Annotations - Last 30 Days

Marijuana is an illegal drug under federal law and I.R.C. Sec. 280E bars deductions for any amounts related to trafficking in controlled substances.  However, the taxpayer can reduce gross receipts by the cost of goods sold.  Here, IRS said that expenses that would not be included in cost of goods sold because they would normally be capitalized under I.R.C. Sec. 263A (and reduce income) cannot be capitalized when they relate to selling marijuana.  Also, IRS said that when they audit a cash-basis marijuana seller, the IRS can allow the seller to deduct its costs that would have been inventoriable had the taxpayer used the accrual method.  C.C.A. 201504011 (Dec. 10, 2014).


Two farm-related organizations, the American Farm Bureau Federation and the National Pork Producers' Council, sued the Environmental Protection Agency (EPA) under the Administrative Procedures Act to bar EPA's release of member information involving physical addresses and details concerning the members' operation of Confined Animal Feeding Operations (CAFOs).  Under the Clean Water Act (CWA), CAFO information involving location and certain operational details must be made public as a condition of obtaining a Natdional Pollution Discharge Elimination System (NPDES) permit.  An NPDES permit must be obtained to operate the CAFO. In 2012, the EPA received Freedom of Information Act (FOIA) requests from several environmental groups seeking CAFO information. In response, EPA released comprehensive data providing precise CAFO locations, animal type and number of head, and personal contact information, including names addresses, phone numbers and email addresses of CAFO owners.  Before the release of information, the Department of Homeland Security had informed EPA that the release of such personal and confidential information could constitute a domestic security risk.  Such personal business information is specifically exempted form disclosure under FOIA under enumerated exemptions No. 4 and No. 6.  The defendants (EPA and intervening activist groups) argued that the plaintiffs lacked standing to sue due to the plaintiffs having not suffered injury or facing the imminent threat of injury. The plaintiffs argued that they would be injured and that at least one member had already been physically invaded.  However, the court determined that the plaintiffs failed to establish standing because they failed to demonstrate an actual or imminent injury, framing the issue as one over "loss of control of their personal information."  The court then reasoned that the potential release concerned information that was already publicly available and was easily accessible via the Web.  The court noted that the one party that had suffered injury sustained it before the EPA responded to the FOIA request.  The court failed to address, however, the obvious question of why the activist groups filed a FOIA request for (what the court stated was) information that was already publicly and readily available. American Farm Bureau Federation, et al. v. U.S. Environmental Protection Agency, et al., No. 13-1751 ADM/TNL Civil No. 13-1751 ADM/TNL, 2015 U.S. Dist. LEXIS 9106 (D. Minn. Jan. 27, 2015).  


The plaintiffs, citizen activists opposed to confined animal feeding operations (CAFOs), sued the U.S. EPA, Ohio Dept. of Agriculture (ODA) and the Ohio EPA under the Clean Water Act (CWA) claiming that the ODA was improperly issuing National Pollution Discharge Elimination System (NPDES) for CAFOs without EPA approval via a memorandum of agreement, and that the Ohio EPA had transferred part of its authority to administer NPDES permits to the ODA without permission from the federal EPA by allowing the ODA to issue a manure management plan as a condition for obtaining an NPDES permit.  The transfer of authority was pursuant to a state law enacted in 2000 that transferred authority from the Ohio EPA to the ODA.  ODA then sought federal EPA approval to transfer NPDES permit authority for CAFOs to the ODA so that CAFO regulation would be centralized under the ODA.  The court previously denied the plaintiffs a preliminary injunction, and in this decision dismissed the plaintiffs' case.  The court noted that any manure management plan that is submitted to the Ohio EPA is reviewed by the Ohio EPA and can only be used as an NPDES permit application if it satisfies the CWA.  The court noted that the plaintiffs' assertions were "completely devoid of merit."  Askins, et al. v. Ohio Department of Agriculture, No. 3:14-cv-01699-DAK (W.D. Ohio Jan. 27, 2015).


In this case, the petitioner operated a retail business that sold home building materials and supplies.  The petitioner built two new retail stores.  As of December 31, 2008, the buildings were substantially complete and partially occupied and the petitioner had obtained certificates of completion and occupancy and customers could enter the stores.  However, the stores were not open for business as of the end of 2008.  The petitioner claimed the 50 percent GoZone depreciation allowance for 2008 on the two buildings which created a tax loss for 2008 and allowed the petitioner to carry back the losses for the 2003-2005 tax years and received a refund.  The IRS disallowed the depreciation deduction on the basis that the petitioner had not put the buildings in service and assessed a deficiency of over $2.1 million for tax years 2003-2008.  The petitioner paid the deficiency and sued for a refund.  The IRS argued that allowing the depreciation would offend the "matching principle" because the petitioner's revenue from the buildings would not match the depreciation deductions for a particular tax year.  The court held that this argument was "totally without merit."  As to the government's "placed in service" argument, the court noted that Treas. Reg. Sec. 1.167(a)-11(e)(1) says that placed in service means that the asset is in a condition of readiness and availability for its assigned function.  With respect to a building, the court noted that this meant that the building must be in a state of readiness and availability without regard to whether equipment or machinery housed in the building has been placed in service.  The court held that there was no requirement that the petitioner's business must have begun by year-end.  Cases that the IRS cited involving equipment (in one case an airplane) being placed in service were not applicable, the court determined.  The court also noted that the IRS's own Audit Technique Guide for Rehabilitation Tax Credits stated that "[A] 'Certificate of Occupancy' is one means of verifying the 'Placed in Service' date for the entire building (or part thereof)".  The court noted that the IRS had failed to cite even a single authority for the proposition that "placed in service" means "open for business,"  and that during oral arguments admitted that no authority existed.  The court granted summary judgment for the petitioner and noted that the petitioner could pursue attorney fees if desired.  Stine, LLC v. United States, No. 2:13-03224, 2015 U.S. Dist. LEXIS 9850 (W.D. La. Jan. 27, 2015). 


The defendants, from the Bel Air, California, area, were arrested in Illinois and charged in a two count indictment with violating the Animal Enterprise Terrorism Act (18 U.S.C. Sec. 43) (Act) for terroristic acts committed upon an Illinois mink farm.  One of the charges involved using a facility of interstate and foreign commerce for the purpose of damaging and interfering with the operation of an animal enterprise under the Act.  Two cells phones were found in their car at the time of the arrest and the government searched those phones pursuant to a search warrant.  The search indicated contact with a third cell phone and the government sought an order seeking historical cell site and toll record information for the third phone.  The defendants claimed that the government had to obtain a search warrant to obtain that information because the defendant had a reasonable expectation of privacy in the information.  The court disagreed with the defendants, noting that no federal case had ever determined that obtaining such information implicated the Fourth Amendment's requirement of a search warrant.  The court held that the defendants did not have an expectation of privacy in historical cell site information.  The court also noted that the records were relevant and material to the ongoing criminal investigation of the defendants and that the third cell phone's number belonged to one of the defendants.  United States v. Lang, et al., No. 14 CR 390, 2015 U.S. Dist. LEXIS 7553 (N.D. Ill. Jan. 23, 2015). 


The petitioners (married couple) owned a condominium as a rental property and the husband managed the property.  The husband also had a full-time job that was not a real estate trade or business.  The petitioners attempted to deduct the loss associated with their rental property, but the IRS disallowed the loss on the basis that the petitioners did not satisfy the real estate professional test.  While the husband claimed that he spent 799 hours in the rental activity, he testified that some of his entries in his logs and calendars were inaccurate and some of his testimony was inconsistent.  The court also noted that the husband would have to put more hours into the rental activity than he did his full-time job.  The court upheld the IRS determination on the basis that the petitioners failed to prove that the real estate professional test had been satisfied.  Flores v. Comr., T.C. Memo. 2015-9   


The petitioner was a long-haul over-the-road truck driver who spent many weeks on the road and was compensated on a per-mile basis.  When not traveling for work, the petitioner lived in Minnesota with his family.  The petitioner claimed deductions for meals and lodging while traveling, claiming that he incurred the expenses while "away from home."  The court determined that the petitioner was never away from his "tax home" and was not entitled to business-related deductions for meals and lodging under I.R.C. Sec. 162.  The court noted that the petitioner didn't establish that he paid household expenses for the communal kibbutz in MN or used the MN address for voter registration purposes.  Jacobs v. Comr., T.C. Summ. Op. 2015-3       


The petitioner entered into contracts to produce unfertilized eggs for transfer to infertile couples.  The contracts characterized the payments as being for the petitioner's time, effort, inconvenience, pain and suffering and not in exchange for or purchase of eggs.  The petitioner underwent numerous physical exams and self-administered painful hormonal injections.  The petitioner suffered bruising and an eventual surgery to harvest the eggs.  In total, the petitioner was paid $20,000 pursuant to the contracts for the tax year at issue, received a Form 1099 for the total amount but excluded the amount from income under I.R.C. Sec. 104(a)(2) as damage payments for pain and suffering.  The IRS disallowed the deduction.  The court agreed with the IRS, construing the payments as being received for personal services.  The fact that the petitioner suffered physical pain or injury during the performance of rendering services pursuant to the contract did not change the result.  The payment was not received on account of personal injuries or sickness, but rather for services.  The court noted that the petitioner voluntarily contracted to be paid to produce eggs via a process that involved pain and suffering.  Perez v. Comr., 144 T.C. No. 4 (2015).


 The plaintiff had been a farmer for 54 years and needed a tractor with more horsepower to use in his farming operation.  The plaintiff saw the defendant's online ad for a 1994 John Deere tractor which stated that the tractor was in "excellent condition."  The defendant also told the plaintiff over the phone and in person that the tractor was "field ready."  The plaintiff inspected the tractor and was informed that the engine had been rebuilt and the tractor repainted.  The plaintiff operated the tractor down the road for a mile and informed the defendant that a hose and hydraulic plug needed replaced.  The repairs were made and the plaintiff bought the tractor for $47,000.  The day after delivery, the plaintiff discovered a major oil leak and a mechanic's inspection revealed major mechanical malfunctions and that the tractor needed numerous repairs before it could be used.  The defendants refused to take the tractor back or refund the purchase price.  The plaintiff sued for breach of express warranty and breach of implied warranty of fitness for particular purpose.  The trial court ruled for the defendant on the basis that neither an express warranty nor an implied warranty of fitness had been created.  On appeal, the court affirmed.  No express warranty became a part of the basis of the bargain because the plaintiff inspected the tractor, determined it was in need of some repairs and was familiar with tractors based on his experience.  Likewise, no implied warranty of fitness existed because the plaintiff was an experienced farmer and had inspected the tractor and demanded that repairs be made before delivery.  Thus, the plaintiff did not rely on the defendant's skill or judgment in furnishing the tractor.  Chinn v. Fecht, No. 3-14-0320, 2015 Ill. App. Unpub. LEXIS 20 (Ill. Ct. App. Jan. 9, 2015). 


This case involved contractual negotiations concerning a 190-acre tract of land near Houston, TX.  The defendant, owner of a Houston area logistics company, was the first to enter into an option contract to buy the tract.  Other options were also entered into by the owner with other parties.  That lead to litigation, and a developer with whom the defendant had previous business dealings, became interested in the property, but couldn't acquire the property with the litigation concerning the tract pending.  The developer (the plaintiff in this case), acting through its agent, offered to pay the defendant's attorney's fees in the pending litigation because, as the agent stated, the plaintiff and the defendant were going to become partners concerning the development of the property.  The defendant received $10,000 from the plaintiff for the defendant's attorney's fees.  The litigation ultimately settled and the plaintiff agreed to purchase the property when all other parties agreed to release their rights.  In exchange for the defendant's agreement to settle which would allow the plaintiff to buy the tract, the plaintiff's agent orally promised the defendant that the defendant would become a partner in the development of the tract and that the defendant would receive $1 million plus an interest in the profits from future development and sale of the property.  Upon the plaintiff's sale of 20 acres of the tract, the defendant asked for his $1 million, but the plaintiff's agent stated that the plaintiff could only pay $500,000 "right now", implying that the balance would be paid later.  Upon being presented the $500,000 check, the plaintiff's agent presented the defendant with a document that the agent said was a "receipt" and that, "It's nothing.  You don't have to worry about it."  The agent also told the defendant that he would get the balance of the $1 million when the property was further developed.  The defendant did not read the document, because he was "in a hurry" and didn't have his glasses or use his magnifying glass, which he needed to read. The document turned out to be a carefully drafted release under which the defendant gave up any and all interest in the tract and all claims against the plaintiff.  The defendant sued for breach of contract, breach of partnership fiduciary duties and fraud.  The plaintiff claimed that the oral contract was unenforceable under the statute of frauds.  The trial court jury found for the defendant on all claims but determined that the defendant did not suffer damages.  The trial court determination was affirmed on appeal that there was an oral contract that the plaintiff had breached that was supported by the plaintiff's payment of $500,000 as consideration.  The appellate court awarded costs to the defendant and remanded for a new trial on attorney's fees.

On further review, the TX Supreme Court reversed.  The Court determined that the defendant could not have justifiably relied on the agent's statements concerning the content of the "receipt" which was actually a release.  The Court noted that the document was obvious on its face that it was a release, and that reliance on the agent's misrepresentations concerning the document was not reasonable where the defendant had a reasonable chance to review the document.  Thus, there was no fraudulent inducement which would negate the validity of the release.  The Supreme Court also determined that the partial performance to the Statute of Frauds did not apply because the $500,000 payment was made to avoid performance of the oral contract under the terms of the release, rather than to perform obligations under the contract.  The Court also determined that there could be no oral agreement to form a partnership under the Statute of Frauds.  National Property Holdings, L.P., et al. v. Westergren, No. 13-0801, 2015 Tex. LEXIS 1, rev'g., in part and aff'g., in part Westergren v. National Property Holdings, L.P., 409 S.W.3d 110 (Tex. Ct. App. 2013).         


Kansas law (Kan. Stat. Ann. Sec. 55-179(b)) says that one of the parties responsible for plugging an abandoned oil or gas well is the original operator who abandoned the well.  Here, the plaintiff operated 44 wells on a 160-acre tract in southeast Kansas beginning in 1939.  Production ceased in 1989 and the plaintiff did not plug the wells.  In 2008, the plaintiff assigned it's lease to another party (lessor) who entered into an agreement with the Kansas Corporation Commission (KCC) to either plug or being production from at least two wells monthly until all the wells were either producing or were plugged.  The lessor entered into new leases with the mineral owners in 2009 and then assigned the leases to a third party in 2010.  The KCC informed the third party that it would be required to plug the wells or start production.  In 2011, the KCC issued a show-cause order to the plaintiff, the lessor and the third party requiring them to demonstrate why they shouldn't be responsible for plugging the wells (44 in total) that KCC had determined had been abandoned.  The KCC subsequently ordered the plaintiff, along with the other parties, to plug the wells.  The plaintiff argued that it had no responsibility to plug the wells because it had assigned the leases to another party.  The KCC determined that that lessor was responsible for plugging the three wells that they had produced from and that the plaintiff was responsible for plugging the other wells because they had abandoned the wells in 1989 and the wells should have been plugged at that time.  The court agreed with the KCC, rejecting the plaintiff's argument that only one party can be held liable for plugging a well under K.S.A. Sec. 55-179(b).  The court noted that the statute was clear that more than one party can be held responsible for plugging wells.  The court noted that the case did not involve the issue of whether the plaintiff could be entitled to reimbursement from the other parties.  John M. Denman Oil Co., Inc. v. Bridwell, et al., No. 110,861, 2015 Kan. App. LEXIS 3 (Kan. Ct. App. Jan. 9, 2015).  


The debtors, a married couple, operate a photography business that sells digitally manipulated landscape photographs to the public.  The husband was also employed at a separate photo business.  The wife handled all of the accounting, some promotional work and most purchasing decisions for the couple's business.  The debtors filed a joint case, and sought to exempt their digital images and website as a tool-of-the-trade under Kan. Stat. Ann. Sec. 60-2304(e).  The trustee objected on the basis that the images and website were not tangible property as contemplated by the statute.  The court disagreed with the trustee, noting many books, documents and "tools" in today's electronic era are digital and that only the specifically listed items in the statute need be tangible property.  In addition, the court noted that the debtor's wife could exempt the digital images and website herself as tools of the trade of her primary occupation.  The wife had a sufficient ownership interest in the couple's business.  In re Macmillan, No. 14-40965, 2015 Bankr. LEXIS 61 (Bankr. D. Kan. Jan. 9, 2015). 


The USDA developed two table grape varieties, secured patents on them, and licensed them to the defendant who then sub-licensed the varieties to nurseries as authorized distributors.  The grape varieties were released to a grower in 2002 and the patents were secured in early 2006.  However, before the official release, a couple of growers began growing grapes from the patented varieties, but did not sell any grapes commercially or give away any mature fruit.  The growers knew that were not authorized to have the grape varieties and took steps to conceal their possession of the varieties.  The plaintiffs challenged the patents as invalid due to a public use more than a year before the date of the patent application.  The trial court upheld the patents as valid because the growers' use and cultivation of the subject varieties was limited in scope and private, and because the vines were "hiding in plain sight."  Also, the trial court determined that the defendant had no reason to believe that the growers had unauthorized possession of the grapes.  On further review, the appellate court affirmed.  The court determined that the grapes in issue had not been generally circulated before the patents were applied for.  Thus the patents were valid  because the "invention" was not "accessible to the public" or "commercially exploited" for more than one year before patent protection was sought.     Delano Farms Company, et al. v. The California Table Grape Commission, et al., No. 2014-1030, 2015 U.S. App. Lexis 346 (Fed. Cir. Jan. 9, 2015), aff'g., No. 1:07-CV-0`6`0-SEH-JLT, 2013 U.S. Dist. LEXIS 130729 (E.D. Cal. Sept. 12, 2013).


In a prior opinion, Mitchell v. Comr., T.C. Memo. 138 T.C. No. 16 (2012), the Tax Court disallowed the petitioner's charitable deduction for a permanent conservation easement donation due to the failure to satisfy the mortgage subordination requirement of Treas. Reg. Sec. 1.170A-14(g)(2).  In the prior case, the petitioner argued that the conservation purpose of easement was protected in perpetuity even without a subordination agreement because the probability of default on the mortgage was negligible.  However, the court rejected that argument on the basis that the Treasury Regulations require a subordination agreement.  In a subsequent Tax Court case, the petitioner argued that Kaufman v. Comr., 687 F.3d 21 (1st Cir. 2012) required the Tax Court to reconsider its prior decision.  The Tax Court disagreed, noting that Kaufman was not binding on the Tax Court because it addressed different legal issues.  Kaufman involved the "proceeds" regulation governing entitlement to proceeds upon judicial extinguishment of an easement, while the present case involved the mortgage subordination regulation.  The court also noted that the subordination regulation is specific and there is no "functional" subordination contemplated by the regulation.  The court also rejected the petitioner's argument that Carpenter v. Comr., T.C. Memo. 2012-1 created a safe harbor and that the regulation should be read as a safe harbor.  Instead, the court noted that Treas. Reg. Sec. 1.170A-14(g) is specific, mandatory and cannot be ignored.  The petitioner argued that the court should create a general rule with respect to the perpetuity requirement of I.R.C. Sec. 170(h)(5)(A) based on Kaufman.  However, the court rejected that argument on the basis that Kaufman did not create a general rule that protecting proceeds from extinguishment of a conservation easement would satisfy the perpetuity requirement of Treas. Reg. Sec. 1.170A-14(g)).  Mitchell v. Comr., T.C. Memo. 2013-204.  On further review, the Tenth Circuit affirmed.  The appellate court specifically noted that Treas. Reg. Sec. 1.170A-14(g)(3) does not relieve a donor from having to meet the subordination requirement when the probability of default on the mortgage is negligible.  Mitchell v. Comr., No. 13-9003, 2015 U.S. App. LEXIS 116 (10th Cir. Jan. 6, 2015). 


The petitioner operated a facility that generated electricity from biogas produced by the anaerobic digestion of livestock manure.  The manure came from the petitioner's dairy operation and the electricity generated is used to operate the petitioner's dairy operation and is sold to the electrical grid.  The petitioner claimed that the facility was exempt from state income tax because it is a "manure storage and handling" facility.  The court disagreed on the basis that the statute at issue contemplated a facility that is used to store and handle manure only.  The tax exemption statute has no application to an anaerobic digester or electrical generator.  An amendment to the statute did not apply because it did not have retroactive application.  In re Synergy, LLC v. Kibler, No. 1171 CA 14-00173, 2015 N.Y. App. Div. LEXIS 44 (N.Y. Sup. Ct. Jan. 2, 2015).  


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

RSS​ Facebook Twitter