Annotations 12/2014

I.R.C. Sec. 409(p) limits tax benefits of an Employee Stock Ownership Plan (ESOP) by limiting the ability to defer tax for the highly compensated employees.  More specifically, I.R.C. Sec. 409(p) limits the tax benefits of an ESOP that owns S-corporate stock unless the ESOP provides meaningful benefits to employees.  If I.R.C. Sec. 409(p) is violated, an excise tax of 50 percent of prohibited allocations applies and the ESOP no longer qualifies as an ESOP.  Tax deferral is lost if any portion of the plan assets that are attributable to the employer securities accrue to the benefit of a "disqualified person" during a nonallocation year.  A nonallocation year is any ESOP plan year during which the plan holds employer securities consisting of S corporation stock and the disqualified persons own at least half of the number of S corporate shares.  A disqualified person is a taxpayer that owns at least 10 percent of the deemed owned shares in the S corporation.  This case involved an S corporation with an ESOP as a shareholder and another non-ESOP shareholder who was the petitioner's only employee and sole participant.  Thus, the  ESOP owner held 100 percent of shares, triggering I.R.C. Sec. 409(p).  The court noted  that while the corporation had two classes of stock which would disqualify it for S corporate status and, therefore, would not result in I.R.C. Sec. 409(p) violation, the statute of limitations had run on IRS from adjusting petitioner's tax liability based on status.  Thus, the petitioner was treated as an S corporation and was liable for additional $161,200 in taxes and penalties of approximately $76,000. Ries Enterprises, Inc. v. Comr., No. 14-2094, 2014 U.S. App. LEXIS 24623 (8th Cir. Dec. 31, 2014), aff'g., T.C. Memo. 2014-14.


The plaintiffs’ predecessor owned a tract of farmland and in 1994 sought an NRCS wetland determination for the tract because he was considering converting it to crop production.  The NRCS concluded that the tract contained approximately 38 acres of wetlands the conversion of which would make the owner ineligible for USDA farm program subsidies.  The owner did not appeal the NRCS decision, but did seek another wetland determination for the tract in 2004.  This time, the NRCS determined that the tract contained at least 28 acres of wetlands.  The NRCS notice of its decision to the owner didn’t inform the owner of his appeal rights as required by regulations.  The owner died and the tract passed to the plaintiffs.  The NRCS notified the U.S. Army Corps of Engineers (Corps) of its wetland determination.  The plaintiffs hired a private company to do wetland mapping for the tract, and the company concluded that the tract did not contain wetlands.  But, the NRCS argued that the private mapping did not meet government regulations, and the Corps determined that part of the tract had federal jurisdictional wetlands for purposes of the permit requirements of the Clean Water Act (CWA).  The plaintiffs converted the tract to crop production use and their acreage determination request triggered another NRCS investigation.  This time, NRCS determined that the tract contained “at least 13.5” acres of wetlands that had been converted.  The NRCS also determined that the plaintiffs were not eligible for a minimal effects exemption.  As a result, the plaintiffs were disqualified for farm program subsidies.  The USDA National Appeals Division (NAD) affirmed, and barred the plaintiffs from presenting evidence that no wetland existed on the tract before conversion to crop production via a regulation that provides that any appeal of a final determination is limited to a determination that the wetland was converted.  On judicial review, the trial court affirmed the NAD on the question involving the scope of judicial review and determined that it lacked jurisdiction over the minimal effects issue because the plaintiffs didn’t raise the issue during the administrative process.  On appeal, the appellate court affirmed.  The 2004 wetland determination did not displace the 1994 determination, which was not appealed and the 2004 request was not one for review of the 1994 determination.  The appellate court also determined that issue exhaustion applied to the minimal effects issue and upheld the trial court on that issue.  Bass v. Vilsack, No. 14-1017, 2014 U.S. App. LEXIS 24633 (4th Cir. Dec. 31, 2014).   


The plaintiff was hired by an oil and gas company as a “landman” to secure properties for oil and gas leasing.  He had an “employee incentive agreement” with his employer that would pay him bonuses equal to a percentage of the net income from oil and gas properties that the employer acquired through the plaintiff’s efforts.  For the tax years in issue, the plaintiff initially treated such payments as ordinary income, but then filed amended returns treating as capital gain the income from the sale of properties that the employer purchased via the plaintiff’s efforts, and also claiming a depletion deduction associated with the income from the proceeds of producing properties.  The IRS disallowed capital gain treatment and disallowed a depletion deduction for the tax years at issue.  The plaintiff paid the additional tax of over $500,000 and sued for a refund.  The court upheld the IRS position noting that a depletion deduction is only available to an owner of an “economic interest” in the mineral deposits.  The court noted that the plaintiff had not acquired an interest in the minerals through a capital investment and that, therefore, the plaintiff’s return on investment was not realized solely from mineral extraction.  The plaintiff’s argument that his time, skill and experience in locating properties for his employer constituted a capital investment providing him with an economic interest in the minerals was rejected as a matter of law.  The court noted that the plaintiff’s compensation agreement with his employer did not separately pay him for his “landman” duties, but that his regular job duties would include work as a “landman” and that the bonus payments were to incentivize his good work and continued employment.   In addition, the agreement also specified that bonus payments were also tied to sales of the properties that the plaintiff helped the employer acquire.  The plaintiff also failed to establish that he had acquired a “net profits interest” in any minerals, and whether such an interest would constitute an economic interest in the minerals.  The court granted the government’s motion for summary judgment.  Gaudreau v. United States, No. 13-1180-JWL, 2014 U.S. Dist. LEXIS 177522 (D. Kan. Dec. 29, 2014).   


The defendants, the current surface owners of the real estate at issue, entered into an oil and gas lease with a production company in 2012 and the memorandum of lease was recorded at that time.  The plaintiffs are the heirs of a prior owner of the property.  That prior owner reserved a one-half mineral interest in the tract via a deed recorded March 22, 1950.  After the defendants filed the memorandum of lease, the plaintiffs filed a "Notice of Claim to Preserve  Mineral Interest" with the county recorder in early 2013, and then sued the defendants claiming that they had not abandoned their mineral interest and that the 1989 Ohio Dormant Mineral Act (DMA) was unconstitutional.  The trail court rejected the plaintiffs' claims, holding that the defendants were the rightful owners of the minerals and that the DMA was constitutional.  As such, the DMA required the plaintiffs to create a "savings event" within three years of the DMA's enactment (by Mar. 22, 1992) and that the plaintiffs had failed to do so.  On appeal, the court affirmed.  While the DMA was amended in 2006 to eliminate the automatic abandonment provisions of the 1989 version of the DMA, by requiring a surface owner to provide notice to the mineral interest holder of an intent to have the minerals declared abandoned, the 2006 version had no application to mineral rights that had become fully vested in the surface owner by 1992.  There was no language in the 2006 amendment that indicated that it should apply retroactively, and the 1989 DMA was constitutional.  Thompson, et al. v. Custer, et al., No. 2014-T-0052, 2014 Ohio App. LEXIS 5530 (Ohio Ct. App. Dec. 29, 2014).   


The petitioner's step-daughter graduated high school in 2010 and enrolled in college later that fall.  For the 2011 spring semester, the college billed the step-daughter $2,113.16 for tuition and $253.14 for various fees.  The petitioner paid $2,150.85 of the amount on behalf of his step-daughter on December 28, 2010, by taking a distribution from his I.R.C. Sec. 529 account plan and remitting the payments to the college via a debit/credit card.  The petitioner and his spouse filed a joint return for 2011 on which they claimed an American Opportunity Tax Credit (AOTC) of $2,107 for the step-daughter's college expenses.  The IRS disallowed all but $157 of the AOTC (the $157 amount was actually paid in 2011).  The Tax Court upheld the IRS disallowance of the AOTC.  While the petitioner paid AOTC-eligible expenses and was not subject to the AOTC income phase-out limitations, the court noted that the statute at issue (I.R.C. Sec. 25A) only allows the credit to be claimed when payment is made in the same year that the academic period begins.  Here, the petitioner paid the expenses in 2010 for an academic period that began in 2011.  Thus, the AOTC could not be claimed on the 2011 return.  While I.R.C. 25A(g)(4) allows for prepayment of tuition in the immediate prior tax year for an academic semester that begins in the first quarter of the next year, that statute only allowed the petitioner to claim the AOTC in 2010 and not 2011.  The court also determined that the petitioner was not eligible for an AOTC for the amounts paid in 2011 because they failed to establish that those amounts were necessary for enrollment or attendance at the college or that the payments were applied solely to qualified tuition and related expenses, requirements to claim the AOTC.  Ferm v. Comr., T.C. Sum. Op. 2014-115. 


The petitioner is a dermatologist in Fresno, CA, who operates his business as an S corporation in which the petitioner is the sole shareholder.  For 2010, he claimed that he mailed Form 7004 to the IRS to request an extension of time to file the S corporation return (which is required via I.R.C. Sec. 6037), but IRS never received it.  The S corporation return (Form 1120S) was received on Jan. 31, 2012, for the 2010 tax year.  IRS assessed a late filing penalty of $2,145 ($195 per month for the 11 months the return was late) pursuant to I.R.C. Sec. 6699(a).  IRS appeals suggested a partial abatement of the penalty, but the petitioner refused, and claimed that he was not properly informed of the penalty and was unaware of the statutory basis for the penalty.  The court rejected the petitioner's argument and determined that the petitioner did not have reasonable cause for late filing so as to avoid the penalty.  The court also noted that the petitioner was a chronic late filer, and that the IRS had followed all appropriate administrative procedures.  Babak Roshdieh, M.D., Corp. v. Comr., T.C. Sum. Op. 2014-113.


The plaintiff was injured in a dog attack while visiting a friend at a home/property that was owned, but not occupied, by the friend's father.  The friend lived in the home rent-free and her father knew that his daughter had dogs and had even disciplined them on a prior occasion.  The father could have told his daughter to not have dogs on the premises.  The trial court held that the father was strictly liable for the plaintiff's injuries because he was the statutory "owner" of the dogs as a "harborer" of the dogs under Wis. Stat. Sec. 174.001(5) which subjects an owner of a dog to strict liability and defines an "owner" as "any person who owns, harbors, or keeps a dog."  On appeal, the father asserted that he was not an "owner" because he did not have custody over or care for the dogs and did not personally reside in the home or on the property where the dogs resided.  However, the appellate court affirmed on basis that "harbor" in the statute meant to give lodging or to give shelter or refuge to a dog, and that the statute lacked the proprietary aspect of keeping a dog.  Because the father provided shelter and lodging for dogs as the owner of the property he had, therefore, "harbored" the dogs.  On further review, the state Supreme Court reversed.  The court held that simply being an owner of property where dogs reside does not make the property owner a n "owner" of the dogs under the statute.  Instead, the totality of the circumstances determines whether the property owner has exercised sufficient control over the property to be considered a "harborer" and, therefore, an owner of the dogs under the statute.  As such, the court's decision squares with the longstanding WI law that landlords are not liable for the actions of their tenant's dogs.  A dissenting judge believed that because the father financially subsidized his daughter, the father was a "harborer" of the dogs. The dissenting judge also pointed to the fact that the daughter was essentially "judgment proof" because of her lack of finances.  Augsberger v. Homestead Mutual Insurance Company, et al., No. 2012AP641, 2014 Wisc. LEXIS 953 (Wisc. Sup. Ct. Dec. 26, 2014), rev'g., 340 Wis. 2d 486, 838 N.W.2d 88 (2013).   


The petitioner was a third-generation auto dealer with successful dealerships, and his family has been involved in horse-related activities since the 1960s.  The petitioner started his own horse activity in 1993.  For various reasons, the horse activity lost money for the years in issue, but the petitioner argued that the auto dealerships and the horse activity constituted a single activity for purposes of I.R.C. Sec. 183.  The court held, however, that the activities were separate.  Based on the evidence, the court noted that the activities were not conducted in the same locations and there was no relationship between the customers of the horse activity and the customers of the auto dealerships.  In addition, there was minimal cross-advertising between the activities and there was no leasing of assets between the two activities.  The court also noted that the activities were not similar in nature.  Price v. Comr., T.C. Memo. 2014-253.


In this Advice from the Chief Counsel's Office, the IRS discussed three sets of facts involving claiming the home mortgage interest deduction when there is more than a single owner of the mortgage home that is paying on the mortgage.  The first scenario involved a married couple that are jointly and severally liable on a mortgage.  One spouse died during the tax year and the bank issued a Form 1098 under the decedent's Social Security number.  The surviving spouse filed a separate return and payments on the account were made either from a joint account or from separate funds of the couple.  The IRS determined that if the decedent paid on the mortgage before death, the decedent's return should reflect one-half of the interest paid from the joint account before death.  After death, the surviving spouse can claim the deduction for interest.  The second scenario involved an unmarried couple that were jointly and severally liable on the mortgage.  The bank issues a Form 1098 under either one Social Security number or under both numbers.  One or both of the owners claims the mortgage interest deduction on their individual returns.  The IRS determined that both parties are entitled to the mortgage interest deduction to the extent of the interest that each taxpayer pays.  If the mortgage interest is paid from separate funds, each taxpayer can claim the mortgage interest deduction paid from each taxpayer's separate funds.  If the interest is paid from a joint account in which each party has a equal interest IRS presumes that each owner has paid an equal amount unless there is evidence to the contrary.  In the third situation, related persons co-owned a house and were liable on a mortgage.  The bank may issue a Form 1098 either under one or both of the parties names, and payment on the mortgage might be made from a joint account or from separate funds of the owners.  Again, IRS stated that each owner is entitled to a mortgage interest deduction attributable to the amount that owner actually pays.  Of course, IRS reiterated that that overall limitations on deducting mortgage interest under I.R.C. Sec. 163(h) apply in all of the scenarios.  C.C.A. 201451027 (Oct. 1, 2014).


The petitioner received $883,250 as an up-front bonus payment to allow  an oil and gas company to lock-up his property for an eventual lease.  The petitioner treated the amount as capital gain and argued that the agreement under which he was paid the bonus constituted a sale rather than being a lease.  The IRS claimed that the amount was ordinary income and assessed additional tax of $147,397 and imposed an accuracy-related penalty of $29,479.  The Tax Court agreed with the IRS and also disallowed a percentage depletion deduction because no production had occurred.  No well had been drilled on the property at the time the payment was received and a permanent easement was not involved.  On appeal, the court affirmed.  The appellate court noted that the agreement was for five years and could be automatically extended as long as thereafter as either oil or gas was being produced from the property.  There was also a "shut-in" clause.  Under the agreement, the petitioner was entitled to royalty payments equal to 16 percent of the net profits of extracted oil and gas.  The court determined that the royalty interest was an economic interest that made the transaction a lease.  There also was not determinable quantity of oil and gas for a determined price, which would have been evidence of a sale.  Dudek v. Comr., No. 14-1517, 2014 U.S. App. LEXIS 24428 (3d Cir. Dec. 24, 2014), aff'g., T.C. Memo. 2013-2.


The parties in this case were married in 1980.  In 1979, the husband purchased 98 acres on contract for approximately $1,400 per acre.  The tract contained the marital home and was paid off during the marriage.  The wife started a milking operation on the tract and generally conducted the farming operations along with the three children of the marriage.  The wife filed for divorce in 2011, and the trial court dissolved the marriage with the wife getting all of the farm real estate with making an "equalization payment" of $1,548,287 to the husband.  The husband appealed on the basis that the property distribution was inequitable to him arguing that he should either be a joint owner on the real estate or that is should be sold and the proceeds split, and claiming that there were valuation errors.  On appeal, the court affirmed.  The court noted the public policy of preserving family farming operations in the hands of the farming spouse.  Importantly, the Iowa Court of Appeals, contrary to a prior opinion of the Iowa Supreme Court, said that tax considerations surrounding the sale of the land were to be factored even if there was no order to sell the land.  In re Marriage of McDermott, 827 N.W.2d 671 (Iowa 2013).  The court also noted that it would not further the policy of preserving the farming operation if the husband were to be a joint owner of the land given his past history and relationship with the children and wife.  On the valuation issue, the court held that the husband did not properly preserve the issue.  The court also upheld the trial court's award of $10,000 of attorney fees.  In re Marriage of Simon, No. 14-0735, 2014 Iowa App. LEXIS 1256 (Iowa Ct. App. Dec. 24, 2014).         


The defendant installed fencing on the plaintiff's farm in the 1995 and the plaintiff paid cash for the work.  Based on the defendant's recommendation, the plaintiff had the defendant install a certain type of posts.  in the first year after installation, the posts began to rot and the manufacturer of the posts went bankrupt and out of business.  The parties discussed the problem and the plaintiff told the defendant that the defendant needed to replace the rotten posts upon the plaintiff notifying the defendant of posts that had become rotten.  Initially, the defendant replaced the posts on notice, but after 15 years, the defendant stopped replacing the posts.  The plaintiff sued, claiming that the defendant breached an oral contract to replace the rotten posts upon notice.   The trial court granted a directed verdict for the defendant on the basis that there was no evidence of an oral agreement between the parties.  On appeal, the court affirmed.  The court held that no enforceable oral contract was formed between the parties because the terms of any contract were not "sufficiently definite" such that the defendant's duty could be determined and the required conditions of his performance.  The court determined that there was not "meeting of the minds" as to the essential contract terms that the defendant would continue to replace posts at no charge indefinitely.  Lenz v. Heiar Fencing & Supply, Inc., No. 13-2026, 2014 Iowa App. LEXIS 1235 (Iowa Ct. App. Dec. 24, 2014).


The plaintiffs challenged a decision of the U.S. Forest Service USFS) which authorized  the issuance of a special permit for the development of a wind power station on National Forest land.  The plaintiffs sought a permanent injunction of the project and the prohibition of the USFS from issuing a special use permit, or at least until the USFS had conducted additional environmental studies.  The plaintiffs claimed that the USFS had violated the National Environmental Policy Act (NEPA) and the Wilderness Act (on the ground that a nearby wilderness area would be impacted by nighttime blinking lights on the aerogenerators).  The court upheld the USFS determination.  The court found that the USFS  had sufficiently analyzed the visual and sound impacts of the wind power station on the nearby wilderness area under the NEPA.  The court also held that the range of alternatives studied were not legally inadequate, and that the USFS had adequately considered and disclosed the environmental impact of potential blasting.  The court also held that the USFS had satisfied the NEPA in terms of properly considering the impacts of the wind power station project on bats.  The court also held that the Wilderness Act had not been violated inasmuch as the USFS had thoroughly considered the effect of the wind power station on the nearby wilderness area.  Vermonters For A Clean Environment, Inc., et al. v. Madrid, et al., No. 1:12-CV-73, 2014 U.S. Dist. LEXIS 177488 (D. Vt. Dec. 24, 2014).        


The petitioner was a disable Vietnam War veteran, sustaining an overall disability of 60 percent, including 50 percent to his right arm and 30 percent to his feet.  The petitioner owned a rental property that adjoined his home and kept the property free of debris, made bank deposits, did some repairs personally, and handled tenant disputes, among other things.  The petitioner sustained losses for the years at issue on the rental property and deducted the losses.  The IRS severely limited the losses and maintained that the petitioner was not a real estate professional under I.R.C. Sec. 469(c)(7) because he failed to meet the 750-hour test.  While the petitioner did not have other work and, therefore, satisfied the 50 percent test, the IRS maintained that the only way the petitioner put in more than 750 hours into the rental activity was because he worked too slowly.  Had he worked faster, IRS maintained, he would not have put in the requisite 750 hours.  The court disagreed with the IRS and allowed the deductibility of the losses.  The court noted that the petitioner was disabled and, based on the record of the work that he performed and his physical condition, satisfied the 750-hour test.  Lewis v. Comr., T.C. Sum. Op. 2014-112. 


Various federal governmental agencies with regulatory authority over the labeling of eggs were sued by the plaintiff, an animal activist group whose founder doesn't even eat eggs, seeking an order from the court that would force the agencies to adopt regulations mandating that egg producers disclose production methods on egg cartons.  All of the agencies refused the plaintiff's petition.  The court refused to issue on order that would force any of the agencies to issue the mandated labeling, noting that the Food and Drug Administration acted within its discretion to refuse to issue the requested labeling regulation as not being a priority given limited resources.  The court also concluded that the Federal Trade Commission (FTC)  had appropriately found that the plaintiff's petition lacked sufficient evidence to allow the FTC to conclude that consumers are deceived by current labeling practices and , as a result, regulation action was not warranted.  The court also held that the Agriculture Marketing Service (AMS) acted appropriately in not adopting such a regulation because the AMS lacked the authority to adopt such a regulation.  The court also held that the Food Safety Inspection Service did not act in an arbitrary or capricious manner in refusing to developing the requested labeling regulatory mandate because the agency correctly determined that it lacked regulatory authority to do so.  Compassion Over Killing, et al. v. Food and Drug Administration, et al., No. 13-cv-01385-VC, 2014 U.S. Dist. LEXIS 176928 (N.D. Cal. Dec. 23, 2014).  


 This case involves a dispute over a 1.67-acre tract.  The tract was conveyed to the plaintiffs in 1986 via a warranty deed, but the plaintiffs did not record the deed until 2010.  The original seller conveyed the same tract to the defendants via warranty deed in 2005, and the defendants recorded the deed shortly thereafter.  In 2010, the plaintiffs brought a quiet title action and sued the defendants for trespass and conversion.  The defendants moved for summary judgment.  The trial court denied the defendants' motion and quieted title in the plaintiffs.  The evidence showed that the plaintiffs mowed the property several times annually, planted trees and installed an irrigation system for the trees, and performed other general maintenance.  The court believed that these actions were sufficient to put the defendants on notice of their interest in the property.  The court also awarded the plaintiffs $2,380 in damages for trees that the defendants had cut on the property.  On reconsideration, the trial court reduced the damage award to $360.  On appeal, the court noted that under state (ND) law, an unrecorded instrument is valid as between the parties thereto and those having notice, but it is void as against good faith purchasers.  The appellate court agreed with the trial court that the defendants were not good faith purchasers.  The court agreed that the defendants had notice that the plaintiffs had an interest in the property based on numerous factors - they had seen the plaintiffs watering trees and mowing grass, drove by on practically a daily basis and the tract was adjacent to the defendants' home.  Thus, the defendants were not good faith purchasers and title was quieted in the plaintiffs.  Chornuk v. Nelson, No. 20140124, 2014 N.D. LEXIS 242 (N.D. Sup. Ct. Dec. 22, 2014). 


In 2009, the National Marine Fisheries Service (NMFS) issued a biological opinion which concluded that irrigation projects in the Central Valley jeopardized protected salmon and steelhead.  The federal government imposed severe water diversion constraints as a result of the biological opinion.    The trial court, in 2011, held that the biological opinion was unlawful for being arbitrary and capricious, and ordered the NMFS to reconsider its findings.  In addition, the trial court reduced the planned release of 190,000 acre-feet of water from the subject water to other rivers for purposes of protecting salmon and steelhead to 20,000 acre-feet.  On further review, the appellate court reversed, determining that the Endangered Species Act did not require the government agencies to detail how the restrictions on irrigation would help the salmon and steelhead.  San Luis & Delta-Mendota Water Authority, et al. v. Locke, No. 12-15144, 2014 U.S. App. LEXIS 24351 (9th Cir. Dec. 22, 2014).


The taxpayer, a corporation, computed its income on a 52 or 53-week tax year ending on the last Saturday in December.  A question arose about the corporation's computation of the 50 percent of W-2 wage limitation for purposes of the domestic production activities deduction (DPAD) under I.R.C. Sec. 199.  The wage limitation is computed based on wages paid to employees during the calendar year that ends during the employer's tax year.  While that would typically be the 12-month period ending on December 31, and would coincide with the calendar year, in this instance the taxpayer's 52 or 53-week tax year for 2017 did not include a calendar year and, thus, did not coincide with a calendar year.  As a result, the corporation was concerned that it might not be entitled to a DPAD for 2017 because there was no tax year to determined the W-2 wage limitation.  However, the IRS determined that under I.R.C. Sec. 441(f) allowed the corporation to deem its 2017 tax year as ending on December 31, 2017 - the last day of the calendar month ending nearest to the 52 or 53-week tax year.  That means that the calendar year 2017 will be the corporation's tax year for purposes of determining the wage limitation for DPAD purposes.  Priv. Ltr. Rul. 201447027 (Aug. 19, 2014).


An estate plan was established for the decedent which, upon the death of the decedent's surviving spouse, resulted in one-half of the trust property passing to the children of the surviving spouse and one-half passing to the decedent's brother.  Upon the brother's subsequent death, the trust specified that the one-half of the balance in the trust would pass to his child.  Had the brother not survived the decedent, one-quarter of the trust property would pass to the brother's child and one-quarter would pass to the child of a predeceased brother.  Given the fact that the brother outlived the decedent, the child of the predeceased brother received nothing.  However, two of the three trustees and the decedent's financial advisor testified that the trust did not carry out the decedent's desire to treat the children of the brothers equally.  The child of the predeceased brother sued to reform the trust, and the matter resulted in a settlement.  The child of the predeceased brother also brought a malpractice and breach of contract claim against the drafter of the trust.  The trial court dismissed the claim, but the state Supreme Court reversed, recognizing that a third-party beneficiary of an estate plan can sue the drafter in tort and contract when the drafting error "defeats or diminishes the client's intent."  Fabian v. Lindsey, No. 2012-213726, 2014 S.C. LEXIS 470 (S.C. Sup. Ct. Oct. 29, 2014).


The plaintiff agreed was watching a couple's dog while they were away from home for a few days.  While caring for the dog, a "Chow," the plaintiff bent over to give the dog a biscuit and the dog bit off the plaintiff's lower lip.  The plaintiff underwent reconstructive surgery to repair her lip.  The couple had a homeowner's policy with the defendant that provided coverage that the insured was legally obligated for, but excluded coverage for bodily injury to "any insured" under the policy.  An insured under the policy included any person that had custody of any animal that the person was "legally responsible for."  The plaintiff filed a claim with the defendant for her injuries from the dog bite, bu the defendant refused coverage on the grounds that the plaintiff was "legally responsible" for the dog and, as a result, the plaintiff was an "insured" excluded from coverage under the policy.  The defendant moved for summary judgment and the trial court agreed.  On appeal, the court affirmed.  The appellate court determined that the plaintiff was "legally responsible" for the dog because she had custody, control or possession of the dog that obligated her to exercise care to prevent third parties from incurring unreasonable risks of harm from the dog.  Van Kleek v. Farmers Insurance Exchange, No. S-13-1006, 2014 Neb. LEXIS 195 (Neb. Sup. Ct. Dec. 19, 2014). 


The petitioner bought a home via a land contract in 1993 for $27,500.  The contract specified that the seller would transfer the property to the purchaser on full performance of the contract, and required a $1,000 downpayment with $223.39 to be paid monthly over a five-year term which was renewable.  Interest was set at 9 percent.  The five-year term was renewable and the petitioner did renew the contract twice.  Upon the expiration of the third five-year term, the petitioner borrowed money from a third party lender and paid off the contract in 2008.  The petitioner claimed a first-time homebuyer credit (FTHBC) in 2008 worth $2,609.  The IRS denied the credit and the court agreed.  The court noted that under state (WI) law, the petitioner became the equitable owner of the house at the time the contract was entered into in 1993 because she bore the benefits and burdens of ownership at that time - a prerequisite for the FTHBC.  The petitioner had been paying, in accordance with the contract, the real property taxes, assessments and insurance.  The petitioner also bore the risk of loss, and had the right to obtain legal title at any time by paying off the then-existing balance of the contract.  Wodack v. Comr., T.C. Memo. 2014-254.


The defendant, as part of her estate plan transferred two quarter sections of land to each of two of her children via quitclaim deeds and reserved a life estate.  The following year, the defendant granted an option to buy the two quarter sections to one of the two children, the plaintiff in this case.  The option said that it was granted in consideration of $10 and other good, valuable and legally sufficient consideration, and that it would remain in force until the end of 2015.  The option also specified that it was exercisable upon the plaintiff tendering the full purchase price of $200/acre ($64,000) before the end of 2015.  The plaintiff was not informed of the option until several days after it was executed, and never paid anything for the option.  In 2012, the plaintiff wrote the defendant a letter stating an intent to exercise the option, but not tendering the full purchase price (or any amount, for that matter).  The defendant notified the plaintiff that she was terminating the option, and the plaintiff sued for specific performance of the option.  The trial court ruled for the defendant and, on appeal, the court affirmed.  The court noted that the plaintiff never tendered the full purchase price to the defendant and, thus, never exercised the option before it was terminated.  The court also noted that the defendant could terminate the option at any time before acceptance because it was a gratuitous option that the plaintiff never paid anything for.  Deckert v. McCormick, No. 20140151, 2014 N.D. LEXIS 226 (N.D. Sup. Ct. Dec. 18, 2014).


The IRS Chief Counsel's Office, in a memo, discussed whether a real estate agent who is not licensed as a real estate broker can be engaged in a real property brokerage trade or business for purposes of the real estate professional rule contained in I.R.C. Sec. 469(c)(7).  The IRS determined that the agent could be engaged in a real property brokerage business because he brought together buyers and sellers of real estate.  Conversely, the IRS determined that a mortgage broker of financial instruments is not in a real property brokerage trade or business as defined by I.R.C. Sec. 469(c)(7)(C).  C.C.M. 201504010 (Dec. 17, 2014).


The plaintiffs, tax-exempt atheist organizations, challenged the exemption for churches contained in I.R.C. Sec. 6033(a)(3) from filing Form 990 that most other tax-exempt organizations must file.  The court dismissed the case for lack of standing on the basis that the plaintiffs never sought an exemption from the Form 990 filing requirement and never showed any interest in seeking such an exemption.  Freedom From Religion Foundation, et al. v. Koskinen, No. 12-cv-946-bbc, 2014 U.S. Dist. LEXIS 174017 (W.D. Wis. Dec. 17, 2014). 


The petitioner purchased a 410-acre tract and developed a residential community and golf course.  Later, the petitioner donated a conservation easement on the golf course and claimed an associated income tax deduction of $10.5 million.  The easement agreement allowed the petitioner to swap the land subject to the easement for an equal or greater amount of contiguous land so long as the substitute property met certain conditions.  The Tax Court held that swap right violated the perpetuity requirement of I.R.C. Sec. 170(h)(2)(C).  On appeal, the court affirmed.  The appellate court noted that the restriction on "the real property" as required by statute was not perpetual because it was not tied to a specific tract in perpetuity.  By having the ability to substitute property under the easement restriction, the court noted that the petitioner could obliviate the appraisal to serve as the verification of the value of the restricted property and the condition of the property.  A "savings clause" in the easement agreement which would void the swapping right if a court found that it violated I.R.C. Sec. 170, was also of no effect because it would have, in essence, rewritten the easement in response to the court's holding.  Belk v. Comr., No. 13-2161, 2014 U.S. App. LEXIS 23680 (4th Cir. Dec. 16, 2014), aff'g., 140 T.C. 1 (2013). 


 The petitioner, a lawyer, was the non-custodial parent of his children.  He claimed a child tax credit and an additional child tax credit for a year in which the children lived with his former spouse who had custody, but the IRS disallowed the credits because the children were not "qualifying children in accordance with I.R.C. Sec. 152(c).  The IRS also disallowed a dependency exemption because the petitioner did not attach Form 8283 to the return or other written declaration of exemption release from his former spouse and the divorce decree was not signed by the former spouse.  The court also upheld the IRS' disallowance of a deduction for telephone expenses attributable to the petitioner's business due to a lack of substantiation.   The court also upheld the denial of other claimed business deductions associated with the petitioner's law practice due to a lack of substantiation.  The court also disallowed a charitable deduction due to the lack of a contemporaneous written acknowledgement for contributions above $250.  Interestingly, the petitioner had written an acknowledgement letter to himself thanking himself for the contribution.  The court also disallowed a domestic production activities deduction attributable to grading and surveying expenses on property claimed to be held for timber harvesting because no timber had been harvested and, hence, the property didn't generate any gross receipts or QPAI.  In addition, the court denied medical expense deductions associated with in vitro fertilization treatments because the petitioner failed to prove that he was sterile.   Claimed deductions were also disallowed for payment of a child's college tuition and fees due to the lack of substantiation.  The court also disallowed a business mileage deduction due to a lack of substantiation.  The court did allow a  partial deduction for expenses attributable to the petitioner's office in the home, but denied part of the claimed expenses due to a lack of substantiation.  The court upheld an accuracy-related penalty of 20 percent of the underpayment due to negligence and lack of proof that he engaged a competent professional to prepare the return.  Longino v. Comr., No. 14-11508, 2014 U.S. App. LEXIS 23355 (11th Cir. Dec. 12, 2014), aff'g., T.C. Memo. 2013-80. 


The parties were married in mid-2007.  At the time of the marriage the wife had a net worth of $68,000 and the husband estimated his net worth to be $364,534.  During the marriage, the husband received a CD as a gift from his grandmother of $27,308.76 and a $16,000 settlement on account of an auto accident.  The husband farmed with his father, sharing labor and equipment, grain storage and cattle herd.  Due to debt levels, the husband sought a sale of assets to pay debt, with the balance split between the parties.  The trial court set-off the husband's injury settlement and CD gift and did not consider tax consequences that might result from the decree.  The trial court valued the marital assets at $1,022,598 and ordered the husband to pay the wife $431,495 over time until paid in full.  The husband claimed the property division was not fair because it failed to account for the father's gift of farm machinery or the premarital property brought into the marriage, and the tax consequences of any sale of the property.  On appeal, the court determined that that value of the premarital property should be considered.  The court also determined that the tax character of the assets should be considered, noting that the assets were substantially depreciated which would result in recapture of depreciation on sale, or the inability to depreciate further if retained.  Ultimately, the court determined that the marital assets available for division were worth $767,178 and that if the assets were sold $250,000 of tax would be triggered which would reduce the marital assets to $517,178.  The court determined that an equalization payment of $260,000 was owed to the wife.  In re Marriage of Johnston, No. 13-1751, 2014 Iowa App. LEXIS 1178 (Iowa Ct. App. Dec. 10, 2014).   


The petitioner operated a leasing business and an automobile salvage yard.  The IRS claimed that the petitioner overstated his gross receipts from the salvage yard, but the court determined that the evidence did not support that claim.  However, many of the petitioner's claimed business expenses, including travel expenses, were disallowed due to lack of substantiation of a business connection.  Safakish v. Comr., T.C. Memo. 2014-242. 


Here, the taxpayer is a mining company that transferred its interest in a mine to a company for consideration but retained a bonus royalty and production royalty.  As is typical with a bonus royalty, it was paid in a single lump sum after a specified amount of cumulative reserves had been added to existing reserves.  As for the production royalty, it was paid based on a sliding scale that maxed-out at a fixed percentage for the commodity price beyond a set level again after a certain amount of reserves had been produced.  The IRS determined that the taxpayer could claim a depletion deduction attributable to the retained production royalty because the taxpayer retained an economic interest in that production royalty that satisfied Treas. Reg. §1.611-1(b) and Treas. Reg. §1.614-1(a)(2).  The IRS determined, however, that the retained bonus royalty was not a retained economic interest in mineral in place.  Tech. Adv. Memo. 201448020 (Jun. 3, 2014).


The U.S. Supreme Court has declined to review a decision on the U.S. Court of Appeals for the Ninth Circuit which affirmed a Tax Court decision involving a decedent’s estate that claimed valuation discounts and deductions associated with claims against the estate.  Under the facts of the case, the decedent and her pre-deceased spouse founded a mail-order horticulture business.  They sold their shares to a company ESOP with the company funding the purchase by borrowing $70 million on an unsecured basis with one lender being the trustee of the ESOP.  The pre-deceased spouse contributed  his sale proceeds ($33 million) to his revocable trust.  Upon his death, the trust split into marital trusts, with the ESOP trustee being the trustee of the marital trusts.  The company’s earnings declined and the ESOP lenders wanted to restructure the loans so that they would be secured.  The company filed bankruptcy after the ESOP beneficiaries sued for breach of fiduciary duty.  Pending the outcome of the litigation, the ESOP trustee barred the decedent from receiving trust distributions from one of the marital trusts.  The trial court ruled against the beneficiaries, and the decedent then died while the appeal was pending.  On the decedent’s estate tax return, a $15 million liability was listed which related to the litigation associated with the three trusts.  The Tax Court denied any discount for litigation hazards and lack of marketability.  The court reasoned that the lawsuit would not have impacted a buyer’s rights.  Also, the bar on the decedent getting distributions had no impact on the value of the assets in the trust.  On the estate’s potential liability, no discount was allowed because the estate did not establish it’s liability with reasonable certainty.  On appeal, the Ninth Circuit affirmed on the same grounds that the Tax Court ruled against the estate.  The U.S. Supreme Court declined to review the case.  Estate of Foster v. Comr., 565 Fed. Appx. 654 (9th Cir. 2014), aff’g., T.C. Memo. 2011-95, cert. den., Bradley v. Comr., No. 14-267, 2014 U.S. LEXIS 8142 (U.S. Sup. Ct. Dec. 8, 2014).


The decedent's estate held a 41.128 percent limited partner interest in a partnership that was involved in forestry operations.  The Tax Court weighted at 75 percent the partnership value of $52 million as determined by a cash flow method (going concern) and a 25 percent weight a value of $151 million via the asset value method.  There was no evidence that any sale or liquidation was anticipated.  The result was that the estate's interest was valued at 27.45 million rather than the $13 million amount that the estate valued the interest at or the $33.5 million that the IRS value the interest at.  The Tax Court, as to the cash flow value, allowed a lack of marketability discount.  The Tax Court did not impose any accuracy-related penalty.  On appeal, the appellate court reversed as to the 25 percent valuation weight and remanded the case to the Tax Court for a recalculation of the value of the decedent's interest based on the partnership being valued as a going concern.  The appellate court stated that the Tax Court had engaged in "imaginary scenarios."  Estate of Giustina v. Comr., No. 12-71747, 2014 U.S. App. LEXIS 22961 (9th Cir. Dec. 5, 2014), rev'g. in part, T.C. Memo. 2011-141 


The plaintiff's company sponsored the motocross activity of the plaintiff's son.  The son was a nationally recognized figure in motocross racing with numerous sponsors.  The plaintiff's business spent more than $150,000 to cover the son's motocross expenses, and the plaintiff's business did recognize additional activity as a result of the sponsorship.  IRS claimed that the business expenditures were nondeductible personal expenses, but the Tax Court disagreed.  The court noted that the plaintiff's business benefitted from the sponsorship, including the securing of a major source of financing.  The court also noted that the plaintiff's business was not the sole sponsor of the son's motocross activity and that the son had achieved national prominence before the plaintiff's business became a sponsor.  Evans v. Comr., T.C. Memo. 2014-237.


A 63-year old construction worker fell through the roof of a building while performing demolition work.  He died five hours later at a hospital.  The state (OH) Workers' Compensation Bureau granted the surviving widow death benefits, but she later sought benefits based on her husband's loss of the use of his arms, legs, eyes and ears in the time period between the fall and his death.  Her claim was largely based on testimony of a doctor who testified that her husband had lost the use of those body parts for the time period before his death.  A Workers' Compensation panel awarded the widow 23.5 years worth of permanent partial disability benefits totaling $959,175, which was the cumulative benefits for the loss of her husband's various body parts.  The employer appealed the award, claiming that OH law would limit the award to one week of benefits based on the short timeframe that he lived after the fall.  The court upheld the award on the basis that OH law bases an award for partial disability benefits on the life expectancy of the surviving spouse and dependents rather than the life expectancy of the decedent.  Arberia v. Industrial Commission of Ohio, No. 13AP-1024, 2014 Ohio App. LEXIS 5177 (Ohio Ct. App. Dec. 4, 2014).


 In this case, the taxpayer got a deficiency notice letter from the IRS (90-day letter) and had to file a petition with the court by March 3, 2014.  The taxpayer printed a stamp from stamps.com on March 3 and put it on the envelope containing the petition and dropped off the envelope at the post office.  The post office affixed a post-mark of March 4 and the IRS claimed that the petition was late based on the USPS post-mark.  The court agreed with the IRS based on Treas. Reg. Sec. 301.7502-1(b)(3) which says that the USPS postmark controls when it is combined with a different postmark.  Under the facts of the case, the taxpayer actually went to the post-office and mailed the petition certified, but because of long lines, put the envelope in a box and didn't get a hand-stamped receipt.  Sanchez v. Comr., T.C. Memo. 2014-223. 


The decedent died in 2002 and the defendant was appointed as executor of the estate that contained primarily real estate and an investment account.  However, the estate's return was not filed until 2008.  The IRS assessed federal income tax, interest and penalties of over $2 million against the estate.  The real estate was sold in 2002 for $379,000 and the proceeds were distributed shortly after the sale, with no proceeds of sale going to pay taxes.  From 2002-2005, the defendant distributed over $750,000 to himself and almost $1 million to his sisters.  In 2008, the IRS asserted that over $70,000 was owed in federal taxes.  The IRS moved for summary judgment to reduce the outstanding liability to judgment.  The defendant did not respond to the government's factual position.  The court held that the executor was liable for the estate's unpaid tax liability because the executor had distributed the estate's assets which rendered the estate insolvent, and the distribution occurred after the executor had actual or constructive knowledge of the liability for unpaid taxes.  The court noted that reliance on bad advice from a lawyer is not a defense to a unambiguous statutory obligation to meet a tax filing deadline.  The court granted the government's motion for summary judgment.  United States v. Stiles, No. 13-138, 2014 U.S. Dist. LEXIS 167125 (W.D. Pa. Dec. 2, 2014). 


An Iowa farm couple installed a wind generator for purpose of generating energy for use on their farm.  They desired to sell excess energy generated to a power cooperative pursuant to state net metering provisions. However, the couple disputed the cooperative's power purchase rates, maintaining that they were underpaid for their electricity generated.  As a result, the couple stopped paying their electric bill and the cooperative disconnected them and stopped buying the electricity that they generated.  The couple challenged the disconnection and the Federal Energy Regulatory Commission (FERC) ordered a reconnection.  The cooperative (and other interested parties) sought review of the FERC order.  The court determined that it lacked jurisdiction to hear the case under the Federal Power Act (FPA).  FERC issued its order in accordance with the Public Utility Regulatory Policies Act (PURPA), and the court reasoned that it could only review orders issued under the FPA.  Jurisdiction, the court held, was in the district court and also held that the FERC order contained no deadlines or consequences for non-compliance. Midland Power Cooperative, et al. v. Federal Energy Regulatory Commission, No. 13-1184, 2014 U.S. App. LEXIS 22650 (D.C. Cir. Dec. 2, 2014).


In this case, the claimant thought that that decedent was her biological father, but learned after his death that she was not his biological child.  The claimant sought a determination that she was the decedent's heir based on the theory of "equitable adoption."    The court noted that state (WY) probate law did not allow stepchildren and foster children and their descendants to inherit.  Based on that, and because the court determined that the purpose of the probate code was to simplify and clarify the administration of the law, the court held that it would not judicially recognize the doctrine of equitable adoption.  In re Estate of Scherer, 336 P.3d 129 (Wyo. 2014).


The petitioner resided in a nursing home and entered into a contract to sell the apartment that she owned and previously lived in.  The petitioner than made an application for Medicaid benefits retroactive to a period in time before she entered into the sale contract.  The state Medicaid agency counted the value of the apartment as an available resource which resulted in the petitioner being disqualified for Medicaid benefits.  The petitioner claimed that the homestead exemption should apply (i.e., the value of the home should not count as an available resource) because the petitioner had the intent to return to the apartment as her home until the date of the execution of the sale contract.  The court ruled for the petitioner based on the presumption in favor or recognizing the homestead exemption.  In re Inglese, 121 A.D.3d 688, 939 N.Y.S.2d 155 (2014).


CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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