December 1999

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Separation of Powers. The Supreme Court has revisited the question of delegation of quasijudicial functions to executive branch agencies in Irwin v. Surdyk’s Liquor, 599 NW2d 132 (Minn. 9/2/99). The Court held that a statutorily imposed limitation on workers compensation attorneys fees violates the separation of powers doctrine since it is not subject to review by a duly established court and grants final authority over attorneys fees to a nonjudicial body. The statute in question set a maximum permissible fee that limited the Court's final independent review of attorneys fees based upon its inherent power to oversee attorneys. The Court observed that delegations of quasijudicial powers to executive branch agencies are constitutional so long as the determinations of those agencies lack judicial finality and are subject to judicial review. Two justices dissented on the grounds that the Legislature has the power to determine when workers compensation attorneys fees should be awarded and to establish statutory maximums.

Case-by-Case Rulemaking. The district court held the Minnesota Department of Transportation (MDOT) in willful constructive contempt and awarded attorneys fees against the Department in L & D Trucking v. MDOT, 600 NW2d 734 (Minn. App. 10/12/99). The district court found that the department had violated its order to stop applying its published interpretation of the term "commercial establishments" in the prevailing wage law, without adopting the definition through APA rulemaking. The Court of Appeals reversed. It determined that the MDOT was attempting to enforce the prevailing wage law on a case-by-case basis, applying specific facts to specific parties, rather than enforcing its interpretation of the term "commercial establishments" as if it were a properly adopted rule. The court encouraged formal rulemaking to establish a definition, however.

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

By the time this December issue of Bench & Bar reaches your desk, the Minnesota Supreme Court will have under consideration the recommendations of the Supreme Court Advisory Committee on the Rules of Civil Procedure to amend the rules. The recommendations were presented by a formal report of the committee on July 13, 1999, and at a hearing on November 17, 1999. The report and recommendations followed approximately two years of study and discussion by the committee. If the Supreme Court adopts the recommendations, the amendments are likely to become effective January 1, 2000, and will apply to actions pending on that date, as well as to those filed after January 1.

The committee has recommended amendments to Rules 11 and 26. (The text of the rule changes can be downloaded from the Web site of the Minnesota Supreme Court, www.courts.state.mn.us).

The comments of the advisory committee state that Rule 11 is amended to conform it completely to the federal rule. The principal change for Minnesota practitioners would be in the procedure for seeking sanctions. The amendments would not significantly change the availability of sanctions or the type of conduct justifying imposition of sanctions. The committee suggests continued reference to Uselman v. Uselman, 464 N.W.2d 130 (Minn. 1990), for guidance regarding use of Rule 11.

The advisory committee’s comments to the Rule 26 amendments state that the intent of the proposed amendment to 26.02(a) is to give the judiciary greater control and broad discretion over the extent of discovery. The most significant change is to Rule 26.02(e) requiring a privilege log to permit consideration of the validity of privilege claims. Finally, 26.05 would conform the supplementation requirement to the federal rule and states affirmatively the duty to disclose.

The committee considered and discussed proposals for major modifications to discovery and disclosure rules, but felt it was appropriate to defer changes to the Minnesota rules due to the likelihood of significant changes to the federal rules, sometime during the next few years.

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Criminal Vehicular Operation: Proximate Cause; Superseding Force. C.P.W. initiated a vehicular chase of a car driven by J.M.P. There had been a prior incident between the two, and this conduct essentially was to settle a score. Both vehicles were traveling between 50 and 90 miles per hour in a 45 mile-per-hour zone, ran several red lights, and repeatedly switched lanes. When J.M.P. approached a final intersection, he ran that light; however, C.P.W. slowed down, did not run the light, and did not leave any skid marks in doing so.

J.M.P., however, continued through the intersection. He struck two vehicles, killing one person and injuring five others. The trial court dismissed the case against C.P.W. for lack of probable cause, finding that C.P.W.'s driving was not the proximate cause of the collision because J.M.P.'s decision to speed through the intersection was a superseding intervening force breaking the chain of causation.

The Court of Appeals reversed, holding that the state presented substantial evidence that C.P.W.'s action constituted the proximate cause of the accident, and that J.M.P.'s decision to run the final intersection was not an intervening superseding cause breaking the chain of causation. Following other jurisdictions, notably Wisconsin and Iowa, the Court of Appeals extended the general rule of causation, stating that participants in car races and chases are responsible for each other's negligence, and it is reasonably foreseeable that death and/or injury could result from such conduct. J.M.P.'s conduct in running a final light was not a superseding cause under the four-step analysis articulated in State v. Jaworsky, 505 NW2d 638, 691 (Minn. App. 1993). The evidence in this case indicated that the chase was an ongoing event. Furthermore, such an accident was a reasonably foreseeable event, given the prior conduct of both vehicles. In re C.P.W., No. C6-99-596, 1999 WL 732252 (Minn. App. 9/21/99).

Firearms: Mandatory Minimum Sentence; Burglary. The respondent pleaded guilty to second-degree burglary, believing he would receive a probationary sentence. However, he stole guns during the burglary. The state argued that the three-year mandatory minimum sentence applied because of the "use or possession" of firearms at the time of the burglary. The trial court disagreed.

Held, the three-year mandatory minimum under Minn. Stat. §609.11, subd. 5(a) (1998) applies to a burglar who comes into possession of firearms during the course of a burglary. The illegal course of conduct continues over the time that a burglar remains in a residence. Hence, he did possess the guns "at the time of the offense." The trial court was reversed. State v. Kenneth Paul Herbert, No. CX-99-827, 1999 WL 732356 (Minn. App. 9/21/99).

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Noncompete Cases. The Minnesota Court of Appeals recently passed upon a series of noncompete cases. In Energy Solutions Int'l. v. Tastad, 1999 WL 787629 (Minn. App. 1999) (unpublished), the court affirmed denial of an injunction for an alleged breach of a noncompete agreement by a salesman for a lighting company who started his own competing company. The court found that because the new company had less than 1 percent of the revenue of the employee's former employer, the "minimal harm" precluded issuance of an injunction.

A member of a family who owned a chain of beauty salon stores was barred from competing with his former employer after he signed a 12-year noncompete agreement when he was bought out of the company. In Kunin v. Kunin, 1999 WL 486814 (Minn. App. 1999) (unpublished), the court upheld an injunction barring the employee from working for a competitor despite the employee's claim that the new company differed from the former company because its stores were freestanding, rather than in department stores like his former employer. The court held that the businesses were in "direct competition" because they provided "substantially identical services" to aesthetically-inclined customers.

In Lemon v. Gressman, 1999 WL 451165 (Minn. App. 1999) (unpublished), a restaurant owner was enjoined from operating an adjacent donut shop after he sold his business and agreed to a noncompete clause. The court held that the businesses were sufficiently similar to warrant injunctive relief.

A dentist who entered into a noncompete agreement was barred from pursuing a claim of marital status discrimination before the Minnesota Department of Human Rights because the dentist signed a binding arbitration agreement. In Correll v. Distinctive Dental Services, 594 NW2d 222 (Minn. App. 1999), the court held that the dentist, who was fired after his wife took a job at a nearby dental clinic, was compelled to arbitrate his dispute over a noncompete clause and could not, therefore, pursue a claim before the Department of Human Rights.

Workers Compensation. An employee who commits suicide due to "work related stress" is entitled to workers compensation benefits if it can be shown by substantial evidence that "an unbroken chain of causation" exists between the stress, ensuing mental derangement, and suicide. Middleton v. Northwest Airlines, 600 NW2d 707 (Minn. 1999).

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

De Novo Review Burden same as Initial Hearing. The parties stipulated to a de novo review in two years of the amount of the award of permanent maintenance. In the interim, the husband resigned his employment in a heated discussion with his bosses. The trial court found the resignation to be voluntary and in bad faith, which was affirmed by the Court of Appeals. Subsequently, the husband requested the de novo review, and the trial court reduced maintenance from $1,700 to $900 per month. Its findings addressed only the current incomes and expenses of the parties.

On appeal by the husband, the Court of Appeals stated:

When conducting de novo review, the court may consider anything that it would be appropriate to consider for an initial maintenance award, including respondent’s earnings history. A district court may consider past earnings and earning capacity to estimate an obligor’s future income. The court is not bound by collateral estoppel or other legal principle to impute appellant’s prior income, for that would contradict the stipulated de novo review. The court may, however, consider past earning history in assessing ability to pay.

The appellate court went on to say that the trial court made no findings of how it arrived at the $900 reduced maintenance award, which prevented review on appeal. The Court of Appeals reversed and remanded with specific instructions to conduct a de novo review based on the statutory factors. LeRoy v. LeRoy, C6-99-419, 600 NW2d 729 (Minn. App. 10/12/99).

Vacation of Default Judgment Denied. After the parties separated, the wife served a petition for dissolution. The husband retained counsel but did not provide an address or phone number. He promised to furnish the data but did not contact his counsel until three months later. The failure resulted in no answer being filed. In the interim, the court entered a default dissolution judgment. The husband moved to vacate four months later, based on excusable neglect. The trial court denied the motion after finding that he was responsible for the majority of the neglect.

On appeal, the husband relied primarily on his lawyer’s failure to answer as a basis for excusable neglect and raised the alternative contention that discussions with his wife prior to the default were an oral expression of his defense. The Court of Appeals found no merit in the contention that the discussions obviated the need for a written answer. It also found no evidence of fraud or a showing of post-decree inequity and affirmed. Ringhand v. Ringhand, CO-99-240, 1999 WL 639249 (Minn. App. 8/24/99) (unpublished).

(Note: Unpublished opinions may be cited only after the requirements of Minn. Stat. 480.08, subd. 3 (1998) have been satisfied.)

UCCJA Judgments Vacated. The father argued that two trial court orders that made preliminary child custody and jurisdiction rulings were the law of the case and could not be vacated. The Court of Appeals rejected the argument, stating that the law of the case is relevant only when there is a prior appellate decision in the case. The father also argued that Rule 60.02 could not be used to vacate properly obtained default orders. The Court of Appeals found that the fact that neither of these orders was reduced to judgment did not preclude the use of Rule 60.02. It further found that Minnesota was not the home state of the child, and Ohio had concurrent jurisdiction as the home state. The court held that the trial court correctly contacted the Ohio court and determined that it was the more appropriate and convenient forum. Dell v. Gaughan, C6-99-632, 1999 WL 672821 (Minn. App. 8/31/99) (unpublished).

Recording Children’s Phone Calls. The parties each were awarded custody of two children. Their father alleged that the mother attempted to alienate the children from him and interfered with visitation. He admitted intercepting the mother’s phone calls and using the recorded information in the dissolution proceedings. The federal district court of Minnesota ruled that a custodial parent may vicariously consent to the recording of a minor child’s phone conversations. Such recordings are exempt from liability under federal and state statutes. Wagner v. Wagner, No. 98-1704, 1999 WL 742280 (D. Minn. 1999).

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Miller-Shugart Garnishments; Diversity Jurisdiction. In Reko v. Creative Promotions, Inc., 1999 WL 608672 (D. Minn. 1999), Judge Montgomery affirmed Magistrate Judge Boylan's order, which in turn decided a number of questions arising out of an attempt by an insurer to remove a Miller-Shugart garnishment action on the basis of diversity jurisdiction.

Trustees for two decedents (Reko and Thorson) entered into Miller-Shugart settlements with defendant Creative Promotions. Reko then served a garnishment summons on the insurer for Creative Promotions, Atlantic Mutual Insurance Co., on February 23, 1999. After Atlantic denied any duty to indemnify Creative Promotions, the Reko trustee filed a motion for leave to file a supplemental complaint in Dakota County on March 29, 1999. Atlantic removed the garnishment proceeding to federal district court on April 14, 1999. Atlantic also removed a similar motion that had been filed by the Thorson trustee.

Both trustees filed motions to remand, cumulatively offering five arguments as to why removal was improper. First, the Reko trustee argued that its garnishment summons served on February 23 was an "initial pleading" that had triggered Atlantic's 30-day removal period, meaning that Atlantic's April 13 removal was untimely. Noting that this issue "appear[ed] to be one of first impression," Magistrate Judge Boylan held that the motion for leave to file a supplemental complaint filed on March 29--and not the garnishment summons-- qualified as the "initial pleading" for purposes of 28 U.S.C. §1446(b), and thus removal by Atlantic was timely.

Second, both trustees argued that the garnishment proceeding was not a "civil action" for purposes of 28 U.S.C. §1441(a) and therefore could not be removed. Magistrate Judge Boylan described this argument as "without merit" and cited a litany of cases holding that garnishment proceedings qualify as civil actions for purposes of the removal statute.

Third, both trustees argued that removal was improper because all defendants are required to joined in removals, and Creative Promotions had not joined Atlantic in its removal. Magistrate Judge Boylan rejected that argument as well, finding that Creative Promotions had become a "nominal party" when it entered into the Miller-Shugart settlements, and its consent was not needed for Atlantic to effect a proper removal.

Fourth, both trustees argued that diversity was lacking because both the trustees and Creative Promotions were Minnesota citizens. However, Magistrate Judge Boylan held that citizenship by Creative Promotions was not relevant to the diversity determination because it was a nominal party and if it were anything more, its interests would require that it be realigned with the trustees as a plaintiff for jurisdictional purposes.

Finally, at oral argument, both trustees argued that Atlantic should be deemed a Minnesota citizen under the 28 U.S.C. §1332(c)(1) "direct action" exception to the usual rules governing corporate citizenship for diversity purposes. Noting that the issue of whether a Miller-Shugart garnishment proceeding constituted a direct action was "a case of first impression," Magistrate Judge Boylan relied on cases addressing the removal of similar proceedings under Missouri and Maryland law, and held that it did constitute a direct action against the insurer for purposes of 28 U.S.C. §1332(c)(1)--which meant that Atlantic was to be deemed a citizen of Minnesota and that diversity was not present. Accordingly, Magistrate Judge Boylan directed that both actions be remanded to district court.

On appeal, Judge Montgomery, applying an "extremely deferential" standard, affirmed the order in its entirety, finding that it was "neither clearly erroneous nor contrary to law."

This decision is required reading for anyone dealing with the removal of a Miller-Shugart-related action.

Other Decisions of Note. In Sphere Drake Insurance, PLC v. Trisko, 1999 WL 740065 (D. Minn. 1999), Magistrate Judge Erickson rejected the argument of the defendants that Minnesota law -- rather than 28 U.S.C. §§1821 and 1920 -- should govern the taxation of costs relating to expert witnesses in a diversity action. Accordingly, the defendants were awarded only $40 per day for each expert witness rather than the $300 available under Minn. R. Gen. Prac. 127 or a larger sum potentially available under Minn. Stat. §357.25.

In Brisson v. Summit Technology, Inc., 1999 WL 766548 (D. Minn. 8/10/99), Judge Kyle followed Judge Tunheim's holding in Peterson v. BASF Corp., 12 FSupp2d 964 (D. Minn. 1998) and held that attorneys fees potentially available to class members in a federal class action premised on diversity jurisdiction cannot be aggregated to meet the $75,000 amount-in-controversy requirement.

In McKenzie v. Lunds, Inc., 1999 WL 740191 (D. Minn. 1999), Judge Tunheim adopted the report and recommendation of Magistrate Judge Erickson awarding summary judgment to Lunds. Curiously, Magistrate Judge Erickson was required to reach the merits of the summary judgment motion only after first extending McKenzie's time to serve his amended complaint pursuant to Fed. R. Civ. P. 4(m), despite finding that McKenzie had failed to offer "good cause" for his failure to serve the amended complaint in a timely manner. Magistrate Judge Erickson noted that his Rule 4(m) "discretion" could be exercised despite the failure by McKenzie to make the required good cause showing.

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Adjudication of Delinquency; Criminal Damage to Property. The state alleged that in the early morning hours of September 6, 1998, N.A.S. broke a beer bottle on the victim's car after N.A.S. and the victim argued. The victim did not witness the alleged act. The trial court adjudicated N.A.S. delinquent after trial for criminal damage to property in the third degree. On appeal, N.A.S. argued that the state failed to meet its burden of proof in two respects: the evidence was insufficient to show that the damage to the victim's car exceeded $250; and the state failed to prove beyond a reasonable doubt that N.A.S. was the person who damaged the car.

The state produced an estimate prepared by a body shop totaling $454 offered through the victim. The Court of Appeals found that not only did the trial court have cost-of-repair evidence per the estimate, but it also had evidence through the victim's opinion testimony as to the diminution in value of her vehicle from the damage. This testimony was deemed properly admitted pursuant to Minn. R. Evid. 701. Further, the owner of the property is competent to give an opinion as to the market value of her property. Vreeman v. Davis, 348 NW2d 756, 757 (1984).

In determining whether the evidence was sufficient to support the finding that N.A.S. caused the damage, the Court of Appeals assumed that the trial court believed the testimony of the victim, which conflicted with the testimony of N.A.S., and deferred to the trier of fact for credibility determinations. State v. Dickerson, 481 NW2d 840, 843 (1992). The trial court had evidence that N.A.S. had a beer bottle, had access to the victim's car, and admitted to committing the offense because of feelings of animosity toward the victim. In the Matter of the Welfare of N.A.S., No. CX-99-391, 1999 WL 787600 (Minn. App. 10/5/99) (unpublished).

Permanent Foster Care; Termination of Parental Rights; Consolidating Petitions; Mid-Trial Amendment; Testimony about Placement Preference. Respondent mother argued that the trial court abused its discretion in consolidating the petitions for permanent foster care placement of her four older children and for termination of parental rights (TPR) to the youngest, S.E., because the evidence on the permanency petition, though properly admitted, was prejudicial to a fair trial on the TPR petition. The Court of Appeals concluded that the trial court did not abuse its discretion by consolidating the two petitions because the two proceedings had common questions of law and fact; the petitions shared almost all the same evidence and witnesses; respondent mother and the county were parties to both petitions; and both petitions were concerned with the children's best interests.

Respondent mother further argued that the trial court abused its discretion by permitting a mid-trial amendment to the TPR petition. The Court of Appeals upheld the trial court, indicating that Minn. R. Juv. P. 53.04 authorizes free amendment "in the interests of justice and the welfare of the child." The Court of Appeals also found that because all three grounds supporting termination had been proven, the trial court did not abuse its discretion by permitting the amendment.

Respondent mother next argued that the trial court abused its discretion in considering the children's wishes on placement preference; prohibiting her counsel from directly cross-examining the children; and excluding her from the in-chambers hearing while the children testified. The Court of Appeals upheld the trial court, indicating that a court may consider a child's wishes, especially in cases where a child is older. See In re Klugman, 256 Minn. 113, 122, 97 NW2d 425, 431 (1959). The children were 12, 13, 15, and 17 at the time of trial; the county, guardian ad litem, and the children's counsel were concerned about the impact of the children's testimony on future visits and the children’s ability to speak freely in their mother's presence; respondent mother's counsel was present during the in-chambers hearing; and the trial court decided placement on the children's best interests. See Minn. Stat. §260.155, subd. 4a and 5 (1998)(permitting juvenile court to take child's testimony informally, and to exclude parent in best interests of child). In the Matter of the Welfare of D.E., E.E., T.E., C.E., and S.E., No. C4-99-533, 1999 WL 885215 (Minn. App. 10/19/99) (unpublished).

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Amicus Brief in Minnesota Tax Court. The Tax Court, following Minnesota Rule 8610.0140, allowed an amicus curiae brief to be filed nine days before oral argument over the objection that the amicus petition was in the form of a motion and not timely. Dealers Manufacturing Co. v. County of Anoka, No. C4-98-2963, 1999 WL 305200 (Minn. T.C. 5/13/99).

IRS Lien Prevails over Minnesota Lien. In a lien priority fight, the 8th Circuit ruled that a Minnesota tax lien is choate as of the date upon which a taxpayer files a return and not summarily enforceable for priority purposes. The United States contended that such liens could be choate only as of the date of the administrative processing of a tax return, and the court agreed. State of Minnesota, Department of Revenue v. United States, 184 F.3d 725 (8th Cir. 1999).

Attorneys Fees. The Tax Court imposed attorneys fees in a case that was dismissed voluntarily with prejudice under Rule 41 of the Minnesota Rules of Civil Procedure. Fees and costs were imposed because the plaintiffs' attorneys failed to act with "civility, professionalism, and efficiency." However, the attorneys fees were limited to the "actual salary" per-hour rate of the county attorney's rates ($5,635) rather than to the "prevailing market rate" for comparable outside legal services ($13,200) in opposing the summary judgment motion. Partnership v. O'Connor, No. 97-567, 1999 WL 743606 (Minn. T.C. 9/20/99).

Attorneys Fees. A couple prevailed in a real estate tax case that held that their Cook County house was their homestead, although they spent more than 80 percent of their time in the Twin Cities where they worked and rented an apartment. The Tax Court ruled that even though the state lost, no attorneys fees under the Equal Process to Justice Act, Minn. Stat. §15.471, subd. 8, which comprises a fee sanction on the state for taking positions that lack merit, were applicable since, although unsuccessful, the state's position was "substantially justified", thus precluding a statutory fee award. Burger v. County of Cook, No. C4-98-49-R, 1999 WL 305110 (Minn. T.C. 5/13/99).

Personal Service. The Court of Appeals ruled that service of process cannot be effectuated by facsimile transmission. Under Rule 4 of the Minnesota Rules of Civil Procedure, a summons and complaint shall be served by personal service or by mail, subject to receipt and acknowledgment of the receipt. Allstate Ins. Co. v. Allen, 590 NW2d 820 (Minn. App. 1999).

"Stigma" Value Can Reduce Contaminated Value. The Tax Court held that the contaminated property tax in Minn. Stat. §270.91, subd. 1, designed to recapture property taxes lost when the assessed value of property is reduced due to environmental contamination, did not preclude "stigma" valuation deductions to the unimpaired value of the environmentally contaminated property. Dealers Manufacturing Co. v. County of Anoka, No. C4-98-2963, 1999 WL 717228 (Minn. T.C. 9/8/99).

Attorney-Client Privilege. The Tax Court ruled that the claim of attorney-client privilege by the city of Duluth was valid with regard to documents and questions posed during the deposition of an attorney who represented the city in a transaction that later became relevant in a property tax dispute. The case represents a good explanation and application of the attorney-client privilege. Lake Superior Paper Industries v. State, Nos. CX-96-600516, C4-97-600649, C1-98-600621, 1999 WL 744344 (Minn. T.C. 9/14/99).

Transaction Held Without Substance; Tax Consequences. Purchase and resale of American Depository Receipts in a transaction, structured by an investment firm to insulate the taxpayer from typical market risks yielding capital loss that was offset against taxpayer's previously-realized capital gain, lacked economic substance and thus taxable benefits from the transaction were disallowed. Compaq Computer Corp. v. Commissioner, T.C. No. 24238-96, 113 T.C No. 17 (9/21/99). See also for similar holding I.E.S. Industries, Inc. v. United States, No. C97-206 (N.D. Iowa 9/22/99).

Constitutionality of Retroactive Application of Increased Rates of Estate Tax. Retroactive application of increased estate tax rates, enacted as part of the 1993 Omnibus Budget Reconciliation Act, to a decedent who died between January 1 and the date of enactment is not unconstitutional. US Bank N.A. v. United States, No. 8:99CV64 (D. Neb. 9/15/99). See also for similar holding NationsBank of Texas v. United States, No. 98-21T, 1999 WL 728383 (Fed. Cl. 6/17/99).

Bargain-Priced Opening Inventory's LIFO Base-Year Cost is Actual Cost. A company that acquired its opening inventory at a bargain price and elected to use the dollar-value, double-extension, last-in-first-out inventory accounting method must not only assign the bargain-priced inventory and subsequently acquired inventory to different pools but must also use the acquisition cost of the bargain-priced inventory as the base-year cost. La Crosse Footware Inc. v. United States, No. 98-5158, 1999 WL 711011 (Fed. Cir. 9/14/99).

Attorney May Deduct Cost of Nonpracticing Malpractice Coverage at Retirement/Termination of Business. The U.S. Tax Court held that an attorney is entitled to deduct the entire cost of a nonpracticing malpractice insurance policy in the year in which he retired from the practice of law, regardless of whether the policy was a capital asset. Steger v. Commissioner, T.C. No. 19824-98, 113 T.C. No. 18, 1999 WL 778530 (10/1/99).

Supreme Court Denies Certiorari in Nondomiciliary Income Tax Case. The U.S. Supreme Court denied certiorari in the case of Luther v. Commissioner, 588 NW2d 502 (Minn. 1999), where the Minnesota Supreme Court held that a Minnesota court could tax a Florida domiciliary on all her income because she spent more than one-half of the year in Minnesota. Luther v. Commissioner, No. 98-1999, 1999 WL 412722 (10/4/99).

"Self-Rental" Rule on Passive Activity Losses. A Treasury regulation that treats income from rental of property to a taxpayer's own business as nonpassive activity income that may not be offset by passive activity losses is a valid interpretation of the statute. Fransen v. United States, No. 98-30984, 1999 WL 781652 (5th Cir. 10/1/99).

IRS Income Allocations Ruled Arbitrary and Unreasonable. Several of the IRS allocations of income pursuant to I.R.C. Section 482 for the use of the trade name and marks by Hyatt International Corp. and its subsidiaries and for management services Hyatt provided to its subsidiaries were arbitrary, capricious, or unreasonable, and the court determined that amount of arm's-length consideration for such transactions. H. Group Holding, Inc. v. Commissioner, T.C. No. 616-91, T.C. Memo 1999-334, 1999 WL 791124 (10/5/99).

Deposit/Payment Dichotomy; Statute of Limitations. Taxpayer's motion to dismiss, on statute of limitations grounds, IRS action to recover interest erroneously paid on remittance that taxpayer expressly designated as a deposit/cash bond is denied. The rule that suspends the statute of limitations for the taxpayer suit to recover deposit/cash bond is applicable to the IRS suit. United States v. Domino Sugar Corp., No. 97 Civ. 9113(RMB), 1999 WL 714096 (S.D.N.Y 9/14/99).

Supreme Court Grants Certiorari on Refund Claim. The lower court held that an individual was not entitled to a refund of withheld and estimated income taxes because the remittances were "payments" and not "deposits", and therefore the taxpayer's refund claim was barred by Section 6511(b)(2)(A). The U. S. Supreme will decide "whether a remittance of estimated taxes or of [withheld taxes] is a payment of tax" subject to the three-year statute of limitations in Section 6511(b). Baral v. United States, No. 98-1667, 1999 WL 241371 (9/28/99).

No Interest Due on Recalculated Overpayment. Plaintiff that received a refund of overpayment within 45 days of its filing an application for tentative allowance was not entitled to interest on that overpayment, pursuant to I.R.C. §6611(e), or on the lower, recalculated overpayment amount, which derived from a later settlement with IRS for which a claim had never been made. Soo Line Railroad Co. v. United States, No. 96-612T, 1999 WL 768384 (Fed. Ct. 9/24/99).

Interest and Penalties for Late Filing Caused by Agent's Misunderstanding Not Recoverable. Taxpayers whose return was filed late because an employee who was instructed to "file" the return but filed it with the taxpayers' company records instead of forwarding it to IRS are not entitled to recover interest and penalties assessed for late filing. Henry v. United States, No. 98cv436/RV (N.D. Fla. 8/17/99).

Leveraged Corporate-Owned Life Insurance Program Held Sham. A broad-based leveraged corporate-owned life insurance program, under which the taxpayer purchased life insurance on its employees and systematically borrowed against the cash value to fund the premiums, is a sham for tax purposes, and the taxpayer therefore is not entitled to deduct the interest on policy loans or program administrative fees. Winn-Dixie Stores, Inc. v. Commissioner, T.C. No. 5382-97, 113 T.C No. 21, 1999 WL 907566 (10/19/99).

Taxpayer May Claim Basis Different from FMV on Estate Tax Return. In a recent ruling, the IRS conceded that a taxpayer could claim a different value than the fair market value shown on the estate tax return for basis. The IRS did not, however, rule that the particular value claimed by the taxpayer was demonstrated by clear and convincing evidence. T.A.M. 199933001.

Member's Prior Tax Overpayment Could Offset Group's Tax. The IRS may credit an overpayment of tax of a member of a consolidated group -- attributable to a taxable year prior to the member's affiliation with the group -- against the outstanding income tax liability of the group for a taxable year in which the member joined in the filing of a consolidated return. T.A.M. 199936001.

Attorney Cannot Deduct Reimbursable Expenses Incurred for Clients. The Office of the IRS Chief Counsel found that expenses incurred by an attorney on behalf of a client were not deductible by the attorney if the attorney expects to be reimbursed by the client. C.C.A. 199937031.

IRS Unveils Installment Payment Calculator. To help individual taxpayers come up with a realistic installment payment schedule to which the IRS will agree for purposes of entering into an installment agreement, the IRS Web site (www.irs.ustreas.gov) now has an interactive calculator that figures the installment payment based on various assumptions. Presumably, the IRS will not reject a payment plan that passes its Web site calculations unless expenses cannot be substantiated. 1999 I.R.B. 69.

IRS Does Not Attribute Taxable Subsidiary Activities to Exempt Parent. The IRS holds that the activities of a wholly owned taxable subsidiary in operating a group health program and other service programs for the parent's members under the parent's name and service marks are not attributable to the parent for purposes of testing the parent's Section 501(c)(4) exempt status or for determining the parent's unrelated business income. The ruling characterizes the fees paid directly to the parent by the service providers as royalty income, excludable from unrelated taxable business income. Priv. Ltr. Rul. 199938041.

IRS May Not Levy on Assets of Single-Member LLC to Satisfy Tax Liability of Owner. In a legal memorandum, the IRS stated that it will not levy on the assets of a single-member limited liability company (LLC) to satisfy the tax liability of the owner. The memorandum illustrates the unique status of single-member entities under state law and federal tax law. CCA 199930013. See also Hollowell v. Orleans Regional Hospital, 1998 U.S. Dist. Lexis 8184, 1999 WL 283298 (E.D. La 1998)(IRS able to file alter ego liens against LLC in reliance on Louisiana state law permitting a creditor to disregard a business entity).

IRS Encourages Use of Appeals Service Reps. The IRS encouraged taxpayers to utilize its appeals customer service representatives as part of its ongoing effort to make the appeals process more customer-friendly. IRS noted that it has such a representative in each of its 33 districts nationwide. The service personnel fill a variety of liaison functions between taxpayers and the IRS, including:

• serving as proponents of the appeals process;
• providing assistance to taxpayers during administrative appeals;
• participating in IRS's national problem-solving days;
• handling taxpayer complaints regarding appeals;
• coordinating with taxpayer advocate representatives on appeals matters;
• performing appeals education and outreach with the public, as well as other IRS functions;
• ensuring that taxpayer rights are not abridged; and
• identifying problems and trends, including analyzing customer surveys and balanced measures results. Announcement 99-98, 1999 I.R.B. 42 (10/18/99).

IRS Restores Mileage Rate for Business Use of Automobile. The IRS announced that it will increase to 32.5 cents from 31 cents the optional standard mileage rate for business use of an automobile. The mileage rates for charitable, medical, or moving purposes remains the same. Rev. Proc. 99-38, 1999 I.R.B. 43 (10/25/99).

Claim IRS Interest Refunds before December 31, 1999. Until last year, the IRS charged taxpayers a higher rate of interest on tax deficiencies than it paid on tax overpayments. With the IRS Restructuring Reform Act, Congress changed the law. Now, the IRS charges and pays interest when you and the IRS owe each other for the same periods. Most adjustments to tax liability are merely movements of income or deductions from one year to another and may cause deficiencies and overpayments. The equalized interest rates apply to interest arising on or after October 1, 1998. But if you apply for them no later than December 31, 1999, they can apply to any underpayments and overpayments for which the statute of limitations is still open.

Rules Proposed to Bar Charitable Remainder Trusts Tax Avoidance. The IRS proposed regulations intended to prevent the misuse of charitable remainder trusts and asked for public comment. REG-116125-99 Fed. Reg. (10/21/99).

Homestead Petitions. Effective for petitions filed with the Tax Court on or after May 26, 1999, owners whose valuation notice does not reflect that their current year homestead application was denied may nonetheless appeal that denial in the small claims division of Tax Court, even though they may not be able to timely appear before the local board of review or the county board of equalization. Minn. Stat. § 271.01, Subd. 5 and 271.21, Subd. 2 are amended.

LLC Eligible for Real Property Exemption. A change in law allows property owned or operated by a limited liability company to qualify for exemption under Minn. Stat. §272.02, Subd. 1, in those cases where the property would be exempt under the same provision if the member (i.e., owner) of the limited liability company owned or operated the property.

Reporting of Business Subsidies. Effective for business subsidies entered into on or after August 1, 1999, reporting requirements for businesses receiving subsidies -- including loans, grants, and tax-increment financing -- and the penalties for noncompliance are strengthened. The new standards apply to companies receiving more than $100,000 in assistance from cities and more than $500,000 from the state. Minn. Stat. §116J.993.

Laws on Offers-In-Compromise and Installment Payments. Minn. Stat. §270.67 is amended, effective for offers submitted after June 30, 1999, to require specific procedures to be installed by the commissioner for evaluating offers-in-compromise and offers for installment payments received from taxpayers.

Bill Targeted at Cash Balance Pension Plan Conversions. Senator Paul Wellstone introduced legislation that would place additional mandates on employers that adopt amendments to their traditional defined-benefit plans that "significantly reduce" workers’ retirement benefits. The legislation, S.F. 1640, would provide that:

• employers must provide workers with a "detailed disclosure" of plan amendment at least 45 days before the amendment becomes effective;
• employers who significantly reduce benefits must offer workers the choice between staying under the old plan or changing to the new plan. Employers who fail to allow this choice would be liable for a 50 percent excise tax on the surplus plan assets; and
• employers would not be allowed to give participating employees an opening account balance in a cash balance arrangement that is lower than their already accrued pension benefits to date under the old plan.

Companion legislation was introduced in the House as H.F. 2902.

Bill to Make Permanent Three-Year Moratorium on Internet Taxation. Various bills, such as S.F. 1611, have been proposed in Congress to impose a permanent moratorium on Internet taxation and to encourage establishment of the Internet as a worldwide "tax-free zone." These bills also include a nonbinding, sense-of-the-Legislature provision that the U.S. trade representative to the World Trade Organization should advocate a "tax-free zone" for the Internet.

In this month's "Notes & Trends":

• Administrative Law
• Civil Litigation
• Criminal Law
• Employment and Labor Law
• Family Law
• Federal Practice
• Juvenile Law
• Tax Law
• Torts & Insurance

Schmidt-Clothier Substitution; Health Insurer Subrogation. Person drove his parents' car and injured his passenger, Brandt, in a one-car accident. Person had a $100,000 liability policy with Prudential. Brandt was insured under her parents' Commercial Union (CU) policy for $500,000 of underinsured motorist (UIM) coverage.

Prudential tendered its $100,000 policy for Person's negligence. Brandt settled her UIM claim with CU for $429,999. CU substituted its draft of $100,000 to Brandt to preserve its subrogation against the Persons pursuant to Schmidt-Clothier, 338 NW2d 256 (Minn. 1983). The Minnesota School Board Association (MSBA) paid $128,419 of Brandt's medical bills. CU asserted its right of subrogation and brought suit against Person. MSBA intervened, while CU cross-claimed against MSBA seeking a declaration that MSBA was not entitled to UIM benefits. Person and Prudential were permitted by court order to deposit $215,000 with the court toward settlement, with Prudential paying $100,000 and the Persons $115,000.

CU moved for summary judgment, asserting that: 1) its substitution under Schmidt-Clothier gave it priority to the first $115,000 deposited by Prudential; 2) it had priority to the first $115,000 deposited by the Persons; and 3) a medical insurer cannot assert a subrogation claim against a UIM carrier. MSBA filed a cross-motion for summary judgment arguing that 1) its subrogation interest takes priority over CU's subrogation interest; and 2) it now has a subrogation right to the balance ($75,000) of UIM benefits available under the CU policy.

The district court ruled that CU preserved its right to subrogation and was entitled to the $100,000 paid into court by Prudential. The court did not decide which subrogation interest had priority to the Persons' $115,000, but applied a pro rata formula by which CU received $88,314 and MSBA received $26,685. It concluded that MSBA could not recover against CU for the remaining UIM benefits, and that Brandt was fully compensated for her injuries.

On appeal, the Minnesota Court of Appeals found that CU, as underinsurer, was "closer to the risk," and that MSBA could assert a conventional subrogation claim against the $115,000 tendered by the Persons. It was undisputed that MSBA began making payments to Brandt shortly after the accident. Thus, applying a "first-in-line" analysis, MSBA's subrogation interest came into existence before CU's right to subrogation. On that basis, Judge Randall reasoned, the district court erred in applying a pro rata formula to divide the remaining $115,000 in proceeds.

MSBA asserted that it should be able to assert its right of subrogation against the remaining $75,000 of coverage still available under the CU policy. As subrogee, MSBA stood in the shoes of Brandt. Brandt agreed to settle her claim against CU for less than the policy limits. Thus, neither Brandt nor MSBA could pursue the remaining $75,000 under CU's UIM policy.

Commercial Union Ins. Co. v. Minnesota School Bd. Ass’n, No. C4-99-614, 600 NW2d 475 (Minn. App. 9/28/99).

Insurance: Resident Relative Defined. On September 9, 1995, Spolarich threw a rock that struck Hanson in the eye, causing injury. At the time, Spolarich was spending a portion of each week with his grandparents, who had insurance with Auto-Owners Insurance Company (Auto-Owners). Spolarich claimed coverage and entered into a Miller-Shugart agreement where judgment could be collected only from Auto-Owners coverage. Auto-Owners brought a declaratory judgment action.

Evidence showed that Spolarich stayed with his grandparents about two nights per week, that he kept his belongings there, that he did not have his own bedroom, that he got mail at his father's house, that he owned his own vehicle, and that his grandmother did not inform Auto-Owners about his overnight stays. The trial court concluded he was not a resident relative of his grandparents' house for insurance coverage. The Minnesota Court of Appeals affirmed, based upon the analysis in Fireman's Ins. Co. v. Viktora, 318 NW2d 704 (Minn. 1982) and Wood v. Mutual Service Casualty Ins. Co., 415 NW2d 748 (Minn. App. 1987) rev. denied (Minn. 2/12/88). Auto-Owners Ins. Co. v. Richard Hanson Jr., No. C5-99-685, 1999 WL 787617 (Minn. App. 10/5/99) (unpublished).

Duty of Care to Child. Person, a minor, injured his hand in a conveyor belt owned and operated by Peterson on Hacker's property. Peterson, by deposition, stated that he could not remember whether he turned on the conveyor. The district court granted summary judgment to both Peterson and Hacker. The trial court found that Hacker was not present when the accident occurred, did not invite Person to his property, or know they were invited there. It concluded Hacker had no duty to provide a safe environment or warn invitees of an obvious danger. Person appealed.

The Minnesota Court of Appeals reversed as to Peterson. It found that he turned on the conveyor belt and warned Person, but it was a jury question as to whether the warning was adequate. The appellate court found sufficient facts to support a special relationship between Peterson and Person. The case was thus remanded to the trial court for trial against Peterson. Blakely v. Hacker, , No. C1-99-456, 1999 WL 787617 (Minn. App. 10/5/99) (unpublished).

Exclusion Void under No-Fault Act. Westbend Mutual Insurance Company (Westbend) issued "garage" policies to car dealers that excluded liability coverage for customers involved in accidents while driving the auto dealer's cars if the customers carried their own automobile insurance coverage.

The insurers of the customer's personal vehicles brought suit, arguing that Westbend's coverage was primary and that the attempted customer exclusion violated the Minnesota No-Fault Act. Guided by the case of Hertz Corp. v. State Farm Mutual Ins. Co., 373 NW2d 686 (Minn. 1988), the Court of Appeals held that Westbend impermissibly sought to shift the burden of providing primary insurance from the owner of a vehicle to the user. The No-Fault Act, as amended in 1994, requires the owner to provide primary coverage. Therefore, Westbend's policy defining "insured" to exclude permissive users with liability coverage was void under the No-Fault Act. Mutual Service Casualty Ins. Co. and State Farm Mutual Automobile Ins. Co. vs. Westbend Mutual Ins. Co., Nos. C6-99-551 and C8-99-552, 599 NW2d 585 (Minn. App. 9/21/99).

Logging Road Immunity. Erickson, a logger going to work, was injured when his truck collided with a DNR truck on a narrow, slippery logging road. The state claimed immunity under Minn. Stat. §3.736, subd. 3 (p)(1988), which provides that the state is not liable for losses arising out of a person's use of a logging road. Erickson attempted to argue that immunity for the state only applied when the damages were caused by the unstable condition of the road, and the district court agreed.

The Court of Appeals reversed, declaring that under the plain meaning of the statute, immunity for the "use" of a logging road cannot be limited to its unstable structure. Erickson v. State of Minnesota, No. C7-99-574, 599 NW2d 589 (Minn. App. 9/21/99).