October 2007

October 2007

October 2007

October 2007

October 2007

October 2007

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patent Claims: “Trigger Means.” Judge Frank held that the patent claim term “trigger means” is a means-plus-function limitation and that defendant had not overcome the presumption created by use of the word “means.” Quantronix sued Data Trak for patent infringement. The parties were before the court on plaintiff’s motion for preliminary injunction. Data Trak’s opposition was based on its argument that the accused product does not have a “trigger means.” Use of the word “means” in a patent claim raises a presumption that the claim term is written in means-plus-function format, resulting in an arguably broader scope of protection in this case. Data Trak unsuccessfully tried to rebut the presumption by arguing that “trigger” described sufficient structure — albeit narrower in scope — such that the word “means” was unnecessary. The court disagreed, concluding that the use of the word “means” conveyed a means-plus-function limitation. The patent specification listed a number of possible components that could serve as “trigger means,” suggesting that a broader scope of structure than just “trigger” was claimed. The court also found that Data Trak did not offer sufficient evidence to overcome the presumption that “trigger means” was a means-plus-function limitation. The court concluded Quantronix made a showing of likelihood of success on the issue of infringement and granted Quantronix’s motion for a preliminary injunction. Quantronix, Inc. v. Data Trak Tech., Civ. No. 07-1799 (D. Minn. 08/01/07).

• Trademark: Color and Shape; Mechanical Device. Judge Davis held that the mark “Next Generation Impactor” and the acronym NGI are suggestive and thus may be entitled to trademark protection. However, the court also held that the color and shape of a mechanical device are not protectable by trademark or trade dress. MSP sued Westech for, among other things, trademark and trade dress infringement. The marks were used by MSP to identify its products, as were the products’ color and shape. The court found that MSP had demonstrated a likelihood of success on the merits regarding the trademarks used to identify the products, but that MSP failed to demonstrate a likelihood of success regarding protectability of the shape and color of the products. The court held that MSP would not be likely to prove that the shape and color were nonfunctional, a requirement for trade dress protection. MSP Corp. v. Westech Inst., Inc., Civ. No. 07-2301 (D. Minn. 08/05/07).

• Patents; Inventorship; 7th Amendment. A Federal Circuit panel held that a trial court erred in holding a bench trial for correction of inventorship under 35 U.S.C. §256 instead of a jury trial where state law claims of fraud and unjust enrichment also existed. Shum sued Intel to be named a coinventor on a patent assigned to Intel. Shum also sought damages under state law resulting from the omission of his name as an inventor on the patent. The trial court held a bench trial on the equitable claim of inventorship correction and found Shum was not an inventor, eviscerating his state law claims. However, the appellate court reversed, finding that the correction-of-inventorship claim contained common underlying factual issues as the state law claims, and the 7th Amendment dictated a jury determine all factual issues including those related to the question of inventorship. Shum v. Intel Corp., No. 2006-1249 (Fed. Cir. 08/24/07).

— Tony Zeuli
— Eric Chad
Merchant & Gould

October 2007

JUVENILE LAW
JUDICIAL LAW

• Child Abuse; Failure to Report. In a landmark case interpreting the Child Abuse Reporting Act (Minn. Stat. §626.556), the Minnesota Supreme Court reviewed a situation where adoptive parents of a child abused by her biological father sued the hospital that treated the child. The parents alleged that the hospital physicians failed to prevent ongoing abuse. The district court ruled that the parents could not introduce evidence of the hospital’s failure to report suspected child abuse to outside authorities. A jury then determined that the hospital was negligent, but that this negligence was not a direct cause of the child’s injuries. The parents appealed, arguing that a cause of action exists under the Child Abuse Reporting Act and common law for failure to report suspected abuse. The Court of Appeals affirmed the district court.

The Minnesota Supreme Court held that the Child Abuse Reporting Act does not create civil liability for failure to report suspected child abuse to authorities. When the harm to a child abused by her parents was inflicted away from the hospital by a person over whom the hospital had no control and when the hospital did not accept custody of the child, the hospital had no special relationship with the abused child, and thus had no duty to protect the child from further harm. The Supreme Court went on to hold, however, that the district court erred when it excluded all evidence related to a hospital’s responsibility to report suspected child abuse to outside authorities when the plaintiffs presented a prima facie case that the ordinary skill and care expected in the medical profession required the hospital to report a child with suspicious injuries as a victim of suspected child abuse. Becker vs. Mayo Foundation, A05-45 (Minn. 08/16/07). www.lawlibrary.state.mn.us/archive/supct/0708/OPA050045-0816.htm

• Termination of Parental Rights; Chemical Abuse; “Palpable Unfitness.” In an unpublished decision by the Minnesota Court of Appeals, a CHIPS petition was filed based on conditions of the home of the mother, who was the custodial parent. The father’s case plan required, among other things, that he submit to random urinalysis tests. He repeatedly failed to do that and the samples he did provide were positive for various chemicals. As a result of the father’s failure to demonstrate sobriety, his parenting assessment was never completed and the results of two chemical dependency assessments were deemed invalid. A majority of the Court of Appeals concluded that there was clear and convincing evidence supporting the findings that the father was palpably unfit and that he was provided with reasonable rehabilitative services and that termination of parental rights was in the child’s best interest.

This case is noteworthy for the dissent of Judge Kevin Ross who opined that what is necessary for the state to prevail in its effort to terminate a parent’s rights is something much more than a demonstration that he or she occasionally smokes marijuana or drinks alcohol or that he or she has not met one of the conditions of the case plan. According to Judge Ross, what is necessary is clear and convincing evidence that the parent’s acts or omissions satisfy the statutory standard for a finding of palpable unfitness to be a parent. Judge Ross concluded that the state had not met that burden on the record of this case. He noted that nothing in the district court’s findings or in the record indicates that the father’s chemical abuse had any impact on his conduct as a parent or on his relationship with his daughter. It had not prevented him from obtaining full-time employment or suitable housing for the child. Merely testing for the failure of that condition of chemical abstinence cannot satisfy the state’s duty to provide reasonable efforts to help a parent to meet the condition. In the Matter of the Welfare of the Children of: T.R, T.M., P.P, and B.H., A07-666 (Minn. App. 09/04/07). www.lawlibrary.state.mn.us/archive/ctapun/0709/opa070666-0904.htm

• Termination of Parental Rights; Termination as to One of Two Cohabiting Parents. In an unpublished decision, the Minnesota Court of Appeals reviewed a challenge to the district court order terminating parental rights of parents as to their two children. The court held that even though the mother failed to exclude the father from the family home after father had committed domestic violence, the mother received erroneous legal advice that the father was permitted to return home, the mother lived with the father of the children, who was her husband, after the children had been removed from the home and while the father was subject to a case plan. The county had been prepared to restore legal and physical custody to the mother until it learned that she continued to allow the father to reside in the home. Thus, the Court of Appeals held that the district court’s decision to terminate the rights of the mother was not supported by substantial evidence, whereas the father was appropriately found to be palpably unfit to be a party to the parent/child relationship, and his parental rights were appropriately terminated. In the Matter of the Welfare of the Children of: S.E.P. and J.W.P., Parents, A07-25 (Minn. App. 08/07/07). www.lawlibrary.state.mn.us/archive/ctapun/0708/opa070025-0807.htm

• Termination of Parental Rights; Reasonable Efforts to Reunite. In another unpublished decision, the Court of Appeals heard the appellant mother’s argument that the county did not make reasonable efforts to reunite her and her children and that the termination was improperly based on conditions at a time other than what existed at the time of the termination. The county had discontinued reunification and rehabilitation efforts 21 months before the mother’s parental rights were terminated. The Court of Appeals noted, however, that because the record contained substantial evidence of the mother’s noncompliance with the reunification plan and the terms of her criminal probation, the district court was permitted by statute to retroactively determine that reasonable efforts became futile. In the Matter of the Children of: D.N.R., Parent, A07-549 (Minn. App. 08/07/07). www.lawlibrary.state.mn.us/archive/ctapun/0708/opa070549-0807.htm

• Juvenile Delinquency; Due Process; Stay of Adjudication Revocation. In an unpublished decision a juvenile challenged the district court’s revocation of a stay of adjudication. The juvenile argued that the district court violated his due process rights by not following the required procedures of the Delinquency Rules, that he did not personally admit the probation violations, and that some of the cited violations did not concern the conditions of probation. The Court of Appeals held that where the juvenile pleaded guilty and the district court stayed adjudication and ordered probation and then after five probation violation hearings the district court revoked the stay of adjudication and adjudicated the delinquent, the district court’s failure to read the advisory under Minn. R. Juv. Delinq. 15.07, Subd. 3(b) did not violate the child’s due process rights where the child was represented by counsel at all of the hearings and he excercised the rights enumerated in the advisory. In the Matter of the Welfare of: S.M.E., A06-330 (Minn. App. 08/07/07). www.lawlibrary.state.mn.us/archive/ctapun/0708/opa060330-0807.htm

• Child Protection; Transfer to Tribal Court. In an unpublished decision, the Court of Appeals reviewed a decision by a state district court to transfer a child-protection matter to tribal court. In this case, the county petitioned to terminate the legal and physical custody of four children, who had been placed with the appellants pursuant to a previous CHIPS adjudication as to the children. The county petitioned to transfer this custody because of alleged abuse of the children by these custodians. The children’s mother initially opposed transfer of jurisdiction to tribal court. A few days before trial, however, the mother changed her position and the tribe, which had been active in the legal proceedings as to these four children, immediately moved to transfer the case to tribal court. The trial court granted the transfer. The Court of Appeals concluded that the district court did not abuse its discretion by granting the transfer over the objection of the legal and physical custodians because the tribe’s interest in determining the custody issue outweighed any prejudice to the custodians, and because the tribal court has a permanency option called “customary adoption” which is not available in state court and which is supported by the guardian ad litem and the county. In the Matter of the Welfare of the Children of: B.W. and L.W., Legal Custodians, A07-612 (Minn. App. 08/28/07). www.lawlibrary.state.mn.us/archive/ctapun/0708/opa070612-0828.htm

— Gary A. Debele
Walling, Berg & Debele

October 2007

PROBATE & TRUST LAW
JUDICIAL LAW

• Guardianship; Health Care Agent. The Minnesota Court of Appeals has held that a trial court has broad discretion to appoint a guardian for an incompetent person other than the agent named in the person’s health care directive. The appellant argued that because: (a) under Minn. Stat. §524.5-309(a), a health care agent has priority to be appointed as guardian of the person for the principal, (b) under Minn. Stat. §145C.07, the appointment of a health care agent in a health care directive is considered a nomination of a guardian, and (c) under Minn. Stat. §145C.10(c), absent clear and convincing evidence to the contrary a health care agent is presumed to be acting in good faith, a trial court cannot appoint a person other than the health care agent as guardian absent a showing by clear and convincing evidence that the health care agent is acting in bad faith.

The Court of Appeals held that a trial court’s discretion to appoint a guardian other than the individual with statutory priority if deemed in the ward’s best interest is not limited by the presumption in Minn. Stat. §145C.10(c). The Court of Appeals found that the presumption under Minn. Stat. §145C.10(c) “addresses a wholly different question than whether the health care agent’s appointment as guardian would be in the ward’s best interests.” In re: Guardianship of Jean A. Wells, Ward, A06-1500 (Minn. App. 06/26/07). www.lawlibrary.state.mn.us/archive/ctappub/0706/opa061500-0626.htm

• Wills; Revocation; Separate Informal Writing. A separate writing incorporated into a decedent’s will that is not signed with the formalities required of a will is not effective to partially revoke the will. The decedent signed a valid will that included a provision at Article IV making reference to “a list designating the distribution of some of my tangible personal property.” The decedent subsequently prepared and signed a handwritten “Addendum to Will per Article IV,” that included an instruction to “delete” two of his children from the residuary clause of the will. The Addendum was not witnessed.

The Court of Appeals rejected the appellant’s argument that the Addendum should be admitted as extrinsic evidence to resolve an ambiguity in the will, because Article IV of the will clearly stated that a separate list made pursuant to that provision could only dispose of tangible personal property. The Court of Appeals held further that the Addendum could not revoke the will or any part of it because a will can only be revoked by valid execution of a subsequent will or codicil or by burning, tearing, cancellation, or obliteration of the will. Minn. Stat. §524.2-507(a). In re the Estate of LeVern D. Young, A06-2071 (Minn. App. 07/03/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0707/opa062071-0703.htm

• Medical Assistance Claims; “Institutionalization”; Lien Against Homestead. The Minnesota Court of Appeals has held that a brief period of hospitalization constitutes “institutionalization” for purposes of the statute limiting medical assistance claims against a decedent’s estate to the value of nonhomestead property in certain circumstances where the decedent’s child resided with the decedent prior to and during the decedent’s “institutionalization.” The Court of Appeals held further, however, that the county can hold a medical assistance lien against the homestead even where the value of the county’s claim is limited to the value of nonhomestead property

The trial court order denied the medical assistance claim of Crow Wing County against the decedent’s estate on the ground that under Minn. Stat. §256B.15, subd. 4(b), medical assistance claims are limited to the value of the estate’s nonhomestead property if a child of the decedent resided with the decedent for two years prior to the decedent’s institutionalization and establishes that she provided care to the decedent that permitted the decedent to reside at home rather than in an institution. The county appealed on the ground that although the decedent’s daughter resided with her and prevented her institutionalization, Minn. Stat. §256B.15 was inapplicable because the decedent never was institutionalized. The trial court based its order on a finding that the statute’s requirement of institutionalization was absurd and unreasonable. The Minnesota Court of Appeals reversed the trial court’s rejection of the institutionalization requirement, but affirmed denial of the county’s claim on the ground that the decedent was hospitalized and that a hospital is an “institution.”

Although the Court of Appeals held the county’s claim was limited to nonhomestead property and, given the lack of such property, properly denied, the court held that the county could still hold a lien against the homestead in the amount of its claim under Minn. Stat. §256B.15, subd. 1j. The estate argued that the lien should apply only to allowed claims, but the Court of Appeals held that Minn. Stat. §256B.15 must be interpreted to give effect to all its parts, and that the homestead exemption limits the presently collectible portion of the claim, but does not wipe out the dollar amount secured by the lien. In re the Estate of Bertha Belle Borg, A06-1037 (Minn. App. 07/17/07). www.lawlibrary.state.mn.us/archive/ctapun/0707/opa061037-0717.htm

— Cameron R. Seybolt
Fredrikson & Byron

REAL PROPERTY
JUDICIAL LAW

• Enforcement of Mechanics Liens; Naming Party with Interest in Property as Defendant. The Minnesota Supreme Court has recently issued an opinion that significantly impacts mechanics lien law. The statutory framework provides that if a mechanics lien holder wishes to enforce its lien, it must commence an enforcement action within one year of the date of last work and must also record a notice of lis pendens. The statute provides that “no person shall be bound by any judgment in such action unless made a party thereto within the year.”

Mavco had been hired to perform certain improvement work on property owned by the Egginks. Mavco’s last work was performed on November 26, 2003. The Egginks failed to pay for the work and, on January 23, 2004, Mavco recorded a mechanics lien statement. On May 14, 2004, the Egginks refinanced their debt on the property and granted a mortgage to Wells Fargo. Wells Fargo did not immediately record its mortgage. Subsequently, Mavco commenced an action to enforce its lien, but as Wells Fargo had not yet recorded its mortgage, Mavco did not name Wells Fargo as a defendant in the action. Instead, Mavco named the Egginks’ former mortgagee and three other entities with interests that were then of record. In their answer and in their answers to discovery, the Egginks stated that Wells Fargo now held a mortgage interest in the property. Despite this knowledge, Mavco did not seek to add Wells Fargo as a defendant in the action. Eventually, Mavco and the Egginks reached a settlement where the Egginks agreed to pay $100,000. When the Egginks failed to make timely payment, Mavco, as authorized in the settlement agreement, moved for the entry of judgment in the amount of the lien. Mavco also sought an order from the court that the property be sold and that Mavco’s interest be granted priority over all other interests in the property. Because Mavco had not named Wells Fargo as a defendant within the one-year period, the district court concluded that Wells Fargo’s mortgage interest was superior to Mavco’s. The Court of Appeals affirmed. The Minnesota Supreme Court accepted review of the case and reversed and remanded.

The critical issue in the case was whether plaintiff in a lien foreclosure action was required to name mortgagees with interest in property as defendants within the one-year time period. The argument that mortgagees indeed need to be named was based on the statutory language that “no person shall be bound by any judgment in such action unless made a party thereto with the year” and by prior Supreme Court decisions holding or at least implying that mortgagees must so be named. After a lengthy and detailed analysis of the statutory language, the Supreme Court concluded that the “person” to whom the statute referred was limited to other mechanics lien holders. Accordingly, Mavco’s failure to name Wells Fargo did not, as both the district court and Court of Appeals concluded, operate to give Wells Fargo a superior interest to Mavco’s previously recorded interest. The Supreme Court acknowledged that this decision was contrary to prior opinions and expressly overruled those prior opinions. The Court also noted that its decision was consistent with the Minnesota Recording Act, which would seemingly be thwarted by giving superior status to an interest later recorded. Reversed and remanded. Mavco Inc. v. Eggink, A05-2018 (Minn. 08/23/07). www.lawlibrary.state.mn.us/archive/supct/0708/OPA052018-0823.htm

• Permissible Uses of Street Dedicated for Public Use. In 1902, a property owner created a plat, part of which dedicated to the city a corridor for public use as a street. Over 100 years later, the various parcels had been acquired by different owners and the street had not been improved, nor had it been used by the public. Although the street had some limited use as an access for the property owners, they had generally taken steps to prevent public use by planting grasses and shrubs. In 2005, one of the property owners (Glass) applied for and received from the city a permit to construct a driveway on the street for the purpose of accessing his garage. Neighboring property owners objected to the permit and ultimately filed suit to prevent the construction of the driveway. The district court concluded that the city had exceeded its authority by allowing the construction of the driveway on the street. The Court of Appeals affirmed.

The court held that to open the street required affirmative action on the part of the city, not simply the mere acceptance of the dedication in the plat. Because the street had not been used by the public and the city had not taken any steps to develop it, the court concluded that the street was not “open.” Moreover, the court’s decision implies that even if the street was declared “open” by the city, this would not necessarily allow for the construction of the driveway. The court indicated that the city could not simply give away the public rights to the street and make it a private drive.

The court noted further that a property owner’s right of access was constitutionally protected, but not in the manner Glass was arguing: the government is not constitutionally required to provide access to a property that lacks it. The court did opine that there may be a common law right of access to property in Minnesota but such a common law right would not apply here. Affirmed as modified. Bolen v. Glass, A06-1422, A06-1440 (Minn. App. 9/4/07). www.lawlibrary.state.mn.us/archive/ctappub/0709/opa061422-0904.htm

— C.J. Deike
Edina Realty Home Services

October 2007

TAX
JUDICIAL LAW

• Fees and Costs: Commissioner Memoranda as Work-Product. Taxpayers previously challenged a notice of deficiency in Tax Court, had a decision issued in their favor, and subsequently moved for an award of costs and sanctions against the commissioner. In their motion, the taxpayers sough to discover two memoranda prepared in the Office of the Commissioner on the rationale that while they were originally prepared for the case in chief, the documents could no longer be considered work-product in determining litigations costs and sanctions. The Tax Court disagreed. In denying the request for discovery, the court stated the memoranda constituted work-product in the original trial, and the subsequent decision did not change their nature. Further, an in camera review of the documents revealed their discovery was not sufficiently important to outweigh the privacy and other concerns underlying the work-product doctrine. Ratke v. Commissioner, 129 T.C. No. 6 (09/05/07).

• Procedure: Applicability of Deficiency Procedures; Jurisdiction Over Accuracy-Related Penalties. This case involved a Son-of-BOSS transaction designed to create a basis of $29.3 million in stock purchases at minimal cost. The IRS determined that the basis of the stock was zero and adjusted the partnership return accordingly. The partnership did not file a petition to contest this adjustment. The IRS then issued an affected-items notice of deficiency as a predicate to assessing those amounts. Taxpayer moved the court to dismiss for lack of jurisdiction asserting that subch. B of ch. 63 of the Code did not apply to the disallowance or to the determination of the accuracy-related penalties. The Tax Court held that Sec. 6320(a)(2)(A)(i) makes deficiency procedures applicable to IRS’ disallowance. The court further held that the IRS’ determination of accuracy-related penalties is not subject to deficiency procedures by virtue of the parenthetical text added to Sec. 6230(a)(2)(A)(i). Domulewicz v. Commissioner, 129 T.C. No. 3 (08/08/07). The Tax Court reached a similar determination about its jurisdiction over accuracy-related penalties related to adjustments to partnership items in Fears v. Commissioner, 129 T.C. No. 2 (08/02/07).

• Procedure: Jurisdiction to Determine Partnership Adjustments. The U. S. Tax Court determined that certain adjustments being contested were partnership items that were being contested by the partnership in a separate proceeding and that the court did not have jurisdiction to determine partnership adjustments in a proceeding brought by individual members of the partnership on their individual behalf. Nussdorf v. Commissioner, 129 T.C. No. 5 (08/16/07).

• Procedure: Overstatement of Basis; Statute of Limitations. The U.S. District Court for the Middle District of Florida disagreed with the U.S. Tax Court and Court of Federal Claims and found that an overstatement of basis constitutes an omission of gross income for the purpose of extending the statute of limitations for issuing a final partnership administrative adjustment from three years to six years. The court relied on 5th Circuit holdings that an item is not adequately disclosed if the item of income is not shown on the face of the return or an attached statement in a manner sufficient to enable the IRS by reasonable inspection of the return to detect the errors. The court concluded that the IRS could not determine on reasonable inspection that the gain on the sale of stock was incorrectly calculated and therefore was an omission. BrandonRidge Partnership v. U.S., No. 8:06-cv-01340 (M.D. Fla. 07/20/07).

• Procedure: Wrongful Levy Claim; No Equitable Tolling. The Court of Federal Claims ruled that a corporation’s wrongful levy claim and challenges to IRS collection activities was filed more than nine months after the levy action and thus was too late. The court further held that the statute of limitations was not equitably tolled because Congress did not intend for tolling of this statute. Four Rivers Investment Inc. v. U.S., No. 06-598 (Fed. Cl. 07/27/07).

• Franchise Taxes. The 9th Circuit recently affirmed the Tax Court’s decision that Charles Schwab Corp. is entitled to deduct its California franchise taxes for its 1988 income on its 1989 tax return because the taxes did not accrue until January 1, 1989.  Charles Schwab Corp et al, v. Commissioner, (9th Cir. 08/02/07).

• Procedure: Tax Accrual Work Papers as Work Product. A U. S. District Court refused to enforce an IRS summons for tax accrual work papers of Textron, Inc. Textron claimed the work papers were protected by the attorney-client privilege, the Sec. 7525 tax-practitioner privilege, and the work-product doctrine. The court found the work papers were protected by the work-product privilege and that Textron did not waive that privilege when it released the work papers to its independent auditor. The disclosure to the outside auditor did waive the attorney-client privilege and the tax-practitioner privilege. The court also rejected Textron’s claim that the summons had been issued in bad faith by the IRS. U.S. v. Textron Inc. et al, No. 1:06-cv-00198 (D.R.I. 08/29/07).

• Procedure: No Settlement Privilege for Documents. The Court of Federal Claims ordered Jenkens & Gilchrist to comply with a subpoena asking about the terms of its settlement with the IRS. Other partners wanted to determine how the IRS treated short- and long-term options contracts and were unable to obtain that information from the IRS. The court noted that the 6th Circuit has recognized a settlement privilege under Fed. R. Evid. 501 but refused to follow suit as there was no such precedent in the Federal Circuit. JZ Buckingham Investments LLC v. U.S., No. 1:05-cv-00231 (08/09/07).

• Procedure: Interest Assessment Following Settlement Agreement. The parties entered into a settlement agreement which transformed a partnership item into a nonpartnership item. This triggered Sec. 6629(f)(1) which provides for a one-year statute of limitations to assess additional tax on the partnership items. The Court of Claims held that the signing of the settlement agreement triggered the one-year statute of limitations and that additional taxes assessed within one year of a subsequent closing agreement were not timely. Eunice Gingerich et al v. U.S., No. 98-533T (Fed Cl. 08/24/07).

• Procedure: Burden of Proof and Valuation Understatement Penalties. The 2nd Circuit remanded an estate valuation case back to the Tax Court to correct an error in the valuation and to determine whether a valuation understatement penalty ought to be imposed. The court also took issue with the estate’s claim that once the court rejected the IRS valuation it was required to accept the estate’s valuation. The 2nd Circuit held that the Tax Court wasn’t bound by the estate’s valuation and was free to undertake an independent analysis of the evidence in the record. The 2nd Circuit questioned whether the estate’s experts had the experience or expertise to value the estate. Estate of Josephine T. Thompson, Nos. 06-0815, 06-1132 (2d Cir. 08/23/07).

• Income Tax: Post Divorce Income; Community Property. The 9th Circuit reversed the Tax Court and held that payments made after a divorce in lieu of pension payments were not deductible as alimony. The 9th Circuit held that post-divorce wages were not community property under California law. Furthermore, the taxpayer could not deduct the payments as alimony because he was required to make them even if his former wife remarried or died. Commissioner v. John Michael Dunkin, No. 05-76004 (9th Cir 08/31/07).

• Minnesota Procedure: Tax Court to Determine Market Value of Property. The MN Tax Court determined that certain property was taxable and a sugar beet processing plant was special-purpose property. The Tax Court concluded that neither party had provided enough evidence to allow the court to determine the market value of the property and thus affirmed the county assessor’s estimated value. The Minnesota Supreme Court affirmed the determinations that certain property was taxable and that the plant was special-use property. However, the Supreme Court remanded the case back to the Tax Court with directions to proceed as if the property’s actual market value is the estimated value and determine whether the taxpayer met its burden to prove the property has been unequally assessed. Southern Minnesota Beet Sugar Coop, v. County of Renville, A07-394 (Minn. 08/23/07).

• FICA Regulations Invalidated. The U.S. District Court in Minnesota in 2003 found that the Mayo Clinic’s medical residents’ stipend qualified for the student exclusion from FICA taxation and that Mayo was a school, college, or university for purposes of the exclusion. The IRS amended its regulations in 2004 and as a result medical residents no longer qualified for the exclusion. The court held that the amended regulations were invalid and awarded Mayo a refund of the FICA taxes withheld. Mayo Foundation for Med. Educ. v. U.S., Civ. No. 06-5059 (D. Minn. 08/03/07).

• Timing of Basis Adjustments to ATNOL. Taxpayers’ exercise of ISOs over several years resulted in the acquisition of 40,362 shares of common stock with an aggregate fair market value of over $5.9 million. At issue in the case was whether the taxpayers could increase their 2001 alternative tax net operating loss (“ATNOL”) by the difference between the adjusted AMT basis and the regular tax basis of stock received through the exercise of the ISOs. The Tax Court stated that the only adjustment to ATNOL under IRC §56(b)(3) is the recognition of gain for AMT purposes when stock is transferred to an individual upon the exercise of an ISO. This adjustment was made in the year of exercise, not in the year of sale. Therefore, the taxpayer’s adjustment of ATNOL was improper. Marcus v. Commissioner, 129 T.C. No. 4.

• Procedure: Jurisdiction over Nondeficiency, Stand-Alone Innocent Spouse Determinations. Taxpayer’s wife embezzled money from her employer’s payroll — without his knowledge — into a separately maintained account. The wife informed the husband of her actions only after their 1999 return had been filed. At the direction of their attorney, the taxpayer and his wife later filed an amended return claiming responsibility for the embezzled funds. Taxpayer subsequently applied for innocent spouse relief; however, the IRS denied this request because (a) no deficiency had been asserted against the amended return and (b) relief was not requested as part of a deficiency action. Such nondeficiency stand-alone petitions traditionally were not heard by the Tax Court. However, Congress amended jurisdiction over such cases prior to the time the case was appealed, and the court later recognized its obligation to hear the case. On the merits, the court found that three of the IRC §6015(f) equity factors weighed toward relief, four were neutral, and one weighed against relief. Under such circumstances, the commissioner abused his discretion in denying innocent spouse relief. Billings v. Commissioner, T.C. Memo. 2007-234 (08/16/07).

• Nature of Settlement Damages, Liability for Deficiency. Taxpayer brought a class action against a county to fight an ordinance establishing a minimum age requirements in a zoned “Senior Citizen Development.” In the action, the taxpayer claimed that harassment by the county and local citizens had resulted in physical ailments. The district court entered a consent decree in which the taxpayer was awarded declaratory, injunctive, and monetary relief in the amount of $175,000, of which only $12,500 was reported on his federal tax return. The commissioner asserted the entire amount was includable in gross income, and the Tax Court reviewed the terms of the settlement agreement to determine the purpose of the payments. Because the agreement lacked express language stating the purpose of the payments, the court looked to the intent of the payors. Here, evidence was insufficient to show that the county or the named individuals in the suit caused physical injury to the plaintiff. As such, taxpayer was liable for his tax deficiency. Gibson v. Commissioner, T.C. Memo. 2007-224.

• Innocent Spouse Relief; Spouse Repeatedly Assured of Tax Shelter Validity. Taxpayer sought innocent spouse relief after her husband invested in Hoyt partnerships designed to generate large losses for the individual partners. Despite the taxpayer’s initial objection, the husband invested in the partnerships which ultimately led to a significant reduction in gross income on their joint tax return. Taxpayer signed these returns only upon her husband’s assurances that they were prepared by tax professionals. The commissioner ultimately found deficiencies for the years in question, and taxpayer sought innocent spouse relief, which was granted by under IRC §6015(b). The court first determined the deficiency was not “attributable” to the taxpayer, given that she participated in name only, repeatedly objected to their involvement, and signed their returns solely because of her husband’s representations. Further, taxpayer satisfied the “knowledge” requirement by fulfilling her duty to inquire about the nature of the transactions. Under such circumstances, relief under §6015(b) was appropriate. Juell v. Commissioner, T.C. Memo. 2007-219 (08/08/07).

• Income Tax: Treatment of E-Trade Account as a Business. Taxpayer husband and wife challenged a determination that losses generated on the wife’s E-Trade account were not entitled to ordinary income treatment of gains and losses by reason that the private business of the husband was that of a securities trader. Even though the account was not in the husband’s name, taxpayers claimed it was financed by the husband and that he conducted trades through it. The Tax Court rejected this attempt based on the fact that the profession of the wife was that of a trader and on the lack of evidence showing it was indeed the husband making the trades. As such, the gains and losses from the account did not receive ordinary income treatment and the related expenses were not deductible. Arberg & Quinn v. Commissioner, T.C. Memo. 2007-244 (08/27/07).

• Business Losses Claimed by IRS Employees. Two recent Tax Court opinions rejected attempts by IRS employees to claim deductions based on their alleged involvement in a for-profit businesses. In Royster, a full-time IRS computer-equipment analyst claimed losses related to his operation of a basketball school. In justifying the lack of documentation for the business, the taxpayer stated the files had been stolen and produced a police report of a robbery in which the only property stolen were the files themselves and a computer holding other business documents. The court found this justification insufficient. In Myrick, an IRS employee attempted to deduct losses from her event-planning business, which incurred over $15,000 in expenses while generating $400 in income. The court failed to find a sufficient intent to generate profit. Royster v. Commissioner, T.C. Summ. Op. 2007-151 (08/30/07), Myrick v. Commissioner, T.C. Summ. Op. 2007-143 (08/15/07).

• Trading Activity Necessary to Constitute a Trade or Business. For the years in question, taxpayer asserted his activities as a stock trader were sufficient to constitute a trade or business. The first year saw the taxpayer make 46 purchases and 14 sales, while in the second year he completed 109 purchases and 103 sales. The totals of both of these years fell short of the court’s standard for trading as a business. See Mayer v. Commissioner, T.C. Memo. 1994-209 (1,100 sales and purchases were substantial). Further, in neither year did he trade on more than ten days in a given month. Under these circumstances, treatment as a trade or business was not appropriate. Cameron v. Commissioner, T.C. Memo. 2007-260 (08/30/07).

• Court’s Role in Dependency Exemption Disputes. Taxpayer claimed a dependency exemption and child tax credit for his minor child even though custody of that child had been granted to his exwife. Amongst his challenges to the commissioner’s stated deficiency, the taxpayer argued that IRC §152 — which eliminates the role of the IRS in dependency exemption disputes — violates the Equal Protection Clause of the 14th Amendment. The Tax Court held that because §152(e) eases the administrative burden of the IRS and thereby advances enforcement of the statute, it satisfies the rational basis test applicable in this instance. The taxpayer’s argument was dismissed. Harris v. Commissioner, T.C. Memo. 2007-239 (08/22/07).

• Antarctica Not a “Foreign Country” for Purposes of Section 911. In August, the Tax Court addressed over 20 cases in which taxpayers excluded from their federal returns income earned and received for services performed in Antarctica. Citing a 7th Circuit approval of their previous determination, the court reaffirmed that Antarctica is not a “foreign country” pursuant to IRC §911 and the regulations thereunder. Therefore, the taxpayers could not exclude such wages from gross income. See e.g. Boone v. Commissioner, T.C. Memo. 2007-214 (08/06/07).

• Murphy Asks D.C. Circuit for En Banc Review. The taxpayer asked the full U.S. Court of Appeals for the D.C. Circuit to reconsider the ruling in July of a three-member panel that reversed its original decision that a tax on her nonphysical injury damages was unconstitutional. See Tax Notes, Vol. 116, No. 9, p. 738.

ADMINISTRATIVE ACTION

• Treasury Department Goals. The Treasury Department has released a new strategic plan for the fiscal years of 2007-2012. The theme of the plan is “E Pluribus Unum,” which is meant to convey the idea that the many Treasury departmental offices and bureaus operate in unity to serve the American people. In order to continuously improve its contributions, the plan identifies the strategic goals of (1) effectively managing government finances, (2) ensuring the U.S. and world economies perform at their full potential, (3) preventing terrorism though the strengthening of financial systems, and (4) building management and organizational excellence. Strategic Plan: Fiscal Years 2007-2012, Department of the Treasury (2007) available at http://www.treas.gov.

• Updated Corporate and Partnership Tax Forms. The IRS has requested comments on drafted revisions to Form 1065, U.S. Return of Partnership Income, and to Form 1120, U.S. Corporation Income Tax Return. Modifications made to these forms are designed to more accurately reflect the ownership structure of an entity and to more efficiently assess the risk of noncompliance. The additional information requested by the forms will be required from complex entities only and will be put to use for the taxable years ending on or after Dec. 31, 2008. IRS News Release, IR-2007-138, (08/02/07).

• Withholding and Reporting Rules for Poker Tournament Sponsors. A recently issued Revenue Procedure informs the sponsors of poker tournaments of their withholding and information-reporting obligations under IRC §3402(q) in regard to paid winnings. The procedure is applicable to sponsors of tournaments involving a “buy-in” fee for each participant with winnings paid out of the pool of combined fees. The new procedure states that a sponsor is required to withhold and report on any payments of more than $5,000 made to a winning payee by filing an information return with the IRS. Rev. Proc. 2007-57, 2007-36 I.R.B. 547.

• “Phishing” Scam. A new IRS consumer alert warns taxpayers of a new email scam promising taxpayers $80 for their participation in an online “Member Satisfaction Survey.” The purpose of the scam is to acquire both personal and financial data in order to access bank accounts, use credit cards, and acquire loans. The IRS assured taxpayers that it does not send unsolicited email, nor does it ask for access to information regarding credit card, bank or other financial accounts. IRS News Release, IR-2007-148 (08/28/07).

• Application of New Deferred-Compensation Rules to Teacher Salaries. The IRS responded to the flood of inquiries of teachers and other school employees concerning the effect of recently implemented deferred-compensation rules. The new law states that when school employees are allowed to choose between being paid only during the school year and being paid over a 12-month period, the selection of the 12-month period constitutes a deferment of income from one year to the next. The IRS has now determined the new rules will not be applied to annualization elections for school years beginning before Jan. 1, 2008. In addition, the IRS stated there is no requirement for school districts to offer the annualization election. IRS News Release, IR-2007-142 (08/07/07).

• Discharge of Liens and Wrongfully Levied Property. Final and temporary regulations have been issued relating to the discharge of liens under IRC §7425 and the return of wrongfully levied upon property under §6343. The Code formerly required notices of nonjudicial foreclosure sale and requests for return of property wrongfully levied upon to be sent to the “district director,” a position previously eliminated by the IRS reorganization. These temporary regulations, effective August 20, 2007, clarify that such notices and claims should be sent to the IRS official and office specified in the relevant IRS publications. T.D. 9344, 2007-36 I.R.B. 535.

• Requirement to Submit Withholding Exemption Certificate. Final regulations have been issued modifying the rules for employers and employees relating to the Form W-4, Employee’s Withholding Allowance Certificate. Specifically, employers are no longer routinely required to submit a copy of any Form W-4 on which an employee claimed more than ten withholding exemptions, nor will they be required to submit a Form W-4 on which an employee claimed complete exemption from withholding if the employee’s wages are sufficient. The effective date of the new regulations is July 13, 2007. T.D. 9337, 2007-35 I.R.B. 455.

• Penalties Related to Listed and to Undisclosed, Reportable Transactions. Proposed regulations under IRC §6404 expand on the rules relating to the suspension of interest, penalties, additions to tax, or additional amounts and explain the general rules and exceptions for suspension. The new rules, which provide guidance to taxpayers participating in listed transactions or undisclosed reportable transactions, reflect recent changes to the Code. T.D. 9333, 2007-34 I.R.B. 411.

• Corporate, Shareholder Reporting Burdens. The IRS issued final regulations designed to simplify, or eliminate, the reporting burdens of taxpayers and also to eliminate impediments to electronic filing. The regulations pertain primarily to corporations and shareholders in regard to certain transactions, including distributions, exchanges and reorganizations. T.D. 9329, 2007-32 I.R.B. 312.

• Crediting Overpayments to Unassessed Taxes. A recent IRS Revenue Ruling holds that the agency may credit an overpayment against unassessed internal revenue tax liabilities that have been determined in a previously sent notice of deficiency. Even though neither IRC §6402 nor the associated regulations specify when “any liability” arises for purposes of determining when the service may credit an overpayment, the ruling states that the accrual of an income tax liability is not dependent on the sending of a notice of deficiency. Further, the well-established presumption for an annual accounting period is also consistent with such treatment of an overpayment. Rev. Rul. 2007–51, 2007-37 I.R.B. 573.

• Last Due Date for Extended Returns; Bankruptcy. The IRS has found that the postponement of time to file a return under IRC §§7508 or 7508A does not change the date on which the return is last due. The ruling states that such relief does not change or extend the extended due date for filing that is fixed by §§6072 and 6081(a). Instead, §7508A disregards the period of postponement and neither changes nor extends the extended due date; thus, there is no change to the priority and dischargeability of the tax for bankruptcy purposes. Rev. Rul. 2007–59, 2007-37 I.R.B. 582.

LEGISLATION

• Patent Reform Act; Ban on Tax Strategy Patents. The House of Representatives passed the Patent Reform Act of 2007, a broad, intellectual-property bill that includes a ban on tax-strategy patents. The bill defines a tax-planning method as “a plan, strategy, technique, or scheme that is designed to reduce, minimize or defer, or has, when implemented, the effect of reducing, minimizing or deferring a taxpayer’s liability.” Bill proponents claim that such patented strategies can mislead taxpayers into believing a tax strategy is valid. However, the bill is not designed to prohibit the patenting of return-preparation software. H.R. 1980, 110th Congress (2007).

• Fairness in Tax Policy. The House Committee on Ways and Means recently held a hearing on “Fair and Equitable Tax Policy for America’s Working Families.” The hearing focused on many of currently controversial tax issues, including the structure of the Code, the effect of recent tax cuts, the alternative minimum tax, and the tax treatment of hedge funds and partners in private equity firms. http://waysandmeans.house.gov.

— Kathryn Sedo
University of Minnesota Law School

TORTS & INSURANCE
JUDICIAL LAW

• Insurance: Uninsured Motorist Coverage. The Minnesota Court of Appeals recently held that an auto insurance policy that limits to “the policyholder” coverage for uninsured motorist injuries sustained by a person who was not occupying an insured vehicle is limited to the policy’s named insureds.

Plaintiff was struck by an uninsured motorist while walking across the street after parking a car owned by his father. Plaintiff sued his father’s insurer for denying uninsured motorist coverage. The district court granted summary judgment in favor of the insurer, finding that, as a pedestrian who was not a named insured and who did not reside with the named insured, plaintiff was not covered under the policy. The Court of Appeals affirmed, holding that (1) the policy, which provided coverage to a named insured only, excluded plaintiff from coverage; (2) plaintiff had no reasonable expectation that coverage would extend to him; and (3) Minn. Stat. §65B.49, subd. 3a(5), did not mandate coverage for plaintiff because he was not an insured entitled to coverage. Under the circumstances, plaintiff was entitled to coverage only when he was “in, on, or getting into or out of the vehicle.” Carlson v. Allstate Ins. Co., A06-1664, (Minn. App. 07/11/07). www.lawlibrary.state.mn.us/archive/ctappub/0707/opa061664-0711.htm

• Fraud: Representations Made by Opposing Counsel in Litigation. In a case closely watched by the state’s legal community, the Minnesota Supreme Court held that a representation made by an attorney can constitute actionable fraud if it amounts to a direct or implied assertion of a past or present material fact.

Plaintiff leased property to the defendant corporation. When defendant defaulted on his lease, the two parties began settlement negotiations. As a part of the settlement agreement, defendant requested a release of its parent corporation. Before signing the agreement, plaintiff’s attorney said to defendant’s attorney: “I don’t know of any reason how we could pierce the [corporate] veil, do you?” Defendant’s attorney appeared to respond in the negative, stating that defendant and its parent were “totally separate” entities. After the agreement was signed, plaintiff learned that defendant was involved in a lawsuit where a party was trying to pierce the corporate veil. Plaintiff immediately filed suit to rescind the settlement agreement because of the statement made by defendant’s attorney. The district court granted partial summary judgment in favor of defendant, holding that the statements constituted a nonactionable legal opinion. The Court of Appeals reversed, holding that the statements were actionable because they both implied and directly asserted facts.

The Supreme Court affirmed the Court of Appeals decision. While noting that “abstract statements of law or pure legal opinions are not actionable,” the Court stated that “a mixed statement of law and fact may be actionable if it amounts to an implied assertion that facts exist that justify the conclusion of law which can be expressed.” After reviewing the requirements for a veil-piercing claim, the Court held that the attorney’s statements were both direct and implied assertions of past or present material facts.

The Court went on to hold that a genuine issue of material f