Case Summaries 01/2012
(extension of time granted to divide testamentary QTIP trust and make reverse QTIP election with respect to a portion of the trust and allocate decedent's unused GSTT exemption to that particular portion; decedent's will created pecuniary marital QTIP for surviving spouse and residuary credit shelter trust for children and grandchildren; upon surviving spouse's death, balance in QTIP to be added to residuary trust and upon death of last of decedent's children, remaining amount to be distributed per stirpes to grandchildren and more remote descendants; scrivener failed to divide QTIP trust into GST exempt and non-exempt portions and did not make reverse QTIP election; at time of ruling request (after death of surviving spouse) trustee had made no taxable distributions or terminations).
(plaintiff sued defendant farm operation for breach of contract involving, among other things, plaintiff's provision of "scouting service" to identify potential weed and pest problems and recommend appropriate crop protection chemicals for which defendant did not pay; defendant suffered some crop damage allegedly caused by crop pest control recommendations and practices and counterclaimed alleging tortious interference with contract, unfair and deceptive trade practices, treble damages and negligence and negligent misrepresentation; court granted plaintiff's motion to dismiss for failure to state a claim finding defendant failed to allege prospective contract for tortious interference with contract claim, lack of aggravating circumstances were not alleged to allow recovery for unfair trade practice or treble damages, and all duties alleged under the negligence claim arose from the duties outlined in the contract at issue, so no negligence existed).
(petitioner, controlling owner of MN company with business in many countries and income over several million dollars for years in issue (2005 and 2006) had purchased 14,000-acre Colorado ranch in 1998 which operated total of 42, 000 acres and had 300 head of cattle and 30 horses; petitioner employed ranch manager to carry out day-to-day duties of ranch; ranching activity incurred losses for years in issue and IRS claimed loss deductions limited by passive activity rules; petitioner spent little time at ranch and typically took family with him to ranch on flights paid for by petitioner’s MN company; petitioner claimed that he materially participated in cattle ranching activity by controlling actions of ranch manager and spent over 500 hours on ranching activity for years in issue via phone and electronic transmissions; petitioner could not produce any logs substantiating involvement in ranching activities or phone records; petitioner’s conduct at ranch often affiliated with MN company; ranch essentially a corporate retreat for MN company; petitioner subject to passive activity loss rules and ranching loss deductions denied).
(case involves whether warrants issued by an S corporation to shareholders in connection with shareholders participating in tax shelter constituted second class of stock that would disqualify the corporation from S corporation status; court noted that instruments, obligations and arrangements are not treated as second class of stock unless they are instruments, obligations or arrangements that are treated as equity in accordance with Treas. Reg. §1.1361-1(l)(4)(ii) or call options, warrants or similar instruments under Treas. Reg. §1.1361-1(l)(4)(iii); on reconsideration, court ruled that safe harbor of Treas. Reg. §1.1361-1(l)(4)(iii)(C) for call options applies if strike price of warrants is at least 90 percent of fair market value of underlying stock on date warrants issued; case to proceed to trial on issue of application of safe harbor; court’s previous ruling modified).
(court upholds state (IN) law barring liquor retailers from shipping wine through a third-party motor carrier service; only seller of wine or employee of seller can deliver wine; no pre-emption by Federal Aviation Administration Authorization Act of 1994; interstate commerce not involved).
(oil and gas corporations charged with criminal misdemeanors for violating Migratory Bird Treaty Act (Act) by “taking” or “killing” birds when dead birds were found around their reserve pits; court held statutory use of “take” and “kill” does not refer to accidental activity or the unintended results of other conduct; court dismissed government’s claims which would criminalize lawful, commercial activity that may indirectly injure or kill migratory birds; such claim is not permitted under the Act).
(court affirms trial court decision that terms of decedent's trust rather than terms of LLC agreement control disposition of farm property; trust specified that, upon decedent's death, trustees to offer to sell or vote to sell to three sons all or any portion of real estate held by LLC; LLC operating agreement specified that LLC to be dissolved upon death of any member unless all other members agree to continue LLC and, if dissolved, LLC assets to be liquidated and distributed to members; LLC formed to reduce estate taxes and trust formed to avoid probate; decedent's land transferred into LLC and personal property to trust and trustee listed as decedent's owner of decedent's interest in LLC; decedent's will specified that, at death, all remaining property in decedent's possession to be transferred to trust; at death, trust held 50.5 percent of interests in LLC with children holding the balance; appraiser hired to determined value of land; issue was whether trust terms or LLC terms governed disposition of real estate; trial court determined that trust owned real estate; decision affirmed and appraisal proper and bad faith not present).
(plaintiffs' home destroyed by fire and insured by defendant; plaintiffs brought action more than two years after fire loss; plaintiffs claim that state (MN) law provides for two-year statute of limitations, but insurance contract specified one-year statute of limitations; trial court held that because defendant is a township mutual fire insurance company it is exempt from two-year statutory requirement; appellate court held that to extent policy is homeowner policy it is subject to two-year requirement; "dwelling coverage" portion of plaintiffs' farm combination package is homeowner's insurance).
(petitioner's horse-related activity not engaged in for profit; petitioner was bankruptcy lawyer whose wife was a college professor; petitioner had no prior experience in horse activities; significant time involved in the activity; no expectation that asset values would increase; no evidence of success in related activities; lengthy period of substantial losses and only occasional profits; elements of personal pleasure present).
(petitioner purchased poultry processing facilities in 1995 for over $27 million and in 1998 for almost $11 million; purchase agreements included purchase price allocations for acquired assets as agreed to by parties, with most of them being listed as real property depreciable as 39-year, non-residential real estate property using the straight-line method; in 1999 petitioner had CPA firm prepare "cost segregation study" which would appraise the real estate component by component, resulting in reallocation of purchase price of buildings to shorter-lived assets, and petitioner then filed amended return changing depreciation method used on buildings to account for shorter lives of components and generating additional depreciation deductions of $5.3 million for years in issue (due to use of double-declining balance method over 15 and seven year lives for the components; government disallowed any modification to original purchase price allocations on the basis that I.R.C. Sec. 1060(a) mandates that the allocations specified in the purchase contract controls; petitioner claimed that I.R.C. Sec. 338(b)(5) allows use of residual method; court agreed with government and noted that allowing subsequent change could put government in "whipsaw" position; residual method only available where contracting parties do not agree in writing to allocation of consideration of acquired assets (citing West Covina Motors, Inc. v. Comr., T.C. Memo. 2009-291)).
(taxpayer, farmers' cooperative, marketed farm products by "agreement sales" which involve the co-op buying the products and reselling them with net profits accounted for on cooperative basis; such payments to patrons constitute PURPIMS and that co-op's DPAD to be computed without regard to any deduction for such payments).
(Chapter 12 case involves appeal from bankruptcy court order which granted trustee's motion to disburse unsecured funds denying any funds to appellant bank who did not file proof of claim; court did not view bank's pleadings to be informal proofs of claim allowing creditor to file formal proof of claim that would relate back to date informal proof filed; court held that pleadings did not meet all requirements as specified by Tenth Circuit to qualify as informal proof of claim; bankruptcy court order affirmed).
(purchasing party of Agriprocessors’ real property during bankruptcy proceedings received court order approving sale free and clear of all liens; county held tax lien on property but was not listed as creditor and did not receive notice of bankruptcy; county brought proceedings against purchaser to set aside the order approving the sale; ruling on summary judgment, court held county did not have actual notice of bankruptcy proceedings to defeat lack of procedural due process required to protect rights; purchaser not bona fide purchaser because had knowledge of tax lien; remedy must be determined at trial because questions of fact remained regarding purchaser’s expectations at sale and whether bankruptcy trustee agreed to pay tax liens).
(trustee objected to exemption claimed by debtors for savings account self-described as a trust for their son; account opened and transfers to account made within four years of bankruptcy petition; account listed on Schedule C to the bankruptcy petition and classified as exempt; in year before bankruptcy filing, $14,540 deposit made from other bank account and withdrawals from the savings account were made by debtors; count found account was “Totten” account; no transfer for trustee to avoid, account properly scheduled and exempted account).
(adverse possession case involving ownership of lot; court notes that state (KY) statute is 15-year statute and that upon expiration of the 15-year period, adverse possessor's rights are inchoate and that deed from title owner to grantee during period of adverse possession is void as to adversely possessed land; record establishes that defendant's possession of lot was hostile and involved clearing of lot and placement of mobile home on lot and mowing activities; summary judgment granted for defendant).
(IRS allowed late allocation of GSTT exemption to lifetime transfer to irrevocable trust; trust created and funded before rule allowing for automatic allocation of any unused GSTT exemption to indirect skips; gift tax return did not allocate any GSTT exemption which wasn't discovered until after transferor's death; at time of ruling request, no taxable distributions or terminations had taken place; IRS proposed regulations in 2008 establishing more rigorous documentation requirements for return preparers and advisors, not yet finalized).
(oil and gas producers appeal state tax appeals court decision denying a sales and use tax exemption for down-hole machinery and equipment in addition to surface pumping equipment; statute at issue (Kan. Stat. Ann. §79-3606(kk)) requires that machinery and equipment be used as integral part of integrated production operations by processing plant or facility operated by processing business where extracted oil and gas is then treated or prepared before transmission to refinery or wholesale distribution; tax court decision affirmed).
(IRS issues new Form 8937 and instructions for use by corporations to report transactions that impact shareholder stock basis; Form issued in accordance with tax reporting rules that became effective Jan. 1, 2011; Form must generally be filed by the earlier of January 15 of the year after the year in which transaction occurs or within 45 days after transaction; filing requirement applicable to public, private, domestic and foreign corporations; filing requirement applicable when corporate transaction impacts basis of all stockholders or holders of particular class of stock (or specified securities); S corporations satisfy reporting requirements by including impact of corporation transaction on timely-filed Schedule K-1; filing requirement avoidable if corporation posts "completed Form 8937" on corporate website; failure to comply with filing requirement results in $100 penalty per information return (up to $1.5 million annual maximum and additional $100 penalty for each shareholder (up to $1.5 million annual maximum).
(IRS notes that for business automobiles that employee drives home, value of personal use to be reported on W-2; value of personal use can be computed via IRS-specified business mileage rate for automobiles costing $15,900 or less (trucks and vans costing $16,700 or less); for vehicles valued in excess of such amount, annual lease value computation must be used as determined by IRS annual lease value table; for fleet-average valuation rule to apply, the amount for automobiles is $21,000 and $21,900 for trucks and vans).
(creditor claimed it was beneficiary of PSA statutory trust for unpaid amounts owed by debtor (supermarket operator) pursuant to invoices setting payment term of “net 30 days” from invoice date; while court determined that PSA statutory trust provisions applicable because sales transactions were “cash sales,” creditor did not preserve statutory trust benefits under PSA by providing requisite timely written notice to debtor and USDA within 30 days of each invoice’s due date; assets not excluded from debtor’s Chapter 7 bankruptcy estate).
(plaintiffs own real estate and claim constitutional taking occurred requiring compensation; state (Oregon) voters passed ballot initiative Measure 37 in 2005 requiring compensation be paid when land use regulations reduced fair market value of property where no physical taking of property present; in 2007 legislative session, initiative Measure 49 passed that extinguished Measure 37 and changed remedies available to property owners in the process of pursuing relief under Measure 37, but exempted property owner from the new remedies if owner had "a common law vested right...to complete and continue the use described in the waiver"; under state law, a landowner has a vested right to complete development of property if commencement of construction has been substantial or substantial costs have been incurred; court held that Measure 37 granted property owners only a cause of action, not vested final judgment recognized as constitutional taking; thus, property owners did not have a property interest that they could then use in challenging the reduced remedies contained in Measure 49).
(petitioners owned nine real estate properties and rented six of them but sold the other three before they were rented; all nine properties treated as rental properties with loss deductions claimed against gains from sale of three properties; plaintiff claimed he qualified as real estate professional, but didn’t maintain records and couldn’t prove that he spent more than 50 percent of his time in real estate activities; properties that were sold were part of same passive real estate activity and proceeds to be netted with rental loss to determine passive income for year; 20 percent penalty of I.R.C. Sec. 6662 imposed to extent excess basis and expenses claimed on return).
(plaintiff, a partnership, paid $5.1 million for turnkey oil and gas well drilling venture; site preparation occurred during 1999 (tax year in issue), but no drilling occurred within 90 days after end of 1999; plaintiff deducted full $5.1 million in 1999 as intangible drilling costs, but amount denied because economic performance requirement of I.R.C. Sec. 461(h) not satisfied; IRS position affirmed – commencement of drilling occurs upon actual penetration of ground for well drilling purposes; 3.5 month rule of Treas. Reg. Sec. 1.461-4(d)(6(ii) does not allow plaintiff to treat any of service due under contract as having been economically performed in 1999 – all services required must be rendered within 3.5 months of payment; in any event, deductions allowed under 3.5 month rule limited to cash payments (or equivalents) but not payments by notes).
(coal produced under particular process and certain chemical additives satisfies definition of “refined coal” in accordance with I.R.C. §45(c)(7) if such coal produced from feedstock coal that is same source or rank as “tested coal” and satisfies I.R.C. §45(c)(7)(B) qualified emission reduction test).
(easement case; defendant’s bought tract upon which prior owner had operated campground on northern portion and prior owner retained those two acres; access easement created to provide access to campground areas that prior seller retained over what would become plaintiff’s property; plaintiff claimed that increased campground business has increased traffic and scope of easement; trial court ruled for defendant and appellate court affirmed based on language of easement).
(drainage case; County Surveyor claimed that plaintiff failed to comply with Indiana Code on two drainage projects; court determined County Surveyor had standing to bring suit and that one project did not implicate Indiana’s regulated drain statute because regulated drains by definition are an “open channel” and there were no open channels in the subdivision; second project involved removal of an apparent obstruction without participation by the County Surveyor, which was contrary to Indiana Code.)
(contribution of company controlled by petitioner to I.R.C. §419A(f)(6) plan in attempt to provide covered employees with severance and other benefits funded via whole life insurance not deductible business expense, but was constructive dividend to company’s only covered employee (petitioner’s spouse) for petitioner’s personal benefit; attempt to provide tax-free income to petitioner and spouse; accuracy-related penalty imposed).
(under Iowa Code Sec. 423.2(6), only enumerated services are subject to sales tax; software training is not an enumerated service and is not subject to tax regardless of how it is delivered; gross receipts of software provider from hosted software and web-based training services are "cloud computing" services that are not subject to sales tax).
(power of trust beneficiary to withdraw trust contributions causes beneficiary to be treated as owner of part of trust over which withdrawal power has not lapsed; beneficiary can be treated as owner of balance of trust; trust is permissible S corporation shareholder if, based on facts, beneficiary treated as owner of entire trust; beneficiary’s estate includes amount from trust that beneficiary can withdraw in year of death less what has already been withdrawn in year of death).
(drainage case; County Surveyor claimed that plaintiff failed to comply with Indiana Code on two drainage projects; court determined County Surveyor had standing to bring suit and that one project did not implicate Indiana’s regulated drain statute because regulated drains by definition are an “open channel” and there were no open channels in the subdivision; second project involved removal of an apparent obstruction without participation by the County Surveyor, which was contrary to Indiana Code.)
(boundary line dispute case; plaintiff claimed that existing fence line established boundary, but true boundary is on plaintiff's side of fence; court determined that fence line established boundary based on mutual recognition and acquiescence).
(homebuyer brought action against seller for fraudulent misrepresentation and concealment, and negligent misrepresentation after discovering water damage and bowing walls in basement of home that had been concealed with drywall and had not been disclosed on the Residential Property Disclosure Form at time of purchase; on appeal, trial court’s awards for economic, noneconomic, and punitive damages upheld).
(petitioner received Form 1099-R reporting insurance policy distribution; petitioner believed that policy had been canceled many years earlier, but didn't provide evidence that cancellation done in accordance with policy terms and premiums continued to be paid in accordance with automatic loan provision of policy until loan balance equaled cash value of policy; policy lapsed and triggered constructive dividend equal to value exceeding petitioner's investment in contract).
(petitioner contributed $5,000 to IRA in 2007 and also participated in employer's qualified retirement plan; petitioner claimed deduction for IRA contribution; deduction denied due to application of I.R.C. Sec. 219(g) phaseout triggered by petitioner's participation in employer's qualified plan and because MAGI over phaseout limitation; petitioner's don't challenge facts but claimed that law treats them unfairly because only allowed a small IRA contribution due to participation in employer's qualified plan; argument rejected).
(petitioner not entitled to dependency exemptions, child tax credit, earned income credit or head-of-household filing status; qualifying child or qualifying relative definition not met; children did not live with petitioner requisite time period).
(family partnership received interests in various properties as consideration for transfer (bargain sale) of right-of-first refusal on encumbered farmland to charity (conservation organization); court redetermined fair market value such that each tract included value of beach rights; valuation approach of IRS expert generally upheld except that expert should have accounted for public access over one tract that would decrease value; gain attributable to beach rights not taxable to partners due to lack of capital interest in petitioner; petitioner's charitable deduction denied due to deficiencies of acknowledgement letter from charity; letter did not disclose certain items that donor received in return for gift and petitioner's reliance on letter not reasonable; accuracy-related penalty upheld).
(before death, decedent remarried and name second spouse as income beneficiary of QTIP trust in addition to credit shelter trust; second spouse named co-trustee of both trusts with bank (which had the effect of replacing decedent's children); dispute arose between second spouse and decedent's children concerning trust accounting and decedent's estate plan; pursuant to settlement agreement, estate reimbursed parties for incurred legal fees; court held that administration expenses deductible as incurred by decedent's children, but that second spouse's expenses not deductible and that taxes incurred by estate did not reduce estate's marital deduction).
(at time of decedent's death, decedent owned three life insurance policies with two payable to the decedent's mother and one payable to a brother; estate also included stock and note from corporation for $10,000; estate, on Form 706, reported two policies payable to mother, did not report note and claimed deductions for executor fees; deductions disallowed due to lack of substantiation and proceeds of third policy should have been included in estate value; court upheld determinations of IRS except that, pursuant to I.R.C. Sec. 2053, court held that estate entitled to deduct administration expenses that the estate actually incurred).
(real estate investment trust (REIT) can qualify for non-recognition treatment under I.R.C. §1031; facts involved series of like-kind exchanges involving related parties where receipt by the parties of some non-like-kind property did not disqualify transactions from non-recognition treatment under I.R.C. §1031(f); each related party must transfer replacement property into series of exchanges that also enter into like-kind exchange; REIT and related parties must hold replacement properties for at least two years after date of last transfer of property in the series of exchanges).
(plaintiff sought declaration that defendant’s authority to regulate gas or oil wells in defendant’s municipal limits and also sought compensation for alleged unconstitutional taking of plaintiff’s property rights; plaintiff had leased 67-acre tract from landowners and had obtained permit to drill for oil on the property from the state Dept. of Natural Resources; defendant annexed property triggering zoning ordinance that classified property as “residential” which prohibited oil drilling; trial court ruled for defendant on basis that state law allowed defendant to prohibit oil drilling; plaintiff claimed that defendant only had power to regulate drilling activity, but couldn’t prohibit it; court disagreed; trial court ruling affirmed).
(plaintiff’s cotton picking machine destroyed by fire; defendant ultimately paid $100,000 on insurance claim for plaintiff’s loss, but plaintiff claimed that payment not made in timely manner as required by policy and constituted a “bad faith breach of the policy terms”; plaintiff sued for punitive damages; defendant claimed that under state (MS) law plaintiff’s only claim compensatory damages would be for pre-judgment interest, but such interest was barred before filing the complaint and it had not been requested in the complaint and, in turn, without compensatory damages, punitive damages could not be recovered; trial court granted summary judgment for defendant, but appellate court reversed; on further review by state Supreme Court, court held that plaintiff could seek pre-judgment interest from date of breach, before complaint filed and that, in contract cases, state law does not limit pre-judgment interest to post-complaint period).
(Arkansas landowners seek summary judgment against defendant for defendant’s failure to pay cash bonuses of $300 per acre in addition to royalty payments in accordance with oil and gas leases; landowners executed leases and defendant failed to pay on bank drafts because it had made determination to abandon oil and gas exploration in the county after drilling dry well; trial court granted summary judgment on finding that lease agreements were binding and only subject to defendant’s good faith approval of title and cancellation unrelated to title; appellate court affirmed; language of written oil and gas leases coupled with bank draft issued to pay cash bonus constituted enforceable contracts; mutuality of obligation present even though bank draft contained “no-liability” clause because such clause contrary to language in lease; lease agreements were accepted in accordance with approval language and renunciation of lease does not preclude enforceability).
(defendant pumps water from plaintiff's irrigation canal to irrigate defendant's farmland; irrigation occurred on hillside which caused erosion and landslides that damaged canal and neighboring property; defendant settled with adjoining property owner; trial court entered order barring defendant from using canal water in a manner that would not result in any groundwater recharge and that all surface irrigation be diverted from slide mass and no excess irrigation be applied to crops being cultivated on defendant's farmland; trial court determination upheld and matter did not constitute condemnation proceeding).
(petitioner not in trade or business of being book author for year in issue; no deductions for related expenses under I.R.C. Sec. 162; petitioner was full-time employee of Intel and had no experience writing or publishing books; no book income reported for year in issue; accuracy-related penalty not imposed because petitioner had good faith reliance on tax advisor with 36 years' experience).
(IRS proposes a new revenue procedure in which IRS revises threshold equitable and/or innocent spouse relief requests; such requests are to be granted when facts and circumstances warrant and are to be granted in such circumstances at initial state of administrative process; IRS accepting comments until Feb. 21, 2012).
(plaintiff owns a trucking firm and improperly classified drivers as independent contractors; plaintiff failed to qualify for "Section 530" relief for lack of filing Forms 1099 for six years; mailbox rule exception inapplicable due to lack of proof).
(inherited IRA exempt from debtor’s bankruptcy estate under 11 U.S.C. Sec. 522(b)(3)(C) because they are “retirement funds” that are tax-exempt under I.R.C. §408; decedent died about a year after establishing account which named daughter as beneficiary; daughter had own IRA and had balance of decedent’s IRA rolled into hers and then took monthly distributions from it before retiring; over nine years later daughter and husband filed Chapter 7; bankruptcy court ruled IRA not exempt; on review, court determined that IRA account funds need not be “retirement” funds of the debtor to qualify for exemption; court followed majority view that direct transfers of retirement funds from tax-exempt account qualify for exemption, and immaterial that there are differences between traditional IRAs and inherited IRAs due to I.R.C. §408(e)(1); question of whether inherited IRA should be exempt up to the Congress to change the statute).
(defendant pumps water from plaintiff's irrigation canal to irrigate defendant's farmland; irrigation occurred on hillside which caused erosion and landslides that damaged canal and neighboring property; defendant settled with adjoining property owner; trial court entered order barring defendant from using canal water in a manner that would not result in any groundwater recharge and that all surface irrigation be diverted from slide mass and no excess irrigation be applied to crops being cultivated on defendant's farmland; trial court determination upheld and matter did not constitute condemnation proceeding).
(case involved whether tracts at issue should be classified as “agricultural” under Minn. Stat. §273.13 so that it is eligible for “Green Acres” treatment; court holds that property fails to qualify because tracts at issue comprise less than statutory minimum 10 acres; while petitioners owned three tracts totaling over 14 acres, residence located on parcel of almost 10 acres; residence parcel had over five acres that were not being used for agricultural production and balance of other two tracts had only three acres that were in agricultural use; vacant land not being used for agricultural purposes).
(adverse possession case involving strip of land one quarter mile long varying from fifteen to twenty-three feet in width along property border; no question exists that plaintiff adversely possessed strip on their side of fence for 20 years as of 1974 and tenant farmer then farmed as close as he could to the fence since 1977; plaintiff maintained fence until 1982; defendant claimed that 30-year statute of limitations for bringing adverse possession claim expired in 2004, but trial court rejected argument - owner-in-possession exception applied; trial court judgment affirmed).