Source: https://www.calt.iastate.edu/annotation/2015-9
Timestamp: 2019-04-18 22:29:19+00:00

Document:
Ten Year Collection Statute Not Suspended.
The decedent died in 1990 and an estate tax return was timely filed by the extended due date with an election to pay the tax in installments via I.R.C. Sec. 6166. The IRS assessed the reported estate tax of $270,737 and the tentative Sec. 6166 deferred tax billing account was established. The estate paid $70,00 of estate tax, and later voluntarily paid another $115,000 in estate tax. In 1994, the IRS issued a deficiency notice asserting that additional estate tax of almost $700,000 was due based largely on valuation increases of inherited property. The estate voluntarily paid another $42,480 in estate tax, and filed a petition in Tax Court challenging the IRS assessment of additional tax. The estate distributed property to all beneficiaries except the one who inherited the property that had the valuation increases. In 1995, the executor filed an inventory with the probate court listing $443,916 of estate assets. In 1996, the estate's assets were distributed and an accounting was filed showing that the estate had zero assets. In 2001, the IRS assessed a deficiency of $247, 714 based on a Tax Court opinion issued in late 2000 in the matter. With interest, the deficiency was $518,451. In late 2001, the IRS sent a statement of tax due to the estate showing a tax due of $619,794 with the estate having 10 days to pay this amount. The estate did not respond and the IRS, in 2002, issued a notice and demand for payment of $839,897, stating that the I.R.C. Sec. 6166 installment agreement was in default due to non-payment and the account was in danger of being accelerated making the full account balance due immediately and noting that to avoid acceleration the amount due was due by Sept. 30, 2002. The estate did not respond. Meanwhile, the estate had never made installment payments on the estate tax under the I.R.C. Sec. 6166 election. In 2009, the executor filed a report with the probate court reporting zero assets in the estate and requesting that the estate be closed. In late 2012, the IRS filed notices of federal tax liens against the estate in jurisdictions where all real estate assets were located, and in 2013 sued to collect the unpaid tax liability. The trial court held that the I.R.C. Sec. 6166 election was terminated on the acceleration date specified in the notice and demand for payment for past-due amounts - Sept. 30, 2002 - which triggered the running of the 10-year statute of limitations for IRS to collect tax under I.R.C. Sec. 6502(a). The IRS had argued that the statute had been suspended under I.R.C. Sec. 6503. The court noted that I.R.C. Sec. 6166(g)(3) says that the 10-year limitations period begins when the estate fails to pay any principal or interest under the installment agreement, or the IRS serves a notice and demand for taxes due. On appeal, the court affirmed. The 2002 notice gave notice that the installment election had been terminated unless the estate made payment. The IRS filed suit outside the 10-year statute. The court noted that after the executor had distributed all of the estate assets, there were no assets under the control of the probate court and from that time on the suspension of the statute of limitations was lifted because normal IRS collection procedures would have then been available against the assets that had been distributed. But, IRS took no action. United States v. Godley, No. 3:13-cv-549-RJC-DCK, 2015 U.S. Dist. LEXIS 132671 (W.D. N.C. Sept. 30, 2015).
Court Approves 5 Percent Valuation Discount For Environmental Contamination.
At issue in this case was the proper determination of the fair market value of the plaintiff's 229.24-acre commercial property for property tax purposes. 110 acres of the tract contained buildings and other improvements with the balance of the tract considered to be "excess" land. The tract had been previously used by the U.S. Navy to operate a weapons manufacturing plant where they buried numerous contaminants which resulted in significant environmental damage to the tract. The tract became subject to an environmental remediation agreement under which the plaintiff was partly responsible for remediation costs. In 2003, the defendant notified the plaintiff of its intent to increase the tract's property tax assessment. The plaintiff filed an appeal with the county Board, which affirmed. The matter then proceeded to court which affirmed. On further review, the appellate court affirmed in part and vacated and remanded in part. The appellate court noted that an appraisal must be based on the tract's current status, considering it's potential for development, and that the trial court's reliance on one of the experts was not supported by the evidence. The appellate court also noted that restrictions on the tract impacted the tract's market value. The appellate court vacated the trial court's order and remanded the case for calculation of the assessed value with consideration of the plaintiff's environmental obligations. On further review, the state (PA) Supreme Court upheld an appraiser's opinion that the value of the tract was fair market value less five percent for environmental "stigma." Harley-Davidson Motor Company v. Springettsbury Township, et al., No. 82 MAP 2014, 2015 Pa. LEXIS 2170 (Pa. Sup. Ct. Sept. 29, 2015).
Withdrawal of CAFO Information Reporting Rule Upheld.
In 2011, the defendant (U.S. EPA) proposed a rule that would have required a confined animal feeding operation (CAFO) to release comprehensive data providing precise CAFO locations, animal types, and number of head as well as personal contact information including names addresses, phone numbers and email addresses of CAFO owners. The Department of Homeland Security (DHS) had informed the defendant that the release of such personal and confidential information could constitute a domestic safety risk. The DHS pointed out that such personal business information is exempted from disclosure under FOIA enumerated exemptions No. 4 and No. 6. In an earlier challenge to the proposed rule, a different court held that the opponents to the rule lacked standing for failure to demonstrate an actual or imminent injury - American Farm Bureau Federation, et al. v. United States Environmental Protection Agency, et al., No. 13-1751 ADM/TNL, 2015 U.S. Dist. LEXIS 9106 (D. Minn. Jan. 27, 2015). The defendant withdrew the proposed rule in 2012, reserving the right to developing a similar rule in the future. The plaintiffs, various activist groups, generally opposed to confinement livestock facilities and related production activities challenged the defendant's withdrawal of the rule as a violation of the Administrative Procedures Act (APA). The court granted summary judgment for the defendant given the greater deference owed to the defendant when it withdraws a rule and maintains the status quo. The court agreed with the defendant that the better approach was to "explore, develop and assess" existing sources of data and keep an option open to require mandatory reporting of such information in the future. The court also determined that the withdrawal of the rule did not violate the Clean Water Act. Environmental Integrity Project, et al. v. McCarthy, No. 13-1306 (RDM), 2015 U.S. Dist. LEXIS 131653 (D. D.C. Sept. 29, 2015).
A farmer entered into a contract with a third party for the construction of a hog building that would utilize the defendant’s trusses. The building was completed in the spring of 2008, but during the winter of 2014, several of the trusses failed which caused a large portion of the roof of the hog building to collapse and killed many hogs. The farmer had taken out an insurance policy with the plaintiff that covered the building. The farmer submitted a claim for $338,381.00 and the plaintiff paid the claim - $300,000 for damage to the building, $30,000 for debris clean-up and $8,381 to the hog supplier for loss of their hogs covered under the farmer’s policy. The plaintiff then sued the defendant claiming that their loss of $338,381 was caused by a manufacturing defect in the defendant’s trusses – a breach of implied warranty claim. The defendant move to dismiss the claim and the court agreed. The plaintiff’s claim arose out of the construction of a hog building in which the defendant’s trusses were used and the building was used in a commercial business and the damage was to the building itself and livestock in the building which were all covered under the plaintiff’s insurance policy. As such, the economic loss doctrine applied to bar the tort action. The losses were purely economic in nature. Farm Bureau Mutual Insurance Company of Michigan, et al. v. Borkholder Buildings & Supply, L.L.C., No. 1:14-cv-1118, 2015 U.S. Dist. LEXIS 128830 (W.D. Mich. Sept. 25, 2015).
DPAD Allowed For the Creation of Unit Doses of Drugs.
The plaintiff was in the business of selling “unit doses” of drugs in non-reusable container intended for single-dose administration to patients. The plaintiff bought the drugs it identifies as suitable for unit doses in bulk and then engages in operating procedures for the processes and equipment to be used in converting the drugs purchased in bulk into unit doses. The IRS denied a domestic production activities deduction (DPAD) under I.R.C. Sec. 199 on the basis that the plaintiff’s activities constituted “packaging, repackaging, labeling and minor assembly” under Treas. Reg. Sec. 1.199-3(e)(2). The plaintiff claimed that its activities were comparable to the taxpayer’s activities in United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) where the taxpayer assembled gift baskets and was allowed a DPAD. The court agreed with the taxpayer in this case and allowed the DPAD on the basis that the activities involved were analogous to those in Dean. The court believed that activities beyond mere packaging and repackaging were involved, including market research to identify which drugs to buy, testing of drugs, studies involving the mixing of drugs, testing of plastics, and other related activities. As such, the plaintiff was engaged in a production process and was entitled to a DPAD on its qualified production income. While the case was decided after the IRS proposed new DPAD regulations containing an example noting the disagreement of the IRS with the result of Dean, the court’s opinion did not involve any analysis or application of those regulations. Precision Dose, Inc. v. United States, No. 12 C 50180, 2015 U.S. Dist. LEXIS 128115 (N.D. Ill. Sept. 24, 2015).
Long Spanning Family Battle Over Farmland Ownership Ends in Default Judgment.
This case was originally filed in 1997, and this is the second opinion of the state (UT) Supreme Court in the matter. The father of the siblings involved in the case was diagnosed with cancer in 1966 and deeded his farm to his oldest son in early 1967 in an attempt to impoverish himself so that he could qualify for public assistance benefits to pay for his cancer treatments. In 1993, the siblings learned that the eldest son considered the farm to be exclusively his when he conveyed a portion of the farm to a third party. The eldest son sued in 1997 to quiet title and establish himself as the rightful owner of the farm. The siblings counterclaimed and requested that they be named equal beneficiaries of a trust that their father intended. The trial court, in the initial action, imposed a constructive trust on the farm, and the UT Supreme Court affirmed. Rawlings v. Rawlings, 240 P.3d 754 (Utah 2010). On remand, the eldest son claimed that the constructive trust should be in the form of an equitable lien and not a possessory interest in the farm or any other property. The trial court disagreed and divided the property among the siblings. The court also determined that the eldest son was a "conscious wrongdoer" and that any profits from the trust property be included in the trust res. The court also permitted additional discovery on the issue of what properties should be included in the trust. The eldest son didn't respond and the siblings moved to compel. The eldest son was non-responsive and the trial court entered default judgment against him. On further review, the UT Supreme Court affirmed. The order of a constructive trust was appropriate to remedy the finding of unjust enrichment and it cannot be converted into an equitable lien. The farm was equally divided among the children. Rawlings v. Rawlings, No. 20130744, 2015 Utah LEXIS 265 (Utah Sept. 22, 2015).
U.S. Forest Service Immune From Liability Under State Recreational Use Statute.
The plaintiff was injured when her all-terrain vehicle (ATV) rolled down a hill in a National Forest in Idaho. The plaintiff sought almost $800,000 in damages for her injuries related to the crash that happened when she drove the ATV up a fence-crossing ramp over a cattle guard on a trail. The ATV slipped off of the ramp and fell four feet, landing on top of the plaintiff. The plaintiff claimed that the U.S. Forest Service was negligent in constructing and maintaining the fence crossing. The court granted summary judgment to the defendant on the basis that it was immune from suit under the ID recreational use statute because of the plaintiff's failure to allege willful and wanton conduct. A complaint grounded in "negligence" does not incorporate all degrees of negligent conduct and the plaintiff never alleged that the defendant acted with willful and wanton negligence. There was no evidence that the defendant knew or had reason to know that the cattle guard ramp was a peril. The cattle guard had been continuously used with no known accidents or incidents, and Forest Service personnel had inspected it annually and had observed that it was in working condition a week before the plaintiff's accident. Linford v. United States, No. 4:13-cv-00194-BLW, 2015 U.S. Dist. LEXIS 126596 (D. Idaho Sept. 21, 2015).
Exceptions From Discharge and Avoidable Transfers.
The creditors sought summary judgment on their claim that the debtor’s obligation to them should not be discharged in his Chapter 7 bankruptcy proceeding. The court granted the creditors’ motion, finding that the $135,000 debt was excepted from discharge under 11 U.S.C. § 523(a)(2)(A). The court had already ruled in a December 17, 2013, decision, that the debtor’s bankruptcy should be converted from a Chapter 12 to a Chapter 7 case on the grounds of fraud. The court found that the debtor did not tell the creditors he had filed bankruptcy when he contracted with them for the sale of hay. As a result, the law of the case applied to establish 11 U.S.C. §523(a)(2)(A)’s required elements: (1) fraudulent omission by the debtor; (2) knowledge of the deceptiveness of his conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor; and (5) damage to the creditor). In re Clark, No. 12-00649, 2014 Bankr. LEXIS 97 (Bankr. D. Idaho Jan. 10, 2014). In a later decision, the court noted that during the pendency of the Chapter 12 case, the debtor had also sold a tractor to unrelated persons and deposited the funds into the bank account of a limited liability company (LLC) that he managed (but of which he was not a member or owner). The trustee claimed that various against various defendants that the trustee claimed had received transfers from the LLC before the case was converted to Chapter 7. The trustee later filed an avoidance action against the buyers of the tractor on the grounds that the transfer was avoidable. The buyers claimed that the transfer of the tractor to them was not avoidable because of the two-year statute of limitations contained in 11 U.S.C. Sec. 549. The court agreed that the transfer was avoidable because the trustee knew of the potentially avoidable transfer at the time the case was converted to Chapter 7 and the trustee obtained the LLC records, but never identified the purchasers. Thus, the transfer was avoidable because the buyers had no notice that an avoidance action was contemplated until more than two years after the sale of the tractor. In re Clark, No. 12-00649-TLM, 2015 Bankr. LEXIS 3167 (Bankr. D. Idaho Sept. 18, 2015).
If It Is Insurance Under State Law The Insurer Accounting Rules Apply.
The petitioner issued residual value insurance policies that insured lessors and lenders against not properly estimating the residual value of leased property at the end of the lease term. Such policies insure the expected residual value remaining on an asset at the end of a lease. The petitioner utilized the accounting rules of I.R.C. Sec. 832 applicable to insurers. However, the IRS claimed that the petitioner was not an insurance company and that the policies they issued were merely a hedge against investment risk rather than truly insurance. As a result, the IRS claimed that the I.R.C. Sec. 832 rules were inapplicable and that the petitioner had to use the rules contained in I.R.C. Secs. 451 and 461 resulting in a $55 million deficiency. The IRS also cited Tech Adv. Memo. 201149021 (Aug. 30, 2011) to support its position. The states that the petitioner operated in regulated the petitioner as an insurance company, and Fitch, Moody’s and S&P rated the petitioner as an insurer. The petitioner offered evidence that it insured against “low frequency/high severity” risks such as earthquakes or floods,” but the IRS claimed that the risk was illusory. The court rejected the IRS position because of evidence showing risk-shifting and risk-distribution. A real risk of loss was being covered. In addition, the court noted that every state in which the petitioner did business the state regulates the petitioner as an insurer. R.V.I. Guaranty Co., Ltd. & Subsidiaries, 145 T.C. 9 (2015).
Bad Drafting and Will Contest Kills Charitable Deduction For Estate.
The decedent died testate in late 2008. At the time of his death, the decedent was not married, had no children, and both of his parents had predeceased him. The Form 1041 for the estate was filed in April of 2012 reporting $335,854 of income and claimed a $314,942 charitable deduction. The IRS disallowed the charitable deduction in its entirety, claiming that the amount had not been permanently set aside for charity as required by I.R.C. §642(c)(2). The decedent’s will, executed in 1983, instructed the executor to pay all estate expenses and costs from the general estate, and conveyed 100 percent of the residuary estate to the church that the decedent regularly attended. There was no provision in the will specifically providing for gross income to be permanently set aside or separated into distinct accounts. Over a timeframe of several years, the estate tried to determine whether there were any unascertained heirs with several being identified as potential heirs. Ultimately, the will was challenged and a proposed settlement was reached with two thirds of the decedent’s gross probate estate. The court noted that, to claim a charitable deduction, the estate must show that the contribution was from the estate’s gross income, that the will/trust terms made the charitable contribution, and that the charitable contribution was permanently set aside for charitable purposes in accordance with I.R.C. Sec. 170(c). The IRS did not challenge the first two requirements, but claimed that the residue of the estate was not permanently set aside for charitable purposes. The court agreed with the IRS that it had not. The court noted that the chance the charitable amount was go to non-charitable beneficiaries for the year in issue was not so remote as to be negligible. The proposed settlement was evidence of the ongoing legal battle that had not yet concluded. he court noted that for the year in issue the estate was in the midst of a legal battle and had ongoing undetermined expenses, and their remained a possibility that the amount set aside for the churches that the decedent attended would go to the challengers. Estate of DiMarco v. Comr., T.C. Memo. 2015-184.
No Deductions For Rental Property Expenses Because Daughter Lived In It.
The petitioner was a cardiologist and his wife also worked in his practice. They constructed a house in 1997 and tried to sell it for four years, after which they rented the house for four years to an unrelated tenant, and then to their daughter at one-third of the amount it was rented to the unrelated tenant. They resumed sales efforts in 2010. On their 2008 return, the petitioners indicated the house was rental property with a net loss of $134,360 which they characterized as a passive loss on Form 8582. On the 2009 and 2010 returns the petitions again showed net losses on the property, but indicated they were in the construction business. They filed a 2008 amended return claiming a refund relating to expenses claimed on the house, which IRS disallowed and also assessed an accuracy-related penalty. The IRS determined that the house was held for the production of income and that the losses were passive losses under I.R.C. Sec. 469. The IRS also asserted that the deductions attributable to the house were limited by I.R.C. Sec. 280A. The court agreed with the IRS because a related party lived in the house and used it for personal purposes for more than the greater of 14 days a year or 10% of the number of days the house was rented at fair rental. The court rejected the petitioners’ claim that they were real estate developers that needed to have their daughter live in the house to keep it occupied as required by their homeowners policy which would then make Sec. 280A inapplicable. Thus, the deductions attributable to the house were limited to the extent of rental income. The court upheld the application of the accuracy-related penalty, and did not need to determine whether the losses were passive. Okonkwo v. Comr., T.C. Memo. 2015-181.
Untimely Harvesting Does Not Necessarily Mean Crop Insurance Inapplicable.
In 2009, the plaintiff bought two multi-peril crop insurance policies (one for each of the plaintiff's two farms) that the defendant reinsured through the federal crop insurance corporation (FCIC). The policies each provided a tobacco crop yield guaranty which guaranteed a minimum yield at $1.85/lb. The plaintiff's 2009 tobacco crop harvest did not meet yield and quality expectations and the losses were reported to the defendant as attributable to plant disease. The policy paid on one of the farms, and after an investigation, the defendant attributed losses on the other farm to various diseases and adverse weather conditions. The defendant made a final decision with respect to this policy that no indemnity payment was due because the plaintiff failed to timely harvest the crop and failed to purchase and apply the proper fungicides. The defendant also found that the plaintiff had inadequate barn space to cure all of its tobacco, which led to the untimely harvesting resulting in deterioration of the crop in the field. The plaintiff sought mediation and administrative review, but mediation did not resolve the matter. The defendant issued a revised final decision again finding that the lack of timely harvest and the failure to purchase and apply the proper fungicides contributed to the loss. The revised decision recalculated the production lost due to uninsured causes, but the result remained that no indemnity would be paid. The plaintiff sought administrative review, which resulted in a finding that there were both insured and uninsured losses, and the matter was remanded the matter for a calculation of the final indemnity amount. The plaintiff appealed the matter to the defendant's National Appeals Division (NAD) and requested a hearing. The result of the NAD hearing was that the outcome remained unchanged. The plaintiff sought director review of the NAD decision, which upheld the NAD decision. From the director review of the NAD decision, the plaintiff appealed for judicial review. On review, the court determined that substantial evidence did not support the NAD Director's decision that plant disease did not contribute to the plaintiff's crop losses. The court determined that the NAD Director failed to explain how the plaintiff's failure to timely harvest undermined the plaintiff's claim that the tobacco crop suffered from plant disease. The court reasoned that plant disease and untimely harvesting are not mutually exclusive causes of loss. The court denied the defendant's motion to dismiss and remanded the matter to the defendant to determined whether there is evidence that the plaintiff's crop suffered from plant disease and whether any disease entitled the plaintiff to an indemnity payment and whether proper methods were used to calculate the indemnity payment. J.O.C. Farms, LLC v. Rural Community Insurance Agency, Inc. et al., No. 4:12-CV-186-D, 2015 U.S. Dist. LEXIS 124266 (E.D. N.C. Sept. 17, 2015).
Representative Under IRS POA Cannot Sign For Another Representative.
An IRS Form 2848 named three representatives to represent the taxpayer with the IRS. One of the representatives had not signed the form and another representative signed the form on that representative's behalf. The IRS determined that the third representative had not been duly appointed. The representative signing on the third representative's behalf simply signed his own name and did not indicate he was signing on the other party's behalf. In addition, Form 2848 Section 5(a), Part I did not provide that representatives had the power to appoint another representative. C.C.A. 201544024 (Sept. 16, 2015).
Gift Value Reduced By Estate Tax Liability Assumed.
The petitioner gifted cash and marketable securities to her three daughters on the condition (pursuant to written net gift agreement) that the daughters pay any related gift tax and pay any related estate tax on the gifted property if the petitioner died within three years of gifts. The petitioner deducted the value of the daughters' agreement to be liable for gift or estate tax from value of gifts and IRS claimed the gift tax was understated by almost $2 million. Each daughter and the petitioner were represented by separate counsel and an appraisal was undertaken using mortality tables to compute the petitioner's life expectancy which impacted values as reported on Form 709. The IRS' primary argument was that the daughters' assumption of potential estate tax liability under I.R.C. Sec. 2035(b) did not increase petitioner's estate and, as such, did not amount to consideration in money or money's worth as defined by I.R.C. Sec. 2512(b) in exchange for gifted property. The court determined that the primary question was whether the petitioner received any determinable amount in money or money's worth when the daughters agreed to pay the tax liability. The court held that the petitioner did receive determinable value as to the gift tax. Likewise, the court held that the assumption of potential estate tax liability may have sufficient value to reduce the petitioner's gift tax liability. The court determined that it was immaterial that it was an intrafamily deal at issue because all persons were represented by separate counsel. However, the court determined that fact issues remained for trial on the assumption of estate tax issue. Steinberg v. Comr., 141 T.C. No. 8 (2013). In the subsequent opinion on the estate tax issue, the court held that the fair market value of the gifted property for gift tax purposes was reduced by the value of the daughters' assumption of the potential I.R.C. Sec. 2035(b) estate tax liability. Steinberg v. Comr., 145 T.C. No. 7 (2015).
Proposed Treasury Regulations Tweak Contemporaneous Acknowledgement Rules.
Under I.R.C. §170(f)(8), a taxpayer claiming a charitable contribution deduction exceeding $250.00 must substantiate that deduction with a contemporaneous written acknowledge from the donee, showing the amount of the contribution, whether any good and services were received in return for the donation and a description and good faith estimate of any goods and services provided by the donee or that the donee provided only intangible religious benefits. However, I.R.C. §170(f)(8)(D) says that the substantiation rules don’t apply if the donee files a return including the contemporaneous written acknowledgement information that the taxpayer was otherwise supposed to report. This provision allows taxpayers to “cure” their failure to comply with the contemporaneous written acknowledgement requirement by the donee exempt organization filing an amended Form 990. However, without any regulations, the IRS has taken the position that the statutory provision does not apply. Apparently believing that their position was weak and would not be supported judicially, the proposed regulations acknowledge the exception and allow the charitable organization to file a form (yet to be announced) on or before February 28 of the year after the year of the donation that shows the name and address of the donee, the donor’s name and address, the donor’s tax identification number, the amount of cash and a description of any non-cash property donated, whether the donee provided any goods and services for the contribution, and a description and good faith estimate of the value of any goods and services the donee provided or a statement that the goods and services were only intangible religious benefits. The form must be a timely filed form and cannot be filed at the time the taxpayer is under examination, and a copy of the form must be provided to the donor. REG-138344-13 (Sept. 16, 2015); Prop. Treas. Reg. §§1.170A-13(f)(18)(i-iii).
Listing IRA As Creditor on Bankruptcy Schedule Kills Exempt Status.
Before filing bankruptcy, the debtor created a self-directed IRA and upon later filing bankruptcy the debtor listed the IRA as an exempt asset under 11 U.S.C. Sec. 522(d)(12) and valued it at $180,000. Before filing bankruptcy, the debtor and his wife created a partnership in which they each owned a 50 percent interest. The partnership was created for real estate development purposes and complemented the debtor's construction business. The partnership agreement provided that the IRA would contribute capital and a cash contribution to the partnership. Ultimately, the IRA funded the purchase price of properties the partnership acquired and a deed conveyed a tract to the IRA. The IRA later paid for development of a tract. The debtor and the partnership filed bankruptcy, and the partnership listed both the debtor and the IRA as unsecured creditors. The trustee and a bank objected to the claimed exemption for the IRA on the basis that the IRA had engaged in a prohibited transaction that caused it to lose its tax exempt status. The bankruptcy court agreed that the IRA was not exempt, and the court affirmed on appeal. The IRA engaged in prohibited transactions with disqualified persons by loaning funds to the partnership. In re Kellerman, No. 4:15CV00347 JLH, 2015 U.S. Dist. LEXIS 122046 (E.D. Ark. Sept. 14, 2015).
Chicken Manure Removal Contract Is a Goods Contract.
The parties entered into a contract involving the removal of chicken manure from egg-laying facilities. Under the contract, the plaintiff agreed to pay the defendant for the transfer of manure ownership with tonnage to be tracked and billed according to the quantities listed on a manure management manifest. The specific quantity of manure was to be determined by and mutually agreeable to both parties. A dispute arose and the trial court denied the plaintiff's motion for preliminary injunction, concluding that the plaintiff did not prove by clear and convincing evidence that it was likely to prevail on its claim of breach of contract because it failed to prove that the contract required the defendant to provide any specific amount of chicken manure. Ultimately, the trial court returned a verdict for the plaintiff. On appeal, a primary question was whether the contract was a goods contract (sale of chicken manure) governed by the Uniform Commercial Code (UCC) or one for the sale of services (removal of chicken manure) governed by state (OH) common law. The appellate court determined that the contract was one for the sale of goods - the transfer of manure ownership. Thus, the contract was one for the sale of goods - chicken manure. Supporting this finding, the court noted that the plaintiff did not bargain for any services to be provided by the defendant. Instead, the plaintiff was responsible for the removal of manure which it would then resell and spread. As such, the plaintiff's ultimate goal was to acquire a product rather than to procure a service. As a contract subject to the UCC, the plaintiff argued that it was enforceable because it provided a sufficient quantity term ("all available tonnage per year of manure") or that it was a requirements contract. The court determined that the contract was not a requirements contract because the contract was for the sale of the output of manure rather than the manure requirements of the plaintiff, and nothing in the contract barred the defendant from selling manure to another party or preclude the plaintiff from buying manure from another seller. On the quantity issue, which is critical for the contract to be valid under the UCC, the court noted that the parties bargained to reserve quantity for the future agreement of both parties in accordance with future negotiations. Thus, the contract did not contain an enforceable quantity term as quantity was subject to future agreement, and the contract was unenforceable as a matter of law. As such, the appellate court reversed the trial court and remanded the case. H & C Ag Services, LLC v. Ohio Fresh Eggs, LLC, et al., No. 6-15-02, 2015 Ohio App. LEXIS 3615 (Ohio Ct. App. Sept. 14, 2015).
Offer and Acceptance Key To Contract Formation.
The plaintiffs, a married couple, claimed that the defendant, an oil and gas company, failed to pay a lease bonus payment of $144,000 that the parties had agreed to. The defendant delivered a "letter agreement" to the plaintiffs stating that the parties would execute and additional "Option to Exercise Oil and Gas Lease" and that the defendant would pay $100.00 per mineral acre and a 1/8th mineral owner's royalty with a primary term of four years. The plaintiffs did not execute the letter agreement or the additional option agreement. A final contract with different terms was ultimately entered into that stated that it became effective when the oil and gas lease described in it was approved and on approval of title. Ultimately, the plaintiffs claimed that the defendant breached the lease and the letter agreement when it did not pay the bonus payment of $100/acre. The plaintiffs also claimed that they incurred over $15,000 of expenses in clearing title defects and confirming marketable title and that by obtaining the recording the lease the defendant blocked the plaintiffs from entering into agreements with other potential oil and gas companies. The defendant motioned to dismiss on the basis that no contract was formed between the parties. The court agreed with the defendant on the basis that there was never any offer that the plaintiffs accepted and that there was no meeting of the minds on all points that left nothing for negotiation. The court noted that there was no evidence that the plaintiffs accepted the letter agreement and the facts did not support an inference of acceptance. Instead, the negotiations over several months resulted in a lease with a different party (the plaintiffs' farming operation) with different terms. The plaintiffs never executed the agreement and the facts did not support the argument that the letter agreement had been incorporated into the parties' final contract. there simply was no mutual manifestation of assent as to key contract terms. The option agreement also never materialized. Norberg, et al. v. Cottonwood Natural Resources, LTD, No. 8:15CV71, 2015 U.S. Dist. LEXIS 122057 (D. Neb. Sept. 14, 2015).
Some GMO Corn Claims Dismissed.
The plaintiff, a global agribusiness company that produces agricultural chemicals and seeds, had one of its genetically-modified corn traits approved for sale in the U.S. and other countries. However, the Chinese had not been approved the trait for import, and they rejected the import of all U.S. corn in the fall of 2013. Exporters, handlers, elevators and corn farmers claimed that the company's marketing of the trait before being accepted in China caused the market price for corn fall from mid-2012 to late 2014. In late 2014, the various lawsuits were consolidated into multi-district litigation in Kansas federal court. The lawsuit asserted that the company violated the Lanham Act by misleading stakeholders, the public and federal regulators concerning the status of the trait and its release into the marketplace. The suit also alleged that the company breached a duty of care by the premature commercializing of the trait without necessary safeguards and by instituting a program that ensured the contamination of the U.S. corn supply. The company filed various motions to dismiss the numerous claims. The court dismissed claims based on an alleged failure to warn to the extent based on a lack of warnings in materials accompanying the trait because those claims were preempted by FIFRA; trespass to chattels claims (except those claims filed in Louisiana); corn farmers' claims for private nuisance, Lanham Act claims and claims under the Minnesota consumer protection statutory provisions. Not dismissed were negligence claims based on a legal duty exercise reasonable care in the manner, timing and scope of the commercialization of the trait. In re Syngenta AG MIR 162 Corn Litigation, No. 14-md-2591-JWL, 2015 U.S. Dist. LEXIS 124087 (D. Kan. Sept. 11, 2015).
Disinherited Child Challenges Will To No Avail.
The decedent executed a will in 1992 that left his multi-million dollar estate, after payment of debts and taxes, to his wife if she survived him. If she did not survive the decedent, the will specified that the decedent’s estate was to be equally divided between his two granddaughters in trust for any of the two granddaughters that had not reached age 30 at the date of the decedent’s death and outright to any of the two granddaughters that had reached age 30 at the time of the decedent’s death. If the decedent’s wife pre-deceased him, then the share passing to any of the granddaughters that also predeceased him would pass to that granddaughter’s children or the surviving granddaughter if there were no surviving children. If the spouse and granddaughters did not survive and there were no surviving great grandchildren, the decedent’s estate was to pass to a specifically identified veterinarian. The will did not mention the decedent’s son. At the time of the decedent’s death, only the granddaughters survived, and they were both over age 30. Within two weeks of the decedent’s death, the executor filed a petition to probate the will and start estate administration. Interested parties were provided copies of the will and publication of notice to creditors was made in accordance with state (KS) law. At the subsequent hearing, the magistrate judge admitted the will to probate. The son did not attend the hearing. About six weeks later, the son filed a petition to set aside the order admitting the will to probate, and a year later the trial court rejected the son’s petition, except that the court found that the will was not self-proving and that no evidence had been submitted from the will’s witnesses. Thus, the magistrate’s order was set aside and a new hearing scheduled. The subsequent hearing resulted in the will being admitted to probate. A trial ensued on the son’s challenges to the will, resulting in the court finding that the will was valid and that the property should be distributed to the granddaughters. On appeal, the court affirmed. The court rejected the son’s claim that the will failed because it didn’t describe how the estate should be distributed to the granddaughters and, thus, the bequest failed resulting in an intestate estate that passed entirely to him. The bequest was neither conditional nor unenforceable. The court also rejected the son’s claim that a 1997 will superseded the 1992 will. However, the court determined that argument was sheer speculation and that the existence of a 1997 was not proven. In addition, even if such a will existed, it would not automatically revoke the 1992 will. The son’s procedural attacks on the validity of the will also failed. The court held that the lack of obtaining an order from the trial court confirming the initial hearing date was not fatal and that filing the petition to probate the will was sufficient to avoid the six-month time bar. While the filing of the affidavit of service did not occur until after the hearing to probate the will, such late filing, the court held, does not operate to bar the will from admission to probate. The son received actual notice of the hearing. Accordingly, upheld the trial court’s order admitting the will to probate and the ordering of the distribution of the estate to the granddaughters. In re Estate of Rickabaugh, No. 111,389, 2015 Kan. App. LEXIS 61 (Kan. Ct. App. Sept. 11, 2015).
IRS Instructions Come Back To Bite the IRS in Debt Discharge Case.
The petitioner defaulted on a car loan in 2005 with the car also being repossessed that year. After the car was sold, an unpaid balance remained on the loan. The lender submitted the account balance due to five collection agencies over several years to collect. However, the balance due on the loan was not able to be collected. In 2011, the lender wrote cancelled the debt and issued Form 1099-C to the petitioner in 2011. The petitioner had moved, however, and the 1099-C was returned as undeliverable. The petitioner did not report the income from the discharged debt on the 2011 return. The IRS received a copy of the 1099-C and sought to collect the amount from the petitioner as income that should have been reported on the 2011 return. While the petitioner argued that the income wasn't reportable due to the lack of receiving Form 1099-C, that argument failed. However, the petitioner also argued that the income should have been reported in 2008 which was a tax year now closed. The petitioner reached that conclusion based on the instructions for Form 1099-C which create a rebuttable presumption that an identifiable event has occurred during a calendar year if a creditor has not received a payment on a debt at any time during a testing period ending at the close of the year. The testing period is a 26-month period. The last payment date on the loan was June 20, 2005, and the 36-month period expired on June 20, 2008. The IRS bore the burden of proof under I.R.C. Sec. 6201(d) and was required to produce evidence of more than just receipt of Form 1099-C because the petitioner raised a reasonable dispute at the accuracy of the 1099-C and cooperated with the IRS. Clark v. Comr., T.C. Memo. 2015-175.
The Cost of Acquiring An Internet Domain Name Is To Be Amortized Over 15 Years.
When an internet domain name is acquired from the secondary market (where it is already constructed and where the taxpayer will maintain it) for use in the taxpayer's trade or business, the IRS has stated that the cost of the acquisition is to be amortized over 15 years for non-generic domain names - those specific to a company, and generic domain named - those not tied to a specific company. The costs are to be capitalized under Treas. Reg. Sec. 1.263(a)-4. Non-generic domain names are amortizable intangibles under Treas. Reg. Sec. 1.197-2(b)(10) or 1.197-2(b)(6). Generic domain names are amortizable intangibles under Treas Reg. Sec. 1.197-2(b)(6). The IRS did not provide guidance on the result if the domain name was purchased from someone not currently using the domain name. That would also seem to be amortizable over 15 years via the safe harbor of Treas. Reg. Sec. 1.167(a)-3(b). C.C.A. 201543014 (Sept. 10, 2015).
Crummey Trust Generates Large Gift Tax Exclusions But No Attorney Fees.
The petitioners, a married couple, established an irrevocable family trust and transferred property worth $3.262 million to the trust. The trust named 60 beneficiaries, primarily family members. The trust language required the trustees to notify all beneficiaries of their right to demand withdrawal of trust funds within 30 days o receiving notice and directed the trustee to make distributions upon receipt of a timely exercised demand notice. In addition, the trust allowed the trustee to make distributions for the health, education, maintenance or general support of any beneficiary or family member. The trust also specified that a beneficiary would forfeit trust rights upon opposing distribution decisions of the trustees. On separate gift tax returns for 2007 the petitioners each claimed annual gift tax exclusion of $12,000 (the maximums per done for 2007) for each of the 60 beneficiaries - $720,000 per spouse. The IRS denied the exclusions on the basis that the gifts were not present interests because the trustees might refuse to honor a withdrawal demand and have the demand submitted to an arbitration panel (as established in the trust), and the beneficiaries would not seek to enforce their rights in court due to the trust language causing forfeiture if they challenged trustee decisions. As such, the IRS held that the withdrawal rights of the beneficiaries was illusory and the gifts were not of present interests. The Court disagreed with the IRS noting that merely seeking arbitration when a trustee breached fiduciary duties by refusing a demand notice did not make the gifts of future interests. The court also held that the trust forfeiture language only applied to discretionary distributions and did not apply to mandatory withdrawal distributions. In subsequent litigation, the Tax Court held that the IRS position was sufficiently justified to defeat the petitioners' claim for attorney fees. Mikel v. Comr., T.C. Memo. 2015-64. The subsequent litigation involving the fee issue is Mikel v. Comr., T.C. Memo. 2015-173.
Unlawful Taking Under the MBTA Requires A Deliberate Act.
The plaintiff owns and operates an oil refinery in Texas. After a 2002 inspection of the facility, the Environmental Protection Agency (EPA) filed a criminal indictment against the defendant for Clean Air Act violations for failure to cover tanks with emission-control equipment, and for "taking" migratory birds in violation of the Migratory Bird Treaty Act (MBTA). The trial court found the defendant guilty of three violations of the MBTA on the basis that liability under the MBTA could result irrespective of the defendant's intent simply based on proximate cause. On appeal, the court reversed. The appellate court applied the well-understood common law meaning of "take" (when not combined with "harass" or "harm") so as to preclude events that cause mere accidental or indirect harm to protected birds. The court determined that the evidence did not show that the equalization tanks were utilized with the deliberate intent to cause bird deaths. In so holding, the court rejected contrary holdings of the Second and Tenth Circuits on the issue. The court also noted that an MBTA violation would not arise from bird collisions with electrical transmission lines, thus power companies would not need to seek an incidental take permit from the USFWS in the Fifth Circuit. United States v. Citgo Petroleum Corp, et al., No. 14-40128, 2015 U.S. App. LEXIS 15865 (5th Cir. Sept. 4, 2015), rev'g. and remanding, 893 F. Supp. 2d 841 (S.D. Tex. 2012).
Late Portability Election Allowed With a Caveat.
The IRS, with this private letter ruling, granted a surviving spouse (as executor) the right to make a late portability election for the amount of the deceased spouse's unused exclusion amount (DSUEA). The IRS determined that it had discretion to allow a late election in this situation because the estate was not required to file Form 706. The IRS has no discretion to allow a late election when the due date is set by statute as it is, for example, for estates that have a filing requirement due to being a taxable estate. The IRS also noted that if it is later determined that the estate exceeded the amount required to file an estate tax return that portability would not be allowed because the IRS, in that situation, would be unable to grant relief. Priv. Ltr. Rul. 201536005 (Jun. 4, 2015).
Proceeds of Auction of Leased Dairy Cows Subject to Bank's Lien.
A debtor borrowed money from a lender and pledged dairy cattle as collateral. The lender secured an interest in the cattle. The debtor later borrowed additional money from the lender, pledging crops, farm products and livestock as collateral with lender's security interest containing a dragnet clause. The lender secured its interest. The debtor later entered into a "Dairy Cow Lease" with a third party to allow for expansion of the herd. The third party lessor perfected its interest in the leased cattle. The debtor filed Chapter 12 bankruptcy and the bankruptcy court determined that the lease arrangement actually created a security interest rather than being a true lease. The court noted that the "lease" was not terminable by the debtor and the lease term was for longer than the economic life of the dairy cows. The third party lessor also never provided any credible evidence of ownership of the cows, and the parties did not strictly adhere to the "lease" terms. The court noted that the lender filed first and had priority as to the proceeds from dairy cows. In addition, the bankruptcy court held that the lender's prior perfected security interest attached to all of the cows on the debtor's farm and to all milk produced post-petition and milk proceeds under 11 U.S.C. Sec. 552(b). In a later action in the district court, a different creditor failed to comply with court’s order requiring posting of bond as a condition to stay the effect of the court’s prior ruling. As a result, there was no stay in effect during pendency of the appeal and the lender was entitled to have the proceeds turned over to it. A feed supplier creditor did not have standing to seek surcharge of the bank’s collateral under 11 U.S.C. Sec. 506(c). The bankruptcy trustee did not file a motion for surcharge and court could not order the amount that the supplier paid for feed deliveries to be retained from funds turned over to the lender. The lender's motion for abandonment and turnover of proceeds was granted. On further review of the bankruptcy court's decision concerning the dairy cow lease, the appellate court reversed. The appellate court determined that under applicable law (AZ) as set forth in the "lease" agreement, a fact-based analysis governed the determination of the nature of the agreement. However, if the lease term is for longer than the economic life of the goods involved, the "lease" is a per se security agreement. The bankruptcy court focused on the debtor's testimony that he culled about 30 percent of the cattle annually which would cause the entire herd to turnover in 40 months. That turnover time of 40 months was less than the 50-month lease term. Thus, according to the bankruptcy court, the lease was a security agreement. The appellate court disagreed with this analysis, holding that the agreement required the focus to be on the life of the herd rather than individual cows in the herd because the debtor had a duty to return the same number of cattle originally leased rather than the same cattle. Thus, the agreement was not a per se security agreement. On the economics of the transaction, the appellate court held that the lender failed to carry its burden of establishing that the actual economics of the transaction indicated the lease was a disguised security agreement. There was no option for the debtor to buy the cows at any price, and there was no option at all. The court remanded the case to the bankruptcy court. The cattle owned outright by the debtor were sold at auction by the bankruptcy trustee subject to the security interest of the bank. The debtor had purchased the cattle with commingled funds from the bank's account which was sufficient for the bank's lien to attach and the court, on remand, determined that it was immaterial that the funds were later reimbursed by a third party under the lease. Thus, the proceeds of the auction were subject to the bank's security interest and were the bank's property. The leasing party's brand on the cows was not sufficient under state (KY) law to establish ownership of the cows because it was unregistered. After-acquired livestock were also subject to the bank's lien, as being proceeds of the pre-petitioner lien. In re Purdy, No. 12-11592(1)(12), 2015 Bankr. LEXIS 2938 (W.D. Ky. Sept. 2, 2015), on remand from, Sunshine Heifers, LLC v. Citizens First Bank (In re Purdy), No. 13-6412, 2014 U.S. App. LEXIS 15586 (6th Cir. Aug. 14, 2014), rev'g., 2013 Bankr. LEXIS 3813 (Bankr. W.D. Ky. Sept. 12, 2013).
Messing Up EIN Result in Limitless Gift Tax Statute.
I.R.C. Sec. 6501(c)(9) says that if a gift tax return is required to be filed and is not filed, the IRS can collect the gift tax (with interest) at any time - the statute of limitations never runs. In this matter, the taxpayer Filed Form 709 to report the transfer of partnership interests in two partnerships. The Form 709 did not identify one of the partnerships involved and did not adequately describe the method used to determine the fair market value of both partnership interests. Also, the employer identification number (EIN) used on both Form 709 and the valuation of gifts statement attached to the Form 709 was missing a digit. The IRS noted that the appraisals valued the land held by each partnership rather than the value of the partnership interests that were transferred. In addition, the Form 709 used incorrect, abbreviated names for the partnerships. Based on these facts, the IRS determined that the gifts had not been adequately disclosed for failure to sufficiently describe the transferred property. F.A.A. 20152201F (May 29, 2015).
No Partial Bad Debt Deduction Allowed Taxpayer Had a Reserve For Anticipated Collections.
In this Field Attorney Advice from the IRS, the taxpayer loaned money against real estate that subsequently declined in value. The real estate was foreclosed upon and the taxpayer lost money. The taxpayer determined the loss in value of the remaining loans it held by estimating the date it expected to receive cash from the sale of the note or the sale of the real estate at foreclosure and then discounting that amount by the current appraised value to the present by using the discount rate of interest on the loan. The IRS determined that a partial bad debt deduction was not allowed because Treas. Reg. Sec. 1.166-3(a)(2) requires the deduction be tied to an amount that is charged off during the year. Here, the taxpayer had merely increased its reserve account for bad debts, which decreased its balance sheet assets. It is insufficient to expect that some debts will be repaid at less than what the underlying note lists as the repayment terms. An amount must actually be charged off. F.A.A. 20153501F (Apr. 22, 2015).

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