July 2005

ALTERNATIVE DISPUTE RESOLUTION
Judicial Law

• Dissatisfaction With Amount Not Grounds to Vacate Award. Claimant received a $100,000 award through NASD arbitration due to improper investment advice given by a broker. Claimant tried to vacate the arbitration award by bringing a complaint alleging that the arbitrators blatantly and willfully disregarded applicable federal law because the award amount should have been $2.9 million. The 8th Circuit Court of Appeals dismissed the complaint for lack of subject matter jurisdiction, stating that the claim must depend on "resolution of a substantial question of federal law," and not merely raise a federal question in the complaint. To vacate an arbitration award, the moving party had to show that the arbitrators were aware of the governing law and refused to apply it. Presenting only the size of the arbitration award as evidence does not prove disregard of the law. Biscanin v. Merrill Lynch & Co., Inc., 407 F.3d 905 (8th Cir. 2005).

• No Authority to Enter Judgment on Unsigned Mediated Property Settlement. A husband and wife who were going through divorce proceedings negotiated a mediated property settlement agreement dividing their real property and financial assets. The mediated property settlement agreement did not become part of a marital termination agreement because the husband died before the wife signed the agreement. Before a personal representative was appointed for the husband’s estate, the wife moved in district court to enforce the property settlement agreement. The district court took jurisdiction and entered judgment to enforce the mediated property settlement. Once appointed, the personal representative of husband’s estate moved to reverse the district court’s decision on due process grounds. The Minnesota Court of Appeals held that equity required appellate review of an otherwise nonappealable order denying the motion to vacate the judgment, and that the trial court lacked authority to enter judgment enforcing a property settlement agreement that was not signed by both parties and approved by the court. In re the Marriage of Rettke, 2005 WL 1331207 (Minn. App. 06/07/05).

— Darin T. Allen
National Arbitration Forum

July 2005

CIVIL LITIGATION
Judicial Law

• Pierringer Release Precludes Settling Defendant’s Contribution Claims. The plaintiff brought a products liability lawsuit against 14 defendants, one of which was A.P.I., Inc. A.P.I. brought contribution claims against a number of third-party defendants not named in the plaintiff’s suit. On the morning of trial, the plaintiff settled his claim against A.P.I. with a Pierringer release. The third-party defendants then moved for summary judgment against A.P.I., arguing that the execution of the Pierringer release extinguished A.P.I.’s contribution and indemnity rights. The court certified the question to the Court of Appeals.

Noted, under a Pierringer release, the settling tortfeasor will never pay more than its fair share. This is significant because contribution claims do not accrue until the person entitled to the contribution has sustained damage by paying more than its fair share of the joint obligation. Therefore, any claims the settling defendant may have for contribution or indemnity will never accrue. The court concluded that A.P.I., having signed a Pierringer release, could not pursue claims for contribution and indemnity. Bruce v. A.P.I., Inc., et al., A04-1348, 1394 (Minn. App. 06/07/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041348-0607.htm

• Untimely Response to Summary Judgment Motion Rejected. In a dispute over the sale of computers, the plaintiff moved for summary judgment. The defendant filed his responsive documents a single day after the deadline imposed by Minn. R. Gen. P. 115.03 and Minn. R. Civ. P. 6.05. The district court refused to consider the defendant’s responsive documents and ultimately granted partial summary judgment in favor of the plaintiff. The Court of Appeals held that the trial court did not abuse its discretion in refusing to consider the defendant’s untimely filing. Gateway Companies, Inc. v. Brevik, A04-1701 (Minn. App. 05/17/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa041701-0517.htm

• Motion to Amend Denied Based Solely on Timing. The plaintiff brought a lawsuit over its failed attempt to purchase three branch banks. When the defendants moved for summary judgment, the plaintiff moved for leave to amend its complaint to assert additional claims and bring in additional parties. The court granted the defendants’ motion for summary judgment, and it denied the plaintiff’s motion to amend without explanation. The Court of Appeals affirmed the denial of the motion to amend, finding that, despite the liberal standard of Minn. R. Civ. P. 15.01 and the trial court’s failure to explain its ruling, the timing of the motion alone provided enough support for the district court’s refusal to permit the amendment. Crosstown Holding Company, et al. v. Marquette Bank, N.A., et al., A04-1693 (Minn. App. 05/17/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa041693-0517.htm

• Agreement to Arbitration; No Option to Opt Out. A contractual arbitration provision that states "arbitration of all questions in dispute under this [a]greement shall be the choice of either party and shall be in accordance with the rules of the American Arbitration Association" is not unclear. It gives either party the choice to arbitrate. Once either party so chooses, arbitration is required and binding. It does not mean that either party could bypass arbitration. Community Partners Designs, Inc. v. City of Lonsdale, A04-1919 (Minn. App. 06/14/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa041919-0614.htm

— James R. Mayer
Fredrikson & Byron

July 2005

CRIMINAL LAW
Judicial Law

• Jury Selection: Batson Challenge by State Reversed: Appellant was on trial for murder. Both the victim and appellant were white. Appellant filed a peremptory challenge against an African American, citing defense counsel objection that the juror was not credible. Following a hearing, the district court judge determined that the defendant’s race-neutral reason was "insufficient," but did not find basis for the first prong of the challenge, namely, that the real reason for the removal was race-based. Nor could the court identify any circumstance that raised an inference of racial discrimination. Instead of finding that the exercise of the peremptory was based on race, the court found that the reason for the strike was not "sufficient." The court clearly erred when it sustained the Batson challenge, and the conviction is reversed because the denial of a peremptory challenge is not harmless because it undermines the integrity of the system. Daniel E. Angus v. State of Minnesota, A03-1690 (Minn. 04/28/05). www.lawlibrary.state.mn.us/archive/supct/0504/opa031690-0428.htm

• Spreigl; Evidence Not Relevant to State’s Purpose; Prejudice. The district court erroneously admitted Spreigl evidence in a murder trial. The three admitted acts were an attempted murder for hire, terroristic threats, and burglary. The state offered the evidence on the issue of intent. It was error for the court to admit such evidence, because none of the Spreigl acts are sufficiently similar to the charged offense, and the prejudice for the admission was great because the prior acts would demonstrate a propensity to commit a criminal act, which is a prohibited use of Spreigl evidence. Angus v. State, supra.

• Spreigl; Inadmissible on Intent. Appellant was on trial for domestic assault. At trial, the state read a portion of a complaint from a prior domestic assault into the record under a Spreigl proffer, citing the need to prove "intent." This admission was error. "In that Courtney’s defense was that he did not point a gun at the officer, we fail to see the need for the state to establish his intent in pointing the gun. In the context of these proceedings, explaining to the jury why Courtney may have pointed a gun at the officer is not probative of whether he pointed a gun at the officer." Hence, the admission was improper, although harmless. State v. Antoine Edward Eugene Courtney, A03-790, 791 (Minn. 05/12/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa030790-0512.htm

• Sentence; Pornography Creation and Solicitation to Engage in Sexual Conduct; Lesser-Included Offense. The appellant was convicted of four counts including two convictions for attempted use of a child in a sexual performance and two separate convictions for solicitation of a minor to engage in a sexual performance and solicitation of a child to engage in sexual conduct. The two convictions for attempted use of a child in a sexual performance are vacated as lesser-included offenses under Minn. Stat. A4609.04. State v. Ari David Levie, A04-381 (Minn. App. 05/03/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa040381-0503.htm

• Sentence; Probation Violation; Failure to Make All Three Austin Findings. Appellant’s probation was revoked after he was ejected from the Minnesota Teen Challenge Program. Appellant had an outburst of anger on the day before he was discharged, but explained to the judge that his medication for a stomach injury had been stolen, that he had not conducted himself appropriately, but he wished to remain in the program. Following the probation officer’s opinion that the appellant represented a huge risk, probation was revoked after the judge identified the specific condition which was violated. However, the court did not make the next two findings required by Austin, namely, whether the probation violation was intentional or excusable and whether the need for confinement outweighed policies favoring probation. The probation violation is reversed and remanded. The court notes that trial courts should not rotely state that the violation was intentional/excusable, and that the need for confinement outweighs probation. Rather, the court suggests that specific findings be made on all disputed issues, combined with a statement of the court’s reasons for its determination. State v. Patrick James Modtland, A04-17 (Minn. 05/12/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa040017-0512.htm

• Evidence; Crawford; Dying Declarations. Admission into evidence of a dying declaration does not violate the 6th Amendment right to confrontation within the meaning of Crawford because the exception for dying declarations existed as common law and was not repudiated by the 6th Amendment. Minnesota follows California in this case of first impression under Crawford. The court notes that Crawford itself hints that even testimonial dying declarations may be admitted because of the historical admissibility of such statements. State v. Lennell Maurice Martin, A04-279 (Minn. 05/12/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa040279-0512.htm

• Evidence; Crawford; Harmless Error Analysis. The Supreme Court reverses the Court of Appeals, noting that the lower court did not properly analyze whether the admission of a videotaped statement by the victim, a six-year-old child, in a domestic assault case was harmless error. "Although the court in Crawford did not discuss the applicability of harmless error analysis, it is well-settled that violations of the Confrontation Clause are subject to such analysis." The Supreme Court also stated that the admission of such evidence in trial does not automatically require reversal. As subject to a harmless error analysis it will not be reversed if it is shown that the verdict actually rendered is "surely unattributable" to the error. While the videotape appears to be testimonial (it was arranged by the chief of police, conducted in a human services interview room, and monitored by the chief of police), the statement quoted added little, if anything, in the way of detail relating to the evidence against the defendant. The court notes that the evidence was cumulative, at most, and not highly persuasive. Furthermore, the state made limited use of the videotaped evidence. Hence, any error in admitting the videotaped statement was harmless beyond a reasonable doubt. State v. Antoine Edward Eugene Courtney, supra.

• Criminal Sexual Conduct; Penetration Through Clothing. In this case of first impression, the Minnesota Court of Appeals holds that the definition of "sexual penetration" under Minn. Stat. A4609.341, Subd. 12(2), First-Degree Criminal Sexual Conduct, includes "any intrusion however slight into the genital or anal openings" of another, even when accomplished through the complainant’s clothing. Ryan Auringer v. State of Minnesota, A04-950 (Minn. App. 05/10/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa040950-0510.htm

• DWI/Implied Consent; Untimely Review; Due Process Violation. The 2003 amendments to the Implied Consent Law are unconstitutional. Those amendments eliminated the requirement that judicial review of the prehearing suspension must be held at the earliest practicable time, and in no event later than 60 days following the filing of the driver’s petition for review. The Court finds that the availability of administrative remedies is inadequate. However, only the latest amendment is severed, and the version concerning judicial review which existed immediately prior to the 2003 amendments is "revived." Fedziuk v. Commissioner of Public Safety, A04-2328 (Minn. 05/19/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa042328-0519.htm

— Frederic Bruno
Frederic Bruno & Associates

July 2005

EMPLOYMENT & LABOR LAW
Judicial Law

• Age Discrimination. The 8th Circuit recently reversed the dismissal of two age discrimination cases by federal judges in Minnesota. In the first, the appellate court overturned the dismissal of a claim under the Age Discrimination and Employment Act (ADEA) by an older laid-off employee who signed a release to receive a severance payment. The release did not satisfy the requirements of the Older Workers Benefit Protection Act because it was ambiguous and not written in a way that could be reasonably understood by the "average" person. The documentation was also defective and seemed to be "contradictory" under the ADEA. Thomforde v. IBM, 406 F.3d 500 (8th Cir. 2005)

In the second case, a qualified 51-year old woman applicant who was hired for a temporary position, rather than on a full-time basis, when three younger men were hired for the full-time spots, was entitled to pursue a claim of age and sex discrimination. Reversing a determination of the U.S. District Court in Minnesota, the 8th Circuit held that the woman, who was seeking a position as a corrections officer, stated a viable claim for age and sex discrimination, even though she was offered and accepted a part-time position. The claimant could also assert a retaliation claim because she was fired two weeks after complaining about discrimination. Peterson v. Scott County, 406 F.3d 515 (8th Cir. 2005).

• Public Employment. A government unit may establish a random drug-testing policy for safety-sensitive employees without bargaining with the labor union representing its employees. The Minnesota Court of Appeals held that creating the policy was an "inherent managerial right." But the employer must "meet and confer" with the union on implementation of the testing program. Law Enforcement Labor Services, Inc. v. Sherburne County, 695 N.W.2d 630 (Minn. App. 2005),

A state correctional employee who received disability benefits was not entitled to later revoke the disability claim and receive a retirement annuity. The Court of Appeals held that a teacher at the correctional facility in St. Cloud who made a disability claim after incurring a work-related injury could not later convert to an ordinary retirement annuity available to state employees upon reach age 55 "as long as he continues to receive disability benefits." Ruter v. State, 695 N.W.2d 389 (Minn. App. 2005).

A government unit is required to pay health care benefits for dependents of a disabled public safety officer until the officer’s 65th birthday, even if the officer is no longer alive. The appellate court held that Minn. Stat. A4299A.465, Subd. 1 imposes a continuing obligation upon the governing body to provide insurance coverage for dependents of a disabled police officer or firefighter, and that obligation continues if the disabled employee dies before reaching age 65, in which case coverage must be continued until the 65th birthdate of the deceased employee. Schmidt v. City of Columbia Heights, A04-2321 (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa042321-0524.htm

A public employee must pay health insurance benefits to retirees after the end of the collective bargaining agreement with the employee’s union. The Minnesota Court of Appeals ruled that under Minn. Stat. A4471.61, Subd. 2, public sector employers are contractually obligated to continue such payments indefinitely after expiration of a bargaining agreement. HRA of Chisholm v. Norman, 2005 WL 1175920 (Minn. App. 2005).

• Family Leave. In a case of first impression, the 8th Circuit held that an employer who violates family leave by terminating the employee during the leave is not liable under the federal Family and Medical Leave Act (FMLA) if the employer shows that it would have made the same decision in the absence of the exercise of FMLA rights. The appellate court rejected a "strict liability" theory for an employer who fired an employee one month into her leave of absence under the act, which allows an unpaid 12-week leave period. The employee had "disturbed the workplace" before she took the leave, and during the leave, she came back to the workplace and "caused additional workplace disturbance." Because the employer established that it would have fired her, regardless of the leave, it is not liable for interfering with her FMLA rights. This precedent probably will make it harder for employees to prevail in cases in which they are terminated while they are on FMLA leave, if the employer raises performance problems which the employee then must refute. Throneberry v. McGehee Desha County Hospital, 403 F.3d 972 (8th Cir. 2005),

• Employment Contract. An ambiguous employment contract calling for incentive compensation that failed to spell out the basis for the calculations was deemed unforceable. The employer and employee testified that they had different notions of what constituted the components of the compensation plan, which made the arrangement too ambiguous to sustain a jury verdict for the employee. Outdoor Environments, Inc. v. Maro, 2005 WL 1020898 (Minn. App. 2005) (unpublished).

• Unemployment Compensation. An employee who was subjected to repeated unwelcome physical contact by the employer who owned the company was entitled to unemployment compensation benefits without having to complain or await any timely or appropriate corrective action prior to quitting. The employer’s conduct was sexual harassment within the meaning of Minn. Stat. A4268.095 subd. 3(e)(3), which constituted a "good reason" for the employee to quit and be entitled to compensation benefits. Because the perpetrator was also the owner of the company, it was unnecessary to formally complain to him. The company failed to take corrective action before the employee resigned. Munro Holding, LLC v. Cook, 695 N.W.2d 379 (Minn. App. 2005).

A pair of inappropriate remarks made by a manager to her subordinate were not sufficiently "offensive or egregious" to justify an employee quitting and receiving unemployment compensation benefits. The manager made a sexual comment about the employee’s appearance and about a pair of shoes she was wearing, which caused the employee to quit. Affirming the decision of the Department of Employment & Economic Development, the Court of Appeals held that the remarks, while inappropriate, were not "so offensive or egregious" to justify the employee’s quitting without "allowing management to take corrective action." Andrews v. Shervey Agency, Inc., 2005 WL 1021261 (Minn. App. 2005) (unpublished).

• Workers Compensation. The "assault" and "intentional injury" exception to the exclusivity provision of the workers compensation statute, Minn. Stat. A4176.011 Subd. 1(b), may allow a tort claim by an employee against his employer for offensive sexual conduct by a coworker. The employee was subjected to offensive sexual comments by a male coworker, along with other rude sexual behavior. The employer claimed that the lawsuit was covered by workers compensation and could not be the basis of a tort claim. However, the appellate court affirmed the decision of the trial court, holding that the "assault" and "intentional tort" exception may apply. Because of an unresolved fact issue whether the perpetrator’s actions were directed against the claimant for personal reasons unconnected to employment, a triable issue exists whether the exception applies to the exclusivity provision of the act. Kopet v. General Mills, Inc., 2005 WL 1021651 (Minn. App. 2005) (unpublished).

— Marshall H. Tanick
Mansfield, Tanick & Cohen, PA

July 2005

ENVIRONMENTAL LAW
Judicial Law

• Agency Jurisdiction; Asbestos-Containing Waste Violations. The Minnesota Pollution Control Agency ("MPCA") referred enforcement of a series of alleged violations regarding asbestos-containing waste material mismanagement at the Lyon County Landfill to the Environmental Protection Agency ("epa"). The epa eventually brought an administrative action under 42 U.S.C. A47413(d)(1) against Lyon County, the owner and operator of the landfill. The county appealed, arguing among other things that the epa lacked jurisdiction to bring the matter under A47413(d) because it did so more than one year after the alleged violation and the penalty amounts sought were under $200,000. The epa argued that the statute allowed it to bring an administrative action even if those conditions were not met so long as the United States Attorney General agreed with the epa Administrator that the matter was appropriate for an administrative action, which was the case here. The epa’s Environmental Appeals Board and the U.S. District Court for the District of Minnesota upheld this interpretation by the epa of its jurisdiction, as did the 8th Circuit, which at last joined other circuits in granting Chevron deference to an agency’s determination of its statutory jurisdiction. The 8th Circuit also affirmed the findings of liability and the penalties assessed by the EAB and the district court. Lyon County Bd. of Commissioners v. U.S. Environmental Protection Agency, 406 F.3d 981 (8th Cir. 2005).

• Water Quality Standards; Outstanding Resource Value Water. The City of Princeton applied for, and the Minnesota Pollution Control Agency ("MPCA") granted, an NPDES/SDS permit to construct a wastewater treatment plant that would allow the city to triple the capacity of its current plant but would result in the discharge of nearly two million gallons of waste per day into the Rum River, an Outstanding Resource Value Water ("ORVW"). Minnesota Center for Environmental Advocacy challenged the proposed permit issuance on the grounds that, among other things, the city had failed to study in detail the alternative of reducing the size of the proposed plant and using decentralized treatment to meet current and future treatment needs. The Minnesota Court of Appeals agreed and remanded the case back to the MPCA The Court of Appeals also rejected the MPCA’s arguments that it could not impose more than minimally required water quality standards that would protect the scenic and recreational aspects of the river but not the river’s high-quality water. It also found that the MPCA must establish the baseline "high quality" of an ORVW at the time of permit issuance before it could possibly establish standards to maintain that high quality. Minnesota Center for Environmental Advocacy v. Commissioner of Minnesota Pollution Control Agency, 696 N.W.2d 95 (Minn. App. 2005).

• Wastewater Treatment Permit; Phosphorous Removal Rule. The Minnesota Center for Environmental Advocacy ("MCEA") challenged the Minnesota Pollution Control Agency’s ("MPCA") planned reissuance of the city of St. Cloud’s wastewater treatment plant NPDES/SDS permit. Specifically, MCEA argued that the phosphorous discharge limits in the proposed permit violated Minn. R. 7050.0211, subp. 1a, the state’s phosphorous removal rule, by not being sufficiently protective of a downstream reservoir. The Court of Appeals rejected MCEA’s challenge to the proposed permit on a number of grounds. If found that the MPCA’s use of a 14-day minimum water residence time before a body of water is deemed a "lake or reservoir" under the phosphorous rule was not arbitrary and capricious. It also found that the failure to trace the effect of phosphorous on a lake or reservoir to a particular discharge (in this case, St. Cloud’s treatment plant) was a failure to show that the discharge "affects" the lake or reservoir within the meaning of the rule. Finally, the Court of Appeals found that MCEA, as the party wishing to have changes made to the permit, bore the burden of proof related to those changes. Minnesota Center for Environmental Advocacy v. Commissioner of Minnesota Pollution Control Agency, 696 N.W.2d 398 (Minn. App. 2005).

Agency News

Individuals or companies who wish to apply for a construction stormwater permit may now do so online at www.pca.state.mn.us/water/stormwater/stormwater-c.html. Complete instructions on completing the application are available.

—Bill Hefner
Greene, Espel

July 2005

FEDERAL PRACTICE
Judicial Law

• Certiorari Granted; Subject Matter Jurisdiction; Title VII. Plaintiff sued her employer in the Eastern District of Louisiana asserting a claim under Title VII, and prevailed in a two-day jury trial. One month after the jury verdict, the employer filed a motion to dismiss, arguing that it was not an "employer" for purposes of Title VII because it did not have 15 or more employees for 20 or more calendar weeks during the relevant period. After allowing jurisdictional discovery, the district court converted the employer’s motion to a motion for summary judgment and entered judgment for the employer on the basis that it lacked subject matter jurisdiction. On appeal, the plaintiff argued that Title VII’s requirement of a 15 employee minimum went to the merits of her claim rather than the court’s subject matter jurisdiction, but the 5th Circuit, citing several previous decisions, held that the 15-employee minimum was a prerequisite for subject matter jurisdiction. The 5th Circuit did concede the presence of a circuit split, with the 2nd, 7th and Federal circuits treating this as a merits issue, and the 4th, 6th, 9th, 10th and 11th circuits joining the 5th Circuit in treating this as a jurisdictional requirement. (The 8th Circuit is notably absent from either list.) A decision by the Supreme Court, expected sometime in 2006, should resolve this circuit split. Arbaugh v. Y&H Corp., 380 F.3d 219 (5th Cir. 2004), cert. granted, 125 S. Ct. 2246 (2005).

• Other Noteworthy Decisions. The Supreme Court unanimously held that loss causation is an element of a Section 10(b) claim a plaintiff must both plead and prove. Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627 (2005).

The 8th Circuit affirmed a dismissal with prejudice for failure to comply with a scheduling order despite the fact that the plaintiff (an attorney acting pro se) claimed that his computer and Internet troubles had prevented him from receiving the order in question through the District of Nebraska’s ECF system. Widtfeldt v. United States, 2005 WL 1175137 (8th Cir. 05/19/05).

The 8th Circuit dismissed an appeal in a diversity action for lack of subject matter jurisdiction where the plaintiff had sought $100,000 in his complaint but subsequently conceded that he could not recover more than $50,000 in damages. Rasmussen v. State Farm Mutual Automobile Ins. Co., ___ F.3d ___ (8th Cir. 2005).

In a lengthy and detailed opinion, Judge Doty awarded class counsel $20 million in attorneys’ fees in a securities class action and $2 million in an ERISA class action. Both awards represented 25 percent of the settlement proceeds. In Re Xcel Energy, Inc., Sec. Derivative & ERISA Lit., 364 F. Supp. 2d 980 (D. Minn. 2005).

Judge Montgomery granted defendants’ motion for summary judgment based in part on the plaintiff’s failure to provide timely signed responses to defendants’ requests for admissions. Hayes v. City of Brooklyn Park, 2005 WL 1041494 (D. Minn. 05/04/05).

Judge Kyle rejected a challenge to an award of punitive damages in an employment discrimination case, finding that a punitive to compensatory damages ratio of approximately 6:1 was not excessive. Briel v. Chang O’Hara’s Bistro, Inc., 2005 WL 827087 (D. Minn. 04/08/05).

Judge Montgomery granted defendants’ motion to dismiss a securities fraud action and simultaneously denied the plaintiffs’ cross-motion for leave to amend, finding that the proposed amended complaint did not cure multiple pleading deficiencies. In Re Best Buy Co. Sec. Lit., 2005 WL 839099 (D. Minn. 04/12/05).

Judge Frank granted the defendants’ motion to dismiss for lack of personal jurisdiction, finding that the defendants were subject to neither general nor specific personal jurisdiction. Wunderlich-Malec Systems, Inc. v. Equipment and Turbines Engineering Corp., 2005 WL 859263 (D. Minn. 04/11/05).

— Josh Jacobson
Law Office of Josh Jacobson

July 2005

INTELLECTUAL PROPERTY
Judicial Law

• Trademark; Actual Confusion; No Infringement. Evidence of actual confusion from friends and family of the plaintiff was not enough to overcome summary judgment of no trademark infringement. The case involved a movie produced by Disney about a fictional evil corporation with the same name as the plaintiff. The plaintiff sued Disney for trademark infringement, which requires proof of a likelihood of confusion. Regarding actual confusion, one prong of a multiprong test for likelihood of confusion, the court found that confusion evidence from only friends and supporters of the plaintiff did not suffice. The court granted the defendant’s motion for summary judgment of no trademark infringement. Earth Protector, Inc. v. Disney, Inc., Civ. No. 04-1782 (D. Minn. 03/08/05)

• Trade Secret Misappropriation; Statute of Limitations. Ruling on an issue of first impression, Judge Magnuson decided that the three-year statute of limitations for trade secret misappropriation runs anew with each wrongful use of the trade secret. The trade secret was a U.S. donor list shared by the plaintiff and defendant when they had existed as one entity. The defendant notified the plaintiff of its wrongful use of the list in November 2000 and the plaintiff stopped. However, the plaintiff used the list again in April 2003. The defendant counterclaimed for trade secret misappropriation in December 2003 based on the April 2003 use. The plaintiff argued the counterclaim was too late, however, because it came more than three years after the November 2000 use. The court recognized that two views of trade secret protection, as property or as confidential relationship, caused conflicting authority among jurisdictions. If the confidential-relationship view (continuing tort) controlled, the defendant’s claim would be barred by the statue of limitations. Although Minnesota courts had not addressed the issue directly, the Minnesota Supreme Court had held that both views overlapped. Therefore, the statute of limitations "commences to run anew with each wrongful use of a trade secret." Thus, the defendant’s claim was not too late. Lutheran Assoc. of Missionaries and Pilots, Can., Inc. v. Lutheran Assoc. of Missionaries and Pilots, U.S., Inc., Civ. No. 03-6173 (D. Minn. 03/15/05).

• Patent Claim Construction. In construing disputed patent claims, Judge Ericksen applied a two-step methodology. First, the court determined the "ordinary and customary meaning" of each term, often using a dictionary definition. Next, the court turned to the patent’s specification and file history to determine whether the patentee had used the term in a way at odds with the ordinary and customary meaning. For example, the court construed the term "audiometer" by first using a dictionary to determine the ordinary and customary meaning of the term. Then the court turned to the patent’s specification and file history to determine if the patentee had expressed a definition of the term at inconsistent with the dictionary definition. Since the court did not find any use of "audiometer" in the patent or file history inconsistent with the definition, the court construed the term giving it the ordinary and customary meaning as defined in the dictionary. Diagnostic Group, LLC v. Benson Medical Instruments Co., Civ. No. 02-777 (D. Minn. 03/28/05).

— Tony Zeuli
— Abdul Basit
Merchant & Gould

July 2005

JUVENILE LAW
Judicial law

• Adoption. In a special term decision, the Minnesota Court of Appeals points out that the new Rules of Adoption Procedure apply to all adoptions matters commenced on or after January 1, 2005. Adoptions commenced prior to that date are governed by the Rules of Civil Procedure. This is important in that under the Rules of Civil Procedure, an appeal on an adoption was timely served and filed within 60 days after entry of the judgment on an appealable order, whereas the new Rules of Adoption Procedure provide for a 30-day appeal period after the filing of an appealable order or judgment. This case involved a separate adoption proceeding and a juvenile protection proceeding in which the appellant was alleging he was the father of the child involved in both proceedings. In the juvenile protection proceeding, the trial court issued orders determining that the appellant was not the child’s parent and that a recognition of parentage signed by him was void. The custody of the child was transferred to the commissioner of human services and the adoption proceeding was commenced.

The alleged father never appealed from the determination in the juvenile protection proceeding. Instead, he appealed in the adoption proceeding, challenging the respondent’s petition to adopt the child. The alleged father raised issues in the adoption appeal relating to decisions made in the juvenile protection proceeding. The alleged father did not move to intervene in the adoption proceeding, nor did he raise objections to the adoption petition in the adoption proceeding. The Court of Appeals concluded that it could not construe this appeal as taken from the juvenile protection proceeding, which would have made the appeal untimely. Thus, the appeal was dismissed. In the Matter of the Petition of K.J.W. and L.L.W. to Adopt C.R.K., A05-541 (Minn. App. 05/24/05) (spec. term).

• Termination of Parental Rights. In an unpublished decision, the Court of Appeals affirmed a termination of parental rights based on the finding of clear and convincing evidence that a four-month-old child experienced egregious harm while in the parents’ care and that the other child was the sibling of such child. The Court of Appeals observed that the statute does not require proof that the parents inflicted the harm, but rather, only that they did nothing while it was inflicted. Here, the infant had rib fractures, scratches, and bruises consistent with trauma over a long period. The parents could not explain the injuries, and the parents also have emotional and psychological issues that the court found affected their ability to parent. The Court of Appeals concluded that given the great harm done, the children’s young ages and vulnerability, there was substantial evidence that the termination of parental rights was in the children’s best interests. In Re the Children of K.M.B. and T.R.B., A04-2270, A04-2296 (Minn. App. 05/24/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa042270-0524.htm

In an unpublished decision, the Court of Appeals held that where the county sought termination of mother’s parental rights in anticipation that the four-year old child would be adopted by her paternal aunt, and in that proceeding, the mother counter-petitioned for a transfer of custody to the paternal aunt, the Court of Appeals determined that it was the mother’s burden to demonstrate that her proposed disposition was preferable to termination of parental rights. This court affirmed the lower court’s determination that the mother failed to offer evidence that a transfer of custody would serve the best interests of the child. Alternatively, the Court of Appeals observed that even if the county had the burden to show that termination was preferable, it met that burden by presenting evidence regarding the child’s need for permanency, which it contended would not have been met through a transfer of custody to the aunt. In the Matter of the Welfare of the Child of A.M.S and E.R.K., A04-2020 (Minn. App. 05/10/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa042020-0510.htm

• Juvenile Delinquency. In an unpublished decision, the Minnesota Court of Appeals ruled that even though the evidence ultimately may support the disposition order committing a juvenile to the commissioner of corrections, that determination by the district court was erroneous because the district court used a preprinted disposition form to which it added only a few conclusory statements. The Court of Appeals found this action by the district court failed to make the requisite written findings that are needed for meaningful appellate review. In the Matter of the Welfare of M.T.R., A04-1258 (Minn. App. 05/10/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0505/opa041258-0510.htm

The Minnesota Supreme Court has issued a decision addressing a juvenile’s Miranda waiver. In this case, the Court held that a district court erred by concluding that the state proved by a fair preponderance of the evidence that a 16-year old defendant who asked for his mother three times before receiving a Miranda warning and ten times afterward made a knowing, intelligent, and voluntary Miranda waiver. The Court also held that allowing the jury to view a videotape of an interrogation that followed an ineffective Miranda waiver was prejudicial error.

Two of the justices concurred and dissented, agreeing that some errors were made in trial, but no error was so prejudicial as to warrant a new trial. The concurrence and dissent stated that repeated references in the majority opinion to the number of times the defendant asked to speak to his mother implied that police should have honored that request. The concurrence and dissent noted that in prior decisions, the Supreme Court had held that a juvenile does not have a right to interrupt interrogation to speak to a parent and that interrogation must cease only when a juvenile unambiguously invokes the right to speak with counsel or the right to remain silent. The concurrence and dissent also noted the investigator’s explanation at trial that he did not accede to the minor’s request to talk to his mother because it became apparent to that investigator that the minor intended to use his mother as an alibi witness. State vs. Burrell, A03-1293 (Minn. 05/19/05). www.lawlibrary.state.mn.us/archive/supct/0505/opa031293-0519.htm

The Minnesota Court of Appeals held that a juvenile adjudication is not a prior qualifying criminal-sexual-conduct conviction triggering the mandatory imposition of a ten-year conditional release term under Minn. Stat. A4609.346, subd. 5 (1996) (now codified as Minn. Stat. A4609.109, subd. 7 (2004)). This determination arose out of a case where a defendant challenged his convictions of first- and second-degree criminal sexual conduct, arguing, among other things, that a juvenile adjudication does not trigger the mandatory imposition of a ten-year conditional release term. State vs. Boehl, A04-583 (Minn. App. 06/07/05). www.lawlibrary.state.mn.us/archive/ctappub/0506/opa040583-0607.htm

The Minnesota Court of Appeals held that statements made by a child victim to a medical professional are not testimonial if the circumstances under which the statements were made would not lead the child, or a reasonable child of her age, to believe that the statements would be available for use at a later trial. Therefore, where the foster mother of a seven-year old child reported to authorities that she suspected that the child had been touched inappropriately by her father, an officer and child protection worker arranged to have the child interviewed at Midwest Children’s Resource Center. Because the child was driven to the Center by her foster mother and shielded from police presence during the interview and examination by a nurse practitioner, and the examination was conducted, at least in part, for purpose of medical diagnosis, the Court of Appeals concluded that the statements at the Center were not testimonial. State vs. Krasky, A04-2011 (Minn. App. 05/24/05). www.lawlibrary.state.mn.us/archive/ctappub/0505/opa042011-0524.htm

— Gary A. Debele
Walling, Berg & Debele PA

July 2005

TAX
Judicial Law

• Sales Tax: Online Internet Data Retrieval System Qualifies For Capital Equipment Exemption. The Minnesota Tax Court held that the taxpayer, who provided and maintained an Internet-based system which compiled, interpreted and transmitted information on potential home loan borrowers for use and analysis by mortgage companies, credit unions, and mortgage insurance companies, was eligible for the capital equipment exemption. The dispute was whether the taxpayer conducted a "data retrieval system" and whether such system was "equally available and accessible to all customers" under Minn. Stat. A4279A.68 (5). Dexma, Inc. v. Commissioner of Revenue, 7656-R, 2005 Minn. Tax lexis 16 (Minn. T. Ct. 03/08/05).

• Real Property: "60-Day Rule." The Minnesota Tax Court dismissed the taxpayer’s appeal for failure to produce the lease and other documents relating to the income-producing property within 60 days of filing the appeal. The taxpayer asserted that the county already had a copy of the lease from a prior appeal and that the taxpayer had provided required information in summary fashion. However, the Tax Court found that the information provided was insufficient because the copy of the lease in the county’s possession was incomplete and a court-ordered stipulation of settlement and subsequent amendments to the terms of the lease were not provided. Outboard Service Co. v. Cass County, C6-04-486, 2005 Minn. Tax lexis 11 (Minn. T. Ct. 02/02/05).

• Real Property: Classification. The Minnesota Tax Court reversed the county assessor and held that 12 acres consisting of four-and-one-half to five acres that are tilled, three acres that can be tilled and used as hay land, and four acres of unusable wild land, should remain classified as agricultural land non-homestead under Minn. Stat. A4273.13 (23)(c)). The county had changed the classification from agricultural, non-homestead to commercial for the January 2, 2003 assessment. The court held that 11.5 acres of the total 12 acres was more than the statutorily required ten acres of continuous acreage for farm land classification. Jean C. Holt v. County of Chisago, C5-04-559, (Minn. T.Ct. 03/02/05).

• Real Property: Required Income-Producing Information; "60 Day Rule." The Minnesota Tax Court dismissed the petitioner’s appeal for failure to timely submit the income-producing information required under the "60 Day Rule" found in Minn. Stat. A4278.05 (6)(a)(2)). The taxpayer’s former counsel submitted an affidavit indicating that he was not aware of the 60-day requirement. However, the taxpayer submitted no information on his knowledge or lack of knowledge of the statutory requirement. The issue in the case was whether there was a 30-day extension of time in which to provide the required information and whether the taxpayer proved "he was not aware of or informed of" the requirement to provide the information to the assessor within 60 days after the filing of the petition. Here the taxpayer’s counsel stated he was unaware of the "60 Day Rule". However, under the plain language of the statute, counsel’s knowledge is irrelevant; it is the taxpayer’s knowledge that determines whether the 30-day extension of time is warranted. The court noted that since the passage of the 30-day relief provision many counties have adopted the practice of sending all income-producing property taxpayers a letter informing them of the requirement to provide the statutory information in a timely manner. Citizens State Bank of Shakopee v. County of Scott, 2004-09057, (Minn. T.Ct. 03/01/05).

• Real Property: Mechanics of 60-Day Rule. The Minnesota Tax Court, in a Petition for Rehearing and Reconsideration, denied Kmart’s Motion. Kmart argued that the 60-Day Rule did not apply to the business income and expense category of items, while the county contended that the information sought was subject property expenses disclosable under the rule. The Tax Court indicated that it is bound by the plain language of the 60-Day Rule and the holdings in BFW v. County of Ramsey, 566 N.W.2d 702 (Minn. 1997) and Kmart Corporation v. County of Becker, 639 N.W.2d 856 (Minn. 2002). The 60-Day Rule requires the production of any and all information available relating to the subject property. To create a bright-line itemization rule would be to obliterate the broad production requirements. To contemplate a valuation process implicated by the 60-Day Rule and, thus, the information relevant to be produced, would also be too narrow for the broad production requirements. Petitioners challenging property assessments have the burden to produce information supporting their challenges and to timely produce it. Whether or not the information is necessary for the purposes of valuation is determined after the 60-Day period. Tax policy underlying the Chapter 278 production requirement stresses the need for speedy resolution allowing counties to establish budgets. A petitioner would be well-advised to produce all information rather than withhold when unsure about meeting the 60-Day Rule requirements. Lastly, the court indicated that it found leases to be helpful in the determination of subject property expenses, and will continue to look at leases as a guide on whether the petitioners have met their burden under the 60-Day Rule. Kmart Corporation v. County of Stearns, CX-00-40, CX-01-1465, C2-02-1387, 2005 WL 937620 (Minn. T. Ct. 03/03/05).

• Property Tax: Valuation and Discrimination Claims. The Minnesota Tax Court ruled in favor of a taxpayer in a real estate tax valuation appeal of an assessment on a seasonal/recreational home. The assessor’s valuation for January, 2003 was $334,500. The owner’s valuation for 2003 was $255,000. The county’s appraisal indicated a fair market value of $332,000 as of 2003. The court determined that the actual value for 2003 was $304,200. The court did not use the income-producing valuation approach and also put little weight on the appraisals of both parties for the sales approach because of a lack of comparables. It rather relied on the cost approach, which the taxpayer testified was $164,000. The court adjusted that cost to reflect true market cost with a profit since it was a custom-built property. Improvements increased the actual cost by $21,000 and the land value was determined to be $750 per square foot or an additional $119,200. Lastly, the court reduced the assessor’s estimated market value for unequal assessment based on the 2003 Nine-Month Sales Ratio Study, prepared by the DOR, which indicated a median level of assessment for January through September, 2003 was 84.9 percent. Based on the valuation and the discrimination, the court found the true value was $258,096 or 10.1 percent below the market value of $304,200. Raymond M. Theobald and Shirley A. Theobald v. County of Lake, CX-04-181, (Minn. T. Ct. 04/01/05).

• Real Property: Deed in Lieu of Foreclosure; Deed Tax. The Minnesota Tax Court held that the deed-in-lieu-of-foreclosure transaction was not exempt from the deed tax, but that the net consideration was less than $500, and therefore, the taxpayer was entitled to a refund. Minn. Stat. A4287.21(1) imposes a deed tax on transactions conveying property unless specifically exempt. The deed tax is $1.65 when the consideration, exclusive of the value of any lien or encumbrance remaining on the property at the time of sale, is $500 or less; if it exceeds $500, the tax is .0033 of the net consideration. First, the court held that the transaction was a deed in lieu of foreclosure and therefore not exempt from the deed tax for the exemptions found in Minn. Stat. A4287.22(11) and (12). Second, the Court held that the value of the consideration was less than $500 because: (1) when the liens remaining on the property are subtracted from the value of the indebtedness forgiven, the result is less than $500; (2) the value of the property transferred was substantially less than the indebtedness; and (3) the loans were non-recourse loans. Giving effect to all words in the statute, the court said that the statute clearly provided that the amount of consideration is reduced by the amount outstanding under any lien that is attached to the real property prior to the time of sale and is not released or satisfied as a result of the sale. See Minn. Stat. A4278.20(2)(f). ZIRP-IC, LLC v. Hennepin County, 31282, 04-02759, 2005 WL 37432 (Minn. T. Ct. 04/21/05).

• Procedure: Cost and Disbursements in Property Tax Claim. The Minnesota Tax Court awarded the taxpayer approximately $700 for costs and disbursements to include the statutory costs, filing fee, service of process fee, witness fees, witness mileage, copies, and exhibits. The court refused to allow approximately $2,000 for trial transcript costs and approximately $400 for a transcript of a deposition, citing to the well-settled principle that trial transcripts and depositions purchased for convenience are not taxable. Nothing was awarded for the costs of initial set-up and final trial notebooks or subpoena costs. Westbrook Health Center v. County of Cottonwood, CX-03-128, (Minn. T. Ct. 03/31/05).

• Procedure: Dismissal of Action for Failure to Respond. The Minnesota Tax Court dismissed a real property tax appeal because of the petitioner’s failure to respond to the county’s motion requiring dismissal of the action under Minn. Tax Ct. R.P. 8610.0070, Subpart 5(b). Tri K Sports, Inc. v. County of Hennepin, 31907, 2005 WL 937428 (Minn. T. Ct. 04/13/05). See also Dahlheimer Real Estate Partnership v. County of Hennepin, 31904, 2005 WL 937340 (Minn. T. Ct. 04/13/05) (same issue and same result).

• Procedure: Lessee Motion to Intervene in Real Property Action. The Minnesota Tax Court dismissed Kohl’s Department Stores’ motion for intervention in a property tax dispute with the county. The court applied the four-part test of Minneapolis Star & Tribune Co. v. Schumacher, 392 N.W.2d 197, 207 (Minn. 1986) and Minn. R.Civ.P. 24.01, which require: was there a timely application for intervention? is there an interest relating to the property or transaction which is the subject of the action? are there circumstances demonstrating that the disposition of the action may as a practical matter impair or impede the party’s ability to protect that interest? and, is there a showing that the party is not adequately represented by the existing parties? The court held that Kohl’s had an interest in the property. However, the court felt that Kohl’s motion was untimely, since the owner and the county had agreed to a settlement in the action, and such settlement would lower the taxes for the properties, including Kohl’s interest. Lastly, the Court dismissed Kohl’s contention that it was not adequately represented by the existing parties since "C9 the test for intervention is adequate representation and not perfect representation C9 ." CRRV Perimeter One, LLC v. County of Anoka, C8-04-4189, 2005 WL 937320 (Minn. T. Ct. 04/13/05).

• IRC A46656: Statement of Penalties for Reasonable Cause. Corporation’s refund action for abatement of IRC A46651 and IRC A46656 penalties assessed due to its failure to timely file, pay and deposit employment taxes was dismissed. Alleged emotional/psychological problems of office manager/wife to whom tax responsibilities were delegated didn’t discharge taxpayer from ultimate responsibility or provide reasonable cause for its delinquencies, particularly where husband/corporate agent knew about wife’s problems and nonetheless failed to take control of taxes, even after receiving two noncompliance notices from IRS. Donald’s Electric And Refrigeration Service, Inc. v. U.S., 95 AFTR 2d 2005-1398 (D. Va. March, 2005).

• Property Transferred to FLPs Set-Up for Incapacitated Individual Included in Estate. The Court of Appeals for the 1st Circuit, affirming the Tax Court, held that the value of property transferred on behalf of an incapacitated individual under court supervision to family limited partnerships ("FLPS") was includible in her gross estate under IRC A42036(a)(1). The court agreed with the Tax Court’s finding that inclusion was proper because there was an implied agreement to use the income from the transferred property for the incapacitated individual’s support. Estate of Ida Abraham, 95 AFTR 2d 2005-1018 (1st Cir. 05/25/05).

• Admission of Taxpayer Evidence; Reconstruction of Store Income. The district court erred in barring taxpayers, whose records from their liquor store business were inadequate and whose income IRS estimated by using the percentage markup method, from using other indirect methods of income reconstruction. Kikalos v. United States, 04-1613 (7th Cir. 05/24/05).

• Penalty for Failure to Pay Employment Tax; CFO Not Responsible. A taxpayer wasn’t a responsible person liable for the 100 percent penalty under IRC A46672 although he was the vice president and chief financial officer of a declining manufacturing company that failed to pay its employment taxes. Due to the extreme degree of control exercised by the company’s president and its limited finances, the taxpayer was virtually powerless to pay the employment taxes. Salzillo v. U.S., 95 AFTR 2d 2005-879 (Ct. Fed. Cl. 04/04/05).

• IRC A47525: Procedure; Confidentiality Privilege for Client Communications. Communications between clients and tax practitioners are privileged provided the communications relate to tax advice. In what may be an important blow to the IRS’s tax shelter efforts, the court held that all but one of 267 documents the IRS had sought as part of its investigation into BDO’s tax shelter activities were privileged and did not have to be disclosed to the IRS. In so holding, the court "was not prepared at this time to conclude C9 that BDO and the associated law firms were not giving advice, but instead were providing documents that were nothing more than orchestrated extensions of the accounting and law firm’s marketing machine." U.S. v. BDO Seidman, LLP, 95 AFTR 2d 2005-1725) (D. Ill. 03/30/05).

• "Bona Fide Sale" Exception to IRC A42036. Where individual transferred stock to a holding company and holding company units to a partnership, U.S. Tax Court finds transfer of stock to holding company satisfied "bona fide sale" exception IRC A42036 because individual had a legitimate and significant nontax reason for transfer. Transfer of holding company units to partnership did not satisfy "bona fide sale" exception. Estate of Bongard v. Commissioner, 124 T.C. No. 8 (2005).

• Discovery: Executive Privilege. The Federal Circuit gave the green light to an interlocutory appeal in which the IRS will argue that the head of an agency may delegate to a subordinate the deliberative-process prong of executive privilege. Marriott International Resorts, O.P. et al v. United States, 95 AFTR 2d 2005-1003 (Fed. Cir. 01/26/05).

• Disputing Liabilities in Collection Due Process Hearing Precluded. Because taxpayers had opportunity to dispute underlying liabilities in bankruptcy proceedings, they are precluded from raising those liabilities during a collection due process hearing. Kendricks v. Commissioner, 124 T.C. No. 6 (2005).

• Rejection of Offer in Compromise for AMT Liability. The U.S. Tax Court held that the IRS didn’t abuse its discretion in refusing a couple’s offer in compromise on an alternative minimum tax liability that they incurred for exercising incentive stock options. Ronald J. Speltz et ux. v. Commissioner, 124 T.C. No. 9 (2005).

• Statute of Limitations on Refund Claim Does Not Run for CRT. The trustee of a charitable remainder trust (crt) could claim a refund of erroneously paid income taxes more than three years after filing the information return for the year in question, because the trust was not actually required to file a return and pay tax. The trustee, who had erroneously filed ordinary income tax returns for the trust and paid income taxes, filed a claim for refund, which the IRS said was untimely. The court held that the three-year statute of limitations on claims for refund did not apply to a charitable remainder trust, because IRC A46511(a) applies to years "in respect of which tax the taxpayer is required to file a return". Wachovia Bank N.A. v. U.S., 95 AFTR 2d 2005-1939 (M.D. Fla., 03/18/05).

• Social Security Act; Benefit-Reducing Earnings. Self-employment earnings reported on taxpayer’s Form 1040 pursuant to a Form 1099 issued to him, for which he received no cash, are earnings for purposes of determining whether taxpayer had excess earnings that would reduce Social Security retirement benefits. Mason v. Barnhart, 95 AFTR 2d 2005-2235 (8th Cir. 05/05/05).

• Damages for Discriminatory Action Ineligible for Exclusion. Damages awarded to taxpayer for damage to professional reputation and for pain and mental anguish resulting from her former employer’s discriminatory action do not qualify for exclusion under revised tax code provision relating to damages for physical injuries. Murphy v. IRS, 03-02414 (RCL) (D.D.C. 03/22/05).

Administrative Action

• Sales Tax: Internet Access Charges. The Minnesota Commissioner of Revenue replaced Revenue Notice No. 02-09 and indicated that when Internet access charges are combined with taxable charges, the whole amount of the bill is subject to sales and use taxation unless the Internet access provider can reasonably identify the charges for Internet access from its books and records kept in the regular course of business. Revenue Notice No. 05-01 (02/28/05).

• Sales Tax: Part Gift, Part Purchase; Nonprofit Admissions. The Minnesota Commissioner of Revenue announced his position regarding part gift, part purchase admissions to events sponsored by a IRC A4501(c)(3). The Revenue Notice requires that the donor "purposely contributed money or property in excess of the value of any benefit received" and the donor must have the intention of making a gift. In-kind contributions of services, such as legal, accounting and bookkeeping, and entertainment services do not qualify as voluntary contributions. Revenue Notice No. 05-02 (02/28/05).

• Sales Tax: Streamlined Sales Tax Agreement. On April 26, 2005, the commissioner filed a petition on behalf of Minnesota for membership in the Streamlined Sales Use Tax Agreement with the cochairs of the Streamlined Sales Tax Implementing States. Copies of the states’ petitions and certificates can be found at www.streamlinedsalestax.org/certificates%20of%20compliance.htm.

• New Gift/GST Tax Form. The IRS issued new Form 8892, Payment of Gift/GST Tax and/or Application for Extension of Time to File Form 709, to request an extension to file Form 709, United States Gift (and Generation-Skipping Transfer Tax) Return, when a donor is not applying for an extension to file an income tax return. The donor uses this form to pay gift or generation-skipping transfer (GST) tax when applying for an extension to file Form 709. New Form 8892 applies to gift tax returns for calendar-year 2004 and thereafter.

• Expanding Access to E-Services. The IRS expanded the number of practitioners eligible to use its suite of E-Services. Previously, registration had been available only to those who filed at least 100 individual returns electronically. However, according to ir-2005-33, preparers that e-file any combination of at least five accepted individual and business tax returns in a calendar year can use the following new E-Services products: Disclosure authorization ("da"); Electronic account resolution ("ear"); and Transcript delivery system ("TDS").

The IRS will be adding additional features to aid return preparers in resolving common problems timely. Before using E-Services, tax advisers must preregister online at www.irs.gov/taxpros/article/0,,id=109646,00.html. Registration entails personal as well as professional credential checks. Notification of final acceptance will be mailed to the tax adviser’s home address.

• Audits Increase in 2004. The IRS 2004 Data Book (available online at www.irs.gov) revealed an increase in audits of both individuals and certain corporations in FY 2004, when compared with the prior fiscal year. The report showed a 14.8 percent increase in total audits and an 18 percent increase in audits of individual returns. Nevertheless, the Service audited less than 1 percent of taxpayers in FY 2004. The IRS audited 0.77 percent of individual income tax returns and 16.7 percent of returns filed by corporations with assets exceeding $10 million. Only 1.5 percent of excise tax returns were audited. Tax-exempt organizations filed 863,494 returns during FY 2004; 5,800 of those were audited.

• AMT Deduction for Refinanced Home Mortgage Interest. A new revenue ruling clarifies that qualified housing interest, which generally is deductible for alternative minimum tax ("amt") purposes, includes interest paid on a mortgage that has been refinanced more than once to the extent the interest on the mortgage that was refinanced is qualified housing interest and the amount of the mortgage indebtedness is not increased. Rev Rul 2005-11, 2005-14 IRB; IR 2005-31.

• Estate Tax: Interest on Bank Loan. Interest on a bank loan obtained to pay the federal estate tax is deductible on the decedent’s federal estate tax return as an administration expense, provided the loan is necessary for the administration of the estate. PLR 200449031.

• Merger Termination Fee Had to be Capitalized. A National Office Technical Advice Memorandum concluded that a merger termination fee paid to clear the way for a merger with another suitor was not a currently deductible expense under IRC A4162, but instead had to be capitalized under IRC A4263. PLR 200512021.

• Deadline Extension for FSA Flexible Spending Accounts Allowed. The year-end deadline for use of funds in flexible spending accounts may be extended by a two-and-one-half month grace period under IRS Notice 2005-42. The Notice permits a grace period immediately following the end of each employee benefit plan year, during which any unused plan benefits or contributions remaining may be paid or reimbursed to plan participants for qualified benefit expenses incurred. The Notice modifies the rule prohibiting the receipt of deferred compensation under IRS A4125 cafeteria plans.

• Facility Fees Related to Credit Lines Deductible in Year Paid. A National Office Technical Advice Memorandum concluded that a corporation could deduct quarterly facility fees, paid in arrears in connection with a revolving credit agreement, as business expenses in the year of payment, when economic performance was deemed to occur. It rejected the IRS examining agents’ contention that the fees had to be capitalized. PLR 200514020.

• Damages for Faulty Home Construction Tax-Free to Extent of Basis. A private letter ruling makes it clear that damages received by a taxpayer for faulty construction of his residence are tax-free to the extent of his basis in it and reduce that basis. Amounts in excess of basis are taxable. PLR 200513011.

• Capitalized Transaction Costs not Deductible Upon Corporate Dissolution. In a Technical Advice Memorandum ("tam"), the National Office analyzed the tax treatment of preacquisition transaction costs that a target corporation had capitalized and whether such costs were deductible under IRC A4165 following the target corporation’s dissolution under state law. Given the facts involved, the conclusion reached may have widespread application to acquisition transactions. tam 200502039

Legislation

• Bankruptcy Reform Bill. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("the Act," P.L. 109-8) was enacted to provide curbs to perceived bankruptcy abuses. The legislation makes it more difficult for many individuals to discharge debts by filing under Chapter 7 of the U.S. Bankruptcy Code. The bill would establish a means test to force more individuals to file under Chapter 13, which imposes repayment plans on debtors. The new bankruptcy reform legislation contains 20 tax provisions. Some of the tax changes are:

• simplifies the calculation of interest applicable to tax claims, so that the interest rate would be determined in accordance with applicable nonbankruptcy law;

• provides greater protection for holders of tax liens on real or personal property of an estate, particularly holders of ad valorem tax lines, for which local governments sometimes face difficulty in collecting;

• simplifies the process for state filings of fuel tax claims by permitting the designated base jurisdiction under the International Fuel Tax Agreement to file a claim on behalf of all states involved;

• sets priority for tax claims during the time that an offer-in-compromise is pending;

• prohibits discharge under Chapter 13 of the Bankruptcy Code of any debt for fraudulent tax payments;

• topping the list of tax-related provisions is the elimination of the "superdischarge" that allows some taxpayers to avoid paying taxes when filing under Chapter 13 bankruptcy protections;

• extends bankruptcy protection for debtors’ retirement funds by providing a new federal exemption for retirement funds held in any of several types of tax-favored plans or accounts. This new exemption is tied to the plan’s or account’s IRC Code qualification, but eliminates other requirements and conditions that existed under prior law. However, the act does impose a $1 million (inflation-adjusted) cap on the exemption for iras and Roth iras;

• provides that funds that a debtor (i) placed in a tax-favored A4530 Coverdell Education Savings Account or (ii) paid or contributed to a tax-favored A4529 qualified tuition program for the debtor’s child, stepchild, grandchild, or stepgrandchild at least 365 days before filing the bankruptcy petition are not property of the bankruptcy estate;

• narrows the bankruptcy protection of self-settled spendthrift trusts;

• prohibits discharge of fraudulent taxes in Chapter 11;

• clarifies rules governing automatic stays and prepetition tax obligations;

• addresses periodic payments of taxes in Chapter 11 cases;

• prohibits the avoidance of statutory liens;

• provides rules governing payment of post-petition tax obligations of businesses in Chapter 11;

• clarifies that an estate is protected if the government does not request an audit of the debtor’s tax returns;

• requires Chapter 13 debtors to file all tax returns as a condition of confirmation;

• provides that the maximum amount of transit passes and van pooling benefits that are excludable from income and wages per month would be increased from $105 (for 2005) to $155 (after 2005);

• for a contingent convertible debt instrument, any Treasury regulations which require OID to be determined by reference to the comparable yield of a noncontingent fixed-rate debt instrument would be applied as requiring that such comparable yield be determined by reference to a noncontingent fixed-rate debt instrument which is convertible into stock. This change would apply for debt instruments issued after the enactment date; and

• for offenses committed after the enactment date the criminal penalty under IRC A47201 would be increased from $100,000 to $500,000 and for corporations from $500,000 to $1 million and the maximum prison sentence would be increased from five to ten years.

The act generally takes effect on October 17, 2005 (180 days after it was signed into law), but does not apply for cases begun before that date.

• Outsourcing Collections Begin in Summer. The IRS use of private collection agencies is expected to begin this summer. Section 881 of the American Jobs Creation Act of 2004 (Pub. L. No. 108-357), authorizes the Treasury secretary to contract with private companies or individuals to collect federal taxes owed.

Looking Ahead

• Possible Congressional Legislation. Congress has much on its plate before it will adjourn. Some bills to keep an eye on that have a good chance of passage among others are:

• "Cuno" repeal. The Senate will be taking up a bill to protect state tax incentives encouraging economic development in light of the 2004 Cuno decision declaring Ohio’s investment tax credit program unconstitutional. See BNA Daily Executive Tax Report at G-6 (05/19/05);

• H.R. 3 – Highway Tax Bill. This tax proposal has been passed by the House and Senate and will go into Conference. It has many revenue-raising tax provisions including shutting down a grandfathering transition period for sale-in, lease-out transactions, codifying the economic substance doctrine; denying a deduction for certain fines and penalties relating to a violation of any law; imposing mark-to-market treatment of individuals who expatriate; denying a deduction for punitive damages paid or incurred by a taxpayer as a result of a judgment or settlement of a claim; eliminating the audit suspension-of-interest benefit; increasing penalties; requiring corporate tax returns be signed by the ceo; and the like. See BNA Daily Executive Tax Report at G-15 (05/18/05);

• Prohibition on Business Activity Tax. A state would be prohibited from imposing a net income tax or other business activity tax "bat" on an entity unless the entity had a physical presence in the state. The Business Activity Tax Simplification Act of 2005 — hr 1956 — would also extend the prohibitions of Public Law 86-272 to all business activity taxes (currently, the law applies only to net income taxes);

• Making Internet Tax Ban Permanent. The Senate and the House will be introducing bills intended to pass a permanent Internet tax ban. (The current ban does not expire until 2007). See BNA Daily Executive Tax Report at G-11 (04/20/05); and

• Federal Excise Tax on Telecommunications Restriction. A bill will be introduced in both the House and Senate which would head off any attempt to impose the telephone excise tax on VOIP services, and any other type of data communications provided through the Internet. The proposal is designed to keep the federal excise tax on only the existing telecommunication services if the excise tax is not repealed. See BNA Daily Executive Tax Report at G-5 (04/12/05).

• Social Security Deficit. Congress is analyzing many ways to make the Social Security funding solvent. The Congressional Research Service recently issued a report that could be adopted. The report indicates that eliminating the cap on earnings subject to the fica payroll tax, while retaining the base for benefit calculations, would keep Social Security solvent for 75 years. Raising the $90,000 cap to $150,000 — roughly the level to cover 90 percent of all earnings — would eliminate 40 percent of the long range shortfall in Social Security. See BNA Daily Executive Tax Report at G-4 (05/06/05).

— Jerry Geis
Briggs & Morgan

July 2005

TORTS & INSURANCE
Judicial Law

• Legal Malpractice; Statute of Limitations. The statute of limitations for a legal malpractice action seeking money damages, caused by an attorney’s negligence or breach of contract, accrues as soon as the plaintiff suffers "some" ascertainable, fixed loss of money. The statute is not triggered when damages are contingent, potential, or even probable. Thus, when plaintiff-client hired defendant-attorney to draft an antenuptial agreement that was supposed to — but did not — provide that certain property was not subject to division upon divorce, the client suffered damages caused by the attorney’s alleged malpractice only when the divorce court awarded a portion of that property to the client’s exwife. The Court of Appeals held that the statute of limitations did not begin to run until the time of the award and rejected the attorney’s argument that the statute was triggered on the date the parties married. Antone v. Mirviss, A04-1367 (Minn. App. 04/12/05). www.lawlibrary.state.mn.us/archive/ctappub/0504/opa041367-0412.htm

• Wrongful Death; Liability Under Child Abuse Reporting Act. A cause of action exists for wrongful death based on the alleged negligence of a county and two county child protection workers in the investigation of child abuse and neglect reports as required by the Child Abuse Reporting Act (CARA), Minn. Stat. A4626.556. The issue arose where plaintiff, as trustee for the next of kin of his murdered 19-month-old son, brought a wrongful death action against a county and two county child protection workers, alleging that they negligently investigated reports of suspected abuse and neglect of his son.

The Supreme Court held that a cause of action exists under CARA for negligence in the investigation of child abuse and neglect reports. The Court analyzed whether the county and child protection workers owed a "special duty" under the factors set forth in Cracraft v. City of St. Louis Park: (1) whether the governmental unit had actual knowledge of the dangerous condition, (2) whether persons reasonably relied on the governmental unit’s representations and conduct, (3) whether a statute required acts for the protection of a particular class of persons rather than the public as a whole, and (4) whether the governmental unit used due care to avoid increasing the risk of harm. The Court determined that the first three factors supported the finding of a special duty owed by the county and the child protection workers. The Court noted that although the fourth factor (due care) was not established, all four factors need not be met because the third factor (protection of a particular class) was "overwhelmingly dominant."

The decision overruled Hoppe v. Kandiyohi County, in which the Court held that no cause of action existed under the Vulnerable Adults Reporting Act, Minn. Stat. A4626.557. Radke v. County of Freeborn, A03-797 (Minn. 04/21/05). www.lawlibrary.state.mn.us/archive/supct/0504/opa030797-0421.htm

• Minnesota Civil Damages Act; Vicarious Liability. Under Minnesota’s Civil Damages Act, Minn. Stat. A4340A.801, subd. 1, claims may be brought only against entities that are commercial vendors of alcohol or holders of liquor licenses. Plaintiff’s wife was killed and children were injured by a driver who was intoxicated allegedly because an American Legion post illegally sold him alcohol. Plaintiff brought claims under the act against the post and the American Legion’s state and national offices. The Court of Appeals affirmed the dismissal of the claims against the state and national offices because neither entity was a commercial vendor of alcohol or held a liquor license. The court concluded that the act is to be strictly construed and that the plain language of the statute provides for a cause of action only against the persons that caused the tortfeasor’s intoxication by "illegally selling alcoholic beverages." The Court of Appeals further rejected plaintiff’s argument that the state and national offices could be held vicariously liable for the post’s alleged illegal sale of alcohol. Urban v. American Legion Post 184, A04-1409 (Minn. App. 04/26/05). www.lawlibrary.state.mn.us/archive/ctappub/0504/opa041409-0426.htm

• Insurance Subrogation; Collateral Source Statute. Under the collateral source statute, Minn. Stat. A4548.36, an assertion of subrogation rights is reasonable and timely if made before the district court’s ruling on a collateral source motion. The Court of Appeals held that the collateral source statute does not require that a subrogation right be asserted in any particular manner and that, for purposes of the statute, an asserted subrogation right is one that has not been waived.

The court issued its holding in a personal injury case that was brought to trial without defendant-tortfeasor being put on notice that plaintiff’s insurer had asserted its subrogation rights for plaintiff’s medical expenses that it had paid. After trial, defendant argued that insurer waived its rights by not timely asserting a subrogation claim, and the trial court agreed. The Court of Appeals reversed, concluding that insurer had not waived its right to subrogation because defendant had knowledge of insurer’s potential subrogation claim and insurer asserted its subrogation rights directly to defendant in a timely manner. The Court of Appeals rejected defendant’s laches argument, reasoning that there was no evidence of injustice, inequity, or prejudice. Kahnke v. Green, A04-1569 (Minn. App. 04/26/05). www.lawlibrary.state.mn.us/archive/ctappub/0504/opa041569-0426.htm

[The authors’ law firm, Bassford Remele, A Professional Association, represented the interests of the plaintiff’s insurer in this matter.]

• Dog Bite Statute; Secondary Ownership. A dog groomer who voluntarily accepts temporary responsibility for care of a dog is deemed to be the keeper of the dog for purposes of secondary ownership under Minn. Stat. A4347.22, the dog bite statute. Plaintiff, an independent contractor hired by a groomer, was bitten while grooming defendant’s dog. The Court of Appeals affirmed summary judgment for defendant, holding that plaintiff was the keeper of defendant’s dog for purposes of secondary ownership and that the dog bite statute prohibits a secondary owner from maintaining an action against the primary owner when the dog injures the secondary owner while it is in her possession. The court referenced its prior holdings which define "keeping" as a voluntary acceptance of temporary responsibility as it relates to the management, control, or care of the dog, exercised in a manner generally similar to that of the dog’s primary legal owner. The court determined that under this definition, plaintiff was the dog’s keeper and that plaintiff could not maintain an action against defendant, who was the dog’s primary owner. Carlson v. Friday, A04-804 (Minn. App. 04/26/05). www.lawlibrary.state.mn.us/archive/ctappub/0504/opa040804-0426.htm

• Products Liability; Defective Food Products. The standard for determining defective food products liability claims in Minnesota is the "reasonable expectation" test. The Supreme Court held that a food product manufacturer, seller, or distributor is liable for injury resulting from consumption of a food product to the extent it is foreseeable that the injury-causing object or substance in the food product would not be reasonably expected by an ord