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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 

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 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).


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).    

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).

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).    

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).

Various meat industry groups sued to enjoin enforcement of the Country of Origin Labeling (COOL) rules (78 Fed. Reg. 31, 367) that require meat retailers of "muscle cuts" to list the countries of origin and production steps occurring in each country.  The groups claimed that providing such factual information violated the COOL statute (7 U.S.C. Sec. 1638a(a)(2)(E)) and the First Amendment.  The trial court denied the injunction on the basis that the groups were not likely to prevail on the merits.  On appeal, the court affirmed.  The appellate court determined that the groups were wrong on their claim that the rule unlawfully bans commingling because the rules don't ban any element of the production process, but merely requires accurate labeling with the three phases of production that are named in the statute  and will require changes in the production process.  The court also held that there was no restriction on free speech in violation of the First Amendment because the rules merely require disclosure of factual information that have legitimate values of patriotism and providing assurance to customers of food safety to those that believe the U.S. is superior to other countries on the food safety issue.  The court's affirmance of the denial of the preliminary injunction means that the meat industry groups cannot suspend the enforcement of the rules while a lower court decides the merits of the case.  However, the meat industry groups asked the full court to re-hear the case and their petition was granted.  In agreeing that the full-court (rather than just a three-judge panel) should hear the case, the court also vacated the three-judge panel's opinion in which the court denied the preliminary injunction against enforcing the COOL rules.  The issue before the court on rehearing will be whether, under the First Amendment, judicial review of mandatory disclosure of factual information can proceed under Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985) or whether it is subject to review under Central Hudson Gas & Electric v. PSC of New York, 447 U.S. 56 (1980)American Meat Institute, et al. v. United States Department of Agriculture, et al., No. 13-5281, 2014 U.S. App. LEXIS 6240 (D.C. Cir. Apr. 4, 2014), pet. for reh'g., granted and vacating, American Meat Institute, et al. v. United States Department of Agriculture, No. 13-5281, 2014 U.S. App. LEXIS 5710 (D.C. Cir. Mar. 28, 2014).

Plaintiff and defendant entered into a written feedlot agreement under which plaintiff agreed to feed defendant’s cattle on plaintiff’s property for a six-month period. The parties  renewed the contract , and defendant fell behind in his payments. Plaintiff filed an action against defendant, seeking $115,568.07 in damages. Defendant admitted that he owned money to plaintiff, but denied the amount. Plaintiff filed an amended complaint, asserting the he had a lien on defendant’s livestock and seeking damages in the amount of $185,883.62. When defendant failed to timely answer, plaintiff filed a motion for a default judgment. The next day, defendant filed a motion for leave to file an answer to the amended complaint. Two days later, he sought through an emergency motion to enjoin the plaintiff from selling defendant’s cattle. The court denied plaintiff’s motion for a default judgment, allowed defendant to answer the amended complaint, and ordered defendant to pay reasonable attorney fees to plaintiff for plaintiff’s costs associated with the motion for default. Finding that defendant could not show irreparable harm, the court denied defendant’s emergency motion, but did order plaintiff to retain only $60,000 from the proceeds of the sale of the cattle and place the remainder of the sale price in escrow with the clerk of court. Kraemer v. Hoffman, No. 13-cv-860-wmc, 2014 U.S. Dist. LEXIS 46280 (W.D. Wis. April 3, 2014).

In March of 2007, a landowner entered into a written lease, agreeing to rent 68 acres of tillable land to the lessee for a set price. The lease provided no end-date, but did state that the lessee could “opt out” of the lease at any time and that if the landowner was to sell the property, the lessee would have a right of first refusal to purchase it.  In October 2011, the landowner and the plaintiff executed a five-year written "cash rent agreement” for the same land for 2012 through 2016. In May 2012, the plaintiff brought an eviction action against the lessee and the landowner, arguing that the lessee’s lease was invalid under N.D.C.C. §47-16-02, which invalidated agricultural leases that were for a term of more than 10 years. The trial court entered judgment for the lessee, finding that under Anderson v. Blixt, 72 N.W.2d 799 (N.D. 1955), the 2007 agreement was not void because (due to the contingencies), it could be performed within 10 years.  In affirming the judgment, the court ruled that the contingencies allowing the lessee to opt or the landowner to sell the property meant that the lease could be performed within a 10-year term, so as not to violate N.D.C.C. §47-16-02.  As in Anderson, the court did not determine whether the lease would be invalid if it were to extend beyond 10 years. Anderson v. Lyons, No. 20130284, 2014 ND 61; 2014 N.D. LEXIS 62 (N.D. Sup. Ct. Apr. 3, 2014).


The testator had four natural children and six step-children from his second wife to whom he was married for 28 years until her death.  Several step-children had daily contact with the testator, and one sharecropped his land. His natural children lived out of state. About a year before his death, the testator moved in with the sharecropping stepson. During the last several years of his life, the testator (with the help of his stepson’s wife who was writing out his checks) wrote several checks to his stepson and his wife. Another stepson took the testator to an attorney in the last year of his life, and the testator transferred one farm to the accompanying stepson and one farm to the sharecropping stepson for one-half of the farms’ respective fair market values. A stepdaughter took the testator to an attorney’s office where he executed a will three months before he died. Due to the testator’s declining mental health, the testator’s natural son was appointed to be his guardian two months before his death. At his father’s death, the son sought to have the district court invalidate the pre-death transfers and the testator’s will. The district court granted relief to the son, finding that the stepchildren had exerted undue influence and that the testator lacked testamentary capacity. In affirming the judgment, the court ruled that the district court’s findings were not clearly erroneous and would not be disturbed. They would therefore be left undisturbed.  Erickson v. Olsen, No. No. 20130217, 2014 ND 66, 2014 N.D. LEXIS (N.D. Sup. Ct. April 3, 2014).

In this "small" Tax Court case, the petitioner was an electrical contractor that had completed a project and was owed payment.  In the process of getting paid for his work, the petitioner took a distribution from his SEP-IRA and then took out a loan with the same company that maintained his IRA account with the loan proceeds to be rolled back into the IRA within 60 days.  However, the funds were rolled back into the account on the 66th day after the petitioner received the distribution from the IRA account.  The petitioner received a 1099-R reporting the distribution as an early distribution but not showing a taxable amount.  The petitioner filed his return for the year and didn't include in income the IRA distribution.  The IRS claimed that a tax deficiency existed including a 10 percent early withdrawal penalty.  The court determined that no deposit had occurred with 60 days and that petitioner had not actually borrowed from his IRA (note - had he done so, the full amount of the IRA account would have been included in income under I.R.C. Sec. 4975).  The court noted, however, that the petitioner was free to pursue an IRS waiver from the 60-day rule in accordance with Rev. Proc. 2003-16).  The court upheld the imposition of the 10 percent penalty.  Alexander v. Comr., T.C. Sum. Op. 2014-18. 

Minn. Stat. §216E.12 subd. 4, called the “buy-the-farm” election, allows owners of Minnesota farmland and other qualified property to require a utility company seeking to condemn a high–voltage transmission line easement to acquire fee title to the owner’s entire contiguous parcel, rather than just the smaller easement. A Minnesota couple owning farmland opted under this provision to require the appellants, several public utility companies, to purchase a 218.85-acre tract of their land instead of taking only the 8.86-acre easement necessary for a powerline project. The district court granted summary judgment to the owners, but the utility companies argued that the district court erred in not properly considering the reasonableness of the buy-the-farm election, as required under Coop. Power Assn v. Aasand, 288 N.W.2d 697 (Minn. 1980). In affirming, the appellate court ruled that Aasand was concerned with the commercial viability of the parcel, not a size differential. Aasand itself affirmed a buy-the-farm election resulting in the condemnation of 149 acres where the proposed easement was 13 acres. The district court did not err in determining that the owner’s election was reasonable. Great River Energy v. Swedzinski, No. A13-1474, 2014 Minn. App. Unpub. LEXIS 255 (Minn. Ct. App. Mar. 31, 2014).

In this case, the property owners signed a 10-year oil and gas lease with the lessee, believing it to be a five-year lease. Two months later, the lessee informed the owners that the lease was invalid because a third party had owned a life estate in the subject property. The third party immediately conveyed her interest to the owners and the owners and the lessee entered into a  second oil and gas lease, this one for a five-year term.  One year later, the lessee assigned its interest in the first lease to an energy company. The company recorded its interest. When the energy company asserted that the first lease was valid and would not expire for another five years, the owners sought a declaratory judgment, asking the court to determine which of two oil and gas leases was valid. The owners also filed a breach of contract claim against the lessees, and the energy company filed a counterclaim against the owners, alleging that they had breached their warranty to defend title. The district court granted the motions to dismiss filed by the lessee and the energy company on statute of limitations grounds, but did not rule on the counterclaim. The owners appealed, but the appellate court dismissed the appeal, finding that the order was not a final appealable order since the district court had not disposed of the counterclaim.  McDougal v. Sabine River Land Co., No. CV-13-894, 2014 Ark. App. 210, 2014 Ark. App. LEXIS 246 (Ark. Ct. App. April 2, 2014).

This case points out the perils of not dividing a revocable trust upon a spouse's death and not limiting distributions to the surviving spouse to an ascertainable standard when required to do so.  The spouse's revocable living trust contained approximately $2.1 million worth of assets at the time the spouse died in 1998 at a time when the federal estate tax exemption was $600,000.  The trust specified that the assets of the trust were be divided into a pecuniary marital trust and a residuary credit shelter trust.  This was not done by the husband as the executor.  In addition, the marital trust was to be divided into GSTT exempt and non-exempt trusts.  The surviving spouse (decedent herein) had a limited power of appointment over principal from the credit shelter trust to appoint principal to his children, grandchildren or charity.  Decedent made over $1 million in withdrawals from the revocable living trust principal for chartable distributions and claimed charitable deductions on personal return.  The decedent also withdrew other funds for distribution to his children and grandchildren.  At the valuation date for the trust after decedent's death in 2008 (when the exemption was $2 million), the revocable living trust contained over $1 million in assets.  The estate took the position that all withdrawals had been from the marital trust (which were subject to an ascertainable standard) such that the decedent's gross estate value was zero.  IRS claimed that withdrawn amounts were attributable to the credit shelter trust and where included in decedent's gross estate or, in the alternative, were pro rata withdrawals, and asserted an estate tax deficiency of $482,050.80.  The Tax Court determined that charitable gifts were from the credit shelter trust via the decedent's limited power of appointment and the other distributions were from the marital trust as discretionary distributions, and rejected the estate's argument that Treas. Reg. 20.2044-1(d)(3) applied.  The court also determined that decedent's limited power of appointment to appoint to charity from the credit shelter trust was exercisable during life.   The court also noted that distributions from principal could only come from the marital trust.  The value of the decedent's gross estate was determined by subtracting all personal withdrawals from value of remaining trust assets.  Estate of Olsen v. Comr., T.C. Memo. 2014-58.

Plaintiffs filed a legal malpractice against defendants, an attorney and his firm, arguing that defendants negligently misrepresented tax consequences of using a trust in an estate plan, failed to use proper estate planning methods to avoid or minimize estate tax, and negligently drafted a power of attorney. The plaintiffs were children of a decedent who had employed defendants to implement his estate plan. The trial court dismissed the action on the grounds that the two-year statute of limitations had run. On appeal, the court affirmed. The court found that under the repose provision of 735 ILCS 5/13-214.3(d), the plaintiffs had two years from the date of decedent’s death to file their malpractice action. They did not file it until 3.5 years after his death. Another claim for aiding and abetting breach of fiduciary duty was properly dismissed under 735 ILCS 5/13-214.3(b), which required the plaintiffs to bring their action within two years of discovering their injury. Voga v. Nash, 2014 Ill. App. Unpub. LEXIS 684 (Ill. App. April 1, 2014).

This is the most recent court opinion in a line of opinions involving the petitioners and their attempt to obtain a tax deduction for a permanent conservation easement donation.  Initially, the court disallowed a deduction on the basis that the easement was not protected in perpetuity.  That decision was affirmed on rehearing and a negligence penalty was not imposed on the basis that the matter was one of first impression.  On appeal of that decision, the appellate court reversed on the basis that the Tax Court analyzed the case incorrectly.  On remand, the Tax Court focused on valuation and did not give any weight to the taxpayer's expert that took a flat 12 percent reduction from fair market value for the "after easement" value of the property.  The Tax Court found the testimony of the expert for the IRS more credible.  That testimony, based on sales data, demonstrated that the façade easement restriction had no impact on market value of the property due largely to existing restrictions imposed by local historical district ordinances.  The Tax Court imposed negligence penalties of 40 percent of the amount of the underpayment and a 20 percent negligence penalty.  Kaufman v. Comr., T.C. Memo. 2014-52.

The IRS pointed out that a person with an FSA is not eligible for an HSA,  and that HSA ineligibility will continue for the entire plan year even if the balance is exhausted during the plan year.  But, IRS noted that an FSA could be designed to allow the participant to elect any carryover amount could be used as limited purpose, post deductible, or both, thus making the FSA compatible with the HSA.  The IRS noted that the carryover amount could not be transferred into any other non-health FSA, including any carryover amounts.  In addition, a cafeteria plan can design the health FSA so that an election for high-deductible health plan coverage forces the participant into the FSA.  IRS also noted that a person can decline or waive an FSA carryover amount to become HSA-eligible.  C.C.A. 201413005 (Feb. 12, 2014). 

In a Chief Counsel Advice, the IRS has said that it will presume that an entity is a partnership when a "husband and wife" own the entity unless, of course, an election is made for the entity to be disregarded for tax purposes.  The IRS cited I.R.C. Sec. 761(a) & (f) as the basis for its conclusion.  Only additional facts indicating a sham will cause the IRS to disregard the "wife" as the partner, IRS stated.  IRS also indicated that each spouse should have reported "his/her" share of net earning from self-employment, with appropriate adjustments.  The IRS did not indicate how entities owned by homosexual couples are to be treated.  C.C.A. 201411035 (Apr. 12, 2013).

Plaintiff’s business involved purchasing hay from local farmers, storing it in three different storage yards, and compressing it and shipping it around the world. Defendant was an insurer that issued plaintiff a commercial output program policy. During the policy period, two fires occurred in February in one of plaintiff’s hay yards, destroying a number of haystacks. A third fire occurred in March at a different hay yard. The insurer denied coverage for nearly all of the hay loss, asserting that plaintiff had breached the “clear space requirements contained in the storage distance warranty” of the baled hay endorsement. The insurer, however, did pay $4,509,849.71 for loss of business personal property, loss of business income, and losses stemming from trans-loading. Plaintiff filed an action against the insurer, asserting claims of breach of contract and breach of duty to indemnify. Finding that there were disputed issues of material fact, the court denied the insurer’s motion for summary judgment on the question of plaintiff’s failure to strictly comply with the warranty. The court denied the plaintiff’s motion for partial summary judgment for the same reason. The court also denied the insurer’s motion to strike new evidence, stating that the parties’ (particularly defendant’s) objections were “voluminous, superfluous, and repetitive.” All-Star Seed v. Nationwide Agribusiness Insurance, No. 12cv146L, 2014 U.S. Dist. LEXIS 44798 (S.D. Cal. Mar. 31, 2014).

In this case, a contractor incurred expenses in traveling between home and work.  The U.S. Court of Appeals for the Third Circuit upheld the Tax Court's holding that the expenses were non-deductible commuting expenses.  The bank and various supply stores were not regular work locations for the contractor.  In addition, no depreciation was allowed for the contractor's vehicle and tools.  However, other business expenses were substantiated and were deductible.  The court also rejected the contractor's tax protestor arguments concerning the unconstitutionality of the federal income tax.  Accuracy-related penalties were imposed and upheld.  The U.S. Supreme Court declined to review the case.  Bogue v. Comr., 522 Fed. Appx. 169 (3d Cir. 2013), afff'g., T.C. Memo. 2011-164, cert. den., No. 13-1030, 2014 U.S. LEXIS 2279 (Mar. 31, 2014).

The defendants were several related entities that grew avocadoes and pomegranates on tracts of property they occupied as lessees, even though the tract at issue was inadvertently left off their lease with the owners. As part of their operation, one of defendant’s agents installed pipe gates and cable gates on the tract to deter trespassing, theft, and vandalism. The cables were difficult to see, so the agent had them marked with flagging tape to improve their visibility. On the opening day of dove season, the plaintiff and two coworkers were riding an ATV through the area.  The plaintiff collided with an unmarked cable, severing his left fingers, rupturing his left femoral artery, and breaking his left femur.  The plaintiff filed an action against the defendants, seeking damages for negligence, premises liability, and negligent infliction of emotional distress. His wife sought loss of consortium damages. The trial court entered judgment in favor of the defendants, based on the recreational use immunity statute, Cal. Civ. Code §846. On appeal, the court affirmed, ruling that the defendants were licensees entitled to the protection of the recreational use statute. The court found that they were occupiers of the land pursuant to a profit a prende. The court also found that the trial court had fairly and clearly explained the standard for the willful misconduct exception to the jury. Monroe v. Yurosek Farms LLC, No. F066028, 2014 Cal. App. Unpub. LEXIS 1653 (Cal. App. 5th Dist. Mar. 7, 2014).

Plaintiffs, a retired farm couple and their daughter, were Minnesota residents looking for land investments. Plaintiffs knew the first defendant, a South Dakota resident, because the husband had attended farm auctions where the first defendant was the auctioneer, and the husband had participated in a number of consignment sales with him. The second defendant was the auctioneer’s son. Without seeking professional assistance, the plaintiffs entered into several major land transactions with the defendants. The couple purchased from the first defendant a 1,040-acre tract that was supposed to be planted with corn by the defendant and his son. They also purchased from the first defendant a 160-acre tract in South Dakota and 50 percent of a 480-acre tract (CRP ground) for their daughter. The latter tract was jointly owned by the daughter and the second defendant. After plaintiffs discovered that the 1,040 acre tract was 1,000 acres of weeds and that the 160-acre tract was not even owned by the defendant, the plaintiffs filed an action against defendants for breach of contract, deceit, and rescission. Pursuant to a default judgment, the court found the second defendant liable to the daughter for CRP payments, real estate taxes, and shared expenses. The court also entered judgment against the first defendant (and his wife), finding that the first defendant committed actual fraud in connection with the sale of the 160-acre tract. The plaintiffs were awarded $20,000 in punitive damages, in addition to their $337,974.51 in compensatory damages. The court determined that the first defendant’s conduct was reprehensible, shocking and evidenced a manipulative mind bent on taking advantage of others who trusted him. Although the plaintiffs were not entitled to rescind their contract for the 1,040-acre tract, they were awarded $149,286.69 in compensatory damages. Greeley v. Walters, No. 105003JLV, 2014 U.S. Dist. LEXIS 42627 (D. S.D. Mar. 30, 2014).

The defendant, an Iowa attorney, represented an Iowa client with a net worth of $4 million who was charged with murder.  Within days of the charge, the defendant began drafting real estate documents transferring the accused's real estate into revocable trusts and to other persons outright.  The accused shortly thereafter informed defendant that they had found a buyer for a significant amount of land the accused owned.  The buyer was an irrevocable trust that the defendant claimed he did not draft.  The irrevocable trust named as trustee a distant cousin of the accused that resided in Tennessee and listed as an address a P.O. Box in California (facts which the court did not disclose, but were revealed at the underlying trial court action in this case).  The trust contained language acknowledging a writ of attachment in the pending lawsuit against the accused.  The defendant drafted a memorandum of contract of sale of the land to the trust.  The accused was ultimately convicted of voluntary manslaughter and a later civil trial resulted in a judgment against the accused/convicted of $5.7 million.  The decedent's widow filed a disciplinary complaint against the defendant for transferring assets to the irrevocable trust to defraud creditors.  The Grievance Commission of the Iowa Bar publicly reprimanded the defendant.  On appeal, the Court reversed and dismissed the complaint on the basis that it was not obvious to the defendant that the conveyances were fraudulent.  The Court reached this conclusion in spite of the extremely unusual nature of the trust where the trustee was an out-of-state individual and the trust address was listed as a P.O. Box in California.  The Court was persuaded that the defendant could have reasonably believed that the reason for the trust's creation was to consolidate the accused's property under "one tent" to allow the accused's wife to more easily manage farming operations.  Iowa Supreme Court Attorney Discipline Board v. Ouderkirk, No. 13-1124, 2014 Iowa Sup. LEXIS 33 (Iowa Sup. Ct. Mar. 28, 2014).

Various meat industry groups sued to enjoin enforcement of the Country of Origin Labeling (COOL) rules (78 Fed. Reg. 31, 367) that require meat retailers of "muscle cuts" to list the countries of origin and production steps occurring in each country.  The groups claimed that providing such factual information violated the COOL statute (7 U.S.C. Sec. 1638a(a)(2)(E)) and the First Amendment.  The trial court denied the injunction on the basis that the groups were not likely to prevail on the merits.  On appeal, the court affirmed.  The appellate court determined that the groups were wrong on their claim that the rule unlawfully bans commingling because the rules don't ban any element of the production process, but merely requires accurate labeling with the three phases of production that are named in the statute  and will require changes in the production process.  The court also held that there was no restriction on free speech in violation of the First Amendment because the rules merely require disclosure of factual information that have legitimate values of patriotism and providing assurance to customers of food safety to those that believe the U.S. is superior to other countries on the food safety issue.  The court's affirmance of the denial of the preliminary injunction means that the meat industry groups cannot suspend the enforcement of the rules while a lower court decides the merits of the case.  American Meat Institute, et al. v. United States Department of Agriculture, No. 13-5281, 2014 U.S. App. LEXIS 5710 (D.C. Cir. Mar. 28, 2014)

The petitioner and his wife married in late 2008 and purchased the marital home in late 2009.  Before the purchase, the wife had owned a principal residence and resided in it for more than five consecutive years as required by I.R.C. Sec. 36(b)(1)(D) to qualify as long-term homeowner.  The petitioner had not owned a home during the prior three-year period and, therefore, qualified as a first-time homeowner.  On the couple's joint tax return for 2009, the couple claimed a $6,500 long-term homeowner tax credit.  The IRS denied the credit in full on the basis that the spouses did not both qualify for long-term homeowner credit.  The IRS conceded that the petitioner would have qualified for the first-time homeowner credit in his own right and that the wife would have qualified for the long-term homeowner credit in her own right, but read the statute to require both spouses to satisfy either the long-term homeowner requirement or first-time homeowner requirement on joint return. The Tax Court reasoned that such a statutory construction  was "absurd," and held that both spouses qualified for one of the homeowner credits and that the credit was limited to the long-term homeowner credit of $6,500.  On appeal, the appellate court reversed on the basis that the statute was clear that the term "individual" included both spouses in a marriage and that each homeowner credit was independent of the other.  Thus, both spouses had to qualify for the same credit.  While the petitioner would have been able to claim the first-time homebuyer credit ($8,000) had he merely lived with his girlfriend in the purchased home without marrying her, the three-judge panel stated that it's holding was not "so gross as to shock the general moral...sense."  Packard v. Comr., 139 T.C. No. 15 (2012), rev'd. and rem'd., No. 13-10586, 2014 U.S. App. LEXIS 5584 (11th Cir. Mar. 27, 2014).

In this case, the estate of a deceased gambler, tried to deduct gambling losses in excess of gambling winnings and also tried to deduct gambling business expenses.  The court, however, held that the gambler did not engage in gambling activities with the intent of making a profit.  The gambler had significant losses from gambling and reported them along with gambling winnings on Schedule C.  The gambler had significant losses for a five-year period, had no business plan, no budget for gambling activities, did not have a separate bank account for gambling activities, made no attempt to make gambling activities profitable, did not consult anyone with expertise in gambling and didn't operate gambling activities  in a businesslike manner.  The court imposed an accuracy-related penalty.  Estate of Chow v. Comr., T.C. Memo. 2014-49 .

Decedent and spouse founded mail-order horticulture business.  Years earlier, the couple sold their stock to the company's ESOP with the company financing the purchase by borrowing $70 million including the trustee of the ESOP.  Decedent's spouse contributed his sale proceeds to a revocable trust that split into three marital trusts on his death.  The ESOP beneficiaries eventually sued and the horticulture business then filed bankruptcy.  While the lawsuit was pending, the decedent died and the marital trusts were valued in the decedent's estate at over $50 million.  The estate claimed a deduction for the pending litigation of just under $15 million.  The estate claimed discounts for litigation hazards, and lack of marketability (because the ESOP trustee froze the decedent from withdrawing principal).  IRS asserted an estate tax deficiency.  The Tax Court denied the discount for litigation hazards and also for lack of marketability.  On appeal, the court affirmed.  The pending litigation's impact on value as of the date of the decedent's death was not ascertainable with reasonable certainty.  Marital trusts included in decedent's estate.  Estate of Foster v. Comr., No. 11-73400, 2014 U.S. App. LEXIS 5563 (9th Cir. Mar. 26, 2014), aff'g., T.C. Memo. 2011-95.

The Clean Water Act (CWA) specifies that a "pollutant" cannot be discharged from a point source into the "navigable waters of the U.S. without a federal permit from the EPA.  In 2006, the United States Court of Appeals for the Second Circuit ruled that that discharge of water containing pollutants from one distinct water body to another constitutes the addition of a pollutant under the CWA that requires a permit.  Catskill Mountains Chapter of Trout Unlimited, Inc., et al. v. City of New York, 451 F.3d 77 (2d Cir. 2006).  But, in 2008, the EPA developed a regulation (78 Fed. Reg. 33697 (Jun. 13, 2008)) that excluded water transfers from the permit requirements of the CWA.  The rationale behind the rule was couched in the "unitary waters" interpretation that had been previously adopted by the U.S. Supreme Court.  The U.S. Circuit Court of Appeals for the 11th Circuit upheld the regulation in 2010 as a reasonable interpretation of the statute which requires an "addition" of a pollutant before a permit is required.  Friends of the Everglades, et al. v. South Florida Water Management District, et al., 570 F.3d 1210 (11th Cir. 2009), reh'g., den. 605 F.3d 692 (11th Cir. 2010), cert., den., 131 S. Ct. 643 (2010).  But, in this case, the federal district court for the Southern District of New York, reached a different conclusion   The court vacated the rule, siding with various environmental groups that had brought the case, on the basis that the rule violated the Supreme Court's plurality opinion in Rapanos v. United States, 547 U.S. 715 (2006).  The district court said that the type of water transfers subject to the rule were "navigable waters" under any of the various interpretations of CWA jurisdiction espoused by the Supreme Court in Rapanos.  Thus, the district court vacated the rule insomuch as the phrase "navigable waters" was interpreted by the Supreme Court.  The trial court remanded the rule to the EPA, with instructions for the EPA to provide additional explanation with respect to its interpretation of the rule.  The case is important to crop irrigation agriculture and many water management projects.  Catskill Mountains Chapter of Trout Unlimited, Inc., et al. v. United States Environmental Protection Agency, et al., No. 08-CV-5606 (KMK), 2014 U.S. Dist. LEXIS 42535 (S.D. N.Y. Mar. 28, 2014). 

This is another case that points out that an executor has personal liability for unpaid federal estate tax when the estate assets are distributed before the estate tax is paid in full.  I.R.C. Sec. 7402 controls and the executor was personally liable for $526,506.50 in delinquent federal estate tax and penalties - the amount of distribution at the time of the decedent's death.  United States v. Whisenhunt, et al., No. 3:12-CV-0614-B, 2014 U.S. Dist. LEXIS 38969 (N.D. Tex. Mar. 25, 2014). 

In 1992 and 1993, the plaintiffs donated two lakefront conservation easements to a land trust. After nearly a decade of IRS litigation, the Sixth Circuit Court of Appeals determined that the easements met the qualifications for permanent conservation easements, but that they were not worth as much as stated on the tax returns because they were not as large as the parties had believed them to be. Because they incurred significant interest, penalties, and attorney fees, the plaintiffs sought to sell a portion of the property, but their neighbors complained that a sale would violate the terms of the easement. The trust filed an action against the plaintiffs to reform the easements to the size they were originally believed by the parties to be. The plaintiffs filed a counterclaim, asserting breach of contract, slander, and tortious interference.  The case was partially dismissed and partially settled. Shortly thereafter, the plaintiffs filed their present action, asserting malicious prosecution, abuse of process, and tortious interference with a business relationship against the trust and the neighbors. The district court dismissed the claims on res judicata grounds. On appeal, the court affirmed the summary judgment, but on grounds that the plaintiffs had failed to state a claim. The trust had a valid business interest in determining whether the plaintiffs could divide their property. The plaintiffs also failed to set forth facts showing that the neighbors interfered with any valid business relationship or that the plaintiffs incurred required “special damages.”  Glass v. Van Lokeren, No. 302385, 2014 Mich. App. LEXIS 496 (Mich. Ct. App. Mar. 25, 2014).

The U.S. Supreme Court reversed the United States Court of Appeals for the Sixth Circuit in holding that lump-sum severance paid to laid-off employees constitutes taxable wages for FICA purposes.  The employer paid the FICA tax on the severance payments and then filed for a refund.  The bankruptcy court, district court and appellate court all agreed with the employer that severance pay was not subject to FICA tax.  The appellate court, in supporting it's decision did not utilize the FICA definition of wages, but the Supreme Court did utilize the FICA definition contained in I.R.C. Sec. 3121(a). A different case had held that severance pay constituted FICA wages and the Supreme Court was asked to clarify the opposing court decisions.  However, the Supreme Court held that employers can avoid FICA taxes on severance pay if an employer creates a trust, funds it and employees are then paid weekly with payments tied to state unemployment benefits received.  United States v. Quality Stores, Inc., et al., No. 12-1408, 2014 U.S. LEXIS 2213, rev'g., 693 F.3d 605 (6th Cir. 2012).

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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