February 2007

February 2007

February 2007

February 2007

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Disability Benefits; Deputy Sheriff; "Any Active Duty." A deputy sheriff who claimed to be disabled because of a hostile work environment was entitled to enhanced disability benefits from the Police & Fire Fund based upon the plain meaning of the phrase "any active duty," which triggers eligibility for benefits. The Supreme Court, affirming the Court of Appeals, held that the terminology under Minn. Stat. §353.656 subd. 1 applies because the hostile work environment was a response to, and interfered with the performance of the claimant’s law enforcement duties. The Court rejected the contention that the claimed disability must arise out of hazardous activities, a proposition also agreed to by the single dissenter, Justice Lori Gildea. The dissent, however, would have remanded the matter to determine whether the officer’s injury occurred "while he was performing specific acts of duty." In Re Disability Benefits of Brittain, 724 N.W.2d 512 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0612/opa042407-1207.htm

• Disability Benefits; Deputy Sheriff; Preexisting Condition. The Public Employee Benefits Eligibility Panel’s denial of employer-provided continued health insurance for a former police officer was reversed by the Court of Appeals. The employee, a Carver County deputy sheriff, incurred a disabling back injury during his work, which prevented him from returning to his job. The board denied benefits on grounds that the injury was attributable to a preexisting condition and that he was currently receiving health insurance benefits as a civilian employee of the county. Both of these factors were impermissible under Minn. Stat. §299A.465, subd. 1, which requires that a peace officer’s employer provide continued health insurance coverage if the officer suffers a "disabling injury" while acting within the scope of the officer’s official duties, which results in the officer’s retirement or separation of service, and the officer has been approved to receive a duty-related disability pension. In Re Meuleners, 2006 WL 3719481 (Minn. App. 2006). www.lawlibrary.state.mn.us/archive/ctappub/0612/opa060014-1219.htm

• Discrimination; Reasonable Accommodation. The University of Minnesota did not discriminate against a medical school resident with an attention deficit hyperactivity disorder (ADHD) and dyslexia by failing to provide a reasonable accommodation. The Court of Appeals ruled that the university properly accommodated the resident by allowing him to tape record lectures around the room during class lectures and was not obligated to provide "more extensive accommodations." Tori v. University of Minnesota, 2006 WL 3772316 (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060205-1226.htm

• Race Discrimination Claim; Failure to Follow Policy. A claim of racial discrimination by an employee who did not follow his company’s antidiscrimination policies failed in a case from Minnesota. The 8th Circuit Court of Appeals affirmed dismissal of the employee’s racial discrimination and age discrimination claims after his employer failed to rehire him, reasoning that the employee failed to follow the employer’s antidiscrimination policy, which constituted a defense to the discrimination charge under the Eller-Faragher doctrine that requires employees to exhaust applicable internal harassment discrimination policies. A third rehiring claim also was not actionable because the employer had legitimate business reasons for not rehiring the terminated employee. Gordon v. Shafer Contracting Co., Inc., 469 F.3d 1191 (8th Cir. 2006).

• Race Discrimination Claim; Termination not Pretextual. A nurse who was fired for verbally abusing a patient was unsuccessful in her race discrimination claim. The 8th Circuit affirmed summary judgment because the employee failed to show that her termination was pretextual for racial discrimination. However, the employer’s motion for attorneys fees was denied because the lawsuit was not brought in bad faith or was not frivolous. Arnold v. Nursing & Rehabilitation Center at Good Shepherd, 2006 WL 3524397 (8th Cir. 2006).

• Gender Discrimination Claim; Retaliation. A claim of gender discrimination by a terminated funeral director was rejected by the 8th Circuit Court of Appeals. The claim was not actionable because the discharged employee did not present sufficient evidence to raise an inference that her gender was a factor in the funeral home’s reduction in force, and her retaliation claim was also rejected. Wells v. SCI Management, 469 F.3d 697 (8th Cir., 2006).

• Gender Discrimination; Disparate Impact. Women who were not hired by a meat packing company after they failed a preemployment strength test properly were rewarded back pay and benefits on grounds of disparate impact. Judge Diana Murphy of Minnesota, writing for the 8th Circuit, upheld the trial court’s determination that all the claimants, except one, were entitled to recovery on grounds of disparate impact, regardless of whether the employer discriminated intentionally. EEOC v. Dial Corp., 469 F.3d 735 (8th Cir., 2006).

• Race Discrimination Suit; After-Acquired Evidence. After-acquired evidence of an employee’s prior criminal record, learned by the employer in discovery in a wrongful failure to hire suit, did not bar the racial discrimination lawsuit. The Minnesota Court of Appeals held that there were disparities regarding the reasons for the employer’s refusal to hire an African-American man which precludes summary judgment. The employer’s claim, after refusing to hire him, that the prospective employee had a criminal record was not dispositive to bar the lawsuit, although it may limit any remedies to which the claimant is entitled. The decision departs from the prior ruling of the appellate court in Frey v. Ramsey County Community Human Services, 517 N.W.2d 591 (Minn. App. 1994) which held that after-acquired evidence barred a discrimination suit. The ruling here, however, follows the decision of the U.S. Supreme Court a year after Frey in McKennon v. Nashville Banner Publishing Co., 513 U.S. 352 (1995), which reasoned that after-acquired evidence does not bar a claim of discrimination under Title VII, although it may limit remedies of back pay or reinstatement. Meads v. Best Oil Co., WL 3720106 (Minn. App. 2006). www.lawlibrary.state.mn.us/archive/ctappub/0612/opa060966-1219.htm

• Whistleblowing; Retaliation. An employee’s use of rental vehicles for personal purposes, in violation of her employer’s policy, did not bar her retaliation claim. The employee sued for retaliation after she was fired following her report to government authorities that her employer was misappropriating grant money and submitting improper grant data. The appellate court reversed summary judgment for the employer on grounds that the employer knew of the employee’s reports before it terminated her and, because of the short time period of one month between the employee’s report to the authorities and her termination, there was inference of causation that could lead a trier-of-fact to determine that her termination was retaliatory and under the whistleblower statute Minn. Stat. §181.932. Henry v. Indigenous People’s Taskforce, 2006 WL 3719658 (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060160-1219.htm

• Unemployment Compensation; Employee or Independent Contractor. Two men who orally agreed to perform certain jobs for a negotiated price, as a subcontractor of a roofing company that paid for the materials for the two jobs, had employee-employer relationships which entitles them to unemployment compensation benefits. The Court of Appeals held that the roofers were entitled to unemployment compensation benefits after the project ended because of the existence of the employer-employee relationship, notwithstanding some elements of independent contractor status. Although the claimants used separate business names, had their own separate federal tax-identification numbers, carried their own liability insurance, and used their own equipment, they are not independent contractors but are employees. Therefore, when the work was terminated, they were eligible for unemployment benefits. Terra Firma Estates, Inc. v. Department of Employment & Economic Development, 2006 WL 3490945 (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060386-1205.htm

• Unemployment Compensation; Refusal to Test. An employee who was fired after refusing to undergo a physical examination following an injury at work was entitled to unemployment compensation benefits. The Court of Appeals determined that because it was reasonable for an employee to feel that the physical examination was violative of the employee’s rights under the Human Rights Act, he was entitled to refuse to comply. A concurring opinion by Judge Kevin Ross would have upheld the employee’s rights to benefits because the test was illegal, regardless of the reasonableness of the employee’s refusal to participate. Caron v. Multimedia Holdings Corp., 2006 WL 3593038 (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa052407-1212.htm

• Unemployment Compensation; "Indifference" to Employer Interest. An employee who was fired after she was cited for driving while intoxicated, with an alcohol concentration of .21, while she was not working, was not entitled to unemployment compensation benefits. The employer fired the employee in anticipation that her license was revoked and claimed that her inability to drive interfered with its ability to assign workers to work crews for which the employee sometimes drove a car. Under these circumstances, the driving offense reflected that the employee was "indifferent" to her employer’s interests, which warranted the determination of disqualifying "misconduct." Shambour v. Property Upkeep Services, 2006 WL 3719677, (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060280-1219.htm

• Unemployment Compensation; Absent Without Notice. An employee’s repeated failure to comply with her company policy requiring notice of absence was denied unemployment compensation benefits. The Court of Appeals held that the employee committed disqualifying "misconduct" because he had received three written reprimands for not calling work at least before the start of the shift to report a prospective absence and, on a fourth occasion, a relative called in for the employee. The employer was unable to reach the claimant for three days to confirm his unavailability. Norvell v. Triangle Services, 2006 WL 3719786 (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060608-1219.htm

ADMINISTRATIVE MATTERS

The U.S. Department of Labor is accepting feedback on the Family and Medical Leave Act (FMLA), conducting its first public survey in more than a decade on the measure, which was enacted in 1993. The department says it is looking for "fresh thinking on the issues" to clarify some of the key regulations under the act, including the amount of notice necessary to declare sick leave and "what qualifies as a serious illness" to trigger the sections of the act, which generally cover employees who have worked for more than one year on a full-time basis for employers with more than 50 employees. The department, which engages in some slight oversight of law, was accepting public comments earlier this year and may seek more comments later in the year before holding a public hearing for changes and regulations under the act.

Meanwhile, there are proposals brewing in Congress to try to change the laws, which have not been modified since enactment 14 years ago, to withstand the pool of employees eligible under the FMLA and to provide for more sick-leave benefits for employees.

— Marshall H. Tanick
Mansfield, Tanick & Cohen, PA

February 2007

ENVIRONMENTAL LAW
JUDICIAL LAW

• Environmental Policy Act; Coal Train Proposal. The 8th Circuit Court of Appeals upheld the Surface Transportation Board’s ("STB’s") decision to approve a controversial proposal of the Dakota, Minnesota & Eastern Railroad Corporation ("DM&E"). DM&E had asked the STB for approval to construct approximately 280 miles of new rail line to reach the coal mines of Wyoming’s Powder River Basin ("PRB") and to upgrade nearly 600 miles of existing rail line in Minnesota and South Dakota. The court in 2003 reversed and remanded a previous approval by the STB for failure to comply with the National Environmental Policy Act ("NEPA"). On remand, the STB issued a draft supplemental environmental impact statement ("DSEIS") and, following comments on that, a final supplemental environmental impact statement ("FSEIS"). It then approved the DM&E proposal based on the analyses in the DSEIS and the FSEIS, both of which addressed the remanded issues as well as other issues raised during the supplemental environmental review process. The Mayo Foundation, the city of Rochester, Olmsted County and the Sierra Club thereafter petitioned the court to review the STB’s latest approval on a variety of grounds, all of which were denied.

The court first addressed the argument by Mayo, Rochester and Olmsted County that DM&E’s acquisition of over 1,000 miles of existing rail line that runs through Minnesota, Iowa, Kansas, Missouri, Wisconsin and Illinois constituted a "significant new circumstance" that should have been examined as an alternative to routing trains through Rochester. The court acknowledged that NEPA regulations require consideration of all "reasonable alternatives" to a proposed project. It also noted that an agency like the STB need not consider alternatives that would frustrate the very purpose of the project. The court upheld the STB’s (implicit) determination that using the acquired rail line instead of the proposed line would frustrate the purpose of the project, which was to provide a shorter, more direct rail line from the PRB to eastern markets. Thus, the court rejected the petitioners’ argument that the acquired line should have been examined as an alternative to DM&E’s proposal under the environmental review process.

The court also rejected Rochester and Olmsted County’s challenge to the STB’s decision to require DM&E to undertake mitigation measures for "wayside noise" but not for "horn noise." It upheld as sufficient the STB’s rationale for its differing treatment of the two noise types, i.e., while the affected communities had an option for addressing horn noise concerns through the establishment of "quiet zones," they did not have that option with regard to wayside noise. Thus, the court concluded that the STB’s rejection of the horn noise mitigation demanded by the petitioners was not arbitrary and capricious.

Finally, the court addressed the Sierra Club’s argument that the STB did not adequately address the issue of the potential increase in certain air emissions that would result from increased use of PRB coal due to the availability of a shorter, cheaper distribution route. The STB’s failure to consider that issue was one of the reasons the court reversed the prior approval. On remand, the STB modeled those potential impacts using a program created by the Energy Information Administration. The court rejected the Sierra Club’s petition because it found that the STB, through the modeling that it did, had "more than adequately" considered the "reasonably foreseeable significant adverse effects [of increased coal consumption] on the human environment." Mayo Foundation v. Surface Transportation Board, __ F.3d __, 2006 WL 3802205 (8^th Cir. 2006).

ADMINISTRATIVE MATTERS

• Environmental Policy Act; New Procedures and Assessments Proposed. The U.S. Environmental Protection Agency ("EPA") on December 19, 2006, published a number of proposed amendments to its rules for implementing the requirements of the National Environmental Policy Act ("NEPA"). All federal agencies are required to adopt rules whose purpose is to ensure the agencies’ decision-making processes are consistent with NEPA and its regulations. The EPA first promulgated rules regarding its own decision-making processes in 1975 and has amended them occasionally since then. Among other things, the proposed new rule would eliminate the requirement that a public meeting or hearing be held as part of the NEPA process. The proposed rule also contains a number of new categories of actions that would be categorically excluded from the NEPA process. Among the newly proposed categorical exclusions are actions involving reissuance of an NPDES permit for a new source if the conclusions of the original NEPA document are still valid. The EPA will accept comment on the proposed rule until February 20, 2007. 71 Fed. Reg. 76082 (Dec. 19, 2006).

— Bill Hefner
The Environmental Law Group

February 2007

FEDERAL PRACTICE
JUDICIAL LAW

• Removal; Supplemental Jurisdiction; Class Action Fairness Act. Two recent 8th Circuit decisions address the impact of the Class Action Fairness Act ("CAFA") on longstanding jurisdictional rules.

In the first case, the defendant removed a putative class action solely on the basis of diversity jurisdiction. The district court denied a motion to remand, and the plaintiff petitioned the 8th Circuit to review the denial of the motion to remand under 28 U.S.C. §1453(c)(1), the CAFA provision which allows discretionary interlocutory appeals from orders granting or denying remand motions. However, the 8th Circuit, citing two decisions by the 5th Circuit, held that 28 U.S.C. §1453(c)(1) applied only to cases that were removed under CAFA, and was inapplicable to a case that had been removed on the basis of diversity. Saab v. Home Depot U.S.A., Inc., ___ F.3d ___ (8th Cir. 2006).

In the latter case, Judge Ericksen dismissed a purported class action which asserted federal antitrust claims, and then declined to exercise supplemental jurisdiction over the plaintiffs’ state law claims. On appeal, the plaintiffs argued that Judge Ericksen had abused her discretion by declining to exercise supplemental jurisdiction over the state law claims. The 8th Circuit rejected that argument, while noting in passing that "the potential for future removal of the state claims to federal court" under CAFA was "not sufficient grounds to require the district court to retain federal jurisdiction." In Re Canadian Import Antitrust Lit., ___ F.3d ___ (8th Cir. 2006).

• Civil Contempt; Monetary Sanctions. The 8th Circuit vacated the imposition of a daily sanction of $500 in a civil contempt matter, finding it unclear from the record whether the sanction was intended to be coercive or compensatory, and finding no explanation in the record for the amount of the sanction. Chaganti & Assocs., P.C. v. Nowotny, ___ F.3d ___ (8th Cir. 2006).

• "Garden Variety" Emotional Distress Claims; Medical Condition "In Controversy." Judge Tunheim affirmed an order by Magistrate Judge Noel which rejected an argument that the plaintiff had waived a medical privilege by seeking "garden variety" emotional distress damages in an employment case. Dochniak v. Dominium Management Services, Inc., ___ F.R.D. ___ (D. Minn. 2006), aff’g 2006 WL 3156539 (D. Minn. July 26, 2006).

• Attorney Fees; Hourly Rates. Judge Frank awarded a prevailing plaintiff in a MHRA case more than $132,000 in attorney fees, approving hourly rates of $350 for the lead partner and $265 for an experienced associate. Peterson v. Ford Motor Co., 2006 WL 3030885 (D. Minn. 10/11/06).

• Request for Stay Pending Appeal. Judge Tunheim denied the plaintiff’s request for entry of final judgment under Fed. R. Civ. P. 54(b) and a stay of trial pending appeal, finding that granting the request would lead to "piecemeal litigation" and that "judicial economy and the equities of the case" weighed against the motion. Guy Carpenter & Co. v. John B. Collins Assocs., Inc., 2006 WL 3627022 (D. Minn. 12/12/06).

• Forum Selection Provision; Enforceability. While acknowledging the absence of any 8th Circuit authority on the issue, Judge Doty applied federal procedural law rather than state substantive law to determine the enforceability of a contractual forum selection provision. Best Buy Stores, L.P. v. Developers Diversified Realty Corp., 2006 WL 3544956 (D. Minn. 12/08/06).

• Requests for Admissions; Failure to Respond. Judge Schiltz held that a plaintiff’s failure to respond to requests for admissions "operates as an admission of the matter requested," and entitled a defendant to summary judgment on its counterclaim. Stellar-Mark, Inc. v. Advanced Polymer Technology Corp., 2006 WL 3406747 (D. Minn. 11/27/06).

— Josh Jacobson
Law Office of Josh Jacobson

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patent Infringement; Substituting Expert. Judge Frank granted in part and denied in part plaintiff’s motion to substitute experts in a patent infringement case. Plaintiff Cardiac Science retained an expert for infringement and validity issues. After submitting his expert reports and shortly after being deposed by Philips, the expert resigned from the case, citing personal issues. Cardiac Science sought to replace this expert with another whose proposed expert report included some opinions and prior art that differed from those contained in the first expert’s reports. Philips did not object to the substitution, but requested that the substitute expert’s report and testimony conform to those of the first expert. Applying 8th Circuit law, a court has discretion to exclude untimely expert opinions unless the failure to disclose was either harmless or substantially justified. The court found that the substitution was substantially justified but limited the substitution to minimize prejudice to Philips. These limitations included forbidding the substitute expert from testifying in any manner contrary to or inconsistent with the first expert, limiting the substitute expert’s invalidity opinions to the first expert’s opening expert report, and limiting testimony on prior art to that which was included in the first expert’s opening report. The court also granted Philips a deposition of the substitute expert with costs assigned to Cardiac Science and held that the first expert’s deposition testimony could be used for impeachment purposes at trial. Cardiac Science, Inc., v. Koninklijke Philips Elecs., Civ. No. 03-1064 (D. Minn. 12/22/ 06).

• Patent Infringement; Written Description Requirement. Finding three claims of respondent’s patent invalid for failure to satisfy the written description requirement, Judge Frank granted plaintiff’s motion for summary judgment. As written, the claims encompassed all external defibrillators that use "a plurality of switches." The patent, however, disclosed only one embodiment: a five-switch circuit. Respondent Philips argued that this disclosure was merely one species (five switches) of the invention and was sufficient to describe a later-claimed genus (a plurality of switches) that includes this species. The court noted that although the disclosure of one embodiment may be enough to cover a genus, there are two exceptions to this rule: "(1) where the area of technology is unpredictable, more description is required to show the inventor possessed a broadly claimed invention; and (2) if a patentee distinguishes the prior art as generally inferior and touts the advantages of the disclosed embodiment over the prior art, the patentee may be found to be in possession of a narrower invention than that one claimed." Applying the second exception, the court found that Philips distinguished the prior art and touted the advantages of the five-switch invention as solving major design challenges found in the prior art. The court further reasoned that the specification provided only a single way of overcoming these challenges by using the five-switch circuit. Thus, the specification provided no support for the broad claim of "plurality of electronic switches" and the claims were invalid. Cardiac Science, Inc., v. Koninklijke Philips Elecs., Civ. No. 03-1064 (D. Minn. 12/11/06).

• Trademark Infringement; Wrongful-Profit Damages. Judge Tunheim denied respondent’s motion for summary judgment of no wrongful-profit damages on the issues of trademark infringement and unfair competition. The court found that plaintiff Fargo presented sufficient evidence by asserting that it was damaged when respondent Iris made profits on its alleged knock-off products. In denying the motion, the court permitted Fargo to seek the respondent’s profits without evidence of willful infringement, continuing the court’s trend away from requiring proof of willful infringement for wrongful-profit damages in trademark cases. Fargo Elecs. Inc. v. Iris Ltd., Inc., Civ. No. 04-1017 (D. Minn. 12/29/06).

— Tony Zeuli
— Sarah Stensland
Merchant & Gould

February 2007

JUVENILE LAW
JUDICIAL LAW

• Juvenile Court Procedure; Due Process. In this Minnesota Supreme Court decision, a minor was charged with two counts of third-degree criminal sexual conduct. The minor admitted to several of the counts, and was given a stay of adjudication and six months’ probation. Subsequently, the district court held a probation revocation hearing and the minor admitted to multiple probation violations. The district court issued findings and an order revoking the stay of adjudication. As a result, the minor was placed on indefinite probation in order to register as a predatory sex offender, complete two days of community service, provide a DNA sample, and continue to attend therapy. Several days after that, the minor’s attorney requested that the district court consider rehearing the order revoking the stay of adjudication.

The basis for the rehearing was an asserted lack of due process because the report of the minor’s therapist was not provided to the minor or the state in enough time for either to review it prior to the probation-revocation hearing. There is no indication that the district court responded to the letter, but the district court did hold the requested hearing for the purpose of arguing the motion for reconsideration. The district court issued another set of findings and order, those findings being identical to those issued in the determination that was asked to be reconsidered, except that they noted the subsequent hearing on the motion for reconsideration.

Approximately one month later, the minor filed the Notice of Appeal to the Court of Appeals. The Court of Appeals dismissed the appeal as untimely because the underlying order where the district court denied the motion for reconsideration was not appealable because neither the Juvenile Delinquency Rules nor the Civil Appellate Rules recognize a motion for reconsideration as one that extends the time to appeal.

The minor petitioned the Minnesota Supreme Court for review, and that court granted the request. The Supreme Court held that while a motion for reconsideration does not extend the appeal period in a juvenile delinquency proceeding, in the circumstances of this particular case, where the motion arguably sought rehearing and the district court held a hearing on the motion at which testimony was taken and exhibits were admitted into evidence, an out-of-time appeal would be allowed in the interest of justice. In the Matter of the Welfare of: S.M.E., Child, A06-330 (Minn. 01/11/07). www.lawlibrary.state.mn.us/archive/supct/0701/opa060330-0111.htm

• Rule Amendments Promulgated. The Minnesota Supreme Court issued an order promulgating corrective amendments to the Rules of Adoption Procedure, the Rules of Guardian ad Litem Procedure in Juvenile and Family Court, and the Rules of Juvenile Protection Procedure. Most of the changes were not significant substantive modifications, but rather, clarifications and nonsubstantive expansions of previously existing rules. One change of interest to juvenile court practitioners is Rule 33.02 of the Rules of Juvenile Protection Procedure dealing with privately drafted and filed child in need of protection or services (CHIPS) petitions. Previously, it was required that the petitioner drafting such a private CHIPS petition state in the petition that he or she has reported the circumstances underlying the petition to the responsible social services agency and that protection or services were not provided to the child. That provision was deleted, and a new clause was added to the Rules stating that the petitioner must include a statement identifying any past or present cases involving the child or family that is the subject of the petition. Presumably, there will no longer be the need for the petition being filed by a private person to first seek services by the county before going ahead with the private petition. Order Promulgating Corrective Amendments. C1-01-927, C0-95-1475, ADM04-8001, and CX-89-1863 (Minn. 12/18/06). (See "By the Court," pages 30-31 in this issue of Bench & Bar.)

• Termination of Parental Rights; Voluntary vs. Involuntary. In an unpublished decision by the Minnesota Court of Appeals, the county filed a petition for involuntary termination of parental rights, the district court conducted an admit/deny hearing, and the mother denied that her rights should be terminated. The mother then subsequently filed a petition to terminate her parental rights voluntarily. The Court of Appeals held that after a hearing on both petitions, the district court did not err when it determined that the mother’s parental rights should be involuntarily terminated and ruling that her voluntary petition was moot. The Court of Appeals held that the district court has discretion to first consider the county’s petition and then determine that the mother’s rights should be terminated involuntarily. While involuntary termination of her parental rights will affect her parental rights to her other children, the Court of Appeals opined that such a consideration is not a factor the district court considers in determining whether involuntary termination is appropriate. In the Matter of Welfare of the Child of: L.H. and M.C., A06-903 (Minn. App. 01/02/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0701/opa060903-0102.htm

• Termination of Parental Rights; Best Interests. Parents appealed the order terminating their parental rights, arguing that the district court erred by relying on their oral stipulation as a basis for the termination and by finding that termination rather than transferring legal custody was in the children’s best interests. These unmarried parents had voluntarily agreed to terminate their parental rights if the district court found that termination was in the children’s best interest, but they petitioned to alternatively transfer permanent legal and physical custody to relatives. These children had been living with a nonrelative couple who were willing to adopt the children. The Court of Appeals, in its analysis of the record, observed that the parents of the two children had a conflicted relationship and had separated several times previously, leading the court to express concern regarding future visitation disputes between the parents and the relatives. Furthermore, the relatives proposed by the parents themselves had an unstable home and the father had significant mental health problems. Testimony from a case worker contained within the record indicated that the nonrelative couple had exhibited the greatest commitment to the children. Thus, the Court of Appeals concluded that clear and convincing evidence supported the trial court’s decision that termination of parental rights was in the children’s best interests. In the Matter of the Welfare of the Children of: C.M.B., J.D., A06-704 and A06-705 (Minn. App. 12/12/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060704-1212.htm

• Juvenile Delinquency; EJJ; Sentence. Appealing from an order adjudicating him delinquent as an extended jurisdiction juvenile (EJJ) and imposing both a juvenile and adult sentence, the appellant juvenile argued that the district court abused its discretion when it denied his motion to cross-examine the state’s juvenile eyewitness regarding the witness’s probationary status and when it admitted a surveillance videotape into evidence without requiring the state to adequately authenticate the videotape. The juvenile witness named the appellant as the shooter at the scene of the incident and later testified at trial. This witness had a juvenile record and was on probation at the time.

After giving defense counsel the opportunity to voir dire the witness to ensure that he had not been promised anything in exchange for his identification of the appellant or his testimony, the district court denied defense counsel’s motion to allow cross-examination of the witness regarding his probationary status. The Court of Appeals concluded that the district court did not abuse its discretion nor did it violate appellant’s right to confrontation because nothing in the record suggested that the witness had any reason to fear that he was a suspect in the shooting and that there was no evidence of bias or self-interest on the part of the witness. As to the admission of the surveillance videotape, the Court of Appeals held that it was an abuse of discretion because the tape was not properly authenticated, but the error was deemed to be nonprejudicial. In the Matter of the Welfare of: L.J.L., A06-92 (Minn. App. 12/19/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060092-1219.htm

• Child Protection; Custody; Self-Incrimination. In an unpublished case, the Minnesota Court of Appeals reviewed a father’s appeal from a district court order permanently transferring the physical and legal custody of his child to the child’s mother. The trial court held that the father failed to comply with his case plan. The Court of Appeals, in reversing the district court, held that even though the father continued to deny that he had improperly touched his daughter’s friend, which was the allegation that gave rise to the CHIPS petition, the district court relied upon improper evidence in concluding that the father failed to substantially comply with the court-ordered case plan where the case plan did not require the father to admit that sexual contact occurred. The Court of Appeals determined that the father had cooperated and completed the requirements of the case plan and that a court may not require a parent to incriminate himself. In the Matter of the Welfare of the Child of: J. P.M.G., A06-585 (Minn. App. 11/14/06).

— Gary A. Debele
Walling, Berg & Debele

TAX
JUDICIAL LAW

• Property Tax: Discrimination Claim. The Minnesota Tax Court rejected the taxpayer’s contention that its property was unequally assessed and discriminated against. The parties stipulated to market values as of January 2, 2002. In reviewing Minn. Stat. §278.75, Subd. 4, the court found that the language indicated that any party may introduce evidence of reliability or unreliability to rebut the statutory presumption of validity of the Sales Ratio Study, and therefore, it followed that the party challenging the Sales Ratio Study must be the one bearing the burden of proof. The taxpayer bore the burden of establishing that the 2002 Sales Ratio Study was unreliable and had failed to do so. Wooddale Shopping Center v. County of Washington, C5-03-2261 and C8-03-2691, 2006 Minn. Tax LEXIS 33 (Minn. T. Ct. 12/15/06).

• Procedure: Columbus Day as Legal Holiday. The Minnesota Supreme Court overturned the Minnesota Court of Appeals and held that Columbus Day is a legal holiday under Minn. R. Civ. P. 6.01 and thus was not included in computing the last day for which an appeal could be filed. The case became complicated because Minn. Stat. §654.44, Subd. 5 defined Columbus Day as an "optional holiday" for the Judicial Branch, and the Judicial Branch does not recognize Columbus Day as a holiday. The rationale for the decision was that appellants should be able to rely on the plain language of the rules and the rules should be given a liberal construction to effectuate that purpose. Commandeur LLC, et al. v. Howard Harty, Inc., A05-2014, 724 N.W.2d 508 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0612/opa052014-1207.htm

• Procedure: Settlement Agreement with Severed Employee. The state appeals court determined that the district court did not err in its determination that a severed employee did not materially breach a settlement agreement upon leaving employment. The settlement agreement stated that the employer would not withhold taxes from the settlement, but did not expressly prohibit the exemployee from filing a tax return for the settlement proceeds. Per the agreement, the employer agreed to reimburse and indemnify the exemployee if she was required to pay any income taxes on the proceeds. The taxpayer disclosed the agreement with the employer to the Internal Revenue Service upon filing of her return, who determined it was taxable income and imposed interest and penalties. The court rejected the employer’s argument that the exemployee breached the agreement by reporting it to the taxing authorities. The employer was then required to indemnify the exemployee for the taxes paid, as stipulated in the settlement agreement. Bruch v. Wendy’s FourCrown, Inc., A06-05, 2006 WL 3772291 (Minn. App. 2006) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0612/opa060105-1226.htm

• Minnesota Statute "Trumps" Federal Election. The Minnesota Supreme Court overturned the Tax Court, holding that a validly organized foreign entity was not deemed to be a U.S. partnership for federal tax purposes even though a "check-the-box" election was made at the federal level. The Court accepted the taxpayer’s position that Minn. Stat. §290.17, Subd. 4(f) excludes a foreign entity — Manpower, S.A.R.L. — that is part of the unitary business from inclusion in the Minnesota combined return of its parent — Manpower, Inc. Manpower, Inc. v. Commissioner of Revenue, 724 N.W.2d 526 (Minn. 2006). www.lawlibrary.state.mn.us/archive/supct/0612/opa060468-1207.htm

• New Federal Rules on E-Discovery. Amendments to the federal Rules of Civil Procedure that took effect as of December 1, 2006, described in a 300-plus-page document, require that companies that are involved in civil litigation meet within 21 days before the first scheduling conference is held to decide how to handle electronic data. The firms must agree on what records are shared, which electronic format is used, and a definition of "accessible data." Perhaps no rule will get as much scrutiny as new Rule 26(b)(2), Limitations on Discovery, which provides in part: "A party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost." The party claiming that production would impose an undue burden will have to make the appropriate demonstration. U.S. Judicial Conference, Summary, Report of the Judicial Conference Committee on Rules of Practice and Procedure (September 2005), available at www.uscourts.gov/rules/Reports/ST09-2005.pdf. U.S. Courts, Federal Rulemaking, Pending Rules and Amendments, available at www.uscourts.gov/rules/newrules6.html

• "Short Sale" Obligation Held to Be Partnership "Liability". The federal district court held that an obligation to close a "short sale" transaction constituted a "liability" under IRC §752. The court vindicated the IRS’s position that an obligation to replace securities borrowed under a short sale is treated as a liability for purposes of IRC §752. At issue was $102.7 million in disallowed losses. COLM Producer Inc. v. United States, No. 3:03-CV-3042 N, 98 AFTR 2d ¶ 2006-7494 (N.D. Tex. 10/16/06).

• IRS Burden for Imposing Penalties Relating to Nonfiled Returns. The U.S. Tax Court held that IRS failed to meet the IRC §7491 burden of imposing penalties relating to returns that a taxpayer failed to file. The Tax Court held that in order to satisfy its burden of production under IRC §7491(c), with respect to the IRC §6651(a)(2) addition to tax, IRS must introduce evidence that the tax was shown on a return. When a taxpayer has not filed a return, the IRC §6651(a)(2) addition to tax may not be imposed unless IRS has prepared an SFR that meets the requirements of IRC §6020(b). In this case, because IRS failed to introduce evidence that it had prepared an SFR for 2003 that met the IRC §6020(b) requirements, it did not satisfy its burden of production under IRC §7491(c), with respect to the IRC §6651(a)(2) addition to tax. In addition, the Tax Court held that in order to satisfy its burden of production under IRC §7491(c), with respect to the IRC §6654 addition (estimated tax) to tax, IRS was required to introduce evidence that taxpayer failed to make a required annual payment of estimated tax under IRC §6654(d), for 2003. Because IRS failed to introduce evidence showing whether taxpayer had filed a return for 2002 and, if so, whether he had any reported income tax liability for that year, it failed to demonstrate that taxpayer was required to make any estimated tax payments for 2003. Consequently, IRS did satisfy its burden of production under IRC §7491(c). Wheeler, 127 T.C. No. 4 (2006).

• Constitutionality of Business Franchise, Income Taxes. The West Virginia Supreme Court held that the imposition of business franchise and corporation net income taxes on a bank was constitutional because its significant business activity established substantial nexus with the state. The bank had no physical presence in the state. Commissioner v. MBNA America Bank, No. 330 49, 2006 LEXIS 132 (W. Va. 2006).

• Nonphysical PI Damages as Income; Murphy v IRS. The case of Murphy v. IRS, on the issue of whether nonphysical personal injury damages are income under the 16th Amendment is reopened sua sponte by the court and is to be rebriefed. Oral argument is scheduled for April 23, 2007. Murphy v. IRS, No. 05-5139 (D.C. Cir. 12/22/06).

• State Remedy for Unconstitutional Tax. A taxpayer wins its case — the city’s tax scheme is held to be unconstitutional — but should the taxpayer receive a refund of all taxes paid under the unconstitutional taxing scheme, or only an amount sufficient to cure the discriminatory effect of the tax? The California Court of Appeals chose the latter remedy, consistent with the holding of McKesson Corp. v. Florida Alcohol and Tobacco Div., 496 U.S. 18 (1990). Macy’s Department Stores Inc. v. San Francisco, 50 Cal. Rptr. 3d 79, 2006, WL 2960743 (Cal. App. 2006).

• Contribution of Conservation Easements Held Qualified. Taxpayers’ contributions of conservation easements on a bluff on Lake Michigan shoreline that is a habitat for threatened plant species, thereby precluding development of property, meet requirements for "qualified conservation contributions" under IRC §170(h)(1). The IRS’ contention was that taxpayer failed the third part of the statutory test because the conservation easements were not used "exclusively for conservation purposes" as required by IRC §170(h)(5). Glass v. Commissioner, No. 06-1398, 98 AFTR 2d ¶ 2006 - 5945 (6^th Cir. 2006).

• Montana: Corporate Returns Protected from Disclosure. The Montana Supreme Court held that the public does not have the right to federally protected information contained on state corporate returns. A Montana legislator filed suit against the commissioner after officials refused to let him review corporate excise tax information filed by publicly traded C corporations with $1 million or more in Montana sales. Although Montana Code Annotated Section 15-31-511 protects tax information filed on a federal return, the taxpayer argued that the Montana Constitution’s "right to know" clause overrides that law. He also argued that a previous Montana Supreme Court opinion deprived corporations of the same privacy rights as individuals. Elliott v. Montana Department of Revenue, No. 05-336 (Mont. S. Ct. 10/24/06).

• Failure to Appear at Trial; Lost Right to Intervene. The U.S. Tax Court held that a taxpayer who properly intervened when his exspouse sought relief from joint and several liability under IRC §6015 failed to prosecute any claims or defenses that he might have had when he failed to appear at trial after receiving notice, with the result that those claims and defenses were dismissed. Tipton, 127 TC No. 15 (2006).

• FLP Interests Included in Decedent’s Gross Estate. The 8th Circuit affirmed a Tax Court decision that the estates of a married couple had to include assets they transferred to a family limited partnership ("FLP") under IRC §2036. Inclusion was required because the spouses retained the right to the income from the property and the transfers were not a "bona fide sale" for consideration. Korby v. Commissioner, No. 06-1201, 98 AFTR 2d 2006 – 5897 (8^th Cir. 2006).

• Tax Crimes: Suppression of Evidence. Magistrate judge’s recommendation to deny taxpayer’s motions to suppress evidence and statements IRS obtained in tax evasion investigation was adopted, based on magistrate’s reasoning and taxpayer’s lack of objection to denial. U.S. v. Barker, 98 AFTR 2d ¶ 2006-5891 (D.C. Minn. 2006).

• Mexican Debt-Equity Swap; Failure to Prove Value. The IRS failed to prove that a Mexican debt obligation purchased from a bank by a U.S. corporation under Mexico’s "debt-equity swap" program in the 1980s was worth the amount claimed by IRS. "[B]efore a taxpayer can be required to disprove an extravagant evaluation the Internal Revenue Service must present some evidence to support it." The IRS’s expert did not try to calculate what a purchaser might have offered for the $19.5 million worth of pesos that the corporation received from Mexico in exchange for $11.1 million in discounted Mexican debt that it bought from a U.S. bank, and thus did not prove its assessment. Mexico’s debt-equity swap program during the inflation-ridden 1980s sought to relieve a foreign currency shortage and debt problems. The discounted value of the pesos the taxpayer received may well have been ascertainable, but the IRS failed to account for the restrictions placed by Mexico on use of the pesos. Kohler Company v. U.S., No. 05-4472, 98 AFTR 2d 2006 – 7983 (7th Cir. 2006).

• 2006 Minnesota Ballot Proposed Constitutional Amendment. Minnesota Supreme Court determined that ballot question on the November 2006 proposed constitutional amendment to dedicate and allocate motor vehicle sales tax revenues for certain transportation purposes was not misleading so as to evade requirement of Minnesota Constitution that constitutional amendments shall be submitted to popular vote. The Court held that it could conceive of a situation, particularly in the area of taxation, where the language of a ballot question is so complex that voters could not fairly be expected to understand the meaning or essential purpose of the proposed constitutional amendment. But that was not the case here. The language of this ballot question unambiguously established only a mandatory minimum allocation for transit and a corresponding mandatory maximum allocation for highways, with the actual allocation within those parameters left to the Legislature. Breza v. Kiffmeyer, 723 N.W.2d 633 (Minn. 2006).

• IRS Unauthorized Disclosures. The 8th Circuit affirmed in part awards of damages and attorney fees in consolidated cases under IRC §7431 for an IRS agent’s unauthorized disclosure of return information in violation of IRC §6103(a). Reflecting a larger split of authority, the three-judge panel divided over several issues, including whether an IRS agent in a third-party interview is allowed to identify the taxpayer under investigation and whether a single disclosure to more than one person constitutes multiple violations of IRC §6101(a). The latter determination is significant because the government’s liability for statutory damages is calculated at $1,000 per violation. Snider v. U.S., No. 95-3636, 98 AFTR 2d ¶ 2006 – 7606 (8^th Cir. 2006).

• "No Interest Netting" Where Tax Year Ended Prior to Enactment of Law. Statute of limitations for filing of refund claim for plaintiff’s 1983 tax year ended July 22, 1998, the enactment date of IRC §6621(d) on global interest netting, and therefore, plaintiff is not entitled to netting of interest payments. The Federal Circuit reiterated its view that the interest netting provision of IRC §6621(d) may be applied retroactively only if the limitation periods for both the overpayment and underpayment years were open as of the statute’s 1998 enactment date. In its second review of a Fannie Mae refund case, the court confronted the surprisingly complex question of when the statute of limitations for a particular year has expired. The opinion takes a painstaking look at the interaction of an indefinite consent and a partial settlement agreement. Federal National Mortgage Association v. United States, No. 06-5055, 98 AFTR 2d ¶ 2006 – 7738 (Fed. Cir. 2006).

• Asset Valuation: FMV for Estate Tax is Cost Basis for Income Tax. Judgment of the Tax Court assessing income tax deficiencies related to sales of inherited works of art is affirmed as the fair market value of the artwork upon which the estate tax was calculated also constitutes the cost basis of the property for income tax purposes when it was later sold. Taxpayers were bound by duty of consistency and could not report on their individual income tax returns a value different than that stipulated for an estate tax return. Janis v. Commissioner, No. 04-4443-AG., 98 AFTR 2d ¶ 2006 - 7836 (2d Cir. 2006).

ADMINISTRATIVE MATTERS

• Federal Prosecutors Prohibited from Considering Waiver of Privilege in Charging of Crimes. The Department of Justice announced a new policy that prohibits federal prosecutors from considering a company’s refusal to waive attorney-client privilege as part of a decision to pursue criminal charges. Also, prosecutors may not take into account in their charging decision a company’s advancement of attorneys fees for employees who are under criminal investigation or indictment unless the totality of the circumstances shows that the payment was intended to impede a government investigation. The new policy, as set forth in the McNulty Memorandum, responded to widespread criticism that said DOJ’s current policies as set forth in the Thompson Memo forced companies to waive important legal rights in order to avoid criminal prosecution. Tax Notes, pp. 1054-1055 (12/18/06). See also United States v. Stein, 435 F. Supp. 2d 330 (S.D.N.Y. 2006). In a criminal tax shelter prosecution involving several former KPMG partners, court rules that the government’s tactics violated the defendants’ right to a fair trial and effective assistance of counsel. The court found that the government’s actions put a "proverbial gun to [KPMG’s] head" and this pressured the accounting firm to cut off its payment of legal fees to employees, who failed to cooperate with federal investigators.

• Minnesota Index Tax Rate Brackets for 2007. The Minnesota Commissioner of Revenue in December announced the inflation-adjusted personal income tax brackets for tax year 2007. Taxpayers, including those who make quarterly payments of estimated tax, should use those adjusted rate bracket schedules to determine their payment amounts, starting with the payments due in April 2007. The inflation rate is measured by the change in the U.S. Urban Consumer Price Index for the average of the 12 consecutive months ending with August 1999 to the average of the 12 consecutive months ending with August 2006. Minnesota’s income tax brackets have expanded by almost 21 percent since 1999 and by about 3.9 percent since last year. For the text of the release, see http://www.taxes.state.mn.us/taxes/publications/pressreleases/contents/2007_tax_brackets.shtml

• Lack of Conformity of Minnesota, Federal Income Tax Laws. The commissioner in December noted that Minnesota had not adopted federal income tax changes subsequent to May 18, 2006. These include the Heroes’ Earned Retirement Opportunities Act of 2006, the charitable contribution provisions in the Pension Protection Act of 2006, and the provisions in the Tax Relief and Health Care Act of 2006. Therefore, taxpayers must reverse the effect of the federal provisions when preparing their 2006 Minnesota individual income tax returns. Minnesota Income Tax Newsletter (12/01/06).

• New Minnesota Revenue Commissioner. Current commissioner Dan Salomone will take the post of deputy chief of the Minnesota Department of Revenue, requesting the reassignment. The new commissioner is Ward Einess. Commissioner Einess was acting commissioner of the Department of Employment and Economic Development, before that was the governor’s senior policy advisor, and prior to that was a fiscal policy director for the Minnesota Business Partnership. Commissioner Einess has a law degree from Hamline University.

• New Legislative Tax Chairs. The November 2006 elections changed the political landscape in Minnesota with the DFL controlling both the House and the Senate, resulting in new tax chairs being named. Rep. Ann Lenczewski is the new House Chair and Sen. Tom Bakke is the new Senate chair, effective legislative session 2007.

• Excise Tax: MinnesotaCare; Program Definitions. In Revenue Notice #06-13 (11/27/06), the commissioner defined with specificity the phrases "community support programs" and "family community support programs." Under Minn. Stat. §295.50, Subd. 9(b)(4), the definition of patient services for MinnesotaCare excludes services provided to and by "community support programs" and "family community support programs," which are approved under Minnesota Rules, Parts 9535.1700 to 9535.1760 (also known as "Rule 78"), or certified as mental health rehabilitation services under Minn. Stat., Chapter 256B. Services provided to and by community mental health centers and community residential mental health facilities are also excluded from the definition of patient services for the MinnesotaCare tax.

• Five-Year Duration on Continuous Audits of Taxpayers. IRS examiners and specialists may not examine or audit the same taxpayer for more than five consecutive years unless a deviation from the policy is authorized. The IRS statement took effect February 9, 2006. IRS Policy Statement P-4-5 on Restrictions on Consecutive Survey or Examination of Taxpayers (02/09/06).

• Restorative Payment Deductibility. IRS ruled that a qualified plan payout made by a company to an owner-employee and recontributed by him back to the plan to partially compensate other participants for losses caused by a trustee’s embezzlement was a restorative payment. The distribution to the owner-employee was taxable to him, but he was entitled to a partially offsetting employee business expense deduction subject to the 2 percent-of-AGI floor. PLR 200640003. In earlier private rulings (see, e.g., PLR 9807028 and PLR 200147056), IRS stated that restorative payments are deductible as ordinary and necessary business expenses if made by an employer to resolve actual or potential claims against it for breach of fiduciary duty. This is the first time that IRS ruled that a restorative payment made by a company owner is deductible as an employee business expenses.

• Stock Distribution Guidance: Reorganization with Identical Owners. The IRS issued proposed and final and temporary rules on the issuance and distribution of stocks and securities in corporate reorganizations where the same owners hold all the stock of the transferor and transferee corporations. The regulations give guidance on the qualification of certain transactions as reorganizations where no stocks or securities of the acquiring corporation are issued and distributed. The regulations relate to circumstances in which the distribution requirement under IRC §§368(a)(1)(D) and 354(b)(1)(B) is considered to be satisfied even though no stock or securities are actually issued. Reg.-125632-06 and T.D. 9303.

• Determining Asset Basis on Transfers of Built-in Loss Property. The IRS issued proposed rules that provide guidance on the basis determinations of transferred assets and stock in certain corporate nonrecognition transactions. The proposed regulations apply to transfers of net built-in loss property within the U.S. tax system in which the tax code otherwise would duplicate the net built-in asset loss in the stock of the transferee. Reg. 110405-05 (10/20/06).

• Private Annuities: Income Tax Advantages. IRS has issued proposed regulations that would knock out the income tax advantages of selling appreciated property in exchange for a private annuity. It would do so by causing the property seller’s gain to be recognized in the year the transaction is made rather than as payments are received. The regulations generally would apply for transactions entered into after October 18, 2006, but certain transactions effected before April 19, 2007 would continue to be subject to the current rules. Preamble to Prop. Reg. (10/17/06); Prop. Reg. §1.72-6, Prop. Reg. §1.1001-1; IR 2006-161.

• Restrictions to IRS’s Ability to Extend Ten-Year Collection Period. Final regulations now cover the IRS’s restricted ability to extend the ten-year period that it has to collect a tax after its assessment. The restrictions on the IRS’s ability to extend the ten-year-period, even if agreed to by the taxpayer in writing, reflect amendments to IRC §6502 made by the IRS Reform and Restructuring Act of 1998 ("RRA 1998"). T.D. 9284.

• Resolving Uncertain Tax Positions Prior to "FIN 48" Effect. IRS announced an expedited resolution initiative taxpayers may use to accelerate examination and resolution of important issues related to uncertain tax positions. Under the procedures listed in the initiative, taxpayers may receive a resolution to uncertain tax positions in as few as three business days. IRS launched the initiative because taxpayers may want to resolve specific uncertain tax positions before the end of their current financial statement accounting year due to the impending effective date for the application of FASB No. 48, "Accounting for Uncertainty in Income Taxes", in FASB Statement 109, commonly known as "FIN 48". BNA Daily Tax Report, No. 1999 at G-1 (10/16/06).

• Fee Increases for Installment Agreements for Some Taxpayers. Beginning January 1, 2007, user fees for entering into a non-direct debit installment agreement will increase from $43 to $105, and the fee for direct debit installment agreements will increase from $43 to $53. For eligible individuals with income at or below certain levels, the fee for entering new agreements will not increase but remain at the 2006 level. IR-2006-196.

• IRC §6501: Filing of Returns – Statute of Limitations on Assessment. Company’s filing of Form 1120 prior to September 15, 2003 doesn’t revoke remaining extension of time to file that was granted until September 15, 2003. Therefore, Form 1120, filed on September 15, 2003, was considered timely filed income tax return that supersedes earlier filed return, and started three-year statute of limitations on assessment. Chief Counsel Advice 200645018.

• Tax Shelter Disclosure Rules. IRS issued temporary and proposed regulations liberalizing some aspects of the tax shelter disclosure rules but toughening others. The regulations reflect changes made by the American Jobs Creation Act of 2004, respond to criticism by practitioners, and modify the shelter disclosure rules in response to changes in other rules and the shelter marketplace. T.D. 9295 (11/11/06); Preamble to Prop. Reg. (11/11/06); Reg. §1.6011-4T; Prop. Reg. §1.6011-4; IR 2006-167; Prop. Reg. §301.6111-3; Prop. Reg. §301.6112-1.

• Telephone Excise Tax Refund Procedures. A new IRS notice further clarifies how individuals and businesses may obtain a refund of telephone excise taxes, liberalizes some of the rules carried in earlier guidance, and explains refund-related topics not addressed in earlier guidance. 2007-11, 2007-4 IRB (12/28/06). This notice amplifies, clarifies, and modifies Notice 2006-50, 2006-25 IRB, where the IRS conceded that telephone communications for which a toll charge varied only with elapsed time, and not distance, was not taxable under IRC §4252(b)(1). Taxpayers or collectors of the tax may request a credit or refund of amounts paid for service that was billed to taxpayers after February 28, 2003, and before August 1, 2006 (the refundable period), but only on their 2006 income tax returns (the income tax return for calendar year 2006 or the first tax year including December 31, 2006).

• Appeals Settlement Guidelines for "FLPs" and "FLLCs". IRS issued Appeals Settlement Guidelines ("ASG") for family limited partnerships ("FLPS") and family limited liability companies ("FLLCs"). The ASG document focuses on four key issues: (1) discounts for the transferred interests; (2) includibility in the estate under IRC §2036 or IRC §2038; (3) indirect gifts of the entity’s underlying assets; and (4) whether accuracy-related penalties should be imposed. RIA Federal Taxes Weekly Alert Vol. 52, No. 49 (12/07/06).

LEGISLATION

• Tax Relief and Health Care Act of 2006. On December 20, 2006, the "Tax Relief and Health Care Act of 2006" was signed into law. The new law retroactively restores some popular expired tax cuts to the beginning of 2006. These are commonly called "extenders" and include the deduction for state and local taxes; the higher education tuition deduction; the teacher’s classroom expense deduction; and the research tax credit. The new law also enhances some incentives, bolsters Health Savings Accounts ("HSA"), and extends some expiring energy credits plus enacting miscellaneous tax relief. Some key provisions to keep an eye on are:

• One-Time-Only Rollovers from Health FSAs and HRAs into HSAs. For distributions and contributions on or after December 20, 2006, and before January 1, 2012, a limited amount can be distributed from a flexible spending account ("FSA") or health reimbursement arrangements ("HRA") and contributed through a direct transfer to an HSA. Only one distribution with respect to each FSA or HRA of the individual is allowed. Another HSA provision increases the HSA contributions limit for individuals; allows full-year contributions for mid-year enrollees; permits employers to make higher HSA contributions on behalf of nonhighly compensated employees; and allows a one-time tax-free irrevocable "rollover" from an individual retirement account into an HSA.

• Refundable Credit for Unused AMT Credit for Stock Options. For tax years beginning after December 20, 2006, if an individual had a long-term unused "minimum tax credit" for any tax year beginning before January 1, 2013, he or she may claim a refundable income tax credit. This provision was designed to protect those taxpayers, who had stock options and who exercised the option but did not sell them immediately. The difference between the grant value and the fair market value at exercise was "phantom income". For many, it was a double blow, they had to sell assets to come up with funds to pay AMT levies, and then when their stock collapsed, the AMT gave them a credit for their overpayment, but one so narrowly prescribed by the AMT that many have never been able to use it. The credit was not usable against the regular income tax which it now is. The unused AMT credit is subject to a phase-out but it is refundable. While the statute does not apply the new relief provision specifically to the AMT treatment of incentive stock options (ISOs), the legislative history indicates that this is the motivation for the refundable credit.

• Information Reporting of Stock Transfers from Option Exercises. Effective for calendar years beginning after December 20, 2006, corporations must report to IRS the transfer of stock from exercises of incentive stock options or purchases from employee stock purchase plans.

• Tax Court Jurisdiction of Innocent Spouse Relief. Effective for a liability for taxes arising or remaining unpaid on or after December 20, 2006, the United States Tax Court has jurisdiction to review IRS’s denial of equitable innocent spouse relief from joint liability even if no deficiency was asserted against the requestor of relief.

For more details, see the website of Congress’s Joint Committee on Taxation (www.house.gov/jct) for publication JCX-50-06. Its title is "Technical Explanation of H.R. 6408, "The Tax Relief and Health Care Act of 2006."

LOOKING AHEAD

• Proposals to Close "Tax Gap". The Joint Economic Committee, the Treasury, and the Government Accounting Office have all issued reports to close the tax gap. The "tax gap" — the difference between the amounts taxpayers pay voluntarily and on time and what they should pay under the law — has been a longstanding problem. These proposals should be watched for enactment by the Congress in 2007:

Joint Committee on Taxation’s Proposals

• Reporting Requirements for Basis of Publicly Traded Securities: Brokers would be required to report to the client and to the IRS the adjusted basis of publicly traded securities sold during the preceding taxable year. Currently, brokers are required to report gross sale proceeds to the IRS, but not basis. This proposal would address the portion of the capital gains tax gap attributable to publicly traded securities transactions.

• Reporting Requirements for Real Estate Taxes: The proposal contains two options for information reporting of real estate taxes paid: 1) would require state and local governments to report to taxpayers and the IRS the amount of real estate taxes paid, or 2) would require mortgage lenders to report to taxpayers and the IRS the amount of real estate taxes paid through escrow accounts. This proposal would reduce deductions taken for assessments, services and other nondeductible charges that frequently are combined with real estate tax billings.

• Reporting Requirements for Proceeds of Auction Sales: Broker information reporting requirements would be expanded to include proceeds from property sold at auctions, including collectibles or motor vehicles. The proposal would reduce underreporting and nonreporting of proceeds resulting from auction sales.

• Reporting Requirements for Mortgage Interest: Present law information reporting by mortgage holders to taxpayers and the IRS would be expanded to identify whether interest paid was in connection with a financing or refinancing, and whether debt proceeds exceed the $100,000 home equity limit. The proposal would make it easier for taxpayers and the IRS to calculate the correct amount and timing of interest deductions and reduce erroneous deductions for nondeductible items like prepaid interest (points) paid in connection with a refinancing.

• Reporting Requirements for Individuals with an Interest in Offshore Bank Accounts and Offshore Trusts: The proposal would impose a due diligence requirement on income tax preparers to determine whether a taxpayer is required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), or Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts. The proposal would improve the ability of the IRS to detect unreported income and abusive transactions resulting from the use of offshore accounts.

• Modify Amounts Subject to Self-Employment Tax for Partners and Subchapter S Corporation Shareholders in Personal Service Businesses: The proposal would apply the present law rule that a general partner’s distributive share is subject to employment taxes to all types of partners and S corporation shareholders with income from service businesses. The proposal also would include members of an LLC or other entity that is treated as a partnership for federal income tax purposes. Present law treats income from general partners, limited partners and Sub S shareholders differently for employment tax purposes. The proposal would eliminate "choice of business form" decisions that result in substantially different tax liability for otherwise similar types of service trades or businesses.

• Denial of Deductions and Credit with Respect to Untimely Returns of Nonresident Aliens and Foreign Corporations: The proposal contains two options to clarify and define timely filing of tax returns by foreign persons: 1) would specify by statute a fixed date or event after which a foreign person’s deductions or credits are denied, or 2) would specify by statute that a foreign person’s deductions or credits are denied when tax returns are not timely filed, and delegate to Treasury the authority to define what is meant by "timely." IRS regulations set forth specific periods of time in which foreign persons may timely file and claim deductions and credits against income but a recent Tax Court decision, Swallows Holding Ltd., determined the regulations were invalid to the extent that they adopt a timely filing requirement.

• Compliance with Earnings-Stripping Provision: Corporate taxpayers would be required to report to the IRS whether any portion of their interest deductions were limited under the IRC §163(j) earnings-stripping provision, as well as additional details explaining the limitation. The proposal would make it more difficult for corporations to conceal the use of earnings stripping to reduce their U.S. tax bill by deducting excessive interest expense paid to foreign related parties (or to unrelated parties with respect to debt guaranteed by related parties).

Senate Finance Committee summary of the new Joint Committee on Taxation options can be found at http://finance.senate.gov/press/Gpress.

Department of Treasury Report

Treasury’s strategy to close the "tax gap" includes seven components:

• Reducing opportunities for tax evasion;

• Making a multiyear commitment to research;

• Continuing to make improvements in IRS information technology;

• Improving document matching, examination and collection activities;

• Enhancing IRS customer service;

• Reforming and simplifying the tax law; and

• Coordinating information sharing and compliance strategies with other tax agencies and taxpayers.

United States Department of the Treasury Office of Tax Policy, September 26, 2006 "A Comprehensive Strategy for Reducing the Tax Gap" (09/26/06).

Government Accounting Office Report

The GAO provided the following ideas and proposals needing congressional oversight to close the "tax gap":

• Provide IRS with additional tools, such as enhanced withholding and information returns authorities for sources of income like capital gains on securities sales.

• Require IRS to obtain data on the extent of, and reasons for, noncompliance.

• Ensure that IRS leverages technology to improve efficiency and effectiveness in its taxpayer service and enforcement efforts.

• Examine how IRS seeks to optimize the allocation of its resources, including how it balances enforcement and service efforts.

• Assess whether IRS’s tax-gap reduction goals are adequate and whether it has a data-based strategy for achieving its goals.

• Simplify the tax code and broaden the base by, for example, consolidating existing tax preferences (e.g., retirement).

United States Government Accountability Office "Suggested Areas for Oversight for the 110th Congress" GAO-07-235-R Potential Oversight Issues.

• Tax Issues Before Congress for the 2007 and 2008 Sessions. Likely issues to be considered in the upcoming years’ congressional sessions are:

• "Pay Go". Many members of Congress believe that the budgetary "pay-as-you-go" ("PAY GO") should be reinstated. "PAY GO" rules would require that the federal government spending would need to be offset by reductions in other federal programs, and if reinstated the se