December 2007

December 2007

December 2007

December 2007

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patents; Jurisdiction; State-Law Malpractice Cause of Action. In an issue of first impression, the Federal Circuit recently ruled that 28 U.S.C. §1338 (exclusive federal jurisdiction for patent cases) provides federal courts with subject matter jurisdiction over state-law malpractice causes of action, where a necessary element for the malpractice claim raised substantial and contested questions concerning patent law. An attorney was initially involved in both the prosecution, as well as the litigation, of several patents. The patent owner subsequently filed several infringement suits. During the litigation, the patent owner hired new trial counsel who discovered several errors committed by previous counsel—casting doubt upon the validity and enforceability of the patents and forcing the patent owner to settle the infringement claims. A malpractice claim followed and was brought in state court, but then removed to a federal district court based on the underlying patent issues. The Federal Circuit affirmed the district court’s denial of a motion to remand, holding that “where, as here, establishing patent infringement is a necessary element of a malpractice claim stemming from alleged mishandling of patent prosecution and earlier patent litigation, the issue is substantial and contested, and federal resolution of the issue was intended by Congress, there is ‘arising under’ jurisdiction under §1338.” Air Measurement Techs., Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 2007 U.S. App. LEXIS 24098, at *25 (Fed. Cir., 10/15/07).

• Trademarks & Copyrights; License. Judge Davis held that an exclusive distributor agreement did not create an exclusive license to trademarks and copyrights associated with the distributed goods. Coyne’s, the exclusive U.S. distributor of Country Artists’ goods, sued Enesco, a company that had recently purchased the business assets and intellectual property rights of Country Artists, when it announced that it would be the new distributor in the United States. Coyne’s sought a TRO to enjoin Enesco from violating the plaintiff’s “exclusive” rights under the distributor agreement, including the use of the Country Artists’ trade names, trademarks and copyrights. The court, applying the Dataphase factors, determined that Coyne’s lacked standing to pursue trademark or copyright infringement claims because it had not demonstrated that the distributor agreement provided Coyne’s with the exclusive rights to use Country Artists’ trademarks and copyrights, or the right to sue the owner, now Enesco, of the respective intellectual property rights for infringement. Coyne’s & Company, Inc. v. Enesco, LLC, Civ. No. 07-4095 (D. Minn. 10/12/07).

• Trademark Infringement; Counterclaims-in-Reply. In a separate case, Judge Davis permitted a plaintiff to allege trademark infringement claims in a “counterclaims-in-reply” pleading. Plaintiff Feed Management sued defendants for breach of contract. In their amended answer, the defendants raised a counterclaim for trademark infringement. Feed Management responded with “counterclaims-in-reply” directed to trademark infringement of its registered trademarks against defendants. The defendants moved to dismiss the counterclaims-in-reply, arguing that the federal rules do not permit such a pleading. But the court permitted Feed Management’s trademark claims because they were a compulsory reply to a permissive counterclaim. “If the counterclaims are permissive and the counterclaims-in-reply are compulsory, then the court may treat the counterclaims-in-reply as permissible pleadings.” Feed Management Systems, Inc. v. Brill, Civ. No. 06-4126 (D. Minn. 10/30/07).

— Tony Zeuli
— Aaron Johnson
Merchant & Gould

December 2007

JUVENILE LAW
JUDICIAL LAW

• Voluntary Termination of Parental Rights; Request to Vacate. In an unpublished Court of Appeals decision, the appellant mother sought to have the termination of her parental rights vacated. She had previously filed a petition to voluntarily terminate her parental rights. She did this as part of an adoption plan. The mother asserted in her petition that she wanted to terminate her parental rights for good cause, namely, that she wanted her child to be raised in a stable home that she had found for her proposed adoptive placement. The district court accepted the petition and found good cause existed to terminate her parental rights.

After this child had been born, the mother and the child’s father maintained an on-again, off-again relationship and when they separated, the father attempted to arrange visitation with the child, a request that the mother continually refused. After the mother was incarcerated, she left the child in the custody of another person and then failed to notify the birth father of the child’s whereabouts. It was while she was incarcerated that she decided it would be in the child’s best interest if she placed him for adoption. She never told the father of this decision. She then went ahead and made the arrangements for the child to be adopted, including her voluntary petition to terminate rights.

When the father then challenged the adoptive plan of the birth mother, the birth mother sought to vacate her voluntary termination of parental rights and also sought to have the birth father’s rights involuntarily terminated. The district court refused to vacate the mother’s termination of parental rights, finding that she had abandoned the child and that it was in the child’s best interest to have her rights terminated. As for her petition to terminate the father’s parental rights, the district court found that the mother had failed to show he was palpably unfit because there was no evidence that the father injured or provided improper care for the child. The Court of Appeals held that there was sufficient evidence in the record supporting the termination of the mother’s rights for good cause, and abandonment, and the denial of the mother’s petition to terminate the father’s parental rights. In the Matter of the Welfare of the Child of : R.A.S and E.T., Parents, A07-297 (Minn. App. 08/16/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0708/opa070297-0816.htm

• Termination of Parental Rights; Failure to Challenge. In another unpublished decision by the Minnesota Court of Appeals, appellant father challenged the involuntary termination of his parental rights to his son. In 2004, this father voluntarily agreed to terminate his parental rights contingent on four conditions, but at that time, no termination order was entered. In 2005, a district court in another county entered an order terminating this father’s parental rights to the same child, based on the father’s prior, voluntary agreement but without conditions. The father did not challenge that order. Later, the father moved to enforce one of the conditions, and in response, the county obtained an order involuntarily terminating his parental rights following an expedited hearing.

The Court of Appeals concluded that the father’s parental rights were voluntarily terminated without conditions pursuant to the order for judgment and judgment filed in 2005. As a result, the father did not retain any rights which could have been involuntarily terminated at a later time. The court went on to hold that if there remained any rights to be involuntarily terminated, the evidence was sufficient to support the finding of palpable unfitness in part because the father is civilly committed as a sexually dangerous person and his commitment makes him physically unavailable to parent the child. The Court of Appeals noted that under the unique procedural facts of this case, it in effect concluded that the father’s parental rights were terminated without conditions by a final order based on the father’s consent, and the district court erred by vacating the father’s voluntary termination of parental rights and involuntarily terminating the father’s parental rights based on palpable unfitness. Thus, the voluntary termination was affirmed and the order for the involuntary termination was vacated. In the Matter of the Welfare of the Child of C.R.C., Parent, A07-0738 (Minn. App. 10/30/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0710/opa070738-1030.htm

• Juvenile Delinquency; 6th Amendment; Crawford. In an unpublished decision, the Minnesota Court of Appeals reviewed a case concerning the trial of a 13-year-old boy accused of sexually abusing two young girls, one five years old and the other eight. On appeal from a delinquency adjudication for first- and second-degree criminal sexual conduct, the appellant asserted that the district court violated his 6th Amendment rights by admitting videotaped statements of one of the alleged victims, a five-year-old girl who did not testify and whom the appellant did not have a prior opportunity to cross-examine.

The statement that was submitted arose out of a situation where, four days after receiving a report of sexual abuse of a five-year-old child by a nonfamily member, a child-protection worker interviewed the child at a law enforcement center. This child-protection worker used the Corner House protocol, which uses nondirective questioning. The record indicated that the worker’s purpose for conducting the interview was to comply with statutory procedure and that her primary concerns were what happened to the child and the state of the child’s current health and welfare.

Given those circumstances, the Court of Appeals concluded that the child’s statements were nontestimonial and that the district court properly admitted them because the record did not suggest that the primary purpose of the interview was to produce evidence for trial. In the Matter of the Welfare of: G.E.F., A06-1778 (Minn. App. 10/16/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0710/opa061778-1016.htm

— Gary A. Debele
Walling, Berg & Debele PA

December 2007

PROBATE & TRUST LAW
JUDICIAL LAW

• Medical Assistance Claims; Joint Property; Claim Against Estate of Surviving Spouse. On November 6, 2007, the Minnesota Supreme Court heard oral arguments on the issue of the proper manner in which to determine medical assistance claims against the estate of the surviving spouse of a recipient of medical assistance benefits under Minn. Stat. §256B.15. The case involves the treatment of a home that was for many years owned jointly by the spouses but was conveyed to the surviving spouse prior to the death of the first spouse to die. At issue is how to determine the interest of the first spouse to die in the home at the time of her death. Before the Minnesota Court of Appeals, the estate argued that the medical assistance claim should be limited to the value of a life-estate in the home, because under probate law, that was the extent of the recipient-spouse’s interest in the home immediately prior to her death. The county argued that the entire value of the home was subject to its claim, because under Minnesota’s divorce statutes, the entire home was marital property of the spouses. The Court of Appeals rejected both parties’ positions, and held that one-half of the home’s value was subject to the claim because under the estate-recovery statute, the home should be treated as though it were still owned jointly by the spouses when the first spouse died, and the interest of a joint tenant is an undivided one-half interest in the property under the common law of Minnesota. Streaming video of the oral arguments is available at http://www.tpt.org/courts/MNJudicialBranchvideo.php?number=A05-2346. Estate of Barg, A05-2346.

• Gift and Estate Tax; Inflation Adjustments for 2008. The IRS has published inflation-adjusted tax figures for 2008, including the following figures relating to estate and gift taxes:

• the annual gift tax exclusion under IRC §2503(b)(2) will remain at $12,000. The annual exclusion was originally $10,000 and is adjusted for inflation in increments of $1,000 from 1998. The annual exclusion was $10,000 for gifts made between 1998 and 2001, was $11,000 for gifts made between 2002 and 2005, and is $12,000 for gifts made between 2006 and 2008.
• the limit on the decrease in the value of a gross estate under IRC §2032A for a decedent who dies in 2008 will increase from $940,000 to $960,000. Section 2032A allows for reduction in the value of an estate’s interest in certain real property, and is usually applied to agricultural land. The limit on the reduction was originally $750,000 and is increased for inflation in increments of $10,000 from 1998.
• the gift tax annual exclusion for gifts to a non-U.S. citizen spouse will increase from $125,000 in 2007 to $128,000 in 2008. This is an important exclusion because gifts to non-U.S. citizen spouses do not qualify for the gift tax marital deduction. Rev. Proc. 2007-45 (11/05/07).

• Gift and Estate Tax; Security for Estate Tax Paid in Installments. The IRS has changed its policy regarding security for estate taxes paid in installments under IRC §6166. The U.S. Tax Court recently held in Estate of Roski, 128 TC 113 (04/12/07) that the IRS has no authority to require a bond or a special lien in every case that an estate elects to pay its estate tax in installments under Code Sec. 6166. In accordance with the Roski decision, the IRS now will determine on a case-by-case basis whether security will be required. Rev. Notice 2007-90 (10/29/07).

• Gift and Estate Tax; Marital Deduction; Violation of Maximum Survivorship Period. The United States Court of Appeals for the 9th Circuit has held that a testamentary gift to a surviving spouse qualifies for the estate tax marital deduction, even though the gift was conditioned on the spouse’s survival until distribution of the estate. Under IRC §2056(b)(3), a gift to a surviving spouse that is conditioned upon the spouse’s survival qualifies for the marital deduction only if the survival period is six months or less. Nonetheless, the 9th Circuit Court of Appeals affirmed a lower court’s decision that the gift qualified for the marital deduction, based partly on extrinsic evidence indicating the testator’s intent was to qualify the gift for the marital deduction. This decision is part of a trend of favorable IRS rulings and judicial decisions allowing the marital deduction despite flaws in the governing document. Sowder v. U.S., 100 AFTR-2d 2007-6379 (9th Cir. 10/18/07).

— Cameron R. Seybolt
Fredrikson & Byron, P.A.

REAL PROPERTY
JUDICIAL LAW

• Statute of Repose Applicable to New Construction Warranties. Property owners hired a builder to construct a new home, which was substantially completed on October 19, 1994. Not long after the home was constructed, the owners discovered leaking issues. Over the next few years ending in 1998 or 1999, the builder attempted to remedy the problem. In August 2004, apparently still suffering from moisture-intrusion issues, the owners commissioned moisture-intrusion testing, resulting in an October 4, 2004 report that detailed significant moisture intrusion and suggested the possibility of structural damage. The owners had a follow-up inspection, which confirmed that there was structural damage in a report dated February 2, 2005.

The owners commenced suit against the builder alleging, in part, breach of the new construction warranty that the property would be free from structural defects for ten years. Among other defenses, the builder moved for summary judgment on the grounds that the owners’ action was barred by the ten-year statute of repose. The district court granted the builder’s motion for summary judgment and the owners appealed.

Minn. Stat. §541.051 provides that actions arising out of the defective and unsafe condition of an improvement to real property must be brought within two years after discovery of the injury, but no later than ten years after substantial completion of construction. The statute previously had excluded warranty claims, but has fairly recently been amended to provide that the time limits apply to those claims as well. In the context of warranty claims, the statute provides that if the action arises in the ninth or tenth year following the warranty date it must be brought within two years after discovery of the breach, but not later than 12 years after the effective warranty date.

The court indicated that the starting point for the timeline was October 19, 1994. The dispute on appeal was defining when the owners’ cause of action accrued and whether it occurred within the ten-year period of the statute of repose. The builder contended that the owners were not even aware of structural damage until the February 2005 report, which was created more than ten years after the warranty date and precluded their claim. The owners argued that a cause of action accrues under the statute of repose when the injury is discovered, which they said occurred when they received the October 2004 report within the ten-year period.

The court observed that for the purpose of the two-year statute of limitations for warranty claims, the Minnesota Supreme Court recently concluded that a cause of action arises not when the injury arises, but rather from the breach of warranty, that is, when the property owner discovers that the builder will not or cannot ensure that the home is free from major structural defects. In the present case, the court declined to make a distinction between the statute of limitations and the statute of repose. The statutory language simply does not support any such distinction. As a result, if the owners did not or could not discover the builder’s inability or refusal to remedy the defects within the ten-year period of repose, their claim must fail. Nevertheless, the court held that there were fact issues concerning whether the breach arose before or after the period expired and reversed and remanded for further proceedings in that regard. Affirmed in part, reversed in part and remanded. Gomez v. David A. Williams Realty & Construction, Inc., A06-2155 (Minn. App. 11/06/07). www.lawlibrary.state.mn.us/archive/ctappub/0711/opa062155-1106.htm

— C.J. Deike
Edina Realty Home Services

December 2007

TAX
JUDICIAL LAW

• Procedure: Jurisdiction to Review Petitioner’s Claim for Relief from Joint and Several Liability.  The taxpayer maintained that he was an “individual against whom a deficiency has been asserted” within the meaning of Sec. 6015(e)(1), and, therefore, invoked the U.S. Tax Court’s jurisdiction to review his claim for relief from joint and several liability on joint return under Sec. 6015(c). The U.S. Tax Court determined that the court lacked jurisdiction to review a taxpayer’s claim for relief under Sec. 6015(c), because, in the context of the Tax Equity and Fiscal Responsibility Act partnership proceeding, the taxpayer’s claim for relief from joint and several liability on a joint return may be raised only after the commissioner has sent a notice of computational adjustment following the completion of partnership-level proceedings. Adkison v. Commissioner, 129 T.C. No.13 (10/16/07).

• Procedure: Nonrequesting Spouse’s Right to Intervene Survives Death. The taxpayer sought the U.S. Tax Court’s review of the commissioner’s denial of innocent-spouse relief under Sec. 6015, triggering the commissioner’s obligation to notify her husband of his right to intervene. The taxpayer’s husband died before receiving the notice. The commissioner moved for a continuance to allow notification of any heirs or personal representatives of the husband’s estate. The court determined that a nonrequesting spouse’s right to intervene survives death, and the commissioner is obliged to try appropriate means to notify any heirs, executors, or administrators. Fain v. Commissioner, 129 T.C. No.11 (10/02/07).

• Procedure: Refusing Proposed Installment Agreement Not Abuse of Discretion. The taxpayer and his wife filed a joint federal income tax return for the 2001 tax year reporting a tax due. The taxpayer and his wife failed to pay the amount due with the joint return. The commissioner accepted the return as filed and assessed the tax reported therein. The commissioner issued to the taxpayer and his wife a Notice of Federal Tax Lien, and the taxpayer filed a request for a collection due process hearing pursuant to Sec. 6320, allegedly without his wife’s knowledge. During the collection due process hearing, the taxpayer and the settlement officer attempted to negotiate an installment agreement. The settlement Officer issued a Notice of Determination rejecting the proposed installment agreement when the taxpayer failed to make estimated tax payments for later tax years. After filing a petition in this court for review of the commissioner’s determination, the taxpayer was killed in an automobile accident. The estate of the taxpayer, substituting for the taxpayer, sought to raise challenges to the taxpayer’s underlying liability. The court determined that the commissioner did not abuse his discretion in rejecting the installment agreement when the taxpayer failed to make estimated tax payments. The court further determined that the estate of the taxpayer may not raise the underlying tax liability on appeal of the commissioner’s determination when the underlying liability was not properly raised during the collection due process hearing before the commissioner’s Appeals Office. Giamelli v. Commissioner, 129 T.C. No.14 (10/30/07).

• Income Tax: Lump-Sum Payments from Military Pension; Alimony.  The taxpayer and his spouse divorced in December 1993. The divorce decree required the taxpayer and his spouse to share equally their children’s uninsured medical and dental costs. The divorce decree also required the taxpayer, pursuant to the Uniformed Services Former Spouses’ Protection Act, to pay his spouse 25 percent of his military retirement pay. The divorce decree, however, did not indicate whether the payments with respect to the taxpayer’s military retirement should be included in gross income or deducted as alimony, or whether such payments were to terminate upon the death of his spouse. The taxpayer paid his spouse $6,074 in 2002 and deducted the entire amount as alimony. The commissioner determined, in a notice of deficiency, that the payments were not alimony and, therefore, were not deductible. The U.S. Tax Court determined that the taxpayer’s payments to his spouse relating to his children’s dental bills are, pursuant to Sec. 71(c) (3), child support. The court further determined that the taxpayer’s payments to his spouse relating to her share of his military retirement pay are alimony and, therefore, deductible pursuant to Sec. 215. Proctor v. Commissioner, 129 T.C. No. 12 (10/10/07).

• Income Tax: Attorney Not Entitled to Charitable Contribution Deduction for Client’s Papers. In 1997, the taxpayer, an attorney practicing in Oklahoma, donated to a university library photocopied materials received from the government in connection with the taxpayer’s representation of a criminal defendant. The issue for decision is whether the taxpayer is entitled to charitable contribution deduction carryovers for 2000 and 2001 with respect to the 1997 donation. The U.S. Tax Court held that under Oklahoma law, an attorney does not own his client’s case file, but rather maintains custodial possession of the file; because the taxpayer did not possess an ownership interest in the materials and was thus incapable of effecting a valid gift of the materials under Oklahoma state law, Sec. 170(c), precludes the charitable contribution deduction. Jones v. Commissioner, 129 T.C. No.12 (11/01/07).

• Income Tax: Affiliated Group of Corporations; Determination of Interest Expense Allocable to Tax-Exempt Interest. Petitioner is the holding company of an affiliated group of corporations that files consolidated federal income tax returns. The other members are petitioner’s wholly owned bank (Bank) and Bank’s wholly owned investment company (IC). Both Bank and IC owned tax-exempt obligations. Only Bank incurred interest expenses. IC’s tax-exempt obligations were either purchased by IC or received from Bank before the subject years as contributions to capital. The commissioner determined that Bank must include all of IC’s tax-exempt obligations in the calculation of Bank’s average adjusted bases of tax-exempt obligations under Secs. 265(b)(2)(A) and 291(e)(1)(B)(ii)(I). On the consolidated income tax returns for the subject years, Bank included IC’s obligations in the calculation only to the extent that Bank had purchased the obligations and transferred them to IC; in other words, Bank omitted from the calculation those obligations that IC purchased. The U.S. Tax Court held that the calculation of Bank’s average adjusted bases of tax-exempt obligations does not include the tax-exempt obligations purchased by IC. PSB Holdings Inc. v. Commissioner, 129 T.C. No.15 (11/01/07)

• Income Tax: Failure to Consider Issues Taxpayer Raised During Collection Due Process Hearing.  The U.S. Tax Court’s review is limited to the administrative record. In this case there was no transcript or actual record of the discussions between the taxpayer and the commissioner’s settlement officer. The only record of a telephone conversation between the taxpayer and the settlement officer was the entry made by the settlement officer in her log and the telephone conversation was the only “hearing” that the taxpayer received. The settlement officer’s entry contained very little information. The court was forced to make certain inferences from the information that was known from the telephone conversation. The court determined that the abrupt decision by the settlement officer to issue a Notice of Determination indicated she did not consider the issues the taxpayer raised during the hearing as required by Sec.6330(c)(3)(B). Pursuant to Sec. 6330(b), the Appeals Office must make its determination after the taxpayer has had the opportunity to be heard at a fair hearing and after giving adequate consideration to all meritorious issues the taxpayer has raised during the hearing. Blosser v. Commissioner, T.C. Memo. 2007-323 (10/29/07)

• Minnesota Procedure: Classification of Multiple Use Property. The Minnesota Supreme Court held that, 1) the Minnesota Tax Court’s classification of the property was erroneous because the record provided by the taxpayer did not support the Tax Court’s finding; and 2) the assessor’s classification of the property conflicted with the property classification statute, making statutory deference to the assessor’s classification inapplicable. Despite the fact that, under Minnesota law, an assessor’s classification of land for tax purposes is prima facie valid, Minn. Stat.§271.06, subd.6(2006), and that the petitioner carries the burden of showing that the classification is incorrect and a taxpayer’s failure to satisfy his burden of proof would result in the assessor’s initial classification being affirmed, the Court held that deference to the assessor’s classification here was inapplicable because: 1) the deference would serve to undermine the statutory classification scheme as a whole; 2) the current definition of “agricultural land” removes the “primarily used” language, Minn. Stat. §273.13, subd.23 (c); and 3) the classification statute clearly contemplates that property may be used for more than one purpose and therefore be subject to more than one classification, Minn. Stat. §273.13, subd. 23(f). This case was remanded back to the Minnesota Tax Court to determine proper classification for each part of the property according to its own use (agricultural purpose, commercial purposes, and some unused). Schmieg v. County of Chisago, A07-503 (Minn. 11/01/07). www.lawlibrary.state.mn.us/archive/supct/0711/OPA070503-1101.htm

• Collection: Innocent Spouse Relief Denied. Taxpayer sought innocent spouse relief after her husband invested in partnership in which she was a limited partner. The commissioner disallowed the partnership loss deductions, which resulted in the deficiencies. The court determined that ignoring contents of a tax return when signing did not satisfy the lack of knowledge requirement. Taxpayer had a college degree, she knew of her status as a limited partner, and she had a full access to the joint bank accounts. The court concluded that she was deemed to have had reason to know of the understatements on the income tax returns. Golden v. Commissioner, T.C. Memo. 2007-299 (10/01/07).

• Income Tax: Early Retirement Payments Taxed as Wages.  The U.S. Court of Appeals for the 3rd Circuit held that early retirement payments made by a university to its tenured faculty were subject to FICA taxes because the amounts were “wages”—and not payments for relinquishment of prospective contract rights as claimed by the university. University of Pittsburgh v. United States, No. 06-1276 (3d Cir. 11/02/07).

• Minnesota Sales & Use Tax: Railroad Revitalization and Regulatory Reform Act. The U.S. Court of Appeals for the 8th Circuit held that Minnesota’s sales and use tax on fuel purchased by railroads discriminated against rail carriers in violation of Railroad Revitalization and Regulatory Reform Act. The court based on this decision on Burlington Northern and Santa Fe Ry. Co. v. Lohman, 193 F.3d 984 (8th Cir. 1999). The court determined that only those taxes imposed upon the railroads are taken into account in determining whether those taxes are discriminatory in violation of Railroad Revitalization and Regulatory Reform Act. The case was reversed and remanded to the district court. Union Pacific Ry. Co. v. Minn. Dep’t of Revenue, No. 06-3397 (8th Cir. 2007).

ADMINISTRATIVE ACTION

• Employment Tax Examination Results. IRS and more than two dozen state workforce agencies have entered into agreements to share the results of employment tax examinations. The agreements, part of the Questionable Employment Tax Practice initiative, provide a centralized, uniform means for the IRS and state employment officials to exchange data, thereby leveraging resources and encouraging businesses to comply with federal and state employment tax requirements. For more information and additional links, see News Release IR-2007-184.

• Allocating Wind Energy Production Tax Credits. Because IRS would not rule on any issues under Subchapter K for partnerships claiming the credit under IRC §45,this revenue procedure establishes the requirements (the safe harbor) under which IRS respects the allocation of §45 wind energy production tax credits by partnerships in accordance with §704 (b). This safe harbor is intended to simplify the application of §45 to partners and partnerships that own and produce electricity from qualified wind energy facilities. Rev. Proc. 2007-65, 2007 I.R.B. 967.

• Deduction for Contributions to Welfare Benefit Fund. For purposes of determining the limitations on an employer’s deduction for contributions to a welfare benefit fund under IRC §§419 and 419A, no matter whether the benefit provided through the fund is life insurance coverage, premiums paid on cash-value life insurance policies by the fund are not included in the fund’s qualified direct cost whenever the fund is directly or indirectly a beneficiary under the policy within the meaning of IRC §264 (a). However, if the benefit provided through the fund is other than life insurance coverage, the fund’s qualified direct cost includes amounts paid as welfare benefits by the fund during the taxable year for claims incurred during the year. Rev. Rul. 2007-65, 2007 I.R.B. 949.

• Amendments to Circular 230 Rules. IRS issued final regulations modifying the general standards of practice before IRS under Circular 230. These regulations finalize the definition of practice before IRS; determine who is authorized to practice before the IRS; subject enrolled retirement-plan agents to an examination to determine competency; set out the application for enrollment; finalize the restrictions on the practice by former government employees; finalize the provisions on contingent fees; finalize the provisions on conflicts of interest; finalize the general practice standards; finalize sanctions and procedure for violations of Circular 230 practice requirements, including the imposition of a monetary penalty and other sanctions, rules about service of the complaint, rules on supplemental charges, rules on discovery, hearings, and publicity of proceedings, and rules on expedited suspension. T.D. 9359, 2007-45 I.R.B. 931.

• General Practice Standards re: Tax Return Preparation and Signing. The standards with respect to tax returns under Section 10.34 (a) in the final regulations (T.D. 9359) do not reflect the amendments made by the Small Business and Work Opportunity Tax Act of 2007. Thus IRS issued Notice of Proposed Regulations with regard to tax-return preparation. Under the proposed regulations, a practitioner may not advise a client to take a position on a tax return on which a position is taken, unless-(1) the practitioner has a reasonable belief that the position satisfies the more likely than not standard; or (2) the position has a reasonable basis and is adequately disclosed to the IRS. REG-138637-07, 2007-45 I.R.B. 977.

• Treatment of Transactions: Obligations between Members of a Consolidated Group, Insurance. The proposed regulations include intercompany regulations and intercompany insurance regulations. They apply to three types of transactions: inbound, outbound, and intragroup. REG-107592-00, 2007-44 I.R.B. 908.

• Credit for Expenses for Household and Dependent Care Services Necessary for Gainful Employment. The final regulations include amendments under the Working Families Tax Relief Act of 2004, and address significant issues that have arisen administratively. They retain the requirements that services must be performed prior to a disqualifying event and at a time when the purpose is to enable the taxpayer to be gainfully employed. No allocation is required for the cost of a specialty day camp. Expenses for summer school and tutoring programs are not eligible for the credit. A safe harbor that treats an absence of no more than two consecutive calendar weeks as a short, temporary absence is created. Costs for care outside the taxpayer’s household for a qualifying individual who is a dependent or spouse incapable of self-care who regularly spends at lease eight hours each day in the taxpayer’s household may continue to qualify for the credit. T.D. 9354, 2007-41 I.R.B. 759.

• Income Tax: Reporting by Regulated Investment Company (RIC) of Foreign Source Income. This change, eliminating country-by-country reporting of RICs’ foreign source income, concerns the foreign tax credit and will affect certain RICs and shareholders thereof that pay foreign taxes. T.D. 9357, 2007-41 I.R.B. 773.

• Income Tax: Partnerships’ Assets-Over Merger; Property Distributions. These proposed regulations provide that IRC §704(c)(1)(B) applies to newly created IRC §704 (c) gain or loss in property contributed by the transferor partnership to the continuing partnership in an assets-over merger, but does not apply to newly created reverse IRC §704(c) gain or loss resulting from a revaluation of property in the continuing partnership. REG-143397-05, 2007-41 I.R.B.790.

• Benefit Restrictions for Certain Pension Plans. These proposed regulations under IRC §436 provide guidance regarding benefit restrictions for certain underfunded defined benefit pension plans and regarding the use of certain funding balances maintained for defined benefit pension plans. REG-113891-07, 2007-42 I.R.B. 821.

LEGISLATION

• Homeowners’ Mortgage Debt. This legislation would permanently exclude from gross income the discharge of indebtedness on a principal home while placing a $2 million cap on the maximum amount of forgiven debt that would be eligible for tax relief. H.R. 3648, 110th Congress (2007).

• IRS Private Debt Collection Contracts. The Tax Collection Responsibility Act of 2007 (H.R. 3056) ends the year-old IRS program that sends private debt collectors after delinquent taxpayers. This measure would repeal the IRS’s authority to outsource tax-debt collection to private firms. However, this bill faces potential problems in the Senate.

• U.S. Offshore Tax Rules. The Senate Finance Committee recently held a hearing on three aspects of U.S. offshore tax rules: the taxation of reinsurance companies, the investment by foundations and nonprofits in hedge funds through offshore entities, and the tax treatment of compensation paid to hedge fund managers.

• Heartland, Habitat, Harvest and Horticulture Act of 2007. The Senate Finance Committee approved this act. It includes an amendment that would raise more than $10 billion by codifying the economic substance doctrine. Under the proposal, the economic substance doctrine would be satisfied only if a transaction changes “in a meaningful way” a taxpayer’s economic position and only if the taxpayer has a “substantial nonfederal tax purpose for entering into such transaction.” 

• Trade Assistance Bill. The House Ways and Means Committee passed a $12 billion trade assistance bill (H.R.3920), the Trade and Globalization Assistance Act of 2007, which would allow tax-credited financing for redeveloping blighted manufacturing areas.

LOOKING AHEAD

• Temporary Alternative Minimum Tax (AMT) Patch. Chair of House Ways and Means Committee said that legislation providing for a one-year patch of AMT and an extension of the so-called tax extenders could come before a larger tax reform bill that would eliminate the AMT.

• Internet Tax Moratorium Extension. The House Judiciary Committee approved an amendment in the nature of a substitute to legislation (H.R. 3678) that would extend the internet access tax moratorium for another four years until Nov.1, 2011. This extension would help to balance the relationship between the industry and the state and local government.

— Kathryn J. Sedo
— Yang Yang
University of Minnesota Law School

TORTS & INSURANCE
JUDICIAL LAW

• Statutory New Home Warranties. The Minnesota Court of Appeals has held that the ten-year statute of repose contained in Minn. Stat. §541.051, subd. 1(a) applies to actions for breach of statutory new-home warranties set forth in Minn. Stat. §327A.02.

In 1994, plaintiffs contracted with defendant builder for the construction of a new home. The home was substantially completed on October 19, 1994. On October 12, 2004, plaintiffs hired a home inspection company to perform a moisture analysis, which revealed high levels of moisture in the home. In early 2005, plaintiffs hired a structural engineering firm to conduct a structural analysis of the home, which revealed that the home had “serious structural and fungal infestation problems[.]” In May 2005, plaintiffs sent written notice to defendant about the structural engineering report. In November 2005, plaintiffs sued defendant for negligence, breach of express and statutory warranties, breach of contract, and breach of implied warranty. The builder filed a third-party action against the window manufacturer.

Defendant and third-party defendant moved for summary judgment asserting that plaintiffs’ claims were barred by the six-month written notice requirement in Minn. Stat. §327A.03, the two-year statute of limitations, and ten-year statute of repose contained in Minn. Stat. §541.051, subd. 1. In response, plaintiffs conceded that their negligence, breach of contract, and breach of implied warranty claims were untimely, but contended that their express and statutory warranty claims were timely because the moisture test dated October 12, 2004, which is less than ten years after substantial completion, constituted discovery of the injury to their home.

The trial court granted summary judgment, finding that plaintiffs did not discover the structural problems with their home upon receipt of a report from their structural engineer in 2005, more than ten years after substantial completion, and therefore their statutory warranty claims under Minn. Stat. §327A.02 were barred by the statute of repose contained in Minn. Stat. §541.051, subd. 1. The trial court also held that plaintiffs had conceded their express warranty claims were barred by the statute of limitations.

On appeal, plaintiffs argued that the ten-year statute of repose contained in Minn. Stat. §541.051, subd. 1 does not apply to statutory or express warranty claims; rather, they contended that Minn. Stat. §541.051, subd. 4 applies, and that it has a 12-year statute of repose. The Court of Appeals rejected this argument, stating that a 2004 legislative amendment made Minn. Stat. §541.051, subd. 1 applicable to statutory and express warranty claims, thereby requiring any such claim to accrue within ten years of substantial completion of a home. The court also reiterated that statutory and express warranty claims accrue upon discovery of a contractor’s breach (not merely upon discovery of an injury, which is the standard for all other claims related to improvements to real property).

Notwithstanding its rejection of plaintiffs’ legal arguments, the Court of Appeals reversed the grant of summary judgment and remanded the case to the trial court holding that there was no factual basis for the trial court’s finding that plaintiffs had conceded their express warranty claims, and that there were fact questions as to when plaintiffs became aware of structural defects with their home and when they became aware of the defendant’s breach of the ten-year structural warranty. Gomez v. David A. Williams Realty & Constructing, Inc., No. A06-2155 (Minn. App. 11/09/07). www.lawlibrary.state.mn.us/archive/ctappub/0711/opa062155-1106.htm

— David Turner
Bassford Remele, A Professional Association