November 2006

November 2006

November 2006

November 2006

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Workers Compensation; No Tort Claim for Action in Scope of Employment. The workers’ compensation statute barred a tort claim by a copilot against the employer and the pilot-in-charge arising out of the crash in 2002 of the plane carrying Minnesota Senator Paul Wellstone. The decedent’s trustee asserted that the chief pilot was acting "grossly negligent," and that the pilot’s actions occurred within the "course and scope" of his employment. Although "grossly negligent" conduct allows a tort claim outside the ambit of the exclusivity provision of the workers’ compensation statute, Minn. Stat. §176.031, such a claim can only be asserted when the employee is acting "outside" the scope of employment. Because this lawsuit alleged that the wrongdoing occurred within the scope of employment, it could not obviate the statutory provision barring tort claims. Guess v. Priore, 2006 WL 2474095 (Minn. App. 08/29/06) (unpublished).

• Workers Compensation; Drive Home in Scope of Employment. An employee who drove a company vehicle home over the weekend, needing it Monday morning to pick up a client, and was fatally injured on his drive home, was found to be engaged in a business purpose and, therefore, his dependent was entitled to workers compensation benefits. Although commuting generally is not covered by workers compensation, the business purpose of this trip was at least a "concurrent reason" for driving the vehicle home. This duality of purposes warranted a determination that the employee was acting within the scope of his employment and was covered under the workers compensation law at the time of the fatal accident. Kurtz ex rel. Gillman v. Lakes Medi Van, Inc., 720 N.W.2d 590 (Minn. 2006).

• Workers Compensation; Wage Base Calculation. The Minnesota Supreme Court ruled that amounts paid by an employer into various management-labor funds, pursuant to a collective bargaining agreement, should not be included in the calculation of an employee’s weekly wages for purposes of determining workers compensation benefits. Because the payments were not discretionary and the employee had no control over the amounts contributed to each fund, the workers compensation judge correctly determined that the amounts paid into national and local pension funds, the health and welfare fund, the apprenticeship fund, the international training fund, and a general industry fund should be excluded from the employee’s weekly wage calculations. Prochnow v. Robert Gibb & Sons, Inc., 720 N.W.2d 589 (Minn. 2006).

• Workers Compensation; Status of Claimant. A workers compensation claim that morphed into a federal declaratory judgment case and then was remanded to state court to determine the status of a claimant was held not to constitute a "justiciable controversy." The issue was whether the claimant, who was injured while removing flood-damaged insulation from someone else’s house, was an employee of several counties at the time of the injury or an emergency volunteer not entitled to benefits under Minn. Stat. §12.22 subd. 2a. The appellate court vacated a determination of the Ramsey County District Court that the claimant was an employee entitled to benefits. The ruling was improper because the workers compensation court, where the claim originally was filed, is the "proper forum" to make this decision. Lake of the Woods County v. Fish, 2006 WL 2729458 (Minn. App. 09/26/06).

• Sexual Harassment; Unemployment Compensation. An employee who quit her job because her management failed to take effective action in response to her complaints about sexual harassment by a coworker was entitled to unemployment compensation benefits. Although the employer gave oral and written warnings to the coworker, they were not "effective" because the misconduct continued. Since this was a "classic case" of an employer’s failure to correct adverse working conditions, the employee was entitled to receive unemployment compensation benefits because she quit for "good reason" attributable to the employer. Nichols v. Reliant Eng’g & Mfg, Inc., 720 N.W.2d 590 (Minn. App. 2006).

• Sexual Harassment; Retaliation; Title VII. A temporary employee whose job was not renewed and was denied permanent employment after she was involved in an internal sex harassment complaint could not recover for retaliation under Title VII of the Federal Civil Rights Act. The internal complaint was made by a male employee against a supervisor, who referred to "ugly" women who worked there, which presumably included the claimant. Because she was not present at the time the comments were made, she was not "personally engaged" in any protected conduct. Her status as an "unknowing" subject of the other employee’s grievance was not maintainable under Title VII. Clark v. Johanns, 460 F.3d 1064 (8th Cir. 2006).

• Unemployment Compensation; "Single Incident" Exception. The Court of Appeals, reversing a ruling of DEED, held that a cashier at a retail facility was entitled to benefits after he was fired for violating company policy by opening the cash register by using an emergency switch. The transgression was insufficient to deny him unemployment compensation under Minn. Stat. §268.095, subd. 9, which allows benefits for a "single incident" that does not have a "significant adverse impact" on the employer. Pierce v. DiMa Corp., 721 N.W.2d 627 (Minn. App. 2006).

• Unemployment Compensation; Misconduct. A fast-food cashier who was fired for undercharging $3.30 on a meal she ate on the premises was denied unemployment benefits. The appellate court upheld the determination by DEED that the employee, who claimed her action was inadvertent, committed disqualifying "misconduct" because the undercharge reflected "dishonesty" that made her employer disinclined to "entrust" her with any responsibilities. Skarhus v. Davanni’s, Inc., 721 N.W.2d 340 (Minn. App. 09/19/06).

• Unemployment Compensation; Employer Failed to Verify Employment. An incarcerated employee was not automatically disqualified from unemployment compensation benefits and was entitled to benefits when the employee made arrangements to continue her employment on work release, but the employer failed to verify her employment to the authorities. Although the employee was jailed for assault, which was unrelated to her work, she made arrangements to continue her job on a work release program under the Huber law, Minn. Stat. §631.425, but the employer failed to verify her employment to allow her to participate in the program. Under these unique circumstances, the Minnesota Supreme Court held that the employee was not disqualified from receiving benefits due to "misconduct" although it pointed out that an employer remains "free to contest an unemployment compensation claim on the basis of employee misconduct if the underlying conviction … demonstrates a substantial lack of concern for the employment" under Minn. Stat. §268.095, subd. 6(a)(2) … ." Jenkins v. American Express Financial Corp., 721 N.W.2d 286 (Minn. 2006).

• ERISA; Loss of Severance. Employees who were promised severance benefits were not entitled to the benefits after they lost their jobs due to an internal consolidation and reorganization. The letter promising them severance did not apply to internal transactions or constitute a binding obligation under the Employee Retirement Income Security & Retirement Act (ERISA). However, the employees might be entitled to a "modest award" of attorney’s fees, even though they did not prevail because of the employer’s "deceptive behavior and flagrant" improprieties. Antolik v. Saks, Inc., 2006 WL 2620626 (8th Cir. 2006).

• Negligent Hiring; Background Check. A jury verdict for negligent hiring was upheld by the Court of Appeals on the grounds that the employer failed to inquire into the suitability of an employee who was entering private homes to paint. The employer knew that the employee had a chemical dependency and criminal history, including a recent theft charge, but failed to undertake an appropriate background check or investigate chemical dependency issues. The robbery and assault of a client by an accomplice of the employee after the employee had finished painting the home breached the employer’s duty to take reasonable care in hiring and warranted upholding the verdict for the injuries, including $43,000 in future medical expenses. Hines v. Aandahl Construction Co., LLC, 2006 WL 2598031 (Minn. App. 09/12/06).

ADMINISTRATIVE LAW

• NLRB; Scope of Federal Labor Law Coverage. The National Labor Relations Board (NLRB) narrowed the scope of employees covered by Federal labor laws and regulations in three related matters, including one from Minnesota.

In a proceeding entitled Oakwood Health Care, Inc., and International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), AFL-CIO, 2006 WL 2842124 (N.L.R.B.) (2006), the Board held that permanent "charge" nurses who oversee other nurses on a shift are "supervisors" and exempt from joining unions or coverage under labor laws, although those who temporarily rotate in that position are not so classified.

The standard adopted by the Board, by a 3-2 vote, for supervisory personnel not subject to union membership is whether they oversee another employee and can be held accountable for that subordinate’s performance through the exercise of "independent judgment."

But applying the test in two other cases led to conclusions that the employees were not supervisors. In Beverly Enterprises - Minnesota, Inc. d/b/a Golden Crest Healthcare Center and United Steelworkers of America, AFL-CIO, CLC, 2006 WL 2842126 (N.L.R.B.) (2006), the Board ruled that charge nurses at a nursing home facility in Hibbing were not supervisors because they were not accountable for poor performance of subordinates. A similar result also was reached, for different reasons, in a case involving "lead" workers at a manufacturing plant in Mississippi. In Croft Metals, Inc. and International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers, AFL-CIO, 2006 WL 2842125 (N.L.R.B.) (2006), the lead workers were not supervisors because they lacked independent judgment in directing work crews.

These rulings are significant because the new standard may mean more personnel who oversee work of others, such as "shift supervisors," are deemed ineligible to join unions and not subject to protection under federal labor laws.

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

November 2006

ENVIRONMENTAL LAW
LOOKING AHEAD

• CERCLA; Challenge to §107(a) Decision. The U.S. Supreme Court asked the Department of Justice on October 2nd to file a brief expressing the government’s position regarding the 2nd Circuit Court of Appeals’ decision in Consolidated Edison Co. of N.Y. Inc. v. UGI Utils., Inc., 423 F.3d 90 (2d Cir. 2005). In that case, the 2nd Circuit held that a Potentially Responsible Party ("PRP") could sue another PRP under CERCLA §107(a) if the former were seeking cost recovery for a voluntary cleanup not mandated by the government. The 2nd Circuit was the first court of appeals to come out in favor of the use of §107(a) by PRPs under such circumstances after the U.S. Supreme Court narrowed the scope of recovery for voluntary cleanups under §113(f)(1) in Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157, 125 S. Ct. 577 (2004). UGI later appealed the 2nd Circuit’s decision to the U.S. Supreme Court, which asked the DOJ’s opinion to help it decide whether to grant UGI’s appeal petition.

A split of opinion regarding the scope of §107(a) has emerged among the federal appellate courts since the 2nd Circuit decided UGI. The 2nd Circuit itself issued another opinion, Schaefer v. Town of Victor, 457 F.3d 188 (2nd Cir. 2006), that again found that a PRP could recover voluntary response costs from another PRP. The 8th Circuit Court of Appeals became the second appellate court to support recovery under §107(a) in August when it issued Atlantic Research Corp. v. United States of America, 459 F.3d 827 (8th Cir. 2006). Later that same month, however, the 3rd Circuit Court of Appeals rejected an effort by a PRP to recover voluntary responses costs under §107(a) in DuPont v. United States, 460 F.3d 515. Post-Aviall cases are also currently pending in the 7th and 9th Circuits.

— Bill Hefner
The Environmental Law Group

November 2006

FEDERAL PRACTICE
JUDICIAL LAW

• Certiorari; Forum Non Conveniens; Hypothetical Jurisdiction. The United States Supreme Court has granted certiorari to determine whether a court must resolve issues of personal jurisdiction prior to granting a forum non conveniens dismissal.

A divided 3rd Circuit panel held that a district court had erred in dismissing an action on forum non conveniens grounds prior to addressing the issue of personal jurisdiction, adopting the rule established in the 5th, 7th and 9th circuits. The dissent, while acknowledging that the Supreme Court has rejected the doctrine of "hypothetical jurisdiction," cited decisions by the 2nd and D.C. circuits and argued that a court may dismiss a case on forum non conveniens grounds without first resolving difficult issues of personal jurisdiction.

It appears that the 8th Circuit has yet to decide this issue. Malaysia Int’l Shipping Corp. v. Sinochem Int’l Co., 436 F.3d 349 (3d Cir.), cert. granted, ___ S. Ct. ___ (2006).

• Spoliation; Sanctions. Plaintiffs demolished their fire-damaged kitchen prior to the scene having been inspected by the defendant. In response to the defendant’s motion for spoliation-related sanctions, Judge Ericksen refused to exclude all evidence of the fire’s cause and origin, but indicated that "evidence that derives from the fire scene itself" would be excluded at trial, and that testimony from plaintiffs’ expert who had inspected the scene prior to the demolition of the kitchen would be excluded from plaintiffs’ case in chief. Wagoner v. Black & Decker (U.S.) Inc., 2006 WL 2289983 (D. Minn. 08/08/06).

• Spoliation; Sanctions. Judge Tunheim denied a spoliation motion premised on the plaintiff’s repair of a compressor prior to the defendant having been notified, finding that the compressor was repaired as part of the plaintiff’s attempt to mitigate its damages, and that the repair had been adequately documented with notes and photographs. Flint Hills Resources, L.P. v. Lovegreen Turbine Services, Inc., 2006 WL 2472819 (D. Minn. 08/25/06).

• Class Action Certification; Fed. R. Civ. P. 23(f); Interlocutory Appeal. The 8th Circuit granted a request for the interlocutory appeal of a class certification order and ultimately vacated the order. However, the 8th Circuit has yet to articulate a standard for granting Rule 23(f) appeals. Elizabeth M. v. Montenez, 458 F.3d 779 (8th Cir. 2006).

• Motion To Quash Non-Party Deposition; Standing. The 8th Circuit held that a party has standing to move to quash a deposition notice to a non-party when it has not been properly served with timely notice of the deposition, and when the deposition runs afoul of deadlines in a scheduling order. Rahn v. Hawkins, ___ F.3d ___ (8th Cir. 2006).

• Anti-Injunction Act; Relitigation Exception. Noting the absence of any 8th Circuit authority and a split among other circuits, Chief Judge Rosenbaum adopted the prevailing view and declined to invoke the All Writs Act or the "relitigation exception" to the Anti-Injunction Act to bar the prosecution of a Georgia state court action under the doctrine of res judicata. Jones v. St. Paul Cos., ___ F. Supp. 2d ___ (D. Minn. 2006).

• Motion to Remand; Dispositive or Non-Dispositive. On several occasions, this column has addressed the apparent split within the District of Minnesota on the issue of whether motions to remand are dispositive or nondispositive.

In a Report and Recommendation adopted by Judge Kyle, Chief Magistrate Judge Erickson recently acknowledged this split and, citing to two Circuit decisions which concluded that motions to remand are dispositive, issued his decision as a Report and Recommendation "in an abundance of caution." Stearns County v. Hoeschen, 2006 WL 2735493 (D. Minn. 08/31/06).

• Sanctions; Deposition Conduct; False Discovery Responses. In a combination Order and Report and Recommendation (subsequently affirmed by Judge Davis), Magistrate Judge Boylan barred the defendant corporation’s president from attending future depositions other than his own, ordered defendant’s witnesses to answer deposition questions they previously had refused to answer, criticized defendant’s counsel for whispering to witnesses during their depositions, and criticized the defendant for its failure to preserve evidence, its failure to conduct a thorough search for responsive documents, its failure to properly prepare its Fed. R. Civ. P. 30(b)(6) witness, and its production of "false and misleading" discovery responses.

As a sanction, the magistrate judge recommended that adverse findings of fact be made and that the jury be instructed regarding additional adverse inferences, and ordered that the plaintiff be permitted additional depositions, with all depositions taking place in the District of Minnesota. 3M Innovative Properties Co. v. Tomar Electronics, 2006 WL 2670038 (D. Minn. 09/18/06).

— Josh Jacobson
Law Office of Josh Jacobson

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Copyright; Correct Registration Prerequisite to Suit. Remember to register your client’s copyright before filing the lawsuit. And make sure the registration is done correctly. These two procedural hurdles tripped up Action Tapes, who sued Kelly Mattson for infringement of computer program copyrights. Although a copyright exists at the time of creation, and registration is not required, a plaintiff must "register," i.e., deliver the deposit, application, and fee, before commencing an action in district court. When a computer program copyright is being registered, the deposit must include identifying portions of the computer program. In affirming the summary judgment of no infringement, the 8^th Circuit Court of Appeals held that Action Tapes had not registered its computer program copyrights. The court of appeals rejected Action Tapes’ reliance on other registered copyrights owned by Action Tapes because none of those copyrights included a deposit that included identifying portions of the computer program. Action Tapes’ copyright claims were barred because it failed to "properly appl[y] for computer program copyrights and deposit[] the required source codes." Action Tapes, Inc. v. Kelly Mattson d/b/a Kelly J’s New Home Sewing Center, Nos. 05-3309, 05-3520 (8^th Cir. 08/20/06).

• Patent; Willful Infringement; Damages. Where the patent owner proved willful infringement, Judge Frank doubled the damages awarded and awarded the patent owner its attorneys fees because the case was "exceptional." Floe sued Newmans for infringement of a patent protecting a snowmobile trailer. The jury awarded Floe $643,881 in damages and found that Newmans’s infringement of the Floe’s patent was willful. The finding of willfulness opened the door for an additional $1,118,881 in enhanced damages and attorneys fees. Once a fact finder has determined that patent infringement was willful, the court can enhance the damages by as much as three times the original amount. Whether to enhance the damages, and if so by how much, is discretionary and based on a nine-factor test. In this case, the court determined that the majority of the nine factors, including a good faith belief that the patent was invalid, supported enhancement. Although the court could have tripled the original award, the court doubled it instead because some of the nine factors favored Newmans. The finding of willful infringement also enabled the court to consider whether attorneys fees should be awarded to Floe. The patent law awards attorney fees to the prevailing party only in "exceptional" cases. A finding of willful infringement is enough alone to make a case exceptional, but it is not per se exceptional. The court held that Newmans’ prolonging the litigation combined with willful infringement supported an award of Floe’s attorney’s fees in the amount of $475,000. Floe Int’l, Inc. v. Newmans’ Manufacturing Inc., Civ. No. 04-5120 (D. Minn. 08/23/06).

• Trademark; Cybersquatting; Contempt. Judge Davis doled out a hefty $500 per day fine against William Purdy, a cybersquatter, who was held in contempt of the court’s previous orders. Purdy, who lost a domain name dispute lawsuit a few years back to clients represented by Faegre & Benson, then registered and used domain names that are the trademarks of Faegre & Benson and even the personal names or pseudonyms of several Faegre lawyers that worked on the case. The court also ordered over $100,000 in fines for Purdy’s previous contempt. Faegre & Benson LLP v. William S. Purdy, Sr., Civ. No. 03-6472 (D. Minn. 08/24/06).

— Tony Zeuli
Merchant & Gould

November 2006

TAX
JUDICIAL LAW

• Income Tax: Motions for Continuance and Bias Removal. The Minnesota Tax Court rejected the tax protestor’s motion for a continuance based on an alleged federal appeal and claims of bias by the Tax Court judge. The motion for a continuance was made on the eve of the trial date, which had been set approximately a year earlier. The taxpayer claimed that the United States Tax Court petition he had filed could be reinstated within 90 days and amended. He admitted there was no prejudice to him in any continuance. Bias allegations against the trial judge and his request for the chief judge’s ruling on the removal issue were rejected. On the merits, the court determined that the taxpayer had taxable income reportable for 2000 and 2001 and the orders should be recalculated for tax, penalties and interest. The court also stated that the General Rules of Practice for the District Courts were not adopted by the Minnesota Tax Court either by the statute (Minn. Stat. §271.06, Subd. 7) or by the Tax Court Rules. Ronald E. Byers v. Commissioner of Revenue, No. 7601-R, 2006 WL 2380586 (Minn. T. Ct. 08/14/06).

• Sales Tax: Exempt "Farm Machinery"; Grain Bins. The Minnesota Tax Court held that grain bins purchased by the taxpayer for installation at farm sites and part of the grain drying system did not qualify as "farm machinery," and therefore were subject to use tax. The taxpayer sold and installed for its farm customers grain dryers and grain drying systems. As part of constructing the system, it purchased "grain bins." The "farm machinery" statute in Minn. Stat. §297A.01, Subd. 15 exempts machinery if "used directly and principally in the production for sale" of agricultural crops. "Farm machinery" is further defined as including the "grain dryers" and "similar installations," but the exemption specifically excludes "grain bins." The court rejected the taxpayer’s argument that the "grain bins" were machinery used "directly and principally in the production for sale," that the bins were used in harvesting agricultural products; and that the bins were a "similar installation" under the statute. Further, "grains bins," even though integral parts of grain dryer systems, were specifically excluded from the statute. The plain wording of the statutory language did not include "grain bins" incorporated into grain drying systems since other parts of the statute included equipment and machinery used in specified "systems." Therefore, the purchases of the grain bins were subject to use tax. The case is on appeal to the Minnesota Supreme Court. Custom Ag Service of Montevideo v Commissioner of Revenue, No. 7714-R, 2006 WL 2380596 (Minn. T. Ct. 08/02/06).

• Procedure: Failure to Comply with Timely Appeal; Corporate Franchise Petition. In Piney Ridge Lodge, Inc. v. Commissioner of Revenue, No. 7738-R, 2005 WL 2648921 (Minn. T. Ct. 10/18/05), The Minnesota Tax Court held that the corporate taxpayer’s appeal for years 1998 through and including 2001 failed to comply with the 60 days to appeal in a timely fashion. On September 2, 2003, the commissioner issued a order for the years 1998 through 2001. In December 2004, the taxpayer received a "Final Notice and Demand for Payment." The taxpayer did not appeal to the Minnesota Tax Court until February 11, 2005. The court dismissed the taxpayer’s contention that the appeal was timely because the taxpayer was working with the corporate office audit supervisor to resolve the tax matter or that the notice and demand was an order. The court felt that the statutory requirements were not met, and taxpayer could have taken a timely appeal and worked with the commissioner at the same time.

The Minnesota Supreme Court affirmed, holding that Piney Ridge had 60 days after the order to either appeal the assessment to the Tax Court or file an administrative appeal to the department. Minnesota law does not provide that the discussions or negotiations with the commissioner toll or suspend the appeal period. Accordingly, it held that Piney Ridge did not perfect an administrative appeal to either the commissioner or the Tax Court. Piney Ridge Lodge, Inc. v. Commissioner of Revenue, No. 05-2387, 2006 WL 2075231 (Minn. 07/27/06).

• Excise Tax: Chapter 298 Aggregate Material Tax. The Minnesota Tax Court held that a contractor who continually and regularly removed aggregate material from a landfill, and used it at a construction site and billed the owner for the aggregate material, met the definition of an "operator" under Minn. Stat. §298.75, Subd. 1(3) and was liable for the aggregate material tax. The taxpayer was a contractor who went to a landfill site and hauled aggregate material to a construction site for the MAC at the airport. The taxpayer argued that it was not "an operator" because its main or principal business was not hauling of aggregate. Rather, it was a general contractor for airport projects and road construction projects and that removal and hauling of aggregate material was ancillary and incidental to its main business. The court found that the phrase "engaged in the business of removing aggregate" was ambiguous but construed under Minnesota case law as requiring continuity and regularity of the taxpayer’s business and did not require that the activity be the taxpayer’s sole or primary activity. Lastly, the court found that the taxpayer removed the aggregate material, and billed for the aggregate material, and was paid for the aggregate material and therefore complied with the purpose of a sale for the definition contained in Minn. Stat. §298.75, Subd. 1(3). Shafer Contracting Co. Inc. v. County of Dakota, C8-05-7603, 2006 Minn. TAX LEXIS 27 (Minn. T. Ct. 09/11/06).

• Sales Tax: Minnesota Sales Tax on Fuel; Rail Carriers; "4R" Act. The U.S. District Court for the District of Minnesota held that the Minnesota sales and use tax on diesel fuel purchases used by rail carriers is not a discriminatory tax against rail carriers in violation of 49 U.S.C. 11501(b)(4) ("4R" Act). The court held that to be discriminatory for purposes of the "4R" Act, a tax must be discriminatory in its treatment of one party as compared to someone else. The proper class comparison to evaluate the sales tax imposed on the rail carriers’ fuel, for purposes of the "4R" Act’s prohibition of discriminatory taxes, was a "competitive mode" comparison class consisting of rail carriers, barges, air carriers, and motor carriers. Therefore, the sales and use tax on fuel used by rail carriers was not invalid under the "4R" Act’s prohibition of discriminatory taxes; both rail carriers and barges were subject to sales and use tax on fuel and motor carriers paid what looks like considerably greater, although different, tax on fuel. The expenditure of tax revenues was not relevant to a determination of whether the tax was discriminatory. The court followed the Minnesota Supreme Court’s decision on essentially the same sales tax issue in Burlington Northern v. Commissioner of Revenue, 606 N.W.2d 54 (Minn. 2000). Union Pacific Railroad Company and Soo Line Railroad Company v. Daniel Salomone, et al., No. 04-924 (JRT/JSM), 2006 WL 2438813 (Minn. D.C. 08/22/06).

• Minutes of Audit Committee Meeting Protected by Attorney-Client Privilege. The court, presiding over a class securities fraud lawsuit alleging market manipulation, declined to compel production of the unredacted minutes of a meeting of the defendant board’s audit committee at which the company’s outside counsel was present. The court concluded that the defendants met their burden of showing that the redacted portion of the minutes included material that was subject to the attorney-client privilege, and was not — as the plaintiff contended — limited to "a recounting of business transactions." The issue was legal or business advice. Desert Orchid Partners LLC v. Transaction System Architects Inc., No. 8:02CV553, 2006 U.S. Dist. LEXIS 47556 (D. Neb. 05/17/06).

• Sale Tax Exemption Denied for Hog Facilities. The Iowa Supreme Court affirmed sales tax assessments based on findings that certain properties that taxpayers used in pork production were not exempt from Iowa sales or use tax because the properties were either no longer tangible personal property having become real property by incorporation, or were not directly and primarily used in livestock production or in the production of agricultural products. Iowa AG Construction Co., Inc. v. State Bd. Of Tax Review, No. 72/04-1836, 2006 Iowa Sup. LEXIS 118 (IA 09/15/06).

• Division of Income for Tax Purposes Act; Redemption of Marketable Securities. Two California cases were recently decided involving application of the Uniform Division of Income for Tax Purposes Act to income arising from the redemption of marketable securities. In Microsoft Corp. v. Franchise Tax Board, the California Supreme Court held that the entire redemption price of marketable securities at maturity generates "gross receipts" that are includible in the three-factor apportionment formula used to calculate a multistate entity’s tax. However, the Court also found that the commissioner had met its burden of establishing that the inclusion of the full redemption price of the securities did not "fairly represent" the extent of Microsoft’s business activity in California and so the commissioner could use an alternate apportionment formula to calculate the entity’s tax. In the companion case of General Motors Corp. v. Franchise Tax Board, the Court also held that the entire redemption price of marketable securities held to maturity by General Motors was includable as gross receipts in the sales factor of the apportionment formula. However, with respect to repurchase agreements (commonly referred to as "repos"), the Court found that they were analogous to secured loans for UDITPA purposes and so only the interest received could be included in gross receipts. Microsoft Corp. v. Franchise Tax Board, No. S133343, 139 P.3d 1169 (Cal. S. Ct. 08/08/06); General Motors Corp. v. Franchise Tax Board, No. S127086, 139 P.3d 1183 (Cal. S. Ct. 08/08/06).

• Maryland’s "Wal-Mart Law" Preempted by ERISA. The District Court of Maryland ruled that Maryland’s so-called "Wal-Mart law," requiring expenditure of 8 percent of payroll on health care, is preempted by the Employee Retirement Income Security Act of 1974, 29 U.S.C. §1001, et seq. ("ERISA"). Retail Industry Leaders Association v. Fielder, et al. Civ. No. JFM-06-316 (U.S.D.C. MD 07/19/06).

• Answer Required in All Small Tax U.S. Tax Court Cases. The U.S. Tax Court proposed an amendment to its Rules of Practice and Procedure requiring the filing of answers by the IRS in all small tax cases of less than $50,000, effective November 27, 2006. The time periods within which to answer or move with respect to the petition, form and content of the answer, and the effect of the answer are provided in Rule 36. See BNA Daily Tax Report at page G-1 (09/13/06).

ADMINISTRATIVE DEVELOPMENTS

• Sales and Use Tax: Fabrication Labor and Prefinishing Woodwork. In Minnesota Department of Revenue Notice No. 06-10 (09/11/06), the commissioner stated his position on whether prefinishing woodwork was taxable fabrication services pursuant to Minn. Stat. §297A.61, Subd. 3(c). Woodwork refers to wooden interior fittings in a house or building with staining and sealing of the wood after installation. Examples are doors, mantels, moldings, trims, staircases, and window sills. Under the Revenue Notice, if a general contractor pays a subcontractor to prefinish woodwork as part of a project the general contractor is performing for a customer, the payments by the general contractor to the subcontractor for the prefinishing are subject to tax. This is so whether the unfinished woodwork was purchased by the general contractor or the customer. The commissioner’s position does not apply to contractors or employees of contractors who prefinish woodwork themselves and also install it, or to owners of real property who buy unfinished woodwork for their real property and prefinish it prior to installation. The effective date of the Revenue Notice is for sales and purchases made on or after January 1, 2006. According to the Revenue Notice, this position does not represent a change in the commissioner’s position on prefinishing woodwork and no refunds will be issued for periods prior to January 1, 2006.

• Sales and Use Tax: Taxable Installation, Fabrication Labor, and Nontaxable Repair Services. In Minnesota Department of Revenue Notice No. 06-11 (09/11/06), the commissioner stated his position on charges for taxable installation and fabrication labor and nontaxable repair labor to reflect the changes made, effective January 1, 2002, by the Streamlined Sales Tax amendments. Installation charges are a part of the sale price, even if separately stated. Repair labor continues to not be subject to the sales tax when separately stated. Fabrication labor means services to make, create or assemble a new item or alter an existing item into a new or changed item. Installation labor means services to set up an item and to position or to connect, adjust or program it for use, or add something new or different to an item. Repair labor means services to mend or restore an item that was broken, worn, damaged, defective, or malfunctioning, to working order or operating conditions so that it can be used for its original purpose. That is, repair labor restores an item to its original use. The Revenue Notice also states that, effective July 1, 2002, Minn. Stat. §297A.61, Subd. 3(j) was enacted to tax installation services charged by a third party. A third party installer is required to charge tax on the installation of an item if the seller of the item would have been required to charge sales tax on the installation. Fourteen examples to illustrate the difference between taxable and exempt labor charges are provided. Revenue Notice 91-20 is revoked.

• Extension Secured Outside Statute of Limitations Valid. The IRS ruled that the Form 2750 waiver was valid and enforceable, notwithstanding the fact that the waiver was executed outside of the original three-year assessment period provided by IRC §6501(a). The IRS found no legal authority that would prohibit the execution of a written agreement to extend the period of assessment during the 90-day extension provided under IRC §6672(b)(3). Chief Counsel Advice 200637001.

• No Time Limit for Estate Tax Liens, Security; IRC §6166. The IRS concluded that there was no statutory period of limitations for demanding security for an election under IRC §6166 — at least as long as the assessment has not been paid. The IRS also concluded that it could seek security at any time, or additional security, such as in the event that the existing security might no longer provide the IRS with adequate assurance that the tax would be paid. The IRS noted, however, that the taxpayer’s obligation to furnish security under IRC §6166 is unrelated to the normal assessment and collection procedures. A taxpayer seeking an election under IRC§ 6166 has the ability to request an appeals conference if the election is denied. If the appeals conference still results in denial, the taxpayer may then petition the Tax Court. Chief Counsel Advice 200627023.

• Qualifying Child Tie-Breaker Rule; Noncustodial Parent Rule. Under Notice 2006-86, except to the extent that the special rule for noncustodial parents applies, the tie-breaker rule applies uniformly. In other words, when more than one taxpayer claims a child as a qualifying child, the child is treated as the qualifying child of only one taxpayer for all the provisions that employ the uniform definition of a qualifying child (head of household filing status under IRC §2(b), the IRC §21 child and dependent care credit, the IRC §24 child tax credit, the IRC §32 earned income credit, the IRC §129 exclusion for dependent care assistance, and the IRC §151 dependency deduction). The tie-breaker rule is applied to these provisions as a group, rather on a section-by-section basis. However, Notice 2006-86 provides that if the IRC §152(e) rule for noncustodial parents applies, a child may be treated as the qualifying child of two taxpayers. A noncustodial parent may claim the child as a qualifying child only for child tax credit and dependency deduction purposes. He cannot claim the child as a qualifying child under IRC §152(e) in determining head of household filing status, the earned income credit, the child and dependent care credit, or the dependent care assistance exclusion. Only the custodial parent (or other eligible taxpayer) may claim the child as a qualifying child for those purposes. Effective for taxable years beginning after December 31, 2004. Notice 2006-86, 2006-41 IRB.

• "Triangular B" Reorganizations with Foreign Corporations. IRS announced that it will issue regulations under IRC §367(b) that apply to triangular "B" reorganizations in which either the parent or its subsidiary is foreign, and the subsidiary buys its parent’s stock for property and then transfers that stock in exchange for the stock or assets of a target corporation. The regulations will treat the transfer of property from the subsidiary to its parent as a distribution of property under IRC §301(c). The Notice states that "the taxpayer’s characterizations of these transactions raises significant policy concerns," especially when either the parent or the subsidiary (or both) is a foreign corporation. When a parent is domestic and the subsidiary is foreign, for example, the deal would result in tax-free repatriations of foreign earnings. If the parent is foreign and the subsidiary is domestic, the U.S. earnings could be repatriated to the foreign parent with no withholding tax — a variation that also raises earnings stripping concerns. Effective for transactions occurring on or after September 22, 2006. Notice 2006-85, 2006-41 IRB.

• Attorneys Fees Paid to Class Counsel. The IRS determined that attorneys fees paid in a class action by a defendant taxpayer to class counsel under an opt-out settlement agreement are not subject to information reporting to the class members under the IRC §6041. Letter Ruling 200625031.

• Designated Roth Accounts under a IRC §401(k) or IRC §403(b) Plan. Have you read about the "new Roth 401(k) plans" but not really known what they were all about? The IRS has developed a new publication, "Designated Roth Accounts under a 401(k) or 403(b) Plan — Frequently Asked Questions," (Publication 4530) to provide you with answers. The publication can be found online at www.IRS.gov/ep by clicking on "EP Forms & Publications" under the "Retirement Plans Community Topics" section.

• Merging "S Corporations" into Disregarded LLC Causes Deemed Asset Sale. The IRS issued a ruling that dealt with the acquisition by merger of two S corporations. The mergers of the S corporations into a limited liability company that is a disregarded entity is treated as a deemed sale of the assets of the S corporations. The deemed sale is followed by the deemed distribution of cash to the shareholder of the S corporations in the complete liquidations of the S corporations. This gain or loss passes through to the shareholder pursuant to IRC §1366. The S corporations recognize gain or loss on their distributions in complete liquidation pursuant to IRC §336. P.L.R. 200628008.

• Electronic IRS Transcripts. The IRS announced the establishment of the Income Verification Express Services ("IVES") program, a new electronic delivery service for providing IRS transcripts and records. Effective Oct. 2, these are available upon submission of IRS Form 4506-T, Request for Transcript of Tax Return. Transcripts will be delivered using the e-Services platform via a secure mailbox. The new service will cost $4.50 per transcript requested. To participate in the IVES program, companies will need to register and identify employees acting as agents to receive electronic transcripts on the company’s behalf. The registration process takes about two weeks to complete. IRS Announcement 2006-7.

• "Per Diems" Procedure. The IRS updated the Revenue Procedure on per diems that businesses can use to reimburse employee expenses for lodging, meals, and incidental expenses. The procedure also provides a method for employees and self-employed individuals, who are not reimbursed for their travel expenses to calculate travel expense deductions. The procedure is effective for per diem allowances for lodging, meal, and incidental expenses, or for meal and incidental expenses only, paid to an employee on or after October 1, 2006, with respect to travel occurring on or after October 1, 2006. New per diem rates are also set forth. Revenue Procedure 2006-41.

LEGISLATION

• Pension Protection Act of 2006. Some minor but important parts of the act that might go unnoticed are:

1. "Qualified Appraiser" Defined and Penalty Increased for Charitable Appraisals. The act expands the previous definition of qualified appraisal of charitable property by codifying a requirement in the IRS regulations that the appraisal must be done by a "qualified appraiser" in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the IRS. A "qualified appraiser" is an individual who:

*Has earned an appraisal designation from a recognized professional organization or has otherwise met minimal education and experience requirements under IRS regulations;

*Regularly performs appraisals for compensation; and

*Meets any other requirements as may be described by IRS.

In addition, the act revises the penalties imposed on appraisers. Rather than the aiding and abetting penalty under IRC §6701 (generally limited to $1,000), appraisers are now subject to a penalty equal to the greater of $1,000 or 10 percent of the underpayment attributable to the valuation misstatement, up to a maximum of 125 percent of the gross income resulting from preparing the appraisal, in certain circumstances. The appraiser penalty applies for appraisals prepared for returns or submissions filed after the date of enactment (August 17, 2006). Whether the provision will have a "chilling" effect on appraisers and significantly impact appraisals for tax purposes remains to be seen. Undoubtedly, appraisals for tax purposes will be more conservative.

2. Valuation Penalty Tests Toughened. In general, current law provides for a substantial valuation misstatement and gross valuation misstatement penalties for income, estate, and gift tax purposes in certain situations. The act reduces the percentages that trigger each of the penalties. "Reasonable cause" is no longer a defense to a gross valuation misstatement penalty for income, estate, or gift tax purposes. Specifically, the act provides:

*Income Tax — Gross Valuation Misstatement: The penalty is 40 percent if the valuation claimed is 200 percent (down from 400%) of the "correct" value

*Estate and Gift Tax — Substantial Valuation Misstatement: If there is an underpayment of estate or gift tax by more than $5,000 and if the value claimed on the return is from 65 percent to 40 percent (up from 50% to 25%), there is a penalty of 20 percent of the underpayment of estate or gift tax attributable to the undervaluation.

*Estate and Gift Tax — Gross Valuation Misstatement: The penalty is 40 percent if the valuation claimed is 40 percent (up from 25%) or less of the "correct" value. For example, the 20 percent substantial evaluation misstatement penalty could apply if an estate or gift tax return claims a 35 percent discount that is disallowed totally. In all likelihood, we will see more penalty situations than in the past. These tougher rules apply to any returns filed after the date of enactment.

3. Charitable Contributions of Taxidermy Property. Charitable deductions for contributions of taxidermy property to a qualified charitable organization by the person who stuffed and mounted the property, or the person who incurred the cost of stuffing or mounting the property, shall be generally limited to basis. Effective for contributions made after July 25, 2006.

LOOKING AHEAD

• New IRS Audit Targets. The IRS has opened new audit targets in three areas. First, the IRS has begun auditing 5,000 Subchapter S corporations for 2003 and 2004 tax years as part of the IRS’s National Research Program, which aims to measure taxpayer’s payment filing, and reporting compliance actions. The audits are to be completed by 2007. BNA Daily Tax Report at page G-2 (08/01/06). Second, the IRS is examining public companies for possible violations of the IRC related to backdating of stock options. BNA Legal News at page 2076 in Vol. 75, No. 5 (08/08/06). The SEC has opened similar audits. Third, the IRS has focused on nonprofit hospitals and whether they provide "measurable community benefits." BNA Daily Tax Report at page GG-1 (09/14/06).

• DOJ Policy on Business Privilege Waivers. Certain members of Congress threatened to override a Justice Department policy with legislation unless Justice voluntarily relaxes guidelines that encourage corporations to waive attorney-client privilege in order to avoid criminal prosecution. The Thompson Memorandum of Justice sets forth factors prosecutors must consider in determining whether a corporation should receive "cooperation credit," or leniency, in charging decisions during federal government investigations. One of the key factors cited in the memorandum is whether the business waived attorney-client and work product privileges and provided any internal company investigation to prosecutors. Congressional concerns expressed turn on "the presumption of innocence" and policy conflicts with fiduciary duties of directors in the corporation in deciding whether an employee should be provided a defense or not. BNA Daily Tax Report at page G-13 (09/13/06).

• S Corporation Proposed Changes. A number of bills have been introduced in Congress that could significantly affect S corporation usage. S. 3857 would, in part, permanently extend temporary rules allowing small businesses to expense up to $100,000 of the cost of property per tax year and reduce from ten years to seven years the holding period subjected to built-in gains tax for subchapter corporations converting to S corporation status. Another Senate bill, S. 3838, would change the IRC to make it easier for banks to elect S corporation status by not treating director shares issued by banks as separate classes of stock, and would amend several code sections to provide more favorable tax treatment to firms using the reserve method of accounting for bad debts that elect to reorganize as S corporations. H.R. 4421, in part, would allow S corporations to issue multiple classes of stock and convertible debt. H.R. 4006 would amend IRC §444A and generally to allow S corporations to elect tax years ending on the last day of any month between March and December. BNA Daily Tax Report at page G-3 (09/11/06).

— Jerry Geis
Briggs & Morgan

TORTS & INSURANCE
JUDICIAL LAW

• Attorney Sanctions; Finding of Bad Faith Not Required. Plaintiff and defendant entered into two contracts. Plaintiff brought a breach of contract action against defendant under an alleged third contract. Defendant denied the existence of the third contract. Plaintiff argued that by failing to respond to the request for written confirmation of the contract, defendant had acquiesced to the contract through its silence. The district court granted defendant’s motion for summary judgment holding that the plaintiff lacked sufficient evidence to prove that a contract had been formed. The court also awarded sanctions against plaintiff on the basis that plaintiff had failed to conduct a reasonable investigation as to the existence of the contract after defendant advised that the breach of contract claim was frivolous.

The Court of Appeals affirmed, holding that given the previous history of business dealings between the parties, the defendant’s silence as to the written confirmation of the contract was not indicative of the defendant’s acceptance to the contract offer, especially since the express terms of the alleged contract required written confirmation.

The court also upheld the award of sanctions against the plaintiff in spite of the fact that the district court had not made a finding of bad faith. The court held that under §549.211, no finding of bad faith was required to award sanctions based on the failure to investigate the claims in the complaint. Cargill Incorporated v. Jorgenson Farms, A05-2287, (Minn. App. 08/08/06). www.lawlibrary.state.mn.us/archive/ctappub/0608/opa052287-0808.htm

• Contracts: Rental Agreements; Exculpatory Clause. Plaintiffs, self-storage facility renters, failed to pay rent to defendant facility owner. Defendant obtained and enforced a statutory lien on the personal property stored in the facility and sold the property at auction. Plaintiffs then sued defendant on a variety of claims. The district court ruled that the exculpatory clause in the rental contract limiting damages to $5,000 was invalid and that the defendant failed to comply with the notice requirements of the Minnesota Liens on Personal Property in Self-Service Storage Act, and awarded damages to plaintiffs. The district court addressed, but did not resolve, the issue of whether defendant intentionally violated the law, which would make the exculpatory clause unenforceable. The defendant appealed.

The Court of Appeals reversed and remanded, holding that the exculpatory clause was valid because (1) it was unambiguous, (2) it was not in violation of public policy based on plaintiff’s ability to negotiate the terms of the agreement and availability of other self-storage facilities, and (3) the exculpatory clause excepts any loss that is directly caused by defendant’s willful violation of law. The court held that the parties’ agreement to limit damages to $5,000 is consistent with the act because it partially, not fully, exempted defendant from potential exposure and still allowed plaintiff to purchase additional property insurance. The case was remanded to determine whether or not defendant’s actions (regarding notice of the auction) constituted willful conduct to which the exculpatory clause would not apply. Johanns v. Minnesota Mobile Storage, Inc., A05-1578, (Minn. App. 08/15/06). www.lawlibrary.state.mn.us/archive/ctappub/0608/opa051578-0815.htm

• Legal Malpractice: Statute of Limitations. Plaintiff sued defendant attorney for legal malpractice alleging that defendant negligently drafted an antenuptial agreement that failed to protect plaintiff’s interest in any marital appreciation to his premarital property. The district court dismissed plaintiff’s complaint on statute of limitation grounds because plaintiff’s cause of action accrued either when he signed the agreement and was married or when the premarital property thereafter appreciated; both events occurring more than six years before the commenced action.

A divided Court of Appeals reversed, holding that plaintiff’s cause of action did not accrue until much later, i.e., when the district court awarded a portion of the marital appreciation of plaintiff’s premarital property to the spouse in a marital dissolution proceeding, which occurred less than six years before this action commenced. The defendant appealed.

In a split decision, the Supreme Court reversed, holding that the district court correctly determined that the statute of limitations bars plaintiff’s action because it accrued when he signed the antenuptial agreement and was married. The Court reaffirmed the "damage" rule of accrual under which the cause of action accrues when "some" damage has occurred as a result of the alleged malpractice — that is, on the occurrence of any compensable damage, whether or not specifically identified in the complaint. Therefore, upon plaintiff’s marriage, plaintiff’s spouse was legally entitled to make a claim upon a portion of any appreciation in his premarital property, contrary to what the pre-nup should have said, and this exposure was an injury that resulted in some damage sufficient to survive a motion to dismiss. Antone v. Mirviss, A04-1367, (Minn. 08/17/06). www.lawlibrary.state.mn.us/archive/supct/0608/opa041367-0817.htm

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