Case Summaries

A recent case from the District Court of Colorado demonstrates problems that can arise without a written agreement. Similar to a contract, partnership agreements should include the name of the parties involved, the terms of partnership, and each partners’ duties. In this “he said, he said” case, a written agreement might have averted some problems, or at least made them easier to resolve.

Background

The plaintiff was a farmer and producer of specialty hemp seeds. The farmer alleged that he and the partner entered into an oral partnership agreement for the purpose of growing, selling, and distributing specialized hemp starts (young plants) across the United States using the farmer’s expertise and nationwide distribution network for the benefit of the partnership. The two agreed that the partner would pay the farmer a 10 percent management fee for overseeing the growing of the starts. The farmer soon determined that this was a “very bad choice” and brought this lawsuit claiming that the partner breached the agreement. The partner filed a motion to dismiss claiming that the farmer failed to join necessary parties and failed to state a claim.

At this early stage of litigation, the district court, without a written agreement, relied on the farmer’s verified complaint to determine whether the lawsuit must be dismissed. In the complaint, the farmer stated that after he entered into the agreement with the partner personally, the partner ordered for himself, for distribution to related entities, nearly $4.6 million worth of the partnership’s hemp starts and then did not pay for those plants. Additionally, the farmer alleged that the partner failed to pay the $406,621.45 management fee.

Failure to Join Indispensable Parties

The partner claimed that he was not liable for these debts because his LLC had entered into the partnership. Because of that, he argued that the LLC must be joined as a necessary party under Rule 19. Despite the farmer’s original complaint alleging that the starts were sold to both the partner and his LLC, there was no reason to believe the LLC was a necessary party. Accepting the farmer’s verified complaint as true, the court found that the partnership was solely between the farmer and the partner, not the LLC.

Failure to State a Claim

The partner claimed that the farmer failed to state a claim for breach of the partnership agreement, breach of fiduciary duties, and for promissory estoppel. Under Colorado law, a plaintiff cannot sue for breach of a partnership without first providing an accounting. Because the verified complaint claimed an accounting was provided, this claim was adequately pled. The court determined that, at this early stage, the allegations were to be taken as true and the claims should survive the motion to dismiss.

Leago v. Ricks, 2021 WL 1192939 (D. Colo. March 30, 2021).

Additional Hemp Resources

For an update on current hemp regulations, read Iowa Outdoor Hemp License Applications Due May 1.

Potential growers should also carefully consider whether there is a profitable market for hemp. For further reading, see Iowa State Extension article “The Opportunities and Challenges with Hemp” by Dr. Chad Hart.

For more information on the federal regulation of hemp, visit: https://www.usda.gov/topics/hemp.

For more information on growing hemp in Iowa, applying for a state license, and hemp in animal food, visit https://iowaagriculture.gov/hemp. All questions about applying for a hemp license or seed permit should be directed to hemp@iowaagriculture.gov or (515) 725-1470.

For questions about consumable hemp products, contact the Department of Inspection and Appeals at hemp-registration@dia.iowa.gov or 515.829.8899.


A farmer filed for Chapter 7 bankruptcy in 2019. Eighteen months later he filed a motion to convert to a Chapter 12 case. A Chapter 7 debtor may convert his case to a Chapter 12 case provided that he meets the requirements of that chapter. See 11 U.S.C. § 706(a), (d).

The court in this case did not discuss whether the debtor met the debt limits and income requirements of Chapter 12, but rather discussed the debtor’s behavior since filing for Chapter 7 liquidation. The United States Supreme Court has determined that 11 U.S.C. section 706(d) allows a court to deny a motion to convert when the debtor has engaged in bad faith conduct. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 374 (2007).

After filing for bankruptcy, the debtor attempted to hide valuable assets from the bankruptcy trustee, used the bankruptcy estate assets to continue to farm, and gave false information regarding his salary from his farm LLC as well as the amount of his liabilities. The court concluded that the debtor consistently acted in bad faith and allowing the debtor to convert to a Chapter 12 case without a trustee would be like “putting the fox in charge of the henhouse.” Thus, the court denied the debtor’s motion.

In re Steven Keith Jenkins, Debtor, 2021 WL 1845572 (Bankr. N.D. Miss. May 7, 2021)


After a wildfire occurred, the plaintiff claimed that hundreds of wild horses drank water from his Nevada land covered by a Bureau of Land Management (BLM) grazing permit. The United States owns and manages these horses. The plaintiff brought this lawsuit in the United States Court of Federal Claims alleging an illegal Fifth Amendment Taking for failing to manage the wild horses. At the time of the filing, the plaintiff claimed to have suffered over $800,000 in damages. The Claims Court dismissed the complaint for lack of subject-matter jurisdiction finding that government inaction cannot support a takings claim. The plaintiff appealed to the Court of Appeals for the Federal Circuit.

The Tucker Act gives the Claims Court jurisdiction to hear “any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). Agreeing with the Claims Court, the Federal Circuit concluded that a takings claim must be based on an affirmative action and cannot be based on government inaction. See St. Bernard Parish Gov. v. United States, 887 F.3d 1354, 1360–61 (Fed. Cir. 2018). The plaintiff’s allegations included the government’s failure to manage the horses and its denial to the plaintiff’s requests to remedy the situation. Additionally, the Tucker Act does not give the Claims Court jurisdiction for tort claims.

Bench Creek Ranch, LLC, v. United States, 2021 WL 1828065 (Fed. Cir. May 7, 2021). 


In this case, the IRS disallowed tens of millions of dollars in exclusions for cost of goods sold and business expense deductions claimed by one of the largest medical marijuana dispensaries in the country. Taxpayers cannot claim a deduction for ordinary and necessary expenses if the taxpayer is engaged in an unlawful business such as selling a controlled substance like marijuana. I.R.C. § 280E, 21 U.S.C. § 812(c). While acknowledging it was subject to section 280E, the dispensary, which operated a legal business under California law, petitioned the United States Tax Court for a redetermination of the IRS decision. The Tax Court affirmed the multi-million-dollar deficiency judgment resulting from the dispensary’s corporate income tax liabilities from tax years 2007 to 2012.

Appeal

On appeal to the United States Court of Appeals for the Ninth Circuit, the dispensary argued that section 280E was unconstitutional or, alternatively, that the denied deductions should qualify as cost of goods sold and therefore be excluded from its gross income. Historically, challenges to the constitutionality of section 280E have been unsuccessful. N. Cal. Small Bus. Assistants Inc. v. Comm'r, 153 T.C. 65, 72 (2019); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1201 (10th Cir. 2018). Here, the court declined to consider the dispensary’s 16th Amendment argument because it was not raised before the Tax Court.

Excludible Inventory Costs

The dispensary alternatively claimed that the approximately $7 million it incurred by purchasing and processing marijuana qualified as excludible inventory costs. The costs, for example, included employee compensation relating to the negotiation of bud purchases and the cost of laboratory testing of marijuana.

The Tax Court found that the dispensary “purchased” rather than “produced” the products it sold and that taxpayers reselling products that they “purchased” are entitled to include as cost only “the invoice price,” less certain discounts not relevant here, as well as “transportation or other necessary charges incurred.”  See Treas. Reg § 1.471-3(b). The dispensary did not appeal the Tax Court’s purchaser determination, but rather claimed that because its inventory method satisfied I.R.C. § 471 by meeting the general requirements for best accounting practice and clear reflection of income, the IRS could not force the dispensary into a particular cost method under Treas. Reg. § 1.471-3. The Ninth Circuit disagreed, stating that § 471 requires taxpayers to take inventory as set forth by the IRS. I.R.C. § 471(a). Therefore, taxpayers must follow the detailed regulations on how to compute their inventories. See Treas. Reg. §§ 1.471-1 to -11.

The dispensary next claimed that because the IRS did not challenge whether the dispensary’s inventory method failed to clearly reflect its income, the IRS could not require a particular accounting method. In rejecting this argument, the court explained that the IRS did not attempt to compel a particular accounting method, but rather disallowed an accounting method that was not in conformance with the applicable regulations.

Lastly, the dispensary argued that under Treas. Reg. § 1.471-3(d), it could include both its production and purchasing costs in the inventory costs. The court stated that § 1.471-3(d) only applies to industries “in which the usual rules for computation of cost of production are inapplicable.” Such industries include famers, some miners and manufacturers, and retail merchants that use the retail method of accounting. The court noted that while the normal inventory accounting rules may be unfavorable to the dispensary, it was still subject to those rules and regulations.

Patients Mutal Assistance Collect Corp. v. Comm'r, 2021 WL 1570288 (9th Cir. April 22, 2021).


In 2018, 62 landowners along the Mississippi River filed a lawsuit against the United States in the United States Court of Federal Claims. The plaintiffs claimed that the Army Corps of Engineers (Corps) committed an illegal taking by making improvements for navigability on the Middle Mississippi River which caused recurrent flooding on the plaintiffs’ property. The court of claims dismissed the complaint, finding that it was barred by the six-year statute of limitations governing actions under the Tucker Act. See 28 U.S.C. § 2501, 28 U.S.C. § 1491(a)(1).  

On appeal, the United States Court of Appeals for the Federal Circuit affirmed. A claim accrues when the alleged event causing the damage occurs and the plaintiff is aware, or should be aware, of the event. Under the stabilization doctrine, when a taking happens gradually, the claim does not accrue until the plaintiff is injured. The court found that 91 percent of the river improvements were in place by 2000, well outside of the six-year statute of limitations. The area had experienced recurrent flooding since the nineteenth century and there was no evidence any Corps action within the statutory six-year period exacerbated the flooding. Additionally, the court found that the plaintiffs should have known about the defendant’s potential liability because there was easily accessible public information dating back to the 1970s on the impact of river training structures.

Jackson-Greenly Farm, Inc. v. United States, 2021 WL 1546034 (Fed. Cir. April 20, 2021).


In 2020, the U.S. Supreme Court issued a ruling in a Clean Water Act (CWA) citizens’ suit against the County of Maui. County of Maui v. Hawai’i Wildlife Fund, 140 S. Ct. 1462 (2020). The plaintiffs claimed that the County of Maui’s wastewater reclamation facility discharged pollutants through groundwater into a navigable water in violation of the CWA. The Court ruled that a permit is required when there is “the functional equivalent of a direct discharge” and remanded the case for further proceedings.

On remand, the plaintiffs moved for summary judgment. The County of Maui claimed that the plaintiffs’ motion relied on a flawed 2013 groundwater tracer study. Arguing that the study was unreliable, the County of Maui petitioned for a pretrial evidentiary hearing. In denying the motion, the court ruled that there was no reason to decide the issue in advance of considering the pending summary judgment motion. The plaintiffs asserted that they did not rely on the study in their motion for summary judgment. The court stated that while it must perform a gatekeeping function to ensure that admitted scientific evidence is relevant and reliable, a pretrial evidentiary hearing was not necessary. The court noted that it might turn out that the court could perform its gatekeeping function when the disputed evidence is offered during the bench trial, which is scheduled for the fall. The case could also be decided on summary judgment without a trial.

Hawaii_Wildlife_Fund_v._County_of_Maui, 2021 WL 1299192 (D. Haw. April 7, 2021).


The plaintiffs in this case market products such as “tofurky,” “vegetarian ham roast,” and “vegan jerky.” In 2018, the Missouri Legislature amended its meat advertising regulation to criminalize plant-based and lab-grown meats from being misrepresented as a meat. See Mo. Rev. Stat. § 265.494(7). The plaintiffs brought this lawsuit challenging the constitutionality of the new statute, as it applied to them, and asked for a preliminary injunction. The district court denied the request finding that the plaintiffs’ marketing clearly indicated that the products do not contain meat; therefore, the statute did not prohibit their speech and the plaintiffs were not likely to succeed on their First Amendment claim.

On appeal, the plaintiffs claimed the district court applied the wrong legal standard and too narrowly interpreted the statute. After determining that the commercial speech standard applied to the plaintiffs’ claim, the Eighth Circuit next considered whether the plaintiffs’ products misrepresented meat and was therefore prohibited by the statute. The Missouri Department of Agriculture had issued guidance explaining that the new law did not prohibit packages which both contained a prominent disclosures that the product is “plant-based” and “made from plants” because the product did not misrepresent meat. The State did not claim that the plaintiffs’ products misrepresented meat. Additionally, the plaintiffs claimed that their products are “clearly labeled as plant based, vegan, or vegetarian.” Because it was unlikely the statute would be applied to their speech, the plaintiffs are unlikely to succeed on their merits of their as-applied First Amendment Claim. Therefore, the court affirmed the district court’s ruling denying the preliminary injunction.

Turtle Island Foods_v. Thompson, 2021 WL 1165406 (8th Cir. March 29, 2021).


Plaintiffs brought this citizen suit under the Clean Water Act (CWA) and against a coal company for discharging selenium and ionic pollutants from two mines. The plaintiffs claimed that the defendant exceeded its 402 permit limitations and its 401 certification as well as violated the Surface Mining Control and Reclamation Act (SMCRA). The West Virginia Department of Environmental Protection (DEP) issued two Orders of Compliance for exceeding selenium discharge limitations and a Proposed Consent Order to come into compliance. The defendant claimed these orders precluded the plaintiffs’ claims under section 309(g) of the CWA, which bars a citizen suit if a state has already begun prosecution under comparable state law or the state has already issued a final order imposing a monetary penalty. See 33 U.S.C. § 1319(g).

In rejecting the defendant’s claim, the court found that these orders did not cover the entire scope of the plaintiffs’ allegations, such as those involving ionic pollutants or the SMCRA. Additionally, the allegations that the Proposed Consent Order did address did not meet section 309(g) criteria. First, because the plaintiffs filed the citizen suit more than a year before the DEP sent the Proposed Order, the enforcement action did not predate the citizen suit. Moreover, the court had previously found that the state law was not comparable to the CWA because it “does not provide for the assessment of administrative penalties without the violator's consent.” Sierra Club v. Powellton Coal Co., LLC 662 F. Supp. 2d 514, 530 (S.D. W. Va. 2009). Alleged violators may terminate DEP enforcement action at any time and for any reason. Finally, none of the orders penalized the defendant, but instead gave the defendant the option to not enter into the proposed order at all. Because of this, the court found that the state enforcement did not preclude the plaintiffs’ suit.

Ohio Valley Environmental Coalition v. Lexington Coal Coal Co., 2021 WL 1093631 (S.D.W. Va. March 22, 2021).


Plaintiffs claimed that several egg-producer trade groups and a large egg producer violated the Sherman Act, 15 U.S.C. § 1, by price-fixing the cost of eggs. After trial, the jury instructions and verdict form asked if the defendants agreed to conspire to reduce the supply of eggs by 1) taking several short-term steps to reduce the supply of hens and chicks, 2) requiring producers to follow certain guidelines to become United Egg Producer (UEP) certified, and 3) coordinating an export program to decrease the domestic supply of eggs. The jury found that the defendants did not conspire to reduce the supply of eggs.

On appeal, the plaintiffs claimed the use of the word “and” in the jury instructions and verdict form did not allow the jury to find a conspiracy occurred unless the plaintiffs proved all three of the aforementioned allegations. However, the district court consistently instructed the jury on the correct components of a conspiracy. Therefore, any error on a jury form did not affect the outcome and was harmless.

The plaintiffs also claimed that the district court erred by failing to instruct the jury that defendants’ conduct was a per se violation of the Sherman Act. The court disagreed, however, ruling that the per se rule is “appropriate only after courts have had considerable experience with the type of restraint at issue, and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason.

In Re: Processed Egg Products Antitrust Litigation, 2021 WL 960730 (3rd Cir. March 15, 2021)


As part of the ongoing litigation against Murphy-Brown and its parent company, Smithfield Foods, 20 plaintiffs brought this lawsuit against the hog integrator seeking compensatory and punitive damages for trespass, negligence, civil conspiracy, and unjust enrichment. The plaintiffs claimed that the swine owned by the defendants at the nearby Vestal Farm caused unreasonable odor, dust, flies, and noise. The defendant filed a motion to dismiss, claiming that the plaintiffs failed to join an indispensable party and for failure to state a claim.

The defendants claimed that the owner/operator of Vestal Farm is a necessary and indispensable party under Federal Rule of Civil Procedure 12(b)(7). In its own motion, the Vestal Farm operator claimed that it cannot protect its farm and financial interests unless allowed to join in the lawsuit. The court found that the operator’s interests were not directly related because the plaintiffs did not challenge the operator’s actions or swine production agreement, but only sought financial compensation from the defendants. Therefore, the operator was not a necessary party.

The defendants also argued that the plaintiffs’ claim should be dismissed under Rule 12(b)(6) because they failed to state a claim. The North Carolina Right to Farm Act (RTFA) bars nuisance lawsuits against agricultural operators if the action is not brought within one year of the operation’s establishment. N.C. Gen. Stat. § 106-701(a)(3). A hog operation has existed at Vestal Farm for decades. The defendants claim that the plaintiffs’ claims “are merely disguised nuisance claims” and should be dismissed under the RTFA. The court found that torts such as nuisance and trespass can share the same elements. Additionally, the RTFA specifically excludes claims of “negligence, trespass, personal injury, strict liability, or other cause of action for tort liability other than nuisance.” Id. at § 106-702(d). Therefore, the plaintiff adequately stated a claim.

Barden v. Murphy Brown, LLC, 2021 WL 965915 (E.D.N.C. March 15, 2021)


Plaintiffs filed this citizen suit under the Clean Water Act (CWA) against a poultry rendering facility for discharging pollutants in excess of its NPDES permit. The defendant, admitting that it had been in continuance noncompliance since the permit took effect, filed for summary judgment claiming that the citizen suit was precluded by an ongoing state enforcement action.

A citizen suit is barred when a state has begun enforcement under a state law “comparable” to the CWA. 33 U.S.C. § 1319(g)(6)(A). The defendant claimed that the Pennsylvania Department of Environmental Protection (PADEP), through two Consent Order and Agreements, had commenced prosecution against the defendant under the Clean Streams Law and that law was comparable to the CWA.

The court acknowledged that there is a circuit split on what findings a court must make to determine comparability. The “overall comparability” standard takes a holistic approach while the “rough comparability” standard requires the state law to be comparable to each of the three provisions found in 33 U.S.C. § 1319(g)(6) regarding penalty assessment, public participation, and judicial review. The court found the “rough comparability” standard more appropriate because it provides uniformity, reduces uncertainty for litigants, and is the most logical interpretation of § 1319(g)(6) requiring that the state law be comparable to that subsection.

After analyzing the two laws, the court ruled that because the Clean Streams Law does not allow adequate public participation, the law is not comparable to the Clean Water Act. Therefore, the court denied the defendant’s motion for summary judgment, and the citizen suit was allowed to continue.

Lower Susquehanna_Riverkeeper v. Keystone Protein Co., 2021 WL 632734 (M.D. Penn. February 18, 2021).


During a Chapter 12 bankruptcy proceeding, debtors petitioned the court to use cash collateral to pay for the post-petition expenses they had incurred. They also requested to use the cash for ongoing farm expenses and family bills until a bankruptcy plan was implemented. A court must consider whether allowing a debtor to use cash collateral creates inadequate protection for the creditors. 11 U.S.C. § 363(e). A substantial equity cushion between the value of the collateral and the total amount of the liens can demonstrate that adequate protection exists. The creditors in this case had a $196,830 equity cushion or 5.69% of the total debt.

In the petition, the debtor claimed to have over $382,000 of cash collateral. However, the debtor’s Chapter 12 plan claimed that the debtors had $457,000 in cash collateral. The debtors could not explain this discrepancy or why they could not use the missing $75,000. Additionally, the debtors did not apply for 2021 financing for the farming operation. They would continue to need to use the cash collateral which would further erode the equity cushion. Therefore, because the proposed use of the cash collateral created substantial risk for the creditors, the court denied the motion. However, the court was willing to consider a two-month use of cash collateral if the debtors could show certain prerequisites.

In the Matter of Justin Dale Raymer and Linda Kay Raymer, Debtors, 2021 WL 510198 (Bankr. D. Neb. Feb. 10, 2021)


A debtor filed a Chapter 13 bankruptcy proceeding. His sister filed a claim asserting that she had a $42,433 lien under Montana law against the debtor’s brand and branded livestock. The claim arose from a state district court order against the debtor for breaching a settlement agreement after he allegedly misappropriated cattle sale proceeds from the siblings’ ranching operating. The bankruptcy court, finding that the sister had a general unsecured lien, affirmed the debtor’s Chapter 13 plan which omitted the sister as a secured creditor. The sister appealed claiming the bankruptcy court erred in finding she lacked a secured lien.

A bankruptcy court will determine whether a creditor has a secured claim based on applicable state law. Bankruptcy laws will then determine the treatment of secured claims. See 11 U.S.C. § 506(a). Under Montana law, a judgment lien is not created in personal property until the debtor either seizes the property or leaves notice of attachment with the debtor. The sister did neither of these. She did, however, obtain a writ of execution from the state district court which directed the Montana Department of Livestock to satisfy the judgment using brands owned or maintained by the debtor. However, there is no Montana law that creates a lien on a brand or on livestock by doing so. Because the sister lacked a secured claim, the court affirmed the debtor’s Chapter 13 plan.

Schweigert_v._Schweigert, 2021 WL 505633 (D Mont. Feb. 11, 2021)


Ranchers-Cattlemen Action Legal Fund (R-CALF) brought this lawsuit claiming that the beef checkoff assessment program violated the First Amendment by requiring R-CALF members to subsidize speech with which they disagreed. The court granted a preliminary injunction while it determined the amount of control the USDA exerted over state beef councils (SBC). The USDA then entered into Memoranda of Understanding (MOUs) with several SBCs. Because the MOUs gave the USDA a level of control so that the SBCs’ advertising qualified as government speech, the court later granted the USDA’s motion for summary judgment. R-CALF petitioned the court seeking attorney fees and costs for obtaining the preliminary injunction under the Equal Access to Justice Act (EAJA). See 28 U.S.C. §2412.

The EAJA is a fee-shifting statute awarding attorney fees, costs, and other expenses for parties which prevail against the United States. The party must show that it is the prevailing party and that the Government’s position was not substantially justified. Even though the court vacated the injunction after the USDA voluntarily chose to enter into the MOUs, the court found R-CALF was the prevailing party because the injunction caused the USDA’s change of action which directly benefited R-CALF. The court also found that the USDA’s litigation position was not substantially justified. The USDA claimed it had sufficient control over the SBCs for the promotions to be considered government speech not subject to First Amendment protections. However, the court did not grant the USDA’s motion for summary judgment, but instead granted R-CALF’s motion for a preliminary injunction, because the USDA did not establish it had sufficient control. The court awarded $145,428.08 in attorney fees and $5,344.17 in costs.  

Ranchers-Cattlemen Action Legal Fund v. Vilsack, 2021 WL 4611 (D. Mont. Feb. 9, 2021)


Intending to get back to his agrarian roots, a successful banker purchased a 156-acre tract of land which had been used as a timber farm and cattle operation. From 2004 to 2014, the taxpayer reported $1.5 million in losses from his farm, primarily in the form of noncash expenses. The IRS audited the taxpayer for tax years from 2004 to 2008, disallowing the farm’s deductions because the evidence showed that taxpayer’s did not engage in the farming activity for profit.

On appeal, the tax court affirmed. If an activity is not engaged in for profit, an individual cannot deduct the expenses related to the activity. 26 U.S.C. § 183. The court ruled that many factors weighed against the taxpayer. The taxpayer had very limited financial records, no business plan, and failed to implement any changes to the operation despite substantial yearly losses. Despite a family history of farming, the taxpayer lacked experience in managing a timber farm or cattle operation. Although the taxpayer did receive advice on the timber operation, it focused more on timber care rather than the timber business.

While there can be losses due to unforeseen circumstances, the farm’s history showed that the losses were not unexpected, but very consistent for a decade. Additionally, the taxpayer did not show any profit in those ten years. The taxpayer earned a substantial income as a banker and the losses from the farm activity resulted in significant tax savings. Finally, the court found that the taxpayer enjoyed farming as a retreat from his stressful job as a banker. This, coupled with the fact that the business was extremely unlikely to be possible, all weighed against the taxpayer.

Whatley v. Commissioner, T.C. Memo. 2021-11 (Jan. 28, 2021).


From 2007 to 2011, a taxpayer reported net losses for her agricultural pursuits on a Schedule F. For 2012 and 2013, the taxpayer and her husband filed joint returns on Form 1040. The taxpayer claimed $1,068 in farm activity income in 2012 for the sale of excess eggs she did not need and $4,800 in 2013 for the sale of several cows. She also reported deductible expenses for both those years and claimed the losses as a deduction. The IRS disallowed the deductions because it did not believe the taxpayer incurred the losses carrying on a trade or business. The taxpayer appealed.

From 2007 to 2011, the taxpayer raised chickens for meat. She only reported one sale in 2011. The taxpayer switched to raising chickens for egg production, but decided that was financially unfeasible because of the increasing price in chicken feed. She then switched back to raising chickens for meat and began growing her flock. The taxpayer intended to begin selling the product in 2014, but wild dogs destroyed most of her flock that year.The taxpayer also experimented with raising verious fruits and vegetables and cattle on her farm, but those activities were not successful.

The Internal Revenue Code allows a deduction for all ordinary and necessary expenses incurred carrying on a trade or business. 26 U.S.C. § 162(a). The IRS disallowed the taxpayer’s deductions finding that she did not have a true profit motive and her business operation had not yet started in 2012 and 2013 when the deductions were claimed. On review, the tax court found that despite the lack of revenue, the wife did intend to profit. However, startup costs are not currently deductible. 26 U.S.C. § 195(a). Startup costs include cost incurred when starting a business and may be allowed as a deduction prorated equally over a 15-year period once the business begins. 26 U.S.C. § 195(b). The court found that the taxpayers business never moved beyond the initial startup stage. In 2012 and 2013, the taxpayer was still planting test crops and investigating business opportunities because none of her attempts had been successful yet. Because most of the expenses reported were startup expenses, the court affirmed the denial of the deductions.

Costello v. Commissioner of Internal Revenue, T.C. Memo. 2021-9 (Jan. 25, 2021).


A federal district court recently denied an egg farm’s motion to dismiss a lawsuit alleging that neighbors were damaged by the flow of polluted wastewater coming from the egg farm onto their properties. Specifically, the plaintiff neighbors allege that the egg farm violated the Clean Water Act (CWA) by allowing waste and water runoff containing pollutants to run across their property and into a creek recognized as “waters of the United States.” The CWA citizen suit also includes state allegations of nuisance, negligence, and trespass and seeks injunctive and monetary relief. The egg farmers moved to dismiss, claiming that there was no ongoing violation of the CWA and that the California Regional Water Quality Control Board’s (RWQCB) grant of a conditional waiver for discharges from an animal operation demonstrated that there was no CWA violation.

The court found that the plaintiffs provided sufficient allegations of a pattern of noncompliance under the CWA to avoid the motion to dismiss. In seeking to have the case dismissed as moot, the egg farmers had a “heavy burden” to show the alleged behavior would not happen again. The egg farmers submitted evidence of the RWQCB application stating that manure generated on the property was stored on a tarp, covered if precipitation was forecasted, and disposed of every two weeks. Additionally, the egg farmers claimed that the grant of the waiver demonstrated that there was no CWA violation. The court found that the waiver, as a public record, was a proper subject of judicial notice, but because the parties disagreed over the facts of the document, the egg farmers did not meet their burden to show “the allegedly wrongful behavior could not reasonably be expected to recur.” Because the court denied the motion to dismiss the CWA claim for mootness, the court also retained jurisdiction of the state claims.

Farrar_v._Fluegge_Egg_Ranch_3, Inc., 2020 WL 7869455 (S.D. Cal. Dec. 31, 2020).


In a Chapter 12 reorganization, dairy farmers filed a plan proposing the re-amortization of a Farm Service Agency (FSA) mortgage on their homestead with payments made directly to FSA. The trustee objected, claiming that the payments must be made through the trustee because FSA was an impaired creditor. If a debtor directly pays a creditor, the trustee does not collect fees on the payments.

The court noted that the plain language of the statute allows the debtor or the trustee to make payments to creditors under a Chapter 12 plan. The court recognized, however, that the courts have been split as to when and if a debtor can make direct payments to an impaired creditor. The court noted three approaches: (1) debtors cannot make direct payments to impaired creditors; (2) debtors can pay secured creditors directly regardless of impairment; or (3) whether direct payments should be allowed must be determined case-by-case.

The court opted to follow number three, the majority approach, and based its determination on the factors set forth in In re Pianowski, 92 B.R. 225 (Bankr. W.D. Mich. 1988). The court found that while the debtors had not supplied various financial reports, they still had time to provide the paperwork because the plan was not yet confirmed. Additionally, the following factors weighed in favor of the debtors: the debtors’ good faith to reorganize; FSA’s legal sophistication as a creditor to monitor payments and consent to the plan; the money saved on behalf of the debtors by making direct payments and avoiding trustee fees; and the small risk of abuse of the bankruptcy system. Based upon this analysis, the court affirmed that the debtors could make direct mortgage payments to FSA.

in_Re_Spindler, 2020 WL 7765808 (Bankr. W.D. Wis. Dec. 28, 2020)


Plaintiffs along the Missouri River brought this lawsuit against the United State government for an unconstitutional taking in violation of the Fifth Amendment. The plaintiffs claimed that the changes the U.S. Army Corps of Engineers made under the Missouri River Recovery Program (MRRP) to comply with the Endangered Species Act (ESA) resulted in a flowage easement. Through the plaintiffs’ testimonies, the court determined the Corps' alterations to the Missouri River was the cause of the flooding. Additionally, because these changes and the MRRP program are still in place, the intermittent flooding will continue.

Takings Liability

The court next determined whether the flooding amounted to a taking of a flowage easement. The court examined several factors identified in Arkansas Game & Fish Commission v. United States, including the severity of the action, the duration of the harm, the foreseeability of the harm, the character of the land, and reasonable investment-backed expectations. (See 568 U.S. 23, 38-39). The government claimed that even though the flooding the plaintiffs’ land experienced was severe, the government’s contribution to the flooding was relatively small and did not meet the level required for this factor. The court disagreed, finding that the testimonies of the plaintiffs and an expert witness demonstrated that not only did the Corps' actions cause the flooding, but caused more severe flooding than the properties had previously experienced. The flooding caused by the MRRP caused the plaintiffs to lose crops and impacted their farming operation. The duration of the intermittent flooding was not temporary, but instead permanent, and would continue into the foreseeable future. The court found the duration factor to weigh in the plaintiffs’ favor. Additionally, flooding was a foreseeable consequence of the Corps’ actions under the MRRP. These actions included changing the hydraulics of the Missouri River or making it shallower or slower which foreseeably could cause the harm the plaintiffs experienced. Additionally, despite the testimony from an environmental historian on behalf of the government stating that flooding occurred on land next to the Missouri River since 1867, the court found the MRRP changed the character of the land due to the increase and severity of flooding. Lastly, the court considered whether the plaintiff’s had “investment-backed expectations regarding the land's use.” This analysis includes determining whether the expectations were reasonable and if the government interfered with those expectations. The plaintiffs’ owned the property and used it as farmland investing a substantial amount of money every year in crop production. The plaintiffs invested in their farmland under the assumption the flood patterns pre-MRRP would continue. The plaintiffs’ expectation that their farmland would not experience increased flooding was reasonable because the Corps’ change in prioritizing habitat protection under the ESA over the historical priority of flood protection was unexpected. Additionally, government publications showed that the United States expected constituents along the Missouri River to be protected after the extensive work was completed to make the land in that area flood-free. The government interfered with these expectations by altering the Missouri River and causing crop loss for the plaintiffs. Therefore, a taking of a flowage easement had occurred.

Just Compensation

Because a taking had occurred, the plaintiffs were entitled to just compensation. The court found the plaintiffs were entitled to compensation for diminution in value of their property, but were not entitled to compensation for crop losses and lost profits based on reduced yields, damage to structures, damages to equipment, flood prevention expenses, and flood reclamation expenses because those are indirect consequential damages.

Idekar Farms, Inc., v. United States, 2020 WL 7334407 (Fed. Cl. 2020).


The IRS assessed the owner of a stone mason business for tax deficiencies which occurred between 2005 through 2008. The taxpayer claimed the three-year statute of limitations barred the assessment. The district court found the three-year statute of limitation period never started because the taxpayer did not file the “the return,” specifically the required Form 945 to report backup withholdings for the subcontractors the taxpayer had hired. The 5th Circuit reversed, finding the taxpayer had filed the required Forms 1040 and 1099 for those years, and those forms contained sufficient information to alert the IRS that the taxpayer was liable for taxes assessed as well as the amount of the tax liability. This amounted to a “return” which started the statute of limitations period.

Quezada v. IRS, 2020 WL 7310680 (5th Cir. 2020).


United States farm laborers brought claims against a farmer and his agricultural business for breach of contract, civil conspiracy, and violations of the Migrant and Seasonal Agricultural Worker Protection Act (AWPA). The defendant entered into an agreement with an agricultural labor contractor to hire seasonal workers on his behalf under the H-2A work-visa program. Because many domestic workers expressed interest in the job, the contractor was obligated to prioritize them in the hiring process under the H-2A program requirements. The contractor hired the plaintiffs at the rate specified in the work contract submitted during the H-2A application process. This rate was higher than both the state and federal minimum wage. The defendant then fulfilled his seasonal labor needs through a different contractor paying minimum wage to the laborers and did not provide any work to the plaintiffs.

The district court granted summary judgment in favor of the agricultural business on all claims finding that the defendant did not have control over the contractor and was therefore not liable for the actions of an independent contractor. The Tenth Circuit reasoned that because this was a contract claim rather than a tort claim, control was not the crucial element, but whether an agency relationship existed between the defendant and the contractor. Because there was a genuine issue of material fact whether contractor had actual or apparent authority to enter into contracts with the plaintiffs on the defendants behalf, the court reversed the grant of summary judgment.

The AWPA prohibits an agricultural employer from violating the terms of the working arrangement with a migrant agricultural worker. The plaintiffs claimed the defendant violated this regulation as both an agricultural employer and joint employer with the contractor when he failed to provide the plaintiffs with work as specified in the work contract. The defendant agreed he was an agricultural employer, but argued he did not enter into a contract with the plaintiffs or jointly employ them with the contractor. The court found that the defendant was not a joint employer with the contractor because he did not actually employ the plaintiffs at any time. However, the court found that whether an agency relationship existed with contractor was the “threshold issue” in determining if the agricultural business could be accountable. Therefore, the court reversed the grant of summary judgment on the breach of contract and AWPA claims. The court affirmed the grant of summary judgment on the conspiracy claim because there was no evidence of an agreement between the defendant and the contractor.

Alfaro-Huitron v. Cervantes Agribusiness, 2020 WL 7295709 (10th Cir. 2020).


Plaintiffs sued manufacturers and major food retailers alleging a violation of state consumer-protection statutes through the labeling of a product advertising “100% Grated Parmesan Cheese.” These products actually contained between four to nine percent of cellulose powder and potassium sorbate and this information was available on the ingredient list on the back of the package. The district court dismissed the plaintiffs’ claim finding that the “100%” claim was clarified on the ingredient list and that a reasonable customer would know that product was not 100% cheese because it was sold in the unrefrigerated areas of stores. On appeal, the Seventh Circuit Court of Appeals found the “100%” labeling could be deceptive to the average consumer. Therefore, because whether the labeling actually was misleading was a question fact, the court reversed the grant of summary judgment.

Bell v. Publix Super Markets, Inc., 2020 WL 7137786 (7th Cir. 2020).


After the Texas State Board of Medical Examiners ordered a veterinarian to stop providing veterinary advice over email and phone in violation of state law regarding telemedicine, the veterinarian filed a lawsuit claiming a violation of his First Amendment, equal-protection, and substantive-due-process rights. The district court dismissed for failure to state a claim.

In 2017, Texas revised the state law to allow medical doctors, but not veterinarians, to practice some forms of telemedicine. The next year, the U.S. Supreme Court ruled that requiring employees at crisis pregnancy centers to notify women of low-cost services offered by the California clinics, including abortions, was unconstitutional. After these changes, the plaintiff brought this lawsuit alleging constitutional violations of equal protection and free speech. The district court once again dismissed the plaintiff’s claims and the plaintiff appealed.

To succeed on an Equal Protection claim, two groups must be similarly situated, yet the plainittif is treated differently. Because there is a rational basis to regulate medical doctors and veterinarians differently, the court ruled that the two are not similarly situated. The court affirmed the dismissal of the Equal Protection claim. First Amendment scrutiny is only given if the law regulates speech, not conduct. As such, the court reversed the grant of summary judgment and remanded the case to allow the district court to determine whether the Texas law regulated conduct or speech of veterinarians.

Hines v. Quillivan, 2020 WL 7054278 (5th Cir. 2020).


Property owners neighboring a large swine operation brought a lawsuit in 2018 against the hog integrator Murphy-Brown. The plaintiffs claimed loss of use and enjoyment of their properties and brought claims of nuisance. A jury awarded $75,000 in compensatory damages and $5 million in punitive damages to each of 10 plaintiffs. Because North Carolina law caps punitive damages to the greater of three times the compensatory damages or $250,000, the punitve damages were reduced to $2.5 million. Murphy-Brown appealed and sought a new trial on several grounds. The court affirmed the jury verdict, but remanded for a rehearing on the amount of the punitive damages. [Murphy-Brown has since ended the case by settling with these and other plaintiffs.]

Statute of limitations:

On appeal, Murphy-Brown claimed North Carolina’s three-year statute of limitations for trespass barred the plaintiffs’ “continuing” nuisance claim. A continuing nuisance is a single event while a reoccurring nuisance involves repeated injuries. Although the first nuisance action occurred more outside of the three year timeline, the court found the statute of limitations did not bar the plaintiffs’ claims because the odor, noise, and pests were a repeated invasion rather than a single occurrence.  

Right to Farm Act Amendment:

While this case was ongoing, the North Carolina General Assembly amended its Right to Farm Law to limit compensatory damages in nuisance lawsuits to the reduction in fair market value or fair rental value of the property. Murphy-Brown claimed this amendment limited the amount of compensatory damages the plaintiffs could receive in the current case 

Looking to the title of the amendment, “An Act to Clarify the Remedies Available in Private Nuisance Actions Against Agricultural and Forestry Operations,” Murphy-Brown claimed the amendment’s purpose was to clarify existing law. The court found that the amendment was a change to the law rather than a clarification. Additionally, because the amendment specifically stated it only applied to lawsuits brought after the date it became law, the court found the amendment did not retroactively apply to this case.

Willful and Wanton Conduct

Murphy-Brown also appealed the award of punitive damages claiming there was insufficient evidence to meet the willful or wanton conduct element required to award punitive damages. The court found that the defendant had knowledge of the harms of its farming practices and policies and intentionally disregarded the harm these methods could cause.

Financial Evidence

Murphy-Brown last challenge involved the admittance of its “corporate grandparent” Smithfield’s and “ultimate parent entity” WH Group’s financial information. The court found the information regarding the finances and executive compensation was relevant when determining nuisance liability and whether Murphy-Brown would face undue hardship in abating the nuisance. However, the court found this information could sway a jury when calculating punitive damages. Therefore, that evidence should have been excluded when determining punitive damages. The court remanded for rehearing on that issue.

McKiver v. Murphy Brown, LLC, 980 F.3d 937 (4th Cir. 2020).


The petitioner is a lawyer that also purchased a 1,300-acre farm.  The petitioner entered into a crop-share arrangement with a tenant under which the tenant had responsibility for farming decisions.  The petitioner spent time during the tax years in issue performing maintenance activities on the farm including cutting vegetation, maintaining fences and shooting wild hogs.  Based on the petitioner's reconstructed records, the court was convinced that the petitioner put in more than 100 hours into the activity and that no one else put in more hours than the petitioner.  Thus, the petitioner was deemed to materially participate in the activity and the losses from the activity were not limited by the passive loss rules.  Leland v. Comr., T.C. Memo. 2015-240.


This case involved the donation of two permanent "conservation" easements inside a gated residential development on developed golf courses in North Carolina that were expanding with the stated purpose to protect a "natural habitat" or provide "open space" to the public.  The sole issue in the case was whether the conservation purpose of I.R.C. Sec. 170(h) had been satisfied by virtue of the easements protecting the natural habitat of various plant and animal species, including the Venus Flytrap.  The donated easements at issue generated claimed deductions of approximately $8 million.  The court noted that while the easements did include some stand of longleaf pine, the easement terms allowed the pines to be cut back from the fairways and the surrounding housing development.  Also, the court opined that the easement did not contain any requirement that an active management plan be followed to mimic the effects of prescribed burning that would allow the pines to mature in a stable condition.  Also, the court stated that the I.R.C. Sec. 170 regulations concerning a "compatible buffer" that contributed to the viability of a conservation area were not satisfied.  While the mere fact that a golf course was involved did not negate the possibility of a valid conservation easement donation deduction, the fact that the golf course was in a gated community eliminated the argument that the donation was to preserve "open space" for the general public.  The court, while denying the claimed deductions, however, did not uphold the imposition of penalties.  Atkinson v. Comr., T.C. Memo. 2015-236.     


The parties executed a partition line fence agreement and recorded it in the fall of 2013.  Under the agreement, the plaintiff was responsible for a portion of the fence between their farms and the defendant was also responsible for a specific portion.  The newly constructed fence was to be a "tight fence" and specifics were provided as to how the fence was to meet that requirement.  As for the defendant, the agreement not only specified the portion of fence the defendant was responsible for, but set deadlines for having the fence built to those specifications.  The defendant hired a fence builder, but never showed the agreement to the builder before leaving to winter in Arizona.  The defendant's portion of the fence was not built to specification and was not built in a timely manner.  The plaintiff sued and the trial court awarded damages for work done to bring the fence into compliance, for repair of a tile line, for reseeding and for lost rent in 2014.  On appeal, the court affirmed.  Brookview Farms, LLC v. Wennes, No. 14-1318, 2015 Iowa App. LEXIS 1159 (Iowa Ct. App. Dec. 9, 2015).


The plaintiff obtained shares of stock upon demutualization of an insurance company.  The plaintiff later sold some of the shares of stock and the defendant asserted that the plaintiff's income tax basis in the stock was zero triggering 100 percent gain on the sale of the shares.  The trial court rejected the defendant's position, and set forth the computation for calculating basis in stock shares received upon demutualization.  The court grounded the computation of stock basis in the same manner in which  the insurance company determined the value of demutualized shares for initial public offering (IPO) for purposes of determining how many shares to issue to a policyholder.  Based on that analysis, the court noted that the company calculated a fixed component for lost voting rights based on one vote per policy holder and a variable component for other rights lost based on a shareholder's past and anticipated future contributions to the company's surplus.  The court estimated that 60 percent of the plaintiff's past contributions were to surplus and 40 percent was for future contributions to surplus which the plaintiff had not actually yet paid before receiving shares and are not part of stock basis; thus, plaintiff's basis in stock comprised of fixed component for giving up voting rights and 60 percent of the variable component representing past contributions to surplus the end result was that the plaintiff's stock basis was slightly over 60 percent of IPO value of stock.  On further review, the U.S. Court of Appeals for the Ninth Circuit reversed in a split opinion.  The court determined that the plaintiff's didn't pay any additional amount for the mutual rights and that treating the premiums as payment for membership rights was inconsistent with how tax law treats insurance premiums. The court noted that under the tax code gross premiums paid to buy a policy are allocated as income to the insurance company and no portion is carved out as a capital contribution.

Conversely, the policyholder can deduct the "aggregate amount of premiums" paid upon receipt of a dividend or cash-surrender value. No amount is carved out as an investment in membership rights. Because of that, the court held that the plaintiff's couldn't have a tax-free exchange with zero basis and then an increased basis upon later sale of the stock. Accordingly, the court held that the trial court erred by not determining whether the plaintiffs paid anything to acquire the mutual rights, and by estimating basis by using the stock price at the time of demutualization instead of calculating basis at the time of policy acquisition. Thus, because the taxpayers did not prove that they paid for their membership rights as opposed to premiums payments for the underlying insurance coverage, they could not claim any basis in the demutualized stock.  Dorrance v. United States, No. 13-16548, 2015 U.S. App. LEXIS 21287 (Dec. 9, 2015), rev'g., No. CV-09-1284-PHX-GMS, 2013 U.S. Dist. LEXIS 37745 (D. Ariz. Mar. 19, 2013).


The petitioner, a banker, and spouse contributed a permanent conservation easement on more than 80 acres to a land trust, valuing the easement at $1,418,500 million.  They claimed a phased-in deduction over several years.  The IRS, on audit, proposed the complete disallowance of the deduction and sought a 20 percent penalty or a zero valuation of the easement and a 40 percent penalty for gross overvaluation of the easement.   IRS Appeals took the position that the 40 percent penalty should apply due to a zero valuation of the easement, and that if that weren't approved judicially a 20 percent penalty for valuation misstatement should apply.  The parties stipulated to a easement valuation of $80,000 and that the petitioner had no reasonable cause defense to raise against the 40 percent penalty, but that the defense could apply against the 20 percent penalty.  The court upheld the 40 percent penalty.  The IRS also conceded, in order to clear the table for the penalty issue, that the petitioner, a non-farmer, was not subject to self-employment tax on CRP rental income for years 2007, 2008, 2009 and 2010.  The concession was made after the IRS issued it's non-acquiescence to the Morehouse decision in the 8th Circuit in which the court determined that CRP rents in the hands of a non-farmer were not subject to self-employment tax.  Legg v. Comr., 145 T.C. No. 13 (2015).     


The IRS has announced on its website that for estate tax returns (Forms 706) filed on or after June 1, 2015 that account transcripts will substitute for an estate closing letter.  Registered tax professionals that use the Transcript Delivery System (TDS) can use the TDS as can authorized representatives that use Form 4506-T, and requests will be honored if a Form 2848 (Power of Attorney) or Form 8821 (Tax Information Authorization) is on file with the IRS.  The IRS provided instructions and noted that Transaction Code 421 on the website will indicate that the Form 706 has been accepted as filed or that the exam is complete.  IRS also noted that a transcript can be requested by fax or by mail via Form 4506-T to be mailed to the preparer's address.  Certain items are necessary to document that the preparer has the authority to receive the transcripts - letters testamentary (or equivalent), Form 56 (Notice Concerning Fiduciary Relationship), Form 2848 and any other documentation that authorizes the party to receive the information.  The IRS noted that its decision whether or not to audit any particular Form 706 is usually made four to six months after the Form 706 is filed, and that the transcript should not be requested until after that time period has passed.  IRS Webpage, "Transcripts in Lieu of Estate Closing Letters," (Dec. 4, 2015).


The defendant is a large herb grower that became the subject of a class action accusing the defendant of mixing organic and conventionally grown herbs in the same package and selling the package at a premium as "fresh organic."  The class sued under state (CA) unfair competition and false advertising laws.  The trial court held that the class action was preempted by federal law governing organic labeling.   On appeal, the CA Supreme Court reversed.  The court noted that the federal Organic Foods Act displaced state law concerning organic standards and thereby created a federal definition of "organic" and created a federal organic certification procedure.  The court, however, determined that federal law did not either explicitly or implicitly preempt state rules for mislabeling.  Likewise, the court held that state consumer protection law furthered the Congressional objective of ensuring reliable organic standards.  Quesada v. Herb Thyme Farms, No. S216305, 2015 Cal. LEXIS 9481 (Cal. Sup. Ct. Dec. 3, 2015).   

 


The plaintiffs, a consortium of environmental activist groups and community organizers, sued the Environmental Protection Agency (EPA) for not responding to their 2011 petition that alleged that ammonia gas from confined animal feeding operations (CAFOs) endangered public health and welfare, should be designated as a "criteria pollutant" under the Clean Air Act (CAA), and that National Ambient Air Quality Standards should be established for ammonia.  The plaintiffs sought to compel the EPA to respond within 90 days and also claimed that the EPA had violated the Administrative Procedures Act (APA) by not responding.  However, the court ruled that it lacked subject matter jurisdiction to hear the petition, because the plaintiffs should have brought suit under the CAA which requires a 180-day notice before filing.  Because the CAA provided a remedy for the plaintiffs, they were required to sue under the CAA before attempting to sue under the APA. The petition was dismissed.  The plaintiffs have stated in another court filing that they will provide the required 180-day notice and sue under the CAA.  Environmental Integrity Project, et al. v. United States Environmental Protection Agency, No. 15-0139 (ABJ), 2015 U.S. Dist. LEXIS 160578 (D. D.C. Dec. 1, 2015).


The plaintiff brought a declaratory judgment action concerning the ownership and control of a tract of land that they claimed their predecessor-in-interest obtained a fee simple interest in via right-of-way deeds signed in 1917 and 1918.  The deeds in issue were captioned "right of way" and stated, that the property owners “grant, sell and convey, and forever release to the people of the County of Sargent, in the State of North Dakota, right of way for the laying out, construction and maintenance of a public drain, as the same may be located by the Board of Drain Commissioners, through said above described lands, being a strip of land . . . [described]. And we hereby release all claims to damages by reason of the laying out, construction and maintenance thereof through our said lands.”  The trial court determined that the deed language was ambiguous and considered extrinsic evidence to determine the intent of the parties to the deeds.  Ultimately, the trial court held that the deeds granted fee simple title to the plaintiff’s predecessor.  On appeal, the court reversed.  The appellate court held that the plain language of the deeds conveyed an easement by explicitly stating that they granted a “right of way” through the specified land, and limited the purposed of the right of way for the laying out, construction and maintenance of a public drain.  Sargent County Water Resource District v. Mathews, et al., No. 20140451, 2015 N.D. LEXIS 294 (N.D. Sup. Ct. Dec. 1, 2015).


The IRS has announced that it has changed its policy of not allowing defrauded taxpayers to see the tax return that had been fraudulently filed using the taxpayer's stolen identity number and name.  Now, a defrauded taxpayer will be able to see the fraudulently filed tax return, subject to certain redacted information (apparently so that the IRS can protect the identity of the defrauding party).  Requests to see the fraudulently filed return can be made for returns filed within the prior six tax years.  A request letter can be obtained at https://www.irs.gov/Individuals/Instructions-for-Requesting-Copy-of-Fraudulent-Retuns. 

 


The petitioner bought a business and along with the purchase came a contract giving the petitioner an exclusive right to tow cars for a local police department.  The petitioner amortized the contract over 15 years.  However, the contract expired after five years and the petitioner wrote off the unamortized amount.  The IRS claimed that value remained and that the unamortized amount, therefore, could not be written off.  The court agreed because it found that the petitioner retained the rights to tow and store vehicle even after the contract expired and until a new contract was entered into.  The court also determined that the willing-buyer/willing-seller test of Treas. Reg. Sec. 20.2031-1(b) did not result in the contract having no value.  Steinberg v. Comr., T.C. Memo. 2015-222.


The plaintiff was friends with the defendant's father and stored property on the father's acreage.  The plaintiff stored items on the property, including cars, an old motor home and other automotive and recreational vehicle parts.  The father died, and the executor allowed the plaintiff to continue to store his property there.  Ultimately, the defendant acquired title to the property and advised the plaintiff that he needed to remove his items from the property or buy the acreage for $50,000.  The plaintiff declined the purchase offer, and the plaintiff did not get his items removed before the winter.  In the spring of the following year (more than a year after the father died), the defendant notified the plaintiff that he owed $350 for the storage of the items ($50/month for seven months) to be paid to the defendant's lawyer within a week and that he should make arrangements to remove the items.  The storage fee wasn't paid and the items weren't removed.  Five months later, the plaintiff sued for conversion after seeing that at least some of his items were no longer on the acreage.  The defendant claimed that the plaintiff had abandoned the items, and sought damages for a reasonable storage fee and costs incurred in removing the property.  The trial court determined that the defendant removed the property in violation of Iowa Code Sec. 556B.1 for failure to give the proper notice, and entered judgment for the plaintiff of $10,800 (the value of the property less the reasonable storage fee and an adjustment for a skid loader).  On appeal, the court reversed.  The court noted that the defendant was a constructive or gratuitous bailee of the plaintiff's property and, as such, was only liable to the plaintiff if the property was lost or damaged through the defendant's gross negligence.  Here, the court noted, the defendant had stored the items for almost a year and stored them for more than six months after asking the plaintiff to remove the items, and didn't dispose of them until receiving a court order from the estate that any items on the property were property of the estate that he inherited.  Accordingly, the defendant did not illegally convert the plaintiff's property.  Theis v. Kalvelage, No. 14-1568 (Iowa Ct. App. Nov. 25, 2015).   


The plaintiffs buy bred heifers sell the cows as soon as possible after calving and then feed the calves for a while before selling the calves, hopefully at a profit.  The calves were not kept for breeding purposes, and the plaintiffs would simply start the process over the next year.  The plaintiffs ordered "creep feed" mixed with Rumensin from the defendant that was placed in creep feeders with the calves.  The calves showed signs of respiratory distress with numerous calves eventually dying.  The toxicology report on two of the calves showed toxic levels of Rumensin.  In total, 23 calves died.  The plaintiffs weaned and fed out the remaining 170 calves and sold them at auction with a disclaimer that they had been fed excess Rumensin and were sold "as is."  The plaintiffs then sued the defendant for negligence, breach of implied warranty of fitness for a particular purpose, and breach of a voluntarily assumed duty.  The plaintiffs also claimed that the defendant was strictly liable for the resulting damages from a hazardous and dangerous feed condition.  The trial court rejected all of the plaintiffs' claims except that based on breach of implied warranty and awarded damages of $164,072.54.  The court also denied the plaintiffs an award of attorney fees.  The plaintiffs appealed on the basis that the award was insufficient to make them whole for failure to award business interruption damages based on lost profits.  However, the appellate court refused to award such damages, noting that in order to recover lost profits on such a theory, there must first be an on-going business with an established sales record and a proven ability to realize profits at the established rate with proof of actual profits for a reasonable time before the breach.  Here, the appellate court determined that the plaintiffs were merely speculating in the calf market and did not have a cattle operation analogous to the swine operation in Ballard v. Amana Society, 526 N.W.2d 558 (Iowa 1995).  The appellate court also denied punitive damages on the basis that the defendant's conduct was not willful and wanton and was without malice, but that errors occurred due to extenuating, non-malicious factors.  The appellate court also upheld the trial court's denial of attorney fees for lack of wanton conduct on the defendant's part.  The court also denied additional damages based on an alleged mistake in the damages calculation because the claim was not raised in the plaintiffs' post-trial motion.  Swanson v. R & B Feeds, L.L.C., No. 14-1823 (Iowa Ct. App. Nov. 25, 2015).


In an attempt to decrease the administrative burden imposed by the repair and capitalization regulations, the IRS has increased the deminimis safe harbor for taxpayers without an applicable financial statement (AFS) from $500 to $2,500.  The safe harbor establishes a floor for automatic deductibility for costs associated with tangible personal property acquired or produced during the tax year that are ordinary and necessary business expenses associated with the taxpayer's trade or business. The safe harbor provides for automatic deductibility for amounts up to $2,500 for the acquisition or production of new property or for the improvement of existing property which would otherwise have to be capitalized.  The IRS Notice points out that deductibility is available for repair and maintenance costs irrespective of amount.  The higher threshold on the safe harbor is effective for costs incurred during tax years beginning on or after January 1, 2016, however, the IRS will not raise on exam the issue of whether a taxpayer without an AFS can use the $2,500 safe harbor if the taxpayer otherwise satisfies the requirements of Treas. Reg. Sec. 1.263(a)-1(f)(1)(ii).  In addition, if a taxpayer is under exam concerning the $500 safe harbor and the amount or amounts in issue do not exceed $2,500 per invoice, the IRS will not further pursue the matter.  IRS Notice 2015-82   


The petitioner operated a sports memorabilia activity that he claimed occupied 12 hours of his time daily, seven days a week.  The court didn't believe him because he had a different full-time job.  The court also noted that the petitioner didn't have any expertise in the sports memorabilia business.  Similarly, the petitioner did not follow accepted business practices, did not insure his inventory and didn't operate the activity in a business-like manner.  Akey v. Comr., T.C. Memo. 2015-227.


In this private ruling from the IRS, the taxpayer sought to use his IRA funds to buy a partnership interest.  The paperwork was prepared and the partnership interest was purchased with the IRA funds, with the result that the IRA held the partnership interest.  However, the advisor that prepared the paperwork failed to realize that the custodian could not hold the partnership interest (while other custodians could), and the IRA custodian reported a distribution by issuing Form 1099-R.  The taxpayer sought relief from the 60-day rollover provision based on the bad advice received.  The IRS denied relief on the basis that the IRA funds were used to start a business venture rather than being rolled-over exclusively for retirement purposes.  Thus, a taxable distribution occurred along with any earnings on the distributed amount.  Priv. Ltr. Rul. 201547010 (Aug. 26, 2015).

 


The decedent died in early 2014 survived by three children.  Seven months after their mother's death, a daughter filed a petition for issuance of letters of administration (for which no statute of limitations applied) claiming that her mother died intestate and the value of her estate was approximately $250,000.  A brother objected, asserting that his sister's petition was basically a claim against the estate that was barred by the 6-month nonclaim statute of limitations contained in Kan. Stat. Ann. Sec. 59-2239.  The brother also asserted that the mother's estate did not have any substantial assets because the mother's real estate had been deeded to him before death and the remaining bank accounts had passed to him via payable-on-death designations established before death, and the remaining tangible personal property had been split between the three children.  The trial court denied the daughter's petitioner largely on the basis of its finding that the estate did not have any substantial assets.  On appeal, the court reversed.  The appellate court noted that the daughter's action was one seeking authority to marshal the estate's assets, if any, which did not trigger the nonclaim statute.  Furthermore, by waiting more than six months to file her petition, the daughter eliminated the need to notify creditors as well as the chance for creditors to file a claim against the estate.  The court also noted that the brother's claims could not be verified unless an administrator was appointed.  A dissenting opinion confused the need to administer the estate to verify the brother's claims (for which no statute of limitations applies) with a claim against the estate (for which the 6-month statute would apply) and asserted that there were no substantial assets in the estate.  In re Estate of Brenner, No. 113,288, 2015 Kan. App. LEXIS 81 (Kan. Ct. App. Nov. 20, 2015). 


In these companion cases, the taxpayers sought to acquire a low-speed electric vehicle (LSEV) by the end of 2009 to be able to offset it's cost with the credit then available through 2009 under I.R.C. Sec. 30D.  The taxpayers ordered and paid for a LSEV by the end of 2009, and title passed to them in 2009.  However, neither taxpayer actually received delivery of the LSEV until mid-2010.  I.R.C. Sec. 30D required that, to get the credit, the LSEV must have been placed in service by the end of 2009.  The court held that because the actual date of production occurred after 2009 and the taxpayers didn't actually take delivery of the vehicles under after 2009, that the credit was not available because the vehicles had not been placed in service as they were not available for the taxpayers' personal use by the end of 2009.  Trout v. Comr., T.C. Sum. Op. 2015-66 and Podraza v. Comr., T.C. Sum. Op. 2015-67. 


The decedent’ died in early 2012 and shortly thereafter, the estate filed the decedent’s 2011 individual income tax return which showed a tax liability of $495,096 and total tax payments of $924,411 which resulted in an overpayment of $429,315 for 2011.  According to the return, $25,000 was to be applied to the decedent’s estimated 2012 taxes with the balance of $404,315 to be refunded to the decedent’s estate.  On Form 706, the estate did not include the value of the tax refund in the gross estate or the value of the $14,126 individual income tax refund for 2012.  The IRS claimed that the individual income tax refunds should have been included in the gross estate value based on I.R.C. Sec. 2033, and assessed a deficiency of estate tax of $146,454.  The estate claimed that under state (KY) law, the refunds were not in existence as of the date the estate tax was due and was, therefore, only a mere possibility or expectancy and that no property interest existed until the time the IRS determined entitlement to the refund.  The court agreed with the IRS on the basis that I.R.C. Sec. 6402(c) specifies that, absent an offsetting liability, the IRS “shall” refund overpaid taxes to the taxpayer.  As such, the refund was not merely an expectancy but was estate property.  Estate of Badgett v. Comr., T.C. Memo. 2015-226.  


The petitioner made advances during the year in issue totaling $808,000 to a family-owned business that the petitioner was a part owner of.  The petitioner later claimed a bad debt deduction of $808,000 upon not being repaid. The note called for 10 percent interest, but no collateral was required and the line of credit remained unsecured.  The Tax Court determined that the petitioner failed to prove that the advances were loans.  There was no proof of repayment expectation or an intent to enforce collection.  In addition, there was no documentation of the business's credit worthiness.  The petitioner's conduct was inconsistent with that of an outside third party lender.  Also, the petitioner did not prove that the advances were worthless in 2009, the year for which the deduction was claimed.   The business had not filed bankruptcy even by mid-2011.  Thus, no default occurred in 2009 and the court denied the bad debt deduction.  On appeal the court affirmed.  Shaw v. Comr., No. 13-73687, 2015 U.S. App. LEXIS 20563 (9th Cir. Nov. 18, 2015), aff'g., T.C. Memo. 2013-70. 


The plaintiff is an energy company that owns numerous oil and gas leases.  The defendant entered into a contract with the plaintiff to buy numerous of the plaintiff's leases for $35 million plus wells, pipelines and related property.  The defendant placed $3.5 million in escrow.  The plaintiff provided the defendant with a list of assets and title limitations related to the leases, and the defendant found title defects in 40 percent of the leases that they claimed lowered the value of the leases being purchased by 55 percent.  The defendant did not seek dispute resolution as specified in the contract and unilaterally terminated the contract.  The plaintiff attempted to invoke the dispute resolution process, but the defendant didn't respond.  The plaintiff sued and the trial court awarded the plaintiff the escrow funds, plus interest.  On appeal, the court affirmed noting that the parties were sophisticated and that the contract did not provide for unilateral termination based on the defendant's own determination of title defects and impact on lease value.  Broad St. Energy Co. v. Endeavor Ohio, LLC, No. 14-4278, 2015 U.S. App. LEXIS 19751 (6th Cir Nov. 13, 2015).


The parties were neighbors in a subdivision with a homeowner’s association. To live in the subdivision, the parties had to sign a waiver stating that they would not take any action to contest or interfere with any development in the community “so long as such development is consistent with the Land Use Approvals.” The plaintiff challenged a decision from the local development review board granting the defendants a permit to build a pole barn on their property. The plaintiff also filed a civil action against the defendants, contesting their building of the pole barn. The defendants filed counterclaims alleging breach of contract, abuse of process, and other torts. Specifically, the defendants argued that the plaintiff had violated the association’s waiver by challenging the construction of their pole barn. The trial court granted summary judgment in favor of the plaintiff on the counterclaims, and the appellate court affirmed. The court ruled that a waiver of a right to participate in a municipal land use permit proceeding would have to be “unmistakable,” a standard that this waiver did not meet. Plaintiff was not given full notice of its meaning. The court also found that judgment was properly entered on the abuse of process claim because there was no evidence supporting the claim. Free and uninhibited access to the courts was an important right for all citizens, and the fact that the plaintiff was an attorney did not lessen her rights. Weinstein v. Leonard, No. 15-075, 2015 VT 136, 2015 Vt. LEXIS 114 (Vt. Sup. Ct. Nov. 13, 2015).


The Environmental Protection Agency (EPA), in 2010, unconditionally approved the registration of sulfoxaflor in accordance with the Federal Insecticide, Fungicide, and Rodenticide Act which bars the sales of pesticides that haven’t been approved and registered by the EPA.  The plaintiffs, commercial bee keepers and bee keeping organizations, challenged the approval based on studies which showed that sulfoxaflor was highly toxic to bees.  The court determined that the EPA’s approval was not supported by substantial evidence and that the approval posed the potential for more environmental harm than vacating the approval.  Pollinator Stewardship Council, et al. v. United States Environmental Protection Agency, No. 13-72346, 2015 U.S. App. LEXIS 19945 (9th Cir. Nov. 12, 2015).


After nearly 40 years of marriage, the wife filed a dissolution action against the husband. During the parties’ marriage, the wife’s mother had given her and the husband title to a farm. During the pendency of the divorce, the wife asked the husband to transfer ownership of the farm to her via quitclaim deed. He complied with her request, but later sought to claim a portion of the property as marital property. He argued that the wife had committed fraud by falsely promising to attend counseling in exchange for the deed. He also argued that because of their confidential relationship, she had unduly influenced him to deed the property to her. The trial court ruled that the transfer of the farm from the husband to the wife was a gift, and the appellate court affirmed. Accordingly, the court classified the farm as the wife’s separate property. The appellate court did remand the case, however, for reconsideration as to whether the husband’s contribution to the separate property during the marriage should have resulted in his receiving a larger share of the marital estate.  Draper v. Draper, No. E2014-02224-COA-R3-CV, 2015 Tenn. App. LEXIS 905 (Tenn. Ct. App. Nov. 12, 2015).


The IRS, in this case, reclassified a significant portion of the taxpayers' (a married couple) income from non-passive to passive resulting in an increase in the taxpayers' tax liability of over $120,000 for the two years at issue - 2009 and 2010.  The husband had practiced law, but then started working full-time as President of a property management company.  He was working half-time at the company during the tax years in issue.  He also was President of a company that provided telecommunications services to the properties that the property management company managed.  The couple had minority ownership interests in business entities that owned or operated the rental properties and adjoining golf courses that the property management company managed, and directly owned two rental properties, two percent of a third rental property and interests in 88 (in 2010) and 90 (in 2009) additional entities via a family trust.  They reported all of their income and losses from the various entities as non-passive, Schedule E income on the basis that the husband was a real estate professional under I.R.C. Sec. 469(c)(7) and that they had appropriately grouped their real estate and business activities.  The IRS claimed that the husband was not a 5 percent owner of the property management company, thus his services as an employee did not constitute material participation.  IRS also claimed that the husband was not a real estate professional and that the activities were not appropriately grouped.  The court agreed with the taxpayers, determining that the husband was a real estate professional on the basis that he owned at least 5 percent of the stock of the property management company.  The court determined that he had adequately substantiated his stock ownership and he performed more than 750 hours of services for the property management company - a company in the real property business.  The court also determined that the taxpayers had appropriately grouped their rental activities, rejecting the IRS argument that real estate professional couldn't group rental activities with non-rental activities to determine income and loss.  The court held that that Treas. Reg. Sec. 1.469-9(e)(3)(i) only governs grouping for purposes of determining material participation, and doesn't bar real estate professional from grouping rental activity with non-rental activity when determining income and loss (as the IRS argued).  Accordingly, the taxpayers had appropriately grouped their renal activity with the activities of the telecommunications company and the adjacent golf courses as an appropriate economic unit.  As such, the grouped non-rental activities were not substantial when compared to the aggregated rental activity.  The activities were under common control and, under Treas. Reg. Sec. 1.469-9(e)(3)(ii), the husband could count as material participation everything that he did in managing his own real estate interests - his work for the management company could count as work performed managing his real estate interests.  Note - in CCA 201427016 (Apr. 28, 2014), the IRS said that the aggregation election under Treas. Reg. Sec. 1.469-9(g) has no bearing on the issue of whether a taxpayer qualifies  as a real estate professional and the 750-hour test is not applied as to each separate activity.  This was not involved in the case.  Stanley v. United States, No. 5:14-CV-05236, 2015 U.S. Dist. LEXIS 153166 (W.D. Ark. Nov. 12, 2015). 


The plaintiff and defendant were brothers who owned adjacent family properties that had once belonged to their parents. The plaintiff owned the farm house and one acre of property. The defendant and his wife owned the surrounding farmland. In 1996, the plaintiff, with the defendant’s permission, razed a barn on the defendant’s property and replaced it with a pole shed for his own use. A water well on the defendant’s property also serviced the plaintiff’s property. After 2010, a dispute arose between the brothers when the plaintiff refused to allow the defendant to drive his large manure tanker on a blacktop driveway the plaintiff had constructed between the two properties. In response to the dispute, the plaintiff filed an action against the defendant and his wife, arguing that he was entitled to approximately one-half acre of the defendants’ property under an adverse possession theory. The trial court entered judgment for the plaintiff, but the appellate court reversed. The court ruled that the plaintiff had failed to prove by clear and convincing evidence that the common law elements of adverse possession had been established. The court ruled that because the plaintiff had used the property with the permission of his brother, his claim was defeated. Moreover, the plaintiff had not used all of the contested property for the 20-year period required by state (WI) law.   Rudnick v. Rudnick, No. 2014AP2893, 2015 Wisc. App. LEXIS 796 (Wis. Ct. App. Nov. 10, 2015).


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