“Greening” Your Business with a Document Retention Policy

By Elizabeth A. Whitman

My parents grew up during the Great Depression. As children they had, by necessity, been trained to save everything that had any possible future use, and that carried into their adult lives.

As a result, our house was the epitome of today’s “green” idea of “reuse.” Our basement storage room was full of a wondrous collection boxes, jars, and plastic containers of various sizes in shapes, waiting to be recommissioned when needed. Plus, there was a craft cabinet in our home that boasted fabric, yarn and ribbon remnants, old buttons, holiday cards (which I fondly remember turning into gift tags), and used wrapping paper to be reused for increasingly smaller gifts until it was too small to reuse again.

Saving Used Violin Strings

It is no surprise that I carried the idea of savings things which might become useful. When I became a violinist, that extended to used violin strings. When I started playing the violin, there was a logic to saving used strings in that they had already been “stretched out.”

At that time, the better violin strings were metal wrapped gut strings.[1] Gut strings take several days at minimum to stretch out and “settle.” Until this happens, they go out of tune and need to be retuned frequently.

Although I tried to plan my string changes so that the new strings would have time to settle in before a major performance, there were occasional “emergency” string changes when, for instance, the metal on a string started unwinding or a string broke. If that happened with a gut string, it was extremely useful to have an old “pre-stretched” string to put on the violin to assure tuning stability in a performance.

Now, however, most musicians use synthetic strings[2], which are wrapped in metal.  One huge benefit to the synthetic strings is that unlike a natural substance like gut, the synthetic strings do not need to be stretched out.  As a result, synthetic strings are much more stable in tuning from the start, and there isn’t as much of a reason to save used strings.

Yet, old habits are difficult to break, and for many years, I found myself hanging onto the habit of saving those old strings, even though they take up space in my violin case and are unlikely ever to be used. Sometimes, just having the old strings even caused a problem, because I thought I had an ample supply of new strings when what I really had were a lot of old, used strings, some of which were even tarnished by the passage of time.  Fortunately, through self-discipline, I finally created a policy where I keep only one set of old strings in my case.

A Document Retention Policy Determines How Long and in What Format to Save Documents

Just as I hung onto old strings after their usefulness was over, a company, also, can fall victim to keeping records so long that they interfere with the company’s business.

Paper records can take over company offices and off-site storage locations and electronic records can clutter up the company’s servers and cloud storage sites. The company may find itself seeking to secure ever increasing record and data storage space to feed an insatiable need that all records be saved – or perhaps just a fear of discarding the wrong thing.

As important as it is that some records be kept, it is equally important that the business discard records on a timely basis. Yet, when it comes time to clean up, both for individuals and business, the task can seem overwhelming – particularly without guidance about which items should be saved and which should be discarded.  It also is important that the company establish protocols about where and how records should be saved.

The consequences of inadequate document or record retention practices can be significant. The news regularly reports data breaches caused when an employee saved private, unencrypted data on a laptop, only to have the laptop stolen, resulting in a costly and embarrassing privacy breach.

In one company without a document retention policy (DRP), instead of saving records to the company’s cloud drive, some employees were saving their records to their individual office PC hard drives. This lapse was discovered only after the PCs were replaced as a new computer system was implemented.  Unfortunately, this occurred during a government investigation.  The resulting penalties to the company far exceeded the cost it would have spent on the development and implementation of a DRP.

Customizing Your Business’ Document Retention Policy

DRPs are not “one size fits all”. A business’ DRP should be customized by the business’ attorney in collaboration with management to not only to ensure that the company complies with legal requirements but also to meet the practical needs of the industry and the business itself.  For instance, some records may be retained longer than legally required to adhere to industry standards, meet customer needs, or in anticipation of litigation.

A DRP also must address the fact that not all “documents” are in traditional written form. Records can include audio and video, as well as the written word. Some company records may be stored electronically on company computers, in company cloud space, on company mobile devices, on flash drives, or even with company contractors.  An inventory which determines how and where the business’ records are stored, therefore, is a critical step.

The DRP should establish in what format and for how long each type of document should be retained. It also should establish security protocols, including any special protocol (e.g., shredding) required for disposition of documents which are no longer needed.

Adopting a DRP is only the beginning of the process, however. Implementation and consistent application of the DRP at every level in the company is critical.  After adoption of a DRP, the company should select an individual document retention manager inside the company who is responsible for implementation and compliance with the DRP.

Using the company’s DRP as a guide, the document retention manager should develop storage systems both on-site and off-site as needed with a goal of minimizing both storage and retrieval costs. The document retention manager also should confirm that the business has the processes and means in place to retain documents longer than is typical should that become necessary due to pending or threatened litigation or otherwise.

Every employee, regardless of function, should receive training about the DRP and be enlisted to assist with DRP compliance on a daily basis. Because breaking old habits can be difficult, training should be repeated regularly, and the document retention manager should also routinely evaluate compliance with the plan.

Using a Document Retention Policy to “Green” Your Business

“Reduce, reuse, recycle” is a common refrain as our society strings to “go green.” A DRP can help a business save money and cut back on use of natural resources. For example, some businesses retain documents in paper format, even though they are already in electronic format. By eliminating unneeded duplication in paper files, the business both can save money while cutting back on the use of paper (and toner, and storage space).

A modern DRP can and should evaluate what documents can be maintained solely in electronic format, assure that safeguards are in place so that documents which should be preserved and in fact preserved, and also can prescribe how documents are to be disposed of. A “green” DRP might, for instance, include not only minimization of use of paper documents. It also might include a quarterly business-wide paper document recycling day to help assure that unneeded paper documents not only are discarded but also are appropriately recycled (with shredding if necessary), rather than thrown in the trash.

Keeping Your Document Retention Policy Current

Finally, just as my need to keep old strings changed over time, a company’s needs may change, also. New technology or business practices may change how or where documents are stored, and new legal requirements may change what needs to be retained or for how long a business must retain its documents.

Therefore, the document retention manager should supervise regular compliance audits and retaining, to assure that the company operations conform to the DRP and work with the business’ attorney to assure that the DRP continues to meet the company’s needs.

A DRP won’t clean out file cabinets, offices, or storage unit for a business. However, a DRP created in collaboration between the business’ attorney and management, is important to business continuity and can eliminate much of the stress and risk from the decision about when, where, how, and how long to save documents, while also helping the business to go green.


[1]  Early violin strings, through the 19th century, were made of pure sheep (not cat) gut. The lower or largest strings were frequently wrapped in silver wire. By increasing the mass of the lower strings, it, therefore, was possible to tighten the lower strings to a similar tension to upper strings, which were pure gut. In the early 20th century, metal (usually silver) wrapped gut strings were the most popular type of string used by professional musicians (with the exception of the high-pitched e-string, which typically was a metal string).  Steel strings came into the market in the early 20th century, and soon, with improved technology, steel core strings wrapped in metal were developed.  These quickly surpassed popularity of gut strings for student instruments and for e-strings due to durability and bright, direct sound and pitch stability. However, steel strings were not popular among professional musicians because their sound was not as warm or rich as that produced by gut strings.

[2] In the 1970’s Tomastic-Infeld was the first manufacturer to create a synthetic core string, which used nylon perlon with a metal wrapping, resulting in a warmer sound closer to gut strings with a pitch stability that is closer to metal strings. Today, there are dozens of different brands of synthetic-core strings, boasting various tensions, resonance, brightness, and warmth of sound. With the variety available, the choice of string depends upon violinist preference, purpose for which the strings will be used (a more powerful sound might be desired for a soloist than for an orchestra musician, for example), and how the instrument responds to the strings.

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at            (301) 664-7713 or eawhitman@mirskylawgroup.com

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

‘Tis the Season for Tax Returns and Tax Scams

By Elizabeth A. Whitman

My violin was made in 1962 by a luthier[1] named Umberto Lanaro[2], but it bears the label of Eligio Puccini[3] and says it was made in 1947.

Lanaro chose in effect to use Puccini’s identity when making my violin, as Lanaro received no obvious benefit from doing so. Lanaro came from a well-known family of luthiers, and Puccini did not, so the Lanaro name, if anything, would have been more impressive than Puccini’s. Further, Puccini, who was 30 years older than Lanaro, made very few violins, and Lanaro was to become a much more prolific and famous luthier than Puccini ever was. Finally, Lanaro’s use of Puccini’s label was not secret – the well-known dealer from which I acquired my violin was well-aware of the situation, as was I when I purchased the violin.

Although it is a mystery why Lanaro used Puccini’s “identity” when he made labeled my violin, money and theft were clearly the motives when, two years ago, an unknown person used my name and social security number to file an income tax return seeking a hefty tax refund. That identity thief almost got away with the crime too, as the attempted theft was thwarted only when the electronic tax refund bounced, causing the IRS to send me a very large check for my “refund.”

Since I had not yet filed my tax return, I quickly returned the refund check. I did not lose any money because of this theft. However, in order to file a tax return (even one without a refund), I have to provide additional identification in the form of a random PIN chosen by the IRS and changed every year.

Common Tax Scams

My experience is not an uncommon one. As tax season once again approaches, the scammers are likely to be out in full force.

Therefore, it is important for individuals, businesses of all sizes, and even tax professionals, to be aware of the most common methods of identity theft and to guard against them. Here are a few of the ways identity thieves have committed fraud in the tax area:

Wire Instruction Change. In a previous blog, When it Looks Like a Stradivari Violin but Isn’t: Protecting Yourself from Wire Fraud in Your Real Estate Transaction, I shared how by hacking into title companies’ e-mail, fraudsters were able to trick buyers into wiring large sums of money to the hacker’s bank accounts, instead of into the title companies’ escrow accounts. In the tax field, hackers have similarly hacked into or spoofed taxpayers’ e-mail accounts and requested that tax preparers change the taxpayers’ returns so that legitimate refunds are wired into the hacker’s bank accounts.

Tax preparers and taxpayers alike should be caution about relying upon changes of key information, such as a bank account number, via e-mail. It is best to relay that information via another communication method, or at least to verify it via a phone call to the phone number in one’s records (i.e. not the phone number on the e-mail).

W-2 Scam. Another popular scam in the tax area by identity thieves involves a request for payroll information. Typically, a hacker will hack into or spoof the account of a company executive and write to human resources (HR) or payroll expressing a need for payroll information or W-2 forms.  If the unwitting HR or payroll employee complies, then confidential personal information for all of the company’s employees goes into the hands of the fraudster.  In addition to this providing names and social security numbers, which can be used for a myriad of identity theft schemes, the Form W-2 information can be used to file fraudulent tax returns, which may be more difficult for the IRS to detect as such.

Tax Collection Scams. There are a number of tax collection scams. Some of the most common include:

Fake Private Collection Company Fraudsters may call, claiming to be a collection company hired by the IRS and threatening serious consequences, such as arrest, deportation, or home foreclosure if a tax bill of which the taxpayer previous was unaware is not paid immediately. Although the IRS has, in some instances, sent a small number of long-overdue tax accounts to private collection companies, that only has occurred when the taxpayer should have been well aware of the tax debt for years.  Furthermore, though the IRS can foreclose on a tax lien or cause a passport revocation, threats of imminent arrest, deportation, or foreclosure without any right of appeal are signs that a call may not be legitimate.

Phone Calls Offering an Opportunity for Credit Card Payment of Taxes Over the Phone Fraudsters may call claiming to be the IRS and offer the ability to take a credit card payment over the phone. The fraudsters can be quite convincing and may even have a spoofed caller ID or know part of the taxpayer’s social security number. Although the IRS does now have a mechanism to accept credit card payments under some circumstances, those payments are not accepted over the phone.

E-Mails Purporting to be from the IRS A fraudster may ask a taxpayer to log into a supposed online tax account or to pay supposedly past due taxes online via credit card or e-check. The IRS nearly always will first contact taxpayers via US Mail.  The IRS does have the ability to accept some payments via credit card or e-check, but those should be accessed through the IRS’ website, rather than clicking on an e-mail link.

Phishing Scams may target tax professionals or taxpayers. Fraudsters may send an e-mail mimicking a tax software provider instructing the recipient to download a software “update,” which may be a keystroke tracker. Similar scams may instruct a taxpayer or tax professional to sign onto their tax software website. Once the fraudster has the login information, the fraudster can access tax information, including names, addresses, and social security numbers.

Fight Tax Scams

         Here are some things you can do to combat tax scams:

If you receive a phone call, do not give information to the caller. Instead, hang up and call the IRS’s general number at 1-800-829-1040. Legitimate IRS employees at that number should be available to help you determine if you truly have a tax problem.

Do not click on links in e-mails. Do not click on a link in an e-mail. Tax software providers nearly always provide the opportunity to download updates directly from their websites or though an option inside of the software installed on your computer. Use those in lieu of any links.

Do not provide credit card or bank account information to anyone who contacts you. If you want to make a tax payment, either mail a check or use the IRS’ online payment system, available on the IRS website, www.irs.gov (click on “Pay” on the landing page).

Immediately Report to the IRS any fraudulent use of your social security number to file a tax return. In my instance, I immediately called the IRS, reported the fraudulent check, and received information on where to return the check. I did not cash the check but instead returned it via a traceable delivery method. I also filed IRS Form 14039 to officially report compromise of my personal information to the IRS.

Report the theft to the Federal Trade Commission at www.identitytheft.gov and consider having a fraud alert placed on your credit report. If you lost money because of identity theft, you may also need to file a police report, particularly if you have insurance to cover the loss.

Change passwords for any accounts you believe may have been compromised, using complex passwords that would not be easy for a fraudster to guess. One approach is to use the first words of a sentence that is near and dear to you, but which will result in a password with lower case and capital letters and numbers. For instance, I might use “My violin was made by Umberto Lanaro in 1962” to create the password “MvwmbULi1962.”     

Close any bank accounts or credit card accounts you believe may have been compromised and open new accounts with different account numbers AND different online user names and passwords.

Unlike my violin’s luthier, the motives of the tax scammers are obvious; they want to collect money at the expense of unsuspecting taxpayers. The scammers are creative, and they take advantage of the natural pressure taxpayers and tax preparers experience as they prepare tax returns and make final tax payments. However, taxpayers and tax preparers can, with care, stay a step ahead of the scammers and prevent unlawful access to and use of their personal info.


[1]  Music Geek Fact: A “luthier” is an individual who makes or repairs string instruments. Although nowadays, luthiers typically work on violins, violas, and cellos, originally, luthiers made only lutes.  Thus, the term “luthier” is derived from the French word for lute, which is ”luth.”

[2]  Umberto Lanaro was born in 1930 and trained under his older brother, luthier Luigi Lanaro. Umberto mostly worked out of Padua, although he spent several years with his brother in Argentina in the 1950’s. Unlike many luthiers, including his brother Luigi (who worked from Stradivari models) Unberto Lanaro shunned copying the work of others and rarely entered violin-making competitions, instead relying on the quality of his work to sell his instruments. Lanaro is an innovative luthier, particularly known for his uniquely-carved fittings and his violas, but he also made violins and cellos.

[3]  Eligio Puccini was born in 1900 and worked as a luthier in Empoli, Italy from approximately 1925-1950. Despite his sharing his surname with the famous opera composer, Giacomo Puccini (who was born 42 years some 30 miles away in Lucca, Italy), Eligio Puccini’s work as a luthier was neither prolific nor particularly well-known.

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or eawhitman@mirskylawgroup.com

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.

Orange Groves, Pay Phones, Visas, and Violins: Why Your Real Estate or Small Business Investment May be Subject to Securities Regulation

By Elizabeth A. Whitman

A recent Wall Street Journal (WSJ) headline announced “SEC Looks Into Kushner Cos. Over Use of EB-5 Program for Immigrant Investors.”[1]

It is not unusual to hear that a company is being investigated by the government over immigration issues. But, what is unusual about this particular investigation, however, is that it is being conducted by the Securities and Exchange Commission (SEC), which regulates securities, rather than the United States Citizenship and Immigration Services (USCIS), which regulates immigration and visas, including EB-5 visas.

To understand why the SEC has jurisdiction over Kushner Co.’s EB-5 program, one needs to go back more than 70 years.

In 1944, the then ten-year-old SEC failed to convince a Florida federal court that the sale of Florida orange groves with an optional management and production agreement (for buyers who did not have the knowledge to manage an orange grove themselves) was in the nature of agriculture and was not under SEC jurisdiction.[2]  A youthful, but determined SEC appealed but once again lost, when in 1945, a federal appeals court agreed with the Florida district court.[3]  Not to be outdone, the SEC appealed to the United State Supreme Court.

In 1946, the Supreme Court held in SEC v. W.J. Howey Co. [4] that the sale of the orange groves with the optional management agreement was an “investment contract” under the Securities Act of 1933. In Howey, the Supreme Court developed the investment contract test, which is still in use today.  Simply put, a business dealing or transaction is an investment contract if:

  1. There is an investment of money (or other assets).
  2. The investment is in a common enterprise (generally this means a pooling of assets).
  3. There is an expectation of a profit.
  4. The profit comes from the efforts of a promoter or a third party.

The Howey test brings many routine transactions under securities law regulation, much to the chagrin of clients coming to me wanting to move into a new business venture. They may want to build a new hotel, buy and operate an assisted living community, flip houses, or engage in another commercial real estate project.  They may want to buy an existing business, or they may have an idea for an entirely new business involving a cloud-based application or to provide a service to busy parents.  Many times, those clients need funding to start their business or pursue their commercial real estate venture, and they may turn to friends and family to invest in their new business venture.

Many of these new businesses or commercial real estate investment structures, however, meet the requirements in the Howey test because they involve an investment of money by the family or friend into a common enterprise with an expectation of profits from the efforts of my client. Unfortunately for my clients, there is no securities exemption for investments by relatives or friends, so even though the only investors may be friends and family, my clients in those situations must comply with securities laws.

Indeed, over the years there has been a surprising variety in the types of investments which have been found to be investment contracts. Whiskey warehouse receipts, commercial real estate funds, pay phones and ATMs with placement contracts, interests in a lumber mill, fine art collections, certain time share arrangements, and, of course, investments as part of the EB-5 immigrant visa program have been found to be investment contracts subject to SEC regulation based upon the Howey test.  Generally, those investments have involved situations in which investors expected a profit from a passive investment.

Further, when the stock market is high and there is a concern bond values might drop due to future interest rate increases, many people turn to alternative investments for diversification. Those alternative investments, traditionally available only to high income or high net worth accredited investors, include commercial real estate funds, oil and gas investments, and even musical instrument collections.[5] For instance, even fine violins are becoming more popular as investments and could be sold to a syndication of investors.[6] Most of those alternative investments are structured so that they are investment contracts under the Howey test.

Yet, not every investment in a common enterprise is an investment company subject to SEC regulation.

In 1975, the Supreme Court held in United Housing Foundation, Inc. v. Forman[7] that investments in stock in a New York City cooperative housing project were NOT investment contracts even though the investors might expect a profit from that common enterprise from the efforts of the developer.  The Supreme Court differentiated the housing cooperative from the investment in, for instance, the Howey orange groves or commercial real estate funds, because the primary purpose of the investment in the housing cooperative was to obtain housing, not to generate a profit.

Investors in EB-5 visa programs, are primarily investing to obtain one of a limited number of available annual immigrant visas from USCIS leading to conditional permanent resident status. To qualify, they must invest at least $500,000 ($1,000,000 under some circumstances) in an investment that results in the creation or preservation of a requisite number of permanent, full-time jobs for US workers.[8]

EB-5 investors typically receive a small, fixed return on their investment, but their main incentive for investment is to obtain permanent resident status in the US, rather than to make a profit. Nevertheless, the SEC treats EB-5 investments as securities under the Howey test, and most reputable EB-5 sponsors attempt to comply with US securities laws when offering and selling EB-5 investments.

It’s not clear why the SEC is interested in Kushner Cos.’ EB-5 commercial real estate investment program. However, traditionally, the SEC has used its regulatory authority over EB-5 investments to combat fraudulent use of funds.  For instance, in 2017, the SEC resolved a complaint against Serofim Muroff, an Idaho EB-5 sponsor, who allegedly used EB-5 money for his personal expenditures and for other projects outside of the purposes for which the investments were made.[9]  A similar case is underway involving EB-5 investments in Vermont ski resorts, which the SEC alleges were used by Ariel Quiros and his partner for personal expenditures.[10]

Unless the SEC believes there has been a violation of securities laws, we may never find out why the SEC is interested in Kushner Cos.’ EB-5 program. However, what we do know is that the SEC has jurisdiction over a commercial real estate investment through a vehicle created by Congress to be administered by USCIS. That, in and of itself, should serve as a reminder to businesses, commercial real estate sponsors, and even to future violin syndicators that if they are asking others to invest money with the expectation of a profit, the securities regulators also may have jurisdiction over them, as well.

Before attempting to raise funds from third parties, everyone should consult with an experienced business and securities attorney, who can help assure that the transaction is in compliance with any applicable securities laws.


[1]  Article by Erica Orden, The Wall Street Journal, Politics, January 6, 2018.

[2] SEC v. W.J. Howey Co., 60 F. Supp 440 (S.D. Fla. 1945).

[3] SEC v. W.J. Howey Co., 151 F.2d 714 (5th Cir. 1940).

[4] 328 U.S. 293 (1946).

[5] E.g., http://liquidrarityexchange.com/musical-instruments.html

[6] There have always been investors interested in vintage violins. Some invest out of a philanthropic desire to support the arts, but yet, investments in violins can result in a steady gain in value, without the need to pay taxes on the gain until the violins are sold. According to a 2017 article by Emily T. Lane, President & Curator of Elan Fine Instruments, in Futures Magazine, interest in violin instruments has moved from the famous Cremonese masters, such as Stradivari and Guarneri del Jesu, which have a minimum value in seven figures, to more “moderately” priced instruments in the $100,000-$500,000 range, including Vuillaume (who was mentioned in my previous blog You Now Can Trade Up Your Violin, but Not the Bow or Case – New things to Consider in Section 1031 Exchanges After the 2017 Tax Law) and Balestrieri, an 18th century violin-maker from Mantua.  See http://www.futuresmag.com/2017/01/21/investing-rare-violins . Although I am not aware of any violin-specific syndications, Liquidity Exchange (mentioned in the previous footnote) does offer a musical instrument syndication, which includes the possibility of investment in violins.

[7] 421 U.S. 837 (1975).

[8] For more information about the EB-5 program, check out the USCIS website at https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa-classification

[9]  https://www.sec.gov/news/press-release/2017-87

[10] http://www.burlingtonfreepress.com/story/news/2017/11/22/jay-peak-owner-quiros-strikes-tentative-deal-sec/888577001/

© 2018 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or eawhitman@mirskylawgroup.com

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC or any of its attorneys.
This blog’s reference to any third-party website is for illustration and attribution purposes only and does not indicate endorsement or approval of the website or any product mentioned on or sold through the website or its owner.

You Now Can Trade Up Your Violin, but Not the Bow or Case – New Things to Consider in Section 1031 Exchanges After the 2017 Tax Law

By Elizabeth A. Whitman

In my February 2017 blog post “Sizing Up in Violins and Investment Real Estate,” I discussed how buying increasingly larger (and more expensive) violins compares to real estate investments. I discussed how starting with a 1/32 size, I had purchased a series of violins and then “traded up” to the next size through a 7/8 size violin. Each time, the primary purchase was a violin, but we also had to purchase a similarly-sized bow, case, and accessories in order to play the larger violin.

A real estate investor might start small, with a single duplex and eventually, through a series of purchases, sales, and reinvestments, the real estate investor may own multiple large apartment complexes, office buildings, or even high-rise mixed-use buildings. In those instances, although the primary purchase was real estate, each purchase would come with a certain amount of personal property in the form of appliances, furnishings, supplies, and other equipment necessary to operate the real estate.

Comparing a real estate transaction to a violin purchase, purchasing the violin would be akin to purchasing the real property, and purchasing the bow and case would be more like the personal property that is purchased with the real estate investment.

My previous blog discussed how there are two ways that an investor might owe taxes upon sale of investment real estate – increase in value (i.e. the property is sold for more than what is invested in it) or a “recapture” of depreciation expenses that the investor took while he/she owned the investment real estate.

Since 1921, one thing that has helped real estate investors accomplish growth while deferring taxes is to use a Section 1031 exchange to defer taxes each time they sell an investment property and reinvest the proceeds in another “like-kind” investment property. Over the years, Section 1031 has evolved, but generally, those changes have provided clarity or expanded the opportunities to defer taxes upon a sale and reinvestment.

The Tax Cuts and Jobs Act signed into law in December (2017 Tax Act) introduces new rules on 1031 like-kind exchanges by limiting the types of assets eligible for Section 1031 exchange. As a result of these changes, effective January 1, 2018, only real estate exchanges will be eligible for tax deferral. Using the violin “trade up” comparison, under the 2017 Tax Act, the violin could be traded for a larger one, but it would not be possible to “trade up” the bow or case.

Most real estate sales include the sale of at least some personal property: from refrigerators in an apartment complex to common area furnishings in an office building or maintenance equipment in a shopping center. Most of that personal property can be depreciated over just a few years or sometimes, expensed entirely under what is known as a Section 179 Deduction[1] which allows a limited amount of capital expenditures to be deducted entirely in the year in which they are made. Therefore, by the time the personal property is sold with the real estate, it likely has a zero basis. As a result, under the 2017 tax law, any amount of the sale price allocated to the personal property is very likely to be taxed either as capital gains or recaptured depreciation.

On the bright side, for many real estate asset classes, either there isn’t much personal property or the personal property doesn’t have much value in its used condition. For instance, even if there are 150 refrigerators in an apartment complex, if each of them is six or seven years old, the sale price isn’t going to be very high, so the resulting taxes won’t be material. However, there are situations where a real estate sale might include more valuable trade fixtures, equipment or machinery, for which a reasonable sale price allocation would result in significant taxes.

Where the potential tax liability for a sale involving both real estate and personal property is significant, careful planning can help to reduce the tax burden of these tax law changes. Strategies to explore include the following:

Consider leasing personal property. Payments made for a true lease (one that is not a disguised sale or installment purchase) can be deducted when made, providing a similar tax liability to depreciation (or a Section 179 deduction). Of course, with a lease, the lessee would not acquire any ownership in the personal property. If the lessee plans to sell the real estate to which the personal property relates and dispose of the lease obligation at the same time, the lease would need to be assumable by the buyer of the real estate or cancellable.

Offset Capital Gains Against Capital Losses. If the taxpayer has capital losses, then many capital gains can be offset against those losses so that no tax is paid. Because real estate assets may be held inside of a separate legal entity, the capital gains and capital losses must be allocable to the same ultimate taxpayer for this strategy to be effective.

Assign Property Values to the Personal Property Upon Sale. There is a natural tension between buyers and sellers when there is a sale of mixed real estate and personal property. Buyers tend to want to purchase price to be as heavily allocated to personal property as possible, both because they can depreciate personal property more quickly and because in some states, a high allocation to real property may result in an increase in real estate taxes or a high transfer tax bill.

Sellers sometimes agree to the buyers’ values in order to move forward with the deal. However, the reality is that many times, used personal property has little to no value in the marketplace – if you look on craigslist for instance, a used refrigerator or other appliance in good condition may sell for no more than 15-20% of the new value, and many times, the personal property sold with investment real estate has been heavily used. Proper valuations of the personal property can result in a smaller portion of the purchase price being allocated to personal property subject to capital gains taxes.

On a related note, the 2017 Tax Law may have adverse consequences for professional violinists. Suppose a professional violinist starts with a nice, $10,000 modern Italian violin, which has appreciated to $40,000 over a period of many years while the violinist saved up to “trade up” to a $150,000 Vuillaume[2] violin.  Under the 2017 Tax Law, this violinist is out of luck; since a violin is personal property, under 2017 Tax Law that violinist now may have to write a check to the IRS for the gain on the sale of the $40,000 Italian instrument acquired for $10,000 many years before.


[1]  The 2017 tax law also modified the Section 179 deduction limitation so that many taxpayers will be able to expense up to $1 mil. per year in capital purchases instead of depreciating those items over time.

[2]  Music Geek Fact: Jean-Phillipe Vuillaume was a 19th century French violin maker. He started his career in the shop of Francis Chanot, who had a reputation for forging violins. Before long, Vuillaume was copying violinists made by Stradivari and Guarneri del Gesu, two 18th century Italian master violin makers, whose instruments were already quite valuable. Vuillaume’s skill was so great that some of his instruments reportedly were mistaken for the originals. Vuillaume turned away from forgery and instead produced violins he acknowledged as copies (the difference between forged and copied violins being only whether the lack of authenticity is disclosed).  Ironically, after Vuillaume won violin competitions in his own right, violins bearing his name became some of the most commonly forged (or shall we say “copied”) in the late 19th century. Today, a Vuillaume might sell for more than $250,000, with his copies of the famous “Messiah” Stradivari violin being among the most desirable.

©   2017 by Elizabeth A. Whitman

For more information, please contact Elizabeth A. Whitman at (301) 664-7713 or eawhitman@mirskylawgroup.com.

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC.


If you have ever attended an elementary school instrumental music concert, you may need your parental pride to outweigh the general cacophony that is inflicted on your ears. Sometimes, however, you may find a group of violins that sound pretty good. Why is that?

Well, for technical reasons, string players can start younger[1]. As supply meets demand, violins can range from a 1/32 size up to full size.  Therefore, a child can start playing the violin on a tiny instrument at a very young age and “size up” on violins as he/she grows.

There are two strategies for obtaining violins for a child: rent or own. If you rent, you just pay each month for your child’s entire career.  If you choose to buy the violins, you will keep buying and disposing of increasingly more expensive violins.  I looked at the math and decided to buy my son’s violins.

My son started at age three playing a 1/32 size violin, which with an eight-inch body looked more like a toy than a violin. At age five, when he moved to a 1/10 size, we also found a need to move up a step in quality (and therefore, price) with each size increase.  A few months ago, my son traded in his ¾ size violin for a 7/8 size instrument, which is valued at 20 times the price we paid for that original 1/32 size violin nearly nine years before.

When we made the most recent violin purchase, I realized how our “investment” in violins is like real estate investment. A real estate investor might start small, with a single duplex.  That duplex might be sold and the money reinvested in a four-plex, and the four-plex might in turn, be sold and the proceeds reinvested in a more expensive three-story office building.  Eventually, through a series of purchases, sales, and reinvestments, the real estate investor may own multiple large apartment complexes, office buildings, or even high-rise mixed-use buildings.

Unlike with violins purchased for my son, a real estate investor has to think about taxes with every “trade up.” There are two ways that an investor might owe taxes upon sale of investment real estate – increase in value (i.e. the property is sold for more than what is invested in it) or a “recapture” of depreciation expenses that the investor took while he/she owned the investment real estate.  Although land cannot be depreciated, buildings can be, so there can be a significant tax liability upon sale of the investment.

One thing that helps real estate investors accomplish growth in is to use a Section 1031 exchange to defer taxes each time they sell an investment property and reinvest the proceeds in another “like-kind” investment property within 180 days.

When it was first created in 1921, a Section 1031 exchange required a literal swap of the two properties, as would occur if my son were to literally trade in his small violin at the violin shop for a larger sized violin.   For a direct swap, tax deferral makes a lot of sense.  It can be difficult to determine the “sale prices.”  Plus, unlike a sale and reinvestment, a sale doesn’t result in a cash payout from which taxes could be paid.

Therefore, over the years, Section 1031 exchanges have evolved so that they are more useful to real estate investors.

For instance, another option with violins, is to sell the smaller violin to another student and then use the money to buy the larger sized violin from the violin shop. Likewise, a real estate investor might choose to sell that duplex to Company A and use the proceeds to buy the four-plex from Company B.

For the past 30+ years, the tax law has allowed real estate investors to use what is known as a “qualified intermediary” to do the real estate equivalent by for instance, exchanging an apartment building sold to Company A with an office building purchased from Company B.   Without going into the detailed rules for this 1031 exchange, this would roughly equivalent to selling the smaller violin to another student, then putting the proceeds of the sale in a special savings account that could only be used to buy a new violin, once the desired instrument was located.

1031 Exchanges, however, are seen by some as a tax loophole for real estate investors. The Republican tax proposal “A Better Way” would significantly change the tax laws, including those on investment real estate. The proposal includes a full and immediate expensing of investment in place of depreciation.

Although this proposal might simplify the tax laws, it is likely to complicate the tax situation for many real estate investors. 1031 exchanges are not specifically mentioned in “A Better Way,” but some believe that 1031 exchanges might be abolished along with depreciation.  If that were to happen, real estate investors likely would be taxed on their proceeds upon sale of their real estate.  This would limit available cash for real estate investors’ to “trade up” and potentially could slow down the recovery of the real estate market.

Therefore, although it seems likely that there will always be a crop of younger violinists in need fractional-sized violins as you “trade up” to larger instruments, tax laws may not always make it as easy to “trade up” your real estate investment.

© 2017 by Elizabeth A. Whitman


[1] Geek fact: A partial explanation is that strings of different length can reach the same pitch by changing the tension, while wind instruments require a certain length of the air column to produce a pitch.  So if you want to start your five-year-old on a bassoon, you may need to stretch him a bit first. Also, wind instruments require a developed mouth and certain number of permanent teeth, which are not required for string instruments.

Disclaimer: The content of this blog is intended for informational purposes only. It is not intended to solicit business or to provide legal advice. Laws differ by state and jurisdiction. The information on this blog may not apply to every reader. You should not take any legal action based upon the information contained on this blog without first seeking professional counsel. Your use of the blog does not create an attorney-client relationship between you and Mirsky Law Group, LLC.