March 2008

March 2008

March 2008

March 2008

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Vacation Pay. An employee who was fired for misconduct was not entitled to paid time off or unused vacation under the terms of her employment handbook. The state Supreme Court, reversing the Court of Appeals, held that Minn. Stat. §181.13(a), which provides for prompt payment of wages to employees who are terminated, is a “timing” statute only and does not give a substantive right to employees to receive paid time off. The Court construed paid time off to constitute “wages” within the meaning of the statute, but further held that the employment manual, which barred paid time off if an employee is fired for misconduct, precluded the employee’s claim because she was terminated for work-related improprieties. Lee v. Fresenius Medical Care, Inc., A05-1787, 741 N.W.2d 117 (Minn. 2007). www.lawlibrary.state.mn.us/archive/supct/0711/OPA051887-1115.htm

• Family Leave. An action under the Family & Medical Leave Act (FMLA) could not be brought against a state government agency because of the immunity provision of the 11th Amendment. Although the Supreme Court held that the FMLA provision for time off for family care abrogated 11th Amendment immunity in Nevada Dept. of Human Resources v. Hibbs, 538 U.S. 721 (2003), the employee in this case sought to take time-off for the claimant’s own self-care, which the circuit court has previously held does not overcome the 11th Amendment bar. McKlintic v. 36th Judicial Circuit Court, 508 F.3d 875 (8th Cir. 2007).

• Wrongful Termination. An insurance agent who was terminated after several warnings was not entitled to sue for wrongful termination under an employment agreement that allowed discharge for “undesirable performance.” The 8th Circuit Court of Appeals affirmed summary judgment for the employer on grounds that the employee received adequate notice of poor performance that triggered the termination. Clifton v. American Family Mutual Ins. Co., 507 F.3d 1102 (8th Cir. 2007).

• Discrimination: Time to Present Case. A trial court’s restriction of two days for a plaintiff to present her case for race discrimination and retaliation was not impermissible. Affirming verdicts for the employer on race, discrimination, and retaliation claims, the 8th Circuit held that the limitation did not materially affect a “substantial” right of the claimant. Evidence of different treatment of a similarly situated employee was properly excluded because it involved different decision-makers in the two situations. Harris v. Chand, 506 F.3d 1135 (8th Cir. 2007).

• Discrimination: Title VII “Protected Activity.” Discrimination and retaliation claims by a university teaching assistant were not maintainable where the court found the employer’s complaints about his grades and his immigration status did not constitute “protected” activity to underlie a retaliation claim under Title VII of the Civil Rights Act. Bakhtiari v. Lutz, 507 F.3d 1132 (8th Cir. 2007).

• Age Discrimination. A discharged sales manager could not pursue an age discrimination claim because his replacement was not substantially younger. Affirming a ruling from the U.S. District Court in Minnesota, the 8th Circuit also upheld summary judgment because of the absence of linkage between allegedly age-biased remarks and the employee’s discharge. Ramlet v. E.F. Johnson Co., 507 F.3d 1139 (8th Cir. 2007).

• Volunteers: Termination of Director. Volunteer board members of a nonprofit organization were not liable for terminating a fellow director from his position and job. Because they acted on the basis of specific factual information and were not reckless or willful, the volunteer directors were entitled to summary judgment under Minn. Stat. §317A.257, subd. 1, which provides immunity to unpaid volunteers of nonprofit organizations. Pressler v. Thies, A06-2449, 2007 WL 3347632 (Minn. App. 2007) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0711/opa062449-1113.htm

• Unemployment Compensation: Resignation for “Personal Reasons.” An employee who stopped working because of long hours and stress and depressing conditions in Louisiana, where he worked, was not entitled to unemployment compensation benefits in Minnesota because he did not quit his job for “good reason” attributable to the employer. Although the claimant’s reasons for quitting the job in Louisiana might have been reasonable, they were “personal in nature,” and not attributable to the employer so as to entitle the resigning employee to benefits under Minn. Stat. §268.095, subd. 3(a). Modlin v. Faithful & Gould, Inc., A06-1720, 2007 WL 3348304 (Minn. App. 2007) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0711/opa061720-1113.htm

• Unemployment Compensation: Resignation. An employee who quit working after receiving criticism regarding her job performance was not entitled to unemployment compensation benefits. The employee, who provided one-on-one assistance for students who had problems in school, was frequently monitored by the employer and given critical feedback regarding her performance. Her resignation did not entitle her to unemployment benefits under the statute because it was not attributable to any improper action of the employer. Lund v. Ind. Sch. Dist. #110, A06-2182, 2007 WL 3348361 (Minn. App. 2007) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0711/opa062182-1113.htm

—Marshall H. Tanick
MansfieldTanick&Cohen, PA

March 2008

JUVENILE LAW
JUDICIAL LAW

• Termination of Parental Rights: Due Process. In an unpublished decision, a mother voluntarily terminated her parental rights to her daughter, but she and the county attorney agreed that the filing of that order would be stayed for 90 days. Approximately 90 days later, the district court lifted the stay of the order and the mother’s rights were terminated. The mother appealed that decision.

The Order Terminating Parental Rights stated that it was to be automatically filed after 90 days unless the district court had previously directed its entry, granted a motion to dismiss the proceeding, or extended the stay. A follow-up hearing occurred a little less than three months after the prior hearing, and there occurred what the mother’s attorney described at the oral argument as “procedural bedlam,” involving counsel less than familiar with the case as well as misunderstandings of the purpose of the hearing and the status of the stayed order. When the hearing was reconvened after five days the district court issued its order terminating the mother’s parental rights.

The mother appealed, claiming a denial of her due process rights. The Court of Appeals concluded that the mother’s substantive and procedural due process rights were not violated and that the record clearly indicated that the likelihood of the mother regaining custody of her child was remote at best. The Court of Appeals did note, however, that the Ssupreme Court has unambiguously expressed a thorough disfavor of staying involuntary termination orders, and given the ensuing chaos in this matter, such an observation was clearly appropriate. In the Matter of the Welfare of the Child of: M.W., Parent., A07-1143 (Minn. App. 12/31/07). www.lawlibrary.state.mn.us/archive/ctapun/0712/opa071143-1231.htm

• Termination of Parental Rights: Defective Service of Petition. In another unpublished decision, the Court of Appeals reviewed a determination where the county had filed a petition to terminate a mother’s parental rights. The child’s grandmother filed an answer and counterpetition in response to the county’s termination petition, and in her pleading requested “alternative permanent placement” with herself. The grandmother served this pleading upon the mother by faxing and mailing copies of the answer and counterpetition to the mother’s attorney. The trial court dismissed the grandmother’s petition for lack of personal jurisdiction because it was not personally served upon the mother. The Court of Appeals confirmed that decision, holding that if service is defective, the trial court lacks personal jurisdiction, and the resulting decision is void. According to the procedural rules for juvenile court, unless the court orders service by publication, a summons and petition must be personally served upon the child’s parent or legal custodian. In the Matter of the Welfare of the Child of: C.M.K., Parent, A07-1329 (Minn. App. 02/05/08). www.lawlibrary.state.mn.us/archive/ctapun/0802/opa071329-0205.pdf

• Termination of Parental Rights: Noncompliance with Case Plan. The Minnesota Court of Appeals reviewed a termination of parental rights matter where a district court, following a bench trial, terminated father and mother’s rights under Minn. Stat. §260C.301, subd. 1(b)(5) and (8). On appeal, the Court of Appeals upheld the district court’s termination of the father’s rights, but reversed as to the mother. The Minnesota Supreme Court granted the county’s petition for review concerning the mother’s parental rights, reversed the Court of Appeals decision and reinstated the district court’s termination of the mother’s parental rights.

Following trial, the district court ordered that both mother’s and father’s parental rights be terminated, with the district court finding father palpably unfit to parent based on his lengthy history of anger problems and abuse. The trial court also found that termination of both parents’ rights was justified for failure to correct conditions leading to out-of-home placement and the children being neglected and in foster care. On appeal, the Court of Appeals upheld the district court’s determination that the father was palpably unfit, but reversed the termination of mother’s rights on grounds that it was not supported by substantial evidence.

Reversing the Court of Appeals, the Supreme Court held that the mother had failed to comply with four separate provisions of her case plan. The Court further held that the district court’s findings were supported by substantial evidence and were not clearly erroneous. The Supreme Court went on to criticize the Court of Appeals for making factual findings based on its own review of the record. To make such factual findings, said the Court, was to overstep the bounds of the role of a reviewing court. Furthermore, the Supreme Court held that the Court of Appeals’ factual findings were not supported by the record, and were also contrary to law.

According to the Supreme Court, Minnesota’s statutes and court rules indicate that court-approved case plans carry with them an imprimatur of reasonableness. Because the case plan had been approved by the district court, it was presumed reasonable. The appropriate action for a parent who believed some aspect of the case plan to be unreasonable was to ask the trial court to change it, rather than to simply ignore it. Therefore, the Supreme Court concluded that it was improper for a reviewing court to flatly refuse to consider a violation of that case plan when it addressed a termination of parental rights.

Justice Page dissented from this decision, stating that the majority rushed to condemn a 24-year-old mother and to terminate her parental rights for failure to comply with the court-ordered case plan, but then failed to account for circumstances surrounding her failure to do so, including lack of support from the county to help her meet the requirement of separating from her husband. In Justice Page’s view, the mother’s case plan was doomed from its conception. In the Matter of the Welfare of Children of: S.E.P. & J.W.P., Parents, A07-25 (Minn. 02/14/08). www.lawlibrary.state.mn.us/archive/supct/0802/OPA070025-0214.pdf

—Gary A. Debele
Walling, Berg & Debele

March 2008

PROBATE & TRUST LAW
JUDICIAL LAW

• Life Insurance; Effect of Divorce on Beneficiary Designation; Minn. Stat. §524.2-804. A federal judge has held that Minnesota’s statute providing a dissolution of marriage automatically revokes a life insurance beneficiary designation in favor of the former spouse is unconstitutional, as applied to a policy that was in force prior to adoption of the statute. The case involved a life insurance policy that was issued in 1980. The husband of the insured was named as the beneficiary. The insured and her husband divorced in 1986. After the divorce, the former husband remained named as the primary beneficiary and he made premium payments until the insured’s death in 2006. The former husband claimed he was entitled to the death benefit as the named beneficiary, but the insurance company and the insured’s daughters claimed that the designation in favor of the former husband was automatically revoked pursuant to Minn. Stat. §524.2-804. The U.S. District Court held that the statute violates the contracts clause of the Constitution, Art. I, §10, cl. 1. The court did not rely on the fact that the former husband continued to pay premiums after the divorce. The court held its decision was controlled by Whirlpool Corp. v. Ritter, 929 F.2d 1318 (8th Cir. 1991) (addressing a similar Oklahoma statute), but acknowledged the Whirlpool decision has been criticized and stated, “the [8]th Circuit might well decide the case differently today. And perhaps the parties here will afford the appellate court an opportunity to do so.” MONY Life Insurance Company v. Robert G. Ericson, et al., Civ. No. 07-1547 (D. Minn. 01/23/08).

• Fiduciary Income Tax; Investment Advisory Fees. The U.S. Supreme Court has held that trusts, like individuals, generally may deduct investment advisory fees only to the extent they exceed 2 percent of adjusted gross income. Section 67(a) of the Internal Revenue Code (“IRC”) provides that miscellaneous itemized deductions are allowed only to the extent they exceed 2 percent of adjusted gross income. There is an exception to the so-called “2 percent floor” for expenses paid in connection with the administration of a trust that would not have been incurred if the property were not held in trust. IRC §67(e)(1). The U.S. Court of Appeals for the 6th Circuit held in 1993 that investment advisory fees paid by a trustee qualified for the IRC §67(e)(1) exception, but the IRS, the 4th Circuit, the 2nd Circuit and the Federal Court of Claims took the opposite view. The U.S. Supreme Court resolved the split of authority and held that the appropriate test is whether a particular expense would commonly be incurred if the taxpayer held property in his individual capacity, rather than as a trustee. Because “it is not uncommon or unusual for individuals to hire an investment adviser,” the Court held that investment advisory fees generally do not qualify for the exception. The Court noted, however, that certain investment advisory fees would qualify for the exception if, for example, “an investment advisor were to impose a special, additional charge applicable only to its fiduciary accounts.” A conflict the Court failed to resolve was whether to use the spelling “advisor” or “adviser.” Knight v. Commissioner, 128 S.Ct. 782 (01/16/08).

• Will Construction; Restriction on Sale of Residence; Estate’s Child Support Obligation. James Peka was divorced several years prior to his death. At the time of his death, Mr. Peka was paying child support to his former spouse for the support of their minor daughter, A.P. Mr. Peka’s assets included a home and a life insurance policy. Under the will, the home was distributable to a testamentary trust for the benefit of A.P. The life insurance was distributable to the trust for A.P. pursuant to beneficiary designation. The will provided that “[i]t is my express intent that my former wife or her mother shall never reside in my home.” The Minnesota Court of Appeals upheld the trial court’s decision that the will prohibited a sale of the residence from the estate to the former spouse, either individually or in her capacity as conservator for A.P. The trial court and Court of Appeals rejected the former spouse’s arguments (a) that the restriction was against public policy, and (b) that a sale to the former spouse would not violate the restriction because the former spouse would not reside in the residence until after the sale, at which time it would no longer be the decedent’s home. The trial court also determined that the life insurance proceeds distributed to the trust for A.P. could not be used to fund Mr. Peka’s child-support obligations because they never became part of the probate estate. The Court of Appeals held it was unnecessary to review this determination by the trial court, because the estate’s child-support obligation was completely offset by Social Security benefits payable to the former spouse for the benefit of A.P. by reason of Mr. Peka’s death. (citing Berg v. D.D.M., 603 N.W.2d 361, 366 (Minn. App. 1999)). Finally, the Court of Appeals affirmed the trial court’s decision to require Mr. Peka’s former spouse to engage separate law firms to represent her in her individual capacity and in her capacity as conservator for A.P., on the ground that the former spouse’s interests conflicted with those of her daughter. In re: The Estate of James L. Peka, A07-147 (Minn. App. 02/12/08) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0802/opa070147-0212.pdf

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

REAL PROPERTY
JUDICIAL LAW

• De Facto Takings and Torrens Property. According to a recent decision of the Minnesota Supreme Court, a property owner cannot lose property to the government via a de facto taking if the property is registered as torrens property. In 1971, the City of Fifty Lakes (city) laid a gravel road. Although land had been dedicated to the city for a roadway, the road was not constructed on the dedicated land, but rather it encroached on private property. Some 34 years later, the landowners filed suit against the city seeking declaratory judgment that they owned the property and also asserting claims for trespass. On a motion to dismiss, the district court determined that the complaint alleged a de facto taking by the city and that the owners’ claims were barred by the statute of limitations. The Court of Appeals reversed the district court’s dismissal of the case. The Minnesota Supreme Court accepted review and affirmed.

Although the construction of a road on private property without acquiring property through eminent domain proceedings would normally be considered a de facto taking, the court could not hold that a de facto taking occurred in this case because the property at issue was torrens property. The purpose of the torrens system is to create a title registration procedure that results in a certificate of title on which a buyer can rely. As a result, one cannot acquire title to torrens property by prescription or adverse possession. Considering both the language of and the principles behind the torrens law, the Court concluded that the government cannot acquire torrens property by a de facto taking, which as a practical matter is much like acquisition by adverse possession.

The Supreme Court also addressed the landowners’ claims for trespass. The city argued that the claims must be dismissed because the alleged trespass occurred in 1971 with the building of the road and the six-year statute of limitations had long since expired. The critical issue for the Court was whether the trespass was a permanent trespass occurring in 1971 or a continuing one. In other words, the question was “whether the whole injury results from the original wrongful act … or from the wrongful continuance of the state of facts produced by such act.” Because the procedural posture of the case was at the stage of a motion to dismiss, the Court did not determine whether the trespass was permanent or continuing. The Court held that the complaint was sufficient to state a claim for a continuing trespass and withstand a motion to dismiss. Of great significance to the Court were the landowners’ allegations that they had demanded that the city remove the road and that the city refused. The Court remanded the case for further proceedings to determine the character of the trespass. Reversed and remanded. Hebert v. City of FiftyLakes, A06-215 (Minn. 01/17/08). www.lawlibrary.state.mn.us/archive/supct/0801/OPA060215-0117.pdf

• Amendment of Conditional Use Permit; Adding Conditions. In 1997, the Minnewawa Sportsman’s Club (club) applied for and received a conditional use permit (CUP) allowing it to operate a shooting range, archery range and other businesses on 20 acres of its property. Although there was some discussion by the club at the time about limiting the shooting activity, the CUP issued by Aitkin County contained no conditions. In 2006, the club sought to amend the CUP to allow an archery range and road on an additional nine acres. The county approved the CUP but with 17 conditions, many of which applied solely to the shooting range aspect of the CUP. On certiorari appeal, the Minnesota Court of Appeals affirmed in part, reversed in part and remanded. The parties focused on the scope of the 1997 CUP, particularly as to whether the statements made at the time of application about limiting shooting activity became a part of the CUP. The court indicated—despite apparent unpublished authority to the contrary—that representations limiting a CUP could not result in conditions on the CUP unless the conditions are expressly made part of the CUP. But the court was not compelled to decide that question because the construction of the 1997 CUP was not the issue presented in the case. The issue was whether the later CUP and its conditions were arbitrary or unreasonable. Because the club’s proposed amendment concerned only the use of the new nine acres for archery and road purposes, the county’s attempt to impose new conditions on the existing firearms use was arbitrary. The court also rejected the county’s proposition that it has inherent authority to reconsider a previously issued CUP. Affirmed in part, reversed in part and remanded. Minnewawa Sportsman’s Club v. County of Aitkin, A07-0381, (Minn. App. 02/05/08). www.lawlibrary.state.mn.us/archive/ctapun/0802/opa070381-0205.pdf

—C. J. Deike
Edina Realty Home Services

March 2008

TAX
JUDICIAL LAW

• Income Tax: Trustee Investment-Advisory Fees. The United States Supreme Court affirmed the judgment of the Court of Appeals for the 2nd Circuit, albeit for different reasons, and held that investment advisory fees generally are subject to the 2 percent AGI floor when incurred by a trust. Under IRC §67(e)(1), a cost incurred by a trust is not subject to the 2 percent AGI floor only when the cost would be uncommon outside the trust context. The Court said that the trustee did not demonstrate that it is uncommon for individuals to hire an investment adviser. The Court conceded that trust-related investment advisory fees might not be subject to the 2 percent AGI floor, were an investment advisor to impose a special, additional charge to the trust, or were the trust to have an unusual investment objective or require a distinctive requisite balancing of competing interests. Knight v. Commissioner, No. 06-1286 (U.S. 2008).

• Procedure: IRC §6330(b)(3); “No Prior Involvement.” The 10th Circuit reversed a U.S. Tax Court opinion that held that an appeals officer who had considered a couple’s liabilities for two tax years during collection due process proceedings for an earlier year wasn’t disqualified from conducting a subsequent CDP hearing for subsequent years on grounds of “prior involvement” under §6330(b)(3). The IRC requires that taxpayers receive a fair hearing by an impartial appeals officer who has had “no prior involvement” with respect to the unpaid tax. The U.S. Tax Court interpreted “no prior involvement” to mean that the appeals officer has not previously conducted a hearing regarding collection of the same unpaid tax. The court rejected this interpretation and wrote that once an appeals officer has had involvement with an unpaid tax liability, regardless of whether the liability is the subject under review, the officer is no longer impartial for purposes of §6303(b)(3). Cox v. Commissioner, No. 06-9004 (10th Cir. 2008).

• Estate Tax: Qualified Disclaimer under IRC §2518. The Tax Court held that an estate is not entitled to a charitable deduction for that portion of property passing to a charitable trust because the sole heir did not make a qualified disclaimer of the property under IRC §2518, but it allowed an increased deduction for property passing to a charitable foundation. The court wrote that under IRC §2518 a disclaimed bequest is treated as if it was never made. Since the will left everything to Hamilton and she still had a contingent remainder in the trust, the disclaimer was partial and therefore not qualified. The court held that the estate was entitled to an increased charitable deduction for the value of property passing to the foundation because the entire value of the property was passing to the foundation; thus, the disclaimer qualified under §2518. The court also rejected the IRS’s argument that allowing the increase would violate public policy. Estate of Helen Christiansen v. Commissioner, 130 T.C. 1 (2008).

• Procedure: Offer-in-Compromise; Commissioner’s Discretion. The Tax Court held that a settlement officer did not abuse his discretion in refusing the petitioner’s offer-in-compromise because the petitioner did not show that payment of more than the amount that they offered in settlement of their liabilities would render them unable to meet basic living expenses. The court rejected the petitioners’ effective-tax-administration argument, stating that future income and expenses were speculative. Bergevin v. Commissioner, T.C. Memo. 2008-6.

• Income Tax: Interest Abatement under IRC §6404 (e). The Tax Court held that the respondent’s denial of petitioner’s request for interest abatement was not an abuse of discretion because the petitioner failed to establish a causal link between an unreasonable error or delay by the IRS in performing ministerial or managerial acts and a specific period during which interest accrued. The court concluded that “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. Reg. §301.6404-2(b)(2). Thus, a decision concerning the proper application of federal tax law is not a ministerial act. Franklin v. Commissioner, T.C. Memo. 2008-13.

• Procedure: Bankruptcy Petition; Statute of Limitations. The Tax Court concluded that signing Form 872-A constitutes an unlimited extension of the statute of limitations not only for the imposition of additional tax but also for the imposition of penalties and interest and the only way to terminate the Form 872-A is to file Form 872-T. The filing of a bankruptcy petition while the Form 872-A was in effect did not impact the extension of the statute of limitations. Estate of Marvin E. Greenfield v. Commissioner, T.C. Memo. 2008-16.

• Procedure: Jurisdiction; Liabilities Due to Frivolous Return Penalties. The Tax Court held that under IRC §6330(d)(1) the court has jurisdiction to review petitioners’ challenge to the portion of their underlying tax liability that resulted from the imposition of frivolous return penalties. Callahan v. Commissioner, 130 T.C. 3 (2008).

• Estate Tax: Decedents’ Loans to Corporation. The Tax Court held that for the purpose of the liquidity test under IRC §2057(b)(1)(C), decedents’ loans to their family-owned corporation are not treated as interests in the corporation. The court also concluded that under IRC §2057(e)(1)(B) the definition of “interest in an entity” for purpose of qualified family-owned business interest deduction is limited to equity ownership interests only. Estate of Duane Farnam v. Commissioner, 130 T.C. 2 (2008).

• Income Tax: Basis of Entities with Subsidiaries. The Tax Court held that under IRC.§265(b)(2)(A) and 291(e)(1)(B)(ii)(I), the calculation of petitioner’s wholly-owned bank’s average adjusted bases of tax-exempt obligations does not include the tax-exempt obligations purchased by the bank’s wholly-owned investment company. The court also concluded that the court has judicial discretion on how much deference it will give to Revenue Rulings, which, unlike regulations, are not binding upon the court. PSB Holdings, Inc. v. Commissioner, 129 T.C. 15, (2007).

• Real Property: “Market Evidence” for Valuation. The Minnesota Tax Court denied the petitioner’s 15 percent reduction for external obsolescence because the court found no market evidence to support the seven factors of external obsolescence. The court ruled that a reduction for external obsolescence must be supported by market data, allocation of market-extracted depreciation, or capitalization of income loss. In order to overcome the prima facie presumption of the assessor’s estimated market value (“EMV”), the petitioner has the burden to present credible evidence to prove the EMV is excessive. The court gives great weight to market evidence or collected data, which is also in compliance with the general standard of real-estate appraisers. Kohl’s Department Stores, Inc. v. County of Washington, C0-06-8287 (Minn. Tax Ct. 01/03/08).

• Real Property: Landfills. The Minnesota Tax Court applied Minn. Stat. §272.03, subd. 1(a)(2007) and Minn. Rule 7001.0150, subp.3(c) and held that a landfill permit is not real property because of two reasons: (1) the permit itself carries no property value; (2) since the permit is specific to one site and its ownership may only be modified upon a sale of the site, it does not convey a property right. The court also held that even if a landfill liner is equipment, it is still real property due to being a floor and having an insulation function (Minn. Stat. §272.03(c)(iii)). In the valuation of the landfill, the court gave greatest weight to the income approach because other jurisdictions all concluded that for the valuation of a landfill, the income approach is the most useful and appropriate approach. Veolia ES Rolling Hills Landfill, Inc., v. County of Wright, 86-CV-06-6446 (Minn. Tax Ct. 11/21/07).

ADMINISTRATIVE ACTION

• Procedure: Privacy and Public Access to Electronic Case Files. Effective March 1, 2008, all parties making filings before the U.S. Tax Court must redact taxpayer identification numbers, dates of birth, names of minor children, and financial account numbers. The court considers the rule change on the disclosure adjustment necessary due to the concern for taxpayer privacy, the great deal of personal and tax information contained in court filings, and the large number of pro se taxpayers. Rule 27, U.S. Tax Court.

• S Corporation Insurance Premiums. Two-percent shareholder-employees are entitled to take a deduction under IRC §162(1) for accident and health insurance premiums if: the premiums are paid or reimbursed by the S corporation and reported on the shareholder-employee’s Form W-2; premiums are included in the gross income and reported on Form 1040; the plan providing medical care coverage for two-percent shareholder-employees is established by the S corporation. Rev. Rul. 2008-1, 2008-2 I.R.B. 251.

• Allocation of Prepaid Qualified Mortgage Insurance Premiums. Individual taxpayers may allocate prepaid premiums ratably over the shorter of: (1) the stated term of the mortgage, or (2) 84 months, beginning with the month in which the insurance was obtained, to determine the amount treated as deductible qualified residence interest for 2007 under IRC §163(h)(4)(F). The Treasury and IRS have determined 84 months to be an appropriate allocation period after reviewing comments received from representatives of the mortgage insurance industry. Notice 2008-15, 2008-4 I.R.B. 313.

• Online Helps for 2008 Tax Filers. IRS has enhanced two electronic tools, Publication 17 and “Where is My Refund?”  The Publication 17 enhancements now allow taxpayers to more quickly navigate the information contained in it. “Where is My Refund?” a refund-tracking tool, is now available in Spanish as well as English.

• Foreign Currency Exchange-Traded Notes. An instrument that requires the payments to be made in a foreign currency is euro-denominated indebtedness of the issuer for U.S. federal income tax purposes because the payments are determined exclusively by reference to the U.S. dollar’s value in the foreign currency and market interest rates with respect to the foreign currency. Rev. Rul. 2008-1, 2008-2 I.R.B. 248

• Bond-Factor Amounts.  Rev. Rul. 2008-2 provides bond-factor amounts for calculating the amount of bond considered satisfactory under IRC §42(j)(6) or the amount of U.S. Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified low-income buildings or interests therein during the period January through March 2008. Rev. Rul. 2008-2, 2008-2 I.R.B. 247.

• Procedure for Determination Letters and Rulings.  IRS has set forth procedures for issuing determination letters and rulings on the exempt status of organizations under IRC §501 and 521. These determination letters and rulings are issued in response to applications for recognition of exemption from federal income tax and will apply to revocation or modification of determination letters or rulings. Rev. Proc. 2008-9, 2008-2 I.R.B. 258.

• Foreign Tax Credit; Mexican Single Rate Business Tax. IRS and the Treasury Department are evaluating whether the Impuesto Empresarial aTasa Unica (IETU), a single rate business taxrecently adopted by Mexico effective January1, 2008, is a creditable income tax for the relief of double taxation. Pending the outcome of this study, IRS will not challenge a taxpayer’s claim for a foreign tax credit. Any change in the foreign tax credit treatment of the IETU as a result of this study will be prospective, and apply solely to the IETU paid or accrued in taxable years beginning after the date that further guidance is issued.

• Wash Sales of Stock and Securities. The loss from selling stock or securities and causing the taxpayer’s IRA or Roth IRA to purchase substantially identical stock or securities within 30 days before or after that sale is disallowed under IRC §1091. The taxpayer’s basis in the IRA or Roth IRA is not increased under IRC §1091(d). Rev. Rul. 2008-4, 2008-3 I.R.B. 272.

• Transitional Relief for Certain Trusts. Transitional relief has been provided for trusts that have become private foundations under §1241(c) of the Pension Protection Act of 2006 and disqualified as Type III supporting organizations under IRC §509 (a) (3). These trusts may continue to file Form 990 for taxable years beginning before January 1, 2008. They will not be required to file an information return on Form 990–PF or pay excise taxes on investment income under IRC §4940 until their first taxable year beginning on or after January 1, 2008. For their first annual return on or after Jan.1, 2008, they must file paper Form 990-PF with the writing “Notice 2008-6” at the top of the form. Notice 2008-6, 2008-3 I.R.B. 275.

• Frivolous Positions Subject to Penalties. IRS has listed positions that it considers frivolous for the purpose of identifying a “frivolous tax return” under IRC §6702(a) and the penalty for a “specified frivolous submission” under IRC §6702(b). Notice 2008-14, 2008-4 I.R.B.310.

• Employment Tax Adjustments and Refund Claim. Proposed amendments to IRC §6205(a) and 6413(a) would modify the process for making interest-free adjustments of both underpayments and overpayments of taxes under the Federal Insurance Contributions Act (FICA), the Railroad Retirement Tax Act (RRTA), and Federal income tax withholding .These amendments would also modify the process for filing claims for refund of overpayments of employment taxes under IRC §§6402 and 6414. These amendments are proposed in connection with the IRS’s development of new forms to report adjustments to employment taxes and would affect taxpayers who file Forms 941, 944, 945, and CT-1. Taxpayers would continue to be permitted to file claims for refund in lieu of making interest-free adjustments for overpayment of employment taxes. A public hearing is scheduled for April 17, 2008. REG-111583-07, 2008-4 I.R.B. 319.

• Substantiating Lump-Sum Charitable Contributions. To substantiate a deduction for a lump-sum charitable contributions made through the Combined Federal Campaign (CFC) or a similar program, §170(f)(17) requires a taxpayer to maintain a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. The IRS and Treasury expect to issue regulations under §170 incorporating the recordkeeping requirements of §170(f)(17). Taxpayers may rely on this notice to comply with §170(f)(17) until those regulations are effective. Notice 2008-16, 2008-4 I.R.B. 315.

• Disclosure and Use of Tax Return Information by Tax Preparers. Regulations issued under IRC §7216 finalize rules for taxpayers to consent to the disclosure or use of their tax return information by tax return preparers, requiring that tax return preparers give taxpayers specific information including who will receive the tax return information and the particular items of tax return information that will be disclosed or used. The regulations are applicable to disclosures or uses of tax return information occurring on or after January 1, 2009. T.D. 9375, 2008-5 I.R.B. 344

LEGISLATION

• Economic Rescue Plan. Congress has passed an economic rescue plan that will rush rebates—$600 for individuals, $1,200 for couples—to most taxpayers. Individuals making up to $75,000 a year and couples earning up to $150,000 will get full rebates. Also, it will speed $300 checks to low-income people, including disabled veterans and the elderly. This plan will also cut business taxes, by increasing the deductions allowed for business spending, in hopes of reviving the economy. The rebate checks are expected to go out in early May, 2008. 

LOOKING AHEAD

• Economic Substance Codification in 2008. Treasury and Senate Finance Committee officials expressed expectations that Congress will codify the economic substance doctrine in 2008 to deter tax abuse. 

• Circular 230 Revision Projects. Treasury is considering adopting a principles-based approach to the Circular 230 revision projects on tap for 2008. The general principles can help avoid the problems that occur in devising a policy stance that must be applied across different areas of tax law. 2008 TNT 15-8.

• Economic Stimulus. With administration officials citing the need to spur economic growth, President Bush used his fiscal 2009 budget proposal, released February 4, to urge once more that Congress permanently extend his 2001 and 2003 tax cuts. Making Bush’s tax cuts permanent would lock in reduced rates on capital gains and dividends, make permanent the repeal of the estate tax, and make permanent the increased child tax credit, all of which are scheduled to expire at the end of 2010. 2008 TNT 24-1

—Kathryn J. Sedo
—Yang Connita Yang
University of MinnesotaLawSchool

TORTS & INSURANCE
JUDICIAL LAW

• Insurance Coverage: Drop-Down Auto Insurance Provision. The Minnesota Court of Appeals has held that an automobile insurance policy that reduces bodily injury coverage for resident family members to the minimum statutory amount is valid and enforceable.

Plaintiff-insured and her daughter commenced a declaratory judgment action following a one-car accident in which the plaintiff’s son was driving a vehicle with his parents (the insureds) and plaintiff’s daughter and her fiancé as passengers. The insureds’ policy contained bodily injury liability limits of $300,000 per person or $500,000 per accident. The policy also contained a drop-down limit for bodily injury liability coverage of $30,000 per person or $60,000 per accident when a “covered person” was legally obligated to pay “a member of that covered person’s family residing in that covered person’s household.” The defendant-insurer denied coverage for amounts above the policy’s drop-down limits because claimants were residents of the insureds’ household.

The district court found the drop-down limits unenforceable. The Court of Appeals disagreed, holding the provision valid and enforceable for several reasons. First, the drop-down provision provided the minimum coverage required by Minnesota law. The court next concluded that the phrase “resident of your household” was not ambiguous, and held the provision did not violate the reasonable expectations of the insured.

Despite its ruling that the drop-down provision was enforceable, the Court of Appeals refused to apply the provision to the case at bar. Adhering to the principle that exclusions in insurance policies are narrowly interpreted against the insurer, the court held that a college student living in a different state, who only periodically resided in the insured household, was not a resident of that household, and therefore, the drop-down provision did not apply to limit coverage. Frey v. United Services Automobile Association, A06-2445 (Minn. App. 01/08/08). www.lawlibrary.state.mn.us/archive/ctappub/0801/opa062445-0108.pdf

• Insurance Coverage: Determinations of No-Fault Coverage; Nonassignment Clauses. The Minnesota Court of Appeals recently ruled that a nonassignment clause in an insurance policy may prohibit the assignment of post-loss insurance proceeds and that an insurer does not waive its rights under a nonassignment clause by making payments to the assignee that are compelled by statute.

This case involves ten customers of defendant’s windshield repair company that were insured by plaintiff-insurer. As payment for windshield repair work, defendant accepted an assignment of each customer’s insurance proceeds. When billed by defendant, plaintiff sent defendant a payment for less than the amount billed. Defendant attempted to initiate arbitration under the Minnesota No-Fault Automobile Insurance Act, Minn. Stat. §§63B.41-.71, to determine amounts owed. Plaintiff filed a declaratory judgment action seeking a declaration that the nonassignment clause in its insurance contract prohibited customers from assigning payments to defendant.

The district court issued a temporary restraining order, enjoining the arbitration proceeding, and then denied defendant’s motion to dismiss the declaratory judgment action on the ground that arbitration was not mandatory under the No-Fault Act. The court then granted plaintiff’s motion for summary judgment, finding that the plain language of the nonassignment clause prevented an assignment of rights under the policy.

The Court of Appeals affirmed, holding it was proper for the district court to rule on the coverage issue involving the nonassignment clause before compelling arbitration. The court also agreed that a nonassignment clause can properly restrict the assignment of post-loss proceeds. The court reasoned that if such assignments were permitted, the insurance company would face additional risk that it expressly sought to avoid through the language in the insurance contract. Finally, the court held plaintiff did not waive its rights under the nonassignment clause by making payments directly to defendant. Auto Owners Insurance Co. v. Star Windshield Repair, Inc., A07-972 (Minn. App. 01/08/08). www.lawlibrary.state.mn.us/archive/ctappub/0801/opa070972-0108.pdf

—David Turner
Bassford Remele, A Professional Association