Tag: Illinois

The Walls Shouldn’t Have Ears: Ruling on Eavesdropping Puts Burden of Prevention on Illinois Employers

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Are your employees surreptitiously recording conversations? It’s a frightening thought. But based upon a new Illinois Supreme Court ruling, they are now free to do so. To discourage this behavior, Illinois employers should consider implementing a policy prohibiting such surreptitious recordings.

In People v. Clark, the Illinois Supreme Court ruled that the state eavesdropping statute, which had made it illegal to record conversations in Illinois without the consent of all parties, was unconstitutionally overbroad under the First Amendment. The state Supreme Court reasoned that audio and audiovisual recordings are “medias of expression commonly used for the preservation and dissemination of information and ideas and thus are included within the free speech and free press guarantee” of the First Amendment.

Consider for a moment how your employees might use secretly recorded conversations against you. An employee who has previously complained to your human resources department about another employee who made inappropriate sexist or racist comments, may now freely record all conversations with the colleague, and can use those recordings in a lawsuit against the company. Or, an employee might surreptitiously record everything said during an internal investigation of alleged wrongdoing by the company, and could then provide third parties with those recordings.

Given the removal of statutory barriers, Illinois employers are now forced to create their own systems for preventing this objectionable conduct. One such avenue would be to implement a policy prohibiting the recording of conversations absent the consent of all parties.

Under certain circumstances, employers may want to record workplace conversations. However, the employer, not each individual employee, should dictate when recording conversations is appropriate. Company policy should be unequivocal and forbid the recording of any conversations with colleagues or business conversations with third parties, regardless of where such conversations take place, without the consent of all parties to the conversation.

Note that such a policy would not prohibit an employee from using such surreptitious recordings in a lawsuit against the company, or from sharing such recordings with others, because Illinois law no longer requires the consent of all parties. But with clear guidelines in place, Illinois employers would at least have the option of taking disciplinary action against employees who violate the company’s policy. Employees generally don’t want to risk losing their jobs by violating such rules, and may therefore think twice before making secret recordings.

In response to the concerns of employers and others, the Illinois General Assembly is already considering new legislation that would limit the recording of conversations in a way that does not violate the Constitution. And while Illinois employers should monitor the progress of such prospective legislation, adoption of a company policy prohibiting the secret recording of conversations can help reduce the likelihood of such behavior in the interim.

Article By:

Robert K. Neiman
Of:
Much Shelist, P.C.

Illinois Trust Taxation Deemed Unconstitutional

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In Linn v. Department of Revenue, the Illinois Fourth District Appellate Court reviewed the state’s statutory framework for taxing trusts. Linn v. Department of Revenue, 2013 Il App (4th) 121055.  On constitutional grounds, the court limited Illinois’ power to impose taxes under its “once subject to tax, forever subject to tax” regime.

This case creates planning opportunities to minimize Illinois income taxes.  However, it should be noted that the Linn case applies to trusts that pay Illinois income tax on trust dividends, interest, capital gains or other income retained by the trust and not distributed to a beneficiary.  This case does not apply to income distributed to an Illinois beneficiary; that income clearly can be taxed by Illinois.

Illinois Trusts

Illinois trusts are subject to a 5 percent income tax plus a 1.5 percent personal property replacement tax.  A nonresident trust is subject to taxation only on income generated within Illinois or apportioned to the state.  Resident trusts, on the other hand, are subject to tax on all income, regardless of the source of that income.  For an individual, state income taxation on a resident basis generally requires domicile or residence within the taxing state.  With respect to a trust, one or more of the grantor, trustees and beneficiaries may have contacts with a state sufficient to uphold as constitutional a tax on all of the trust income.

Illinois defines a resident trust based solely on the domicile of the grantor. 35 ILCS 5/1501(a)(20).  A resident trust means:

  • A trust created by a will of a decedent who at death was domiciled in Illinois or
  • An irrevocable trust, the grantor of which was domiciled in Illinois at the time the trust became irrevocable.  For purposes of the statute, a trust is irrevocable when it’s no longer treated as a grantor trust under Sections 671 through 678 of the Internal Revenue Code.

The Illinois statute would forever tax the income generated by the trust property, regardless of the trust’s continuing connection to Illinois.  One can analogize the Illinois statute to a hypothetical statute providing that any person born in Illinois to resident parents is deemed an Illinois resident and subject to Illinois taxation no matter where that person eventually resides or earns income.  Many lawyers believe that the Illinois statute is unconstitutional.

Linn

Linn involved a trust established in 1961 by A.N. Pritzker, an Illinois resident.  The trust was initially administered under Illinois law by trustees who lived in Illinois.  In 2002, the trustee exercised a power granted in the trust instrument to distribute the trust property to a new trust (the Texas Trust).  Although the Texas Trust generally provided for administration under Texas law, certain provisions of the trust instrument continued to be interpreted under Illinois law.  The Texas Trust was subsequently modified by a Texas court to eliminate all references to Illinois law, and the trustee filed the Texas Trust’s 2006 Illinois tax return as a nonresident.  At that time:

  • No current trust beneficiary resided in Illinois;
  • No trustee or other trust officeholder resided in Illinois;
  • All trust assets were located outside Illinois; and
  • Illinois law wasn’t referred to in the modified trust instrument

The Illinois Department of Revenue (the IDR) asserted that the trust was a resident trust for 2006 and that, as such, the trust pay Illinois income tax on all income.  The trustee countered that the imposition of Illinois tax under these circumstances was unconstitutional as a violation of the due process clause and the commerce clause.  The court held the statute was unconstitutional based on due process grounds (not reaching the commerce clause arguments), and stated that the following are the requirements for a statute to sustain a due process challenge:  (1) a minimum connection must exist between the state and the person, property or transaction it seeks to tax during the period in issue and (2) the income attributed to the state for tax purposes must be rationally related to values with the taxing state. Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992).

This was the first case in Illinois on this issue so the court cited cases from other jurisdictions, including Chase Manhattan Bank v. Gavin, 733 A. 2d 782 (Conn. 1999), McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964), Blue v. Department of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990) and Mercantile-Safe Deposit & Trust Co. v. Murphy, 242 N.Y.S.2d 26 (N.Y. App. Div. 1963).  Gavin, which upheld the application of the Connecticut income tax on the undistributed income of a lifetime trust created by a Connecticut grantor, was cited at length by the court.  A critical fact in that case was that the beneficiary resided within the state for the year in question and the court assumed that the beneficiary would receive all trust property shortly.  In Linn, the court noted, there were no Illinois beneficiaries.  Relying on Blue and Mercantile, the court found that a grantor’s residence within a state isn’t itself enough to satisfy due process.

The IDR argued that significant connections with Illinois existed, maintaining that the trust owed its existence to Illinois law and listing legal benefits Illinois provides to the trustees and beneficiaries. The IDR cited some cases that involved trusts created by a will (i.e.,testamentary trusts).  The Illinois court disagreed with the testamentary trust cases the IDR relied on, finding that a lifetime trust’s connections with a state are more attenuated than in the case of a testamentary trust.  Further, the court found that the Texas Trust wasn’t created under Illinois law, but rather by a power granted to the trustees under the original trust instrument.  The court proceeded to dismiss the trust’s historical connections to Illinois and focused on contemporaneous connections, finding that “what happened historically with the trust in Illinois courts and under Illinois law has no bearing on the 2006 tax year.”  Linn at ¶30.  For 2006, the court concluded that the trust received the benefits and protections of Texas law, not Illinois law.

Steps to Consider

The IDR did not appeal the Linn decision to the Illinois Supreme Court.  We anticipate that additional cases will test and define the boundaries of the Linn decision.  Of course, Illinois might change its statute. For the time being, however, the Linn decision is binding authority for trustees of trusts that can eliminate all contact with Illinois.

Trustees of resident trusts with limited contacts to Illinois (in particular, those trusts without trustees, assets or non-contingent beneficiaries in Illinois) should consider the following issues.

  • Review state taxation:  The trustee should review connections to Illinois and consider whether actions could be taken to fall within theLinn holding.  Contacts with other states and those states’ rules for taxing trusts should also be reviewed.
  • File Illinois return with no tax due:  Pending guidance from the IDR, the trustee could consider filing an IL Form 1041, referencing theLinn case and reporting no tax due.  For each tax year, a tax return must be filed in order to commence the running of the statute of limitations.  An Illinois appellate court decision that supports the taxpayer’s position will ordinarily provide a basis for the abatement of tax penalties. 86 Ill. Admin Code Section 700.400(e)(8). However, if the facts are not exactly like those in Linn, a penalty cold be imposed on the trustee.  A safer method for trusts when the facts are not the same as in Linn would be to file and pay the Illinois tax in full but then file a claim for refund.  This should eliminate penalties but likely will result in a dispute with the IDR.
  • Amend prior tax returns:  The trustee could consider filing amended tax returns for prior years and claim a refund.  A trustee that has timely filed prior year tax returns may file an amended tax return at any time prior to the third anniversary of the due date of the tax return, including extensions.  For example, the 2010 tax year return may be amended at any time prior to October 15, 2014.

Other Considerations

Given the holding in Linn and uncertainty regarding trust tax law, trusts that offer flexibility and can adapt to changing circumstances may have a distinct advantage.

  • Officeholders:  Carefully consider the residency of trustees and other trust officeholders (such as investment advisers) and provisions regarding the appointment and removal of those officeholders.
  • Decanting provision:  Consider providing the trustee with broad authority to distribute trust property in further trust.
  • Lifetime trusts:  While the legal basis for the continued income taxation of a testamentary trust may also be questionable, testamentary trusts can be avoided by creating lifetime trusts.
  • Situs and administration:  Consider establishing and administering the trust in a state that doesn’t assess an income tax against trust income.
  • Governing law:  Consider including trust provisions that allow the trustee to elect the laws of another state to govern the trust.
  • Discretionary dispositive provisions:  Consider including discretionary rather than mandatory trust distribution provisions, as some states may tax a trust based on the residence of beneficiaries with non-contingent trust interests.
  • Division provisions:  Consider including provisions authorizing a trustee to divide a trust without altering trust dispositive provisions.  This type of provision may allow a trustee to divide a trust into separate trusts and isolate the elements of a trust attracting state taxation.  For example, a trust may simply be divided into two separate trusts, one trust for the benefit of a child and his descendants that live in Illinois and a second trust that might not be subject to Illinois taxation, for a child and his descendants that don’t live in Illinois.
Article By:

James H. Cundiff
L. Timothy Halleron
Of: 
McDermott Will & Emery

 

Has Your Trust Lost Touch With Illinois? If So, It May Not Be Subject to Illinois Income Tax

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Overview

In December 2013, an Illinois Appellate Court of the Fourth District held that an inter vivos trust – that had no connections with Illinois other than the fact that the settlor of the trust was residing in Illinois when the trust was created – was not subject to Illinois income taxation.  Linn v. Department of Revenue, 213 IL App (4th) 121055.  Even though the Illinois Department of Revenue (“IDOR”) had the opportunity to appeal the ruling, it did not do so.  As a result, there may be an opportunity for inter vivos trusts established by an Illinois settlor to avoid Illinois income tax – if such trusts no longer have sufficient contact with the State of Illinois.

Background

The relevant portion of the Illinois Income Tax Act defines an Illinois resident as “[a]n irrevocable trust, the grantor of which was domiciled in [Illinois] at the time such trust became irrevocable.” 35 ILCS 5/1501(a)(20)(D).  The trust at issue in Linn was established in 1961 when the grantor and trustee of the trust were Illinois residents.  At the time the trust was established, the beneficiary of the trust resided in Illinois, and the trust assets were deposited in Illinois.  The trust instrument provided that Illinois law would govern the construction, administration and validity of the trust.

In 2007, the trust filed a 2006 nonresident Illinois income tax return – as the trustee and beneficiaries were no longer residents of Illinois and the trust had no Illinois situs income.  Additionally, the trust agreement had been modified in 2002 to provide that it shall be construed and regulated under Texas law.  Due to the lack of sufficient contact with Illinois, the Illinois Appellate Court held that the imposition of Illinois income tax on the trust was unconstitutional in violation of the due process clause – as the trust did not meet any factors that would give Illinois personal jurisdiction over the trust.

Review of Existing Irrevocable Trusts

As a result of the decision in Linn, there may be an opportunity for certain trusts that have no contact with Illinois to avoid Illinois income tax.  In spite of Illinois law that deems a trust to be an Illinois resident if the grantor of a trust resides within the State when it becomes irrevocable, the decision in Linn effectively invalidates that law when a trust no longer has any connections to Illinois.  In the wake of Linn decision, we recommend that you review any irrevocable trusts established by a grantor who resided in Illinois (at the time of creation) to consider the following:

  • The current residence or location of the trustee and the beneficiaries, and the present location of the trust assets.
  • Whether the trust agreement contains provisions that (i) allow a trustee to be appointed outside the State of Illinois, or (ii) permit the law governing the trust to be changed to another state.
  • Whether the trust allows “decanting” – which is a process authorized by a recent Illinois statute that allows the transfer of assets to a new trust, which could be governed by the law of another state.
  • Whether a trust with no connections to Illinois for the past several years (and which filed Illinois income tax returns and paid Illinois income taxes) should file a claim for refund.  Generally, there is a three year period from the due date (or filing date) of an income tax return to file an amended return and claim a refund.

Conclusion

The Linn decision is now the law in Illinois.  Therefore, if you are a beneficiary or a trustee of a trust originally created in Illinois (or an advisor to any such beneficiary or trustee), you should examine whether the trust has sufficient connections to Illinois to be taxed.

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Illinois Whistleblower Awarded $3 Million Following Jury Trial

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In what appears to be an alarming trend for employers, the Chicago Tribune recently reported that a former Chicago State University employee was awarded $3 million after a Cook County, Illinois jury found that the University retaliated against him for reporting alleged misconduct by top university officials in violation of the Illinois State Official and Employees Ethics Act (5 ILCS 430/15-5, et seq.) and the Illinois Whistleblower Act.  Crowley v. Chicago State University, No. 2010-L-012657.

Background

Plaintiff James Crowley (Crowley) was the Senior Legal Counsel for Chicago State University (University).  His responsibilities included reviewing contracts and processing Freedom of Information (FOIA) requests.  During his employment, the University hired a new President, Wayne Watson (Watson).  Watson did not commence his employment immediately due to a retirement benefits regulation; however, Watson allegedly made official University decisions and moved into the Presidential residence during the interim period.  Crowley received several FOIA requests inquiring about whether Watson was working unofficially in contravention of the benefits regulation.

Crowley alleged that Watson urged him to withhold certain documents from the FOIA requests, and threatened him by saying “If you read this my way, you are my friend. If you read it the other way, you are my enemy.”  Crowley refused Watson’s request, and released all documents relevant to the FOIA inquiry.  Crowley reported his concerns about the FOIA requests, as well as concerns about the University’s contracting practices, to the Illinois Attorney General’s Office.  The University subsequently terminated Crowley’s employment.  Crowley filed suit alleging that he was terminated for refusing to withhold documents from the FOIA requests and reporting the University’s alleged misconduct in violation of the Illinois State Official and Employees Ethics Act and the Illinois Whistleblower Act.

Jury Verdict

The jury found in favor of Crowley, and awarded him $480,000 in back pay and an additional $2 million in punitive damages.  The jury also concluded that Crowley should be reinstated to his prior position.  After receiving the jury’s verdict, the presiding judge doubled the jury’s back pay award, as permitted under state law, and also granted Crowley $60,000 in interest.

Implications

Multi-million dollar judgments in state court whistleblower retaliation cases are trending at an alarming rate.  We recently reported on a $6 million whistleblower verdict in California and other large verdicts in Minnesota and New Jersey.   This trend highlights the serious risks employers face under state and federal whistleblower laws, and servers as a wake-up call for employers to carefully review and refine their whistleblower policies and related practices.

© 2014 Proskauer Rose LLP.

Article By:
Steven J Pearlman
Allison Lynn Martin

Of:

Illinois Federal Court Issues Reminder That "100% Healed" Requirements Violate ADA (Americans with Disabilities Act)

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On February 11, 2014, an Illinois Federal District Court issued a decision reminding employers that “100% healed” return-to-work requirements violate the Americans with Disabilities Act (“ADA”). In EEOC v. United Parcel Service, Inc., the U.S. Equal Opportunity Commission (“EEOC”) filed a lawsuit alleging that United Parcel Service’s (“UPS”) “100% healed” requirement violated the ADA. UPS moved to dismiss the complaint, claiming that the EEOC could not state a claim that there was a violation of the ADA. The Court denied UPS’s motion and permitted the EEOC lawsuit to proceed.

UPS maintained a leave policy requiring employees to be “administratively separated from employment” after 12 months of leave. In 2007, an employee returned from a 12-month medical leave. After returning, the employee requested certain accommodations, including a hand cart. UPS refused to provide any accommodation. Shortly thereafter, the employee injured herself and needed additional medical leave. Instead of granting leave, UPS terminated the employee under its 12-month leave policy.

The EEOC alleged that UPS’s 12-month leave policy acted as a “100% healed” requirement because it functioned as a “qualification standard” under the ADA. UPS argued that the ability to regularly attend work was an essential job function and not an impermissible “qualification standard” and, therefore, not in violation of the ADA.

Although the Court conceded that regular job attendance is an essential job requirement, the court found that the lawsuit was not based on attendance requirements, but rather on the “100% healed” requirement that an employee must satisfy before returning to work. As a prerequisite to returning to work, the 12-month policy was a “qualification standard” and not an essential job function subject to accommodation. A “qualification standard” is “the personal and professional attributes, including the skill, experience, educational, physical, medical, safety and other requirements established by a covered entity as requirements an individual must meet in order to be eligible for the position held or desired.”

The court relied on the Seventh Circuit’s previous determination that a “100% healed” policy is per se impermissible because it “prevents individualized assessments” and “necessarily operates to exclude disabled people that are qualified to work.” A “100% healed” requirement limits the ability of qualified individuals with a disability to return to work. Thus, a “100% healed” acts as a prohibited “qualification standard” because it removes the opportunity for the employee to pursue reasonable accommodation, in violation of the ADA. Accordingly, the court denied UPS’s motion to dismiss and permitted the EEOC’s lawsuit to proceed.

Although this case does not provide a definitive answer to the EEOC’s lawsuit, it does provide a strong reminder to employers that “100% healed” policies violate the ADA. Employers should review their return to work policies to ensure that they do not contain “100% healed” requirements. When dealing with leave issues, employers also should remember to enter into the interactive process when necessary and balance obligations under federal, state and local disability and leave requirements, in addition to those created by contract or agreement.

Article by:

Geoffrey S. Trotier

Of:

von Briesen & Roper, S.C.

Illinois Environmental Protection Agency (IEPA) Proposes Emergency Petcoke Rules to the Illinois Pollution Control Board

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On Thursday, January 16, 2013, the Illinois Environmental Protection Agency (IEPA)filed a proposal and motion for emergency rulemaking regarding the containment of coke (also referred to as petroleum coke, or petcoke) and coal at bulk terminals with the Illinois Pollution Control Board (Board).  In the proposed rule, IEPA asserts that fugitive emissions emanating from several outdoor storage areas at bulk terminals in Cook County are not properly controlled and, therefore, constitute a threat to the public interest, safety, or welfare.  The rule requires sources to engage in a number of management activities, take immediate measures to suppress fugitive emissions, and totally enclose all coke and coal piles. [1]

The rule applies to coke and coal bulk terminals which are defined as sources, sites, or facilities that store, handle, blend, process, transport, or otherwise manage coke or coal.  A number of these bulk terminals are located along shipping channels and waterways such as the Calumet River, Illinois River, and the I&M Canal.  Excluded from the rule are sources, sites, or facilities that “produce” or “consume” the coke or coal, such as mines or coal-fired power plant sites.  We highlight a few key requirements and deadlines included in the proposal below, but this is not an exhaustive list.  To see the entire proposal, please click here.

  • Within 60 days, all coke and coal that has been at the source for more than a year must be moved to a location that complies with the requirements of the Act and Board regulations.
  • All other coke and coal must be used or removed within a year from the date it was received.
  • Within 45 days, sources must submit a plan to IEPA for the total enclosure of all coke and coal within two years.
  • Within 45 days, sources must submit to IEPA and follow a Coke and Coal Fugitive Dust Plan.
  • All plans submitted pursuant to the proposed rules will be posted on IEPA’s website and subject to a 30-day public comment period.
  • Beginning 60 days after the effective date, new setback requirements apply in Cook County, municipalities, and their immediate surroundings requiring coke and coal piles that are not totally enclosed to be located at least 200 feet inside the property line of the source.
  • Beginning 60 days after the effective date, all coke and coal piles must be on impermeable pads and located at least 200 feet from waters of the U.S., public water supply reservoirs and intakes, and any potable water well.
  • No loading or unloading or otherwise “disturbing” coke and coal piles when wind speeds exceed 25 miles per hour.
  • Sources must discontinue the use of non-paved roads within 90 days

Owners or operators of sources subject to the emergency rules will have to implement a number of other operational measures to comply with the rules.  In addition, the rule proposes rigorous recordkeeping and reporting requirements that impose, at minimum, monthly certification and reporting requirements.

The Illinois economy relies on shipping canals and water systems on a daily basis as transportation corridors so we are further reviewing this proposal to ensure the end result does not impede commerce.  The proposal raises several questions such as whether it is economically reasonable or even technically feasible to totally enclose all of these areas in the manner prescribed in the rules especially given the short timeframes for compliance.  This rule could also be reaching unintended entities.  Finally, we are reviewing whether IEPA has adequately supported that an emergency exists.  The Agency’s proposal as filed does not provide clear answers to these questions and we intend to work closely with the IEPA to help identify areas where the regulatory approach may be improved.  The Board will address IEPA’s motion at the January 23, 2014 Board meeting, but the Board can take a number of actions and the outcome is unknown.  Nonetheless, the rulemaking docket is now open to accept public comments through noon on Tuesday, January 21.  This is the time to begin educating the State and others as to the importance of the coke and coal industry to the State and nation, and to ensure that the difficulties presented by the rule are known.  Since emergency rules, once effective, have a limited effective period, the next step for the State will be to develop a more permanent framework for regulation, either through a full rulemaking or legislation.  Industry must be mindful of the need to participate fully in order to ensure any framework developed is achievable and sensible.

[1] Generally, “coke” is derived from the distillation of coal, including metallurgical coke, or “metcoke” or from oil refinery coker units or other cracking processes, including petroleum coke, or “petcoke.”  Coke is primarily used as a fuel.

Article by:

Amy Antoniolli

Of:

Schiff Hardin LLP