Case Summaries

The plaintiff grew and packed raisins and refused to forfeit 47 percent of his crop in one year and 30 percent of his crop in another year to the USDA for the privilege of selling the balance of his crop not subject to the marketing Order implemented in 1949 that is based on the Agricultural Marketing Agreement Act of 1937 allowing the USDA to seize the specified percentages of his crop.  The USDA fined the plaintiff $483,843.53 for the market value of the raisins he refused to give up, plus a $200,000 civil penalty for disobeying the marketing order.  The plaintiff sued for a constitutional taking.  Reversing the Ninth Circuit, the U.S. Supreme Court held that a physical taking was involved since title to the subject grapes had been taken by the government.  As such, the plaintiff was entitled to "just compensation" under the Fifth Amendment.  That amount was the market value of the amount of the grapes that the government seized.  Horne v. United States Department of Agriculture, No. 14-275, 2015 U.S. LEXIS 4064 (U.S. Sup. Ct. Jun. 22, 2015).  


The petitioner was a dressage trainer and rider and tried to deduct her horse-related expenses.  Based on the nine factor analysis of the regulations, the court concluded that the petitioner did not conduct the activity with a  profit intent.  Importantly, the petitioner had only tack as an asset in the activity and there was no expectation that it would increase in value.  The petitioner had no other successes in relevant businesses, and the horse-related expenses were far greater than income from the activity.  The petitioner also had significant income from other sources and derived pleasure from the horse activity.  McMillan v. Comr., T.C. Memo. 2015-109.


A father and two daughters drowned at a beach near a city dike.  The surviving wife/mother sued the defendant city on a gross negligence theory for failure to post more warning signs that were posted or close the beach.  The trial court dismissed the case and the state (TX) Supreme Court affirmed.  There was no evidence that the defendant was aware that perils at the beach exceeded what a reasonable recreational user of the beach could expect - there was no extreme degree of risk.  In addition, the mere fact that existing warning signs had been destroyed in a hurricane and had not yet been replaced (2 years later when the beach reopened and the drownings occurred) did not mean that the city had any actual knowledge of any risks beyond inherent risks of open-water swimming.  In addition, the plaintiff failed to offer any evidence of the extent or nature of any previous drownings during the dike's 100-year existence.  As a result the TX recreational use statute barred liability for the defendant.  Suarez v. City of Texas City, 465 S.W.3d 623 (Tex. 2015).     


The plaintiffs, a married couple, bought stock in a small company which later came under SEC scrutiny for a “pump and dump” scheme as a result of the corporate officers  releasing false information about sales that never occurred which enhanced the stock price before the officers sold their stock at a large gain.  The buyers of the stock, including the plaintiffs, suffered a total loss as a result of an SEC investigation that halted trading.  The company involved eventually filed bankruptcy.  The plaintiffs  claimed a deductible theft loss (ordinary loss that was fully deductible).  The IRS claimed that the loss was a capital loss (which would only offset other capital gains or $3,000 of other income annually).  The court noted that for the loss to qualify as a theft loss, the wrongdoers must have acted with the specific intent to deprive the taxpayer of their property, and the taxpayer must have transferred their property to the wrongdoers.  The court, agreeing with the IRS, determined that the second part of the test was not satisfied – the taxpayers’ stock was not transferred to the corporate officers but was sold to general investors in an open market.    Thus, the taxpayers’ stock had not been stolen.  Greenberger v. United States, No. 1:14-CV-01041, 2015 U.S. Dist. LEXIS 80643 (N.D. Ohio Jun. 19, 2015). 


The plaintiffs, a married couple, were injured in an auto accident when the wife lost control of the couple's vehicle in a rural area when the vehicle came into contact with corn mash (a byproduct of ethanol production) that had spilled from a truck onto a roadway the day before.  During the day before the accident, a state trooper was working a traffic stop in the area when he saw the mash spilling from the truck owned by the private party defendant.  The officer completed his traffic stop and then closed the lane of the road in question.  The local rural fire department responded to the spill and moved it onto the unpaved shoulder and into the ditch.  The truck owner was not required to assist with the cleanup and was issued a citation after the cleanup was complete, with the roadway then reopened.  As noted, the accident occurred the next day when the corn mash migrated back onto the traveled portion of the roadway.  Eyewitness testimony noted that the plaintiffs' vehicle contacted the mash before losing control and sliding off the roadway.  The trial court held that the political subdivisions (local town, county and rural fire department) were immune from liability under state law, and also held that the truck owner owed the plaintiffs no duty because any duty they owed the plaintiffs had been extinguished when the officer deemed the roadway safe and reopened it.  On appeal, the court affirmed the trial court as to the grant of summary judgment to the truck owner because the truck owner did not owe any duty to the plaintiffs on account of the roadway being deemed safe for vehicular travel and the authorities had been actively engaged in removing the obstruction.  However, the court reversed the grant of summary judgment to the political subdivisions.  The court reasoned that there was a single incident("spot or localized defect) of spillage of corn mash and that the migration back to the roadway from the shoulder was not a separate incident.  Thus, the political subdivisions were on notice of the incident and had reasonable time to correct the problem and had waived their sovereign immunity under Neb. Rev. Stat. 13-910(12).  Kimminau v. City of Hastings, et al., 291 Neb. 133 (2015).          


The plaintiff is a farming/ranching partnership consisting of brothers.  The defendant owns about 33,000 acres of farmland.  The parties entered into a cash lease in 2009 for over 10,000 acres and the lease terminated after the 2009 crop harvest, but required the defendant to  give the plaintiff a first opportunity to rent the leased premises before renting it out for the 2010 crop year.  The parties again entered into a leasing arrangement involving two leases for separate tracts totaling over 29,000 acres.  One lease said the plaintiff again had the first opportunity to rent for the next crop year, and the other lease said the plaintiff had the option to rent for the '13, '14 and '15 crop year.  In April of 2012, the defendant informed the tenant of the right of first refusal and inquired as to whether the plaintiff wanted to rent the land for the future.  The parties met in person in late July after the plaintiff said they wanted to rent on the same terms as the previous year, but the defendant wanted to raise the cash rent amount.  The plaintiff was told that a decision had to be made by August 1, 2012.  The plaintiff did agree to the higher cash rent on August 1 by calling the defendant.  The plaintiff then made financial commitments and purchases in anticipation of leasing the land.  Just over a week later, the defendant sold the land and sought a court determination that the lease to the plaintiff had not been extended and told the plaintiff to cease farming operations.  The defendant then served the plaintiff with notice to quit and vacate the property.  A third party then took possession of the land and planted winter wheat on over 12,000 acres at a cost of over $1 million.  The trial court found that the parties had an enforceable contract and that the plaintiff had exercised its option to lease the property for the '13-'15 crop years.  A second trial resulted in a finding that the plaintiff was not damaged, was not unjustly enriched by receiving the proceeds of the winter wheat crop that the third party planted, and that the defendant had unclean hands.  On appeal, the court affirmed.  Dowling Family Partnership v. Midland Farms, LLC, No. 27114, 2015 S.D. LEXIS 82 (S.D. Sup. Ct. Jun. 17, 2015).


The decedent's surviving spouse found a copy of the decedent's will on his desk among his papers.  The original could not be found and the attorney that drafted the will had died several years earlier.  Two nephews of the decedent petitioner the court for formal probate of the copy of the will and the surviving spouse petitioned the court for an informal intestate probate.  The trial court held that the nephews had overcome the presumption that the original was revoked.  Both of the nephews had a close relationship with the decedent and helped him with farming and farmland was left to them under the terms of the will.  The surviving spouse did not know about the existence of the will.  On appeal, the court affirmed.  Estate of Deutsch, 2015 S.D. LEXIS 81 (S.D. Sup. Ct. Jun. 17, 2015). 


In this case, a married couple executed a transfer-on-death (TOD) deed naming the husband's daughter and her husband as beneficiaries of a farm that the husband owned.  The farm was owned solely by the husband even though the TOD recited that both the husband and wife owned the farm.  An initial draft of the TOD gave the wife a life estate in the farm upon the husband's death when the TOD would become effective to transfer the farm.  A subsequent version (the version at issue) eliminated the life estate in favor or an oral understanding that the wife could live on the farm as long as she desired.  The husband died the sole owner of the farm, and the surviving wife claimed that the TOD was ineffective because it stated that both the husband and wife owned the farm.  The wife also attempted to revoke the TOD after her husband's death.  The trial court held that the wife had no marital interest in the farm and that the TOD was effective to transfer the farm to the husband's daughter and her husband.  The trial court also determined that the TOD designation was not the result of undue influence and that reformation to grant the wife a life estate was not warranted by the evidence.  The trial court denied reconsideration.  On appeal, the court affirmed.  It was sufficient that the actual owner of the farm was named as an owner of the farm and the TOD was not invalidated simply because it also said that other people had an ownership interest in the farm. The court also determined that the evidence did not support an undue influence claim, and that the wife had no ability to revoke the TOD.  The evidence also did not support a reformation of the TOD designation.  Sarow v. Vike, No. 2014AP1476, 2015 Wisc. App. LEXIS 427 (Wisc. Ct. App. Jun. 11, 2015).


The petitioners claimed deductions for business travel and medical expenses.  However, they did not prepare mileage logs as the trips were incurred and did not record the business purpose of trips.  In addition, logs maintained did not provide the names and addresses of customers or the businesses that were visited or the business purpose of the trips.  Claimed medical expenses did not list the name of the patient, the medical purpose of the service or expense and did not list the doctor visited.  The court upheld the denial of the deductions.  Renner v. Comr., T.C. Memo. 2015-102.


The IRS claimed that the petitioner had a tax deficiency of $2,500.  The return was prepared by a return preparation service known as "Tax Whiz," and claimed a $2,500 American Opportunity Tax Credit (AOTC) which resulted in the return showing a $1,853 refund due to petitioner.  However, the petitioner admitted that he did not have any qualified educational expenses for the year in issue and was not entitled to the credit.  The petitioner also admitted that he did not examine the return before Tax Whiz filed it.  The petitioner did not receive the refund because IRS intercepted it and had it applied to the petitioner's outstanding child support debt.  The court held that the petitioner was not entitled to the AOTC, and was liable for the resulting deficiency.  Reliance on a tax return preparer does not absolve a taxpayer from the responsibility to file an accurate return, the court noted.  The court lacked jurisdiction to review the reduction of the petitioner's overpayment to pay his child support debt.  Devy v. Comr., T.C. Memo. 2015-110.


As part of an estate plan, a husband created a trust for the benefit of his wife and their descendants.  The trustee could pay to or use for the benefit of any of the beneficiaries any amount of the trust income and principal as the trustee determined necessary for a beneficiary's support, health and education.  The husband also established two grantor retained income trusts (GRATs) with the remaining trust assets at the end of the GRAT term paid to the trust.  The couple filed gift tax returns and elected to split the gifts to the trusts such that one-half of each gift would be deemed to have been made by each spouse for purposes of gift tax.  The IRS, citing, I.R.C. Sec. 2513 and Rev. Rul. 56-439, denied split gift treatment because the spouse was a beneficiary of the trusts.  A split gift election is only permissible for gifts to someone other than a spouse.  No gifts were eligible for split gift treatment.  Priv. Ltr. Rul. 201523003 (Jan. 28, 2015).


The debtor filed Chapter 12 bankruptcy and listed a bank debt in his schedules.  The bank debt was secured by real estate.  The bank was notified of the deadline to file claims and was also notified of the meeting of creditors.  The bank filed a proof of claim more than a month after the deadline, but the bank's attorney did timely file a notice of appearance identifying the bank as a creditor.  The debtor proposed a reorganization plan that provided for no payments on the bank's disallowed claim, but the plan did retain the bank's lien and did provide for post-bankruptcy payments on the bank debt.  The bank objected and the debtor asserted that the bank's claim was untimely.  The court disallowed the bank's claim as untimely because the bank had done nothing that could be treated as the equivalent of filing a proof of claim on a timely basis.  An entry of appearance and request for notice were insufficient to qualify as an informal proof of claim.  The court also determined that the debtor's motives for objecting to the late filed claim had no bearing on whether the late filed claim should be allowed.  The court held that 11 U.S.C. Sec. 502(b)(9) required that the bank's claim be disallowed.  In re Swenson, No. 14-40173-12, 2015 Bankr. LEXIS 1922 (Bankr. D. Kan. Jun. 12, 2015). 


The decedent had four children and gave one daughter a power of attorney and established a joint checking account with another the daughter.  Two other children alleged that the decedent’s funds had been misappropriated and two daughters had received almost $300,000 combined. A forensic CPA was not able to determine if the transfers were appropriate or reasonable.   On an action for the removal of the personal representative, the trial court determined that there could not be any undue influence if the principal is lucid.  On appeal, the court reversed.  The court stated that, under state (ND) law, the trial court was to determine whether the two daughters assumed a confidential relationship with the decedent and, if so, a presumption of undue influence would apply as to any and all benefits the daughters obtained on account of that relationship.  In re Estate of Bartelson, No. 20140244, 2015 N.E. LEXIS 157 (N.D. Sup. Ct. Jun. 11, 2015).


In this case, the son had farmed with his father for 25 years until the father's death.  The father's will left one-half of the farm personal property to the son with the other half passing to the son's three non-farm siblings.  The will also left the farmland to the four children equally with the son having a right of first refusal with respect to any sale of the farmland.  The son filed a claim in the probate estate that he was entitled to all of the farmland based on an oral promise from his parents and that he had detrimentally relied on that promise.  The trial court denied the claim and the son appealed.  On appeal, the court affirmed on the basis that the evidence failed to establish a clear and definite promise that the son would receive the farmland without paying for it.  The court also held that the evidence failed to support the son's claim that he was entitled to be reimbursed for funds he spent on machinery and buildings over the prior 25 years.  In re Estate of Beitz, No. 14-1492, 2015 Iowa App. LEXIS 519 (Iowa Ct. App. Jun. 10, 2015).


The plaintiffs owned a vacation property bordering a lake and received a permit to maintain a boat dock and stone steps on the public land between their property and the lake.  The lake and shoreline is managed by the defendant.  The defendant revoked the plaintiffs' permit, after conducting a hearing, for causing herbicides to be sprayed on public property and for removing brush (and mowing the shoreline) from the previously sprayed land.  The plaintiffs challenged the revocation for lack of due process.  The trial court held that the defendant had not acted arbitrarily or capriciously and that the plaintiffs' constitutional due process rights had not been violated.  The appellate court affirmed.  The court noted that the plaintiffs had no property interest in the permit to which due process rights could attach, and that the permit clearly specified the conditions that had to be satisfied to keep the permit.  McClung v. Paul, No. 14-3463, 2015 U.S. App. LEXIS 9491 (8th Cir. Jun. 8, 2015).


The taxpayer took a distribution from his IRA and then suffered a work-related injury that put him on medical leave.  The leave period expired after the 60-day IRA rollover period.  But, the taxpayer was also caring for his disable wife at the same time.  The taxpayer sought relief from the 60-day rule, but IRS determined that relief would not be granted because the taxpayer used the withdrawn funds to pay personal expenses during the 60-day period and didn't return the funds to the account for more than six months after the 60-day period had expired.  Thus, the funds had, in effect, been used as a short-term, interest-free loan that the taxpayer used to pay personal expenses.  U.I.L. 201523025 (Mar. 13, 2015). 


The petitioner built a commercial building and entered into a 10-year lease with the lessee.  Under the terms of the lease, monthly rent payments were to be paid but the lessee could make a one-time payment to the petitioner which could be used in calculating rent and thereby reduce the amount owed under the lease.  A $1 million payment was made and the IRS claimed that the petitioner should have reported it as income.  The petitioner claimed that the amount was a reimbursement of construction costs or, if it was rental income, could be reported over the life of the lease.  The Tax Court agreed with the IRS that the amount was rental income that was to be fully reported in the year received under I.R.C. Sec. 467.  The rental agreement did not specify any specific allocation of fixed rent.  Thus, the rent allocated to a rental period is the amount of fixed rent payable during that rental period.  The constant rental accrual and proportional rental accrual methods were inapplicable to the lease at issue.  Stough v. Comr., 144 T.C. No. 16 (2015).


Iowa HF 661, effective July 1, 2016, instead of repealing the inheritance tax, the Bill specifies that a step grandchild is exempt from Iowa inheritance tax rather than being subjected to the tax along with siblings, nieces and nephews and unrelated persons.  In addition, the Bill allows a surviving spouse to relinquish the elective share amount of a deceased spouse's estate upon being notified of the rights being relinquished.   


The petitioner used funds in his IRA to start a business via an LLC.  The initial capital contribution to the LLC was $319,000 of the petitioner's IRA funds.  The IRA was created after the LLC with funds from the petitioner's 401(k) with a prior employer.  The LLC was created and the petitioner directed the IRA custodian to acquire LLC shares, reporting the transactions (there were two of them) as non-taxable rollover contributions with the IRA now owning LLC interests.  The LLC employed the petitioner as its general manager, and also employed the petitioner's spouse and children.  The LLC paid a salary to the petitioner for his services as general manager.  The IRS asserted a tax deficiency of $135,936 plus an accuracy-related penalty of over $26,000.  The Tax Court agreed with the IRS, holding that the payment of a salary and the directing of compensation from the LLC violated I.R.C. Sec. 4975(c)(1)(D) and I.R.C. Sec. 4975(c)(1)(E) as a prohibited transaction.  On appeal, the court affirmed.  The payment of salary amounted to an indirect transfer of the petitioner's income and assets of his IRA for his own benefit and indirectly dealt with the income and assets for his own interest or his own account in a prohibited manner.  As a result, the IRA was terminated with the entire amount taxable income, plus penalties.  Ellis v. Comr., No. 14-1310, 2015 U.S. App. LEXIS 9380 (8th Cir. Jun. 5, 2015), aff'g., T.C. Memo. 2013-245.


The Iowa legislature has passed HF 624 which allows custom farming contracts with beginning farmers to last for 24 months rather than the current requirement that they be an annual contract.  


SF 512 exempts all-terrain vehicles that are "used primarily in agricultural production" from sales tax.  


The Iowa legislature unanimously passed HF 661 which allows a deduction on the Iowa Form 1041 for administrative expenses that were not taken or allowed as a deduction in calculating net income for federal fiduciary income tax purposes.  Thus, deductions taken on the Federal Form 706 can be claimed on the Iowa 1041 (Iowa has no estate tax).  The bill also allows administrative expenses to be deducted that would otherwise be disallowed for exceeding the 2 percent of adjusted gross income floor.  The effective date of the Bill is for tax years ending on or after July 1, 2015.


An S corporation had rental income from a property that it leased to others.  The S corporation, through its officers, employees and independent contractors, provides various services with respect to the property including janitorial and trash removal, maintenance and repairs and inspection services.  The S corporation also provided security services.  The IRS determined that the rental income was not passive.  Priv. Ltr. Rul. 201523008 (Feb. 4, 2015).


The plaintiffs entered into a grazing contract with the defendant to graze the plaintiffs' cattle on the defendant's ranch.  The contract required the defendant to provide adequate grass and water "as nature shall provide" as well as feed and mineral according to the nutritional needs of the cattle.  The contract also required the defendant to monitor the condition of the cattle and provide veterinary care as needed, and otherwise optimize the quality of the grass for the cattle.  The defendant also was required to provide labor for handling the cattle.  However, the cattle started to be unable to stand and the defendant's ranch manager had a veterinarian check the cattle.  The veterinarian diagnosed malnutrition and prescribed a magnesium solution and more food.  The ranch manager followed the instruction and the cattle improved.  The plaintiffs placed additional cattle on the ranch, but there was a pneumonia outbreak that afflicted the calves that was only partially treated.  In addition, the cattle were not rotational grazed, had insufficient grass and lost significant weight.  The plaintiffs sued for damages and the trial court determined, based on the evidence, that the average conception rate for the cows would have been 92 percent, but that the rate for the plaintiffs' cows was 83 percent.  The body scores of the cattle (degree of flesh on a cow) was also well below average.  Two bulls died after leaving the ranch and two others had to be sold for salvage value.  The trial court determined that the defendant breached the grazing contract and awarded $240,416.90 in damages as compensation for the reduced value of the open cows, the lost value of calves never conceived, the costs associated with rehabilitating the body condition of the bulls and cows, the lost value of dead and salvaged bulls and the reduced value of stocker cattle that did not put on the expected weight.  On appeal, the Court of Appeals, dismissed one of the plaintiffs for lack of standing because that plaintiff's cattle were actually owned by his entities, not by him personally.  In all other respects the court upheld the trial court's determinations.  On further review, the Supreme Court affirmed.  The court flatly rejected the defendant's claim that all the grazing contract required him to do was "supply water and grass as nature availed."  Instead, the contract clearly required the defendant to provide veterinary care, monitor the condition of the cattle and provide food and minerals according to the needs of the cattle, and manage the grazing to optimize grass quality.  The Court upheld the damage award as determined by the Court of Appeals, after dismissing one of the plaintiffs for lack of standing.   Damages were awarded for the difference in value between an open and bred cow (the market calf after factoring for risk and costs) at the lower than expected conception rate, but not for calves that were never conceived.  The damage award also included an amount for costs associated with rehabilitating the body condition of the cattle (i.e., putting on weight).  The plaintiff was also entitled to damages reflecting the cost of virgin 2 year-old bulls because there was no market for used bulls due to the risk of spreading venereal disease.  Eilert, et al. v. Ferrell, No. 107,359, 2015 Kan. LEXIS 356 (Kan. Sup. Ct. Jun. 5, 2015).

 


The landowner bought the tract at issue as part of a transaction in which the landowner purchased an entire peninsula on which the tract was located.  The landowner developed the other land into a gated community and did not treat the tract as part of the same economic unit, but later decided to develop the tract.  In order to develop the tract, the landowner needed to acquire a Clean Water Act Section 404 permit.  The permit was denied and the landowner sued for a constitutional taking.  Initially, the U.S. Court of Federal Claims  determined that a constitutional taking had occurred and that the relevant parcel against which to measure the impact of the permit denial was the tract plus a nearby lot and scattered wetlands located nearby that the landowner owned.  On appeal, the U.S. Court of Appeals for the Federal Circuit held that the tract was the relevant parcel.  On remand, the Court of Federal Claims, held that the loss of value caused by the permit denial was 99.4 percent of the tract's value, or $4,217,888 based on the difference in the tract's value before and after the permit denial.  As a result, only a nominal value remained and the entire value of the tract had essentially been taken which constituted a taking under the rationale of Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992).  The court rejected the government's argument that the "before valuation" must account for the permit denial.  The court said that the government cannot lower the tract's value by arguing the possibility of the permit denial.  The court noted that such an argument was also rejected in Loveladies Harbor, Inc. v. United States, 28 F.3d 1171 (Fed. Cir. 1994) and Florida Rock Industries, Inc. v. United States, 791 F.2d 893 (1986).  Lost Tree Village Corporation v. United States, No. 2014-5093, 2015 U.S. App. LEXIS 9018 (Fed. Cir. Jun. 1, 2015), aff'g., 115 Fed. Cl. 219 (2014) on remand from 707 F.3d 1286 (Fed. Cir. 2013).


The plaintiffs in this case were farmers that raised genetically modified alfalfa who sued the defendant county on the basis that a county ordinance banning the propagation, cultivation, raising or growing of genetically engineered plants in the county violated the state (OR) right-to-farm law and amounted to a taking of the plaintiffs' private property requiring compensation under the Constitution.  The court (the decision was made by a federal magistrate judge rather than a federal district judge) determined that the ordinance did not conflict with the right-to-farm law because that law did not bar lawsuits between farmers for activities that damage other agricultural products. Thus, the court reasoned, the purpose of the ordinance was to prevent damage to non-GMO (conventional and organic crops) and that purpose was consistent with the right-to-farm law.  The court did not address the constitutional taking claim.  The court also did not address the fact that, under the court's rationale, the plaintiffs would be able to sue non-GMO farmers in the county on a nuisance theory for non-GMO crops which, because of the court's decision upholding the ordinance, now amounts to an activity which damages other agricultural products (i.e., GMO crops) that is not protected under the right-to-farm statute.  The court also did not address the fact that GMO crops grown just over the county line could have pollen drift that would "contaminate" non-GMO crops in the county for which the ordinance would not apply.  Schultz Family Farms, et al. v. Jackson County, No. 1:14-cv-01975, 2015 U.S. Dist. LEXIS 69587 (D. Ore. May 29, 2015).

 


The plaintiffs in this case were farmers that raised genetically modified alfalfa who sued the defendant county on the basis that a county ordinance banning the propagation, cultivation, raising or growing of genetically engineered plants in the county violated the state (OR) right-to-farm law and amounted to a taking of the plaintiffs' private property requiring compensation under the Constitution.  The court (the decision was made by a federal magistrate judge rather than a federal district judge) determined that the ordinance did not conflict with the right-to-farm law because that law did not bar lawsuits between farmers for activities that damage other agricultural products. Thus, the court reasoned, the purpose of the ordinance was to prevent damage to non-GMO (conventional and organic crops) and that purpose was consistent with the right-to-farm law.  The court did not address the constitutional taking claim.  The court also did not address the fact that, under the court's rationale, the plaintiffs would be able to sue non-GMO farmers in the county on a nuisance theory for non-GMO crops which, because of the court's decision upholding the ordinance, now amounts to an activity which damages other agricultural products (i.e., GMO crops) that is not protected under the right-to-farm statute.  The court also did not address the fact that GMO crops grown just over the county line could have pollen drift that would "contaminate" non-GMO crops in the county for which the ordinance would not apply.  Shultz Family Farms, et al. v. Jackson County, No. 1:14-cv-01975, 2015 U.S. Dist. LEXIS 69587 (D. Ore. May 29, 2015).


The taxpayer was a corporation that received payments from a neighboring property owner for deed restrictions placed on the taxpayer's property that would restrict development.  These negative easement payments were paid to prevent the taxpayer from using its property in a manner that would diminish the value of the payor's property.  The question was whether the payments were rents or income from the sale of a capital asset or gains from the sale of I.R.C. Sec. 1231(b) property that would result in the taxpayer, a C corporation, having personal holding company (PHC) income in excess of 60 percent of its adjusted ordinary gross income for the tax year which would trigger the PHC tax of 20 percent on undistributed PHC income.  The IRS determined, based on the Eighth Circuit's holding in Morehouse,  that the payments were "rents" paid for the "use" of the taxpayer's property.  As such, the payments were PHC income.  However, the conclusion of the IRS would also have application in situation's involving the government's use of property to enhance wildlife and conservation which would mean that the payments would not be subject to self-employment tax.  Such payments would be "rents from real estate" and would be excluded from self-employment tax in the hands of a non-materially participating farmer, or a non-farmer.  CCM 20152102F (Feb. 25, 2015).


The petitioner operated a real estate investment partnership.  As part of the partnership's business it acquired a leasehold interest in a property with the intent to develop an apartment complex and retail space.  The lease originally ran for 20 years, but was extended for another 34 years.  The leasehold was transferred to another entity for development and management purposes.  The property generated only rental income and no substantial effort to sell the property was made for the first 13 years, when an offer to buy was received.  The property was sold for $14.5 million plus a share of the profits from the homes that would ultimately be developed on the property.  The partnership reported $628,222 of capital gain, but IRS took the position that the transaction triggered $7.5 million or ordinary income.  The court agreed with the IRS.  The court determined that the property was initially acquired for developmental purposes, and efforts to obtain financing and continue that development were made; the sale was to an unrelated party with the plan for the petitioner to develop the property; and efforts continued to develop the property up until the purchase date.  While there were some factors that favored the petitioner (only minor improvements made; no prior sales; no advertising or marketing performed), the court held that the factors weighed in the favor of the IRS and the sale was in the ordinary course of business under I.R.C. Sec. 1221(a)(1).  Fargo v. Comr., T.C. Memo. 2015-96.


The debtor, an LLC, bought about four aces of real estate.  The LLC was owned 50/50 by a husband and his wife, and the husband was a co-debtor on numerous LLC debts.  The husband's self-directed IRA also participated in a partnership with the LLC.  Pursuant to an agreement, the IRA made a cash contribution of just over $40,000 and a non-cash contribution of the real estate valued at $122,830.  The LLC's sole obligation was a cash contribution of $163,354.49, the amount of the IRA's cash and non-cash contribution values, to be made at an unspecified construction date.  The day after forming the partnership, the husband directed the IRA to sell off $123,000 of assets.  The purchase of the four acres occurred simultaneously.  Later, the partnership paid expenses of over $40,000 and the LLC filed bankruptcy claiming the IRA and the husband as unsecured parties.  The partnership was not listed.   The bankruptcy trustee objected to the IRA being treated as exempt, and the court agreed, finding that the IRA had engaged in numerous prohibited transactions, including serving as a lending source for the purchase and development of the real estate, which terminated the tax-exempt status of the IRA.  In re Kellerman, No. 4:09-bk-13935, 2015 Bankr. LEXIS 1740 (Bankr. E.D. Ark. May 26, 2015).

 


The IRS has concluded that it has the power to abate interest and penalties where they have been paid and an amended return seeking a refund of tax was filed late.  The facts indicated that a taxpayer had previously paid interest and penalties based on the tax liability shown on the taxpayer's original return.  However, the tax liability was discovered to have been substantially overstated and the amended return got the tax liability correct.  Unfortunately, the amended return was filed late - the statute of limitations for claiming a refund had already expired.  The question was whether IRS could, under I.R.C. Sec. 6404(a)(1), abate and refund any of the penalties where the underlying tax refund claim was not timely filed.  The IRS concluded that it could abate excess penalties and interest because I.R.C. Sec. 6404(a)(1) was permissive in nature which allowed IRS to abate the paid portion of any assessment.  Accordingly, the amended return is to be treated as a claim for refund of penalties and interest paid in the prior two years before the filing of the amended return, to the extent the amounts exceed the taxpayer's actual tax liability.  C.C.A. 201520010 (Apr. 23, 2015).


I.R.C. Sec. 104(a)(1) does not exclude from income payments that are made from a disability pension to a former spouse under a qualified domestic relations order (QDRO).  That is the result, the IRS determined, even if the amounts are excluded from income under I.R.C. Sec. 104(a)(1) when they are paid to the original recipient of the payments.  The facts involved a situation when a taxpayer receiving an income stream got divorced and the payment rights were divided under a QDRO.  The IRS determined that the entire amount paid to the former spouse is includible in taxable income.   The result is that non-taxable income is converted to taxable income.  Priv. Ltr. Rul. 201521009 (Feb. 9, 2015).


The debtor filed Chapter 12 bankruptcy and listed the bulk of his crop sale proceeds on his bankruptcy schedules as exempt "farm earnings" in accordance with Minn. Stat. Sec. 550.37(13)(exemption for disposable earnings).  The crop sales were evidenced by checks made jointly payable to the debtor and several secured creditors.  A creditor and the bankruptcy trustee objected to the claimed exemption.  Disallowing the claimed exemption would mean that more funds would be available to pay secured creditors.  A creditor later claimed that because the checks had ultimately bee turned over to another creditor that the issue was moot because the debtor no longer had any interest in the funds.  The court, reversing the bankruptcy court, disagreed.  The court held that the turnover of the checks to a creditor did not constitute a determination of what amount would be paid to unsecured creditors.  Thus, the issue of whether the state law exemption provision applied was not moot.  In re Seifert, No. 14-6044, 2015 Bankr. LEXIS 1723 (B.A.P. 8th Cir. May 22, 2015).  


The petitioners, a married couple, bought a home in 2004 for $875,000 and used it as a seasonal residence.  They stopped using it as a seasonal residence in 2008 and converted it to a rental property.  A realtor hired to find a renter used the property as a "model" of similar units to show to prospective buyers.  The petitioners removed all of their personal belongings and converted a room to a child's room.  Two prospective renters expressed interest in renting the home, but ultimately did not do so.         The property was never rented before the petitioners sold the property in late 2010 at a loss.  On their 2010 return, the petitioners deducted the loss on sale under I.R.C. Sec. 165(c).  The IRS disallowed the loss under I.R.C. Sec. 262 because the petitioners failed to convert the house to a rental property before sale.  The court agreed with the IRS, determining that the facts illustrated that the petitioners had failed to change their intent from using the house as their personal residence to a rental property citing five factors - (1) length of time the house was occupied by the taxpayer as a residence before being placed on the market for sale; (2) whether all personal use of the home had been discontinued; (3) the character of the property ; (4) the number of offers to rent the home; and (5) the number of offers to sell the home.  The court noted that the petitioners had used the house for four years before moving out and there were only limited efforts to rent the property.  Had a deduction been allowed, it would have only been the amount of any further reduction in value after the conversion to rental.  No deduction is allowed for the decline in value while the house was used as a personal residence.    Redisch v. Comr., T.C. Memo. 2015-95. 

 


This case is a qualified title action involving title to farmland.  The plaintiff conveyed various tracts of farmland to his father with the deeds to the tracts containing an option agreement that reserved to the plaintiff an option to buy the tracts "when the grantee no longer farms the land or decides to sell it or upon his death."  The value of the land upon exercise of the option was to be set at the lands' agricultural value.  While still farming, the father gifted the tracts to his four children equally.  Thus, none of the option-triggering events occurred.  Ten years later the father died and the plaintiff attempted to exercise the options.  The trial court held that the father's gift of the tracts eliminated the possibility of the plaintiff from exercising the options and, therefore, terminated them.   The court also cited other reasons the options were invalid.  On appeal, the court reversed, finding that the options "ran with the land."  A dissenting justice pointed out the absurdity of the majority's opinion.  The dissent pointed out that the trial court noted that the option agreements clearly set forth the three possible events that could trigger the options, and that if the plaintiff wished to exercise the options upon his father making a gift he should have included that language in the options that he drafted.  The dissent opined that the court should have given deference to the trial court as the fact finder in the matter that the option did not run with the land.  Kasben v. Kasben, et al., No. 314851, 2015 Mich. App. LEXIS 1056 (Mich. Ct. App. May 19, 2015).     


The plaintiff raises cattle and other livestock and wanted to build a stockwatering pond on his property.  In March of 2012, the plaintiff applied to the U.S. Army Corps of Engineers (Corps) for a permit to build an earthen dam on his property across a creek.  Due to delays in the permit approval process,  the plaintiff built the dam before receiving permit approval.  The Corps concluded that the creek was a relatively permanent stream which flowed into a non-navigable watercourse at that point, but which became navigable further downstream and eventually flowed into a lake.  The court determined that the Corps' conclusion that it had jurisdiction over the creek under the Clean Water Act was not arbitrary, capricious or contrary to law under the Supreme Court's plurality opinion in Rapanos v. United States, 547 U.S. 715 (2006).  The court noted that the evidence showed that the creek flowed throughout the year.  However, the court also noted that no fill permit was necessary if the dam was built for the purpose of constructing a stock pond (33 U.S.C. Sec. 1344(f)(1)(C)).  However, the exemption does not apply, the court noted, if building the dam would bring an area of the creek into a use to which it was not previously subject (the "recapture" provision) where the flow or circulation of the water may be impaired or the reach of the waters reduced.  Because the plaintiff pleaded the Clean Water Act exemptions as an affirmative defense, the court's holding that the plaintiff was not entitled to judgment as a matter of law about the stock-pond exemption on the administrative record was without prejudice and a deadline of June 19, 2015 was established  for a motion seeking judgment on the pleadings on the plaintiff's remaining constitutional claims.  Eoff v. Environmental Protection Agency, No. 4:13-cv-368-DPM, 2015 U.S. Dist. LEXIS 65379 (E.D. Ark. May 19, 2015).   


The plaintiff owned a tract of land adjacent to a neighbor's tract.  The neighbor claimed their property would flood during heavy rains because the plaintiff constructed "an L-shaped field dike" that changed a natural drainage way, violated the reasonable use doctrine and caused the neighbor damages.  The plaintiff was insured under a policy with the defendant and the defendant denied coverage based on the "intentional act" exclusionary language which meant that there was no accident or "occurrence" under the policy.  The defendant also denied coverage under the "criminal act" exclusionary language on the basis that the plaintiff's conduct violated local watershed district rules.  The federal trial court granted summary judgment for the plaintiff in the action brought by the neighbor based on the statute of limitations.  The plaintiff then sought a declaratory judgment against the defendant that the defendant breached its duty to defend and should pay the plaintiff's legal fees of over $66,000.  The trial court granted summary judgment for the defendant and dismissed the case.  On appeal, the court affirmed.  The court held that the plaintiff intentionally violated the reasonable use rule with disregard for the high probability that injury would result to the neighbor's crops.  Thus, there was no "occurrence" under the policy that triggered coverage.  Estate of Norby, et al. v. Waseca Mutual Insurance Company, A14-1146, 2015 Minn. App. Unpub. LEXIS 461 (Minn. Ct. App. May 18, 2015).


The plaintiffs bake food products in their homes from custom-built kitchens separate from their family's kitchens.  The plaintiffs sought to expand their sales beyond merely farmers' markets or community events and did not seek licensing under the Minnesota Consolidated Food Licensing Law (Minn. Stat. Sec. 28A).  No licensing and payment of licensing fees is necessary for non-hazardous food sold at a community event or a farmers' market where gross receipts generated are less than $5,000 in a calendar year.  Similarly, no licensing is required for persons receiving less than $5,000 in gross receipts in a calendar year from the sale of home processed and home-canned food products.  The plaintiffs challenged the law as unconstitutional on equal protection and due process grounds.  The trial court dismissed the case for failure to state a claim.  On appeal, the court reversed and remanded.  The appellate court determined that, on the equal protection issue, the trial court erred by comparing licensed food handlers with unlicensed food handlers where the correct comparison should be between two groups of unlicensed food handlers - those who meet the sales-cap and venue restrictions and those who do not.  The court remanded the case to adequately develop the record for a determination as to whether the statutory exceptions satisfied the rational basis test.  Astramecki, et al. v. Minnesota Department of Agriculture, No. A14-1367, 2015 Minn. App. Unpub. LEXIS 470 (May 18, 2015).


The petitioner was the guardian of a child that was placed in the taxpayer's home beginning in 1991 through 2004 when the child reached age 18.  In 2006, the child had a baby and the taxpayer continued providing support to the child and, now, the baby.  The taxpayer claimed dependency exemption deductions for the child and the baby (now five) on the taxpayer's 2011 return.  In addition, the petitioner claimed an earned income tax credit, child tax credit and head of household filing stats on the 2011 return.  The IRS denied the deductions and credits and head of household filing status, but later conceded that the child was the petitioner's qualifying relative which entitled the petitioner to a dependency exemption deduction.  The child's child was not, however, a qualifying child.  The "relationship" test was not satisfied and the child was no longer an eligible foster child after achieving majority.  Relationship of affinity did not apply, the court reasoned, because a foster relationship is not a relationship of affinity based on marriage and is only temporary.  Cowan v. Comr., T.C. Memo. 2015-85.


In 2012, the petitioners' personal property contained in their rental home was destroyed by fire.  The loss was covered by insurance and the petitioners received $60,000 in insurance proceeds, the limits of the policy, and claimed a casualty loss in 2012 for the remaining amount of the loss not compensated for by insurance.  The petitioners sued the landlord for the excess loss not compensated by insurance.  The matter was set for trial in 2014 and in early 2015 mediation was scheduled.  The IRS denied the 2012 deduction and the court agreed with the IRS, noting that a casualty loss is only deductible in the year of occurrence if there is no reasonable prospect of recovery.  Because the petitioners' claim for reimbursement was alive after 2012, no casualty loss deduction could be claimed in 2012.  Hyler v. Comr., T.C. Sum. Op. 2015-34.


Upon the decedent's death, his ex-wife received approximately $5.4 million of his $7.7 million estate consisting largely of non-probate assets including life insurance deferred compensation/commission plan accounts, IRA account, Sec. 401(k) account and an annuity.  The estate executor mistakenly excluded the non-probate assets from the taxable value of the estate and claimed that the estate was insolvent and that no estate tax was due.  After negotiating with the IRS, the executor agreed to pay $1.2 million in estate tax plus accrued interest of $145,425.  Under the terms of the decedent's will, a tax apportionment clause spread the estate tax liability among the assets that generated estate tax liability.  Because the amount passing to the ex-wife was not covered by the marital deduction, the ex-wife, according to the apportionment clause, bore approximately 70 percent of the estate tax liability.  Upon declining to pay, the executor sued the ex-wife and the court ruled for the executor on the ex-wife's proportionate share of estate tax but not for pre-judgment interest and attorney fees.  The court also determined that $1 million passing to the ex-wife was on account of the divorce settlement between the couple and was a debt of the estate which dropped the overall estate tax bill by almost $500,000 and reduced the ex-wife's tax liability proportionately.  As to the insurance policies, the court determined that they were included in the decedent's estate because the decedent had reviewed them shortly before death and he retained the right to change beneficiaries at the time of death.  Thus, the ex-wife was liable for estate tax attributable to the policies in a proportionate amount under I.R.C. Sec. 2206.  Smoot v. Smoot, No. CV 213-040, 2015 U.S. Dist. LEXIS 46572 (S.D. Ga. Mar. 31, 2015).  


The debtor filed Chapter 12, but defaulted on his plan payments to secured creditors when his crop yield and sales price projections were not met.  The debtor's provided testimony that showed he was uncertain about revenue and expenses, and made "nonsensical" estimates of tillable acreage and planned tillable acreage.  His financial information was inaccurate and he understated lease rates.  The debtor then proposed an amended plan which called for the sale of his farm that would pay the creditors in full, but the buyer was not disclosed.  A creditor who had invested heavily in a facility on the debtor's farm, proposed a competing plan that called for a higher selling price of the farm and additional funds to be provided to secured creditors.  The court found the debtor's plan to be deficient and the trustee opposed the debtor's plan.  The court held that the debtor did not proposed a feasible plan and the amended plan was not proposed in good faith.  However, the court granted leave to the debtor to allow the debtor to file an amended plan by end of day on May 8, 2015, which the debtor did (and the creditor also filed an another amended plan which again raised the selling price of the farm and named the creditor as the buyer).  The court, however, again determined that the debtor's amended plan was based on faulty financial information and did not reflect the inherent risk of farming.  The debtor failed to meet his burden under 11 U.S.C. Sec. 1229(b) to propose a plan in good faith.  The debtor's plan also did not meet the liquidation test of 11 U.S.C. Sec. 1225(a)(4).  The court held that the creditor's modified plan which called for a sale of the farm to the creditor at a higher price than what the debtor proposed did satisfy all requirements and was confirmed.  In re Daniels, No. 13-30010, 2015 Bankr. LEXIS 1609 (W.D. La. May. 11, 2015).   


The debtor operated a land partnership with other partners and two of the partners filed an involuntary Chapter 11 bankruptcy against the debtor and the partnership.  The primary asset of the partnership was two tracts of land that were verbally leased to a friend of the debtor. The lease was reduced to writing a few days before the involuntary bankruptcy filing.  The bankruptcy trustee alleged that the written lease was actually executed after the bankruptcy filing, but had been backdated to a date before the filing.  The written lease was for a three year term covering the 2011-2013 crop years.  Under the terms of the lease, the tenant was to pay 20 percent of the gross proceeds with a minimum annual payment of $300,000.  The first year’s rent of $311,464.55 was deposited into the trust account of the tenant’s lawyer near the end of 2011.  The trustee attempted to sell the properties, but buyers did not want to buy the properties with the lease in place.  The trustee, as a result, moved to avoid the lease as being entered into post-petition without authorization under 11 U.S.C. Sec. 549, or as a fraudulent transfer under 11 U.S.C. Sec. 548(a)(1) on the basis that the rent was less than fair market rent.  During pendency of the adversary action, the bankruptcy was converted to Chapter 7.  The bankruptcy court held that held that the lease was entered into pre-petition, but that the rent was below fair market rent and avoided the lease on that ground.  The court held that the tenant was entitled to the growing crops, but had to pay the 2011 rent and a pro-rata share of the 2012 rent for the time the tenant occupied the property.  The properties were then sold with the growing alfalfa crops, but not the growing wheat crops.  The lease was terminated and the wheat crop harvested which netted $442,218.09 for the bankruptcy estate.  The tenant claimed he was entitled to the wheat crop proceeds for the 2012 crop year.  The bankruptcy court held that estate was entitled to the fair market rent for the entire time the tenant was in possession - $745,200 less the amount he previously paid for the 2011 rent, which came to $431,200.  Then the court took that amount and deducted expenses the tenant incurred and determined that the tenant was entitled to a judgment of $147,377.95 as a claim against the bankruptcy estate.  On further review, the court affirmed the bankruptcy court’s determination that the tenant owed the estate $431,200 in rent.  However, the court reversed the bankruptcy court on the set-off amount, finding that the tenant was entitled to the wheat crop proceeds of $442,218.09 plus property taxes of $14,879.95 that the tenant had paid on the property during the time he possessed the property.  The result was that the tenant was entitled to a judgment of $25,898.04 of a claim against the bankruptcy estate.  The tenant was not entitled to compensation for the wheat he planted into the alfalfa that was sold with the land because it didn’t add any value to the property.  In re Grabanski Land Partnership, Nos. 14-6037, 14-6042, 2015 Bankr. LEXIS 1642 (B.A.P. May 14, 2015).    


The plaintiffs challenged the registration by the Environmental Protection Agency (EPA) of the pesticide cyantraniliprole (CTP).  The EPA approved the registration of CTP under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)  for use on a wide variety of crops as well as for non-agricultural uses in early 2014.  The court held that it did not have jurisdiction to review the registration process because such jurisdiction was vested in the Circuit Courts under FIFRA under 7 U.S.C. Sec. 136n.  The court dismissed the case for lack of subject matter jurisdiction.  Center for Biological Diversity, et al. v. United States Environmental Protection Agency, et al., No. 14-942 (GK), 2015 U.S. Dist. LEXIS 63465 (D. D.C. May 14, 2015).


In companion cases involving the same livestock owner, the court upheld the long-standing and well-known Kansas rule in livestock trespass cases that the livestock owner is not liable for damages caused by escaped livestock unless the plaintiff can establish a prima facie case that the livestock owner failed to exercise reasonable care in confining the livestock.  In other words, ordinary negligence principles apply.  The cases involved the defendant's livestock that had escaped their enclosure and were hit by the plaintiff's automobile on a U.S. highway.  The trial court determined that the facts were uncontroverted that the defendant had exercised reasonable care in confining the livestock, and that the plaintiff had also failed to establish any affirmative act of the defendant that evidence lack of reasonable precaution or due care.  On appeal, the court affirmed.  The appellate court also mentioned that it was not persuaded by the plaintiff's counsel in each case of a "somewhat disingenuous and circuitous suggestion that the Kansas Supreme Court has indicated an intention to depart from the"... longstanding ordinary negligence rule in livestock trespass cases.  Both attorneys that the court scolded were non-agricultural plaintiffs' trial attorneys.  Beneke v. Smith, No. 111, 722, 2015 Kan. App. Unpub. LEXIS 349 (Kan. Ct. App. May 1, 2015) and Kiraly v. Smith, No. 111,635, 2015 Kan. App. Unpub. LEXIS 355 (Kan. Ct. App. May 1, 2015).  

 


The plaintiffs are landowners that objected to a large wind energy generation facility to be constructed near their respective tracts and homes.  The defendant county had adopted a zoning ordinance that allowed such development in areas of the county zoned agricultural, and the ordinance only specified a 1,000 foot setback for aerogenerators from residential dwellings.  The county Plan Commission approved the development plan and the landowners appealed.  On appeal, the trial court held that the landowners were not aggrieved by nor prejudiced by the approval of the development plan.  On further review, the court affirmed.  The landowners, the court held, were not prejudiced by the Plan Commission’s approval of the zoning decision.  The landowners were alos not prejudiced by the zoning ordinance.  The county, the court noted, had decided to allow such projects in the county areas zoned agricultural.  The court, however, did strike as invalid the reciprocal setback provisions of the zoning ordinance.  Dunmoyer, et al. v. Wells County, et al., No. 90A02-1407-MI-460, 2015 Ind. App. LEXIS 393 (Ind. Ct. App. May 12, 2015).


The petitioner was a CPA with a Big Four firm.  The firm spun-off its consulting business to a new corporation while retaining an equity stake in the new corporation's shares.  Those shares were allocated among the firm's partners with the petitioner receiving shares and taking a zero income tax basis in the shares.  The petitioner resided in the U.K. and had been recently divorced.  Based on his fear that his ex-wife would attempt to get the shares because he received them during their marriage, the petitioner gave the shares to his second wife who was a U.K. resident (non-resident alien).  Ultimately, the stock is sold for a large gain without anything reported as taxable gain for either gift or income tax purposes.  The second wife ultimately receives U.S. residency and the petitioner files a Form 1040 and Form 709 three years late.  The petitioner then filed a Form 1040-X claiming the gift to the second wife was taxable in accordance with I.R.C. Sec. 1041(a) because she was a non-resident alien at the time of the gift (gifts to non-resident aliens are taxed as transfers at fair market value and the second wife would also have an income tax basis in the shares).  However, the court pointed out that I.R.C. Sec. 102(a) excludes the value of gifted property from the donee's gross income, and I.R.C. Sec. 1015(a) pegs the donee's basis at the lesser of the donor's basis or, for unrecognized losses, the property's fair market value for loss purposes.  In addition, the donor paid no gift tax that would have provided basis in the hands of the donee second wife.  The court upheld the imposition of a 40 percent penalty for a gross valuation misstatement because the petitioner's good faith arguments failed - he never sought review by the experts in the firm, and relied on the wrong tax treaty.  Hughes v. Comr., T.C. Memo. 2015-89. 

 


In this IRS ruling, a parent corporation owned all of the stock of subsidiary 1.  Subsidiary 1, in turn, owned all of the stock of subsidiary 2.  Subsidiary 2 owns all of the stock of subsidiary 3.  The parent corporation owned all of the interests in an LLC which had elected corporate tax treatment.  The parent corporation proposed to transfer all of its interests in the LLC to subsidiary 1. Subsidiary 1 would then transfer the interests to subsidiary 2 which would then transfer to subsidiary 3.  At each step along the way, stock would be issued to the transferor by the transferee.  At the end of the transactions, the LLC would elect to be treated as a disregarded entity.  The IRS determined that two I.R.C. Section 351 transfers were involved and a type "D" reorganization upon the transfer from subsidiary 2 to 3, based on Rev. Rul. 67-274.  Rev. Rul. 2015-10.     


The petitioner founded a communications company (Summit) in 1996.  In 1998, the petitioner executed an employment agreement with another communications problem (SIC).  Under the agreement, the petitioner personally received a loan of $450,000 which he was to loan to Summit to support its operations.  Summit then began receiving large contracts from SIC which within two years amounted to 60 percent of Summit's revenue.  In 1998, the petitioner also received a $20,000 loan from SIC's parent company.  In 2000, the petitioner resigned from SIC to manage the growth of Summit.  The resignation triggered the repayment obligation on the SIC loan.  SIC did not demand repayment at that time and did not issue a Form 1099-C, and the petitioner also did not receive a Form 1099 from SIC's parent company.  In 2001, SIC received a large USDA loan to provide telecommunication services to rural areas.  Consequently, SIC's reliance on Summit reduced substantially, which impacted Summit negatively.  Summit filed bankruptcy in 2002 and was dissolved in 2009.  In 2005, the petitioner was rehired by SIC.  The IRS audited the petitioner's 2007 return and claimed that the $20,000 loan had been forgiven and needed to be reported in income.  The IRS also claimed that the SIC loan constituted discharge of indebtedness income that should have been reported on the 2007 return based on the fact that SIC had not taken collection action and the loan became due and before the period of limitations for collection expired.  The IRS thought that such inaction manifested an intention on the part of SIC or its parent corporation to forgive the SIC loan.  The court disagreed, noting that credible testimony indicated that SIC did not consider the loan forgiven and that the petitioner was currently repaying the loan and that Form 1099-C was not issued.  In addition, the expiration of the state limitations period was not conclusively an identifiable event as to when a debt has been discharged.  However, the $20,000 loan from SIC's parent was forgiven in 2007.  However, the court noted that the petitioner was insolvent in 2007 at the time the $20,000 loan was forgiven and was, therefore excludible under the insolvency exemption of I.R.C. Sec. 108(a)(1)(B).  However, the court held that the petitioner was not entitled to a bad debt deduction as a result of the Summit loan becoming worthless in 2009.  The court did not have jurisdiction to hear the claim because the year under review was 2007.  An accuracy-related penalty was not imposed.  Johnston v. Comr., T.C. Memo. 2015-91.     

 


 This case involved a family farm partnership that formed between two sisters and their spouses after the sisters' father retired from farming.   Bayer Crop Science (BCS) planted GMO rice in an area near the partnership's farming operation which spread into other rice operations and caused the price of rice to drop.  The plaintiff, one of the partners, did not want to participate in the class action lawsuit being brought against BCS, but one of the other partners did meet with one of the lawyers bringing suit against BCS who then hired the lawyer to represent the partnership in the suit against BCS.  The plaintiff was notified of the meeting, but did not attend.  Over the following several years these two partners did not speak with each other, but all correspondence concerning the BCS litigation was left on the partnership's office desk and the plaintiff would always go through the mail and none of the 19 letters received from BCS were ever hidden or not disclosed.  The plaintiff then decided to retire for health reasons and wanted to liquidate the partnership.  However, the other partners wanted to continue the business.  Consequently, the partners entered into a buy-sell agreement on December 17, 2010 whereby the plaintiff would convey his interest back to the partnership for $825,000 and some land.  The agreement did not mention the BCS pending litigation.  Three days after the buy-sell agreement was executed, BCS sent a letter to the partnership that it was settling the litigation and that the partnership would receive $310/acre.  The letter was placed in the open on the partnership office desk with the rest of the mail.  The plaintiff received $825,000 and some land for his partnership interest on Jan. 31, 2011, and he and his wife resigned that day.  In July of 2011, the plaintiff's wife learned of the settlement and sought a portion of the $177,000 payment the partnership received from BCS.  The partnership refused to pay any amount to the plaintiff or his wife.  The plaintiff sued for an accounting and winding up of partnership business, damages for breach of fiduciary duty, failure to disclose the BCS litigation, rescission of the buy-sell agreement based on mutual mistake and unilateral mistake and punitive damages.  The trial court ruled for the defendant on all points.  On appeal, the court affirmed.  The plaintiff was fully informed of the BCS litigation and chose not to participate in it, and lied about not knowing about it.  The court also held that the plaintiff was not entitled to an accounting because the plaintiff was a former partner who had sold his partnership interest.  The court noted that the buy-sell agreement specifically stated that any assets not mentioned in the agreement were transferred with the partnership interest, and the agreement contemplated that any unidentified assets would be transferred to the remaining partners.  Mick v. Mays, No. SD33149, 2015 Mo. App. LEXIS 505 (Mo. Ct. App. May 11, 2015).          


Pages