April 2013 – Significant Developments

April 1, 2013 | Roger McEowen

During April there were several major developments in the courts and with the IRS that are important to pay attention to. We highlight those in the case and rulings annotations list on the website and draw your attention to them here.

As we mentioned last month, the Tax Court is set to decide whether a residuary trust involved in rental real estate activities can claim associated losses - in other words, can a trust qualify as a real estate professional by satisfying the material participation test under the passive loss rules. The Tax Court has never decided the issue (they do, however, have a case presently before them involving how a trust can satisfy the material participation test for passive loss purposes), but the one federal district court that has considered it, has ruled that the trust is the taxpayer for purposes of the passive loss rules and that the participation of the employees (in that case) of the trust are to be included in determining whether the trust’s participation is “regular, continuous and substantial.”  In April, however, IRS issued another Technical Advice in which they continue to maintain their position (without any regulations or basis in the law) that only the trustee’s participation as trustee counts toward the material participation test.  

Also in April, the U.S. Circuit Court of Appeals for the Seventh Circuit held that an inherited IRA is not an exempt asset in bankruptcy.  That’s contrary to a Fifth Circuit opinion, so the U.S. Supreme Court may be asked to address the issue.

On the environmental law front there were several important court opinions issued of importance to agriculture.  In one, the U.S. EPA will have to defend its “dander dust” regulation in a case from West Virginia.  The case involves a poultry confinement facility where the EPA took the position that a discharge requiring a federal Clean Water Act permit occurs when dust, feathers and dander are released through ventilation fans and are contacted by precipitation.  Such discharges, the EPA claims are not within the exemption for stormwater discharges because a land application area where crops are grown was not involved.  When the farmer challenged the EPA in court, the EPA sought to have the case dismissed so that they didn’t have to defend their position.  The court refused, and will rule on the matter.

In another case, the U.S. Circuit Court of Appeals for the Ninth Circuit held that a utility company did not have to obtain federal permits for the use of utility poles treated with a certain chemical mixture.  The court determined that utility poles are not a point source pollutant, and refused to expand the definition of “point source” and “discharge” to cover utility poles and similar items such as fence posts and other structures that use pre-treated wood products.

The Ninth Circuit also decided an important employer benefit plan case.  The Code limit’s employer deductions for contributions to the plans to an amount based on the cost of benefits provided during the year plus an additional amount for reserves.  The court disagreed with the IRS position as to how much had to be reported into income upon distribution of the life insurance policies to the taxpayers, holding that surrender charges must be considered when determining the fair market value of the policies.

On the IRS front, in April, the IRS released information on how to report USDA discrimination settlement payments, the maximum vehicle values for 2013 for purposes of determining the value of personal use of employer-provided vehicles, guidance on how to determine when construction begins on a “qualified facility” for purposes of the renewable electricity production tax credit, and guidance for landowners receiving income from natural resources via lease or royalty.  We have linked to all of these IRS pronouncements on the CALT website. 

In Iowa, the legislature failed to enact legislation to deal with the recent Iowa Supreme Court opinion that substantially modified the Iowa Recreational Use statute.  The implications for landowners are serious and substantial, so careful consideration will have to made of the issue by landowners, lenders and other potentially impacted parties.  We updated our article on legislative developments in April.