Case Summaries 09/2011

(action by beneficiaries of trust to remove defendant as successor trustee because bank went through series of mergers and did not maintain position for trust officer in local bank; trustee may be removed by court “for cause” when trustee’s “continuation in role would be detrimental to interests of beneficiaries” in Kentucky, including changes in place of trust administration; federal district court ordered removal of successor trustee and granted plaintiffs’ motion for summary judgment).

(IRS provides guidance on treatment of cell phones (or similar equipment) that employers provide to employees primarily for non-compensatory business purposes; before 2010, log of cell phone usage required to substantiate business use for deduction purposes on employer-provided cell phones and separate out amount included as compensation to employee; 2010 legislation (eff. Jan. 1, 2010) removed cell phones from definition of "listed property" which require logs; in Notice, IRS states that value of employer-provided cell phone excludible from employee's income as working condition fringe to extent that, if employee personally paid for use of cell phone, the payment would be allowable as an I.R.C. Sec. 162 deduction for employee; employer considered to have provided cell phone to employee primarily for noncompensatory business purposes if substantial reasons exist relating to employer's business other than providing compensation to employee with cell phone; Notice is effective as applied to employer-provided cell phones occurring after December 31, 2009).

(Administration's plan continues application of $1.2 trillion in discretionary spending cuts that were already included in debt ceiling law previously enacted which is estimated to cut $350 billion from defense budget over next 10 years, and adds $1.1 trillion in defense cuts and unspecified spending reductions on benefits for military personnel; plan includes no structural reforms to existing major entitlement programs; no increase in age of eligibility for Medicare enrollment (remains at 65) instead of going to 67 which the President had supported during debt ceiling negotiations and which CBO estimates would save $124 billion from 2012 to 2021; proposal cuts Medicare spending by changing payments to rural providers and applying Medicaid rebate (i.e., price control system) for drug payments to Medicare Part D, among other things; proposal includes increase in Part B and Part D Medicare premiums for upper income retirees and increases from 5% to 25% the percentage of seniors paying such premiums; federal workers to contribute extra 1.2% of compensation toward their retirement; new fee on military retirees to participate in Tri-Care health program; no proposal to repeal any portion of the Patient Protection and Affordable Care Act of 2010 which CBO revised projections show an increase in deficit spending significantly in the out years; proposal includes $1.5 trillion tax increase, including a tax increase on families and businesses with AGI over $250,000 annually, and a 5.4 percent surcharge on families earning more than $1 million per year. (MFJ return); [Note: the proposal does not account for the fact that IRS data shows that, for all taxpayers, the current average tax rate is 11 percent (once credits and deductions are accounted for) and that the highest average tax rate paid by persons earning less than $100,000 annually is 8 percent and the average tax rate for persons between $1 million and $10 million is 25 percent with those earning more than $10 million paying an average of tax rate of 26 percent; no mention made of fact that top 0.1 percent of all income earners paid 16.4 percent of total tax burden and the bottom 80 percent of all income earners paid 10.9 percent of total tax burden; no mention made that top 0.1 percent of income earners paid more in total taxes than did the bottom 80 percent even though the bottom 80 percent made more than six times as much money as the top 0.1 percent.]; minimum 10-year term for grantor retained annuity trusts with such trusts having a remainder interest greater than zero; elimination of valuation discounts; reversion to 2009 estate and gift tax law; increased depreciation period for privately-owned jets; repeal of deduction for intangible drilling costs for five largest oil companies; repeal of I.R.C. §199 for domestic producers of oil and gas; President's extension of tax cuts to expire at end of 2012 on families earning more than $250,000; elimination of carried interest; no mention made of 1843 account established by U.S. government to accept gifts to the United States that is for general use by the federal government that can be made available for budget needs; many parts of proposal have bi-partisan opposition in the Congress and proposal likely dead on arrival).

(taxpayer that provides telecommunication services derives gross receipts from services to customers, leasing or renting property and does not derive income from the manufacture, production, growth or extraction of qualified production property for purposes of the Sec. 199 deduction and does not constitute domestic production gross receipts). 

(decedent's will bequeathed tangible personal property and residuary estate to his "eight (8) children, per stirpes"; with respect to the distribution of tangible personal property, will gave executor sole discretion to dispose of such property in a reasonable manner; executor simply given discretion to dispose of residue of estate; executor, who was also an heir, distributed all of decedent's interest in annuity to executor; court determined that "per stirpes" language in will meant that members of class take per capita and discretion given to executor extends only to the equal division of non-fungible items). 

(plaintiff, environmental advocacy, organization appealed EPA’s order overruling plaintiff’s objections to EPA’s risk assessments for dichlorvos pesticide and denying plaintiff’s requests for public evidentiary hearing; plaintiff claimed EPA failed to account for potential pre-and post-natal toxicity and completeness of data with respect to infant and children exposure to toxicity, and failed to comply with Food Quality Protection Act screening program; court held EPA failed to explain why it did not use risk assessments that relied on flawed study and acted in arbitrary and capricious manner; court partially vacated EPA’s order). 

(as a supplement to  IRS Publication 555, IRS provides additional information concerning common questions relating to registered domestic partners in CA, NE and WA and homosexual couples in CA that are subject to community property law). 

(purported securities loan (securities purchased with fixed rate of return and paid for at price derived from variable interest rate) with fixed term of 250-450 days entered into for purpose of avoiding taxable income to the lender rather than provided borrower with access to loaned securities does not qualify for nonrecognition treatment as a securities loan under I.R.C. Sec. 1058; under facts of case, taxpayers relinquished all control over securities for all except two days in 450-day period and during those two days could not have taken advantage of spike in securities market value due to lack of ability to call securities back and sell them at increased price as a normal borrower would have been able to; interest deduction of $7.8 million attributable to fee payment denied).

(sale of state (MA) tax credit triggers capital gain to seller; upon use of credit, buyer has gain recognition if credit purchased for less than face value).

(appellees (trustee, nonprofit group, and lake-front property owners) filed complaint against appellants (ODNR) for determination of boundary of property adjacent to Lake Erie; territory of Lake Erie held in trust by state extended to “natural shoreline” which was line at which water usually stands when free from disturbing causes). 

(on government's motion to dismiss, court holds that mandate provision contained in Patient Protection and Affordable Care Act (codified at 26 U.S.C. Sec. 5000A) which requires persons to buy insurance as a condition of lawful citizenship or residency violates the Commerce Clause of the U.S. Constitution; court stated that "the power of the Congress to regulate interstate commerce does not subsume the power to dictate a lifetime financial commitment to health insurance coverage"; the Congress cannot exercise police power under the Commerce Clause; mandate provision, along with guaranteed issue provision and pre-existing conditions health insurance reform provisions stricken from the Act).

(Giaever, former professor with Rensselaer Polytechnic Institute and winner of the Nobel prize in physics in 1973, resigned from the APS due to the stated policy of the APS that "global warming is occurring"; APS has taken the position that "the evidence is incontrovertible" that global warming is occurring, but Giaever noted that global temperature has increased only 0.8 degrees Kelvin over the past 150 years with the result that "human health and happiness have definitely improved in this 'warming period'"; Giaver noted that the use of the word "incontrovertible" by APS is contrary to the very nature of scientific inquiry).

(IRS solicits public comment on a proposed affordability safe harbor for employers under the shared responsibility provisions of the Patient Protection and Affordable Care Act (Act); under Act, employers with 50 or more full-time employees that don't offer government-determined "affordable" health care are subject to a penalty (deceptively termed a "shared responsibility payment"); under Act, coverage is deemed unaffordable if the employee's required plan contribution for self-only coverage exceeds 9.5 percent "of the applicable taxpayer's household income"; how employers are to legally obtain household income is unknown, and IRS, in the Notice, says that Treasury expects to propose a safe harbor that would determine affordability of an employer's coverage by referring to an employee's wages from the employer reported on Box 1 of Form W-2).

(boundary dispute between adjacent landowners; trial court determined that “slightly crooked horse fence” separating parcels and line extending north from fence established boundary by practical location through express agreement, and that appellant's chopping down and moving fence was conversion and trespass; trial court awarded compensatory and punitive damages and prejudgment interest).

(announcement details the tax increases contained in the "American Jobs Act of 2011" designed to pay for nearly $500 billion in additional spending; most provisions are simply re-proposals of tax increases that have been previously rejected by legislators in both parties and are likely "dead on arrival" in the Congress; taxation of partnership carried interests (i.e., earnings by hedge fund managers and various types of partnerships) as ordinary income (which has been previously rejected by Charles Schumer (D-NY); 28 percent limitation deduction phase-out (which accelerates other rate increases on taxpayers subjected to the phase-out) on itemized deductions for individuals with adjusted gross income exceeding $200,000 in a year ($250,000 for families) (similar provision rejected as part of the Patient Protection and Affordable Care Act when Democrats had control of both bodies in Congress and a super-majority in the Senate); elimination of bonus depreciation on private jets; tax increase on the U.S. oil and gas industry by eliminating the domestic production deduction (which is presently allowed to all taxpayers that manufacture, grow, produce or extract products in the United States (but is allowed at a lower rate to domestic producers of oil and gas); proposal also includes provision extending 100 percent bonus depreciation through 2012, and other temporary tax provisions including a "returning heroes" tax credit of up to $5,600, up to a $9,600 credit for business that hire an unemployed or injured veteran, and up to a $4,000 tax credit for hiring a worker unemployed longer than six months; proposal finances tax hikes by providing "stimulus" via temporary payroll tax cuts including cut in employee Social Security payroll tax from 6.2 percent to 3.1 percent, and temporary elimination of payroll taxes for companies that increase their payroll by up to $50 million).

(Food and Drug Administration (FDA) Amendment to Animal Drug Regulations, effective Sept. 13, 2011; final rule based on veterinary medicine and science, FDA updates existing regulations governing allowable tolerances for progesterone residues above concentrations naturally occurring in untreated animals to specify the following acceptable levels in cattle and sheep:  muscle - 5 parts per billion (ppb) [increase from 3ppb]; liver - 15 ppb [up from 6ppb in cattle and no increase in sheep; kidney - 30 ppb [up from 9 in cattle and 15 in sheep; fat - 30 ppb [up from 12 in cattle and 15 in sheep; updated regulation based on 1994 revised daily consumption values and is taken to improve the accuracy of the regulation; regulation to be codified at 21 C.F.R. Pt. 556). 

(state of VA lacks standing to challenge individual mandate provision in Patient Protection and Affordable Health Care Act (Act) of 2010; Liberty University cannot challenge Act before mandate provision becomes effective in 2014; no dissenting opinions filed; VA had argued that it had standing due to the Act conflicting with state law that protects VA citizens from the Act's individual mandate provision, but court disagreed and stated, "When a state brings suit seeking to protect individuals from a federal statute, it usurps this sovereign prerogative of the federal government and threatens the 'general supremacy of federal law'"; court did not address question of constitutionality of individual mandate). 

(plaintiff recovered $12 million under insurance policy with defendant for damages incurred as a result of FDA issuing an "alert" in September of 2006 that consumers not eat bagged fresh spinach due to E. coli outbreak; FDA advisory reported 50 "cases of illness" and "one death"; FDA advisory withdrawn two weeks after source of outbreak identified; plaintiff no source of E. coli outbreak, but suffered market losses and filed claim under insurance policy; trial court award reversed on appeal; damages awarded for losses that did not come within policy coverage which were required to be a direct result of an insured event of accidental contamination as defined by policy). 

(taxpayer entitled to deduct losses without limitation set forth in I.R.C. Sec. 469 on real estate under real estate professional exception for two out of six properties because taxpayer spent at least 750 hours on the two properties combined and spent more time on those properties than he did in his day job as harbor pilot in San Francisco Bay; no election to aggregate activities made and court did not require taxpayer to work at least 750 hours in any particular rental activity for purposes of counting hours worked on rental activities toward the 750-hour test; taxpayer did not put 750 hours into any particular rental activity; court rejects (without saying so) holding of Bahas v. Comr., T.C. Sum. Op. 2010-115 where court said that taxpayer had to meet 750-hour test with respect to each activity where an election to not aggregate activities is not made; thus, only two requirements must be satisfied to be a real estate professional under I.R.C. Sec. 469 - participation of more than 750 hours in a real estate trade or business, and real estate activities comprise most of the taxpayer's activities).

(plaintiff sued state of Oklahoma for right to sell 200,000 acre-feet of water to city of Irving, Texas; OK law required legislative approval before plaintiff could sell water to out-of-state interests; 10th Circuit dismissed case for lack of federal jurisdiction; U.S. Supreme Court declined to hear case). 

(plaintiff, environmental challenged defendant’s general permit on poultry waste accumulation by animal feeding operations as not in compliance with state law; administrative law judge ruled for defendant and trial court affirmed; on further review appellate court affirmed because defendant had reasonable basis for general permit and permit not contrary to state law because it regulated aspect of agricultural operations that had been unregulated; permit did not violate federal law even though new dischargers could discharge into impaired waters because net effect was still reduced pollution; sufficient state overview of permit process present and permit not less stringent than federal law). 

(case involves claim of intentional trespass by one landowner against adjacent landowner who didn't determine property line between parcels and had tree service company remove trees and plantings on plaintiff's property; trial court awarded $150,000 to plaintiff for loss of value of property; state (CT) law does not eliminate common-law remedies for timber trespass and is not exclusive remedy; three year statute of limitations for tort actions applicable; equitable estoppel not proven; intentional tort proven; plaintiff's real estate appraiser qualified; trial court judgment affirmed).

(farm partnership comprised of two couples, and one couple assigned their interest to the other couple who then defaulted on partnership debts; couple that assigned their interest then filed involuntary petition against partnership; bankruptcy court determined that cause existed to have trustee appointed because of assertions of fraud and defaulting couple had farmed the partnership land rent-free, and partnership was leasing land for less than fair market value; interests of creditors merited trustee's appointment under 11 U.S.C. Sec. 1104(a)(1)).

(Solyndra Corp., Freemont, CA, solar panel manufacturer that had received $535 million in loan guarantees from federal government as a result of the 2009 "stimulus" legislation (and was the first company selected under the new program), announced on Aug. 31, 2011, that it was filing for bankruptcy and eliminating 1,100 jobs; company officials cited "regulatory and policy uncertainties" in making its decision; in 2009, U.S. Energy Department analysis of Solyndra's business model predicted that firm would run out of money in September of 2011, and Energy Department's credit department unanimously decided not to fund Solyndra in early January of 2010; funding decision changed by new Administration, and in May 2010, President Obama made a speech at the company in which he stated, "Companies like Solyndra are leading the way toward a brighter and more prosperous future"; presently, 20 percent of U.S. solar manufacturing capacity have or will be filing bankruptcy; U.S. share of solar panel manufacturing has fallen from 43 percent in 1995 to 7 percent in 2010; congressional subpoena issued to obtain key governmental documents in matter).