Recent Developments

■ Loans on Your Life Insurance.  Your back is up against the wall, and
you borrowed on your life insurance. Caveat Emptor –the loan can have some nasty tax consequences if the policy
contract is terminated. The insured borrowed on the policy and did not pay
interest on the loan until the loan balance and accrued interest increased to
the point where it exceeded the policy cash value. The policy provided that if
the outstanding debt exceeds the cash value that the policy will be cancelled
31 days after a notice is sent to the insured. That cancellation requires
recognition of gain. 72(e)(1)(A)(i), (5)(A), and (C). Reinert v.
Commissioner; T.C. Summ. Op. 2008-163.

■ Liable For Partner’s Misdeeds.  The recession has flushed
out lots of bad boys. Unfortunately, you may only have to look down the hall.
The fall of the NYC law firm Drier LLP highlights another landmine many people
will have to contend with. If you were partners with someone who defrauded
customers, stole money or committed other misdeeds as a partner, you may be on
the hook regardless of your innocence. You might have to return money you
thought you earned from work that was not completed. If you were held out to
the public as a partner, even if you had no signature authority over bank
accounts and did nothing wrong, you still may have had “apparent
authority” to act. You have an obligation to monitor your partners. How
far that obligation extends, and the scope of your liability, may turn on the
partnership agreement and other terms of your relationship.  You could be
held liable for your partner’s wrong doing. Bottom line: if the economic
turmoil has brought to light misdeeds of one of your partners, don’t assume you
can duck the fallout. Get legal counsel and determine the scope of your
liability.