March 2006

ADMINISTRATIVE LAW
JUDICIAL LAW

• Statutory Interpretation. The Public Employees Retirement Association (PERA) denied line-of-duty retirement benefits to a deputy sheriff who developed a severe depression due to a hostile work environment. An administrative law judge had recommended granting the benefit, which is higher than the normal disability benefit amount. PERA decided that the higher line-of-duty benefits should be awarded only where the disability was incurred in a hazardous situation. In a 2-1 decision, the Court of Appeals reversed and noted that the Legislature directed that line-of-duty benefits should be paid for a "disability incurred in or arising out of any act of duty" that renders the employee unable to perform his or her duties. (Emphasis by the court). A dissent argued that "act of duty" implies the performance of a task that an employee had an obligation to perform. The dissent would have given deference to PERA’s interpretation of the statute. In Re Application for PERA Police and Fire Plan Line of Duty Disability Benefits of Stephen Brittain, A04-2407, ___ N.W.2d ___, (Minn. App. 11/15/05). www.lawlibrary.state.mn.us/archive/ctappub/0511/opa042407-1115.htm

• Jurisdiction. The Court of Appeals decided that the Minnesota Public Utilities Commission (MPUC) did not have jurisdiction over an 89-mile underground natural gas pipeline constructed and owned by the Hutchinson Utilities Commission (HUC). The pipeline transports natural gas to the cities of Hutchinson and New Ulm and their electric-generating facilities. The MPUC argued that because New Ulm residents had no control over the HUC, it could not be effectively regulated. However, another provision of the statute would allow New Ulm residents to lodge complaints with the MPUC. The court pointed out that an agency enjoys only the authority granted to it by the Legislature. The statute specifically exempted municipal utilities from regulation except as specifically provided otherwise. The court could find no provision granting MPUC the authority it claimed and observed that the Legislature had specifically provided for regulation of municipal utilities elsewhere in the statute when it so intended. In the Matter of an Investigation into the Commission’s Jurisdiction Over the City of Hutchinson’s Intrastate Natural Gas Pipeline, A04-2342, A04-2414, ___ N.W.2d ___(Minn. App. 12/27/05). www.lawlibrary.state.mn.us/archive/ctappub/0512/opa042342-1227.htm

— Hon. George Beck (retired)
Office of Administrative Hearings
— Michael Ahern
Dorsey & Whitney

March 2006

ALTERNATIVE DISPUTE RESOLUTION
JUDICIAL LAW

• Arbitration Agreement Cannot Be Implied. Needing legal representation in a post-dissolution property settlement matter, plaintiff met with an attorney, agreed to retain him, and signed and returned a retainer letter. The attorney then mailed a Legal Services Agreement (LSA) to the new client that, among other things, required arbitration of disputes, but did not require the client’s signature. After one year of representation, plaintiff became dissatisfied with the attorney’s billing practices, discharged him, and filed a complaint alleging fraudulent billing. The attorney sought to compel arbitration pursuant to the LSA. The plaintiff responded that she never saw, discussed, or signed the LSA, and was not bound by its terms. Given that the retainer letter was an express contract between the client and her attorney, the Minnesota Court of Appeals held that the parties’ written contract precluded the existence of an implied-in-fact contract containing the arbitration provision. If the retainer letter had included the arbitration provision or if the client had signed the LSA, the court would have likely reached a different conclusion. Alben v. Mahoney & Emerson, Ltd., 2006 WL 224151 (Minn. App. 01/31/06).

• Manifest Disregard of Law Standard. A company purchased the assets of another business under a contract containing an arbitration clause. A breach of contract dispute arose and the parties submitted the dispute to arbitration. Following the arbitration, the losing party opposed confirming the award, claiming it was irrational and a manifest disregard of the law. The 8th Circuit characterized the "manifest disregard of the law" standard as extremely narrow and as a doctrine of last resort reserved for those rare instances where some egregious impropriety on the part of the arbitrator is apparent, but where none of the provisions of the Federal Arbitration Act apply. To succeed on a claim for manifest disregard of the law, one must prove that the arbitrator was fully aware of the existence of a clearly defined governing legal principle, but refused to apply it. Even if an arbitrator failed to reach a certain conclusion or made erroneous factual findings, manifest disregard of the law would not be established under this stringent standard. MX, Inc. v. Zotec Solutions, Inc., 2006 WL 213879 (8th Cir. 01/30/06).

• Employment Agreement Class Action Waiver. An employee in California filed a class action claiming his employer misclassified him and other salaried workers as "managerial/executive employees," causing them to not be entitled to overtime pay. The employer sought to compel arbitration pursuant to the company’s "Dispute Resolution Rules and Procedures," which contained an arbitration clause and a class arbitration waiver. The employee argued that the class waiver in his employment agreement was unenforceable because of a recent decision by the California Supreme Court that invalidated a class action waiver in a bank cardholder agreement. See Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). The Court of Appeals determined that the narrow circumstances that made the cardholder agreement unconscionable in Discover Bank were not present in the employee’s case for three reasons: 1) the agreement between the employer and the employee was not a consumer contract of adhesion; 2) the employee had an opportunity to reject the terms; and 3) the agreement did not involve a scheme to deliberately cheat large numbers of consumers out of individually small sums of money. Gentry v. Superior Court, 2006 WL 137228 (Cal. Ct. App. 2 Dist. 01/19/06).

— Darin T. Allen
National Arbitration Forum

March 2006

CIVIL LITIGATION
JUDICIAL LAW

• Official Immunity. On the afternoon of November 29, 2001, an SUV driven by respondent Litz was being followed by two Minneapolis police officers in a detox van. The SUV hit and injured respondent Thompson as she was crossing a street in downtown Minneapolis. Thompson brought suit claiming negligence on the part of Litz, the two police officers, and the City of Minneapolis.

The city and the officers moved for summary judgment based on the defense of official immunity for the officers and vicarious official immunity for the city. The district court granted judgment in favor of both the officers and the city, but the Court of Appeals reversed. The Supreme Court affirmed the denial of summary judgment but remanded for further fact finding.

Nearly every fact in the case was disputed, as a result of sworn testimony by at least 19 different witnesses, who observed various portions of the events leading to the accident. The most significant dispute was regarding the "pursuit."

In reversing and remanding, the Court of Appeals held that even though the officers’ original decision of whether to engage in pursuit was discretionary, the City of Minneapolis’ pursuit policy imposed ministerial duties on the officers once they began pursuit. The Court of Appeals also held that the officers failed to conform to the requirements set forth in the pursuit policy, resulting in a loss of official immunity.

In review, the Supreme Court noted that a public official is not protected by immunity in the performance of his duties when he fails to perform a ministerial act. A ministerial act is one which requires the execution of a specific duty; as opposed to a discretionary act which requires the exercise of individual judgment in carrying out the official duty.

The Supreme Court noted that the district court granted official immunity because it focused upon the officers’ "decision to pursue" which it held to be a discretionary act. The Court of Appeals focused upon the manner in which the officers were carrying out their duties in following Litz. The Court of Appeals agreed that the decision to pursue was discretionary, but the officers’ failure to continuously operate the lights and siren while in pursuit was a breach of a ministerial duty mandated by the pursuit policy.

Because the Supreme Court found that, on the state of the record, they are unable to determine whether the officers had in fact initiated a "vehicular pursuit" as defined by the pursuit policy, they remanded the case to the district court for trial to determine if the officers had initiated such a pursuit and, if they had, whether they used the lights in the required continuous manner. Because of the factual disputes, a trial must be held to determine if the officers are entitled to official immunity. Thompson v. City of Minneapolis, 707 N.W.2d 669 (Minn. 2006).

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

March 2006

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Labor Law. An airline pilot’s claim for accrued vacation pay and severance pay against the claimed "alter ego" of a bankrupt airline company was not maintainable in state court because the claims were preempted by the Federal Railway Labor Act. The Minnesota Court of Appeals upheld dismissal of the lawsuit for lack of subject matter jurisdiction because the claims came under a collective bargaining agreement subject exclusively to the mandatory grievance procedure provided by the federal statute. Geelan v. Mark Travel, Inc., 2005 WL 3372709 (Minn. App. 12/13/05) (unpublished).

• Discrimination. An employer’s reduction of the weekly hours of a 60-year-old employee, who had chronic back and health problems, did not constitute discrimination based on age or disability and was not retaliatory because the diminution of available work and hourly corollary reduction in salary was not an "adverse employment action," ruled the 8th Circuit Court of Appeals. Affirming a ruling by U.S. District Court Judge David Doty in Minnesota, the court held that the cutting of hours, which resulted in a 40 percent decline in pay, was not actionable for two reasons. First, it was unclear whether the employer initiated the reduction or if it was attributable to the employee taking vacation and sick leave. Regardless of the source, the reduction in work hours and pay constituted only a "slight decrease," which was not sufficiently severe to constitute an actionable "adverse employment action" since it "did not produce a material employment disadvantage" for the employee. Baucon v. Holiday Co., 428 F.3d 764 (8th Cir. 2005).

• Harassment. A claim of harassment by a former teacher was rejected by the Minnesota Court of Appeals. The school district was shielded by statutory and district immunity from the assertion that it was negligent in failing to prevent harassing behavior by students directed to the former educator. Malone v. Special Sch. Dist. No. 1, Minnesota Public Sch., 2005 WL 3289468 (Minn. App. 12/06/05) (unpublished).

• Shareholder Employment. A discharged shareholder-employee in a closed corporation remained a shareholder until the shares were repurchased, in the absence of a clause in a mandatory buy-out agreement that divested the shareholder of the stock upon termination of employment. The Court of Appeals held that a shareholder who was fired was entitled to continue to hold his stock until the corporation purchased it back because the corporate buy-sell agreement lacked any clear or implicit provision terminating stock ownership upon discharge. Drewitz v. Motorwerks, Inc., 2005 WL 3370863 (Minn. App. 12/13/05).

• False Imprisonment. A teacher who was kept in a room for 15 minutes against her will by an employer who was hostile to her and refused to let her leave was allowed to pursue a claim for false imprisonment. The circumstances created a fact issue as to whether the employee was falsely imprisoned and whether the employer, a school district, was vicariously liable for the action by the supervisor. However, a claim for promissory estoppel for failure to renew the employee’s teaching contract was not actionable because the employee was a probationary employee. Any assurances given to her by the supervisor that she would continue to be employed after her probationary period ended did not overcome the "sole discretion" of the school district to determine whether to renew the contract after the probationary period ended. Graham v. Indep. Sch. Dist. 625, 2005 WL 3159742 (Minn. App. 11/29/05) (unpublished).

• Unemployment Compensation. In a rare reversal, the appellate court overturned a denial of unemployment compensation benefits. The employee, who left work due to illness, was directed to call in the next morning to tell the employer whether she was coming to work, and she did call to report she would not be working. The senior unemployment review judge was found to have erred in holding the employee barred from benefits due to "misconduct" for not calling in a second time later that day. Franczyk v. Medpersonnel, Inc. 2005 WL 3291251 (Minn. App. 2005) (unpublished).

In another unusual ruling the appellate court remanded a compensation case to the Department of Employment and Economic Development because the unemployment judge failed to assist the pro se claimant in presenting evidence and following-up on the claimant’s generalized reference to harassment. The department was directed to conduct a new evidentiary hearing. Smith v. Northstar Aerospace, 2005 WL 3289683 (Minn. App. 2005) (unpublished).

— Marshall H. Tanick
Mansfield, Tanick & Cohen, PA.
mtanick@mansfieldtanick.com

March 2006

ENVIRONMENTAL LAW
JUDICIAL LAW

• CERCLA; Bankruptcy Proceedings. The Court of Appeals for the 8th Circuit recently held that a proof of claim filed by the United States government in the bankruptcy proceeding of a responsible person under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §§9601-9675, is a sufficient "action" for purposes of the limitations periods under CERCLA, and that the government need not serve a complaint on such person in order for the courts to have jurisdiction to adjudicate the government’s claims.

In March of 1992, William M. Gurley was found liable under CERCLA for $1.7 million in response costs incurred by the United States government for the cleanup of a hazardous waste site in Arkansas. The government also obtained a declaratory judgment for future response costs at this site, which were estimated at $6 million. In 1995, Gurley filed a Chapter 7 petition for bankruptcy in Florida. The following year, the government filed a proof of claim in bankruptcy court for response costs and interest pursuant to the earlier judgment, post-judgment response costs pursuant to the earlier declaratory judgment, and response costs for a second contaminated site in Arkansas. The case was later moved to the district court for the Eastern District of Arkansas, which held that the government was entitled to more than $20 million in response costs and interest.

On appeal, Gurley argued that the government’s claim was time-barred under the CERCLA statute of limitations because the government did not commence an action by serving or filing a complaint outside the bankruptcy process within the applicable limitations periods. The 8th Circuit rejected Gurley’s argument, holding that the government’s filing of a proof of claim in the bankruptcy process constituted the requisite "action" to recover costs under CERCLA, and that such claim was filed within the applicable limitations periods. No other redundant action or service of a complaint by the government outside the bankruptcy process was required. The court also rejected Gurley’s claims that the Arkansas district court did not have subject matter or personal jurisdiction to hear the CERCLA claims. Unlike the cases cited by Gurley, Gurley’s plan of reorganization did not provide for filing and recovery of claims outside of the bankruptcy process. Moreover, because the bankruptcy proceeding was an in rem proceeding and the government’s claim was against assets being held in rem by the bankruptcy trustee, there was no need to establish personal jurisdiction over Gurley. United States v. Gurley, ___F.3d.___, 2006 WL 141658 (8th Cir. 2006).

ADMINISTRATIVE ACTION

• Environmental Review; New Guidance Documents. The Minnesota Environmental Quality Board (EQB) has released nine new guidance documents to assist participants in the environmental review process. The documents go into greater detail and cover topics that are not addressed in guidance documents previously issued by the EQB, and are designed to assist local governments, citizens and project proposers. The guidance documents are available at www.eqb.state.mn.us/documents/newenreviewguidance_2006.01.pdf.

— Robert Devolve
Leonard, Street and Deinard

March 2006

FAMILY LAW
LOOKING AHEAD

• Antenuptial Agreements; Attorney Malpractice: On January 9, 2006, the Minnesota Supreme Court heard oral arguments in Antone v. Mirviss, 694 N.W.2d 564 (Minn. App. 2005), review granted, June 28, 2005.

In Antone, the Court of Appeals had reversed the district court’s dismissal of a legal malpractice suit brought by Respondent Antone against Appellant Mirviss, the attorney who drafted the antenuptial agreement before Antone’s marriage in 1986. The district court dismissed the malpractice claim as occurring outside the six-year statutory limit for legal malpractice, concluding that the statute of limitations began to run upon Antone’s marriage. Alternatively, the district court concluded that some damage had occurred more than six years before the malpractice action commenced because of the immediate appreciation of Antone’s nonmarital property. A split panel of the Court of Appeals reversed the district court, holding that the statute of limitations did not accrue until the district court in the Antone divorce entered an amended judgment awarding Mrs. Antone an interest in the appreciated value of Antone’s nonmarital real estate. The court reasoned that a cause of action for legal malpractice in negotiating and drafting an antenuptial agreement accrues when the malpractice claimant sustains ascertainable monetary damages. In dissent, Judge Dietzen concluded that the statute of limitations accrues upon the marriage of the parties to the antenuptial agreement.

The MSBA Family Law Section filed an amicus brief urging the Court to reverse the Court of Appeals. In doing so, the Section agreed with Judge Dietzen’s dissent in the Court of Appeals. Judge Dietzen noted that the majority opinion would deter attorneys from drafting antenuptial agreements in order to avoid malpractice claims brought many years after the alleged malpractice occurred. The Section’s brief also argued that the cost of insuring against such malpractice would be prohibitive, assuming an attorney could obtain such insurance.

— Stephen R. Arnott
Arnott Law Firm, PA

FEDERAL PRACTICE
JUDICIAL LAW

• Motion for Judgment as a Matter of Law; Renewal Following Verdict. In May-June, 2005, this column noted the Supreme Court’s grant of certiorari on the question of whether a court of appeals may review the sufficiency of the evidence where a party makes a motion for judgment as a matter of law prior to the case going to the jury, but then fails to renew that motion under Fed. R. Civ. P. 50(b) or move for a new trial under Fed. R. Civ. P. 59 following the verdict.

Adopting the near-unanimous position of the circuits, the Supreme Court recently held that the failure to file a post-verdict motion under Fed. R. Civ. P. 50(b) or to seek a new trial under Fed. R. Civ. P. 59 results in a waiver of the right to challenge the sufficiency of the evidence on appeal. A dissent by Justice Stevens, joined by Justice Kennedy, argued that 28 U.S.C. §2106 empowered the circuit courts to examine the sufficiency of the evidence even in the absence of a proper post-trial motion.

This decision mirrors present 8th Circuit practice, and should not have a significant impact on litigators who have been aware of the 8th Circuit’s views on this issue. Unitherm Food Systems, Inc. v. Swift-Eckrich, Inc., ___ S. Ct. ___ (2006).

• Other Noteworthy Decisions. The scope of the collateral order doctrine was addressed in several recent decisions. The Supreme Court held that a district court’s refusal to dismiss an action based on the judgment bar of the Federal Tort Claims Act is not a collateral order subject to immediate appeal. And relying in part on that Supreme Court decision, the 8th Circuit held a few days later that the denial of a summary judgment motion premised on so-called Noerr-Pennington immunity is not an appealable collateral order. Will v. Hallock, 126 S. Ct. 952 (2006); Hinshaw v. Smith, ___ F.3d ___ (8th Cir. 2006).

Reversing a decision by the 4th Circuit, the Supreme Court held that under 28 U.S.C. §1348, a jurisdictional statute applicable only to national banks, a bank is "located" for diversity of citizenship purposes only in the state where its main office is located, rather than in every state where it has established a branch. Wachovia Bank v. Schmidt, 126 S. Ct. 941 (2006).

The 8th Circuit held that the substitution of the named plaintiff in a putative class action did not "commence" a new action for purposes of the removal provisions of the Class Action Fairness Act. Plubell v. Merck & Co., ___ F.3d ___ (8th Cir. 2006).

The 8th Circuit issued a rare published opinion denying a motion to stay its mandate pending the filing of a writ of certiorari, finding that the appellees could not meet the relevant four-part test. Doe v. Miller, 418 F.3d 950 (8th Cir. 2005).

Judge Frank took the relatively rare step of granting a motion for a more definite statement. Pharmaceutical Solutions, Inc. v. Vitamax RX, 2006 WL 14559 (01/03/06).

Adopting a Report and Recommendation by Magistrate Judge Erickson, Judge Kyle declined plaintiffs’ request to certify an issue to the Minnesota Supreme Court. Peterson v. Scottsdale Ins. Co., ___ F. Supp. 2d ___ (D. Minn. 2006).

Pro se litigants were the target of several motions for sanctions, with Judge Davis imposing Rule 11-based economic sanctions against a pro se defendant in the first case, Judge Magnuson permanently enjoining the plaintiff from filing further related pro se actions without leave of court in the second case, and Judge Tunheim declining to award sanctions in a third case. Semmelman v. Mellor, 2006 WL 90094 (D. Minn. 01/13/06); Cycenas v. U.S. Bank, N.A., 2006 WL 145218 (D. Minn. 01/18/06); Kolosky v. Fairview Medical Center, 2006 WL 167714 (D. Minn. 01/23/06).

— Josh Jacobson
Law Office of Josh Jacobson

March 2006

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patents; Statements Narrowing Broad Claim Term. The Court of Appeals for the Federal Circuit, the appellate court that reviews almost all patent-related issues, issued another surprise decision. Reading the facts of nCube Corp. v. Seachange Int’l., the outcome seemed as certain as bitter cold in January, based on recent Federal Circuit case law. But January felt like March and the outcome of this case was almost as unexpected. nCube sued Seachange for infringement of a patent claiming a new computer used to route multimedia data. One of the patent-claim terms construed by the court was "upstream manager." The claim-construction issue centered on whether statements made in the patent limited the definition of "upstream manager" to routing accomplished by logical addresses only, and not also by physical addresses. A statement in the patent read "[i]t is important to note that all routing is accomplished based on logical addresses, not physical addresses." Here is where the court’s prior case law comes in. The two best-known cases regarding when statements in a patent will narrow an otherwise broad claim term are SciMed Life Sys. v. Advanced Cardiovascular Sys. and Toro v. White. In Toro, the court held that describing certain structure in the patent as "important" was enough to limit the patent claims to that "important" structure. In SciMed, the court held that describing certain structure as being part of "all" of the inventions was enough to limit the patent claims. Enter nCube’s patent with its statement employing both "important" and "all" to describe how the upstream manager routes data using logical addresses. Seemed like a slam-dunk, but no such thing in patent law since the Federal Circuit was created. The court held that the statements in the patent did not limit the otherwise broader term found in the claims. The majority did not even address SciMed or Toro. The minority did; however, and pointed out what appears to be the latest in a series of inconsistencies in patent law that drive practitioners, trial judges, and clients crazy. nCube Corp. v. Seachange Int’l, Inc., 03-1341, -1366 (Fed. Cir. 01/09/06).

• Patent Infringement; Joinder of Necessary Parties. Another recent decision by the Federal Circuit reminds plaintiffs in patent-infringement cases about an oft-overlooked rule of civil procedure: joinder of necessary parties. Several recent decision by the appellate court, as reported in this column, have strictly construed the requirement that only the owner of the patent has standing to sue for infringement. However, in Aspex Eyewear v. Miracle Optics, it may be failure to join an exclusive licensee (a necessary party) that proves fatal to the plaintiff’s case. Aspex and Contour sued Miracle for infringement of a patent related to eye glasses. The trial court dismissed the complaint with prejudice because it held Contour was not the owner of the patent. The court of appeals disagreed, but pointed out that Contour’s ownership of the patent may not be enough to save its case. The court of appeals remanded the case for a determination of whether Chic, not Aspex, was the exclusive licensee of the patent at the time the complaint was filed and, therefore, a necessary party that was not joined. Aspex Eyewear, Inc., Manhattan Design Studio, Inc., Contour Optik, Inc, and Asahi Optical Co., Ltd., v. Miracle Optics, Inc. and Viva Optique, Inc., 04-1265 (Fed. Cir. 01/10/06).

— Tony Zeuli
Merchant & Gould

JUVENILE LAW
JUDICIAL LAW

• CHIPS/Termination of Parental Rights. In an unpublished decision, where appellant adoptive parents challenged an order requiring them to contribute to the cost of their emotionally disturbed child’s out-of-home placement in foster care, the Minnesota Court of Appeals reversed the district court. The Court of Appeals held that such an assessment violated Minn. Stat. §252.27, subd. 2(a), which clearly exempts adoptive parents who receive an adoption subsidy from contributing to the costs of 24-hour care outside the home for a child with a qualifying condition. Despite the analysis of the district court, the Court of Appeals found nothing in the statute preventing this exemption for parental contribution when the out-of-home placement is court-ordered or is the result of a child protection proceeding under Chapter 260C. The case also raised the question of whether the guardian ad litem, as a party in a child protection matter, had standing to raise the issue of parental contribution for out-of-home placement. The Court of Appeals affirmed that the guardian ad litem had standing and could bring issues before the district court in a child protection proceeding. In the Matter of the Child of: P.B. and S.B., A05-1460 (Minn. App. 01/09/06). www.lawlibrary.state.mn.us/archive/ctapun/0601/opa051460-0109.htm

• Termination of Parental Rights; Presumption. In an unpublished decision, the Court of Appeals held that where a mother’s rights to her two oldest children were involuntarily terminated in 2004 and both the mother and her newborn third child in January of 2005 tested positive for marijuana, the district court did not clearly err by finding that the mother had failed to rebut the presumption that she is palpably unfit to parent a child based on a prior involuntary termination. The Court of Appeals held this presumption applied even where the mother had made positive changes after the third child’s birth, but, at the time of trial, she had not secured housing, she had not begun a promised job, she had yet to begin chemical dependency treatment, her sobriety was unsubstantiated by urinary analysis, and during the past nine years, the mother had not remained sober except when residing in a very structured environment. In the Matter of the Welfare of the Child of K.L.M. and J.E.J., A05-1232 (Minn. App. 01/10/06). www.lawlibrary.state.mn.us/archive/ctapun/0601/opa051232-0110.htm

• Juvenile Delinquency; EJJ; Procedure. In an unpublished decision, the Court of Appeals affirmed the district court in an appeal from an order denying the appellant’s motion to dismiss the extended jurisdiction juvenile (EJJ) prosecution designation of a delinquency petition that charged the appellant with offenses related to a home burglary. The appellant argued that the state improperly filed the petition in an attempt to circumvent procedural timelines for commencing an EJJ proceeding and that the district court erred in failing to issue written findings. The district court had dismissed the certification motion for failure to comply with service requirements. After that, the state then filed a second delinquency petition, charging the same offenses and designating the case as an EJJ prosecution. The district court granted the state’s motion to dismiss the proceeding on the first petition. The Court of Appeals concluded that the EJJ prosecution was not untimely because jeopardy had not attached when the prosecutor filed the second delinquency petition, and further held that the prosecutor had authority to file the second petition. In the Matter of the Welfare of G.J.B., A05-538 (Minn. App. 01/17/06). www.lawlibrary.state.mn.us/archive/ctapun/0601/opa050538-0117.htm

• Juvenile Delinquency; EJJ; Blakely. In another appeal from an order denying a post-conviction petition challenging appellant’s EJJ sentencing on a second-degree murder conviction, the appellant argued that the post-conviction court erred in ruling that his challenge was procedurally barred under Minn. Stat. §244.11, subd. 3(b). Appellant claimed his stay of execution was a mandated stay of execution, not a dispositional departure. Appellant also asserted that the departure based on judicial findings violated his right to a jury trial under Blakely v. Washington, 542 US 292 (2004), and that Blakely applied retroactively to his sentence. Appellant argued also that an upward durational departure based solely on his plea agreement was improper under State v. Misquadace, 644 N.W.2d 65 (Minn. 2002), and that this case doctrine applied because his conviction was not yet final when that case was released. The Court of Appeals, in this unpublished decision, concluded that Minn. Stat. §244.11 did not apply as a procedural bar to appellant’s claim for post-conviction relief. However, because appellant’s case became final before the rulings in Blakely and Misquadace, which do not apply retroactively, and because the appellant entered a valid plea under the law applicable at the time of his conviction, the Court of Appeals affirmed the conviction. White v. Minnesota, A05-328 (Minn. App. 01/24/06). www.lawlibrary.state.mn.us/archive/ctapun/0601/opa050328-0124.htm

CASES ELSEWHERE

• Support Owed State; Child in State Custody. Held, a juvenile court properly relied on the child support guidelines in calculating the amount of support owed to the state by a mother whose daughter was adjudicated a Child in Need of Assistance ("CINA") and placed in state custody. Application of the child support guidelines in CINA cases to determine the amount owed by a parent for the care of the child is deemed to further the guideline’s goal of consistency in support awards. In re Katherine C., No. 32 (Md. App. 01/17/06). In Minnesota, the child support guidelines are not applied in such child protection cases; but given current budgetary constraints, look for other courts across the country to adopt this type of approach for children placed in programs out of their family homes.

• Termination of Rights; Equal Protection. Nebraska parents challenged termination of their parental rights, arguing that protections provided Native Americans by the Indian Child Welfare Act required the state to meet a higher burden of proof in order to terminate parental rights in juvenile court, regardless that neither the parents nor their children were Native Americans. Held, the fact that the clear and convincing standard of proof generally required to terminate parental rights under Nebraska law is less than that required to extinguish the rights of parents of Native American children does not violate equal protection guarantees. The United States Supreme Court has made clear that the different treatment of Native Americans is rooted in their history as a sovereign community, and not in their classification as a racial group. In re Phoenix L. (State v. Sonya L.), S-05-536 (Neb. 01/13/06).

• Adoption; Grandparent’s Visitation Right. An Oklahoma grandmother, whose earlier petition to adopt her grandchild after the child’s mother’s rights were terminated was denied, was allowed to intervene as of right in the adoption proceedings filed by the child’s foster parents for the limited purpose of establishing that she has court-ordered visitation and to protect her right to it. The Oklahoma appellate court observed that the child had been previously adjudicated a deprived juvenile, and the grandmother had been provided limited visitation in connection with that proceeding. Absent evidence that the grandmother had received a statutorily mandated hearing for termination of that visitation, the court said that the grandmother had a "protectable interest" in that visitation and therefore had a statutory right to intervene in the adoption action. Oklahoma law provided that a trial court shall not grant grandparent visitation subsequent to the final order of adoption of the subject child; therefore, the grandmother’s opportunity to protect her existing visitation rights would not be available unless she was allowed to intervene in the adoption action prior to entry of the final decree. In re Adoption of D.D.B. (Bishop v. Lovelis), 100955 (Okla. App. 12/23/05).

— Gary A. Debele
Walling, Berg & Debele PA

March 2006

REAL PROPERTY
JUDICIAL LAW

• Conflict Between Comprehensive Plan and Zoning. In a 4-to-3 decision, the Minnesota Supreme Court upheld the City of Mendota Heights’ decision to deny a comprehensive plan amendment that would allow residential development on property historically used as a golf course. The applicant, Mendota Golf, owned property that was guided as a golf course under the city’s comprehensive plan, but designated as residential under the zoning ordinance. Mendota Golf sought to sell the property to a developer and, in connection with that sale, sought city approval to change the comprehensive plan designation to residential. After the city denied Mendota Golf’s request, Mendota Golf brought an action in district court seeking a writ of mandamus that would order the city to so amend its comprehensive plan. The district court issued the writ, concluding that the denial of Mendota Golf’s proposed amendment was arbitrary, capricious and without rational basis, and the Court of Appeals affirmed. The Supreme Court reversed.

The Supreme Court agreed with appellants that a residentially zoned property that was guided for golf course use necessarily constituted a conflict requiring action, but nevertheless concluded that mandamus relief was inappropriate because amending the comprehensive plan was not the only option available to the city. There was no clear duty to amend the comprehensive plan and mandamus relief in that regard was inappropriate. The Court recognized a historical lack of clarity regarding the type of relief to seek in the context of governmental land use decisions but nevertheless reiterated that in the context of legislative decisions, the most appropriate avenue of relief is to seek declaratory judgment. Because that remedy was available in this case, mandamus relief would be inappropriate.

With respect to the claim that the decision was arbitrary and capricious the Court concluded that there was a rational basis for such a decision, which was founded in a municipality’s legitimate interest in preserving open and recreational space. The dissent concurred that mandamus relief was inappropriate, but rejected the majority’s conclusion that the record supported a rational basis for the city’s decision. Reversed and remanded. Mendota Golf, LLP v. City of Mendota Heights, A04-206 (Minn. 01/10/06). www.lawlibrary.state.mn.us/archive/supct/0601/opa040206-0110.htm

• Eminent Domain; Leasehold; "Bad Faith." Cooperative Power Association (CPA) leased property to maintain a telecommunications tower. A new lessor took title to the property and discovered that CPA was failing to pay property taxes and had subleased the premises, both apparently in violation of the lease. The lessor and CPA entered into negotiations to address these issues and to amend the lease, but reached no resolution. Accordingly, CPA petitioned for a quick take condemnation of the property. The district court granted the petition. The Court of Appeals and Supreme Court affirmed. On appeal, the lessor argued that condemnation was not necessary because CPA already held a leasehold interest. The Supreme Court disagreed, holding that whether the condemnor holds some interest in the property is irrelevant to considerations of necessity. The question is not whether it was necessary for CPA to increase its interest in the property but rather whether taking of the property was legally necessary to serve the public interest of a telecommunications tower. The Court also rejected the lessor’s argument that the condemnation was invalid because CPA acted in bad faith, holding that whether the taking entity is acting in bad faith is generally not a pertinent inquiry in eminent domain cases. Finally, the lessor challenged the use of the quick take procedure given that CPA was already in possession of the property. The Supreme Court held that a quick take was appropriate because the lessor was threatening CPA’s continued right to possession. Affirmed. Lundell v. Cooperative Power Ass’n, A04-1045 (Minn. 01/05/06). www.lawlibrary.state.mn.us/archive/supct/0601/opa041045-0105.htm

• Equal Protection; Zoning Decisions. In the 1990s, the City of Minneapolis adopted a moratorium and a variety of other regulations regarding firearms dealerships. A gun shop owner was able to continue his business as a nonconforming use until his lease expired and he was forced to find a new location. The gun shop owner relocated his business within an area where such shops were not permitted and the city required him to cease his operations. The shop owner commenced an action against the city claiming that the regulations violated his equal protection and due process rights, and constituted a taking. The district court granted summary judgment in favor of the city and the 8th Circuit Court of Appeals affirmed. The 8th Circuit noted that the gun shop owner could not show that he was treated differently from similar businesses because there were no other gun shops in the city. Even assuming that a firearms dealership could be compared with another type of retail establishment for purposes of equal protection analysis, the court observed that "obvious difference" between establishments that sell firearms and those that do not would warrant difference in treatment. Affirmed. Koscielski v. City of Minneapolis, 05-1664 (8th Cir. 01/25/06). http://caselaw.lp.findlaw.com/data2/circs/8th/051664p.pdf

• Home Solicitation Statute. According to the Minnesota Court of Appeals, Minnesota’s home solicitation statute does not apply to the sale of improvements to real property. Homeowner entered into contract with contractor for the construction of a new garage on her property. Homeowner and contractor became involved in a dispute during the course of the contract and homeowner sought to terminate the contract and obtain a refund of money already paid. The district court ruled in favor of contractor and the Court of Appeals affirmed in part and reversed in part. At issue, in part, was whether the protections of the home solicitation statute (Minn. Stat. §325G.06) applied to this transaction. In general, the statute provides protections to a buyer when the sale is made somewhere other than the seller’s usual place of business. The statute contains a number of exceptions, one of which is for the sale of real property. Because the transaction at issue concerned an improvement to real property, which would become a part of the real estate when completed, the Court of Appeals concluded that the transaction in this case was a "sale of real property." Affirmed in part and reversed in part. Busch v. Model Corp., A05-426 (Minn. App. 01/10/06). www.lawlibrary.state.mn.us/archive/ctappub/0601/opa050426-0110.htm

— C.J. Deike
Edina Realty Home Services

March 2006

TAX
JUDICIAL LAW

• Real Property; 60 Day Rule. The Minnesota Tax Court held the petitioner failed to comply with Minn. Stat. 278.05, sub. 6(a) ("60 Day Rule") following his challenge of a 2004 assessment of property-generated income. Petitioner alleged the relevant income and expense information was lost after damages were incurred at his storage facility, and in the alternative, that that the information was irrelevant to determining the value of the property. Citing BFW v. County of Ramsey, 566 N.W.2d 702, 705-06 (Minn. 1997), the court determined the petitioner was required to provide any information that was within his possession. Because the petitioner failed to provide even limited information, and because he failed to respond to multiple notices, the court dismissed the assessment challenge against the county. Meldahl v. County of Hennepin, Minn. Tax Ct. (01/20/06).

• Income Tax: Check-the-Box Partnership. Manpower, Inc., an international organization with operations throughout the United States, elected to check the box for purposes of federal income taxes and be taxed as a partnership. Subsequently, the corporation excluded its income allocation for Minnesota state taxes based the belief that it was an exempt foreign entity. Minn. Stat. §290.17, sub. 4. The Tax Court held that a check the box partnership is presumed to exist even though no such partnership actually exists. See Hutchinson Technology, Inc. v. Commissioner of Revenue, 698 N.W.2d 1, 13 (Minn. 2005). Under the plain meaning of Minnesota law, the newly formed check-the-box partnership created under United States law is a domestic entity. Therefore, the income generated from the check-the-box partnership was not income from a foreign entity and cannot be excluded from the income allocable to Minnesota. Manpower, Inc. v. Commissioner, Minn. Tax Ct. (01/12/06).

• Income Tax: No Fee Recovery Absent Prevailing Party. Where the Minnesota Tax Court denied taxpayer’s claim that as the prevailing party he was entitled to recover costs and attorney’s fees under Minn. Stat. §15.472 (2004), the state Supreme Court found that both parties had prevailed regarding certain aspects of the litigation. In addition, neither side received a final judgment since the parties settled before a decision was entered. Under these circumstances, the Tax Court did not abuse its discretion in denying costs and attorney’s fees to the taxpayer. Wilson v. Commissioner of Revenue, A05-440 (Minn. 01/12/06).

• Income Tax: Terminated Insurance Contracts as Losses. The Tax Court denied business loss deductions under section 165 to petitioner Blue Cross despite petitioner’s claim it sufficiently established basis in regard to hundreds of insurance contracts it terminated during 1994. The Tax Court found the petitioner’s valuation methods insufficient. The 3d Circuit stated that it was possible to make individual determinations on the fair market value of group contracts and rejected the notion that the petitioner’s valuation model was wrong. Because the contracts could be individually valued, the Tax Court’s claim that the loss could not be deducted was clearly erroneous. Remanded. Capital Blue Cross v. Commissioner, 431 F.3d 117 (3d Cir. 2005).

• State Fuel Tax; Indian Reservations. An Indian tribe challenged the application of a Kansas excess motor fuel tax (Kan. Stat. Ann. 79-3408) charged to a non-Indian distributor that delivered gas to a station owned by the tribe and located on its reservation. The District Court of Kansas initially granted summary judgment in favor of the Secretary, and the 10th Circuit later reversed. See 379 F.3d 979; 241 F.Supp.2d 1295. The tribe alleges that the adverse impact to the reservation requires a balancing of state and tribal interests. The Supreme Court found that the tax in no way was meant to discriminate against the tribe, and instead was meant to influence transactions outside the reservation. Further, the tax was levied against the distributors, not gas stations themselves, which made any adverse impact incidental. Reversed. Joan Wagnon v. Prairie Band Potawatomi Nation, 126 S.Ct. 676 (2005).

• Income Tax: Corporate-Owned Life Insurance Program. Petitioner purchased corporate-owned life insurance for thousands of employees from 1988 to 1991 and subsequently claimed deductions for interest incurred on the loans used to pay the insurance premiums and for related administrative fees. The IRS declared a deficiency for those years, which the plaintiff subsequently paid before bringing action to recover. At trial, the district court found in favor of company. On appeal, the 6th Circuit focused on the three nontax benefits typically provided by corporate-owned life insurance, positive cash flows, inside build-up, and mortality gains, none of which were created by petitioner’s plan. Because the plan provided no economic benefit other than the creation of income tax losses, the plan was declared to be a sham and the company’s deductions were denied. The Dow Chemical Co. v. United States, No. 03-2360 (6th Cir. 01/23/06).

• Income Tax: Partnership Income Held in Escrow. The Tax Court held that a partner whose current share was being held in escrow, due to a disagreement amongst owners, was still required to report partnership income during that time. Because the income was not contingent on any other event, it was considered realized. Therefore, petitioner was taxable for his share of the partnership income even though he did not receive it during the taxable year. Burke v. Commissioner, T.C. Memo 2005-297.

• Corporation Tax: Family-Owned Corporation. Where one brother sold his majority share in a family-owned corporation to his brother, also a shareholder, the issue was whether an ownership change occurred within the organization. The court found that the plain language of §382(a)(3)(A) indicates that the ownership of stock by one brother does not signify ownership by another. Therefore, the sale from one brother to another within the family corporation constituted a change in ownership. Garber Indus. v. Commissioner, No. 05-60142 (5th Cir. 01/09/06).

• Stock Transfer to Family Partnerships; Gift of Partnership Interest. Petitioners transferred two blocks of stock totaling approximately $3.5M into two family partnerships in which their children held limited interests. The taxpayers claimed the transfers constitute gifts of partnership interests, which may be discounted depending on transferability. The commissioner asserted the gifts had to be valued at the full value of the stock. The sequence of events was critical, since a contribution of stock after the transfer of a partnership interest is an indirect gift to the partners. The court stated that regardless of whether the transactions were simultaneous, they would constitute a single transfer of the stock to the children. Senda v. Commissioner, T.C. Memo 2004-160, 2004 Tax Ct. Memo LEXIS 165.

• Estate Tax: Deduction Invalid for Lack of Consideration. The decedent was the sole shareholder of the corporation at issue. Before her death, the trustee for the decedent promised to provide $400K to the corporation in exchange for 400 additional shares. While the corporation issued the appropriate stock certificate to the decedent, the money was not actually received until after the decedent passed away. The $400K was used to pay off a debt owed to a family partnership of which the decedent’s relatives owned a majority of shares. Following the death, the estate attempted to deduct the $400K from estate taxes under section 2001(a). The court held that because the corporation was insolvent at the time of the subscription, the stock was worthless, and the decedent did not receive adequate consideration for the additional shares. The lack of adequate consideration prohibited the deduction from the taxable estate. The court stated IRC §2053(c)(1)(A) is intended to protect against invalid gifts to family members as a means of avoiding the estate tax. Estate of Hughes v. Commissioner, T.C. Memo 2005-296.

• Income Tax: Community Property; Underpayment Liability. Petitioner and her former husband filed joint income tax returns for the years 1982 to 1984. The couple resided in California, a community property state, and their payments were made from community property assets. Subsequently, underpayments arose related to the husband, and the commissioner applied overpayments from the petitioner’s separate and community assets against these understatements. The parties agree that the petitioner is entitled to relief under IRC §6015(b), though the petitioner challenges the amount of that refund as calculated in §6015(g). The court analyzed the plain language and legislative history of §6015, as well as the difficulty of potential litigation regarding the true owner of community property, and held that petitioner was not entitled to a refund of amounts from community property used to pay her husband’s understatements. Congress did not intend for state community property laws to be ignored in considering underpayment liabilities. Ordlock v. Commissioner, 126 T.C. No. 4.

Income Tax: Income Earned in Antarctica. Petitioner worked for a United States corporation on the continent of Antarctica in 2001, and subsequently excluded his income during that time from his federal tax return, asserting it constituted foreign income under IRC §911. The court stated that Antarctica does not constitute a "foreign country" as defined in §911; therefore, the income should have been included in the petitioner’s return. Arnett v. Commissioner, 126 T.C. No. 5.

• Injunction Against Tax Preparer. Plaintiff appealed a district court decision issuing a lifetime injunction prohibiting him from either selling or promoting his "Tax Toolbox" system, which encouraged many aggressive deductions methods. Promotional materials falsely identified the plaintiff as an attorney and agent of the IRS. The 6th Circuit found no abuse of discretion by the district court and stated the plaintiff’s actions were subject to penalty under 26 U.S.C.S. 7600. United States v. Gleason, 432 F.3d 678 (6th Cir. 2005).

• Income Tax: Reimbursement Payments; No "Accountable Plan." When petitioner’s employer in 1996 decided it could no longer afford to pay petitioner, petitioner offered to continue working for the company so long as it reimbursed him for expenses incurred. Between 1996 and 1999, the company made payments to the petitioner which it did not treat as wages and the petitioner excluded from his tax return. Petitioner asserted that the agreement constitutes an "accountable plan" under 26 U.S.C. 62; therefore, he was not required to report the payments as gross income. The court stated that a valid accountable plan has three requirements: a business connection, substantiation of expenses by the employee, and the return of payments in excess of expenses by the employee. Because petitioner failed to both substantiate his expenses and to calculate any amounts paid in excess of those expenses, the payments were not made as part of a valid accountable plan and were properly included in gross income. Namyst v. Commissioner, No. 05-1760 (8th Cir. 2006).

• Bankruptcy: Child Tax Credit Refund. Debtors filed for bankruptcy in 2004 and later amended their filings to reflect tax refunds for the year. The debtors claimed the portion of the refund attributed to the Child Tax Credit (CTC) is not the property of the estate and subtracted that amount from the refund to be handed over to the estate. The debtors attempted to distinguish the CTC from excess earned income tax credits, which the Supreme Court has treated as ordinary tax refunds. The 8th Circuit found the distinction irrelevant. For bankruptcy purposes, both are contingent interests on the petition date that become the property of the estate once realized. Law v. Stover, No. 05-6037WM (8th Cir. 2006).

• Communications Excise Tax:. Petitioner’s action against the IRS seeking a refund in relation to the Communications Excise Tax, 26 U.S.C.A. 4251, 4252(b)(1), was rewarded when the court found that the petitioner’s long distance charges did not vary in both time and distance, as required. The decision constituted another blow to the enforcement of the tax, which despite multiple adverse circuit court decisions, the IRS continues to apply and litigate. National Railroad Passenger Corp. (Amtrak) v. U.S., 431 F.3d 374 (D.C. Cir. 2005).

• Bankruptcy: Definition of "Return." Under the Bankruptcy Code, a party declaring bankruptcy may not discharge federal tax liability for which a return was required, but not filed. 11 U.S.C.A. 523(a)(1)(B)(i). Taxpayer asserted he did indeed file a "return," even if he did so six years late. A "return" is not defined under either the Bankruptcy or Internal Revenue Code; therefore, the court relied on case law for the definition, determining that to be deemed a return, a document filed with the IRS must (1) purport to be a "return," (2) be signed under penalty of perjury, (3) contain enough information to enable the taxpayer’s tax liability to be calculated, and (4) "evince[ ] an honest and genuine endeavor to satisfy the law." Writing for the court, Judge Posner found that the delayed response meant the fourth requirement of this definition was not met. Judge Easterbrook dissented. For Easterbrook, the fact that the taxpayer provided all the relevant information to the IRS two years before he applied for bankruptcy implies that he made a valid return and his debt should be discharged. In re Payne, 431 F.3d 1055 (7th Cir. 2005).

ADMINISTRATIVE DEVELOPMENTS

• Minnesota Changes in Calculating Income. Taxable income under Minnesota law is closely related to the federal definition, though the Department of Revenue has recently recognized several distinctions. Minnesota did not adopt the increase in the federal deduction for married persons starting in 2005, deductions for domestic production activities, itemized deductions for sales tax paid, or the expanding ability to expense newly purchased business assets, rather than depreciate them, under §179. In addition, the Legislature has not had the opportunity to decide whether it will adopt federal changes related to Hurricane Katrina, including the Energy Policy Act of 2005 and the Katrina Emergency Tax Relief Act of 2005. See Income Tax Newsletter, Minnesota Department of Revenue (Dec. 2005) available at http://www.taxes.state.mn.us

• Regs Regarding Stock Basis and Adjustments. Final regulations clarify that the basis of each share of stock received in certain tax-free transactions shall be the same as the basis of the share or shares of stock given in exchange. A taxpayer has the ability to designate which share of stock is received in exchange for or with respect to a particular share of stock held prior to the tax-free transaction. The final regs also address the allocation of consideration and the application of the rules to stockless organizations. T.D. 9244.

• Widely Held Investment Trusts. Final regs have been issued addressing the reporting requirements for the trustees of certain investment trusts and for the brokerage firms that hold interests for investors in these trusts. The regs expand the definition of a widely held investment trust and clarify the definitions of the key terms of the old rules. T.D. 9241.

• Fraudulent Email Scheme. The IRS has issued a warning to consumers regarding a fraudulent Internet scheme designed to obtain private personal information. Individuals have received e-mails from "tax refunds@irs.gov" informing them of a tax refund and providing and online link to recover the refund. At the site, the individual is prompted to provide social security and credit card information that is eventually used to access financial assets. Anyone receiving such an email is urged to contact the IRS immediately.

• CAP Pilot Program. The IRS formally introduced the Compliance Assurance Process (CAP), a pilot program for large business taxpayers. The dual purposes of the program are to reduce taxpayer burden and uncertainty regarding their income tax return and to lower the need for post-filing investigation through increased return accuracy. CAP requires extensive cooperation between participating companies and the agencies. In return for their compliance, the companies are assured their return will be accepted. The agency will not, however, provide guidance to the participants in regard to proposed or incomplete transactions. Announcement 2005-87.

• Annual Federal Tax Program Established for Qualifying Employers. Temporary regulations have been issued creating the Employers’ Annual Federal Tax Program, which assists in the reporting and paying of income and FICA taxes. The temporary regs require certain employers to file Form 944 annually as opposed to the quarterly filing of Form 941. Such employers are also allowed to deposit or remit accumulated employment taxes on an annual rather than a quarterly basis. Employers eligible to file using Form 944 must have annual employment tax liabilities of less than $1,000. T.D. 9239.

• Updated IRS Procedures for 2006. The IRS has updated the procedure for the issuance of letter rulings as well as the procedure for providing technical advice to taxpayers. Rev. Proc. 2006-1; Rev. Proc. 2006-2. It also issued guidance to its counsel regarding issues that the agency will not be issuing letter rulings or determination letters. Rev. Proc. 2006-3. Finally, the agency announced the opening of Free File, a free electronic filing initiative that allows taxpayers with less than $50K in adjusted gross income to file without expense. More than 70 percent of the nation’s taxpayers qualify for the program. Announcement 2006-15.

• Cooperative Tax: Equity Discounting Program. In two letter rulings, two rural electrical cooperatives were allowed to establish an equity discounting program, whereby members could receive capital at less than face value in exchange for patronage capital without threatening the tax-exempt status of the cooperative. The features of the program included a rotation period for allocating capital, a recording of each member transaction, the ability of the board to suspend the program, and the ability of current and former members to participate. The purpose of such programs is to provide a mechanism to fairly clear the patronage accounts of departing members or members that are in receivership. IRS Letter Ruling 200602035 (01/13/06).

• Schedule D Instructions. The IRS has clarified that its new instructions for Schedule D were not meant to change taxpayer filing requirements for reporting multiple capital gain or loss transactions. The agency has received complaints that the new instructions are unclear as to whether each transaction must be reported separately under Schedule D, and the Agency made clear that taxpayers are still allowed to attach transaction summaries from their brokers. See 2005 Instructions for Schedule D, Internal Revenue Service (2005) available at http://www.irs.gov

LEGISLATION

• Voluntary Compliance Program for Abusive Tax Shelter Participants. Minnesota has created a voluntary program whereby taxpayers can avoid substantial new penalties under Minn. Stat. 270C.60 for tax shelter transactions determined to be abusive by the IRS. To comply with the program, the taxpayer is required to file an amended Minnesota return form reporting the corrected taxable income and complete a Voluntary Compliance Initiative Agreement. The program is available for all years preceding 2005. For a comprehensive report discussing the variances in compliance programs amongst different states, see Kathleen Pakenham, "State Tax Shelter Legislative Update," Tax Analysts (01/30/06).

• Wrongful Withholding of Income Tax Refunds. The annual report of the National Taxpayer Advocate (Olson) asserts that the agency’s Questionable Refund Program (QRP) has wrongfully delayed the refunds of thousands of taxpayers each year. The QRP is run by the Agency’s Criminal Investigation Division. According to Olson, if a refund is tagged as questionable by the QRP, CI must investigate and sign off within a week or payment will be delayed without notice provided to the taxpayer. In 2005, 120K refunds were frozen under QRP, and Olson estimates that nearly 1.6M refunds have been held without notice in the last five years. The typical delay in payment is approximately eight months. What has advocates and legislators especially concerned is the disproportionate impact of the QRP against low-income taxpayers. The median income and refund totals for the program are only $13K and $3K. See Allen Kenney, "Olson Drops Refund Bombshell," 110 Tax Notes 183 (2006).

LOOKING AHEAD

• Property Tax: Property Sale Notification. The United States Supreme Court heard oral arguments January 17 for Jones v. Flowers et al., which involves a property owner’s right to receive notice of a tax deficiency before his property is sold at public auction. Plaintiff lived in his home from 1967 to 1993 before moving into an apartment. The mortgage was subsequently paid off, and the mortgage company ceased paying taxes on the property. Notice of the deficiency and planned sale were sent to, but never reached the plaintiff. He first discovered the events after the house had already been purchased by the defendant. The Arkansas Supreme Court held that the notice was constitutionally sufficient.

• "Son of Boss" Case. Closing arguments on the first sales option bond strategy tax shelter case, known as Son of Boss, were held in the U.S. Court of Federal Claims in December. The IRS has found such tax shelters to be abusive and illegal, and is seeking the names of the participants in the scheme. Promoters, who have traditionally guarded their clients’ identities closely, are following the case to learn the IRS’ strategy for approaching future tax shelter cases. The IRS has stated there are nearly 700 similar Son of Boss tax shelters that wrongfully withheld income from federal taxation. For a history of this case, see Jade Trading, LLC v. United States, 65 Fed. Cl. 641 (2005); Jade Trading, LLC v. United States, 67 Fed. Cl. 608 (2005).

• New Look for IRS Site. The IRS enters the 2006 filing season with a new web site, featuring improved online tools and more comprehensive services. The link to "Electronic IRS," which contains all of the new features, is available through the service’s traditional web site, http://www.irs.gov. In 2005, more than half of all income tax returns were filed electronically, and the IRS expects continued growth in that area. Taxpayers began filing electronically on January 13, 2006. IR-2006-1. IR-2006-10.

• TRAC Seeks IRS Data Pursuant to Court Order. The Transactional Records Access Clearinghouse (TRAC) of Syracuse University has filed a motion against the IRS demanding it produce statistics pursuant to a longstanding court order. The popular data research organization provides the public with information regarding the operation of many federal agencies, including the IRS. In 1976, the Agency was ordered to provide data on an ongoing basis regarding its audit, collection and enforcement activities. There had been compliance through mid-2004, when the Agency stopped providing data even though it acknowledged the presence of the court order. See Long v. IRS, Motion No. C 74-724S (W.D. Wash. 01/27/06).

• Tax Reform 2006. Even though the President’s Advisory Panel on Federal Tax Reform has issued its final report, no significant changes to the federal tax system are expected in the upcoming year. The White House continues to focus on extending President Bush’s tax cuts, and the plan for Congress is to complete the tax reconciliation bill that remained unfinished at the end of the last session. Supporters of the president are wary as to whether tax reform will ever become a pressing concern during his second term.

— Mychal Brenden
— Kathryn Sedo
University of Minnesota Law School

March 2006

TORTS & INSURANCE
JUDICIAL LAW

• Automobile Insurance; Underinsured Motorist Benefits (UIM); Notice and Prejudice. The Minnesota Court of Appeals held that when an insured fails to give its underinsured motorist coverage carrier timely notice of commencement of suit against a tortfeasor, to recover UIM benefits the insured must demonstrate by a preponderance of the evidence that the underinsurer was not prejudiced by the untimely notice. The court further held that when an insured fails to give 30 days’ notice of its intent to reach a settlement with a tortfeasor as required by Schmidt v. Clothier, the insured must put forth specific evidence of the tortfeasor’s limited financial worth to rebut the presumption that the UIM insurer has been prejudiced by the insured’s untimely notice. Lori Kluball v. American Family Mutual Ins. Co., A05-436, (Minn. App. 12/20/05). www.lawlibrary.state.mn.us/archive/ctappub/0512/opa050436-1220.htm

• Police Pursuits; Governmental Immunity; Qualified and Official Immunity. The Minnesota Supreme Court held that police officers are not entitled to qualified immunity when they unreasonably use deadly force against a fleeing mentally ill person who has committed no serious crime prior to the pursuit. However, a bystander killed during a police pursuit cannot maintain a 14th Amendment substantive due process claim where the police officers’ pursuit was intended to protect the public from harm. Nonetheless, police officers are not entitled to common law official immunity when they violate a duty imposed by the department’s policies. Beverly Mumm v. Geralyn E. Mornson v. City of Minneapolis, A04-729, (Minn. 01/10/06). www.lawlibrary.state.mn.us/archive/supct/0601/opa040729-0110.htm

• Police Pursuits; Governmental Immunity; Official Immunity. In a case arising from an incident in which plaintiff was struck and injured by defendant who was being pursued by police officers after running a red light, the Minnesota Supreme Court held that where a police-vehicular-pursuit policy sets forth specific conduct required of officers, the officers do not have discretion to ignore the policy and are not entitled to official immunity for actions not conforming to the policy. The Court held that the pursuit policy creates a ministerial duty to continuously operate emergency lights and sirens. Therefore, if a pursuit was initiated, and the officers failed to use the emergency lights and sirens in a continuous manner, they were not entitled to official immunity from a claim by a third party injured by the party being pursued. Kristen Thompson v. City of Minneapolis v. Michael Litz, A04-1050, (Minn. 01/10/06). www.lawlibrary.state.mn.us/archive/supct/0601/opa041050-0110.htm

• Automobile Insurance; Underinsured Motorist Coverage. A person injured while loading a vehicle — by being pinned between the vehicle and another vehicle — is entitled to underinsured motorist coverage from the insurer of the vehicle she was loading because (1) at the time of the accident she was "occupying" insured’s vehicle and (2) her injury arose from the "maintenance or use" of insured’s vehicle. Illinois Farmers Ins. Co. v. Mariese Marvin, A05-874, (Minn. App. 01/17/06). www.lawlibrary.state.mn.us/archive/ctappub/0601/opa050874-0117.htm

— Michael A. Klutho
— David A. Turner
Bassford, Remele, A Professional Association