Annotations - Last 30 Days

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 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.  Hawkes 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 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).


In this Chapter 12 case, the debtor took over his father’s 3,000-acre crop and dairy farm upon the father’s retirement.  The debtor got divorced and, as a result, only had 1,000 crop acres at the petition date.   Because the row crop business suffered continual losses, the debtor sold some of the land to his son and began growing berries and raising pheasants for hunting.  The debtor became licensed by the state to acquire and release pheasants.  The pheasants were raised in a barn until fully grown. The incubation period of three weeks required the debtor to ensure that the birds were protected and remained disease-free.  The pheasants were ultimately released for hunts by customers on the debtor's land that had been placed in the CRP. Upon filing Chapter 12, the creditors argued that debtor was not engaged in farming but in a recreational activity.  The court determined that the debtor was engaged in farming under the totality of the circumstances citing  the dissent in Armstrong v. Corn Belt Bank, 812 F.2d 1024 (7th Cir. 1987), cert. den., 484 U.S. 925 (1987) and In re Maike, 77 B.R. 832 (Bankr. D. Kan. 1987).  However, the court determined that the amount of the debtor’s debt was not 50 percent or more related to a farming operation.  This was the result because the court concluded that the debt related to the debtor’s personal residence did not arise out of the farming operation, and there was no evidence presented that the mortgage secured the farm debt.   The court held that the case was to be dismissed or converted to a different chapter.   On appeal, however, the appellate court held that the residence debt, as non-farm related, should be excluded from aggregate debt - both the numerator and the denominator in the calculation set forth in 11 U.S.C. Sec. 101(18)(A).  However, the appellate court determined that the bankruptcy court correctly concluded that the residence debt was not farm-related debt.  Upon recalculation, 93 percent of the aggregate debt arose from a farming operation and satisfied the farm debt test of Chapter 12.  As for the corporation owning the CRP land on which the pheasant hunts were conducted, the court determined that simply having land in the CRP was insufficient to constitute a farming operation by itself without other income from farming.    In re Acee, No. 6:14-CV-0259 (LEK), 2015 U.S. Dist. LEXIS 41055 (N.D. N.Y. Mar. 31, 2015), aff'g and rev'g., No. 12-61632, 2013 Bankr. LEXIS 4789 (Bankr. N.D. N.Y. Nov. 12, 2013).


The plaintiff, a Kansas farmer, sold hay to buyers in the U.S.  The defendant operated a cattle operation in Texas and bought hay from the plaintiff in 2011 on separate occasions.  Ultimately, the buyer did not pay for $15,992.35 worth of hay.  The plaintiff sued, asserting relief under the civil federal Racketeer Influenced and Corrupt Organizations Act (RICO) and the Kansas Consumer Protection Act (KCPA).  The defendant motioned to dismiss the claims and the court agreed.  On the RICO claim, the court held that the plaintiff had failed to allege close-ended continuity that threatens future criminal conduct and that the matter was simply a "garden-variety fraud and deceit case."  On the KCPA claim, the court noted that the plaintiff is a supplier and not a consumer and that the statute applied to protect consumers.  Cory v. Bailey, No. 14-1258-MLB, 2015 U.S. Dist. LEXIS 42328 (D. Kan. Mar. 31, 2015).


A third party bought cattle and shipped them to a feedyard for feeding and care until they were sold on the third party's behalf to various buyers. The feedyard deposited the sale proceeds with a creditor for application against its line of credit. The feedyard would then pay the third party an amount equal to the sales proceeds less the feed cost. Several payments to the third party occurred during the year immediately preceding the feedyard's bankruptcy filing during which time the feedyard was insolvent. The bankruptcy trustee motioned to recover the payments made to the third party within a year of the bankruptcy filing, and the bankruptcy court ruled in the trustee's favor. On appeal, the third party claimed that the proceeds were not a "transfer of an interest of the debtor in property" as required by 11 U.S.C. Sec. 547(b) because the funds were not the debtor's property but were held in trust by the feedyard as bailee for the third party. In addition, the third party claimed that the proceeds were not traceable to the funds transferred to the third party because the feedyard used the proceeds to pay its debts and, as such, the state (NE) "swollen assets" doctrine imposed a constructive trust on the funds. On appeal, the court determined that the third party was purportedly a bailor whose bailment property was misused by the debtor-bailee which led to the inability of the third party to recover under the bailment agreement alone. Accordingly, the court determined that genuine issues of material fact remained with respect to the existence of a bailment under NE law that would extend to the proceeds of the cattle sales and, thus, whether the proceeds were the debtor's property.  On remand, the bankruptcy court determined that the trustee was entitled to the proceeds as preferential transfers upon finding that the proceeds were the property of the feedlot.  The court reached that conclusion based on the fact that the creditor had a security interest in any funds in any of the feedyard's deposit accounts and could apply the funds against any loans or other of the feedlot's obligations.  The court also determined that neither the feedlot nor the creditor obtained the funds by fraud or misrepresentation and, thus, a constructive trust could not be imposed.  Because there was no conversion, the "swollen assets" doctrine was inapplicable.  The transactions also did not occur in the ordinary course of business. In re Big Drive Cattle, L.L.C. v. Overcash, No. BK11-42415, 2015 Bankr. LEXIS 991 (Bankr. D. Neb. Mar. 30, 2015), on remand from, No. 4:14CV3064, 2014 U.S. Dist. LEXIS 80853 (D. Neb. Jun. 13, 2014).  


The defendant insurance company filed this declaratory judgment action seeking a determination that it's "motor vehicle" exclusion in a farm insurance policy applied to bar coverage for the plaintiff, a farmer that had purchased the policy for coverage for his farm.  The plaintiff had been sued by a third party for injuries that the third party's granddaughter sustained while driving the plaintiff's all-terrain vehicle (ATV).   The plaintiff owned a farm on which he has cattle.   The plaintiff used the ATV daily to check the cattle and fences.  The ATV was designed to be used off-road.  The plaintiff's 14 year old daughter and her 14 year old friend (the third party's granddaughter) asked to use the ATV, but the plaintiff refused to give permission because he was not going to be home.  However, the girls found the keys and took the ATV for a ride on a public road resulting in the injuries to the granddaughter.  The third party sued the plaintiff for negligence, and the plaintiff asked the defendant to provide the defense and pay the third party's claim.  The policy excluded coverage for bodily injury arising from the use of a "motor vehicle."   However, the exclusionary clause did not apply to farm implements operated on public roads or "mobile equipment."       The trial court ruled in favor of the defendant, finding that the ATV did not qualify as either a farm implement or mobile equipment.  On appeal, the court reversed determining that the policy language of "mobile equipment" could reasonably be construed to provide coverage for the ATV accident.  Partin, et al. v. Georgia Farm Bureau Mutual Insurance Company, No. A14A2025, 2015 Ga. App. LEXIS 213 (Ga. Ct. App. Mar. 27, 2015). 


In this adversary action brought by a bank, the bank argued that the debtors’ obligations under a promissory note and an ag security agreement should be excepted from discharge in the Chapter 7 case under 11 U.S.C. Sec. 523(a)(6) due to the debtors’ willful and malicious injury to the property.  The debtors had borrowed $150,000 from the bank to finance their farming operation.  The security agreement required the debtors to make all proceeds from the sale of collateral available immediately to the bank by depositing the proceeds in the debtors’ account with the bank.  The bank did not enforce that policy.  The husband farmer was injured in a farming accident and his relatives took over the farming operation but did not deposit all proceeds from the farming operation into the bank account.  Instead, the majority of funds used to pay medical bills.  The husband’s son started his own farming operation with the use of his father’s equipment, with the son ultimately providing financial assistance to his father.  The debtors filed Chapter 7 and the bank argued that the funds not deposited into the bank account should be excepted from discharge due to willful and malicious injury to the bank.  The court, however, determined that the bank failed to prove willfulness, malice and injury as required by the statute.  The debtors’ testimony was viewed as credible.  In re Jacobsen, No. 13-00331, 2015 Bankr. LEXIS 94 (Mar. 27, 2015).    


The IRS has issued another item of guidance stating that Form 1099 need not be issued for income from freight services.  Treas. Reg. 1.6041-3(c) exempts payments for "freight services" from the general requirement for payors to issue Form 1099 to independent contractors and others with which they do business.  Thus, trucking companies need not issue Form 1099s to owner-operators that are under lease for freight hauling services.  The same rule applies to farmers that make payments in connection with the trucking or hauling of livestock, grain or other farm products - no Form 1099 is required.  CCM 20151002F (Jun. 6, 2014).   


The taxpayer was a non-exempt cooperative and a partner in an LLC taxed as a partnership.  It wanted to treat the partnership's grain purchases as its per-unit retains paid in money (PURPIM) when the partnership bought grain from the taxpayer's current or former patrons.  The IRS determined that it could not.  Absent an agency relationship, the taxpayer did not satisfy the requirement that the grain be bought from the taxpayer's current or former patrons.  The fact that the LLC was taxed as a partnership and that the taxpayer's income from the partnership flowed through to its members was irrelevant because an LLC is not a cooperative and cannot ascribe to itself the attributes and ability of a member cooperative to issue PURPIMS.  CCM 20150801F (Apr. 22, 2014).


In 2000, a group of doctors formed an LLC to provide diagnostic testing services to patients in two counties.  They had a post-withdrawal non-compete agreement prepared that included a provision protecting member investments by restricting competition of former members in the two counties in which the LLC operated.  The provision specified that "each member shall...refrain from competing with the Company" within the two designated counties.  About five years later, one of the doctors began constructing a sleep laboratory and was going to operate it in the designated counties.  The LLC informed the doctor that such operation would violate the LLC agreement, so he withdrew from the LLC and operated the sleep lab.  The LLC sued the doctor for breach of the non-compete agreement.  The trial court ruled for the former member, holding that the agreement only applied to current or active members.  On appeal, the court affirmed, holding that the agreement no longer applied to a former member.  The court also held that the withdrawn doctor did not breach any implied duty of good faith and fair dealing and that the LLC had foregone any breach of fiduciary duty claim.  Grants Pass Imaging & Diagnostic Center, LLC, et al. v. Machini, No. A152437 (Ore. Ct. App. Mar. 25, 2015).    


Passive losses cannot be used to offset income from non-passive activities.  The petitioners, a married couple, operated a family business that had its genesis in the husband's father who started a lumber company in the late 1970s.  For planning purposes, the business developed into a real estate development business comprised of an S corporation and a partnership.  The enterprise incurred losses and the issue was whether the separate entities comprised a single activity under Treas. Reg. Sec. 1.469-4(c) for purposes of the material participation 500-hour test.  The court examined the factors under the regulation for determining the presence of an "appropriate economic unit," and determined that the S corporation and the partnership had common control and conducted the same type of business activity.  The court also determined that the entities were interdependent, used common employees and combined their financial reporting.  The petitioners were able to satisfy the 500-hour test in the combined entities based on witness testimony and phone records of business activity.  Lamas v. Comr., T.C. Memo. 2015-59. 


The petitioner, a C corporation that employed an eye doctor who also owned the C corporation, paid a $2,000,000 bonus to the eye doctor in 2007.  The payment of the bonus by the C corporation had the effect of eliminating corporate income, taxable at a 35 percent rate.  The petitioner also carried over an NOL from 2007 to 2008.  The IRS argued for a reduced bonus on the basis that $2,000,000 was not reasonable under the facts.  The court agreed with the IRS on the basis that the C corporation provided no methodology as to how the doctor's bonus was computed.  The court deemed $1 million of the bonus payment to be "excessive compensation" taxed at 32 percent.   The court also upheld the IRS determination of penalties in the amount of $62,000.  Midwest Eye Center, S.C. v. Comr., T.C. Memo. 2015-53.


The petitioners, a married couple, came into millions of dollars when the husband's family baking company founded by the petitioner's grandfather was sold.  The husband had started working for the business after dropping out of college.  He used the proceeds from the buyout to get involved in raising Arabian horses.  His venture, which is still ongoing, proved overwhelmingly unsuccessful, losing millions of dollars from 2004 through 2007, the years under review.  The IRS denied the losses under the hobby loss rules.  The court weighed the nine factors (not all with the same weight) and ruled for the petitioners.  The court note that the petitioners had made various business moves designed to facilitate the profitability of the horse activity, including borrowing against non-farm investments to channel funds into the horse activity.  The petitioner also sold many investments that resulted in a multi-million dollar capital gain to try to generate funds for the horse activity.  Based primarily on these events, the court determined that the factors weighed in the petitioners' favor and the losses were not limited by the hobby loss rules.  Metz v. Comr., T.C. Memo. 2015-54. 


The petitioner worked for Dupont in recruiting and human relations from 1968 to 1992, when he retied and created an S corporation through which, as a contractor, he offered many of the same services that he performed as an employee of Dupont.  Over the years, the s corporation income declined significantly, but the S corporation still had significant deductions. The IRS disallowed many of the deductions for lack of substantiation.  The court largely agreed with the IRS on the basis that the petitioner failed to show that the claimed deductions were ordinary and necessary expenses for the S corporation.  Instead, many of the expenses were for personal items.  The petitioner's automobile was also found to be used primarily for personal reasons and the petitioner failed to substantiate the extent of business use.  Consequently, only a small portion of claimed business deductions were  allowed.  Moyer v. Comr., T.C. Memo. 2015-45.


The debtors filed Chapter 7 in late 2009 and the creditor, a bank, filed four claims that were secured by the debtors' residence.  The bank knew that the debtors received a discharge in early 2010.  The debtors' Chapter 7 case was then converted to Chapter 12  and new payment terms were worked out resulting in a direct assignment of proceeds from the debtors' dairy farm (i.e., milk checks) to the bank along with new interest rates and maturity dates.  The debtors made the required payments for about two months until the checks no longer met the amount required under the new payment terms.  Almost two years later, the bank started foreclosure proceedings.  The debtors filed a contempt motion, claiming that the bank's conduct violated the discharge injunction of 11 U.S.C. Sec. 524(a)(2).  The debtors claimed that the milk payments were involuntary payments.  The bankruptcy court ruled for the bank.  On appeal, the court affirmed.  The court noted that the bank's conduct was exempt from the discharge injunction because the agreement between the parties - (1) involved a situation where the bank retained a security interest in the debtors' principal residence; (2) was entered into in the ordinary course of business between the creditor and debtor; and (3) was limited to seeking or obtaining periodic payments associated the bank's security interest in the residence (11 U.S.C. Sec. 524(j)).  In re Teal, No. 4:14-CV-15, 2015 U.S. Dist. LEXIS 32315 (E.D. Tenn. Mar. 17, 2015).  


At issue were conflicting deeds involving 202 acres.  A 1945 deed used a metes and bounds description to convey title to the 202 acres which included the 34.28-acre tract at issue.  A 1973 deed conveyed almost 5,000 acres in three tracts and the metes and bounds description did not contain the 34.28-acre tract, but a general description that referred to a previous deed did.  The issue was whether the 1973 deed subsequently conveyed the same 34.28-acre tract that was included in the 1945 deed and, consequently, who the present owner of the tract is.  The trial court determined that the metes and bounds description in the 1973 deed controlled, but the appellate court reversed.  On further review, the Supreme Court reversed the appellate court.  The court noted that the metes and bounds description was not defective or doubtful and was not ambiguous.  The court also determined that the metes and bounds description, which was more specific, better evidenced the parties' true intention and controlled over the more general description.  Stribling, et al. v. Millican DPC Partners, et al., No. 14-0500, 2015 Tex. LEXIS 270 (Tex. Sup. Ct. Mar. 20, 2015).


The plaintiff was watching her daughter participate in a high school soccer match at the defendant's facility.  After the match, while leaning on a gate to sign the school's required sing-out form for the daughter, the plaintiff fell approximately five feet and injured her ribs and arm.  The plaintiff sued for damages and the defendant asserted the state (TX) recreational use statute as a defense which would limit liability to intentional acts or gross negligence.  The defendant claimed that attending a soccer match was a recreational use covered by the statute.  The court disagreed on the basis that attendance at a soccer match was not a recreational use contemplated by the statute.  University of Texas at Arlington v. Williams, No. 13-0338, 2015 Tex. LEXIS 268 (Tex. Sup. Ct. Mar. 20, 2015).


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

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