In This Issue
Twas the night before Christmas, when all through System and even OGC
On October 6, 2006, H.R. 683, President Bush signed into law the Trademark Dilution Revision Act of 2006 (“TDRA”). The TDRA is designed to better protect famous trademarks from unauthorized uses that blur their distinctiveness and clarifies that tarnishment of the mark (loss of value due to the infringing use) is also actionable. The TDRA defines a mark as famous “if it is widely recognized by the general consuming public of the United States,” thereby precluding protection under the TDRA for marks known only in a niche or regional market. Protection of famous trademarks is now easier because the owner must only prove a “likelihood of dilution,” rather than “actual dilution”. Some of UT System’s marks may qualify as famous allowing us to better protect UT’s interest in them. UT System institutions should also exercise caution when contracting for the use of famous marks on campus—obtain clear and specific rights for all uses.
Recently, the Texas Attorney General issued an opinion clarifying whether an honorably discharged veteran must be a U.S. citizen at the time the veteran seeks exemption from certain dues, fees, and charges under Texas Education Code, §54.203(a). The answer is no. Reiterating an earlier opinion regarding section 54.203(a), the Attorney General opined that to receive benefits under section 54.203(a), an honorably discharged veteran must (1) have been a U.S. citizen and Texas resident at the time he or she entered the service; and (2) have resided in Texas for at least 12 months at the time the veteran registers in an institution of higher education. Section 54.203(a) does not require that the veteran be a U.S. citizen at the time he or she registers in the institution of higher education. Att’y Gen. Op No. GA-0445 (2006).
by Scott Patterson (Business Law Section)
This lawyer may very well have been carrying the new rules that the Texas Department of Information Resources (“DIR”) recently issued requiring the accessibility of state “electronic and information resources” (or “EIRs”), such as computer hardware, software, or services. These DIR rules, which became effective on September 1, 2006, are set forth in Title 1, Chapter 206, Rule §206.70 of the Texas Administrative Code and in Title 1, Chapter 213, Subchapter C of the Texas Administrative Code.
The new DIR rules are intended to ensure that any EIRs procured or developed by Texas state agencies or institutions of higher education are accessible by persons with disabilities. UT System has already taken a leadership position on this issue to give students, faculty, and staff access to our critical information resources, regardless of visual, hearing, or motor skills disabilities. However, the new DIR rules are detailed specific and compliance will require forethought in EIR purchasing and implementation.
One way that the new DIR rules promote accessibility is by establishing technical standards that EIRs must meet in order to be considered accessible. For example, one DIR rule identifies twelve technical standards that “Software Applications and Operating Systems” must satisfy in order to be found to be accessible by persons with disabilities. The DIR rules are largely the same as the EIR accessibility rules that federal agencies have operated under since 2001, and the federal government has produced training and information materials for use in learning how to apply such rules.
Even so, understanding how to work with and apply the DIR rules will be very challenging for our purchasing and IT staffs as well as our faculty and other staff who also purchase EIRs. To assist, UT System has implemented a new UT System-wide policy, entitled “Access by Persons with Disabilities to Electronic and Information Resources Procured by The University of Texas System Administration and The University of Texas System Institutions.” The policy identifies the procedure that UT System and the UT institutions must follow in order to comply with these DIR rules when procuring EIRs.
While OGC may not be able to bring you world peace, we should be able to assist you with these new DIR rules! Please contact me at 512-499-4528 (or email me) if you require such assistance or have any questions about these new accessibility rules.
The Bottom Line: New rules issued by the Texas Department of Information Resources require electronic and information resources that are procured or developed by UT System or UT institutions to meet specific requirements allowing those resources to be accessed by persons with disabilities. UT System has implemented a new policy to assist UT System and UT institutions in complying with these rules when procuring such resources. OGC will gladly assist in complying with these rules.
by Hannah Huckaby (General Law Section)
The purpose of usury laws is to protect the borrower from unjust credit terms because of uneven bargaining power. As Texas Finance Code §302.001(b) states, “All contracts for usurious interest are contrary to public policy and subject to the appropriate penalty …” The Texas Finance Code defines interest as “compensation for the use, forbearance, or detention of money ...” §301.002(4). Usurious interest is defined as “interest that exceeds the applicable maximum amount allowed by law.” Texas Finance Code §301.002(17). When dealing with student loans and other debts, UT institutions should be aware of the statutes that define the maximum interest rates allowed by law, together with the statute that outlines liability for the usurious creditor. The Texas Constitution addresses usury in Article 16, Section 11: “The Legislature shall have authority to define interest and fix maximum rates of interest; provided, however, in the absence of legislation fixing maximum rates of interest all contracts for a greater rate of interest than ten per centum (10%) per annum shall be deemed usurious; provided, further, that in contracts where no rate of interest is agreed upon, the rate shall not exceed six per centum (6%) per annum.” Most interest and usury statutes are codified in Title 4 of the Texas Finance Code.
In Texas, an interest rate of more than 10% per annum is usurious for loans between students and institutions of higher education. Texas Finance Code §302.001(b). Some statutes provide for interest at a lower rate. For example, the maximum interest rate allowed for emergency tuition loans is 5% per annum. Texas Education Code §56.053(a)(2). There are alternative rate and usury provisions for other types of transactions, e.g. commercial transactions. When there is no interest rate specified between creditor and borrower, the creditor may charge interest at the rate of 6% per annum on the principal amount. It may begin to accrue on the 30th day after the date on which the principal amount is due. Texas Finance Code §302.002. This type of interest is called “legal interest,” and although it is permissible for you to assess it under state law, please contact OGC to discuss prior to doing so. Judgment interest is defined as “interest on a money judgment, whether the interest accrues before, on, or after the date the judgment is rendered.” Texas Finance Code §301.002(7). Judgments are sometimes taken by UT institutions against delinquent debtors, and interest on the total amount awarded in the judgment is usually awarded by the court. If the contract on which a judgment has been taken provides for a specific interest rate, then the judgment interest rate must be the lesser of either the same interest rate as the underlying contract, or 18% (e.g. a judgment taken on a 5% emergency tuition loan must accrue interest at 5% per annum, and similarly a judgment taken on a 9% Health Professions Student Loan must accrue interest at 9% per annum). Texas Finance Code §304.002. If the contract or debt on which the judgment has been taken does not specify an interest rate (e.g. delinquent tuition and fees), then the judgment interest rate must be that determined by the Texas Consumer Credit Commissioner and published in the Texas Register, generally no less than 5% per annum nor more than 15% per annum. Texas Finance Code §§304.003-304.004. If the creditor were to receive judgment interest at a higher rate than allowed by this subtitle, the judge could modify or reverse the judgment during the period when the court has the power to do so (usually 30 days after the entry of the judgment). After the court loses the power to modify or reverse the judgment, this “incorrect” judgment interest would stand, and the creditor would not be liable to the debtor for a violation of this subtitle. Texas Finance Code §305.105.
Liability for usury is outlined in Texas Finance Code §§305.001-305.105. It is unlikely that UT institutions could be sued successfully for usury because of the sovereign immunity they enjoy as governmental entities. However, it is critical that they remain aware of the penalties for usury because: (1) we cannot be certain that court would agree with our sovereign immunity protection, (2) it is wise not to abuse our sovereign immunity protection, and (3) if a UT institution files suit on a usurious contract or promissory note (e.g. file suit against a student loan borrower on a 12% promissory note), it waives its sovereignty immunity, and then the defendant could successfully raise a counterclaim for usury. The basic penalty for usury applies to a contract for, charge of, or receipt of usurious interest in connection with a transaction for personal, family, or household use. Texas Finance Code §305.001(a). This means that even if you contracted for interest at the usurious rate of 12% but only charged and received interest at the allowable rate of 10%, you nonetheless violated the usury laws. The basic formula for liability is “the greater of: (1) three times the amount computed by subtracting the amount of interest allowed by law from the total amount of interest contracted for, charged, or received; or (2) $2,000 or 20 percent of the amount of the principal, whichever is less.” Texas Finance Code §305.001(a). There is additional liability for the creditor who has charged and received interest that is greater than twice the allowable amount. Texas Finance Code §305.002. A creditor who is liable under §305.001 is also liable to the borrower for reasonable attorney's fees set by the court. Texas Finance Code §305.005.
Some laws do limit the liability of usurious creditors. A creditor is not subject to penalty for usurious interest resulting from accidental and bona fide error. Texas Finance Code §305.101. If the creditor cannot claim accidental and bona fide error, it may avoid liability if “(1) not later than the 60th day after the date the creditor actually discovered the violation, the creditor corrects the violation as to that obligor by taking any necessary action and making any necessary adjustment, including the payment of interest on a refund, if any, at the applicable rate provided for in the contract of the parties; and (2) the creditor gives written notice to the obligor of the violation before the obligor gives written notice of the violation or files an action alleging the violation.” Texas Finance Code §305.103(a). Specifics regarding when a violation is deemed “discovered” and what is “written notice” to the borrower are provided in Texas Finance Code §§305.103(b) and (c).
Additional protection from suit is found at Texas Finance Code §305.006 which provides requirements that borrowers must meet in order to bring suit: “(a) An action under this chapter must be brought within four years after the date on which the usurious interest was contracted for, charged, or received. … (b) Not later than the 61st day before the date an obligor files a suit seeking penalties for a transaction in which a creditor has contracted for or charged usurious interest, the obligor shall give the creditor written notice stating in reasonable detail the nature and amount of the violation. (c) A creditor who receives a notice under this section may correct the violation as provided by Section 305.103 during the period beginning on the date the notice is received and ending on the 60th day after that date. A creditor who corrects a violation as provided by this section is not liable to an obligor for the violation.…”
The Bottom Line: When dealing with students, do not contract for, charge, or receive an interest rate higher than 10% per annum. If you want to charge students the legal interest rate because no interest rate is specified, contact OGC. If you are concerned you are violating usury laws, please contact OGC immediately.
by Cecilia Gonzalez (Business Law Section)
The IRS has issued final regulations, effective July 13, 2006, applicable to payments made to attorneys in or after 2007. These regulations will apply to almost all payments UT System and its institutions make to attorneys. Internal Revenue Code §6045(f) generally requires Form 1099-MISC reporting for payments of $600 or more of gross proceeds made in the course of a trade or business to attorneys in connection with legal services (whether or not the services are performed for the payor). “Legal services” means all services related to, or in support of, the practice of law performed by, or under the supervision of, an attorney. “Payor” means anyone who makes a payment if that person is an obligor on the payment or the obligor’s insurer or guarantor.
The obligation to report attorney payments on Form 1099-MISC is not a new one. The reporting of payments of gross proceeds in connection with legal services under Section 6045(f) has been required since 1998. These regulations continue the broad approach of the proposed regulations that were issued in 2002 with clarifications and examples.
To determine the institution’s reporting obligation the institution must (1) determine whether it is paying for legal services that were performed for the institution, paying the legal fees of a claimant in a lawsuit or paying a claim against the institution; and (2) identify the payee(s) on the check and to whom the check is to be delivered.
If the legal services were performed for the institution and $600 or more was paid to an attorney or law firm, these amounts are reported in Box 7 of Form 1099-MISC pursuant to Section 6041. If the institution is paying $600 or more to an attorney in connection with legal services performed for someone other than the institution, Section 6045(f) requires the reporting of these payments in Box 14 of Form 1099-MISC, unless excepted from the reporting requirements. Section 6045(f) requires reporting of the payment regardless of whether the attorney keeps any portion of the payment as compensation for legal services rendered. Reporting of the payment is also required even if the institution is required to file other information returns with respect to some or all of the payment under another provision of the Code (e.g., the payment is required to be reported to a claimant as part of a total settlement paid to the claimant).
The limited exceptions to reporting payments made to attorneys under Code §6045(f) are as follows: (1) the payment is required to be reported under Code §6041(a) on a Form 1099-MISC related to payments made in the course of a trade or business; (2) the payment is to an attorney acting in the capacity of a settlement agent in connection with the closing of a real estate transaction, including payments made in connection with the financing of real estate; (3) the payment is made to an attorney in the attorney’s capacity as a bankruptcy trustee; (4) the payment is wages or other compensation paid to an attorney by the attorney’s employer; (5) the payment is compensation or profits paid or distributed to the partners of a partnership engaged in providing legal services; (6) the payment is dividends or corporate earnings and profits paid to its shareholders by a corporation engaged in providing legal services; and (7) the payment is made to a nonresident alien individual, foreign partnership, or foreign corporation that is not engaged in trade or business within the U. S. and does not perform any labor or personal services in the U. S.
The rules are straightforward when only one payee is involved but when dealing with joint or multiple payees the rules become more complicated. Following are three examples of the application of the final regulations under Section 6045(f):
Example 1: One check- joint payees – taxable to claimant. Employee C, who sues university P for back wages, is represented by attorney A. P settles the suit for $300,000. The $300,000 represents taxable wages to C. P writes a settlement check payable jointly to C and A in the amount of $200,000, net of income and FICA tax withholding with respect to C and delivers the check to A. A retains $100,000 of the payment as compensation for legal services and disburses the remaining $100,000 to C. P must file Form 1099-MISC with respect to A with $200,000 reported in Box 14. P also must file a Form W-2 with respect to C under sections 6041 and 6051, in the amount of $300,000.
Example 2: Separate checks- taxable to claimant. C, an individual plaintiff in a suit for defamation against university P, is represented by attorney A. P settles the suit for $300,000, all of which will be includible in C’s gross income. A requests P to write two checks, one payable to A for $100,000 as compensation for legal services and the other payable to C for $200,000. P writes the checks as requested and delivers both checks to A. P must file a Form 1099-MISC with respect to A with $100,000 reported in Box 14. P must also file an information return with respect to C for $300,000.
Example 3: One check – joint payees –multiple attorneys - not taxable to claimant. Employee C sues university P for damages on account of personal physical injuries. C is represented by attorneys A, Y, and Z, all in different law firms. P settles the suit for $300,000. P writes a $300,000 settlement check payable jointly to A, Y, and Z and delivers the check to A. A deposits the check in A’s IOLTA account, transfers her share of the attorneys’ fees to her operating account, and issues checks to Y and Z for their share of the attorneys’ fees. A remits the remaining $200,000 to C. P must file a Form 1099-MISC with respect to A with $300,000 in Box 14. A must file Forms 1099-MISC with respect to Y and Z reporting their share of attorneys’ fees in Boxes 14. The $300,000 is excludable from C’s gross income so no information return is required to be filed for the damages paid to C.
If the payment to the attorney or law firm is subject to reporting on Form 1099-MISC, the attorney must furnish the institution with the correct taxpayer identification number (TIN). U. T. System institutions should use Form W-9 to obtain the TIN. While the attorney or law firm is required to provide a TIN, no certification is required; therefore, the Form W-9 does not have to be signed under penalty of perjury. If no TIN is furnished, the payment is subject to 28% backup withholding.
Because the rules are very complicated when dealing with multiple payees, the final regulations should be consulted to ensure proper reporting. In particular, the examples will be extremely helpful for determining when and how to report the attorney payments.
Generally, three separate and distinct categories of penalties apply to information returns and payee statements: (1) a $50 Section 6721 penalty for each failure to file a correct information return; (2) a $50 Section 6722 penalty for each failure to furnish a correct payee statement; and (3) a $50 Section 6723 penalty for each failure to comply with other information reporting requirements (including the requirement to furnish a TIN). The maximum penalties that may be imposed under these sections on any one person for all such failures in a calendar year range from $100,000 (Sections 6722 and 6723) to $250,000 (Section 6721). However, the per failure and maximum penalty limitations will not apply if due to intentional disregard of the reporting requirements. Finally, pursuant to Section 7203, a willful failure to supply information (including a TIN) constitutes a misdemeanor punishable by a fine of not more than $25,000 ($100,000 for corporations), or imprisonment for not more than one year, or both, together with the costs of prosecution.
The Bottom Line: Payments of $600 or more to an attorney or law firm most likely will require the institution to file an information return with IRS. The institution’s task will be to determine whether the payment should be reported in Box 7 or Box 14 of Form 1099-MISC.
IRS Circular 230 Disclosure: As required by United States Treasury Regulations, any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under United States federal tax laws.
Come On and Take a Free Ride - The Edgar Winter Group
by Karen Lundquist (General Law Section)
Cleaning out old files has a tendency to generate stories, like the story Jim Phillips recounted in an earlier version of this newsletter about legendary Texas attorney Percy Foreman. This story has a similar genesis in that it involves a letter found while cleaning out old files in the Office of the Board of Regents. In the letter, a Regent tendered his resignation from the Board of Regents because of a conflict of interest.
As Deputy Ethics Advisor for UT System, I am occasionally asked by the Office of the Board of Regents to research conflict of interest issues. These assignments generally involve issues such as whether a Regent’s financial interest would restrict the ability of UT System to engage in business transactions that might affect that interest. However, the situation described in the letter was one I had never before encountered.
The letter from C.M. Caldwell was dated March 1, 1924. According to Mr. Caldwell’s letter, he was the vice president of a short line railroad at Breckenridge and had several railroad passes that saved him a substantial amount of money. He stated that he was resigning as Regent because “the Attorney General holds that a man cannot hold the office of Regent and ride on railroad passes.” With appreciation for the opportunity to serve as Regent and with some regret, he chose the railroad passes.
These days, it is hard to imagine giving up a public office to avoid having to pay to ride the train. However, in 1924, automobile travel in Texas was in its infancy. Mr. Caldwell’s business required him to travel frequently by rail, an expensive proposition if he paid out of his own pocket. Even so, modern conflict of interest provisions would not have resulted in a requirement to choose between holding office or riding the rails for free, and so I was asked to look into the basis for the Attorney General’s holding.
Although I found several Attorney General opinions on railroad passes, I was not able to locate an Attorney General opinion that explained the basis for the determination that “a man cannot hold the office of Regent and ride on railroad passes.” However, my research allowed a brief journey through the early period of railroad regulation in Texas. According to historical commentary, early attempts to regulate railroads in Texas were largely ineffective. Abuses by the railroad companies and vocal complaints against them resulted in the Constitutional Convention of 1875, which resulted in a new constitutional provision that authorized the Legislature to pass laws to correct abuses by the railroad companies and to prevent unjust discrimination and extortion in rates and fares. That provision was last amended in 1890, the year the constitution was amended to provide for the Railroad Commission and also the year James Hogg was elected Governor based on his efforts as Attorney General to protect the public interests against powerful corporate railroad interests.
Under the authority of the new constitutional provision, the Legislature passed a series of statutes that generally prohibited the granting or use of free railroad passes or passes sold at greater or lesser rates than sold to others for similar transportation. Presumably, this law was meant to discourage railroad companies from abusing their powers by requiring some passengers to pay and letting others ride free or at a reduced rate, depending on the whim of the company. Some of those statutes were enacted in 1907, although most appear to have been enacted around 1911.The statutes provided fines and even imprisonment for violations. Surprisingly, those statutes are still in effect today under Title 66, Vernon’s Texas Civil Statutes (Articles 4005 – 4015f).
The statutes exempted certain classes of persons from the general prohibition against free passes. For example, “bona fide” officers and employees of railroad companies were permitted to receive free railroad passes. Mr. Caldwell probably relied on this exception to obtain his free passes. The statutes also permitted a limited class of public officials to ride free, but generally they were confined to officials concerned with law enforcement or public health. Most likely, the Attorney General determined that Mr. Caldwell’s status as a Regent trumped his status as an officer of a railroad company and thus, because the statutes did not include Regents in the list of officials permitted to receive free passes, Mr. Caldwell could not receive and use the free passes. To avoid that result, Mr. Caldwell resigned, noting that although his attorney disagreed with the Attorney General’s holding, he did so to avoid any question in the matter.
Times have changed, the power of railroad companies has waned, and the concept of choosing between free railroad passes and the office of Regent has been relegated to dusty old files.
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