Annotations 12/2015

The petitioner is a lawyer that also purchased a 1,300-acre farm.  The petitioner entered into a crop-share arrangement with a tenant under which the tenant had responsibility for farming decisions.  The petitioner spent time during the tax years in issue performing maintenance activities on the farm including cutting vegetation, maintaining fences and shooting wild hogs.  Based on the petitioner's reconstructed records, the court was convinced that the petitioner put in more than 100 hours into the activity and that no one else put in more hours than the petitioner.  Thus, the petitioner was deemed to materially participate in the activity and the losses from the activity were not limited by the passive loss rules.  Leland v. Comr., T.C. Memo. 2015-240.


This case involved the donation of two permanent "conservation" easements inside a gated residential development on developed golf courses in North Carolina that were expanding with the stated purpose to protect a "natural habitat" or provide "open space" to the public.  The sole issue in the case was whether the conservation purpose of I.R.C. Sec. 170(h) had been satisfied by virtue of the easements protecting the natural habitat of various plant and animal species, including the Venus Flytrap.  The donated easements at issue generated claimed deductions of approximately $8 million.  The court noted that while the easements did include some stand of longleaf pine, the easement terms allowed the pines to be cut back from the fairways and the surrounding housing development.  Also, the court opined that the easement did not contain any requirement that an active management plan be followed to mimic the effects of prescribed burning that would allow the pines to mature in a stable condition.  Also, the court stated that the I.R.C. Sec. 170 regulations concerning a "compatible buffer" that contributed to the viability of a conservation area were not satisfied.  While the mere fact that a golf course was involved did not negate the possibility of a valid conservation easement donation deduction, the fact that the golf course was in a gated community eliminated the argument that the donation was to preserve "open space" for the general public.  The court, while denying the claimed deductions, however, did not uphold the imposition of penalties.  Atkinson v. Comr., T.C. Memo. 2015-236.     


The parties executed a partition line fence agreement and recorded it in the fall of 2013.  Under the agreement, the plaintiff was responsible for a portion of the fence between their farms and the defendant was also responsible for a specific portion.  The newly constructed fence was to be a "tight fence" and specifics were provided as to how the fence was to meet that requirement.  As for the defendant, the agreement not only specified the portion of fence the defendant was responsible for, but set deadlines for having the fence built to those specifications.  The defendant hired a fence builder, but never showed the agreement to the builder before leaving to winter in Arizona.  The defendant's portion of the fence was not built to specification and was not built in a timely manner.  The plaintiff sued and the trial court awarded damages for work done to bring the fence into compliance, for repair of a tile line, for reseeding and for lost rent in 2014.  On appeal, the court affirmed.  Brookview Farms, LLC v. Wennes, No. 14-1318, 2015 Iowa App. LEXIS 1159 (Iowa Ct. App. Dec. 9, 2015).


The plaintiff obtained shares of stock upon demutualization of an insurance company.  The plaintiff later sold some of the shares of stock and the defendant asserted that the plaintiff's income tax basis in the stock was zero triggering 100 percent gain on the sale of the shares.  The trial court rejected the defendant's position, and set forth the computation for calculating basis in stock shares received upon demutualization.  The court grounded the computation of stock basis in the same manner in which  the insurance company determined the value of demutualized shares for initial public offering (IPO) for purposes of determining how many shares to issue to a policyholder.  Based on that analysis, the court noted that the company calculated a fixed component for lost voting rights based on one vote per policy holder and a variable component for other rights lost based on a shareholder's past and anticipated future contributions to the company's surplus.  The court estimated that 60 percent of the plaintiff's past contributions were to surplus and 40 percent was for future contributions to surplus which the plaintiff had not actually yet paid before receiving shares and are not part of stock basis; thus, plaintiff's basis in stock comprised of fixed component for giving up voting rights and 60 percent of the variable component representing past contributions to surplus the end result was that the plaintiff's stock basis was slightly over 60 percent of IPO value of stock.  On further review, the U.S. Court of Appeals for the Ninth Circuit reversed in a split opinion.  The court determined that the plaintiff's didn't pay any additional amount for the mutual rights and that treating the premiums as payment for membership rights was inconsistent with how tax law treats insurance premiums. The court noted that under the tax code gross premiums paid to buy a policy are allocated as income to the insurance company and no portion is carved out as a capital contribution.

Conversely, the policyholder can deduct the "aggregate amount of premiums" paid upon receipt of a dividend or cash-surrender value. No amount is carved out as an investment in membership rights. Because of that, the court held that the plaintiff's couldn't have a tax-free exchange with zero basis and then an increased basis upon later sale of the stock. Accordingly, the court held that the trial court erred by not determining whether the plaintiffs paid anything to acquire the mutual rights, and by estimating basis by using the stock price at the time of demutualization instead of calculating basis at the time of policy acquisition. Thus, because the taxpayers did not prove that they paid for their membership rights as opposed to premiums payments for the underlying insurance coverage, they could not claim any basis in the demutualized stock.  Dorrance v. United States, No. 13-16548, 2015 U.S. App. LEXIS 21287 (Dec. 9, 2015), rev'g., No. CV-09-1284-PHX-GMS, 2013 U.S. Dist. LEXIS 37745 (D. Ariz. Mar. 19, 2013).


The petitioner, a banker, and spouse contributed a permanent conservation easement on more than 80 acres to a land trust, valuing the easement at $1,418,500 million.  They claimed a phased-in deduction over several years.  The IRS, on audit, proposed the complete disallowance of the deduction and sought a 20 percent penalty or a zero valuation of the easement and a 40 percent penalty for gross overvaluation of the easement.   IRS Appeals took the position that the 40 percent penalty should apply due to a zero valuation of the easement, and that if that weren't approved judicially a 20 percent penalty for valuation misstatement should apply.  The parties stipulated to a easement valuation of $80,000 and that the petitioner had no reasonable cause defense to raise against the 40 percent penalty, but that the defense could apply against the 20 percent penalty.  The court upheld the 40 percent penalty.  The IRS also conceded, in order to clear the table for the penalty issue, that the petitioner, a non-farmer, was not subject to self-employment tax on CRP rental income for years 2007, 2008, 2009 and 2010.  The concession was made after the IRS issued it's non-acquiescence to the Morehouse decision in the 8th Circuit in which the court determined that CRP rents in the hands of a non-farmer were not subject to self-employment tax.  Legg v. Comr., 145 T.C. No. 13 (2015).     


The IRS has announced on its website that for estate tax returns (Forms 706) filed on or after June 1, 2015 that account transcripts will substitute for an estate closing letter.  Registered tax professionals that use the Transcript Delivery System (TDS) can use the TDS as can authorized representatives that use Form 4506-T, and requests will be honored if a Form 2848 (Power of Attorney) or Form 8821 (Tax Information Authorization) is on file with the IRS.  The IRS provided instructions and noted that Transaction Code 421 on the website will indicate that the Form 706 has been accepted as filed or that the exam is complete.  IRS also noted that a transcript can be requested by fax or by mail via Form 4506-T to be mailed to the preparer's address.  Certain items are necessary to document that the preparer has the authority to receive the transcripts - letters testamentary (or equivalent), Form 56 (Notice Concerning Fiduciary Relationship), Form 2848 and any other documentation that authorizes the party to receive the information.  The IRS noted that its decision whether or not to audit any particular Form 706 is usually made four to six months after the Form 706 is filed, and that the transcript should not be requested until after that time period has passed.  IRS Webpage, "Transcripts in Lieu of Estate Closing Letters," (Dec. 4, 2015).


The defendant is a large herb grower that became the subject of a class action accusing the defendant of mixing organic and conventionally grown herbs in the same package and selling the package at a premium as "fresh organic."  The class sued under state (CA) unfair competition and false advertising laws.  The trial court held that the class action was preempted by federal law governing organic labeling.   On appeal, the CA Supreme Court reversed.  The court noted that the federal Organic Foods Act displaced state law concerning organic standards and thereby created a federal definition of "organic" and created a federal organic certification procedure.  The court, however, determined that federal law did not either explicitly or implicitly preempt state rules for mislabeling.  Likewise, the court held that state consumer protection law furthered the Congressional objective of ensuring reliable organic standards.  Quesada v. Herb Thyme Farms, No. S216305, 2015 Cal. LEXIS 9481 (Cal. Sup. Ct. Dec. 3, 2015).   

 


The plaintiffs, a consortium of environmental activist groups and community organizers, sued the Environmental Protection Agency (EPA) for not responding to their 2011 petition that alleged that ammonia gas from confined animal feeding operations (CAFOs) endangered public health and welfare, should be designated as a "criteria pollutant" under the Clean Air Act (CAA), and that National Ambient Air Quality Standards should be established for ammonia.  The plaintiffs sought to compel the EPA to respond within 90 days and also claimed that the EPA had violated the Administrative Procedures Act (APA) by not responding.  However, the court ruled that it lacked subject matter jurisdiction to hear the petition, because the plaintiffs should have brought suit under the CAA which requires a 180-day notice before filing.  Because the CAA provided a remedy for the plaintiffs, they were required to sue under the CAA before attempting to sue under the APA. The petition was dismissed.  The plaintiffs have stated in another court filing that they will provide the required 180-day notice and sue under the CAA.  Environmental Integrity Project, et al. v. United States Environmental Protection Agency, No. 15-0139 (ABJ), 2015 U.S. Dist. LEXIS 160578 (D. D.C. Dec. 1, 2015).


The plaintiff brought a declaratory judgment action concerning the ownership and control of a tract of land that they claimed their predecessor-in-interest obtained a fee simple interest in via right-of-way deeds signed in 1917 and 1918.  The deeds in issue were captioned "right of way" and stated, that the property owners “grant, sell and convey, and forever release to the people of the County of Sargent, in the State of North Dakota, right of way for the laying out, construction and maintenance of a public drain, as the same may be located by the Board of Drain Commissioners, through said above described lands, being a strip of land . . . [described]. And we hereby release all claims to damages by reason of the laying out, construction and maintenance thereof through our said lands.”  The trial court determined that the deed language was ambiguous and considered extrinsic evidence to determine the intent of the parties to the deeds.  Ultimately, the trial court held that the deeds granted fee simple title to the plaintiff’s predecessor.  On appeal, the court reversed.  The appellate court held that the plain language of the deeds conveyed an easement by explicitly stating that they granted a “right of way” through the specified land, and limited the purposed of the right of way for the laying out, construction and maintenance of a public drain.  Sargent County Water Resource District v. Mathews, et al., No. 20140451, 2015 N.D. LEXIS 294 (N.D. Sup. Ct. Dec. 1, 2015).


CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

RSS​ Facebook Twitter