Annotations 04/2014

Various meat industry groups sued to enjoin enforcement of the Country of Origin Labeling (COOL) rules (78 Fed. Reg. 31, 367) that require meat retailers of "muscle cuts" to list the countries of origin and production steps occurring in each country.  The groups claimed that providing such factual information violated the COOL statute (7 U.S.C. Sec. 1638a(a)(2)(E)) and the First Amendment.  The trial court denied the injunction on the basis that the groups were not likely to prevail on the merits.  On appeal, the court affirmed.  The appellate court determined that the groups were wrong on their claim that the rule unlawfully bans commingling because the rules don't ban any element of the production process, but merely requires accurate labeling with the three phases of production that are named in the statute  and will require changes in the production process.  The court also held that there was no restriction on free speech in violation of the First Amendment because the rules merely require disclosure of factual information that have legitimate values of patriotism and providing assurance to customers of food safety to those that believe the U.S. is superior to other countries on the food safety issue.  The court's affirmance of the denial of the preliminary injunction means that the meat industry groups cannot suspend the enforcement of the rules while a lower court decides the merits of the case.  However, the meat industry groups asked the full court to re-hear the case and their petition was granted.  In agreeing that the full-court (rather than just a three-judge panel) should hear the case, the court also vacated the three-judge panel's opinion in which the court denied the preliminary injunction against enforcing the COOL rules.  The issue before the court on rehearing will be whether, under the First Amendment, judicial review of mandatory disclosure of factual information can proceed under Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985) or whether it is subject to review under Central Hudson Gas & Electric v. PSC of New York, 447 U.S. 56 (1980)American Meat Institute, et al. v. United States Department of Agriculture, et al., No. 13-5281, 2014 U.S. App. LEXIS 6240 (D.C. Cir. Apr. 4, 2014), pet. for reh'g., granted and vacating, American Meat Institute, et al. v. United States Department of Agriculture, No. 13-5281, 2014 U.S. App. LEXIS 5710 (D.C. Cir. Mar. 28, 2014).

Plaintiff and defendant entered into a written feedlot agreement under which plaintiff agreed to feed defendant’s cattle on plaintiff’s property for a six-month period. The parties  renewed the contract , and defendant fell behind in his payments. Plaintiff filed an action against defendant, seeking $115,568.07 in damages. Defendant admitted that he owned money to plaintiff, but denied the amount. Plaintiff filed an amended complaint, asserting the he had a lien on defendant’s livestock and seeking damages in the amount of $185,883.62. When defendant failed to timely answer, plaintiff filed a motion for a default judgment. The next day, defendant filed a motion for leave to file an answer to the amended complaint. Two days later, he sought through an emergency motion to enjoin the plaintiff from selling defendant’s cattle. The court denied plaintiff’s motion for a default judgment, allowed defendant to answer the amended complaint, and ordered defendant to pay reasonable attorney fees to plaintiff for plaintiff’s costs associated with the motion for default. Finding that defendant could not show irreparable harm, the court denied defendant’s emergency motion, but did order plaintiff to retain only $60,000 from the proceeds of the sale of the cattle and place the remainder of the sale price in escrow with the clerk of court. Kraemer v. Hoffman, No. 13-cv-860-wmc, 2014 U.S. Dist. LEXIS 46280 (W.D. Wis. April 3, 2014).

In March of 2007, a landowner entered into a written lease, agreeing to rent 68 acres of tillable land to the lessee for a set price. The lease provided no end-date, but did state that the lessee could “opt out” of the lease at any time and that if the landowner was to sell the property, the lessee would have a right of first refusal to purchase it.  In October 2011, the landowner and the plaintiff executed a five-year written "cash rent agreement” for the same land for 2012 through 2016. In May 2012, the plaintiff brought an eviction action against the lessee and the landowner, arguing that the lessee’s lease was invalid under N.D.C.C. §47-16-02, which invalidated agricultural leases that were for a term of more than 10 years. The trial court entered judgment for the lessee, finding that under Anderson v. Blixt, 72 N.W.2d 799 (N.D. 1955), the 2007 agreement was not void because (due to the contingencies), it could be performed within 10 years.  In affirming the judgment, the court ruled that the contingencies allowing the lessee to opt or the landowner to sell the property meant that the lease could be performed within a 10-year term, so as not to violate N.D.C.C. §47-16-02.  As in Anderson, the court did not determine whether the lease would be invalid if it were to extend beyond 10 years. Anderson v. Lyons, No. 20130284, 2014 ND 61; 2014 N.D. LEXIS 62 (N.D. Sup. Ct. Apr. 3, 2014).


The testator had four natural children and six step-children from his second wife to whom he was married for 28 years until her death.  Several step-children had daily contact with the testator, and one sharecropped his land. His natural children lived out of state. About a year before his death, the testator moved in with the sharecropping stepson. During the last several years of his life, the testator (with the help of his stepson’s wife who was writing out his checks) wrote several checks to his stepson and his wife. Another stepson took the testator to an attorney in the last year of his life, and the testator transferred one farm to the accompanying stepson and one farm to the sharecropping stepson for one-half of the farms’ respective fair market values. A stepdaughter took the testator to an attorney’s office where he executed a will three months before he died. Due to the testator’s declining mental health, the testator’s natural son was appointed to be his guardian two months before his death. At his father’s death, the son sought to have the district court invalidate the pre-death transfers and the testator’s will. The district court granted relief to the son, finding that the stepchildren had exerted undue influence and that the testator lacked testamentary capacity. In affirming the judgment, the court ruled that the district court’s findings were not clearly erroneous and would not be disturbed. They would therefore be left undisturbed.  Erickson v. Olsen, No. No. 20130217, 2014 ND 66, 2014 N.D. LEXIS 59 (N.D. Sup. Ct. April 3, 2014).

In this "small" Tax Court case, the petitioner was an electrical contractor that had completed a project and was owed payment.  In the process of getting paid for his work, the petitioner took a distribution from his SEP-IRA and then took out a loan with the same company that maintained his IRA account with the loan proceeds to be rolled back into the IRA within 60 days.  However, the funds were rolled back into the account on the 66th day after the petitioner received the distribution from the IRA account.  The petitioner received a 1099-R reporting the distribution as an early distribution but not showing a taxable amount.  The petitioner filed his return for the year and didn't include in income the IRA distribution.  The IRS claimed that a tax deficiency existed including a 10 percent early withdrawal penalty.  The court determined that no deposit had occurred with 60 days and that petitioner had not actually borrowed from his IRA (note - had he done so, the full amount of the IRA account would have been included in income under I.R.C. Sec. 4975).  The court noted, however, that the petitioner was free to pursue an IRS waiver from the 60-day rule in accordance with Rev. Proc. 2003-16).  The court upheld the imposition of the 10 percent penalty.  Alexander v. Comr., T.C. Sum. Op. 2014-18. 

Minn. Stat. §216E.12 subd. 4, called the “buy-the-farm” election, allows owners of Minnesota farmland and other qualified property to require a utility company seeking to condemn a high–voltage transmission line easement to acquire fee title to the owner’s entire contiguous parcel, rather than just the smaller easement. A Minnesota couple owning farmland opted under this provision to require the appellants, several public utility companies, to purchase a 218.85-acre tract of their land instead of taking only the 8.86-acre easement necessary for a powerline project. The district court granted summary judgment to the owners, but the utility companies argued that the district court erred in not properly considering the reasonableness of the buy-the-farm election, as required under Coop. Power Assn v. Aasand, 288 N.W.2d 697 (Minn. 1980). In affirming, the appellate court ruled that Aasand was concerned with the commercial viability of the parcel, not a size differential. Aasand itself affirmed a buy-the-farm election resulting in the condemnation of 149 acres where the proposed easement was 13 acres. The district court did not err in determining that the owner’s election was reasonable. Great River Energy v. Swedzinski, No. A13-1474, 2014 Minn. App. Unpub. LEXIS 255 (Minn. Ct. App. Mar. 31, 2014).

In this case, the property owners signed a 10-year oil and gas lease with the lessee, believing it to be a five-year lease. Two months later, the lessee informed the owners that the lease was invalid because a third party had owned a life estate in the subject property. The third party immediately conveyed her interest to the owners and the owners and the lessee entered into a  second oil and gas lease, this one for a five-year term.  One year later, the lessee assigned its interest in the first lease to an energy company. The company recorded its interest. When the energy company asserted that the first lease was valid and would not expire for another five years, the owners sought a declaratory judgment, asking the court to determine which of two oil and gas leases was valid. The owners also filed a breach of contract claim against the lessees, and the energy company filed a counterclaim against the owners, alleging that they had breached their warranty to defend title. The district court granted the motions to dismiss filed by the lessee and the energy company on statute of limitations grounds, but did not rule on the counterclaim. The owners appealed, but the appellate court dismissed the appeal, finding that the order was not a final appealable order since the district court had not disposed of the counterclaim.  McDougal v. Sabine River Land Co., No. CV-13-894, 2014 Ark. App. 210, 2014 Ark. App. LEXIS 246 (Ark. Ct. App. April 2, 2014).

This case points out the perils of not dividing a revocable trust upon a spouse's death and not limiting distributions to the surviving spouse to an ascertainable standard when required to do so.  The spouse's revocable living trust contained approximately $2.1 million worth of assets at the time the spouse died in 1998 at a time when the federal estate tax exemption was $600,000.  The trust specified that the assets of the trust were be divided into a pecuniary marital trust and a residuary credit shelter trust.  This was not done by the husband as the executor.  In addition, the marital trust was to be divided into GSTT exempt and non-exempt trusts.  The surviving spouse (decedent herein) had a limited power of appointment over principal from the credit shelter trust to appoint principal to his children, grandchildren or charity.  Decedent made over $1 million in withdrawals from the revocable living trust principal for chartable distributions and claimed charitable deductions on personal return.  The decedent also withdrew other funds for distribution to his children and grandchildren.  At the valuation date for the trust after decedent's death in 2008 (when the exemption was $2 million), the revocable living trust contained over $1 million in assets.  The estate took the position that all withdrawals had been from the marital trust (which were subject to an ascertainable standard) such that the decedent's gross estate value was zero.  IRS claimed that withdrawn amounts were attributable to the credit shelter trust and where included in decedent's gross estate or, in the alternative, were pro rata withdrawals, and asserted an estate tax deficiency of $482,050.80.  The Tax Court determined that charitable gifts were from the credit shelter trust via the decedent's limited power of appointment and the other distributions were from the marital trust as discretionary distributions, and rejected the estate's argument that Treas. Reg. 20.2044-1(d)(3) applied.  The court also determined that decedent's limited power of appointment to appoint to charity from the credit shelter trust was exercisable during life.   The court also noted that distributions from principal could only come from the marital trust.  The value of the decedent's gross estate was determined by subtracting all personal withdrawals from value of remaining trust assets.  Estate of Olsen v. Comr., T.C. Memo. 2014-58.

Plaintiffs filed a legal malpractice against defendants, an attorney and his firm, arguing that defendants negligently misrepresented tax consequences of using a trust in an estate plan, failed to use proper estate planning methods to avoid or minimize estate tax, and negligently drafted a power of attorney. The plaintiffs were children of a decedent who had employed defendants to implement his estate plan. The trial court dismissed the action on the grounds that the two-year statute of limitations had run. On appeal, the court affirmed. The court found that under the repose provision of 735 ILCS 5/13-214.3(d), the plaintiffs had two years from the date of decedent’s death to file their malpractice action. They did not file it until 3.5 years after his death. Another claim for aiding and abetting breach of fiduciary duty was properly dismissed under 735 ILCS 5/13-214.3(b), which required the plaintiffs to bring their action within two years of discovering their injury. Voga v. Nash, 2014 Ill. App. Unpub. LEXIS 684 (Ill. App. April 1, 2014).

This is the most recent court opinion in a line of opinions involving the petitioners and their attempt to obtain a tax deduction for a permanent conservation easement donation.  Initially, the court disallowed a deduction on the basis that the easement was not protected in perpetuity.  That decision was affirmed on rehearing and a negligence penalty was not imposed on the basis that the matter was one of first impression.  On appeal of that decision, the appellate court reversed on the basis that the Tax Court analyzed the case incorrectly.  On remand, the Tax Court focused on valuation and did not give any weight to the taxpayer's expert that took a flat 12 percent reduction from fair market value for the "after easement" value of the property.  The Tax Court found the testimony of the expert for the IRS more credible.  That testimony, based on sales data, demonstrated that the façade easement restriction had no impact on market value of the property due largely to existing restrictions imposed by local historical district ordinances.  The Tax Court imposed negligence penalties of 40 percent of the amount of the underpayment and a 20 percent negligence penalty.  Kaufman v. Comr., T.C. Memo. 2014-52.

The IRS pointed out that a person with an FSA is not eligible for an HSA,  and that HSA ineligibility will continue for the entire plan year even if the balance is exhausted during the plan year.  But, IRS noted that an FSA could be designed to allow the participant to elect any carryover amount could be used as limited purpose, post deductible, or both, thus making the FSA compatible with the HSA.  The IRS noted that the carryover amount could not be transferred into any other non-health FSA, including any carryover amounts.  In addition, a cafeteria plan can design the health FSA so that an election for high-deductible health plan coverage forces the participant into the FSA.  IRS also noted that a person can decline or waive an FSA carryover amount to become HSA-eligible.  C.C.A. 201413005 (Feb. 12, 2014). 

In a Chief Counsel Advice, the IRS has said that it will presume that an entity is a partnership when a "husband and wife" own the entity unless, of course, an election is made for the entity to be disregarded for tax purposes.  The IRS cited I.R.C. Sec. 761(a) & (f) as the basis for its conclusion.  Only additional facts indicating a sham will cause the IRS to disregard the "wife" as the partner, IRS stated.  IRS also indicated that each spouse should have reported "his/her" share of net earning from self-employment, with appropriate adjustments.  The IRS did not indicate how entities owned by homosexual couples are to be treated.  C.C.A. 201411035 (Apr. 12, 2013).


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