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The defendant owns a property and leased it to the plaintiff.  EPA designated 27 square miles around the property (former lead refinery) as CERCLA site.  The EPA sued the plaintiff for $400 million in "recovery" costs.  The plaintiff filed bankruptcy and the court approved a $214 million settlement that resolved the plaintiff's liability.  The defendant, as owner of the site, was a potentially responsible party and settled with the EPA for $25 million.  The defendant claimed that lead-based paint was the primary source of contamination and filed FOIA requests for EPA documents to prove its argument.  The plaintiff moved to intervene in the FOIA case in an attempt to void its government settlement.  The plaintiff also had outstanding claims against the defendant for a portion of its $214 million that it owed the EPA.  The defendant tolled the statute of limitations for a contribution action for two years after a final judgment in the FOIA case, but later reached a settlement with the EPA for $25 million.  The plaintiff did not object to the settlement which provided the defendant with "protection from contribution actions or claims"  via Sec. 113(f)(2) of CERCLA.  The appellate court upheld the trial court's determination that the plaintiff's failure to object barred any claims it had against the defendant.  The court noted that the plaintiff had failed to raise its estoppel argument prior to the appeal.  Asarco v. Union Pacific Railroad Company, No. 13-2830, 2014 U.S. App. LEXIS 15285 (8th Cir. Aug. 8, 2014), aff'g., 8:12cv416, 2013 U.S. Dist. LEXIS 108852 (D. Neb. Aug. 2, 2013).

The plaintiff, a chemical manufacturing plant, discharged dissolved minerals into two tributaries that ultimately flowed into regulated waters.  The state (AR) imposed more stringent water quality standards that impacted the plaintiff's discharges and gave the plaintiff three years to comply.  The plaintiff, however, filed a third party rulemaking which would allow it to continue the same level of discharges of minerals into the tributaries.  The state adopted the plaintiff's proposed revisions and submitted them to the Environmental Protection Agency (EPA) for approval.  The EPA rejected the changes on the basis that aquatic life in the downstream regulated waters  would not be adequately protected.  The trial court upheld the EPA position.  On appeal, the court affirmed, upholding the EPA regulations that allowed it to examine downstream waters when evaluating a state's water quality standards and noting that AR's supporting documentation was inadequate.  The EPA had a rational basis for adopting the regulations and the EPA's rejection was neither arbitrary nor capricious.  Eldorado Chemical Company v. United States Environmental Protection Agency, No. 13-1936, 2014 U.S. App. LEXIS 15694 (8th Cir. Aug. 15, 2014).

The debtor borrowed money from a lender and pledged dairy cattle as collateral.  The lender secured an interest in the cattle.  The debtor later borrowed additional money from the lender, pledging crops, farm products and livestock as collateral with lender's security interest containing a dragnet clause.  The lender secured its interest.  The debtor later entered into a "Dairy Cow Lease" with a third party to allow for expansion of the herd.  The third party lessor perfected its interest in the leased cattle.  The debtor filed bankruptcy and the bankruptcy court determined that the lease arrangement actually created a security interest rather than being a true lease.  The court noted that the "lease"  was not terminable by the debtor and the lease term was for longer than the economic life of the dairy cows.  The third party lessor also never provided any credible evidence of ownership of the cows, and the parties did not strictly adhere to the "lease" terms.  The court noted that the lender filed first and had priority as to the proceeds from dairy cows.  In addition, the bankruptcy court held that the lender's prior perfected security interest attached to all of the cows on the debtor's farm and to all milk produced post-petition and milk proceeds under 11 U.S.C. Sec. 552(b).   In a later action in the district court, a different creditor failed to comply with court’s order requiring posting of bond as a condition to stay the effect of the court’s prior ruling.  As a result, there was no stay in effect during pendency of the appeal and the lender was entitled to have the proceeds turned over to it.  A feed supplier creditor did not have standing to seek surcharge of the bank’s collateral under 11 U.S.C. Sec. 506(c).  The bankruptcy trustee did not file a motion for surcharge and court could not order the amount that the supplier paid for feed deliveries to be retained from funds turned over to the lender.  The lender's motion for abandonment and turnover of proceeds was granted.  On further review of the bankruptcy court's decision concerning the dairy cow lease, the appellate court reversed.  The appellate court determined that under applicable law (AZ) as set forth in the "lease" agreement, a fact-based analysis governed the determination of the nature of the agreement.  However, if the lease term is for longer than the economic life of the goods involved, the "lease" is a per se security agreement.  The bankruptcy court focused on the debtor's testimony that he culled about 30 percent of the cattle annually which would cause the entire herd to turnover in 40 months.  That turnover time of 40 months was less than the 50-month lease term.  Thus, according to the bankruptcy court, the lease was a security agreement.  The appellate court disagreed with this analysis, holding that the agreement required the focus to be on the life of the herd rather than individual cows in the herd because the debtor had a duty to return the same number of cattle originally leased rather than the same cattle.  Thus, the agreement was not a per se security agreement.  On the economics of the transaction, the appellate court held that the lender failed to carry its burden of establishing that the actual economics of the transaction indicated the lease was a disguised security agreement.  There was no option for the debtor to buy the cows at any price, and there was no option at all.  In re Purdy, No. 13-6412, 2014 U.S. App. LEXIS 15586 (6th Cir. Aug. 14, 2014), rev'g., 2013 Bankr. LEXIS 3813 (Bankr. W.D. Ky. Sept. 12, 2013).



In this case, the petitioner claimed a $33 million charitable deduction of a remainder interest in the membership interests of an LLC.  The LLC was the landlord of property that was subject to a triple net lease.  At issue was the value of the remainder interest and the application of the IRS tables contained in I.R.C. Sec. 7520.  The court determined that the contribution of the remainder interest (to the University of Mich.) resulted in a deduction that far exceeded the partnership's investment.  After the contribution, the University sold the remainder interest to another entity then resold it and the last purchaser then contributed it to another charity which again triggered a charitable deduction that exceeded the entity's or the donor's investment.  The court denied summary judgment, noting that the entire scheme suggested a tax shelter.  On whether the appraisal of the remainder interest was a qualified appraisal, the court determined that the appraisal barely satisfied the requirements of I.R.C. Sec. 170.  RERI Holdings I, LLC v. Comr., 143 T.C. No. 3 (2014); Zarlengo v. Comr., T.C. Memo. 2014-161. 

In yet another case, the court held that a property settlement arising in the divorce context was not deductible alimony.  Here, the amount of the settlement, $63,500, was established by the divorce court as a property settlement.  Peery v. Comr., T.C. Memo. 2014-151.

The petitioners, a married couple, bought a 40-acre tract within the Pike's Peak viewshed.  They also owned another adjacent 60 acres and sought to plat both tracts as a subdivision with a 2.5 acre size limitation per lot.  Before platting the property, the petitioners  granted a conservation easement on the 40-acre parcel with a development size restriction of one lot of 40 acres.  The pre-easement value as established by the petitioners' appraiser was $1.6 million and the post-easement value was $400,000.  The IRS originally disallowed the entire deduction due to a failure to satisfy I.R.C. Sec. 170, but later conceded that the Code requirements were satisfied and then challenged the appraised values.  The Tax Court determined that the petitioners' appraised values were closer to what the court determined were most accurate.  The result was that the petitioners were entitled to a charitable deduction of over $1.1 million and no penalties or interest.  Schmidt v. Comr., T.C. Memo. 2014-159.

The petitioner operated a business in which he trained telephone representatives and also he also practiced law.  He also conducted an airplane rental activity which the court found was unrelated to the telephone activity.  The court, agreeing with the IRS, disallowed the flying deductions against the income from the telephone business activity.  The petitioner also failed to establish that he had devoted sufficient hours to the airplane activity to satisfy the material participation tests under the passive loss rules - either the 500-hour test or the 100-hour test.  The court noted that the petitioner had failed to keep records of the time spent on the airplane activity.  The court also upheld the IRS-imposed negligence penalty and underreporting penalty.  Williams v. Comr., T.C. Memo. 2014-158.

At the time of the decedent's death, he was the sole owner of a satellite uplink company that provided satellite access to a religious non-profit company operated by the decedent's son.  In the year of the decedent's death, his company had $16 million in revenue. The decedent's estate was valued at $9.3 million, but IRS valued it at nearly three times that amount. The court determined that the key to the success of the decedent's corporation was his son and the son's goodwill which had not been transferred to the decedent's corporation.  The Tax Court accepted the $9.3 million valuation.  Estate of Adell v. Comr., T.C. Memo. 2014-155

The petitioner lived in NYC and worked for a business that was headquartered in L.A.  The petitioner worked from her apartment at the employer's request, and divided her studio apartment into thirds with one-third used for business.  During 2009, the tax year at issue, the petitioner paid for a cleaning service, cable, telephone and internet access, clothing for the employer, and a cell phone for business use.  The IRS disallowed all of the associated deductions that were claimed as unreimbursed employee business expenses.  However, the Tax Court allowed a deduction for one-third of the petitioner's apartment rent and cleaning service charges.  The Tax Court also deductions for telephone and 70 percent of the internet cost.  As for electricity charges, the petitioner's records were insufficient to allow a deduction for any amount.  Cell phone charges were not deductible due to lack of substantiation required (cell phones were listed property in 2009 and subject to strict substantiation rules which were removed by the SMJA of 2010).  The Tax Court did not allow any deduction for clothing expenses because the petitioner admitted that the purchased clothing were also suitable for personal wear.  Miller v. Comr., T.C. Sum. Op. 2014-74.

This case points out, again, that payments in a divorce by means of a property settlement are not deductible.   Here, the petitioner signed a separation agreement that was incorporated into a divorce decree.  The agreement awarded the petitioner's ex-wife $65,000 to be paid within 30 days of the execution of the agreement.  The petitioner deducted the $65,000 as alimony.  Under I.R.C. Sec. 71(b)(1)(B), such payments are generally not deductible.  The court disallowed the deduction the imposed a 20 percent substantial understatement penalty.  Also, numerous scrivenor errors in separation agreement.  Peery v. Comr., T.C. Memo. 2014-151.

The petitioner was a full time insurance professional and also engaged in various real estate ventures from his home base in North Carolina.  He got involved in cattle breeding with an individual located (at least part of the time) in Indiana.  The cattle breeding venture resulted in numerous breached contracts, unpaid bills and promissory notes and unregistered genetic lines of cattle.   The cattle breeding business was not operated in a business-like manner.  In addition, the cattle breeding venture showed four consecutive years of losses while he was showing a substantial increase in income from this insurance and real estate businesses.  The court determined that IRS prevailed under the I.R.C. Sec. 183 tests and petitioner's cattle breeding venture was deemed to be conducted without a profit intent.  Gardner v. Comr., T.C. Memo. 148.

Plaintiffs sued their neighbor for compensation after the neighbor was convicted of intentionally killing the plaintiffs’ dog. The trial court limited damages to the market value of the dog. On appeal, the court affirmed, finding that dogs were classified as personal property by an Ohio statute. As such, the court had to abide by the market-value limitation on damages derived from common law. While the court appreciated the subjective value of the dog to the plaintiffs and their emotional attachment to him, the court found that the law simply did not consider sentimentality as a “proper element in the determination of damages caused to animals.” The plaintiffs had not identified a particularized and identifiable pecuniary loss. Davison v. Parker, No. 2013-L-098,  2014 Ohio App. LEXIS 3201 (Ohio Ct. App. Jul. 28, 2014).


A corporation's former subsidiary business converted to an LLC with the corporation as it's sole member and the IRS determined that the businesses were separate and distinct trades or businesses under I.R.C. Sec. 446(d) because they were engaged in different activities, had separate books, separate records, were not located near each other and did not share employees except for top-end executives.  Thus, the businesses could use different accounting methods for each of the different businesses.  There was not creation or sharing of profits and losses between the businesses, and income of the businesses was clearly reflected.   This was the case even though the LLC did not elect to be taxed as a corporation and, as a result, was a treated for tax purposes as a division of the corporation.  C.C.A. 201430013 (Mar. 24, 2014).  

The sellers had purchased their home for $450,000 from the estate of a couple who died in a murder/suicide. The murder/suicide was highly publicized. One year later, after investing in many renovations, the sellers listed their house for sale, informing their realtor and consulting with an attorney and the Pennsylvania Real Estate Commission regarding the tragic history of the home. The sellers relied on the advice of counsel and the Commission and did not disclose the murder/suicide as a material defect on their Seller’s Property Disclosure Statement. A California resident purchased the home from the sellers for $610,000. She did not learn of the murder/suicide until after she had moved into the home. She filed an action against the sellers and their realtor, asserting that she never would have purchased the home had she known its history. The trial court granted summary judgment for the defendants, ruling that murder/suicide was not a material defect subject to disclosure. An en banc panel of the Superior Court affirmed, finding that psychological damage to a property cannot be considered a material defect. On appeal, the Pennsylvania Supreme Court agreed. The court ruled that the murder/suicide events were not defects in the “structure” of the house. The sellers’ disclosure duties were designed to address structural defects, not tragic events. The court reasoned that a requirement that such events be disclosed would be impossible to apply with consistency and would place an unmanageable burden on sellers.  Milliken v. Jacono, No. 48 MAP 2013, 2014 Pa. LEXIS 1770 (Pa. Jul. 21, 2014).

The plaintiff was a Mexican citizen and nonresident of the U.S. that brought a tax refund action exceeding $16 million.  He claimed that he was engaged in the trade or business of slot machine gambling in Las Vegas and, as a result, his taxes should be based on his net income in accordance with I.R.C. Sec. 871(b) (nonresident alien is taxed on taxable income connected with trade or business conducted in the U.S.).  The plaintiff had retired from a Mexican potato farming business in 2001 and began his "betting business" at that time, making numerous trips to Las Vegas annually.  For the years at issue, the plaintiff reported a net loss in some years and profit in other years.  On audit, IRS disallowed wagering costs due to lack of trade or business and issued deficiency notice and assessed tax at 30 percent rate pursuant to I.R.C. Sec. 871(a)(1).  Court determined that test set forth in Comr. v. Groetzinger, 480 U.S. 23 (1987) was to be utilized in determining the existence of a trade or business, and that the test was not satisfied because the plaintiff did not engage in gambling activities on a basis that were continuous and regular.  The court turned to the factors set forth in Treas. Reg. Sec. 1.183-2 to determine whether the plaintiff had the requisite profit intent to be deemed to be in the conduct of a trade or business and determined that: (1) he did not pursue his gambling activity for the purpose of making a profit; (2) he couldn't rely on advisors or gain expertise because playing slots is controlled by a random number generator with the outcome based on pure luck; (3) his time spent on the activity was sporadic and did not consume much of his personal time; (4) he had no expectation that the assets used in the activity would increase in value (because there were none); (5) he didn't participate in any other activities that would enhance his success in playing slot machines; (6) the history of income or loss from the activity was a neutral factor; (7) the amount of occasional profits slightly favored the plaintiff; (8) the taxpayer was very wealthy and didn't need income from slots to support himself, and; (9) there were substantial elements of personal pleasure.  Thus, the plaintiff did not engage in playing slots with the required profit intent.  The court upheld the IRS position.  Free-Pacheco v. United States, No. 12-121T, 2014 U.S. Claims LEXIS 666 (Fed. Cl. Jun. 25, 2014).     

A married couple operated numerous Steak 'n Shake franchises, but later also began breeding and training Tennessee Walking Horses.  After the husband died in a 2003 house fire, the surviving spouse became President of the corporation that ran the franchises and was very involved in the franchise businesses.  The couple had purchased several hundred acres in TN for slightly under $1 million to operate their horse breeding and training activity.  They ran up substantial losses from the horse activity which they attempted to deduct.  The IRS denied the deductions and the surviving spouse paid the tax and sued for a refund.   The court upheld the IRS determination.  The court noted that under the multi-factor analysis the taxpayers (and later the widow) didn't substantially alter their methods or adopt new procedures to minimize losses, didn't get the advice of experts and continued to operated the activity while incurring the losses.  The court noted that the losses existed long after the expected start-up phase would have expired.  Profits were minimal in comparison and the taxpayers had substantial income from the franchises.  Also, the court noted that the widow had success in other ventures, those ventures were unrelated to horse activities.  Estate of Stuller v. United States, No. 11-3080, 2014 U.S. Dist. LEXIS 100617 (C.D. Ill. Jul. 24, 2014).

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.

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