Annotations 04/2015

The decedent, shortly before death, executed a will that revoked his prior will.  The last will completely changed  the disposition of the decedent’s estate by leaving the decedent’s farm to his daughter in contrast the prior wills that had benefitted the decedent’s son that had worked on the farm for his entire life.  The daughter offered the last will for probate.  The probate court determined that, based on the evidence, the daughter had unduly influenced the will and had not offered it for probate in good faith.  On appeal, the court affirmed.  The court found it persuasive that the last will deviated from the disposition pattern of prior will that had benefitted the son, that testimony showed that the decedent’s state of mind and physical and mental condition was poor and that the circumstances surrounding the drafting and execution of the will compelled a conclusion of undue influence.  As a result the, the trial court’s determination was upheld.  In re Estate of Hanson, No. 11-13-00113-CV, 2015 Tex. App. LEXIS 4400 (Tex. Ct. App. Apr. 30, 2015).


Effective August 28, 2011, Mo. Rev. Stat. Ch. 537.296 replaced the common law of private nuisance to bar recovery for non-economic damages caused by an alleged ag nuisance.  A contract hog production operation was sued on a nuisance theory for odors and other "hazardous emissions" that allegedly substantially impaired the plaintiffs' use and enjoyment of their property.  The plaintiffs made no claims that the odors, etc., caused any reduction in the value of their properties.  Instead, the plaintiffs challenged the constitutionality of the law.  The court rejected the multiple constitutional claims because the law was tied to the legitimate state interest of promoting the agricultural economy and protecting it from frivolous lawsuits.  Labrayere, et al. v. Bohr Farms, et al., 458 S.W.2d 319 (Mo. 2015). 


This case involves the defendant's cow that escaped from its pen and was hit by a cattle truck on a state highway in western Kansas.  The case was initially filed in Federal District Court in Colorado, but that court (Sage v. Bird City Dairy, LLC, No. 12-cv-02985-RBJ, 2013 U.S. Dist. LEXIS 51056 (D. Colo. Apr. 8, 2013)) determined that Colorado lacked personal jurisdiction over the defendant due to lack of contact with Colorado.  However, the court transferred the case to Kansas rather than dismissing it because the statute of limitations would have run if the plaintiff had to refile, and the plaintiff's claims were colorable, and there was an absence of bad faith in choosing to file suit in Colorado.  The Kansas court denied the defendant's motion for summary judgment because the plaintiff raised genuine issues of material fact as to how the cow escaped based on circumstantial evidence and that the evidence supported an inference that workers on the defendant's premises that day were the defendant's agents.  While the cows in the enclosure had never been seen on the roadway before, there was evidence that they had escaped the enclosure in the past.  In addition, there was evidence to support a finding that a third party's employees that hauled manure from the defendant's premises, and were the last parties to enter and exit the cows' enclosure, were the defendant's agents insomuch as the defendant's operating manager directed and supervised them.  Sage v. Bird City Dairy, LLC, No. 13-4039-KHV, 2015 U.S. Dist. LEXIS 55785 (D. Kan. Apr. 29, 2015).     


The petitioners are a married couple.  The husband was the sole beneficiary of his father's IRA.  He elected a lump sum option upon his father's death, and issued checks to both of his siblings totaling $37,000 based on what he thought his father wanted.  The payment was made out of the distribution that the husband had received in the previous months.  The petitioners filed a return for the year at issue but did not report the IRA distributions in income.  The IRS issued a deficiency notice for over $27,000 plus a penalty in excess of $5,000.  The court upheld the IRS position.  Morris v. Comr., T.C. Memo. 2015-82. 

                       


The petitioner had amounts garnished from his paycheck in order to satisfy a separation agreement with his ex-wife to pay child support that he had defaulted on to the extent of approximately $64,000.  In the Colorado proceeding utilizing Colorado law, the payments were not terminated upon death of either the payor or the payee.  The ex-wife sued in a Texas court to enforce the separation agreement where the court ordered garnishment.  Accordingly, the petitioner paid in excess of $50,000 in spousal support and child support, and claimed about a $39,000 alimony deduction.  The ex-wife also claimed about $13,000 in alimony income.  The court disallowed the deduction for failure to satisfy the conditions for deductible alimony contained in I.R.C. Sec. 71(b)(1), one of which is that the payments terminate upon death of the ex-wife.  Under CO law, spousal support payments that are in arrears are treated as money judgments, and are not affected by the payor or payee's death.  Iglicki v. Comr., T.C. Memo. 2015-80.


The petitioner was a CEO of a computer company with no knowledge or expertise in oil and gas.  In the 1970s, the petitioner acquired working interests in several oil and gas ventures of about 2-3 percent each.  The ventures were not part of any business organization, but were established by a purchase and operating agreement with the actual operator of the interests.  The operator managed the interests and allocated to the petitioner the income and expense from the petitioner's interests.  The petitioner had no right to be involved in the daily management or operation of the ventures.  Under the agreement, the parties elected to be excluded from sub-chapter K.  For the year at issue, the petitioner's interests generated almost $11,000 of revenue and $4,000 of expenses.  The operator classified the revenues as non-employee compensation and issued the petitioner a Form 1099-Misc.  No Schedule K-1 was issued and no Form 1065 was filed.  The petitioner reported the net income as "other income" on line 21 of Form 1040 where it was not subject to self-employment tax.  The petitioner believed that his working interests were investments and that he was no involved in the investment activity to an extent that the income from the activity constituted a trade or business income.  The IRS claimed that the income was partnership income that was subject to self-employment tax.  The court agreed with the IRS because a joint venture had been created with the working interest owners (of which the petitioner was one) and the operator.  Thus, the petitioner's income was partnership income under the broad definition of a partnership in I.R.C. Sec. 7701(a)(2).  The trade or business was conducted, the court determined, by agents of the petitioner, and simply electing out of sub-chapter K did not change the nature of the entity from a partnership.  Also, the fact that IRS had conceded the issue in prior years did not bar IRS from changing its mind and prevailing on the issue for the year at issue.  Methvin v. Comr., T.C. Memo. 2015-81.


In 2014, the Vermont legislature passed a genetically modified organism (GMO) labeling law.  It was signed into law with an effective date of July 1, 2016.  Under the law, retailers can only sell food with an appropriate label if the food (whether raw or processed) has had its genetic material altered.  The labeling requirement is placed on manufacturers of packaged foods and on retailers for food that is not separately packaged.  With respect to bulk food, the label must conspicuously appear on the shelf or bin where the raw food is sold.  Manufacturers are also barred from labeling GMO food as “natural.”  The law’s purported purpose is to provide consumer information and prevent consumer confusion and deception.  Various food manufacturers and their lobby groups sued, seeking to have the law declared unconstitutional under the First Amendment and as unduly burdening interstate commerce.  They also claimed that federal labeling laws preempted the provision. The plaintiffs also claimed that it is virtually impossible to manufacture many foods with non-GE sources, and that the availability of non-GE products did not meet demand. As such, the plaintiffs claimed that they will be forced to relabel the “vast majority” of their products at significant expense.  As a result, the plaintiffs claimed that smaller manufacturers would not be able to bear the additional costs, would go out of business, and market competition in Vermont would suffer.

The defendants motioned to dismiss the case, and the plaintiffs asked the court for a preliminary injunction, specifically asking the court to enjoin enforcement of the law.  The court granted in part and denied in part the defendants’ motion to dismiss. The court dismissed the plaintiffs’ claims asserting a violation of the dormant commerce clause. The court ruled that the plaintiffs had failed to assert a plausible claim that the law clearly discriminates against interstate commerce. The burden imposed on interstate commerce, the court found, was no different than the burden placed on intrastate commerce. The court also dismissed several of the plaintiffs’ preemption claims, but allowed several others, namely those alleging preemption by Federal Meat Inspection Act and the Poultry Products Inspection Act, to continue. The court also allowed the First Amendment claims to continue, although the court seemed inclined to dismiss the claim that challenged the law’s disclosure requirements.  Specifically, the court stated that the law bore a reasonable relationship to the harm it sought to prevent - the deception of customers. The question to be resolved later will be whether a “substantial governmental” interest is required to be established. The court also found that the plaintiffs had stated a plausible claim that the “natural” restriction violated their members’ First Amendment rights.

The court also rejected the plaintiffs’ request for a preliminary injunction, finding that they had not shown persuasive evidence that their members would prevail on the merits and that they would suffer irreparable harm absent enjoinment of the enforcement of the law.  Grocery Manufacturers Assoc. v. Sorrell, No. 5:14-cv-117, 2015 U.S. Dist. LEXIS 56147 (D. Vt. Apr. 27, 2015).

 


The plaintiffs were lesbians that were married under Massachusetts law.  They later moved to Florida, a state that, based on the health, safety and welfare of its citizens, enacted a statutory provision barring homosexuals from marrying each other.  Florida also does not recognize as valid homosexual marriages entered into in any other state or other jurisdiction.  One of the couple sought a divorce and the trial court refused to grant it because Florida did not recognize homosexual marriage.  On appeal, the court reversed.  The court specifically noted that granting the divorce would further Florida’s public policy to “prevent, eliminate, discourage or otherwise preclude” homosexual marriage in Florida by reducing the number of such marriages in Florida.  Refusing to grant the divorce, the court noted, would not further Florida’s legitimate public policy of not recognizing homosexual marriage.  Brandon-Thomas v. Brandon-Thomas, No. 2D14-761, 2015 Fla. App. LEXIS 6051 (Fla. Ct. App. Apr. 24, 2015).


In an earlier action, the First Circuit upheld the Tax Court's partial summary judgment for the IRS which was then affirmed on reconsideration that the taxpayer's  contribution of a facade easement did not comply with the enforceability-in-perpetuity requirements of Treas. Reg. Sec. 1.170A-14(g)(6).  The cash payments to the charity that accepted the facade easement remained conditional at end of 2003 and, thus, were not deductible.  However, cash payments made in 2004 were deductible.  The facade easement was not protected in perpetuity because the donee organization was not guaranteed a proportionate share of the proceeds in the event of casualty or condemnation as required by Treas. Reg. Sec. 1.170A-14(g)(6)(ii).  An accuracy-related penalty was applicable for the deduction of cash payments in 2003.  On appeal, the appellate court vacated the lower court's opinion on the basis that the interpretation of the regulation at issue by the IRS and the Tax Court was unreasonable and inconsistent with Congressional intent.  While the lender retained priority to the insurance proceeds, the petitioner had no power to make the lender give up such protections.  The tax liens could potentially trump the donee's right to the funds upon extinguishment of the easement and, thus, the regulation's reference to "entitled" cannot be reasonable construed to give the donor an absolute right to any proceeds.  The court's opinion, thus called into question Tax Court opinions in Wall v. Comr., T.C. Memo. 2012-169 and 1982 East, LLC v. Comr., T.C. Memo. 2011-84).  On further review, the First Circuit held that the Tax Court correctly upheld the IRS imposition of a substantial valuation misstatement penalty for an underpayment of tax as a result of the donated easement.  The easement had no value because the façade was already subject to similar restrictions by reason of being in an historic district.  Kaufman v. Comr., No. 14-1863, 2015 U.S. App. LEXIS 6830 (1st Cir. Apr. 24, 2015), aff'g., T.C. Memo. 2014-52.


The plaintiffs, an assortment of environmental activist groups, petitioned the Environmental Protection Agency (EPA) to "use its power" to control nitrogen and phosphorous pollution" in the Mississippi River Basis and the Northern Gulf Of Mexico.  The EPA chose not to do so, noting that federal rulemaking was not the most effective or practical means of addressing such concerns and that the EPA's policy (consistent with the Clean Water Act (CWA)) was to allow the states to develop and adopt their own standards.  The plaintiffs sued, claiming that the EPA had violated the Administrative Procedure Act and the CWA by declining to make a "necessity determination."  The EPA moved to dismiss the case on the basis that the agency had the discretion to decline to make a necessity determination that wasn't reviewable by the court.  The trial court ruled that it had jurisdiction to review the EPA's decision and ordered the EPA to make a necessity determination.  On further review, the appellate court vacated the trial court's decision.  The appellate court determined that the courts have jurisdiction to review a denial of a rulemaking petition.  The court also determined that the EPA had discretion to decide not to make a necessity determination due to the broad language in 33 U.S.C. Sec. 1313(c)(4)(B).  The court remanded the case to the trial court to decide in the first instance whether the EPA's explanation for why it declined to make a necessity determination was legally sufficient.  The court also informed the trial court that in doing so the court was to give great deference to the EPA and use a rational basis review standard.  Gulf Restoration Network, et al. v. McCarthy, No. 13-31214, 2015 U.S. App. LEXIS 5602 (5th Cir. Apr. 7, 2015).


The defendant, a crop farmer owned land adjacent to the plaintiff's 5.5 acre parcel that contained brush, scrub trees and overgrown volunteer trees.  The defendant hired a contractor to clean the fence line because the plaintiff's trees and brush were shading his crops.  The defendant incorrectly assumed that a creek bed on the neighbor's side of the fence served as the border between the properties, but the actual border was the crop line.  The contractor removed trees from the creek bed and the plaintiff sued claiming over $30,000 in damages for the removal of 50 small trees and six mature trees.  The trial court awarded the damages based on replacement cost of the trees and the defendant appealed.  On appeal, the court noted the theories of recovery for tree loss:  (1) for trees serving a special purpose, the damages are the difference between the value of the real estate before and after the destruction of the trees; (2) for trees not serving any special purpose, the damages are the commercial market value of the trees as lumber or other wood products; and (3) for trees that can be replaced (or when they have special value to the owner), the replacement cost of the trees.  In addition, the court noted that Iowa Code Sec. 658.4 allows for treble damages for the willful injury to trees or shrubs.  The appellate court used the replacement cost approach for the small trees because the plaintiff's were tree lovers, but did not award damages for the mature trees because the evidence did not show that they needed to be replaced.  Treble damages were not allowed because the defendant made an honest mistake about the property boundary.  Survey costs were also disallowed along with attorney's fees.  Lackman v. Muff, No. 14-1150, 2015 Iowa App. LEXIS 373 (Iowa Ct. App. Apr. 22, 2015).


The defendant operated a dairy farm and had invited a local kindergarten class to the dairy for a field day every year for over the past 20 years.  On the field trip at issue, a mother of one of the students, acting as a chaperone, fell through a floor in a barn and injured herself.  The mother sued the defendant and the defendant asserted the state (IA) recreational use statute as a defense.  The court of appeals agreed, but the Iowa Supreme Court reversed and remanded the case to the trial court (827 N.W.2d 128 (Iowa 2013).  The Iowa legislature quickly vacated the Iowa Supreme Court opinion (unanimously in both the House and the Senate) by amending the statute to specifically include educational activities and related chaperoning activities as covered activities.  On remand, the trial court jury found in favor of the defendant.  On appeal, the Iowa Court of Appeals affirmed based on the evidence.  Sallee v. Stewart, No. 14-0734, 2015 Iowa App. LEXIS 361 (Iowa Ct. App. Apr. 22, 2015).


The petitioner managed construction projects and claimed employee business travel-related deductions.  He kept a calendar that detailed the trips and also recorded his business miles.  The IRS disallowed the deductions, but the court allowed the deductions because the calendar contained weekly mileage and detailed where petitioner was working and the dates he worked at various locations on a contemporaneous basis.  The court noted that the petitioner also recorded the beginning and ending mileage.  The court views the petitioner's testimony as credible and his records as adequate.  Ressen v. Comr., T.C. Sum. Op. 2015-32


The petitioner was a doctor that was recruited to work for a hospital in a rural area and was offered a $260,000 loan to work for the hospital with the loan forgiven upon the satisfaction of certain goals.  The goals were met and the loan was forgiven over a four-year timespan.  The petitioner didn't report any income from the forgiveness and the IRS asserted a tax deficiency.  The court agreed with the IRS.  The petitioner argued that because the loan was non-recourse that he wasn't personally liable for repayment and, thus, didn't have income upon forgiveness.  The court noted that the loan terms made him liable and also rejected the petitioner's argument that the nature of the loan meant that he couldn't have cancelled debt income.  While the hospital issued the petitioner a Form 1099-Misc. rather than a Form 1099-C, the court held that was merely a bookkeeping error that had no bearing on the tax effect of the forgiveness.  Wyatt v. Comr., T.C. Sum. Op. 2015-31.


The petitioner retired from the L.A. police force, but didn't report as gross income payment that he received on retirement for cashing out his unused vacation and sick leave time.  He claimed that at least some of the portions of the payments accrued when the petitioner was on temporary disability leave.  Under state law (CA), a temporarily disabled cop gets temporary disability equal to the employee's base pay.  Thus, the petitioner argued, some of the leave payments were excludible under I.R.C. Sec. 104(a)(1) as amounts received under a workmen's compensation act as compensation for personal injury or sickness.  The court disagreed.  None of the payments were excludible from income.  Speer v. Comr., T.C. Memo. 144 T.C. No. 14 (2015).


The petitioners, a married couple, owned an S corporation that held real estate and a medical C corporation.  The husband worked full-time for the C corporation and materially participated in its business activity.  The couple did not, however, materially participate in the S corporation and they were not engaged in a real estate trade or business.  For the years at issue, the S corporation lease commercial real estate to the C corporation.  The S corporation had rental income of about $50,000 in each of the two years at issue, which the petitioners reported as passive income, not subject to self-employment tax.  They also offset the rental income with passive losses from other S flow-through entities they owned as well as losses from other rental properties that they owned.  The IRS viewed the rental income as non-passive under Treas. Reg. Sec. 1.469-2(f)(6) (the "self-rental" rule) and disallowed passive losses that exceeded adjusted passive income for the years at issue.  The petitioners, however, argued that I.R.C. Sec. 469 did not apply to S corporations and was invalid.  The court disagreed even though I.R.C. Sec. 469, on its face, does not say that it applies to S corporations because it need not identify S corporation due to the S corporation shareholders are the taxpayers to whom I.R.C. Sec. 469 actually applies.  In addition, the court ruled that Treas. Reg. Sec. 1.469-4(a) validly interpreted "activity" as used in I.R.C. Sec. 469.  Thus, the rental activity was subject to I.R.C. Sec. 469.  The court also held that the self-rental rule applied and rejected the petitioners' argument that the self-rental rule didn't apply because the S corporation, as lessor, didn't participate in the C corporation's trade or business.  As such, the rental income was properly recharacterized as non-passive and couldn't be used with passive losses.  Williams v. Comr., T.C. Memo. 2015-76.      


The petitioners, a married couple, owned several rental properties approximately 26 miles from where they lived.  The wife managed the properties, which produced an approximate $70,000 loss for the year at issue.  The IRS claimed that the loss was passive and, thus, could not offset the petitioners' active income from other sources.  The wife claimed that she qualified as a real estate professional.  The IRS did not challenge that she put more than half of her time in the activity, but claimed that she didn't commit at least 750 hours to the rental activity.  The wife's log did not initially include commuting time to and from the rental properties (approximately 42-55 minutes each way), but a revised log did.  The revised log resulted in the wife putting in more than 750 hours into the activity.  The IRS challenged the revised log, but the court upheld its legitimacy due to the wife's testimony and the detailed nature of the log.  The revised log was within the guidelines of Treas. Reg. Sec. 1.469-5T(f)(4) and the loss from the activity was fully deductible.  O'Neill v. Comr., T.C. Sum. Op. 2015-27.


The petitioner started a photography business by creating a business plan and obtaining a sales tax permit.  However, the business did not show a profit for more than 10 years.  Thus, the state (IA) Department of Revenue (IDOR) could not grant the petitioner the presumption in accordance with I.R.C. Sec. 183 that the activity was engaged in with a profit intent.  Thus, in accordance with the nine-factor test set forth in Treas. Reg. Sec. 1.183-2(b), the activity would be evaluated.  The IDOR determined that none of the factors favored the petitioner other than the fact that the petitioner had expertise in photography.  Thus, deductions associated with the activity were disallowed.  In re Groesbeck, Doc. Ref. No. 15201018 (IA Dept. of Rev. Apr. 8, 2015).


The plaintiff was the driver of a tractor-trailer hauling large round hay bales to various farms.  After delivering a load at one farm, the plaintiff attempted to deliver the remainder of the load at another farm.  While entering the driveway entrance to the farm, the right rear wheels of the trailer missed the driveway and slipped into a four-foot deep drainage ditch.  As a result, the entire tractor-trailer tipped over causing the plaintiff's injuries.  The plaintiff sued the landowner and a tenant for his injuries and damages.  The court, based on the evidence granted summary judgment for the defendants determining that the plaintiff's careless driving was the sole cause of the accident.  The court based it's conclusion on eyewitness testimony and photographs of the accident scene along with an accident reconstruction expert.  It was determined that the driver simply turned the corner to the entrance too tight, and there were no intervening causes that contributed to the accident.  Cox v. McCormick Farms, et al., No. 44722, 2015 N.Y. Misc. LEXIS 1171 (N.Y. Sup. Ct. Apr. 14, 2015).


The defendant, an egg producing company, was linked to an egg salmonella outbreak in 2010 that caused illnesses to almost 2,000 people.  The defendant was ordered to pay a $6.8 million fine as part of a plea agreement  Two of the defendant's executives were also fined $100,000 each and ordered to pay $83,000 in restitution.  The court, on the sentencing phase of the case, sentenced the executives to three months of prison time each plus a year of supervised release.  The executives claimed that they had no knowledge of the unclean conditions at the defendant's facility and were not directly involved.  The court pointed out that the defendant's workers knowingly shipped eggs with false processing and expiration dates, and bribed USDA regulators to secure approval of sales of poor quality eggs.  The executives are free pending appeal of the sentence.  United States v. Quality Egg, LLC, et al., No. C 14-3024-MWB, 2015 U.S. Dist. LEXIS 50660 (N.D. Iowa Apr. 14, 2015).


The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineer (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects.  The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA).  The plaintiff sought to challenge the COE determination, but the trial court, in a highly disingenuous opinion in light of the unanimous U.S. Supreme Court opinion in Sackett v. Environmental Protection Agency, 132 S. Ct. 1367 (2012), ruled for the COE, holding that the plaintiff had three options:  (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment.  On appeal, the court unanimously reversed, strongly criticizing the trial court's opinion.  Based on Sackett, the court held that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court.  The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct in light of Rapanos v. United States, 547 U.S. 715 (U.S. 2006).  The court noted that the COE had deliberately left vague the "definitions used to make jurisdictional determinations" so as to expand its regulatory reach.  While the COE claimed that the jurisdictional determination was merely advisory and that the plaintiff had adequate ways to contest the determination, the court determined that such alternatives were cost prohibitive and futile.  The court stated that the COE's assertion that the jurisdictional determination (and the trial court's opinion) was merely advisory ignored reality and had a powerful coercive effect.  The court held that the Fifth Circuit, which reached the opposition conclusion with respect to a COE Jurisdictional Determination in Belle Co., LLC v. United States Army Corps. of Engineers, 761 F.3d 383 (5th cir. 2014), cert. den., 83 U.S.L.W. 3291 (U.S. Mar. 23, 2015), misapplied the Supreme Court's decision in SackettHawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-3067, 2015 U.S. App. LEXIS 5810 (8th Cir. Apr. 10, 2015), rev'g., 963 F. Supp. 2d 868 (D. Minn. 2013).


The petitioner donated property (primarily clothing and household items) to various charitable organizations.  He attempted to keep many of the property gifts individually less than $250 on the belief that he didn't need a contemporaneous written acknowledgement from the charity.  For the contributions exceeding $500, the petitioner did not maintain written records and did not get an appraisal for gifts exceeding $5,000.  The IRS denied all of the claimed charitable deduction of $37,000 due to lack of substantiation and the court agreed.  The court, while not doubting that the gifts were made, held that the record was lacking to support the petitioners' statements and the petitioner maintained no written records and failed to have appraisals for the property gifts exceeding $5,000.  The petitioner didn't even maintain receipts for the under $250 gifts and had no evidence that the clothing gifted was "in good used condition or better."  The court upheld an accuracy-related penalty of 20 percent of the underpayment.  Kunkel v. Comr., T.C. Memo. 2015-71.


The petitioners, a married couple, established an irrevocable family trust and transferred property worth $3.262 million to the trust.  The trust named 60 beneficiaries, primarily family members.  The trust language required the trustees to notify all beneficiaries of their right to demand withdrawal of trust funds within 30 days o receiving notice and directed the trustee to make distributions upon receipt of a timely exercised demand notice.  In addition, the trust allowed the trustee to make distributions for the health, education, maintenance or general support of any beneficiary or family member.  The trust also specified that a beneficiary would forfeit trust rights upon opposing distribution decisions of the trustees.  On separate gift tax returns for 2007 the petitioners each claimed annual gift tax exclusion of $12,000 (the maximums per done for 2007) for each of the 60 beneficiaries - $720,000 per spouse.  The IRS denied the exclusions on the basis that the gifts were not present interests because the trustees might refuse to honor a withdrawal demand and have the demand submitted to an arbitration panel (as established in the trust), and the beneficiaries would not seek to enforce their rights in court due to the trust language causing forfeiture if they challenged trustee decisions.  As such, the IRS held that the withdrawal rights of the beneficiaries was illusory and the gifts were not of present interests.  The Court disagreed with the IRS noting that merely seeking arbitration when a trustee breached fiduciary duties by refusing a demand notice did not make the gifts of future interests.  The court also held that the trust forfeiture language only applied to discretionary distributions and did not apply to mandatory withdrawal distributions.  Mikel v. Comr., T.C. Memo. 2015-64.


The debtors, a married couple, filed Chapter 12 bankruptcy on August 7, 2010 and submitted their reorganization plan on February 8, 2011.  The plan was approved with some modifications on March 18, 2011.  The confirmed plan contained a provision treating federal and state tax obligations attributable to the sale of farm assets occurring post-petition in 2010 and 2011 to be "classified, treated and discharged" as unsecured claims in accordance with 11 U.S.C. Sec. 1222(a)(2)(A) with the liability computed under the "marginal" method.  The debtors received a tax refund for the 2010 tax year, and asserted a refund of almost $6,000 for the 2011 tax year attributable to the sale of farm property.  The IRS claimed that the debtors owed over $66,000 of tax.  For the 2012 tax year, the IRS did not issue a $5,706 refund, but rather applied it to the tax liability that IRS was asserting for the 2011 tax year.  In May of 2013, the IRS demanded that the debtors pay the outstanding tax liability (including interest) of over $67,000.  The debtors did not pay the tax claim, but then filed a 2013 return claiming a refund of almost $7,000.  The IRS applied the amount of the refund to the outstanding tax liability and demanded payment in full of the outstanding tax liability of $65,431.85.  The debtors sought to have the IRS held in contempt for violation of the debtors' reorganization plan on the basis that 11 U.S.C. Sec. 1222(a)(2)(A) made the IRS claim an unsecured claim not entitled to priority and subject to discharge.  The court, after determining that it had jurisdiction, determined that the reorganization plan could not bind the IRS as to the post-petition tax claims.  While the law in the Eighth Circuit at the time the tax was incurred was that taxes attributable to the sale of farm assets (and IRS did not challenge that the taxes at issue were attributable to farm assets) were unsecured, non-priority claims subject to discharge, the court held that a U.S. Supreme Court opinion decided in May of 2012 had abrogated the Eighth Circuit opinion.  While the Eighth Circuit opinion was still applicable law at the time of plan confirmation and when the taxes at issue were incurred, the Court held that the U.S. Supreme Court opinion controlled. The court reached this conclusion by reasoning that the U.S. Supreme Court merely clarified what 11 U.S.C. Sec. 1222(a)(2)(A) had meant all along and, thus, had retroactive application.  The court said this was the case "regardless of when the Plan was confirmed."  In re Legassick, No. 10-02202, 2015 Bankr. LEXIS 1260 (Bankr. N.D. Iowa Apr. 13, 2015).   


The decedent was diagnosed with terminal cancer on May 19, 2011 and began hospice care on June 3, 2011.  On June 1, the decedent executed a health care power of attorney and a power of attorney for his property.  He executed a will on June 13.  He died on June 24, 2011.  The will’s validity was contested on the bases of undue influence and lack of testamentary capacity.  The jury heard testimony from the decedent’s friends, business associates, the lawyer that drafted the will and others, and returned a verdict that invalidated the will on lack of testamentary capacity grounds.  The attorney testified that he had no concerns about the decedent’s soundness of mind.  The decedent’s friends, however, contradicted the lawyer’s testimony.  The jury found the testimony of the friends more credible.  A judgment notwithstanding the verdict was sought or, in the alternative, a new trial, but the trial court denied the motion.  On appeal, the court affirmed.  In re Estate of Schutzbach, No. 4-14-0600, 2015 Ill. App. Unpub. LEXIS 801 (Ill. Ct. App. Apr. 10, 2015). 


The decedent hired the defendant to draft an amendment to the decedent's revocable living trust.  The amendment named the decedent's wife and children as beneficiaries.  However, after the decedent's death, two of the children as successor trustees petitioned the probate court to modify the trust amendment on the basis that it didn't carry out the decedent's wishes that the wife not be named as a beneficiary to the decedent's brokerage accounts as well as real and personal property.  The defendant admitted that the amendment did not conform to the decedent's wishes.  The trustees settled the probate court action with the decedent's wife, and sought to amend their complaint to add an allegation that the defendant owed the children a duty.  The trial court did not allow the complaint to be amended because the children lacked privity with the defendant as merely trust beneficiaries.  On appeal, the court reversed.  The court held that the defendant did owe a duty to beneficiaries such as the children at issue in the case that are all named beneficiaries in the trust amendment.  The court reasoned that doing so posed not risk that a random unnamed beneficiary would be making a claim against the defendant.  Paul v. Patton, No. H040646, 2015 Cal. App. LEXIS 304 (Cal. Ct. App. Apr. 9, 2015).


Before death, the decedent hired the defendant to draft a revocable trust and will as part of the decedent's estate plan.  Over time, the decedent had the defendant make several amendments to the documents to effectuate the decedent's intent.  One such amendment changed the trust to leave the decedent's residuary estate to his nieces and nephews rather than charity.  This trust amendment, however, was not signed into effect before the decedent's death.  The nieces and nephews sued the defendant for breach of contract with the decedent.  The trial court granted the defendant summary judgment on the basis that the heirs lack standing.  On review, the court reversed  on the basis that the heirs may have standing to pursue a breach of contract malpractice action against the defendant if they can show that they were intended beneficiaries.  The case was remanded.  Agnew v. Ross, No. 2195 EDA 2014, 2015 Pa. Super. LEXIS 33 (Feb 2, 2015), rev. den., Estate of Agnew, 2015 Pa. Super. LEXIS 158 (Pa. Super. Ct. Apr. 7, 2015).


A Nebraska C corporation sold all of its assets.  The sale triggered a substantial gain.  The shareholders sold their shares to a third party upon the third party's agreement to pay the corporation's tax liability triggered by the asset sale.  However, the third party did not pay the tax liability.  The IRS sought to recover the unpaid tax liability from the shareholders.  The court allowed the IRS to recover the tax liability from the shareholders by virtue of transferee liability via the NE Uniform Fraudulent Conveyance Act (UFCA).  The court determined that the transfer was fraud as to the IRS and was for the benefit of the shareholders.  Unmatured tax liabilities constituted "claims" under the NE UFCA and that the shareholders were "transferees" under the NE UFTA.  Stuart, et al. v. Comr., 144 T.C. No. 12 (2015).


The petitioners claimed additional flow-through losses from an LLC that was taxed as a partnership for tax purposes.  To be able to do so, the LLC could not be subject to the procedural rules of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.  The petitioners argued that the LLC was not a partnership subject to TEFRA because it had 10 or fewer partners and, therefore, qualified for the "small partnership exception" of I.R.C. Sec. 6231(a)(1)(B)(i).  The LLC was owned 99.98 percent by two individuals and .02 percent by a partnership.  In addition, the LLC had previously filed a partnership return. The petitioners knew that the LLC could not qualify as a "small partnership" and use the "small partnership exception" because the LLC had a partnership as a partner, so they argued that they qualified for the "small partnership exception" because the partnership member held such a small ownership interest that it should be disregarded.  The court disregarded that argument and denied qualification for the "small partnership exception" on the basis that the LLC had a partner as a member.  The petitioners were not entitled to additional flow-through losses.  The court's opinion also stands for the proposition that simply having 10 or fewer partners does not mean that the entity is not a partnership for tax purposes.  Brumbaugh, et al. v. Comr., T.C. Memo. 2015-65.


The petitioners, a married couple, built a residence on a lot that they had purchased.  They paid cash for the lot and for the residence.  A year later, the petitioners borrowed approximately $1.75 million from a bank, pledging the house as collateral.  The bank transferred the loan funds directly to the husband's wholly-owned C corporation.  The loan was later refinanced for $2.5 million with the residence securing the debt.  In 2008 and 2009, over $150,000 of interest was paid on the loan in each year.  In 2008, the petitioners deducted approximately $7,000 of interest paid on the loan as home mortgage interest, carrying the remaining $166,000 forward as investment interest to 2009.  In 2009, the petitioners deducted $60,000 of the interest paid as mortgage interest and $97,835 as an investment interest expense deduction.   The IRS denied in full the investment interest deduction and made an adjustment to the home mortgage interest deduction.  The court agreed with the IRS because the petitioners did not show that the funds were used for investing as required by Treas. Reg. Sec. 1.163-8T.   Simply depositing the funds in the C corporation's bank account was insufficient.  The corporation's general ledger account treated the mortgage proceeds as a personal loan to the corporation from the husband.  Minchem International, Inc. v. Comr., T.C. Memo. 2015-56.


In 2012, a chemical company holding a water right dating to 1942 made a call on the water in a river associated with its water right.  The plaintiff issued the priority call due to a shortage of water in the river for all users, thereby cutting off withdrawals of water from the river by water rights holders whose permits were obtained after 1942.  The result was that 845 permit holders had their water rights suspended, including 716 for crop irrigation users.  According with the plaintiff's rules, the plaintiff exempted junior water rights held by cities and power plants based on public health and safety concerns.  The defendant challenged the validity of the rules are being arbitrary.  The trial court agreed, holding that the plaintiff did not have the authority to exclude cities and power plants in time of drought.  The appellate court agreed, holding that state (TX) law strictly applies the prior appropriation doctrine to water withdrawals in the event of water shortages.  Texas Commission on Environmental Quality v. Texas Farm Bureau, et al., No. 13-13-00415-CV, 2015 Tex. App. LEXIS 3160 (Tex. Ct. App. Apr. 2, 2015). 


The plaintiff in this case is a retired Republican Congressman from Michigan whose farm contained a 2.24-acre tract that the defendant claimed was a wetland.  The tract at issue was initially drained and tiled in 1964 and crops were grown on tract through at least 1982.  In early 1980s, drainage on the tract deteriorated.  After the enactment of the Swampbuster provisions contained in the 1985 Farm Bill, the NRCS made wetland determinations on the tract in 1988 and 1993 from which the plaintiff did not appeal.  The plaintiff executed Form AD-1026 in 2008 indicating that he was intending to plant crops on the land for which a highly erodible determination had not been made and conduct land drainage or associated activities that had not been evaluated by NRCS.  The plaintiff also executed another form that authorized the NRCS to conduct a wetland determination on the plaintiff’s property.  In 2008, a wetland determination was made and the plaintiff appealed by requesting reconsideration and mediation.  A mediation agreement was entered into in early 2009 under which the NRCS agreed to make a wetland delineation and allow the planting of crops in spring of 2009.  The NRCS conducted a delineation after spring crops were planted which resulted in a Final Technical Determination that the tract was converted wetland and that the plaintiff was ineligible for farm program benefits.  The plaintiff appealed to the National Appeals Division (NAD) which suspended the appeal while mediation continued.  The mediation failed and the appeal proceeded.  The NAD Hearing Officer upheld the NRCS determination and noted that the tract could not be determined to be prior converted wetland because it had wetland conditions as of Dec. 23, 1985.  The Hearing Officer also noted that plaintiff did not request a minimal effect determination before converting the wetland, but that such a request would have been pointless because USDA-NRCS maintained that the minimal effect exemption only applied where:  (1) there was a subsurface drain in an existing wetland that was necessary to drain adjacent cropland; or (2) there was the passage of a center pivot irrigation system through a wetland.  Neither of those facts were present.  The Deputy Director upheld the NAD Hearing Officer's decision on appeal.  The court upheld the NRCS interpretation of 16 U.S.C. §3822(b)(2)(D) that the status of the land as of December 23, 1985 was determinative of the issue irrespective of whether the was land drained and cropped prior to that date and merely reverted to wetland status as a result of deterioration to drainage work citing Horn Farms, Inc. v. Johanns, 397 F.3d 472 (7th Cir. 2005) and noted that the NRCS determination was entitled to Chevron deference.  On appeal, the court reversed.  The appellate court did uphold the trial court's determination that the "prior converted wetland" exception only applied where the conversion occurred before Dec. 23, 1985, and remained in farming status continuously thereafter and that the USDA was entitled to deference on that determination.  As for the minimal effects exemption, the court determined that USDA-NRCS acted arbitrarily be refusing to consider the plaintiff's "minimal-effect" exemption evidence.  The court determined that the NRCS position had no support in the law, reversed the trial court on this point, and remanded the case to the NRCS to determine whether the effect of the conversion to the surrounding wetland was "minimal."  The appellate court also reversed the trial court for upholding the NRCS position that to qualify for the minimal effect exemption a farmer must agree to a mitigation plan.  That, the court said, is not the law.  The appellate court also determined that the USDA's discretion to adjust applicable penalties was tied to six specific factors contained in 7 C.F.R. Sec. 12.4(c), and could not rely solely on the plaintiff's failure to mitigate.  The court also said that the USDA/FSA was bound by the guidance in its handbook a the time the plaintiff sought penalty reduction, and could not utilize the handbook position that it had created after the plaintiff requested a penalty reduction.       Maple Drive Farms Family Limited Partnership v. Vilsack,  No. 13-1091, 2015 U.S. App. LEXIS 5208 (6th Cir. Apr. 1, 2015), rev'g., No. 1:11-CV-692, 2012 U.S. Dist. LEXIS 176539 (W.D. Mich. Dec. 13, 2012).


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