March 2007

March 2007

March 2007

March 2007

FEDERAL PRACTICE
JUDICIAL LAW

• Advisory Jury; Notice; Harmless Error. While noting that advance notice of a court’s intention to treat a jury’s verdict as advisory is "preferable," the 8th Circuit found that a defendant was not prejudiced by a district court’s decision to convert a bench trial to a jury trial on three days’ notice, or its later decision to treat the jury’s verdict as advisory. Allen v. Tobacco Superstore, Inc., ___ F.3d ___ (8th Cir. 2007).

• Fed. R. Civ. P. 54(d)(1); Costs to Prevailing Party. The 8th Circuit reversed a district court’s refusal to award costs to the prevailing defendant under Fed. R. Civ. P. 54(d)(1), finding that the district court needed to provide "a more precise rationale" for departing from the "presumption" that a prevailing party is entitled to recover its costs. Thompson v. Wal-Mart Stores, Inc., ___ F.3d ___ (8th Cir. 2006).

• Spoliation; Fed. R. Evid 702; Summary Judgment. Judge Schiltz issued two orders of interest in the same fire-related case. In the first decision, Judge Schiltz sanctioned plaintiffs for spoliation of evidence despite his determination that the insurer responsible for the spoliation had not acted in bad faith. In the second decision, Judge Schiltz struck the insurer’s experts under Fed. R. Evid. 702 and awarded summary judgment to the defendant, finding that without expert testimony the insurer could not establish the defendant’s responsibility for the fire. Hughes v. Black & Decker (US), Inc., 2007 WL 107680 (D. Minn. 01/10/07). Hughes v. Black & Decker (US), Inc., 05-CV-1536 (PJS/JJG) (D. Minn. 01/24/07).

• Class Certification; Predominance. Judge Montgomery denied plaintiffs’ motion for class certification, finding that the plaintiffs had failed to establish that common questions of law predominate as Fed. R. Civ. P. 23(b)(3) requires. However, the court allowed the plaintiffs 30 days to submit supplemental briefing on the predominance issue. Mooney v. Allianz Life Ins. Co., 2007 WL 128841 (D. Minn. 01/12/07).

• Sanctions; Rule 11; Inherent Powers. Judge Davis sanctioned a serial plaintiff under Rule 11 and the court’s inherent powers, enjoining the plaintiff from filing future actions and awarding the defendant its attorney fees and costs incurred in defending the action. Zhang v. Equity Office Properties Trust, 2007 WL 26324 (D. Minn. 01/03/07).

• Amendments to Pleadings; Fed. R. Civ. P. 15(a) and 16(b). Judge Magnuson denied defendants’ motion for leave to amend their answer to assert a new affirmative defense on the eve of a hearing on their motion for summary judgment, finding that the defendants had failed to establish the "good cause" Fed. R. Civ. P. 16(b) requires to amend a pleading after the deadline established in the pretrial order has passed. Metro Produce Distributors, Inc. v. City of Minneapolis, 2007 WL 188574 (D. Minn. 01/24/07).

• Possible Spoliation; Expedited Discovery. Chief Judge Rosenbaum granted plaintiff’s motion for leave to conduct expedited discovery regarding possible spoliation of evidence, rejecting the defendants’ argument that any discovery should have been deferred until challenges to the court’s subject matter jurisdiction were resolved. Roberts v. Canadian Pacific Rwy Ltd., 2007 WL 118901 (D. Minn. 01/11/07).

• Remand; Amount in Controversy. Judge Magnuson granted a motion to remand a diversity action to the Minnesota courts after both plaintiffs stated under oath that neither was seeking to recover more than $75,000 in damages. Smith v. Eye Safety Systems, Inc., 2007 WL 128837 (D. Minn. 01/12/07).

• Antitrust; Judgment on the Pleadings Denied. Sustaining the plaintiff’s objection to a report and recommendation by Magistrate Judge Graham, Judge Doty denied a Fed. R. Civ. P. 12(c) motion for judgment on the pleadings in an antitrust action, finding that the plaintiff’s allegations contained the "short, plain statement" required to comply with Fed. R. Civ. P. 8. UltiMed, Inc. v. Becton, Dickinson & Co., 2007 WL 128834 (D. Minn. 01/12/07).

• Reply Brief; New Argument Stricken. The 8th Circuit granted an appellee’s motion to strike an argument raised for the first time in an appellant’s reply brief. Bearden v. Lemon, ___ F.3d ___ (8th Cir. 2007).

• Title VII; Prevailing Plaintiff; Attorney Fees. Judge Davis awarded more than $255,000 in attorney fees and costs to a prevailing plaintiff in a Title VII case. Maule v. Nicholson, 2006 WL 3758390 (D. Minn. 12/20/06).

— Josh Jacobson
Law Office of Josh Jacobson

March 2007

JUVENILE LAW
JUDICIAL LAW

• Juvenile Delinquency; Certification. In an unpublished decision, a minor appealed from an order certifying him to stand trial as an adult on counts of first-degree murder, first-degree aggravated robbery, second-degree assault, kidnapping, first-degree burglary, and first-degree criminal sexual conduct. The 15-year-old argued that the district court did not properly weigh his culpability in the alleged offenses, gave too much weight to the seriousness of the offense, did not properly weigh his prior record of delinquency, and abused its discretion by determining that the punishment in the juvenile system is insufficient and that no appropriate dispositional options are available in the juvenile system. In affirming the district court, the Court of Appeals held that the seriousness of the alleged offenses weighed heavily in favor of certification. The juvenile was found to have been the primary participant in the alleged crimes, and while he had no prior record of delinquency, he did have a history of behavioral problems. The Court of Appeals found that the seriousness of the offenses made both the punishment and the programming available in juvenile court inadequate to protect public safety. In the Matter of the Welfare of A.J.F., A06-303 (Minn. App. 01/16/07). www.lawlibrary.state.mn.us/archive/ctapun/0701/opa060303-0116.htm

• Indian Child Welfare Act; Termination of Parental Rights. In a published decision, the mother of three children challenged a termination of her parental rights to her two children. The mother alleged that the juvenile court erred by finding her palpably unfit and that reasonable and active efforts to unify the family had failed. She also alleged that the trial court erred by admitting expert testimony from an unqualified witness under the Indian Child Welfare Act ("ICWA") and giving that testimony too much weight, and by denying a petition to invalidate the termination of parental rights proceeding based on ICWA violations that occurred during earlier temporary foster placement proceedings. While the court summarily affirmed the lower court’s determination that the mother was palpably unfit and that reasonable efforts at reunification were sufficient, the court did do an extensive analysis on the ICWA issues.

The appellate court affirmed the lower court’s qualifying of the Indian expert under ICWA, finding that while she was not a member of the mother’s tribe, she was a member of the larger tribal consortium that includes the mother’s tribe and had more than 20 years’ experience in providing social services, with 14 of those as social service director of the Leech Lake Reservation. She also had experience in an Indian child welfare program, had child-rearing practice, and was involved in the adoption of the Minnesota Tribal/State Agreement on Indian Child Welfare.

The mother also claimed the county and district court violated ICWA by placing her children in foster care when she was hospitalized without a recorded consent form or notice to the tribe, when the county did not immediately return the mother’s children to her care upon her release from the hospital, when it failed to give proper notice for the admit/deny hearing, and failed to present expert testimony at a dispositional hearing. Based on those alleged ICWA violations that occurred during the CHIPS proceedings, the mother asked that the TPR proceedings be invalidated.

The Court of Appeals observed that no prior Minnesota case law has addressed the issue of invalidation of a termination based on earlier ICWA violations. In this case, the tribe filed a petition to invalidate the placement and the TPR proceeding pursuant to the alleged ICWA violations. The district court deferred its decision on the petition until evidence was received at the TPR hearing. The Court of Appeals adopted the reasoning of an Iowa appellate decision and declined to extend the language of Section 1914 of ICWA to provide the remedy the mother sought. The court held that the alleged ICWA violations that occurred during the temporary foster care placements did not, as a matter of law, require that the district court invalidate the subsequent termination of parental rights proceedings. Thus, the trial court’s TPR determination was affirmed. In the Matter of the Welfare of the Children of: S.W., M.M., and J.A., Parents, A06-1175 (Minn. App. 01/30/07). www.lawlibrary.state.mn.us/archive/ctappub/0701/opa061175-0130.htm

— Gary A. Debele
Walling, Berg & Debele

March 2007

REAL PROPERTY
JUDICIAL LAW

• Torrens Property; Knowledge of an Unregistered Interest. M&I Bank acquired and subsequently foreclosed upon a mortgage that it held on torrens property. Both the mortgage and sheriff’s certificate, the latter of which was acquired by the bank as well, were recorded with the county recorder, but were not filed with the registrar of titles. Collier was fully aware of the bank’s mortgage and the foreclosure sale, but was equally aware of the fact that the bank had failed to properly register either one. In an apparent attempt to take advantage of that error, Collier acquired the owner’s interest in the property and shortly thereafter mortgaged the property. Both Collier’s interest and the mortgage were filed with the registrar of titles. Collier then claimed that his interest in the property was superior to that of the bank’s. The district court concluded that because Collier had actual notice of the bank’s interest he was not a good faith purchaser and, accordingly, the bank’s interest was superior. The Court of Appeals reversed, concluding that under the torrens laws, the bank had no interest in the property until that interest was registered. As a result, Collier’s knowledge did not prevent him from being a purchaser in good faith. The Supreme Court reversed. The Court held that in order to take advantage of the protections of the Torrens Act, a purchaser must be one in good faith. Extrapolating from the statutory language, the Court held that a good faith purchaser is one without actual knowledge of interests not recorded on the certificate of title. Even though it was not registered, the bank’s mortgage and sheriff’s certificate constituted interests in the property, the knowledge of which prevented Collier from being a good faith purchaser. By its decision, the Supreme Court clarified that if one has actual notice of an unregistered interest against torrens property, the person will take subject to that interest. Reversed. In re Collier, A05-1178 (Minn. 02/01/07). www.lawlibrary.state.mn.us/archive/supct/0702/opa051178-0201.htm

• Application of the 60-Day Rule. The city of Duluth received an application from Minnesota Towers to construct a telecommunications tower. The city’s planning commission recommended approving the application. In a meeting a few days before the expiration of the 60-day deadline, the city council rejected the planning commission’s resolution to approve Minnesota Towers’ application. At the meeting, several city council members stated on the record their reasons for rejecting the resolution. But the city did not approve a resolution setting forth the reasons for denying the resolution until after 60 days had passed. The district court ruled that the city failed to meet the 60-day deadline because the law required a written statement of the reasons for denial within the 60-day time period. The 8th Circuit Court of Appeals reversed. Relying on "practical reality" and "a textual nuance in the statute," the court concluded, despite statutory language apparently to the contrary, that the 60-day rule statute does not require the government to issue written reasons for the denial when the denial is the rejection of a resolution to approve the application. Minnesota Towers, Inc. v. City of Duluth, 06-1118 (8^th Cir. 01/10/07).

• Application of the Cartway Statute. Two nearly identical statutes, one applicable to municipalities and one for townships, provide a mechanism allowing property owners with qualifying parcels of landlocked property to petition the government for a cartway across neighboring property. In an unpublished decision, the Minnesota Court of Appeals addressed a number of novel challenges to a petitioner who generally met the basic criteria, namely, owning a five-acre or larger parcel that lacks access. The Court of Appeals rejected all challenges and affirmed the district court’s decision that approved the establishment of a cartway by the township. Some of the various challenges rejected by the court included: (1) that the property owner currently had permission to cross neighboring property to get to her property, which according to the court, did not constitute access for the purpose of the statute; (2) that the owner may have an implied easement over neighboring property, to which the court concluded that the property owner need not exhaust all legal remedies (e.g., sue to establish an easement); and (3) that the owner had created the problem herself by distributing property to others and creating a landlocked parcel. Finally, the affected land owners challenged the establishment of the cartway across their property as an unconstitutional taking of private property because it was simply taken to give to another private entity and not for a public use. The court rejected this on the grounds that the taking was for the creation of a public road and although perhaps only one person would use this public road, the fact remained that it was open to the public and available for the use of anyone. Affirmed. In re Daniels, A06-571 (Minn. App. 01/09/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0701/opa060571-0109.htm

— C.J. Deike
Edina Realty Home Services

TAX
JUDICIAL LAW

• Corporate Tax: Relationship Between Startup and Ordinary Business Expenses. Taxpayer began operating a horse boarding and training facility in 1998, and the facility eventually began to produce profits as more was invested in the business. The commissioner challenged certain ordinary business deductions claimed by the taxpayer resulting from the operations of the business on the grounds that the taxpayer anticipated that her activities would eventually become an active trade or business. It was argued such expenses constitute nondeductible startup expenditures under §195(a). The Tax Court disagreed. The court stated it would not interpret startup expenditures under §195 to override the deductibility of ordinary and necessary expenses incurred in an ongoing §212 activity, relating to the production of income. Once a §212 activity has begun, the deduction of ordinary and necessary expenses paid or incurred in that activity is not precluded by §195 regardless of whether that activity is subsequently transformed into a trade or business. The business expense deductions were upheld. Toth v. Commissioner, 128 T.C. No. 1 (01/18/07).

• Income Tax: Head-of-Household; Taxpayer Living with Adult Children. For the tax year in question, taxpayer lived with his two unmarried children, ages 22 and 19, both of whom earned income similar to that of the taxpayer. The commissioner rejected the taxpayer’s claims for both a dependency exemption and earned income tax credit in relation to the children, as well as his head-of-household filing status. While the Tax Court agreed that the taxpayer did not merit the dependency exemption and earned income credit, it rejected the notion that he could not file as head-of-household. Even though the two children earned a similar level of income for the year and may have contributed some assistance in the operation of the household, the court was satisfied from the record that taxpayer paid the rent, utilities, and most of the food and other expenses, and whatever the children provided appeared to be incidental. Under such circumstances, the head-of-household filing status was appropriate. Jordan v. Commissioner, T.C. Summary Opinion 2007-13 (01/22/07).

• Income Tax: Multiple Support Agreement; Lack of Written Declaration. From January through May of the year in question, taxpayer lived with his mother, his aunt, and six siblings. Amongst the family members, the mother, aunt, and one of the sisters worked to contribute to the family’s monthly expenses; however, the taxpayer provided income information only for himself and his mother. The taxpayer asserted there was an oral agreement with his mother that he would be financially responsible for two of the underage siblings. As such, the taxpayer claimed deductions for dependency exemptions for those two siblings. The commissioner rejected these deductions. Based on the existence of an oral agreement between the taxpayer and his mother, the court reviewed the case for the existence of a multiple support agreement under §152(c). It concluded the taxpayer had failed to demonstrate that no one person contributed over half of the support for the two siblings. In addition, the court noted that no member of the family had filed a written declaration allowing the taxpayer to claim the siblings as dependents. Under such circumstances, the deductions could not be accepted based on the presence of a multiple support agreement. Balumba v. Commissioner, T.C. Summary Opinion 2007-11 (01/18/07).

• Collections: Future Medical Expenses as Grounds for Offer-in-Compromise. Taxpayer had originally incurred tax deficiencies amounting to $214,000 in relation to a cattle-breeding partnership tax shelter. In an effort to eliminate this liability, an offer-in-compromise was submitted offering to pay $158,000 of the total obligation. The taxpayer identified the grounds for this offer as either doubt as to collectibility with special circumstances or effective tax administration. The commissioner rejected the offer. At trial, the court stated that the "special circumstances" claimed by the taxpayer were nothing more than general assertions about the increase of medical costs as people age and about the need for some seniors to seek in-home care or nursing home care or to make their house handicapped-accessible. Given the lack of clearly defined special circumstances, there was no merit to the taxpayer’s argument that, in rejecting the offer-in-compromise, the appeals officer failed to discuss the taxpayer’s special circumstances in sufficient detail. The court stated that the appeals office is under no obligation to specifically list in the notice of determination every single fact that it considered in arriving at the determination. The notice of determination issued subsequent to the rejection of the offer was upheld. Ertz v. Commissioner, T.C. Memo 2007-15 (01/24/07).

• Collections: Late Payment Resulting from Denied OIC; Material Breach. Taxpayer had entered into an offer-in-compromise ("OIC") in relation to tax liabilities for the years 1993, 1994, and 1995. The offer stated that the taxpayer would comply with all provisions of the Internal Revenue Code relating to filing his returns and paying his required taxes for a period of five years or until the offered amount was paid in full, whichever was longer. The taxpayer subsequently failed to pay his outstanding 2002 income tax liability of $77,540 by the due date, and the outstanding balance remained unpaid for over one year. The taxpayer argued that he had submitted an OIC request in relation to the 2002 liability, but did not receive a response from the commissioner. Based on the lack of a response, the taxpayer asserted the breach of the original agreement was not material and therefore that it could not be revoked by the commissioner. The Tax Court disagreed, and held significantly late payment of a substantial tax liability amounts to both a failure of an express condition of the OIC and a material breach of the OIC. Because of the breach, the commissioner was fully entitled to terminate the original OIC agreement and pursue the taxpayer’s full tax liability. Ng v. Commissioner, T.C. Memo 2007-8 (01/16/07).

• Procedure: Post Date for Purposes of §7502. Taxpayer received a notice of deficiency from the commissioner on February 6, 2006, providing for a due date to petition the Tax Court of May 8, 2006. The taxpayer’s petition was received by the court on May 10th via FedEx’s Overnight Service. Attached to the envelope was an electronically generated label showing a May 9th pickup date as well as the taxpayer’s handwritten label showing a May 8th pickup date. The taxpayer asserts that she affixed that label on May 8th before giving the envelope to the front desk at her hotel, with the understanding that it would be picked up later in the day. Even though the electronically imprinted date was May 9th, the taxpayer asserted her delivery of the envelope to the hotel front desk precluded the dismissal of her petition. The Tax Court disagreed. The court first stated that the date on the electronically generated label, which was generated and applied by a FedEx employee, is the postmark date for purposes of §7502. Furthermore, the hotel front desk does not constitute a postal delivery service; therefore, leaving the envelope there does not constitute timely delivery. Because the petition was sent one day late, the court dismissed the case for lack of jurisdiction. Austin v. Commissioner, T.C. Memo 2007-11 (01/16/07).

• Income Tax: "Living Apart" Under §86. Commissioner identified a deficiency of $2,835 in relation to taxpayer’s 2002 federal tax return due to the omission of certain social security benefits. During that year, the taxpayer’s legal residence was Shreveport, Louisiana, the same as his wife, though he spent a majority of the year working Reno, Nevada as construction superintendent. Using the married filing separately status, the taxpayer reduced the taxable portion of his social security benefits on the grounds that he "lived apart" from his wife that year. The Tax Court rejected this adjustment. While the taxpayer utilized the appropriate filing status, the phrase "living apart" was interpreted for purposes of §86(c)(1)(C)(ii) as living in separate residences at all times during the taxable year. The intermittent visits to Shreveport were sufficient to establish that the couple was not living apart and that the total amount of social security benefits was taxable. Calvert v. Commissioner, T.C. Summary Opinion 2007-7 (01/16/07).

• Procedure: Dismissal of Complaint Sua Sponte; Jurisdiction. The IRS issued the taxpayer final notices of intent to levy for the taxable years 1996, 1999, 2000, and 2001. For the year 2000, the taxpayer requested an IRS Appeals Office hearing under §6330, though he failed to participate in the meeting and the IRS ultimately issued a notice of determination. The taxpayer then challenged that determination in district court, which dismissed the complaint sua sponte after the taxpayer failed to serve the defendant United States. Within 30 days of dismissal, the taxpayer filed a petition with the Tax Court asserting that the district court’s dismissal constituted a determination under §6330. The Tax Court held that such a dismissal by the district court cannot be construed as a "determination" and that the appeal was therefore made to the wrong court. Because the petition to the Tax Court was well after the initial 30-day period for filing, the claim was untimely and the Tax Court lacked jurisdiction to hear the case. Headley v. Commissioner, T.C. Memo 2007-7 (01/10/07).

• Procedure: Deductions Following Compromise, Execution of Form 870. In 2001, taxpayers negotiated an offer-in-compromise related to their outstanding tax liabilities for 1994 and validly executed a Form 870. The taxpayers learned later that year that one of their businesses had produced net operating losses that could be carried back to 1994. The taxpayers subsequently issued an amended return, asserting that the deductions could be used to offset the agreed upon deficiency, thereby delaying collection. The Tax Court disagreed. It stated a Form 870 memorializes an agreement that the commissioner can assess a particular amount of tax and that there is no remedy for taxpayers who have chosen not to receive a notice of deficiency. The commissioner could proceed with collection efforts under the agreement. Nichols v. Commissioner, T.C. Memo 2007-5 (01/09/07).

• Kanter Litigation. The Tax Court issued a 457-page opinion on the long-running Kanter, Ballard and Lisle litigation, which follows a Supreme Court decision on taxpayer access to special trial judge reports and the 11th Circuit’s remand of the case. The initial Tax Court decision prompted the Supreme Court to reject the Tax Court’s interpretation of its own rule and require release of the special trial judge opinion as a part of the official record that would be given considerable deference on findings of fact. This lengthy opinion includes a detailed review of the record in the case, adopting a majority of the findings from the special trial judge but rejecting certain findings that were found to be "manifestly unreasonable." It is expected this latest decision will be appealed as well. Kanter v. Commissioner, T.C. Memo. 2007-21 (02/01/07).

• Corporate Tax: Promised Indemnification Covering Business Losses. Taxpayer was a developer and promoter of restaurant and entertainment venues who sought a refund of taxes paid. He had established a temporary restaurant in Atlanta’s Centennial Park for the 2006 Olympics and agreed that, in the event the restaurant lost money in connection with the venture, he would contribute up to $5 million to cover the shortfall. Unfortunately for the taxpayer, the explosion of a bomb in the park during the games closed the restaurant for several days and was largely responsible for the nearly $10 million in operating losses. The taxpayer attempted to deduct the subsequent expense as either an ordinary business expense under §162 or as a business loss under §165(c)(1). This attempt was rejected. The court reasoned first that the cost to protect his reputation was a capital expense, not a business expense, and second, that the $5 million indemnity obligation to cover unforeseeable corporate losses due to a terrorist attack could not be considered "ordinary." Tigrett v. U.S., 05-6629 (6th Cir., 01/12/07).

• Procedure: Reconstructing Taxpayer Income. Taxpayers, owners of a construction business, challenged a Tax Court decision finding them liable for tax deficiencies totaling $157,088 related to underreported income. Taxpayers asserted that the sales journal used by the commissioner to reconstruct their income included contracted jobs for which they had not yet been paid and thus should not be included in income. However, the only other documentation of the business’s financial performance was an accounts receivable journal the court described as disorganized and illegible. Because the sales journal was more clearly constructed, the commissioner’s decision to use that information was clearly a reasonable method for reconstructing income. The deficiencies and the penalties were upheld. Payne v. Commissioner, No. 06-1212 (8th Cir., 01/09/07).

• Corporate Tax: LILO Tax Shelter. In a case of first impression, the U.S. District Court for the Middle District of North Carolina addressed the validity, for tax purposes, of lease-in/lease-out ("LILO") transactions, which generally involve the lease to a lessee company and sublease back to the lessor/sub-lessee company. The taxpayer corporation, the lessee, sought to recover funds allegedly overpaid when the IRS disallowed certain tax deductions. The transaction consisted of a "Head Lease" in which BB&T acquired an undivided interest in the lessor’s equipment for a period of 36 years and an immediate shorter term sublease of the undivided interest in the equipment back to the lessor. The transaction was a tax-driven deal designed to generate accelerated tax rent deductions; the issue for the court was whether such deductions are valid. In addressing the issue, the court first stated that a central tenet of income tax law is that the substance of a transaction, rather than its form, governs for tax purposes. Special attention was given to the fact that the lessor purported to lease the right to use and possess the equipment to the lessee and immediately sublease back from the lessee the same rights to use and possess the equipment. Thus, the lessor retained in substance, at least for the term of the lease, its rights of use and possession as the legal owner of the equipment. The court granted the government’s summary judgment motion against the corporation. Many commentators predict the case could be a model for the judicial treatment of similar transactions in the future, considering many LILO transactions comprise a similar core set of facts. BB&T Corp. v. United States, 1:04CV00941 (M.D.N.C. 01/04/07).

• Procedure: Jurisdiction; Complaint Amended to Incorporate Constitutional Challenge. Taxpayer failed to file Minnesota income tax returns from 1996 to 1998 and the commissioner of revenue assessed taxes for those years. Taxpayer appealed the order, and at the start of trial made a motion to amend her appeal to add a constitutional challenge to the Minnesota tax statute. After the amended appeal was accepted, the taxpayer asked that the entire trial be stayed on the grounds that the Tax Court lacked jurisdiction. The taxpayer argued that the Tax Court’s jurisdiction over the case was improper, since she would be subjected to concurrent jurisdiction of both the district court and Tax Court. While the Tax Court did state that there may have been some confusion regarding the appropriate court following several "Erie shuffles" to determine jurisdiction, it also stated there was no doubt that it had personal jurisdiction over the taxpayer due to her filing of her appeal. There could be no concurrent jurisdiction as the district court could not hear the case until the matter was transferred to it. As to the substantive claim regarding the constitutionality of the Minnesota income tax, the court rejected it given that no case could be cited to support her position. The order of the commissioner was affirmed. Byers v. Commissioner of Revenue, 7408 R (Minn. Tax Reg. Div., 01/11/07).

• Property Tax: Exemption for Assisted Living Center. The Minnesota Supreme Court recently upheld a Tax Court decision holding that an assisted living center did not qualify for a real property tax exemption on the grounds that the center was not an institution of purely public charity. Minn. Stat. §272.02 (2002). To determine whether the center qualified as an institution of purely public charity, the Court applied the six-factor test established in North Star Research Institute v. County of Hennepin, 236 N.W.2d 754 (1975). The Court noted that while the taxpayer bears the burden of establishing that it is such an institution, it need not establish all six factors identified in North Star. Of the three factors considered, the first was whether the recipients of the charity received services at a rate "considerably less than market value or cost." To this point, the Court determined that the center’s rental rates were set to allow the institution to break even, thus reflecting the costs of operation to such an extent that they could not be considered considerably less than market cost. The second factor was whether the revenue from charges and donations are sufficient to generate a profit. The showing of financial documents estimating cash flow of $125,000 to $325,000 over five years supported evidence of such profit. Finally, the Court looked at whether the center in some way restricted who received the public benefit. Because financial assistance was available only to eligible, current residents, the public benefit was indeed restricted. Because the center failed to establish itself as a public charity under the North Star test, the county was within its right to revoke the property tax exemption. Croixdale, Inc. v. County of Washington, A06-153 (Minn., 01/25/07). www.lawlibrary.state.mn.us/archive/supct/0701/opa060153-0125.htm

ADMINISTRATIVE DEVELOPMENTS

• Earned Income Tax Credit Awareness Day. On February 1, the IRS held Earned Income Tax Credit Awareness Day in which the agency and over 150 coalitions and partners across the nation provided a series of news conferences and news releases promoting the valuable tax credit for low-wage taxpayers. For eligible families, the Earned Income Tax Credit can provide a refundable credit of up to $4,536 for a given tax year. In 2005, the credit was claimed on more than 22 million returns amounting to $41 billion; however, the IRS also estimates that as many as 25 percent of eligible taxpayers failed to claim the credit. The IRS stated that interested taxpayers and tax preparers can learn more about the credit by using the EITC Assistant on the agency’s website at www.irs.gov/eitc. IRS News Release IR-2007-24 (02/01/07).

• Telephone Excess Tax Refund. In response to the large number of errors detected in early 2006 returns, the IRS has provided guidance for taxpayers requesting the telephone excise tax refund. Federal officials authorized the one-time refund for taxes billed on long-distance service from March 2003 to the end of July 2006. Last fall, several federal court decisions held that the tax does not apply to long-distance service as it is billed today. The agency noted that while many taxpayers have submitted excessive or duplicative refund claims, there are also a significant number of returns that omit the refund altogether. To curb these errors, the agency has recommended that taxpayers e-file their returns in order to flag omitted refunds, submit the standard $30 refund, and make sure there is appropriate documentation for any claimed refund in excess of the standard amount. IRS News Release IR-2007-21 (01/31/07).

• Credit Card NSF Fees Not "Interest." The IRS issued guidance on the treatment of insufficient funds (NSF) fees charged by credit card issuers against card holders. The ruling states that when the card issuer determines that it will not honor a charge that a third party has presented for payment, because the card holder has overdrawn his line of credit, the issuer is denying the holder the use of its funds. This denial of funds is not equivalent to the traditional definition of interest as a payment that compensates the lender for the "use or forbearance of money." Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932). The ruling also provided that the NSF fee is includible in the income of the issuer when the NSF event occurs. Rev. Rul. 2007-01, 2007-3 IRB 265.

• Qualification of Transactions as Corporate Reorganizations. The IRS has issued temporary regulations regarding the qualification of certain transactions as reorganizations, described in §368(a)(1)(D), where no stock and/or securities of the acquiring corporation is issued and distributed in the transaction. Of significance in the regulations is the determination that where the same person or persons own, directly or indirectly, all of the stock of the transferor and transferee corporations in identical proportions, these temporary regulations provide that the distribution requirement under §§368(a)(1)(D) and 354(b)(1)(B) will be treated as satisfied even though no stock is actually issued in the transaction. In addition, the distribution requirement under §§368(a)(1)(D) and 354(b)(1)(B) will be treated as satisfied in the absence of any issuance of stock and/or securities where there is a de minimis variation in shareholder identity or proportionality of ownership in the transferor and transferee corporations. T.D. 9303, 2007-5 IRB 379.

• E-Filing for Businesses. The IRS has taken further action to make electronic filing easier for business taxpayers. Recently issued final regulations under §6011 have been designed to eliminate regulatory impediments to the electronic filing of certain income tax returns and other forms. Among the modifications is the elimination of requirements that taxpayers include third-party signatures on their tax returns or that documents or statements generated by a third party be attached to a return. The final regulations make only nonsubstantive changes to the temporary regulations issued in 2003. T.D. 9300, 2007-2 IRB 246.

• Process for Release of Liens and Discharges of Property. The IRS has issued proposed regulations related to requesting a certificate of discharge of a federal tax lien under §6325(b)(4), as well as the impact of the new procedures on the tolling of the collection limitations period under §6503(f)(2) and the judicial remedy provisions of §7426. These sections provide a statutory mechanism for a person other than the person against whom the underlying tax was assessed, upon furnishing a deposit or bond, to obtain a discharge of the federal tax lien from property owned by him, and for the IRS or the courts to determine the disposition of the deposit or bond amount. The proposed regulations are meant to incorporate and update existing temporary regulations on the release of tax liens under §6325(a) in order to reflect the agency’s acceptance of additional forms of payment since the temporary regulations became effective in 1983. Prop. Treas. Reg., REG-159444-04 (01/11/07).

• Treatment of Tax-Exempt Property; Pass-Thru Entities. A recent IRS notice extends by one year the transition relief in Notices 2006-2 and 2005-29 previously provided to partnerships and other pass-thru entities. Those notices provide that, in the case of partnerships and pass-thru entities described in §168(h)(6)(E), the IRS will not apply §470 to disallow losses associated with property that is treated as tax-exempt use property solely as a result of the application of §168(h)(6). The extended transition period is meant to soften the impact of §848 of the American Jobs Creation Act of 2004, which imposes new limitations on the deductibility of losses relating to tax-exempt use property. Notice 2007–4, 2007-2 IRB 260.

• Impact of Contract Liabilities for Accrual Method Taxpayers. A recent Revenue Ruling provides guidance on when accrual method taxpayers incur liability for services under section 461. The Ruling utilizes the "all events test" of Regulation 1.461-1(a)(2)(i) in stating that all the events have occurred that establish the fact of the liability for services provided to the taxpayer when (1) the event fixing the liability, whether that be the required performance or other event, occurs, or (2) payment is due, whichever happens earliest. The mere execution of a contract, without more, is insufficient for establishing a taxpayer’s liability for services. In order for an accrual method taxpayer to change the treatment of liability for services, he must also change his method of accounting by obtaining the consent of the Commissioner under section 446(e). Rev. Rul. 2007–3, 2007-4 IRB 351.

LEGISLATION

• Minnesota 2006-2007 Tax Enforcement Initiative. The Minnesota Department of Revenue issued the second of two reports regarding the $17.8 million appropriated by the Legislature for stepped up tax enforcement activities. The original goal of the increased enforcement was to produce an additional $90.7 million in revenue between 2006 and 2007, and the department now believes that it will exceed that goal. As of November 30, $74.6 million had been collected pursuant to these efforts though only $9.6 million in incremental spending. Of the collected amount, $38.4 million was generated from identifying nonfilers and increasing the number of audits and $36.2 million was produced from increases in delinquent tax collection activities. While pleased with the results, the department stated that additional strategies would enhance the enforcement activities, including acquiring better taxpayer data, simplifying tax laws, improving services, and making better use of technological tools. Minnesota Department of Revenue, Expanded Tax Compliance Initiatives - Fiscal years 2006 – 2007: Report to the Minnesota Legislature (Jan. 2007) available at www.taxes.state.mn.us

LOOKING AHEAD

• Reportable Transaction Disclosure Penalties. The IRS has stated that it will soon issue interim guidance under §6707A, a recently enacted provision that allows for a monetary penalty for the failure to include on any return or statement information required to be disclosed on a reportable transaction under §6011. The guidance, which is expected to be in the form of a Revenue Procedure, will lay out the procedures for requesting and the standards for applying rescission and elaborate on the list of nonexclusive factors for purposes of getting penalties rescinded.

• U.S. Tax Court Coming. The U.S. Tax Court will be in St. Paul to hear cases beginning March 5th. A second Tax Court calendar will also be heard starting May 22, 2007. A schedule of the cases to be heard can be found at www.ustaxcourt.gov.

— Kathryn Sedo
University of Minnesota Law School

March 2007

TORTS & INSURANCE
JUDICIAL LAW

• Legal Malpractice: Third-Party Beneficiaries. Dorsey and Whitney, LLP ("Dorsey") was retained by Miller & Schroeder Financial, Inc. ("Miller") to prepare documents for a complicated financing agreement involving a casino in New York. The loan balances were later sold to the plaintiffs, 31 banks. The casino was unsuccessful and loans went into default. The involved Indian tribe argued that because the management agreement had not been approved by the National Indian Gaming Commission ("NIGC), the loan was unenforceable. The banks sued Dorsey, alleging that the law firm negligently advised Miller, and therefore the banks, that the pledge agreement did not require NIGC approval. The district court granted summary judgment to Dorsey, holding that no attorney-client relationship existed.

The Court of Appeals reversed and remanded, holding that the district court erred by failing to apply the Lucas factors to determine whether an attorney-client third-party beneficiary relationship exists. Those factors include (1) the extent to which the transaction was intended to affect the nonclient; (2) the foreseeability of harm to the nonclient; (3) the degree of certainty that the nonclient suffered injury; (4) the closeness of the connection between the attorneys’ conduct and the injury; (5) the policy of preventing future harm; and (6) whether recognition of liability under the circumstances would impose an undue burden on the profession. The court also found issues of fact as to the scope of Dorsey’s representation of Miller, suggesting that an implied contract existed between the banks and Dorsey. McIntosh County Banks v. Dorsey & Whitney, LLP, A06-486, (Minn. App. 01/10/07). www.lawlibrary.state.mn.us/archive/ctappub/0701/opa060486-0110.htm

• Sexual Abuse: Respondeat Superior. A minor and her sibling brought suit against several churches for sexual abuse suffered at the hands of a retired minister who continued to provide pastoral services after his retirement. The court dismissed plaintiff’s respondeat superior and negligent supervision claims.

Because the pastor served in a "fill-in" capacity, was not provided with vacation or health benefits, and did not have taxes withheld from his payment, he was viewed as an independent contractor rather than as an employee of the church. Because plaintiffs also failed to present evidence of any "red flags" of which the church should have been aware, they could not establish liability for negligent supervision, which requires that the conduct be foreseeable and that an employee failed to use advisory care when supervising the worker. C.B., a minor, and L.B. v. Evangelical Lutheran Church in America, et al., A06-295, (Minn. App. 01/16/07). www.lawlibrary.state.mn.us/archive/ctappub/0701/opa060295-0116.htm

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