Case Summaries 03/2011

(plaintiff, dairy farm operation, entered into multiple contracts to purchase cottonseed feed from defendant; plaintiff conceded that it was a merchant in the type of grain contracted for in the case based on its history of dealings with defendant and other suppliers of grain for dairy cattle feed; case scheduled for trial). 

(taxpayer suffered collapse of retaining wall at taxpayer's cooperative housing complex and claimed a casualty loss associated with the collapse of the wall that separated the housing complex from public roads; taxpayer, as shareholder, assessed portion of damage and claimed casualty loss; IRS denied deduction because collapse gradual in nature and did not result from event of sudden, unusual or unexpected nature, and because collapse was on property owned by the cooperative rather than the shareholder; taxpayer did not have sufficient property rights in common areas - no "equitable easement"). 

(I.R.C. §72(u) limit disallowing deferral of income tax for qualified annuities owned by a trust inapplicable when trust utilized as an agent for a natural person; under facts of ruling, trust bought annuities and remaindermen were annuitants with third person as current beneficiary of trust; distributions made from annuity before death of current beneficiary payable to trust and remaindermen after current beneficiary’s death; current situation did not involve funding of deferred compensation for employees (for which purpose  I.R.C. §72(u) was enacted to disallow deferral); all beneficiaries of trust were natural persons; distribution of annuity contracts to remaindermen not subject to deemed sale provisions of I.R.C. §72(e)(4)(C) because tax deferral would not last beyond life of any individual taxpayer). 

(inherited IRA is exempt asset in bankruptcy; court reasons that inherited IRA holds "retirement funds" in accordance with meaning of 11 U.S.C. Sec. 522(d)(12), and that inherited IRA is tax exempt by virtue of I.R.C. Sec. 408(e)). 

(case involves plaintiff's motion to confirm condemnation based on Certificate of Public Convenience and Necessity issued by FERC; motion granted). 

(value of residence transferred to QPRT that terminated six months before transferor's death excluded from transferor's gross estate; agreement present for transferor to pay fair market rent; deductions for administrative expenses, investment management fees and unpaid rent denied). 

(EPA regulations implementing the CWA's oversight of CAFOs (i.e., the 2008 Rule) that require CAFOs proposing to discharge "pollutants" into navigable waters vacated; as are provisions that create liability for CAFOs that fail to apply for NPDES permit; but, provisions of 2008 Rule allowing regulation of permitted CAFO's land application and including such requirements in CAFO's NDPES permit upheld). 

(debtors, married couple, filed Chapter 12 and a subsequent amended plan and sought court permission to use funds that trustee held for use in farming operation; before bankruptcy filing, debtors had borrowed almost $1 million from creditor and gave creditor security interest in debtors chicken farm; amended plan proposed repaying debt into 20-year obligation and 30-year obligation which would ultimately pay creditor $700,000 at 5 percent interest; expert testimony revealed that secured property worth at least $700,000; debtors had obtained from chick supplier that supply contract would be reinstated if farm improvements made and financing secured to make necessary improvements; amended plan confirmed and debtors allowed to use funds held by trustee). 

(trademark infringement case involving two haunted attractions in different (but adjacent) states that share common name; plaintiff filed motion for preliminary injunction after failing to get defendant to voluntarily stop using "Field of Screams" as the name of its attraction; motion denied because plaintiff could not prove that its mark had secondary meaning in southern Maryland market before 2002). 

(state water law requires plaintiff to weigh "public interest" in process of permitting proposed oil and gas waste injection wells; plaintiff did not consider traffic-safety factors in public interest inquiry and lower court erred in not deferring to plaintiff's interpretation of "public interest"; plaintiff's ruling interpretation entitled to deference). 

(plaintiffs have right to exclude defendants from using abandoned roadway located on plaintiff's property; road did not provide "necessary access" to defendant's property). 

(plaintiff, buyer of home sued defendants (seller, real estate agent and real estate agency) for problems associated with leaking basement on purchased home; allegations involved defendants' breach of the Kansas Consumer Protection Act (KCPA), fraud, negligent misrepresentation and breach of contract; trial court granted summary judgment for defendants on all claims; seller had completed and given to buyer disclosure statement that did not indicate problems with basement wall and water in basement that seller actually knew about; trial court noted that plaintiff had independent inspection performed before closing which revealed "major cracking" in basement wall; summary judgment improper simply because buyer signed buyer acknowledgment and agreement - plaintiff may have relied on the representations; "as is" and release provisions do not necessarily bar plaintiff's breach of contract claim - factual finding necessary as to whether reasonable inspection would have revealed defects in foundation that should have then been included as unacceptable conditions listed by plaintiff in form Amendment; claims for fraud and misrepresentation subject to two-year statute of limitations and issue remanded for determination of when fact of plaintiff's injury was reasonably ascertainable by plaintiff; matter remanded on KCPA issue and on whether agent breached Brokerage Relationships in Real Estate Transactions Act by not revealing known facts about the home on seller's disclosure statement).

(economic loss doctrine bars recovery against defendant for fire damage to combine and cornhead; combine and head purchased second-hand and without warranty; cornhead integral part of combine and is not "other property"). 

(overstatement of basis constitutes an omission from gross income with result that applicable statute of limitations is six years in accordance with I.R.C. Sec. 6501(e); while decision contrary to court's prior decision in Salman Ranch, Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009), regulations issued after 2009 decision are now upheld and their application to preceding tax years not abuse of discretion by Treasury). 

(non-member of LLC can sign on LLC's behalf if such person is an officer or manager or authorized by state law to sign on LLC's behalf). 

(portion of payment of settlement for violating antitrust laws that is tied to volume of commerce and total gross sales not deductible business expense under I.R.C. Sec. 162(g); balance of payment not subject to deduction limitations of Sec. 162(g)). 

(taxpayer's activity of producing and selling cellulosic fuel, gasoline that the taxpayer purchased, processed diesel fuel and processed fuel oils constituted qualified biofuel production for purposes of the credit under I.R.C. Sec. 40(b)(6)). 

(case involves revocable trust funded with family farm; grantor's wife was income beneficiary of trust with children to be beneficiaries on wife's death; grantor's son given two-year option to buy farm from trust which son attempted to exercise within 2-year timeframe, but sisters claimed that option had expired because two-year period began upon father's death in 1986 (mother died in 2004); court construed option clause to be triggered on father's 1986 death).  

(legislation introduced to repeal the volumetric ethanol excise tax credit; bill would save taxpayer's $6 billion annually by eliminating the $.45/gallon "blenders tax credit" utilized by blenders of ethanol; sponsors of bill called the credit "bad economic policy, bad energy policy, and bad environmental policy"; sponsors note the impact of ethanol production on the rise in food prices; sponsors note that ethanol-blended fuel is less efficient than gasoline, has increased price of corn and can cause engine damage in vehicles).

(disability retirement payments received in form of retirement annuity from U.S. Office of Personnel Management attributable to injuries sustained while serving in U.S. Armed Forces not excludible under I.R.C. Sec. 104(a)(4); payments not designed to compensate for military-related injuries, but cause of disability irrelevant when determining eligibility for payments). 

(IRS states that it cannot waive the requirement that a taxpayer own and use as a principal residence for five consecutive years in an eight-year period that ends on the date a new home is purchased for purposes of eligibility for the $6,500 long-term homeowner credit).

(capital gain taxes incurred as result of post-confirmation of Chapter 12 plan for debtors' dairy operation remain a secured claim - 11 U.S.C. Sec. 1222(a)(2)(A) inapplicable to post-confirmation sale of farm assets; confirmed plan in place before any sale of farm assets contemplated and debtor cannot modify plan to change such result; court noted that Ninth Circuit decision in Hall adopted "plain meaning" approach to applying 11 U.S.C. Sec. 1222(a)(2)(A) and determined it to persuasively control the issue; court noted that Chapter 12 bankruptcy estate is not treated as a separate taxable entity from the debtor, thus "incurred by the estate" cannot mean "incurred post-petition"; while court not entirely persuaded by either Hall or Knudsen approach, court would side with Hall, but noted that this case involved post-confirmation sale rather than post-petition). 

(estate entitled to $11.7 million charitable deduction for amount paid to charitable trust in settlement of dispute with decedent's son concerning residuary estate; court concluded that decedent wanted residuary estate to pass to charitable trust, but failed to do so do solely to scrivener's error (all other testamentary instruments had provided for a charitable residuary bequest, but 1999 will failed to include it due to scrivener's error); I.R.C. Sec. 2056 has been narrowly construed to curtail marital deduction abuses, but I.R.C Sec. 2055 is designed to encourage charitable gifts; bona fide dispute existed as to whether charity had legal right to residuary estate; case distinguishable from Bach v. McGinnes, 333 F.2d 979 (3d Cir. 1964) on basis that no bona fide dispute concerning charity's legal entitlement to bequest existed in Bach). 

(plaintiff's interest in cattle proceeds was subordinate to defendant's perfected first lien in same proceeds; title to cattle immaterial when priority in issue). 

(plaintiff, owner of pepper farm sued defendant, owner of cotton farm, and also sued pepper farm employee for crop damage caused by drift of chemicals aerially applied to cotton crop that drifted to pepper crop; employee had no control over management of pepper farm operation and was compensated in cash without having any ownership interest in cotton crop, so summary judgment granted to employee; aerial application of chemicals involved sufficient danger to come within scope of state law with result that cotton farm owner potentially liable for independent contractor's negligence; summary judgment not proper for cotton farm owner). 

(payments made in settlement of wrongful death case not deductible as casualty loss; amount paid not attributable to physical damage or destruction to taxpayer's property and, thus, does not meet statutory definition of I.R.C. Sec. 165). 

(debtors entitled to homestead exemption even though exemption claimed in a year after the year of sale and debtors had no intention to reinvest proceeds in new homestead at time bankruptcy petition filed, which was before the statutory one-year requirement; state law did not require reinvestment or intent to reinvest in new homestead). 

(evidence insufficient to establish existence of prescriptive easement for plaintiff over driveway used for access to plaintiff's property; post-1987 use via permission and prior use not proven by evidence).

(debtors were in cattle business and plaintiff bought 2,610 head of cattle for specified amount from debtors; some cows were noted as having "extra value" and would be sold again to third parties; dispute arose over how proceeds of sale to be divided and computation of formula for dividing sales proceeds; buyer couldn't prove entitlement to set number of calves under contract). 

(state tax debt non-dischargeable due to debtor's failure to report changes to federal tax liability caused by audit; change required to be disclosed under state law, and 11 U.S.C. Sec. 523(a)(1)(B) does not support debtor's position).

(township zoning hearing board revoked wind farm developer's zoning permit to develop wind farm upon appeal of neighboring landowners within one-half mile of wind farm; landowners had standing to appeal initial granting of zoning permit and develop did not have legally protected right in zoning permit). 

(debtor's motion to use cash collateral of creditor to fund expenses of growing crops in the future (in accordance with 11 U.S.C. Sec. 363(c)(2)-(3) and 11 U.S.C. Sec. 1205) denied; lien would not provide adequate protection and debtors' computations showed they would be left in worse position and cash flow problems made worse because of proposal to make higher payments under Chapter 12 reorganization plan; debtors' crop insurance could not be considered a guaranteed payment because it only guaranteed revenue and not profit; while debtors offered creditor third position on vehicles and equipment, debtors did not have sufficient equity in such items to amount to adequate protection). 

(defendant acquired 25-acre parcel via adverse possession; well-established boundary line and tract enclosed by fence for statutory period and fence believed to be dividing line and defendant maintained fence). 

(children of deceased parents named beneficiaries of parents' trusts; daughters claimed that son was indebted to parents at time of parents' deaths and that trustee should be required to retain amount of debt from trust assets to be distributed to son; son farmed with his parents in informal relationship, but parents maintained notebook containing handwritten financial records of farm including every expense paid and personal expenses of son that parents paid and denoted certain amounts as "loans" to son; court concludes that evidence insufficient to establish that son indebted to trusts either for payments designated by parents as "farm expenses" or for payments parents made to third parties on son's behalf; however, son indebted to trusts for payments parents made to him for which record shows a canceled check bearing designation as "loan").

(bank's claim against debtor flowing from financing arrangement where cattle and farm equipment served as collateral determined to be non-dischargeable under 11 U.S.C. Sec. 523(a)(6); no intent to deceive present, but failure to remit $47,010 of sale proceeds violated Sec. 523(a)(6)). 

(married couple could not deduct rental real estate losses attributable to two rental properties due to the passive loss rules; husband was emergency room physician and wife operated rental properties that the couple jointly owned and in which wife operated an "Inn" in one of them for 260 hours during year at issue; other dwelling rented out on longer term basis that had mildew problem which resulted in lawsuit and lots of legal fees and, ultimately, a settlement; wife did not qualify as a real estate professional; each real estate activity treated as separate activity for purposes of 750 hour test, and time spent on an activity with average rental period of seven days or less not counted for purposes of 750 hour test regardless of whether taxpayer materially participating;  court follows rationale of Bailey v. Comr., T.C. Memo. 2001-296 (unrelated case)). 

(IRS announces that it will not apply I.R.C. Sec. 118 to non-corporate entities (Sec. 118 specifies that capital contributions are not included in corporate gross income)).

(precatory language in will stating "it is my desire" determined to be mandatory language with result that equity interests are passed to decedent's children as specific bequests; marital deduction reduced). 

(no long-term capital loss deduction for stock due to lack of record-keeping that would substantiate ownership, basis in stock and date stock became worthless; because petitioners tried to determine proper tax treatment earnestly, no accuracy-related penalty imposed). 

(majority f amounts paid to caregiver not a deductible business expense, other amounts can be deducted as medical expense; facts involve married couple where wife has Alzheimer's disease and husband is self-employed contractor; husband hired caregiver for wife and deducted payments as a business expense; small percentage of payments deductible as business expense because wife performed clerical work for business, but majority of payments deductible as medical expense on Schedule A).