October 2006

ALTERNATIVE DISPUTE RESOLUTION
JUDICIAL LAW

• Limited Scope of Narrow Arbitration Clause Affirmed. Lipton brought suit to compel Shurgard to arbitrate the purchase price of a storage facility it operated under a lease. The parties had entered into a lease agreement that included a purchase option. Also within the lease was a narrow arbitration clause, providing for a panel of real estate experts to resolve disputes over additional sales terms and conditions. Lipton made several offers to buy the property, all of which Shurgard rejected. As a result, Lipton filed suit, arguing that Shurgard was required to arbitrate the purchase price. The 8th Circuit disagreed, noting that this particular arbitration clause was intended to cover terms not contemplated in the agreement. By contrast, the purchase price had been contemplated by the parties, and a formula for its calculation appeared in the contract. Therefore, the 8th Circuit refused to force the parties to arbitrate the purchase price when the arbitration clause was specifically limited to the addition of supplemental terms. Lipton-U. City, LLC v. Shurgard Storage Centers, Inc., 06-1282, 2006 WL 2100763 (8th Cir07/31/06).

• Mediated Settlement Agreement Deemed Binding and Enforceable. Two former employees of Hypertension Diagnostics, Inc. ("HDI") reached a settlement agreement related to whistleblower claims during a voluntary mediation session. Although the parties memorialized the settlement in a written agreement, HDI refused to abide by the settlement, claiming that it was "merely a preliminary document." The Minnesota Court of Appeals looked at Minnesota’s statutory requirements for settlement agreements. Under Minnesota law, settlement agreements are binding if they contain a provision stating that they are binding and include other advisory statements. Minn. Stat. §572.35(1) (2004). Moreover, the agreement itself indicated that it would not be necessary to prepare "formal documents" in order "to facilitate the detail of [the] agreement." Since the mediated settlement agreement met these requirements, the court upheld its validity. Chesney v. Hypertension Diagnostics, Inc., A05-2210, 2006 WL 2256590 (Minn. App. 08/08/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa052210-0808.htm

• Iowa: Court Cannot Vacate Arbitral Award Sua Sponte. The Court of Appeals of Iowa reversed a district court’s decision to deny ten motions to confirm arbitration awards, despite the lack of any vacatur motions by the opposing parties. Citing an alleged absence of a written agreement to arbitrate, the district court unilaterally decided to refuse confirmation of the awards. In five of those denied motions, the district court claimed that the agreements were unenforceable contracts of adhesion. The Court of Appeals reversed and remanded with instructions to confirm the awards. Under Iowa law, which is similar to section 11 of the Uniform Arbitration Act, a court must confirm an arbitral award unless a timely ground to correct or vacate the award is filed. Iowa Code §679A.11 (2005). Thus, it was inappropriate for the court to deny confirmation, absent an opposing motion from the other parties. Even if a valid motion to vacate had been filed, the court noted the strong federal policy favoring arbitrations, which results in a very limited role for the judiciary in reviewing arbitral awards. MBNA America Bank, N.A. v. Boyce, 04-1733, 2006 WL 2265297 (Iowa App. 08/09/06).

— Ryan D. Chandlee
National Arbitration Forum

October 2006

CRIMINAL LAW
JUDICIAL LAW

• Blakely: Not Applicable to Facts Supporting Adult Certification. Appellant is a juvenile who was indicted and convicted on three counts of first-degree murder. Appellant asserts that he has a right to a jury determination of the facts supporting adult certification. Because juvenile proceedings have historically been designated as civil rather than criminal proceedings, Blakely does not apply. Blakely is rooted in a criminal defendant’s 6th Amendment right to have a jury determine guilt beyond a reasonable doubt, while the guarantees afforded juveniles at certification and adjudication proceedings are based only on the Due Process Clause and its requirement for fundamental fairness. Hence, Blakely does not apply. These are pretrial and jurisdictional type proceedings which also make Blakely inapposite. In re J.C.P., Jr., A05-1294 (Minn. App. 07/03/06). www.lawlibrary.state.mn.us/archive/ctappub/0607/opa051294-0703.htm

• Sentence: Accomplice After the Fact Convictions; No Consecutive Sentences. The Supreme Court affirms the Court of Appeals decision in State v. Skipintheday, 704 N.W.2d 177 (Minn. App. 2005). The respondent had helped some gang members with a get-away car and concealing a weapon, following a shooting incident where two people were seriously wounded, and one person killed. The Supreme Court notes that while coconspirators, or "accomplices before the fact" may be liable for crimes against persons, and hence, are subject to multiple sentences, an accomplice after the fact helps a person who has committed a crime evade the law, but not to commit the offense. Hence, the respondent’s three counts of being an accomplice after the fact, all arising from a single behavioral incident, are not multiple victim crimes, and are therefore not subject to multiple punishment under Minn. Stat. §609.035. State v. Todd Skipintheday, A04-1293 (Minn. 07/13/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa041293-0713.htm

• Self-Defense CRIM JIG 7.07 Criticized. The first clause of CRIM. JIG 7.07 states as follows: "If the defendant began or induced the incident that led to the necessity of using force in a defendant’s own defense, the right to stand the defendant’s ground and thus defend himself is not immediately available to him." The Supreme Court rejects appellant’s argument that a jury may be persuaded to deem a defendant to have forfeited self-defense by simply beginning an "incident" with conversation or a simple quarrel. Further language in the instruction seems to equate the word "incident" with "affray" and "contest." Furthermore, any error would be harmless, because the appellant did not request the JIG be modified or supplemented at trial. In a concurring opinion, Justice Hanson severely criticizes the JIG, concluding that it materially misstates the law in two respects: "incident" is unduly broad, and there is no requirement that the defendant is in some way culpable in beginning the incident. Hence, forfeiture of self-defense may be too easily granted by juries. State v. Brian Keith Edwards, A04-2396 (Minn. 07/13/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa042396-0713.htm

• Evidence: Extra-Judicial Statements of Identity to Medical Personnel. Appellant was convicted of third degree assault against the mother of his children. At trial, the victim testified that the injuries were caused accidentally; however, the night of the incident, the victim stated to her nurse that the appellant had inflicted the injuries in question, and also described the type of slap to the head which was delivered. Held, while the description of the hand slap as a mechanism of the injury is admissible under the medical diagnosis exception provided in Rule 803 (4), the identity portion is not. Without any expert testimony on the scope of treatment and whether the identity of an abuser is reasonably pertinent to that treatment, the Supreme Court states that they are "reluctant to adopt a rule of admissibility under the medical exception." Held, where, as here, there is an insufficient evidentiary foundation to establish that the identity of the person who caused an injury was reasonably pertinent to the medical diagnosis or treatment of that injury, the statement of identity is not admissible under Rule 803 (4).

Next, the statement to the nurse was not admissible under Rule 801 (d)(1)(C), which allows statements of identification after perceiving the person. This rule has only been applied to cases involving prior identification of an unknown offender, for example in line-ups, show-ups or similar procedures. Held, Rule 801 (d)(1)(C) does not extend to the out-of-court accusation against an offender whose identity was well known to the victim.

Finally, the residual exception under 803 (24) does allow the admission of these two prior statements. Using a totality of the circumstances approach, the Supreme Court enumerates six factors, including strong corroboration, which ensures the trustworthiness of the statements to the nurse practitioner. Crawford is not implicated because the victim testified and was subject to cross-examination. State v. Andre Robinson, A04-840 (Minn. 07/20/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa040840-0720.htm

• Expungement: Expungement Disallowed Under §609a.03. District court expunged a gross misdemeanor theft conviction of the respondent under a petition brought pursuant to Minn. Stat. §609A.03. That statute, however, generally requires that criminal cases be "resolved in favor of the petitioner." Because she pleaded guilty, appellant did not qualify. There is some ambiguity in the statute, pertinent to sealing criminal records and weighing the public’s interest against the advantages to the petitioner. That ambiguity is resolved in this case, by stating that the statute does not provide a separate statutory ground for expungement in weighing the two interests. Because the petitioner did not bring the petition under the court’s "inherent authority", the expungement cannot be upheld on that basis. State v. L.W.J., A05-2071 (Minn. App. 07/18/06). www.lawlibrary.state.mn.us/archive/ctappub/0607/opa052071-0718.htm

• Crawford: Retroactivity; Not Retroactive Under Teague. Appellant was convicted of first-degree criminal sexual conduct in 1996, well before Crawford. Following Crawford, appellant filed a second petition for post-conviction relief alleging he was entitled to the benefit of Crawford (and Blakely). The Supreme Court rejects the appellant’s argument that Minnesota is free to adopt a broader retroactivity standard than that of Teague. Teague states that a new rule is usually not retroactively applicable to a defendant’s case once the defendant’s case has become final. The Supreme Court of Minnesota is "compelled to follow the lead of the Supreme Court in determining when a decision is to be afforded retroactive treatment," when the new rule is of federal constitutional procedure. Secondly, under Teague, neither retroactivity exception applies because Crawford did, indeed, announce a new rule that could not have been predicted by reasonable jurists at the time. Lastly, Crawford does not establish a watershed rule of criminal procedure. The Minnesota Supreme Court notes that the United States Supreme Court, since Teague, has yet to find that a new rule of federal constitutional procedure qualifies as a watershed rule. Steven Danforth v. State of Minnesota, A04-1993 (Minn. 07/27/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa041993-0727.htm

• Evidence: Spreigl; Admission of Prior Relationship/Abuse Evidence Under §634.20: The appellant was tried and convicted for first-degree burglary. At the pretrial, the state received permission to use two prior restraining order violations against the appellant under §634.20, which allows evidence of similar conduct by the accused against the victim of domestic abuse, or against other family or household members, unless the probative value is substantially outweighed by the danger of unfair prejudice, etc. The Minnesota Supreme Court rejects the defendant’s invitation to graft the admissibility rules for Spreigl under Minnesota Rule of Evidence 404 (b) onto requirements for admission of relationship evidence under 634.20. In doing so, the Supreme Court notes that State v. Ness, 707 N.W.2d 676 (amended 2006) creates new law for the admission of Spreigl evidence, and essentially does away with the analysis to evaluate the strength or weakness of the state’s case ("need"). The Supreme Court also rejects the adoption of three additional Spreigl requirements: limiting instructions, minimum burden of proof, and notice. Finally, the trial court did engage in a probative versus prejudicial balancing test, and there is no requirement that the analysis be on the record. State v. Ronald James Bell, A04-1595 (Minn. 07/27/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa041595-0727.htm

• Jury Instructions: Flight as Inference of Guilt. Following an incident resulting in murder, the appellant fled the state of Minnesota, but was later arrested. At trial, the judge instructed the jury, in part, as follows: "It is for you alone to decide whether or not the defendant fled after the alleged crimes. If you determine that he did flee, then you may take such flight into consideration as an inference of guilty intention at the time of the incident giving rise to these charges". Held, the district court erred by instructing the jury on the permissive inference that may be drawn from the evidence of flight: "Flight instructions are a species of permissive inference instruction, and the factors leading us to reject such instructions in Litzau and Olson apply with equal force to flight instructions." These types of inferences unduly isolate particular facts, and permit juries to avoid assessing myriad facts which make specific cases unique." State v. Daniel James Valtierra, A05-919 (Minn. 07/27/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa050919-0727.htm

• Expert Testimony: Police Testimony on "Triangulation." In a murder prosecution, a police sergeant testified that "when taking narcotics class" to prepare as an undercover agent, she was taught that triangulation is meant to split attention and it almost certainly indicates that the triangulators are intending on robbing the drug purchaser. Held, the evidence of triangulation in this case was not helpful to the jury. Even the state admits that triangulation did not occur in the sense that the sergeant described. Furthermore, such evidence concerning the intent of the assailants in this can be resolved by applying principles of general common knowledge. State v. Valtierra, supra.

• Evidence: Facts Underlying Defendant’s Prior Convictions. In a robbery and murder prosecution, the appellant took the stand, and was asked under direct examination about his prior convictions. He admitted to having prior convictions for aggravated robbery, burglary, and providing a false name to the police. He stated that he "took full responsibility" for what he did. On a cross-examination, the state inquired into the underlying facts of the aggravated robbery, specifically about the type of gun and the victim. Held, the appellant did not "open the door" so as to allow the prosecution to elicit specific facts underlying the defendant’s prior conviction: "…the admission of underlying crimes’ evidence against an accused presents a unique opportunity for prejudice". State v. Daniel James Valtierra, supra.

• DWI/Implied Consent: Consecutive Sentence for Felony DWI; Criminal History Score. Respondent was on probation for a gross misdemeanor DWI when he was charged with felony DWI. The trial court, using a criminal history score of five, including one custody status, imposed a 66-month felony DWI sentence, and a consecutive one-year gross misdemeanor sentence for the probation violation. Minn. Stat. §1698.28 subd. 1 provides for mandatory consecutive sentencing for felony DWI when a defendant’s sentence on a prior gross misdemeanor offense is executed at the time of sentencing for the felony DWI. The Court of Appeals is reversed. The appellate court had determined that Minnesota Sentencing Guidelines II.F applied. This guideline states that there is an artificial criminal history score of one if a consecutive sentence is "presumptive." However, presumptive consecutive offenses are limited to convictions for crimes committed by an offender serving, on supervised release, or on escape status, from an executed prison sentence. Held, the duration of an offender’s consecutive sentence under Minn. Stat. §1698.28 subd. 1 is measured by the offender’s actual criminal history score, and is not amended downward under the guidelines. The Court notes that this statute has been amended, effective 06/01/06, to allow for concurrent sentencing in cases similar to this. State v. Frank E. Holmes, A04-1134 (Minn. 07/27/06). www.lawlibrary.state.mn.us/archive/supct/0607/opa041134-0727.htm

• Criminal Sexual Conduct: "Position of Authority." Appellant was convicted of third-degree criminal sexual conduct for having sexual intercourse with a 17-year-old child, while on duty. Held, the definition of "position of authority" contained in the Minn. Stat. §69.344 subd. 1 (e) as an element of third-degree criminal sexual conduct is not unconstitutionally vague, because it provides reasonably certain notice that, for purposes of criminal sexual conduct prohibitions, an on-duty police officer is in a position of authority over a 17-year-old child. It was not an error for the prosecuting attorney to state, in closing, that a police officer is "always in a position of authority." This was not a statement of actual law, but in a statement of a prosecutor’s view. State v. Scott Mogler, A05-1037 (Minn. App. 07/25/06). www.lawlibrary.state.mn.us/archive/ctappub/0607/opa051037-0725.htm

— Frederic Bruno
Frederic Bruno & Associates

October 2006

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Discrimination; Discharge. The 8th Circuit Court of Appeals upheld a ruling by U.S. District Court Judge Ericksen in Minnesota, dismissing a racial discrimination lawsuit under Title VII of the Federal Civil Rights Act. The claimant, a black male who was terminated from the employer’s training program, was unable to overcome the employer’s legitimate reasons for discharge due to poor performance. Riser v. Target Corporation, 2006 WL 2370475 (8th Cir. 2006).

• Discrimination; Remedial Action. An employer’s prompt remedial action helped it to defeat a claim of a racially hostile work environment and discriminatory discharge under Title VII. The claim was brought by a bank teller, who alleged that racially insensitive terms were directed to her by a coworker. Although the conduct was sufficiently "severe and pervasive" to constitute a hostile work environment, the employer took prompt remedial action by terminating the offensive coworker. The teller’s claims of retaliation were not actionable because the bank had legitimate nondiscriminatory reasons to terminate her for trying to work while she was taking classes during a severe staffing shortage. Green v. Franklin National Bank of Minneapolis, 2006 WL 2419171 (8th Cir. 2006).

• Discrimination; Duty of Fair Representation. A union did not breach its duty of fair representation in the discharge of two employees who alleged racial discrimination and age bias were the reasons they were discharged. The union did not act in "bad faith" because it did represent the two employees in grievance proceedings, and the employer had legitimate nondiscriminatory reasons for the discharge, which negated claims of racial discrimination and age bias. Jones v. United Parcel Service, Inc., 2006 WL 2404041 (8th Cir. 2006).

• Drug Testing; Refusal to Test; Discharge. An employer that fired a warehouse worker after he refused to take a federally mandated drug test was found not to have violated the Minnesota Drug & Alcohol Testing in the Workplace Act (DATWA). The 8th Circuit held that the employer may not have been required to terminate the warehouse worker for refusing to be tested, since he only occasionally drove commercial vehicles — a role subject to testing — and he could have been reassigned to a position that was not safety-sensitive, but the termination was nonetheless lawful. The discharge did not transgress DATWA because employers are required to comply with mandatory federal testing, which is "expressly" exempt from DATWA claims under Minn. Stat. §221.031 subd. 10 and 221.605 subd. 1(6). Even if the claim is not preempted, the termination does not violate DATWA because the statute does not prohibit firing an employee who refuses to submit to a drug test mandated by federal law. Belde v. Ferguson Enterprises, Inc., 2006 WL 2381570 (8th Cir. 2006).

• Bonus Payment; Termination. An employee who was fired shortly before a bonus was due was found not entitled to the bonus. The employee sued after she was fired three days before the quarterly bonus was due to be paid. Because she was no longer employed at the time the bonus was payable, she was not entitled to a bonus, regardless of the reasons for her termination. Guerrero v. J.W. Hutton, Inc., 2006 WL 2389377 (8th Cir. 2006).

• Unemployment Compensation; Misconduct; Absence. An employee who missed work on two occasions and failed to call in her absence one hour before a scheduled start time, as required by the employer’s policy, was properly fired for "misconduct." The failure to follow the employer’s policy on both occasions made the employee ineligible for unemployment benefits. Nutall v. Associates in Women’s Health, P.A., 2006 WL 2405709 (Minn. App. 08/22/06) (unpublished).

• Unemployment Compensation; Misconduct; Lateness. An employee who was late to work at least once per week after receiving warnings for lateness was ineligibile for unemployment benefits on grounds of "misconduct." Continued lateness in the face of warnings from management was deemed to violate the standards of behavior employers have the right to expect from employees and, therefore, the employee was ineligible for benefits. Williams v. Old Chicago of Colorado, Inc., 2006 WL 2405875 (Minn. App. 08/22/06) (unpublished).

• Unemployment Compensation; Ability to Work. An employee was not totally unable to work and, thus, was ruled eligible for unemployment benefits. Reversing a determination of DEED, the Minnesota Court of Appeals held that the claimant was medically unable to work only in his job of personal-care attendant but could "work in other occupations." Thus, he satisfied Minn. Stat. §268.085, subd. 1, that a claimant be "able to work and available for suitable employment" because he was "unable to work in one specific industry" but available for other "gainful employment." Yang v. Dept. of Employment & Economic Development¸ 2006 WL 2529770 (Minn. App. 09/05/06).

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

October 2006

ENVIRONMENTAL LAW
JUDICIAL LAW

• CERCLA; Cost Recovery for Voluntary Cleanups. On August 11, 2006, the 8th Circuit Court of Appeals held that a private party who voluntarily cleans up contamination for which it may be liable is entitled to recover some of its costs under Section 107 of CERCLA. In doing so, the court acknowledged that it was departing from the precedent established in Dico, Inc. v. Amoco Oil Co., 340 F.3d 525 (8th Cir. 2003).

Atlantic Research Corporation ("Atlantic") retrofitted rocket motors for the U.S. Defense Department from 1981 through 1986. The work involved removing and burning fuel from the rockets that were being retrofitted. Residue from the burnt fuel contaminated the site of Atlantic’s operations. Atlantic voluntarily cleaned up the contamination and sought to recover some of its costs from the United States government under Sections 107(a) and 113(f) of CERCLA.

The parties began to negotiate, but negotiations ended after the U.S. Supreme Court held in Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157 (2004), that a responsible party could seek contribution under Section 113(f) only after it had been sued under Sections 106 or 107(a) of CERCLA. Atlantic had not been sued and was therefore barred from asserting a contribution claim under Section 113(f). Moreover, the 8th Circuit Court of Appeals had decided in Dico that a responsible party could not bring a cost-recovery action under Section 107(a) and was limited to seeking contribution under Section 113(f). Atlantic amended its complaint, eliminating the claim for contribution and relying solely on its cost-recovery claim under Section 107(a) and federal common law. The district court granted summary judgment in favor of the United States based on Dico and Atlantic appealed.

The 8th Circuit Court of Appeals reversed the district court’s ruling and justified its departure from Dico on grounds that Aviall had undermined the court’s rationale in Dico and Dico had been decided in a different legal context. According to the court, before Aviall the 8th Circuit and other courts required responsible parties to seek contribution under Section 113(f) instead of cost-recovery under Section 107(a) on the assumption that all responsible parties had a right to contribution under Section 113(f), whether or not they had been sued, and to prevent such parties from evading the more limited remedy and shorter limitations period under Section 113(f). However, in the post-Aviall world in which responsible parties who have never been sued cannot seek contribution under Section 113(f), the court said that "it no longer makes sense to view §113 as a liable party’s exclusive remedy" and to categorically deprive a liable party of a Section 107 remedy. The court noted that Section 107(a)4(B) does not expressly limit recovery to innocent parties and reasoned that the savings clause in Section 113(f)(1), which expressly preserves the right of contribution in the absence of a civil action, manifests Congress’ intent to preserve the right of contribution in some form for responsible parties who have not been sued. In light of Aviall, precluding recovery under Section 107(a) by a responsible party who had not been sued would deprive that party of all remedies for recovering costs under CERCLA and would frustrate one of main purposes of CERCLA. The court harmonized the remedies available under Sections 107(a) and 113(f) by holding that a responsible party who has been sued under CERCLA is limited to contribution under 113(f) and cannot seek cost recovery under Section 107(a). Responsible parties who have not been sued, however, can bring an action under Section 107(a). The court further held that responsible parties may not use Section 107 to recover all of their costs and reasoned that a defendant’s ability to counterclaim for contribution under Section 113(f) would prevent such recovery. The court also reasoned that barring Atlantic and similarly situated parties from recovery under Section 107(a) would result in "an absurd and unjust outcome" by allowing the United States to insulate itself from liability for its own pollution simply by declining to bring an action under CERCLA or refusing a liable party’s offer to settle. According to the court, that would be contrary to the express waiver by Congress of the federal government’s sovereign immunity under Section 120(a) of CERCLA. Having held that Atlantic has a remedy under Section 107(a), the court declined to decide whether Atlantic can recover its costs under federal common law. Atlantic Research Corp. v. United States of America, 2006 WL 2321185 (8th Cir. 2006).

— Robert F. Devolve
Leonard Street and Deinard

October 2006

FEDERAL PRACTICE
JUDICIAL LAW

• Appellate Jurisdiction; Dismissal of Claims Without Prejudice. The 8th Circuit continues to wrestle with attempts to create appellate jurisdiction by dismissing claims without prejudice.

In the most recent case, most of the plaintiff’s claims were dismissed on summary judgment by Judge Davis. After Judge Davis denied the plaintiff’s request to certify his orders for appeal under Fed. R. Civ. P. 54(b), the parties agreed to dismiss the remaining claims without prejudice under Fed. R. Civ. P. 41. The plaintiff then appealed from the summary judgment orders.

Noting the "peculiar procedural posture" of the case, the 8th Circuit felt obligated to examine whether the voluntary dismissal of the remaining claims was sufficient to make the previous orders "final" for purposes of the appeal. While acknowledging that it previously "had been less than clear in establishing the rules for finality when parties dismiss some of their claims without prejudice in order to appeal a partial summary judgment order," and that one other 8th Circuit decision had "strongly disapprove[d]" of a similar attempt to create jurisdiction, the court determined that it had jurisdiction over the appeal.

Despite this decision, 8th Circuit law remains murky at best, and creative attempts to create appellate jurisdiction should be approached with caution. Hope v. Klabal, 457 F.3d 784 (8th Cir. 2006).

• Sanctions; Suspension; Law School Course Required. In October, 2005, this column noted Chief Judge Rosenbaum’s Order to Show Cause why an attorney should not be sanctioned. Following a response to the Order to Show Cause monetary sanctions were imposed, the attorney was temporarily suspended from the district court’s bar, and the attorney was ordered to complete a law school course in federal jurisdiction.

The 8th Circuit recently affirmed the monetary sanction, but reversed the law school course requirement on the basis that "it would impose a burden on a law school to accept a practicing attorney as a student." However, the 8th Circuit did suggest that a requirement for Continuing Legal Education courses might be an appropriate sanction on remand. The 8th Circuit also reversed the suspension from the district court’s bar due to Judge Rosenbaum’s failure to comply with Local Rule 83.6, again remanding for further proceedings. Willhite v. Collins, ___ F.3d ___ (8th Cir. 2006).

• Sanctions; Failure to Comply with Local RulesThe 8th Circuit affirmed $21,000 in sanctions and attorney fees under Rule 11 and 28 U.S.C. §1927, where plaintiffs’ counsel filed a 480-page opposition to summary judgment which failed to comply with applicable local rules. Clark v. United Parcel Service, Inc., ___ F.3d ___ (8th Cir. 2006).

• Sanctions; Discovery; Dismissal with Prejudice. In a recent unpublished decision, the 8th Circuit reversed the dismissal of an action with prejudice which had been imposed as a Fed. R. Civ. P. 37(b) discovery sanction, finding that there was nothing in the record to suggest that the trial court had considered a lesser sanction prior to dismissing the case. Gleghorn v. Melton, 2006 WL 2265880 (8th Cir. 08/09/06).

• Sanctions; Expert Disclosure Deadline. Judge Schiltz declined to bar plaintiff’s expert from testifying at trial as sanction for plaintiff’s counsel’s failure to meet expert disclosure deadlines, but he ordered plaintiff’s counsel to assume all costs related to the deposition of the expert, including defendants’ counsel’s time incurred in preparing for and attending the deposition. Brethorst v. The Pampered Chef, Ltd., 2006 WL 2225477 (D. Minn. 08/02/06).

• Sanctions; "Frivolous" Claims. Judge Schiltz denied the defendant’s motion for Rule 11 sanctions despite his finding that the plaintiff’s RICO claim was "frivolous," where the plaintiff’s state law claims were determined not to be frivolous and parts of the defendant’s Rule 11 motion were themselves "frivolous or near-frivolous." Ellis v. Underdahl, 2006 WL 2331182 (D. Minn. 08/10/06).

• Privilege Logs; Meet and Confer; Precursor to In Camera Review. Faced with a dispute over privilege, Chief Magistrate Judge Erickson specified the procedures litigants should follow when there is a dispute over whether privilege attaches to disputed documents:

This opinion strongly suggests that Magistrate Judge Erickson will be unwilling to resolve privilege disputes by reviewing documents in camera unless the parties have first engaged in this interactive process. Xcel Energy, Inc. v. United States, ___ F.R.D. ___ (D. Minn. 2006).

— Josh Jacobson
Law Office of Josh Jacobson

October 2006

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Misappropriation of Trade Secrets; MUTSA. Failure to identify specific trade secrets resulted in denial of plaintiff’s motion for a preliminary injunction in a claim of misappropriation of trade secrets. Plaintiff Hutchinson sued its former employee and his current employer, Magnecomp, for, among other things, misappropriation of trade secrets. However, the court held that Hutchinson’s alleged trade secrets failed to satisfy the Minnesota Uniform Trade Secret Act ("MUTSA") requirements. Under MUTSA, a plaintiff must first identify its trade secrets with sufficient specificity. For information to qualify as a trade secret, "(1) the information must be neither generally known nor readily ascertainable; (2) the information must derive independent economic value from secrecy; and (3) the plaintiff must make reasonable efforts to maintain secrecy."

In this case, the court found that Hutchinson did little more than name a design, a few processes, and a few machines which Hutchinson alleged to be trade secrets. The court further found that Hutchinson lacked specific information about the alleged trade secrets. Therefore, the court refused to issue a preliminary injunction relating to the misappropriation claim. Hutchinson Tech. Corp. v. Magnecomp Corp. et al., Civ. No. 06-1703 (D. Minn. 07/17/06).

• Trademark; Trademark Prosecution Estoppel. Judge Frank denied defendants’ motion for summary judgment to dismiss Eniva’s trademark infringement claims based on the doctrine of trademark prosecution estoppel. Eniva sued defendants for use of the mark AQUAVIBE for bottled water. Eniva owns the mark VIBE for dietary supplements and sells bottled water. Defendants argued that they were entitled to summary judgment because Eniva should be estopped from asserting that there was a likelihood of confusion between Eniva’s mark VIBE and defendants’ mark AQUAVIBE due to prosecution estoppel. However, the court rejected defendants’ prosecution estoppel arguments. Finding no pertinent case in the 8th Circuit to address the issue, the court looked to McCarthy on Trademarks and found that "[t]he doctrine of prosecution history estoppel is not an absolute rule in trademark law." The court further found that arguments made with respect to a trademark might change over time because, unlike patents, trademarks are dynamic. The court therefore held that Eniva was not estopped by its prior trademark prosecution: Eniva Corp. v. Global Water Solutions, Inc., et al., Civ. No. 05-1298 (D. Minn. 07/13/06).

• Patent Claim Term Construction. The Federal Circuit narrowly construed a patent claim term based on the Summary of the Invention section of the patent. The Federal Circuit found that the patent claim term "alphanumeric keyboard" was limited to a substantially full set of alphanumeric keys because the Summary of the Invention clearly depicted it as such. In denying a request for preliminary injunction, the court said: "The undisputed evidence established that the accused device utilized twelve keys rather than a … full set of alphanumeric keys." Wireless Agents, L.L.C. v. Sony Ericsson Mobile Communs. AB, et al., 2006 U.S. App. LEXIS 18933 (Fed. Cir. 07/26/06).

— Tony Zeuli
— Sonny Zhan
Merchant & Gould

JUVENILE LAW
JUDICIAL LAW

• Juvenile Delinquency; Out-of-Home Placement. In an unpublished decision, the Court of Appeals addressed a situation where the appellants were the parents of a minor son who was adjudicated delinquent. As a result of that adjudication, the child was placed in out-of-home treatment facilities on multiple occasions. The respondent county incurred costs of nearly $25,000 for the out-of-home placements, and sought approximately $5,000 in reimbursement from the appellant parents. The parents challenged a determination by a Department of Human Services hearing officer that they must reimburse the county for part of the cost for their son’s out-of-home placement. The district court affirmed that decision of the hearing officer. The Court of Appeals held that even though a juvenile’s parents received SSI and RSDI benefits for the juvenile during the same time that the county incurred costs for the juvenile’s placement in out-of-home treatment facilities, it was error for the court to order the juvenile’s parents must reimburse the county for part of the cost of their son’s out-of-home placement where the parents’ household income was below the federal poverty level, the parents did not have an opportunity to be heard on the issue of their ability to support their son, and where the district court made no findings on these issues. Forthun v. Goodno, Commissioner of Human Services, A06-66 (Minn. App. 08/29/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa060066-0829.htm

• Juvenile Delinquency; EJJ Probation; Treatment. In another unpublished decision by the Court of Appeals, a minor child challenged the district court’s revocation of his extended jurisdiction juvenile probation and the decision to place him on adult probation, with conditions that he complete sex offender and chemical dependency treatment and that he comply with medication requirements. The Court of Appeals held that even though the probationer failed to complete treatment prior to expiration of his EJJ probation, the district court abused its discretion by revoking the EJJ probation and placing the probationer on adult probation where the record lacked evidence that the probationer’s failure to progress in treatment was intentional or inexcusable, as opposed to being caused by symptoms associated with his schizophrenia or by the lack of time remaining before his 21st birthday. In the Matter of the Welfare of: G.V., A05-2351 (Minn. App. 08/29/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa052351-0829.htm

• Juvenile Delinquency; EJJ Probation Revoked. In an unpublished decision, the Court of Appeals considered an appeal from the revocation of a juvenile’s extended juvenile jurisdiction probation and the imposition of an adult sentence. The probationer admitted that he had tested positive for marijuana and had failed to maintain contact with his probation officer. The district court found that those violations were intentional and inexcusable. The district court then did a balancing of mitigating factors, namely, the probationer’s completion of programming, obtaining employment and saving money to rent an apartment, against his repeated violations of probation and his failure to take the opportunity to rehabilitate seriously. The district court concluded that the need for confinement outweighed the policies favoring probation. The Court of Appeals affirmed that decision, finding that the district court did not abuse its discretion in revoking the EJJ probation. In the Matter of the Welfare of R.D.W., A05-2250 (Minn. App. 08/08/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa052250-0808.htm

• Juvenile Delinquency; Disposition to Red Wing. In another unpublished Court of Appeals decision, the appellant minor challenged the district court’s delinquency disposition order placing him at the state correctional facility in Red Wing. Here the 17-year-old juvenile had pleaded guilty to burglary and aiding and abetting burglary. The juvenile had completed four out-of-home placement programs in the past and then immediately reverted to his former behaviors and chemical abuse. The district court found that the Red Wing facility was preferable to other placement facilities because it offered comprehensive cognitive restructuring, chemical dependency treatment, and job skill training which would benefit the juvenile. The Court of Appeals concluded that the district court did not abuse its discretion and affirmed the disposition. In the Matter of the Welfare of: C.M.B., A05-1903 (Minn. App. 08/08/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa051903-0808.htm

• Delinquency; Certification as Adult; Burden of Proof. In a published decision of the Court of Appeals, the state challenged the district court’s denial of its motion to designate a minor child as an adult for the charges of aiding and abetting aggravated robbery, conspiracy to commit aggravated robbery, and felony theft, arguing that the court abused its discretion by shifting to the state the burden of rebutting the presumption of certification. The Court of Appeals agreed with the state, reversed the district court, and remanded the matter for further consideration. The Court of Appeals held that under the presumptive certification statute, when the state establishes that a juvenile is 16 or 17 years old at the time of the offense and has been charged with an offense that carries a presumptive prison sentence, the burden shifts to the juvenile to demonstrate by clear and convincing evidence that he is amenable to treatment and that adequate programming is available in the juvenile system. The court further noted that in a presumptive certification case, the mere possibility that a more comprehensive search for adequate juvenile programming than that conducted by the state might reveal the existence of an appropriate program is insufficient to satisfy the juvenile’s burden of proving that retaining the case in the juvenile system serves the public safety. In the Matter of the Welfare of L.M., A06-0044 (Minn. App. 08/15/06). www.lawlibrary.state.mn.us/archive/ctappub/0608/opa060044-0815.htm

• Child Protection. In an unpublished decision, an appellant father challenged the adjudication of his children as children in need of protection or services. The father’s three teenage children had conditions requiring special care. The father himself testified to an altercation in which he hit and punched his 15-year-old daughter. It was determined that the father uses marijuana and alcohol regularly. The father rejected any family therapy, denied he had problems with anger, refused any urinalysis, and believed he had done nothing wrong as a parent. The Court of Appeals concluded that the district court did not abuse its discretion in declaring the children to be children in need of protection or services. In the Matter of the Welfare of the Children of: G.W., T.T., and G.A., Sr., A06-239 (Minn. App. 08/08/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa060239-0808.htm

• Termination of Parental Rights; Chemical Dependency. In an unpublished decision, the appellant mother challenged the district court’s order terminating her parental rights. In affirming the district court’s decision, the Court of Appeals noted that where the mother has a history of chemical dependency, and at the time of trial, the district court found that the mother was not able to achieve and maintain sobriety outside of an inpatient or jail setting, and where the child had spent more than half of her life in relative foster care where she has thrived, the district court did not err terminating her parental rights on the grounds that reasonable efforts failed to correct the conditions leading to the child’s placement. The Court of Appeals also noted that the record provided that the professional who had worked with the mother on her chemical dependency issues had clearly expressed that she would not be able to maintain sobriety and provide a stable home in the reasonably foreseeable future. In the Matter of the Welfare of the Child of: K.A.W., and J.O.W., A06-133 (Minn. App. 08/22/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa060133-0822.htm

• Termination of Parental Rights; Egregious Harm. In another unpublished decision, the Minnesota Court of Appeals affirmed the district court’s determination that the father had sexually abused his child, who was born in 1991, over an extended period of time, refused to obtain psychological services for the child, and refused to comply with the case plan. The court also noted that this child had special needs, and that the court found that this child was incapable of devising a plan to falsely allege sexual abuse in order to facilitate placement with her mother, as the father alleged. The Court of Appeals determined that termination of the father’s parental rights was in the child’s best interests and that the findings were supported by clear and convincing evidence indicating the father’s parental rights be terminated on the statutory ground of egregious harm. In the Matter of the Welfare of the Child of: M.P., A05-2511 (Minn. App. 08/15/06). www.lawlibrary.state.mn.us/archive/ctapun/0608/opa052511-0815.htm

• Adoption; ICWA; Statute of Limitations. In an Alaska Supreme Court decision, that court was faced with a claim by a biological father that the decree of adoption of his child violated the federal Indian Child Welfare Act. Among many adoption practitioners, it has often been assumed that there was no statute of limitations to disrupting an adoption if a subsequent violation of ICWA was found. Here the Alaska Supreme Court found that the man’s claim was barred by Alaska’s one-year limitation for challenging adoption decrees. The court went onto explain that it is "reasonable to assume" that Congress’ enactment of ICWA without a general statute of limitations was informed by "the settled practice" of borrowing statutes of limitation from state law. This was an issue that had previously come before the Alaska Supreme Court, causing the fragmented decisions by that court. Given the broad citation of ICWA cases beyond the state where they are issued, this is a case which could have significant national ramifications. In Re the Adoption of Erin G., 140 P.3d 886 (Alaska 08/04/06).

• Procedural Rules. Amendments to the Minnesota Rules of Juvenile Delinquency Procedure were promulgated and become effective in all delinquency actions commenced, or situations where children are taken into custody, after midnight October 1, 2006. Most of the amendments pertain to the procedure for seeking an aggravated adult criminal sentence for a child who is the subject of an extended jurisdiction juvenile prosecution. Promulgation of Amendments to the Minnesota Rules of Juvenile Delinquency Procedure, CX-01-926, (Minn. 08/17/06).

— Gary A. Debele
Walling, Berg & Debele

October 2006

REAL PROPERTY
JUDICIAL LAW

• Mechanic’s Lien Foreclosure; Timeliness of Naming Parties. A recent Minnesota Court of Appeals decision arguably makes more difficult a mechanic’s lien claimant obligation to timely name all parties with an interest in property in an action to foreclose the lien. Mavco provided materials and services for the improvement of property, but was not paid. Mavco commenced a lien foreclosure proceeding and filed a notice of lis pendens. Days before the action was commenced, the property owners refinanced and gave a mortgage to Wells Fargo. Wells Fargo did not record the mortgage until after the foreclosure action commenced. In the course of the action, Mavco entered into a settlement agreement with the property owners, which resulted in a judgment. Although Mavco learned of Wells Fargo’s mortgage shortly after commencing the action, it did not seek to add Wells Fargo as a party until more than a year after it last provided materials or services to the property. The district court concluded that Mavco’s attempt to add Wells Fargo was untimely and, as a result, the mortgage held priority over Mavco’s judgment lien. The Court of Appeals affirmed.

Minn. Stat. §514.12 provides that an action to enforce a mechanic’s lien must be commenced within a year after the last item of work. The statute further provides that no person is bound by a judgment unless made a party to the action within that one-year period. The statute does not address a circumstance where the interest is not recorded until after the action is commenced. But because the statutory time limit has been strictly construed, the court concluded that an interest not recorded until after an action is commenced is still entitled to protection of the statute.

The dissenting opinion observed that the decision was sharply at odds with the principles of notice embodied in Minnesota’s foreclosure laws. At any rate, the majority’s decision makes clear that a mechanic’s lien claimant has a heightened duty to go beyond simply checking the interests recorded against the property at the time of commencement of the foreclosure action. Mavco, Inc. v. Eggink, A05-2018 (Minn. App. 08/29/06). www.lawlibrary.state.mn.us/archive/ctappub/0608/opa052018-0829.htm

• Eviction Action; Pending Action Asserting Title in the Tenant. Property owners (owners), whose property was in foreclosure, entered into an agreement whereby Real Estate Equity Strategies (REES) purchased the property and leased it back to owners. Owners defaulted under the lease and REES began an eviction action. Owners subsequently commenced a separate action against REES claiming equity stripping under Minn. Stat. Ch. 325N, which sought to restore title to the property to owners. In the eviction action, owners moved for dismissal or stay of the proceedings based on the pending Chapter 325N action. The district court denied owner’s motion and entered an eviction judgment. The Court of Appeals affirmed.

On appeal, owners argued that the district court did not have subject matter jurisdiction over this matter because owners were asserting an equitable interest in the property in another action. This argument was based on the longstanding principle that eviction proceedings are summary in nature and traditionally involve only the right to possession of the property, not issues of title. Referring to jurisprudence cited by owners as "stale," the court concluded that the fact that owners were challenging REES’s title did not deprive the district court of jurisdiction in the eviction action. The court’s decision raises the possibility of an arguably controversial ability of a tenant to assert a counterclaim challenging title in the eviction action itself.

Nevertheless, it is not as though a tenant with a claim to title is left without a remedy, as the court observed when discussing property owners’ challenge that the eviction action should have been stayed pending the Chapter 325N action. Owners argued that allowing the action to proceed could ultimate violate the spirit of Chapter 325N in that it could allow owners to lose the property before the rights to the property could be fully adjudicated. The court recognized that Minnesota law has long permitted a tenant to seek to enjoin an eviction action in a separate proceeding commenced to determine title. In this case, owners did not seek injunctive relief. Real Estate Equity Strategies, LLC v. Jones, A05-2083 (Minn. App. 08/08/06). www.lawlibrary.state.mn.us/archive/ctappub/0608/opa052083-0808.htm

— C.J. Deike
Edina Realty Home Services

TAX
JUDICIAL LAW

• Definition of "Income" Overbroad, Unconstitutional. Taxpayer brought action to recover income taxes paid on compensatory damages for emotional distress and loss of reputation that she was awarded in an administrative action against her former employer. While the court rejected the taxpayer’s argument that the damages were received "on account of personal physical injuries or physical sickness," it did hold IRC §104(a)(2) unconstitutional insofar as it allows taxation on compensation unrelated to lost wages or earnings. The court reasoned that damages for emotional and mental distress are not received "in lieu of" something normally taxed as income nor within the meaning of the term "income" as used in the 16th Amendment. The damages were awarded to make Murphy emotionally and reputationally whole, not to compensate her for lost wages or taxable earnings. The emotional well-being and good reputation she enjoyed before they were diminished by her former employer were not taxable as income; therefore, the IRS improperly recognized the payments as income. The decision has elicited a flood of commentary from the tax community. While the ruling will most certainly encourage further constitutional challenges to other parts of the tax code as to the definitional scope of "income," many believe the issue will be reviewed and overturned by the Supreme Court on appeal. Murphy v. United States, 03CV02414 (D.C. Cir. 08/22/06).

• Gift Assignment Valuation Method. Taxpayers entered into an assignment agreement in which their interests in a limited partnership were distributed to their children, their children’s trusts, and to charity. The agreement identified these distributions in terms of gross dollars, with the actuarial values and percentages confirmed a month later. On their tax return, the taxpayers identified the gross value in dollars of the gift shares, reduced by the value of the gift tax and the actuarial value of the children’s contingent obligation under the agreement. The Tax Court held that the valuation date for the FMV of the gifts should have been suspended until the donees (the children) entered into the subsequent confirmation agreement; therefore, the taxpayers’ tax obligation was underestimated. The 5th Circuit reversed this decision, holding that FMV applied to gifts is to be determined at the time the gifts are completed. McCord et al. v. Commissioner, 03-60700 (5th Cir. 08/22/06).

• Duty of Consistency in Valuation. Taxpayers previously acted as coexecutors of their father’s estate. Based on concerns about the market for the artwork in the estate, the petitioners had agreed on a discounted valuation of the collection. Several years later, the petitioners claimed a higher, undiscounted market value as the tax basis for the collection in their joint tax returns. The commissioner rejected this higher valuation as inconsistent with past filings. The 9th Circuit affirmed the decision of the commissioner and the Tax Court in concluding that the petitioners could not take a different position — based on the duty of consistency — than they had stipulated to on a previous estate tax return. Janis v. Commissioner, 04-74624 (9th Cir.08/21/06).

• Clothing Deduction Rejected. Petitioner challenged the commissioner’s declaration of a deficiency in the taxes paid, including improper deductions for automobile, meal, and clothing expenses. Of note, the petitioner had attempted to deduct as a clothing expense — the petitioner was a welder during the years in question — a pair of Rocky Wolverine boots. Clothing deductions are only allowed where items are "not suitable for general or personal wear." The Tax Court refused to allow this deduction given the petitioner acknowledged that he was wearing the boots in question to the trial, thus showing they were indeed "suitable" outside of work. Nicely v. Commissioner, T.C. Memo. 2006-172 (08/17/06).

• Theft Deduction; Affidavit of Confession Insufficient to Establish. For all but one year between 1996 and 2001, the taxpayer made an untimely tax return and/or failed to pay taxes owed. The commissioner delivered a notice of deficiency, and at the hearing the petitioner presented evidence of an alleged theft of property. Because of this theft, the petitioner asserted he was eligible for a $250,000 theft loss to be carried back or carried forward pursuant to IRC §§165(c)(3) and 172(d)(4)(C). The only evidence presented to confirm this theft was an affidavit of confession previously given by his nephew and filed with the state of New York. The Tax Court found this evidence insufficient to justify a theft deduction. The court stated that since the affidavit was merely a confession of civil judgment, it does not establish that the property was in fact stolen. Rosen v. Commissioner, T.C. Memo. 2006-170 (08/16/06).

• FMV of Interest Swaps. The case involved a disagreement over the proper calculation of the fair market value of interest swaps to be reported as corporate income. At trial, the Tax Court rejected the value computations submitted by both the petitioner and the commissioner, crafted a different method based upon expert testimony, and ordered both parties to generate new calculations using the updated method. After providing time to generate figures using the new methodology, the court ultimately adopted the modified calculations of the commissioner. The 7th Circuit rejected this approach. The court stated that while the Tax Court had a right to reject the petitioner’s methodology, it must give deference to the commissioner’s method and only reject it where it is determined to be arbitrary or unlawful. In developing its own approach, the Tax Court failed to give the proper level of deference to the commissioner’s calculation. However, the circuit court also questioned the lack of explanation behind the decision of the commissioner. The case was remanded to the Tax Court. JPMorgan Chase & Co. v. Commissioner, 05-3730 & 05-3742 (7th Cir. 08/09/08).

• Lodging Expenses as Income; Living Quarters Outside of Business Premises. The commissioner found deficiencies for a group of taxpayers working for the same employer. A prerequisite for employment with the defense facility in question was to agree to live in assigned worker housing, located approximately 22 miles from the facility. For the years in question, the petitioners did not pay rent or utility expenses, and they did not recognize the payment of these expenses by their employer as gross income on their tax returns. Though IRC §119 states that some lodging requirements may be excluded from gross income under certain conditions, lodging must be located on the "business premises of the employer" in order to be deductible. Because no work was done at the living quarters, the employees were not entitled to exclude the expense from income. Hargrove v. Commissioner, T.C. Memo. 2006-159 (08/08/06).

• Reallocation of Income Amongst Partners. Taxpayer corporation brought action against the United States for improper tax adjustments made by the IRS to a partnership ("Castle Harbour") of which the corporation was a tax-matters partner. The adjustments amounted to an additional $62 million in income being applied to the corporation. The terms of the partnership agreement allocated 98 percent of the partnership’s income to two international banks, which do not pay U.S. income taxes, with only the remaining 2 percent allocated to the corporation. The effect of this allocation scheme was a significant shielding of a majority of income from domestic taxation. At trial, the district court upheld the allocation scheme, even though it was tax-motivated, because the partnership had other bona fide purposes. The 2nd Circuit disagreed. In concluding the partnership was a sham, the court focused on the district court’s acceptance at face value of the appearances and labels created by the partnership, rather than assessing the underlying economic realities of the business. TIFD III-E, Inc. v. United States, 05-0064-CV (2d Cir. 08/03/06).

• Fishing as Hobby vs. For-Profit Business. Taxpayer held a full-time position with a medical product distribution company but was also a lifelong fisherman who frequently competed in weekend bass fishing tournaments. While petitioner did generate income from his involvement in these tournaments and from the creation of a bass fishing website, that income was eclipsed each year by the expenses related to those endeavors. After consulting with his accountant, the petitioner decided to deduct the difference as losses of a for-profit business. This attempt was rejected by the commissioner. Though the petitioner did produce a business plan on his fishing business, the Tax Court noted that the plan lacked financial projections and that the continued losses indicated that a timeframe for profit was irrelevant. There was simply no commitment to generating profit from his activities. Under these circumstances, it could not be said that there was an "actual and honest objective of making a profit". Hill v. Commissioner, T.C. Summ. Op. 2006-120 (07/31/06).

• Premature CDP Requests Invalid. Taxpayers received notice that a federal tax lien had been filed by the IRS on their property to collect unpaid taxes from 1996 to 2000. In response, the taxpayers requested a collection due process hearing to discuss the period from 1990 to 2000. Subsequently, the commissioner sent a notice of levy for the unpaid taxes from 1990 to 1994. The taxpayer did not respond to this notice. The question in the case is whether a request for a CDP hearing prior to the notice of levy is a valid request. Under IRC §6330(a)(3)(B), a taxpayer has the right "to request a hearing during the 30-day period" before the day of the first levy for a particular tax period. The court concluded that a premature request for a CDP hearing cannot lead to a valid notice of determination and jurisdiction under §6330(d). Thus, the commissioner had no obligation to grant the petitioners a CDP hearing or to issue a determination in response to their premature CDP request. To recognize such early requests would create inequity by placing an unfair burden on the side of the commissioner. Andre v. Commissioner, 127 T.C. No. 4 (2006).

• Taxpayer Anonymity Preserved in Face of Threat. Petitioner was a foreign national who previously had a member of his family kidnapped and held for ransom. The petitioner feared his family and friends might also be kidnapped and their lives placed in jeopardy should his identity or financial circumstances become known to the public. Thus, he requested to have his name and records remain restricted. The Tax Court acquiesced. The court noted that it retains the right to restrict access to records where they may be used for an improper purpose. Because the extreme physical harm to petitioner and petitioner’s family outweighs the countervailing public interest favoring open judicial proceedings, the court granted the right to have the files restricted and for the petitioner to proceed with his current case anonymously. Anonymous v. Commissioner, 127 T.C. No. 6 (2006).

• Payroll Service; Limitation on Per Diem Deductions. The taxpayer corporation was in the business of contracting out drivers to small- to medium-sized trucking companies. The corporation’s operations included services such as paying employees, employment taxes, and workers compensation premiums, and administering employee benefit plans. The commissioner declared a deficiency against the taxpayer for failing to account for IRC §274 limitation on deductions for per diem payments. The question in this case is whether the limitation on the deductibility of per diem payments should apply to the contracting business or to the trucking companies. The Tax Court held that the taxpayer corporation was responsible for this limitation since it was the common law employer of the workers. The 8th Circuit disagreed, stating the Tax Court’s inquiry did not go far enough in stopping at the common law question. The court should have determined whether the corporation, as an employer, was entitled to the §274(e)(3) exception, which requires a determination of (i) whether TLC incurred the per diem expenses "under a reimbursement or other expense allowance arrangement with such other person" (its trucking company clients), and if so (ii) whether TLC "account[ed] … to such person" in the manner §274(e)(3)(B) requires. The court also noted the fact that each client of the corporation was free to change the percentage of gross compensation allocated to per diem payments and that these adjustments would not affect the corporation’s profit. Thus, the limitation on per diem expense deductions should not apply to the corporation, and the decision of the Tax Court was reversed. Transport Labor Contract & Leasing, Inc. & Subs. v. Commissioner, No. 05-3827 (8th Cir. 08/23/06).

• Attempt to Apply Net Operating Losses Against Tax Obligation Following Agreement. Taxpayer offered to pay the IRS a sum to fully resolve his tax deficiencies under IRC §7430(g). Subsequent to the IRS agreeing to the amount offered, the taxpayer attempted to apply net operating losses ("NOLs") to reduce the agreed upon payments. The application of NOLs — which would have been sufficient to eliminate the taxpayer’s obligation — had not been involved in the agreement nor had they been mentioned by the taxpayer to the commissioner. The court stated that a tax settlement is a contract that should be interpreted according to ordinary principles of contract law and refused to allow the taxpayer to introduce new elements not originally identified within the four corners of the agreement. Johnston v. Commissioner, No. 04-73833 (9th Cir. 09/01/06).

• Business Expense Deduction; Credit Card Debt Replaced by Home Equity Loan. Taxpayers, operators of a tree farm, accumulated credit card debt in purchasing the equipment necessary to operate the farm. To pay off this debt, the petitioners took out a home equity loan, and subsequently claimed that the interest paid on that loan constituted a business expense deduction. The petitioners and the commissioner disagreed as to whether the interest expense deduction should be itemized or treated as a trade or business expense. The court found that the credit card debt was a valid expense related to the petitioners’ business, and that the home equity loan constituted "replacement debt" that took the place of the credit cards. Under such circumstances, the petitioners have the ability to deduct the interest payments as a trade or business expense. Alexander v. Commissioner, T.C. Summary Op. 2006-127 (08/21/06).

• AMT Income; Options Exercised Outside of Six-Month Time Frame; Risk of Forfeiture. As president, taxpayer had received incentive stock options from his former employer. In 2000, these interests were either sold or gifted away, with the taxpayer reporting the proceeds as excess AMT income. The commissioner issued a notice of intent to levy after the taxpayer was able to pay off all but $200,000 of his tax liability for the year in question. After receiving this notice, the taxpayer filed an amended return which asserted he was not subject to the AMT tax and was owed a refund because some shares were subject to a substantial risk of forfeiture under §§83(c)(3) and 16(b) of the Securities Exchange Act of 1934. The Tax Court disagreed. The court stated the shares were not subject to such a forfeiture risk since they were exercised outside of the six-month time frame required under §16(b). Thus, the amount was properly included in the Taxpayer’s AMT income. Montgomery v. Commissioner, 127 T.C. No. 3 (2006).

• Amended Tax Return; Knowledge of Agreement Terms Lacking. Taxpayer company and the IRS entered into a closing agreement to resolve outstanding issues. The agreement provided that the loss reserve for incurred-but-not-paid claims was to be determined using actual claims paid information, though on its original return, the company used an actuarial estimate of this amount that ultimately exceeded the actual figure. The company then issued an amended return increasing its deduction for losses incurred under IRC §832(c)(4) based on the actual amount. The IRS rejected this attempt, and the company brought action seeking the difference between tax liabilities calculated using the estimate and that resulting from the actual data. The court stated the government would prevail if it produced evidence the company knew or should have known how the provision would be interpreted by the IRS. However, the IRS supervisor who signed the closing agreement had no memory of the provision; therefore, the company could not have known how the IRS would interpret the provision and was entitled to use the actual claims data. Blue Cross & Blue Shield United of Wisconsin et al. v. United States, No. 98-727T (Fed. Cl. 06/29/06).

• Work Product Privilege; Documents for Litigation and Business Decisions. While his company was under investigation, the IRS issued an administrative summons for documents retained by the company’s vice president of tax. These documents were never produced, and a federal magistrate judge subsequently determined they were not protected because they were not prepared in anticipation of litigation. The 6th Circuit disagreed. After adopting the "because of" test for determining whether a document is created in anticipation of litigation, the court stated that a document could be created both in anticipation of litigation and to assist with business decisions without losing its work product privilege. The case was remanded to the district court with instructions to quash the summons. United States v. Roxworthy, No. 05-5776 (6th Cir. 08/10/06).

• Damages for Professional Malpractice; Interest Paid to IRS. Investors brought a professional malpractice action against an investment company for its role in the creation and marketing of an abusive tax shelter. The district court initially dismissed the investors’ claims that they should be allowed to recover the interest they improperly paid to the IRS because of this shelter. Following a motion to reconsider, the court concluded the defendant corporation was indeed liable for those damages. Peter Amato et al. v. KPMG LLP et al., No. 06CV39 (M.D. Pa. 08/14/06).

• Section 6337(b)(1); 180-Day Redemption Period. After the taxpayer’s home was levied to pay off his outstanding tax liabilities, taxpayer obtained a mortgage and issued a redemption tender on his home to the IRS. The IRS rejected this tender on the grounds that it was offered 181 days after the date of the sale and therefore was untimely under the 180-day redemption period established in IRC §6337(b)(1). The 10th Circuit disagreed, affirming the district court’s conclusion that the redemption of real property after a tax sale does not include the date of sale. Thus, the tender was validly offered on the last day of the period. Westland Holdings Inc. v. Ross Lay et al., No. 05-8083 (10th Cir. 08/15/06).

• Authority to Refuse Process of Offer in Compromise. Taxpayer company submitted an offer in compromise to pay $85,000 under a deferred payment schedule on account of the $134,000 in outstanding employment taxes. Referencing the Internal Revenue Manual, the appeals officer rejected the offer since the company had failed to make timely employment tax deposits for the two quarters preceding the offer. The company asserted the officer had improperly relied on the manual, that he had authority to process the offer, and that the rejection constituted a violation of its constitutional rights. The court found that the company had failed to state a claim for which relief could be granted and that the officer was within his authority to reject the offer. Christopher Cross Inc. v. United States, No. 05-30606 (5th Cir. 08/21/06).

• Presumptive Sanction for Frivolous Appeals. The 7th Circuit established $4,000 as the presumption sanction for frivolous tax appeals and stated that amount should be doubled in the case of recidivist litigators. The amount reflects the court’s logic that approximately 30 attorney hours must be devoted to such appeals. Szopa v. United States, No. 05-4788 (7th Cir. 08/21/06).

• Facts and Circumstances Test; Medical Resident FICA Refund. The government brought an erroneous refund claim in its ongoing efforts to thwart hospitals from securing refunds of FICA taxes paid on stipends provided to medical residents. The hospital justified its refund on the grounds that the stipends fall under the IRC §117 definition of scholarships and are therefore excluded from the FICA definition of "wages." In its motion for summary judgment, the government argued that such stipends cannot constitute scholarships because the payments to the residents are conditioned on their providing services to the hospital. The court rejected this per se exclusion approach. It read the plain language of the statute to demand a case-by-case assessment of the circumstances under which the payments were made in order to determine whether payments constitute scholarship payments or wages. The decision will likely make it more difficult for the government to resolve many similar refund cases for FICA refunds prior to 2004. United States v. University Hospital Inc., No. 1:05-CV-445 (S.D. Ohio 07/26/06).

• Amendments to Pension Plan; Safe Harbor. As part of his company’s pension plan, the taxpayer had the option to receive a lump sum payment upon retirement amounting to 51 percent of the future monthly benefits. The company amended this plan to increase the interest rate used to calculate this lump sum payment after that rate had been increased by a statutory change from the Pension Benefit Guarantee Corporation rate to the annual rate on 30-year Treasury securities. The taxpayer challenged this amendment on the grounds that it illegally decreased the value of the lump sum payment. The court determined the amendment fell within the safe harbor provision of Reg. §1.417(e)-1(d)(10)(iv) since the PBGC rate was replaced with a rate no higher than the Treasury rate. In addition, the amendment did not violate the anticutback provision of IRC §411(d)(6) since it went into effect before February 28, 2002. Stepnowski v. Commissioner et al., No. 05-3665 (3d. Cir. 07/27/06).

• Foreign Tax Credits; Summary Judgment. Taxpayer company has been engaged in ongoing litigation with the government over foreign tax credits. The company’s operations included an oil venture in Indonesia for which it paid taxes to that country and claimed foreign tax credits domestically. In computing the FTC limitation, the company treated the policyholders’ share of foreign oil investment yields as a deduction from income. The IRS had challenged this approach as well as the company’s method for making foreign currency adjustments. While the company prevailed on both of these issues in the Court of Federal Claims during the mid-90s, both were reversed on consolidated appeal. In that appeal, the Federal Circuit concluded the policyholders’ share must be treated as an exclusion rather than a deduction for FTC limitation purposes and that the IRS had the discretion to use historical exchange rates for calculating foreign income. Litigation continued as the company filed a new suit for the same FTC issues occurring in different years and asserted the government had improperly appealed a prior decision. Last month’s decision brought the most recent round of litigation to an end by granting the government summary judgment on all FTC issues and denying the company’s cross-motion for summary judgment on the exchange rate issue. Traveler’s Insurance Co. v. United States, Nos. 88-494T 89-262T, 96-543T (Fed. Cl. 08/01/06).

• Economic Outlay Required to Increase Basis in S Corporation Debt. Taxpayer, as the owner of several S corporations, took out a collective $4 million in bank loans by pledging the inventory and accounts receivable of the corporations. Subsequently, the corporations defaulted and entered into involuntary bankruptcy, and the taxpayer attempted to take advantage of the losses by claiming a $4 million increase in his debt basis. The Tax Court rejected this attempt. IRC §1366(d)(1) states passthrough losses and deductions from an S corporation cannot exceed the shareholder’s adjusted basis in the stock or debt of that corporation. Because the taxpayer did not make an "economic outlay" to increase the capital of the corporations, he was not allowed to increase his basis in the S corporation debt. Maloof v. Commissioner, No. 05-1967 (6th Cir. 08/04/06).

• Statute of Limitations on Adjustment of Partnership Items. Taxpayers formerly held an interest in a partnership which was terminated at the end of 2000. The IRS issued a final administrative adjustment reducing the basis in this partnership, thereby also reducing the substantial loss deductions claimed by the couple. The partnership filed a complaint that the readjustment was untimely under IRC §6229(a) because it was issued more than three years after the partnership return was filed. The government asserted it acted within the statute of limitations since the FPAA was issued within three years of the filing of the individual taxpayer’s returns. The government argued it retained the authority to act within the statute of limitations because §6229(a) constitutes an exception to the standard time frame for adjusting partnership items established in §6501(a). The court noted the plain language of the IRC was consistent with the government’s position and upheld the adjustment. Schumacher Trading Partners II et al. v. United States, No. 05-380T (Fed. Cl. 07/31/06).

• Settlement Proceeds from Civil Action Involving Inter Vivos Trust. Taxpayers were donees of an inter vivos trust established by their grandparents. In a previous civil action against the trust’s original trustees, the taxpayers had been awarded damages for negligence and the breach of the duty of loyalty and care. Taxpayers initially included the settlement proceeds as income on their tax returns, but they later filed a refund suit against the government citing the gift exclusion of IRC §102(a) and alternatively, the physical injury or sickness exclusion under §104(a)(2). The district court found insufficient evidence to support either of these exclusions. The payments from a settlement involving an inter vivos trust must be included in income unless the taxpayers can present tangible evidence that the settlement payments were acquired by gift or because of physical injury or sickness. No such evidence was presented in this case. Clayton et al. v. United States, No. 5:04CV143 (N.D. W.Va. 07/31/06).

• Deficiency Notice; Untimely. As shareholders of two wholly owned S corporations, taxpayers reported losses on their individual tax returns from a TEFRA partnership owned by the corporations. The IRS became interested in the operations of the partnership, and the taxpayers filed a series of Forms 872 in which they consented to an IRS request for a time extension to assess their tax liabilities. The commissioner ultimately sent a notice of deficiency to the taxpayers before the expiration date of the last of the Forms 872, although the form did not specify the inclusion of tax attributable to either the partnership or affected items. The taxpayers asserted this notice adjusted their partnership items and was therefore invalid. The Tax Court agreed, reasoning that the failure under IRC §6229(b)(3) to reference tax attributable to partnership items in the Forms 872 resulted in the expiration of the statute of limitations under §§6501 and 6229(a) for any affected items adjustments. Thus, the notice was untimely under §6229(b)(3). Ginsburg v. Commissioner, 127 T.C. No. 5 (2006).

• Challenge to Frivolous Return Penalty. After taxpayer failed to file tax returns for the years in question, the commissioner issued the taxpayer notices of deficiency, balance due, and intent to levy and imposed a frivolous return penalty under IRC §6702. Subsequently, the Appeals Office issued to petitioner a notice of determination concerning collection actions under §§6320 and 6330. The court dismissed the taxpayer’s challenge for lack of jurisdiction insofar as the taxpayer’s sole purpose was to challenge the validity of the return penalty. In addition, a $1,000 fine for raising frivolous arguments was imposed. Dunbar v. Commissioner, T.C. Memo. 2006-184 (08/30/06).

• Remainder Interest Not Charitable Deduction. Decedent’s will directed that all of decedent’s property, after the payment of debts, expenses, and taxes pass to a trust that would briefly provide income to several relatives before the remainder passed to the Roman Catholic diocese. The estate timely filed its federal estate tax return, which included a charitable contribution deduction of nearly $1.5 million for the remainder interest given to the diocese. The commissioner challenged this deduction and asserted remainder interest was not a reformable interest that had undergone qualified reformation pursuant to IRC §2055(e)(3). The Tax Court agreed. Since no judicial proceeding was commenced to reform the trust within 90 days after the filing of the return and the payments to the diocese were not expressed as either a specified dollar amount or a fixed percentage, the charitable contribution could not be deducted under the terms of §2055(e)(3). Tamulis v. Commissioner, T.C. Memo. 2006-183 (08/29/06).

• Insufficient Review of Offer in Compromise. After their second offer in compromise was rejected, taxpayer’s sought review of the commissioner’s determination. The Tax Court concluded that in reviewing the petitioner’s case the settlement officer had failed to conduct an independent administrative review of the rejection of the OIC as required under IRC §7122(d)(1). The court noted that the officer relied solely on conclusory, undocumented, and unsupported figures in making the determination and also failed to complete a monthly income and allowable expense analysis based on all of the information provided by the taxpayers. Under these circumstances, it could not be said that the officer completed an independent analysis as required by the Code. Harris v. Commissioner, T.C. Memo. 2006-186 (08/30/06).

• Innocent Spouse Claim; Taxpayer’s Participation. Taxpayer sought review of commissioner’s notices of determination denying relief under IRC §6015 from joint liability for tax deficiencies. The Tax Court rejected this challenge on the grounds that the taxpayer had meaningfully participated in the deficiency case by preparing the tax returns and being present at meetings with counsel and at the trial. There was also no evidence that the husband stopped her from raising an innocent spouse claim. Huynh v. Commissioner, T.C. Memo. 2006-180 (08/29/06).

• Benefits and Burdens Test for Mortgage Interest and Property Tax Deductions. Taxpayer challenged the commissioner’s disallowance of mortgage interest and property tax deductions relating to a lease-option agreement in which he retained an option to purchase the property at any time. The taxpayer asserted his interests in the property were sufficient to justify deductions under IRC §§163 and 164. The Tax Court disagreed. In considering whether the benefits and burdens of owning the property had passed to the taxpayer, the court focused on the fact that the taxpayer was not obligated to purchase the house and that no title had passed to him. Additional penalties were imposed for failure to properly file tax returns. Jones v. Commissioner, T.C. Memo. 2006-176 (08/22/06).

• Equity in Offer in Compromise. Taxpayer challenged the commissioner’s determination to proceed with a collection, arguing that the exceptional circumstances of the case merited acceptance of his offer in compromise. The taxpayer’s deficiency arose following his investment in a partnership tax shelter and the improper deductions that were subsequently claimed. The taxpayer did submit an offer in compromise to resolve the issue, though it was rejected on the grounds that the taxpayer did not qualify for such an offer and that it referenced years the commissioner had not yet assessed. The court rejected the equitable arguments of the taxpayer in holding the decision of the commissioner was not an abuse of discretion. Keller v. Commissioner, T.C. Memo. 2006-166 (08/14/06).

• Improper Ex Parte Communications Amongst IRS Officers. Taxpayer had previously been involved in a number of tax issues with the IRS. Prior to the most recent CDP hearing to discuss an offer in compromise, communications had occurred between agency revenue officers, appeals officers, and offer specialists who were familiar with the taxpayer’s past. It was at these discussions that the appeals officer was advised not to accept the most recent offer. Rev. Proc. 2000-43 specifies that ex parte communications about substantive matters, such as a taxpayer’s credibility and the accuracy and importance of alleged facts, are prohibited under RRA 1998 §1001(a)(4). The Tax Court remanded to the Appeals Office to identify and apply an appropriate administrative remedy. Moore v. Commissioner, T.C. Memo. 2006-171 (08/17/06).

• Defense Contractor Employee; Allowance Exemption. Taxpayer worked as a government contractor and, because much of his work was done overseas, received a supplemental "special offsite allowance" as part of his compensation. The commissioner asserted this allowance should be reported as income since the taxpayer was not an employee of the government and the allowance was not received under regulations approved by the president. While it is possible for employees to serve two masters, the Court stated that IRC §912(2) requires an exempt cost-of-living allowance to be received in accordance with regulations approved by the President of the United States. Because the taxpayer’s allowance was determined by the contractor’s internal policies, the taxpayer was not eligible for the §912(2) exemption. Pavich v. Commissioner, T.C. Memo. 2006-167 (08/15/06).

• Settlement Purportedly Offered by Commissioner’s Counsel Rejected. Taxpayers issued an offer in settlement via a letter from their counsel to the IRS Appeals Office. While the appeals officer on the case did not provide a written or oral response to this offer, the taxpayers assert it was accepted by the commissioner’s counsel assigned to the case and is therefore binding. The Tax Court rejected this assertion because the commissioner’s counsel had not negotiated the deal, was unfamiliar with its terms, and had brought up a novel issue at the time the taxpayers state the agreement occurred. The motion to enforce the agreement was rejected. Smith v. Commissioner, T.C. Memo. 2006-187 (08/14/06).

• Attempt to Carry Back Losses on ISOs. Petitioner was granted incentive stock options as part of his compensation with his employer. Before a drop in the market occurred, the taxpayer recognized significant amounts of ordinary income for AMT purposes, and following the drop, he had significant AMT capital losses. Based on the advice of his accountant, the taxpayer attempted to offset the gains on the tax returns of the earlier years with losses of the latter. The IRS and the Tax Court rejected this attempt. The court determined that the capital loss limitations of IRC §§1211(b) and 1212(b) must be included in AMT, and that the taxpayer could not carry back the excess AMT capital losses. The vourt did spare the taxpayer from accuracy-related penalties since his actions were based on the advice of his accountant. Spitz v. Commissioner, T.C. Memo. 2006-168 (08/15/06).

ADMINISTRATIVE DEVELOPMENTS

• Cases Handed to Private Collection Agencies. The IRS recently initiated a program which outsources the duties of collecting federal tax debts to private collections agencies ("PCAs"). The program was initially authorized by Congress in 2004, and it is estimated that over 12,000 accounts will be outsourced to PCAs selected by the agency. The role of the PCAs will includes locating and contacting taxpayers, requesting payment of taxes either by lump sum or installments, and obtaining financial information specified by the IRS. The controversial program has received plenty of criticism. National Taxpayer Advocate Nina Olson has repeatedly issued warnings that the program will potentially create inequities in the collection of taxes and may not be a good business decision to begin with. She has stated that the limitations placed on the PCAs designed to protect taxpayers will limit their effectiveness in gathering information and require IRS involvement in a majority of instances. The IRS has issued number of announcements to outline the process and provide guidance on this new procedure. Announcement 2006-63 (Overview of PCA Use); IR-2006-131 (Taxpayer Protections regarding PCAs); IR-2006-131 (Steps to Prevent Scams); Publication 4518 (Private Debt Collection FAQs).

• Telephone Excise Tax Refunds for 2006 Returns. The IRS announced that millions of taxpayers will be eligible for a $30 to $60 telephone tax refund without having to produce old phone bills. The refund will be provided to anyone paying the long-distance tax during 2006 and is calculated based on the total number of exemptions claimed on the 2006 federal income tax return. While individual taxpayers will only be required to complete an additional line on a standard return, businesses and nonprofits will still be required to determine their refund based on the amount of taxes actually paid. IR-2006-137.

• Treasury Department 2006-2007 Priority Guidance Plan. The Treasury Department released a list of 264 projects to be completed between July of 2006 and June of 2007. The department stated it will continue to evaluate the effectiveness of the plan throughout the year and encourages tax professionals and the public to provide comments on the identified priority topics.

• Military Personnel; New Laws Governing IRA Contributions. The IRS reminded U.S. military personnel that under the new Heroes Earned Retirement Opportunities (HERO) Act taxpayers may now count tax-free combat pay when determining whether they qualify to contribute to either a Roth or traditional IRA. In addition, taxpayers receiving tax-free combat pay in 2004 and 2005 may retroactively make contributions for those years as well. IR-2006-129.

• Report on IRS Compliance with Levy Rules. TIGTA released its most recent report on the IRS’s compliance with the Restructuring and Reform Act of 1998, which requires the IRS to notify taxpayers at least 30 days before initiating any levy action to give taxpayers an opportunity to formally appeal the proposed levy. TIGTA has been especially concerned over whether taxpayers were being informed of their rights during this 30-day period. The report indicated that IRS procedures continue to be followed effectively, and the report provided no further recommendations for IRS action.

• Proposed Regs for Capital Asset Exclusion for Accounts and Notes Receivable. Proposed regulations have been issued regarding when accounts or notes receivable are acquired for services rendered under IRC §1221(a)(4). The new rules provide that an account or note receivable is not described under §1221(a)(4) if, in exchange for an account or note receivable, the taxpayer provides more than de minimis consideration other than §1221(a)(1) services or property, or if the account or note receivable isn’t issued by the person receiving §1221(a)(1) services or property. REG-109367-06.

• Fast-Track Settlement Option Extended. The IRS is expanding its Fast-Track Settlement option, previously available only to large- to mid-sized businesses, to include both small businesses and the self-employed. This option will be administered by the both the SB/SE and Appeals divisions of the IRS. The purpose of the program is to resolve factual and legal issues, and it may be initiated at any time after an issue has been fully developed, the taxpayer has stated a position in writing, and where there are a limited number of disputed issues. Announcement 2006-61.

• Deduction and Capitalization of Expenditures Related to Tangible Property. The IRS has clarified the application of IRC §263 to amounts paid to acquire, produce, or improve tangible property. The proposed regulations expand the standards of the current regulations and provide several new bright line rules, including a 12-month rule for acquisitions and a repair allowance for improvements. REG-168745-03.

• CDP Handbook Updated. The IRS handbook for the handling of CDP cases arising under §§6320 and 6330 has been updated, replacing the 2003 version. CC-2006-019.

LEGISLATION

• Pension Protection Act of 2006. President Bush recently signed a new tax law aimed at strengthening pension funds and providing a multitude of other tax changes. A significant portion of the act is designed to forced employers to properly fund their employee pension funds, which is meant to be achieved by allowing employers a deduction for additional pension contributions, establishing strict funding guidelines, and imposing an excise tax on companies that fail to fund properly. Other significant provisions of the act involve employer IRA and 401K plans as well as charitable contributions. The bill is consistent with the Bush administration’s push to make elements of the Economic Growth and Tax Relief Reconciliation Act of 2001 permanent.

• Sales Tax to Fund New Ballpark. The Hennepin County Board formally approved a .15 percent sales tax increase that will finance the building of a new $522 million baseball stadium in downtown Minneapolis. The tax, which was expected to be approved, could remain in place over several decades to meet the $392 million contribution of the county.

LOOKING AHEAD

• Tax Changes in Response to Option Backdating. The Senate Finance Committee heard arguments on backdated options and is considering legislation in the near future. Executive compensation has been a key issue with many shareholders as executives have found ways to avoid federal tax limitations. A primary method of avoidance has been the backdating of stock options, where executives wait until after the fact to pick a date for their stock options, and then pick the low point of the stock during the year to maximize their profit. Senate Finance Committee Chair Chuck Grassley has stated that his committee would likely deal with these types of issues within the next year.

• U.S. Tax Court Coming to Minnesota. The U.S. Tax Court will be in St. Paul to hear cases beginning October 10th. A schedule of the cases to be heard can be found at http://www.ustaxcourt.gov. The Tax Court is also scheduled to return to St. Paul for a calendar beginning March 5, 2007.

— Kathryn Sedo
University of Minnesota Law School

October 2006

TORTS & INSURANCE
JUDICIAL LAW

• Insurance Policies/Exclusions — Attribution of Intent. While on a construction site, defendant struck plaintiff on the head with a piece of wood, fracturing plaintiff’s skull. Plaintiff sued for assault and battery and sued the corporation of which defendant was sole shareholder, officer, and director for respondeat superior liability, negligent hiring, negligent retention, and negligent supervision.

Defendant corporation was covered by insurance policies that excluded coverage for bodily injury "expected or intended from the standpoint of the insured." The policies also included language requiring that the individual defendant and defendant corporation be considered "as if each Named Insured were the only Named Insured" and "separately to each insured against whom claim is made or ‘suit’ is brought."

The district court granted summary judgment to the insurers, holding that coverage for plaintiff’s injuries was barred by the "expected or intended injury" exclusion of the insurance policies, based on hearsay testimony that the individual defendant had a history of prior violent acts and therefore the corporation should have "expected" the defendant’s violent attack on the plaintiff.

On plaintiff’s appeal, the Court of Appeals affirmed, noting that the corporation "knew or should have known that an outburst of violence [by defendant] was likely to occur."

The Supreme Court reversed and remanded the case for trial, concluding that nothing in the insurance policies required that the individual defendant’s knowledge of his own violent history be imputed to the insured corporation. The Court held that whether the corporation had actual or imputed knowledge of other acts of violence by the defendant was a fact determination for trial. The Court also rejected insurers’ arguments that a general corporate legal principle attributing the knowledge of corporate officers and agents to a corporation created an exclusion, because there was no admissible evidence of defendant’s violent history in the record. The Travelers Indemnity Co., et al. v. Bloomington Steel & Supply Co., et al., A04-1713, (Minn. 08/03/06). www.lawlibrary.state.mn.us/archive/supct/0608/opa041713-0803.htm

• Liability for Damage from Gas Leaks — Ten-Year Period of Repose. In 2002, a natural gas pipeline intersecting a sewer pipe beneath a trailer park was ruptured by an auger during an attempt to unclog the sewage system. Leaking natural gas entered nearby homes and ignited, resulting in damage to the property of several park residents. Plaintiff individuals and their insurers brought suit against both the construction company that installed the pipeline in 1990 and the gas company that owned and operated it.

The district court granted summary judgment for both defendants. On plaintiffs’ appeal, the Court of Appeals reversed the summary judgment for the gas company on the grounds that the pipeline as a matter of law was not an "improvement to real property" but rather a part of a distribution system which was owned and controlled by the gas company. Accordingly, the court held that a ten-year statute of repose for improvements did not apply. The court also held that a prima facie case of negligence exists where an explosion is caused by a natural gas leak owned by a utility, notwithstanding absence of any notice of the leak.

The Supreme Court reversed the Court of Appeals, holding that the new pipeline was an "improvement to real property" and that the plaintiffs failed to show any evidence of negligence in the "maintenance, operation, or inspection" of the property.

In determining the status of the pipeline as an improvement, the Supreme Court considered (1) the tangible cost of the improvement, (2) the complete abandonment of a previous steel pipeline system on the same property, and (3) the significance of the increase to the real property value as a direct result of replacing a hazardous propane system with a safer natural gas system. Because the explosion was a direct result of the "defective and unsafe placement of the pipeline system" arising from an "improvement to real property," the Supreme Court held that plaintiffs’ claims for negligent installation were barred by Minnesota’s ten-year statute of repose.

The Supreme Court then evaluated the four essential elements of plaintiffs’ negligence claim: (1) existence of a duty of care, (2) breach of that duty, (3) injury sustained, and (4) breach of the duty as a proximate cause of the injury. The Court found that the record contained no evidence of any breach of a duty of reasonable care, where plaintiffs failed to establish a duty to perform maintenance or that any maintenance would have uncovered the defect at issue. The Court also rejected an argument that a gas company is strictly liable when "gas escapes from a pipe over which the gas company has control and for which it is responsible." The Court held that such a rule does not apply where others are responsible for the gas leak and the gas company had no notice of the defect. State Farm Fire and Casualty, et al. v. Aquila Inc, et al, A04-1816, (Minn. 08/03/06). www.lawlibrary.state.mn.us/archive/supct/0608/opa041816-0803.htm

[The authors’ law firm, Bassford Remele, A Professional Association, successfully represented the defendant gas company in this matter.]

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