Annotations 09/2014

The debtor operated a small dairy farm in New York. In an attempt to keep the struggling farm operational, the debtor obtained three loans from the Farm Service Agency (FSA), granting the FSA a security interest in the debtor's real and personal property, including cattle. During a period in which FSA held first lienholder position and had an outstanding loan valued at $160,530.52, the debtor (without informing FSA) sold cattle and distributed the proceeds to other creditors.  He also purchased $40,000 in cattle and gave the seller a lien on the cattle. When the debtor sought to obtain another loan from FSA, the agency discovered that over a two-year period, the debtor had sold 113 cattle, resulting in total sale proceeds of $84,605.66. FSA alleged that the debtor’s conduct constituted a conversion that was “willful and malicious.” It thus sought to have $64,325.35 of the debtor’s debt excepted from discharge pursuant to 11 U.S.C. § 523(a)(6). The debtor argued that the FSA had impliedly consented to the sales because of the nature of the supervised credit relationship between the debtor and FSA. The court sustained FSA’s request, finding that the debtor’s actions were deliberate and intentional. The court also found that the injurious acts were done "in knowing disregard" of FSA's rights because the loan documents were clear. The court held that although the debtor did not use the proceeds to reap a personal financial gain, he did use the proceeds to favor certain creditors and elevated such creditors' rights above those of FSA. This conduct led the court to infer malice. In re Shelmidine, No. 13-60354, 2014 Bankr. LEXIS 4154 (Bankr. N.D.N.Y. Sept. 30, 2014).


In this technical advice to an IRS agent, the IRS National Office recommended that the taxpayer's exempt status be revoked.  The agent was examining the organization's returns and as part of the examination looked into the conduct of the organization.  The taxpayer was a exempt public charity originally formed to operate a private school.  However, the organization later amended its organizational documents to allow it to own and lease schools in specific parts of the state to non-exempt charter schools.  The IRS agent took the position that the taxpayer's function as a landlord were not exempt purposes under I.R.C. Sec. 501(c)(3) and sought to revoke the taxpayer's exempt status.  The agent sought further review by the IRS National Office.  The National Office suggested revocation of the taxpayer's exempt status.  The National Office noted that the lessees were not exempt entities, and while the rents were below fair market value, they weren't sufficiently low as the taxpayer was able to recover more than costs.  While the taxpayer conducted an educational summer seminar (exempt activity) it was only a minor part of its overall activity.  Tech. Adv. Memo. 201438034 (May 13, 2014).

The taxpayer bought land in 2003 and started a farming operation at that time, later setting up a farm checking account and writing a business plan.  The taxpayer originally started raising cattle, but later switched to growing hay and horse boarding, raising and training.  The taxpayer also used some of the property as a vineyard.  Ultimately, the farming operations generated losses that the defendant disallowed the taxpayer's Schedule F deduction.  Based on the nine-factor analysis of I.R.C. Sec. 183, the court determined that the taxpayer was not engaged in the farming activity with the required profit intent.  The defendant also added the 100 percent penalty for willful attempt to evade tax, but the court determined that the penalty did not apply due to lack of purposeful acts beyond mere negligence.  However, the court did impose the substantial understatement penalty.  Deboer v. Department of Revenue, No. TC-MD 140027N, 2014 Ore. Tax LEXIS 168 (Ore. Tax. Ct. Sept. 25, 2014). 

A private developer wanted to build a 219-unit adult residential subdivision on its property. The local municipal authority supported the development and sought to purchase an easement across private greenway property to supply the proposed subdivision with water and sewer services. After negotiations failed, the city authorized the municipal authority to acquire the easement for the developer through eminent domain.  The owner of the greenway objected, arguing that the taking was invalid under the Pennsylvania Property Rights Protection Act (PRPA) because it was being accomplished solely for the benefit of private enterprise.  The common pleas court agreed and dismissed the complaint. On appeal, however, the commonwealth court reversed, finding that the taking was appropriate since the purpose was for installation of a water main and utility lines.  On review, the Pennsylvania Supreme Court reversed, finding that the PRPA was passed by the Pennsylvania legislature to curb what it perceived to be “eminent domain abuse” The court did not decide whether the taking was unconstitutional but stated that the statute granted additional protections to landowners. The court found that in spite of the drainage easement’s colorable public use, it was condemned to allow the private developer to occupy and use it for a private enterprise. As such, the court found that it was not allowed under 26 Pa. C.S. §204(a) of the PRPA, which stated “the exercise by any condemnor of the power of eminent domain to take private property in order to use it for private enterprise is prohibited.”  The court noted that it could not depart from the “statutory text,” despite the possible difficulties the determination might bring. Reading Area Water Auth. v. Schuylkill River Greenway Ass'n, No. 62 MAP 2013, 2014 Pa. LEXIS 2499 (Pa. Sup. Ct. Sept. 24, 2014).

The petitioner was an abused spouse in a dysfunctional marriage.  The petitioner divorced in 2008 and didn't file a separate return for 2007.  However, for 2007, a join return was e-filed with only the electronic authorization signature of the petitioner's spouse.  The petitioner also received IRA distributions in 2007 before reaching age 59 and one-half for which a separate return was not filed.  The court determined that the petitioner did not intend to file a joint return for 2007 and the return that was filed was not valid.  Thus, the petitioner was not eligible for innocent spouse relief.  Sorrentino v. Comr., T.C. Sum. Op. 2014-99. 

On April 17, 2014, the IRS issued a notice of deficiency to the petitioner for tax years 2011 and 2012.  The petitioner timely sent two separate but identical petitions to the U.S. Tax Court in dispute of the notice.  One petition was sent by FedEx First Overnight and was received by the court on Jul. 17, 2014.  The other petition was sent by certified mail and was mailed on Jul. 16, 2014, and received by the court on Jul. 21, 2014.  While the petition mailed by certified mail satisfied the timely mailing rules of I.R.C. Sec. 7502, FedEx First Overnight is not on the IRS list of designated private delivery services providing protection under the timely mailing rules of I.R.C. Sec. 7502.  The IRS filed a motion to close the case assigned a docket number based on the U.S. mailed petition on the grounds that it was duplicative of the petition mailed by FedEx.  The result, had the motion been granted, would have been to dismiss the entire action for lack of jurisdiction because the FedEx petition was not timely mailed under IRS rules.  The court denied the motion and instead dismissed the petition based on the FedEx filed petition.  The court noted that the petitioner should be granted "the greatest protection under section 7502."  Bulakites v. Comr., No. 16719-14 and 16878-14 (filed Sept. 24, 2014). 

The petitioners, a married couple, incurred a large net operating loss (NOL) that they wanted to carry forward.  However, they didn't timely file the necessary election to do so in accordance with I.R.C. Sec. 172(b)(1) and (3) (forego the two-year carryback to be able to carry forward).  Upon asking IRS what they should do, IRS informed them to amend the return to carryback the NOL and then carry it forward.  The petitioners did so and then wanted the IRS to credit the balance of the NOL forward.  However, the IRS simply refunded the balance of the NOL to the petitioners.  As a result, the petitioners had a tax deficiency for the following year and got assessed interest.  Upon consulting the taxpayer advocate, the petitioners were told that it was their problem and that IRS did not err.  The court noted that taxpayers owe underpayment interest beginning on "the last date prescribed for payment", which is the due date of the return (Apr. 15 of the following year) without regard to whether a return is actually filed.  The court also noted that IRS does not owe interest on an overpayment before the return is filed.  In this case, the court noted that the IRS did not owe interest because the return was deemed untimely filed and the IRS refunded the overpayment within 45 days after the return is filed, citing I.R.C. Sec. 6611(e)(1).  As for the IRS "advice," the court noted that the IRS was not acting in a "ministerial" or "managerial" fashion and, thus, interest abatement was not possible.  Larkin v. Comr., T.C. Memo. 2014-195. 

The plaintiff was injured when he tripped and fell on a cattle guard on the defendant's premises while he was visiting her home for a dinner party.  He parked his car in the street and walked across the defendant’s driveway and cattle guard to access the house. When he was crossing the cattle guard on the return trip to his car, the plaintiff’s foot slipped on one of the pipes, and he was injured. The plaintiff filed an action against the defendant (who became the administrator of the estate of the deceased defendant), seeking damages for his injuries. The defendant sought summary judgment on the grounds that the cattle guard was an open and obvious condition that was not inherently dangerous. The court denied the motion, ruling that whether a condition is open and obvious is generally a question for the jury. The court also ruled that the finding of an open and obvious hazard was never fatal to a plaintiff’s claim. Rather, it was relevant only to the question of the plaintiff’s comparative fault. Because the defendant had not made a prima facie showing that the premises were maintained in a reasonably safe condition, summary judgment was not appropriate.  Reitner v. Hauser, No. 151241/13, 2014 N.Y. Misc. LEXIS 4223 (N.Y. Sup. Ct. Sept. 23, 2014).

The petitioner transferred several patents to a corporation of which he owned 24 percent.  The balance was owned by a related party and the petitioner's friend.  The petitioner controlled the corporation and reported the royalty income received from the corporation for the patents as capital gain.  The IRS challenged that characterization and the court agreed with the IRS because the petitioner failed to transfer all of the substantial rights associated with the patents due to his control of the transferee corporation.  Cooper v. Comr., 143 T.C. No. 10 (2014).

A married couple farmed with their son.  They all banked with the plaintiff, but the parents had their own financial statements and executed their own promissory notes and security agreements.  The parents also had their own checking account separate from the son's checking account.  The parents did not co-sign or guarantee the son's indebtedness to the plaintiff and the son didn't co-sign or guaranty the parents' debt, even though it was the plaintiff's practice to have all parties engaged in an informal partnership to do so.  The parents and the son owned and operated separate farming and livestock operations, but bought and sold livestock, grain and crops together as well as leased grazing pasture together.  The parents had their own operating line of credit with the bank as did the son.  The son filed bankruptcy, and when the parents and son sold cattle the sale proceeds were deposited into the parents' account and then apportioned between them and their son in accordance with the number of livestock sold that were attributable to the son via different colored ear tags.  This was in accordance with past practice when cattle were sold.  The parents then tried to pay off their debt to the plaintiff, but the plaintiff converted the funds into a cashier's check to be deposited into the son's account and applied to the son's debt with the plaintiff.  Ultimately, the $80,000 in dispute was deposited with the court until proper application of the funds was determined.  The trial court ruled that the plaintiff had filed to establish that the parents had failed to show that the parents had breached  their duty  on their promissory notes, and that the parents were not jointly or severally liable for the son's debts because they were not in a partnership or joint venture with the son.  Thus, the $80,000 was to be applied to the parents' indebtedness.  On appeal, the court affirmed.  On the partnership issue, the court noted that the parents and son intended to be treated as separate owners of similar property, obtained separate financing, maintained separate checking accounts, promissory notes and security agreements, and owned separate equipment and livestock, and filed separate tax returns.  The court also held that there was no express or implied agreement establishing a joint venture.  The court noted that the parents and the son held themselves out as engaged in separate businesses.  Merely sharing equipment and labor was insufficient, by itself, to establish a partnership or joint venture.  Even though the parties jointly owned cattle, the cattle were separately branded.  Heritage Bank v. Kasson, 22 Neb. App. 401 (Neb. Ct. App. 2014).   

The taxpayer was involved in an equipment like-kind exchange program, but property that was acquired in an exchange was not like-kind property to the property that had been given up.  The taxpayer, however, had identified other property during the timeframe for identifying property in a delayed exchange (180 days) and the other property (which was like-kind) was timely acquired.  The IRS noted the I.R.C. Sec. 1031 only requires the like-kind property to be acquired during the replacement period and does not contain any requirement that the taxpayer select which properties will be the replacement property.  The transaction at issue satisfied I.R.C. Sec. 1031.  Tech. Adv. Memo. 201437012 (Apr. 18, 2014).

In this administrative ruling, the IRS said that an IRA (including a Coverdell ESA) contribution is treated as timely made for the current year if the contribution is postmarked on or before the unextended due date for filing the return for that year.  The IRS stated that this is also the case if the payment does not arrive in the custodian's hands by the time of the filing date.  In addition, the IRS said that this would also be the outcome if only a verbal request is made to the IRS custodian that funds be transferred from a non-IRA account.  Priv. Ltr. Rul. 201437023 (Jun. 18, 2014). 

In this case, a trust beneficiary claimed that the trustee willfully breached its fiduciary duties by failing to pursue certain development opportunities with respect to real estate contained in the trust.  The trustee motioned to dismiss the case on the grounds that the beneficiary's case is time-barred by the applicable statute of limitations.  The defendant claimed that the breach of fiduciary duty and gross negligence claims were based on events from 1963-2002 and that a five-year statute of limitations applied to the claims.  The court agreed and dismissed the claims on the basis that the claims had to be brought within five years from the time the claims accrued.  The narrow exception from the five-year limitation only applied in the context of "an express trust that is both continuing and subsisting" which did not apply in this case.  However, the court did not grant the trustee's motion to dismiss the beneficiary's claim of a right to an accounting, and that the trustee's claim for unjust enrichment was not appropriate to rule on when the motion was for dismissal.  Watkins v. PNC Bank, N.A., No. 3:13-CV-01113-TBR, 2014 U.S. Dist. LEXIS 132523 (W.D. Ky. Sept. 22, 2014). 

The decedent executed a will almost a decade before he died without amending it after executing it.  The will provided that the decedent's residuary estate would pass to his first wife with her children named as alternate beneficiaries.  The decedent's wife pre-deceased him and he remarried and then died before his second wife.  The surviving spouse claimed an intestate share of the estate under the state (AL) omitted-spouse statute (Ala. Code Sec. 43-8-90).  While the trial court held that a beneficiary failed to prove that the decedent had provided for the spouse other than under the will, the state Supreme Court reversed.  The Supreme Court determined that the evidence showed that the second spouse was provided for outside of the will by virtue of the decedent changing the beneficiary designations on life insurance and retirement accounts to the second spouse.  The Supreme Court also noted that the decedent had considered changing his will but did not do so apparently because he believed that the second spouse was sufficiently provided for. Ferguson v. Critopoulos, No. 1130486, 2014 Ala. LEXIS 136 (Ala. Sup. Ct. Sept. 19, 2014).   

 In this case, the husband murdered his wife and then committed suicide.  Neither the wife nor the husband had a will.  Under the state (AL) slayer statute (Sec. 43-8-253), the slayer cannot benefit from the murdered person’s estate.  Thus, the slayer is treated as having predeceased the decedent and, in this case, the wife’s intestate estate (and a portion of non-probate property) would pass under state law as if the husband had predeceased her.  However, the administrator of the wife’s estate also claimed that the slayer statute should be construed such that the pre-deceased wife should inherit from the slayer-husband.  The court disagreed, upholding a trial court determination that the plain reading of the slayer statute meant that the husband (as the “slayer”) would be treated as having predeceased the wife, and that his intestate hairs would receive his estate.  Willingham v. Matthews, No. 1130890, 2014 Ala. LEXIS 139 (Ala. Sup. Ct. Sept. 19, 2014).

The parties entered into a contract for the sale of approximately 50 acres which stated that the "seller to convey 1/2 interest in all mineral rights owned and 100% of the surface rights."  While the seller owned a 50 percent interest in the mineral interests and intended to convey a 25 percent interest to the buyer, but the warranty deed (which neither party reviewed) did not reserve any mineral interests to the seller.  The sale closed on September 19, 2005.  The seller discovered the omission in December of 2009 when friends and neighbors told the seller that they had leased their land for drilling operations.  The seller was told by an oil company "landman" the company "goes by the deed" regarding royalty payments.  The buyer refused to sign a corrected deed, and the seller sued to reform the deed.  The buyer raised the applicable four-year statute of limitations as an affirmative defense.  The trial court granted summary judgment for the buyer.  On appeal, the court reversed on the basis that fact issues remained as to whether the seller should have known by the exercise of reasonable diligence that the deed contained a mistake such that the statute of limitations would bar the seller's suit.  Wigley v. Willems, No. 07-13-00028-CV, 2014 Tex. App. LEXIS 10541 (Tex. Ct. App. Sept. 19, 2014). 

The petitioners, a married couple, had numerous tax issues at stake in this case.  The husband co-owned a house with his wife's sister in a resort area in Idaho that they rented out as a short-term vacation rental.  The petitioners were also invested in a real estate development project in another Idaho location for which they promised to pay $400,000 in the event that the development project failed and the primary obligor on the project's debt failed to pay.  The project did fail and the petitioner's paid the bulk of the promised $400,000 but had $102,000 forgiven.  The court disallowed some expenses associated with the petitioner/husband's dental practice due to lack of substantiation, but did uphold the vast majority of expenses associated with the rental property.  On the forgiveness issue, the petitioners argued that they did not have $102,000 of cancelled debt income because they were merely guarantors.  The Tax Court noted that it had previously held that a guarantor does not realize cancelled debt income upon the release of a contingent liability - see, Landreth v. Comr., 50 T.C. 803 (1968) and Hunt v. Comr., T.C. Memo. 1990-248, but the IRS argued that those cases were distinguishable because the guaranties in those cases were contingent while the petitioners' guaranty was unconditional and not contingent by its terms.  However, the court noted that the guaranty was an unconditional promise to pay if the primary obligor failed to pay which made the guaranty contingent.  As a result, the petitioners did not have cancelled debt income.  Mylander v. Comr., T.C. Memo. 2014-191. 

The petitioner and his wife were married in 1975 and divorced in 2006. They agreed to a stipulation of settlement which required the petitioner to make monthly maintenance payments of $1,250 to the ex-wife that would continue until her death or remarriage.  The settlement stated that the payments would be taxable to the ex-wife and deductible to the petitioner.  The stipulation of settlement was incorporated by reference into the divorce decree.  The ex-wife did not receive approximately $39,000 that she should have upon equal division of the couple's retirement accounts, ultimately resulting in a lawsuit with a judgment rendered in 2009 which, in part, resulted in a payment of approximately $50,000 from petitioner's non-IRA accounts.  On his 2009 return, the petitioner deducted over $63,000 for payments to his ex-wife.  The IRS concede that $15,000 was deductible as alimony, but not the balance.  The court agreed with the IRS because the judgment would have to be paid even if the ex-wife had died before payment had been made.  The court noted that the petitioner should have satisfied the judgment via a QDRO by a tax-free transfer from his IRA.  Laremore v. Comr., T.C. Sum. Op. 2014-94.

The IRS, in a recent Notice, has expanded the permitted election rules for health coverage under an I.R.C. Sec. 125 cafeteria plan.  The Notice discusses two specific situations and whether a cafeteria plan participant can revoke the election.  The one situation involves a participating employee who has hours of service reduced to get under the 30 hours/week threshold, but the reduced hours don't impact eligibility for coverage under the employer's group health plan.  The other situation concerns an employee that is a participant in the employer's group health plan and wants out of that coverage to be able to buy health insurance in the Obamacare "marketplace."  In both situations, the IRS said the election could be revoked.  IRS Notice 2014-55.

In a recent Notice, the IRS announced the fee that will be imposed under Obamacare on the issuer of a specified health insurance policy for the policy year ending after September 30, 2014 and before October 1, 2015.  The fee will be $2.08 for each life covered by the plan.  The fee is used to fund the executive branch non-physician organizations that will make decisions about the procedures that Medicare will cover - the so-called "death panels."  IRS Notice 2014-56, I.R.B. 2014-41  

The petitioner, a waiter at a seafood restaurant, was diagnosed with attention deficit disorder along with a depressive disorder.  Upon being fired from his job, the petitioner sued and received a $35,000 settlement.  $5,000 of the $35,000 was designated as lost wages which are taxable as compensation, and the remaining $30,000 was designated as payment for "pain and suffering and emotional distress."  The IRS took the position that the $30,000 should also be included in income because it was paid to compensate the petitioner for the personal effects on him of being terminated and not because of any personal injury or physical sickness (as required for exclusion under I.R.C. Sec. 104).  The court agreed with the IRS position because the origin of the claim indicated that the payment was made to compensate for the anxiety and depression he sustained as a result of being terminated.  The payments were not made on account of any personal injury or physical sickness.  Smith v. Comr., T.C. Sum. Op. 2014-93.

This case involved the merger of two corporations, one owned by the parents and one owned by a son.  The parents' S corporation developed and manufactured a machine that the son had invented.  The son did not patent the invention, and the parents' corporation claimed the research and development credits associated with the machine.  The sons' corporation sold the machine (liquid dispenser) to various users, but the intellectual property rights associated with the machine were never formally received.  The two corporations were merged for estate planning purposes, with the parents' receiving less stock value than their asset ownership value.  The lawyers involved in structuring the transaction "postulated" a technology transfer for significant value from the son to the parents that had occurred in 1987.  The transfer was postulated because there were no documents concerning the alleged transaction executed in 1987.  Instead, the lawyers executed the transfer documents in 1995.  The IRS asserted that no technology transfer had occurred and that the merger resulted in a gift from the parents to the son of $29.6 million for which no gift tax return had been filed and no taxes paid.  The Tax Court agreed with the IRS and the resulting gift tax (at 1995 rates) was $14.8 million.  No penalties were imposed on the taxpayers.  Cavallaro v. Comr., T.C. Memo. 2014-189.

Since 2010, food stamp enrollment has outpaced job creation in Illinois.  Presently, the Illinois labor force is approximately 300,000 workers less than at the beginning of 2008.  Simultaneously, the number of Illinois residents on Food Stamps has increased by almost 750,000.  Illinois Policy Institute, Report of Sept. 10, 2014.

The debtor filed a Chapter 12 bankruptcy petition and his required schedules and statements. During extended confirmation hearings, facts emerged showing that the debtor had concealed his interest in real property and had made other numerous errors. The debtor contended that these errors were oversights. The trustee sought dismissal of the case pursuant to 11 U.S. C. §1208(c)(1). The court agreed, stating, “Considering the facts of this case, it appears to the Court that despite many months under the protections of the Bankruptcy Code, four failed attempts to propose a confirmable plan, and three attempts to file accurate and complete schedules and statements, [the debtor’s] case is getting more convoluted and perplexing with each passing hearing. Meanwhile his creditors are waiting in the wings without payment, as their interests are impaired and collateral is devalued. Accordingly, the Court finds [the debtor’s] repeated delays and failure to propose a confirmable plan unreasonable, without justification, and harmful to his creditors.”  In re Dickenson, No. 13-71283, 2014 Bankr. LEXIS 4067 (Bankr. W.D. Va. Sept. 15, 2014).


The plaintiff entered into an oil and gas lease with a company in 2003.  Under the terms of the lease, the company was granted the exclusive right to develop oil and gas on 275.67 acres that the plaintiff owned.  There was no number of wells specified that had to be located on the property, and stated that if the operation for a well was not commenced within 12 months from the lease date that the lease would terminate as to both parties unless the company paid a certain sum of money to the plaintiff.  The lease was specifically made binding on all heirs, successors and assigns of the parties.  In 2007, the company assigned its interest in the lease to the defendant which then assigned a percentage of its interest in the lease to another company.  In 2012, the plaintiff filed a quiet title action and an action for partial cancellation of the lease.  The complaint alleged that three wells had been drilled, but that the property had not been further developed.  the plaintiff claimed that the defendant breached its duty to develop the balance of the property and should not be able to bar others from developing the property.  As such, the plaintiff sought cancellation of the lease as to the undeveloped portion of the real estate.  The defendant filed a motion to dismiss, which the court granted.  The defendant also filed a motion for sanctions which the trial court granted, finding that the plaintiff's lawyer had engaged in frivolous conduct.  The trial court also conducted a hearing on awarding attorney fees to the defendant, resulting in a fee award of $22,414.36 to the defendant.  On appeal, the court affirmed.  The lease did not contain any covenant to develop the property, and specifically disclaimed any implied covenant to reasonably develop the property.  The appellate court also upheld the attorney fee award.  Bilbaran Farm, Inc. v. Bakerwell, Inc, et al., No. 14CA07, 2014 Ohio App. LEXIS 3922 (Ohio Ct. App. Sept. 15, 2014).   

The debtor founded a company which supplied computer entertainment software.   The debtor lived a profligate lifestyle and, upon advice of CPAs, got involved in tax shelters which resulted in huge disallowed losses and ultimately resulted in his company's wholly-owned subsidiary filing Chapter 11 bankruptcy which was later converted to Chapter 7.  Ultimately, by 2005, the debtor owed the IRS $25 million, the state of California over $15 million, had limited income and was insolvent.  However, the debtor failed to change his lifestyle in any significant manner.  In 2006, the debtor sold his home for $6.5 million (net) and the state of CA seized the bulk of the funds.  A few days later, the debtor filed bankruptcy and sold a condominium for $3.5 million with the proceeds going to the IRS.  The debtor's confirmed reorganization plan discharged pre-plan confirmation debts and the debtor claimed that the taxes were discharged.  Both IRS and CA claimed that the tax debts were excluded from discharge by virtue of 11 U.S.C. Sec. 523(a)(1)(C) on the basis that the debtor continued to live lavishly in a manner that exceeded their income and that such behavior constituted a willful attempt to evade taxes.  The bankruptcy court agreed that the taxes were not discharged.  The federal district court affirmed.  On appeal, the appellate court reversed on the basis that it could not be shown that the debtor was not shown to have the specific intent to evade the taxes.  The mere fact that expenses exceeded income is insufficient, by itself, to establish a specific intent to evade tax.  The appellate court remanded the case for an application of the specific intent standard to the facts.  Hawkins v. California Franchise Tax Board, et al., No. 11-16276, 2014 U.S. App. LEXIS 17925 (9th Cir. Sept. 15, 2014).

The decedent owned fractional interests in artwork at the time of death that had been placed in a grantor-retained interest trust (GRIT), but had signed an agreement waiving his right to file a partition action.  The decedent survived the 10-year term of the GRIT with the decedent's undivided interest passing equally to the decedent's three children with each child receiving a 16.67 percent interest in the artwork.  The decedent's spouse died before the end of the GRIT with her undivided 50 percent interest in the artwork passing to the decedent.  However, the decedent disclaimed a sufficient amount of interest in the artwork to optimize the use of the unified credit so as to pass the disclaimed portion to his children without estate tax.  The decedent then entered into an agreement with the children giving up his right to partition.  The waiver of his right was disregarded for valuation purposes under I.R.C. Sec. 2703(a)(2) - the provision that states that property value is to be determined without regard to any restriction on the right to sell or use property.  In addition, the Tax Court held that the exception from I.R.C. Sec. 2703(a)(2) contained in I.R.C. Sec. 2703(b) did not apply.  The Tax Court applied a 10 percent discount to the pro-rata value of the artwork due to uncertainties concerning their value associated with childrens' intentions concerning the artwork.  On appeal, the court held that a 45 percent discount should apply because the IRS provided no evidence as to any discount, simply arguing that no discount should apply.  Conversely, the court noted that the estate provided substantial evidence on the discount issue.  Thus, when the Tax Court rejected the IRS position of no discount, the Tax Court should have accepted the estate's evidence that IRS failed to contradict.  Estate of Elkins v. Comr., No. 13-60472, 2014 U.S. App. LEXIS 17882 (5th Cir. Sept. 15, 2014), rev'g., 140 T.C. 86 (2013).   

In 2006, the plaintiff sought to have the Environmental Protection Agency (EPA) to require pesticide labels to list 374 inert chemicals that "have been determined to be hazardous under other environmental laws and regulated as such by the EPA."  The EPA didn't respond by 2009, so the plaintiff sued for an unreasonable delay in violation of the Administrative Procedures Act.  Shortly thereafter, the EPA issued an advance notice of proposed rulemaking declaring its intent to address the issue inert ingredients, but that EPA was not committed to any particular outcome for rulemaking.  The EPA then motioned to dismiss the plaintiff's case for mootness.  The case was dismissed.  The EPA then took no action for over four years, and the plaintiff sued for unreasonable delay.  The EPA then informed the plaintiff that it was looking at different approaches to the issue and would not adopt rules requiring the listing of inert ingredients.  The EPA motioned for dismissal, but the plaintiff claimed that the issue of unreasonable delay meant that the case could not be dismissed for mootness.  The court dismissed the case, noting that the EPA never committed to any advance notice of proposed rulemaking.  Thus, all action on the plaintiff's complaint was terminated.  Center for Environmental Health, et al. v. McCarthy, No. 14-cv-01013-WHO, 2014 U.S. Dist. LEXIS 130459 (N.D. Cal. Sept. 15, 2014). 

The parties owned adjacent tracts of land and the plaintiff claimed that five of his cows ended up in the defendant's cow herd and that the defendant had retagged the cows as his own.  The plaintiff sued for return of his cows or their value, plus exemplary and punitive damages.  The defendant filed a motion for summary judgment which the trial court granted.  On appeal, the court reversed, finding that genuine issues of material fact existed regarding the ownership of the cows and whether the defendant converted the plaintiff's cows for his own use.  Bryant v. Hammonds, No. 2130562, 2014 Ala. Civ. App. LEXIS 173 (Ala. Ct. Civ. App. Sept. 12, 2014).  

The plaintiff, a minor, sued the state of Alaska violations of the state's alleged duty to protect the atmosphere under the "public trust" doctrine.  While the court held that the plaintiff had standing, the court, in affirming the lower court, dismissed the plaintiff's claim that asked the court to establish specific standards for carbon dioxide emissions and implement reductions to meet those standards.  Those, claims, the court noted, involved political questions fit for the legislative functions of elected representatives and were not proper claims for the court to consider.  Kanuk v. Alaska, No. S-14776, 2014 Alas. LEXIS 192 (Alas. Sup. Ct. Sept. 12, 2014).       

The petitioners, a married couple, had a disabled child that they attempted to provide for via income-producing real estate.  The petitioners engaged in multiple I.R.C. Sec. 1031 exchanges that ultimately, and upon their tax advisor's advice, turned into an abusive tax shelter.  They received $375,000 in settlement of their claims of a lawsuit against their accountants and claimed the sum was not taxable as a return of capital.  In essence, the petitioners claimed that the award represented compensatory damages for losses they suffered due to accountant negligence with respect to the disposition of their real property.  The IRS claimed the amount was fully includible in income as damages for lost profits.  The Court noted that generally such awards represent a return of capital that is not includible in the taxpayer's income.  Under the facts of the case, the petitioners claimed amounts exceeding what they could prove was lost.  Thus, some portion of the $375,000 award will be includible in income and some will be a non-taxable return of capital.  Cosentino v. Comr., T.C. Memo. 2014-186. 

The petitioner and his wife were divorced in 2010 and, as part of the settlement, the petitioner's former wife quitclaimed her 50 percent interest in the former marital home to the petitioner.  The petitioner claimed a long-term homeowner credit on his 2010 return and the IRS denied the credit because he had not "purchased" the home as defined by I.R.C. Sec. 36(c)(3).  The court agreed.  The transfer of the interest in the home was incident to a divorce and the petitioner received a carry-over basis in the home as to that interest which is a prohibited manner in which a home can be acquired and qualify for the credit.  Sullivan v. Comr., T.C. Sum. Op. 2014-89.

The petitioner was diagnosed with a degenerative disease that ultimately prevented him from working.  He had a disability policy through his employer and received short-term disability benefits for the last few months of his employment.  He later applied for long-term disability benefits, but was denied because the insurance company determined that he wasn't totally disabled.  The petitioner sued and obtained a settlement amount of $65,000 that would be reported as long-term disability benefits.  The petitioner claimed that the amount was excluded from income under I.R.C. Sec. 104(a)(2) as payment for physical illness, and would also be excludible under I.R.C. Sec. 104(a)(1) as a worker's compensation payment.  The IRS disagreed and the court upheld the IRS determination.  The amount was not paid for any claim of physical injury or sickness, but for a failure to pay disability benefits that the company had contracted to pay.  The court also noted that under California law a settlement had to be approved by the CA Workers' Compensation Appeals Board, and that the petitioner had not submitted the payment for approval.  The court also noted that the amount was paid for sickness on a disability policy that the employer paid for where the premiums were not included in the petitioner's income.  As such, the amount as included in the petitioner's income.  Ktsanes v. Comr., T.C. Sum. Op. 2014-85.

Before filing Chapter 12, the debtor allowed the insurance on his combine and header to lapse.  After filing bankruptcy the combine remained uninsured, with a creditor later obtaining forced-place insurance on the combine and header.  Inadvertently, the creditor allowed its lien on all of its collateral to be released without being reimbursed for insurance expenses.  The creditor sought reimbursement of administrative expenses and the court allowed it, with modification, because the cost of insuring the equipment postpetition is among "the actual, necessary costs and expenses of preserving the estate" within the meaning of 11 U.S.C. Sec. 503(b)(1)(A).  In re Jarriel, No. 13-60070-EJC, 2014 Bankr. LEXIS 3938 (S.D. Ga. Sept. 11, 2014). 

In this case, a personal service C corporation paid an $815,000 bonus to its sole shareholder and attempted to deduct the amount.  The corporation paid the amount in an attempt remove corporate profit and the corporation reported zero taxable income for the year in issue by virtue of the deduction for the bonus paid.  The IRS disallowed the deduction on the basis that the corporate bank account only contained $288,000 at the time the bonus was paid and that the deduction is only allowed when sufficient funds are available to pay the amount.  The Tax Court upheld the IRS position on the basis that the amount of the payment cannot be treated as a distribution when the account has insufficient funds to honor the check.  Thus, the deduction was disallowed.  The court also noted that the sole shareholder's wife kept the corporate books and records and wrote the check at issue thereby subjecting the transaction to "special scrutiny."  Vanney Associates, Inc. v. Comr., T.C. Memo. 2014-184. 

The taxpayer was an architect that used a bonus that he received from his architectural firm in 1975 to buy 420 acres of farmland and an old run-down farmhouse.  The taxpayer continued to live in town until 2010.  From time-to-time, he farmed the tillable ground and rented the pasture ground to neighboring farmers for cash rent.  For the tax years at issue, the taxpayer reported substantial losses as a result of deducting expenses related to the farmhouse in addition to expenses related to the farm ground.  The IRS denied the deductions related to the farmhouse.  The farmhouse had never been rented out for cash and family members occasionally lived in the house over the years in exchange for improvements made to the house.  The Tax Court, ruling for the IRS held that the farmhouse-related deductions were not allowed either under I.R.C. Sec. 212 or Sec. 162 because the taxpayer failed to present evidence that he incurred claimed expenses and because  the taxpayer failed to establish the existence of a real estate rental business.  In addition, the Tax Court determined that the taxpayer had failed to establish that the farmhouse was held for the production of income.  On appeal, the court affirmed. The appellate court noted that the taxpayer had not established a profit motive for any alleged farmhouse rental business and did not establish that he ever treated the farmhouse as part of the farm ground (which did involve a business activity).  The appellate court also held that the farmhouse was not property held for the production of income.  Meinhardt v. Comr., No. 13-2924, 2014 U.S. App. LEXIS 17455 (8th Cir. Sept. 10, 2014), aff'g., T.C. Memo. 2013-85

The plaintiffs own land subject to an oil and gas lease that the defendant holds.  The defendant did not drill for oil or gas for over 30 years based on a determination that doing so would not be cost effective.  The plaintiffs argued that the defendant breached an implied duty to develop the land and, as a result, the lease should be terminated.  The trial court granted judgment as a matter of law to the defendant because the plaintiffs failed to present substantial evidence showing that the defendant breached the implied covenant to prudently develop.  On appeal, the court affirmed.   The simple fact that the defendant admitted that it would not be commercially feasible to drill on the plaintiffs' land does not automatically require lease cancellation.  The burden is on the plaintiff to prove, by substantial evidence, that the defendant to breach the implied covenant to prudently develop the leased land.  That burden was not carried.  Novy v. Woolsey Energy Corp., et al., 327 P.3d 1052 (Kan. Ct. App. 2014). 

The defendant owned a three-acre property that used to be a quarry but was presently used to convert tree stumps, yard waste and logs into mulch.  The plaintiff township notified the defendant that the mulching activity violated a township ordinance for operating non-permitted mill, warehouse and wholesale uses on the property.  After notice and a hearing, the zoning board determined that the mulching activity violated the ordinance as a manufacturing use.  The trial court affirmed the board's decision on the basis that the raw materials used in making the mulch did not originate on the property and none of the resulting mulch was used on the property.  On further appeal, the appellate court affirmed.  The court determined that the activity was not protected under state (PA) Municipalities Planning Code (MPC) or the right-to-farm act.  The activity failed to meet the definition of "forestry" or "silviculture" under the MPC and did not involve  the production of agricultural crops and commodities.  Likewise, the appellate court determined that the mulching activity was not protected by the right-to-farm law because it didn't fit within that statute's definition of "agricultural activity."  Tinicum Township v. Nowicki, et al., No. 2176 C.D. 2012, 2014 Pa. Commw. LEXIS 440 (Comw. Ct. Pa. Sept. 9, 2014). 

The defendant operated a flour mill in Illinois and a grain bin was part of the facility.  The defendant discovered a burning smell and hired the other defendant, a salvage company, to save as much of the wheat stored in the bin as possible.  A week after beginning work, the salvage operator noticed smoke coming from the bin and called the fire department.  Before firefighters arrived, the salvage company sent several of its workers into the bin to remove tools that could be an obstruction to the firefighters.  While the workers were in the bin, the bin exploded, severely injuring the workers.  At trial, the jury awarded $180 million consisting of $80 million in compensatory damages and $100 million in punitive damages, $99 million of which was allocated to the operator of the flour mill.  On appeal, the court overturned the punitive damage award against the flour mill operator.  The court determined that the flour mill operator could not be held liable for failing to provide a safe workplace.  In addition, the court held that the salvage operator was not liable for $1 million in punitive damages.  The court determined that the parties knew of the unsafe condition and were trying to correct it when the bin exploded and the parties did not know that an explosion was imminent.  The court noted that the verdict was the result of "hindsight bias."  The court remanded the case for a redetermination of how compensatory damages were to be paid.  Jentz, et al. v. ConAgra Foods, Inc., et al., No. 13-1505, 2014 U.S. App. LEXIS 17425 (7th Cir. Sept. 9, 2014).

The petitioner and his company were members of an LLC taxed as a partnership.  The partnership experienced financial issues and the petitioner's company inquired of their attorney whether they could contribute promissory notes to the LLC.  The attorney advised the petitioner that the notes would provide basis to the petitioner equal to the face value of the notes.  Based on that advice, the petitioner contributed unsecured promissory notes without any assumption of the LLC's debt.  The notes contained incorrect dates and incorrect values as to amounts payable. The court held that the petitioner's basis in the notes was zero.  There was no evidence that the petitioner was personally obligated to contribute any fixed amount for a specific, preexisting LLC liability. No accuracy-related penalty was imposed.  VisionMonitor Software, LLC v. Comr., T.C. Memo. 2014-182.

In early 2014, the Idaho Governor signed into law legislation that criminalizes the clandestine filming of certain agricultural production activities.  The court noted that the state had to show that the law's restriction on "protected speech" served the state's interest in protecting private property.  But, that requirement did not apply in connection with the portion of the law involving intentional damage to agricultural facilities, livestock, workers and equipment to which the governor was not a proper defendant.  The plaintiffs claimed that the legislature acted with animus against animal rights activists in passing the law, and the court noted that if such claim was true, any proffered justification for the law would be viewed skeptically.  As such, the court denied summary judgment for the state.  Animal Legal Defense Fund, et al. v. Otter, et al., No. 1:14-cv-00104-BLW, 2014 U.S. Dist. LEXIS 124622 (D. Idaho Sept. 4, 2014). 

This case involved several homosexual couples living in Louisiana (LA) that were   validly married in another state and one homosexual couple seeking to be married in LA.  The LA constitution defines marriage as between one man and one woman and statutory law bars recognition of homosexual marriages contracted in other states.  The LA Department of Revenue also requires homosexual couples lawfully married in other states to certify on their LA income tax return that they are filing as single persons for state income tax purposes.  The plaintiffs claimed that LA law unconstitutionally violated their constitutional rights to equal protection and due process, and that the LA income tax certification violated their free speech.  On the equal protection issue, the court determined that the LA constitutional ban on homosexual marriage was to be evaluated under rational basis review because the U.S. Supreme Court opinion in United States v. Windsor, 133 S. Ct. 2675 (2013)  did not require heightened scrutiny and the constitutional ban on homosexual marriage was rationally related to the legitimate state interest of achieving marriage's preeminent purpose of linking children to their biological parents.  Plaintiffs did not suffer discrimination based on gender because the ban on homosexual marriage applies to both genders equally irrespective of sexual orientation - neither homosexuals nor heterosexuals can marry someone of the same gender.  The LA constitutional and statutory provisions also had no hateful animus because the law furthered the state's legitimate purpose of linking children to an intact family formed by their biological parents, and the state's legitimate interest in safeguarding fundamental social change through democratic consensus rather than the courts.  On the Due Process claim, the court noted that homosexual marriage is not anchored to history or tradition and that no fundamental right guaranteed to everyone is involved.  The court specifically noted that the plaintiffs could not maintain that state law against cousins marrying or polygamy were invalid and admitted that such marriages would have unacceptable "significant societal harms."  Thus, rational basis review was invoked because no fundamental constitutional right was involved.  Under that analysis the LA constitutional and statutory provisions are constitutional.  The LA Department of Revenue requirement did not involve compelled speech, but prescribes conduct necessary to an essential government function of collecting taxes.  Robicheaux, et al. v. Caldwell, No. 13-5090, 2014 U.S. Dis. LEXIS 122528 (E.D. La. Sept. 3, 2014).  

This case involves a class of about 2,300 persons that drive full-time for FedEx delivering packages.  The claimed that they should be classified as "employees" and not as independent contractors for tax purposes and for purposes of the federal Family and Medical Lease Act (FMLA).  The trial court determined that the drivers were independent contractors for tax purposes, and the parties settled on the FMLA issue.  On appeal, the court determined that the drivers were employees based on their relationship with FedEx - FedEx controlled the drivers' appearance, the vehicles that they drove, the time of work and how and when packages were received and moved.  Alexander v. FedEx Ground Package System, Inc., No. 12-17458, 2014 U.S. App. LEXIS 16585 (9th Cir. Aug. 27, 2014). 

Plaintiff 1 owns property in a Louisiana parish. Plaintiff 2 has an option to purchase that property in the event that it can be used as a solid-waste landfill. In February 2012, the United States Army Corps of Engineers (COE) issued a jurisdictional determination (JD) stating that the property contains wetlands that are subject to regulation under the Clean Water Act. The plaintiffs sued, alleging that the JD is unlawful and should be set aside. The district court dismissed the suit for lack of subject-matter jurisdiction, concluding that the JD is not "final agency action" and therefore is not reviewable under the Administrative Procedure Act (APA). On appeal, the Fifth Circuit affirmed, finding that the JD did not oblige the plaintiffs to do or refrain from doing anything to the property. The court did find that the JD marked the consummation of the Corps' decision-making process as to the question of jurisdiction. However, because no actual legal consequences would flow from the JD, which merely informed the plaintiffs that the property was subject to regulation, it did not constitute reviewable final agency action under the APA. Belle Co., L.L.C. v. United States Army Corps of Engineers, No. 13-30262, 2014 U.S. App. LEXIS 14544 (5th Cir. Jul. 30, 2014).

In this case, the petitioner claimed that the statutory limits on deductibility of IRA contributions were unconstitutional.  The court disagreed, and held that no deduction was allowed for IRA contributions because the petitioner's wife was an active participant in her employer's sponsored retirement plan and the couples combined MAGI was greater than the phaseout ceiling.  While the petitioner claimed that he never received airline "thank you" reward points, the court determined that the value had to be included in income.  Shankar v. Comr., 143 T.C. No. 5 (2014).

Under I.R.C. Sec. 501(c)(7), a club organized substantially for pleasure, recreation or another nonprofitable purpose is tax-exempt if no part of the club's earnings inures to the benefit of a private shareholder.  It's under this provision that social clubs (including sororities and fraternities) are tax-exempt.  However, IRS has ruled that an "online sorority" does not qualify to be tax-exempt under the provision.  The IRS said face-to-face interaction was required to achieve tax exemption under the statute.  The sorority did not have any fixed facility where members could meet, and the lack of spending funds for social or recreational purposes was crucial.  IRS said that the face-to-face annual meeting wasn't enough because is was an organizational meeting rather than a social meeting.  Under Rev. Rul. 58-589, commingling of members must be a material part of the organization for the organization to be tax exempt.  In addition, the social organization must simply provide personal growth or other benefits to members - it must focus on social and recreational activities.  Priv. Ltr. Rul. 201434022 (May 29, 2014).