Recent Developments

Partnership Agreement:

A law firm changed its partnership agreement by majority vote from accrual to cash basis. While state law provided that a unanimous vote is required to change any agreement between the partners, the provision of the partnership agreement trump the statute.  The partnership agreement provided in general that majority vote governs, although several provisions provided for unanimous approval. The provision involved in the case did not provide for the higher standard. Bailey v. Fisch & Neave, 8 N.Y.3d 523 (5/8/07). Too often it's only with hindsight that the implications of a provision are really understood. This case is a great caution to those rushing through governing documents and not giving them the care and thought needed.

Real Estate Brokerage Commissions:

As the residential real estate market continues to soften, it may become more common for brokers to rebate or reduce brokerage commissions to benefit buyers to encourage sales. A recent ruling addresses the tax consequences of such rebates. A buyer's agent paid the buying customer a portion of the commission after closing. The IRS held that the buyer does not have to recognize this payment as income. Instead the payment should be treated as a downward adjustment of the purchase price. Also, the broker does not have to issue a Form 1099 reporting the payment to the buyer to the IRS. The rationale is that since the amount is not income it did not have to be reported. PLR 200721013.

Art Valuation:

An estate was entitled to discount the value of its ½ undivided interest in artwork for the cost it would likely incur in a partition action to sell the art. This discount was based on an estimate of the cost to sell the paintings at auction. The court also indicated that a further discount to factor into the valuation the volatility of the art market and its impact on the timing of a sale. R. Stone DC Cal. 2001-1 USTC Para. 60,540.