August 2006

ALTERNATIVE DISPUTE RESOLUTION
JUDICIAL LAW

• Arbitrator’s Scope of Authority; Construing Contract. The Star Tribune Company brought an action against the union representing its news and editorial department employees to challenge an arbitrator’s ruling in the union’s favor on a grievance. The grievance alleged that the newspaper breached the collective bargaining agreement (CBA) with the union by publishing a meteorologist’s freelance articles in a section of the paper reserved solely for the work of union members. After the United States District Court for the District of Minnesota denied the newspaper’s motion and confirmed the arbitration award, the newspaper appealed. The United States Court of Appeals for the 8th Circuit held that the arbitrator’s conclusion that placement of expert freelance articles elsewhere in the news section of the paper was inconsistent with the parties’ current practice and not permissible was a reasonable interpretation of the CBA. Further, the arbitrator’s award did not nullify the CBA article allowing the newspaper to employ freelance writers for ten categories of material or create a "location clause" not contemplated by the parties. The Star Tribune Company v. Minnesota Newspaper Guild Typographical Union, 450 F.3d 345 (8th Cir. 06/12/06).

• Arbitration; Nonparticipation by Losing Party. The Iowa Court of Appeals recently held that there was no statutory basis for denying confirmation of an arbitration award despite a complete lack of participation by the losing party in any of the arbitration proceedings. After CACV was awarded $23,391.82 by an arbitrator for a claim against Croy, CACV attempted to confirm the award. Confirmation of the award was denied by an Iowa trial court on four grounds: 1) CACV did not submit a copy of the arbitration agreement; 2) CACV failed to comply with an Iowa statute that required an arbitration award to be delivered by registered mail; 3) there was no evidence that Croy was served with notice of the arbitration hearing; and 4) the court could not determine whether the award was made within 30 days of the arbitration hearing as required by Iowa law. After an appeal by CACV, the Iowa Court of Appeals overturned the trial court, stating that only the nonexistence of an arbitration agreement would justify vacating an arbitration award, and it was clear from the arbitrator’s decision and the motion that an arbitration agreement existed. CACV of Colorado, L.L.C. v. Croy, 2006 WL 1628444 (Iowa Ct. App. 06/14/06).

• Arbitration; Agreement In Employment Handbook. The Ohio Court of Appeals enforced an arbitration policy in an employee handbook because the employee signed a form acknowledging the arbitration agreement and wrote her initials next to the arbitration policy. Corl, who worked for Applebee’s as an assistant manager, was provided with a copy of Applebee’s manager handbook during an orientation session. Included within the handbook were a variety of company policies, including a four-step dispute resolution program (DRP) that culminated in binding arbitration. While closing Applebee’s one evening, Corl was attacked by a former employee who was robbing the restaurant. When Applebee’s denied Corl’s subsequent request for a police escort in the evenings, Corl sued. The trial court granted Applebee’s motion to stay the proceedings pending arbitration. On appeal, Corl argued that she never assented to the arbitration agreement. The court rejected Corl’s argument because Corl initialed the DRP and signed a form acknowledging that she read and understood the terms of the DRP and specifically agreed to binding arbitration as the sole and exclusive method of resolving employment disputes. The court also rejected Corl’s argument that there was no consideration for the arbitration agreement, holding that no consideration was required above and beyond a mutual agreement to arbitrate. Corl v. Thomas & King, 2006 WL 1629740 (Ohio Ct. App. 06/13/06).

— Darin T. Allen
Chair-Elect, MSBA ADR Section

August 2006

CIVIL LITIGATION
JUDICIAL LAW

• Statute of Limitations; Contribution and Indemnity Claims. In this construction defect case, the Supreme Court applies the statute of repose, Minn. Stat. §541.051, subd. 1(a) to bar claims for contribution and indemnity by a general contractor against its subcontractors.

The general contractor was sued in May 2003 by the homeowner who claimed that his home, completed in July 1993, had developed water intrusion and mold problems. In March 2004, the general contractor brought claims for contribution and indemnity against various subcontractors. The district court granted the subcontractors’ motions for summary judgment on the grounds that the contribution and indemnity claims were extinguished by the statute of repose.

The Court of Appeals reversed, on the ground that claims for contribution and indemnity which accrue during the 10th year trigger the two-year extension provision found in subd. 2 of Minn. Stat. §541.051. The Supreme Court reversed the Court of Appeals and remanded to the district court with instructions to reinstate its orders for summary judgment.

First, the Supreme Court acknowledges that the Legislature has created a situation in which the homeowners’ claims against the general contractor may be extended for one or two years, but the general contractor’s rights to make claims for contribution or indemnity are extinguished at the end of ten years, and not subject to extension. Looking beyond Minnesota, the Supreme Court finds that other states have resolved this problem differently and have provided for a continuing remedy to general contractors. The Supreme Court acknowledges that, while the result may seem unfair, the plain meanings of the statutes are not ambiguous and cannot be construed to force a different result. Therefore, the Court holds that the statute of repose bars a claim for contribution and indemnity which has not accrued and has not been brought within ten years from the completion of construction.

Secondly, the Supreme Court rejects the general contractors’ argument that the resulting interpretation violates the contractor’s Due Process rights. The Court holds that the repose provision does have a legitimate legislative purpose and, therefore, does not violate the Due Process clause of either the state or federal constitutions.

Third, the Court rejects the general contractor’s argument that the statute, as applied, violates its equal protection rights under the Constitution.

However, a three-justice concurrence may describe a factual situation in which the statute does deny a general contractor its fair remedies. As noted in the concurrence, where a builder had no time to bring contribution and indemnity claims, because suit was brought by the homeowner against the builder as late as the end of the 12th year after completion of construction, at least three justices suggest that the denial of contribution and indemnity claims to the builder would violate constitutional principles. Weston v. McWilliams & Associates, Inc. v. Tappe Construction 716 N.W.2d 634 (Minn. 2006).

— Andrew T. Shern
Murnane Brandt

August 2006

FEDERAL PRACTICE
JUDICIAL LAW

• Remand; Appeals; 28 U.S.C. §§1447(c) and (d). Mutual fund investors brought multiple putative class actions in the Illinois state courts, and defendants removed all of the cases under SLUSA’s removal provisions. Federal district courts subsequently remanded both cases to the Illinois courts, finding that SLUSA did not preclude these state court actions. Defendants appealed. The 7th Circuit held that 28 U.S.C. §1447(d) did not bar its review of the remand orders, because SLUSA preclusion was "substantive" and distinct from any underlying jurisdictional issue, and that to treat SLUSA remand orders in any other manner would mean that a major substantive issue of federal law would escape review. Noting a split in the circuits on this SLUSA-remand issue, the Supreme Court granted certiorari.

The Supreme Court held that 28 U.S.C. §1447(d) applies to all remands based on the grounds specified in 28 U.S.C. §1447(c), and that a SLUSA-related remand is a remand for lack of subject matter jurisdiction under Section 1447(c). Accordingly, the 7th Circuit lacked jurisdiction over the appeals, and its decision was vacated and remanded with instructions to dismiss the appeal for lack of jurisdiction.

Less than a week later, the 8th Circuit confronted its own similar remand issue. Plaintiffs filed a putative class action in the Missouri courts, and defendants removed based on alleged ERISA preemption. Plaintiffs questioned ERISA preemption and sought to have their claims remanded. However, the district court never reached the ERISA preemption issue, but instead determined that the plaintiffs lacked standing to pursue their claims and remanded the action for lack of subject matter jurisdiction.

Defendants appealed, arguing that once the district court determined that the plaintiffs lacked standing it should have dismissed the action without prejudice rather than remanding it. Plaintiffs moved to strike or dismiss the appeal, arguing that the 8th Circuit lacked jurisdiction over the appeal because the case had been remanded for lack of subject matter jurisdiction. The 8th Circuit agreed, finding that a dismissal due to plaintiffs’ lack of standing was a dismissal for lack of subject matter jurisdiction, and that it lacked appellate jurisdiction under 28 U.S.C. §1447(d).

Both of these decisions arguably broaden the scope of nonappealable remand orders, making it even more difficult for litigants to obtain appellate review of remand orders. Kircher v. Putnam Funds Trust, 126 S. Ct. 2145 (2006). Roberts v. BJC Health System, ___ F.3d ___ (8th Cir. 2006).

• Error Answering Jury Question; Section 1983. The 8th Circuit reversed a jury verdict for the plaintiff in a Section 1983 action, finding the trial court had erred in answering a question posed by the jury during deliberations rather than simply instructing the jury that its question was irrelevant. Conley v. Very, ___ F.3d ___ (8th Cir. 2006).

• Abuse of Discretion; Expert Testimony. The 8th Circuit vacated a jury verdict in a copyright case, finding that the trial court had abused its discretion in admitting purported expert testimony on substantial similarity of expression. Rottlund Co. v. Pinnacle Corp., ___ F.3d ___ (8th Cir. 2006).

• Judicial Estoppel; Standard for Review. Acknowledging that it had never previously decided the issue, the 8th Circuit held that a district court’s application of judicial estoppel is to be reviewed under an abuse of discretion standard. Stallings v. Hussmann Corp., 447 F.3d 1041 (8th Cir. 2006).

• Firm Partner Removed from Steering Committee; Class Action. Chief Judge Rosenbaum sua sponte removed a partner in a recently indicted national law firm as a member of the plaintiffs’ steering committee in a class action. In Re Medtronic, Inc. Implantable Defibrillator Product Liability Lit., ___ F. Supp. 2d ___ (D. Minn. 2006).

• Rule 11; Safe Harbor Requirement. Rejecting the plaintiff’s argument that an intervening appeal made compliance with the safe harbor provisions of Rule 11 "futile," Judge Doty denied the plaintiff’s sanctions motion for failure to comply with Rule 11’s 21-day safe harbor requirements. Steinlage v. Mayo Clinic Rochester, ___ F.R.D. ___ (D. Minn. 2006).

• Amount in Controversy; Failure to Offer Damage Figure. Adopting the Report and Recommendation of Magistrate Judge Graham, Judge Ericksen denied a motion to remand, finding that despite the plaintiff’s failure to offer a damage figure in its complaint, the defendant had met its burden to demonstrate by a preponderance of the evidence that the amount in controversy exceeded $75,000 exclusive of interest and costs. Questar Data Systems, Inc. v. Service Management Group, Inc., 2006 WL 1662961 (D. Minn. 06/14/06).

• Choice of Law; Forum Selection Clause. While acknowledging that the 8th Circuit has yet to definitively decide the issue, Judge Ericksen applied federal rather than state law to determine the enforceability of a forum selection clause. Holm v. Art Leather Manufacturing, Inc., 2006 WL 1662722 (D. Minn. 06/12/06).

— Josh Jacobson
Law Office of Josh Jacobson

August 2006

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Copyright; Expert Opinion; "Similarity of Expression." The 8th Circuit reversed a Minnesota federal district court’s denial of appellant Rottlund’s motion for a new trial and remanded the case because an expert witness was allowed to testify about similarity of expression in a copyright case. Rottlund, a home builder, sued competitor Pinnacle for infringement of copyrights on Rottlund’s architectural design plans. The test for infringement includes whether the infringing work is substantially similar to the copyrighted work. Determining substantial similarity is a two-step analysis involving both similarity of ideas and similarity of expression. During trial, the district court allowed Pinnacle to present expert testimony to disprove "similarity of expression, the only issue of liability remaining." The jury subsequently found no infringement by Pinnacle. On appeal, the 8th Circuit agreed with Rottlund, holding that while "similarity of ideas" may be appropriate for expert opinion, "similarity of expression" is not because it must be measured by the response of the ordinary, reasonable person. Therefore, "expert opinion and analytical dissection" are inadmissible. The Rottlund Co., Inc. v. Pinnacle Corp., 2006 U.S. App. LEXIS 15075 (8th Cir. 2006).

• Patent; "Printed Publications"; 35 U.S.C. §102(b). A divided Federal Circuit denied rehearing en banc this appeal that broadens the scope of "printed publication" for purposes of 35 U.S.C. §102(b). An appellate court panel had previously affirmed Judge Frank’s ruling (02-CV-1761 (D. Minn. 06/16/03)) that "the file wrapper contents of [a] Canadian patent constitute a printed publication," even though the drawings in question were not a part of the issued Canadian patent and were only available for inspection by obtaining the prosecution history in person at the Canadian Patent Office in Hull, Quebec. Judge Linn dissented from the initial appellate panel decision and joined Judge Newman in dissenting from the denial of rehearing en banc, arguing that the drawings "were not available in multiple locations, could not be ordered from the Canadian patent office, were not indexed or cataloged, and their presence cannot be divined from the Canadian patent that eventually issued." Bruckelmyer v. Ground Heater’s, Inc., T.H.E. Machine Co., 2006 U.S. App. LEXIS 16174 (Fed. Cir. 2006).

• Patent Construction; Fuel Systems. The Federal Circuit affirmed the district court’s narrow construction of a patent claim term based on language within the patent, and affirmed summary judgment of noninfringement in favor of ITT. Honeywell sued ITT for infringement of a patent dealing with fuel systems. Honeywell argued that the claim term "fuel injection system component" should be construed broadly to include a fuel filter and other fuel system components. The district court agreed with ITT, however, and narrowed the construction of the claim term to just "fuel filter" based on language in the patent that on four occasions referred to the fuel filter as "this invention" or "the present invention." The patent did not describe a fuel filter as simply one preferred embodiment of the invention, it was the invention. "The public is entitled to take the patentee at his word and the word was that the invention is a fuel filter." Honeywell Int’l, Inc. v. ITT Indus., Inc., 2006 U.S. App. LEXIS 15553 (Fed. Cir. 2006).

• Patent Infringement; Injunctive Relief; Four-Factor Test. The Federal Circuit vacated a preliminary injunction citing the recent Supreme Court decision in eBay v. MercExchange, 126 S. Ct. 1837 (2006) (permanent injunction case covered in July Bench & Bar at 42). Abbott sued ANDRX and Teva for infringement of patents related to pharmaceuticals. Abbott moved for and was granted a preliminary injunction on the grounds that Teva was infringing two of Abbott’s patents. The Federal Circuit, citing eBay v. MercExchange, applied the traditional four-factor test of preliminary injunctions. The Federal Circuit held that the district court erred because Teva raised substantial questions as to the validity of Abbott’s patents, and Abbott, as the moving party, failed to establish a sufficient likelihood of success on the merits. Since Abbott failed to establish a likelihood of success on the merits, "the public interest was best served by denying the preliminary injunction." Abbott Labs. v. ANDRX Pharms., Inc., and Teva Pharms. USA, Inc., 2006 U.S. App. LEXIS 15554 (Fed. Cir. 2006).

— Tony Zeuli
— Mike Maza
Merchant & Gould

August 2006

JUVENILE LAW
JUDICIAL LAW

• Adoption; Same Sex Foster Parents; Arkansas. The nationwide controversy on same sex marriage continues to seep into the world of adoption. The Arkansas Supreme Court on June 29, 2006, upheld a lower court decision that a Department of Human Services regulation banning homosexuals from being foster parents was unconstitutional. The justice from that court who wrote the majority decision stated that there is no correlation between the health, welfare and safety of foster children and the blanket exclusion of homosexuals from being foster parents. This ban was instituted in March of 1999 by the Child Welfare Agency Review Board. The decision of the Arkansas Supreme Court upheld the lower court’s ruling that the ban violated separation of powers and the rights of equal protection, privacy and intimate association guaranteed by both the state and federal constitutions. Department of Human Services v. Howard, No. A05-814 (Arkansas 06/29/06).

• Delinquency; Adult Certification; Blakely. In an appeal from an adult-certification order, the appellant minor child argued that because adult certification exposes a juvenile to a potentially greater sentence if convicted, he has a 6th Amendment right to a jury determination of any facts supporting that certification under the United States Supreme Court decision of Blakely v. Washington. The Court of Appeals, in a published decision, held that because the constitutional protections available to the juvenile arise from the Due Process Clause of the 14th Amendment and not from the 6th Amendment, and because adult certification is a pretrial jurisdictional determination, a juvenile does not have a 6th Amendment right to a jury determination of facts supporting adult certification. In the Matter of the Welfare of J. C.P. Jr., A05-1294, (Minn. App. 07/03/06). www.lawlibrary.state.mn.us/archive/ctappub/0607/opa051294-0703.htm

• Termination of Parental Rights. Parents of minor children appealed from a denial of a motion for a new trial following the termination of their parental rights. They argued that the district court should have granted a continuance based on late disclosure of exhibits and the fact that a settlement collapsed the day before trial, that the court failed to require proper foundation for exhibits admitted as business records, admitted irrelevant and prejudicial exhibits, allowed leading questions, and that the court erred by terminating their parental rights. The Court of Appeals disagreed and affirmed the lower court’s decision. The Court of Appeals stated that where the parents failed to show how a continuance would have helped their case, there were two trial dates separated by more than 20 days which allowed sufficient time to review late disclosed exhibits, and where clear and convincing evidence supported each of the district court’s findings on the statutory basis for termination, the district court did not abuse its discretion by denying a continuance and did not in terminating parental rights. In the Matter of the Welfare of the Children of V.H. and E.S. Jr., Parents, A05-2348 (Minn. App. 06/20/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0606/opa052348-0620.htm

LEGISLATION

• Intercountry Adoptions. The Intercountry Adoption Reform Act (ICARE) was reintroduced into the United States Senate on April 4, 2006, by Sen. Arlen Specter as one of several amendments to the controversial immigration reform bill ("Securing America’s Borders Act")(S.2454). The ICARE measure would establish an Office of Intercountry Adoptions (IAO) in the State Department and confer automatic citizenship to children upon entry of a final adoption decree, rather than upon entry into the United States. The original ICARE Bill (S.1934) was introduced in the Senate in November of 2003, with a revised version reintroduced a year later. The current version is pending further action once the Senate comes back into session. To read the Immigration Reform Bill and ICARE Amendment, go to http://thomas.loc.gov/ and search for S.2454 and S. AMDT.3192.

• Termination of Parental Rights; Adoption. The adoption code was amended in Minn. Stat. §259.24, Subd. 6 (a) to provide that in cases where the county attorney has commenced a termination of parental rights action, but resolves the action by having the parents consent to an adoption in lieu of termination, that consent becomes irrevocable upon proper notice to both parents of the effect of their consent to adopt and acceptance by the court. The only exception to this is that if the court makes written findings that the consent was obtained by fraud.

• Adoption; Communication and Contact Agreements. The adoption code provisions regarding communication and contact agreements post adoption were amended to provide that for children under state guardianship, a written communication or contact agreement between prospective adoptive parents and birth relatives (other than the birth parents themselves) must be included in the final adoption decree, unless all parties agree to omit it. If adoptive parents or birth relatives do not comply with the communication or contact agreement, then the court is empowered to determine the terms of any ongoing communication or contact. See Minn. Stat. §259.58

— Gary A. Debele
Walling, Berg & Debele

August 2006

REAL PROPERTY
JUDICIAL LAW

• Special Assessments; Waiver of Procedure. In this, one of two cases addressing similar issues, property owners applied to the city for approvals for a residential subdivision. As part of the process, they agreed in writing that the city would install improvements and property owners would pay a particular assessment. In the agreement, property owners waived their right to notice of a public hearing, the right to a public hearing, and the right to object to the assessment. In a later dispute over the validity of the assessment, the district court ruled that it was valid and that the city was entitled to recover the assessment. The Court of Appeals reversed. The appellate court observed that the assessment was not levied by the city council as required by law, but rather was only in an agreement signed by the mayor. On the issue of waiver, the court held that the property owners "did not, and could not, waive the procedure by which an assessment is levied." Because the function is a legislative one delegated only to the council, the assessment was invalid. Reversed. Metropolitan Airports Comm’n v. Bearman, A05-2041 (Minn. App. 07/03/06). www.lawlibrary.state.mn.us/archive/ctappub/0607/opa052041-0703.htm

• Special Assessments; Waiver of Objections. An unpublished decision of the Court of Appeals, issued a few weeks prior to Bearman, supra, involved similar issues but yielded a decision potentially at odds with Bearman. As in Bearman, the developer contracted with the city, agreeing to certain improvements and a corresponding assessment. The developer also agreed to waive all procedural and substantive objections to the assessments, including objections as to the required hearings or amount of assessment. The developer later sought to challenge the assessments. The district court upheld the assessments on a number of grounds, one of which was that the developer had waived the right to object to the assessments. The Court of Appeals affirmed. On appeal, the developer argued that the waiver provision was unenforceable because it was contrary to public policy. In rejecting the argument, the court held that as long as the exculpatory clause was unambiguous and did not excuse the party from intentional, willful or wanton acts, it would be enforced. The court did not directly address the issue touched upon in Bearman of whether, through a waiver from the property owner, the city could deviate from the procedure conferred in the statutory authority to assess. Affirmed. Woodland Development Corp. v. City of Andover, A05-1636 (Minn. App. 06/13/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0606/opa051636-0613.htm

• Eminent Domain; Recovery of Attorney Fees. According to the Minnesota Court of Appeals, when a condemning authority dismisses its petition to take property, the award of expenses and attorney fees to the property owner is not mandatory. Blue Earth County petitioned to take an easement from private property owners, but subsequently dismissed its petition. Property owners sought to recover attorney fees under Minn. Stat. §171.95, which provides that "[w]hen the proceeding is … discontinued by petitioner, the owner may recover from the petitioner reasonable costs and expenses including attorney fees." The district court denied the motion. In affirming, the Court of Appeals held that the use of the word "may" in the statute, as opposed to "must" or "shall," meant that the award of fees was discretionary. The court further held that the denial of fees was not an abuse of the district court’s discretion. Affirmed. County of Blue Earth v. Wingen, A05-1699 (Minn. App. 06/27/06) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0606/opa051699-0630.htm

LEGISLATION

A number of real property-related statutes have recently been adopted, most taking effect on or before August 1, 2006. Some noteworthy laws included the following:

• Carbon Monoxide Alarms. Effective January 1, 2007 for newly constructed residential property, August 1, 2008 for existing single family dwellings, and August 1, 2009, for all multifamily dwelling units, residential properties must have carbon monoxide alarms. 2006 Minn. Laws Ch. 260.

• Adult Entertainment Establishments. A new law provides restrictions for adult entertainment establishments, including requiring notice of intent to operate such a business, restricting the location and timing of operations, and prohibiting certain convicted criminals from owning or managing them. 2006 Minn. Laws Ch. 240.

• Mandatory Cartways in Cities. Under certain circumstances, upon a petition by a property owner, a statutory or home rule charter city must establish cartway access to the property, provided that the petitioner pays for the costs of the cartway, including the costs of taking the land to establish the cartway. This is similar to an already existing law applicable to townships. 2006 Minn. Laws Ch. 236.

— C. J. Deike
Edina Realty Home Services

TAX
JUDICIAL LAW

• Capital Loss Carryback Refund Claims; Special Limitations Period. In a case of first impression, the Federal Court of Claims held that a refund claim was untimely because a net capital loss carryover is not attributable to a carryback for the purposes of the special limitations period under §6511(d)(2)(A). The refund claim was based on a net capital loss carryover under §1212(a)(1)(B). The taxpayer contended the claim was timely because it was attributable to a capital loss carryback. The court read attributable to mean caused or generated by. The court reasoned that because a net capital loss can be carried over to any of the five successive years, even if the taxpayer is unable to carry back the loss to a preceding year, the carryover is not caused or generated by a carryback. Electrolux Holdings Inc. et al v. United States, No. 05-450T (Fed. Cl. 06/22/06).

• Volume Discounts; Gross Income Calculation. The taxpayers included several grocery chains that had frequently entered into contracts to purchase minimum levels of inventory and in return were given a volume discount in the form of cash. The taxpayers treated this cash as a liability at the time of receipt since they were required to return it to the wholesaler if they did not fulfill their purchase obligations. The commissioner claimed these payments constituted income under IRC §61. The court disagreed. Because the taxpayers could have been obligated to repay the discounts, they did not constitute an "accession to wealth" and therefore did not constitute income to the store. There was no need to report the cash discounts in the year of receipt. Westpac Pacific Food et al. v. Commissioner, No. 02-71041 (9th Cir., 2006).

• Cooperative Dividend Payments to Farmers; Deferred Recognition. Taxpayers were members of a farmer cooperative that received both contemporaneous and value-added payments for corn shipments delivered to the cooperative, which subsequently processed, marketed, and sold the corn. The cooperative sent letters to the taxpayers in both 1994 and 1995 inquiring whether the cooperative should refrain from sending the value-added payments until the subsequent year. The taxpayers decided to defer and did not recognize income until the year of receipt. Both the Installment Sales Act and rules of deferred compensation agreements were presented to prove the validity of deferral. The commissioner asserted the payments should have been recognized in the year the cooperative, as the agent of the taxpayers, received payment from the ultimate buyer. Crimmins v. United States, 655 F.2d 135, 138 (8th Cir. 1981). The 8th Circuit found the value-added payments did not constitute "installments" pursuant to an installment agreement; therefore, the ISA was inapplicable. In addition, the agreement between the farmer and the cooperative was found not to constitute a sale, rendering irrelevant the rules of deferred compensation. Because the agent received income on behalf of the farmer, the farmer was required to recognize the income in the year the cooperative received payment. Scherbart v. Commissioner, No. 05-1325 (8th Cir., 2006).

• Conservation Easement Deduction; Limiting Residence Density. Taxpayer was a real estate investor who purchased property in an historic district that was subject to strict county zoning provisions. The taxpayer claimed he was entitled to develop over 60 residences on the 30-acre property. Subsequently, he purported to "limit" the number of residences on the development to 30 in order to claim a deduction for a qualified conservation easement under IRC §170(h)(1). The Tax Court held that the taxpayer did not make a valid contribution of qualified conservation easement under §170(h)(1) because the grant did not satisfy the requisite "conservation purposes." The action of the taxpayer did not "preserve open space or a historically important land area or certified historical structure." The court denied the deduction, and also assessed a 20 percent penalty for negligence under IRC §6662. Turner v. Commissioner, 126 T.C. No. 16 (2006).

• Sale of Future Lottery Payments. The taxpayer won over $12 million in the Colorado state lottery, which was to be paid out in installments over a 25-year period. After receiving several payments, the taxpayer sold his interests in the remaining payments and claimed the lump sum received as a capital gain. The court disagreed. Lottery winnings, whether received initially and wholly in a lump sum or in annual payments, are treated as ordinary income under the tax code. The lump sum received by the taxpayer constituted a "substitute" for the ordinary income to be received by the taxpayer, not a reclassification of the income. There was no capital transaction involved, therefore the taxpayer could not claim the lump sum as a capital gain. Watkins v. Commissioner, No. 04-9016 (10th Cir., 2006).

• Early Retirement Payments; FICA. Plaintiffs were a class of teachers who, subsequent to resigning from their positions in order to receive early retirement benefits, claimed the severance payments received did not constitute "wages" for FICA purposes. The issued reached the 6th Circuit after the Eastern and Western district courts of Michigan had produced alternate determinations as to the classification of these payments. The 6th Circuit held the payments did constitute "wages" because they fell within the definition of FICA wages as "all remuneration for employment" under 26 U.S.C.S. §3121(a). The court focused on the fact that the payments had been earned through service and were merely an inducement to retire early. Thus, the payments were appropriately taxable under FICA. Appoloni v. United States, Nos. 04-2068 (6th Cir., 2006).

• Tax Evasion; Specific Intent; Previous Conviction. Commissioner brought action against a taxpayer for under-reporting his income with the intent to evade taxes in three different years. The commissioner claimed the taxpayer’s previous tax-related convictions were sufficient to establish the intent necessary in this case. The 11th Circuit disagreed. While specific intent had been found in relation to the previous convictions, the commissioner failed to prove by clear and convincing evidence that the taxpayer had that specific intent for the years in question here. The court stated that collateral estoppel did not apply because the issue of intent was distinct in each case. McGowan v. Commissioner, No. 05-13751 (11th Cir., 2006).

• Proper Levy Process; "Levy" vs. "Offset." Taxpayers were a husband and wife who asserted the IRS failed to utilize the statutory levy process when it sought to offset their joint income tax refund against a prior business-related tax debt owed by the husband. The Tax Court rejected their claim for lack of jurisdiction, and on appeal the 1st Circuit reviewed the case to determine whether the 1998 revisions to the Tax Code eliminated the historical distinction between a "levy" and an "offset" and therefore required the same procedural protections for both. IRC §6330 states that Tax Court jurisdiction is limited to instances in which taxpayers obtain the written "notice of determination" that is issued by the Appeals Office following a hearing. The court stated that even after the 1998 revisions, traditional "offset" actions were intended to remain distinct and therefore are not subject to the new procedural protections for levies. Thus, the court upheld the Tax Court’s decision to dismiss for lack of jurisdiction. Boyd v. Commissioner, No. 05-13751 (1st Cir., 2006).

• Automatic Stay Relief; Claims Related to LLC. Petitioners were owners of an LLC that had gone into bankruptcy. They attempted to acquire automatic stay protection for the debtor and the bankruptcy estate under 11 U.S.C. 362(a)(8) (2000). The commissioner argued the referenced automatic stay provisions were inapplicable because petitioner has filed no petition with the bankruptcy court and is not a debtor therein. The key issue in the case was whether a Tax Court proceeding instituted by an LLC should be viewed as "concerning" debtor members of the LLC within the meaning of 11 U.S.C. §362(a)(8). The Tax Court concluded it does not. Because this proceeding concerned the LLC’s employment tax liabilities and not the individual tax liabilities of the husband and wife, the automatic stay provision did not apply to this proceeding. Accordingly, any such relief could not be provided by the Tax Court. People Place Auto Hand Carwash v. Commissioner, 126 T.C. No. 19 (2006).

• Promissory Note Between Parents and Child; Nonbusiness Bad Debt Deduction. Taxpayers contributed $97,000 to their son in order to purchase a pet store, $55,000 of which was raised by mortgaging their home and $42,000 through savings. The son subsequently signed a promissory note to his parents to repay the $55,000 mortgage. Soon after the son gained ownership of the store, competition moved into the area and the son was ultimately forced into bankruptcy. The parents then attempted to treat the $55,000 as an IRC §166(d) nonbusiness bad debt deduction, which was opposed by the commissioner. Even though the promissory note was executed between parent and child, the court was satisfied that a genuine debtor/creditor relationship existed and that the note was a "valid, legal, enforceable obligation that was due on demand." Because there was a valid debtor/creditor relationship, the deduction under §166(d) was valid. Alt v. Commissioner, T.C. Summ. Op. 2006-96.

• State Divorce Decree Insufficient for Establishing Dependency. Taxpayer had divorced from his first wife. Though the wife was initially given custody of their one child, the state court subsequently issued a judgment modifying the divorce decree regarding the petitioner’s support obligations and ability to make dependency deductions. The decree specifically stated that the husband was to receive the dependency deduction on his tax return. There was no question that the petitioner supported the child for the year in question, and the taxpayer attempted to make a dependency deduction under IRC §151 by sending the state decree with his tax return. The commissioner asserted that the state documents supporting the tax treatment in regard to the taxpayer did not meet the federal requirements set out in Form 8332. The court went on to confirm that state courts, by their decisions, cannot determine issues of federal tax law. Because the taxpayer failed to submit the proper materials, the deduction for the years in question was upheld. Colozza v. Commissioner, T.C. Summ. Op. 2006-97.

• Business Deductions; Proprietorship Scam. Taxpayer was a 50 percent owner of a corporation and the sole owner of a proprietorship, both of which shared the name Worldwide Technology Solutions. During the years in question, the corporation generated and reported hundreds of thousands of dollars in income while the proprietorship simultaneously claimed none. Still, the taxpayer claimed business losses related to the operation of the proprietorship and made deductions on his personal tax return. The commissioner rejected these deductions on the grounds that the taxpayer was unable to establish the proprietorship constituted a separate business entity. The court stated that the proprietorship had no clients, no income, no records, and the taxpayer did not make any attempts to promote the business other than to retain an office — which was partially paid for by the corporation. Under such circumstances, the losses of the proprietorship could not be called ordinary and necessary business expenses. The personal deductions were denied. Pillay v. Commissioner, T.C. Summ. Op. 2006-95.

• Nonprofessional Gamblers; Reporting Income, Deductions. Taxpayer did not purport to be a professional gambler, though she did earn in excess of $13,400 in gambling income for the year in question. The taxpayer believed these earnings did not need to be reported since they were exceeded by gambling losses for that year and did not include the earnings on her tax return. The commissioner disagreed and claimed the taxpayer was required to report the income and to make itemized deductions for any related losses. Such treatment of gambling winnings and losses has the effect of increasing the tax liability for social security purposes. The court held that whereas a professional gambler may deduct losses under IRC §162, gamblers who are not professionals may only deduct losses on an itemized basis. The circumstances surrounding the taxpayer were not such as to establish a trade or business; therefore, only itemized deductions are allowed. Spencer v. Commissioner, T.C. Summ. Op. 2006-95.

• Cert. Denied. In denying certiorari, the U.S. Supreme Court recently: 1. Declined interlocutory review in a summons enforcement action. Jerome Gipetti v. United States, Sup. Ct. Dkt. 05-1231 (06/26/06); Declined to review whether the Tax Injunction Act violates the 1st Amendment right to petition for redress of grievances. Robert L. Schulz v. Washington County Board of Supervisors et al., Sup Ct. Dkt. No. 05-1331 (06/26/06).

ADMINISTRATIVE DEVELOPMENTS

• Revoking Section 83(b) Elections. The IRS has issued guidance regarding the factors that must be present in order for a taxpayer to receive commissioner consent to revoke an election previously filed under IRC §83(b). A §83(b) election cannot be revoked without the consent of the commissioner. The new guidance clarifies that "consent will only be granted where the person filing the election is under a mistake of fact as to the underlying transaction and must be requested within 60 days of the date on which the mistake of fact first became known to the person who made the election." The guidance also discusses instances in which consent will not be available. Rev. Proc. 2006-31.

• Worker Classifications. The IRS has issued a fact sheet to employers regarding proper worker classifications in response to the large number of workers hired in the wake of several natural disasters. The agency states that the main factor in determining whether a worker is an "employee" or an "independent contractor" continues to be the control the employer exercises over that individual, though all facts and circumstances will be considered. Form SS-8 and IRS Headliner 152 should also be referenced when making and amending classifications. FS-2006-21.

• New Tax Tool for Customized Source Book Information. The IRS has begun testing a Prototype Tax Stats Table Wizard, which allows users to view published Source Book data tables and to compose custom data tables with data extracted from the published tables. The prototype tool will use data from 1999 and 2000 Corporate Source Books, though the final version would be expected to incorporate data from additional forms. The agency does caution that the program is still in the developmental stage and encourages users to offer feedback. www.irs.gov

• Charitable Organization Status; Offering Lifetime Planning to Persons with Disabilities. In a private letter ruling, the IRS denied IRC §501(c)(3) status to a corporation designed to facilitate lifetime planning for persons with disabilities. The ruling states that because the organization provides benefits to specific individuals, as opposed to the public in general, it is not eligible for §501(c)(3) status. The agency urged that the key issue was not whether serving the disabled is a charitable purpose, but whether the activities result in a more than insubstantial benefit to private individuals and whether the institution had been organized and operated for a nonexempt purpose. The business in this case did not meet the necessary requirements. Priv. Ltr. Rul. 2006-21-025.

• Election Season; Tax Exempt Organizations. The IRS is cautioning charities and other tax-exempt organization to avoid making political contributions related to the upcoming elections. Tax-exempt institutions under IRC §501(c)(3) are not allowed to participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office. This restriction includes actions to endorse candidates, distribute statements for or against candidates, raise funds for or donate to candidates or become involved in any other supportive or opposing activity. IR-2006-87.

• Reporting Requirements Eased. The IRS announced more than 20 regulatory revisions designed to decrease the reporting burdens of corporations and their shareholders. Most of the revisions were developed in order to overcome the impediments to e-filing by these parties, which the agency views as a key component of improving efficiency and regulation. IR-2006-83.

• Safe Harbors for Individuals; Casualty and Theft Losses. The IRS has developed safe harbor provisions under Treasury Reg 1.165-7(a)(2)(i) in regard to determining the amount of casualty and theft loss deductions allowed for personal-use residential real property and personal belongings that were damaged, destroyed, or stolen in the 2005 Gulf hurricanes. The three provisions establish varying calculations based on cost indexes, personal belongings and personal use property. Rev. Proc. 2006-32.

• Determining FICA Applicability. The IRS has issued final regulations regarding the FICA treatment of payments made for service not in the course of the employer’s trade or business, for domestic service in a private home of the employer, for agricultural labor, and for service performed as a home worker. The final regulations are meant to provide guidance as to the time and payment amount standards used to determine whether payments are subject to FICA. TD 9266.

LEGISLATION

• Tracking Down Sex Traffickers. The Senate Finance Committee has approved a new "Pimp Tax" that has the potential to drastically increase punishments imposed on offenders by establishing that the failure-to-file provision applies per failure. The bill’s proponent, Chuck Grassley, said the bill would use the federal tax code to put behind bars criminals who make money in the underground economy by selling sexual access to girls and women. The bill passed the Finance Committee by a unanimous vote, and many members are hoping it will provide the same impact on sex trafficking that the harsh rules on drug trafficking have produced. Press Release, "Committee Approves Grassley Legislation to Stop Illegal Sex Trafficking with Tax Code Violations," Senate Committee on Finance (06/28/06).

LOOKING AHEAD

• Vote on Estate Tax Reduction Delayed in the Senate. Senate Majority Leader Bill Frist delayed the vote on a proposal that would make most multimillionaires exempt from federal estate taxes. The bill, which eliminates taxes on the first $5 million of an individual’s estate and cut taxes for others, passed in the House by a vote of 269-156 on June 22. Frist’s concern in bringing the bill to a vote in the Senate is that there will not be enough Democratic votes for it to pass. The law currently is applicable to approximately 12,500 estates — less than one percent of the population — and a repeal of the tax would affect all but 2,800 thousand estates. Ryan Donmoyer, "Senate Delays Vote on Estate Tax Reduction," Bloomberg (06/27/06).

• Potential Improvements in Customer Service. As part of its continuing plan to improve services provided to taxpayers, the IRS announced it would be conducting 50,000 interviews in June and July on topics ranging from customer service to the effectiveness of its forms and publications. The surveys are part of a long-terms IRS project, Taxpayer Assistance Blueprint, engineered toward improving the service. IR-2006-95.

— Kathryn J. Sedo
University of Minnesota Law School

August 2006

TORTS & INSURANCE
JUDICIAL LAW

• Jurisdiction: Insufficient Service of Process and Expiration of Statute of Limitations. Plaintiff failed to obtain personal service in a medical malpractice action. Defendant moved to dismiss the claims on the basis of insufficiency of process and expiration of the statute of limitations. Plaintiff argued that because he conceded that he did not obtain personal service on defendant, the court could only dismiss the claims without prejudice and lacked jurisdiction to decide the statute of limitations issue. The district court nonetheless dismissed the complaint with prejudice, finding that the statute of limitations barred the action. The Court of Appeals affirmed, holding that district courts have jurisdiction to determine the substantive effect of a statute of limitations on parties that have not been served with process. Plaintiff was precluded from tolling the statute of limitations under Minn. Stat. §541.13 because he failed to pursue a diligent search for defendant. Robert Mercer v. Steven Anderson, M.D., et al., A05-1103, (Minn. App. 06/06/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa051103-0606.htm

• Experts; Expansion of Statutory Time Periods. Plaintiff brought suit against defendant design firm on the basis of defects in a large exhibit tank at an aquarium. Plaintiff failed to timely file the affidavit of expert review required to maintain a claim against certain professionals under Minn. Stat. §544.42. The court determined that while plaintiffs did not comply with time limits set forth in the expert review statute, extending the time to file the affidavit was proper under Minn. R. Civ. P. 6.02 which provides for the extension of time limits based on excusable neglect.

The Court of Appeals affirmed. The court acknowledged that parties asserting professional negligence are bound by the rules and time limitations regarding expert-disclosure requirements under Minn. Stat. §544.42. However, the court determined that the procedural nature of statutory time limitations required them to be read in conjunction with Minn. R. Civ. P. 6.02, which allows trial courts to expand statutory time periods upon a showing of excusable neglect. Thus, even though the statutory time period to submit an affidavit of expert review had expired, it was proper for the court to extend the time under the procedural rule, based upon the showing made in this case. Lake Superior Center Authority, et al. v. Hammel, Green & Abrahamson, Inc., A05-800 & A05-1533, (Minn. App. 06/06/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa050800-0606.htm

• Res Judicata; Claim Splitting. Plaintiff filed two lawsuits against defendant about a year apart. The first lawsuit was dismissed by the district court, but was remanded on appeal to determine an issue regarding expert testimony. The facts of the second lawsuit were very similar to, but not identical to, those in the first lawsuit. The defendant moved to dismiss the second lawsuit, alleging it was precluded by the doctrine of res judicata. The district court agreed with the defendant, finding that res judicata applied and stated that plaintiff’s second lawsuit was "a recasting of the earlier complaint." Plaintiff appealed.

The Court of Appeals found that the district court erred by dismissing the second lawsuit on res judicata grounds because, due to the remand of the first lawsuit, a final judgment was never entered on that suit. The defendant then argued that even if res judicata did not bar plaintiff’s second lawsuit, it should be dismissed because the plaintiff was prohibited from "splitting" its cause of action, meaning that a plaintiff may not bring successive suits involving the same set of factual circumstances. The defendant also urged the court to adopt the prohibition against claim splitting as an affirmative defense separate from the doctrine of res judicata. The court declined to do so, explaining that Minnesota law is clear that the prohibition against claim splitting is based on res judicata. The court found no case law connecting the claim-splitting prohibition to any other rule or doctrine, and reversed the district court’s judgment dismissing plaintiff’s second lawsuit. Brown-Wilbert, Inc., et al. v. Copeland Buhl & Co., P.L.L.P., et al., A05-1952, (Minn. App. 06/13/06). www.lawlibrary.state.mn.us/archive/ctappub/0606/opa051952-0613.htm

• Employment: Wrongful Discharge in Violation of Public Policy. Plaintiff, who was both an employee and a member of defendant nonprofit corporation, brought an action claiming that he was wrongfully discharged as an employee because he voted as a member of the corporation. Plaintiff claimed that the discharge was a wrongful discharge in violation of public policy under Minnesota common law. The district court concluded that plaintiff had failed to state a claim under Minn. R. Civ. P. 12.02(e), determining that Minnesota’s Whistleblower Act precludes all common law wrongful discharge claims.

The Court of Appeals found that the Whistleblower Act does not preclude common law wrongful discharge claims, but affirmed the district court, concluding that the scope of such claims, as articulated by Phipps v. Clark Oil & Refining Corp., is limited to situations in which an employee is fired for refusing to violate a law, regulation, or rule.

The Minnesota Supreme Court agreed with the Court of Appeals and held that the Whistleblower Act does not preclude common law wrongful discharge actions premised on Phipps, but nonetheless found that the plaintiff’s claim failed under Minn. R. Civ. P. 12.02. The Court explained that the public policy at issue must be clear in order to justify a common law cause of action, noting that the plaintiff did not point to any clear public policy that supported a cause of action for employees who are discharged in retaliation for exercising their voting rights as nonprofit members. Chris Nelson v. Productive Alternatives, Inc., A04-1691, (Minn. 06/15/06). www.lawlibrary.state.mn.us/archive/supct/0606/opa041691-0615.htm

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