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Cypen & Cypen
NEWSLETTER
for
FEBRUARY 9, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. PENSION BATTLE MAY ENTANGLE MOGUL’S HOME:

Ira Rennert’s colossal house in the New York’s tony Hamptons, built with riches from his sprawling industrial empire, has withstood lawsuits from angry neighbors, appeals to the local zoning board and even an attempted documentary filming by Michael Moore. But now, according to The New York Times, a new challenge is looming: the Pension Benefit Guaranty Corporation has laid claim to Mr. Rennert’s 29-bedroom oceanfront estate, along with other assets, to make sure he delivers on hundreds of millions of dollars in pensions promised to workers at WCI Steel Inc., of Warren, Ohio. In most pension cases, PBGC has little choice but to absorb liabilities of the pension plan itself, because the sponsoring company has filed for bankruptcy and there is rarely enough wealth tucked away in related entities to be worth chasing. But, PBGC believes WCI’s corporate parent, Rennert’s Renco Group Inc., should assume responsibility for the pension plan. PBGC is seeking as much as $189 Million -- just slightly more than the $185 Million-valued house. Stay tuned.

2. DISABILITY RETIREE “REGARDED AS HAVING IMPAIRMENT”:

Todd, a former Cincinnati police officer, in 1992 at age 37, was granted a disability pension due to degenerative disc disease acquired as a result of injuries during his police employment. In 1996 he applied to the City as a firearms instructor, but was not hired. One police official, who interviewed Todd, doubted that he could perform the job due to his back problem. Todd sued the City under the Americans with Disabilities Act of 1990. ADA prohibits a covered entity, including a municipality, from discriminating against a qualified individual with a disability because of the disability of such individual in regard to hiring, advancement and other terms, conditions and privileges of employment. ADA defines “disability” in non-obvious ways, including as a physical or mental impairment that substantially limits the major life activities of such individual and as “being regarded as having such an impairment” by the employer. The federal district court granted summary judgment in favor of the City. On appeal, the appellate court determined that the question was a narrow one: whether Todd offered material evidence sufficient to overcome summary judgment that police officials denied him the job because they “regarded him as disabled.” Because a summary judgment is inappropriate if there are any genuine issues of material fact, the appellate court reversed and remanded for a trial on the evidence. “We think that this case should not be decided as a matter of law on the issue of whether the appointing police officials regarded the plaintiff as disabled. There is considerable evidence that two of the appointing officials believed that plaintiff had left the police department due to a disability that would make him unable to perform the duties of a firearms instructor.” Considering that Todd was already receiving a service-incurred disability benefit from the Cincinnati Police Department, to us this lawsuit presents a perfect example of “chutzpah.” Todd v. City of Cincinnati, Case No. 05-3343 (U.S. Sixth Cir., February 3, 2006).

3. STEELERS WIN SUPER BOWL; MARKET TO RISE?:

According to the Super Bowl Theory, a win by a team from the old National Football League is a precursor to a rising S&P 500; but if a team from the old AFL prevails, stocks will fall. (Actually, in Super Bowl XL it did not matter who won: the Pittsburgh Steelers were originally an NFL team.) Since the first Super Bowl in 1967, the Super Bowl indicator has correctly forecast the S&P 500's direction three out of four times. However, the indicator has been right only once in the past eight games.

4. “JANUARY INDICATORS” PREDICT GOOD MARKETS:

And speaking of indicators, plansponsor.com tells us that January has two other special attributes: (1) it tends to be a good month and (2) good or bad, it seems to predict the rest of the year. The “January Effect” has held true -- during the month of January, the Russell 2000 was up 8.91%, the NASDAQ 4.56%, the Wilshire 5000 3.48% and the Dow 1.37%. As for the “January Barometer,” from 1938 through 2004 the January direction of the S&P 500 predicted the full-year direction over 80% of the time!

5. NEW YORK SENATE APPROVES BILL TO RAISE EARNINGS CAP FOR GOVERNMENT PENSIONERS:

Retirees from state and local government can earn more money without paying a pension penalty under legislation recently approved by the New York State Senate. The bill extends from $27,000 to $30,000 the amount seniors can make per year without paying penalties on their pensions. The provision would go into effect in 2007. The bill now awaits action by the State Assembly.

6. WISCONSIN RELEASES STUDY OF MAJOR PUBLIC EMPLOYEE RETIREMENT SYSTEMS:

The State of Wisconsin Legislative Council has issued a report entitled “2004 Comparative Study of Major Public Employee Retirement Systems.” The report compares significant features of major state and local public employee retirement systems in the United States. The report compares retirement benefits provided to general employees and teachers, rather than benefits applicable only to narrower categories of employees such as police, firefighters or elected officials. Generally, the report has been prepared every two years since 1982 by the Wisconsin Retirement Research Committee Staff or the Legislative Council Staff (see C&C Newsletter for October, 2001, Item 12). The 2004 report includes data from the same 85 public employee retirement systems that have been compared in each of the previous reports. Although the report does not cover all major public employee retirement systems, it does include at least one statewide plan from each state. Because the same public employee retirement systems have been covered in the report over time, it can be used to determine long-term trends in public employee retirement systems. The plans surveyed provide pension coverage for almost 12 million active employees and 5.3 million retirees and beneficiaries, a total of over 17 million participants. The total is 3% greater than the 16.5 million participants in the 2002 report. The number of active participants has grown between the 2002 and the 2004 reports by 2%, while the number of retirees has grown by 8% in the same time period. The average ratio of active employees to retired employees has declined over prior years. For 2004, the average ratio was 2.24, while comparable figures for 2002, 2000 and 1996, respectively, were 2.38, 2.52 and 2.89. In 68 of the 85 plans, participants are also covered under the federal Social Security program. Of the 17 public employee retirement systems included in the report that do not provide Social Security coverage, 10 represent pension plans covering teachers only. The decision on whether to participate in the Social Security program was at one time elective, rather than mandatory, for public employers. However, for those employers who elect coverage, future participation is mandatory.

7. 2005 REPORT ON SOCIALLY RESPONSIBLE INVESTING TRENDS IN THE UNITED STATES:

The subject report marks ten years since the Social Investment Forum published its first biennial report on socially responsible investing. Over those ten years, socially responsible investment assets grew 4% faster than the entire universe of managed assets in the United States. SRI assets rose more than 258% from $639 Billion in 1995 to $2.29 Trillion in 2005, while the broader universe of assets under professional management increased less than 249% from $7 Trillion to $24.4 Trillion over the same period. Nearly one out of every ten dollars under professional management in the United States today -- 9.4% of the $24.4 Trillion in total assets under management -- is involved in socially responsible investing. The report identifies the following 10-year trends:

  • Socially and environmentally screened mutual funds have experienced substantial growth in the number and diversity of products and screens offered.
  • Mainstream money managers are increasingly incorporating social and environmental factors into their investing.
  • A growing number of institutional investors are active owners of the companies in their portfolios, and support for the growing numbers of shareholder resolutions filed on social, environmental and corporate-governance issues rose dramatically over the last 10 years.
  • Community investing is experiencing significant growth in assets, helping to increase the economic opportunities for lower-income communities and spurring industry developments that are making it easier for a broad range of investors to participate in this expanding field.
  • The globalization of socially and environmentally responsible investing continues to advance to a diversity of developments in different regions around the world, from the largest SRI markets in Canada, Europe, Australia and Japan to the more sophisticated emerging markets of Latin America, South Africa and the Asia Pacific region. The entire report, dated January 24, 2006, can be accessed at
    www.socialinvest.org/areas/research/trends/sri_trends_report_2005.pdf.

8. IRS ANNOUNCES “DIRTY DOZEN” TAX SCAMS FOR 2006:

Ala` the classic 1967 film of the same name starring Lee Marvin, Internal Revenue Service has issued its 2006 “Dirty Dozen” -- the latest annual tally of some of the most notorious tax scams. IRS urges people to avoid the following common schemes:

1. Zero Wages. In this scam, a taxpayer attaches to his return either a Form 4852 (Substitute Form W-2) or a “Corrected” Form 1099 that shows zero or little wages or other income.

2. Form 843 Tax Abatement. This scam involves the filer requesting abatement of previously-assessed tax using Form 843, although not having previously filed tax returns.

3. Phishing. This technique is used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names.

4. Zero Return. Promoters instruct taxpayers to enter all zeroes on their federal income tax filings.

5. Trust Misuse. For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts, promising reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.

6. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning Congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.

7. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes.

8. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt.

9. Use of Charitable Organizations and Deductions. IRS has observed increased use of tax-exempt organizations improperly to shield or assets from taxation.

10. Offshore Transactions. Despite a crackdown by IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so.

11. Employment Tax Evasion. IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees, based on an incorrect interpretation of Section 861 and other parts of the tax law that has been refuted in court.

12. “No Gain” Deduction. Filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A.

Involvement in tax schemes can lead to imprisonment and fines. IRS pursues and shuts down promoters of these and numerous other scams. Anyone pulled into these schemes can also face repayment of taxes plus interest and penalties.

9. QPSA PROVISION OF ERISA TRUMPS “FAULTY” QDRO:

The United States Court of Appeals for the Ninth Circuit recently decided a case in which “the alphabet soup world of pension benefits has spawned a dizzying array of acronyms, like ERISA, QDRO and QPSA, and a complex web of interrelated statutory provisions.” In a case of first impression, the Court was challenged to cut through the dense language to figure out what Congress meant in terms of surviving spouse benefits under the Employee Retirement Income Security Act of 1974. (Of course, in general, ERISA does not apply to public plans, and, a public plan in Florida is not ordinarily subject to a Qualified Domestic Relations Order.) The case involved an ERISA- governed pension fund, Mary Hamilton, surviving spouse of plan participant Michael Hamilton, and Michael’s children from a previous marriage. After Michael’s pre-retirement death, Mary and the children claimed competing rights to survivor benefits. The trial court summarily found that a marital dissolution order, which required Michael to name the children as beneficiaries under the plan, was a valid QDRO under ERISA that took precedence over Mary’s right to a Qualified Pre-Retirement Survivor Annuity. The Court was required to address the intersection between a surviving spouse’s statutorily-guaranteed survivor annuity, a QPSA, and a marriage dissolution order, a QDRO, that is silent with respect to surviving spouse rights. In reversing and remanding for trial, the appellate court relied on the plain language of the statute, and held that the purported assignment of pension rights did not meet the strict requirements of a QDRO. Even if a dissolution order were liberally construed as a QDRO, under the statutory language coupled with a complementary interpretation of the plan, the surviving spouse benefit must be explicitly assigned to a former spouse in a QDRO in order to overcome the surviving spouse’s right to an annuity under ERISA. (Public plan participants do not panic. As we said, ERISA does not apply to you, and, thus, there is no spousal guarantee of a survivor annuity.) Hamilton v. Washington State Plumbing & Pipefitting Industry Pension Plan, Case No. 04-35526 (U.S. Ninth Cir., January 10, 2006).

10. CROOKED INSURANCE BROKER FIDUCIARY UNDER ERISA:

Day accepted hundreds of thousands of dollars from 29 ERISA-covered employee benefit plans for the purpose of purchasing insurance for them. Under his brokerage scheme, Day sent invoices to the plans for various insurance policies, the plans paid the bills by sending checks to Day and he deposited the checks into his corporate account. Instead of using the plan’s checks to purchase insurance, however, Day kept the money and provided the plans with fake insurance policies. The Department of Labor brought suit under the Employee Retirement Income Security Act of 1974, alleging that Day violated his fiduciary responsibilities. Day alleged that he did not fall within ERISA‘s definition of “fiduciary.” The District Court agreed with the Department, granted its motion for summary judgment and ordered Day to pay almost $1 Million in damages. On Day’s appeal, the only issue was whether he was a fiduciary under ERISA. In affirming, the appellate court found that the relevant section of ERISA defines two classes of fiduciaries: a person is a fiduciary with respect to a plan to the extent he (a) exercises any discretionary authority or discretionary control respecting management of such plan or (b) exercises any authority or control respecting management or disposition of its assets. Day clearly fell within the scope of the second clause, because he exercised “authority or control” over the “disposition of the plans’ assets.” Day unsuccessfully argued that fiduciaries under both the first and second clauses require some element of discretionary authority or control. Get this: “Day contends he was simply an insurance salesman, and he did not exercise any discretion over the plans’ assets -- he was under strict instructions to use the plans’ funds to purchase insurance coverage for the plans’ members.” (On second thought, Day may have had more “chutzpah” than the cop in item 2.) Very important: the Court hastened to emphasize the limited scope of its ruling and interpretation does not extend fiduciary status to every person who exercises “mere possession or custody” over plan assets. Chao v. Day, No. 05-5050 (U.S. DC Cir., January 24, 2006).

11. BANKING ON TALLULAH:

We just came across the following quote from the inimitable Tallulah Bankhead, which we deem worth sharing with readers: “If I had to live my life again, I’d make all the same mistakes, only sooner.” Ha!

Copyright, 1996-2006, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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