Annotations 04/2014

In this tax refund case, the taxpayer is a tax-exempt voluntary employees' beneficiary association (VEBA) insurance trust that did not have to file a federal income tax return unless it had unrelated business income.  The taxpayer obtained a membership in a mutual insurance company that later demutualized.  As a result of the demutualization, the taxpayer received approximately $1.5 million in cash that IRS characterized as long-term capital gain with no income tax basis in accordance with Rev. Rul. 71-233.  The taxpayer filed a Form 990T reporting the income as UBIT and paid the associated tax.  At least two additional demutualization proceeds were reported similarly. Later Fisher v. United States, 82 Fed. Cl. 780 (2008) was decided rejecting the IRS position on amounts received in demutualization.  The taxpayer filed an amended return for 2006 and 2008 based on the Fisher case.  The IRS disallowed the refund claims, but later allowed the approved the refunds based on the affirmance of the Fisher case on appeal (333 Fed. Appx. 572 (Fed. Cir. 2009).  However, the IRS Appeals Office determined that the refund claim was not timely filed with respect to the 2004 refund and the plaintiff sued for a refund on Mar. 28, 2013.  The court noted that the taxpayer's 2004 return was filed on Oct. 15, 2004, and that a refund claim had to be filed within three years in accordance with I.R.C. §6511.  The taxpayer argued that I.R.C. Sec. 6511 was inapplicable because the taxpayer was a non-profit entity who was not required to file a return.  The court noted that numerous other courts have rejected the same argument.  On the issue of whether the mitigation provisions of I.R.C. §§1311-1314 provided equitable relief from the statute of limitations, the court noted that IRS had made a final determination which established a basis (by referring to the Fisher case) which meant that, but for the statute of limitations, the taxpayer would have been entitled to a refund.  In addition, the court noted that IRS had taken an inconsistent position between its position taken in the final determination and the IRS's position that demutualization payments are taxable (due to the taxpayer's lack of basis in the payments).  Thus, the taxpayer satisfied the mitigation provisions of I.R.C. §§1311-1314 (the taxpayer satisfied its burden of proof that (1) IRS made a determination that barred it from correcting its erroneous filing; (2) the determination concerned a specific adjustment; and (3) the IRS had adopted a position in the final determination and maintained a position inconsistent with the erroneous inclusion or recognition of taxable gain.  The court granted the taxpayer's motion for summary judgment and IRS is required to make a return for the plaintiff.  Illinois Lumber and Materials Dealers Association Health Insurance Trust v. United States, No. 13-CV-715 (SRN/JJK), 2014 U.S. Dist. LEXIS 59716 (D. MInn. Apr. 30, 2014).      


The plaintiff executed a Warranty Easement Deed in favor of the United States in exchange for $1.5 million. The Deed placed plaintiff’s property in the Wetlands Reserve program with the USDA, but reserved to the plaintiff title, quiet enjoyment, and control of access to the property. Defendants owned the property to the south of the plaintiff’s, and granted a Pond easement to the United States permitting the overflow of water from the plaintiff’s property to run onto defendants’ property, if that should occur. The defendants claimed that the easement granted them the right to use the plaintiff’s property, and they also authorized third parties to do so. The plaintiff filed a trespass action against defendants, seeking to enjoin them from entering the plaintiff’s property and seeking to recoup money earned by the defendants in allowing others to hunt the wildlife. The district court entered summary judgment in favor of the plaintiff, and the appellate court affirmed. The Warranty Easement Deed did not place the plaintiff’s property in the public domain. Standing water in the easement area did not transform it into a navigable stream. The court stated that Arkansas law provides that an owner of part of a bed of a non-navigable stream has ownership of that part of the surface of the stream that lies above the portion of the bed of the stream it owns.  Johnson v. De Kros, No. CV-13-785, 2014 Ark. App. 254, 2014 Ark. App. LEXIS 318 (2014).


 A son of the decedent challenged the circuit court’s interpretation of the decedent’s will, arguing that the court incorrectly considered extrinsic evidence, resulting in a lesser share distributed to his children. The appellate court agreed, ruling that the circuit court should not have relied on extrinsic evidence of intent where the will’s terms unambiguously provided the distribution scheme. Each child of the decedent (or their kin) was to receive 25 percent of the property remaining after payment of expenses. That amount, however, was to be reduced by the stated sum for each bequest, and the residue was to pass, in trust, to the son’s children. On remand, the circuit court was to direct the personal representative to distribute the property accordingly.   In re Estate of Christiansen, No. 2013AP1134, 2014 Wisc. App. LEXIS 348 (Wisc. Ct. App. Apr. 29, 2014).


In this case, the Tax Court held that the IRS failed to timely issue the plaintiff a Notice of Final Partnership Administrative Adjustment (FPAA) and, as a result, couldn't make adjustments to the plaintiff's partnership returns and to returns of individual partners.  Whether the FPAA was timely depended on whether the three-year or six-year statute of limitations for tax assessment applied.  The Tax Court determined that the shorter statute applied.  On appeal, the court noted that the issue turned on whether an omission from gross income exceeded 25 percent of the amount of gross income shown on the return in accordance with I.R.C. Sec. 6501(e)(1)(A)(i).  While court noted that overstated basis cannot constitute an omission from gross income, appellate court noted that Tax Court did not address other argument of IRS that individual partners had failed to disclose more than $10 million in proceeds earned by virtue of liquidation and sale of plaintiff to another entity in a sham transaction.  Tax Court's decision vacated and decision remanded.  Beverly Clark Collection, LLC v. Comr., No. 12-71968, 2014 U.S. App. LEXIS 8086 (9th Cir. Apr. 29, 2014). 


 In 2009, the EPA began developing various rules that would negatively impact U.S. coal production.  One of those rules, the Cross-State Air Pollution rule, imposed a cap-and-trade style program that expanded limitations on sulfur dioxide and nitrogen oxide emissions from coal-fired power plants in 28 "upwind" states.  EPA claimed to have authority to cap emissions that supposedly traveled across state lines.  However, in 2012, the D.C. Circuit Court of Appeals invalidated the rule on the basis that, while the Clean Air Act (CAA) grants the EPA authority to require upwind states to reduce their own significant contributions to a downwind state's non-attainment, the rule could impermissibly require upwind states to reduce emissions by more than their own significant contributions to a downwind state's non-attainment.  The court also held that the EPA failed to allow states the initial chance (as required by statute) to implement any required reductions to in-state sources by quantifying a state's obligations and establishing federal implementation plans.  Indeed, the EPA admitted that the rule would cost the private sector $2.7 billion and force numerous coal-fired power plants to shut down.  However, on further review, the U.S. Supreme Court reversed in a 6-2 decision (Alito not participating).  The Court held that the CAA did not require the states to be given a second opportunity to file a state implementation plan after the EPA has quantified a state's interstate pollution obligations.  The Court also determined that the EPA had properly developed a "cost-effective" allocation of emission reductions among upwind states.  The dissent pointed out that the statute precisely specified the responsibility of upwind states - to eliminate the amount of pollutants that it contributes to downwind problem areas rather than achieve reductions on the basis of how cost-effectively each state can decrease emissions.  The dissent also pointed out that the Court's decision allows unelected bureaucrats to develop plans to implement air-quality standards before a state could have satisfied the benchmarks established in the plans on their own.  Environmental Protection Agency, et al. v. EME Homer City Generation, L.P., et al., Nos. 12-1182 and 12-1183, 2014 U.S. LEXIS 3108 (U.S. Sup. Ct. Apr. 29, 2014). 


Plaintiff alleged that she obtained permission from the defendant  railroad company to cross their tracks on foot to go to and from work each day. One day, a railroad employee approached her, told her she was trespassing, and allegedly proceeded to throw her up against a vehicle and choke her. The employee then, according to the plaintiff, forced her to the ground and handcuffed her, arresting her for trespass, assault and battery, and resisting arrest.  The plaintiff was found not guilty of the charges. She then filed her action against the railroad and its employee, alleging, inter alia, negligence, inadequate supervision and hiring of its employees, and false imprisonment.   The defendants filed motions for judgments on the pleadings. The court dismissed the false arrest claims on statute of limitations grounds, but did not dismiss the negligence claims against the railroad, even though the court was “dubious” as to their viability. The plaintiff had pleaded a sufficient claim. The court ruled that the employee was not entitled to qualified immunity at this stage of the proceedings because some evidence suggested he used excessive force, which was outside the protection of qualified immunity.  Hill v. Allen Simmons & Union Pac. R.R. Co., No. CIV-12-211-KEW, 2014 U.S. Dist. LEXIS 58556 (E.D. Okla. Apr. 28, 2014).

 


The petitioner bought an abandoned restaurant building in the late 1960s and operated it successfully until a kitchen fire shut it down.  The petitioner later reopened the business as a bar which eventually became a strip club.  The petitioner sold that business for moral reasons and opened a pizza parlor about five miles away.  He later reclaimed the strip club because the buyer defaulted on payments.  He continued to operate the club (having apparently jettisoned his prior moral concerns) successfully  and opened other strip clubs and restaurants and participated in strip club trade organizations.  In the late 1980s, petitioner bought farmland adjacent to the strip club and bought additional farmland in the late 1990s near the strip club on which a stable was located.  With the purchases, the petitioner created a 95-acre contiguous plot.  Petitioner relinquished control of the strip club businesses to his children and started an insulation business and used car dealership.  He ultimately terminated involvement in both of those businesses, and turned the 95-acre tract into a horse training facility to support his interest in horse racing.  He expanded the business and obtained a trainer's license.  The petitioner got crosswise with county officials with respect to building codes and his horse activities and ultimately sold the 95-acre tract in 2005 to an unrelated party for $2.2 million in a part-sale part like-kind exchange transaction.  The next year, petitioner bought a 180-acre parcel 16 miles from his home for horse-related activities, where he built a first-class training facility.  Petitioner was deeply involved in the activities, but due to mishaps in the early years involving, in part, disease and death of numerous horses, and his deductions for the four years in issue far exceeded his income from horse-related activities with cumulative losses just shy of $1.5 million.  The court determined that the taxpayer conducted the horse activities in a business-like manner, consulted experts, but significant time into the activities, had a legitimate expectation that the new property would appreciate in value, had successfully conducted other activities that were relevant to an expectation of profit in horse activities, was neutral on the history of loss issue, had a legitimate expectation of future profit, was not an "excessively wealthy" individual and had elements of personal please or recreation for only the first two of the four tax years under review, and while initially started the horse activities without profit objective, turned that intent into one with a profit objective.  As a result, the petitioner had the requisite profit intent for the last two years at issue, but not the first two.  Accuracy-related penalty not imposed, but petitioner liable for addition to tax for one of the tax years under review.  Roberts v. Comr., T.C. Memo. 2014-74.


In this case, an ex-husband participated in his employer's 401(k) and his ex-wife was an alternate payee.  The couple's divorce decree said that the ex-wife was liable for income tax on distributions.  In 2009, the ex-wife (petitioner) received a distribution with she reported as nontaxable pension and annuity income.  The IRS disagreed with that characterization and imposed an accuracy-related penalty.  The court determined that the distribution was includible in petitioner's income because it was not received as part of a divorce decree but as a transfer of property made incident to divorce.  Likewise, her ex-husband's adjusted basis (0) carried over to petitioner.  In addition, the petitioner did not opt to roll the distribution over into an eligible IRA within 60 days of receipt.  Petitioner received the distribution pursuant to a QDRO which provided that petitioner was liable for any tax on distribution.  Accuracy-related penalty upheld.  Weaver-Adams v. Comr., T.C. Memo. 2014-73.


Substantiation of expenses is always important when claiming deductions.  In this case, a married couple deducted over $10,000 associated with employee business expenses and miscellaneous deductions for the husband and over $27,000 associated with the wife's auto expenses attributable to her real estate business.  As for the unreimbursed expenses, the court determined that the husband had failed to demonstrate that the employer would not have reimbursed his expenses if he had requested reimbursement.  Likewise, the wife failed to properly document her auto expenses in accordance with I.R.C. Sec. 274.  The court upheld the imposition of an accuracy-related penalty under I.R.C. Sec. 6662(a) and (b)(2).  Tocher v. Comr., T.C. Sum. Op. 2014-34.   


In 1998, the plaintiff purchased ranch land adjacent to that of defendant.  Before the purchase, the defendant had crossed the land to move cattle and conduct other ranching and recreational operations. After the purchase, a dispute arose between the parties regarding the defendant’s right to cross the plaintiff’s property.  The animosity escalated until the plaintiff filed an action to exclude the defendant from his property. The trial court found that because the defendant had been crossing the property since 1973, he had acquired a prescriptive easement to continue the use. On appeal, the court affirmed. The plaintiff argued that defendant’s use began only through neighborly accommodation and that it could not ripen into a prescriptive easement. The court agreed that Montana law recognizes that land use based upon "mere neighborly accommodation" is not adverse use and cannot ripen into a claim for a prescriptive easement. However, the court stated a landowner's “passive acquiescence” to another's use of his land is not evidence of permissive use. The court found that the evidence supported a conclusion that the defendant’s use began with a claim of right that plaintiff’s predecessor in interest did not contest. One justice dissented, arguing that the evidence established that the defendant’s use was permissive and by neighborly accommodation. The court remanded the case for a redetermination of costs assessed to the plaintiff.  Lyndes v. Green, 374 Mont. 510 (2014).


In this case, the respondents filed an action against the petitioners, seeking a declaration that they had a prescriptive easement to use a road crossing  the petitioners’ property. They also sought nuisance damages and the removal of a gate the petitioners had erected across the road. The action arose because the respondents had built a cabin on their property and used it for recreational purposes for more than 20 years. They had always accessed the property via the road in question, until the petitioners erected a locked gate across the road, blocking access. After a trial, the jury found that the respondents had acquired a prescriptive easement on the private road and that they were entitled to $40,000 in nuisance damages. The trial court ordered the petitioners to remove the gate. On appeal, the court affirmed, finding that the two year statute of limitations did not bar the action (even though the gate had been erected more than two years before the action was filed) because the gate was a continuing nuisance. The court also found that the circuit court did not err in finding sufficient evidence to establish a prescriptive easement. Myers v. Root, No. 13-0757, 2014 W. Va. LEXIS 475 (W. Va. Apr. 25, 2014).


The petitioner owned four rental properties with numerous rental units and was the landlord and maintained them.  He also owned an eight-acre tract that he was developing into a a family amusement center.  The petitioner did not keep a contemporaneous log of his involvement in the rental activities and later tried to reconstruct his activity.  In 2008 and 2009, he claimed a real estate loss of $35,755 and $40,969 respectively.  The IRS disallowed all but $852 of the loss deductions.  The court agreed with the IRS because the petitioner failed to substantiate his activities so as to satisfy the material participation tests.  The petitioner also did not satisfy the real estate professional exception for failure to make the required election under I.R.C. Sec. 469(c)(7) to aggregate all of his rental activities for purposes of the 750-hour test.  The petitioner also did not qualify for the fall-back active participation test because he was phased-out of the $25,000 deduction due to sufficiently high income.  An accuracy-related penalty was not imposed.  Billeci v. Comr., T.C. Sum. Op. 2014-38.


While the child's mother was designated as the custodial parent in a conciliation agreement entered into seven years earlier, that agreement was not reflective of the amount of time that the child spent with each parent for the years at issue.  Also, testimony revealed that the child's father spent a lot of time with the child while the child participated in sports and spent more nights at the father's home than the mother's home.  The court determined that the father was the custodial parent and was entitled to the dependency deduction, dependent care credit, child tax credit and earned income tax credit for the years in issue.  Harris v. Comr., T.C. Memo. 2014-69.


The  IRS issued a ruling on a set of facts involving a proposal to modify three trusts.  The IRS determined that the modifications would not cause the trusts' property to be included in the settlor's gross estate by virtue of either I.R.C. Sec. 2036 or 2038 because the settlor did not retain any possession or enjoyment of, or the right to income from, property transferred to trusts.  In addition, the IRS noted that the settlor could only participate in the trusts' modifications with the consent of the beneficiaries.  Priv. Ltr. Rul.s 201417001 and 201417002 (Dec. 10, 2013).


Alimony payments are deductible, but the payments must satisfy the Internal Revenue Code requirements for alimony.  For example, they cannot be contingent.  In this case, the ex-husband made payments to his ex-wife under a divorce decree that would end when the child graduated from high school.  The court said that violated the non-terminable rule of I.R.C. Sec. 71(c)(2) and, therefore, the payments were not deductible.  That was the case even though the divorce decree contained a specific child support obligation that was separate from the payments for "alimony" and a statement that the "alimony" payments would be deductible.  Johnson v. Comr., T.C. Memo. 2014-67.


Pursuant to authority granted by the Animal Control Act, a county adopted a feral cat ordinance designed to prevent the spread of rabies by reducing and controlling the feral cat population. The ordinance permitted county residents to maintain feral cats, provided they participated in trap, neuter, and release programs sponsored by human societies. Shortly thereafter, a city within the county passed its own feral cat ordinance prohibiting city residents from operating feral cat colonies and fining those who violated the ordinance. The county filed an action alleging that the city had acted outside of its authority and seeking to enjoin the city’s enforcement of its ordinance. The circuit court entered judgment for the county, and, on appeal, the court affirmed. The city’s ordinance was an invalid exercise of its home rule authority under Ill. Const. art. VII, § 6(a). The city also had no statutory authority to pass the ordinance. The court found that the state and its counties had a greater interest and a more traditional role in addressing the issues of animal control and preventing the spread of rabies than did local municipalities. As such, the city ordinance was invalid. County of Cook v. Village of Bridgeview, No. 1-12-2164, 2014 IL App (1st) 122164, 2014 Ill. App. LEXIS 263 (2014).

 


The petitioner, a mechanical engineer, wanted to expand his business into Central and South America and paid $25,000 to a consultant from El Salvador.  The payment was in cash that the petitioner borrowed from family and cash he kept in a lockbox.  The court did not believe the petitioner's testimony and characterized the receipts as unreliable hearsay that didn't prove the payments were actually made.  The court noted that it gave the petitioner a chance to provide an affidavit or other evidence to substantiate the payments, but the petitioner did not do so.  The contract labor expense deduction was denied. Van Velzor v. Comr., T.C. Memo. 2014-71


The line between an employee and an independent contractor is often defined by control.  The characterization has tax implications.  In this case, the petitioner was employed for part of the years at issue by an adult home-care business.  The business treated the petitioner as an independent contractor and issued a Form 1099-Misc and Form 1099-G (reflecting unemployment compensation from the state).  On his return for the year at issue, the petitioner did not report unemployment compensation or compensation from the business and did not report any self-employment tax liability.  The IRS determined that the petitioner was an independent contractor and was liable for self-employment tax.  The court disagreed with the IRS based on numerous factors - (1) the business controlled petitioner's work and specifically enumerated petitioner's duties and required daily reports; (2) the business covered all out-of-pocket costs of petitioner; (3) petitioner did not use his own "tools" in the activity; (4) the petitioner was paid an hourly rate and had no other opportunity for profit or risk of loss; (5) the business retained the right to discharge the petitioner; (6) the work petitioner performed was integral to the business's normal operations; and (7) the parties contemplated an employment relationship.  Accordingly, the petitioner was not liable for self-employment tax, but is liable for an accuracy-related penalty for failure to report income.  Rahman v. Comr., T.C. Sum. Op. 2014-38.


In this case, a doctoral student received a fellowship grant which paid his tuition and fees and provided an additional cash stipend.  IRS awarded a grant to the company of the student's father which paid the student to conduct grant-related research.  The company issued the student a 1099-Misc., but he only reported the amount not used to pay off student loans and other related education expenses.  The student also did not report the income as subject to self-employment tax.  The court determined that the student failed to substantiate the additional education expenses that he claimed were paid with the stipend from the company.  The court also determined that the student was engaged in the trade or business of medical research as an independent contractor of the company and, as a result, the full payment received from the company was subject to self-employment tax.  Wang v. Comr., T.C. Sum. Op., 2014-39.


This case involved a tax shelter and the associated penalties that come along with engaging in such transactions.  The taxpayer, a partnership that had partners participating in the shelter, claimed to have a reasonable belief based on the law and facts involved that its transactions were permissible under the tax laws and that it would likely prevail if challenged.  The taxpayer didn't rely on the advice of counsel, so claimed that it had not waived the attorney-client privilege.  That determination hinged on the state of mind of the managing partner.  IRS argued that opinions of tax lawyers were necessary to determine whether the managing partner conducted an independent review of the law and facts or relied on what he had read in the legal applicable legal opinions.  IRS argued that the taxpayer waived the attorney-client privilege by raising the issue and putting the managing partner's state of mind in issue.  The court agreed, noting that a tax penalty defense that involves a subjective state of mind, requires IRS access to relevant evidence to either prove or disprove that particular intent.   Ad Investment 2000 Fund LLC, et al. v. Comr., 142 T.C. No. 13 (2014)


The hobby loss rules bar deducting expenses that exceed income when a business activity is not engaged in with an intent to make money.  It's a multi-factor analysis that determines whether the taxpayer had the required profit intent.  In this case, a D.O. and his wife started an Amway business which they reported on a Schedule C.  Over a seven-year period, they reported $29,489 in gross receipts and $192,427 in net losses.  IRS audited and this case involved a year in which they had $4,811 of gross receipts and a net loss of $39,919.  For that same year, the petitioners reported over $25,000 in expenses associated with vehicle and travel expenses.  The petitioners sold many of their Amway products out of their home, but did make some trips associated with the business.  The court agreed with the IRS that the petitioners did not engage in the business with a profit intent.  They didn't use their business records to analyze the business or prepare profit projections or make a budget.  They also didn't consult other disinterested professionals about how to conduct the business and had no prior related experience.  Seven consecutive years of substantial losses were present.  Penalties not imposed due to reliance on CPA to prepare returns and maintenance of good records.  Mikhail v. Comr., T.C. Sum. Op. 2014-40 


In an IRS Chief Counsel Legal Advice, the IRS has provided guidance as to the tax effect of guaranteeing debt in an LLC.  Under I.R.C. Sec. 465, losses incurred in the conduct of a trade or business or in an activity where the production of income is desired are deductible to the extent the taxpayer is "at risk."  The amount "at risk" is generally measured by the amount of money and adjusted basis of other property that the taxpayer contributes to the activity and amounts borrowed with respect to the activity.  For an LLC member that guarantees the LLC's debt, the member will be treated as being "at risk" for the amount guaranteed, but only to the extent that the member can't be reimbursed from persons other than the LLC and the debt is bona fide and the LLC's creditors can enforce it.  With respect to LLCs that hold real estate, the IRS position is that LLC liabilities constitute amounts "at risk" if (1) the debt is held for the purpose of holding real estate; (2) the debt is borrowed from a qualified person such as a bank; (3) there is no personal liability for the indebtedness (which eliminates the possibility that one LLC member can make the guarantee, and if so guaranteed, eliminates such guaranteed amount from being included in the amount at-risk by any other member and could cause recapture of previously deducted losses if a member's at-risk amount becomes negative as a result of the member's guarantee); and (4) the indebtedness cannot be converted.  AM2014-003 (Aug. 27, 2013).


Plaintiff seed companies filed an action seeking to invalidate and enjoin enforcement of Kauai County Code § 22-22 (2013), relating to pesticides and genetically modified organisms (GMO). Generally, the provision (which is set to take effect in August 2014) requires commercial agricultural entities to: issue weekly and annual reports regarding their use of "restricted use" pesticides and their possession of GMOs and to establish pesticide buffer zones between crops to which “restricted use” pesticides are applied and surrounding properties. The plaintiffs contended that the law was preempted by state and federal law and that it imposed burdensome operational restrictions violating their due process and equal protection rights. They also alleged that the buffer zone requirement would result in “takings” without just compensation. Several public interest groups sought to intervene in the action, contending that the county (which had limited resources) did not share and would not adequately represent the proposed intervenors’ interests. They argued, in particular, that the county would fail to protect their interests because the mayor had vetoed the bill before the veto was overridden by the county council. The court granted the motion, finding that the intervenors had satisfied the four-part test to intervene as of right under FRCP Rule 24(a)(2). Their motion was timely, they had demonstrated they had a significantly protectable interest, that interest may be impaired by the action, and they showed that the county "may not" adequately represent their interests.  Syngenta Seeds, Inc. v. County of Kauai, No. 14-00014BMK, 2014 U.S. Dist. LEXIS 56344 (D. Haw. Apr. 23, 2014)


The petitioners were three of the four sons (and equal beneficiaries) of a decedent’s estate. The estate, which was poured into trusts, comprised a large operating ranch and mineral interests. The trusts provided that one of the decedent’s sons and the decedent’s nephew were to be the co-trustees. The trusts also provided that none of the remaining sons or their descendants was to ever serve as trustees. The petitioners sought to remove the co-trustees on the grounds of breach of fiduciary duty stemming from the allegation that the co-trustee brother acted with a conflict of interest in serving as both co-trustee and as president of the ranch corporation (the stock of which was held by the trust). In affirming the district court’s denial of the petition, the court found that the petitioners had failed to show that the district court abused its discretion. The record revealed that the co-trustees followed the instructions of the decedent, the brother co-trustee was a CPA who carefully maintained all records, and the trust property was productive. At the heart of the matter, stated the court, was a family farm passed down to beneficiaries who disagreed with the decedent’s decisions. Kavon v. Kavon, No. 13-0576, 2014 MT 100N, 2014 Mont. LEXIS 154 (Mont. Sup. Ct. Apr. 15, 2014).


A decedent left his property, in trust, for his wife and nephews. He also named his wife as the trustee of the trust. A dispute arose between the wife and the nephews regarding her administration of the trust. They filed an action against the wife, arguing that she had an impermissible conflict of interest as both the trustee and the beneficiary. They also argued that the wife breached her fiduciary duties to them in the way she valued the units of a partnership in which the nephews had an interest and in acting hostilely toward them. The trial court dismissed the nephews’ claims and granted relief to the wife as to her counterclaim that the nephews acted in bad faith toward the trust in their administration of the partnership. On appeal, the court affirmed. The decedent created the trust knowing that the wife would be both beneficiary and trustee. Therefore, he condoned this conflict.  The trial court’s finding that the wife acted in good faith in her administration of the trust and did not engage in self-dealing was supported by the evidence. Even if the trial court was required to strictly scrutinize the wife’s actions, the nephew’s did not show that the trial court failed to do so.  The record also supported the trial court’s conclusion that the nephews operated the partnership as though they owned it outright. They intentionally and improperly kept financial records from the wife. Fanetti v. Donald A. & Marilyn J. Fanetti 2004 Rev. Tr., No. 2013AP1870, 2014 Wisc. App. LEXIS 330 (Wisc. Ct. App. Apr. 22, 2014).


The plaintiff, a company that manufactures and sells cement, reorganized.  As a result of the reorganization, a minority shareholder filed a class action suit against the plaintiff claiming that the reorganization constituted self-dealing amongst controlling family members and unfairly diluted the stock of the minority shareholders.  The plaintiff paid $15 million to a trust for the class in settlement of the litigation and also incurred $43,345 in legal fees.  The plaintiff deducted the settlement payment and the legal fees as ordinary and necessary business expenses, but the IRS claimed the amounts were nondeductible capital expenditures.  The court agreed with the IRS on the basis that the amounts originated from or "proximately resulted" from the reorganization transaction.  Ash Grove Cement Company v. United States, No. 13-3058, 2014 U.S. App. LEXIS 7505 (10th Cir. Apr. 22, 2014). 


A grandfather allowed his grandson to keep the grandson’s steers on his property. The cattle were cared for by the grandson and his father. Up to twice a month, the grandfather would provide water to the cattle, but the grandson was the caretaker. One evening after the grandson had cared for the cattle, two steers escaped from the grandfather’s property, causing an accident in which plaintiff was injured. The plaintiff filed a negligence action against the grandfather and the grandson. The grandson filed a motion for summary judgment, alleging that the statutory presumption of negligence arising against the “keeper” or “owner” when an animal was on a public road (O.R.C. §951.02) was overcome and that he did not breach his duty of ordinary care. The grandfather sought summary judgment on the grounds that he was not an “owner” or “keeper” of the cattle, subject to the statutory presumption of negligence. The district court granted summary judgment to the grandfather, but denied summary judgment to the grandson. The court found that because the grandfather did not provide care for the cattle or maintain the gate or structure at issue, reasonable minds could not find that he exercised the requisite control over the cattle, so as to be liable. The court found, however, that a question of fact existed as to whether the grandson had met his duty of care. Vaughn v. Shepard, No. 3:13-cv-258, 2014 U.S. Dist. LEXIS 50441 (N.D. Ohio Apr. 11, 2014).

 


In a recent IRS Chief Counsel Advice, the IRS determined that a marital deduction would not be allowed to the extent that the spousal elective share allowed under state law was paid via assets from a foreign trust.  The trust beneficiary was the decedent's child and the surviving spouse could not access the assets in the trust.  The trust was irrevocable and was administered in a foreign country.  The decedent was a resident of the U.S. at death and his spouse elected the state's elective share which consisted, in part, of assets that passed to the surviving spouse.  On the estate's Form 706, the trust assets were included to fully satisfy the elective share and a marital deduction was claimed equal to the elective share amount.  The trust assets were not eligible for the marital deduction.  C.C.A. 201416007 (Nov. 6, 2013).


The debtors ran a feeding-to-finish pig operation. Two creditors held security interests in the debtor’s livestock and after acquired property. A farm service company provided feed for many of the debtors’ hogs. The creditors and the feed supplier had properly filed financing statements. Six months before the debtors filed for Chapter 12 bankruptcy protection, they sold hogs, and the $209,412.24 proceeds were placed into escrow. After the debtors filed their action, the creditors and the supplier all claimed first priority status in the proceeds. The creditors argued that an Iowa Code §570A.5.agricultural supply lien (which was what the feed suppler asserted) extended only to the livestock, not to the proceeds. As such, they argued that the supplier had no interest in the proceeds of the sale of the livestock. This pre-petition sale, they argued, was different from those cases where a court had ordered livestock sold and the proceeds distributed. Although it found the creditors’ arguments persuasive, the court ruled (in this case of first impression) that an agricultural lien does extend to proceeds. The court found that this position best supported the intent of the legislature to encourage a fluid feed market and remove an incentive to suppliers to race to the court house for repossession of livestock. The court also found consistently with In re Shulista, 451 B.R. 867 (Bankr. N.D. Iowa 2011) and In re Big Sky Farms, Inc., No. 12-01711, Adv. No. 13-09038, 2014 Bankr. LEXIS 1725 (Bankr. N.D. Iowa April 18, 2014) that agricultural supply liens are limited to the 31-day look back period prior to filing a financing statement. The court denied motions for summary judgment, finding that genuine issues of material fact existed as to whether the feed supplier had an agricultural lien on the proceeds of the hogs that were actually sold. The supplier could only claim a lien on the proceeds from those pigs fed by the supplier’s feed and for amounts not already reimbursed.  In re Schley, No. 10-032522014, Bankr. LEXIS 1724 (Bankr. N.D. Iowa Apr. 18, 2014).


The debtor was a Canadian company operating part of its hog business in Iowa.  The debtor filed for bankruptcy protection in Canada in 2012, and the Canadian court appointed a receiver, which filed a Chapter 15 petition. The receiver was authorized to liquidate the debtor’s hogs and distribute the $1.5 million in proceeds to creditors. A farmers cooperative that had supplied feed to the debtor (FCC) submitted a proof of claim for $120,444.51, and the receiver paid FCC only $74,045.15, arguing that the remainder of FCC’s claim was not perfected as a super-priority agricultural lien under Iowa Code §570A because FCC did not file its financing statement within 31 days of selling the feed to the debtor.  FCC filed it adversarial action, alleging that In re Shulista, 451 B.R. 867 (Bankr. N.D. Iowa 2011), which established the 31-day rule, was overruled by the Iowa Supreme Court's decision in Oyens Feed & Supply, Inc. v. Primebank, 808 N.W.2d 186 (Iowa 2011). The court found that the Oyens decision was not dispositive because that case did not address the 31-day filing requirement, but the supplier’s failure to send a statutorily-required certified request. The court found that the plain language of the statute required a supplier to file the financing statement within 31 days of purchase. Oyens did not eliminate every requirement for establishing priority of an agricultural lien in favor of the policy of enhancing a fluid feed market. The court found that FCC had a perfected, super-priority agricultural supply lien for feed purchased during the 31 days preceding the filing of their financing statement ($20,404.03 of the outstanding balance). Farmers Coop. Co. v. Ernst & Young, Inc. (In re Big Sky Farms Inc.), No. 12-01711, 2014 Bankr. LEXIS 1725 (Bankr. N.D. Iowa Apr. 18, 2014).


I.R.C. Sec. 6166(d) specifies that the election is to be made on a timely-filed (including extensions) return in accordance with the regulations.  The regulations are detailed, and require that the appropriate box on Form 706 be checked and a notice of election be attached to the return.  The notice of election must also contain certain information.  In this case, however, the estate filed for an extension of time to file and included in that filing a letter that expressed the estate's intent to make an installment payment election and estimated that approximately $10,000,000 in tax would be paid in installments.  A subsequent request for an additional extension was made along with another letter containing some of the required information for an I.R.C. Sec. 6166 election.  IRS denied the second extension and informed the estate to file by the previously extended due date.  The estate ultimately filed its estate tax return late and attached a proper notice of election to pay the tax in installments.  IRS rejected the election for lack of timely filing, but estate claimed that it substantially complied.  The court determined that the estate's letters did not contain all of the information required by the regulations to make the election, particularly valuation information to allow IRS to determine if the percentage qualification tests had been satisfied.  Thus, the estate did not substantially comply with the regulations and the election was disallowed.  Estate of Woodbury v. Comr., T.C. Memo. 2014-66.


In this case, the decedent was a 53-year-old mother of two who died of brain cancer. Four days before her death, her friends and family held a benefit auction for the purpose of raising money to assist the decedent with medical expenses. The auction raised $5,174, but none of the money was placed in the decedent’s control before she died. The companies in charge of the auction thus donated the money to charity as a memorial to the decedent. In his final report to the court, the decedent’s executor (her brother) did not include the benefit money as part of the estate’s assets. Her sons objected to the final report on that basis, but the district court overruled their objections. The sons filed their notice of appeal one day late, and the court ruled that it did not have jurisdiction to hear the appeal. Nonetheless, the court stated that the claims would have failed on the merits. There was insufficient evidence presented by the sons, the court said, to show that the donors intended their donations to be present “gifts” to the decedent. In re Estate of Braner, No. 13-1014, 2014 Iowa App. LEXIS 417 (Iowa Ct. App. Apr. 16, 2014).    


Here, an irrevocable trust with a South Dakota situs was created for the settlor's three children.  A trust protector was designated that had "the power to represent the Trust with respect to any litigation brought by or against the Trust if an Trustee is a party to such litigation" and "to prosecute or defend such litigation for the protection of Trust assets."  Ultimately, the children who were the beneficiaries and trustees liquidated the trust and distributed the proceeds outright to themselves.   The trust protector sued on the grounds that the liquidation and termination was wrongful and frustrated the trust's intent.  The children filed a motion to dismiss and argued that the trust protector was not a party in interest and couldn't sue on the trust's behalf.  The court granted the motion to dismiss because, under South Dakota law, trust protectors are not a real party in interest with respect to trust litigation matters and personally didn't suffer any harm from the termination of the trust.  Schwartz v. Wellin, No. 2:13-cv-3595-DCN, 2014 U.S. Dist. LEXIS 53083 (D. S.C. Apr. 17, 2014). 


In this case, the IRS denied a first-time homebuyer credit (FTHBC) in a transaction involving a mother and her son.  Two properties were involved.  The mother conveyed property "A" to a third party who then conveyed it to the son later the same day.  While the home purchase was completely financed, the son never made full payment for the house pursuant to the purchase contract.  The son and his wife claimed a FTHBC for the home, but IRS denied the credit on the basis that the home was purchased from the mother via a lender who never had full possession of the home before its sale.  The court agreed with the IRS on the basis that the substance of the transaction was a purchase of the home was, in reality, a purchase from the mother.  Basically the same set of facts involved property "B".  The FTHBC that was claimed for that property was ultimately returned after consultation with IRS.  Moreland v. Koskinen, No. CV-13-S-579-NW, 2014 U.S. Dist. LEXIS 53308 (N.D. Ala. Apr. 17, 2014).


In this Chief Counsel's Advice, the facts involved a taxpayer that had purchased a rental property for $1 million via a recourse loan.  The property generated suspended passive activity losses.  Later, a lender foreclosed on the property when the balance owed on the loan was $900,000, the fair market value was $825,000 and income tax basis was $800,000.  The transaction, therefore resulted in $25,000 of gain realized and recognized to taxpayer and CODI of $75,000.  The taxpayer was insolvent and, therefore, the CODI was excluded from income under I.R.C. Sec. 108(a)(1)(B).  The IRS determined that the transaction was a "fully taxable transaction" in accordance with I.R.C. Sec. 469(g)(1)(A) which freed-up the suspended losses to be used against the taxpayer's other income.  The suspended losses were not reduced as a tax attribute due to the suspended losses.  While there is no regulation that governs the situation (Treas. Reg. Sec. 1.469-6 is reserved) IRS determined that legislative history showed that the "fully taxable transaction" rule was intended to apply to any situation where the ultimate gain or loss could be determined.  C.C.A. 201415002 (Feb. 11, 2014).


The plaintiff in this case, a Christian religious corporation, objected to Obamacare's mandate (as part of the "preventative care coverage requirement") that group health plans provide coverage for abortion or abortifacient-related services as a violation of the corporation's First Amendment rights and places a substantial burden on the exercise of their religious beliefs.  The plaintiff sought a preliminary injunction against enforcement against the provision.  While Obamacare provides an exemption from the mandate (created by regulation after enactment when various religious groups objected to the mandate), court noted that such exemption merely transfers the mandated obligation and related penalty to a third party, but still forces plaintiff's employees to be provided the objectionable services; court held that completion of form for exemption resulted in violation of plaintiff's sincerely held religious beliefs and amounted to "forced facilitation of the objectionable coverage that is religiously repugnant to the plaintiff..." and constituted compelled government force to act in violation of religious beliefs.  The court noted that the U.S. Court of Appeals had already rejected the government's arguments in a case presently pending with the U.S. Supreme Court.  The court determined that the plaintiff was likely to prevail on the merits of their claim, that the balance of the harms weighed in the plaintiff's favor, and that the public interest was served by enjoining enforcement of the mandate.  Thus, the court issued the preliminary injunction to remain in effect until modified or rescinded by the court's order).  Dobson, et al. v. Sebelius, et al., No. 13-cv-03326-REB-CBS (D. Colo. Apr. 17, 2014).


The defendant, a dairy farm, filed for Chapter 11 bankruptcy protection. Thereafter, the plaintiff entered into a contract with defendant to lease 240 cows to defendant for $13,056 per month for 48 months. The plaintiff began delivering the cows to the defendant several weeks after the court confirmed the plan. The defendant made regular payments under the lease until a principal of the defendant was seriously injured in a farm accident and the defendant was forced to cease operation of the farm. The defendant then breached its lease and the plaintiff retrieved the cows. The plaintiff filed a breach of contract action against the defendant, and the defendant argued that court approval was necessary for the lease because the lease was not an unsecured transaction. In granting partial summary judgment in favor of the plaintiff, the court ruled that the lease was enforceable against the defendant as debtor-in-possession because this was a post-petition contract negotiated by the debtor-in-possession on behalf of the estate. Sunshine Heifers, LLC v. Moohaven Dairy, LLC, No. 13-10319, 2014 U.S. Dist. LEXIS 52294 (E.D. Mich. April 16, 2014).


The defendant enrolled land in the Conservation Reserve Program (CRP) and received CRP payments from the USDA until 1998, when the defendant sold the property to another party. In exchange for the CRP payments, the USDA required the defendant to plant hardwood trees on the property.  The defendant did not plant the trees. The plaintiff purchased the property in 2001, and continued to participate in the CRP program. When the plaintiff attempted to sell the property in 2009, it discovered that the defendant had not planted the promised trees and that the USDA was investigating. The USDA required the plaintiff to repay all CRP payments made on the property since 1998, even those made to prior owners. The plaintiff filed an administrative appeal, but the USDA upheld the decision. The plaintiff then filed its action seeking relief from the defendant and judicial review of the USDA’s decision. The court granted defendant’s motion to dismiss all claims by the unjust enrichment claim on the grounds that they were barred by the statute of limitations. The plaintiff did not fail to join a necessary party. Welsh Farms, LLC v. United States Dep't of Agric., No. 3:12CV410 DPJ-FKB, 2014 U.S. Dist. LEXIS 51915 (S.D. Miss. Apr. 15, 2014).


Plaintiff and defendant were neighbors who purchased their property from a common owner. The plat recorded by the original owner showed a 30-foot wide easement benefiting what became plaintiff’s property and burdening what became defendant’s property. An eight-foot-wide unpaved road sat within the easement. When the owner sold the property to defendant, he attached a Road Relocation Agreement (Agreement) to the recorded deed. The Agreement contemplated the construction of a new road, part of which would be located outside of the original easement. The Agreement stated that the “relocated easement shall equal to the ‘as built’ dimensions and location of the road to be constructed.” A new 10-12 foot wide paved road was constructed, and the owner sold the second lot to plaintiff. The deed contained language nearly identical to the terms of the Agreement regarding a relocated easement. When a dispute regarding the easement arose, plaintiff filed an action against defendant, seeking to quiet title to a 30-foot easement, alleging interference with his right to an easement, and asserting trespass and nuisance claims. The trial court determined that the Agreement modified the express easement, making the easement’s dimensions coextensive with those of the paved road. On appeal, the court affirmed, ruling that the unambiguous terms of the Agreement dictated a finding that the Agreement relocated the entire easement. The court also found that the trial court did not err in finding that defendant did not create a nuisance or act intentionally in damaging plaintiff’s video camera. Plattner v. Bonnett, No. 43938-7-II, 2014 Wash. App. LEXIS 883 (Ct. App. Wash. Apr. 15, 2014).    


In 1995, the decedents created a revocable living trust in which they specified that their property was to be distributed equally among their three children. In 2000, they amended paragraph 3.4 to provide that the farm assets were to be distributed to the daughter. In 2006, they again amended the trust, replacing paragraph 3.4 with a paragraph again distributing all assets equally among their children. After the death of the second decedent, the trustee (a bank) sought to reach a family agreement as to asset distribution.  The daughter contended, however, that she was still entitled to all of the farm assets. The district court ruled that the amendment unambiguously stated that the property, including the farmland, was to be distributed equally among the three children. The daughter appealed, arguing that she was entitled to discovery to show that her parents intended for her to receive the farm property. On appeal, the court affirmed, ruling that the district court did not err in ruling that the property should be distributed in equal shares. Because the amendment was unambiguous, no evidentiary hearing was required. In re H & A Neumann Revocable Trust, A13-1150, 2014 Minn. App. Unpub. LEXIS 313 (Minn. Ct. App. Apr. 14, 2014).


The defendant’s vehicle crashed into the back of plaintiffs’ vehicle while she was attempting to stop in traffic on an icy road. The plaintiffs filed a negligence action against the defendant, and the trial court gave a sudden emergency instruction to the jury. The jury found in favor of defendant, and the plaintiffs appealed. On appeal, the court affirmed, ruling that the trial court had not abused its discretion in giving the sudden emergency instruction. The instruction was proper where (1) the defendant must not have created or brought about the emergency through his own negligence; (2) the danger or peril confronting the defendant must appear to be so imminent as to leave no time for deliberation; and (3) the defendant's apprehension of the peril must itself be reasonable. The court noted that the sudden emergency doctrine was not an affirmative defense, but rather a circumstance to be considered. The evidence supported the issuance of the instruction because the weather was warm when the defendant began her journey. She did not realize the conditions were icy until she was unable to stop.  Darland v. Rupp, No. 06A04-1308-PL-403, 2014 Ind. App. Unpub. LEXIS 494 (Ind. Ct. App. Apr. 14, 2014)


A two-year old plaintiff visited a retail store located on a farm. He was injured when a horse he was petting bit him, removing a large portion of his cheek. In an action for damages, the owner moved for summary judgment, arguing that he had no actual or constructive knowledge of any vicious tendencies of the specific horse that bit the plaintiff. The district court granted summary judgment, but the appeals court reversed, holding that negligence can be proven against the owner of a domestic animal by proof of “natural propensities” of the species to “do mischief or be vicious,” rather than only proof of the tendencies of a specific animal.  On appeal, the Connecticut Supreme Court affirmed, finding that, as a matter of law, the owner or keeper of a domestic animal has a duty to take reasonable steps to prevent the animal from causing injuries that are foreseeable because the animal belongs to a class of animals that is naturally inclined to cause such injuries, regardless of whether the animal had previously caused an injury or was roaming at large. The Court found that there was a genuine issue of material fact as to whether it was reasonably foreseeable that the horse would bite the minor plaintiff causing his injury because horses, as a species, have a natural inclination to bite. The Court remanded the case for trial. Vendrella v. Astriab Family Ltd. P'ship, No. 18949, 311 Conn. 301, 2014 Conn. LEXIS 79 (Conn. Sup. Ct. April 14, 2014).


The plaintiffs were the parents of a child who was injured when he fell off a horse at the defendants’ riding establishment. The plaintiffs alleged that the defendants were negligent in failing to train and supervise the riders. The trial court granted summary judgment to the defendants on the grounds that they were immune from suit under the Equine Activities Liability Protection Act ("the Equine Act"), codified at § 6-5-337, Ala. Code 1975. The Equine Act provided immunity to equine professionals for personal injuries resulting from “equine activities.” On appeal, the plaintiffs argued that the defendants were not immune under the Equine Act because the accident fell under the statutory exception of failing to make "reasonable and prudent efforts to determine a rider’s ability to engage safely in horseback riding.” The court disagreed and affirmed the trial court’s judgment in favor of the defendants. The evidence was undisputed that the injury to the child occurred as a result of the horse becoming startled, or the "propensity of an equine to behave in ways that may result in injury, harm, or death to persons on or around them" and because of the "unpredictability of the reaction  of the horse to other animals" as set forth in Ala. Code § 6-5-337(b)(6)(a) and (b).  Estes v. Stepping Stone Farm, LLC, No. 2120519, 2014 Ala. Civ. App. LEXIS 65 (Ala. Ct. Civ. App. Apr. 11, 2014).


Often it is believed that an IRS tax lien can only attach to real estate or bank accounts.  This case, however, points out that an IRS tax lien can attach to other property that the taxpayer owns or receives.  The decedent owned a building that was damaged in a fire.  An insurance company paid $50,000 in insurance proceeds.  A bank held a perfected first-priority lien over judgment liens and tax liens and was awarded over $24,000 in accordance with the lien.  The IRS sought entitlement to the remaining funds in accordance with its tax lien covering over $300,000 in unpaid federal income tax that the decedent owed from prior tax years.  The court determined that the IRS lien priority was based on first-in-time, first-in-right analysis because only competing lienholder was state revenue department which didn't implicate I.R.C. Sec. 6323(f) (state revenue department was not a purchaser, judgment lien holder or holder of security interest).  Owners Insurance Company v. McDaniel, et al., No. 2:13-dcv-882-JHH, 2014 U.S. Dist. LEXIS 48934 (N.D. Ala. Apr. 9, 2014).


In this case, the petitioner was a lawyer in Minnesota that had a client that introduced him to horse racing.  He got heavily involved in horse breeding activities in Louisiana.  The petitioner sustained losses associated with his horse activities and IRS limited deductibility under the passive loss rules of I.R.C. Sec. 469, conceding that petitioner was engaged in the horse activities with a profit intent.  Court determined that petitioner satisfied material participation test of I.R.C. Sec. 469 based on telephone logs, credit card invoices, and other contemporaneous materials including trips to Louisiana, buying insurance, recordkeeping and continuing education.  Court did not require petitioner to call customers as witnesses.  Tolin v. Comr., T.C. Memo. 2014-65. 


A married couple had a child, but later divorced.  The ex-wife had custody of the child, but the parties later agreed that the ex-husband could claim the dependency deduction for any year that the ex-husband was current with child support.  That agreement became part of a court order.  However, the IRS determined that the court order was insufficient to give the ex-husband the dependency deduction because the court order was not a "written declaration" signed by the custodial parent.  Such written declaration must be made on either Form 8332 or on a statement that conforms to Form 8332.  In addition, Treas. Reg. Sec. 1.152-4(e)(1)(ii) specified that a court order or decree or a separation agreement may not serve as a written declaration for tax years beginning after Jul. 2, 2008.  While this matter involved a pre Ju. 2, 2008 agreement, it still failed the I.R.C. Sec. 152(e)(2)(A) signature requirement and the requirement that the agreement wasn't unconditional.  Swint v. Comr., 142 T.C. No. 6 (2014).


The taxpayer was a C corporation that gave various personal care products (various hair care products, and other bath and body products) to charity.  I.R.C. Sec. 170(e)(3)(A) allows for an enhanced charitable deduction for donated property used exclusively for the ill, needy or infants.  The IRS determined that the donation did not qualify for the enhanced deduction because the donated items were not used solely for the care of the ill, needy or infants.  Instead, the IRS determined that the donated items were luxury items rather than necessities.  C.C.A. 201414014 (Aug. 23, 2013). 


A mother died, leaving her two sons as beneficiaries and executors of her estate. One son purchased the home from the estate at a price of $215,000. The deed was given from the two brothers, individually and as executors of their mother’s estate, to the purchasing brother. The purchasing brother claimed an $8,000 first-time homebuyer’s credit on his 2008 tax return. The IRS denied the credit on the grounds that the brother, as a beneficiary of his mother’s estate, purchased the home from a related person, namely the executors of the estate. The purchasing brother alleged that he was entitled to the credit because siblings are not “related persons” under IRC §36(c)(3)(A)(i) and he purchased the house from his brother. Affirming the tax court, the Third Circuit Court of Appeals disagreed, finding that while the definition of related persons in the statute exempted siblings, it included “an executor of an estate and a beneficiary of such estate.” The documentation attendant to the transfer supported the determination that the taxpayer purchased the property from the estate, not from his brother as an individual. New Jersey law specifying that property vests immediately in the beneficiaries upon the death of the decedent did not mean that title transferred to the brothers upon their mother’s death.  Zampella v. Comm'r, No. 13-1672, 2014 U.S. App. LEXIS 6245, 2014-1 U.S. Tax Cas. (CCH) P50250 (3d Cir. Apr. 4, 2014).


In a case pending since 2004, the Kansas Court of Appeals reversed a district court order that had severely restricted the definition of the class of plaintiffs authorized to sue defendant for alleged price fixing in violation of the Kansas Restraint of Trade Act (the “Act”). Plaintiffs alleged that the defendant, a manufacturer and retailer of handbags, accessories, and luggage, violated the Act by illegally fixing the prices its independent retailers could charge for its products. The district court originally granted summary judgment in favor of the defendant, based upon Leegin Creative Leather Products v. PSKS, Inc., 551 U.S. 877 (2007).  In that case, the U.S. Supreme Court held that resale price maintenance agreements (the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance)) were subject to a "rule of reason" analysis.  But the Kansas Supreme Court reversed in 2012, ruling that the United States Supreme Court case was inapplicable since the case was based on the Kansas Act, not federal law, and that Kansas law held that resale price maintenance agreements were per se unlawful.  On remand, the defendant had asked the district court to decertify the class, and the district court had significantly modified the class to include only those consumers who had purchased the defendant’s luggage from an exclusive luggage seller.   In it's remand opinion, the Kansas court of Appeals stated that its opinion would have “very limited precedential value going forward” since it was applying the Kansas Restraint of Trade Act before it was substantially reworked by the Kansas Legislature in April of 2013.  Indeed, in its 2013 session, the Kansas legislature abrogated the Kansas Supreme Court's opinion in the case by passing legislation (which was later signed into law) reestablishing a rule of reason analysis for resale price maintenance agreements under Kansas antitrust law.  Accordingly, such agreements will not be deemed unlawful if they are reasonable.   [Note:  Some states still deem resale price maintenance agreements to be per se unlawful and there is opposition to the 2006 U.S. Supreme Court opinion in the U.S. Congress.  Thus, businesses that have national resale networks should carefully consider the legality of such agreements.] The Kansas Court of Appeals went on to find that the district court had applied erroneous legal principles in excluding most of the class because of the mere existence of one or more individual questions. The district court also failed to rigorously analyze the class certification factors. As such, the court could not grant meaningful review of the district court’s exercise of discretion. The court remanded for further proceedings in accordance with the opinion.  O’Brien v. Leegin Creative Leather Products, Inc., No. 108,988, 2013, Kan. App. Unpub. LEXIS 221 (Kan. Ct. App. Apr. 4, 2014).


 Plaintiff filed his action against the Farm Service Agency (FSA), alleging that an FSA employee violated state and federal privacy laws by disclosing private information to plaintiff’s former tenant. Plaintiff leased 110 acres of farmland to the tenant under a lease that became voidable in the event that plaintiff sold his property.  In March of 2011, plaintiff contacted his tenant to inform him that the land was no longer available for lease because plaintiff had sold the property. At some point, an FSA agent told the tenant that plaintiff sold only 40 acres of the parcel and that plaintiff had leased the remaining 70 acres to another party. The tenant filed a breach of contract action against the plaintiff, which the plaintiff won. The plaintiff then filed his action, alleging that the FSA employee had violated Wis. Stat. §995.50(2)(c) and 5 U.S.C. §552a by disclosing the information. The defendant sought dismissal of the action, alleging that the information allegedly disclosed was publically available. Finding that plaintiff had stated a “barely plausible claim,” the court denied the motion to dismiss, allowing the claims to continue through discovery.  The court did dismiss plaintiff’s separate claim under the Food Conservation and Energy Act outright.  Mitchell v. USDA Farm Service Agency, No. 13-cv-500-bbc, 2014 U.S. Dist. LEXIS 46884 (W.D. Wis. April 4, 2014).


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