Bench & Bar of Minnesota

CIVIL LITIGATION
JUDICIAL LAW

• Insurance Coverage; Allocation of Damages. In this case the Supreme Court was asked to resolve the proper allocation of damages among individual insurers and their insured. Multiple homeowners had brought claims for construction defects against the insured, Wooddale Builders, a general contractor of single family homes.

The parties agreed that the "property damage" as defined by the CGL policies, began with respect to each home on the closing date of its sale by Wooddale. The Court held that the "end date" for coverage would be the date on which Wooddale received notice of the claim for each property, based upon the "known loss" and "expected or intended" doctrines. (Some of the insurers had agreed to use the remediation date as the end date. This date was rejected by the Court.)

Next, the Court held that the insurers which were deemed to be on the risk for a particular claim would be obligated for their entire policy period, rather than for fractional shares of years.

The Court also addressed how to resolve responsibility for periods where the contractor lacked insurance. While not stating who has the burden of proof, the Court held that the contractor will bear responsibility for periods where it deliberately chose not to purchase coverage. Because no record had been developed on the issue, the Court remanded for further evidence as to the availability of coverage and the reasons for the lack thereof.

Finally, the Court affirmed the district court’s apportionment of defense costs equally among the insurers whose policies were triggered. Wooddale Builders, Inc. v. Maryland Casualty Co., et al., 722 N.W.2d 283 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0610/opa041442-1005.htm

• Civil Damage Act; Vicarious Liability. The Urban family’s car was involved in a collision with a drunk driver, resulting in the death of wife and mother, Barbara Urban, and serious injuries to two of the Urban children. The Urbans sued American Legion Post 184 (under the Civil Damages Act for illegal sale of alcohol to the drunk driver). In addition, they brought suit against the American Legion National (National)and the American Legion Department of Minnesota (the Department) alleging vicarious liability under several theories including respondeat superior. National and Department moved for summary judgment and both motions were granted. The Court of Appeals affirmed and the Supreme Court granted review on the issue of whether the Department and National could be held vicariously liable on a respondeat superior theory for Post 184’s allegedly tortious liquor sale.

The Supreme Court reviewed the organizational structure of the American Legion, including its creation by federal statute in 1919. It explained that posts and departments are separately incorporated, as is National. Each has its own leaders, executive committees, constitutions and bylaws. Neither National nor the Department financed the local posts. Each post is expected to collect dues from its members.

The issue presented by the appeal is whether the application of respondeat superior, a common law doctrine under which an employer may be vicariously liable for the torts of an employee committed within the course and scope of employment, is applicable to the facts of this case. The Court noted that the Legislature specifically extended liability to licensees for sales made by their employees, but it did not provide for vicarious liability for such sales extending upward to the Department or National.

The Court declined to act where it found that the Legislature had affirmatively chosen not to act. It agreed that the Civil Damage Act may be liberally construed where the provisions are clear as to intent and purpose, but must also be strictly construed so as not to enlarge the act beyond its definite scope. Marcus Robert Urban v. The American Legion Department of Minnesota and the American Legion and its Subdivisions, 2006 WL 2975186 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0610/opa041409-1019.htm

— Steven J. Kirsch
— Andrew T. Shern
Murnane Brandt

CRIMINAL LAW
JUDICIAL LAW

• Crawford: BCA Lab Reports; Notice and Demand Statute. Appellant was arrested and charged with a controlled substance violation. The appellant waived his right to a jury trial. The state presented the BCA lab reports with the results of the drug testing. Appellant objected to the admission of the report based on Crawford. Held, the BCA report is testimonial. It was clearly produced for litigation. The fact that it was produced by a "non-adversarial" crime lab analyst is not dispositive, citing Bobadilla, 709 N.W.2d, 245, 251-52 n.3: "We do not think that an approach that makes the declarant’s perspective dispositive gives adequate consideration to Crawford’s fear of government abuses". The Supreme Court notes the split in the various states concerning lab reports, and sides with those holding such reports are testimonial under Crawford. Next, the Court finds Minn. Stat. §634.15 to be unconstitutional. This statute allows a defendant who wants to cross-examine the analyst, via live testimony, the opportunity to do so by demanding, at least ten days prior to trial, that the analyst testify in person. The statute does not provide adequate notice to the defendant of the contents of the report, nor of the consequences for failure to request live testimony. State v. Scott Caufield, A04-1484 (Minn. 10/05/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa041484-1005.htm

• Transferred Intent: Duty to Find Element of Proof. Appellant was convicted of first-degree premeditated murder. The state contended that appellant premeditated the victim’s murder and argued, in the alternative, that if he set out that evening to kill other men who had jumped him, but mistakenly shot the victim, he could be found guilty of premeditated murder of the victim. Noting that: "We have consistently held that when an erroneous jury instruction eliminates a required element of the crime, this type of error is not harmless beyond a reasonable doubt," the conviction is reversed. "Because the transferred intent instruction pertains directly to the element of premeditation, and because that instruction relieves the jury of its obligation to find that the element of premeditation was satisfied, the instruction is not harmless. State v. Andre Francis Hall, A05-1534 (Minn. 10/12/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa051534-1012.htm

• Pro Se Representation: Appointment of Advisory Counsel. On the day of trial, the appellant terminated his public defender, and requested substitute counsel. The request for substitute counsel was denied. Following a hearing, the court granted appellant’s request to proceed pro se. During cross-examination of a witness, appellant sought to relinquish self-representation, requesting standby counsel. This request was denied. Held, it was not an abuse of discretion to deny the appellant’s request for substitute counsel. Furthermore, construing the Minnesota Constitution as commensurate with the U.S. Constitution, there is no constitutional guarantee of the appointment of advisory counsel for pro se defendants. Finally, it was not an abuse of discretion to fail to appoint standby counsel. State v. Clay Carl Clark, A04-1101 (Minn. 10/12/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa041101-1012.htm

• Blakely: Authority to Impanel Sentencing Jury on Aggravating Factor; Shattuck. Subsequent to Blakely, but prior to Shattuck II, the district court impaneled a sentencing jury on the issue of victim vulnerability. Shattuck had declined, as a matter of policy, to "engraft" sentencing juries or bifurcated trials onto the guidelines; however, this case makes clear that Shattuck did not "foreclose" the district court from using that remedy, noting that the Legislature had recently authorized it by amending the guidelines. Therefore, the district court did have the inherent power to impanel a sentencing jury under the facts of this case. Next, due process does not require that an aggravating factor, here, victim vulnerability, be alleged in the complaint. The defendant was on specific notice of the intent to depart by receiving, approximately three weeks before trial, the state’s notice of intention to seek an upward departure based on victim vulnerability. State v. Richard Raymond Chauvin, A05-726 (Minn. 10/26/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa050726-1026.htm

• Blakely: Authority to Impanel Resentencing Jury; Double Jeopardy; Ex Post Facto Law Making. Minn. Stat. §244.210, made final on September 14, 2005, specifically states that it is applicable to "sentencing hearings, resentencing hearings, and sentencing departures sought on or after" the effective date of the act. Although Minnesota Sentencing Guideline II.D does not specifically address the issue of retroactivity, nothing in the guidelines prohibits the court from imposing a sentence based on facts found by a jury, hence, reading both the statute and the guideline together, the district court was authorized to impanel a sentencing jury on resentencing of an original conviction which did not comply with Blakely. Next, the Supreme Court rejects the defendant’s double jeopardy argument, noting that on resentence, the only restriction is that the state cannot seek and the court cannot impose a sentence in excess of the original sentence of 264 months. In also rejecting the argument against ex post facto law making, the Supreme Court states that the changes are procedural, and not substantive. Dena Lyn Hankerson v. State of Minnesota, S.Ct. 10/26/06.

• Search and Seizure: Preconviction DNA Collection Statute. Minn. Stat. §299C.105 directs law enforcement personnel to collect biological samples for the purpose of DNA analysis for "juveniles and adults who have had probable cause determinations on certain charged defenses but who have not yet been convicted." This statute can result in collection of the DNA of charged individuals for a reason. Held, this statute is unconstitutional under both the United States Constitution and Article I, Section 10 of the Minnesota Constitution as an unreasonable search and seizure. The Court of Appeals notes that probable cause to support a criminal charge is a different standard from the probable cause necessary to support the issuance of a warrant. The latter requires a judicial determination that there is probable cause to issue a search warrant when, given the totality of the circumstances, there is a "fair probability that contraband or evidence of a crime will be found in a particular place". Minn. Stat. §299C.105 uses a judicial determination of probable cause to support a criminal charge as a substitute for a judicial determination of probable cause to issue a search warrant. Therefore, the statute dispenses with a 4th Amendment requirement that before conducting a search, law enforcement personnel must obtain a warrant based on a neutral magistrate’s determination that there is a fair probability that the search will produce evidence. The Court of Appeals concludes that the privacy interests of the person who has been charged but not convicted of an offense is not outweighed by the state’s interest in collecting and analyzing a DNA sample. In re C.T.L., A06-874 (Minn. App. 10/10/06). www.lawlibrary.state.mn.us/archive/ctappub/0610/opa060874-1010.htm

— Frederic Bruno
Frederic Bruno & Associates

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Unemployment Compensation; Discretionary Conduct Known to Management Not Misconduct. The manager of an apartment complex was entitled to unemployment benefits after he was fired for purportedly waiving penalty fees for tenants who sought early termination of their leases. Reversing a determination by the Department of Employment and Economic Development (DEED), the appellate court ruled that the employee had such broad job duties that he was entitled to exercise his discretion in waiving penalties. Because management knew that he was waiving the penalties, but continued to give him good performance reviews, his action did not constitute disqualifying "misconduct" and he was, therefore, entitled to unemployment benefits. Van Hee v. Dominium Management Services, Inc., 2006 WL 2129795 (Minn. App. 08/01/06) (unpublished).

• Unemployment Compensation; "Unsuitable Job." An employee of a temporary staffing agency, who was not allowed to continue work at a site where she was placed because she made mathematical errors, was entitled to unemployment benefits. Although she failed to call her employer and report her availability, she was not disqualified from benefits on grounds of resignation. The decision of DEED was overturned by the appellate court on grounds that the assignment given to the employee was not "suitable" because she lacked the experience and skills to do the work assigned to her. Therefore, she was not disqualified from benefits under Minn. Stat. § 268.095, subd. 2(d), which disqualifies temporary employees from benefits if they quit before completing work at a "suitable" job. McJimsey v. Dolphin Industrial Staffing, 2006 WL 2129782 (Minn. App. 08/01/06) (unpublished).

• Unemployment Compensation; Constructive Lockout." The imposition of a 25 percent pay cut on employees constituted a "constructive" lockout, which entitled the employees to unemployment compensation benefits. The pay cut met the criterion in prior case law that a 25 percent diminution of pay justifies employees ceasing the work and being eligible for unemployment benefits under Minn. Stat. §268.085, subd. 13b(c)(2), which provides statutory exception and ineligibility if an employee "stops working because of a lock out." Aircraft Mechanics Fraternal Ass’n Members v. Northwest Airlines, Inc., 2006 WL 2599086 (Minn. App. 2006) (unpublished).

• Unemployment Compensation; Independent Contractor. Individuals hired to drive used cars purchased at automobile auctions by the dealer to the dealer’s lot are independent contractors and, therefore, are not entitled to unemployment compensation benefits. The Court of Appeals held that no employment relationship existed because the drivers are free to accept or reject any trip call, are paid a flat fee for each trip plus gas reimbursement, and may determine their own schedules, which makes them independent contractors and ineligible for unemployment benefits. Southwood Motors v. Dep’t of Employment & Econ. Dev., 2006 WL 2599132 (Minn. App. 09/12/06) (unpublished).

• Unemployment Compensation; Independent Contractor. An employee who did interior decorating work for a building company was not an independent contractor and was entitled to seek unemployment benefits. The employee was paid on an hourly basis by the company, which controlled the means and the manner of her performance. But since she quit her job without "good reason" attributed to her employer, she was disqualified from receiving benefits. Kollross v. REC, Inc., 2006 WL 2673913 (Minn. App. 09/19/06) (unpublished).

• Unemployment Compensation; Concurrent Disability Benefits. An employee of the City of St. Paul was required to repay unemployment benefits because she later received temporary partial disability benefits under the worker’s compensation law. DEED properly had jurisdiction over the claim and it is entitled to be repaid to the extent that the claimant received "loss-of-wages benefits" for the same time period as the unemployment benefits had been paid. LaBeau v. Dep’t of Employment and Econ. Dev., 2006 WL 2675495 (Minn. App. 2006) (unpublished).

• Race Discrimination. The 8th Circuit Court of Appeals affirmed a decision of U.S. District Court Judge Joan Ericksen in Minnesota, dismissing a lawsuit brought by an African-American employee for Ramsey County, who sued for retaliation, hostile work environment, and national origin and race discrimination. There was insufficient evidence to establish a hostile environment, and the county established that it had a legitimate reason for terminating the employee, which was not pretextual. Arraleh v. County of Ramsey, 461 F.3d 967 (8th Cir. 2006).

• Race Discrimination. Similarly, the 8th Circuit upheld dismissal of race discrimination and retaliation claims brought by a bank employee in Iowa, who was terminated for violating the company’s computer policy. The lawsuit was not actionable because the employee was not able to show that the employer’s reason for termination was pretextual. Twymon v. Wells Fargo & Company, 462 F.3d 925 (8th Cir. 2006).

• Race Discrimination. A Muslim-American airplane pilot who was fired after drinking in uniform in a hotel bar lost his religious bias claim. The employee’s drinking, which violated company policy, was not shown to be pretextual. Equal Employment Opportunity Comm’n v. Trans State Airlines, Inc., 462 F.3d 987 (8th Cir. 2006).

— Marshall H. Tanick
Mansfield, Tanick & Cohen P.A.

TAX
JUDICIAL LAW

December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	CIVIL LITIGATION JUDICIAL LAW • Insurance Coverage; Allocation of Damages. In this case the Supreme Court was asked to resolve the proper allocation of damages among individual insurers and their insured. Multiple homeowners had brought claims for construction defects against the insured, Wooddale Builders, a general contractor of single family homes. The parties agreed that the "property damage" as defined by the CGL policies, began with respect to each home on the closing date of its sale by Wooddale. The Court held that the "end date" for coverage would be the date on which Wooddale received notice of the claim for each property, based upon the "known loss" and "expected or intended" doctrines. (Some of the insurers had agreed to use the remediation date as the end date. This date was rejected by the Court.) Next, the Court held that the insurers which were deemed to be on the risk for a particular claim would be obligated for their entire policy period, rather than for fractional shares of years. The Court also addressed how to resolve responsibility for periods where the contractor lacked insurance. While not stating who has the burden of proof, the Court held that the contractor will bear responsibility for periods where it deliberately chose not to purchase coverage. Because no record had been developed on the issue, the Court remanded for further evidence as to the availability of coverage and the reasons for the lack thereof. Finally, the Court affirmed the district court’s apportionment of defense costs equally among the insurers whose policies were triggered. *Wooddale Builders, Inc. v. Maryland Casualty Co., et al., 722 N.W.2d 283 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0610/opa041442-1005.htm • Civil Damage Act; Vicarious Liability.* The Urban family’s car was involved in a collision with a drunk driver, resulting in the death of wife and mother, Barbara Urban, and serious injuries to two of the Urban children. The Urbans sued American Legion Post 184 (under the Civil Damages Act for illegal sale of alcohol to the drunk driver). In addition, they brought suit against the American Legion National (National)and the American Legion Department of Minnesota (the Department) alleging vicarious liability under several theories including respondeat superior. National and Department moved for summary judgment and both motions were granted. The Court of Appeals affirmed and the Supreme Court granted review on the issue of whether the Department and National could be held vicariously liable on a respondeat superior theory for Post 184’s allegedly tortious liquor sale. The Supreme Court reviewed the organizational structure of the American Legion, including its creation by federal statute in 1919. It explained that posts and departments are separately incorporated, as is National. Each has its own leaders, executive committees, constitutions and bylaws. Neither National nor the Department financed the local posts. Each post is expected to collect dues from its members. The issue presented by the appeal is whether the application of respondeat superior, a common law doctrine under which an employer may be vicariously liable for the torts of an employee committed within the course and scope of employment, is applicable to the facts of this case. The Court noted that the Legislature specifically extended liability to licensees for sales made by their employees, but it did not provide for vicarious liability for such sales extending upward to the Department or National. The Court declined to act where it found that the Legislature had affirmatively chosen not to act. It agreed that the Civil Damage Act may be liberally construed where the provisions are clear as to intent and purpose, but must also be strictly construed so as not to enlarge the act beyond its definite scope. *Marcus Robert Urban v. The American Legion Department of Minnesota and the American Legion and its Subdivisions, 2006 WL 2975186 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0610/opa041409-1019.htm — Steven J. Kirsch — Andrew T. Shern Murnane Brandt*
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	CRIMINAL LAW JUDICIAL LAW • Crawford: BCA Lab Reports; Notice and Demand Statute. Appellant was arrested and charged with a controlled substance violation. The appellant waived his right to a jury trial. The state presented the BCA lab reports with the results of the drug testing. Appellant objected to the admission of the report based on Crawford. Held, the BCA report is testimonial. It was clearly produced for litigation. The fact that it was produced by a "non-adversarial" crime lab analyst is not dispositive, citing Bobadilla, 709 N.W.2d, 245, 251-52 n.3: "We do not think that an approach that makes the declarant’s perspective dispositive gives adequate consideration to Crawford’s fear of government abuses". The Supreme Court notes the split in the various states concerning lab reports, and sides with those holding such reports are testimonial under Crawford. Next, the Court finds Minn. Stat. §634.15 to be unconstitutional. This statute allows a defendant who wants to cross-examine the analyst, via live testimony, the opportunity to do so by demanding, at least ten days prior to trial, that the analyst testify in person. The statute does not provide adequate notice to the defendant of the contents of the report, nor of the consequences for failure to request live testimony. *State v. Scott Caufield, A04-1484 (Minn. 10/05/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa041484-1005.htm • Transferred Intent: Duty to Find Element of Proof.* Appellant was convicted of first-degree premeditated murder. The state contended that appellant premeditated the victim’s murder and argued, in the alternative, that if he set out that evening to kill other men who had jumped him, but mistakenly shot the victim, he could be found guilty of premeditated murder of the victim. Noting that: "We have consistently held that when an erroneous jury instruction eliminates a required element of the crime, this type of error is not harmless beyond a reasonable doubt," the conviction is reversed. "Because the transferred intent instruction pertains directly to the element of premeditation, and because that instruction relieves the jury of its obligation to find that the element of premeditation was satisfied, the instruction is not harmless. *State v. Andre Francis Hall, A05-1534 (Minn. 10/12/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa051534-1012.htm • Pro Se Representation: Appointment of Advisory Counsel.* On the day of trial, the appellant terminated his public defender, and requested substitute counsel. The request for substitute counsel was denied. Following a hearing, the court granted appellant’s request to proceed pro se. During cross-examination of a witness, appellant sought to relinquish self-representation, requesting standby counsel. This request was denied. Held, it was not an abuse of discretion to deny the appellant’s request for substitute counsel. Furthermore, construing the Minnesota Constitution as commensurate with the U.S. Constitution, there is no constitutional guarantee of the appointment of advisory counsel for pro se defendants. Finally, it was not an abuse of discretion to fail to appoint standby counsel. *State v. Clay Carl Clark, A04-1101 (Minn. 10/12/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa041101-1012.htm • Blakely: Authority to Impanel Sentencing Jury on Aggravating Factor; Shattuck. Subsequent to Blakely, but prior to Shattuck II, the district court impaneled a sentencing jury on the issue of victim vulnerability. Shattuck* had declined, as a matter of policy, to "engraft" sentencing juries or bifurcated trials onto the guidelines; however, this case makes clear that Shattuck did not "foreclose" the district court from using that remedy, noting that the Legislature had recently authorized it by amending the guidelines. Therefore, the district court did have the inherent power to impanel a sentencing jury under the facts of this case. Next, due process does not require that an aggravating factor, here, victim vulnerability, be alleged in the complaint. The defendant was on specific notice of the intent to depart by receiving, approximately three weeks before trial, the state’s notice of intention to seek an upward departure based on victim vulnerability. *State v. Richard Raymond Chauvin, A05-726 (Minn. 10/26/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa050726-1026.htm • Blakely: Authority to Impanel Resentencing Jury; Double Jeopardy; Ex Post Facto Law Making. Minn. Stat. §244.210, made final on September 14, 2005, specifically states that it is applicable to "sentencing hearings, resentencing hearings, and sentencing departures sought on or after" the effective date of the act. Although Minnesota Sentencing Guideline II.D does not specifically address the issue of retroactivity, nothing in the guidelines prohibits the court from imposing a sentence based on facts found by a jury, hence, reading both the statute and the guideline together, the district court was authorized to impanel a sentencing jury on resentencing of an original conviction which did not comply with Blakely. Next, the Supreme Court rejects the defendant’s double jeopardy argument, noting that on resentence, the only restriction is that the state cannot seek and the court cannot impose a sentence in excess of the original sentence of 264 months. In also rejecting the argument against ex post facto law making, the Supreme Court states that the changes are procedural, and not substantive. Dena Lyn Hankerson v. State of Minnesota, S.Ct. 10/26/06. • Search and Seizure: Preconviction DNA Collection Statute.* Minn. Stat. §299C.105 directs law enforcement personnel to collect biological samples for the purpose of DNA analysis for "juveniles and adults who have had probable cause determinations on certain charged defenses but who have not yet been convicted." This statute can result in collection of the DNA of charged individuals for a reason. Held, this statute is unconstitutional under both the United States Constitution and Article I, Section 10 of the Minnesota Constitution as an unreasonable search and seizure. The Court of Appeals notes that probable cause to support a criminal charge is a different standard from the probable cause necessary to support the issuance of a warrant. The latter requires a judicial determination that there is probable cause to issue a search warrant when, given the totality of the circumstances, there is a "fair probability that contraband or evidence of a crime will be found in a particular place". Minn. Stat. §299C.105 uses a judicial determination of probable cause to support a criminal charge as a substitute for a judicial determination of probable cause to issue a search warrant. Therefore, the statute dispenses with a 4th Amendment requirement that before conducting a search, law enforcement personnel must obtain a warrant based on a neutral magistrate’s determination that there is a fair probability that the search will produce evidence. The Court of Appeals concludes that the privacy interests of the person who has been charged but not convicted of an offense is not outweighed by the state’s interest in collecting and analyzing a DNA sample. *In re C.T.L., A06-874 (Minn. App. 10/10/06). www.lawlibrary.state.mn.us/archive/ctappub/0610/opa060874-1010.htm — Frederic Bruno* Frederic Bruno & Associates
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	EMPLOYMENT & LABOR LAW JUDICIAL LAW • Unemployment Compensation; Discretionary Conduct Known to Management Not Misconduct. The manager of an apartment complex was entitled to unemployment benefits after he was fired for purportedly waiving penalty fees for tenants who sought early termination of their leases. Reversing a determination by the Department of Employment and Economic Development (DEED), the appellate court ruled that the employee had such broad job duties that he was entitled to exercise his discretion in waiving penalties. Because management knew that he was waiving the penalties, but continued to give him good performance reviews, his action did not constitute disqualifying "misconduct" and he was, therefore, entitled to unemployment benefits. *Van Hee v. Dominium Management Services, Inc., 2006 WL 2129795 (Minn. App. 08/01/06) (unpublished). • Unemployment Compensation; "Unsuitable Job."* An employee of a temporary staffing agency, who was not allowed to continue work at a site where she was placed because she made mathematical errors, was entitled to unemployment benefits. Although she failed to call her employer and report her availability, she was not disqualified from benefits on grounds of resignation. The decision of DEED was overturned by the appellate court on grounds that the assignment given to the employee was not "suitable" because she lacked the experience and skills to do the work assigned to her. Therefore, she was not disqualified from benefits under Minn. Stat. § 268.095, subd. 2(d), which disqualifies temporary employees from benefits if they quit before completing work at a "suitable" job. *McJimsey v. Dolphin Industrial Staffing, 2006 WL 2129782 (Minn. App. 08/01/06) (unpublished). • Unemployment Compensation;* Constructive Lockout." The imposition of a 25 percent pay cut on employees constituted a "constructive" lockout, which entitled the employees to unemployment compensation benefits. The pay cut met the criterion in prior case law that a 25 percent diminution of pay justifies employees ceasing the work and being eligible for unemployment benefits under Minn. Stat. §268.085, subd. 13b(c)(2), which provides statutory exception and ineligibility if an employee "stops working because of a lock out." *Aircraft Mechanics Fraternal Ass’n Members v. Northwest Airlines, Inc., 2006 WL 2599086 (Minn. App. 2006) (unpublished). • Unemployment Compensation; Independent Contractor.* Individuals hired to drive used cars purchased at automobile auctions by the dealer to the dealer’s lot are independent contractors and, therefore, are not entitled to unemployment compensation benefits. The Court of Appeals held that no employment relationship existed because the drivers are free to accept or reject any trip call, are paid a flat fee for each trip plus gas reimbursement, and may determine their own schedules, which makes them independent contractors and ineligible for unemployment benefits. *Southwood Motors v. Dep’t of Employment & Econ. Dev., 2006 WL 2599132 (Minn. App. 09/12/06) (unpublished). • Unemployment Compensation;* Independent Contractor. An employee who did interior decorating work for a building company was not an independent contractor and was entitled to seek unemployment benefits. The employee was paid on an hourly basis by the company, which controlled the means and the manner of her performance. But since she quit her job without "good reason" attributed to her employer, she was disqualified from receiving benefits. *Kollross v. REC, Inc., 2006 WL 2673913 (Minn. App. 09/19/06) (unpublished). • Unemployment Compensation;* Concurrent Disability Benefits. An employee of the City of St. Paul was required to repay unemployment benefits because she later received temporary partial disability benefits under the worker’s compensation law. DEED properly had jurisdiction over the claim and it is entitled to be repaid to the extent that the claimant received "loss-of-wages benefits" for the same time period as the unemployment benefits had been paid. *LaBeau v. Dep’t of Employment and Econ. Dev., 2006 WL 2675495 (Minn. App. 2006) (unpublished). • Race Discrimination.* The 8th Circuit Court of Appeals affirmed a decision of U.S. District Court Judge Joan Ericksen in Minnesota, dismissing a lawsuit brought by an African-American employee for Ramsey County, who sued for retaliation, hostile work environment, and national origin and race discrimination. There was insufficient evidence to establish a hostile environment, and the county established that it had a legitimate reason for terminating the employee, which was not pretextual. *Arraleh v. County of Ramsey, 461 F.3d 967 (8th Cir. 2006). • Race Discrimination.* Similarly, the 8th Circuit upheld dismissal of race discrimination and retaliation claims brought by a bank employee in Iowa, who was terminated for violating the company’s computer policy. The lawsuit was not actionable because the employee was not able to show that the employer’s reason for termination was pretextual. *Twymon v. Wells Fargo & Company,* 462 F.3d 925 (8th Cir. 2006). • Race Discrimination. A Muslim-American airplane pilot who was fired after drinking in uniform in a hotel bar lost his religious bias claim. The employee’s drinking, which violated company policy, was not shown to be pretextual. *Equal Employment Opportunity Comm’n v. Trans State Airlines, Inc.,* 462 F.3d 987 (8th Cir. 2006). — Marshall H. Tanick Mansfield, Tanick & Cohen P.A.
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	FEDERAL PRACTICE JUDICIAL LAW • Word Limits; Striking Summary Judgment Affidavits. A recent order by Judge Schiltz raises two issues of particular import to federal practitioners. First, Judge Schiltz severely criticized what he called "motion splitting" — the practice of bringing multiple motions for partial summary judgment — in an attempt to violate the word limits set forth in Local Rule 7.1(c). Judge Schiltz also criticized the fairly common practice of "motions to strike" summary judgment affidavits, concluding that no such motion exists in the Federal Rules of Civil Procedure, and noting therefore that such a motion cannot be "warranted by existing law" as Fed. R. Civ. P. 11(b) requires. *Carlson Marketing Group, Inc. v Royal Indemnity Co., 2006 WL 2917173 (D. Minn. 10/11/06). • Perfunctory Request for Leave to Amend Denied; No Abuse of Discretion.* The 8th Circuit found no abuse of discretion in a district court’s denial of leave to amend a complaint where the request was made in a single sentence in a memorandum opposing defendants’ motion to dismiss and the plaintiff failed to explain the substance of his proposed amendment. *Misischia v St. John’s Mercy Health Systems, 457 F.3d 800 (8th Cir. 2006). • Striking of Expert Affirmed; No Abuse of Discretion.* The 8th Circuit found no abuse of discretion in a district court’s decision to exclude testimony from the plaintiff’s purported automobile safety expert under Fed. R. Evid. 702 and Daubert. *Smith v Cangeiter, 462 F.3d 920 (8th Cir. 2006). • Supplemental Jurisdiction; Remand of State Law Claims Following Summary Judgment.* Judge Davis declined to exercise supplemental jurisdiction over the plaintiff’s state law claims following the voluntary dismissal of her federal claims, and remanded the state law claims to the court from which the case was originally removed. *Geist-Miller v Sun Place Tanning Studios, Inc., 2006 WL 3004101 (D. Minn. 10/20/06). • Violation of Protective Order; Attorney Fees.* Judge Montgomery adopted an order by Magistrate Judge Graham which had ordered the payment of fees and costs incurred in bringing a successful motion for violation of a protective order. *Schwarz Pharma, Inc. v Paddock Laboratories, Inc., 2006 WL 3004200 (D. Minn. 10/20/06). • Appeal from Report and Recommendation; New Argument.* Judge Schiltz affirmed a report and recommendation by Magistrate Judge Nelson, overruling an objection to the report and recommendation premised on an argument that had never been advanced before the magistrate judge. *Hammann v 1-800 Ideas.com, Inc., ___ F. Supp. 2d ___ (D. Minn. 2006). • Depositions Continued; Newly Produced Documents.* Judge Frank granted plaintiffs’ motion to continue the depositions of two previously deposed witnesses where thousands of pages of additional documents had been produced after these witnesses had been deposed. *Gallus v American Express Fin. Corp., 2006 WL 2590646 (D. Minn. 06/02/06). • Reconsideration Granted; Dismissal of Fraud Claims.* Judge Magnuson granted a motion for reconsideration and reversed his previous dismissal of fraud claims asserted against multiple defendants. *Bray Int’l, Inc. v Collings, 2006 WL 2708645 (D. Minn. 09/20/06). • Interlocutory Appeal Denied; Discovery Issues.* Judge Davis denied a request to certify a discovery order for interlocutory appeal under 28 U.S.C. §1292(b). *Day v State of Minnesota,* 2006 WL 2670142 (D. Minn. 09/18/06). • Magistrate’s Discovery Order Reversed. In a relatively rare move, Judge Tunheim reversed a discovery order by Magistrate Judge Noel, finding that an employee’s immigration status was not relevant at the early stages of a sexual harassment case. *E.E.O.C. v Restaurant Co., ___ F. Supp. 2d ___ (D. Minn. 2006). • Securities Fraud; PSLRA; Motion to Dismiss Denied.* Judge Tunheim denied defendants’ motion to dismiss securities fraud claims under Fed. R. Civ. P. 9(b), 12(b)(6) and the PSLRA. *In Re St. Paul Travelers Sec. Lit. II, 2006 WL 2735221 (D. Minn. 09/25/06). • Motion for a More Definite Statement Denied.* Judge Frank recently denied defendants’ Fed. R. Civ. P. 12(e) motion for a more definite statement, finding that the allegations in the complaint were "sufficient to provide Defendants with a basis to form a responsive pleading." *Kia Motors America, Inc. v. Autoworks Distributing, 2006 WL 2727357 (D. Minn. 09/22/06). • After-Acquired Evidence; Damages.* Judge Tunheim declined to limit the plaintiff’s damages as part of a summary judgment motion under the after-acquired evidence doctrine, holding that issues of fact precluded summary judgment on the damages issue. *Predzik v. Shelter Corp., 2006 WL 2794368 (D. Minn. 09/27/06). • Rule 11 Sanctions; Safe Harbor.* Judge Ericksen denied a motion for Rule 11 sanctions where the movant failed to comply with the "safe harbor" provisions of Fed. R. Civ. P. 11(c)(1)(A). *Fearing v. City of Lake St. Croix Beach, 2006 WL 2827250 (D. Minn. 09/28/06). • Vexatious Litigants; Sanctions.* In an unpublished opinion, the 8th Circuit recently affirmed sanctions imposed by Judge Frank which barred a vexatious litigant from filing further actions without leave of court. Several days later, Judge Magnuson issued a similar order barring a plaintiff from filing further actions unless represented by counsel or with leave of court. *Vaughn v. Swatek, 2006 WL 2862132 (8th Cir. 10/10/06). Dixon v. Rybak, 2006 WL 2945564 (D. Minn. 10/13/06). — Josh Jacobson* Law Office Of Josh Jacobson
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	INTELLECTUAL PROPERTY JUDICIAL LAW • Patent; Obviousness. The Federal Circuit reversed the district court’s denial of Bann’s judgment as a matter of law for, among other things, invalidity of plaintiff DyStar’s patent based on obviousness. The jury found in favor of Dystar, awarding $90 million in damages. On appeal, however, the court held that the jury’s decision as it related to obviousness was erroneous. The court — presumably in response to the Supreme Court’s grant of certiorari to KSR Int’l Co. v. Teleflex, Inc. — painstakingly reviewed its prior precedent showing the proper methods to evaluate the motivation to combine in an obviousness analysis and determined that the level of ordinary skill in the art is "inextricably linked." After reviewing the evidence, the court concluded that the jury’s implicit finding that the ordinary skill in the art was a person trained as a dyer was not supported by substantial evidence. The court determined that a person of ordinary skill in the art was a person capable of designing an optimal dyeing process. Based on the inextricable link, the court further held that the jury’s corresponding implicit decision to disregard the primary cited prior art as nonanalogous also erroneous; a person designing an optimal dyeing process would have considered the reference making Dystar’s patent obvious. *Dystar Textilfarben GmbH & Co. Deutschland KG v. C. H. Patrick Co. et al., Civ. No. 06-1088 (Fed. Cir. 10/03/06). • Trademark; Likelihood of Confusion.* The 8th Circuit reversed the district court’s grant of summary judgment dismissing MQVP’s trademark infringement and false advertising claims against Mid-State Aftermark Body Parts. MQVP owned a federal registration for the service mark MQVP^® used in connection with services comprising a quality assurance program for automotive parts and products. Mid-State — an aftermarket automobile parts supplier — advertised that it sold "MQVP parts," without participating in MQVP’s quality assurance program. Mid-State argued that, because it purchased its parts from MQVP-participating manufacturers, its advertising was accurate. The district court granted Mid-State summary judgment on MQVP’s Lanham Act claims; however, the 8th Circuit reversed because the following genuine issues are in dispute: (1) whether MQVP authorized use of its MQVP^® service mark in connection with products; (2) the nature of the services protected by the MQVP^® service mark; and (3) whether end users would be confused as to whether they are buying qualified MQVP^® parts. *Mid-State Aftermarket Body Parts, Inc. v. MQVP, Inc., Civ. No. 05-3057 (8th Cir. 10/19/06). • Patent; Prosecution History Estoppel.* The Minnesota federal district court granted defendant Paddock Laboratories’ motion for summary judgment of noninfringement based on no equivalence as a matter of law. Schwarz sued Paddock for patent infringement based on Paddock’s ANDA filing concerning a generic drug. The court ruled that the prosecution history of Schwarz’s patent estopped it from claiming Paddock’s product infringed based on equivalence (literal infringement was not an issue). During prosecution, Schwarz amended its claims to limit the patent’s scope to overcome an obviousness rejection. The court ruled that the amendments precluded Schwarz from recapturing the subject matter it surrendered during prosecution, here, Paddock’s product. *Schwarz Pharma, Inc. et al. v. Paddock Laboratories, Inc., Civ. No. 05-832 (D. Minn. 10/20/06). — Tony Zeuli* — Sam Lockner Merchant & Gould
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	JUVENILE LAW JUDICIAL LAW • Termination of Parental Rights. In an unpublished decision, the Court of Appeals affirmed a district court’s termination of the mother’s parental rights based on her being palpably unfit to be a parent for the reasonably foreseeable future and because reasonable efforts by the county failed to correct the conditions leading to the children’s placement. Here the mother had a history of drug and alcohol abuse as well as mental health issues. She failed to respond to available treatment and therapy during the first eight months of her case plan, but did make progress during the four months before trial. The district court received a letter from the mother’s counselors questioning the adequacy of the county’s reunification efforts. Despite that, the district court found that the efforts made by the county were reasonable and the Court of Appeals found that adequate evidence supported the termination on the grounds enunciated by the district court. *In the Matter on the Welfare of the children of: C.F. and J.S.* A06-917 (Minn. App. 10/31/06). www.lawlibrary.state.mn.us/archive/ctapun/0610/opa060917-1031.htm • Termination of Parental Rights; Minor Child’s Preference. In another unpublished decision, the Minnesota Court of Appeals reviewed an appeal brought by the minor child seeking to reverse the termination of her mother’s parental rights. While the minor did not dispute that at least one statutory ground for termination was satisfied, she specifically argued that the district court failed to weigh her personal preference to be placed in long-term foster care rather than to have her mother’s parental rights terminated when making its best interest determination. The Court of Appeals observed, however, that the findings established that the district court did consider the minor’s preference, but concluded that the termination was nonetheless in her best interest. A child’s preference is not dispositive; and the Court of Appeals held that there was no evidence that the district court failed to properly weigh the minor’s preference. The minor also argued that the amended long-term foster care statute, which now allows a district court to consider long term foster care as a viable placement option only if it is requested by the county social services agency, violates Separation of Powers principles because the statute limits the inherent power of the courts to act in the child’s best interest. The Court of the Appeals observed that while under the amended statute the best interest determination is partially delegated to the county, in this particular case the district court found termination was in the children’s best interest because it would provide the children with a permanent home and greater stability. The court observed that even if the statute permitted the district court to make its own determination, in this case, parental rights would still have been terminated based on other considerations. The court held that the minor appellant lacked standing to raise the Separation of Powers issue because a threshold consideration of a litigant’s rights to a determination on the merits of a claim is a traceable connection between a concrete injury and a requested remedy. In the Matter of the Welfare of: M.S., C.M., and D.C., Parents. A06-828 (Minn. App. 10/17/06). www.lawlibrary.state.mn.us/archive/ctapun/0610/opa060828-1017.htm • Indian Child Welfare Act; Transfer of Jurisdiction. In a matter arising from a juvenile child protection dispute concerning custody of an Indian child, the Minnesota Supreme Court reversed the Court of Appeals and reinstated the district court order denying transfer of jurisdiction to the tribal court. Under both the Indian Child Welfare Act (ICWA) and the Minnesota Indian Family Preservation Act (MIFPA), proceedings involving custody of any Indian child who does not reside on and is not domiciled on the reservation must be transferred to the jurisdiction of the tribal court upon proper request and in the absence of good cause to the contrary. In this case, the district court concluded that there was good cause under both ICWA and MIFPA to deny the transfer. Under both ICWA and Minnesota law, the state court will retain jurisdiction over foster care placements of an Indian child who neither resides nor is domiciled on the reservation if (1) transfer of jurisdiction to the tribal court is not requested; (2) either parent objects to transfer; (3) the child’s tribal court declines jurisdiction; or (4) the state court finds "good cause" to deny a request for transfer. Neither ICWA nor Minnesota law define or provide examples of "good cause" to deny a motion to transfer jurisdiction to the tribal court. The Supreme Court noted, however, that the Bureau of Indian Affairs, ("BIA") published guidelines in 1979 for use by state courts in Indian child custody proceedings. Commentary to the BIA guidelines indicates that there is good cause to deny the transfer request when a party who could have petitioned earlier waits until the case is almost complete to ask that it be transferred to another court and retried. There was nothing in the record to suggest that resort to the good cause exception in this case was for purposes undermining ICWA. The Court concluded that the good cause criteria were met and that the district court had good cause to deny the motions to transfer jurisdiction of the case to tribal court. Two justices dissented, observing that irrespective of the purpose for which the good cause exception was invoked in this case, this decision will have the effect of undermining the goals of ICWA and placing the achievement of the goals of the ICWA further out of reach. *In the Matter of the Welfare of: T.T.B and G.W., Parents*. A05-1615 and A05-1631 (Minn. 10/19/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa051615-1019.htm — Gary Debele Walling, Berg & Debele
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	REAL PROPERTY JUDICIAL LAW • State’s Ability to Recover Medical Assistance Benefits. A person with insufficient assets to pay for medical care may qualify for medical assistance benefits from the state of Minnesota (state). In order to qualify for benefits, some will have to deplete their personal resources. This is what husband and wife, Delores and Francis Barg, did in 2001 when Delores’ health required her to move into a nursing home. Delores transferred to Francis her interest in the home that she held in joint tenancy with Francis. In 2004, Delores died. Francis died a few months later. Under certain circumstances, Minnesota and federal law permit the state to recover amounts paid for medical assistance benefits after the recipient’s death. One source of recovery is the residence owned by the recipient. But to prevent undue hardship to the spouse who remains in the property, proceeds cannot be pursued until the death of the surviving spouse. At that time, the state may assert a claim against the surviving spouse’s estate. In the probate of Francis’ estate, at issue was the amount that the state could recover that was attributable to the homestead. The property was valued at $120,800. The state argued that based upon marital property law, Delores held an undivided interest in the full value of the property at the time of her death and, accordingly, the state was entitled to recover all it was owed up to the full value of the property. Francis’ estate contended that under probate law principles, Delores owned merely a life estate and that the state’s recovery was limited to the value of that property interest. The district court agreed with Francis’ estate and the state appealed. The Court of Appeals reversed and remanded. The court declined to follow both the state’s reliance on marital law principles as well as the estate’s contention that probate law should apply. Instead, the court held that the determination must be made based on real property law as modified by the estate recovery statutes. The court concluded that a recipient’s interest is limited to her legal interest in the property at the time of death. Although Delores had conveyed her interest in the property to Francis, the estate recovery laws provide that she retained an interest in the property for recovery purposes. Her interest, however, was limited to an undivided one-half interest in the property. As a result, the state’s recovery was limited to one-half of the property’s value. Reversed and remanded. *In Re Estate of Barg, A05-2346 (Minn. App. 10/17/06). www.lawlibrary.state.mn.us/archive/ctappub/0610/opa052346-1017.htm — C.J. Deike* Edina Realty Home Services
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	TAX JUDICIAL LAW • Procedure: Application of §7502 to Motion for Leave to File Motion to Vacate. The Tax Court had previously entered an order of dismissal for lack of jurisdiction related to the taxpayer’s case because he had failed to file an amended petition and to pay the filing fee as ordered. Eighty-seven days after the order was entered, the taxpayer mailed the amended petition, along with the filing fee and a request to vacate the dismissal order. These documents were received and filed 92 days after the dismissal order. The issue for the court was whether the taxpayer’s filing was timely. The Tax Court has previously held that the Mail Box Rule of IRC §7502 does not apply to a motion for leave to file a motion to vacate. After reconsidering the issue, the court determined §7502 does indeed apply to such a motion. The court reasoned that the time between when the court enters the dismissal order and when that order becomes final creates a "prescribed period" for filing a motion for leave within the meaning of §7502. Since the motion was timely filed, the order to dismiss did not become final and the taxpayer’s motion is granted. The court also allowed the amended petition to be filed. *Stewart v. Commissioner, 127 T.C. No. 8 (2006). • Income Tax: Travel Expense Deductions; Ferryboat Captain.* For the years at issue, the taxpayer worked as a ferryboat captain for a company that owned and operated boats that carried travelers on sea voyages throughout Puget Sound. The taxpayer would work for seven consecutive days, then have seven days off. He would typically work 15- to 17-hour days in which he was out at sea, then spend seven hours sleeping on a cot stored on the vessel. He did not go home to his personal residence in the evening because of the short turnaround time between trips. The taxpayer paid for his meals and incidental expenses during these trips, which he reported as miscellaneous itemized deductions for the tax years 2001, 2002, and 2003. The commissioner rejected these deductions on the grounds that the taxpayer was not "away from home" within the meaning of IRC §162(a). The Tax Court disagreed. The court cited the "sleep or rest rule" for traveling expenses: "If the nature of petitioner’s employment was such that when away from home, during released time, it was reasonable for him to need and to obtain sleep or rest in order to meet the exigencies or business demands of his employment, his expenses for this purpose would be traveling expenses." Because of the long hours, the short turnaround time, and the duties of the taxpayer, it was reasonable for him to sleep or rest in order to meet his business demands. Though the deductions were upheld, the taxpayer was required to reduce his allowable M&IE by 50 percent pursuant to IRC §274(n). *Bissonnette v. Commissioner, 127 T.C. No. 10. • Procedure: Jurisdiction; Commissioner’s Treatment of Overpayment.* Taxpayer couple made two payments to the IRS intended to be estimated payments for 2002 and 2003. After their 2002 return was filed, the commissioner applied a portion of those payments against the husband’s outstanding tax liability from a prior year. The taxpayers argue that the Tax Court has jurisdiction over the proper application of the payments in issue because those payments are included in the calculation of a deficiency. The court disagreed, concluding that the payments were estimated tax payments and not amounts assessed as a deficiency pursuant to IRC §6211(a)(1)(B). The Tax Court did not have jurisdiction to hear the case because the commissioner had applied the overpayment to the husband prior tax liability pursuant to §6402(a). A decision was entered for the commissioner. *Bocock v. Commissioner, 127 T.C. No. 12. • Income Tax: Adjustment to AMT Stemming from Incentive Stock Options.* The commissioner identified a $155,305 deficiency in the taxpayers’ return based on disallowance of an adjustment made by the taxpayers in calculating their 2001 alternative minimum taxable income. In 2000, the taxpayers purchased shares pursuant to their incentive stock options and realized income of $2,086,009 on the exercise. In 2001, the sale of those shares resulted in a regular tax capital gain of $148,461 and a $1,937,547 AMT capital loss. The taxpayers also had $153,625 in unrelated capital losses for that year. The taxpayers calculated their 2001 AMTI by reducing their 2001 taxable income by the $2,086,009 difference between the $148,461 regular tax capital gain and $1,937,547 AMT capital loss attributable to the ISO transaction. The commissioner rejected this adjustment, which had the effect of creating the deficiency identified above. The Tax Court first rejected the taxpayers’ argument that the $2,086,009 difference between the capital gain and the capital loss constitutes an AMT net operating loss within the meaning of §56(d)(2)(A)(i). The court then stated that the recognition of both the regular tax capital loss and the AMT capital loss is limited to $3,000 pursuant to §1211(b); therefore, the taxpayers’ adjustment under §56(b)(3) — the difference between the recognized losses for regular tax and AMT purposes — was zero. The commissioner’s determination was upheld. *Palahnuk v. Commissioner, 127 T.C. No. 9 (2006). • Estate Tax: Generation Skipping Tax Regulations.* The Tax Court held that the regulations concerning the "grandfather" exception to the generation-skipping tax (GST), which provide the exception contained in IRC §1433(b)(2)(A), do not except from GST tax a transfer of property pursuant to the exercise, release or lapse of a general power of appointment that is treated as a taxable transfer for purposes of the federal estate or gift tax. The trust at issue conferred upon the decedent a general power of appointment over the trust property which she exercised in her will in favor of her grandchildren. The court held that Sec. 26.2601-1(b)(1)(i) is a reasonable and valid interpretation of Sec. 1433(b)(2)(A) because it harmonizes with the plain language of the statute, its origin and its purpose. Therefore, the transfer was subject to the GST tax. *Estate of Eleanor R. Gerson, 127 T.C. No. 11. • Estate Tax: Annuities Included in Gross Estate.* Two annuities payable under a settlement agreement for alleged malpractice during the birth of the decedent were includable in decedent’s estate because the court determined decedent had a beneficial interest in the annuity. Decedent’s parents had the right as coconservators of the annuity to direct the annuity payments other than to decedent and/or her estate, but had not done so. The annuity was valued in accordance with the actuarial valuation methodology in IRC §20.2031-7(d). The Tax Court allowed parol evidence on the settlement agreement in accordance with Michigan law. The estate was denied a deduction for a funeral lunch. *Estate of Sarah M. Davenport, T.C. Memo 2006-215. • Income Tax: S Corporation Election Outlasts Status as Married Couple.* For the tax year at issue, the taxpayer was married and operated a business collecting medical bills for individual practitioners. The taxpayer failed to include any income from the corporation on his tax return for that same year, although a Form 1120S had been filed by the S corporation, since he claimed not to have received income from the business. The commissioner recognized a deficiency against petitioner for the unreported $9,314 in flow-through income from the corporation. The court found that despite the subsequent issues encountered between the petitioner and his wife, the S corporation election remains the same. IRC §1362(a) requires an S-status election to be made by all shareholders, and that election is effective and continues for all succeeding taxable years unless terminated under §1362(d). Since there was no termination of the election as to the year at issue, the income was properly included in the petitioner’s income. *Sweeney v. Commissioner, T.C. Summ. Op. 2006-169. • Penalties: Awaiting Determination Letter Does Not Preclude Timely Filing, Payment.* The commissioner issued a notice of deficiency to the taxpayer relating to the 2000 taxable year, which included penalties for the failure to file and failure to pay. Although the taxpayer had filed his 2000 income tax return, paying self employment tax on the income he received that year, he believed that he was an employee of the company rather than an independent contractor. As such, the taxpayer contacted the IRS Service Center in Austin and requested a determination on his employment status for the purpose of federal income taxes. The commissioner ultimately issued a determination letter that the taxpayer was an employee for his company; however, the taxpayer did not file a 2001 return in the time it took to receive a response. Taxpayer does not contest his 2001 federal income tax liability stemming from the wages as an employee of the company. Instead, he challenges the §§6651(a)(1) and 6654(a) additions to tax imposed by the commissioner on the grounds that he could not file his 2001 return before receiving a determination on his employment status. The court disagreed. Without a valid extension, waiting for a determination letter from the IRS does not preclude the filing of an income tax return within the appropriate timeframe. Further, the fact that the commissioner ultimately determined the taxpayer qualified as an employee does not negate his failure to make appropriate tax payments when they were due. The penalties against the taxpayer were upheld. *Erwin v. Commissioner, T.C. Summary Opinion 2006-172. • Procedure: Offer-in-Compromise; Grounds for Acceptance.* Taxpayers petitioned the Tax Court under IRC §6330(d) to review an Appeals determination sustaining a proposed levy relating to $298,000 in income taxes for the taxable years 1981 through 1986. For the years in question, taxpayers had benefited from a tax shelter scheme that was ultimately rejected by the IRS, with the organizer of the shelter found guilty of criminal charges. The taxpayers argue the commissioner was required to accept their offer-in-compromise for those years as a matter of equity and public policy given the "longstanding" nature of the issue. The commissioner asserted the taxpayer’s offer does not further the purpose of an offer-in-compromise in promoting effective tax administration on the basis of economic hardship or equity and public policy. The court noted the three grounds for accepting an offer: doubt as to liability, doubt as to collectibility, and promoting effective tax administration. Here, the taxpayers had more than enough assets to cover their tax liabilities, and the fact that this issue has taken a long time to be resolved did not limit the ability of the IRS to fully collect or to reject insufficient offers. The levy was upheld. *Blondheim v. Commissioner, T.C. Memo 2006-216. • Procedure: Unreported Income; Burden of Proving Receipt.* The deficiencies claimed by the commissioner related to unrecognized income and associated penalties for the failure to pay taxes. The taxpayer challenged the commissioner’s assertion of unreported income, but did not produce any evidence to rebut the claim. Instead, the taxpayer simply argued that since his case involved the issue of unreported income, the commissioner had the burden of proving receipt of that income. The Tax Court determined that because the taxpayer did not introduce any evidence to support his position, IRC §7491(a)(1) does not apply and the burden did not shift to the commissioner. The taxpayer retains the burden of proof under Rule 142(a)(1). *Nicholls v. Commissioner, TC Memo 2006-218. • Penalties: Additional Tax on Early 401(k) Distributions.* During the taxable year at issue, the taxpayer received two payments from his 401(k) account. The first payment was rolled over into a retirement account and is not at issue. The second payment was retained by the taxpayer and used to pay off individual debts and to purchase a new home. The taxpayer recognized this payment as gross income, but did not include the 10 percent additional tax for the early distribution from his retirement account pursuant to IRC §72(t). The commissioner asserted a deficiency against the taxpayer related to the additional tax on an early distribution. The court first stated that there was no exception to the additional tax related to paying off personal debt. As for the payment on his home, the court stated the "first-time homebuyer" exception did not apply because the taxpayer did not make the payment within 120 from the date of distribution. As such, the additional tax was properly applied to the entire payment. *Smart v. Commissioner, TC Summary Opinion 2006-177. • Procedure: Lack of New Address Notification Leads to Dismissal of Tax Case.* Commissioner sent a notice of deficiency to the taxpayers’ last known address as identified on the taxpayers’ 2000 and 2001 tax returns. The taxpayers subsequently filed a petition to have the case heard in the Tax Court, though the filing occurred over a year after the notice was issued. The taxpayers note that for personal reasons, they actually resided at an address different from the last known address listed by the IRS. There was also evidence of correspondence at that address between the IRS and the taxpayers during the examination period. However, the tax returns from 2002 and 2003 both listed the same address as the 2000 and 2001 returns, and there was no other "clear and concise" notification of an address change. The court found that the petition was not timely filed and dismissed the case for lack of jurisdiction. *Evans v. Commissioner, T.C. Summary Opinion 2006-160. • Criminal: Tax Shelter Case; Remand for Proper Sentencing.* Defendant had previously pleaded guilty to one count of tax evasion, after originally being charged with 47 counts of wire fraud, securities fraud, money laundering, and conspiracy amounting in a total tax loss to the government of $1.15 million. The district court settled on a sentence of 27 months, which was lowered from the time suggested by the sentencing guidelines based on the low value of the defendant’s stock at the end of the tax year. On appeal, the 5th Circuit rejected the taxpayer’s challenge to the tax loss determination and questioned the trial court’s decision to impose a lesser sanction than that identified in the guidelines. Because the district court did not consider the appropriate factors for sentencing under §3553(a), the sentence was unreasonable and the case was remanded for proper sentencing. *United States v. Roush, No. 05-10238 (5th Cir. 10/03/06). • Criminal: Tax Fraud; Upward Sentence Adjustment.* Defendants pleaded guilty in a scheme involved recruiting persons to file fraudulent federal and state tax returns. Because the defendants were the organizers and leaders of the scheme, the district court had adjusted their penalty upward from the penalty identified in the sentencing guidelines. U.S. Sentencing Guidelines Manual §3B1.1. Defendants challenged this determination, though the 8th Circuit agreed with the trial court that recruiting accomplices, planning the offense, taking a greater share of the returns, and exercising control was sufficient to warrant an upward sentence adjustment. The court also upheld the restitution component of the decision under the Mandatory Victims Restitution Act because the harm to the state of Minnesota and private financial institutions was directly and proximately caused by the offense conduct. *United States v. Mickle, No. 05-3799, No. 05-4344 , (8th Cir. 10/03/06). • Procedure: Rejected Offer-in-Compromise; Errors in Calculating Collection Potential.* Taxpayers were issued a notice of deficiency related to their participation in a tax shelter. They subsequently made two offers-in-compromise, both of which were rejected on the grounds that the reasonable collection potential was in excess of their total liability. The taxpayers challenged the commissioner’s determination as an abuse of discretion because he had made errors in calculating said collection potential. The court disagreed. Even though the commissioner’s calculation contained some errors, the errors were harmless because the taxpayer still had the ability to repay their tax obligations. The commissioner’s determination was upheld. *Lindley, T.C. Memo. 2006-229. • Procedure: Denial of Hearing Prior to Collection.* Taxpayers challenged the decision of the commissioner to proceed with the collection of petitioners’ 1989 tax liability. Their argument was that the commissioner had violated their collection due process rights by waiting over three years to schedule a face-to-face conference. The court rejected this claim. The court first stated that an in-person hearing is not automatically guaranteed by IRC §6330. It also stated that it is not an abuse of discretion if an appeals officer determines a face-to-face hearing would not be productive based on a taxpayer’s frivolous or groundless arguments. The commissioner was within his discretion in denying a hearing until after the matter was resolved in Tax Court. *Summers v. Commissioner, TC Memo 2006-219. • Trusts: Investment Advice Deduction.* A trust challenged the commissioner’s calculation of a deduction related to the investment advisory fees of the trust. The trust argued that the fiduciary duties of the trustee — as defined by Connecticut law — required the use of investment advisory services in the management of its significant portfolio and that the costs were therefore deductible under IRC §67(e)(1). The commissioner asserted the expenses were deductible only to the extent that they exceed 2 percent of the trust’s adjusted gross income pursuant to §67(a). There is currently a split on the issue in federal circuit courts, with the 6th Circuit on the side of the trust and the 4th and Federal circuits with the commissioner. The 2nd Circuit sided with the commissioner, stating that the exemption of §67(e)(1) applies only to those costs incurred by a trust that could not have been incurred if the property were held by an individual. Such advisory fees could also be incurred by individual investors; therefore, the payments were deductible only the extent that they exceeded 2 percent of the trust’s adjusted gross income. *Rudkin Testamentary Trust et al. v. Commissioner, No. 05-5151 (2d Cir. 2006). • Collection: Offer-in-Compromise; Failure to Substantiate Expenses.* Taxpayer couple had an outstanding tax obligation of approximately $750,000 for the years 1990 to 1993. In 2004, the commissioner sent a notice to the taxpayers regarding the intent to levy their property, to which the taxpayers responded by making an offer-in-compromise of $77,000. The commissioner rejected this offer, and the taxpayers appealed. The issue for the Tax Court was whether the Appeals Office acted appropriately and within its proper discretion based on information it received during the its consideration of taxpayers’ appeal. The court focused on the fact that the taxpayers failed to timely submit requested information regarding their medical expenses and that they had spent over $100,000 in cash as a down payment to purchase a new home at a time when they had substantial federal income taxes due. Under such circumstances, it was not an abuse of discretion to reject the offer-in-compromise. *Steinberg v. Commissioner, T.C. Memo. 2006-217. • Income Tax: Payment for Attorneys Fees; Alimony Deduction.* In obtaining a divorce from his wife, taxpayer had been ordered to pay attorneys fees in connection with the underlying divorce proceeding. The taxpayer subsequently tried to deduct these payments under the alimony deduction of §215(a). The court rejected this attempt. Because state law provided that a spouse’s obligation to pay attorneys fees survives the death of the payee spouse, the payment of attorneys fees and costs will not constitute alimony pursuant to §71(b). *Salesky v. Commissioner, T.C. Summary Opinion 2006-162. • Property Tax: Property Valuation.* The Minnesota Supreme Court offered its opinion on the valuation dispute between EOP-Nicollet Mall and Hennepin County. The realtor had challenged the valuation of its downtown Minneapolis property and sought to compel the production of any information in Hennepin County’s files relating to at least 20 different third-party downtown properties. The Supreme Court stated that the Tax Court was correct in its determination that the information sought by EOP was private or nonpublic data under §13.51 of the MGDPA, Minn. Stat. §13.51 (2004). *EOP-Nicollet Mall, L.L.C. v. County of Hennepin,* 2006 WL 3093810 (Minn., 11/02/06). • Murphy v IRS; Rehearing Request. The Department of Justice filed a petition in the D.C. Circuit requesting a rehearing of the court’s controversial decision in *Murphy v. IRS. In that case, the court held IRC §104(a)(2) unconstitutional insofar as it allows taxation on compensation unrelated to lost wages or earnings. The decision’s treatment of "income" has elicited a great deal of discussion, and many commentators believe the issue may ultimately reach the Supreme Court. • Certiorari in Third Party Confiscation Case.* The Supreme Court will determine whether an innocent third party whose property has been confiscated by the IRS to satisfy the tax liability of another person, whose wrongful levy action under IRC §7426 has been time-barred, may use IRC §1346 as an alternative approach to seeking a refund from the IRS. *EC Term of Years Trust v. United States, No. 05-1541. (The Supreme Court denied certiorari in 18 other petitions involving federal and state tax issues.) ADMINISTRATIVE MATTERS • Appeals Arbitration Program.* The IRS formally established an appeals arbitration program designed to improve tax administration, provide customer service, and reduce taxpayer burden. Arbitration will be available in cases that meet the operational requirements of the program — generally, those in which a limited number of factual issues remain unresolved following settlement discussions in the Appeals Office. The Revenue Procedure became effective on October 30, 2006 and supersedes Announcements 2000-4 and 2002-60, which established the testing periods for the program. Rev. Proc. 2006-44. • CDP Hearing Rights Related to Liens, Levies. The IRS has issued final regulations that clarify the collection due process hearing rights of an individual both after the IRS has filed a tax lien notice under §6320 and before or after levy under §6330. The regulations became effective November 16, 2006. TD 9290; TD 9291. • Impact of §6330(d) Amendment. A recent chief counsel notice offers guidance on the recent amendment to IRC §6330(d), which provides the Tax Court with exclusive jurisdiction over review of all collection due process determinations regardless of the type of underlying tax liability. Pursuant to the amendment, all CDP determinations issued on or after October 17, 2006, may be appealed only to the Tax Court. If an appeal is filed to an incorrect court, taxpayers are no longer entitled to a 30-day period to refile with the Tax Court. The notice stated that the transfer of jurisdiction from the district courts to the Tax Court means that additional substantive tax issues may now be considered by the Tax Court in CDP cases. CC-2007-001. • Deduction Limits for Foreign Income and Housing Deductions. The IRS has made adjustments to the limitation on housing expenses for purposes of §911, which allows qualified individuals to exclude from U.S. gross income both foreign earned income and housing costs. The adjustments, which allow taxpayers to deduct a greater portion of their expenses for 2006, will be updated annually. These changes apply to taxable years beginning after December 31, 2005. Notice 2006 -87. • Regulations for Domestic Product Deductions. The IRS has issued final and temporary regulations concerning the amendments made by the Tax Increase Prevention and Reconciliation Act of 2005 to IRC §199, which permits deductions for income attributable to domestic production activities. Of significance, the new regulations contain several safe harbor methods for determining the amount of wages allocable to domestic production gross receipts and guidance on the allocation of wages for pass-through entities. T.D. 9293. • Qualified Appraisals, Appraisers. The IRS has issued guidance relating to the new definitions of "qualified appraisal" and "qualified appraiser" in IRC §§170(f)(11) and 6695A, as added by §1219 of the Pension Protection Act of 2006. A qualified appraisal is one conducted by a qualified appraiser in accordance with generally accepted appraisal standards. Taxpayers can expect the agency to issue further regulations related to IRC §170(f)(11). Notice 2006-96. • Other IRS Announcements: — Standard Mileage Rates. Rev. Proc. 2006-49. — Pension Contribution Limits. IR-2006-1620. — Updates to Electronic Filing Requirements. Announcement 2006-73. — New Regulations for Gains on Exchange of Appreciated Property. IR-2006-161. LEGISLATION • Federal Tax Legislation. Congress adjourned for its election recess without extending many popular tax relief measures or passing the controversial estate tax reform legislation. Among the expiring tax relief provisions that would have been included in the extender package are the state and local sales tax deduction, research credits, work opportunity and welfare-to-work credits. The Senate will also face a decision as to the estate tax reform bill, which has already made it through the House (HR 5970). Several representatives have stated that these issues deserve priority when sessions reconvene. Tax Analysts — Kathryn Sedo University Of Minnesota Law School
December 2006 In this month's "Notes & Trends: Civil Litigation Criminal Law Employment & Labor Law Federal Practice Intellectual Property Juvenile Law Real Property Tax Torts & Insurance	TORTS & INSURANCE JUDICIAL LAW • Standard Homeowners’ Insurance Policies; Claims Connected To Business Activity Not Covered. Plaintiff was injured while snowmobiling on land that had been farmed and was being developed for residential housing. Plaintiff sued the landowner who was insured under a standard homeowner’s policy. The parties settled pursuant to a Miller-Shugart arrangement in which the plaintiff steps into the shoes of the landowner-insured. The insurer filed a declaratory judgment action, contending the policy’s business exclusions barred coverage. The district court granted summary judgment. The Court of Appeals affirmed, holding that Minnesota does not distinguish between a "business" exclusion and "business pursuits" exclusion, but rather both pertain to any type of activity in which persons regularly engage for the purpose of earning a livelihood or gain. The court further held that the liability-causing conduct (here, constructing a ditch) was connected to the development of the property, which was underway at the time of the accident and was considered a business activity. Therefore, both the "business" and "business premises" exclusions barred coverage. Finally, the court also held that the "farming" exclusion barred coverage because the land had previously been used for farming and it was not clear that such usage would cease. *Metropolitan Property and Casualty Ins. Co. v. Jablonske, A05-2541, (Minn. App. 10/03/06). www.lawlibrary.state.mn.us/archive/ctappub/0610/opa052541-1003.htm • Insurance Policy Coverage; Allocating Liability.* Homeowners brought multiple claims against defendant arising out of water intrusion and mold growth problems that continued for eight years in plaintiffs’ homes. During the eight-year period, five insurance companies consecutively provided commercial general liability coverage to defendant. Although the insurers were involved to varying degrees in defending and settling certain provisions of the claims, a dispute arose as to allocation of the damages and defense costs. The policyholder commenced a declaratory judgment action against one of the insurers, which in turn commenced a third-party action against the others. The threshold question normally presented in cases of continuing injury concerns whether the damages should be allocated over time, or all attributed to the year in which the injury began. This determination hinges on whether the damages were caused by a discrete, identifiable event. Here, the parties agreed that the pro-rata-by-time-on-the-risk allocation method was applicable, and disagreed only as to the method and extent of the application of that rule. Therefore, the trial court and the reviewing courts applied that method, without making an independent determination that it would otherwise have been applicable. The district court concluded that under the pro-rata-by-time-on-the-risk allocation method, damages arising from plaintiffs’ claims should be allocated among those insurers providing coverage to defendant-insured from the closing date of the purchase of plaintiffs’ homes to the date defendant received notice of plaintiffs’ claims. The court also concluded that defense costs should be shared equally among all insurers whose policies were triggered by a homeowner’s claim. The Court of Appeals reversed, holding that under the pro-rata-by-time-on-the-risk allocation method, the allocation period should extend past the date the defendant-insured received notice of plaintiffs’ claims through the date plaintiffs’ homes were repaired. The court also held that defense costs should be allocated among the insurers on the same basis as the damages. The Supreme Court reversed the Court of Appeals decision, holding that under the pro-rata-by-time-on-the-risk allocation method: 1. The end date for the allocation period is the date on which the policyholder receives notice of the claim. 2. The insurance policy that is triggered applies to damages occurring during the entire policy period, including the portions of the policy period that extend before the closing date of plaintiffs’ homes or after the policyholder received notice of plaintiffs’ claim. 3. The period over which damages are allocated does not include any years during which the policyholder can prove coverage was unavailable, but does include any period during which the policyholder was voluntarily self-insured. The Supreme Court further addressed recovery of defense costs among the insurers whose policies were triggered. Ordinarily, each insurer owes its insured an independent duty to defend a claim if any part of the claim falls within the scope of coverage. Furthermore, an insurer that provides a defense is not entitled to contribution from other insurers, even from those that improperly failed to provide a defense. Here, however, the Court determined that the insurers had waived the "no contribution for defense costs" rule. It also rejected the determination that defense costs should be allocated among insurers on a pro-rata-by-time-on-the-risk method. Rather, it held that defense costs should be allocated equally among the insurers whose policies were triggered. *Wooddale Builders, Inc. v. Maryland Casualty Company, d/b/a Zurich North America, A04-1442, A04-1612, (Minn. 10/05/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa041442-1005.htm • Insurance – Truth in Repairs Act.* Following the repair of his vehicle, plaintiff sued defendant repairman and his body shop for breach of contract, deceptive trade practices, and violations of the Truth in Repairs Act and the Consumer Fraud Act. The district court awarded damages to plaintiff based on defendant’s use of a radiator that was not original equipment from the manufacturer and denied all of plaintiff’s other claims (including a request for attorneys fees). The Court of Appeals affirmed the denial of attorneys fees because the attorneys fee statute does not apply to violations of Minn. Stat. §325F.60 (the invoice requirement of the Truth in Repairs Act) if an insurance company paid for the repairs. The Court of Appeals also reversed and remanded for redetermination of damages with respect to the radiator. Plaintiff appealed. The Supreme Court affirmed, holding that the remedies provision in the Truth in Repairs Act is not available to plaintiff because the plain language of Minn. Stat. §325F.64, subd. 1 (the exemption provision), precludes a private cause of action for damages or attorneys fees if an insurer paid up to 90 percent of the repairs or pays an amount in excess of his deductible. In dissent, Justice Page concluded that such a claim should be allowed because the Truth in Repairs Act must be read broadly to enhance consumer protection. Toth v. Arason, A04-769, (Minn. 10/12/06). www.lawlibrary.state.mn.us/archive/supct/0610/opa040769-1012.htm — Michael Klutho — David Turner Bassford Remele, A Professional Association

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