April 2006

ALTERNATIVE DISPUTE RESOLUTION
JUDICIAL LAW

• Determining Validity of Contract with Arbitration Clause. A customer brought a putative class action against a check-cashing company, alleging the company charged usurious interest rates for its check-cashing loans, and that the loan agreements violated several lending and consumer protection laws. The check-cashing company moved to compel arbitration based upon the arbitration clause contained in the check-cashing agreement. The customer argued that the entire contract was illegal and void, and that the arbitration clause was therefore also void. In 2005, the Florida Supreme Court held that the court rather than an arbitrator should resolve a claim that a contract is illegal and void from the beginning because of the usurious finance charges. The U.S. Supreme Court, in a 7-1 decision (Justice Alito did not participate), soundly rejected using the distinction between void and voidable contracts to determine the enforceability of arbitration provisions. Reaffirming its holdings in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) and Southland Corp. v. Keating, 465 U.S. 1 (1984), the Supreme Court articulated three points. First, an arbitration provision is severable from the rest of the contract. Second, unless the challenge is to the arbitration provision itself, the validity of a contract is for the arbitrator to decide. Third, substantive federal arbitration law applies in both state and federal courts. Applying these propositions, the Court held that regardless of whether the challenge was brought in state or federal court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator. The Supreme Court specifically noted that reliance on the distinction between void and voidable contracts was irrelevant. Buckeye Check Cashing v. Cardegna, 2006 WL 386362 (U.S. 02/21/06).

• Arbitration Award Vacated Due to Public Policy. An art gallery entered into a franchise agreement to open four Thomas Kinkade galleries in Minnesota. The franchisee later sued in U.S. District Court for the District of Minnesota in connection with the four agreements, asserting claims under the Minnesota Franchise Act ("MFA"). Because the franchise agreement contained a California choice-of-law provision, the arbitration panel determined that the franchisee’s MFA claim would render the parties’ choice of law void, so it dismissed the MFA claim. The art gallery moved to vacate the award, arguing that dismissing the MFA claims violated Minnesota public policy. The court emphasized that an "extraordinary level of deference" is given to arbitration awards. However, a court does not need to defer to an award that violates clear public policy, especially when the public policy is a "well defined and dominant public policy as evidenced by law or legal precedent," and not merely general considerations of public interest. The court concluded that the MFA explicitly states that any choice-of-law provision that purports to waive a Minnesota franchisee’s rights under the MFA is void. As a result, the court determined that the arbitrator’s decision to dismiss the art galleries’ MFA claim violated public policy, and should be vacated. Twin Cities Galleries, LLC v. Media Arts Group, Inc., 2006 WL 334908 (D. Minn. 02/13/06).

• Employment Arbitration Agreement Enforced. An employee filed suit against his employer, alleging violations of the Age Discrimination in Employment Act (ADEA). Based on an arbitration agreement that the employee signed when he was hired, the employer filed a motion to compel arbitration. The employee argued that the arbitration agreement was unenforceable because the rules and procedures of his employer’s dispute-resolution program were so one-sided that any alleged contract lacked consideration and mutual obligation. The United States District Court for the Eastern District of Arkansas, Western Division, reiterated the strong federal policy favoring arbitration, noting that arbitration agreements are to be enforced unless a party can show that it will not be able to vindicate its rights in the arbitral forum. Following 8th Circuit precedent, the court limited its review to whether there was a valid arbitration agreement and whether the particular dispute fell within the terms of that agreement. All other issues were left for the arbitrator to decide. The court proceeded to dismiss several of the employee’s complaints, and granted the motion to compel arbitration. Brady v. General Electric Co., 2006 WL 167959 (E.D. Ark. 01/23/06).

— Darin T. Allen
National Arbitration Forum

April 2006

BANKRUPTCY
JUDICIAL LAW

• Sovereign Immunity; Trustee’s Preference Action. The United States Supreme Court held that a bankruptcy trustee’s preference action seeking to set aside a debtor’s transfers to state agencies was not barred by sovereign immunity. The Bankruptcy Code gives a bankruptcy trustee the authority to set aside preferential transfers and recover the transfer for the benefit of the bankruptcy estate. 11 U.S.C. §§547, 550. A transfer is preferential if it is from the debtor to a creditor while the debtor was insolvent, that was on account of an antecedent debt, made within 90 days of the time the debtor filed its bankruptcy petition, and that enabled the creditor to receive more than that creditor would have received in a liquidation setting.

Prior to filing bankruptcy, debtor Wallace’s Bookstores, Inc. did business with Central Virginia Community College . Debtor’s court-appointed liquidator alleged that during this relationship, the college was the recipient of preferential transfers. The college moved to dismiss the claim, alleging sovereign immunity. Finding that Congress had the power to subject states to preference claims under the Bankruptcy Code, the Court affirmed the bankruptcy court’s denial of the motion to dismiss. Central Virginia Community College, et al., v. Katz, 546 U.S. ____ (2006)

• Tax Refunds Attributable to Child Tax Credit. In a consolidated appeal from a bankruptcy court’s orders sustaining a trustee’s objection to debtors’ claimed exemptions, the Bankruptcy Appellate Panel for the 8th Circuit ("B.A.P.") held that tax refunds attributable to the federal child tax credit are property of the bankruptcy estate. Property of the bankruptcy estate includes "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. §541. This broad definition includes contingent interests, future payments, and tax refunds.

Debtors, in separate cases, amended their bankruptcy schedules to include their 2004 tax returns and claimed as exempt that portion of the tax return attributable to the federal child tax credit. The Trustee objected, and the bankruptcy court sustained Trustee’s objections. On appeal, Debtors argued that the child tax credit was separate and distinct from a normal tax return, and was therefore not property of their respective bankruptcy estates. The B.A.P. disagreed, holding that the child tax credit is a contingent interest, which becomes property of the bankruptcy estate under the Bankruptcy Code on the date of filing. The orders of the bankruptcy court were affirmed. Law v. Stover (No. 05-6034WM) and Brouse v. Stover (05-6037WM) (8th Cir. B.A.P., 2006).

— Drew Moratzka
Mackall Crounse & Moore PLC

April 2006

CIVIL LITIGATION
JUDICIAL LAW

• Claim for Fees; Minn. Stat. §549.211; Notice, Separate Motion Required. Even where sanctionable conduct occurs, courts may not award fees under Minn. Stat. §549.211 or Rule 11 absent strict compliance with the statutory procedure.

In its suit for an alleged breach of a contract to convey real property, the plaintiff also filed a notice of lis pendens, which the defendants moved to discharge. Two days before the hearing on the motion, the defendants notified the plaintiff that they would ask the court for sanctions at the hearing.

The district court dismissed all the plaintiff’s claims as meritless, found that the plaintiff had slandered the defendants’ title, and awarded the defendants attorneys’ fees under Minn. Stat. §549.211.

The Court of Appeals found that the district court abused its discretion in awarding fees under Minn. Stat. §549.211. The Court of Appeals noted that the statute limits the district court’s discretion to award fees to cases where the party seeking sanctions provides adequate notice, a separate motion seeking sanctions, and a 21-day safe harbor period. The same analysis applies to awards of fees under Rule 11. Haislet v. Skoglund, A05-451 (Minn. App. 12/13/05) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0512/opa050451-1213.htm

• Claim Preclusion; Failure to Assert Claims Accruing After Commencement. A plaintiff is not required to amend its complaint to assert new claims arising during the litigation, even if such claims share common factual and legal issues with the claims already asserted.

When a shareholder in a closely held corporation learned that his employment would be terminated, he sued the company for a fair-value buyout of his shares, as well as for breaches of contract, fiduciary duty, and the covenant of good faith and fair dealing. The district court granted the company’s motion for summary judgment on all counts but one, which the parties settled.

After exhausting his appeals on the initial action, the plaintiff sued the company again, this time asserting that the company had, while the initial case was ongoing, breached a shareholder agreement by failing to pay him shareholder distributions. The company argued that the claim was barred by res judicata because the claim shared some of the same operative facts as the initial claim, and because the claim was available to the plaintiff while the original action was pending and he failed to assert it before entry of final judgment in that action.

Acknowledging a split among various courts on the issue, the Court of Appeals held that the plaintiff was not required to amend his complaint in the initial action to avoid claim preclusion. First, Minn. R. Civ. P. 15.04 makes the filing of supplemental pleadings permissive rather than mandatory. Second, forcing the amendment of pleadings would result in substantial disruption in cases after significant discovery has already been accomplished. Drewitz v. Motorwerks, Inc., A04-2338 (Minn. App. 12/13/05). www.lawlibrary.state.mn.us/archive/ctappub/0512/opa042338-1213.htm

— Emily Duke
— Jim Mayer
Fredrikson & Byron

April 2006

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Discrimination; Sexual Harassment. A home resident’s inquiry directed to a woman "home visitor" employed by the Head Start program whether he could "watch" her urinate when she used the bathroom at the home she was visiting was "not sufficiently severe and pervasive" to constitute sex harassment, according to an unpublished ruling by the Minnesota Court of Appeals. In addition, the employer took "timely and appropriate action" in response to the incident to refute any prima facie claim for sex harassment. The organization that sponsored the program also was not liable under the Federal Civil Rights Act, 42 U.S.C. §1983 because it is not a "state actor" susceptible to suit under the statute. Parker v. Lakes and Pines Community Action Council, Inc., 2006 WL 330116 (Minn. App. 02/14/06) (unpublished).

• Discrimination; Race, Age. The Court of Appeals held that a 49 year-old African American bias claimant failed to establish a prima facie case for his race and age bias claims after he was fired for unsatisfactory performance. He failed to show that he was qualified for the job and could not rely on past satisfactory performance reviews dating more than a year before his discharge. Nor was there any "duty" on the part of the employer to provide guidance and coaching for the employee to improve his performance. Huggins v. Pechiney Plastics Packaging, Inc., 2005 WL 3527248 (Minn. App. 2005) (unpublished).

• Discrimination; Gender, Pregnancy. An employee whose duties were reduced after she returned from a four-month maternity leave, who complained about pay inequity for women, and then quit did not succeed with her claims of gender and pregnancy discrimination and reprisal. There were no "intolerable working conditions" that warranted a determination of a constructive discharge, and no evidence giving rise to an inference that her job duties were diminished because of her pregnancy. Her claim that she need not show an inference of discrimination "has no basis in law." Tong v. America Public Media Group, 2005 WL 3527273 (Minn. App. 2005) (unpublished)

• Discrimination; Disability. A determination that an employee was eligible for workers compensation was not determinative in the employee’s request for accommodation under the Americans with Disabilities Act (ADA) and, therefore, did not support the employee’s claim. A school case worker had been determined to be permanently partially disabled for workers compensation purposes due to a fall at work and the subsequent assault from a student, but the school district’s denial of her request for accommodation was upheld because the medical examination was performed nearly a year after her request for accommodation was denied. Because of this time gap, the workers compensation finding was "irrelevant" to the issue of her inability to perform the essential functions of her job under the ADA. Samuels v. Kansas City Missouri School District, 2006 WL 327976 (8^th Cir. 02/14/06).

• Whistleblowing. An employee who raised concerns regarding the safety of tests conducted by a company selling industrial machinery was not protected under the Minnesota whistleblower statute, §181.932, and therefore could not sue for wrongful termination. Upholding summary judgment, the Court of Appeals ruled that there was no "actual or suspected" violation of law implicated in his report and, furthermore, he was terminated for legitimate reasons relating to his job performance. McCormick v. Banner Engineering Corp., 2006 WL 330141 (Minn. App. 02/14/06) (unpublished).

• Settlement; Bar to Subsequent Suit. A settlement in state court of a suit by a former employer against an employee for alleged violation of a noncompete agreement barred a subsequent lawsuit by the employer in federal court against a competitor who hired the settling employee. The doctrine of res judicata precluded the subsequent suit because it was based upon the same course of conduct that was at issue in the settled state court lawsuit. Kforce, Inc. v. Surrex Solutions Corp., 2006 WL 300537 (8^th Cir. 02/09/06).

• Settlement; Authority to Settle. An attempt by a former employee to overturn a settlement agreement based upon a "gross misunderstanding" with her attorney over his authority to settle a case was unsuccessful. The strong judicial preference for a settlement agreement did not give way to the client’s assertion that her lawyer exceeded his authority in settling her wrongful termination claim. Harris v. Arkansas State Highway & Transp. Dep’t, 2006 WL 305513 (8^th Cir. 02/10/06).

• Unemployment Compensation; Remand. An employee, who lost at an unemployment hearing, was entitled to a new hearing because the hearing judge improperly denied the employee’s request to subpoena three witnesses who could have supported his claim that he acted in self-defense in a fight with a security guard. Since the security guard did not testify, the testimony of those witnesses was crucial, and subpoenas for them should have been allowed, which warranted remand of the case. Olisa v. Pepsi Bottling Group, 2006 WL 278992 (Minn. App. 02/07/06) (unpublished).

• Unemployment Compensation; "Single Incident." The "single incident" doctrine was invoked by the appellate court to permit unemployment compensation benefits for an employee. The employee, a restaurant chef, was denied unemployment compensation benefits after he was fired for alleged failure to perform a recorded physical inventory of food on hand. This incident did not constitute disqualifying "misconduct" because of the provision that allows benefits for "a single incident that does not have a significant adverse impact on the employer" under Minn. Stat. §268.095 subd. 6(a). Aberle v. Premier Rest. Mgmt., Inc., 2006 WL 330171 (Minn. App. 02/14/06) (unpublished).

• Unemployment Compensation; "Misconduct." An employee who falsified his timesheet was denied unemployment compensation benefits. Because the employee added to his timesheets some 37 hours of additional work per week during a two-month period, he committed disqualifying misconduct. Leduc v. U.S. Bank Nat’l Ass’n, 2006 WL 330170 (Minn. App. 02/14/06) (unpublished).

• Unemployment Compensation; "Misconduct." The officer of a company who signed a promissory note for a $44,200 debt along with a security agreement to a company that he partly owned without consulting the board was denied unemployment compensation benefits. Because he "put his own business interest above those of" his employers, he committed disqualifying "misconduct." Campbell v. Brake Tru, Inc. 2006 WL 163533 (Minn. App. 01/24/06) (unpublished).

• Unemployment Compensation; "Misconduct." An employee who missed ten days of work without approval after receiving a final, written warning against unexcused absences was disqualified from benefits. His failure to give proper notice when he left work one day and did not call in the next day constituted "misconduct," and was not justifiable under Minn. Stat. §268.095, subd. 6(a), which states that missing work because of illness or injury is not misconduct if accompanied by "proper notice to the employer." Minn. Stat. §268.095, subd. 6(a) (2005). Since employee did not inform the employer of his absences or obtain approval, he was not entitled to benefits. GAV v. American Express Financial Corp., 2006 WL 163571 (Minn. App., 2006) (unpublished).

• Workers Compensation. An employer’s right of subrogation against a third-party tortfeasor for workers compensation benefits paid to the spouse of a decedent employee is limited to the amount of damages recoverable by the employee’s heirs and next-of-kin. The Minnesota Supreme Court held that amendments to the workers compensation statute in 2000 did not enlarge the subrogation rights of an employer beyond the amount recoverable in torts under the wrongful death statute. Zurich American Ins. Co. v. Bjelland, 2006 WL 240646 (Minn. 2006).

— Marshall H. Tanick
Mansfield Tanick & Cohen, PA

April 2006

ENVIRONMENTAL LAW
JUDICIAL LAW

• Environmental Cleanup: Additional Conditions to Remediation Plan. The 8th Circuit Court of Appeals in 2004 remanded an injunction order back to the U.S. District Court for the District of Minnesota for modification consistent with the 8th Circuit’s decision (Kennedy Building Associates v. Viacom, Inc., 375 F.3d 731 (8^th Cir. 2004). The 8th Circuit found that the district court’s injunction order requiring remediation of the disputed site’s soil, groundwater, and building interior exceeded the scope of relief allowed under the Minnesota Environmental Rights Act ("MERA"). It further directed the district court to limit any injunctive relief to that necessary to prevent ongoing releases of PCBs or chlorobenzenes into the soil or groundwater at the site.

The district court opted to allow the Minnesota Pollution Control Agency ("MPCA") time to develop a site remediation plan before taking any further action on its previous order. The MPCA issued its "Decision Document," which set forth Defendant Viacom, Inc.’s ("Viacom’s") requirements for site remediation, on April 20, 2005. Plaintiff Kennedy Building Associates ("Kennedy") later moved the district court to modify its previous order to require Viacom to take additional measures beyond those required under the MPCA’s Decision Document.

The district court, for the most part, declined to order the additional measures requested by Kennedy on the grounds that the requests exceeded the authority given to the courts under MERA. It did, however, order Viacom to undertake a few additional measures not required under the MPCA’s Decision Document. The district court ordered Viacom, for example, to provide results of all testing required under the Decision Document to Kennedy and the district court within 30 days of receipt. Furthermore, if those tests revealed contaminant migration, Viacom must also provide a plan for remediating the contamination and preventing further contamination to Kennedy and the district court within that same time period. The district court’s order also included additional requirements of Viacom in the event that future work at the site exposed previously unremediated soils and required Viacom to post a bond or irrevocable letter of credit in an amount to be determined later. Kennedy Building Associates v. Viacom, Inc., slip opinion, 2006 WL 305279 (D.Minn.).

ADMINISTRATIVE ACTION

• EQB Guidance Documents. The Minnesota Environmental Quality Board has posted on its website a number of new and revised guidance documents regarding the environmental review process in Minnesota. Among the newly-posted documents are a number of "citizen guides" that explain various aspects of the environmental review process and guides for local governments and project proposers who choose to work with consultants to prepare environmental review documents. These and other EQB guidance documents can be found at www.eqb.state.mn.us/EnvRevGuidanceDocuments.htm.

— Bill Hefner
Greene Espel

April 2006

FAMILY LAW
JUDICIAL LAW

• Custody; Removal. The Court of Appeals held that an award of sole physical custody of a minor child conditioned on maintaining a particular geographical residence for the child is permissible as long as that condition demonstrably serves the child’s best interests. The court also held that when conclusions of law are designated as the judgment in a marriage dissolution and when a conflicting or inconsistent statement in the findings of fact remains after all opportunities for corrective action have expired, the judgment is binding and controlling.

The district court had ruled the conditional custody provision unenforceable, citing Imdieke v. Imdieke, 411 N.W.2d 241, 244 (Minn. App. 1987), review denied (Minn. 10/30/87) and Auge v. Auge, 334 N.W.2d 393 (Minn. 1983) for the proposition that to base custody or care on a parent’s remaining in a certain area is a restrictive condition contrary to Minnesota law. However, the Court of Appeals ruled there is no absolute prohibition under Minnesota law against a custody award conditioned on maintaining a specific geographic residence for the child, as long as that residence is clearly and genuinely in the child’s best interests.

Nevertheless, the appellate court held that the district court was correct in ruling that conclusions of law (which become the judgment in the case) prevail over an inconsistent statement in the findings of fact.

Most importantly, according the Court of Appeals, the district court also correctly rejected the conditional-custody contention because the dissolution court failed to analyze the statutory custody factors to show how custody could properly be conditioned on residency. Thus, because there was no factual finding in the dissolution proceeding to show that conditional custody or a restriction on the child’s residency would be in the child’s best interests, that deficiency rendered the conditional-custody statement a nullity. Dailey v. Chermak, 709 N.W.2d 626 (Minn. App. 2006).

— Stephen R. Arnott
Arnott Law Firm, PA

FEDERAL PRACTICE
JUDICIAL LAW

• Title VII Numerical Threshold. The Supreme Court held that Title VII’s 15-employee numerical threshold is an element of a Title VII claim that is waived by the defendant if not raised in a timely manner, rather than a jurisdictional requirement that can be raised at any stage of the litigation. Arbaugh v. Y & H Corp., ___ S. Ct. ___ (2006).

• Arbitration Clause. The Supreme Court held that under the Federal Arbitration Act, a claim that a contract containing an arbitration clause is void for illegality must be decided by the arbitrator rather than a court. Buckeye Check Cashing, Inc. v. Cardegna, ___ S. Ct. ___ (2006).

• Authority to Settle. The 8th Circuit affirmed the denial of a motion to set aside a settlement agreement, finding that the plaintiff’s attorney had authority to enter into the agreement. Harris v. Arkansas State Highway and Trans. Dept., ___ F.3d ___ (8th Cir. 2006).

• Partial Summary Judgment; Appeal. The 8th Circuit held that an order for partial summary judgment, otherwise not appealable, necessarily becomes a final appealable order once the remaining claims in the case are resolved. Porter v. Williams, 436 F.3d 917 (8th Cir. 2006).

• Forum Selection Clause; Erie Doctrine. The 8th Circuit affirmed the trial court’s enforcement of a forum selection clause, while again declining to decide whether the enforceability of a forum selection clause in a federal diversity action is governed by federal or state law under the Erie doctrine. Servewell Plumbing, LLC v. Federal Ins. Co., ___ F.3d ___ (8th Cir. 2006).

• Expert Testimony; Daubert. The 8th Circuit rejected the plaintiff’s argument that the trial court erred in not conducting a Daubert hearing prior to excluding the testimony of plaintiff’s experts, finding that the trial court had provided the plaintiff with a sufficient "opportunity to be heard" prior to ruling on defendants’ motion. Miller v. Baker Implement Co., ___ F.3d ___ (8th Cir. 2006).

• Sham Affidavit. The 8th Circuit affirmed a trial court’s striking of an affidavit submitted in opposition to summary judgment under the so-called "sham affidavit" doctrine, determining that the affidavit was "inconsistent" with prior deposition testimony. City of St. Joseph v. Southwestern Bell Telephone, ___ F.3d ___ (8th Cir. 2006).

• District Court Decisions. Judge Montgomery deferred a decision on defendants’ motion to strike certain testimony by the plaintiff’s experts until the eve of trial, but noted that those experts likely would not be permitted to offer testimony "as to what the law provides" or to offer opinions as to the "legal meaning" of certain disputed terms. Rexam, Inc. v. United Steel Workers of America, 2006 WL 435985 (D. Minn. 02/21/06).

Judge Magnuson dismissed an excessive force action with prejudice after the pro se plaintiff failed to comply with discovery orders. LaBelle v. City of Roseville, 2006 WL 314498 (D. Minn. 02/09/06).

Judge Magnuson granted plaintiffs’ motions to remand their claims arising out of the crash of a private plane, rejecting the defendant’s argument in favor of federal question jurisdiction as well as its complete preemption argument. Glorvigen v. Cirrus Design Corp., 2006 WL 399419 (D. Minn. 02/16/06).

— Josh Jacobson
Law Office of Josh Jacobson

April 2006

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patent Infringement; Personal Jurisdiction. Judge Frank denied three individual defendants’ motions for dismissal due to lack of personal jurisdiction because he found no merit in their argument that the activities they directed into Minnesota were done in their official, not individual, capacities. Pharmaceutical Solutions (PSI) sued several corporate defendants and three individual defendants for patent infringement and other claims. The individuals moved to dismiss the claims against them arguing that the court lacked personal jurisdiction. Each of the defendants, while an officer or employee of one of the corporate defendants, traveled to Minnesota or lived in Minnesota and allegedly sold or offered for sale the accused pharmaceutical products. Each was accused of indirect patent infringement — inducing or contributing to the infringement, or both. Each pointed out that their alleged acts were in an official capacity for one or more of the corporate defendants and, thus, they should not be individual defendants. But the court did not see the distinction. Citing the low threshold that PSI needed to establish prima facie personal jurisdiction, the court denied the motions to dismiss, finding that the individual defendants "purposely directed their activities to Minnesota, by their various marketing and sales contacts." Pharmaceutical Solutions, Inc. v. Vitamax RX, et al., Civ. No. 05-1621 (D. Minn. 01/03/06).

• Patent Infringement; Invalidity. In a different patent case, Judge Frank denied a defendant’s motion for summary judgment of invalidity because determinations of anticipation and obviousness were premature and oral testimony of an on-sale bar was uncorroborated. Floe sued Newmans for infringement of a patent protecting a snowmobile trailer. Newmans moved for summary judgment. As to the patent being invalid based on anticipation and obviousness, the Court denied the motion because it had not yet construed the claims of the patent-in-suit and Newmans had not provided any evidentiary support for its positions, only attorney argument. Interestingly, Newmans was willing to accept the claim construction proffered by Floe for purposes of this motion only but the court was still unwilling to decide this portion of the motion before a claim construction had occurred. Newmans also argued that the patent was invalid because it had been sold before the statutory bar deadline. Newmans offered the declaration testimony of three witnesses who each claimed that a trailer having the elements of the invention was sold before the bar date. The court rejected this testimony as uncorroborated oral testimony — insufficient to establish invalidity by clear and convincing evidence. Two of the witnesses have the last name Newman but it is unclear whether the third witness was an "interested" witness or not. Unfortunately, the court did not provide some additional explanation as to whether the oral testimony of an "uninterested" witness can corroborate the oral testimony of another that a patent is invalid. Floe Int’l, Inc. et al., v. Newmans’ Mfg. Inc., Civ. No. 04-5120 (D. Minn. 01/06/06).

• Patent; Antitrust. The U.S. Supreme Court recently resolved an important patent/anti-trust issue, reversing the Court of Appeals for the Federal Circuit which had held that a rebuttable presumption of market power sufficient to restrain trade under antitrust law arises from the defendant’s ownership of a patent allegedly used in a tying agreement. However, the Supreme Court held that a plaintiff must prove that a defendant has market power because a patent does not necessarily confer such power. Illinois Tool Works v. Independent Inc., Civ. No. 04-1329 (03/01/06).

— Tony Zeuli
Merchant & Gould

JUVENILE LAW
JUDICIAL LAW

• Termination of Parental Rights; Statutory Grounds. In an unpublished decision, the Minnesota Court of Appeals affirmed a district court’s findings that termination of parental rights was warranted under three statutory criteria and was supported by substantial evidence. The case involved twins who were placed in foster care shortly after birth. The adjudicated father had a history of chemical dependency, failure to successfully complete treatment, criminal convictions, and various incarcerations. He committed two felony level offenses after his children were adjudicated in need of protective services. Because he made no effort towards progressing on his case plan when not incarcerated, and never actively parented the children or provided any financial support, the district court terminated his parental rights. The Court of Appeals also noted that there was no merit to the father’s argument that the district court improperly relied solely on his incarceration. In the Matter of the Welfare of the Children of: L.S. and D.W.D., A05-1105 (Minn. App. 01/31/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0601/opa051105-0131.htm

• Termination of Parental Rights; Substance Abuse. In another unpublished decision, the Minnesota Court of Appeals again affirmed the district court in its termination of the mother’s parental rights. Here, the mother’s testimony showed that she had not abstained from the use of drugs or alcohol, did not enter inpatient treatment as recommended, and failed to show that she had completed outpatient treatment. It was found that the county’s efforts were appropriately directed toward the mother’s drug use and deficient parenting skills, and therefore, findings that the mother was palpably unfit to be a parent and that the county had made adequate efforts to reunite the family were supported by the record and found to not be erroneous. In the Matter of the Welfare of the Children of: A.M.V., A05-1781 (Minn. App. 01/31/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0601/opa051781-0131.htm

• Termination of Parental Rights; Child Abuse. The Court of Appeals, in an unpublished decision, affirmed a district court’s determination that the parents were palpably unfit to be parties to the parent/child relationship. Here, the parties’ three-year-old child suffered tearing, lacerations and bruising in her genital area and bruises on other areas of her body. Physicians also found four healing fractures in the child’s arms, and psychological evaluators determined that the parents have poor insight into their children’s needs and into the effects of the abuse. They also opined that it would not be safe for the children to return to their care, and that neither parent was amenable to treatment. The district court, in terminating the parental rights, concluded that the children’s interest in permanent placement in a safe and secure environment outweighed the parent’s interest in maintaining the parent/child relationship. Several alleged evidentiary errors were also rejected by the Court of Appeals. In the Matter of the Welfare of the Children of C.E.C. and J.B.C., A05-1669 (Minn. App. 02/14/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0602/opa051669-0214.htm

• Confrontation Clause; Risk Assessment Interview. In a criminal decision issued by the Minnesota Supreme Court, a majority of the justices held that statements made by a young child in a risk assessment interview conducted by a child protection worker in accordance with the statutory scheme outlined in Minn. Stat. §626.556 were not testimonial when neither the child nor the child protection worker were acting, to a substantial degree, in order to produce statements for use at trial. Thus, the Supreme Court held that the admission of such statements at trial without having afforded the defendant an opportunity for cross-examination did not violate the defendant’s rights under the Confrontation Clause of the United States Constitution. Justice Page dissented, observing that the Court’s conclusion that the child’s out-of-court statements were not testimonial was erroneous because the child’s statement was a statement made as part of a police interrogation, in the presence of a police officer, and to a government official who was taking the statement as a surrogate interviewer for the police. While Justice Page noted that the majority eloquently articulated the need to, and the importance of, protecting children, that important need conflicts with the 6th Amendment of the United States Constitution, which he believes must prevail under our system of justice. Minnesota v. Bobadilla, A03-1891 (Minn. 02/09/06). www.lawlibrary.state.mn.us/archive/supct/0602/opa031891-0209.htm

• Change of Surname; Best Interests. In an unpublished decision by the Minnesota Court of Appeals, a district court’s finding that a minor child’s name change would improve and foster that child’s relationship with the mother but would not negatively impact or hinder the child’s relationship with the father was affirmed when it granted the mother’s request to change the child’s surname based on the best interest of the child. Here, the mother was the child’s sole physical and legal custodian, the child had lived with the mother all of her life, and at 18 months of age, it was found that the child would not suffer disruption from the change of her name. In the Matter of the Application of: Danielson on Behalf of Jameson, A05-186 (Minn. App. 02/07/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0602/opa050186-0207.htm

• Maltreatment of Child. The Court of Appeals in an unpublished decision affirmed an administrative determination that a child’s sister/guardian had maltreated the child. The court found that the decision was supported by substantial evidence, despite some inconsistancies in the child’s accounts of the incident. Here, a 16-year-old child who lived with her sister/guardian stated that the sister/guardian had struck her on the side of the head with a belt buckle. The administrative hearing officer found that the sister/guardian had maltreated the child. Johnson v. Hennepin County Human Services and Public Health Department, A05-987 (Minn. App. 02/14/06) (unpublished).

LEGISLATION

On February 8, 2006, President Bush signed into law the 2006 federal budget bill, which includes provisions to decrease federal funding for arranged services that help children who have been abused or neglected. It also removes foster care payments for some low-income relatives caring for children at risk of abuse and neglect, and restricts access to some Medicaid services for children in foster care. The bill made two modest improvements to child welfare funding, but they were not sufficient to offset the cuts.

— Gary A. Debele
Walling, Berg & Debele PA

April 2006

REAL PROPERTY
JUDICIAL LAW

• Public Roads. Neighbors asked Landowners to use an abandoned road running across the western edge of Landowners’ property. This road would provide Neighbors with a more convenient access to a portion of Neighbors’ property. When Landowners refused, Neighbors filed a petition with the City of Afton requesting that the city reopen this "public" road. Before the city issued its decision on the petition, Landowner commenced this declaratory judgment action to determine whether the road had been made public under a common law dedication. Consequently, the district court dismissed Landowners’ complaint for failing to exhaust its remedies with the city. This appeal ensued. The Court of Appeals held that under Minnesota’s Declaratory Judgment Act, courts "have power to declare rights, status, and other legal relations whether or not further relief is or could be claimed" including the power to determine if a road has been dedicated to the public under common law. In this case the city did not have the authority or the procedures in which Landowners could seek a determination on the status of the road. Dahl et al. vs. Popov et al. A05-1255 (Minn. App 02/28/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0602/opa051255-0228.htm

• Construction. The City of Fergus Falls contracted with Sirny Architects to design a building, which is part of the Prairie Wetlands Learning Center. The city hired a contractor to construct the building. Construction on the building was completed in August 1998. During the fall of 1999, occupants of the building noticed water leaking and uneven flooring. The city had several discussions with Sirny about these problems, and then on March 22, 2000, the city sent a letter to Sirny and the contractor to formally notify them about the building’s defects. For more than a year, the city, Sirny, and the contractor attempted to identify and resolve the problems with the building. Then in a letter to the city dated August 15, 2003, Sirny stated that the problems with the building are the result of construction defects, not design issues. On December 2, 2003 the city initiated this action against Sirny and the contractor. The Court of Appeals affirmed the district court decision granting Sirny’s motion for summary judgment, finding that under Minn. Stat. §541.051, subd. 1 a person shall be barred from bringing suit against any person that designed, planned, constructed or furnished materials for any improvement to real property more than two years after discovery of the injury. Furthermore, the court held that the assurances made by Sirny to resolve the building’s defects were insufficient for the city to rely on to preclude Sirny from asserting a statute of limitations defense. City of Fergus Falls vs. Sirny Architects, LLP et al. A05-1077 (Minn. App. 02/14/06).

— Melissa Baer
Lindquist & Vennum

April 2006

TAX
JUDICIAL LAW

• Real Property: Denial of Motion to Dismiss on 60-Day Rule. The Minnesota Tax Court denied Hennepin County’s motion to dismiss the taxpayer’s property tax appeal for failure to comply with the "60-Day Rule." Taxpayer filed a petition challenging the assessment of property value for January 2, 2002, and timely provided the county with 2002 and 2003 information on income and expenses. However, the county found the 2003 operating budget summary illegible and notified the taxpayer to provide a legible copy but a copy was not forwarded until June 13, 2005, after the county’s motion to dismiss was filed on May 13, 2005. The court ruled that the initial information was provided in a timely fashion and was thus in compliance. MN Nicollet Mall, LLC v County of Hennepin, No. 30411 (Minn. T. Ct. 12/05/05),

• Real Property: Valuation of Residential Properties. The Minnesota Tax Court affirmed the assessor’s estimated market values for each of several properties because of an inaccuracy in the appraisal reports. The court did rule that the properties had been unequally assessed and granted relief as prescribed in Minn. Stat. §278.05. The taxpayer did not submit appraisals for the properties but rather called the county’s expert as an adverse witness and introduced his appraisals as evidence. The taxpayer testified that the properties were in worse condition than shown in the expert’s appraisals and contended that the value should be lower than those stated in the appraisals. In its review, the court gave no weight to the cost approach because the properties were 80-100 years old and in fair or poor residential condition. The court gave no weight to the expert’s income method on value because of a lack of information on actual rents and expenses, the basis for market rents and expenses, and the appropriate multiplier. The court also dismissed the cost appraisals of the expert since they were based on inaccurate information due to the taxpayer’s lack of cooperation and the failure to provide other evidence to establish the value of the properties. Using the median ratio for the nine-month study for residential property in the City of Minneapolis for 2003, which was 88.7%, and after subtracting the median ratio from 95%, the reduction for the unequal assessment was 6.3%. Steven Meldahl v. County of Hennepin, No. 31899, 2006 WL 163008 (Minn. T. Ct. 01/17/06),

• Property Tax: 60-Day Rule Violated. The Minnesota Supreme Court held that the 60-Day Rule contained in Minn. Stat. §278.05, Subd. 6(a) required a tenant to provide to the county sufficient information on tenant-paid real estate expenses within 60-days of filing a petition for review of the property tax assessment. Furthermore, the Court held that the Tax Court decisions incorrectly interpreting the 60-Day Rule did not create such a binding precedent as to require that the Supreme Court interpret its holding prospectively. The Court rejected Kmart’s argument that only landlord expenses and not tenant expenses were disclosable by holding that tenant-paid real estate expenses are relevant to the process of appraising the value of rental property under the income approach and the 60-Day Rule provides that such information will be provided to the county within 60-days of filing a Chapter 278 petition. The Court also rejected Kmart’s argument that the decision of the Supreme Court represented a new principle of law and thereby should have only prospective effect. The Court concluded that the decisions of the Tax Court did not qualify as precedent for purposes of retroactive analysis when overturned by the Supreme Court. Thus, where the Tax Court incorrectly interprets a statute in one case, that interpretation does not overrule the statute in future cases. Decisions of the Tax Court have no binding effect on the Supreme Court when it is called upon to interpret a statute. This is true since the Tax Court erroneously interpreted the plain meaning of the 60-Day Rule in previous cases. A dissent felt that the result in the Kmart case was unfair since it put Kmart and other like taxpayers in a "no man’s-land of uncertainty — taxpayers may be penalized by the Tax Court for not following Tax Court precedent, or, if they follow those precedents, they may be punished by our Court for doing so." Kmart Corporation v. County of Stearns, No. A05-442, 2006 WL 304724 (Minn. 02/09/06).

• Real Property: Valuation. The Minnesota Supreme Court affirmed the Tax Court’s property valuation as reasonable and supported by the evidence as a whole and not clearly erroneous. In 2004 the Minnesota Tax Court determined the fair market value of a Kmart store in Detroit Lakes for assessment periods 2000 through 2002. The building was in a commercial development and improved for a single tenant Big Box Discount Retailer. The assessor had valued the property for the years 2001 through and including 2003 at $2.8 million, while the expert for Kmart testified the values were $2.3 million. At the trial, the county produced an appraisal for the value of the property at $3.3 million. The Court looked at the three methods of valuing the building and dismissed the cost approach since the building was 11 years old but did utilize the sales and income approaches to determine that the fair market value was approximately $2.7 million. The level of assessment for commercial property in Becker County was approximately 82.8% of market value for the 2003 assessment year, and therefore qualified for a 12.2% reduction based on discrimination for tax year 2003. Kmart Corporation v. County of Becker, A05-1069, 2006 WL 300636 (Minn. 02/09/06),

• Sales Tax: Purchase and Install Contract Not Shown. The Minnesota Tax Court held that the sale in question encompassed only a purchase and not a purchase and install contract resulting in an improvement to real estate. Therefore, sales tax was due from the purchaser. The taxpayer sold aggregate and gravel to various businesses and the sale contract provided for a purchase plus delivery to a spot selected by the purchaser but did not include leveling or spreading. Fact Sheets of the department indicated that a construction contract resulting in an improvement to real estate was established when the aggregate was installed or spread by the seller. The factual evidence in this case indicated that the seller made a sale and delivery, which was merely dumped on the purchaser’s property, but which in no way involved any activity by the taxpayer that could reasonably be characterized as installation of the aggregate. William Schwartz & Sons, Inc. v. Commissioner of Revenue, No. 7702, 2006 WL 223176 (Minn. T. Ct. 01/27/06).

• MinnesotaCare Tax; Cert. Denied. The U. S. Supreme Court declined to review an unsuccessful Commerce Clause challenge to Minnesota’s tax on the gross revenues of healthcare providers doing business in the state (the MinnesotaCare tax). Mayo Collaborative Services Inc. v. Commissioner of Revenue, Sup. Ct. Dkt. No. 05-684, 698 N.W.2d 408 (Minn. 2005). www.supremecourtus.gov/docket/05-684.htm

• Standing to Challenge IRS Redemption of Property. Real Estate Equity Strategies LLC is a junior creditor to the IRS with sufficient interest in a property to confer standing to challenge the IRS’s redemption of that property. Contract-for-deed vendee may grant a mortgage on the property after a foreclosure sale so long as the mortgage is granted before the end of the redemption period. Real Estate Equity Strategies, LLC v. IRS, No. 05-1008, 97 AFTR 2d ¶2006-532 (D. Minn. 2006).

• Embezzlement of Tax Payments by Payroll Service; Employer Liability. Employer remains liable for payroll taxes, interest, and penalties that remained unpaid due to the embezzlement of the employer’s remittances by the owner of the payroll service firm used by the employer. Employer’s reliance on the payroll service firm as its agent did not constitute "reasonable cause." Pediatric Affiliates P.A. v. United States, No. 05-3108 (MLC), (D.N.J. 02/23/06).

• Jurisdiction to Consider Petition for Relief Absent Deficiency. U.S. Tax Court lacked jurisdiction to consider petition seeking review of IRS’s denial of innocent spouse relief. There was no deficiency asserted against petitioner. The plain language of IRC §6015 clearly indicates that the Tax Court has jurisdiction over a petition only when a deficiency has been asserted and the taxpayer had elected relief under subsection (b) or (c). Here, there is no dispute that no deficiency had been asserted against taxpayer. Further, taxpayer had elected relief only under subsection (f), not under subsection (b) or (c). Commissioner v. Ewing, No. 04-73237, 97 AFTR 2d ¶2006-554 (9th Cir. 2006).

• Delegated Claim of "Executive Privilege." IRS’s claim of "executive privilege" made in response to a request for production of documents in discovery is allowed even thought the claim was not by the IRS commissioner but by an assistant chief counsel in Office of Associate Chief Counsel. The circuits are split on whether the deliberative process privilege allows delegation. The majority view, exemplified by Landry v. Fed. Deposit Ins. Co., 204 F.3d 1125 (D.C. Cir. 2000), is that it does. Marriott International Resorts v. United States, No. 05-5046, 97 AFTR 2d ¶2006-353 (Fed. Cir. 2006).

• "AMT" Net Operating Losses; Offset Income in Pre-AMT Tax Years. Alternative minimum tax ("AMT") net operating losses may be carried back and offset against regular taxable income in pre-1987 years when AMT was not yet in effect, rather than being offset only against AMT income, which by definition cannot exist before 1987. Sequa Corp. v. United States, No. 04-5714-cv, 97 AFTR 2d ¶2006-862 (2nd Cir. 2006).

• Equitable Recoupment of Estate Tax. The IRS is entitled to equitable recoupment of estate taxes that would have been due on a residuary trust that the IRS claimed did not qualify for marital deduction but was barred from challenging. The court also held that the IRS is not entitled to recover interest on the recoupment. Estate of Buder v. United States, No. 05-2145 97 AFTR 2d ¶2006-509(8th Cir. 2006).

• Cash Method Requirement for Interest Paid to Foreign Related Party. Treasury Regulations §1.267(a)-3, which provides for the cash method of accounting when claiming deductions for payments to a related foreign person, is valid as applied to interest payments made by U.S. corporation to its French parent company. This was true even though the French parent company does not pay U.S. taxes. Square D Co. v. Commissioner, No. 04-4302, 97 AFTR 2d ¶2006-508 (7th Cir. 2006).

• Estate’s Untimely Income Tax Refund Claim; Mitigation Denied. Untimely claim filed by decedent’s estate seeking refund of income tax that was overpaid as a result of a court decision upholding IRS’s higher valuation of decedent’s stock is not entitled to relief from the statute of limitations under the mitigation provisions of IRC §§1311-1314. The estate does not satisfy two of the three requirements for application of the mitigation provisions. First, there is no "determination" as defined by IRC §1313(a). The court agreed with other courts that have held that the "determination" referred to in §1313(a) can only be an income tax determination, not an estate tax determination. Second, even assuming that a §1313(a) "determination" existed in this case, that determination is not a specified circumstance of adjustment listed in IRC §1312. Specifically, the circumstance of adjustment listed in §1312(7), which relates to the basis of property after erroneous treatment of a prior transaction, is not applicable. Malm v. United States, No. A2-05-48, 97 AFTR 2d ¶2006-795 (D.N.D. 2005).

• Sale of Right to Receive Future Payments From Lottery. Lump-sum consideration paid to taxpayers in exchange for their right to receive future lottery payments is ordinary income, rather than capital gains. The payment was made for the future right to earned income, rather than for the future right to earn income. Lattera v. Commissioner, No. 04-4721, 97 AFTR 2d ¶2006-795 (3rd Cir. 2006).

• Taxation of Out-of-State Bond Interest; Commerce Clause. The Kentucky Court of Appeals ruled the state’s taxation of income derived from bonds issued outside of Kentucky violated the Commerce Clause of the U.S. Constitution. Kentucky exempted from personal and corporate income taxation interest income derived from bonds issued by Kentucky or its subdivisions but required taxes to be paid on interest income from bonds issued by other states and their subdivisions. Kentucky’s bond taxation system is facially unconstitutional, since it obviously affords more favorable taxation treatment to in-state bonds than it does to extraterritorial bonds. Davis v. Department of Revenue, No. 2004-CA-001940-MR (Ky. App. 01/06/06).

• Code §6330; Collection Due Process; Failure to Pay and Deposit Payroll Taxes. IRS’s administrative determination to proceed with collection and deny staffing corporation abatement of IRC §6651(a)(2) and §6656 employment tax late payment penalties was upheld on summary judgment. Taxpayer failed to raise genuine fact issue that payment failures were due to "reasonable cause" and not willful neglect. Although taxpayer showed financial difficulty from lost business and September 11 terrorist attacks, such didn’t rise to level of "reasonable cause" or show that it acted with ordinary business care and prudence in not paying taxes where it still paid other creditors, waited until taxes were long past due before taking any real cost-cutting measures such as salary cuts or layoffs, and continued with nonessential and discretionary expenses. Staff It Inc. v. U.S., No. H-H-04-2210, 97 AFTR 2d ¶2006-505 (S.D. Tx 2006).

• Black & Decker Tax Shelter Case; "Economic Substance" Issue. The court partially reversed and remanded the district court’s allowance of more than $560 million in loss deductions claimed by the Black & Decker Corp., ruling questions of "economic substance" remain unanswered. To treat a transaction as a sham, the court must find that (1) the taxpayer was motivated by no business purposes other than obtaining tax benefits, and (2) the transaction has no economic substance because no reasonable possibility of a profit exists. The court said the lower court did not properly apply the second prong of the test to the sham transaction itself, looking instead at the general business activities of the corporation. Black & Decker Corp. v. United States, No. 05-1015, 97 AFTR 2d ¶2006-841 (4th Cir. 2006).

ADMINISTRATIVE ACTION

• Prohibited Political Activity; Exempt Organizations. The IRS stated that nearly three-quarters of the 82 examinations it performed on tax-exempt organizations during the 2004 election cycle, including those for churches, involved some level of prohibited political activity. Three tax-exempt organizations are expected to lose their exempt status as a result of the initiative. IRS also unveils new procedures for the 2006 election season. The IRS warns that in 2006 it will move more quickly to address prohibited activities but said it will also provide more and better guidance. News Release IR-2006-36.

• Legislative Auditor Report on Tax Compliance. In March, 2006, the Office of the Legislative Auditor issued its "Evaluation Report Tax Compliance" on "tax cheaters" in the state of Minnesota and the collection activities of the Minnesota Department of Revenue. The "tax gap" is the difference between the amount of taxes allegedly owed and the amount taxpayers voluntarily report on their tax returns. The income tax "tax gap" is $604 million and the sales and use tax "tax gap" deficiency totals $451 million. This $1 billion does not include tax balances due that taxpayers report on their tax returns, even if the balance due is not remitted on time. Overall, the legislative auditor’s report concludes that the DOR is doing a good job of collecting taxes but could do better. In addition to the $1 billion state "tax gap," the report found that Minnesota currently is owed about $450 million by taxpayers that have failed to pay the taxes they have been ordered to pay or that they admitted they owe. The full evaluation report, "Tax Compliance," including the Department of Revenue’s response is available by calling (651) 296-4708 or at http://www.auditor.leg.state.mn.us/ped/2006/taxcomp.htm

• Tax Compliance Initiatives 2006-2007. The DOR in March, 2006 issued its Report "Expanded Tax Compliance Initiatives" for Fiscal Years 2006-2007 to the Minnesota Legislature in response to the $17.8 million appropriated by the Minnesota Legislature for tax audits and enforcement activities by the department in 2006-2007 biennium. The expectation of the Legislature was that enforcement would generate $91 million in new revenue through stepped-up audit activities. As of December, 2005, DOR spent $2.4 million of the approximate $18 million appropriated and collected $17 million, or 19 percent of the anticipated $91 million for the biennium. Based on the results to date, DOR believes it is on track to collect the estimated added revenue. A copy of the report is on the Department of Revenue’s website.

• Minnesota Use Tax Obligations of Individuals. The Minnesota Department of Revenue updated an information release outlining the use tax obligations of individuals. Minnesota Sales Tax Fact Sheet 156 (February 1, 2006).

• Circular 230 Amendments. In early February, the Service again proposed amendments to the Circular 230 ethical standards, through which the Treasury and IRS seek to remedy perceived abuses by lawyers, accountants, and other tax practitioners in the corporate tax shelter and fraud scandals of recent years. In the new Proposed Regulations, the principal element is limitations on contingent fees in connection with "any matter before the Service," including return preparation, amended tax return, or refund claim. On the other hand, such fees would be allowed in connection with IRS audits of an original return or amended return or refund claim, provided that the matter was commenced before a taxpayer receives a notice of examination. The proposed modifications of Circular 230 also address the definition of practice before the IRS, eligibility for enrollment, and unenrolled practice. A hearing on the proposed regulations is scheduled for June, 2006. IR-2006-22, REG-122380-02.

• Trust, Escrow Income in Deferred Exchanges, Other Scenarios. The IRS issued new guidance on the tax treatment and reporting of income earned on qualified settlement funds and certain other escrow accounts, trusts, and funds. IRS issued final rules (T.D. 9249) that close the book on all but one section of its earlier, 1999 regulations in the area. REG-209619-93. The agency withdrew the section dealing with like-kind exchanges and proposed new rules in this area. The proposed rules REG-113365-04 deal with the use of settlement and escrow income in deferred exchanges of like-kind property. The rules also address below-market loans to facilitators of these exchanges. They would create the concept of an "exchange fund" to ensure equal treatment of settlement funds and escrow accounts. REG-113365-04.

• CRAT, CRUT Safe Harbor. The IRS extended its safe harbor date that applies to some charitable remainder annuity trusts ("CRATs") and charitable remainder unitrusts ("CRUTs"), pending its issuance of further guidance. Rev. Proc. 2005-24, 2005-16 IRB 909 provided a safe harbor procedure under which a surviving spouse’s right of election to receive a statutory share of a grantor’s estate will be disregarded for purposes of determining whether a CRAT or CRUT satisfies the requirements of IRC §664(d). The IRS and Treasury are reconsidering the approach of Rev. Proc. 2005-24, including the safe harbor rule. The IRS said that until further guidance is issued on the effect of a spousal right of election on a trust’s qualification as a CRAT or CRUT, it will disregard the existence of that right, even without a waiver, but only if the surviving spouse does not exercise the right. Notice 2006-15, 2006-8 IRB1.

LEGISLATION

• Uniform Definition of "Dependent". In 2005, a retooled rule, with the intent to assist most taxpayers, uniformly defines "dependent" for the purposes of IRC Code. Generally the change will benefit most American families; however, some taxpayers will be severely impacted. To fit the definition of a "qualifying child", children generally must pass four tests involving their relationship to the tax filer, the location where the child lived, the child’s age, and the source who provided support. Make sure that the box checked indicating filing status as single and/or head of household is correctly completed for your and your client’s 2005 Federal personal returns. Because the change occurred in late December, 2005, the changes are not reflected in the IRS tax returns, instructions, and publications such as Publication 929. See Gulf Opportunity Zone Act of 2005.

LOOKING AHEAD

• Sales and Use and Corporate Taxes: Federal Action. Provisions of S. 2152 and S. 2153 in Congress, which are substantially similar, would promote the administration and collection of state sales and use taxes and would permit the implementation of the Streamlined Sales and Use Tax Agreement ("SSUTA"). Provisions of the bill would allow SSUTA member states to require remote sellers to collect and remit sales and use taxes and would provide that the Federal Court of Claims would have exclusive jurisdiction over actions for judicial review of determinations of the Governing Board of the SSUTA. The difference between the two measures is the small business exception. While S. 2152 provides that retailers with less than $5 million in annual remote sales would be exempt from collection obligations on their Internet and/or other remote sales, S. 2153 charges the administrator of the Small Business Administration to develop an exception. A hearing on the bills was held in February, 2006. Full text is available at: http://Thomas.loc.gov. The Business Activity Tax Simplification Act of 2005 (H.R. 1956), which was approved by the House Judiciary Subcommittee on Commercial and Administrative Law in December, 2005, would, among other things, establish a uniform, 21-day standard for states to determine that an out-of-state business or individual has established sufficient nexus in a given year to owe the state income and sales taxes. A number of other bills circulating in Congress would make the current Internal Tax Moratorium permanent by repealing its sunset date now set for 2007. See, Daily Tax Report at 6-2 (02/13/06); see also, Congressional Research Service Report, "Internet Taxation: Issues and Legislation in the 109^th Congress" (02/02/06). The general consensus is that Congress is unlikely to act this year on any of the proposals. See, State Tax Notes at pp. 358-359 (02/06/06).

— Jerry Geis
Briggs & Morgan