REPORT FROM COUNSEL
SUPER LAWYERS 2006
Henningson & Snoxell, Ltd. congratulates our colleagues on their selection as Super Lawyers. Your selection reflects the firm's commitment to client service.
James E. Snoxell focuses his practice in the areas of business & commercial law, business organizations and employment law. He works closely with business and corporate clients by advising them of business and corporate law issues and working with clients with any special legal needs.
Steven M. Graffunder practices in all areas of commercial and residential real estate, construction law and banking law. He is a MSBA Board Certified Real Property Law Specialist and works closely with the firm's clients concerning all of their real estate needs.
Jeffrey A. Berg represents clients in all areas relating to family law. He helps clients through the difficult process of divorce and is an experienced mediator. Jeff also practices in the area of employment law dealing with discrimination and harassment issues, non-compete agreements, contract disputes and wrongful termination.
Mark V. Steffenson is the head of the firm's Litigation Department and practices in the area of business and commercial litigation focusing on areas such as contract disputes, employment law, product liability claims, and shareholder, partnership, and franchise disputes. He represents clients in arbitration, mediation, and in state and federal court.
Richard J. Krambeer represents clients in all areas of domestic and family law. He is a frequent lecturer on aspects of family law in Minnesota to various civic and church groups in Minnesota and has been a guest lecturer at the annual Minnesota Family Law Institute. He is also a Qualified Neutral under Rule 114.
VALUATION DISCOUNTS FOR ESTATE AND GIFT TAXES
Upon the death of the owner of stock in a closely held corporation, the fair market value ("FMV") of the stock must be determined before an estate tax return can be filed. For gifts of such stock, it is also necessary to ascertain the value of the stock for gift tax purposes. Unlike publicly traded stock, the value of which can be determined easily on the Internet or in a newspaper, stock in a closely held business has a value that is more difficult to nail down. By definition, the shares are held by a much smaller number of people and are not widely traded.
Fair market value means the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have a reasonable knowledge of relevant facts. Calculating the FMV of closely held stock generally starts with an estimate of the total value of the closely held company itself. Application of discounts (or premiums) to account for the specific circumstances of the company then reduces (or increases) the FMV of the stock.
The process is highly focused on the particulars of each business. For example, in a recent decision by the United States Tax Court, the starting point in valuation of a decedent's minority interest in a closely held family corporation was easier to figure, because the corporation was a holding company with a portfolio of widely traded securities that had readily ascertainable values. But that market value was discounted by 10% to take into account a buyer's lack of control over the company and by another 15% for lack of marketability of the shares.
The Internal Revenue Service likes to keep an eye on valuation discounts, since they lead directly to a reduction in estate tax liability. Federal statutes, regulations, and Revenue Rulings have shed light on the use of valuation discounts. IRS Revenue Rulings have identified the following list of some primary criteria for determining the valuation discounts for closely held stock:
* nature and history of the business;
* outlook for the economy and the specific industry;
* book value of the stock and financial condition of the business;
* earning and dividend-paying capacities of the company;
* goodwill or other intangible value of the enterprise;
* sales of the stock and size of the block of stock to be valued; and
* market price of publicly traded stocks of corporations in the same or similar line of business.
THE HAZARDS OF RÉSUMÉ SCREENING
It is popular now for employers to use screening tests, often administered on the Internet, to weed out a large portion of applicants for job openings before making the more difficult selections from among those who survive that first cut. Such tests are supposed to measure cognitive ability, personality characteristics, or, in fewer instances, the ability to perform in a simulation of the duties that the job requires. The easily administered and scored screening tests have their appeal, especially if you are charged with filling, say, 10 positions from 100 people who have submitted résumés.
A downside to screening tests is the risk that rejected applicants may persuade a court that the tests essentially were a tool to accomplish prohibited discrimination, even though that may not have been the employer's intent. For example, an employment test that impacts racial minorities or women disproportionately could lead to liability unless the employer can show that the test is sufficiently related to the job and is necessary to the employer's business.
Another potential pitfall stems from the prohibition in the Americans with Disabilities Act (ADA) against medical testing of job applicants. There sometimes is a fine distinction between acceptable personality or psychological tests and prohibited medical tests. The screening of applicants also could run afoul of some state statutes that protect against invasions of privacy.
When individuals adversely affected by a personality test challenged the test in federal litigation under the ADA, an appellate court struck down the test. The test, at least in some of its 502 questions, was a prohibited examination of the applicants' mental health. Its true or false questions went much farther than the acceptable lines of inquiry about matters such as working well in groups or in a fast-paced office. Instead, they ventured into the realm of psychiatric disorders. In this case, a prospective manager of a rent-to-own store could not be required to give true or false answers to statements such as: "I see things or animals or people around me that others do not see"; "At times I have fits of laughing and crying that I cannot control"; or "My soul sometimes leaves my body."
EMINENT DOMAIN UPDATE
Landowner Loses the Battle but Wins the War
In one of the most controversial eminent domain decisions ever, the United States Supreme Court ruled in 2005 that a city's exercise of its eminent domain powers to take private property in furtherance of an economic development plan satisfied the constitutional requirement that such power be used only for a "public use," even though private developers stood to profit handsomely from the city's actions. In reaction to that ruling, some state legislatures have been busy crafting legislation to limit the use of condemnation powers in such circumstances. For their part, the owners of property targeted for condemnation have considered how they still might fend off the taking, or, failing that, how to maximize the compensation that the government must pay.
In a recent case, a landowner was not able to defeat a condemnation initiated by a city so that a new hotel could be built on the property, but he did receive maximum compensation from an obviously sympathetic jury. The landowner was an immigrant who had spent two years and a lot of money renovating a warehouse and building a mail-order cigar business. When two private developers were unsuccessful in negotiations to buy the property as a site for a hotel, they instead reached an agreement with the city whereby the city would condemn the property for their desired use and the developers would pay the costs and fees associated with the condemnation.
When the city was first attempting to buy the property, it sent the landowner a toxic waste notice requiring him to investigate whether any toxins existed in the ground. The landowner tried to comply, but after spending many thousands of dollars he found no toxins. The city would later admit in the litigation that such an investigation was not really feasible so long as a building remained on the property. The toxic waste notice, and especially its suspicious timing, came to be seen as a tactic to put pressure on the landowner during the negotiations leading up to the condemnation.
Although the trial court ruled that the city could condemn the land for the hotel, in the subsequent trial before a jury for damages, the landowner fared much better. The jury awarded him the entire amount he had sought. The award included several million dollars each for the value of the property itself and for the loss of the goodwill associated with the cigar business. Damages for loss of a business are not typical in condemnation cases, but the landowner was able to show that there was no suitable alternative location for the business, so that he would have to start over from scratch. For good measure, the jury also awarded damages equal to the cost of the dubious toxicity study that the landowner had been forced to undertake.
SMOKE ALARMS: INEXPENSIVE GUARDIAN ANGELS
If you could pay $10 and, in return, get a guard who would warn your family if your house caught fire, would you? Of course you would. Despite this, most people do not have enough smoke detectors in their homes--detectors that will stand guard over your family's lives 24 hours a day. The evidence shows that using even an inexpensive smoke detector increases your family's chance of surviving a house fire by 50%, making it one of the best investments you can make for your family's safety.
Experts recommend installing smoke detectors, the cheapest of which start at about $10, throughout your house. At a minimum, install one detector for every floor and one outside of each bedroom. Test your smoke alarms once a month, and replace the batteries once a year. Make sure that every member of your family knows (1) what to do when the smoke alarm sounds, and (2) the fire escape route from each room. A little advance planning can help make sure that you and your family have a better chance if a fire should start in the night.
THE DANGERS OF EMPLOYEE INTERNET USE
By some accounts, a large majority of employees access the Internet on company computers for personal reasons while at work. The obvious adverse effects of this on productivity are only the tip of the iceberg with regard to the potential headaches that such activities can cause for employers. Personal Internet activity by employees can pose security risks to the company's computer network itself, such as by exposing a network to a computer virus.
Less immediate but just as serious is the threat of legal liability of the employer to injured third parties. Some scenarios are not difficult to imagine. An employee uses his computer as a tool for sexually harassing fellow workers by visiting pornographic websites. Or, an employee embroiled in a bitter domestic dispute uses his office computer to communicate threats to his spouse, and the employer fails to take action.
In a recent case, one such nightmare scenario was all too real for an employer that had to defend itself against the alleged victims of an employee who used a workplace computer for conduct that was criminal, not just indicative of poor judgment. This case may be the first reported decision on the matter of an employer's liability to a third party for having failed to take action to stop an employee from using a company computer in a manner that harmed the third party. It most certainly will not be the last such case.
The case involved an employee who used his company's computer at work to visit pornographic sites, including some relating to child pornography. Over a period of time, a supervisor and some coemployees became aware of this activity and complained to management. Eventually, the offending employee was confronted and was told to stop such use of the computer, but, a few months later, he was again discovered to have accessed pornographic sites.
Eventually, the employee was arrested on child pornography charges, including allegations that he had transmitted nude pictures of his 10-year-old stepdaughter over his office computer to a child pornography site. The employee's wife, who divorced him, sued the employer for failing to investigate and for failing to report the employee's viewing of child pornography. The case was settled, but not until a precedent was set when the lawsuit survived attempts to have it dismissed before trial.
There are limits to what companies can or should do to prevent improper use of company computers, but it is only prudent to take at least some basic measures. It makes sense to have a written e-mail and Internet use policy that clearly informs employees of what, perhaps, they should already know--that the employer has and reserves the right to monitor employees' use of the company's computers and to discipline violators. In addition, there needs to be even-handed enforcement of the policy. Even the best written policy will do little to convince a jury, if it comes to that, that a company has done all it reasonably could have done, if the evidence is that the policy was toothless or rarely enforced.
