Annotations 07/2015

The plaintiff operates an egg farm and, in accordance with state (NC) law, constructed a detention pond near a hen house for surface water control purposes.  The pond also collect small amounts of dust, feathers and manure.  The pond does not discharge directly into state or federal waters, but does periodically discharge accumulated rainfall and debris into a nearby canal which the defendant claimed requires a state-issued permit under the Clean Water Act (CWA).  The plaintiff unsuccessfully challenged the permit requirement administratively, and then filed the present action in federal court seeking an order that incidental discharge qualified as ag stormwater which is exempt from the CWA permit requirements at the state level.  The court held that it lacked jurisdiction to consider the matter.  The court noted that the only way it could possible hear the case was if state law implicated significant federal issues, but ultimately determined that if it took the case it would upset a "congressionally approved balance of federal and state judicial responsibilities."  The court determined that, under the CWA, no federal right of action was created to allow the challenge of state permitting decisions.  The court also declined to exercise declaratory-judgment jurisdiction noting that NC courts had a strong interest in reviewing state CWA permitting decisions and that hearing the case would create "unnecessary entanglement" between federal and state courts.  Rose Acre Farms, Inc. v. North Carolina Department of Environment and Natural Resources, et al., No. 5:14-CV-147-D, 2015 U.S. Dist. LEXIS 99628 (E.D. N.C. Jul. 30, 2015).   

The petitioner is a C-corp. California farming operation utilizing the cash method of accounting (and the accrual method of keeping books for purposes of lenders with the result that inventory exists for each year at issue) that deducts the cost of various fieldpacking materials (clamshells, cardboard trays and cartons, etc.) that it uses to pack raspberries, strawberries and similar fruits and vegetables.  The IRS claimed that the petitioner could not deduct the cost of the fieldpacking materials until they were actually used, rather then when the petitioner purchased them.  Both parties agreed that the petitioner was not a "farming syndicate" as defined by I.R.C. Sec. 464 which would bar the use of the cash method of accounting, and prevent the deduction for "seed, feed or fertilizer, or other similar farm supplies" in a year before they are consumed.  However, IRS argued that Treas. Reg. 1.162-3 allowed a deduction only for those fieldpacking materials only to the extent they were used or consumed during the tax year.  The court disagreed with the IRS position.  The court noted that the fieldpacking materials are not "similar" to seed, feed or fertilizer because they aren't necessary to grow agricultural crops.  The court noted that I.R.C. Sec. 464 was aimed at tax shelters, not the type of taxpayer involved in the case, and that the fieldpacking materials are not "on hand" and are subject to cash accounting rules.  Thus, the cost of the materials were deductible when purchased.  The court held that Treas. Reg. Sec. 1.162-3 does not require a cash method taxpayer to defer deductions until they are used or consumed, if the cost of such items is deducted in a prior tax year.  The court did note that a limit on deductibility could apply if the materials were not used or consumed within one year.  Agro-Jal Farming Enterprises, Inc., et al. v. Comr., 145 T.C. No. 5 (2015).


A farmer operated a farm including two registered feedlots and 4,000 acres of cropland. Each winter, the farmer would place more than 2,000 beef cattle on approximately 400 acres of its cropland. The resulting cattle density was several times higher than for a typical foraging field and, although there was at least an initial vegetative cover, the farmer provided his cattle with feed that supplied at least 90 percent of their nutritional needs. The Commissioner of the Minnesota Pollution Control Agency (MPCA) required the farmer to obtain a State Disposal System (SDS) permit for his winter cattle lands The MPCA also determined that the farmer needed a federal National Pollutant Discharge Elimination System (NPDES) permit because his operation was an animal feeding operation (AFO). The farmer challenged the administrative decisions, and the court reversed in part and affirmed in part the agency’s ruling. The court found that the farmer’s operation was not an AFO under 40 C.F.R. § 122.23(b)(1) because the farmer’s winter feeding fields sustained crops in the normal growing season. The “no vegetation” requirement in the regulation applied only to the normal growing season. The court did find, however, that the agency correctly determined that the concentration of cattle on the farmer’s winter fields was not commensurate with the statutory definition of “pasture” under  Minn. Stat. § 116.07, subd. 7d(b). The farmer’s cattle were not "allowed to forage" on the winter feeding fields and they did not qualify for the statutory pasture exemption. Accordingly, the winter feeding fields required an SDS permit.  On appeal, the state Supreme Court affirmed.  In the Matter of Reichmann Land and Cattle, LLP., No. A13-1461, 2015 Minn. LEXIS 385 (Minn. Sup. Ct. Jul. 29, 2015), aff'g., 847 N.W.2d 42 (Minn. Ct. App. 2014).

The decedent created two irrevocable charitable remainder trusts during his life, one for each of his sons.  The decedent was the income beneficiary during his life, with each son then being the beneficiary of that son's trust.  The amount paid to the decedent during life and each son after the decedent's death, was the lesser of the net trust accounting income for the tax year or 11% of the net value of the trust assets for trust one or 10% for trust two.  If trust income exceeded the fixed percentage for that trust, the trustee was directed to make additional distributions to make up for prior years when the trust income was insufficient to satisfy a distribution of the fixed percentage for that particular trust (hence, the trusts were a "net income with makeup charitable remainder unitrust" - NIMCRUT).  The payout period was the latter of 20 years from the time of creation of the trusts or the date of death of the last beneficiary to die.  The decedent died about one year after creating the trusts, and his estate reduced the taxable value of the estate by the amount it deemed to be charitable (note - the estate did not claim a charitable deduction).  The IRS denied the deduction because the trusts did not satisfy the requirement that the value of the charitable remainder interest be at least 10% of the net fair market value of the property contributed to the trust on the date of the contribution as required by I.R.C. Sec. 664(d)(2)(D).  The estate claimed that it was entitled to a charitable deduction under I.R.C. Sec. 664(e) because the distributions were to be determined according to the applicable I.R.C. Sec. 7520 rate so long as the rate is above 5%.   The court determined that I.R.C. Sec. 664(e) was ambiguous, but that the legislative history supported the IRS position that the value of a remainder interest in a NIMCRUT is to be based on the fixed percentage stated in the trust instrument.  As such, the trusts failed the 10% test.  The court also noted that the IRS regulations on the matter were not helpful.  Schaefer v. Comr., 145 T.C. No. 4 (2015).   

The decedent prepared a holographic will leaving all of his property to his wife and a dollar to his brother.  The will specified that if the decedent and his wife were to die at the same time, the decedent's property was to pass equally to two charities.  In the simultaneous death situation, all other persons were specifically disinherited.  However, the decedent's wife pre-deceased the decedent, 18 years after the decedent had executed his will.  The decedent died six years later at the age of 96 without amending his will.  The decedent did not remarry and died childless.  The children of a sister of the decedent and the charities battled over the distribution of the estate.  The court rejected its decision in a comparable 1964 case where it categorically barred extrinsic evidence concerning the decedent's intent.  The court determined that such a rule no longer conformed with "modern" probate and interpretation of wills.  The court held that such evidence is allowed if clear and convincing evidence shows that the will contains a mistake in the expression of the testator's intent at the time the will was drafted and also establishes the testator's specific intent.  The court remanded the case to the trial court for consideration of extrinsic evidence.  Estate of Duke v. Jewish National Fund, et al., No. S199435, 2015 Cal. LEXIS 5119 (Cal. Sup. Ct. Jul. 27, 2015).  

The taxpayer sold S corporation stock to an ESOP and remained involved in the S corporation business after the sale.  The taxpayer also paid for non-business expenses from the corporate account which were recorded in a ledger account.  The corporation, on behalf of the petitioner, made significant charitable contributions and IRS denied a charitable deduction because the taxpayer fully paid the ledger account balances with personal funds and was the party that bore the economic burden of the contributions.  In the latter half of the year in which the contributions were made, the taxpayer used corporate funds to pay off the ledger account balances previously incurred.  The Tax Court determined that the S corporation actually bore the economic burden of the contributions.  However, the court determined that the taxpayer did not prove the portion of contributions made in the latter half of the tax year were made with personal funds and did not establish with sufficient evidence that ledger account balances were bona fide debt of petitioner; as a result, the associated deductions were denied.  However, the taxpayer was allowed a charitable deduction for the amounts he had actually repaid the corporation.  He was not allowed to deduct the contributions where his repayments were immediately paid for by a new corporate advance.  On appeal, the appellate court affirmed.   Zavadil v. Comr., No. 14-1053, 2015 U.S. App. LEXIS 12262 (8th Cir. Jul. 16, 2015), aff'g., T.C. Memo. 2013-222).

The decedent's estate held three tracts of land that were part of five contiguous parcels.  If the tracts could be combined, they could be developed.  But, without that combining, it was not economically feasible to develop the tracts.  There current zoning was for agricultural use.  The other two parcels were owned by an entity that the decedent owned 28 percent of.  The IRS took the position that the estate's land value should be its value reflecting its develop potential on the basis that it was likely that the properties could be combined such that a willing buyer would value the property at its developmental potential value.  The Tax Court determined that federal law governed the valuation issue and rejected the IRS position.  The IRS failed to show that there was a reasonable probability that the tracts could be combined in the near future, and that the presumption was with the estate that the decedent was using the land for its highest and best use at the time of death.  The court noted that the argument that the land would be worth more if the tracts were combined was not a relevant fact in determining if assembling the tracts together would occur.  The court also rejected the IRS argument that the estate's minority interest in the entity and relationships with the other owners required combination of the tracts.  There was no evidence that the decedent's estate controlled the entity.  Estate of Pulling v. Comr., T.C. Memo. 2015-134.

A car rental company claimed a casualty loss for losses sustained when rental customers purchased the company's damage waiver and then had an accident and the company decided not to repair the vehicle and return it to their fleet.  The IRS determined that the loss was not deductible as a casualty loss because the loss was not sudden, unexpected and unusual in nature.  Instead, the costs associated with accidents are an ordinary and necessary expense of the car rental business.  C.C.M. 201529008 (Feb. 4, 2015).

The taxpayer is a tax-exempt voluntary employees' beneficiary association (VEBA) insurance trust that did not have to file a federal income tax return unless it had unrelated business income.  The taxpayer obtained a membership in a mutual insurance company that later demutualized.  As a result of the demutualization, in 2004 the taxpayer received approximately $1.5 million in cash that IRS characterized as long-term capital gain with no income tax basis in accordance with Rev. Rul. 71-233.  For 2004, the taxpayer filed a Form 990T reporting the income as UBIT and paid the associated tax.  Two additional demutualization proceeds were reported similarly in 2006 and 2008. Later Fisher v. United States, 82 Fed. Cl. 780 (2008) was decided rejecting the IRS position on amounts received in demutualization.  The taxpayer filed an amended return for 2006 and 2008 based on the Fisher case.  The IRS disallowed the refund claims, but later approved the refunds based on the affirmance of the Fisher case on appeal (333 Fed. Appx. 572 (Fed. Cir. 2009).  However, the IRS Appeals Office determined that the refund claim was not timely filed with respect to the 2004 refund and the plaintiff sued for a refund on Mar. 28, 2013.  The trial court noted that the taxpayer's 2004 return was filed on Oct. 15, 2004, and that a refund claim had to be filed within three years in accordance with I.R.C. §6511.  The taxpayer argued that I.R.C. Sec. 6511 was inapplicable because the taxpayer was a non-profit entity who was not required to file a return.  The trial court noted that numerous other courts have rejected the same argument.  On the issue of whether the mitigation provisions of I.R.C. §§1311-1314 provided equitable relief from the statute of limitations, the court noted that IRS had made a final determination which established a basis (by referring to the Fisher case) which meant that, but for the statute of limitations, the taxpayer would have been entitled to a refund.  In addition, the trial court noted that IRS had taken an inconsistent position between its position taken in the final determination and the IRS's position that demutualization payments are taxable (due to the taxpayer's lack of basis in the payments).  Thus, the taxpayer satisfied the mitigation provisions of I.R.C. §§1311-1314 (the taxpayer satisfied its burden of proof that (1) IRS made a determination that barred it from correcting its erroneous filing; (2) the determination concerned a specific adjustment; and (3) the IRS had adopted a position in the final determination and maintained a position inconsistent with the erroneous inclusion or recognition of taxable gain.  The trial court granted the taxpayer's motion for summary judgment and IRS is required to make a return for the plaintiff.  However, on further review, the appellate court reversed.  The court noted that a timely refund claim was a jurisdictional prerequisite to a tax refund lawsuit, with the only exception being the mitigation provisions.  On those provisions, the court focused on I.R.C. Sec. 1312(7) which regards a determination that "determines the basis of property, and in respect of any transaction on which such basis depends, or in respect of any transaction which was erroneously treated as affecting such basis.  The appellate court determined that the denial of the 2004 claim was due to timeliness and was not a determination that "determined the basis of property."  The court held that IRS had not taken an inconsistent position and had not actively changed its longstanding position that mutual policyholders' proprietary interests have a zero basis when an insurance company demutualizes.  Instead, the court determined that the IRS had merely acquiesced in the 2009 decision of the Federal Circuit.  Thus, the taxpayer couldn't use the mitigation provisions the reopen a closed tax year based on a favorable change in or reinterpretation of the law.  Illinois Lumber and Materials Dealers Association Health Insurance Trust v. United States,  No. 14-2537, 2015 U.S. App. LEXIS 12675 (8th Cir. Jul. 23, 2015), rev'g., No. 13-CV-715 (SRN/JJK), 2014 U.S. Dist. LEXIS 59716 (D. MInn. Apr. 30, 2014).      


The decedent married his wife in 1955, had four children together, but later divorced in 1978.  Under the marital separation agreement, the decedent agreed to leave one-half of his eventual estate equally to the children.  The decedent remarried in 1979 and later executed a will and trust.  Under the trust terms, sufficient funds were to be set aside to buy an annuity that would pay the ex-wife $3,000 monthly.  The balance of the trust assets were to pass to the children, with six percent passing to each of three daughters and 16 percent to the son and the balance to the surviving spouse.  After the decedent's death, the children waived all potential claims they might have against the estate.  As a result, each daughter received approximately $3.5 million and the son received $9.5 million.  The estate claimed a deduction of $14 million for the payments to the children under I.R.C. Sec. 2053(a)(3).  The IRS denied the deduction in full and the estate filed a Tax Court petition.  Before trial, the IRS agreed to allow 52.5 percent of the $14 million deduction and informed the Tax Court.  Some of the children then sued the estate for fraudulent procurement of their waiver.  The estate settled by paying each child at issue an additional $1.45 million.   The decedent's estate then sought to set aside the settlement agreement based on mutual mistake of fact or because the IRS knew that at least one child was going to sue the estate before the Tax Court was advised of the settlement.  The Tax Court refused to set aside the settlement agreement between the parties.  On appeal, the court held that the estate could not set aside the settlement agreement on the grounds of mutual mistake because the doctrine didn't apply.  The estate simply failed to see that any of the children would sue the estate.  Also, the court held that the allegation that the IRS didn't reveal a statement by one of the children indicating the child would sue was not a misrepresentation that would allow the estate to set aside the settlement.   The settlement established the amount of the deduction.  Billhartz v. Comr., No. 14-1216, 2015 U.S. App. LEXIS 12730 (7th Cir. Jul. 23, 2015).    

The petitioner was before the IRS appeals office arguing that the appeals officer should have considered the petitioner's health and/or age or give the petitioner additional time to file a delinquent tax return when the appeals officer denied the petitioner the ability to satisfy his unpaid tax liability via an installment agreement.  The court agreed with the IRS because the petitioner did not submit the return that the IRS requested, nor the necessary financial information or any type of evidence of health or age claims within a reasonable time.  As such, the IRS did not abuse its discretion in denying the petitioner an installment agreement.  Hartmann v. Comr., T.C. Memo. 2015-129.

As part of building a transcontinental railroad, the Congress chartered the Union Pacific Railroad Company (U.P.) and gave it large portions of federally-owned land on either side of the planned route between Nebraska and Utah.  In the late 1800s and early 1900s, the U.P. began to sell some of the land to farmers, ranchers, loggers and homesteaders via deeds that conveyed only the surface estate but retained the mineral rights to U.P.  and a right of ingress and egress to prospect for, mine and remove minerals.  When U.P. sought to exploit minerals on a particular tract, it would negotiate a "surface owners agreement" (SOA) with the owner of the surface estate and U.P. would pay the surface owner 2.5% of the value of minerals extracted.  Around year 2000, the defendant acquired U.P.'s mineral interests with respect to the land at issue in the case.  The defendant discontinued the practice of entering into an SOA with the landowners and ceased paying royalties to them as well.  The plaintiffs (1,300 surface owners) sued, claiming that the defendant's use of the surface of their land exceeded the scope of the surface reservations in the deeds and that the defendant was committing a trespass.  The plaintiffs moved for class certification.  The court certified the class on a restricted basis simply to answer the question of whether the defendant exceeded the surface owner's rights by using vertical drilling rather than directional drilling because vertical drilling requires the drilling of more wells than would directional drilling.  A-W Land Co., et al. v. Anadarko E&P Company LP, No. 09-cv-02293-MSK-MJW, 2015 U.S. Dist. LEXIS 95480 (D. Colo. Jul. 22, 2015). 

The plaintiff was renovating it hog facility and contracted with the defendant to install infrastructure needed to provide the building with liquid propane gas.  Another defendant was contracted with to install gas lines from exterior walls throughout the interior of the building to connect heaters and other devices.  An employee of one of the contractors connected the external gas lines to the building.  Later, the new ventilation fans were turned on and within two hours the building caught fire.  The plaintiff sued the contractors for negligence and also sought a jury instruction on res ipsa loquitur.  The trial court refused to issue the instruction and the jury ruled for the contractors.  On appeal, the court affirmed.  The court noted that the plaintiff failed to prove that the cause of the fire was under the defendants' exclusive control.  However, the court mistakenly stated that where "as here, the cause or instrumentality giving rise to the injury is unknown, the doctrine of res ipsa loquitur is simply inapplicable."  In fact, it's precisely the opposite.  However, the court managed to stumble into the right result.  The pleading of negligence precludes the ability to also plead res ipsa loquitur.  The presence of the evidence of negligence bars a res ipsa claim.  TAMCO Pork II, LLC v. Heartland Cooperative, No. 14-0412, 2015 Iowa App. LEXIS 629 (Iowa Ct. App. Jul. 22, 2015). 

The defendant, the Federal Energy Regulatory Commission (FERC), issued a certificate of public convenience and necessity to a company authorizing the company to extend a natural gas pipeline.  The plaintiff sued seeking a review of FERC's issuance of the certificate on behalf of its members who "work, live, and recreate" along a nearby river and were concerned about the exercise of eminent domain conveyed to the company under Section 7 of the Natural Gas Act (NGA) to secure rights-of-way.  The defendant claimed that the plaintiff lacked standing and the court agreed.  The court held that the plaintiff's desire to protect its members property due to the defendant's alleged non-compliance with the National Environmental Policy Act (NEPA) and the Clean Water Act (CWA) was not within the "zone of interests that the NGA, NEPA or CWA protected.  The plaintiff did not claim that its members would suffer any environmental harm (thus, the NEPA claim failed) and the CWA claim failed because the plaintiff did not involve any allegation of pollution to navigable waters of the U.S.  The court also determined that an eminent domain claim was not a basis for a CWA claim.  Gunpowder Riverkeeper v. Federal Energy Regulatory Commission, No. 14-1062, 2015 U.S. App. LEXIS 12532 (D.C. Cir. Jul. 21, 2015). 

The plaintiff operates a chicken processing facility.  Upon receiving an anonymous complaint, the defendant inspected a nearby creek and discovered sludge that appeared "visually similar" to the plaintiff's wastewater lagoon.  Without any direct or physical evidence, the defendant assessed a $75,000 penalty against the plaintiff.  The $75,000 penalty was comprised of a $25,000 penalty for violating a state (NC) statute barring discharges into state waters that violate state water quality standards, and $50,000 in penalties for two separate violations of state water quality standards (dissolved oxygen standard and settleable solids and sludge standards).  An administrative law judge (ALJ) viewed the $50,000 in penalties as improper.  The Environmental Management Commission upheld the $25,000 penalty for the discharge violation and one $25,000 penalty for the other violations.  On further review, the trial court affirmed the ALJ's decision.  On appeal, the court affirmed.  The appellate court held that a violation of water quality standards could not occur without a discharge violation.  Thus, the plaintiff had impermissibly been penalized multiple times for the same violation.  House of Raeford Farms, Inc. v. North Carolina Department of Environment and Natural Resources, No. COA15-47, 2015 N.C. App. LEXIS 631 (N.C. Ct. App. Jul. 21, 2015). 

The plaintiff sued the defendant for damages arising from alleged negligent cattle inspections.  State (WA) law allows the defendant to conduct mandatory cattle inspections to determine ownership of cattle, and cattle must be inspected before they are moved from WA to another state.  In this case, a third party leased cattle from the plaintiff and the plaintiff obtained a security interest in all cattle that the third party owned or leased from others.  The third party defaulted on the lease and transported cattle to Oregon for sale at a public livestock market without the plaintiff's knowledge or consent.  The defendant inspected the cattle at the Oregon market before they were sold.  The third party claimed that it owned all of the cattle, even though some of them had the plaintiff's brand.  The defendant allowed the cattle to be sold without impounding the cattle or holding the sale proceeds.  The public market sold the cattle and distributed the proceeds to the third party.  The plaintiff sued the defendant for negligence in inspecting the cattle.  The court held that the defendant's inspection involved a governmental function for which it could not be held liable in negligence.  Inspections, the court determined, were for the common good.  Sunshine Heifers, L.L.C. v. Washington Department of Agriculture, No. 46322-9-II, 2015 Wash. App. LEXIS 1599 (Wash. Ct. App. Jul. 21, 2015). 

The petitioner, a real estate agent, claimed a home office deduction for a dwelling unit that she claimed to use for business purposes.  The petitioner supported her claim with "aerial view" photos from Google coupled with handwritten notes.  The petitioner provided no other documents, canceled checks or receipts to bolster the claimed rental arrangement she had with her sister concerning the dwelling unit.  The court agreed with the IRS and denied any deduction for a home office because the petitioner couldn't show that any part of the dwelling unit was used regularly and exclusively for business purposes.  The court also disallowed expense deductions for telephone and internet, again for lack of substantiation.  The court also upheld the IRS assessment for failure to file based on receipt of a Form 1099 showing over $17,000 of income before the expenses at issue were claimed.  Grossnickle v. Comr., T.C. Memo. 2015-127. 


Under the Clean Air Act, the Environmental Protection Agency (EPA) regulates vehicle emissions.  Accordingly, the EPA developed regulations requiring vehicle manufacturers to test emissions of new vehicles using a "test fuel" that is "commercially available."  The plaintiffs, a coalition comprised largely of ethanol producers, challenged the test fuel regulation as arbitrary and capricious because their fuel, which contains 30 percent ethanol, could not be a test fuel because it is not yet commercially available.  They claimed that a fuel need not be commercially available in order to be approved as a test fuel.  The court, in short order, dismissed the plaintiffs' arguments in that the regulation was solidly rooted in the statute requiring vehicles to be tested under circumstances that reflect actual current driving conditions.  The court made no mention that fuel containing ethanol does not actually improve environmental quality as reported in the Proceedings of the National Academy of Sciences published in December of 2014 which reported that "the combined climate and air quality impacts [of corn-ethanol-fueled vehicles] are greater than those from gasoline vehicles."  Energy Future Coalition, et al. v. Environmental Protection Agency, et al., No. 14-1123, 2015 U.S. App. LEXIS 12078 (D.C. Cir. Jul. 14, 2015).

The debtor filed Chapter 12 in October of 2014 and creditors immediately motioned for relief from the automatic stay largely on the point that the debtor could not successfully reorganize.  At an evidentiary hearing two months later the court took the matter under advisement, and the debtor filed a reorganization plan in early 2015.  The debtor had been involved in a cattle sale scam and also was subsequently pled guilty to two counts of livestock neglect.  His attorney filed a motion to withdraw, which was approved.  The plan confirmation hearing was scheduled and the debtor was informed that he needed legal counsel or had to file necessary documents himself.  The debtor failed to appear at a status conference and the court later dismissed the case.  The debtor retained new counsel and then filed another Chapter 12 petition.  The trustee moved for dismissal based on 11 U.S.C. Sec. 109(g)(1) which bars re-filing  within 180 days of the previous case if the previous case was dismissed for willful failure to follow a court order or otherwise prosecute a case.  The court determined that 11 U.S.C. Sec. 109(g)(1) applied to bar the re-filing based on the debtor's willful failure to follow a court order and willful failure to appear before the court.  In re Bryngelson, No. 15-00704, 2015 Bankr. LEXIS 2240 (Bankr. N.D. Iowa Jul. 8, 2015).

The plaintiff, an S corporation coal mining company, overpaid excise taxes on coal sales which triggered refunds, plus interest for tax years 1990 through 1996.  The refund payments were made in 2009, but the plaintiff claimed that more interest should have been applied - to the tune of $6 million.  The plaintiff claimed that it was due the statutory rate of interest applicable to a non-corporate taxpayer - the federal short-term rate plus three percentage points.  The IRS claimed that the corporate rate applied - the federal short-term rate plus two percentage points.  However, a reduced rate of interest applies to overpayment refunds exceeding $10,000.  In that event, the interest rate is the federal short-term rate plus .5 percentage points.  The court agreed with the IRS that I.R.C. Sec. 6621(a)(1) treats an S corporation as a "corporation" for purposes of determining the applicable interest rate.  The court refused to follow a U.S. Tax Court decision that reached the opposite conclusion, and refused to give much weight to an Internal Revenue Manual provision that somewhat supported the plaintiff's argument.  The court did note, however that I.R.C. Sec. 6621(c) treats S and C corporations differently for purposes of determining underpayment interest.  Eaglehawk Carbon, Inc., et al. v. United States, No. 13-1021T, 2015 U.S. Claims LEXIS 862 (Fed. Cl. Jul. 16, 2015). 

The petitioner owned land that included the habitat of the golden-cheeked warbler, and endangered bird species.  The petitioner granted a conservation easement over the property to the North American Land Trust (NALT), claiming a multi-million dollar charitable deduction for the easement donation.  The easement deed allowed the petitioner and NALT to change the location of the easement restriction, and the petitioners retained the right to raise livestock on the property as well as hunt the property, cut down trees, construct buildings and recreational facilities, skeet shooting stations, deer hunting stands, wildlife viewing towers, fences, ponds, roads and wells.  The petitioners also sold partnership interests to unrelated parties who received homesites on adjacent land.  The appraisal at issue was untimely and inaccurately described the property subject to the easement, and a NALT executive failed to clarify the inconsistencies.  The court denied the charitable deduction and also imposed the additional 40 percent penalty for overvaluation (the easement was actually worth nothing).  Bosque Canyon Ranch, L.P., et al. v. Comr., T.C. Memo. 2015-130.   

The petitioner divorced her husband.  Later the ex-couple agreed to modify their divorce settlement whereby the petitioner transferred property to her ex-husband in satisfaction of the petitioner's alimony obligation.  The petitioner claimed a deductible loss on the transfer.  The IRS disallowed the loss and the court agreed.  The loss wasn't deductible because the transfer was incident to a divorce, and the transfer was not deductible as alimony because it was not in the form of cash or its equivalent.  Mehriary v. Comr., T.C. Memo. 2015-126.

The petitioner had no permanent home and lived in casino hotels and gambled at the associated casinos.  He lost money gambling and attempted to fully deduct his losses on the basis that he was a professional gambler.  The IRS disagreed and the court agreed with the IRS.  The court noted that the factors under I.R.C. section 183 are relevant in determining whether the gambling activity is engaged in with the requisite profit intent and that the petitioner could not satisfy the tests.  The court noted that the petitioner did not maintain complete and accurate books and records, did not adjust his system of gambling or try to improve "profitability" by changing methods, did not have and did not develop any level of expertise, had no history of success in any business, had substantial income from non-gambling sources which funded his gambling addiction, and enjoyed gambling.  As such, the petitioner's gambling losses were deductible only to the extent of his gambling winnings as a miscellaneous itemized deduction.  Boneparte v. Comr., T.C. Memo. 2015-128.

The defendants owned mineral rights which they leased in 2004.  The plaintiff subsequently acquired the lease.  With respect to oil production, the lease provided for a 25 percent royalty for the "market value at the well of all oil and hydrocarbons." As for gas production, the lease provided for a 25 percent royalty "of the price actually received by Lessee" from gas produced under the lease that was marketed.  The plaintiff owned the wells, but then sold oil and gas production from the wells to a third party that owned the gathering lines and transported the production through pipelines for ultimate sale to customers.  The plaintiff was paid based on a weighted average selling prices received by the third party buyer.  Downstream production costs were factored in when computing the amount that the plaintiff received.  The plaintiff based its royalty computation for purposes of determining the amount paid to the defendants by taking into account those downstream production costs.  Such calculation made sense because the plaintiff and, in turn, the defendants would benefit from the higher value of the market-ready oil and gas.  The defendants claimed that they amount of royalty paid to them shouldn't bear any post-production (post-extraction) costs (except for their portion of production taxes).  An overriding royalty clause granted the plaintiff production from wells bottomed on neighboring properties that were reached by horizontal wells drilled on the defendants' properties.  The defendants were granted a 5 percent royalty on this production.  The defendants also argued for no reduction for post-production costs on this royalty because it referred to a "perpetual cost-free...overriding royalty of 5 percent (5%) of gross production obtained."  The court held that the oil royalty clause language ("market value at the well") meant that the defendants shared in post-production expenses, but that the gas royalty clause language ("of the price actually received by Lessee") meant that the plaintiff solely bore the post-production expenses.  The overriding royalty language ("perpetual cost-free...overriding royalty), the court held, could reasonably be interpreted to bar the deduction for post-production expenses when computing the defendants' royalty.  Four justices dissented on the construction of the overriding royalty clause.  Chesapeake Exploration, L.L.C., et al. v. Hyder, et al., No. 14-0302, 2015 Tex. LEXIS 554 (Tex. Sup. Ct. Jun. 12, 2015).   

The parties to a farm lease that was entered into in 2004 for a 10-year term.  For several months before the end of the termination date of the lease, the tenant had failed to pay the specified rent.  After the termination date, the tenant held over in possession, and was served a notice of termination.  The tenant claimed he had tried to pay the rent, but it was refused because of a discrepancy in the legal description contained in the lease and the owners of the property.  The tenant was given instructions as to how to correctly pay the rent, but did not follow those instructions.  While there was a mutual mistake as to the legal description of the leased premises, the court noted that the tenant drafted the lease and could not use that mistake as an excuse for non-payment of rent or to holdover after the lease terminated.  The court determined that the trial court had given the tenant a full opportunity to present evidence, rebut evidence and be heard.  The court upheld the trial court's ruling that the tenant be evicted from the leased premises and that the landlord be granted damages for unpaid rent.  Dobbs v. Trost, No. 2014AP2816, 2015 Wisc. App. LEXIS 500 (Wisc. Ct. App. Jul. 9, 2015). 

The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineer (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects.  The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA).  The plaintiff sought to challenge the COE determination, but the trial court, in a highly disingenuous opinion in light of the unanimous U.S. Supreme Court opinion in Sackett v. Environmental Protection Agency, 132 S. Ct. 1367 (2012), ruled for the COE, holding that the plaintiff had three options:  (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment.  On appeal, the court unanimously reversed, strongly criticizing the trial court's opinion.  Based on Sackett, the court held that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court.  The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct in light of Rapanos v. United States, 547 U.S. 715 (U.S. 2006).  The court noted that the COE had deliberately left vague the "definitions used to make jurisdictional determinations" so as to expand its regulatory reach.  While the COE claimed that the jurisdictional determination was merely advisory and that the plaintiff had adequate ways to contest the determination, the court determined that such alternatives were cost prohibitive and futile.  The court stated that the COE's assertion that the jurisdictional determination (and the trial court's opinion) was merely advisory ignored reality and had a powerful coercive effect.  The court held that the Fifth Circuit, which reached the opposition conclusion with respect to a COE Jurisdictional Determination in Belle Co., LLC v. United States Army Corps. of Engineers, 761 F.3d 383 (5th cir. 2014), cert. den., 83 U.S.L.W. 3291 (U.S. Mar. 23, 2015), misapplied the Supreme Court's decision in SackettHawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-3067, 2015 U.S. App. LEXIS 5810 (8th Cir. Apr. 10, 2015), rev'g., 963 F. Supp. 2d 868 (D. Minn. 2013).  In a later decision, the court denied a petition to rehear the case en banc and by the panel.  Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-3067, 2015 U.S. App. LEXIS 11697 (8th Cir. Jul. 7, 2015).

The petitioner withdrew funds from his IRA before reaching age 59.5 to pay delinquent mortgage payment so as to avoid a mortgage foreclosure on his home.  The exception from the 10 percent penalty under Treas. Reg. Sec. 1.401(k)-1(d)(3)(iii)(B)(4) for withdrawals so the funds can be used to prevent eviction from the taxpayer's principal residence due to foreclosure did not apply.  The exception has no application, the court held, to financial hardship.  Kott v. Comr., T.C. Sum. Op. No. 2015-42.

On certified question from the federal district court as part of a class action, the court held that an agricultural employer has a legal obligation to separately pay piece-rate workers for their rest breaks.  On a second certified question, the court held that, in the absence of a separate agreement, the rate of pay for rest breaks must equal at least the greater of the applicable minimum wage or the pieceworker's regular rate of pay (calculated as the worker's total weekly piece work earnings, divided by the hours worked by the worker during such period, excluding break times).  Under state regulatory law, an employer must cover the cost of 10-minute rest breaks every four hours for all workers in all industries.  The court was silent as to whether the court's ruling was to be applied retroactively.  It is anticipated that the court's decision could lead to lawsuits against agricultural operations claiming pay for workers' unproductive activities such as walking to and from fields, emptying picking bags and moving ladders, etc.  It is also anticipated that the court's decision will result in higher harvest costs for apples in the amount of approximately $1 per apple bin.  Demetrio, et al. v. Sakuma Brothers Farms, Inc., No. 90932-6, 2015 Wash. LEXIS 807 (Wash. Sup. Ct. Jul. 16, 2015).  

The plaintiff's three ag buildings and equipment in the buildings were destroyed by fire.  The buildings were used to dry, process and store hop crops and the equipment was used to store hop bales.  The plaintiff had the buildings and equipment insured under a fire policy issued by the defendant for the cash value of the buildings and equipment, not to exceed the policy limit.  The plaintiff's appraiser determined that the cash value of the buildings and equipment was $1.41 million and the defendant's appraiser severely low-balled the value, pegging it at $380,909.  The defendant paid the $380,909 to the plaintiff.  The defendant hired another appraiser who, expectedly, determined that the plaintiff's appraisal was too high.  The plaintiff sued to recover the balance of what it claimed was owed under the policy, plus prejudgment interest.  The defendant revised its values upwards and paid an additional $85,330.  The matter was submitted to arbitration as the policy required, and the arbitrator set the value at $1.055 million.  The defendant paid an additional $588,761.  The court awarded the plaintiff attorney fees of $82,059.75, but no prejudgment interest.  On appeal, the court affirmed that the plaintiff was not entitled to prejudgment interest because such amount was not due until the amount of loss was ascertained by arbitration.  Jackson Hop, LLC v. Farm Bureau Mutual Insurance Company of Idaho, No. 42384-2014, 2015 Ida. LEXIS 188 (Jul. 16, 2015).

The plaintiff owned 120 acres of farmland that was mostly irrigated by pivot irrigation.  However, the pivot could not reach a 6.5 acre corner which was irrigated by gravity irrigation fed by a pipe running along a fence line.  The defendant allegedly damaged a section of the pipe while removing and replacing fence.  The plaintiff discovered the damage in July of 2011 and the damaged pipe needed to be repaired by June 1 of 2012 to avoid crop damage in the 6.5 acre corner.  The plaintiff took the pipe in for a repair estimate on May 15 of 2012 and was told that the repair could be completed by June 1 at a cost of $1,772.40.  However, the plaintiff did not authorize the repair because he believed that the defendant's insurance company needed to approve the repairs.  The plaintiff had the financial ability to pay for the repair at that time.  On June 5, 2012, the defendant requested an estimate and offered to pay the plaintiff $1,772.40 to fix the pipe and offered the same amount in writing on August 21, 2012.  The pipe was not repaired in time for the 2012 crop year, but was repaired in time for the 2013 crop year at a cost of $2,854.83.  The plaintiff paid for the repair and was not compensated by the defendant.  The plaintiff sued in May of 2013 seeking $13,578.62 in damages for the cost of the pipe repair and the lost 2012 crop profits.  The trial court awarded the plaintiff $2,854.83 for the cost of the pipe repair, but nothing for lost profits because the plaintiff did not seek to repair the pipe within a reasonable amount of time. On appeal, the court affirmed.  The court determined that the plaintiff failed to mitigate damages by not simply paying for the pipe repair before June 1, 2012, and then being able to profit from the crops planted on the 6.5 acre tract.  The court noted that the plaintiff stood to profit from the impacted tract nearly four times the cost of repairing the pipe.  In addition, the defendant did not do anything to prevent the plaintiff from paying for the repair to the pipe to avoid the lost profits from the 2012 crop year.  Tedd Bish Farm, Inc. v. Southwest Fencing Services, LLC, 291 Neb. 527 (2015). 

The county auditor included the plaintiff's grain storage bins in the valuation of the plaintiff's real property for tax purposes.  On review, the Board of Revision affirmed.  On appeal, the Board of Tax Appeals (BTA) reversed.   The BTA determined that the grain bins were personal property under state (OH) law and reduced the valuation of the plaintiff's real property by $1.1 million - the value of the grain bins.  On further review by the OH Supreme Court, the Court affirmed the BTA.  The court reasoned that when the legislature amended the pertinent code provisions (O.R.C. Sec. 5701.02(A) and O.R.C. Sec. 5701.03(B)) in 1992 it clearly defined "business fixture" (which is classified as personal property) to include storage bins.  Thus, real property tax did not apply to them.  The definition, the Court noted, categorized personal property as that type of property that primarily benefitted the business owner rather than the real estate.  Metamora Elevator Company v. Fulton County Board of Revision, et al., No. 2014-0874, 2015 Ohio LEXIS 1835 (Ohio Sup. Ct. Jul. 15, 2015).  

The parties, owners of adjacent residential tracts, were in a battle over water drainage.  The plaintiffs claimed that the defendants unlawfully constructed an earthern berm that obstructed the flow of water in a drainageway and caused the water to back-up onto the plaintiffs' property.  The plaintiffs also claimed that the defendants altered the course of another drainageway, moving it closer to the plaintiffs' property line which would endanger their property in the event of a major rainfall.  The defendants sought an injunction to stop the plaintiffs from pumping water onto their property and an order for money damages for loss of trees due to excessive water. The plaintiffs were discharaging water via a sump pump through an underground pipe so that water would not get into their basement.  The pipe was connected to another pipe beneath the defendants' property, but the system failed and the plaintiffs began discharging the water at the property line.  The defendants then obtained a permit to build a second culvert and an earthen berm where the plaintiffs' dewatering well discharged the groundwater.  A pipe was installed through the berm to facilitate drainage.  Ultimately, water backed-up onto the plaintiffs' property.  When the plaintiffs discontinued the use of their dewatering well, problems ceased.  The trial court denied the plaintiffs' request for injunctive relief and also denied the defendants' counterclaim for tree damage/loss and denied an injunction that would bar the plaintiffs from discharging water via the dewatering well.  On appeal, the court affirmed.  The court noted that the water at issue was comprised of both surface and ground water, but the pooling issue involved groundwater that was pumped from the plaintiffs' sump pump and dewatering well.  The court applied the common enemy rule to the ground water and held that the defendants were free, as owners of the servient estate, to dam the water if necessary and reasonable under the circumstances.  The court held that the defendants' conduct was reasonable.  Thus, the plaintiffs were not entitled to an injunction on that issue.  The court also determined that the defendants were not entitled to money damages for their trees due to a lack of proof of causation.  The court also determined that the defendants were not entitled to injunctive relief stopping the plaintiffs from using their dewatering well.  Kobza v. Bowers, 23 Neb. App. 118 (2015).

This case involved multiple cases that were consolidated involving the "Sterling Benefit Plan."  The plan was a purported welfare benefit plan consisting of separate plan that each employer that participated in the plan tailored to its employees concerning the payment of death, medical, and disability benefits.  An employee would designate a beneficiary that the plan would pay benefits to, and the death benefit was the face amount of the life insurance policy that the plan bought on the employee's life.  The premiums were paid by the employer via plan payments and the policy typically had a cash value that increased on an annual basis.  Non-death benefits were limited to cash value, and an employer could end plan participation and trigger full vesting of an employee in the life insurance policy.  An employee could take the policy in satisfaction of a post-death retirement death benefit upon retirement.  The case involved three corporations that were each wholly owned by a sole person, and an S corporation owned by three other persons.  The court determined that the plan was a split-dollar arrangement under which the shareholder/employees with insurance on their lives had compensation income in accordance with Treas. Reg. Sec. 1.61-22.  In addition, the payments to the plan were not deductible and the policies did not qualify as group term policies because they were individually underwritten.  The plan was a listed transaction, and the 30 percent accuracy-related penalty applied.  Our Country Home Enterprises, Inc., et al. v. Comr., 145 T.C. 1 (2015). 

This case involved construction of a clause contained in oil and gas leases that computed the royalty owed to lessors in a class action suit.  The producer, Oil Producers, Inc. of Kansas (OPIK) is a small producer that produces gas in areas served by midstream companies (third-party purchasers).  OPIK owns the well and the midstream companies own the gas gathering and processing facilities.  Thus, OPIK sells the gas at the wellhead to the midstream companies who process the natural gas for eventual delivery into the interstate pipeline system.  The price that OPIK receives for the raw gas it sells to the midstream companies is based on a formula that allows OPIK (and royalty owners) to jointly share in "downstream" market values as the gas gets closer to the consumer after deduction for expenses to account for services provided by the midstream companies to process the gas and transport it from the wellhead to the downstream resale location.  OPIK pays the royalty owners a percentage of what OPIK receives, thus the royalty owners share in the expenses incurred to get the gas to consumers.  Many of the leases contained a provision stating that, "The lessee shall pay lessor as royalty 1/8 of the proceeds from the sale of gas at the mouth of the well where gas only is found."  Another lease document provided for "one-eighth (1/8) of the proceeds if sold at the well...".  The royalty owners claimed that they should not have to share in the production expenses because the duty to market the minerals produced was on OPIK and that duty meant that OPIK solely bore the burden of the expenses necessary to make the gas marketable.  The trial court and court of appeals agreed with the royalty owners, effectively negating the "at the well" language of the oil and gas leases.   The lower courts held that OPIK had to take the proceeds it received from the midstream companies and add to it the amounts that the midstream companies spent to make the gas marketable so as to obtain higher prices downstream.  This had the effect of making OPIK pay a royalty on selling prices of gas that it did not receive.  On further review, the Kansas Supreme Court reversed.  The Court noted that prior Kansas caselaw held that the term "proceeds" in a royalty clause similar to the clause involved in this case referred to gross sale price in the contract between the first purchaser and the operator (except for the statutorily withheld conservation fee which is borne by the operator as a mill levy on gas the operator sells).  The Court held that OPIK satisfied its duty to market minerals by entering into the purchase agreements with the midstream companies for sale of gas at the wellhead.  That is when gas has been "marketed."  Thus, where, as in this case, the lease provides for royalties based on a share of proceeds from the sale of gas at the well, the post-production, post-sale processing expenses deducted by the third-party are taken into account when computing the "proceeds" paid to OPIK and impact the amount of the royalty paid to the lessors.  Fawcett v. Oil Producers of Kansas, No. 108,666, 2015 Kan. LEXIS 376 (Kan. Sup. Ct. Jul. 2, 2015).

In this case, the parents had three children and 138 acres of farmland along with various farm property and four certificates of deposit (CD) at a local bank worth $160,000.  They also transferred the farmland to the son, and executed wills that left the farm equipment to the son and other property to the daughters.  Mom died in early 2011, and Dad and the son went to the bank and executed documents indicating that the son was being added as a joint co-owner on each CD.  Dad died in mid-2013 and the bank filed a petition for guidance on distribution of the CDs.  The court determined that the CDs belonged to the son as the surviving joint tenant.  The sisters appealed attacking the process that was utilized to add their brother as joint co-owner on the accounts such that the accounts should be determined to be assets of their father's estate that would pass as part of the residuary of the estate.  The appellate court affirmed on the basis that the daughters lacked clear and convincing evidence of a different intent of their father other than to add their brother as a joint co-owner.  That was the requirement under the state (IN) probate code.  In re Estate of Herin, No. 39A-5-1411-ES-537, 2015 Ind. App. LEXIS 491 (Ind. Ct. App. Jun. 29, 2015).  

The plaintiff operated a Christmas Tree farm on his 110-acre property.  Neighbors complained about the additional noise and traffic associated with the plaintiff's use of the farm for weddings, and business and educational events.  The local zoning board held that the plaintiff could not hold such events on his premises, rejecting the plaintiff's argument that his event business activity constituted agritourism under state law which allowed such activity on farm land as a farming activity.  The plaintiff appealed and the trial court upheld the zoning board's finding.  The trial court determined that the zoning board's decision was reasonable, and that the petitioner could not argue that the event business was an accessory use of the farm land or that the event business was subordinate or incidental to the use of the land as a Christmas tree farm.  The trial court made a specific finding that guests were more attracted to the view rather than the Christmas trees.  The evidence also showed that no other farms in the area marketed wedding and other events as accessory uses.  The trial court, however, did not uphold the zoning board's attempt to fine the plaintiff for violation of the local zoning ordinance.  On appeal, the court affirmed.  There was no longstanding practice of using farms for weddings and meetings that would have been allowed as an exceptional use as ancillary to the use of the land as a farm.  Forster v. Town of Henniker, No. 2013-893, 2015 N.H. LEXIS 54 (N.H. Sup. Ct. Jun. 12, 2015).

The petitioner, an ex-NFL player, co-founded a non-profit business in 1997 to train at-risk persons to be automotive technicians.  Upon the death of the co-founder, the petitioner handled fundraising until he resigned in 2010.  The petitioner received a base salary and a business credit card for payment of business expenses.  However, the petitioner also charged personal expenses on the card.  The non-profit treated the personal expense charges as advances for future wages or business expenses.  Beginning in 2005, the non-profit started withholding money from the petitioner's salary for purposes of paying back the advances.  The petitioner resigned in 2010 at the time that the balance due on the credit card was $83,000.  The non-profit issued a Form 1099 to the petitioner for 2010 for the $83,000.  The petitioner did not include the $83,000 in income and IRS, upon audit, assessed additional taxes and penalties for 2010 based on the $83,000 being an advance and not a loan.  The court agreed that the $83,000 was taxable as an advance, but that it was taxable in the years received.  Those years were 2003 through 2006.  However, the only year in issue was 2010, so the case was dismissed.  If the tax years 2003-2006 were closed due to the statute of limitations, the IRS is barred from assessing any additional tax for those years (unless, of course, fraud (no SOL) or substantial understatement of tax is involved (six year SOL) - which also requires fraud to be present).  Starke v. Comr., T.C. Sum. Op. 2015-40. 

The plaintiff is a medical marijuana facility operating in a state where such activity is legal.  It sold medical marijuana and provided vaporizers, food and drink, yoga, games, movies and counseling at no cost to patrons.  I.R.C. Sec. 280E disallows a deduction for amounts incurred by a business that traffics in a controlled substance.  The Tax Court noted that marijuana is a controlled substance and held that it was irrelevant that 15 states had legalized marijuana sales for medical purposes. Accordingly,  the Tax Court denied 100 percent of the petitioner's deductions associated with operating the vapor room were not deductible business expenses.  The Tax Court held that the petitioner failed to adequately substantiate revenue (and was not entitled to keep less formal documentation because the business is primarily a cash business) and must include all revenue in income that was reflected on its business ledgers (which exceeded the amount on the return).   The Tax Court did allow the petitioner to deduct it cost of goods sold (COOGS) as estimated by the court pursuant to the Cohan Rule, with a reduction of COGS by the amount of products given away. No operating expenses were deductible.  On appeal, the court affirmed.  The appellate court determined that the petitioner's business activity solely consisted of selling medical marijuana.  The other activities were not conducted for-profit.  As such, the petitioner's only business activity involved trafficking in a controlled substance, the I.R.C. Sec. 162 expenses for which were disallowed under I.R.C. Sec. 280E.  The court viewed it as immaterial that medical marijuana facilities did not exist at the time I.R.C. Sec. 280E was enacted.     Olive v. Comr., No. 13,-70510, 2015 U.S. App. LEXIS 11812 (9th Cir. Jul. 9, 2015), aff'g., 139 T.C. No. 2 (2012).

In this case, the plaintiffs cases were consolidated on appeal.  They claimed that their on-the-job injuries should be covered under the state (NM) workers' compensation law.  One plaintiff tripped while picking chile and fractured her left wrist.  The other plaintiff was injured while working in a dairy when he was head-butted by a cow and pushed up against a metal door causing him to fall face-first into a concrete floor and sustain neurological damage.  The plaintiffs' claims for workers' compensation benefits were dismissed via the exclusion from the workers' compensation system for farm and ranch laborers.  On appeal, the court reversed.  Using rational basis review (the standard most deferential to the constitutionality of the provision at issue), the court could find no rational purpose for the exclusion from workers' compensation for farm and ranch laborers, and noted that the purpose of the law was to provide "quick and efficient delivery" of medical benefits to injured and disabled workers.  Thus, the court determined that the exclusion violated the constitutional equal protection guarantee.  The court stated that the exclusion circumvented the policy of the Act  which was to balance the interests and rights of the worker and the employer.  While the court stated that the exclusion "results in expensive drawn out litigation being the only available option to the employee," the court failed to note that New Mexico is one of very few states that has adopted a "pure" comparative fault system whereby the injured party could be 99 percent at fault and still recover damages - although the recovery is reduced by the percentage of the injured party's fault.  Such a system would seem to greatly enhance the likelihood of settlement of personal injury cases without protracted and expensive litigation.  However, the state tort system went completely unmentioned by the court likely because it undercuts the court's claim that the exclusion results in "drawn out litigation."  The court offered no citation to any scholarly research or statistics to back up its claim.  The court further believed that the exclusion for workers that cultivate and harvest (pick) crops, but the inclusion of workers that perform tasks associated with the processing of crops was a distinction without a difference.  However, the court made no mention (even though it was briefed) that farm laborers are more likely to be illegal immigrants than are workers that are engaged in crop processing activities, and made no mention that NM has at least four sanctuary cities or counties that harbor illegal immigrants.  The processing of workers' compensation claims for such persons is not only illegal, it is more difficult due to the lack of documentation.  Thus, an argument was provided to the court in briefs that the state had a legitimate interest in the farm laborer/processor distinction.  The court did not address the point, holding the exclusion was arbitrary on its face.  The court further dismissed the claim that the protection of the NM ag industry from additional overhead cost served a legitimate state interest.  The court made no mention of the data indicating that the cost of workers' compensation insurance coverage rates for agriculture is commonly in the 6-8 percent of payroll range, with some states reporting the cost to be approximately 15 percent and, hence, did not address the argument that the exclusion had served a legitimate state interest in keeping food costs to the public down.  The court did not address the point that has been made in similar cases that the ag exclusion slows down the mechanization of certain agricultural crop harvesting jobs as being a legitimate state interest.  The court also made no mention that the highest court in numerous other states had upheld a similar exclusion for agriculture from an equal protection constitutional challenge.  The court stated that its decision was applicable to workers' claims pending as of March 30, 2012.  That's the date, because of litigation in a different case, that the Workers' Compensation Administration was on notice that the ag exclusion was unconstitutional.  Rodriguez, et al. v. Brand West Dairy, et al., Nos., 33,104 and 33,675, 2015 N.M. App. LEXIS 69 (N.M. Ct. App. Jun. 22, 2015).       

The debtors, a married couple, filed Chapter 12 bankruptcy on August 7, 2010 and submitted their reorganization plan on February 8, 2011.  The plan was approved with some modifications on March 18, 2011.  The confirmed plan contained a provision treating federal and state tax obligations attributable to the sale of farm assets occurring post-petition in 2010 and 2011 to be "classified, treated and discharged" as unsecured claims in accordance with 11 U.S.C. Sec. 1222(a)(2)(A) with the liability computed under the "marginal" method.  The debtors received a tax refund for the 2010 tax year, and asserted a refund of almost $6,000 for the 2011 tax year attributable to the sale of farm property.  The IRS claimed that the debtors owed over $66,000 of tax.  For the 2012 tax year, the IRS did not issue a $5,706 refund, but rather applied it to the tax liability that IRS was asserting for the 2011 tax year.  In May of 2013, the IRS demanded that the debtors pay the outstanding tax liability (including interest) of over $67,000.  The debtors did not pay the tax claim, but then filed a 2013 return claiming a refund of almost $7,000.  The IRS applied the amount of the refund to the outstanding tax liability and demanded payment in full of the outstanding tax liability of $65,431.85.  The debtors sought to have the IRS held in contempt for violation of the debtors' reorganization plan on the basis that 11 U.S.C. Sec. 1222(a)(2)(A) made the IRS claim an unsecured claim not entitled to priority and subject to discharge.  The court, after determining that it had jurisdiction, determined that the reorganization plan could not bind the IRS as to the post-petition tax claims.  While the law in the Eighth Circuit at the time the tax was incurred was that taxes attributable to the sale of farm assets (and IRS did not challenge that the taxes at issue were attributable to farm assets) were unsecured, non-priority claims subject to discharge, the court held that a U.S. Supreme Court opinion decided in May of 2012 had abrogated the Eighth Circuit opinion.  While the Eighth Circuit opinion was still applicable law at the time of plan confirmation and when the taxes at issue were incurred, the Court held that the U.S. Supreme Court opinion controlled. The court reached this conclusion by reasoning that the U.S. Supreme Court merely clarified what 11 U.S.C. Sec. 1222(a)(2)(A) had meant all along and, thus, had retroactive application.  The court said this was the case "regardless of when the Plan was confirmed."  The debtor then filed a motion asking the court to reverse its prior ruling because the court incorrectly retroactively applied the U.S. Supreme Court's holding in Hall to the debtors where the reorganization plan was confirmed before Hall was decided.  The court agreed with the debtor and reversed its previous ruling.  The court noted that the IRS need not be a "creditor" to be bound by a debtor's Chapter 12 plan in accordance with 11 U.S.C. Sec. 1222(a)(2)(A), and the debtor's plan contained a 11 U.S.C. Sec. 1222(a)(2)(A) provision.  Thus, the IRS had violated the terms of the Chapter 12 plan.  However, the court did not sanction the IRS.  Thus, the IRS was bound the debtor's confirmed plan and any set-off or other action taken by IRS was reversed.  In re Legassick, No. 10-02202, 22015 Bankr. 2239 (Bankr. N.D. Iowa Jul. 8, 2015, rev'g., 528 B.R. 777 (Bankr. N.D. Iowa 2015).   

A foundation was established to develop and support an alumni association, with most of its income derived from sales at a weekly art and craft bazaar that includes a farmers' market and refreshment booths held at a parking lot on campus every weekend throughout the year.  The university allowed the foundation to use the parking lot, and associated rest rooms and utilities without cost for two of the three years under examination.  Vendors at the bazaar had to pay an application fee and then a monthly fee for space at the bazaar.  The IRS, on examination asserted unrelated business income tax and rejected the foundation's view that the bazaar advanced the recruiting of students as mere speculation.  The IRS also rejected the foundation's claim that the bazaar lessened the burdens of government, citing Rev. Rul. 85-2 primarily because the bazaar is not required by the associated community college district.  Nor did the bazaar, as claimed by the foundation, relieve the distress of the elderly because they were the primary attendees at the bazaar.  The IRS rejected this claim primarily based on Rev. Rul. 77-246 and its factual distinctions.  The foundation made a fall-back claim that it was exempt from UBIT on the basis that its bazaar income was rent from real estate under I.R.C. Sec 512(b)(3).  The IRS rejected this view because the vendor fees were paid to have the opportunity to sell merchandise rather than to use real property.  Tech. Adv. Memo. 201544025 (Jul. 10, 2015).  

A New York appellate court recently granted summary judgment to a farm in a wrongful death action stemming from the death of a woman who exited her car to help an escaped calf. A newly born calf escaped and wandered near to or onto the road. A woman driving by the farm stopped her car in the southbound side of the road and exited her vehicle in an attempt to assist the calf. The woman was killed when a car in the northbound lane struck her. The parties agreed that the decedent and the calf were both in the northbound lane when the woman was struck. The woman’s husband filed a wrongful death and personal injury action against the farm, and the trial court dismissed the farm’s motion for summary judgment. On appeal, the court reversed, stating that although a farm can be liable for an escaped animal, liability could not be imposed upon a party who “merely furnishes the condition or occasion for the occurrence of the event but is not one of its causes.” The court found that any negligence on the part of the farm in allowing the calf to escape merely created the opportunity for the decedent to be standing in the road. It did not cause her to stand there. One justice dissented, stating that the farm had failed to prove as a matter of law that the decedent’s conduct was “of such an extraordinary nature or so attenuated that responsibility for the injury could not be reasonably attributed to the farm.  Hain v. Jamison, No. 14-02093, 2015 N.Y. App. Div. LEXIS 5939 (N.Y. App. Div. 4th Dep't July 10, 2015).

The plaintiff is a chicken grower that owned poultry barns and provided janitorial services with respect to raising chicks that the defendant supplied.  The plaintiff typically had chicks for five to six weeks when the defendant would then pick up the chickens and pay the plaintiff for the services provided.  The plaintiff would then prepare the facility for the next batch of chickens to be delivered.  The defendant retained the power under the contract to determine how many chickens to be delivered and could terminate the relationship with the plaintiff at any time for any reason on 90-days written notice.  In 2011, the defendant required its growers to upgrade their facilities to meet certain, heat, ventilation and other standards.  Consequently, the defendant sent the plaintiff two written notices describing the upgrade requirement and asking the plaintiff to reply concerning its intent.  However, the plaintiff never responded, claiming that it never received the notices.  No further chickens were delivered and the plaintiff's growing contract was placed on its "inactive" list.  The plaintiff sued for breach of contract and the defendant moved for summary judgment.  The trial court denied the motion.  At trial, the defendant moved for directed verdict which was denied.  The defendant renewed the motion at the close of all evidence, which was denied.  The jury ruled for the plaintiff finding that the defendant breached the contract for non-performance, that the plaintiff did not breach via repudiation, and that the plaintiff was entitled to $42,235.96 in damages.  The defendant motioned for judgment notwithstanding the verdict, which was denied.  The defendant appealed.  On appeal, the court affirmed.  The court noted that the contract stated that the defendant "agrees to deliver the FLOCKS (number and breed of which are to be determined by [defendant] in its sole discretion) to [plaintiff]."  As such, the court determined that it was not optional for the defendant to not deliver any chicks.  The court also reasoned that if the defendant had the right to not deliver any birds, that right would render other contract language meaningless - such as the language the gave the defendant the right to terminate the contract for with or without cause on 90 days notice.  The court also determined that the plaintiff did not breach the contract by repudiation (other growers also testified as to not receiving letters about the required upgrades) and that the defendant never gave 90-days notice to terminate.  The damage award was also upheld on the basis that the plaintiff was a top grower, could reasonable anticipate profits on chicks delivered to it and the jury award was based on the plaintiff's past performance.  Brock v. Johnson Breeders, Inc., No. COA14-914, 2015 N.C. App. LEXIS 549 (N.C. Ct. App. Jul. 7, 2015).

Under the tangible personal property regulations that became effective in 2014, the IRS declined to provide a percentage test for determining when there has been a replacement of a major component (or unit of property if the item has no major components) or substantial structural part of an asset (Treas. Reg. Sec. 1.263(a)-3) which would cause the associated expense to be capitalized.  However, in a guidance to examining agents, the IRS has established an 80 percent threshold for steam or electric generation property.  Thus, if 80 percent or more of a component (or unit of property if there is no component) of such property is replaced, then the expense must be capitalized under Treas. Reg. Sec. 1.263(a)-3(k). If less than 80 percent is replaced, the associated expenses are currently deductible.  LB&I-04-0315-002, impacting IRM 4.51.2 (Jul. 6, 2015). 

he defendant established Total Maximum Daily Load (TMDL) limits on nitrogen, phosphorus and sediment entering in the Chesapeake Bay and associated rivers and streams annually.  The impacted states also developed individual plans as to how they would achieve the regulatory limits along with establishing two-year milestones for achieving regulatory compliance.   The plaintiffs challenged the defendant's regulatory limits as exceeding the defendant's authority, but the trial court upheld the limits.   On appeal, the court affirmed on the basis that the limits did not eliminate state flexibility to make cleanup decisions and how to reach pollution reduction targets.  American Farm Bureau Federation, et al. v. United States Environmental Protection Agency, et al., No. 13-4079, 2015 U.S. App. LEXIS 11548 (3rd Cir. Jul. 6, 2015).


The debtor proposed a Chapter 12 reorganization plan under which he would avoid two secured debts.  When the debtor was not able to avoid the debts, he initially wanted more time to appeal but neither appealed nor filed an amended reorganization plan.  The bankruptcy trustee motioned to dismiss the case and the court agreed.  The court noted that the goal of Chapter 12 was to move the case promptly through the confirmation process.  The court noted that the debtor's failure to propose an amended plan after a year of Chapter 12 relief was grounds for dismissal under 11 U.S.C. Sec. 1208(c)(3).  The court also noted that the debtor had unreasonably refused to cooperate with the trustee when he failed to appear for his deposition.  The debtor had fired his legal counsel.  In addition, the debtor had not timely filed monthly reports and the bankruptcy estate lost value during the times of delay.  The court also believed that there was no reasonable likelihood of rehabilitation.  In re Haffey, No. 14-50824, 2015 Bankr. LEXIS 1850 (Bankr. E.D. Ky. Jun. 5, 2015).

The taxpayer at issue in this advice from the National IRS office invested in a real estate transaction via a multi-member LLC taxed as a partnership.  The transaction was financed and the creditors ultimately foreclosed.  The foreclosure triggered income to the taxpayer that the taxpayer treated as cancelled debt income potentially excludible from income under the insolvency exception of I.R.C. Sec. 108(a)(1)(B) because, as the taxpayer claimed, the debt was recourse and the I.R.C. Sec. 752 rules applied due to the borrower being the LLC.  On audit, the examining agent claimed that the debt was nonrecourse resulting in the income triggered on foreclosure being nonexcludible.  On review by the National Office, the IRS did not make a determination as to the classification of the debt because that issue needed to be developed further, particularly because the debt did not impose an unconditional personal liability on the LLC.  The National Office stated that the debt could be recourse because of the existence of guarantees and pledges, however.  In addition, the National Office concluded that the regulations under I.R.C. Sec. 752 have no application in determining the classification of debt to a partnership.  The National Office pointed out that it is improper to determine the status of debt at the partnership level for I.R.C. Sec. 1001 purposes based on whether the partners personally guarantee the debt.  Taxpayers cannot rely on footnote 35 of Great Plains Gasification Associates v. Comr., T.C. Memo. 2006-276.   In this situation, if the debt is nonrecourse, the entire amount of the debt is realized income eligible for long-term capital gain treatment, but cannot be excluded from income.  CCM 201525010 (Mar. 6, 2015).

The petitioners, a married couple, owned five rental properties and had a $30,146 net loss on the properties which they deducted in full. The IRS disallowed over $28,000 of the loss on the basis that the loss was a passive loss.  The court agreed with the IRS. The petitioners’ logbook, while showing that the petitioners spent 764 hours in rental activities during the tax year, illustrated that the work the petitioners performed were more akin to investor activities rather than material participation in the activity.  A management company was hired to manage four of the properties and a separate company was hired to find tenants and lease the other property.  The petitioners performed research activities with respect to investment opportunities.  Padilla v. Comr., T.C. Sum. Op. 2015-38.

In the fall of 2014, Maui County adopted an ordinance that banned the cultivation of genetically modified engineered organisms (GMOs).  In an earlier action,  the court entered an injunction preventing enforcement of the ordinance until the court decided the merits of a challenge to the ordinance.  In this case, the court invalidated the ordinance as unenforceable as being preempted by the Plant Protection Act and the regulations thereunder.  The ordinance, the court held, also exceeded the authority that the state had delegated to the county and that the fines specified in the ordinance were excessive.  Robert Ito Farm, Inc., et al. v. County of Maui, et al., No. 14-00511, 2015 U.S. Dist. LEXIS 84709 (D. Haw. Jun. 30, 2015).    

The plaintiffs bought a 40-acre tract from the seller with the seller reserving all minerals and royalties except that the seller conveyed "a 1/4 non-participating royalty interest in and to all of the royalty paid on production."  The seller then later conveyed his remaining mineral interest to the defendant.  An oil and gas lease was executed on the property, and the plaintiffs claimed that they were entitled to 1/4 of the royalty actually received that was paid on production.  The court agreed.  Leal v. Cuanto Antes Mejor, LLC, No. 04-14-00694-CV, 2015 Tex. App. LEXIS 6724 (Tex. Ct. App. Jul. 1, 2015).       


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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