Annotations 10/2014

 The decedent's estate plan included a pour-over will and a trust.  The terms of the trust specified that the decedent's assets would be divided equally amongst her children, except that a son had an option to buy the decedent's 95 shares of stock in a closely-held company.  At the time of death, the decedent's stock was subject to a shareholder's agreement requiring the company to buy the decedent's stock upon the decedent's death unless the stock passed to the decedent's "immediate family" (defined as children, spouse, parents or siblings of the decedent).  By virtue of the decedent's will, the decedent's stock passed to her revocable trust which included a son-in-law of the decedent as a co-trustee.  Because a trustee has legal title to trust assets, the court reasoned that the corporate shareholder agreement barred the transfer of stock to the trust due to the son-in-law serving as a co-trustee.  The court reached this conclusion even though all beneficiaries of the trust were immediate family members.  Thus, the option for the son to buy the corporate stock was ineffective.  The court remanded the case to the trial court (which had held that the shareholder agreement did not control the disposition of the stock) to determine if the parties, in accordance with the shareholder agreement, could reach an agreement with respect to the purchase of the shares.  If the parties cannot reach such an agreement, the court directed the trial court to order the shares be sold to the corporation.  Jimenez v. Corr, 764 S.E.2d 115 (Va. 2014). 

The debtor failed to pay employment taxes which ultimately resulted in the IRS filing a notice of federal tax lien against the debtor's property.  However, six days before the IRS filed its lien, the debtor had borrowed money from a bank giving the bank a note and deed of trust on two parcels of land adjacent to the tract on which the IRS filed its lien.  The bank recorded the deed of trust to secure repayment of the note five weeks after the IRS filed its lien.  Over six years later, the debtor filed Chapter 11 bankruptcy.  The IRS filed a proof of claim for over $60,000 in unpaid taxes, interest and penalties, and the bank brought an adversary proceeding to determine priority of the competing liens.  The bank relied on a state (MD) statue that relates back a deed of trust's effective date upon recordation to the date when the deed of trust was executed, and also claimed that they had a prior equitable lien.  Both the bankruptcy court and the district court agreed with the bank's reliance on the relations back theory under MD statutory law, with the bankruptcy court also stating that the bank had priority even if the deed of trust had never been recorded.  On appeal, the IRS argued that the lower courts erred in construing I.R.C. Sec. 6323(h)(1) because, according to the IRS, the key was whether a security interest existed at the time when the IRS filed its lien and that a security interest only exists when it has become protected under local law - which occurred when the deed of trust was recorded.  The appellate court noted that, under I.R.C. Sec. 6323(h)(1), a security interest must exist and be protected under state law to obtain priority over an IRS lien.  The court reasoned that the language of I.R.C. Sec. 6323(h)(1)(A) precluded the application of the relation back doctrine under MD law, but that the bank still had priority by reason of having an equitable security interest under the MD doctrine of equitable conversion which I.R.C. Sec. 6323(h)(1) incorporated.  In re Restivo Auto Body, Inc. v. United States, No. 13-2249, 2014 U.S. App. LEXIS 20927 (4th Cir. Oct. 31, 2014).


The petitioner bought a home for $300,000 and later refinanced it for $600,000 and then even later had the loan modified.  As a result of the modification, the interest rate was reduced.  Before the modification, the loan balance was $579,275 and after the modification it was $623,953.  The increased loan balance included $30,273 of past due interest that was added to principal.  The lender issued Form 1098 reflecting $9,253 of mortgage interest paid during the year.  The petitioner deducted $39,536 of interest for the year and IRS denied the additional $30,273 deduction because it had not yet been paid.  The court upheld the IRS position.  Copeland v. Comr., T.C. Memo. 2014-226.

The petitioner's brother owned a home but became unemployed and could no longer make the monthly mortgage payment.  The petitioner's made the mortgage payments for her brother and attempted to deduct the mortgage interest paid for the tax year at issue.  The IRS denied the deduction and the court agreed.  To deduct mortgage interest, the petitioner had to be the "owner" of the home.  The court noted that the petitioner's brother was the sole legal owner of the home under state (CA) law, and the brother was also the beneficial/equitable owner under CA law.  There was no agreement to give the petitioner an ownership interest in the home and the petitioner voluntarily made the payments, never contributed to the down payment and provided no other evidence of any ownership interest in the home.  Puentes v. Comr., T.C. Memo. 2014-224.

I.R.C. Sec. 6050P lists the events that trigger discharge of indebtedness reporting requirements, including a 36-month non-payment period.  The IRS has not proposed removing the reporting requirement associated with the 36-month non-payment period because the expiration of the 36-month period may not necessarily reflect that debt has been discharged.  Instead, the period may expire before any debt has been discharged and IRS may not then be notified when the debt is actually discharged.  Notice of Prop. Treas. Reg. 136676-13 (Oct. 14, 2014).   

The plaintiffs were cattle farmers, and the defendant was a neighboring landowner who sought to build a third pond on his property. The defendant initially stated that the pond was for recreational and aesthetic purposes, but later contended that it was to irrigate 3.5 acres of fruit trees that he intended to plant. The United States Army Corps of Engineers and the Environmental Protection Agency determined that the defendant was not required to obtain a permit to build the pond on his property due to the Clean Water Act’s farm pond exemption. 33 U.S.C. § 1344(f)(1)(C).  The plaintiffs filed a citizen suit contesting the agencies’ determination. The court granted the defendant’s motion for summary judgment, finding that because the defendant used the third pond for irrigation of his crops, he was entitled to a farm pond exemption and the agencies’ determination was not arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law.  The court also found that there was no evidence to establish that the recapture exception to the exemption applied. Finally, the court found there was nothing deceitful or illegal about the defendant’s actions.   Craig v. United States Army Corps of Eng'rs, 2014 U.S. Dist. LEXIS 154388 (D. S.C. Oct. 29, 2014).

 The plaintiff entered into a contract with the defendant to buy real estate that the defendant owned.  After moving onto the property, several of the plaintiff's livestock became sick and died.  After moving to the property, the plaintiff discovered that the defendant had operated a septic tank septic business and had dumped raw sewage and other unknown contents onto the property.  The plaintiff claimed that the seller and the seller's real estate agent fraudulently concealed this information from the plaintiff during negotiations for the sale of the property.  As a result, the plaintiff stopped making monthly payments and the defendant filed a foreclosure action.  No response was filed with the court within the appropriate timeframe (the plaintiff claimed that the County Court Clerk were deliberately lost by the Court Clerk) and the court entered a default judgment against the plaintiff.  The court ordered that the plaintiff's livestock be seized and sold at auction in satisfaction of the plaintiff's debt.  The plaintiff brought a pro se action in federal court claiming that their federal civil rights were violated due to "illegal proceedings in a circuit court hearing."  The court denied the plaintiff's motion and granted the defendant's motion to dismiss for lack of subject matter jurisdiction.  The court held that it lacked subject matter jurisdiction over challenges to state court judgments where, as here, the plaintiff's claim was "inextricably intertwined" with the state court claim because the relief requested would effectively reverse or void the state court's decision, and that such jurisdiction rested solely with the U.S. Supreme Court.    Morse v. Ozark County, No. 14-03348-CV-S-GAF, 2014 U.S. Dist. LEXIS 151381 (W.D. Mo. Oct. 24, 2014).

A landowner bought a 400-acre farm containing a barn and single-family residence.  The residence was uninhabitable and the barn was in disrepair.  The buildings were approximately one mile from the shoreline of the Pacific Ocean.  The landowner applied to the county for a permit to connect an existing well to the house and received an over-the-counter permit that authorized him to remove dry-rot and make deck and roof repairs.  County regulations exempted from permit requirements any repair and maintenance  activities that didn't result in any change to the approved land use.  The landowner made two additional work requests to permit applications that would allow him to replace an existing septic tank and "rehabilitate the existing residence."  The landowner began work on the structures consistent with the construction permits, but the county ordered him to stop until the county issued the necessary permits for the additional work.  The landowner died and a family trust became the owner of the property.  Two years after the initial application for the coastal development permit (CDP) from the county, the county approved the CDP but conditioned it on the trust dedicating a lateral easement for public access along the shorefront portion of the property because the house had not been habitable for several years and making it so would increase the intensity of the property's usage.  The trust did not appeal the county's determination.  But, on a later permit application, the trust requested the removal of the dedication of the lateral easement and the county agreed.  Environmental activist groups and like-minded coastal commissioners appealed to the defendant state agency and the defendant reversed the county's decision and conditioned the CDP on the granting of the lateral easement.  Upon judicial review, the court reversed the defendant's decision noting that the defendant abused its discretion and that even the defendant agreed that the exaction of the lateral easement did not comport with the "rough proportionality" test set forth in Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dollan v. City of Tigard, 512 U.S. 374 (1994).  The defendant argued that it did not create the easement condition because it was established by the county and the defendant simply refused to remove it, and that the owner's failure to appeal collaterally estopped the landowner from challenging the exaction.  The court refused to allow collateral estoppel to apply because doing so would result in an unjust result and would subvert the law.  The court also noted that the landowner never benefited from the CDP because no work was done under it.  Bowman v. California Coastal Commission, 230 Cal. App. 4th 1146, 179 Cal. Rptr. 3d 299 (Cal. Ct. App. 2014).  

 The taxpayers, three pairs of landowners, created conservation easements on their lands, had the easements appraised and sold them to a land trust for a portion of their appraised value.  They claimed state (CO) income tax credits on their 2004 returns which they applied against their income tax liability, carrying the balance of the credits forward.  In late 2009, the defendant (CO Department of Revenue) disallowed the credits due to an alleged deficiency in the appraisals.  The taxpayers claimed that the statute of limitations period had run before the defendant acted to disallow the credits.  The trial court agreed and granted summary judgment to the taxpayers.  On appeal, the defendant claimed that the statute of limitations began to run each time a donor (or transferee of the credits) applied the credits to their tax liability.  The appellate court affirmed, noting that Colo. Rev. Stat. Sec. 39-21-107(2) specified that the defendant had to make assessment of tax within one year of the expiration of the statute of limitations of the time provided for assessing a deficiency in federal income tax.  The federal statute of limitations is three years.  Thus, the question was what event triggered the commencement of the four-year period.  Based on legislative history, the appellate court determined that the legislature did not intend the limitations period to restart each time a conservation easement credit is used.  Such a construction would, the court noted, yield the unacceptable result of allowing the defendant to potentially disallow a credit claimed 24 years earlier.  Markus, et al. v. Brohl, No. 13 CA1656, 2014 Colo. App. LEXIS 1788 (Colo. Ct. App. Oct. 23, 2014).      

The petitioner worked as an independent contractor for a medical services company, was paid, but did not receive a Form 1099.  She claimed that the payment was a loan from the company, but the IRS determined otherwise.  The court agreed with the IRS.  The facts did not support characterizing the payment as a loan, and the owner of the company testified that the petitioner was paid for her services.  Fisher v. Comr., T.C. Memo. 2014-219.

The petitioner was a recreational gambler who incurred substantial gambling losses.  The court sustained the denial of gambling-related deductions, and even denied more gambling loss-related deductions than IRS asserted, because the petitioner failed to substantiate the losses.  While the petitioner submitted "cash submitted" and "cash recycled" documents as evidence of losses, the petitioner's documents and other evidence did not show how much money she left with daily.  Burrell v. Comr., T.C. Memo. 2014-217.

A Mother and her children formed an LLC with Mom contributing real estate and the children contributing nothing.  Mom then gifted membership interests in the LLC to her two sons and their children.  The LLC was later recapitalized with the sons taking over the LLC's management and the LLC's operating agreement amended to provide that all profit and loss and asset gain would be split equally among the sons.  After the recapitalization, the Mom's (and her grandchildren's) only equity interest in the LLC was a right to distributions tied to capital account balances as they were immediately before the recapitalization.  The IRS determined that Mom held a retained interest in the LLC because she and her family controlled the LLC and she held a senior equity interest because she had a right to distributions tied to her capital account balance before the recapitalization.  Thus, the transfer to the sons was subject to the special valuation rules of I.R.C. Sec. 2701.  The value of the taxable gift was the aggregate value of the transfer less the value of retained interests and equity interests.  Chief Counsel Advice 201442053 (Jun. 17, 2014).

For deaths in 2010, the federal estate tax was inapplicable.  That also meant that a carryover basis applied to estate assets in the hands of an heir.  However, the Congress retroactively reinstated the estate tax, but an executor could elect to not have the estate tax apply with a modified carryover basis then applying to estate assets.  The election was to be made via Form 8939 on or before Nov. 15, 2011.  IRS later granted limited relief from that deadline in accordance with Notice 2011-66.  Here, a late Form 8939 was filed and the estate sought an extension of time to refile Form 8939 to make the election and allocate basis to eligible estate property.  The IRS granted the estate a 120-day extension of time to refille From 8939.  Priv. Ltr. Rul. 201442019 (Jul. 7, 2014).  In separate guidance, the IRS denied an estate's request for an extension of time to make the I.R.C. 1022 election to allocate basis.  The executor claimed that the U.S. Postal Service lost the mailed Form 8939.  The IRS noted that the estate couldn't prove that the Form was mailed by either registered or certified mail, so the "mailbox rule" didn't apply.  Priv. Ltr. Rul. 201442015 (Jul. 15, 2014). 

The decedent owned a property in joint tenancy with another party.  Five years after acquiring the property, the IRS filed a lien against the decedent.  The decedent died the following year, with the decedent's undivided one-half interest in the property passing by survivorship to the other party who then had full ownership of the property.  The IRS sought enforce its lien.  However, the court determined that the decedent's death extinguished the lien - it died with the decedent.  The Court noted that federal tax liens do not give the IRS any rights that extend beyond state law.  Instead, the IRS obtains only those rights that other lienholders acquire.  The court noted that a surviving joint tenant(s) does not succeed to the rights of the first joint tenant to die, but rather the survivor's rights in joint tenancy property correspond to the rights obtained at the time the joint tenancy was created.  In this case, at the time the joint tenancy was created , the property was not subject to an IRS lien.  NPA Associates, LLC v. Estate of Cunning, 114 A.F.T.R. 2d 2014-____ (D. V.I. Oct. 17, 2014). 

The debtors, including a farm company and two individuals, filed Chapter 12 bankruptcy petitions. A secured creditor filed an objection to the confirmation of their joint plan on the grounds that the debtors’ proposed treatment of the creditor’s personal property secured claim was not commercially reasonable. Although the secured creditor conceded that its claims were substantially undersecured and therefore subject to “cram down,” it objected to the specific terms.  The parties reached an agreement under which the creditor’s secured claims would be collateralized by real property, but the plan was underfunded and the trustee agreed that it was not feasible. The court agreed that the debtors’ proposed repayment terms were well outside of the acceptable parameters that the court could approve. Even if the repayment terms were sufficient, the proposed interest rate was also unreasonable. The 6 % interest rate proposed by the debtors did not give the secured creditor the present value of its personal property secured claims.  Consequently, the court denied confirmation of the joint plan.  In re Howe Farms LLC, No. 13-61601, 2014 Bankr. LEXIS 4385 (Bankr. N.D. N.Y. Oct. 16, 2014).

The plaintiff owned a fruit orchard and the defendant manufactured and sold fertilizer products. The defendant’s representatives met with the plaintiff on multiple occasions and instructed the plaintiff how to apply its products. The plaintiff allegedly followed the defendant’s instructions, but many of the plaintiff’s fruit trees and bushes died. Trees and bushes that were not treated by the defendant’s products did not suffer damage. The plaintiff sued the defendant for $5 million in damages. The defendant sought partial summary judgment, alleging, inter alia, a lack of duty and causation. The court denied the motions, ruling that the evidence supported a finding of a breach of duty because the defendant undertook to render services to the plaintiff and specific damage allegedly resulted from the services rendered. The court also found that sufficient evidence existed for a jury to find that the plaintiff’s damage was caused by the defendant’s product. The court also held that a jury could find that the plaintiff followed the defendant’s oral instructions, even if they differed from those printed on the product label. As such, the plaintiff’s misuse of the product would not be an intervening cause of the damage. Fowers Fruit Ranch, LC v. Bio Tech Nutrients, LLC, No. 2:11-cv-00105-TC, 2014 U.S. Dist. LEXIS 148108 (D. Utah Oct. 16, 2014).

The plaintiff claimed that he possessed water rights because of the activities of his predecessor in interest, which occurred more than one century ago.  He pursued the claims by filing an action in the United States Court of Federal Claims, which denied his claim after finding that it was barred by the statute of limitations. He then intervened in an ongoing water rights adjudication to which the United States and the State of New Mexico were both parties. The other parties sought to dismiss the plaintiff’s claim, and the district court granted the motion, finding that the plaintiff had failed to establish his right and that his claims were barred by res judicata. On appeal, the court affirmed. To establish an existing water right a claimant must demonstrate his intent to appropriate water and show that he actually diverted the water and applied it to beneficial use. The plaintiff had not shown that he or his predecessor had diverted water for more than 100 years.  The plaintiff did not show that the government had interfered with his rights. His predecessor had forfeited its water rights in 1903. The court also found that the action was barred by res judicata. In re Boyd Estate, No. 32,119, 2014 N.M. App. LEXIS 99 (N.M. Ct. App. Oct. 15, 2014).

While married, the decedent (who was an Arizona resident) engaged in planned sexual relations with a woman who was not his wife for the express purpose of allowing the woman to conceive a child. The woman gave birth to the child in 1994. The decedent maintained infrequent phone contact with the mother of the child throughout the remainder of his life. He died in Arizona in 2011, owning a one-half interest in an Iowa farm. The decedent’s wife (who had also only maintained infrequent phone contact with the decedent from 1996 until his death) filed a petition in the ancillary Iowa action seeking a declaration that the child born in 1994 was not an heir of the decedent. The child filed a motion for summary judgment based upon an Arizona paternity order declaring that the decedent was his father. The district court denied summary judgment to the son, finding that he had to prove both paternity and recognition by his father. After a trial, the district court denied the spouse’s petition and ultimately found the son to be an heir. On appeal, the court affirmed. Iowa Code §633.222 states that a child can inherit from his biological father if (1) the evidence proving paternity is available during the father’s lifetime OR (2) the child has been recognized by the father as his child. Nonetheless, the court ruled that Iowa case law, including a 1989 Iowa Supreme Court case, In re Estate of Evjen, 448 N.W.2d 23 (Iowa 1989), “deviates from the plain language of the statute in interpreting the ‘or’ to mean ‘and’” and that it was “bound by this long-standing supreme court precedent.” As such, the court found that both paternity and recognition had to be established for the son to be an heir. Even so, the court found that the spouse had failed to carry her burden to show that the decedent had not recognized the child to be his son. Mohr v. Mohr, No. 13-1422 (Iowa Ct. App. Oct. 15, 2014).

The decedent died with a will that contained a provision leaving the decedent's "personal property" to her sisters.   At issue were Indian baskets of considerable worth.  The decedent and her husband lived in a home on a ranch, with the home and ranch owned by an LLC that they controlled.  The surviving spouse claimed that the will provision did not control the disposition of the baskets because the baskets were owned by the LLC which owned an insurance policy on household property.  The court determined that the insurance policy controlled the issue and that the baskets were not the decedent's personal property subject to the terms of her will.  Keland v. Moore, No. 1 CA-CV 13-0605, 2014 Ariz. App. Unpub. LEXIS 1231 (Ariz. Ct. App. Oct. 14, 2014).    

The defendant had been leasing the plaintiff’s property. When the plaintiff decided to sell the property through an auction, it created a brochure which incorrectly stated that the water right granted to the property (being sold in three parcels) was for 1,100 acres. The brochure also listed an incorrect Department of Ecology permit number. The water right for the three parcels was actually limited to 825 acres. The defendant alleged that he read the brochure, but did not do other research to discover the errors. The plaintiff had discovered the error before the auction, but the brochures were still available at the auction. There was a spiral notebook with the correct information available at the auction, but the defendant allegedly did not see it. All bidders were required to sign a statement that they were purchasing the property “AS-IS WHERE IS with no warranty expressed or implied except as to the merchantability of the title.” The defendant was the successful bidder on two of the three parcels. When he discovered the reduced water right, however, he refused to sign the purchase agreement. The plaintiff sold the property to someone else and then sued the defendant for damages. The lower court granted summary judgment to the defendant on the basis that there was no meeting of the minds since the defendant did not know and consent to the reduced water rights. On appeal, the court reversed, finding that questions of fact existed as to whether the defendant knew or should have known this information. It was for the trier of fact to determine the reason the defendant did not consummate the purchase.  Custom AG Serv. v. Watts, No. 32010-3-III, 2014 Wash. App. LEXIS 2455 (Wash. Ct. App. Oct. 14, 2014).


The defendants designed and built a duplex, and one defendant lived there. Attached to the back of the house was a deck, which was approximately six or seven feet above the ground. Ten steps granted access to the deck from the back yard. The deck had a railing around the perimeter, but there was no handrail on either side of the three-foot-wide steps. The plaintiff and the defendant who lived in the home had been friends for many years. The defendant allowed the plaintiff and his family to park their camper in his back yard and access the defendant’s home through the deck. On night after the plaintiff had drunk four or five beers inside of the plaintiff’s home, he headed to his camper by way of the deck. His right leg “gave out” on the first step, he fell off the side of the stairs, and fractured his spine. The plaintiff then sued the defendants, alleging that his injuries were caused by the lack of a handrail on their stairs. The district court granted summary judgment for the defendants on the grounds that the action was barred by the 10-year statute of repose, Minn. Stat. §541.051, since the deck had been negligently constructed more than 10 years before the accident. On review, the court reversed. While it agreed that the statute of repose barred an action based upon the negligent construction of the deck, the court ruled that the defendants could still be liable under a theory that they failed to use reasonable care to ensure the safety of their guests by remedying a dangerous condition.  The statute of repose did not bar this common law premises liability claim. The court remanded the case for further proceedings. Monson v. Suck, No. A14-0461, 2014 Minn. App. LEXIS 89 (Minn. Ct. App. Oct. 14, 2014).

The petitioner worked full-time as a quality assurance engineer and also had an activity in which he sold sports memorabilia.  On his return for the year in issue, he filed separate Schedule Cs for his engineering business and his sports memorabilia activity.   For the sports activity, he showed no income, no costs of good sold and about $20,000 of expenses.  He had no separate bank account, no inventory system or accounting system or any books and records for the sports memorabilia activity.  The IRS disallowed the losses from the sports memorabilia activity.  The court upheld the disallowance based on the nine-factor analysis contained in Treas. Regs. Sec. 1.183-2(b).  Akey v. Comr., T.C. Memo. 2014-211

Here, the decedent's estate wanted to make an alternate valuation election pursuant to I.R.C. Sec. 2032.  However, the estate didn't file the estate tax return within a year of the due date for the return.  Thus, I.R.C. Sec. 2032(d)(2) was not satisfied and the estate was not eligible for an extension of time to file.  Priv. Ltr. Rul. 201441001 (Jun. 6, 2014). 

The petitioner, a real estate agent, that didn't customarily make loans and didn't hold himself out as a lender.  Over a 30-year period, the petitioner made loans on less than ten occasions.  The petitioner did not advertise lending services, did not have a separate office for lending services, or maintain separate books and records for loans that he made.  The petitioner made an unsecured loan, made no background check of the borrower and did not seek financial information from the borrower.  Ultimately, the borrower ceased paying on the loan.  The petitioner merely asked for payment and did not take any further action.  The borrower filed bankruptcy, but the petitioner did not file a proof of claim with the court   On his return, the petitioner claimed a deduction for a business bad debt (i.e., ordinary deduction that offsets ordinary income).  IRS disallowed the deduction because they claimed it wasn't incurred in connection with the petitioner's business as a real estate agent.  The court agreed with the IRS, noting that the petitioner was not in the business of lending money and the debt was not a worthless debt incurred in the petitioner's trade or business.  Thus, debt was a nonbusiness bad debt deductible only as a capital loss that is subject to the limitation of $3,000 annually as an offset to ordinary income).  Langert v. Comr., T.C. Memo. 2014-210.

The petitioner was into banking and real estate development. He then joined forces with another person, remediated a chemical plant, and began importing ammonia and other chemicals.  The business structure for this venture was a C corporation.  The petitioner ultimately wanted to sell the business, but had large gains trapped inside the C corporation.  The petitioner sold the assets of the business and placed $1 million of the proceeds in his personal bank account.  The corporate stock was sold to an intermediary that was a shell company of the buyer, without any reduction for the BIG tax.  The shell company then sold the stock to a legitimate buyer and transferred the net proceeds of the sale to the petitioner.  The shell company offset the gain on the stock sale with the end result that the tax liability was the petitioner's.  The court noted that the transaction was a listed transaction and that petitioner was fully liable for the tax on sale of the assets and stock.  The petitioner was also found to have violated the state (TX) fraudulent transfer statute.  The court noted that other parties may also be liable for the tax liabilities of the transaction via joint and several liability and that the petitioner could seek contribution from them.  Cullifer v. Comr., T.C. Memo. 2014 T.C. Memo. 208. 

The petitioner installed a swimming pool in his backyard allegedly for medical purposes because his doctors told him he needed to lose weight.  The petitioner deducted the cost of the pool to the extent it increased the value of his home.  The IRS disallowed the deduction and the court agreed.  The court noted that the only substantiation of the medical purpose of the pool was the taxpayer's self-serving testimony that his doctors told him to lose weight.  As such, the pool was not medically required and was not primarily for the treatment of the petitioner's medical ailments.  Le Beau v. Comr., T.C. Memo. 2014-198.

The petitioner claimed deductions for cost of goods sold.  The petitioner installed flooring by using his own materials and with materials that his customers supplied.  Some receipts had been lost in a flood, and others were simply missing. The IRS disallowed deductions that couldn't be substantiated and the court agreed with the IRS position.  Nguyen v. Comr., T.C. Memo. 2014-199. 

The petitioner's son died and the petitioner received $75,000 on account of the son's death.  The petitioner (and wife) used the insurance proceeds to establish a scholarship fund in honor of the son.  The fund was set up as in irrevocable trust, except that the petitioner reserved the right to amend the trust if funds would be distributed to students solely for educational purposes.  The trust was not a tax-exempt charity.  The trust made payments to three high school students from its investment income.  The petitioners did not include the investment income in their gross income, but claimed the payments to the students as charitable deductions.  The IRS disallowed the charitable deduction attributable to the amounts that originated in the trust.  The court denied the charitable deduction because the trust was irrevocable.  The petitioner did not need to report the trust income nor was the petitioner entitled to any charitable deduction attributable to payments the trust made.  In any event, no charitable deduction would be allowed because the payments did not qualify as charitable contributions.  The amounts were paid directly to the students who were not charitable donees.  In addition, there was not contemporaneous written acknowledgement of the "charitiable" contributions.  Kalapodis v. Comr., T.C. Memo. 2014-205. 

The petitioner formed an S corporation for his cabinet business and utilized it for over twenty years until its liquidation.  Later, a "pure trust" was formed with the cabinet shop's land, building, equipment and inventory transferred to it.  A series of transactions ensued with the ultimate result that petitioner did not report any tax from the transactions.  The IRS asserted, and the court agreed, that the trust was a sham and that the petitioner was taxable on lease payments.  Wheeler v. Comr., T.C. Memo. 2014-204.

In 2009, President Obama joked about the President having the power to direct IRS audits of particular individuals or groups.  Later, in 2010, a White House Senior advisor told reporters at a press conference that Koch Industries, Inc. paid no taxes.  Based on these developments, various member of the Congress asserted that the advisor's statement was based on illegally obtained confidential tax return information that had been disclosed to the White House.  In response, the Treasury Inspector General for Tax Administration (TIGTA) announced that it was starting an investigation.  Ultimately, TIGTA never released a report and the plaintiff brought a Freedom of Information Act (FOIA) request seeking records relating to any authorized disclosure of tax return information.  However, TIGTA neither confirmed or denied whether they conducted an investigation, asserting certain exemptions from FOIA in a "Glomar" response.  TIGTA claimed that it couldn't acknowledge whether an investigation into the illegal release of taxpayer information to the White House occurred because such acknowledgement would constitute disclosure of tax return information.  The court disagreed, determining that the mere existence of an investigation records of investigations into unlawful disclosures of return information of unnamed parties was not, itself, return information compiled by the IRS in connection with its determination of a taxpayer's liability for a violation of the Internal Revenue Code.  The court also noted that TIGTA had waived reliance on other FOIA exemptions by publicly acknowledging that an investigation existed.  The court remanded the case to TIGTA for a determination of whether the contents of the officially acknowledged records may be protected from disclosure by virtue of a FOIA exemption.  Cause of Action v. Treasury Inspector General for Tax Administration, No. 13-1225 (ABJ), 2014 U.S. Dist. LEXIS 188825 (D. D.C. Sept. 29, 2014).   

The debtor filed a Chapter 12 plan and three amended plans. Two large creditors and the trustee objected to each plan, and none of the plans were confirmed. Finally, the creditors sought dismissal of the case, alleging unreasonable delay prejudicial to the creditors and the lack of a reasonable likelihood of rehabilitation. The debtor sought confirmation or, in the alternative, leave to amend to file a fifth plan.  The court denied confirmation of the plan and leave to amend. Instead, the court dismissed the case,  finding that a reorganization was objectively futile. The debtor could not afford to make his payments in the proposed plan, even though the terms were not commercially reasonable at the proposed interest rate. Any adjustment to the interest rate would make the payments even higher and the debtor even less able to make them. The proposed plan failed to meet the requirements of 11 U.S.C. §1225(a)(5) and (6). In re Keith's Tree Farms, No. 13-71316, 2014 Bankr. LEXIS 4243 (Bankr. W.D. Va. Oct. 3, 2014).


One set of defendants owned and maintained  an oil pipeline that carried heavy crude oil from Canada to Indiana. Another defendant was hired by the owners to inspect the pipeline. The inspector reported that there were indications of "crack-like" features that were 12.5% to 25% of the wall thickness depth. Several years later, the inspector discovered that its inspection tool had been underestimating the actual depth of crack fields. It revised its tool to eliminate this problem, but did not reanalyze the data for the pipeline at issue. Five years after the inspection, the pipeline ruptured and began to leak. The leak was not addressed for 17 hours. The accident resulted in the release of over 20,000 barrels of diluted bitumen, or heavy crude oil. The oil flowed into a creek, which ran across the northeast side of property owned by the plaintiff. On motion for summary judgment, the plaintiff alleged that the inspector was negligent in performing the 2005 inspection of the pipeline and that the pipeline owners would have repaired the crack that later caused the rupture if they had been supplied with accurate data at that time. In granting summary judgment for the inspector, the court found that the plaintiff did not show that the inspector owed the plaintiff a duty of care. The inspector had a very limited connection to the plaintiff and the inspector did not undertake the pipeline owners’ duty to maintain the pipeline. There was also no evidence that the pipeline owners chose to forego maintenance activities based on the inspection. The court also found that there was no evidence that the inspector’s actions caused the rupture of the pipeline. Thus, the plaintiff did not show that the inspector’s actions were a but-for cause of its injuries. Fredonia Farms v. Enbridge Energy,  No. 1:12-CV-1005, 2014 U.S. Dist. LEXIS 140623 (W.D. Mich. Oct. 3, 2014).


The defendant owned cattle in Wyoming. His brother owned land adjacent to Bureau of Land Management (BLM) property. The defendant did not lease land from his brother, nor did he or his brother have a grazing permit from the BLM. Nonetheless, the defendant's cattle grazed on the BLM property after a BLM cattle guard in a road was worked on but not completed and the fence on each side was left down.  Wyoming is a "fence-out" state and, thus, BLM bore initial responsibility for keeping the defendant's cattle out.  The defendant paid the initial $200 fine, but was later accused of additional grazing trespass violations.  After issuing numerous administrative trespass notices and levying fines against the defendant, the BLM asked the United States Attorney to file criminal charges.  The defendant represented himself, and after a jury trial, the defendant was convicted of one count of unlawful use or occupation of public lands, in violation of 43 C.F.R. § 2920.1-2(a) and (e) and two counts of allowing his livestock to graze without authorization on public lands, in violation of 43 C.F.R. § 4140.1(b)(1)(i). The district court sentenced him to two years of supervised probation for each count, to be served concurrently, together with a $3,000 fine. On appeal, the court affirmed, finding that the government presented overwhelming evidence to support the convictions. Lumber, farm equipment, vehicles, and fencing material were left on the public property, as was a vehicle with license plates registered to the defendant. The defendant failed to remove the property even after multiple warnings. The defendant’s due process rights were not violated. He had an opportunity to represent himself and to be heard at trial.  United States v. Jones, No. 13-8093, 2014 U.S. App. LEXIS 18928 (10th Cir. Wyo. Oct. 3, 2014).

Before 2005, the state did not tax transfers at death.  In 2005, however, the legislature enacted a "stand-alone" estate tax on a prospective only basis that mirrored the federal estate tax (where QTIP property is subject to tax in the surviving spouse's estate).  The state then adopted a regulation that taxed QTIP assets when the surviving spouse after the legislative change but where the first spouse had died before the effective date of the 2005 legislative change.  The Washington Supreme Court later invalidated the regulation by interpreting "transfer" narrowly and holding that the only "transfer" subject to tax occurred at the time the QTIP trusts at issue in the case were created.  In re Estate of Bracken, 175 Wash.2d 549, 290 P.3d 99 (2012).  The state of Washington amended its Estate and Transfer Tax Act in 2013 to provide that the tax on QTIP trust assets upon the death of the surviving spouse applies prospectively and retroactively to all estates of decedents dying on or after May 17, 2005.  In the case at issue, the question was whether the 2013 law's retroactive application was permissible insomuch that retroactive application taxed interests that had previously not been taxable.  The court upheld the constitutionality of the law, finding that it did not violate either the separation of powers doctrine, due process clause or the impairment of contracts clause.  In re Estate of Hambleton, No. 89419-1, 2014 Wash. LEXIS 773 (Wash. Sup. Ct. Oct. 2, 2014).        

The petitioner, as described by the court, was a well-renown, successful artist that lost money.  The IRS denied the deductibility of her losses on the basis that she was not engaged in the art activity with a profit intent and, alternatively, if she was found to have a profit intent, that the claimed deductions should be disallowed because they weren't necessary business expenses.  However, the court determined that the petitioner was engaged in the art activity with a profit intent based on the nine factors set forth in the I.R.C. Sec. 183 regulations.  The petitioner conducted the activity in a business-like manner, was an expert artist that understood the economics of her business, devoted substantial time to the activity, had some reasonable expectation of appreciation in value of the artwork, had success in a substantially related field that could positively impact her activity, had many years of losses but this factor alone did not outweigh her honest profit intent, had only very occasional profits, but this factor did not weigh much in the favor of the IRS, and did not use her activity to shield income from a primary business or occupation.  Crile v. Comr., T.C. Memo. 2014-202.

The petitioner's mother died and his father asked the petitioner to get all of the personal effects out of the house.  The petitioner did so and donated the items to charity along with some clothing items belonging to himself and his children.  He also donated various electronic equipment to the same charity.  The charity (a qualified charity) gave the petitioner blank tax receipts signed by "Jose" and "Amado."  The taxpayer filled in the amount of the donations and claimed $27,767 in non-cash charitable contributions on his return for the year at issue.  The petitioner claimed that he used Salvation Army guidelines for valuing the donated items, but many of the items he actually valued at amounts exceeding the high-end range of the guidelines for that property.  The court noted that the tax receipts did not contain a description of any of the property and were actually signed before the property was donated.  The court determined that the substantiation requirements had not been satisfied.  The petitioner also never showed his spreadsheet calculations of value to the charity for review.  The court determined that the petitioner had failed the "contemporaneous written acknowledgement" requirement for gifts over $250.00.  The court also imposed a 20 percent accuracy-related penalty.  Smith v. Comr.,  T.C. Memo. 2014-203.

 A resident of an assisted living facility transferred almost $80,000 to her daughter who then paid over $40,000 to the assisted living facility.  The resident then entered a nursing home and made an application for Medicaid benefits.  The state (NY) Medicaid agency treated the transfer as an uncompensated transfer resulting in a 6.84-month benefit disqualification penalty.  The resident argued that the penalty period should be reduced because the daughter effectively transferred funds back to her mother to the extent she paid for her costs to reside in the assisted nursing facility.  However, the court disagreed.  The court noted that the funds were used to pay for the mother's residence in the assisted nursing facility rather than for services.  In re Weiss, 121 A.D.3d 703, 993 N.Y.S.2d 368 (2014).