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.
While a landlord who is not a possessor is not liable for injuries sustained by the tenant or third parties on the property, there are exceptions. Those exceptions include the landlord's retention over part of the leased premises and injury occurs on that part, and agreeing to keep the premises in good repair and failing to do so and injury results from that failure. Here, a portion of a former supermarket was leased to a tenant under an "as is" lease. However, the landlord, under the terms of the lease, agreed to keep the ceiling, floors, lighting and other fixtures, in good repair. The ceiling and fixtures were not in good condition when the tenant took possession and the tenant did not ask the landlord to make repairs. The plaintiff, an employee of the tenant, was injured when light fixtures fell on her. The trial court granted summary judgment for the landlord (defendant), but the appellate court reversed on the basis that the defendant had agreed to keep light fixtures in "good repair" but had failed to do so. The court reversed the trial court and remanded for trial. Benson v. 13 Associates, LLC, No. 14-0132, 2015 Iowa App. LEXIS 102 (Iowa Ct. App. Feb. 11, 2015).
The defendant, an Iowa farmer who sustained debt-related financial problems in the 1980s, failed to pay his property taxes in 2007. A third party bought the tract in question at a tax sale auction, paid the delinquent taxes and received a tax sale certificate. The defendant did not redeem the property during the statutorily-required 21 month period. The third party then served notice on the defendant of the expiration of the right to redeem. The third party then filed an affidavit of service of notice with the county treasurer. The affidavit contained an incorrect date, referring to "2011" instead of "2012". The defendant did not redeem the property during the additional redemption period of 90 days. After the expiration of the 90-day period, the third party assigned its interest in the tax sale certificate to the plaintiff who then recorded it. Two months later, the plaintiff filed a quiet title action against the defendant. The second paragraph of the pleadings contained an incorrect legal description, but the correct legal description was contained in attachments to the petition, which included the tax deed, tax sale certificate and the previously served notice of right to redeem. The defendant, even though knowing full well which tract was at issue, moved to dismiss the quiet title action, and the plaintiff moved to amend the petition to correct the legal description in the pleadings. The trial court saw through the defendant's deception and allowed the plaintiff to amend the pleading. The trial court stated, "the defendants cannot seriously argue they were prejudiced or unfairly surprised by Plaintiff's proposed amendment. Attached to the petition were the Tax Deed and the Notice of Expiration of Right of Redemption contained the correct legal description. Additionally, the Certificate of Purchase from the Washington County tax sale contained a correct abbreviated legal description, the VIN number of the property, and a parcel number particular to the property at issue." The defendant also made no claim of surprise, but came to trial fully prepared to dispute the plaintiff's claim to the actual parcel at issue. On appeal, the court reversed on the basis that the notice did not comply with Iowa Code Sec. 649.3 which requires the notice in a quiet title action to adequately describe the property. Incredibly, the court said the legislative intent behind the provision was to "require ample notice to a defendant facing a quiet title action," but then ignored that legislative intent to determine that ample notice had not been give because the pleadings contained an incorrect legal description but the attachment contained multiple references to the correct parcel, and the defendant was not, in fact, deceived in any manner - thus, comporting with the legislative intent. Also, incredibly, the court determined that the reference to the wrong year in the notary jurat of the affidavit of service was not a defect which would invalidate the tax deed. The court held that the trial court abused its discretion in allowing an amendment of the pleadings. The case was remanded with instructions to grant the defendant's motion to dismiss without prejudice. Adair Holdings, L.L.C. v. Escher, No. 14-0477, 2015 Iowa App. LEXIS 106 (Iowa Ct. App. Feb. 11, 2015).
The defendant was in charge of an elaborate scheme to gather investments in a non-existent “wind farm” in South Dakota. The defendant was the sole signatory over invested funds solicited from others and could withdraw the funds for the other members of the conspiracy. The defendant set up money drop boxes, ran the “boiler room” where sales people worked, came up with sales pitches, told an investor that a wind turbine had been purchased with the $250,000 that the investor paid when it hadn’t been, oversaw the placement of signage in a field indicating that a “wind farm” was under construction when it wasn’t, and claimed he was merely a consultant paid $125,000 annually even though he transferred over $7000,000 of invested funds to his account over a period of two and one-half years. The defendant plead guilty to conspiracy to commit money laundering, as well as wire and mail fraud and was sentenced to over 12 years in prison plus three years of supervised release and ordered to pay restitution. The defendant appealed his sentence on the basis that the scheme had not resulted in any criminal securities violations as of the start of his prosecution and, thus, the court lacked subject matter jurisdiction because the government didn’t first obtain a referral from the Securities and Exchange Commission. The court rejected the argument and upheld the sentence enhancements. Shumaker v. Reed, No. 13-8073, 2015 U.S. App. LEXIS 2188 (10th Cir. Feb. 11, 2015).
The parties in this case were married for 35 years before divorcing. The ex-husband was required to pay his ex-wife, under the marital separation agreement, $500 per month alimony until her remarriage or co-habitation with a male or death of either party. Over six years later the ex-husband petitioned to terminate the alimony on the grounds that the ex-wife was cohabiting with a male. At trial, the ex-wife conceded that a male had been living with her in her townhouse which consisted of two bedrooms and two and one-half baths. The live-in paid the ex-wife $400 monthly rent. The live-in had a separate mailbox from the ex-wife, and the rent amounts were deposited in the ex-wife's account. The trial court determined that the live-in was cohabitating with the ex-wife and ordered that the alimony payments be terminated. On appeal, the court reversed. Even though the ex-wife loaned the live-in $15,000 to buy a car, went on a cruise with him, and used the monthly rent checks to pay her expenses, the court determined that no supportive relationship existed between the ex-wife and the live-in. The court determined that the live-in was merely a tenant or a "lodger" and not a cohabiter. Atkinson v. Atkinson, No. 2D13-5815, 2015 Fla. App. LEXIS 1776 (Fla. Ct. App. Feb. 11, 2015).
The petitioner was a limited liability company that acquired real estate properties via tax deeds that they purchased at public auctions. The petitioner then sold the properties under contracts for deed and reported the sales on the installment method as capital gain. The IRS denied the installment method and capital gain treatment. The court determined that while the deeds were acquired with the primary intent to profit from their redemption, the continuous property sales of the forfeited properties demonstrated that the petitioner did not intend to hold onto the properties with an expectation in appreciation in value, but to sell the properties in quick fashion for profit. As such, when combined with the fact that the petitioner employed persons to act on the petitioner's behalf in acquiring the tax deeds, preparing the acquired tracts for sale and maintaining business records, the court determined that the sales were in the ordinary course of the petitioner's business as a dealer in real estate. Thus, the income from the sales was capital gain in nature and also subject to self-employment tax and could not be reported on the installment method. SI Boo, LLC v. Comr., T.C. Memo. 2015-19.
The petitioner, a bankruptcy lawyer whose wife was a college professor, was held to have engaged in his horse activity without a profit intent. As a result, the losses from the activity were largely non-deductible. The court noted that the petitioner had no prior experience in horse activities. While he did spend significant time in the activity, he had no expectation that asset values would increase. There was also no evidence that the petitioner had any past success in related activities. The petitioner incurred a lengthy period of substantial losses and only occasional profits, and there were elements of personal pleasure present. Bronson v. Comr., No. 12-72342, 2015 U.S. App. LEXIS 1745, aff'g., T.C. Memo. 2012-17.
The plaintiff, a food safety activist group, sued the USDA challenging the USDA's National Poultry Inspection System rules finalized in 2014 and to be codified at 9 C.F.R. parts 381 and 500. The USDA's Food Safety and Inspection Service adopted the rules as part of an effort to modernize the federal poultry inspection process. The rules all employees of poultry-processing establishments to take a more active role in the inspection process, thereby requiring fewer federal inspectors to be stationed along slaughter lines since the employees can conduct a preliminary screening of the carcasses before presenting the poultry to a federal inspector for a visual-only inspection. The plaintiffs sought a preliminary and permanent injunction barring implementation of the rules on the grounds that the rules were inconsistent with the Poultry Products Inspection Act (PPIA) and will result in the production of unsafe poultry products. The court rejected the plaintiff's claim for lack of subject matter jurisdiction and dismissed the case. The court held that the plaintiff had failed to demonstrate and injury-in-fact that is traceable to the defendant's conduct and, therefore, lacked standing to challenge the rules. The court also noted that the plaintiff's "fox guarding the henhouse" assertions of increased risk were "unsupported and overblown." The court noted that the USDA-FSIS anticipated less food-borne illnesses as a result of the rules. Food and Water Watch, Inc., et al. v. Vilsack, No. 14-cv-1547 (KBJ), 2015 U.S. Dist. LEXIS 14883 (D. D.C. Feb. 9, 2015).
This case involves a dispute between adjoining landowners concerning a boundary line. After a survey, the parties still continued to dispute the matter resulting in police action and criminal charges being filed as a result of one party "mooning" the other party and public urination on the neighbor's lawn. A court order resulted in the boundary line being that as established by a surveyor and that each party could erect and maintain a lawful fence. At 5:30 a.m. a few days after the court order and stipulation, the plaintiffs' contractor began building a wooden stockade fence on the boundary that was 6 feet tall and was flush with the ground. The fence contained wording on the side facing the defendants and also backed-up drainage on the plaintiffs' property. The plaintiffs also planted trees on their property that obstructed the defendants' view of a mountain. The defendants filed a post-judgment motion claiming that the stockade fence was an unlawful spite fence and sought an injunction for its removal. The defendants also sought damages. The plaintiffs filed motions for contempt and damages for trespass and poisoning of trees and littering the plaintiffs' property. The trial court determined that the fence was a spite fence based on the facts and ordered a reduction in its height with space to be left at the bottom. As for damages, the court assessed damages against both parties with the overall result that the plaintiffs could recover $396 from the defendants. The plaintiffs appealed, but the court determined that the fence was a spite fence under either the "dominant purpose" test or the "sole purpose test," but the court announced that it was following the "dominant-purpose test for determining the existence of a spite fence which subjects the owner to a $100 fine. The court rejected the balance of the plaintiffs' claims. Obolensky v. Trombley, No. 13-418, 2015 Vt. LEXIS 14 (Vt. Sup. Ct. Feb. 6, 2014).
In a recently released Revenue Procedure, the IRS has announced the user fee for obtaining a private letter ruling - a taxpayer request for guidance concerning an uncertain area of tax law. The basic fee is $28,300 per request, but is $2,200 for taxpayers having gross income less than $250,000. The user fee is $6,500 for taxpayers with gross income of less than $1 million but more than $250,000. Rev. Proc. 2015-1
The plaintiff, a rice farm, sued the defendant, the operator of a wastewater disposal facility that was adjacent to the plaintiff's property, for trespass. The basis of the trespass claim was that subsurface wastewater injected into a rock formation more than 1.5 miles below the surface of the defendant's property had migrated into the deep subsurface of the plaintiff's property possibly contaminating briny groundwater beneath the surface. The trial court charged the jury with determining whether the plaintiff trespassed on the defendant's property with trespass defined as a non-consensual entry where the party claiming trespass bore the burden of establishing the lack of consent to the entry. The jury determined that the plaintiff had not committed a trespass. On appeal, the court reversed, determining that consent is an affirmative defense to trespass for which the plaintiff, as the alleged trespasser, bore the burden of proof. The appellate court also determined that the defendant was not entitled to a directed verdict because there was some evidence that the defendant had impliedly consented to the plaintiff's subsurface entry. On further review, the Texas Supreme Court reversed the appellate court and reinstated the trial court's judgment holding consent is not an affirmative defense to a trespass action. Instead, the Supreme Court noted, lack of consent of authorization is an element of a trespass cause of action that the party alleging trespass must prove. The court noted that the Texas Court of Appeals had never delivered a well-reasoned decision in which it allocated the burden of proving consent in trespass cases, while it is well-established in Texas that a trespass action is an unauthorized entry onto the land of another. Environmental Processing Systems, L.C. v. FPL Farming Ltd., No. 12-0905 (Tex. Sup. Ct. Feb. 6, 2015).
The IRS has issued a non-acquiescence with four Tax Court cases from 2004 involving discharge of debt under I.R.C. Sec. 108(a)(1) - the exclusion from gross income of any amount derived from the discharge of debt of the taxpayer if the discharge occurs in bankruptcy if the taxpayer is under the bankruptcy court's jurisdiction. For partnerships, the discharge provision is applied at the partner level. In the four cases, the taxpayer in each case was a general partner of a partnership who had personally guaranteed partnership debt. When each partnership filed Chapter 11, each of the respective general partners agreed to make payments to the particular bankruptcy estate in exchange for the release of creditor claims against them personally. The bankruptcy court order approving the agreement indicated that every one of the general partners was under the court's jurisdiction. Each partner excluded the discharged debt from income and IRS disagreed with that characterization, assessing several hundred thousand of dollars of additional tax. The Tax Court, in each case, held that the IRS was wrong because the partnership debt was discharged in bankruptcy in accordance with Sec. 108(d)(2) and that the discharge released the partners from liability in a bankruptcy matter and that the partners were subject to the court's jurisdiction. The court determined in each case that it was immaterial that none of the partners was in bankruptcy in their individual capacities. IRS Action on Decision, 2015-001 (Feb. 9, 2015). The cases are Gracia v. Comr., T.C. Memo. 2004-147; Mirarchi v. Comr., T.C. Memo. 2004-148; Price v. Comr., T.C. Memo. 2004-149; and Estate of Martinez v. Comr., T.C. Memo. 2004-150.
The taxpayers, a married couple, made excess contributions in 2007 to their IRAs. They withdrew the excess contribution and earnings on the excess on March 23, 2010. In addition, their returns for 2008 and 2009 were not timely filed. The taxpayers sought a waiver of the 6 percent excise tax on the excess contribution, but IRS refused and levied the excise tax plus penalties for late filing plus interest and penalties for late payment. After paying the alleged deficiency, the taxpayers sought refunds on the basis that IRS had improperly determined the date of payment because the IRS calculated interest based on the date the payment was received rather than on when the taxpayer mailed the payment. In addition, the taxpayers argued that they were owed a refund for 2009 taxes because they had removed the IRA funds before April 15, 2010. The court determined that IRS had improperly calculated interest because the "postmark rule" applies, and that because the excess IRA funds were withdrawn before April 15, 2010, the penalty for 2009 did not apply. Wu v. United States, No. 14-cv-3925, 2015 U.S. Dist. LEXIS 12991 (N.D. Ill. Feb. 3, 2015).
The parties owned farmland next to each other and were also stockholders in an irrigation company that provided water to the stockholders via an irrigation canal. Water was provided via headgates located at various points along the canal. When multiple landowners receive water via a headgate, they must determine on their own how to receive the water. At issue was a headgate located on the edge of the defendant's property with a lateral across the defendant's property to the plaintiff's property. The defendant claimed that the plaintiffs had not been property maintaining the lateral which cased it to overflow onto the defendant's property. Ultimately, the defendants shut down the headgate and the plaintiffs did not receive any additional water for their crops for the balance of the year. The plaintiff sued seeking the imposition of a prescriptive easement over the defendant's property and an order barring the defendant's from interfering with the easement. The plaintiffs also sought damages. The trial court determined that the plaintiffs had established the elements necessary for a prescriptive easement. On appeal, the court affirmed. The court noted that the plaintiff's use of the lateral had been continuous and uninterrupted, was not via permission, and had been utilized since at least 1959. The court also ordered that culverts installed by the defendants that restricted the flow of water to the plaintiff be removed. Fyfe v. Tabor Turnpost, L.L.C., 22 Neb. App. 711 (2015).
The petitioner's return was under audit and IRS sought the petitioner's signature on Form 872 to extend the normal three-year statute of limitations for assessment of additional tax to allow IRS more time to complete the audit. However, Form 872 contained the wrong tax year and the petitioner argued that the statute of limitations had not been extended and, thus, IRS couldn't assess additional tax because the statute of limitations had run. The court disagreed, noting that both the petitioner and the IRS believed that the Form 872 actually applied to the tax year being audited. Thus, the parties had made a mutual mistake and the court allowed the Form 872 to be reformed such that it was applicable to the tax year under audit. Hartland Management Services, Inc. v. Comr., T.C. Memo. 2015-8.
The defendant was convicted of burglary in the third degree (as a habitual offender) after a farmer caught him stealing tools and other items from a remote farm building. He alleged upon discovery that the building hadn’t been entered for three to five years and that he was just “picking.” On appeal, the defendant argued that an aiding and abetting jury instruction was inappropriate and that he received ineffective assistance of counsel. The court affirmed the judgment, finding that the woman in his car when he was caught in the act could have been participating in the theft. As such, the aiding and abetting instruction was not error. The court also found that defendant’s counsel was not ineffective for failing to raise the issue of insufficiency of the evidence. The State’s case against defendant was strong. Defendant’s allegations of no evidence of specific intent had no merit, and he suffered no prejudice. State v. Braden, No. 13-2014, 2015 Iowa App. LEXIS 42 (Iowa Ct. App. Jan. 28, 2015).
Marijuana is an illegal drug under federal law and I.R.C. Sec. 280E bars deductions for any amounts related to trafficking in controlled substances. However, the taxpayer can reduce gross receipts by the cost of goods sold. Here, IRS said that expenses that would not be included in cost of goods sold because they would normally be capitalized under I.R.C. Sec. 263A (and reduce income) cannot be capitalized when they relate to selling marijuana. Also, IRS said that when they audit a cash-basis marijuana seller, the IRS can allow the seller to deduct its costs that would have been inventoriable had the taxpayer used the accrual method. C.C.A. 201504011 (Dec. 10, 2014).
The parties in this case were neighboring landowners that shared a common boundary. The plaintiff (appellant in this case) instructed his workers to cut down trees on the plaintiff's side of the property line. The plaintiff also instructed his workers to tear out the existing fence and build a new one to hold cattle on his property. The workers, however, also tore out the defendant's (appellee in this case) fence and about 30 large trees on the defendant's property with the damage to the defendant's property occurring in and area 16 feet wide and 800 feet long. The plaintiff admitted to the trespass, but argued that the defendant's property still had the same appraised value and, thus, the defendant was not entitled to any damages. The court noted that the destruction of the trees caused only nominal diminution in the property's value, thus the defendant was entitled to the "intrinsic value" of the trees. The defendant lost privacy and the previous view of their property. The court determined that the cost to remove stumps would be $6,500 and that the defendant also lost a windbreak and shade for his horses. An arborist's report indicated that the destroyed trees had an intrinsic value of $150,000. The evidence was sufficient to support the jury's award of damages. Ortega v. Cheshier, No. 11-13-00002-CV, 2015 Tex. App. LEXIS 837 (Tex Ct. App. Jan. 29, 2015).
The decedent died in 2005 and had not filed returns for 2001-2004. The returns were late-filed shortly before the decedent's death with the return for 2001 reporting an overpayment of nearly $50,000. The estate sought to have the overpayment credited to the 2002 tax year. The estate also claimed that the decedent had been diagnosed with Alzheimer's/dementia which prevented the decedent from timely filing the returns and, thus, was entitled to an extension of time to file the returns via I.R.C. Sec. 6511(h). The IRS denied the refund claim and the estate sued. The court denied the extension of time to file because the evidence showed that the decedent had lived alone, cared for himself, cooked his own meals, fed and clothed himself, and made a lot of money buying and selling securities and investing. The decedent's primary care physician testified to the contrary, but had earlier written a report for the state Vehicle Administration that the decedent did not have dementia. The court determined that the physician's earlier report was more credible and his testimony was not reliable. Thus, I.R.C. Sec. 6511(h) did not apply and the estate could not apply the overpayment to the 2002 tax year. Estate of Rubinstein v. United States, No. 09-291T, 2015 U.S. Claims LEXIS 41 (Fed. Cl. Jan. 29, 2015).
Two farm-related organizations, the American Farm Bureau Federation and the National Pork Producers' Council, sued the Environmental Protection Agency (EPA) under the Administrative Procedures Act to bar EPA's release of member information involving physical addresses and details concerning the members' operation of Confined Animal Feeding Operations (CAFOs). Under the Clean Water Act (CWA), CAFO information involving location and certain operational details must be made public as a condition of obtaining a Natdional Pollution Discharge Elimination System (NPDES) permit. An NPDES permit must be obtained to operate the CAFO. In 2012, the EPA received Freedom of Information Act (FOIA) requests from several environmental groups seeking CAFO information. In response, EPA released comprehensive data providing precise CAFO locations, animal type and number of head, and personal contact information, including names addresses, phone numbers and email addresses of CAFO owners. Before the release of information, the Department of Homeland Security had informed EPA that the release of such personal and confidential information could constitute a domestic security risk. Such personal business information is specifically exempted form disclosure under FOIA under enumerated exemptions No. 4 and No. 6. The defendants (EPA and intervening activist groups) argued that the plaintiffs lacked standing to sue due to the plaintiffs having not suffered injury or facing the imminent threat of injury. The plaintiffs argued that they would be injured and that at least one member had already been physically invaded. However, the court determined that the plaintiffs failed to establish standing because they failed to demonstrate an actual or imminent injury, framing the issue as one over "loss of control of their personal information." The court then reasoned that the potential release concerned information that was already publicly available and was easily accessible via the Web. The court noted that the one party that had suffered injury sustained it before the EPA responded to the FOIA request. The court failed to address, however, the obvious question of why the activist groups filed a FOIA request for (what the court stated was) information that was already publicly and readily available. American Farm Bureau Federation, et al. v. U.S. Environmental Protection Agency, et al., No. 13-1751 ADM/TNL Civil No. 13-1751 ADM/TNL, 2015 U.S. Dist. LEXIS 9106 (D. Minn. Jan. 27, 2015).
The plaintiffs' daughter was a 17-year old equestrian competitor and the defendant was her coach/trainer. The parties had executed a liability release form in which the daughter agreed to release the defendant from liability except for damages caused by the defendant's "direct, willful and wanton negligence." During a competition, the daughter's horse struck a hurdle which caused the daughter to fall with the horse then falling on the daughter resulting in the daughter's death. The plaintiffs sued the defendant for wrongful death and negligent infliction of emotional distress as a result of witnessing the accident and the daughter's death. The trial court granted the defendant's motion for summary judgment based on the release of liability. On appeal, the court affirmed. The court noted that the release provided an express assumption of risk defense as to the plaintiffs' claims of negligence and negligent infliction of emotional distress. The court determined that the release was not ambiguous, and that the plaintiffs failed to carry their burden to prove that the defendant acted with gross negligence (because the release served as a defense to the claims arising from ordinary negligence). Eriksson, et al. v. Nunnink, 233 Cal. App. 4th 708 (2015).
The plaintiffs claimed that the defendant, a potato chip manufacturer, violated the Missouri Merchandising Practices Act (MMPA) by falsely labeling and maketing sixteen different varieties of potato chips as "all natural" chips that contain "no preservatives" when the chips are actually not all natural and do contain preservatives. However, the court dismissed the suit primarily because the plaintiff failed to define "natural." The court rejected the dictionary definition of "natural" because potato chips are a processed food product. Likewise, an FDA advisory opinion was not binding because it did not involve the FDA's formal adoption of a definition of the term. Also, the USDA definition was inadequate because it only applied to meat and poultry products, and the USSDA's definition of "synthetic" only applied to products in the National Organic Program. As to the plaintiffs' claim that the use of the phrase "no preservatives" was misleading, the court noted a complete lack of evidence that "no preservatives" actually showed up on the package labels. The court observed that the packages provided enough information for the plaintiffs to avoid products with ingredients they objected to. An injunction would not issue, the court held, because the plaintiffs testified that they wouldn't buy the products anyway. The putative class claims were dismissed. Kelly, et al. v. Cape Cod Potato Chip Company, Inc., No. 14-00119-CV-W-DW, 2015 U.S. dist. LEXIS 8988 (W.D. Mo. Jan. 27, 2015).
The plaintiffs, citizen activists opposed to confined animal feeding operations (CAFOs), sued the U.S. EPA, Ohio Dept. of Agriculture (ODA) and the Ohio EPA under the Clean Water Act (CWA) claiming that the ODA was improperly issuing National Pollution Discharge Elimination System (NPDES) for CAFOs without EPA approval via a memorandum of agreement, and that the Ohio EPA had transferred part of its authority to administer NPDES permits to the ODA without permission from the federal EPA by allowing the ODA to issue a manure management plan as a condition for obtaining an NPDES permit. The transfer of authority was pursuant to a state law enacted in 2000 that transferred authority from the Ohio EPA to the ODA. ODA then sought federal EPA approval to transfer NPDES permit authority for CAFOs to the ODA so that CAFO regulation would be centralized under the ODA. The court previously denied the plaintiffs a preliminary injunction, and in this decision dismissed the plaintiffs' case. The court noted that any manure management plan that is submitted to the Ohio EPA is reviewed by the Ohio EPA and can only be used as an NPDES permit application if it satisfies the CWA. The court noted that the plaintiffs' assertions were "completely devoid of merit." Askins, et al. v. Ohio Department of Agriculture, No. 3:14-cv-01699-DAK (W.D. Ohio Jan. 27, 2015).
In this case, the petitioner operated a retail business that sold home building materials and supplies. The petitioner built two new retail stores. As of December 31, 2008, the buildings were substantially complete and partially occupied and the petitioner had obtained certificates of completion and occupancy and customers could enter the stores. However, the stores were not open for business as of the end of 2008. The petitioner claimed the 50 percent GoZone depreciation allowance for 2008 on the two buildings which created a tax loss for 2008 and allowed the petitioner to carry back the losses for the 2003-2005 tax years and received a refund. The IRS disallowed the depreciation deduction on the basis that the petitioner had not put the buildings in service and assessed a deficiency of over $2.1 million for tax years 2003-2008. The petitioner paid the deficiency and sued for a refund. The IRS argued that allowing the depreciation would offend the "matching principle" because the petitioner's revenue from the buildings would not match the depreciation deductions for a particular tax year. The court held that this argument was "totally without merit." As to the government's "placed in service" argument, the court noted that Treas. Reg. Sec. 1.167(a)-11(e)(1) says that placed in service means that the asset is in a condition of readiness and availability for its assigned function. With respect to a building, the court noted that this meant that the building must be in a state of readiness and availability without regard to whether equipment or machinery housed in the building has been placed in service. The court held that there was no requirement that the petitioner's business must have begun by year-end. Cases that the IRS cited involving equipment (in one case an airplane) being placed in service were not applicable, the court determined. The court also noted that the IRS's own Audit Technique Guide for Rehabilitation Tax Credits stated that "[A] 'Certificate of Occupancy' is one means of verifying the 'Placed in Service' date for the entire building (or part thereof)". The court noted that the IRS had failed to cite even a single authority for the proposition that "placed in service" means "open for business," and that during oral arguments admitted that no authority existed. The court granted summary judgment for the petitioner and noted that the petitioner could pursue attorney fees if desired. Stine, LLC v. United States, No. 2:13-03224, 2015 U.S. Dist. LEXIS 9850 (W.D. La. Jan. 27, 2015).
The parties executed a cash rent farm lease with one-half due after wheat harvest of by July 15 and the other half due by December 15 annually. The lease specified that it ran from May 2, 2006 to December 31, 2011. In the spring of 2011, the surviving spouse landlord notified the tenant in writing that the lease was ending on December 31, 2011 and that no fall-seeded crop should be planted. The written lease, however, contained language stating that the landlord gave the tenant "peaceable possession of any land upon which crops are growing in the year of termination through and including the harvest thereof...". The tenant planted wheat in the fall of 2011 harvested the crop in June of 2012. The landlord sued on the basis that the lease terminated at the end of 2011 and the tenant was on notice not to plant a fall crop. Thus, the landlord argued that the landlord was entitled to the wheat crop. The trial court agreed. On further review, the appellate court (in an unpublished opinion) disagreed. The court held that the lease clearly stated that the tenant had the discretion to plant whatever crops they wanted during the term of the lease ("Tenants... shall have the right to plant the leased land to any crop they determine advantages [sic]...") and be able to harvest those crops. The evidence also was insufficient to support an extension of the lease. Meairs v. Watson, No. 111, 114, 2015 Kan. App. Unpub. LEXIS 52 (Kan. Ct. App. Jan. 23, 2015).
The landlord entered into identical leases with different tenants for separate farms in the spring of 2011. The leases specified that, "The term of this lease shall be five (5) years. An annual review of rental rates and terms will be completed in January of each year. The final year of this contract shall be 2015." The leases set for the initial rent that was to be paid, but one of the tenants did not agree to the rental rate for 2013 that the landlord desired. Thus, they paid the same rent as they had for 2012 and continued to farm the land. The landlord sued, claiming that the tenants failed to negotiate in good faith the terms for 2013 and that the leases were invalid. The trial court disagreed. On appeal, the court affirmed, holding that the rental amount, as expressly specified in cash, was an essential contract term and, as such, the agreement to agree on it in the future was not enforceable. The court determined that the lease language was clear in that the rental rate were to be reviewed annually. The lease said nothing about coming to an agreement on rental rates. Thus, the lease was for a 5-year term rather than being an annual lease, and the rental rate initially specified applied for the entire term unless the parties agreed otherwise. The court also upheld the trial court's application of the parol evidence rule to exclude extrinsic evidence. Gibbons Ranches, L.L.C. v. Bailey, et al., 289 Neb. 949 (2015).
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. 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).
The petitioners (married couple) owned a condominium as a rental property and the husband managed the property. The husband also had a full-time job that was not a real estate trade or business. The petitioners attempted to deduct the loss associated with their rental property, but the IRS disallowed the loss on the basis that the petitioners did not satisfy the real estate professional test. While the husband claimed that he spent 799 hours in the rental activity, he testified that some of his entries in his logs and calendars were inaccurate and some of his testimony was inconsistent. The court also noted that the husband would have to put more hours into the rental activity than he did his full-time job. The court upheld the IRS determination on the basis that the petitioners failed to prove that the real estate professional test had been satisfied. Flores v. Comr., T.C. Memo. 2015-9
The petitioner was a long-haul over-the-road truck driver who spent many weeks on the road and was compensated on a per-mile basis. When not traveling for work, the petitioner lived in Minnesota with his family. The petitioner claimed deductions for meals and lodging while traveling, claiming that he incurred the expenses while "away from home." The court determined that the petitioner was never away from his "tax home" and was not entitled to business-related deductions for meals and lodging under I.R.C. Sec. 162. The court noted that the petitioner didn't establish that he paid household expenses for the communal kibbutz in MN or used the MN address for voter registration purposes. Jacobs v. Comr., T.C. Summ. Op. 2015-3
The petitioner entered into contracts to produce unfertilized eggs for transfer to infertile couples. The contracts characterized the payments as being for the petitioner's time, effort, inconvenience, pain and suffering and not in exchange for or purchase of eggs. The petitioner underwent numerous physical exams and self-administered painful hormonal injections. The petitioner suffered bruising and an eventual surgery to harvest the eggs. In total, the petitioner was paid $20,000 pursuant to the contracts for the tax year at issue, received a Form 1099 for the total amount but excluded the amount from income under I.R.C. Sec. 104(a)(2) as damage payments for pain and suffering. The IRS disallowed the deduction. The court agreed with the IRS, construing the payments as being received for personal services. The fact that the petitioner suffered physical pain or injury during the performance of rendering services pursuant to the contract did not change the result. The payment was not received on account of personal injuries or sickness, but rather for services. The court noted that the petitioner voluntarily contracted to be paid to produce eggs via a process that involved pain and suffering. Perez v. Comr., 144 T.C. No. 4 (2015).
This case involved a 70-acre wooded tract that the owner purchased at a time when the buildings on the property were in disrepair. After acquiring the tract, the owner built and enclosure for raising ducks, and repaired a barn for purposes of storing a tractor. The owner also, in the fall of 2011, entered into a farm lease with a tenant authorizing the harvesting of wood and farming on the tract and also the clearing of the existing lake to determine if trout could be raised. The county classified the property as commercial for tax purposes for the 2012 tax year, but not for 2013 and the owner appealed to the state (KS) Court of Tax Appeals (COTA). The COTA ruled for the county, asserting that the owner failed to meet its burden to show that agricultural activity occurred on the property on or before January 1, 2012. On appeal, the court determined that the COTA erred on the burden of proof issue, holding that the county bore the burden to prove that the proper classification of the property was commercial for the year in issue, and that the county had not provided any evidence to support commercial classification. The court also held that the owner satisfied its burden of proof to establish that some agricultural activity occurred on the property in 2011. The court vacated COTA’s order and remanded the case with directions for the COTA to enter an order classifying the property as agricultural. In re Equalization Appeal of Camp Timberlake, LLC, No. 111,273, 2015 Kan. App. Unpub. LEXIS 16 (Kan. Ct. App. Jan. 9, 2015).
The plaintiff had been a farmer for 54 years and needed a tractor with more horsepower to use in his farming operation. The plaintiff saw the defendant's online ad for a 1994 John Deere tractor which stated that the tractor was in "excellent condition." The defendant also told the plaintiff over the phone and in person that the tractor was "field ready." The plaintiff inspected the tractor and was informed that the engine had been rebuilt and the tractor repainted. The plaintiff operated the tractor down the road for a mile and informed the defendant that a hose and hydraulic plug needed replaced. The repairs were made and the plaintiff bought the tractor for $47,000. The day after delivery, the plaintiff discovered a major oil leak and a mechanic's inspection revealed major mechanical malfunctions and that the tractor needed numerous repairs before it could be used. The defendants refused to take the tractor back or refund the purchase price. The plaintiff sued for breach of express warranty and breach of implied warranty of fitness for particular purpose. The trial court ruled for the defendant on the basis that neither an express warranty nor an implied warranty of fitness had been created. On appeal, the court affirmed. No express warranty became a part of the basis of the bargain because the plaintiff inspected the tractor, determined it was in need of some repairs and was familiar with tractors based on his experience. Likewise, no implied warranty of fitness existed because the plaintiff was an experienced farmer and had inspected the tractor and demanded that repairs be made before delivery. Thus, the plaintiff did not rely on the defendant's skill or judgment in furnishing the tractor. Chinn v. Fecht, No. 3-14-0320, 2015 Ill. App. Unpub. LEXIS 20 (Ill. Ct. App. Jan. 9, 2015).
This case involved contractual negotiations concerning a 190-acre tract of land near Houston, TX. The defendant, owner of a Houston area logistics company, was the first to enter into an option contract to buy the tract. Other options were also entered into by the owner with other parties. That lead to litigation, and a developer with whom the defendant had previous business dealings, became interested in the property, but couldn't acquire the property with the litigation concerning the tract pending. The developer (the plaintiff in this case), acting through its agent, offered to pay the defendant's attorney's fees in the pending litigation because, as the agent stated, the plaintiff and the defendant were going to become partners concerning the development of the property. The defendant received $10,000 from the plaintiff for the defendant's attorney's fees. The litigation ultimately settled and the plaintiff agreed to purchase the property when all other parties agreed to release their rights. In exchange for the defendant's agreement to settle which would allow the plaintiff to buy the tract, the plaintiff's agent orally promised the defendant that the defendant would become a partner in the development of the tract and that the defendant would receive $1 million plus an interest in the profits from future development and sale of the property. Upon the plaintiff's sale of 20 acres of the tract, the defendant asked for his $1 million, but the plaintiff's agent stated that the plaintiff could only pay $500,000 "right now", implying that the balance would be paid later. Upon being presented the $500,000 check, the plaintiff's agent presented the defendant with a document that the agent said was a "receipt" and that, "It's nothing. You don't have to worry about it." The agent also told the defendant that he would get the balance of the $1 million when the property was further developed. The defendant did not read the document, because he was "in a hurry" and didn't have his glasses or use his magnifying glass, which he needed to read. The document turned out to be a carefully drafted release under which the defendant gave up any and all interest in the tract and all claims against the plaintiff. The defendant sued for breach of contract, breach of partnership fiduciary duties and fraud. The plaintiff claimed that the oral contract was unenforceable under the statute of frauds. The trial court jury found for the defendant on all claims but determined that the defendant did not suffer damages. The trial court determination was affirmed on appeal that there was an oral contract that the plaintiff had breached that was supported by the plaintiff's payment of $500,000 as consideration. The appellate court awarded costs to the defendant and remanded for a new trial on attorney's fees.
On further review, the TX Supreme Court reversed. The Court determined that the defendant could not have justifiably relied on the agent's statements concerning the content of the "receipt" which was actually a release. The Court noted that the document was obvious on its face that it was a release, and that reliance on the agent's misrepresentations concerning the document was not reasonable where the defendant had a reasonable chance to review the document. Thus, there was no fraudulent inducement which would negate the validity of the release. The Supreme Court also determined that the partial performance to the Statute of Frauds did not apply because the $500,000 payment was made to avoid performance of the oral contract under the terms of the release, rather than to perform obligations under the contract. The Court also determined that there could be no oral agreement to form a partnership under the Statute of Frauds. National Property Holdings, L.P., et al. v. Westergren, No. 13-0801, 2015 Tex. LEXIS 1, rev'g., in part and aff'g., in part Westergren v. National Property Holdings, L.P., 409 S.W.3d 110 (Tex. Ct. App. 2013).
Kansas law (Kan. Stat. Ann. Sec. 55-179(b)) says that one of the parties responsible for plugging an abandoned oil or gas well is the original operator who abandoned the well. Here, the plaintiff operated 44 wells on a 160-acre tract in southeast Kansas beginning in 1939. Production ceased in 1989 and the plaintiff did not plug the wells. In 2008, the plaintiff assigned it's lease to another party (lessor) who entered into an agreement with the Kansas Corporation Commission (KCC) to either plug or being production from at least two wells monthly until all the wells were either producing or were plugged. The lessor entered into new leases with the mineral owners in 2009 and then assigned the leases to a third party in 2010. The KCC informed the third party that it would be required to plug the wells or start production. In 2011, the KCC issued a show-cause order to the plaintiff, the lessor and the third party requiring them to demonstrate why they shouldn't be responsible for plugging the wells (44 in total) that KCC had determined had been abandoned. The KCC subsequently ordered the plaintiff, along with the other parties, to plug the wells. The plaintiff argued that it had no responsibility to plug the wells because it had assigned the leases to another party. The KCC determined that that lessor was responsible for plugging the three wells that they had produced from and that the plaintiff was responsible for plugging the other wells because they had abandoned the wells in 1989 and the wells should have been plugged at that time. The court agreed with the KCC, rejecting the plaintiff's argument that only one party can be held liable for plugging a well under K.S.A. Sec. 55-179(b). The court noted that the statute was clear that more than one party can be held responsible for plugging wells. The court noted that the case did not involve the issue of whether the plaintiff could be entitled to reimbursement from the other parties. John M. Denman Oil Co., Inc. v. Bridwell, et al., No. 110,861, 2015 Kan. App. LEXIS 3 (Kan. Ct. App. Jan. 9, 2015).
The debtors, a married couple, operate a photography business that sells digitally manipulated landscape photographs to the public. The husband was also employed at a separate photo business. The wife handled all of the accounting, some promotional work and most purchasing decisions for the couple's business. The debtors filed a joint case, and sought to exempt their digital images and website as a tool-of-the-trade under Kan. Stat. Ann. Sec. 60-2304(e). The trustee objected on the basis that the images and website were not tangible property as contemplated by the statute. The court disagreed with the trustee, noting many books, documents and "tools" in today's electronic era are digital and that only the specifically listed items in the statute need be tangible property. In addition, the court noted that the debtor's wife could exempt the digital images and website herself as tools of the trade of her primary occupation. The wife had a sufficient ownership interest in the couple's business. In re Macmillan, No. 14-40965, 2015 Bankr. LEXIS 61 (Bankr. D. Kan. Jan. 9, 2015).
The USDA developed two table grape varieties, secured patents on them, and licensed them to the defendant who then sub-licensed the varieties to nurseries as authorized distributors. The grape varieties were released to a grower in 2002 and the patents were secured in early 2006. However, before the official release, a couple of growers began growing grapes from the patented varieties, but did not sell any grapes commercially or give away any mature fruit. The growers knew that were not authorized to have the grape varieties and took steps to conceal their possession of the varieties. The plaintiffs challenged the patents as invalid due to a public use more than a year before the date of the patent application. The trial court upheld the patents as valid because the growers' use and cultivation of the subject varieties was limited in scope and private, and because the vines were "hiding in plain sight." Also, the trial court determined that the defendant had no reason to believe that the growers had unauthorized possession of the grapes. On further review, the appellate court affirmed. The court determined that the grapes in issue had not been generally circulated before the patents were applied for. Thus the patents were valid because the "invention" was not "accessible to the public" or "commercially exploited" for more than one year before patent protection was sought. Delano Farms Company, et al. v. The California Table Grape Commission, et al., No. 2014-1030, 2015 U.S. App. Lexis 346 (Fed. Cir. Jan. 9, 2015), aff'g., No. 1:07-CV-0`6`0-SEH-JLT, 2013 U.S. Dist. LEXIS 130729 (E.D. Cal. Sept. 12, 2013).
The decedent died in 2001 with a gross estate of approximately $1.7 million and an estate tax return was filed reporting a net estate tax liability of $275,000. The estate paid $123,000 and made an additional payment of $4,200 in 2009. In 2008, the IRS entered into a settlement agreement with the estate for the outstanding estate tax liability whereby the estate tax would be paid in installments. Ultimately, approximately $84,000 of estate tax, interest and penalties remained unpaid. The IRS did not assess the failure to pay penalty of approximately $35,000 until early 2013 and the estate claimed that the penalty was time-barred via I.R.C. Sec. 6501(a) or 6502(a)(1). The court determined that neither of those provisions applied and the assessment of the failure-to-pay penalty was not time barred. The estate also claimed that the interest assessment was incorrectly calculated, but the court disagreed. The court also determined that the beneficiaries of the estate were liable for the unpaid estate tax and rejected their arguments that the government should be equitably estopped from enforcing the judgment or that the government had violated their due process rights. United States v. Estate of Hurd, No. CV12-7889-JGB (VBKx), 2015 U.S. Dist. LEXIS 3350 (C.D. Cal. Jan. 8, 2015).
In a prior opinion, Mitchell v. Comr., T.C. Memo. 138 T.C. No. 16 (2012), the Tax Court disallowed the petitioner's charitable deduction for a permanent conservation easement donation due to the failure to satisfy the mortgage subordination requirement of Treas. Reg. Sec. 1.170A-14(g)(2). In the prior case, the petitioner argued that the conservation purpose of easement was protected in perpetuity even without a subordination agreement because the probability of default on the mortgage was negligible. However, the court rejected that argument on the basis that the Treasury Regulations require a subordination agreement. In a subsequent Tax Court case, the petitioner argued that Kaufman v. Comr., 687 F.3d 21 (1st Cir. 2012) required the Tax Court to reconsider its prior decision. The Tax Court disagreed, noting that Kaufman was not binding on the Tax Court because it addressed different legal issues. Kaufman involved the "proceeds" regulation governing entitlement to proceeds upon judicial extinguishment of an easement, while the present case involved the mortgage subordination regulation. The court also noted that the subordination regulation is specific and there is no "functional" subordination contemplated by the regulation. The court also rejected the petitioner's argument that Carpenter v. Comr., T.C. Memo. 2012-1 created a safe harbor and that the regulation should be read as a safe harbor. Instead, the court noted that Treas. Reg. Sec. 1.170A-14(g) is specific, mandatory and cannot be ignored. The petitioner argued that the court should create a general rule with respect to the perpetuity requirement of I.R.C. Sec. 170(h)(5)(A) based on Kaufman. However, the court rejected that argument on the basis that Kaufman did not create a general rule that protecting proceeds from extinguishment of a conservation easement would satisfy the perpetuity requirement of Treas. Reg. Sec. 1.170A-14(g)). Mitchell v. Comr., T.C. Memo. 2013-204. On further review, the Tenth Circuit affirmed. The appellate court specifically noted that Treas. Reg. Sec. 1.170A-14(g)(3) does not relieve a donor from having to meet the subordination requirement when the probability of default on the mortgage is negligible. Mitchell v. Comr., No. 13-9003, 2015 U.S. App. LEXIS 116 (10th Cir. Jan. 6, 2015).
The petitioner operated a facility that generated electricity from biogas produced by the anaerobic digestion of livestock manure. The manure came from the petitioner's dairy operation and the electricity generated is used to operate the petitioner's dairy operation and is sold to the electrical grid. The petitioner claimed that the facility was exempt from state income tax because it is a "manure storage and handling" facility. The court disagreed on the basis that the statute at issue contemplated a facility that is used to store and handle manure only. The tax exemption statute has no application to an anaerobic digester or electrical generator. An amendment to the statute did not apply because it did not have retroactive application. In re Synergy, LLC v. Kibler, No. 1171 CA 14-00173, 2015 N.Y. App. Div. LEXIS 44 (N.Y. Sup. Ct. Jan. 2, 2015).
I.R.C. Sec. 409(p) limits tax benefits of an Employee Stock Ownership Plan (ESOP) by limiting the ability to defer tax for the highly compensated employees. More specifically, I.R.C. Sec. 409(p) limits the tax benefits of an ESOP that owns S-corporate stock unless the ESOP provides meaningful benefits to employees. If I.R.C. Sec. 409(p) is violated, an excise tax of 50 percent of prohibited allocations applies and the ESOP no longer qualifies as an ESOP. Tax deferral is lost if any portion of the plan assets that are attributable to the employer securities accrue to the benefit of a "disqualified person" during a nonallocation year. A nonallocation year is any ESOP plan year during which the plan holds employer securities consisting of S corporation stock and the disqualified persons own at least half of the number of S corporate shares. A disqualified person is a taxpayer that owns at least 10 percent of the deemed owned shares in the S corporation. This case involved an S corporation with an ESOP as a shareholder and another non-ESOP shareholder who was the petitioner's only employee and sole participant. Thus, the ESOP owner held 100 percent of shares, triggering I.R.C. Sec. 409(p). The court noted that while the corporation had two classes of stock which would disqualify it for S corporate status and, therefore, would not result in I.R.C. Sec. 409(p) violation, the statute of limitations had run on IRS from adjusting petitioner's tax liability based on status. Thus, the petitioner was treated as an S corporation and was liable for additional $161,200 in taxes and penalties of approximately $76,000. Ries Enterprises, Inc. v. Comr., No. 14-2094, 2014 U.S. App. LEXIS 24623 (8th Cir. Dec. 31, 2014), aff'g., T.C. Memo. 2014-14.