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April 2011
You Really Thought This Would Work?
By Robert Norris

 You Really Thought This Would Work?

     Some opportunities are too good to be true. Even when the come with letters from law firms providing opinions about the opportunity. That’s because those letters don’t always say what they are advertised as saying. And, in most cases, those letters are not a defense if you are found to have broken the law.

     A husband and wife thought they had a great plan. They became members of a financial planning company. One of the financial strategies was a “family public charity” created through the financial planning company’s 501(c)(3) charity. The strategy was advertised as a “tax reduction” program and designed to benefit charities and the families creating the fund.

     The investment materials discussed using pre-tax dollars to fund the accounts, gaining tax-deferred growth in the investments, and using funds for personal teaching, research, and college scholarship programs. The families could also be compensated by their own charity for working for the charity and doing “good works.”

     Further, the charities could make student loans. The loans could be repaid by providing charitable services for designated periods of time.

     The husband and wife set up their own charity through the financial planning company, and they got a letter from the company’s law firm. The letter stated that it was more likely than not that contributors to the “family charities” could deduct their contributions for tax purposes. BUT, the letter stated the law firm had not reviewed any documents about and would not render an opinion on many of the programs advertised to be part of the family charity program.

     The husband and wife used their family charity to loan money to their son for college. In exchange for the loan, the son promised to perform 2,000 hours of charitable work for each year his expenses were covered by the charity. If, for some reason, the son did not perform his charitable work, he agreed to repay the loans over 15 years beginning 5 years after he graduated school.

     The Tax Court decided that the charity wasn’t really a charity. The husband and wife were not allowed to deduct any of their contributions to the fund. The Court stated that the couple was negligent and did not make a reasonable attempt to verify if what they were doing was correct. The Court viewed the strategy as something a reasonable or prudent person would find too good to be true. The letter from the law firm didn’t help them.

 

 

Expanded Foreclosure Requirements

     In 2008, the General Assembly enacted the Emergency Program to Reduce Home Foreclosures Act to provide certain rights and “foreclosure relief” for “subprime” home loans. This Act has been renewed and expanded to cover all residential home mortgages.

     The Act requires that a lender send a notice to the borrower at least 45 days before filing a notice of hearing in a foreclosure process to let the borrower know of any resources available to help prevent foreclosure. The notice must include the amount of payments required to bring the loan current and a list of all past-due amounts.

     The lender must also make a filing with the Administrative Office of the Courts and pay a $75 fee with each filing. This fee funds a “State Home Foreclosure Prevention Trust Fund.” The fees will be used to pay the costs of the fund, to fund nonprofit counseling agencies and to fund nonprofit legal service providers to help homeowners both in and near default.

 

Installment Sales Beware

     If you have the opportunity to sell your land, be careful how you do it. You may have heard of a transaction where the seller accepts installment payments from a buyer for land, but the seller gets to keep the deed until the buyer makes the last payment.

     North Carolina wants to be certain that all parties are treated fairly in these transactions. These agreements must be in writing and contain all of the terms of the agreement. In addition, the contract must contain a number of particulars about the property.

     Any breaches of the contract that result in the buyer losing the right to buy the property must be expressly set forth in the contract as such. The buyer also has a right to cure such breaches.

     The maximum late fee for payments that can be charged is four percent of the amount of the payment due. And, a violation of this law by a seller is an “unfair trade practice.” This means that means the buyer gets three times the amount of damages from the seller for a seller’s breach.

 

Lease to Own Your Risk

     North Carolina has taken steps to help homebuyers and homeowners recently. In the 2010 Short Session of the General Assembly, the law governing leases of homes with options to purchase has some new teeth for property owners who act badly. This law applies to leases with options to purchase for homes that the tenant/buyer will use as a principal residence.

     First, the contract must be in writing. In addition, a buyer’s option to purchase property can’t be forfeited unless an express obligation in the written contract is breached by the buyer, the buyer is notified of the breach, and the buyer is given a chance to cure the breach. The buyer’s right to cure exists for one default in every 12-month period of the lease term.

     If the seller happens to default on a loan secured by the property, the buyer can exercise the option to purchase or cancel the contract. In addition to other remedies, the buyer can seek to get all the money back that he paid the seller. If the buyer cancels the contract, however, the seller will get to keep an amount equal to fair rental value of the property plus amounts necessary to fix any damages to the property by the buyer above and beyond normal wear and tear. 

     Also, to really make certain that sellers don’t try to swindle buyers, a violation of this law by a seller is an “unfair trade practice.” This means that the buyer gets three times the amount of damages from the seller. This part of the law does not apply to the individual homeowner selling his or her principal residence.

     Content provided by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Robert Norris at 704-364-0010 or visit www.wnhplaw.com.

Robert Norris is managing partner at Wishart, Norris, Henninger & Pittman, P.A.
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