Case Summaries

The plaintiff, a group opposed to wind power stations in residential areas, opposed an Ohio project due to it's projected impact on the Indiana bat, an endangered species.  The U.S. Fish and Wildlife service approved the project's application for an incidental take permit under the Endangered Species Act, and the plaintiff challenged that approval.  The court determined that the approval was appropriate because the permit was granted on the condition that the project lower blade speeds during particular months and be limited to 26 bat takings over a five-year period. The court granted summary judgment for the government on the basis that the Administrative Procedures Act, the Endangered Species Act and the National Environmental Policy Act had not been violated.  The court noted that the government's mitigation requirements for the project fully offset the impact of bat takings and that the court didn't have to determine if the plan was the maximum that could be practically implemented, as the plaintiff claimed was required.  Union Neighbors United, Inc. v. Jewell, No. 13-01435 (RJL), 2015 U.S. Dist. LEXIS 33664 (D. D.C. Mar. 18, 2015).


The petitioner didn't file a return and the resulting unreported income contained a distribution from a pension plan that was subject to the early distribution penalty (10%) of I.R.C. Sec. 72(t).  The issue was whether I.R.C. Sec. 7491(c) shifted the burden of proof to the IRS with respect to the early distribution penalty.  The petitioner argued that it did on the grounds that the additional tax was a penalty rather than a "tax" or "addition to tax" or "additional amount."  The court held that the I.R.C. Sec. 7491(c) did not shift the burden of proof to the IRS.  The additional amount was determined to be a "tax."  El v. Comr., 144 T.C. No. 9 (2015).


The Large Business and International Division of IRS has issued a directive to examiners that lists several retail activities that typically don't constitute MPGE and, thus, the DPGR from the activities do not qualify to be deducted under I.R.C. Sec. 199.  The examples that the IRS lists include: (1) cutting blank keys to a customer's specification; (2) mixing base paint and a paint coloring agent; (3) applying garnishments to cake that is not baked where sold; (4) applying gas to agricultural products to slow or expedite fruit ripening; (5) storing agricultural products in a controlled environment to extend shelf life; and (6) maintaining plants and seedlings.  LB&I-04-0315-001, impacting IRM 4.51.2 (Mar. 16, 2015).     


This case, brought by various activist groups opposed to the planting of genetically modified crops, involved a challenge to five refuges in the National Wildlife Refuge System (including one in north-central Iowa) managed by the U.S. Fish and Wildlife Service (USFWS).  The plaintiffs challenged the USFWS decision to permit the farming of GMO crops and the use of certain pesticides in the refuges.  The plaintiffs claimed that the USFWS violated the National Environmental Policy Act (NEPA) and the Administrative Procedure Act (APA) by allowing farming in the refuges without NEPA analysis of the impacts of pesticide use via the use of neonicotinoid pesticides (which have been linked to harm to bee colonies) and the farming of GMO crops.  The plaintiffs sought to vacate the FWS decisions allowing pesticide use and GMO crop farming and enjoin the practices until the USFWS prepared an adequate NEPA analysis for the refuges.  With respect to the NEPA claims regarding GMO crop farming, the court denied the plaintiffs' motion for summary judgment with respect to the Iowa refuge, but granted it with respect to the refuge in Michigan.  With respect to the NEPA claim involving pesticides, the court granted the plaintiffs' motion for summary judgment, and ordered the defendants to file, by April 15, 2015, a notice indicating the extent to which neonicotinoid pesticides are currently used on the refuges and where they are used.  The court ordered the defendant to "devise a plan to phase out their use as soon as practicable, but no later than January 1, 2016."  Center for Food Safety, et al. v. Jewell, No. 14-360 (CKK), 2015 U.S. Dist. LEXIS 31700 (D. D.C. Mar. 16, 2015)..   


The petitioners got a refund of $54,507 in state (NY) income tax in 2008.  The refund was attributable to refunded state income tax credits which were based on state real property taxes that entities paid in which the petitioners had an ownership interest.  The property tax was paid and deducted at the entity level which decreased the entity income that ultimately passed through to the taxpayers, resulting in a lower tax liability.  The Court, agreeing with the IRS, determined that the petitioners received a tax benefit from the credits and, as such, the credits were income to them.  The court cited its prior decision in Maines v. Comr., 144 T.C. No. 8 (2015), which involved similar facts.  Elbaz v. Comr., T.C. Memo. 2015-49.   


The petitioner, in early 2007, entered into an agreement with a homeowner to lease the home.  The agreement also contained an option for the petitioner to acquire the home upon meeting certain conditions before the option expired on January 31, 2008.  The petitioner paid for the option and an additional amount per month to be applied against the purchase price if the option was exercised.  The petitioner did not exercise the option due to the inability to get financing.  The third party filed bankruptcy in late 2008, and the petitioner filed a complaint in the bankruptcy estate claiming that the third party had tried to defraud her concerning the option contract.  The petitioner's complaint was dismissed.  The petitioner claimed the FTHBC of $7,500 on her 2008 return which the IRS rejected.  The court upheld the IRS position, noting that the petitioner did not produce any settlement statement, closing statement, purchase agreement or any other document to substantiate that she had purchased or acquired an interest in the home.  Because the petitioner did not execute the option, she did not have any equitable in the house either.  Pittman v. Comr., T.C. Memo. 2015-44. 


The petitioner was a truck driver that spent 358 days on the road in 2009.  The company he worked for did not require him to return to base and told him where to go for his next trip after completing the current trip.  The petitioner used his mother's address to get his driver's license, but only stayed at her house rent-free while on jury duty and kept his personal effects in a storage locker.  The petitioner claimed over $27,000 as a deduction for unreimbursed employee business expenses, including over $19,000 for travel expenses while away from "home." The petitioner also claimed over $7,000 for truck stop "electrification" expenses (electricity provided by the truckstop so that the petitioner's truck didn't have to have its engine idle).  The court upheld the IRS denial of the per diem expenses and hotel expenses on the basis that the expenses were not incurred while away from home because the petitioner did not have a tax home.  To qualify as a tax home, the court noted that the petitioner needed to have incurred expenses associated with maintaining the home while away from it.  However the court allowed the deduction of expenses associated with truck stop electrification expenses.  Those expenses were deemed to be the functional equivalent of fuel expenses and were deductible subject to the two percent floor on itemized deductions.  The court, contrary to its own prior opinion in a different case, did not impose the negligence penalty because the petitioner had read IRS publications to determine how to handle the expenses and thus acted in good faith.  The court did uphold the substantial understatement of tax penalty.  Howard v. Comr., T.C. Memo. 2015-38. 


The decedent had 10 IRAs at the time of death with his estate designated as the beneficiary of each one.  The decedent's will specified that the decedent's tangible personal property would pass to the taxpayer and that the residue of the estate (such as the IRAs) would pass to a trust which, after payment of debts and taxes, would pass the remaining property to a POA trust.  The IRAs ultimately passed to the POA trust.  The POA trust gave the taxpayer the income annually and, upon written demand, the principal of the trust assets according to an ascertainable standard along with the right to withdraw trust principal upon written demand to the trustee.  The taxpayer did make such written demand and sought to transfer the remaining IRA proceeds to IRAs established in the taxpayer's name.  The IRS determined that such transfer would not qualify as an inherited IRA.  The taxpayer was deemed to have received the proceeds from the trust and not from the decedent.  The taxpayer was not the sole trustee of the POA trust.  U.I.L. 201511036 (Dec. 18, 2014).


The plaintiff worked for an equestrian center as its barn manager.  The equestrian center operated on 200 acres and provided riding lessons, horse training and riding facilities with riding lessons being the center's predominant activity.  The plaintiff performed general maintenance work and other necessary daily tasks to prepare horses for riding privately and for camps.  While training a race horse, the plaintiff fell from a horse and was injured.  The center did not carry workers' compensation insurance, having been advised it was exempt from coverage based on the statutory exemption for "[a]ny person employed in agriculture" contained in Ky. Rev. Stat. Sec. 342.650(5).  For purposes of that provision, Ky. Rev. Stat. Sec. 342.0011(18) defined "agriculture" as the "operation of farm premises, including the planting, cultivation, producing, growing, harvesting, and preparation for market or agricultural or horticultural commodities thereon, the raising of livestock for food products and for racing purposes,...and any work performed as an incident to or in conjunction with the farm operations...."  An Administrative Law Judge dismissed the plaintiff's claim and the Workers' Compensation Board affirmed.  On appeal, the court affirmed.  The court noted that a prior decision of the court had held that "raising" of race horses included the boarding of the horses and that there is no distinction based on whether the employer owned the horses or they were owned by other persons.  The court also noted that the KY Supreme Court had held that the ag exemption included conditioning or exercising of race horses after they had been sold or released to racing but had returned to the farm for rehabilitative purposes.  As to the facts of this case, the court stated that, "the feeding, housing, caring for, and training of horses in a farm setting is agricultural in nature."  Horses used at an equestrian center, the court determined, were the same as the raising of livestock for racing purposes.  Thus, "training" of horses constitutes "agriculture" for purposes of the ag exemption from workers' compensation.  In addition, the court's opinion, means that the raising of livestock for purposes other than food or racing constitutes "agriculture" for workers' compensation purposes.  Hanawalt v. Brown, et al., No. 2014-CA-000744-WC, 2015 Ky. App. 36 (Ky. Ct. App. Mar. 13, 2015). 


The defendant was convicted of second degree criminal mischief for damaging the "property of another" when he aided and abetted his son in shooting two state-owned deer decoys that the defendant and his son believed to be deer.  The defendant appealed his conviction because wild deer do not become property until reduced to physical possession (e.g., the son thought he was shooting at deer and deer are not "property of another" until reduced to possession).  The appellate court upheld his conviction and the OR Supreme Court granted review to determine whether wild deer are "property of another" as used in Ore. Rev. Stat. Sec. 164.354.  The Court noted that the legislature had amended Ore. Rev. Stat. Sec. 164.305(2) (the definition of "property of another" in 1977 to broaden it and that the state had previously declared that it had a property interest in wildlife.  Thus, the state had a legal interest in wildlife and wild deer are "property of another" for purposes of the statute at issue.  The conviction was upheld.  State v. Dickerson, No. S06218, 2014 Ore. LEXIS 1036 (Ore. Mar. 12, 2015), aff'g., 317 P.3d 902 (Ore Ct. App. 2013). 


The petitioner donated a perpetual conservation easement on 22 acres to qualified charity - the North American Land Trust.  The easement grant, however, allowed the petitioner to make "minor alterations to the boundary of the Conservation Area" if certain requirements were met within the first five years of the grant.  The petitioner claimed a charitable deduction for the contribution and the IRS denied the deduction.  The court agreed with the IRS because the easement was not a "qualified real property interest" as defined by I.R.C. Sec. 170(h)(2)(C) because the petitioner could change the property subject to the easement.  The court noted that I.R.C. Sec. 170(h)(2)(C) specifies that a "qualified real property interest" is one that involves an identifiable, specific piece of real property.  The retained right to change the property boundaries violated that requirement.  Balsam Mountain Investments, LLC, et al. v. Comr., T.C. Memo. 2015-43.


The petitioners, a married couple, received targeted economic development payments from the state of New York which the state terms "credits" and treats them as refunds for "overpayments" of NY state tax.  While one credit was limited to the amount of past real property tax actually paid, the other two credits at issue were not limited to past tax paid.  The credits first reduced a taxpayer's NY income tax liability with any excess being carried forward or partially refunded.  The petitioners claimed that the credits they received shouldn't be taxable income because they were "overpayments" of past NY income tax and, as such, were the functional equivalent of withheld taxes, and because they didn't claim deductions for NY income tax.  The IRS took the position that the credits were taxable income as cash subsidies, but the petitioners also maintained that the IRS was bound by the NY definition of the credits of the credits as "overpayments."  The petitioners also argued that the credits were not taxable income because they were welfare.  The court agreed with the IRS position.  The court first noted that if the petitioners' definitional argument were to be upheld, then states could undermine federal tax law by redefining terms.  On the "welfare" argument, the court noted that receipt of the credits were not conditioned on the petitioners showing need.  Thus, the credits were not excludible under the "general welfare" exception.  The court also noted that the credits were income to the petitioners irrespective of whether the credits were refunded or were carried forward.  Maines v. Comr., 144 T.C. No. 8 .


The plaintiff, a nonprofit corporation, supplies water to approximately 12,000 persons and alleged that the defendant caused solid hazardous waste to be disposed of at it's manufacturing facility that contaminated the plaintiff's water supply in violation of the Resource Conservation Recovery Act (RCRA).  The plaintiff also alleged public and private nuisance, abnormally dangerous or ultrahazardous activity, conversion and unjust enrichment  The plaintiff sought injunctive relief and an order mandating the cleanup of the defendant's facility.  The defendant motioned for summary judgment on all claims.  The court granted the defendant's motion for summary judgment on the abnormally dangerous or ultrahazardous activity claim, as well as the unjust enrichment claim.  The defendant's motion was denied on other claims.  The Little Hocking Water Association, Inc. v. E.I. DuPont de Nemours and Co., No. 2:09-CV-1081, 2015 U.S. Dist. LEXIS 29200 (S.D. Ohio Mar. 10, 2015).     


The petitioner claimed a charitable deduction of $31,037 on her 2008 return ($15,340 for cash contributions and $15,697 in noncash contributions) and a $10,357 charitable deduction on her 2009 return ($6,490 in cash contributions and $3,867 in noncash contributions). However, the petitioner merely attached Form 8283 to her 2008 and 2009 returns showing several contributions of property for each year with each contribution valued over $250 and further attempted to substantiate the contributions with donation receipts that lacked either the date of contribution or a property description, or both.  The receipts neither reconciled with Form 8283 nor provide anything more than vague descriptions of the donated items.  Accordingly, the court upheld the IRS' denial of the charitable deductions in any greater amount than IRS had allowed.  Jalloh v. Comr., T.C. Sum. Op. 2015-18.


The states of Colorado, Kansas and Nebraska executed a "water compact" in the 1930s concerning the apportionment of water in the Republican River between the states.  Under the compact, Colorado is to get 11 percent of the water, Nebraska 49 percent, and Kansas 40 percent for "beneficial consumptive use."  In the late 1990s, Kansas filed a complaint that groundwater wells in NE had pumped excess water from the Republican River which depleted stream flow as the river water flowed into Kansas.  The U.S. Supreme Court agreed with a  special master report upholding KS' claim.  The parties settled, with the settlement resulting in usage to be computed on a five-year running average (reduced to two years during drought).  Under the settlement agreement, groundwater pumping counted toward a state's water consumption.  KS later claimed that NE violated the first five-year review and a special water master agreed, determining that NE had "knowingly failed" to comply with the compact.  NE was found to have exceeded its allotment by 70,829 acre-feet (note - a four person family uses approximately one acre-foot of water annually).  The special master suggested an award of $5.5 million to KS ($3.7 million for loss and $1.8 million for disgorgement of gain), but did not issue an injunction.  Both NE and KS appealed.  The Court affirmed the special master's report, noting that NE had acted too slowly to come into compliance with the compact and had adopted a water management plan in 2005 that only required a 5 percent reduction in groundwater pumping without evidence that such reduction would bring the state into compliance with the compact.  In addition, the Court noted that NE had no way to enforce the 5 percent reduction other than to trust the irrigators.  The Court also agreed with the special master in that the settlement agreement should be reformed so that a state was not charged for using imported water.  The dissent disagreed on this latter point.  NE has 60 days from the date of judgment to pay.  In addition, the Court ordered each of KS and NE to pay 40 percent of the special master's fee, and assessed the remaining 20 percent to CO.  Kansas v. Nebraska, et al., No. 126, 2015 U.S. LEXIS 1835 (U.S. Sup. Ct. Mar. 9, 2015).     


A taxpayer created an irrevocable trust created a trust for himself, his spouse and his lineal descendants.  He later died, followed by his spouse.  A second taxpayer created a trust for himself and later amended it to have income paid equally to his children for life.  The second taxpayer later amended the trust to release his right to revoke.  A subsequent court order divided the second taxpayer's trust into two irrevocable equal trust for the benefit of the taxpayer's spouse and her descendants and one for the benefit of his son and his descendants.  The beneficiaries of one of the divided trusts and the taxpayer's trust were the same.  These trusts owned farmland, but the tracts owned by each trust was acquired at different times and some of the tracts were landlocked.  The trustees of the trusts want to sell the property in a coordinated sale to a limited partnership owned by a lineal descendant of each taxpayer.  The IRS determined that the sale would not trigger GSTT and would not be a taxable gift.  Priv. Ltr. Rul. 20151021 (Oct. 16, 2014).   


Just like it said in Priv. Ltr. Rul. 200818028 (Feb. 8, 2008) (see our article at https://www.calt.iastate.edu/article/operator-farmer%E2%80%99s-market-not-tax-exempt), the IRS has again said that an organization that operates a farmers' market is not a tax-exempt charity.  The IRS noted that most of the market's funding came from vendor and membership fees with the primary benefit going to the vendors that profited at the market by selling their goods to the public.  While a part of the reason for forming the market was to promote "healthy" foods, the IRS determined that was only a minor part of the reason of formation.  Priv. Ltr. Rul. 201510058 (Oct. 16, 2014). 


In this case, a holder of a 1/2 royalty interest in 1,773 acres of land who obtained the interest via inheritance sued the executive rights holder for breach of duty of good faith.  The plaintiff acquired the right to buy the land, acquired the right to negotiate and sign oil and gas leases for others, and later made a deal with another party under which the plaintiff exercised its right to buy the land, sold the land to the third party, reserving all minerals, and then leased the minerals to the third party for a 1/8th royalty and a $7,505 per acre bonus payment.  The holder of the 1/2 royalty sued both parties claiming they conspired to limit her royalty on production from the lease to 1/16 (1/2 of 1/8) when it otherwise should have been 1/8 (1/2 of 1/4).  The holder of the 1/2 interest produced evidence that the going rate for lease royalties in the county was 1/4 and claimed that the third party had agreed to a lower royalty to get an above-market bonus.  As such, the holder of the 1/2 interest claimed that the executive rights holder breached the duty of good faith with respect to her.  The trial court ruled for the executive rights holder and dismissed the case.  The Court of Appeals reversed, determining that factual issues remained for trial.  On further review, the Supreme Court affirmed.  While there is a duty of utmost good faith and dealing that an executive rights holder owes to a non-participating royalty owner, the Court said the executive rights holder did not have to wholly subordinate its interests in favor of the non-participating royalty owners.  However, the executive rights holder cannot engage in self-dealing.  The Court said that factual issues remained  and that a trial was needed to determine if the executive rights holder misappropriated what would have been a shared benefit ( market-rate royalty interest) and converted it into a benefit reserved only unto itself (an enhanced bonus), with the intent to diminish the value of the complainant's royalty interest. If established, that would show self-dealing.  KCM Financial LLC, et al. v. Bradshaw, No. 13-0199, 2015 Tex. LEXIS 220 (Tex. Sup. Ct. Mar. 6, 2015).  


The defendant was convicted under K.S.A. Sec. 21-6418(a) for allowing a dangerous animal (her dogs) to run at large when she knew they had dangerous or vicious propensities.  The defendant lives next to a sheep farm with many lambs.  The dogs had a history of predation upon the sheep and one dog had been shot while harassing the sheep on one occasion.  The farmer had often complained to the defendant about the dogs, but to no avail.  Ultimately, the county sheriff warned the defendant that the dogs could be considered dangerous and vicious and that the defendant needed to restrain the dogs.  The dogs again mauled some sheep, and the defendant was cited for the offense.  The rial court found that the defendant had violated the dangerous animal statute, imposed a sentence of 6-months in jail, one year of unsupervised probation and $192.85 in restitution.  On appeal, the court affirmed.  The appellate court determined that the trial court properly applied the plain language of the statute to the facts and that there was no need to resort to canons of statutory construction because the statute was not vague.  The appellate court also held that the evidence was sufficient to put the defendant on notice that the dogs had dangerous or vicious propensities.  The defendant had been warned numerous times about the dogs harming the sheep and lambs, the existing holes in the fence near the defendant's house and the unlikelihood of harm caused by coyotes.  State of Kansas v. Shell, No. 111,779, 2015 Kan. App. Unpub. LEXIS 153 (Kan. Ct. App. Mar. 6, 2015).     


A dog, "Brutus," had been turned over to the defendant (an animal control shelter) in May of 2010 to be euthanized.  However, the defendant allowed the plaintiffs to adopt the Brutus on July 3, 2010.  The plaintiffs were informed that Brutus had exhibited "food aggression" toward a child in his prior home and that the prior owner did not know how to handle him.  Between July 3 and July20, Brutus bit the plaintiffs on their arms without breaking the skin, and then later bit the plaintiffs  in a manner causing severe injuries.  The defendant removed Brutus from the plaintiffs' home, and the plaintiffs sued for damages for injuries, negligence, fraudulent misrepresentation, products liability and intentional infliction of emotional distress and sanctions.  The defendant argued that because Brutus had already bitten the plaintiffs before the bite that caused injury, the plaintiffs could not have reasonably relied on the defendant's representations concerning Brutus thereby defeating the plaintiffs' claims for fraud or negligent misrepresentation.  The plaintiffs claimed that they would not have adopted Brutus if they had been truthfully told about the prior owner's reason for turning him over to the defendant.  The court determined that fact issues remained on the reasonable reliance issue.  The court also held that the waiver language in the adoption agreement did not bar the plaintiffs from recovering for negligence because it did not advise the plaintiffs that their waiver of claims extended to claims that might arise from the defendant's own negligence.  However, the court did hold that the intentional infliction of emotional distress claim failed.  Sanctions were also not warranted.  Lawrence, et al. v. North Country Animal Control Center, Inc., No. 51812, 2015 N.Y. App. Div. LEXIS 1857 (N.Y. Sup. Ct. Mar. 5, 2015). 


The petitioner provided computer consulting services to family members without charge.  He deducted expenses associated with the activity, but the IRS denied the deductions on the basis that the petitioner was not engaged in the activity with a profit intent.  The court upheld the IRS position.  Shah v. Comr., T.C. Memo. 2015-31.


The petitioner deducted expenses associated with moving his wife from her home in South Carolina to his home in Minnesota.  The IRS denied the deduction and the court agreed.  The petitioner had moved to various locations in Minnesota as well as changing jobs.  The expenses were denied because the distance from the taxpayer's old home to his new workplace were not at least 50 miles more than the distance from his old home to his old workplace as required by I.R.C. Sec. 217.  Palmer v. Comr., T.C. Memo. 2015-30.


The defendants, from the Bel Air, California, area, were arrested in Illinois and charged in a two count indictment with violating the Animal Enterprise Terrorism Act (18 U.S.C. Sec. 43) (Act) for terroristic acts committed upon an Illinois mink farm.  In an earlier action, one of the charges involved using a facility of interstate and foreign commerce for the purpose of damaging and interfering with the operation of an animal enterprise under the Act.  Two cells phones were found in their car at the time of the arrest and the government searched those phones pursuant to a search warrant.  The search indicated contact with a third cell phone and the government sought an order seeking historical cell site and toll record information for the third phone.  The defendants claimed that the government had to obtain a search warrant to obtain that information because the defendant had a reasonable expectation of privacy in the information.  The court disagreed with the defendants, noting that no federal case had ever determined that obtaining such information implicated the Fourth Amendment's requirement of a search warrant.  The court held that the defendants did not have an expectation of privacy in historical cell site information.  The court also noted that the records were relevant and material to the ongoing criminal investigation of the defendants and that the third cell phone's number belonged to one of the defendants.  United States v. Lang, et al., No. 14 CR 390, 2015 U.S. Dist. LEXIS 7553 (N.D. Ill. Jan. 23, 2015).  In the present action, the indictment charged the defendants with damaging an animal enterprise (18 U.S.C. Sec. 43(a)(2)(A)) and conspiring to damage an animal enterprise (18 U.S.C. Sec. 43(a)(2)(C)).  The defendants moved to dismiss the indictment on the basis that the Act is facially overbroad because it criminalizes protected speech that causes an "animal enterprise" to lose profits or business goodwill.  They also challenged the indictment as being void for vagueness because it allowed for arbitrary and discriminatory enforcement against animal rights activists, and that it is violated substantive due process for punishing as terrorism non-violent damage to property.  The court rejected the overbreadth argument because the Act excludes purely economic damage.  The court also rejected the void for vagueness argument and the substantive due process argument under rational basis review.  United States v. Johnson, et al., No. 14-CR-390, 2015 U.S. Dist. LEXIS 26843 (N.D. Ill. Mar. 5, 2015).  


The petitioners, a married couple, bought a home in 1994 for $200,000.  They used the home as a group home for disabled persons.  The petitioners resided in another home in a different town, and it was this home's address that was used on the petitioners checks, payroll records, their kids' school records, etc.  The petitioner's sold the group home in 2007 for $600,000 and sought to exclude the gain under I.R.C. Sec. 121.  The court, agreeing with the IRS, denied the exclusion because there was no evidence that the petitioners ever lived in the group home and used it as their principal residence.  Villegas v. Comr., T.C. Memo. 2015-33.  .


The petitioner made an initial contribution of $1000.00 to an IRA and did not claim any deduction for the contribution.  The petitioner took a distribution of $950.81 from the IRA in 2010 at a time when the petitioner was less than age 59.5.  The petitioner received a Form 1099-R for that amount, but did not include the amount in income.  The IRS claimed that the full amount should have been included in income.  The Tax Court concluded that I.R.C. Sec. 72(e) applied which allows the taxpayer's investment in the IRA to be taken into account when computing the amount of the distribution to be included in gross income.  The court rejected the taxpayer's argument that because the distribution was less than his investment that the distribution should be treated as a return of the petitioner's investment.  The court also rejected the notion that the distribution was fully taxable.  Instead, the court told the parties to compute the taxable amount by utilizing I.R.C. SEc. 72(e)(3) and include in income the untaxed increase in the IRA value attributable to interest and investment growth from 2008 until the time of the distribution.  Morles v. Comr., T.C. Sum. Op. 2015-13. 


Minn. Stat. §216E.12 subd. 4, called the “buy-the-farm” election, allows owners of Minnesota farmland and other qualified property to require a utility company seeking to condemn a high–voltage transmission line easement to acquire fee title to the owner’s entire contiguous parcel, rather than just the smaller easement. A Minnesota couple owning farmland opted under this provision to require the appellants, several public utility companies, to purchase a 218.85-acre tract of their land instead of taking only the 8.86-acre easement necessary for a powerline project. The district court granted summary judgment to the owners, but the utility companies argued that the district court erred in not properly considering the reasonableness of the buy-the-farm election, as required under Coop. Power Assn v. Aasand, 288 N.W.2d 697 (Minn. 1980). In affirming, the appellate court ruled that Aasand was concerned with the commercial viability of the parcel, not a size differential. Aasand itself affirmed a buy-the-farm election resulting in the condemnation of 149 acres where the proposed easement was 13 acres. The court of appeals held that the district court did not err in determining that the owner’s election was reasonable.  On further review, the Minnesota Supreme Court affirmed.  The Court held that the statute did not allow a court to consider outside factors when ruling on an election to compel a purchase.  The statute was unambiguous.  Great River Energy v. Swedzinski, No. A13-1474, 2015 Minn. LEXIS 108 (Mar. 4, 2015), aff'g., 2014 Minn. App. Unpub. LEXIS 255 (Minn. Ct. App. Mar. 31, 2014).


The settlor of an intervivos trust named herself as trustee and three other persons as successor trustees.  One of those successor trustees was the settlor's son.  Several years later, the settlor executed a general power of attorney (GPOA) in which she directed that the son was to be the executor of her estate and trust.  The settlor, as principal, and the son, as agent, signed the GPOA.  The legal question was whether the GPOA was sufficient to amend the trust.  The court held that it was because, in accordance with the trust language, the settlor reserved the right to amend the trust "by a duly executed written instrument...".  Strange v. Towns, 330 Ga. App. 876 (2015).   


In 2014, the plaintiff seed company filed a complaint against numerous cotton farmers for violating the plaintiff's general utility patents on cotton seed.  The patents limit the use of the seed for planting a commercial crop in a single growing season, and prohibits a the buyer from saving harvested seed for the purpose of planting a subsequent crop.  In addition, the buyer can't sell saved seed or supply or transfer any seed produced from the purchased seed to third parties for planting.  The plaintiff claimed that the defendant, a cotton farmer in Georgia, intentionally planted the plaintiff's patented seed during three consecutive crop years without buying the seed from an authorized dealer and paying the technology use fee or obtaining a license from the plaintiff.  All other farmers who saved seed and replanted in the defendant's area settled the plaintiff's claims, but the defendant refused to settle.  The court, in this consent order, determined that the defendant violated the plaintiff's patents on cotton seed willfully and intentionally by planting the seed without the authority to do so, concealing the illegal planting and selling the patented seeds to other cotton farmers for planting.  The court ruled that the defendant was liable for damages to the plaintiff in the amount of $360,000.  The court also entered a permanent injunction against the defendant barring him from using, buying, acquiring, selling, offering to sell or otherwise transferring any of the plaintiff's patented seed.  Monsanto Company, et al. v. Ponder, No. 7:14-CV-00013-CAR (M.D. Ga. Mar. 4, 2015).  


The defendant held a grazing permit to graze cattle on federal land.  One of the permit conditions required the defendant to erect a fence, maintain it and remove abandoned fence wire and steel posts, etc.  The plaintiffs were riding a motorcycles on the federal land where they collided with an uncharged electric fence that the defendant had erected in accordance with the permit.  The plaintiffs sued the defendant for negligence on the basis that the defendant created a dangerous condition that the defendant should have discovered and remedied.  The trial court granted summary judgment for the defendant and the plaintiffs appealed.  On appeal, the court assumed that the plaintiffs had the status of "invitees," but affirmed the trial court on the basis that as a permit holder, the defendant was a mere licensee and was not an owner or possessor of the land at issue.  The permit also did not give the defendant an easement in the federal land at issue, and the defendant did not violate any of the standards and requirements associated with establishing fences on the property.  As such, the defendant lacked intended control sufficient to give rise to a duty to the plaintiffs.  There was also no duty that arose from the relationship of the parties as there was no "special" relationship between the parties.  Furthermore, there was no duty based on public policy.  Smith v. Almida Land & Cattle Company, LLC, No. 1 CA-CV 13-0757, 2015 Ariz. App. Unpub. LEXIS 283 (Ariz. Ct. App. Mar. 3, 2015). 


The defendant enacted a Master Zoning Plan (MZP) that is regulated and enforced via a series of ordinances.  At issue was an ordinance that limited one residence to a lot ("base tract"), but to build a second residence on a lot, the lot must be subdivided and an Improvement Location Permit is obtained.  The MZP contains a farm exemption which exempts farm houses and other farm structures from the one residence restriction when the lot is used for agricultural purposes as a primary means of livelihood.  The base tract was 59.2 acres when the plaintiff bought it in 1993 from a decedent's estate.  The deed required the plaintiff to continue to have the land enrolled in the Conservation Reserve Program (CRP).  In 1996, the plaintiff built a residence (a second residence on the tract) without obtaining an Improvement Location Permit and did not apply for subdivision approval.  Instead, the plaintiff argued that the tract was exempt from the zoning rules due to being used for agricultural purposes.  The defendant sought removal of the residence from the parcel and the trial court agreed, granting the defendant summary judgment.  On appeal, the court affirmed.  The court noted that the plaintiff purchased the property subject to a condition that it remain in the CRP.  The court upheld the trial court's finding that "land in a conservation reserve program can not, by definition, be farmed."  The appellate court also stated, "it cannot possibly be used for agricultural purposes unless and until the CRP contract expires.  As such, there is no way for the farm exemption to apply.  The court's opinion is completely silent that it is the position of the federal government that land enrolled in the CRP produces self-employment income that must be reported on a farmer's Schedule F as farm income where it is subject to self-employment tax.  That is the case for a retired person on social security, although CRP rents paid to such persons are statutorily not subject to self-employment tax.  Apparently, this significant point was not briefed and argued by the plaintiff's lawyer.  Kruse v. DeKalb County Plan Commission, No. 17A03-1406-PL-227, 2015 Ind. App. LEXIS 120 (Ind. Ct. App. Feb. 27, 2015).  


A group of farmers contracted to deliver cotton grown during the 2010 and 2011 crop years to the U.S. Cotton Growers Association (USCGA), a marketing pool that the appellant owned.  A dispute arose concerning performance under the contracts ultimately resulting in the farmers suing the appellant and the USCGA.  The farmers alleged breach of contract, fraud, violations of the state (TX) Deceptive Trade Practices Act, conversion, negligent misrepresentation, breach of fiduciary duty, conspiracy and civil fraud.  Each contract contained a provision stating that "any and all disputes arising between" the parties "shall be resolved...exclusively by binding arbitration pursuant to the arbitration rules of the American Cotton Shippers Association."  The appellant and the USCGA sought an order compelling arbitration, but the trial court held that the arbitration clause was unconscionable, unenforceable and void.  On appeal, the court reversed.  The appellate court noted that after the case had been briefed and submitted, the TX Supreme Court had decided Venture Cotton Coop v. Freeman, 435 S.W.3d 222 (Tex. 2014) in which the Court noted that an unconscionable or illegal contract provision could be severed if it does not constitute the essential purpose of the agreement.  The appellate court noted, based on the TX Supreme Court's analysis, that numerous factors had to be considered to determine unconscionablity, including whether the farmers knew of the ramifications of agreeing to arbitrate before signing the contracts.  Other factors to be considered are the commercial atmosphere in which the agreement was made, the available alternatives, and the ability of the farmers to bargain.  Accordingly, the court reversed the trial court's decision and remanded for further proceedings in light of the TX Supreme Court's 2014 opinion.  Ecom USA, Inc., et al. v. Clark, et al., No. 07-14-00240-CV, 2015 Tex. App. LEXIS 1817 (Tex. Ct. App. Feb. 25, 2015).


The taxpayer was a nonexempt ag co-op that bought, stored, marketed and sold grain.  The grain was purchased from the co-op's members (farmers) and was sold to grain processors.  The co-op, along with two other co-ops, formed an LLC.  The LLC was the licensed grain dealer and was classified as a partnership for tax purposes, but was not a cooperative.  After the LLC was formed, the taxpayer got out of the grain business and surrendered its grain licenses under a non-compete agreement with the LLC.  The taxpayer's patrons could continue to sell to the LLC.  The taxpayer wanted to treat the LLC's purchases of grain as its own, the LLC's payments as patronage allocations and that the purchases were deductible on the taxpayer's return as PURPIMs.  The IRS determined that such treatment was not allowed because the purchases were by an entity that was not subject to cooperative taxation under Subchapter T.  The IRS also determined that there was no facts that provided an argument that the LLC was acting as the taxpayer's agent.  IRS noted that a payment to a co-op patron for grain cannot be treated as PURPIM unless it is paid by means of an agreement between a co-op and the patron.  That didn't exist.  F.S.A. 20150801F (Apr. 22, 2014).


The IRS Chief Counsel's Office has issued guidance to IRS agents to assist in determining whether the TEFRA audit procedures apply to a partnership.  The Chief Counsel's Office noted that the TEFRA/non-TEFRA determination is to be made at the beginning of the audit of the partnership.  The small partnership exception of I.R.C. Sec. 6231 is then determined to apply or not based on the partnership return.  As such, the small partnership exception is only for purposes of the partnership being exempt from the TEFRA audit procedures and does not mean that the entity is not a partnership for other purposes.  C.C.A. 201510046 (Jan. 23, 2015).   


The plaintiff, a ranching operation, bought a 100-acre tract along a road which included surface rights necessary for irrigation water from canals that diverted water from a nearby river.  The defendant organized itself as a water users' association that assessed dues on adjoining landowners to the canals for the purpose of covering the cost of maintaining the canal system.  The defendant claimed that the plaintiff became a member of the association obligated to pay assessed dues upon buying the tract, and assessed $9,500 in dues on the plaintiff that the plaintiff could not opt out of.  The plaintiff challenged the assessment on the basis that the defendant was not qualified to operate under state (ID) law.  The trial court agreed and upheld the assessment, and also ruled for the defendant on contract-based equity theories.  On appeal, the court reversed.  The court determined that the defendant was not authorized to operate under ID law on the basis that the canals were fed by water that was in a natural watercourse rather than a canal or reservoir as ID law required and because only two users (rather than the statutorily-required three or more) used water from a qualified source.  The appellate court also rejected the trial court's equity-based theories.  In addition, the appellate court granted the plaintiff's attorney fees and costs on appeal.  Big Wood Ranch, LLC v. Water Users' Association of the Broadford Slough and Rockwell Bypass Lateral Ditches, Inc., No. 41265, 2015 Ida. LEXIS 75 (Idaho Sup. Ct. Mar. 2, 2015).


The U.S. Court of Appeals has now joined the Ninth and Eleventh Circuits, in finding that inserting a qualified intermediary between related parties does not avoid I.R.C. Sec. 1031(f).  The plaintiff, a subsidiary of a Caterpillar dealer that sold Caterpillar equipment, ran the dealer's rental and leasing operations.  The plaintiff sold used equipment to third parties who then paid the sales proceeds to a qualified intermediary.  The qualified intermediary forwarded the sales proceeds  to the dealer who then purchased new Caterpillar equipment for the plaintiff and then transferred the new equipment to the petitioner through the qualified intermediary.  The arrangement provided favorable financing from Caterpillar and the dealer had up to six months from the invoice date to pay Caterpillar for the petitioner's new equipment.  The petitioner claimed the transaction was non-taxable as a like-kind exchange.  The trial court agreed with the IRS that the transactions failed I.R.C. Sec. 1031(f) and the appellate court agreed.  The court determined that the case was factually similar to Ocmulgee Fields (10th Cir 2010) and Teruya Bros. (9th Cir. 2009).  North Central Rental and Leasing v. United States., No. 13-3411, 2015 U.S. App. LEXIS 3383 (8th Cir. Mar. 2, 2015), aff'g.,  No. 3:10-cv-00066 (D. N.D. Sept. 3, 2013).


In this case, an individual (as settlor) had an attorney establish a trust for her and wanted the attorney to name himself as trustee.  The trust contained three insurance policies on the settlor's life totaling about $8.5 million.  The policies were payable on death to the trustee for the benefit of the settlor's four daughters.  The trust said that the trustee had no duty to pay the insurance premiums, had no duty to notify the beneficiaries of nonpayment of the premiums and had no liability for any nonpayment. The trustee was required by the trust language, however, to provide annual reports to the beneficiaries.  The trustee executed all three insurance policy applications with each one identifying the trust as the policy owner.  On each policy application, the trustee gave the insurer a false trust address.  After paying premiums for two years, the policies lapsed for non-payment of premiums.  Neither the settlor, trustee nor beneficiaries received notice of the lapse until two years later - the notices of nonpayment were sent to the false address.  The settlor paid over $250,000 to an insurance agent who did not forward the payment to the insurers.  The daughters sued the trustee for breach of trustee duties and damages.  The trial court dismissed the case for failure to state a claim.  On further review, the court reversed.   The court determined that under Neb. Rev. Stat. Sec. 30-3805 the trustee's duty to act in good faith trumps the effect of any exculpatory term contained in the trust.  In addition, Neb. Rev. Stat. Sec. 30-3866 is required to administer the trust in good faith with its terms and purposes and the interests of the beneficiaries, and in accordance with the Code.  The trustee, under state law, is also required to keep the beneficiaries reasonably informed of the trust assets.  The court also determined that the trustee failed to adequately explain the trust's exculpatory language to the settlor.  Rafert v. Meyer, 859 N.W.2d 332, 290 Neb. 219 (2015).


The plaintiff, a small town of 230 people, sued the defendants, a married couple, for violating a town ordinance which declared commercial farming within the town boundaries to be a nuisance. The defendants bought a 57-acre farm, six acres of which were within the town's boundaries. The tract had been a commercial nursery for trees and prairie grass. After buying the property, the defendants removed the trees, leveled the property and prepared the ground for planting corn and soybeans. Nine months after the defendant's purchase, the town enacted the ordinance at issue expanding the definition of nuisance to include engaging "in any commercial farming for the production and harvesting of any agricultural or horticultural products on any private or public property within" the town's limits. The defendant's planted a corn crop about six weeks later and the town sent them a notice to abate their nuisance. The town then filed a complaint seeking a penalty for violating the ordinance and an injunction. The matter ended up in court and the trial court acquitted the defendants based on lack of notice, but then issued an injunction barring farming on the portion of the property within the town's borders. The trial court held that the state (IL) Farm Nuisance Suit Act (Act) did not apply to block the town's ordinance from applying. On appeal, the court reversed. The court noted that the town had the authority to enact the ordinance at issue, but that the Act preempted the ordinance from applying because the Act specified that a farm would not become a nuisance because of any changed conditions in the surrounding area. The enactment of the ordinance was a changed condition that the Act applied to. The court also noted that the Act's purpose was to protect and conserve the development and improvement of agricultural land, and that the tract in issue had been used continuously for commercial agricultural purposes. A dissenting judge would have held that the Act did not apply to preempt the ordinance because the tract in issue had not been used to produce corn and soybeans for at least a year before the enactment of the ordinance, and because the defendants changed the use of the tract. The dissent also believed that there were no changed conditions in the "surrounding area" such as neighborhood surrounding the farm changing. The dissent's view would basically have given the town a year after the defendant had started raising row crops to zone the defendant's farming activity out of existence. Village of Lafayette v. Brown, No. 3-13-0445, 2015 Ill. App. LEXIS 120 (Ill. Ct. App. Feb. 25, 2015).


The plaintiff bought $98.6 million of third-party securities via an asset purchase agreement.  The securities lost value, and the third party offered to redeem them for $20 million which would have caused the transaction to have been treated as a capital loss (deductible against capital gain for five years).  The plaintiff didn't accept the offer, instead voluntarily surrendering them to the third party.  The plaintiff reported a $98.6 million loss on the surrender as an abandonment (I.R.C. Sec. 165) loss which was ordinary in nature.  The IRS maintained that the loss was a capital loss, which severely limited its deductibility.  The Tax Court, in Pilgrim's Pride Corp. v. Comr., 141 T.C. No. 17 (2013), agreed with the IRS in holding that I.R.C. Sec. 1234 caused the abandonment to trigger a capital loss even though there was no sale or exchange of the securities.  In addition, the Tax Court invalidated a portion of Rev. Rul. 93-80 where the IRS has determined that the abandonment of a partnership interest where no liability was released under I.R.C. Sec. 752 was not a sale or exchange and the result was ordinary loss treatment (i.e., full deductibility).  On appeal, the appellate court reversed.  The court determined that I.R.C. Sec. 1234A(1), by its plain terms, only applies to the termination of contractual or derivative rights and not to the abandonment of capital assets.  The court noted that the abandonment was of the securities and not a "right" or "obligation" with respect to the securities.  Pilgrim's Pride Corp. v. Comr., No. 14-60295 (5th Cir. Feb. 25, 2015).         


The decedent's estate contained her Ohio residence, a California condominium in which her brother lived and a state teachers' retirement account.  The residuary of the decedent's left $50,000 to her brother that lived in the condominium with the balance of the residuary estate passing to charity.  The estate received a distribution from the retirement account of $243,463 and set aside $219,580 of it “permanently” for charity by placing it in an unsegregated checking account.  Under I.R.C. Sec. 642(c), an estate can claim a charitable deduction for an amount that is set aside for charity, but hasn't yet been paid if, under the terms of the governing instrument, the possibility that the amount set aside will not be devoted to the charitable purpose or use is so remote as to be negligible.  Treas. Reg. Sec. 1.642(c)-2-(d).  When the estate income tax Form 1041 was filed on July 17, 2008, the charitable gift had not been completed, but the estate claimed the charitable deduction on the estate's Form 1041.  The IRS denied the deduction.  The court noted that for the deduction to apply, the charitable distribution must come from the estate's gross income, must be made pursuant to the governing instrument, and must be set aside.  The court determined that the charitable amount did come from gross income (pension distribution which is IRD) and was made according to the decedent's will.  However, the decedent's brother refused to move out of the condominium and claimed that existence of a resulting trust.  In state court litigation, the brother prevailed, but also caused the estate's funds to deplete sufficiently such that the charitable bequest was never paid.  The court noted that the brother's legal claims were public at the time the 1041 was filed and he had refused a buy-out to move out of the condo and the charity had refused to trade the monetary bequest for a life estate/remainder arrangement in the condominium.  Apparently, the CPA in Ohio knew none of this at the time the 1041 was filed.  The estate claimed that the "unanticipated litigation costs" were unforeseeable but, based on the facts and circumstances at the time Form 1041 was filed, the court held that the "so remote as to be negligible" requirement was not satisfied and upheld the denial of the charitable deduction.  The funds had not been permanently set aside.   The charity ultimately did receive a bequest, although it was less than initially anticipated, and the estate did not get a charitable deduction.  Estate of Belmont v. Comr., 144 T.C. No. 6 (2015).


In a Chief Counsel Advice, the IRS has concluded that the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) as codified in I.R.C. Sec. 6221, et seq. don't apply to partnership employment tax or worker classification issues.  In the Advice, the IRS also noted that "small partnerships" are not subject to the TEFRA rules, but gave no indication that that they are not partnerships for non-TEFRA purposes.  The IRS also concluded that there are no special procedures that revenue agents must follow when conducting employment tax examinations of partnerships that are subject to TEFRA.  C.C.M. 20145001F (Aug. 25, 2014). 


The petitioner was an art teacher who inherited a hobby store from her father upon his death.  At the time, the petitioner was an art teacher in Nevada.  The hobby store was in Idaho, but was adjacent to a residence that she owned and lived in.  The petitioner hired a volunteer to watch over the store on a daily basis and she assisted with the business when she was in Idaho.  The store was open daily from 8-5, but incurred small net losses for each of the years in issue which the IRS denied under the hobby loss rules.  However, based on the nine factors of Treas. Reg. Sec. 1.183-2(b), the court determined that the petitioner operated the hobby business as a business with a profit intent.  She conducted the activity as a profitable business, retained the volunteer who had worked with her father, took over the business aspects after her father's death, developed the customer base, did not have substantial income from other sources and did not derive personal pleasure from the activity.  Savello v. Comr., T.C. Memo. 2015-24.


The plaintiff lived in her home unassisted until May of 2011, at which time a non-relative caregiver was hired to provide in-home care.  The hiring was done on an informal basis with no written contract.  Over the next 10 months, the plaintiff paid the caregiver approximately $19,000 via the liquidation and conversion to cash of some of the plaintiff's assets.  At the end of the 10-month period, the plaintiff entered a nursing home.  The plaintiff subsequently executed a written contract with a grandson to reimburse him $1,400 for mileage he incurred while managing the plaintiff's affairs.  Upon applying for Medicaid, the state (MI) Medicaid agency determined that the payments to the caregiver (among other transfers) were "divestments" resulting in a disqualification of Medicaid benefits for almost three months.  The plaintiff died before becoming eligible for Medicaid.  An administrative law judge upheld the agency's determination, but the trial court reversed on the basis that the regulation at issue only applied to up-front payments for services where an assessment of fair market value was not possible and because the care-giver was a non-relative.  On further review, the court reversed the trial court because the payments were not made pursuant to a written contract and were made without a doctor's recommendation as required by the regulation in order for the payment to not constitute a "divestment." Jensen v. Department of Human Services, No. 31908, 2015 Mich. App. LEXIS 315 (Mich. Ct. App. Feb. 19, 2015).   


The plaintiff is a participant in the Tennessee walking horse industry as a buyer, seller and exhibitor of horses.  The Horse Protection Act (HPA) prohibits the practice of "soring" horses, and requires the USDA to establish regulatory requirements for the appointment by the management of any horse show, exhibition, sale or auction of persons that are qualified to detect and diagnose a horse that is sore or to otherwise inspect horses purposes of enforcing the HPA.  The USDA's Animal Plant Health Inspection Service developed regulations creating horse industry organizations (HIOs) which develop and enforce penalties for soring.  Specifically, the management of each horse show is the primary enforcer of the HPA, and the horse industry administers inspectors' training and criteria for qualifications and performance.  The horse industry imposes penalties for soring violations and sets procedures for appealing the penalties.  Penalties would vary from suspensions to disqualifications depending on the particular horse industry organization that managed a horse show.  In 2012, the USDA finalized regulations that required HIOs to adopt mandatory minimum penalties for various soring violations as a conditions certification for being a qualified inspector.  The regulations also required the HIOs to provide copies of their rulebooks to the USDA and establish uniform appeals procedures for disputes over soring.  The regulations also allowed the USDA to initiate its own investigations and prosecutions even if an HIO had already issued a penalty for soring or cleared a potential violator of soring.  The court was unimpressed with USDA's attempted regulatory takeover of the horse show industry by creating new liability provisions and noted that the USDA has arbitrarily injected itself into each layer of enforcement absent any authority in the HPA to do so.  The court held that the HPA merely allows the USDA to establish a regulatory program for managers of horse shows to hire qualified persons to detect horse soring.  The court reversed the trial court's decision, vacated (wiped off the books) the 2012 USDA regulations, and remanded the case for the trial court to enter judgment for the plaintiff.  Contender Farms, L.L.P. v. United States Department of Agriculture, No. 13-11052, 2015 U.S. App. LEXIS 2741 (5th Cir. Feb. 19, 2015).   


Under the facts of this memo, the operator of an oil and gas lease was required, via the operating agreement, to pay all of the expenses and bill co-owners their respective shares.  The operator paid the expenses up-front, but the co-owners didn't reimburse the operator for their shares.  A settlement was reached the next year for payment of the costs in year two.  The IRS determined that the unreimbursed expenses were deductible and were not barred by I.R.C. Sec. 162(f).  However, the operator could not deduct claim a business loss under I.R.C. 165 or a bad debt deduction under I.R.C. 166 for the unreimbursed amounts.  C.C.M. 20150801F (Apr. 22, 2014). 


The petitioner held a patent for a "smokeless tobacco vaporizer."  He had many years of low sales and claimed a $1 million deduction on his return for a "loss arising from theft."  He blamed the lack of success of his invention and the resulting "theft" loss on pirates stealing his intellectual property associated his patent.  The IRS disallowed the theft loss based on a complete lack of evidence of patent infringement or that the petitioner had suffered actual damages.  The petitioner claimed that Internet search engines had intentionally demoted his product, that social media had conspired to diminish his product's visibility, that the U.S. Postal Service intentionally misspelled the name of his business and that his computer had been continually hacked, among other claims.  He estimated his theft losses from $282 million to $294 million annually, but only claimed a deduction for $1 million to "prevent further victimization."  The court upheld the IRS determination, noting that the petitioner had not demonstrated that a theft had occurred as required by I.R.C. Sec. 165(e).  The court also noted that the petitioner had failed to show that he discovered the theft in the years in which the deduction was claimed rather than other years since his patent was filed.  The court upheld an accuracy-related penalty.    Sheridan v. Comr., T.C. Memo. 2015-25.


The debtor appealed the bankruptcy court’s determination that she was ineligible to be a Chapter 12 debtor.  The debtor had filed a Chapter 7 "no-asset" bankruptcy in 2010 and was granted a discharge. The current action was filed four months after the debtor received a discharge in the Chapter 7 case.  The total amount of debt on the debtor's ranch and other property exceeded the Chapter 12 debt limits by more than $4 million.  The debtor argued that only the secured portion of the debt should be counted because her personal liability had been discharged in a Chapter 7 filing.  The appellate court bankruptcy panel reviewed only whether the Chapter 12 debt limit counts secured debt only up to the value of collateral.  The appellate court held that obligations that are enforceable against the debtor’s property but for which there is no personal liability are still “claims” and “debts” within bankruptcy.  Thus, the debtor was not eligible to file Chapter 12 bankruptcy.  In re Davis, No. 12-60069, 2015 U.S. App. LEXIS 2381 (9th Cir. Feb. 17, 2015), aff'g., In re Davis, No. CC-11-1692-MkDKi, 2012 Bankr. LEXIS 3631 (Bankr. 9th Cir. Aug. 3, 2012).


In this case, the court held that the majority owners of a corporation were personally liable for the unpaid employment taxes of the corporation.  The court noted that under state (CA) the corporate veil is pierced if the creditor establishes the existence of unity of interest and ownership between the owners and the corporation such that the separate personalities of the corporation and the individual no longer exist, and that if the corporate acts are treated as those of the corporation alone, an inequitable result would follow.  The Court, upholding a trial court decision, noted that the majority shareholders exercised substantial control over the corporation's operations, and regularly drew on corporate funds to finance personal expenses.  The majority shareholder also borrowed corporate funds without proper documentation.  In addition, the majority shareholders facilitated the transfer of funds between the corporation and another corporation where there was a unity of interest and ownership.   As such, the majority shareholders were the corporation's alter egos and the corporate veil was pierced resulting in the shareholders being personally liable for the corporation's unpaid employment tax.  Politte v. United States, No. 12-55927, 2015 U.S. App. LEXIS 2380 (9th Cir. Feb. 17, 2015).   


The debtor bought an individual retirement annuity in 2009 for $267,319.48 which he funded with a rollover from another one of his retirement accounts.  The terms of the annuity specified that the debtor would receive eight annual payments of $40,497.95 beginning on April 12, 2010.  The annuity contained a liquidity feature allowing the debtor to take a single, lump-sum withdrawal of up to 75 percent of the present value of the remaining payments.  The debtor file bankruptcy on June 6, 2012, listing the annuity at a value of $263,370.23, but claiming it as an exempt asset.  The trustee argued that the annuity was not exempt.  The bankruptcy court held that the annuity was exempt, as did the Bankruptcy Appellate Panel.  The trustee argued that the annuity had fixed premiums and did not require annual premiums that were under the limit for IRAs for the year, in violation of I.R.C. Sec. 408(b)(2).  The court disagreed.  Even though the contract barred any additional premiums after purchase, the purchase price was not fixed.  On the IRA limit issue, the court held that I.R.C. Sec. 408(b)(2) did not require annual premiums, but if annual premiums were required, the contributions could not exceed the applicable IRA contribution limits.  The court noted that rollover contributions are not subject to premium limitations.  Thus, the annuity was exempt under 11 U.S.C. Sec. 522(b)(3)(C).  In re Miller, No. 13-3682, 2015 U.S. App. LEXIS 2275 (8th Cir. Feb. 13, 2015), aff'g., 500 B.R. 578 (B.A.P. 8th Cir. 2013).


The defendant, a pipeline company, sought to construct a carbon dioxide pipeline across the plaintiff's cattle ranch and rice farm.  The plaintiff barred the defendant from surveying the property and the defendant received a temporary injunction against the plaintiff.  The trial court determined that the defendant was a "common carrier" which carried with it the power of eminent domain.  Accordingly, the trial court permanently enjoined the plaintiff from interfering or attempting to interfere with the defendant's right to enter and survey the plaintiff's property.  On appeal, the appellate court affirmed.  On further review the TX Supreme Court reversed, establishing a new test for determining common carrier status.  On remand, the trial court determined that the defendant was a common carrier that had the right of eminent domain.  On appeal, the court determined that before the defendant can obtain common carrier status, the affected property owners can demand that the party seeking common carrier status be established at a jury trial.  In the prior Supreme Court case, the Court held that the designation of common carrier by the Texas Railroad Commission was inadequate and that it was up to the pipeline company to establish common carrier status as part of a condemnation case.  Under the Supreme Court test, a pipeline company must establish a "reasonable probability" that the pipeline will, at some point after the pipeline is constructed, serve the public "by transporting gas for one or more customers who will either retain ownership of their gas or sell the gas to parties other than the carrier."  This must be shown, the court held, at the time the company intends to build the pipeline.  Thus, the "reasonable probability" question is a fact issue to be determined by a jury.  Texas Rice Land Partners, Ltd., et al. v. Denbury Green Pipeline-Texas, LLC, No. 09-14-00176-CV, 2015 Tex. App. LEXIS 1377 (Tex. Ct. App. Feb. 12, 2015). 


The petitioner operated a sole proprietorship and incurred a net operating loss (NOL) of $81,957 in 2007 and an NOL of $91,812 in 2008.  He claimed that the NOL carryover relating to 2007 could offset his 2008 net self-employment earnings.  The IRS disagreed and the court agreed with the IRS.  The court noted that I.R.C. Sec. 1402(a)(4) specifically provides that when determining self-employment earnings, the deduction for an NOL is not allowed.  The court also applied the I.R.C. Sec. 6651(a)(1) penalty for failure to timely file a return.  Stebbins v. Comr., T.C. Sum. Op. 2015-10.


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