Click here to print "Portability of Federal Estate Tax Exclusion Between Spouses Requires Form 706"

(Published in the Idaho Business Review)

By Kimbal L. Gowland 

          As many people may have read or heard by now, the Tax Relief Act of 2010 (the “2010 Act”) provides that the federal estate tax exclusion amount for a person who passes away in 2011 or 2012 is $5 million.  One of the most significant and unique aspects of the 2010 Act is the provision on spousal “portability”, which means that a surviving spouse can take advantage of the unused exclusion amount of his or her predeceased spouse by adding the unused exclusion amount to the exclusion amount of the surviving spouse.  In plain English that means, together, a married couple can transfer up to $10 million to children and other people without federal estate taxes being imposed, making portability (if it, and the $5 million exclusion amount, were here to stay – see discussion below) a very important consideration in effective estate planning, particularly for people owning construction businesses and other small businesses.   

          To take advantage of portability, the federal estate tax laws require that the unused exclusion amount must be transferred from the estate of the first spouse to die to the surviving spouse.  This transfer can only be done by the filing of a “timely and complete” federal estate tax return (Form 706) for the first spouse to die, even if there is no federal estate tax due and even if the executor of the estate of the first spouse to die is not otherwise obligated to file a Form 706.  All of the assets owned by the decedent at his or her date of death must be properly valued and listed on Form 706. 

           If Form 706 is not filed (or is not “timely and complete”), any unused exclusion amount that could have been transferred to the surviving spouse is lost forever and will not be available at the death of the surviving spouse to reduce the amount of his or her estate that may otherwise be subject to federal estate tax.  The need to timely file Form 706 appears to be a trap for the unwary.  Often, the value of the estate of the first spouse to die will be less than the amount required to file a Form 706.  Nevertheless, the executor is required to file a timely and complete Form 706 before the decedent’s unused exclusion amount will become portable to the surviving spouse.  

          It is important to recognize that portability and the $5 million exclusion amount are, under present federal estate tax law, only scheduled to last through 2012.  For deaths occurring after December 31, 2012, unless Congress legislates otherwise before then, the exclusion amount will be reduced to $1 million, the maximum federal estate tax rate will increase to 55% from the present 35%, and portability will no longer be part of the federal estate tax law.  What happens in 2013 and thereafter in regard to the transferred portion of the unused exclusion of a first spouse who died in 2011 or 2012 is unclear, but one would assume that it would still be available (but undoubtedly in a smaller amount, if everyone’s exclusion amount is reduced from the present $5 million).  

          There will certainly be changes proposed to the federal estate tax laws before 2013.  The Obama administration has already proposed a return to 2009 levels, with a $3.5 million exclusion amount and a 45% maximum estate tax rate.  Some Republications have called for an outright repeal of the federal estate tax laws, while others in Congress have urged continuation of the $5 million exclusion amount.  Unfortunately, given the current political environment of seemingly unresolvable deadlock and the recent failures of Congress (and its “supercommittee”) in regard to the debt ceiling and deficit reduction (which political environment and failures will likely continue during the upcoming election year), we could very well return to a $1 million exclusion amount and a maximum estate tax rate of 55% (to which federal law will automatically revert as of January 1, 2013, if Congress fails to act before then).  In my opinion, the best outcome we can expect is the continuation of present law, which I hope would be made permanent (instead of for a “patchwork” two-year period, like the 2010 Act), so that people can engage in more certain estate planning. 

          Thus, although nobody knows where federal estate tax laws are headed after 2012, in the event of any death in 2011 or 2012, where a benefit could be derived from a portability election with respect to a deceased spouse’s unused exclusion amount as explained above, it is critical that serious consideration be given to the filing of Form 706 for the first spouse to die.  Form 706 is due nine (9) months after the date of death (although a decedent’s executor may request an automatic 6-month extension of the due date for Form 706). 

 Kimbal Gowland is a partner with the law firm Meuleman Mollerup LLP, representing clients with legal concerns in real property matters including purchases, sales, leasing, lending, title and development issues, general business matters, and estate planning matters.  He can be contacted at 208.342.6066 or by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available online at www.lawidaho.com.

Click here to print:  Buyer Defaults, But Still Gets "Non-Refundable" Earnest Money Back?

By Kimbal L. Gowland

(published in the Idaho Business Review, December 2010)

At some point in the hopefully near term, we will reach the bottom of this economic downturn that is so deeply impacting the real estate and construction industries in Idaho (and in almost every other location in the United States).  Then, those of us who work in those industries can look forward to more “deals” and a full slate of construction projects.

 In any event, buyers and sellers will continue to find themselves in a situation where one or the other of them cannot (or will not) fulfill the terms of a real estate purchase and sale agreement to which they are a party.  The consequences of one such situation, arising from a lawsuit recently decided in a neighboring state (with ramifications that could affect similar situations in Idaho), are discussed below.

 In almost every real estate purchase and sale agreement, the buyer will be required to deposit earnest money.  Depending upon the relative bargaining positions of the buyer and seller, and upon the complexity of the proposed transaction, there will be different size, timing and refundability limitations imposed on the earnest money deposits.

 In the subject lawsuit, the buyer and seller entered into a purchase and sale agreement in December 2005, in which the buyer agreed to pay the seller $14 million for the subject property, after certain contingencies were satisfied.  After several extensions, closing was to occur on September 15, 2006.  In accordance with the purchase and sale agreement, the buyer made two “non-refundable” deposits into escrow in early 2006, totaling $620,000.

 On September 18, 2006, the buyer sent a letter to the escrow company requesting that escrow be cancelled.  The buyer and seller signed cancellation escrow instructions on October 17, 2006.  The seller then turned to a back-up offer he had received for the subject property and sold the property for $15 million on November 16, 2006.  The seller refused to return any portion of the breaching buyer’s deposits, on the grounds that the purchase and sale agreement specifically stated that the deposits were non-refundable, and it was the buyer who had breached the agreement by failing to close.  The buyer sued the seller for a refund of the deposits. 

 The trial court agreed with the seller and concluded that the seller was entitled to keep the non-refundable deposits.  The buyer appealed.  The appellate court agreed with the buyer and ruled that a non-refundable deposit may only be retained by the seller to the extent the seller incurs damages as a result of the buyer’s breach of the purchase and sale agreement.

 Rather than focusing on the fact that the parties had agreed in the purchase and sale agreement that the deposits would be non-refundable (which, the seller argued, entitled him to retain the buyer’s deposits without regard to actual damages or to whether there was a breach of the agreement), the appellate court analyzed the buyer’s refund claim on whether the seller had been damaged by the buyer’s failure to close on his purchase of the subject property.  The court concluded that the seller’s measure of damages for the buyer’s breach of contract is the amount that would be obtained by subtracting the market value of the property at the time of the breach ($15 million) from the price that the buyer had agreed to pay the seller under the contract ($14 million); in other words, the seller was not damaged by the buyer’s failure to close.  The court found that during a period of rising property values, when a seller seeks damages from a breaching buyer, if the property has increased in value before trial and the seller re-sells the property at a price equal to or higher than the purchase price to be paid under the original contract, the seller no longer has any loss-of-bargain damages.

 The appellate court found that the non-refundability provision of the purchase and sale agreement was unenforceable, holding that any provision by which money would be forfeited without regard to the actual damage suffered by the seller would be an unenforceable penalty (overruling the trial court, which had concluded that the seller’s retention of the non-refundable deposit did not constitute a forfeiture “because both parties were ‘big boys,’ that is, sophisticated business people, [who] understood all the ramifications of their actions in freely negotiating to make the deposits non-refundable.”).  As a result of the appellate court’s holding, a seller’s retention of an earnest money deposit after the seller re-sells the property for more than the original contract amount results in an unenforceable penalty against the buyer (even in circumstances where the buyer’s contract breach was willful), unless the seller is able to show some sort of actual damages arising from the buyer’s failure to close under the purchase and sale agreement.

 The purchase and sale agreement did not contain a liquidated damages provision, but, in response to several of the seller’s arguments, the court discussed the requirements for such a provision.  It noted that a liquidated damages provision in a contract for the sale of real property is presumptively valid if the earnest money deposit (which is typically established, at the time the parties enter into the contract, as the amount to be retained by the seller as damages in the event of the buyer’s failure to close under the contract) is reasonable in amount; provided, however, that a liquidated damages provision may only be enforced if the evidence establishes that, at the time the buyer and seller entered into the contract, it would have been impractical or extremely difficult for them to fix the actual damages resulting from a future breach.  Consequently, it is questionable whether a liquidated damages provision may be more effective than a non-refundability provision to accomplish the seller’s goal of keeping a deposit payment if the buyer breaches the purchase and sale agreement.

 It is also noteworthy that the court found that the agreement between the buyer and seller did not constitute an option for the purchase of real property.  By the use of options, disputes such as the one in the subject case may be avoided (as may disputes over whether contingencies have been satisfied in a contingent contract situation).  Under an option, the buyer has the right to compel the seller to close the transaction and no obligation to purchase.  In exchange for granting those rights to the buyer, the seller receives a fixed, non-refundable payment for the option, which may or may not be credited toward the purchase price, depending on the particular option contract (and, if it is credited, the economic impact of the option payment becomes equivalent, at closing, to that of an earnest money deposit).  For a cash investment (the option payment), the buyer enjoys a hold on the subject property for a specific time period.  If the buyer succeeds in satisfying his or her pre-closing contingencies, the buyer then exercises the option and closes on the purchase.  If the property proves unsuitable to the buyer for any reason (e.g., adverse market changes during the option period, unavailability of financing, geology or entitlement difficulties, etc.), the buyer may elect to withdraw from the option, forfeiting only the option payment.  On the flip side, the seller receives the option payment and is not faced with the refund problems brought about by the court’s holding in the case discussed above.  Thus, an option will provide more protection for a seller who wants to keep the option payment amount if the buyer decides not to go through with the purchase. 

Kimbal Gowland is a partner with the law firm Meuleman Mollerup LLP, representing clients with legal concerns in real property matters including purchases, sales, leasing, lending, title and development issues, general business matters, and other commercial matters.  He can be contacted at 208.342.6066 or by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available online at www.lawidaho.com. 

(Published in the Idaho Business Review, December 2009)

Thinking of relocating your business?  Have you found a great new location and you are anxious to make a deal on a lease?  Before you start packing up, take a moment to image this scenario.  After more effort than you could have ever imagined at the start of the process, you have signed the lease and moved your business into a new space. 

   Given the current economic conditions you are pleased by the deal that you negotiated, but the relocation of your business was still expensive.  Upgraded tenant improvements, moving expenses, lost productivity - all these factors have taken their toll on you and your business in terms of time, money and energy.  You take some comfort in the fact that you won't have to move again for the next ten years.  But, how sure are you about that?

  Unfortunately, many tenants fail to obtain a very important agreement that will protect the tenant's lease if the tenant's landlord gets into financial trouble - a non-disturbance and attornment agreement (frequently referred to as an "NDA").  Generally, this is an agreement entered into with the project's lender, which provides that the lender will honor the tenant's lease in the event the lender forecloses its deed of trust or mortgage.  This is the "non-disturbance" part of the agreement.  In return, the tenant agrees to accept the lender as the tenant's new landlord in the event of foreclosure, and to then pay rent directly to the lender.  This is the "attornment" part of the agreement.

  In the absence of a non-disturbance and attornment agreement, the law does not require the lender to honor the tenant's lease in the event the lender forecloses.  This is because the lender's deed of trust or mortgage existed prior to the tenant's lease, and when the lender forecloses, all junior interests in the real property against which the lender has recorded its deed of trust or mortgage, including the tenant's lease, are eliminated.

  A similar situation occurs when the project is located on real property that is subject to a long-term ground lease.  If the underlying ground lease is terminated, the tenant's lease also terminates, unless the tenant has entered into a non-disturbance and attornment agreement with the ground landlord.

  After a foreclosure or ground lease termination occurs, the lender or ground landlord might offer the tenant a new lease, and allow the tenant to stay in its leased space on the same terms that had been in the now-eliminated lease.  Alternatively, in the absence of a non-disturbance and attornment agreement, the lender or ground landlord could demand more rent or decide to force the tenant to leave (even if the tenant's lease term has not yet expired) if the lender or ground landlord has other plans for the leased space. 

  Without the protections provided to a tenant by a non-disturbance and attornment agreement, the rent escalation and eviction types of decisions are entirely within the control of the lender or ground landlord, who the tenant can expect to act for its own advantage, not for the tenant's advantage.

  Therefore, if you are leasing space - whether it be office, retail, warehouse, or industrial space - always require that your landlord deliver to you a non-disturbance and attornment agreement that has been executed by the project's lender (or by the ground landlord, as the case may be). 

  To avoid as much risk as you can, you should negotiate with your landlord so that the non-disturbance and attornment agreement is delivered to you at the earliest date possible. 

  In addition, make it a condition of your new lease that you be entitled to terminate the lease if the non-disturbance and attornment agreement is not executed and delivered within a timeframe that is acceptable to you - which should be before your relocation schedule dictates that you start to spend significant time, money and energy on tenant improvements and moving expenses, and before you terminate the lease on the space you presently occupy from which you desire to relocate.

  Kimbal Gowland is a partner with the law firm Meuleman Mollerup LLP, representing clients with legal concerns in real property matters including purchases, sales, leasing, lending, title and development issues, general business matters, and other commercial matters.  He can be contacted at 208.342.6066 or by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available online at www.lawidaho.com.

              Until recently, I suspect that not many of us had thought much about the Federal Deposit Insurance Corporation (commonly known as the “FDIC”) and the insurance protections it provides.  While we have all heard the important catchphrase “FDIC Insured”, who among us has looked into what it really means to individuals and businesses alike?

            The substantial downturn in the stock market and other investments (real estate, for example) has caused many investors to seek out safer places for their money.  At the same time, however, serious problems in the financial markets (including several bank failures) have spooked many people, and have raised concern as to whether their hard-earned money would continue to be safe in the banks where they had been customers for years. 

            The FDIC insures deposits in most banks and savings associations located in the United States.  It protects depositors against the loss of their deposits if an FDIC-insured bank or savings association fails.  To check whether a bank or savings association is insured by the FDIC, call toll-free at 1-877-275-3342 or use “Bank Find” at www.fdic.gov/deposit/index or look for the FDIC official teller sign where deposits are received.  For simplicity, the term “insured bank” as used in this article means any bank or savings association covered by FDIC insurance. 

            FDIC insurance covers all types of deposit accounts received at an insured bank, including checking, savings, money markets, CDs, and certain types of self-directed retirement accounts (including all types of IRAs, if held at an insured bank).  The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if these investments were purchased from an insured bank.  The FDIC does not generally insure assets in an employer-sponsored retirement plan, which plans are regulated by way of a federal law called the Employee Retirement Income Security Act, commonly known as “ERISA”.  The FDIC does not insure U.S. Treasury bills, bonds, or notes, which are backed by the full faith and credit of the United States government. 

            Until October 2008, the FDIC covered deposits up to as much as $100,000.00 per account owner per insured bank.  For IRAs held at an insured bank, the coverage limit was $250,000.00 per account owner.  The financial system bailout legislation enacted in October raised the FDIC insurance limit on non-retirement accounts to $250,000.00 per account owner per insured bank.  Unfortunately, the increase in the FDIC insurance limit to $250,000.00 is temporary and will expire at the end of 2009.  Consequently, unless the higher coverage limit is made permanent by federal legislation enacted before the end of 2009, those presently taking advantage of the higher limits will need to restructure their accounts before then. 

            Deposits in separate branches of an insured bank are not separately insured.  Deposits in one insured bank are insured separately from deposits in another insured bank.  When two insured banks merge (such as when troubled banks are acquired by healthier banks), the deposits from the acquired bank continue to be insured separately for at least six months after the merger (different time periods apply to CDs, based upon their maturity dates).  This grace period gives a depositor the opportunity to restructure his or her accounts, if necessary.  A person does not have to be U.S. citizen or resident to have deposits insured by the FDIC. 

            The FDIC insures accounts based upon the ownership of the account.  Each account has a different owner.  The FDIC regulations recognize eight different ownership categories:  single accounts, certain retirement accounts, joint accounts, revocable trust accounts (such as informal payable-on-death accounts and formal living/family trust accounts), irrevocable trust accounts, employee benefit plan accounts, corporation/partnership/unincorporated association accounts, and government accounts.  If the accounts are set up properly, each is covered under its own $250,000.00 (for now) insurance cap. 

            If you presently hold considerable bank deposits (perhaps because you have chosen to “sit on the sidelines” hoping that the stock market will stabilize), you can, with a little planning, significantly increase your FDIC insurance coverage, even if you keep all your deposits in a single insured bank.  For example, you and your spouse could own individual accounts holding $250,000.00 each, plus a joint account holding $500,000.00 (in our example, the husband’s ownership share in a joint account is insured up to $250,000.00 and the wife’s ownership share is also insured up to $250,000.00), and the $1,000,000.00 would be fully insured by the FDIC.  This same arrangement could be established at a second insured bank and, again, the $1,000,000.00 deposited in the second insured bank would be fully insured by the FDIC. 

            It is important to note that federal law expressly limits the amount of insurance the FDIC can pay to depositors, and no representation made by any person can increase that coverage.  For an interactive worksheet that will help you to determine the extent to which any of your deposits are uninsured, you can visit the FDIC’s Electronic Deposit Insurance Estimator (fdic.gov).  Also, Bankrate.com’s Safe & Sound ratings will give you an idea as to the financial health of your bank.

 (Published in the Idaho Business Review, December 2007)

            When buying real estate, the buyer has a choice between “standard” and “extended” coverage title insurance.  For commercial and industrial properties, extended coverage costs an additional 50% in premiums over the cost of standard coverage.  In addition, the title company will likely require a current ALTA/ACSM survey, which could be expensive depending on the size, location and complexity of the property.  Sometimes the transaction can be negotiated to require the seller to pay the additional costs, but frequently they will be the buyer’s cost.

 Standard coverage insurance insures that the buyer has obtained marketable title to the property, subject to liens and encumbrances against the property appearing of record, and that the property has access to a public road.  Generally, standard coverage provides little or no protection against title defects not shown by the public records.  The protection in both standard and extended coverage policies is limited by certain exclusions.

The protection in a standard coverage policy is also limited by six “standard” exceptions in the policy.  Generally, all six standard exceptions are deleted from an extended coverage policy, and the insured will have protection against any claim associated with the deleted items.  However, additional exceptions to coverage may be added to Schedule B of the policy as part of the process of issuing extended coverage insurance.  The buyer must evaluate whether there is a significant risk of loss posed by one of the six standard exceptions against which the buyer would be protected by purchasing extended coverage, and whether that risk outweighs the cost of the extended coverage.

For the purpose of this article, I have grouped into two primary areas the six standard exceptions that are generally deleted as part of obtaining an extended coverage policy.  The first area pertains to unfiled mechanic’s liens (sometimes called “lien” coverage).  If work has been recently performed on the property, persons who furnish labor or materials have the right to lien the property for 90 days after supplying their work or materials.  Standard coverage provides no protection for mechanic’s liens filed after the policy date for work performed prior to that date. 

In Idaho, it is difficult to determine the persons who have supplied labor or materials to the property within the past 90 days, all of whom have lien rights.  Unlike some other states, Idaho requires no pre-lien notice by contractors, subcontractors or suppliers, so potential lien claimants cannot be determined from reviewing the public records.  A lien release from the seller or general contractor will not prevent liens by unpaid subcontractors, suppliers or laborers.  The buyer could be in the unenviable position of having to pay subcontractors or suppliers even if the general contractor has been paid in full.  The potential of a devastating loss and the inability to determine the extent of the potential lien rights as of the policy date makes the buyer’s decision to obtain extended coverage for new construction an easy one.

The second primary area of additional protection provided by extended coverage is sometimes called “survey” coverage.  Standard coverage provides little or no protection for typical boundary disputes, fence or building encroachments, unrecorded easements, or rights of parties in possession.  Evaluating the risk of not obtaining survey coverage is difficult.  As part of the transaction negotiations, the buyer should obtain from the seller copies of any existing surveys, which should be carefully reviewed.  In any case, the property should be inspected for apparent encroachments and unrecorded easements.  Look for roadways, joint drives or indications of utility easements.  It is often impossible to determine the existence of encroachments or other boundary line issues without a survey.  The buyer should obtain the seller’s promise that there are no encroachments, boundary line issues, easements or parties in possession not shown by the public records.  In common practice, residential properties are rarely surveyed and commercial and industrial properties are often surveyed.  For some property (particularly residential), the title company may be persuaded to issue extended coverage without a survey, based upon its own inspection.

Whether a buyer desires to accept the risk of a title claim that might otherwise be covered by extended coverage also depends on the buyer’s attitude toward risk.  Some buyers are cautious and would rather pay the cost to avoid risk.  Lenders also drive the extended coverage purchase decision.  Institutional purchasers and trustees will usually purchase extended coverage because they are dealing with the assets of others and believe it is inappropriate to take unnecessary risks.  The size of the transaction can be a consideration.  Some buyers are willing to take a gamble on a small transaction, but not on a large one with the potential of a crippling loss.

If, after an analysis of the risks, the decision is made to purchase extended coverage insurance, the title company will have certain prerequisites (in addition to the ALTA/ACSM survey) before it will issue the extended coverage.  In order to obtain “lien” coverage for newly-constructed property, the seller and/or the contractor will need to furnish the title company with satisfactory evidence that all construction costs have been paid or will be paid.  The title company may also insist on a financial statement from the seller and/or the contractor.

By understanding the different risks covered by standard and extended coverage insurance, the buyer can make an informed choice whether the additional cost of extended coverage is worthwhile.  In any event, the issue of extended coverage should be discussed with your title company and real estate counsel.

In order to conduct or expand their business operations, a construction company (like other closely held companies) may have to obtain cash advances from the company shareholders.  The federal income tax treatment of those cash advances is subject to particular scrutiny as the IRS could argue that the advances should have been treated as an equity contribution from the shareholders rather than loans. 

Why is this distinction important to the company (and to the IRS)?  Because federal income tax law treats debt and equity differently.  Primarily, interest payments by the company on debt are deductible by the company, while dividend payments by the company on equity contributions are not deductible.

 Whether a corporate investment is, for tax purposes, a loan by the shareholders or an equity contribution is a difficult question with no clear statutory answers or clear answers provided by the Treasury Regulations.  To determine whether a shareholder advance to a closely held company is debt or equity, a court will look at these factors:

            Fixed Rate of Interest and Interest Payments:  A court will first look at whether or not a fixed rate of interest and regular interest payments were made in connection with the shareholder advances.  Their absence indicates equity; while the presence of both evidences that the shareholder advances were bona fide loans.  However, paying excessively high interest rates to the shareholders might indicate a distribution of corporate profits to the shareholders is being disguised as debt payments.  It is important to consider what interest rate would be available from a bank or other outside lending source for the same type of loan.

            Written Instruments of Indebtedness:  The presence of promissory notes or other written evidence of indebtedness (such as a written line of credit agreement) is a strong indication that the shareholder advances are loans and not equity contributions. 

            Fixed Maturity Date and Schedule of Payments:  The absence of a fixed maturity date and a fixed obligation to repay the advance amounts indicates that the advances were capital contributions and not loans.  Frequently, advances are structured as demand loans with ascertainable maturity dates controlled by the shareholders.  Where advances are documented by demand notes with a fixed rate of interest and regular interest payments, the lack of a maturity date and a schedule of principal payments does not strongly favor equity treatment versus loan treatment. 

            Source of Repayments:  Statements should be avoided in the corporate records that the source of funds to repay the advance will come from company profits, since this implies that repayment is tied to the company's fortunes, suggesting that the advances were equity contributions.  It should be emphasized that repayment could come from other sources, such as liquidation of assets or refinancing with another lender.

            Use of Advanced Funds:  Use of advances to meet the daily operating needs of the company (i.e., to provide working capital) rather than to purchase capital assets, is indicative of bona fide debt.  Consequently, going to a bank or other outside lending source to obtain the funds necessary to buy equipment and other capital assets will help the company preserve the desired debt treatment of the shareholder advances.

            Sinking Fund:  The fa/ilure to establish a sinking fund (a type of reserve considered to be a form of security for debt) for repayment is considered to be evidence that the shareholder advances were intended to be equity contributions rather than loans.  However, where a company has sound capitalization and there are outside lending sources ready to loan it money, there is less need for a sinking fund.

            Security:  The lack of collateral to secure repayment of a shareholder advance is an indication that the advance was intended to be an equity contribution rather than a loan.  Consequently, if possible, collateral should be provided by the company (and documented) to secure the company's repayment obligations to the shareholder.

            Availability of External Financing:  The fact that the company has previously obtained, or is able to obtain, financing from a bank or other outside financing sources is also a factor.  If no reasonable lender would have acted in the same manner as the shareholder in making an advance to the company, the evidence becomes stronger that the shareholder advance is a capital contribution rather than a loan.

            Capitalization:  The adequacy of a corporation's capitalization is also a factor in determining whether a corporation will be successful in arguing that a shareholder advance is a loan rather than an equity contribution.  Inadequate capitalization is strong evidence that the advances are capital contributions rather than loans.

            Proportions of Advances vs. Stock Holdings:  Determining the extent to which advances by shareholders are proportional to the ownership interests of the shareholders in the corporation is an important factor.  If advances are made by shareholders in proportion to their respective stock ownership, an equity contribution is indicated rather than bona fide debt.

            Subordination to Other Creditors:  The extent to which the shareholder advances are subordinated to claims of outside lending sources is also a factor to be considered.  Subordination of advances to the claims of all outside lending sources indicates that the advances were capital contributions and not loans.

 No one factor is controlling or decisive, and much depends on the particular circumstances of each case.  In essence, the more a shareholder advance resembles an arms-length transaction, the more likely it is to be treated as debt for interest expense deduction purposes.

Kimbal Gowland is a partner with the law firm Meuleman Mollerup LLP, practicing in the areas of real property law and general business law.  Mr. Gowland brings to his law practice years of business experience plus the additional qualification of Certified Public Accountant.  Mr. Gowland can be reached at 208.342.6066 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  More information is available at www.lawidaho.com

PROFESSIONAL RECOGNITION

• Chambers and Partners USA, America's Leading Lawyers for Business 2004-2011
• Best Lawyers in America 2006-2012 (Real Estate Law / Business & Succession Planning)
• Martindale-Hubbell "AV" Peer Review Rated 
• Boise Metro Chamber of Commerce, "Leadership Boise" Program Graduate

AREAS OF EXPERTISE

REAL ESTATE LAW

• Real estate leases, including ground, building, build-to-suite, office, warehouse and shop leases  
• Real estate sales, purchases, exchanges, options, development agreements, easements, covenants, conditions and restrictions
• Financing / loan documents
• Judicial and non-judicial foreclosure of real estate morgages and deeds of trust 

BUSINESS LAW

• General business law including formation and operation of corporations and limited liability companies
• Purchase and sale of businesses
• Advice on potential state and federal tax consequences associated with each
• Business planning and financing

ESTATE PLANNING 

• Wills, trusts, powers of attorney and healthcare directives
• Probate of estates

PROFESSIONAL EXPERIENCE

1992 - Present:  Partner, Meuleman Mollerup LLP

1988 - 1992: Associate, Meuleman Mollerup LLP 

1984-1988:  CPA, tax consultant at Touche Ross & Co.,  (now Deloitte)

BUSINESS AND INDUSTRY ACTIVITIES   

• Idaho State Bar, Real Property Section  
• Certified Public Accountant
• Idaho State and American Institutes of Certified Public Accountants  
• Wealth Counsel - a national group of estate planning attorneys 
• Boise Valley Economic Partnership, Committee on Economic Development - former member
• Idaho Association of Commerce and Industry, Tax Policy Committee - former member

EDUCATION   

• University of Idaho College of Law, J.D.
• University of Idaho, B.S., cum laude, Accounting