April 2007

ENVIRONMENTAL LAW
JUDICIAL LAW

• CERCLA; Cost Recovery for Voluntary Cleanups. On January 19, 2007, the United States Supreme Court agreed to review a ruling by the 8th Circuit Court of Appeals that a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §9601 et seq. ("CERCLA") who voluntarily cleans up contamination has an implied right to contribution for recovery of its costs under §107(a) of CERCLA. In so doing, the Court presumably will resolve the current split among the federal circuits on this issue. Atlantic Research Corp. v. United States of America, 459 F.3d 827 (8th Cir. 2006); Supreme Court Docket No. 06-562. (To date, the U.S. courts of appeals for the 2nd and 7th circuits also have found an implied right of contribution under §107(a). Consolidated Edison Co. of New York v. UGI Utilities, Inc., 423 F.3d 90 (2d Cir. 2005); Metropolitan Water Reclamation District of Greater Chicago v. North Am. Galvanizing & Coatings, Inc., 473 F.3d 824 (7th Cir. 2007). The U.S. Court of Appeals for the 3rd Circuit found no such implied right. E.I. du Pont de Nemours & Co. v. United States, 460 F.3d 515 (3d Cir. 2006).)

• Clean Water Act; Use of Mechanized Equipment in Wetlands. On January 30, 2007, the U.S. District Court for the District of Columbia enjoined the U.S. Army Corps of Engineers ("COE") and the U.S. Environmental Protection Agency ("EPA") from enforcing the so-called "Tulloch II" rule, which required a permit for the use of mechanized earth-moving equipment in wetlands unless the activity resulted in fallback of only small volumes of material. According to the court, the volume of fallback material is irrelevant and cannot be the basis for requiring a permit.

Section 301 of the Clean Water Act ("CWA"), 33 U.S.C. §1321 et seq., prohibits the discharge of any pollutant into waters of the United States without a permit. Id. §1311(a). "Discharge" is defined as the "addition" of a pollutant to waters of the United States. Id. §1362(12). Pursuant to its authority under the CWA, the COE requires permits for the discharge of dredged or fill material into waters of the United States. §323.3(a). In 1993, the COE issued a new rule ("Tulloch I") that defined discharge to include all redeposits of dredged material. In 1998, the Court of Appeals for the District of Columbia held Tulloch I invalid on grounds that the statutory term "addition" did not encompass situations where dredged material is removed and a portion of the material falls back to substantially the place from which it was removed. National Mining Ass’n. v. United States Army Corps of Engineers, 145 F.3d. 1399 (D.C. Cir. 1998). The COE and EPA subsequently issued a new rule ("Tulloch II") under which the use of mechanized earth-moving equipment in wetlands was presumed to result in the discharge of dredged material unless project-specific evidence showed that use of the equipment resulted in the redeposit or "fallback" of only "small volumes" of dredged material to substantially the same place as the initial removal. 33 C.F.R. §323.2(d)(2)(I); 40 C.F.R. §232.(2)(I). The district court held Tulloch II invalid on grounds that the rule impermissibly requires the volume of fallback to be small in order to avoid regulation. According to the court, the volume of material is irrelevant in determining whether fallback constitutes an "addition" of dredged material within the meaning of the CWA. "Conceivably," the court said, "the operator of a shovel removing 500 tons of dirt could accidentally drop all 500 tons back to the earth without redepositing anything." National Ass’n of Home Builders v. U.S. Army Corps of Engineers, (D.D.C. No. 01-124, 01/30/07).

• MEPA; "Material Evidence" Defined. The Minnesota Court of Appeals for the first time has provided a definition as to what constitutes "material evidence" in support of a request for an Environmental Assessment Worksheet ("EAW") under Minn. Stat. §116D.04, subd. 2a(c). In that case, a citizens group petitioned the Environmental Quality Board ("EQB") asking that a development project in Benton County be required to complete an EAW. The Benton County Board of Commissioners, which was the responsible governmental unit, ultimately denied the petition. It did so because it determined that the project did not have the potential for significant environmental effects and that any potential environmental effects would be controlled through state regulatory and permitting authority over the project’s wastewater and water-supply systems. The group brought a declaratory judgment action in district court challenging the petition’s denial. The district court, in granting summary judgment to the Board, concluded that the project as proposed did not have the potential for significant environmental effects and, therefore, an EAW was not required. The group then appealed the summary judgment dismissal of their action.

As a threshold matter, the Court of Appeals had to determine whether the group had satisfied the criteria under the Minnesota Environmental Protection Act ("MEPA") that requires the preparation of an EAW. Minn. Stat. §116D.04, subd. 2a(c) requires that an EAW regarding a proposed project be prepared whenever a petition signed by 25 or more individuals is submitted to the EQB before the project has received final approval by the appropriate governmental units. In addition to the above requirements, subdivision 2a(c) also requires that the petition be supported by "material evidence" that demonstrates that there may be potential for significant environmental effects stemming from the project due either to its nature or its location. Despite this requirement, the Court of Appeals noted that neither MEPA nor the rules interpreting it defined the term "material evidence." It then went on to conclude that "material evidence" means "such evidence as is admissible, relevant and consequential to determine whether the project may have the potential for significant environmental effects." It further stated that "material evidence" is "evidence that is both admissible in an administrative proceeding before a state agency and relevant and consequential to whether the project may have the potential for significant environmental effects." The Court of Appeals upheld the denial of the EAW petition when it found that none of the evidence the citizens group offered in support of its petition met the court’s new standard of "material evidence." Watab Township Citizen Alliance v. Benton Co. Bd. of Commissioners, __ N.W.2d __, 2007 WL 582989 (Minn. App. 2007).

— Robert Devolve
Leonard Street and Deinard
— Bill Hefner
The Environmental Law Group

FEDERAL PRACTICE
JUDICIAL LAW

• Punitive Damages; Due Process. In the latest of its numerous recent decisions addressing the limits on punitive damages under the Due Process Clause, the Supreme Court held that the Due Process Clause prohibits the use of punitive damages to punish a defendant for harm to nonparties. Notably, the Court declined to decide whether an award of $79.5 million in punitive damages was "grossly excessive" where the award of compensatory damages was $821,000. Philip Morris USA v. Williams, 127 S. Ct. 1057 (2007).

• Removal; Remand; "Other Paper"; Fraudulent Joinder; Amount in Controversy. A number of recent decisions address various aspects of removal and remand. The 8th Circuit reversed the denial of a motion to remand an action that had been removed on the basis of alleged fraudulent joinder of a nondiverse defendant, finding that there was a "reasonable basis" for believing that the nondiverse defendant might be liable to the plaintiff. Wilkinson v. Shackelford, ___ F.3d ___ (8th Cir. 2007).

The 8th Circuit reversed the denial of a motion to remand an untimely removal, holding that an intervening court decision in an unrelated case was not an "order or other paper" sufficient to recommence the removal period under 28 U.S.C. §1446(b). Dahl v. R.J. Reynolds Tobacco Co., ___ F.3d ___ (8th Cir. 2007).

Judge Frank denied a motion to remand a diversity action, finding "it more probable than not" that the amount in controversy exceeded $75,000. Vision Trading, LLC v. Spanton, 2007 WL 628342 (D. Minn. 02/14/07).

• Stay vs. Abstention; Appealable Order. On an appeal from an order by Judge Tunheim staying proceedings in Minnesota pending action by an Austrian court, the 8th Circuit held that the order was not equivalent to an immediately appealable abstention order, nor was the order appealable under the collateral order doctrine. Accordingly, the appeal was dismissed for lack of jurisdiction. Kreditverein Der Bank Austria Creditanstalt Für Niederösterreich Und Bergenland v. Nejezchleba, ___ F.3d __ (8th Cir. 2007).

• Personal Jurisdiction; Foreign Corporation; Limited Sales. Judge Davis held that a British corporation that had sold a single machine to a distributor knowing that it would end up in Minnesota was subject to personal jurisdiction in an action brought by an individual who was injured while using the machine. Vang v. Whitby Tool & Eng’g Co., 2007 WL 522304 (D. Minn. 02/15/07).

• Fed. R. Civ. P. 12(b)(6); Judicial Notice of Public Records. The 8th Circuit affirmed a Fed. R. Civ. P. 12(b)(6) dismissal, finding that the trial court properly relied on public records in dismissing the action without first converting the 12(b)(6) motion to a motion for summary judgment. Levy v. Ohl, ___ F.3d ___ (8th Cir. 2007).

• Attorney Fees; Prevailing Party; 42 U.S.C. §§1983 and 1988. Judge Davis denied parties’ cross-motions for attorney fees in a §1983 action, finding that the plaintiff was not a "prevailing party" entitled to attorney fees, and that the defendant was not entitled to fees because the action was not "frivolous, unreasonable, or groundless." Advantage Media, L.L.C. v. City of Hopkins, 2007 WL 270426 (D. Minn. 01/29/07).

• Rule 11 Sanctions; Motion Denied. Judge Doty denied a motion for Rule 11 sanctions, concluding that the plaintiff’s opposition to a motion to dismiss one claim consisting of "two sentences bereft of any substantive legal argument" did "not rise to the level of unprofessional conduct that might warrant Rule 11 sanctions." R & A Small Engine, Inc. v. Midwest Stihl, Inc., ___ F. Supp. 2d ___ (D. Minn. 2007).

• Admission of Expert Testimony; Fed. R. Evid. 702. Two recent decisions in the District of Minnesota addressed challenges to the admission of expert testimony under Fed. R. Evid. 702.

Judge Schiltz struck both of the insurer’s experts in a product liability action where the "critical issue" in the case involved the thermal properties of a component in an allegedly defective toaster oven, listing seven "problems" with the experts’ opinions and ultimately finding that the experts "can be of no help to the jury on that critical issue." Hughes v. Black & Decker (U.S.), Inc., 2007 WL 624333 (D. Minn. 01/24/07).

Judge Davis denied a motion exclude the plaintiff’s damages expert, finding that the expert’s assumptions were reasonable, and that he would assist the jury to understand how certain factors could impact the plaintiff’s alleged lost profits. SuperValu Inc. v. Associated Grocers, Inc., 2007 WL 624342 (D. Minn. 01/03/07).

• Abstention; Declaratory Judgment. Judge Davis granted the defendants’ motion to dismiss a federal declaratory judgment action on grounds of abstention in favor of an earlier filed state court action. Travelers Indem. Co. v. Bundul, 2007 WL 424098 (D. Minn. 02/02/07).

— Josh Jacobson
Law Office of Josh Jacobson

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patent Ownership; Valuation; Diversity Jurisdiction. Judge Frank denied plaintiff Vision Trading’s motion to remand a dispute over patent ownership to state court. Vision Trading sued the personal representative of the estate of John Spanton in Minnesota state court seeking a declaration determining the Spanton Estate’s rights in Vision Trading and declaring Vision Trading the true owner of U.S. Patent No. 7,047,578. The defendant, a resident of Arizona, removed the case to federal court on the basis of federal question and diversity jurisdiction, and the plaintiff filed a motion to remand the case back to state court. Although the defendant conceded that there was no federal question jurisdiction, the court held that diversity jurisdiction existed because the parties were citizens of different states and the defendant established by a preponderance of the evidence that the amount in controversy (the value of the patent and the value of the estate’s interest in Vision Trading) exceeded $75,000. To determine the value of the patent, the court examined actions taken after the patent issued and upfront development costs incurred, such as contracting with a marketing company to promote the patented product, seeking new investors, and planning for promoting the patented product. This, together with the Spanton Estate’s substantial monetary contribution to Vision Trading, made it more probable than not that the amount in controversy exceeded $75,000. Vision Trading, LLC v. Spanton, Civ. No. 06-3775 (D. Minn. 02/14/07).

• Copyright Infringement; Software Licensing Agreement; Direct vs. Indiret Profits. Judge Frank granted plaintiff Piper Jaffray’s motion for summary judgment dismissing SunGard’s copyright infringement claim for Piper’s continued use of SunGard software after termination of the parties’ software licensing agreement. The agreement provided that following termination, Piper would stop using the software and return it to SunGard. The court held that because this provision covered Piper’s allegedly infringing use of the software, any resulting damages were subject to the terms of the agreement. The agreement barred liability for indirect damages of any kind for any breach. The court rejected SunGard’s argument that it sought direct damages in the form of profits earned by Piper as a result of unauthorized use of the software. Relying on the Copyright Act to distinguish between direct and indirect profits, the court reasoned that SunGard failed to allege that Piper earned any profits by selling the copyrighted work (direct profits). Instead, SunGard’s only alleged that Piper earned profits by using the copyrighted work to sell another product (indirect profits). Thus, the copyright infringement claim was barred by the agreement. Piper Jaffray & Co. v. SunGard Systems International, Inc., Civ. No. 04-2922 (D. Minn. Feb. 16, 2007).

LOOKING AHEAD

• Patents; "Obviousness" Test. In November 2006, the Supreme Court heard oral arguments on the legal test for obviousness. Currently, the Federal Circuit’s standard for obviousness under 35 U.S.C. 103 requires some teaching, suggestion, or motivation that would have led a person of ordinary skill in the art to combine the relevant prior art teachings. During the oral arguments, the justices were extremely critical of the test. Justice Scalia called the test "gobbledygook" and "irrational." Chief Justice Roberts referred to the test as "less than meaningless." Justice Breyer said he read the briefs 15 or 20 times but could not understand the meaning of "motivation." If these comments are any indication, the Supreme Court’s forthcoming opinion will change the standard for obviousness. Teleflex Inc. v. KSR Int’l Co., 298 F. Supp. 2d 581 (E.D. Mich. 2003); KSR International v. Teleflex, Inc., 04-1152 (Fed. Circ. 01/06/05) (unpublished); cert. granted __ U.S. __ (06/26/06). Dkt. No. 04-1350.

— Tony Zeuli
— Sarah M. Stensland
Merchant & Gould

JUVENILE LAW
JUDICIAL LAW

• Juvenile Delinquency; Certification to Adult Court. In an unpublished decision, the Court of Appeals reviewed a district court finding of probable cause to believe that a 17-year-old minor had aided and abetted a first-degree burglary and found that he had failed to meet his evidentiary burden to rebut the presumptive certification to adult court. The Court of Appeals held that even though the juvenile’s delinquency petition covered charges relating to a series of residential burglaries over a three-month period and the juvenile was not a minor participant, the district court erred in its consideration of the seriousness and culpability factors. Because presumptive certification is based solely on the charge of first degree burglary, the district court’s focus on the entire series of charges against the juvenile, including separate offenses to which the presumption of certification does not apply, impermissibility extended the reach of the statutory factors. The court went on to hold that although the district court’s application of the seriousness and culpability factors might not, standing alone, be sufficient to require a remand for redetermination, the findings regarding two other factors were at variance with the applicable law. As a result, the Court of Appeals reversed and remanded to the district court for appropriate proceedings in line with the legal standards required for certification of a minor to adult court. In the Matter of the Welfare: B.A.D., child, A06-1776 (Minn. App. 02/27/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0702/opa061776-0227.htm

• Juvenile Delinquency; Certification. In another unpublished decision, the Court of Appeals again reviewed a juvenile certification matter. Here the district court had determined that the juvenile was one of the primary planners and perpetrators of an armed robbery. The victim of the crime had also reported that the masked juvenile, together with another masked gunman, pointed a gun at his face, and robbed him in a public park. At the time of the offense, the juvenile that was the subject of this proceeding was 16 years old. The juvenile had ten prior juvenile adjudications, three adult convictions, and numerous disciplinary problems in school and in various treatment programs. Furthermore, the juvenile’s VREG score indicated that he was likely to reoffend. There also were few placement options available in the juvenile system because the juvenile was 19 years old at the time of the trial. The Court of Appeals affirmed the district court’s determination certifying this matter for adult prosecution. In the Matter of the Welfare of: J.B.S., A06-1555 (Minn. App. 02/13/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0702/opa061555-0213.htm

• EJJ; Certification Denied. In an unpublished Extended Jurisdiction Juvenile (EJJ) case, the state challenged the district court order denying a motion for presumptive certification by arguing that the district court erred in its findings on the public safety factors and abused its discretion by denying the motion to certify. A juvenile had fired shots at two men who were fleeing his home after vandalizing the exterior, he fatally wounded one of the vandals. In denying the state’s request for certification, the district court found that the juvenile’s culpability was lessened by the unintentional nature of the crime, the juvenile’s youth and impulsivity, the "imperfect defense of self and home," the juvenile’s remorse, as well as the juvenile’s minimal prior record. The court also held that the juvenile system provided better options for addressing the youth’s gang involvement. The district court also found that the juvenile system offered adequate punishment and programming. The Court of Appeals held that the district court did not abuse its discretion in determining that the juvenile met his burden of proving that public safety would be served by retaining the matter as EJJ. In the Matter of the Welfare of: A.C.L., A06-1489 (Minn. App. 02/13/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0702/opa061489-0213.htm

• Child Protection; Compliance with Case Plan. In an unpublished decision, the Court of Appeals reviewed a guardian ad litem’s challenge to a district court order dismissing a petition alleging that two minor children were children in need of protection or services. The guardian ad litem argued that the district court failed to consider the statutory criteria alleged under the child protection statute, erred by not concluding that the children were in need of protection or services, and also erred by finding that the parent had substantially complied with the case plan. In affirming the trial court’s dismissal of the petition, the Court of Appeals held that where the child was temporarily removed from the home after the mother failed to obtain medical care for the child’s accidental injury and the court continued the case to allow the mother to comply with the case plan and correct the conditions that led to the filing of the CHIPS petition, the record supported the district court’s finding that the mother had substantially complied with the case plan. In the Matter of the Welfare of the Children of: L.D. and J.C., parents, A06-1596 (Minn. App. 02/13/ 07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0702/opa061596-0213.htm

• Child Protection; Dangerous Environment. In another unpublished decision, the Court of Appeals reviewed a challenge by a mother who alleged that neither the findings nor the record of the trial court supported the adjudication of her children as being in need of protection or services based on the children’s environment being dangerous to the children. The Court of Appeals, in affirming that decision, observed that where several of the mother’s children were present in the home on the night she was involved in a domestic incident with a former boyfriend, where the district court found that the mother’s testimony that the children slept through the incident was not credible, and where the mother failed to comply with almost every condition in the protective services order and case plan, the evidence supported the finding that the children were indeed in need of protection or services. In the Matter of the Welfare of the Children of: N.M., parent., A06-1304 (Minn. App. 02/13/07) (unpublished). www.lawlibrary.state.mn.us/archive/ctapun/0702/opa061304-0213.htm

• Child Custody; Child Protection; Best Interest Factor. In an unpublished decision, the Court of Appeals reviewed a district court’s denial of the county’s petition to transfer legal custody of a minor child to the child’s father in the context of a child protection matter directed at concerns within the mother’s home. The mother and father of the child were never married and were not living together at the time the county intervened in the mother’s situation. Here the district court found that the mother had corrected the conditions that led to the child’s out-of-home placement through compliance with her case plan. The father argued, however, that the trial court applied the wrong standard by not considering the best interest custody factor and instead holding that the best interest factors were not relevant unless the mother, who was the custodial parent, failed to correct the conditions that led to the out-of-home placement. The Court of Appeals agreed with the court’s legal analysis, holding that the district court properly determined that a best interest analysis is not appropriate unless the mother, the custodial parent, failed to correct the conditions that led to the out-of-home placement. However, the Court of Appeals reversed and remanded the matter. It held that the evidence did not support the district court’s findings that the mother had corrected the conditions that led to the child’s out-of-home placement where the mother was not in compliance with her case plan, the evidence indicated that the mother will continue to use the child to provide day care for her younger siblings, and there was evidence that the mother had not been forthright about her living situation. In the Matter of the Welfare of the Child of: J.A.C. and L.H.S., A06-1663 (Minn. App. 03/06/07) (unpublished).

— Gary A. Debele

Walling, Berg & Debele

TAX
JUDICIAL LAW

• Real Property: Sugar Beet Plant Valued. The Minnesota Tax Court sustained the assessor’s valuation of a sugar beet plant in Renville. The plant was situated on 600-plus acres and consisted of buildings, warehouse, bins, tanks, and silos. First, the court applied Minn. Stat. §272.03, subd. 1(c)(iii) to determine whether a structure is taxable real property by using the three-part test: (1) has walls, ceilings, roofs, or floors, and (2) provides building-like functionality including structural, insulation, or temperature control functions, or (3) provides protection from the elements, even if it also has special features distinct from that of a building. The court found that the tanks, silos, bins, etc. were real property. Second, the court found that the highest and best use of the plant was as an improved continued use as a sugar beet processing facility. Third, the facility was "special purpose" property since it had a unique function or design, was unlikely to be sold in the market (i.e., limited market property), and its conversion to other uses would require either a large capital investment or a substantial loss in the investment value of the property’s special features. Fourth, the court upheld the assessor’s valuation as of January 2, 2003 of $20.168 million and January 2, 2004 assessment of $20.134 million and rejected claims of unequal assessment since both experts’ appraisals were incomplete under the cost approach. Southern Minnesota Beet Sugar Coop. v. County of Renville, C5-04-286 and CV-05-100, 2006 Minn. Tax LEXIS 32 (Minn. T. Ct. 12/22/06).

• Real Property: Public Charity Exemption for Daycare Facility. The Minnesota Tax Court held that a daycare facility owned by Rainbow Childcare Center, Inc. was exempt from real property taxation as an institution of purely public charity under Minn. Stat. §272.02, subd. 7 for real property taxes for the assessments for the January 2, 2004 and January 2, 2005 years on property located in Redwing, Minnesota. The court used the six factors to determine whether an organization qualified for exemption as an institution of purely public charity found in North Star Research Institution v. County of Hennepin, 236 N.W.2d 754, 757 (Minn. 1975). Under the Rainbow Childcare Center, Inc., v. County of Goodhue, C9-05-706 and CV-06-743, 2007 WL 148839 (Minn. T. Ct. 01/18/07).

• Real Property: Valuations of Industrial Vacant Lots. The Minnesota Tax Court increased the value of vacant industrial lots as of January 2, 2004 from $108,222 to $201,000; from $107,400 to $198,000; and $118,700 to $225,000 and accepted the assessor’s value for the lots for assessments on January 2, 2005 at $121,900, $121,000, and $133,800. The court also increased the valuation of an income-producing property for the January 2, 2005 assessment year from $576,300 to $637,000. The court accepted the fact that the highest and best use of the vacant lots was as industrial property and for the income-producing property as commercial. Although the court normally uses the traditional approaches of cost, income, and sales to determine market value, it relied solely on the sales approach since the subject properties were vacant. Hallberg Marine, Inc. v. County of Chisago, CV-05-343 and 13-CV-06-312, 2007 Minn. Tax LEXIS 2 (Minn. T. Ct. 01/16/07).

• Real Property: Exemption from Tax as "Public Hospital." The Minnesota Tax Court, on a motion for partial summary judgment, granted the exemption from property taxes as a "public hospital," pursuant to Minn. Stat. §272.02, subd. 4, for a laboratory, radiology unit, emergency room, and hospital pharmacy of the Cambridge Medical Center. However, the court denied the out-patient/clinic portion of the building from property tax status because of factual issues that need to be determined at a trial. Allina Medical Clinics v. County of Isanti, C1-02-396, C9-03-558 and C5-04-471, 2007 WL 221241 (Minn. T. Ct. 01/25/07).

• Property Tax: 60-Day Rule. The Minnesota Tax Court dismissed Kohl’s property tax petitions for 2003, 2004, and 2005 for failure to provide information required under Minn. Stat. §278.05, subd. 6(a) ("60-Day Rule"). Citing the recent decision in Kmart Corporation v. County of Stearns, 710 N.W.2d 761 (Minn. 2006), the court rejected the taxpayer’s contentions that it did not "know" what was to be provided or that the 60-Day-Rule was unconstitutionally vague. Kohl’s Department Stores, Inc. v. County of Dakota, C5-04-7628, C9-05-7318, and 19-C7-06-7635, 2007 WL 329159 (Minn. T. Ct. 01/29/07).

• Real Property: Agricultural Exemption for Beekeeping Activities. The Minnesota Tax Court held that 42 acres of land kept by the owner for his beekeeping operation including processing the honey qualified for the agricultural exemption under Minn. Stat. §273.13, subd. 23(c). While the taxpayer also rented a portion of the property for billboard display, that use only involved a minimal amount of land and was not enough to change the classification to commercial for the 2005 assessment year. Leonard Schmieg v. County of Chisago, 13-CV-06-92, 2007 Minn. Tax LEXIS 8 (Minn. T. Ct. 02/07/07).

• Real Property Taxes: Discovery; Third Parties’ Real Property Lease and Income Data. The Minnesota Tax Court granted taxpayer’s motion to compel third party real property lease and income data subject to Minnesota Governmental Data Practices Act but denied the taxpayer’s request to have the county discover other city assessor’s third party records. The court used the balancing test set forth in EOP-Nicollet Mall, LLC v. County of Hennepin, 723 N.W.2d 270 (Minn. 2006). Kmart Corporation v. County of Anoka, C1-03-4234, et al., 2007 Minn. Tax LEXIS 10 (Minn. T. Ct. 02/26/07).

• Procedure: Failure to Comply with Timely Appeal. The Minnesota Tax Court dismissed the taxpayer’s individual income tax appeal for the year 2002 for failure to file within the statutory 60-day period. The taxpayers mailed their petition on the last day but it was not received by the Tax Court until three days after the filing deadline and the court held that Minn. Stat. §271.06, subd. 2 requires actual receipt of an original petition with the Tax Court prior to the expiration of the 60-day appeal. Eugene Wiebesick and Gwendolyn Wiebesick v. Commissioner of Revenue, 7864-R, 2007 WL 329151 (Minn. T.Ct. 01/31/07).

• Procedure: Amendment of Timely Filed Petition. The Minnesota Tax Court allowed the taxpayer to amend a timely filed petition under Rules of Civil Procedure 15.01 when justice so requires and there was no prejudice to the other party. American Crystal Sugar Company v. County of Pope, C1-05-574, C3-05,575, CX-06-373, and C4-06-367, 2007 WL 220863 (Minn. T.Ct. 01/25/07).

• Procedure: Noncompliance with Pretrial Procedure. A petitioner/appellant must initiate the pretrial conference call with the Minnesota Tax Court. If you are unable to reach the other party, you need to notify the court immediately. If you are more than 15 minutes late or you fail to call in for your pretrial hearing, you will incur a $250.00 fine. Imposition of fines became effective January 1, 2007.

• Excise Tax; Unemployment Benefits; "Experience-Rating Transfer." In an Order of Affirmation, the Minnesota Department of Employment and Economic Development held that Kforce Flexible Solutions, to whom certain temporary employees were transferred from its parent Kforce, Inc. but without transfer of physical assets, carried over the experience rating of Kforce, Inc. The department originally accepted the notification of change in successor but two years later indicated that it had made an error and that successorship in the experience rating of the parent Kforce would apply. The hearing examiner rejected the arguments of the taxpayer that the determination of successorship had become final and the department was precluded from reopening it two years later after it had become final; that Kforce did not substantially transfer all of its assets to solutions since it had made an error in that the listed 87 percent of its assets was for the transfer of the temporary employee staffing and not for hard assets; and the department was estopped from changing Kforce Solution’s succession determination after it became final. On direct appeal to the Minnesota Court of Appeals by a writ of certiorari, the court affirmed, finding the record reasonably supports the unemployment law judge’s conclusions that the Minnesota Department of Employment and Economic Development had jurisdiction to amend its succession determination because it was correcting its own error in the computation or assignment of relator’s tax rate. Kforce Flexible Solutions, LLC v. Department of Employment and Economic Development, 766005, WL 656458 (Minn. App. 03/06/ 07).

• Income Tax: Minnesota Tax on Indian Member from Wages Earned on Reservation in Wisconsin. The Minnesota Tax Court held that the taxpayer was a "resident" of Minnesota and therefore wages he earned on the Indian reservation located in Wisconsin were properly includible in Minnesota. The court held that a resident of Minnesota could be taxed on his rural-wide revenues. The taxpayer failed the domicile tests set forth in Dreyling v. Commissioner of Revenue, 711 N.W.2d 491 (Minn. 2006) and therefore was a resident of Minnesota. Gordon C. Thayer and Sheila E. Thayer v. Commissioner of Revenue, 7724R, 2007 WL 609532 (Minn. T. Ct. 02/26/07).

• Disclosure of Taxpayer Information. Court granted the IRS summary judgment and held that incorrect information disclosed by the IRS under a tax treaty with Japan did not run afoul of IRC §6103. Aloe Vera of America Inc. et al. v. United States, CV 99-1794-PHX-JAT, 99 AFTR 2d ¶2007-895 (D. Ariz. 2007).

• Request for Disclosure of IRS Documents in KMPG Criminal Case. Court concluded that the prosecution in the criminal case against former KPMG executives did not have to disclose documents purportedly showing that IRS personnel did not know if there was a legal duty to register tax shelter BLIPS transactions. United States v. Jeffrey Stein et al., SI 05 Crim. 0888, 99 AFTR 2d ¶2007-951. (S.D.N.Y. 2007).

• Freedom of Information Act ("FOIA") Request for TAs. Court held that 8 of 34 technical assistance memorandums ("TAs") sought by Tax Analysts in a FOIA suit against the IRS must be disclosed but that the remaining documents were properly withheld under the deliberative process privilege encompassed in FOIA Exemption 5. Tax Analysts v. IRS, 96-2285, 99 AFTR 2d ¶2007-XXXX (D.D.C. 2007).

• Stock Options Exercise Date. Court held that the exercise of employee stock options by third party debt is a taxable event and the taxable date is not on the date the options were sold. Cidale v. U.S., 05-51372, 99 AFTR 2d ¶2007-411 (5th Cir. 2007). See also, Jonathan Palahnuk et ux. v. U.S., 2006-5069, 99 AFTR 2d ¶2007-794 (Fed. Cir. 2007), U.S. v. Tuff, 469 F.3d 1249 (9th Cir. 2007); and Racine v. Commissioner, T.C. Memo 2006-162 (2006) (cases consistent with Cidale; exercise date is taxable event).

• Deduction for Advice Fees Paid by Trust. The 2nd Circuit determined investment advice fees incurred by a trust are not fully deductible from the trust’s adjusted gross income and the court denied a request to reconsider its ruling. William Rudkin Testamentary Trust v. Commissioner of Internal Revenue, 05-5151-ag, (2nd Cir. 10/10/06). See also, Federal Circuit in Mellon Bank N.A. v. United States, 265 F.3d 1275 (Fed. Cir. 2001), and 4th Circuit in Scott v. United States, 328 F.3d 132 (4th Cir. 2003) (cases held that because investment advice and management fees are commonly incurred by individual taxpayers outside of trusts, they are not exempt under IRC §67(e)(1) and are required to meet the 2 percent floor). Cf. O’Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993) (investment fees are not subject to the base of 2 percent of A.G.I.).

• Son-of-BOSS Shelter. Loan transactions that were part of a tax shelter ("Son-of-BOSS") lacked economic substance and were shams. Klamath Strategic Investment Fund, LLC v. U.S., 5:04-CV-278, 99 AFTR 2d ¶2007-850 (D. Tex. 2007).

• Sole Shareholder/Employee Advance to Corporation; Deductibility. The 9th Circuit affirmed a Tax Court decision holding that a sole shareholder/employee of a bankrupt corporation was entitled to a business bad debt deduction for advancing money to it in the course of this employment. However, the court agreed with the Tax Court that the deduction was a miscellaneous itemized deduction subject to the 2 percent floor, not an adjustment to gross income as the employee had contended. Graves, 04-75843, 99 AFTR 2d ¶2007-480 (9th Cir. 2007).

• Threshold for Small Case Procedures; Collection Actions. Tax Court held that its small tax case procedures do not apply to a collection action where the total tax exceeds $50,000. It reached this result even though the tax owed for any one single year of the multiple years involved in the case did not exceed $50,000. Schwartz, 128 TC No. 2 (2007).

• Retroactive Application of Nexus Changes; Michigan. In a one-sentence order reversing a Court of Appeals opinion, the Michigan Supreme Court reinstated a trial court opinion that allowed the retroactive application of the single business nexus test announced in Gillette Co. v. Department of Treasury, 198 Mich. App 303, 519 N.W.2d 156 (1993), to a tax year before the release of that decision during which the commissioner had in place an interpretive ruling favorable to the taxpayer’s tax challenge. International Home Foods, Inc. v. Department of Treasury, 130542 - 130543 (Mich. 01/05/07).

• U.S. Tax Court Changes. The U.S. Tax Court has implemented or is proposing amendments to its Rules of Practice, some of which are set forth below. See the court’s website, www.ustaxcourt.gov, for the text of proposed rule amendments.

1. A proposed amendment to Rule 25(b) of the U.S. Tax Court’s Rules of Practice and Procedure would include the District of Columbia’s Emancipation Day, April 16, as a legal holiday. As under IRC §7503, the court’s rules provide that deadlines that fall on a Saturday, Sunday, or legal holiday are timely if met by the next business day, and that holidays observed in the District of Columbia are treated as legal holidays for purposes of this rule.

2. The court has adopted an amendment to its Rule 173 "Pleadings", requiring the filing of answers by the commissioner in all small tax cases. The amendment is effective for small tax cases in which the petitions are filed after March 13, 2007.

3. The court also proposed amending the rules on privacy and public access to electronic files, including procedures to keep sensitive taxpayer information such as Social Security numbers, birth dates, names of minor children, and financial account numbers from being published on the Internet. Although taxpayers’ sensitive personal information will not be available to the public via the Internet, parties and their counsel still will have electronic access to all case documents, and there will be no restriction on access to files at the court’s reading room. Remote access by the public will be to the court docket and to orders and opinions. Other changes that practitioners may notice are the elimination of the requirement for multiple copes of a petition and a new Form 13, Notice of Intervention, for use by the nonrequesting spouse when the former spouse seeks court review of an IRS decision to deny relief from joint and several liability under IRC §6015. The new rules include a provision directing parties requesting admissions to warn the opposing party that silence is deemed an admission.

• Certiorari Granted. The Supreme Court granted review in some controversial tax-related cases. Some of these are set forth below:

The Court agreed to review a case involving New York City’s efforts to collect millions of dollars in unpaid property taxes levied against buildings owned by the governments of India and Mongolia. At issue is whether Foreign Sovereign Immunity Act bars tax collection actions against foreign governments. The Permanent Mission of India to the United Nations et al. v. City of New York, 466 F.3d 365 (2nd Cir. 2006), Dkt. 06-134, cert. granted (01/19/07).

The Court agreed to review the decision by the Federal Circuit that the U.S. Tax Court has exclusive jurisdiction over a taxpayer’s request for interest abatement under IRC §6404(h). While the Court of Appeals for 9th, 10th, and 11th circuits agree with the Federal Circuit, the 5th Circuit has reached a contrary conclusion. Hinck v. U.S., 97 AFTR 2d ¶2336 (C.A. Fed. Cir. 2006), Dkt. 06-378, cert. granted (01/12/07).

The Court is considering whether a person who is not the assessed taxpayer may use IRC §1346 to seek a refund when its funds were seized through a wrongful levy and it had an opportunity to use the wrongful levy procedure under IRC §7426. EC Term of Years Trust v. United States, Dkt. 05-1541, cert. granted (10/27/06).

In another case, the Court agreed to consider whether the Supreme Court of Guam erred in its interpretation of the "aggregate tax valuation" in tying the debt limit on borrowing by the Guam government to the full value of property on Guam rather than to the assessed value and whether the time for filing the petition for writ of certiorari from the Supreme Court is tolled while a petition for writ of certiorari for the same judgment was pending before the U.S. Court of Appeals for the 9th Circuit. The case deals with the definition of "aggregate tax valuation" in determining whether a public debt limit has been reached. Limtiaco v. Camacho, Dkt. 06-116, cert. granted (09/26/06).

ADMINISTRATIVE DEVELOPMENTS

• Income Tax: Filing and Payment Date Deadline. The due date for all Minnesota personal income tax returns and payments normally due on April 15 has been extended for the 2006 tax year to April 17, 2007. Minnesota is providing this extension to conform with the extended IRS deadline.

• Income Tax: Section 199 Status in the States. A January 2, 2007 report from the Center on Budget and Policy Priorities predicts that states which have not decoupled from the IRC §199 domestic production deduction will see their losses double in 2007 because the rate of the deduction increased from 3 percent to 6 percent, effective January 1, 2007 (the rate will increase to 9% in 2010). Currently 28 states allow the deduction, excluding Minnesota which has decoupled. Full text of the report is available at: http://www.cbpp.org/1-2-07sfp.pdf.

• Procedure: Employment/Payroll Taxes. Employers may now submit their Minnesota forms W-2 (and any 1099 with Minnesota withholding) electronically through e-File Minnesota at the same time they file the year-end withholding tax return. Employers with more than 250 employees are required to submit W-2s electronically or magnetically on CD or 3" diskette (tax year 2006 will be the last year magnetic media is allowed). Further, employers that withheld more than $10,000 in fiscal year 2006 (threshold down from $20,000) must make 2007 deposits electronically. Employers must also deposit withholding tax electronically if required to pay any other Minnesota business tax to the commissioner electronically. Employers making supplemental payments to employees, at a different time than regular wages are paid, should not use the tax tables provided in the employer guide to determine how much to withhold on those payments. Instead, regardless of the number of withholding allowances the employee claimed, the employer should multiply the supplemental payment by 0625. The result is the amount to withhold. Additional information is available at: http://www.taxes.state.mn.us/taxes/withholding/index.shtml.

• International Taxation for Individuals. IRS released Publication 593 and Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. They discuss provisions of U.S. federal income tax law that apply to U.S. citizens and resident aliens, who live or work abroad (taxpayers abroad), and who expect to receive income from foreign sources.

• Life Insurance Transfers to and From Grantor Trust. A new ruling explains the tax consequences of a transfer, from one grantor trust to another, and from a nongrantor trust to a grantor trust, of life insurance insuring the trust grantor’s life. In both cases, the ruling concludes that the life insurance transfer-for-value rules do not apply, thereby ensuring that the policy proceeds paid at death will be fully excludable under IRC §101. Rev. Rul. 2007-13, 2007-11 IRB.

• New Pension Act Distribution Rules. IRS issued its first wave of guidance on the many qualified plan distribution changes made by the Pension Protection Act of 2006. The notice, in Q and A format, covers eight Pension Act changes. Notice 2007-7, 2007-5 IRB; IR 2007-7.

• Rollover Option for Nonspouse Beneficiaries of Qualified Plan Account. IRS issued new guidance on the new law allowing rollovers to be made from qualified plans to a nonspouse beneficiary’s inherited IRA. Such rollovers are permitted for post-2006 distributions under the Pension Protection Act of 2006. IRS’s interpretation of the nonspouse rollover provisions carries some surprises. For example, a plan may, but is not required to, offer rollovers to nonspouse beneficiaries. Notice 2007-7, 2007-5 IRB; IR 2007-7.

• Nontaxable Transfers from IRAs to Charity. IRS explained how IRA owners and beneficiaries age 70 and older can make nontaxable 2006-2007 transfers to charity under IRC §408(d)(8). IRS’s interpretation of the nontaxable transfer provision is quite liberal. It permits each spouse to make an up-to-$100,000 tax-free transfer. Notice 2007-7, 2007-5 IRB; IR 2007-7.

• Gain Recognition Rule; Acquisitive Reorganization. IRS ruled that the gain recognition rule of IRC §357(c)(1) does not apply to a transaction that qualifies as an acquisitive reorganization, notwithstanding that it also qualifies under IRC §351 (dealing with tax-free transfers to controlled corporations). Rev Rul 2007-8, 207-7 IRB.

• Telephone Excise Tax Refunds. IRS stated that early filings indicate that some individuals have requested large and apparently improper long-distance telephone tax refunds. It is investigating potential abuses and IRS will aggressively take action against those claiming improper refunds and their return preparers. IR 2007-16.

• Distribution of Money in Redemption of Partner’s Interest. A partnership began the process of liquidating a departing partner’s interest. As part of the process, the partnership formed a limited liability company and such LLC purchased a house in which the departing partner wished to dwell. To complete the transaction, the LLC transferred the house to the taxpayer in exchange for his interest in the partnership. The parties took the position that the provisions of IRC §732 and IRC §732 applied and, since no money or marketable securities were conveyed to taxpayer, (i) the liquidation of his interest in the partnership did not give rise to any current tax consequences, and (ii) the taxpayer’s basis in the house would be equal to his basis in the surrendered partnership interest. The IRS recharacterized the transactions along the lines set forth in Rev. Rul. 77-321. Thus the Chief Counsel Advice concluded, when the partnership purchased the house it, in effect, distributed money (the currency it employed to acquire the home) for taxpayer. Accordingly, IRC §§731 and 732 were not applicable because the distribution to taxpayer of the home was not a "distribution of property" but was instead a distribution of money the taxpayer then deployed to purchase the home. Chief Counsel Advice 200650014 (09/07/06).

• Circumstances Permitting Reopening Appeals Cases. The IRS issued two policy statements detailing when new issues may be raised in an appeals case and when mutual concession cases may be reopened. IRS will not reopen cases that were closed on the basis of concessions made by both IRS and a taxpayer unless the disposition involved fraud, malfeasance, concealment of material facts, an important mathematical error, or discovery that a return contains unreported income or deductions and credits resulting from a listed transaction. Moreover, IRS will not reopen nonmutual concession cases except under certain circumstances, including when a case’s prior disposition involved fraud, malfeasance, or concealment of a material fact, an important mathematical error, or another circumstance that indicates that failure to take such action would be a serious administrative omission. The IRS also ruled that an agreement of a taxpayer and the IRS to resolve a case will "neither be reopened by Appeals nor should a new issue be raised, unless the ground for such action is a substantial one and the potential effect upon the tax liability is material." IRS Policy Statement (P-8-3) on Reopening Issues in Mutual Concession, N-Mutual Concession Appeals Cases; IRC Policy Statement (P-8-2) on Reopening, Raising New Issues in Appeals Cases.

• IRC §118 Exclusion by Partnerships. The IRS alerted its auditors to request a taxpayer for a list of all IRC §118 exclusions from income. The memorandum to its agent stated that IRC §118 arguments by taxpayers operating in a partnership form should be disregarded. IRC §118 applies only to corporations. LMSB-04-1106-016.

LEGISLATION

• Federal Laws Impacting 2006 Federal Returns. The IRS kicked-off the 2007 filing season for 2006 returns with a fact sheet highlighting 2006 tax law changes, new administrative practices, and other items. IRS Fact Sheet 2007-02.

• Minnesota Conformity to IR Code. New law (HF8) updates the state’s conformity to the IR Code and adopts the IR Code of 1986, as amended through December 31, 2006 (formally May 18, 2006). However, conformity was only effective for tax year 2006 and does not carry over to tax year 2007 unless specifically updated by the Legislature.

LOOKING AHEAD

• February Economic Forecast. The February 2007 budget forecast released by the Department of Finance indicated a budget virtually unchanged from the November 2006 forecast. General revenues FY 2006-2007 are now $3.4 million less than forecast in November and spending is down $9 million, leaving a projected surplus of $1.013 billion for the close of the current biennium (FY 2006-2007) on June 30, 2007. The revenue forecast in FY 2008-2009 (beginning July 1, 2007 and ending June 30, 2008 and June 30, 2009) is up by $160 million but offset by a projected spending increase of $142 million. The balance now projected is $1.150 billion. When combined with the surplus for FY 2006-2007, the total balance available for the FY 2008-2009 is $2.163 billion. A complete report can be found at: http://www.finance.state.mn.us.

• Federal Minimum Wage Bill. While both the Senate and House agree that the minimum wage should be raised, both bills contain numerous provisions on penalties, fines, and other restrictive revenue measures. H.R. 976, as passed by the House, denies the lowest capital gains and dividends tax rate to dependent children (revenue: $874 million); grants the IRS additional time to provide taxpayers with notices of deficiency before the agency is required to suspend the imposition of interest and penalties on underpayments ($506 million); and increases corporate estimated tax payments for the third calendar quarter of 2012 (raises $4 billion over five years, revenue-neutral over ten years). H.R. 2, as passed by the Senate, limits the annual amount that may be deferred under nonqualified deferred compensation arrangements ($806 million); modifies the definition of "covered employee" for denial of the deduction for excessive employee remuneration ($105 million); eliminates the deduction for punitive damages ($299 million); denies deductions for amounts paid or incurred in connection with civil settlements ($244 million); amends collection due process procedures for employment tax liabilities ($271 million); modifies the tax treatment of contingent payment convertible debt instruments ($448 million); extends IRS user fees through September 2016 ($60 million); and increases tax-related fines and penalties ($35 million). A conference committee will have to sort out the differences as not all provisions are found in both bills.

— Jerry Geis
Briggs & Morgan

TORTS & INSURANCE
JUDICIAL LAW

• Defamation: Statements Regarding Serious Sexual Misconduct. Plaintiff, a 34-year old police officer who was involved in a romantic relationship with an 18-year-old woman, sued defendant who made a statement to a third party referring to plaintiff as "Pat the Pedophile." The city police department chose not to retain plaintiff as a police officer after his probationary period expired, in part because people in the community thought he was overzealous and overbearing. However, the police chief also noted that certain members of the community referred to plaintiff as "Pat the Pedophile" and that fact influenced the city’s decision to terminate appellant even though no one actually believed he was a pedophile.

Plaintiff sued a number of defendants including the chief of police and the defendant who made the statement to the third party. The jury found that defendants calling plaintiff "Pat the Pedophile" did not intend to accuse plaintiff of actually being a pedophile, that the defamatory publication was negligent, that the publication caused plaintiff emotional distress, and that there was evidence that defendants acted in deliberate disregard for plaintiff’s rights and safety. The jury awarded $230,000 for past and future harm to reputation, mental distress, humiliation, and embarrassment; $3,000 for future health care expenses; $90,000 for past and future wage loss; and $250,000 in punitive damages. The district court granted defendant’s motion for judgment as a matter of law.

On appeal, the Court of Appeals held that statements that impute serious sexual misconduct are defamatory per se. If a statement is defamatory per se, the statement is actionable without proof of special damage and general damages are presumed without proof that the defamatory publication caused plaintiff any actual harm. Punitive damages are recoverable without proof of actual damages; however, punitive damages are only proper where there is clear and convincing evidence that the defendant acted in conscious or intentional disregard for the high probability that the statement would cause plaintiff harm.

The court found that the evidence was insufficient to support the jury’s award of past and future wage loss and punitive damages because there was no evidence that defendant originated the nickname or participated in its dissemination. Further, the court noted that the city’s decision to terminate plaintiff was based on his unrelated conduct and that the publication of the defamatory statement was not a substantial factor in his termination. Finally, the court held that the $233,000 in general damages far exceeded the amount of past and future harm which included plaintiff’s reputation, mental distress, humiliation, and embarrassment that would normally flow from that type of publication. As a result, the court remanded for a new trial on general damages. Patrick Longbehn v. Robin Schoenrock, A06-1021, (Minn. App. 02/06/07). www.lawlibrary.state.mn.us/archive/ctappub/0702/opa061021-0206.htm

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