Annotations - Last 30 Days

The taxpayer was a corporation that received payments from a neighboring property owner for deed restrictions placed on the taxpayer's property that would restrict development.  These negative easement payments were paid to prevent the taxpayer from using its property in a manner that would diminish the value of the payor's property.  The question was whether the payments were rents or income from the sale of a capital asset or gains from the sale of I.R.C. Sec. 1231(b) property that would result in the taxpayer, a C corporation, having personal holding company (PHC) income in excess of 60 percent of its adjusted ordinary gross income for the tax year which would trigger the PHC tax of 20 percent on undistributed PHC income.  The IRS determined, based on the Eighth Circuit's holding in Morehouse,  that the payments were "rents" paid for the "use" of the taxpayer's property.  As such, the payments were PHC income.  However, the conclusion of the IRS would also have application in situation's involving the government's use of property to enhance wildlife and conservation which would mean that the payments would not be subject to self-employment tax.  Such payments would be "rents from real estate" and would be excluded from self-employment tax in the hands of a non-materially participating farmer, or a non-farmer.  CCM 20152102F (Feb. 25, 2015).


The petitioner operated a real estate investment partnership.  As part of the partnership's business it acquired a leasehold interest in a property with the intent to develop an apartment complex and retail space.  The lease originally ran for 20 years, but was extended for another 34 years.  The leasehold was transferred to another entity for development and management purposes.  The property generated only rental income and no substantial effort to sell the property was made for the first 13 years, when an offer to buy was received.  The property was sold for $14.5 million plus a share of the profits from the homes that would ultimately be developed on the property.  The partnership reported $628,222 of capital gain, but IRS took the position that the transaction triggered $7.5 million or ordinary income.  The court agreed with the IRS.  The court determined that the property was initially acquired for developmental purposes, and efforts to obtain financing and continue that development were made; the sale was to an unrelated party with the plan for the petitioner to develop the property; and efforts continued to develop the property up until the purchase date.  While there were some factors that favored the petitioner (only minor improvements made; no prior sales; no advertising or marketing performed), the court held that the factors weighed in the favor of the IRS and the sale was in the ordinary course of business under I.R.C. Sec. 1221(a)(1).  Fargo v. Comr., T.C. Memo. 2015-96.


The IRS has concluded that it has the power to abate interest and penalties where they have been paid and an amended return seeking a refund of tax was filed late.  The facts indicated that a taxpayer had previously paid interest and penalties based on the tax liability shown on the taxpayer's original return.  However, the tax liability was discovered to have been substantially overstated and the amended return got the tax liability correct.  Unfortunately, the amended return was filed late - the statute of limitations for claiming a refund had already expired.  The question was whether IRS could, under I.R.C. Sec. 6404(a)(1), abate and refund any of the penalties where the underlying tax refund claim was not timely filed.  The IRS concluded that it could abate excess penalties and interest because I.R.C. Sec. 6404(a)(1) was permissive in nature which allowed IRS to abate the paid portion of any assessment.  Accordingly, the amended return is to be treated as a claim for refund of penalties and interest paid in the prior two years before the filing of the amended return, to the extent the amounts exceed the taxpayer's actual tax liability.  C.C.A. 201520010 (Apr. 23, 2015).


I.R.C. Sec. 104(a)(1) does not exclude from income payments that are made from a disability pension to a former spouse under a qualified domestic relations order (QDRO).  That is the result, the IRS determined, even if the amounts are excluded from income under I.R.C. Sec. 104(a)(1) when they are paid to the original recipient of the payments.  The facts involved a situation when a taxpayer receiving an income stream got divorced and the payment rights were divided under a QDRO.  The IRS determined that the entire amount paid to the former spouse is includible in taxable income.   The result is that non-taxable income is converted to taxable income.  Priv. Ltr. Rul. 201521009 (Feb. 9, 2015).


The debtor filed Chapter 12 bankruptcy and listed the bulk of his crop sale proceeds on his bankruptcy schedules as exempt "farm earnings" in accordance with Minn. Stat. Sec. 550.37(13)(exemption for disposable earnings).  The crop sales were evidenced by checks made jointly payable to the debtor and several secured creditors.  A creditor and the bankruptcy trustee objected to the claimed exemption.  Disallowing the claimed exemption would mean that more funds would be available to pay secured creditors.  A creditor later claimed that because the checks had ultimately bee turned over to another creditor that the issue was moot because the debtor no longer had any interest in the funds.  The court, reversing the bankruptcy court, disagreed.  The court held that the turnover of the checks to a creditor did not constitute a determination of what amount would be paid to unsecured creditors.  Thus, the issue of whether the state law exemption provision applied was not moot.  In re Seifert, No. 14-6044, 2015 Bankr. LEXIS 1723 (B.A.P. 8th Cir. May 22, 2015).  


The petitioners, a married couple, bought a home in 2004 for $875,000 and used it as a seasonal residence.  They stopped using it as a seasonal residence in 2008 and converted it to a rental property.  A realtor hired to find a renter used the property as a "model" of similar units to show to prospective buyers.  The petitioners removed all of their personal belongings and converted a room to a child's room.  Two prospective renters expressed interest in renting the home, but ultimately did not do so.         The property was never rented before the petitioners sold the property in late 2010 at a loss.  On their 2010 return, the petitioners deducted the loss on sale under I.R.C. Sec. 165(c).  The IRS disallowed the loss under I.R.C. Sec. 262 because the petitioners failed to convert the house to a rental property before sale.  The court agreed with the IRS, determining that the facts illustrated that the petitioners had failed to change their intent from using the house as their personal residence to a rental property citing five factors - (1) length of time the house was occupied by the taxpayer as a residence before being placed on the market for sale; (2) whether all personal use of the home had been discontinued; (3) the character of the property ; (4) the number of offers to rent the home; and (5) the number of offers to sell the home.  The court noted that the petitioners had used the house for four years before moving out and there were only limited efforts to rent the property.  Had a deduction been allowed, it would have only been the amount of any further reduction in value after the conversion to rental.  No deduction is allowed for the decline in value while the house was used as a personal residence.    Redisch v. Comr., T.C. Memo. 2015-95. 

 


This case is a qualified title action involving title to farmland.  The plaintiff conveyed various tracts of farmland to his father with the deeds to the tracts containing an option agreement that reserved to the plaintiff an option to buy the tracts "when the grantee no longer farms the land or decides to sell it or upon his death."  The value of the land upon exercise of the option was to be set at the lands' agricultural value.  While still farming, the father gifted the tracts to his four children equally.  Thus, none of the option-triggering events occurred.  Ten years later the father died and the plaintiff attempted to exercise the options.  The trial court held that the father's gift of the tracts eliminated the possibility of the plaintiff from exercising the options and, therefore, terminated them.   The court also cited other reasons the options were invalid.  On appeal, the court reversed, finding that the options "ran with the land."  A dissenting justice pointed out the absurdity of the majority's opinion.  The dissent pointed out that the trial court noted that the option agreements clearly set forth the three possible events that could trigger the options, and that if the plaintiff wished to exercise the options upon his father making a gift he should have included that language in the options that he drafted.  The dissent opined that the court should have given deference to the trial court as the fact finder in the matter that the option did not run with the land.  Kasben v. Kasben, et al., No. 314851, 2015 Mich. App. LEXIS 1056 (Mich. Ct. App. May 19, 2015).     


The plaintiff raises cattle and other livestock and wanted to build a stockwatering pond on his property.  In March of 2012, the plaintiff applied to the U.S. Army Corps of Engineers (Corps) for a permit to build an earthen dam on his property across a creek.  Due to delays in the permit approval process,  the plaintiff built the dam before receiving permit approval.  The Corps concluded that the creek was a relatively permanent stream which flowed into a non-navigable watercourse at that point, but which became navigable further downstream and eventually flowed into a lake.  The court determined that the Corps' conclusion that it had jurisdiction over the creek under the Clean Water Act was not arbitrary, capricious or contrary to law under the Supreme Court's plurality opinion in Rapanos v. United States, 547 U.S. 715 (2006).  The court noted that the evidence showed that the creek flowed throughout the year.  However, the court also noted that no fill permit was necessary if the dam was built for the purpose of constructing a stock pond (33 U.S.C. Sec. 1344(f)(1)(C)).  However, the exemption does not apply, the court noted, if building the dam would bring an area of the creek into a use to which it was not previously subject (the "recapture" provision) where the flow or circulation of the water may be impaired or the reach of the waters reduced.  Because the plaintiff pleaded the Clean Water Act exemptions as an affirmative defense, the court's holding that the plaintiff was not entitled to judgment as a matter of law about the stock-pond exemption on the administrative record was without prejudice and a deadline of June 19, 2015 was established  for a motion seeking judgment on the pleadings on the plaintiff's remaining constitutional claims.  Eoff v. Environmental Protection Agency, No. 4:13-cv-368-DPM, 2015 U.S. Dist. LEXIS 65379 (E.D. Ark. May 19, 2015).   


The plaintiff owned a tract of land adjacent to a neighbor's tract.  The neighbor claimed their property would flood during heavy rains because the plaintiff constructed "an L-shaped field dike" that changed a natural drainage way, violated the reasonable use doctrine and caused the neighbor damages.  The plaintiff was insured under a policy with the defendant and the defendant denied coverage based on the "intentional act" exclusionary language which meant that there was no accident or "occurrence" under the policy.  The defendant also denied coverage under the "criminal act" exclusionary language on the basis that the plaintiff's conduct violated local watershed district rules.  The federal trial court granted summary judgment for the plaintiff in the action brought by the neighbor based on the statute of limitations.  The plaintiff then sought a declaratory judgment against the defendant that the defendant breached its duty to defend and should pay the plaintiff's legal fees of over $66,000.  The trial court granted summary judgment for the defendant and dismissed the case.  On appeal, the court affirmed.  The court held that the plaintiff intentionally violated the reasonable use rule with disregard for the high probability that injury would result to the neighbor's crops.  Thus, there was no "occurrence" under the policy that triggered coverage.  Estate of Norby, et al. v. Waseca Mutual Insurance Company, A14-1146, 2015 Minn. App. Unpub. LEXIS 461 (Minn. Ct. App. May 18, 2015).


The plaintiffs bake food products in their homes from custom-built kitchens separate from their family's kitchens.  The plaintiffs sought to expand their sales beyond merely farmers' markets or community events and did not seek licensing under the Minnesota Consolidated Food Licensing Law (Minn. Stat. Sec. 28A).  No licensing and payment of licensing fees is necessary for non-hazardous food sold at a community event or a farmers' market where gross receipts generated are less than $5,000 in a calendar year.  Similarly, no licensing is required for persons receiving less than $5,000 in gross receipts in a calendar year from the sale of home processed and home-canned food products.  The plaintiffs challenged the law as unconstitutional on equal protection and due process grounds.  The trial court dismissed the case for failure to state a claim.  On appeal, the court reversed and remanded.  The appellate court determined that, on the equal protection issue, the trial court erred by comparing licensed food handlers with unlicensed food handlers where the correct comparison should be between two groups of unlicensed food handlers - those who meet the sales-cap and venue restrictions and those who do not.  The court remanded the case to adequately develop the record for a determination as to whether the statutory exceptions satisfied the rational basis test.  Astramecki, et al. v. Minnesota Department of Agriculture, No. A14-1367, 2015 Minn. App. Unpub. LEXIS 470 (May 18, 2015).


The petitioner was the guardian of a child that was placed in the taxpayer's home beginning in 1991 through 2004 when the child reached age 18.  In 2006, the child had a baby and the taxpayer continued providing support to the child and, now, the baby.  The taxpayer claimed dependency exemption deductions for the child and the baby (now five) on the taxpayer's 2011 return.  In addition, the petitioner claimed an earned income tax credit, child tax credit and head of household filing stats on the 2011 return.  The IRS denied the deductions and credits and head of household filing status, but later conceded that the child was the petitioner's qualifying relative which entitled the petitioner to a dependency exemption deduction.  The child's child was not, however, a qualifying child.  The "relationship" test was not satisfied and the child was no longer an eligible foster child after achieving majority.  Relationship of affinity did not apply, the court reasoned, because a foster relationship is not a relationship of affinity based on marriage and is only temporary.  Cowan v. Comr., T.C. Memo. 2015-85.


In 2012, the petitioners' personal property contained in their rental home was destroyed by fire.  The loss was covered by insurance and the petitioners received $60,000 in insurance proceeds, the limits of the policy, and claimed a casualty loss in 2012 for the remaining amount of the loss not compensated for by insurance.  The petitioners sued the landlord for the excess loss not compensated by insurance.  The matter was set for trial in 2014 and in early 2015 mediation was scheduled.  The IRS denied the 2012 deduction and the court agreed with the IRS, noting that a casualty loss is only deductible in the year of occurrence if there is no reasonable prospect of recovery.  Because the petitioners' claim for reimbursement was alive after 2012, no casualty loss deduction could be claimed in 2012.  Hyler v. Comr., T.C. Sum. Op. 2015-34.


Upon the decedent's death, his ex-wife received approximately $5.4 million of his $7.7 million estate consisting largely of non-probate assets including life insurance deferred compensation/commission plan accounts, IRA account, Sec. 401(k) account and an annuity.  The estate executor mistakenly excluded the non-probate assets from the taxable value of the estate and claimed that the estate was insolvent and that no estate tax was due.  After negotiating with the IRS, the executor agreed to pay $1.2 million in estate tax plus accrued interest of $145,425.  Under the terms of the decedent's will, a tax apportionment clause spread the estate tax liability among the assets that generated estate tax liability.  Because the amount passing to the ex-wife was not covered by the marital deduction, the ex-wife, according to the apportionment clause, bore approximately 70 percent of the estate tax liability.  Upon declining to pay, the executor sued the ex-wife and the court ruled for the executor on the ex-wife's proportionate share of estate tax but not for pre-judgment interest and attorney fees.  The court also determined that $1 million passing to the ex-wife was on account of the divorce settlement between the couple and was a debt of the estate which dropped the overall estate tax bill by almost $500,000 and reduced the ex-wife's tax liability proportionately.  As to the insurance policies, the court determined that they were included in the decedent's estate because the decedent had reviewed them shortly before death and he retained the right to change beneficiaries at the time of death.  Thus, the ex-wife was liable for estate tax attributable to the policies in a proportionate amount under I.R.C. Sec. 2206.  Smoot v. Smoot, No. CV 213-040, 2015 U.S. Dist. LEXIS 46572 (S.D. Ga. Mar. 31, 2015).  


The debtor filed Chapter 12, but defaulted on his plan payments to secured creditors when his crop yield and sales price projections were not met.  The debtor's provided testimony that showed he was uncertain about revenue and expenses, and made "nonsensical" estimates of tillable acreage and planned tillable acreage.  His financial information was inaccurate and he understated lease rates.  The debtor then proposed an amended plan which called for the sale of his farm that would pay the creditors in full, but the buyer was not disclosed.  A creditor who had invested heavily in a facility on the debtor's farm, proposed a competing plan that called for a higher selling price of the farm and additional funds to be provided to secured creditors.  The court found the debtor's plan to be deficient and the trustee opposed the debtor's plan.  The court held that the debtor did not proposed a feasible plan and the amended plan was not proposed in good faith.  However, the court granted leave to the debtor to allow the debtor to file an amended plan by end of day on May 8, 2015, which the debtor did (and the creditor also filed an another amended plan which again raised the selling price of the farm and named the creditor as the buyer).  The court, however, again determined that the debtor's amended plan was based on faulty financial information and did not reflect the inherent risk of farming.  The debtor failed to meet his burden under 11 U.S.C. Sec. 1229(b) to propose a plan in good faith.  The debtor's plan also did not meet the liquidation test of 11 U.S.C. Sec. 1225(a)(4).  The court held that the creditor's modified plan which called for a sale of the farm to the creditor at a higher price than what the debtor proposed did satisfy all requirements and was confirmed.  In re Daniels, No. 13-30010, 2015 Bankr. LEXIS 1609 (W.D. La. May. 11, 2015).   


The plaintiffs challenged the registration by the Environmental Protection Agency (EPA) of the pesticide cyantraniliprole (CTP).  The EPA approved the registration of CTP under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)  for use on a wide variety of crops as well as for non-agricultural uses in early 2014.  The court held that it did not have jurisdiction to review the registration process because such jurisdiction was vested in the Circuit Courts under FIFRA under 7 U.S.C. Sec. 136n.  The court dismissed the case for lack of subject matter jurisdiction.  Center for Biological Diversity, et al. v. United States Environmental Protection Agency, et al., No. 14-942 (GK), 2015 U.S. Dist. LEXIS 63465 (D. D.C. May 14, 2015).


In companion cases involving the same livestock owner, the court upheld the long-standing and well-known Kansas rule in livestock trespass cases that the livestock owner is not liable for damages caused by escaped livestock unless the plaintiff can establish a prima facie case that the livestock owner failed to exercise reasonable care in confining the livestock.  In other words, ordinary negligence principles apply.  The cases involved the defendant's livestock that had escaped their enclosure and were hit by the plaintiff's automobile on a U.S. highway.  The trial court determined that the facts were uncontroverted that the defendant had exercised reasonable care in confining the livestock, and that the plaintiff had also failed to establish any affirmative act of the defendant that evidence lack of reasonable precaution or due care.  On appeal, the court affirmed.  The appellate court also mentioned that it was not persuaded by the plaintiff's counsel in each case of a "somewhat disingenuous and circuitous suggestion that the Kansas Supreme Court has indicated an intention to depart from the"... longstanding ordinary negligence rule in livestock trespass cases.  Both attorneys that the court scolded were non-agricultural plaintiffs' trial attorneys.  Beneke v. Smith, No. 111, 722, 2015 Kan. App. Unpub. LEXIS 349 (Kan. Ct. App. May 1, 2015) and Kiraly v. Smith, No. 111,635, 2015 Kan. App. Unpub. LEXIS 355 (Kan. Ct. App. May 1, 2015).  

 


The petitioner was a CPA with a Big Four firm.  The firm spun-off its consulting business to a new corporation while retaining an equity stake in the new corporation's shares.  Those shares were allocated among the firm's partners with the petitioner receiving shares and taking a zero income tax basis in the shares.  The petitioner resided in the U.K. and had been recently divorced.  Based on his fear that his ex-wife would attempt to get the shares because he received them during their marriage, the petitioner gave the shares to his second wife who was a U.K. resident (non-resident alien).  Ultimately, the stock is sold for a large gain without anything reported as taxable gain for either gift or income tax purposes.  The second wife ultimately receives U.S. residency and the petitioner files a Form 1040 and Form 709 three years late.  The petitioner then filed a Form 1040-X claiming the gift to the second wife was taxable in accordance with I.R.C. Sec. 1041(a) because she was a non-resident alien at the time of the gift (gifts to non-resident aliens are taxed as transfers at fair market value and the second wife would also have an income tax basis in the shares).  However, the court pointed out that I.R.C. Sec. 102(a) excludes the value of gifted property from the donee's gross income, and I.R.C. Sec. 1015(a) pegs the donee's basis at the lesser of the donor's basis or, for unrecognized losses, the property's fair market value for loss purposes.  In addition, the donor paid no gift tax that would have provided basis in the hands of the donee second wife.  The court upheld the imposition of a 40 percent penalty for a gross valuation misstatement because the petitioner's good faith arguments failed - he never sought review by the experts in the firm, and relied on the wrong tax treaty.  Hughes v. Comr., T.C. Memo. 2015-89. 

 


In this IRS ruling, a parent corporation owned all of the stock of subsidiary 1.  Subsidiary 1, in turn, owned all of the stock of subsidiary 2.  Subsidiary 2 owns all of the stock of subsidiary 3.  The parent corporation owned all of the interests in an LLC which had elected corporate tax treatment.  The parent corporation proposed to transfer all of its interests in the LLC to subsidiary 1. Subsidiary 1 would then transfer the interests to subsidiary 2 which would then transfer to subsidiary 3.  At each step along the way, stock would be issued to the transferor by the transferee.  At the end of the transactions, the LLC would elect to be treated as a disregarded entity.  The IRS determined that two I.R.C. Section 351 transfers were involved and a type "D" reorganization upon the transfer from subsidiary 2 to 3, based on Rev. Rul. 67-274.  Rev. Rul. 2015-10.     


The petitioner founded a communications company (Summit) in 1996.  In 1998, the petitioner executed an employment agreement with another communications problem (SIC).  Under the agreement, the petitioner personally received a loan of $450,000 which he was to loan to Summit to support its operations.  Summit then began receiving large contracts from SIC which within two years amounted to 60 percent of Summit's revenue.  In 1998, the petitioner also received a $20,000 loan from SIC's parent company.  In 2000, the petitioner resigned from SIC to manage the growth of Summit.  The resignation triggered the repayment obligation on the SIC loan.  SIC did not demand repayment at that time and did not issue a Form 1099-C, and the petitioner also did not receive a Form 1099 from SIC's parent company.  In 2001, SIC received a large USDA loan to provide telecommunication services to rural areas.  Consequently, SIC's reliance on Summit reduced substantially, which impacted Summit negatively.  Summit filed bankruptcy in 2002 and was dissolved in 2009.  In 2005, the petitioner was rehired by SIC.  The IRS audited the petitioner's 2007 return and claimed that the $20,000 loan had been forgiven and needed to be reported in income.  The IRS also claimed that the SIC loan constituted discharge of indebtedness income that should have been reported on the 2007 return based on the fact that SIC had not taken collection action and the loan became due and before the period of limitations for collection expired.  The IRS thought that such inaction manifested an intention on the part of SIC or its parent corporation to forgive the SIC loan.  The court disagreed, noting that credible testimony indicated that SIC did not consider the loan forgiven and that the petitioner was currently repaying the loan and that Form 1099-C was not issued.  In addition, the expiration of the state limitations period was not conclusively an identifiable event as to when a debt has been discharged.  However, the $20,000 loan from SIC's parent was forgiven in 2007.  However, the court noted that the petitioner was insolvent in 2007 at the time the $20,000 loan was forgiven and was, therefore excludible under the insolvency exemption of I.R.C. Sec. 108(a)(1)(B).  However, the court held that the petitioner was not entitled to a bad debt deduction as a result of the Summit loan becoming worthless in 2009.  The court did not have jurisdiction to hear the claim because the year under review was 2007.  An accuracy-related penalty was not imposed.  Johnston v. Comr., T.C. Memo. 2015-91.     

 


 This case involved a family farm partnership that formed between two sisters and their spouses after the sisters' father retired from farming.   Bayer Crop Science (BCS) planted GMO rice in an area near the partnership's farming operation which spread into other rice operations and caused the price of rice to drop.  The plaintiff, one of the partners, did not want to participate in the class action lawsuit being brought against BCS, but one of the other partners did meet with one of the lawyers bringing suit against BCS who then hired the lawyer to represent the partnership in the suit against BCS.  The plaintiff was notified of the meeting, but did not attend.  Over the following several years these two partners did not speak with each other, but all correspondence concerning the BCS litigation was left on the partnership's office desk and the plaintiff would always go through the mail and none of the 19 letters received from BCS were ever hidden or not disclosed.  The plaintiff then decided to retire for health reasons and wanted to liquidate the partnership.  However, the other partners wanted to continue the business.  Consequently, the partners entered into a buy-sell agreement on December 17, 2010 whereby the plaintiff would convey his interest back to the partnership for $825,000 and some land.  The agreement did not mention the BCS pending litigation.  Three days after the buy-sell agreement was executed, BCS sent a letter to the partnership that it was settling the litigation and that the partnership would receive $310/acre.  The letter was placed in the open on the partnership office desk with the rest of the mail.  The plaintiff received $825,000 and some land for his partnership interest on Jan. 31, 2011, and he and his wife resigned that day.  In July of 2011, the plaintiff's wife learned of the settlement and sought a portion of the $177,000 payment the partnership received from BCS.  The partnership refused to pay any amount to the plaintiff or his wife.  The plaintiff sued for an accounting and winding up of partnership business, damages for breach of fiduciary duty, failure to disclose the BCS litigation, rescission of the buy-sell agreement based on mutual mistake and unilateral mistake and punitive damages.  The trial court ruled for the defendant on all points.  On appeal, the court affirmed.  The plaintiff was fully informed of the BCS litigation and chose not to participate in it, and lied about not knowing about it.  The court also held that the plaintiff was not entitled to an accounting because the plaintiff was a former partner who had sold his partnership interest.  The court noted that the buy-sell agreement specifically stated that any assets not mentioned in the agreement were transferred with the partnership interest, and the agreement contemplated that any unidentified assets would be transferred to the remaining partners.  Mick v. Mays, No. SD33149, 2015 Mo. App. LEXIS 505 (Mo. Ct. App. May 11, 2015).          


The plaintiff built a 60x128 foot pole barn on his property.  The property was zoned for agricultural use, but the plaintiff intended to use the barn to store equipment for his off-site construction business.  The county viewed the use of the pole barn as not permitted.  The plaintiff filed for a change in the zoning of the property, but was denied.  The plaintiff sought judicial review, but the court affirmed the denial by the county board.  On appeal, the court affirmed.  The court held that it lacked jurisdiction to determine whether the plaintiff's proposed use of the property was prohibited under the ordinance because the plaintiff failed to exhaust administrative remedies by seeking administrative review of the board's decision.  The court also held that the decision to deny his application for a zoning change was not manifestly against the weight of the evidence.  Tipton v. Madison County Board, et al., No. 5-14-0186, 2015 Ill. App. LEXIS 996 (Ill. Ct. App. May 11, 2015).


In the fall of 2011, the defendant sought an easement over the plaintiff's property.  When the plaintiff refused to grant the easement, the defendant initiated a condemnation action under K.S.A. Sec. 26-501, et seq.  The trial court determined that the defendant had the power of eminent domain and appointed appraisers to determined the amount of compensation to be paid to the plaintiff.  The appraisers filed their report and the plaintiff appealed, but later motioned to dismiss his appeal without prejudice (a dismissal that allows for refilling in the future).  About five months later, the plaintiff filed another notice of appeal of the appraisers' award citing the Kansas Savings Statute (K.S.A. Sec. 60-518) as the authority for allowing his appeal, which would otherwise be untimely.  The defendant moved to dismiss and the trial court dismissed the case.  On appeal, the court reversed.  The appellate court determined that the savings statute applied and that the appeal was a "new civil action" to be tried as any other civil action.  The legislature, the court held, had not specified that eminent domain cases were to be treated differently.  Neighbor v. Westar Energy, Inc., No. 111,972, 2015 Kan. LEXIS 238 (Kan. Sup. Ct. May 8, 2015).


In 2012, the Environmental Protection Agency (EPA) approved California's plan for the reduction of ozone and pesticide levels in the state, particularly the San Joaquin Valley.  The state had originally agreed to a 20 percent reduction of volatile organic compound (VOC) emissions by 2005, but the EPA allowed the state to reduce that goal to a 12 percent reduction.  A consortium of environmental groups challenged the EPA's approval.  The court noted that the state had submitted paperwork to the EPA setting the goal at a 12 percent reduction level and that 20 percent was merely a goal or target.  The court also pointed out that the plaintiffs had not established any proof of a current or ongoing violation of environmental rules.  The court deferred to the EPA that CA's plan was enforceable and that compliance would occur in years involving high fumigation of crops in the San Joaquin Valley.  El Comite Para El Bienestar De Earlimart, et al. v. United States Environmental Protection Agency, No. 12-74184, 2015 U.S. App. LEXIS 7631 (9th Cir. May 8, 2015).

 


The plaintiff, a C corporation, filed a return for the year ending Aug. 31, 2008, reflecting a tax liability of "0.00."  Based on the 2008 return, the plaintiff did not make any estimated tax payments for its 2009 tax year based on the exemption contained in I.R.C. Sec. 6655(d)(1)(B)(ii) which says that estimated tax penalty is 100 percent of the tax shown on the return for the preceding tax year (which would be zero).  However, in 2011, the IRS levied a penalty of $94,671.53 plus interest of $301.34 (which ultimately grew to $1,284.70) for failure to pay estimated tax for the plaintiff's 2009 tax year.  The matter ultimately went to an IRS appeals conference which did not resolve the matter.  The plaintiff paid the tax and sued for refund.  The IRS claimed that because the plaintiff did not file a tax return for tax year 2008 that showed a liability for tax, the plaintiff could not rely on the safe-harbor of I.R.C. Sec. 6655(d)(1)(B)(ii).  The statutory language immediately after the safe-harbor states as follows:  "Clause (ii) shall not apply if the...corporation did not file a return for such preceding taxable year showing a liability for tax."  The plaintiff claimed that its 2008 return was a return that showed a liability for tax and that liability was zero.  The IRS claimed that the return did not show any liability for tax which eliminated the safe-harbor.  The court, based on a plain reading of the statute, agreed with the IRS.  The court noted that S corporations and individuals need not file a return to take advantage of the safe-harbor, which indicated that the Congress intended to treat C corporations differently.  The court reached this conclusion even though I.R.C. Sec. 6655(g)'s definition of "tax" for this Code section could result in "zero" meeting the definition, and the regulations do not provide otherwise.  IRS has never issued any formal or informal guidance on the definition of "tax" for this purpose, but has taken this position with respect to C corporations in litigation.  Nevertheless, the court gave the IRS position deference.  As a result of the court's ruling, had the plaintiff's 2008 return showed a tax liability of one cent, the estimated tax penalty would have been zero.  Cal Pure Pistachios, Inc. v. United States, No. CV 14-5237-DMG (PLAx) (C.D. Cal. Apr. 10, 2015).   


The petitioners (a married couple) claimed a chartable deduction of $2.1 million resulting from the bargain sale of 63.39 acres of undeveloped land to a charitable foundation and their allocation and carryover of deductions from other years.  The issue in the case was the value of the contribution.  As is typical of cases like this, the result is fact-based with the outcome of which party had the better appraisal.  The court largely upheld the petitioner's claimed deduction, finding that the petitioners satisfied the contemporaneous written acknowledgment rule and had the better appraisal as to fair market value.  Davis v. Comr., T.C. Memo. 2015-88.


A family S corporation was created in 1983 with family members holding the corporate stock.  A nephew of the founder, the plaintiff, bought a 25 percent interest in the corporation in 1993 and was being groomed as the founder's successor.  However, the founder ultimately decided that the succession plan wouldn't work with the plaintiff and the plaintiff's employment was terminated in 1995.  In 1996, more stock was sold to other family members on the same terms of the 1993 stock sale to the plaintiff and other shares were given to family members.  The plaintiff retained his shares and typically sent a representative to shareholder meetings.  In 1998, the founder gifted and sold more shares to other family member and then died in 1998 with management transition passing to other family members.  The plaintiff still owned 25 percent of the corporation at this time.  In 2008, the board sold the remaining share of treasury stock to key employees which had the effect of reduced the plaintiffs overall stock ownership percentage.  The plaintiff protested the sale of the treasury stock and bonuses paid to key employees and wanted dividends to be paid to him along with a portion of retained earnings, and wanted paid for two years of employment.  The plaintiff ultimately sold the bulk of his stock to pay his own debts.  The plaintiff then sued the corporation and the controlling shareholders for breach of fiduciary duty, oppression and unjust enrichment.  The trial court dismissed the case and assessed court costs to the plaintiff.  The appellate court affirmed.  The court noted that frustrated expectations is the plight of all minority shareholders and create no special duty on the part of the majority that could lead to a breach of a fiduciary duty, and the majority's actions were fair to the corporation, which is where fiduciary duties are owed.  On the oppression claim, the court cited the IA Supreme Court's Baur opinion which was, in essence, vacated by the trial court for the Supreme Court's incorrect recitation of the facts of the case (the trial court, on remand, held that the Supreme Court opinion was no longer the law of the case), where the court  adopted a reasonableness standard for handling oppression claims.  The court held that there was no oppressive conduct because the bonuses were reasonable and based on expert analysis, and that the plaintiff had no reasonable expectation for employment.  The court also rejected the plaintiff's claim of unjust enrichment because there was no breach of a fiduciary duty owned to the plaintiff.  Ahrens v. Ahrens Agricultural Industries Co., No. 14-0564, 2015 Iowa App. LEXIS 390 (Iowa Ct. App. May 6, 2015).     

 


The plaintiffs ordered samples of hardwood flooring from the defendant through the defendant's website.  They later followed up with a telephone where they bought over $8,000 of flooring from the defendant.  The defendant emailed a two-page written purchase contract to the plaintiffs which included a bullet point that said that the order was subject to the defendant's "terms of sale."  After installing the flooring, the plaintiffs had an infestation of wood-boring insects that so damaged their home that caused it to be subject to quarantine and possible destruction by the USDA.  The plaintiffs sued for fraud, breach of contract, negligence, trespass, breach of implied warranties of merchantability and fitness for a particular purpose, deceptive trade practices, products liability  and nuisance.  The defendant moved to compel arbitration as required by the terms of sale which were available on the defendant's website and that the terms of sale had been incorporated into the purchase contract by reference.  The court disagreed.  It was insufficient, the court reasoned, for the defendant to merely place quotation marks around the phrase "terms of sale."  The multitude of terms, the court noted, were contained in the four corners of the purchase contract.  A clear reference needed to be made to the terms of sale on the defendant's website.  Walker v. BuildDirect.com, Inc., No. 112075, 2015 Okla. LEXIS 41 (Okla. Sup. Ct. May 5, 2015).


Under the facts of this ruling, a parent corporation owned all of the stock of two foreign subsidiaries.  One of the subsidiaries was an operating company and the other a holding company.  The holding company owned all of the stock of three other operating companies that were also foreign companies.  The proposal was that all of the operating companies would be combined into a new subsidiary in the foreign country.  A new foreign corporation would be formed with the parent transferring all of the stock it held in the two subsidiaries in exchange for additional shares of voting common stock of the new corporation.  Then, the other operating subsidiaries will transfer all of their assets to the new corporation in exchange for additional shares of the new corporation's stock.  Then the subsidiaries and the operating company subsidiary will liquidate and distribute their stock to the holding company subsidiary.  Then the new corporation will continue to conduct the business that was formerly conducted by the operating subsidiary and the three subsidiaries that had been owned by the holding company subsidiary.  A gain recognition agreement will be entered into.  The IRS determined that the transaction would qualify for Sec. 1031 treatment as a Sec. 351 exchange followed by a type D reorganization.   Rev. Rul. 2015-9, 2015-21 I.R.B., revoking Rev. Rul. 78-130, 1978-1 C.B. 114.


A brother and sister, residents of Arkansas, were battling each other over who was responsible for paying an estate tax liability exceeding $2 million of their mother's estate.  The plaintiff was executor of the estate and the defendant was the trustee of the decedent's trust and received life insurance proceeds as a trust asset.  The plaintiff asked the defendant to disburse trust funds such that the estate tax liability triggered by the insurance could be paid.  The defendant refused, and the plaintiff sued in federal court to force the defendant to disburse trust funds.  The court ruled for the defendant, holding that the Code does not create a claim for the decedent's estate until the taxes are paid.  I.R.C. Sec. 2206 specifies that unless the decedent directs otherwise by will, if any part of the gross estate on which tax has been paid consists of proceeds of policies of insurance on the decedent's life receivable by a beneficiary other than the executor, the executor can recover from the beneficiary the portion of the total tax paid as the proceeds of the policies bear to the taxable estate.  No other direction was provided in the decedent's will.  Thus, the court lacked jurisdiction until the federal estate tax is paid.  The matter belonged in state court.  Manley v. DeVazier, No. 2:15-cv-54-DPM, 2015 U.S. Dist. LEXIS 58782 (E.D. Ark. May 5, 2015).     


In this case, various environmental groups challenged the state of New York's general permit system which allowed smaller communities to develop stormwater-management programs and limit pollution before seeking approval from the state for the allowable discharge of runoff into rivers and streams.  The permit system allowed a general permit to be issued upon the filing of a "notice of intention" to discharge with the Department of Environmental Conservation.  The permit system involved a stormwater management plan that included 44 "mandatory best practices" which could be achieved with flexibility.  The plaintiffs claimed that such a process did not pressure the communities to reduce pollution to the "maximum extent practicable" as they claimed was required.  The court rejected the plaintiffs' argument and wouldn't engage in second-guessing the experience and expertise of the responsible state agencies, and determined it was permissible for the communities to determine for themselves the necessary pollution controls that satisfy federal standards.  In re NRDC, No. 48, 2015 N.Y. LEXIS 934 (N.Y. Ct. App. May 5, 2015).     


In 2006, the petitioners, a married couple, granted a land preservation easement to a county (under the county's Agricultural Land Preservation Program (AALP) in exchange for being entitled to sell to a developer the development rights on the tract - known as a "density exchange option."  As a result of the easement grant, the petitioners claimed a charitable deduction of $5.54 million which they carried over, in part, to 2007 and 2008 due to deduction limitations.  The IRS denied the deductions due to the petitioners' failure to satisfy the reporting requirement for this type of charitable contribution and because of the lack of donative intent because of a quid pro quo exchange.  As a result, the IRS asserted deficiencies of $1.3 million also levied accuracy-related penalties totaling almost $260,000.  The court sustained the IRS position.  The court determined that that the appraisal of the property was not a "qualified appraisal" as required by Treas. Reg. Sec. 1.170A-13(c)(3) because it lacked an accurate description of the property, the date of the contribution and the terms of the agreement.  The court also noted that the appraisal summary required by Treas. Reg. Sec. 1.170A-13(c)(2)(I)(B) that is submitted on Form 8283 did not have the donee's signature and did not disclose the consideration received.  Also, the court held that the petitioners were not entitled to substantial compliance.  The court also held that the transaction involved a quid pro quo and could not be re-characterized as a bargain-sale transaction.  As for computation of the gain from the sale of the development rights, the court held that it was not possible to determine the basis of the development right and, as such, the "equitable apportionment" doctrine did not apply.  The court upheld the imposition of the 20 percent accuracy-related penalty for a substantial valuation misstatement under I.R.C. Sec. 6662(b)(3) for which reasonable cause did not apply.  Costello v. Comr., T.C. Memo. 2015-87         


Various environmental groups challenged the defendant's resource management plan (RMP) on 1.3 acres of land in Southwestern Arizona.  The plaintiffs sought to reduce the amount of livestock grazing allowed by claiming that the RMP failed to account for the effects of current and future grazing and competing land uses.  However, the court upheld the RMP noting that, unlike a grazing permit, the RMP was concerned with balancing many competing land uses and that the RMP at issue property considered alternatives that reflected various priorities.  The Bureau of Land Management (BLM)m the court held, made sufficient analysis of the impacts of livestock grazing and properly used its expertise in developing the environmental impact statement.  Western Watersheds Project v. Kenna, No. 12-15110, 2015 U.S. App. LEXIS 7357 (9th Cir. May 4, 2015). 


The petitioner, a doctor, had various entities that he controlled that utilized certain items of equipment.  The petitioner acquired a CT scanner with a five-year life.  The scanner was leased by one of the petitioner's entities that provided that the lessee could buy the scanner at a below market price.  One of the entities deducted the rent amount received for the "lease" of the scanner and another entity deducted depreciation, with both deductions flowing through to the petitioner.  The IRS denied the deductions and the court agreed.  The court determined that the substance of the transaction was a conditional sale primarily based on the fact that the lessee had the option at the end of the lease term to buy the scanner at a nominal (below market) price.  The petitioner also formed, with two others, a limited liability company (LLC) that was taxed as a partnership.  The LLC managed the scanner.  The LLC, for the tax year at issue, had a large loss which petitioner claimed on his own return.  IRS denied the denied the deductible loss due to lack of basis in the LLC.  The petitioner claimed he had sufficient basis in the LLC via the scanner "lease".  The court disagreed, holding that the lease was not a partnership liability because the "lease" transaction was a conditional sale that was not transferred to the LLC.  The scanner transaction was specifically non-transferable and non-assignable.  Coastal Heart Medical Group, Inc., et al. v. Comr., T.C. Memo. 2015-84.

 


In this case, a veterinarian noticed that the plaintiff's horse and dogs were not being cared for properly and were living in deplorable conditions.  The veterinarian notified the state police who searched the plaintiff's premises and took a horse and three dogs with the assistance of the local Society for the Prevention of Cruelty to Animals (SPCA).  The veterinarian fostered one of the dogs, which later died, and also adopted the horse.  Other parties adopted the remaining dogs.  The plaintiff brought a replevin action and some of the defendants asserted counterclaims based on Lien Law Sec. 183.  The city court granted the plaintiff's motion for replevin and dismissed the counterclaims.  On appeal, the court reversed finding triable issues.  On further appeal, the court held that the plaintiff had established the inapplicability of the lien law because there was no agreement for services rendered before the animals were seized.  On the plaintiff's claim that the SPCA was required to bring a forfeiture action to obtain possession of the animals, the court disagreed.  The animals were seized pursuant to a search warrant due to improper care and plaintiff then had five days to redeem before SPCA could make them available for adoption.  The court held that the plaintiff failed to redeem the animals or establish that she had not abandoned them, and had not established that she was entitled to possession of the animals.  Gonzalez v. Royalton Equine Veterinary Services, P.C., et al., No. 266 CA 14-01289, 2015 N.Y. App. Div. LEXIS 3600 (N.Y. Sup. Ct. May 1, 2015).


The Texas Court of Appeals held that the enactment and implementation of the Edwards Aquifer Act substantially advanced a legitimate governmental interest and did not deprive the defendants of all economically viable use of their property.  However, the Act did unreasonably impede the defendant's use of the farm as a pecan orchard because the irrigation permit approved withdrawal of water for irrigation at less than a sufficient amount which constituted a regulatory taking, and outright denial of second permit on separate tract also constituted a regulatory taking.  The trial court had awarded compensation on the tract where the permit was denied (tract 1) in the amount of $134,918.40 based on the difference in value of a dry land farm in the county and a comparable irrigated farm.  The compensation for a regulatory taking on the tract where a permit was authorized for water withdrawals in an insufficient quantity (tract 2) was determined to be $597,575 based on the market value per acre-foot of water denied.   On appeal, the appellate court affirmed the trial court finding that implementation of the Act resulted in a regulatory taking, but reversed the trial court on the computation of compensation owed the defendants.  The appellate court determined that compensation on tract 1 was to be computed as the difference between the value of the land as a commercial-grade pecan orchard with unlimited access to the Edwards Aquifer water immediately before implementation of the Act and the value of the land as a commercial-grade pecan orchard without access to Edwards Aquifer water immediately after implementation of the Act.   Compensation for tract 2 was to be determined as the difference between the value of the land as a commercial-grade pecan orchard with unlimited access to Edwards Aquifer water immediately before implementation of the Act and the value of the land as a commercial-grade pecan orchard with access to Edwards Aquifer water limited to 120.2 acre-feet of water immediately after the Act was implemented.  The Texas Supreme Court declined to review the case.  The Edwards Aquifer Authority v. Bragg, 421 S.W.3d 118 (Tex. Ct. App. 2013), pet. for rev. den., No. 13-023, 2015 Tex. LEXIS 400 (Tex. Sup. Ct. May 1, 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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