WI Supreme Court Rules Against Bars and Restaurants on COVID-19 Pandemic Financial Losses

WI Supreme Court Rules Against Bars and Restaurants on COVID-19 Pandemic Financial Losses

This article is a follow up to one I wrote on August 10, 2020 relating to potential insurance coverage for business losses due to the government shutdowns and restrictions for in-person dining during the COVID-19 pandemic. The first lawsuit on this issue was filed nearly two years ago.

One case finally made its way to the Wisconsin Supreme Court, and on June 1, 2022, the Court unanimously held that Society Insurance Company did not have to provide coverage for business interruption losses claimed by restaurants and bars due to government shutdowns and restrictions imposed on in-person dining. This case is Colectivo Coffee Roasters, Inc. v. Society Insurance, 2021AP463 (June 1, 2022).

In this lawsuit, the plaintiff and other bars and restaurants experienced substantial losses as a result of the COVID-19 pandemic and related government restrictions on in-person dining. The Supreme Court addressed the specific issue of whether those losses are covered by a property insurance policy issued by Society Insurance. Specifically, the questions are: (1) Whether a bar or restaurant’s inability to use its dining space for in-person dining because of the pandemic and related government restrictions constitutes a direct physical loss of or damage to its property under Society’s policy; and (2) Whether the presence of COVID-19 on a bar or restaurant’s property caused the bar or restaurant to suspend its operations, thereby entitling it to coverage under the policy’s contamination provision. The Supreme Court concluded that the answer to both questions is no, and ruled against the bars and restaurants.

The Wisconsin Supreme Court followed the majority of courts nationwide in holding that the presence of COVID-19 does not constitute a physical loss of or damage to property because it does not “alter the appearance, shape, color, structure, or other material dimensions of the property.”  The Court held that although the restaurants could not use their dining room for in-person dining for a period of time, “the dining room was still there, unharmed and it was not physically lost or damaged. Without such a harm, the policy’s business income and extra expense provisions do not apply.”

With respect to the civil authority provisions of the insurance policy, which the restaurant argued should apply based upon the government’s imposed shutdown, the Court ruled that the restaurant did not identify any physical loss or damage to its property or surrounding property such that the business income or extra expense coverage should apply.

Finally, the Court affirmed the ruling of no coverage under the contamination provision of the policy for three reasons. (1) The restaurant did not suspend its operations due to the presence of COVID-19, but did so based upon the Governor’s orders. (2) The Governor’s orders did not prohibit access to the restaurant’s property – they restricted how the property could be used. (3) The Governor’s orders did not prohibit the restaurant from producing its products – they prevented it only from serving its products for in-person dining.

This ruling by the Wisconsin Supreme Court marks a trend among state Supreme Courts in finding no business interruption coverage for alleged COVID-19 related losses, and also follows the well-established nationwide trend in the federal courts denying insurance coverage for these claims.


What is a Real Estate 1031 Excange?

What is a Real Estate 1031 Excange?

In the field of real estate, a commonly used term is a 1031 Exchange. But what exactly is that? A 1031 Exchange is aptly named after Section 1031 of the U.S. Internal Revenue Code, which permits the deferral of capital gains tax in certain real estate transactions. Capital gains taxes are owed on the profits from the sale of most investments if they are held for at least one year. Due to the possibility of deferring the tax, there are many requirements in place that must be followed in order to receive the benefit of deferring the capital gains tax.

The first requirements is that a 1031 Exchange can only be used in certain real estate transactions. A 1031 Exchange is only applicable to the sale of real property that is held for productive use in a trade, business or for investment. Furthermore, the replacement property that is purchased also has to be held for productive use in a trade, business or for investment. Therefore, a 1031 Exchange would not be allowed in real estate transactions with property that is used for personal reasons, such as your residence.

The second requirement of a 1031 Exchange is that a qualified intermediary is required to facilitate the transaction by handling the funds. As part of the regulations, you (the owner) are unable to receive or control the funds from the sale of the property in a 1031 Exchange. A qualified intermediary can be a person or a company, however, they cannot be a disqualified person as defined in the Treasury Regulations. The qualified intermediary will take possession of the funds from the sale of your property and hold those funds until they can be transferred to the seller of the replacement property you are purchasing.

The next requirement is that there are certain time periods that must be met to complete the 1031 Exchange. Firstly, you have 45 days from the sale of the property to identify a replacement property. Secondly, you need to conclude the 1031 exchange within 180 days. If you miss any of these deadlines, then the 1031 Exchange will not be complete and you will not receive the tax benefit of deferring the capital gains tax.

Although these are three important requirements of a 1031 Exchange there are still other requirements and technicalities involved with completing a 1031 Exchange. For that reason, if you are considering utilizing a 1031 Exchange it will be helpful to seek the advice of a real estate attorney before selling your property. A real estate attorney will be able to help you navigate through the requirements and technicalities of a 1031 Exchange so that you may benefit from the deferral of capital gains tax. If you have any questions about completing a 1031 Exchange, do not hesitate to reach out to one of our experienced real estate attorneys.

Are Contractors Actually Fully Insured?

Are Contractors Actually Fully Insured?

Anyone who has inquired with, or hired, a contractor or homebuilder has invariably seen or been told by the company that they are “fully insured.”  More times than not, this statement simply means that the company has a standard commercial general liability (CGL) policy. Unfortunately, these “fully insured” statements understandably give the customer a false sense of security that if anything goes wrong with the work performed by the contractor or builder, its insurance company will cover the damage and make things right. In fact, with a standard CGL policy, the opposite is true:  the insurance company will not cover damage that arises out of the company’s work (or its contactor or subcontractor). What is often referred to as the “your work,” “business risk” or “exclusion” directs to an exclusion in standard CGL policies that bar coverage for property damage to the part of the real property that the company is performing work on. The language often looks like this in CGL policies:

This insurance does not apply to:

  1. Damage to Property

Property damage to:

…. (5) That particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the property damage arises out of those operations.

Practically speaking, this exclusion bars insurance coverage for damages such as deficient or defective work performed by the company or damage to your property caused by the company’s work. The net effect of no insurance coverage means that any recovery by the aggrieved customer will have to come against the company itself, which, depending on the company’s financial status, can be exceedingly difficult. Not only are many contractor and building companies set up as legal entities designed to protect against liability, but Wisconsin law exempts up to $15,000 in business assets from execution of a judgment. See Wis. Stat. § 815.18(3)(b).

In summary, it is incredibly important to vet the contractor or building company prior to hiring. In addition to their reputation and longevity in the community, you can inquire whether they have any insurance coverage or bond above a standard CGL policy and whether they have the financial resources to pay a judgement if a dispute arises. Moreover, the Wisconsin Circuit Court Access search (https://wcca.wicourts.gov/)  allows you to look up a company and see if they have unpaid judgments entered against them. This due diligence is necessary because a contractor’s claim of “fully insured” means little to nothing when the contractor’s work is the subject of the claim.


Tax-Exempt Nonprofit Organizations in Wisconsin

Tax-Exempt Nonprofit Organizations in Wisconsin

Do you hold a charitable intention close to your heart but are not sure on how to begin the process to form your new organization?  It is important to note that a nonprofit and a tax-exempt are commonly thought to be the same entity; however, these entities have a significant difference. A “nonprofit” is a nonstock corporation formed for a nonprofit purpose under Chapter 181 of the Wisconsin Statutes. A “tax-exempt” organization is a nonprofit organization with an additional qualification: the Internal Revenue Service (IRS) has recognized the organization as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code. This formal exemption is the reason that tax-exempt organizations are commonly referred to as a “501(c)(3).”  The formation of a tax-exempt nonprofit organization requires, at a minimum, the following steps.

First, you should determine your specific charitable purpose and goals for your organization. You should also consider whether there is a specific need for a new organization with this charitable purpose. Under Section 202.11(2) of the Wisconsin Statutes, a charitable purpose must be for a benevolent, educational, philanthropic, humane, scientific, patriotic, social welfare or advocacy, public health, environmental conservation, civic, or other eleemosynary (charitable) objective. Further, to be recognized as a tax-exempt organization, your charitable purpose shall also fall under Section 501(c)(3) of the Internal Revenue Code.

Second, as you consider forming your organization, you should determine a name for your organization. This name must be distinct from other organizations registered in Wisconsin. Your attorney can assist you with determining the availability of your desired name.

Third, you should identify the initial directors and officers of the organization. A good rule of thumb for selecting directors is to identify at least three people that support your charitable purpose. These directors will govern the operation of your organization. The officers that you should elect are President, Vice President, Secretary and Treasurer. The roles for each officer are explained in the initial governing documents.

Fourth, after you determine your charitable purpose, name and initial directors, your organization must file Articles of Incorporation with Wisconsin and obtain an employer identification number. The Articles of Incorporation formally create your organization and describe the initial key operational details for your organization. Your attorney can assist with drafting and filing of these Articles of Incorporation with the Wisconsin Department of Financial Institutions (DFI). After filing the Articles of Incorporation, the organization shall obtain an employer identification number from the IRS.

Fifth, now that your organization is registered with Wisconsin, you should prepare the organizational documents and hold the organization’s initial meeting. You will need bylaws, which provide for the overarching terms that govern the organization, including the duties for directors, voting requirements and roles of officers. You should have a conflict of interest policy which states that any key person within your organization shall set aside any personal interests that may compete with the interests of the organization. Each director, officer and other key person shall sign an acknowledgement of this policy and disclose any potential competing interests. Your attorney can assist with the drafting of the bylaws, conflict of interest policy and other necessary organizational resolutions and acknowledgments to make sure the intentions of the organization are met and protected. When the documents are ready, you should hold an initial meeting of the directors and officers, at the meeting you will adopt and approve the documents and discuss the initial actions of the organization.

Finally, you should obtain 501(c)(3) status and any necessary state tax exemption status. Your accountant can assist you with the preparation and filing of Form 1023 or Form 1023-EZ to obtain tax-exempt status from the IRS. After you receive your tax-exempt status from the IRS, you should file the Form S-103 Application for Wisconsin Sales and Use Tax Certificate of Exempt Status with the State of Wisconsin. You should also consider whether it is necessary to register as a charitable organization with the Wisconsin Department of Financial Institutions.

The experienced business law attorneys at Anderson O’Brien, LLP are happy to answer your questions regarding the most suitable organization for your intentions and to guide you through the formation process and ongoing operations of your desired organization.


Legal Considerations for Running a Business from Home

Legal Considerations for Running a Business from Home

The past decade has seen a steady increase of businesses being run from individual’s homes and the changes brought about by the Covid-19 pandemic have only increased this trend. Whether a “side-hustle” or primary source of income, business owners should carefully consider the legal and tax rules at play before opening their homes for business.

In addition to aspects relevant to all businesses, those operating a business from home must consider: (1) relevant property restrictions, (2) home business tax deductions, and (3) special liability and insurance considerations.

Property Restrictions

Property restrictions should be among the earliest factors analyzed, ideally before expenses are invested into the venture, as municipal zoning or private land restrictions may flatly prohibit the at-home business altogether.

Counties and municipalities enforce zoning restrictions which classify large swaths of land under different rules for use. These zoning programs are intended to organize land use in a planned and practical manner. For example, zoning codes may protect the interests of quiet suburbs by prohibiting the construction of multi-unit apartments or noisy factories in the area. While every local government unit has their own approach to zoning, generally, larger communities have more specific, restrictive, and regularly enforced zoning programs than smaller ones. Depending on your local rules, your home may be in an area which prohibits commercial activity. Whether your planned business falls under the relevant rules can only be determined by checking to see how the local codes define and restrict commercial use. Faced with an adverse zoning designation, you may be able to apply for a variance – a special exception to the zoning rule applied for and reviewed on a case-by-case basis.

Your use of the home may also be subject to private land-use restrictions. Most obviously if you rent your home, your lease may restrict your ability to operate a business from the property. If you have a good relationship with your landlord, they may be willing to amend the lease, as the inclusion of commercial use restrictions in the lease is often the result of a landlord using a form document, not their particular objection to you using the property that way.

Homeowners are not necessarily free from private party restrictions, as many properties are subject to restrictive covenants. These documents are essentially private contracts that were put into place by former owners and whose terms automatically pass on to new owners of the property. Some neighborhoods form Homeowner Associations to enforce these covenants. Others do not, but still allow any property owner, also subject to the covenants, to sue for their enforcement. Make sure to read your restrictive covenants carefully before opening a business. In addition to restrictions on business operations, check the rules for signage restrictions and parking and guest vehicle restrictions if clients will be visiting your home office. If the covenants restrict the type of activity you plan to perform, check to see what process is available for amending them.


Assuming no land use restrictions prevent you from operating the business from your home, you will want to ensure you are taking maximum advantage of any available tax saving options. When considered during the onset of a new business, these tax rules may influence how you choose to organize running the business from your home.

Businesses are entitled under the tax code to deduct necessary and ordinary business expenses from their taxes. For example, if a business purchases a couch for their waiting room and hires a cleaning service to maintain it, this will typically be deductible as a business expense. If an individual purchases that same couch for personal use and hires the same cleaning crew to clean their home, this expense is not entitled to deduction. Because of a home business’s inherent melding of business and personal use expenses, the rules for home office deductions are somewhat complex. This article will review in broad strokes how these rules operate, but a qualified tax accountant or attorney can help guide you through the nuance of your particular situation. While no substitute to qualified professional advice, Reviewing IRS Publication 587 may also be a good start to understanding the basic rules at play.

The first step towards taking advantage of these tax benefits is to qualify for the deduction. Generally to qualify, a part of your home must be used exclusively and regularly for business purposes. As an example, using your living room couch as a place to sit when you check email is unlikely to qualify. Special variations of the general rules exist for unattached separate structures, space used for storage of inventory, daycare facilities or property used for rental purposes. Like most areas of law, the qualification tests are deceptively simple, and careful attention must be paid to how the rules define each word in a given test.

Assuming you qualify to take the deduction, the next step is to calculate the amount of the deduction. Here, you have a choice for each year you claim the deduction, either use a calculation for actual expenses or elect to use the simplified method offered by the IRS. Whatever your method of accounting for the deduction, make sure to keep adequate records to support your claims if you are challenged by the IRS. Your records should be maintained as long as the facts they support may still be challenged. For tax purposes, this usually is three years following the date that year’s tax return was filed.

Liability and Insurance

A lawsuit can wipe out years worth of income if proper precautions are not taken by a business owner and running a business from the home introduces unique risks. These risks are compounded if you have business clients or employees of the business meet or work at your home.

Like all business owners, a home business operator should consider forming a Limited Liability Company (LLC), Corporation or other form of limited liability business entity to operate their business out of to shield their personal assets from any suits made against their business.

To the extent possible, anyone entering your home for business purposes should remain in the portion of the property used for the business, as an injury occurring in another part of the home may blur lines between a business contact of your LLC and a house guest to whom you are personally liable for. It may be difficult to argue a personal injury lawsuit should be limited to your LLC when the injury was a result of tripping over a toy left in the living room by your child.

Even with proper limited liability entity planning, the assets of the business inside the entity are still subject to the suit and may be a devasting loss if liquidated to pay a settlement or judgement. Thus, insurance on the business is the first line of defense to maintain your assets, with the limited liability entity planning serving as an emergency flood wall against a disastrous lawsuit wiping out your entire estate. Most homeowner’s carry homeowner’s insurance, but these policies may not cover damages flowing from business use of the property. You should consult with your insurance provider to make sure you are appropriately covered and whether you need a supplemental business insurance policy. In addition to liability coverage, if your business owns expensive equipment or large amounts of inventory stored in your home, consider loss coverage to fund the replacement of those assets in the event of a flood, theft, or fire. Like with liability coverage, homeowner’s coverage for your personal assets will be unlikely to cover the garage full of business inventory that is damaged, destroyed or stolen without additional coverage options. If you have questions, do not hesitate to reach out to one of our business or tax law attorneys.


Will You Be My Guarantor?

Will You Be My Guarantor?

One of the questions you may be asked in your lifetime is to be a guarantor. This request may come from a family member or even a friend that needs someone to be a guarantor for a lease, loan, etc. Your first thought may be to agree right away to help that individual but, there are many things you should consider prior to becoming a guarantor.

It is important to understand that as a guarantor you are making yourself financially responsible for the obligations of the individual if they fail to perform. Often the Landlord or Lender requires a personal guarantor to provide an extra level of protection to ensure they are paid what they are owed. This likely means the individual does not meet their rental or loan criteria and is considered high risk. Therefore, the Lender or Landlord is looking to protect their interests by having a more qualified person guarantee to fulfill the financial obligations of the individual in the event they are unable to satisfy the prescribed conditions.

Since you are making the commitment to be financially responsible for the obligations of another, you should consider some of the following items prior to becoming a guarantor. To begin with, you should consider the individual’s financial situation. Are they reliable and dependable? Are they able to handle their own bills? These are questions you will want to consider, because depending on the individual’s financial situation, you may be putting yourself at a greater risk than you are aware of.

In relation to knowing the individual’s financial situation you should also take a second to consider your own financial situation. It is wise to consider whether you would be financially able to fulfill the obligations of the individual in the event they fail to perform. If you would not be able to handle the financial obligations of the individual, then you should not be their guarantor.

Additionally, you should be attentive to the underlying document that you are being asked to guarantee. If you are asked to be a guarantor on a lease, that is typically only a year-long commitment. However, if you are asked to guarantee on a car loan or mortgage, then you could be taking on this extra financial responsibility for seven, fifteen, or even thirty years. It is important to consider the underlying document for the guarantee so that you understand how long you are committing to taking on this additional financial responsibility. Moreover, you should consider how this extra financial responsibility may impact your own debt to income ratio and thus your own ability to get a loan or mortgage in the future.

Another item you should consider is what type of guarantee the Landlord or Lender is expecting you to provide. Is it a limited or unlimited guarantee? If it is limited, then there is usually a set amount that the Landlord or Lender will be able to collect from you as the guarantor. However, if it is an unlimited guarantee then they would be able to recover the entire amount from you as the guarantor. It is very important to understand the type of guarantee that you would be providing before you become a guarantor.

These are just a few items you should consider before becoming a guarantor. In light of the substantial financial responsibility of becoming a guarantor, it is advisable to seek the advice of a business law attorney before executing any type of personal guarantor. An attorney will be able to analyze your situation and the requirements of the personal guarantee, in order to advise you on the risks and best course of action with regards to becoming a personal guarantor.


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