Case Summaries 11/2013

(proposed Treasury Regulations narrowly-tailored to impact Tea Party organizations by taking the position that education activities related to such things as size of government, the Constitution, and distribution of non-partisan voter guides and voter registration drives by I.R.C. 501(c)(4) groups are deemed to be impermissible political activities (rather than social welfare activities) that would disqualify such groups from tax-exempt status; rule only applicable to I.R.C. Sc. 501(c)(4) groups and not I.R.C. Sec. 501(c)(3) groups such as the League of Women Voters Education Fund(I.R.C. Sec. 501(c)(3)) or unions (I.R.C. Sec. 501(c)(5)); proposal has already caught attention of House Ways and Means Committee as highly tailored targeting of Tea Party groups; public comments due Feb. 27, 2014). 


(county sheriffs and others filed an action against the State of Colorado, asking the court to declare that two new gun statutes were unconstitutional; at issue in this opinion was the court’s jurisdiction to hear the claims that C.R.S. §§18-12-301, 302, which would restrict the sale and possession of large capacity ammunition magazines, were “unconstitutionally vague”; the court ruled that at least one plaintiff had standing to assert a claim that the phrase “continuous possession” was unconstitutionally vague, but no plaintiff had alleged a credible threat of prosecution based upon the transfer of a magazine “designed to be readily converted to” accept more than 15 rounds; the court dismissed all claims asserted by the county sheriffs in their official capacities, finding that they lacked standing to assert the claims since they were not asserting an injury to their “individual interests”). 


(district court had held that inherited IRA funds 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 (450 B.R. 858 (Bankr. W.D. Wis. 2011)) ruled IRA not exempt on basis that inherited IRA funds were not "retirement funds" in the hands of the debtor and, therefore, not exempt; on review, district court (466 B.R. 135 (W.D. Wis. 2012)) determined that IRA account funds need not be “retirement” funds of the debtor to qualify for exemption; district 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; on further review, circuit court reversed on basis that inherited IRAs represent opportunity for current consumption in hands of debtor and are not a fund of retirement savings; court analogized situation to that of debtor inheriting home - home only exempt if debtor lived in it, and is not exempt merely based on how prior owner used the property; court's opinion contrary to Fifth Circuit in In re Chilton, 674 F.3d 486 (5th Cir. 2012); U.S. Supreme Court granted certiorari). 


(bankruptcy trustee seeks avoidance (as a fraudulent transfer) and recovery of two payments debtor made within two years before petition date; trustee claimed that payments made to crop dusting company for services performed for owner of debtor and, as a result, debtor received less than equivalent fair market value in return; competing motions for summary judgment denied on basis that fact issues remained as to whether payment obligation was joint obligation of owner of defendant and defendant or not). 


(petitioner received income from her husband's S corporation in transaction involving I.R.C. Sec. 351 in which property was contributed to corporation in return for stock; property in question was an amortizable I.R.C. Sec. 197 intangible property which is treated as I.R.C. Sec. 1245 property; I.R.C. Sec. 1239 treats gain from sale of depreciable property between related taxpayers as ordinary income and not capital gain; court noted that 50 percent ownership rule applied and examined voting rights and valuation of both common and preferred stock of corporation, and held that petitioner's gain was ordinary in nature


(petitioner was Mary Kay consultant and formed defined benefit plan that petitioner's sole proprietorship adopted; petitioner then transferred consulting income to limited partnership, but Mary Kay refused to pay consulting income to partnership, but petitioner reported expenses of consulting business on the partnership; defined benefit plan restated and adopted by partnership; petitioner claimed deductions of approximately $750,000 for funding plan; income from partnership reported by petitioner on K-1; IRS claimed that partnership not a business and had no income on which to base plan contributions and partnership had no self-employment income on which to base contributions; court determined that petitioner conducting business and that restated plan document adopted when partnership formed said that employer sponsoring plan was "entity specified in Adoption Agreement, any successor which shall maintain this Plan and any predecessor which has maintained this Plan"; court reasoned that petitioner's sole proprietorship original plan sponsor and was employer for plan purposes and could contribute to plan and claim deduction; on separate issue, court determined that petitioner's income received in 2006-2009 (during retirement years) was derived from past Mary Kay sales work and was performance-based (calculated based on previous commissions, age at retirement and years of service) earned during employment and was subject to self-employment tax). 


Here, the surviving spouse of a farmer placed the farm into a revocable trust which named her as trustee and specified that the trust assets were for her use and benefit during her life with the assets then passing to the couple's children.  The surviving spouse sold the farm to the on-farm child who had farmed with his father at a discounted per-acre price which equaled the price at which a tract had been sold to a daughter, but the daughter (now acting as successor trustee) objected to the sale and refused to honor the purchase agreement.  The on-farm child sued for specific performance.  The appellate court determined that the surviving spouse was competent, the selling price was adequate and no undue influence was present, but also held that the on-farm heir breached a fiduciary duty by participating in the sale.  On further review, the state (IN) Supreme Court determined (in accordance with Sec. 603 of Uniform Trust Code (UTC)) that a trustee's duties are only owed to the settlor while the trust is revocable and that state law mirrored the UTC.  Thus, the surviving spouse's ability to amend or revoke the trust displaced any implied duty owed to beneficiaries and the surviving spouse could sell the farm to the on-farm heir at a price below market value.  The purchase agreement did not constitute an amendment to the trust due to lack of governing trust language, and the surviving spouse signed the purchase agreement as trustee rather than as settlor.  The on-farm child was entitled to specific performance.  Fulp v. Gilliland, 998 N.E.2d 204 (Ind. 2013).


(plaintiff, atheist organization, challenged as unconstitutional the cash allowance provision of I.R.C. §107(2) that excludes from gross income a minister’s rental allowance paid to the minister as part of compensation for a home that the minister owns; court determined that I.R.C. §107(2) is facially unconstitutional under the Establishment Clause based on Texas Monthly, Inc. v. Bullock, 489 U.S. 1 (1989) because the exemption provides a benefit to religious persons and no one else, even though the provision is not necessary to alleviate a special burden on religious exercise; court noted that religion should not affect a person’s legal rights or duties or benefits, and that ruling was not hostile against religion; court noted that if a statute imposed a tax solely against ministers (or granted an exemption to everyone except ministers) without a secular reason for doing so, the law would similarly violate the Constitution; court noted that defendants (U.S. Treasury Department) did not identify any reason why a requirement on ministers to pay taxes on a housing allowance is more burdensome for them than for non-minister taxpayers who must pay taxes on income used for housing expenses; court noted that Congress could rewrite law to include housing allowance to cover all taxpayers regardless of faith or lack thereof; I.R.C. §107(1) not implicated and, as such, a church can provide a minister with a parsonage and exclude from the minister’s income the rental value of the parsonage provided as part of the minister’s compensation). 


(defendant received gift of land with stipulation that defendant could develop land for “agricultural, academic, research and development, delivery of health and medical care and services, or related purposes” or that the defendant’s proposed “mixed-use” research park would use land entirely for such purposes; plaintiffs, family members of deceased donor, argued that defendant’s plans for land violated terms of agreement due to scale, density and lessor/lessee structure of defendant’s plans; court determined that donor agreement not ambiguous and extrinsic evidence need not be considered; defendant’s plans for land permissible under donor agreement). 


(decedent established IRA account and named spouse as primary beneficiary and couple’s revocable trust as contingent beneficiary; under amended trust language, upon death of surviving spouse, $100,000 to be distributed to church; decedent changed contingent beneficiaries numerous times; spouse died and charitable trust named primary beneficiary; ultimately, decedent designated payouts to go directly to named charities rather than through trust and single charity named as beneficiary – Univ. of Ariz. Foundation for Breast Cancer Research; church received $100,000 and claimed entitlement to IRA proceeds in addition; trial court determined that Foundation was sole beneficiary; on appeal, court affirmed based on evidence that decedent did not want church to be IRA beneficiary). 


(creditor motions to dismiss debtor’s Chapter 12 case on basis that debtor is not an eligible Chapter 12 debtor; debtor listed assets of 10.5 acres of land valued at $150,000; debtor listed occupation as “nursery manager” and debtor’s wife was bookkeeper for different business; debtor admitted that did not engage in farming operations in commonly understood sense; while court noted that other activities not specifically mentioned in 11 U.S.C. §101(18) can qualify as a farming operation citing In re Watford, 898 F.2d 1525 (11 th Cir. 1990), debtor was not a “family farmer” engaged in farming operations for at least two years since growing pumpkins and watermelons; agritourism not farming operation within letter or spirit of 11 U.S.C. §101(18)); court noted that by debtor’s logic, Disneyland would be a farming operation because it was built on land that had formerly been an orange grove). 


(trial court determined that boundary line between parties properties was established by 2004 survey; plaintiffs claim that boundary established by acquiescence or adverse possession; prima facie evidence showed that boundary established by acquiescence and is consistent with amount of property defendants purchased in 1972; trial court decision reversed). 


(defendant claimed that plaintiff breached contract for sale of horse; defendant sought possession of horse and $74,000 judgment; default judgment entered against plaintiff and plaintiff later sought to have judgment set aside for defective service due to incorrect statement that plaintiff had 20 days to respond (correct number of days was 30); court refused to set judgment aside; on appeal, court reversed on basis that service requirements must be strictly complied with; default judgment set aside). 


(decedent died intestate survived by four children and was the owner of a large farming operation; the four children were the original personal representatives until disputes caused the trial court to appoint an independent personal representative; in reversing in part the trial court’s approval of the final accounting, the court found that stock still owned by the estate eight years after the death of the decedent should have been valued at the date of distribution, not the date of death; trial court improperly approved a partial distribution of dividends to one of the heirs because there was no valid agreement (1) set out in writing, (2) signed by all heirs, and (3) submitted to the court for approval; trial court improperly allowed estate to reimburse heirs, not partnership owned by several heirs, for administrative fees partnership paid on behalf of the estate). 


(plaintiffs filed a quiet title action, seeking to establish that the true boundary line separating the parties’ properties was a survey line, not a dilapidated fence; the court upheld a trial court’s finding that defendants proved their ownership of the disputed parcel under a theory of “acquiescence,” pursuant to Iowa Code § 650.14; the evidence showed that there had been “mutual recognition” by two adjoining landowners for 10 years or more that a line, definitely marked by a fence, was the dividing line between them; defendants had farmed and tended to the disputed strip for at least 20 years, and plaintiffs’ predecessors never disputed the use or asserted their ownership interests in the property).


(plaintiff was injured by defendants’ llama while caring for defendants’ animals while they were away; plaintiff had previously tended to the animals, including the llama, and the llama had been aggressive toward plaintiff on several occasions; plaintiff alleged that defendants were negligent because they knew of the llama’s prior aggressive behavior and failed to control the animal; in affirming the trial court’s summary judgment in favor of defendant, the court held that plaintiff assumed the risk he would be attacked by the llama when he entered the barn; it did not matter that plaintiff was a nonprofessional; plaintiff waived his “deliberate encounter exception” argument by not presenting it to the trial court). 


(plaintiff, a partnership,  granted façade easement on certified historic structure to National Architecture Trust; easement required grantor to obtain prior written consent from NAT before making any changed to façade; plaintiff claimed $10.7 million deduction for donation on partnership tax return and IRS fully disallowed deduction because at time of grant, plaintiff owned first 14 floors of building and third party owned top 6 floors and plaintiff did not own entire exterior of structure; plaintiff claimed that easement terms imposed enforceable restrictions on entire exterior and that under state (IL) law ownership of entire exterior not required to grant easement imposing enforceable restrictions on entire exterior; court agreed with IRS on basis that while state law determines nature of property rights, federal law determines appropriate tax treatment of those rights; based on state law, court noted that plaintiff only had rights to two sides of structure and did not have assignable right in entire exterior via maintenance agreement or need to get prior approval to make alterations). 


(decedent was minority member of LLC; LLC owned rented commercial building in New York City and executor valued decedent’s interest in LLC at $1.78 million; IRS determined deficiency of $309,000 based on reduction of minority and lack of marketability discount; executor attaches new appraisal to petition rather than obtaining expert witness testimony due to fee dispute with expert; court noted that petitioner did not qualify expert nor satisfy preconditions to receiving opinion evidence; appraisal not in evidence and court need not consider expert’s opinion). 


(petitioner’s return had zero tax liability but claimed refundable   credits which triggered refund of $7,327; IRS issued refund, but later recomputed and determined that petitioner owed $144 (petitioner had to repay the $7,327 and an additional $144) and assessed penalty of $1,494.20 (20% underpayment penalty); petitioner challenged IRS position that refundable credit counted as an “underpayment”; court noted that accuracy-related penalty is on deficiencies based on how much the taxpayer underpaid the “tax required to be shown on the return” and determined that refundable credits cannot take the tax below zero for purposes of the accuracy-related penalty; thus, underpayment was $144 for penalty computation purposes). 


(bank filed financing statement indicating lien on debtor’s crops, farm products and livestock; almost three years later, debtor filed Chapter 12 while loan still outstanding; at time petition filed, debtor did not have growing crops or grain on hand, but did have cash proceeds of checks  from sale of prior fall’s crops; debtor received permission to cash checks and use funds to plant next year’s crop; debtor used 2008 crop proceeds to pay living expenses, pay the Chapter 12 trustee and remodel house that was later sold with court permission; no further crops were funded with proceeds subject to bank’s lien; debtor filed motion for declaration that grain harvested from 2010 and all later crop years not subject to bank’s lien; motion granted; debtor sought financing from different bank to fund purchase of heifers, but bank refused; initial bank released security interest in cattle and debtor’s present and future crops; debtor then sought operating loan from the different bank to fund planting of 2011 crop; due to various snafus, amended financing statement filed late and weed control not effective for 2011 with result that 2011 and 2012 crops impacted; debtor claimed that bank failed to timely release lien in violation of court order and automatic stay; court determined that debtor’s evidence insufficient to establish willfulness or intentional disobedience of court order, only negligence; debtor’s motion for contempt and sanctions denied; on appeal, court affirmed; while parties entered into stipulation that called for debtors to liquidate cattle and distribute proceeds in return for bank's release of security interest in cattle and present and future crops, when debtor did so in March, bank waited until mid-June to file amended UCC financing statement releasing liens which hampered debtor's ability to get subsequent loans to support 2011 and 2012 crops; debtor filed motion for contempt; court noted high standard for contempt and that order only required bank to "subsequently" filed amended financing statement; no willfulness present; debtor's contempt motion denied). 


(Chapter 12 case involving issue of plan confirmation; debtor’s amended plan not confirmable due to continued losses and no reasonable likelihood of rehabilitation). 


(in prior action,  Texas Supreme Court  held that land ownership includes an interest in groundwater in place, and that limiting a private owner’s water usage for a public purpose constitutes a taking requiring the payment of just compensation under the Texas Constitution; ultimately, however, Court remanded case for determination of whether denial of  permit in amount of water requested by landowners constituted taking after full development of record; on remand, court held that regulatory taking occurred when water was limited to amount inadequate for landowners’ pecan orchards and just compensation was amount by which property impaired by taking). 


(petitioner, sole shareholder of mortgage broker business, deemed not to be in trade or business of trading securities; over $800,000 of claimed expenses disallowed and accuracy-related penalties imposed; court noted that I.R.C. Sec. 162(a) does not provide definition of "trade or business" but noted that relevant considerations include taxpayer's intent, nature of income derived from activity, frequency, extent and regularity of activity; court noted that trading activities must be substantial in terms of number of trades executed, amount of money involved and number of days on which trades executed; petitioner received substantial wage income and executed trades on investment account for which petitioner had no clients; in 2005, 535 trades executed on account on 121 days (out of available 250) with 95 trades occurring in one week; eight periods of at least seven days in which no trades occurred; in 2006, 235 trades executed on 66 days (out of 250 available days); holding period ranged from between one to 101 days; seven periods of at least seven days where no trades occurred; number of trades insufficient to constitute "substantial" amount for either 2005 or 2006 and even though amount of money involved "considerable" ($24 million to $33 million), amount not determinative of whether activity substantial; total number of trading days not substantial).


(Chapter 12 case; debtor took over father’s 3,000-acre crop and dairy farm upon father’s retirement; debtor got divorced and, as a result, only had 1,000 crop acres at petition date; because row crop business suffered continual losses, debtor sold some of the land to his son and began growing berries and raising pheasants for hunting; debtor became licensed by state to acquire and release pheasants; pheasants raised in barn until fully grown; incubation period of three weeks required debtor to ensure that birds protected and remain disease-free; pheasants ultimately released for hunts by customers; upon filing Chapter 12, creditors argued that debtor not engaged in farming but in a recreational activity; court determined that debtor engaged in farming under totality of circumstances citing dissent in Armstrong v. Corn Belt Bank, 812 F.2d 1024 (7th Cir. 1987), cert. den., 484 U.S. 925 (1987) and In re Maike, 77 B.R. 832 (Bankr. D. Kan. 1987); however, court determined that amount of debtor’s debt not 50 percent or more related to farming operation; most of debt related to personal residence and no evidence presented that mortgage secured farm debt; case to be dismissed or converted to different chapter). 


(petitioner donated qualified conservation easement to National Architectural Trust on petitioner's townhouse (façade easement on historic property); IRS challenged appraisal of property as not being a "qualified appraisal" because it did not contain state method of valuation (even though petitioner's appraiser testified that he used the "before and after" approach; IRS also argued that Pension Protection Act expanded requirements for qualified appraisal by requiring that appraisal follow "generally accepted appraisal standards"; IRS claimed easement had no value insomuch as it mirrored restrictions in local law; court did not accept IRS' argument and noted that an easement restriction does reduce value of the restricted property; court determined two percent reduction in value due to easement restriction which resulted in charitable deduction of $104,000 rather than $605,000 that petitioner claimed; petitioner liable for I.R.C. Sec. 6662 penalty).


(petitioner formed corporation to perform engineering consulting work and steel fabrication; steel fabrication business ultimately transferred into LLC and businesses separated; corporation used advanced funds from LLC and bank loans to continue operations; LLC claimed bad debt deduction on Form 1065 for 2006 and 2007 for amounts not repaid by corporation; IRS disallowed deductions on basis that they weren't bona fide debt; court agreed with IRS - advances not bona fide debt because no use of promissory note, lack of definitive maturity date, lack of repayment schedule, no collateral pledged and no interest paid or accrued; Tax Court decision affirmed on appeal)


(taxpayer proposed to disclaim contingent right to receive trust corpus upon trust termination; disclaimer to be executed within nine months after reaching age 18; disclaimer determined to be made within timeframe of Treas. Reg. Sec. 25.2511-1(c); IRS noted that disclaimer must be unequivocal and be effective under local law; IRS determined that, based on facts represented, disclaimer would not be a taxable transfer).


(property owners obtained favorable tax treatment after being granted a “current use assessment” on 448.5 acres and entered into a 10-year “conservation use assessment of agricultural property covenant agreement” pursuant to O.C.G.A. § 48-5-7.4; the board of assessors asserted that the owners violated their covenant by operating a commercial grain business on a portion of the property; in reversing the lower court’s ruling in favor of the owners and remanding for further consideration, the court found that the lower court may have erroneously based its decision on the faulty premise that operating a business on the property would never breach the covenant; the correct rule was that if a taxpayer was operating some other type of business, and the business was not “incidental, occasional, intermediate, or temporary,”  but was “detrimental to or in conflict with the property’s primary purpose,” the land would not qualify for a current use assessment). 


(taxpayer proposed to modify trust by appointing successor trustees, and IRS determined that such modification would not create a general power of appointment that would cause trust assets to be included in taxable estate of any trust beneficiary, and exercise of appointment power would not be a gift taxable transfer; IRS also determined that proposed modifications would not cause trust to lose exempt status from GSTT tax, and no distributions or terminations of trust would be subject to GSTT due to modifications). 


(petitioners borrowed money from a relative of a petitioner with mortgage prepared as security for debt; mortgage not publicly recorded, thus mortgage holder could foreclose upon default, but other lenders not notified of debt such that mortgage subordinated to later mortgages and security interests; petitioners deducted interest paid to lender, but IRS denied deduction based on I.R.C. Sec. 163(h) which denies deduction for personal interest except for qualified residence interest, but debt must be secured by the residence to be deductible; court upheld IRS position on basis that Treas. Reg. Sec. 1.163-10T(o)(1) requires mortgage to be recorded or perfected in accordance with state law). 


(tenant and landlord executed an agreement on May 3, 2010, for the lease of a farm from January 1, 2010 through December 31, 2012; lease provided that $51,100 annual rent was due “April 1 of each year of the lease”; when tenant failed to pay any rent during 2010, the landlord filed suit, and the trial court entered judgment in landlord’s favor; in affirming the judgment, the court ruled that the trial court properly considered extrinsic evidence showing the intent of the parties as to when rent was due; the court found that although the due date was ambiguous, the rent was due either May 3, 2010, or December 31, 2010; under either interpretation, the tenant breached the contract; the court urged practitioners drafting leases that would be executed after the effective date of the lease to include a clause specifying that the initial payment was “due upon execution” or upon some specific date thereafter). 


(Chapter 7 case involving IRA account balance of over $236,000 debtor claimed as exempt under 11 U.S.C. §522(b)(3)(C) and under state (MN) law; court’s opinion limited to federal exemption; debtor originally purchased annuity with funds rolled over from tax-qualified IRA that would have been exempt in bankruptcy; annuity complies with I.R.C. §408 and is exempt asset because it was purchased via direct rollover from another tax-exempt IRA).


(petitioner owned and operated customs brokerage business along with dog breeding and showing business; dog breeding business showed profit in one of prior 16 years; court determined that dog breeding activity not conducted with profit intent because no changes made to activity to make it profitable and losses from activity offset substantial income from petitioner's other activities; petitioner received substantial pleasure from dog breeding activity).