly when you are seeking a substantial  reduction in value. Remember, when you bring a challenge to the Board of Revision it is your burden to prove that your proposed value is right and that the auditor’s value is wrong. Bring everything you can think of to prove your case. And if there is an appeal, take the opportunity to bring in additional evidence to bolster your case.

Your Case

Finney Law Firm has represented commercial and residential property owners (and one school board) before the Boards of Revision throughout Ohio and before the Ohio Board of Tax Appeals in property tax valuation challenges.

Every case should be evaluated based on its own unique set of circumstances. The time to file a challenge begins January 1 of each year and ends March 31. If you have questions about the value of your property, or if you recently purchased property at a price less than the auditor’s value, we can help. More information about the property tax valuation process is available here.

Contact Christopher P. Finney at 513-943-6655 or contact us here.

Ohio Public Interest Law: Finney Law Firm files suit to enjoin unauthorized lawsuit

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In June 2019, Cincinnati City Solicitor Paula Boggs Muething filed suit against the state of Ohio, arguing that a state law provision prohibiting cities from enacting their own firearms regulations violates the Ohio Constitution. Unfortunately, it seems, she went off “half-cocked.”  We say this because, while the suit was brought in the name of the City of Cincinnati, the Cincinnati City Council never voted to authorize the lawsuit.

State Representative Tom Brinkman

On July 19, 2019, State Representative, and Cincinnati resident, Tom Brinkman sent a letter to Ms. Boggs Muething demanding that she seek an injunction to restrain the abuse of corporate powers (in essence to sue herself to keep her from bringing suit in the City’s name without specific authorization from the City Council).

Ms. Boggs Muething rejected Mr. Brinkman’s demand, thus permitting Brinkman to file suit himself on behalf of the City. Brinkman filed suit on August 13, 2019, and a few days later, the court ordered Brinkman’s suit consolidated with the original lawsuit against the State of Ohio.

While the lawsuit has been presented as an attack on the City’s efforts to regulate firearms, the lawsuit simply seeks to have the City Solicitor live within the bounds of her authority. If the Cincinnati City Council wishes to authorize the Solicitor to bring suit, she would be authorized to do so. But, to date, the council has not authorized such a suit and it is improper to have the solicitor deciding on her own to bring suit in the City’s name. This is an abuse of her power and everyone concerned about transparency and accountability should agree that Council’s authority should not be usurped.

The State of Ohio filed a motion to dismiss the City’s original complaint, the city’s response to that motion is due August 19, 2019.

Read Brinkman’s Complaint here  and Motion for an Injunction here. Fox 19’s coverage of the suit is available here.

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