EMPLOYMENT & LABOR LAW
JUDICIAL LAW
• Arbitration appeal denied; interlocutory action barred. An employer’s attempt to appeal a determination by the trial court that a dispute under an employment contract was subject to arbitration was rejected by the 8th Circuit Court of Appeals. They rejected an interlocutory appeal of the lower court’s action to stay the lawsuit and order arbitration on grounds that the employer could obtain review of the arbitration award after it is entered and was barred from a pre-arbitration appeal. Webb v. Farmers of North America, Inc., 925 F.3d 966 (8th Cir. 5/31/19).
• Pension challenge barred; action was timely. An order by the National Labor Relations Board (NLRB) finding that an employer failed to make a contractually mandated pension fund contributions was enforced. The 8th Circuit rejected a claim by the union that the claim, arising out of an unfair labor practice charge, was untimely because the employer’s conduct was ambiguous and the union did not have notice of the nonpayment until after the employer had stopped making the pension fund contributions. NLRB v. Anderson’s Excavating Co., 925 F.3d 970 (8th Cir. 5/31/19).
• ERISA investments; breach claim rejected. A claim by a former employee that the manager of his employer’s ERISA Savings Plan breached fiduciary duties by making improper investments was denied. Affirming a lower court decision, the 8th Circuit held that the fiduciaries did not breach the duty of prudence and, therefore, the lawsuit against them was properly dismissed. Usenko v. MEMC, LLC, 926 F.3d 468 (8th Cir. 6/4/19).
• Unemployment compensation; unavailable for work. An employee lost her claim for unemployment compensation benefits because she was unavailable for suitable employment, as required by the Minnesota unemployment compensation law. The court of appeals affirmed a decision of the Department of Employment and Economic Development (DEED) that an employee’s registration in a dislocated worker program did not constitute “re-employment assistance training.” Thus, the employee did not satisfy the statutory requirement that he was seeking “suitable employment” in order to qualify for unemployment compensation benefits. Only v. Regency Home Healthcare, 2019 WL 2332496 (8th Cir. 6/3/2019) (unpublished).
LEGISLATIVE ACTION
• Cosmetology law. A measure passed by the state Legislature during the past session repeals a long standing requirement of the Board of Cosmetology for the licensing of individuals engaged in hair-braiding. The decision ended a 14-year struggle, dating back to 2005 litigation spurred by the Institute for Justice, a national libertarian public-interest law firm, against the Board of Cosmetology.
Other measures have been introduced, many of them with bipartisan support, to undo regulatory requirements of the board for hair stylists, make-up artists, and eyelash technicians, along with permitting funeral homes to employ funeral planners who are not fully licensed as morticians.
Marshall H. Tanick Meyer, Njus & Tanick
ENVIRONMENTAL LAW
JUDICIAL LAW
• 8th Circuit Court of Appeals hands Met Council major NEPA win. The U.S. Court of Appeals for the 8th Circuit ordered that a citizen group’s action challenging environmental review for the Met Council’s proposed Southwest Light Rail Transit project (SWLRT) must be dismissed for lack of a viable cause of action.
The underlying dispute involved alleged flaws in the environmental review conducted by the Met Council and the Federal Transit Administration (FTA) under the National Environmental Policy Act (NEPA) for the proposed SWLRT—a new light rail line that would connect downtown Minneapolis to the southwestern Twin Cities. At the time the lawsuit was commenced in 2014, environmental review was still ongoing. Among the allegations of plaintiff Lakes and Parks Alliance (LPA) was that the Met Council undertook its “Municipal Consent Process” under Minn. Stat. §473.3994 (which requires the Council to consult with all municipalities affected by the SWLRT and obtain their advance consent to the proposed project design) prior to completing environmental review, in violation of NEPA and MEPA.
In March 2015, the district court disagreed, denying LPA’s summary judgment motion. The district court also granted FTA's motion to dismiss, noting that NEPA does not provide a private right of action (challenges to NEPA review must proceed under the Administrative Procedure Act, an option not available to LPA because environmental review was ongoing and there was thus no final agency action to challenge). The district court also dismissed most of the LPA's claims against the Met Council, but it ultimately denied the council's motion to dismiss in order to preserve a "narrow" cause of action under NEPA to prevent the council from taking actions that could "'eviscerate' any federal remedy later available to the LPA." See Lakes & Parks Alliance of Minneapolis v. Fed. Transit Admin., 91 F. Supp. 3d 1105, 1124–25 (D. Minn. 2015) (quoting S.C. Wildlife Fed'n v. Limehouse, 549 F.3d 324, 331 (4th Cir. 2008).
Following the 2016 release of the Council’s final EIS and the FTA’s record of decision, which determined the EIS satisfied the requirements of NEPA, the council and LPA then filed competing motions for summary judgment. The LPA continued with its “narrow” NEPA claim against the Met Council, arguing the council had focused only on a preordained, politically motivated course for the SWLRT in violation of environmental review requirements. In denying LPA’s motion (and granting the Met Council’s), the district court held that LPA had failed to show that the council had "irreversibly and irretrievably committed to a specific SWLRT route" before the end of environmental review.
In reversing the district court’s decision, the 8th Circuit appellate court reemphasized that NEPA does not provide a private right of action and that the lower court’s attempt to “circumnavigate” this fact by allowing the “narrow” cause of action was in error. The 4th Circuit Limehouse case the district court had relied upon in allowing the cause of action was inapposite, the 8th Circuit held, because, among other things, in Limehouse there was still a federal agency party to the lawsuit; here, the Met Council was the only remaining defendant. Moreover, the appellate court concluded, even if the “narrow” cause of action could be maintained, it was now moot:
“If the entire purpose of the action was to prevent ‘eviscerat[ing]’ a future federal remedy… that purpose no longer exists: the very federal remedy the district court sought to preserve is the very remedy the LPA declined to seek, an APA challenge to the ROD. Because there is no longer any federal remedy available, there is no cause of action to imply to protect it.”
Accordingly, the 8th Circuit did not address LPA’s claim on the merits but rather reversed and remanded with instructions to the district court to dismiss the case. Lakes & Parks All. of Minneapolis v. Fed. Transit Admin., 2019 U.S. App. LEXIS 19639 (8th Cir. 7/1/2019).
ADMINISTRATIVE ACTION
• Trump administration repeals Obama-era Clean Power Plan and finalizes replacement plan. On 6/19/2019, the Environmental Protection Agency (EPA) issued notice of its final rules for three separate rulemakings. The three separate actions are: (1) EPA is repealing the Clean Power Plan (CPP), which was put in place during the Obama administration; (2) EPA is finalizing the Affordable Clean Energy rule (ACE); and (3) EPA is finalizing new regulations for EPA and state implementations of ACE and any future emissions guidelines issued under the Clean Air Act (CAA).
EPA published the CPP in August 2015, finalizing the first-ever performance standards for carbon emissions from existing power plants in the U.S. under section 111(d) of the CAA. Under section 111, performance standards for pollutants such as CO2 must be based upon the degree of emission limitation achievable through the application of the “best system of emission reduction” (BSER). The CPP identified four broad “building blocks” that together constituted BSER for existing power plants (including, e.g., switching to low-carbon power sources such as natural gas, and increasing energy efficiency) and set ambitious nationwide carbon reduction goals for the power sector.
However, the CPP was to be short-lived. With Executive Order 13783, President Trump directed the EPA to review and initiate reconsideration proceedings to “suspend, revise, or rescind” the CPP. (See Executive Order 13783, section 4(a)-(c).) In repealing the CPP, the EPA reasoned that the plan exceeded the EPA’s statutory authority. Specifically, EPA has interpreted the Section 111 of the CAA as authorizing EPA to establish BSER for a source based solely on specific measures that can be applied to or at the source, a particular facility—not on broad industry-wide mandates such as effectively requiring a change in fuel source (e.g., from coal to natural gas), as was the case under the CPP.
Consistent with the EPA’s new interpretation of section 111, EPA’s rulemaking finalized ACE, which consists of emission guidelines for states to utilize in their development, submittal, and implementation of state plans that establish standards of performance for CO2 emissions from certain existing coal-fired Electric Utility Generating Units (EGUs) within their jurisdictions. BSER for CO2 emissions from these EGUs, the agency determined, is not the CPP’s broad “building blocks” but rather “heat rate improvement” in the form of a specific set of technologies and operating and maintenance practices that can be applied at and to certain existing coal-fired EGUs.
Finally, the EPA is finalizing implementing regulations that will be used by both the EPA and states in the implementation of ACE and any other future emission guidelines issued under Section 111(d) of the CAA. The new implementing regulations’ purpose is to harmonize aspects of any existing regulations with the statute by making it clear that states have broad discretion in establishing and applying emissions standards consistent with the EPA’s determined BSER. Repeal of the Clean Power Plan; Emission Guidelines for Greenhouse Gas Emissions from Existing Electric Utility Generating Units; Revisions to Emission Guidelines Implementing Regulations, XX Fed. Reg. XX (proposed 6/18/2019) (to be codified at 40 C.F.R. Part 60).
• EPA extends RVP waiver for gasoline with 15% ethanol, expanding market possibilities. The EPA published a final rule adopting a new statutory interpretation and making corresponding regulatory changes to allow gasoline blended with up to 15 percent ethanol (E15) to take advantage of the Clean Air Act (CAA) 1-pound per square inch (psi) Reid Vapor Pressure (RVP) waiver, formerly available only to E10 (i.e., most gasoline sold in the U.S.). EPA first granted CAA fuel waivers allowing the introduction into commerce of E15 in in October 2010 and January 2011. The waivers provided that the fuel must have an RVP “not in excess of 9.0 psi during the time period from May 1 to September 15,” a limitation designed to control emission of volatile organic compounds (VOCs) resulting from fuel evaporation, a problem that is exacerbated by warmer air temperatures. E10 is subject to the same RVP limitation. However, for E10, EPA passed a regulation providing that E10 can exceed the 9.0 psi limit by one pound. The “one-pound waiver” is designed to accommodate the gasohol industry’s practice of “splash blending” 10% ethanol with conventional gasoline. When 10% ethanol is added to conventional 9.0-psi gasoline, the RVP of the mixture will rise to about 10 psi. Absent the one-pound waiver, E10 would have required a base gasoline with a lower RVP; producing a special low-RVP blendstock, the industry successfully argued, presented prohibitive expenses and logistical problems.
When EPA granted the CAA fuel waiver authorizing the sale of E15, the agency did not extend the one-pound waiver to E15. As a result, even though producers of E15 have been able to sell the fuel blend since the fuel waivers were passed in 2010/2011, they have been significantly limited in their ability to commercialize E15, especially in summer months. EPA’s new rule rectified this situation by extending the one-pound waiver to E15, an extension that required reinterpreting the underlying statutory exemption (CAA § 211(h)(4)). EPA’s rulemaking also made related regulatory changes to modify certain elements of the renewable fuel standard (RFS) compliance system, in order to improve functioning of the renewable identification number (RIN) market and prevent market manipulation. Modifications to Fuel Regulations to Provide Flexibility for E15; Modifications to RFS RIN Market Regulations, 84 Fed. Reg. 26980 (6/10/2019).
Jeremy P. Greenhouse The Environmental Law Group, Ltd.
Jake Beckstrom Vermont Law School, 2015
Erik Ordahl Flaherty & Hood, P.A.
Audrey Meyer University of St. Thomas School of Law, J.D. candidate 2020
FEDERAL PRACTICE
JUDICIAL LAW
• Confirmation of arbitration award; lack of personal jurisdiction. Reversing Judge Magnuson, the 8th Circuit found that the existence of an agreement between Minnesota and Florida insurance companies that contained a Minnesota choice-of-law provision and a requirement that the defendant “regularly communicate” with the plaintiff in Minnesota were insufficient to make the Florida defendant subject to specific personal jurisdiction where the defendant conducted no business in Minnesota and lacked a physical presence in the state. Federated Mut. Ins. Co. v. FedNat Holding Co., ___ F.3d ___ (8th Cir. 2019).
• Motion for summary judgment; denial of extension of time affirmed. Affirming a district court’s denial of the plaintiff’s motion for an extension of time to oppose a defendant’s summary judgment motion and her subsequent motion to file her opposition out of time where she: (a) offered no explanation for her failure to complete her opposition prior to requesting an extension on the eve of the filing deadline; and (b) offered no evidence of “diligent efforts” to meet the original deadline, the 8th Circuit reiterated that “preoccupation with other hearings does not constitute excusable neglect.” Albright ex rel. Doe v. Mountain Home Sch. Dist., 926 F.3d 942 (8th Cir. 2019).
• Denial of request for leave to amend affirmed when not accompanied by proposed amended complaint. The 8th Circuit affirmed the denial of the plaintiff’s request for leave to amend his complaint contained in his opposition to defendant’s motion to dismiss, finding no abuse of discretion in the denial of his request when it was not accompanied by a proposed amended complaint. Soueidan v. St. Louis Univ., 926 F.3d 1029 (8th Cir. 2019).
• No abuse in discretion in setting aside default. The 8th Circuit found no abuse of discretion in Judge Wright’s decision to set aside one defendant’s default where the defendant had informed the process server of a misspelling in the complaint and assumed that he would be re-served, where he immediately sought to retain counsel after learning of the default from his insurance company, and where he asserted a meritorious defense. Johnson v. Leonard, ___ F.3d ___ (8th Cir. 2019).
• Sanctions and contempt; multiple decisions. Adopting a report and recommendation by Magistrate Judge Rau, Judge Frank held that the defendant’s discovery failures would result in the imposition of five different adverse inferences against it at trial. Tholen v. Assist Am., Inc., 2019 WL 2387109 (D. Minn. 6/6/2019).
Magistrate Judge Leung recommended that the defendant law firm and its sole owner be held in contempt where they failed to comply with a subpoena and failed to appear at a hearing on an order to show cause. Magistrate Judge Leung also ordered the law firm to pay more than $45,000 in reasonable fees and expenses associated with the plaintiff’s attempts to compel its compliance with the subpoena. Paisley Park Enters., Inc. v. Boxill, 2019 WL 2710703 (D. Minn. 6/28/2019).
• Jurisdictional discovery granted to determine citizenship of limited partnership. After Judge Ericksen twice entered orders directing the plaintiff to correct its allegations regarding the citizenship of the defendant limited partnership, Magistrate Judge Wright granted the plaintiff’s motion to stay the action pending limited jurisdictional discovery, rejecting the defendants’ argument that the proposed discovery was “speculative” because it related to the issue of subject matter jurisdiction. Tim-Minn, Inc. v. Tim Hortons USA, Inc., 2019 WL 2865600 (D. Minn. 7/3/2019).
• Motion to remand denied where there was no state court action. While agreeing with the plaintiff that she lacked subject matter jurisdiction over the action, Judge Brasel declined to remand a diversity action to the Minnesota courts that was alleged to have been removed, where neither party had filed its pleading with a Minnesota court and the defendant also had failed to file a copy of the notice of removal. Instead, Judge Brasel dismissed the action for lack of subject matter jurisdiction where it did not involve the required amount in controversy. Wiste’s LLC v. Am. Select Ins. Co., 2019 WL 2577901 (D. Minn. 6/24/2019).
• Attorney’s fees; multiple decisions. Citing the complex legal and procedural issues in the case, Judge Nelson awarded the prevailing plaintiff more than $18 million in attorney’s fees and more than $5 million in costs. In Re: RFC and ResCap Liquidating Trust Action, 2019 WL 2567566 (D. Minn. 6/21/2019).
After reducing the settling plaintiff’s fee request by more than $71,000 for “unnecessary” work, “vague” entries, and time billed for work that was “clerical in nature,” Magistrate Judge Menendez awarded the plaintiff more than $324,000 in attorney’s fees. First Lutheran Church v. City of St. Paul, 2019 WL 2403200 (D. Minn. 6/7/2019).
• Motion to dismiss for failure to effect service granted. Where the plaintiff failed to effect service within 90 days after the action was filed, purportedly “due to an unintentional error” by plaintiff’s counsel, defendant’s counsel declined to waive service and the defendant moved to dismiss for failure to effect service, Judge Doty found no “good cause” or “excusable neglect” to justify an extension of the service deadline, and instead granted the defendant’s motion and dismissed the action without prejudice. McCourt v. Carver County, 2019 WL 2525428 (D. Minn. 6/19/2019).
Josh Jacobson Law Office of Josh Jacobson
INDIAN LAW
JUDICIAL LAW
• Treaty right to travel preempts state fuel-importation taxes. Under its 1855 treaty with the United States, the Yakama Nation ceded approximately 10 million acres of land but reserved certain rights within the ceded territory, including “the right, in common with citizens of the United States, to travel upon all public highways.” In 2013, the Washington State Department of Licensing assessed $3.6 million in taxes, penalties, and licensing fees against Cougar Den, Inc., a wholesale fuel-importer owned by a member of the Yakama Nation, for transporting fuel on public highways within the state. The Washington Supreme Court upheld the assessment, but Cougar Den appealed to the U.S. Supreme Court, arguing that the 1855 treaty preempted the fuel tax. Applying the rule that treaties must be interpreted as tribal negotiators would have understood them, a plurality of justices agreed with Cougar Den. The Court reasoned that the fuel tax “act[ed] upon the Indians as a charge for exercising the very right their ancestors intended to reserve[.]” Washington State Department of Licensing v. Cougar Den, Inc., 139 S. Ct. 1000 (2019).
• Treaty right to hunt unaffected by state’s admission to the Union. Wyoming convicted a member of the Crow Tribe of taking elk off-season in the Bighorn National Forrest and of hunting without a state license. On appeal to the U.S. Supreme Court, the defendant argued that the Crow Tribe’s 1868 treaty with the United States, which guaranteed “the right to hunt on the unoccupied lands of the United States so long as game may be found thereon[, . . .] and peace subsists[,]” blocked the state’s regulations. The Supreme Court agreed, vacated the convictions, and remanded the case. It formally repudiated an 1896 outlier decision that held that statehood could impliedly abrogate treaty rights and reaffirmed the longstanding rules that courts must construe treaties liberally and as their tribal negotiators would have understood them, and that Congress may only abrogate treaties expressly. Because the Crow negotiators would have understood “unoccupied lands” to mean lands without non-Indian settlement, because the treaty conditions of game and peace still subsist, and because Wyoming’s admission did not expressly abrogate the 1868 treaty, the 1868 treaty right to hunt on unsettled lands remains in effect. Herrera v. Wyoming, 139 S. Ct. 1686 (2019).
• State defendant may not receive custody credit for time served for tribal offense. Minnesota courts have two tests for awarding custody credit against criminal sentences: one for intrajurisdictional custody, and one for interjurisdictional custody. The Red Lake Tribal Court convicted the defendant of two tribal offenses while she was on probation for a separate state conviction. When the state court executed the sentence for the state conviction, it denied the defendant’s request for custody credit for time served in the Red Lake Detention Center for the tribal offenses. The Minnesota Supreme Court affirmed, concluding that because the Red Lake Band of Chippewa Indians is a separate sovereign, the interjurisdictional test applied. Under that test, the defendant was not entitled to custody credit. State v. Roy, 928 N.W.2d 341 (Minn. 2019).
• Tribal officer may detain and deliver non-Indian suspected of on-reservation state-law victimless offense to state authorities. A tribal officer who suspected that a driver was impaired on the Red Lake Reservation confirmed intoxication through field-sobriety and breath tests. The officer detained the non-Indian suspect and transported him to the reservation boundary, where a state sheriff arrested him. On appeal from his resulting state-law conviction, the defendant argued that the evidence against him was obtained through an unlawful arrest by the tribal officer and should have been suppressed, and that even if the arrest was proper, Minnesota lacked jurisdiction over his on-reservation crime. The Minnesota Court of Appeals disagreed, ruling that Minnesota has jurisdiction to prosecute non-Indians’ on-reservation victimless crimes, including driving while impaired. It further held that tribal officers may detain and deliver on-reservation non-Indian suspects to authorities with jurisdiction over the offense. State v. Thompson, ___ N.W.2d ___ (Minn. Ct. App. 2019).
Jessica Intermill Hogen Adams PLLC
Peter J. Rademacher Hogen Adams PLLCm
INTELLECTUAL PROPERTY
JUDICIAL LAW
• Patent: The government is not a “person.” The U.S. Supreme Court recently held that the United States Postal Service is not a “person” under patent law and could not use a covered-business-method review to challenge the validity of a patent. Return Mail sued the Postal Service for infringing a method patent for processing undeliverable mail. The Postal Service asked the Patent Office to institute a covered-business-method review of the asserted patent. The Patent Office instituted review and invalidated all of the claims in the patent. Return Mail appealed arguing government agencies, such as the Postal Service, are not “person[s]” under the America Invents Act (AIA). The patent statutes do not define the term “person,” so the Court applied the longstanding presumption that “person” does not include the government or government agencies. The Postal Service made several arguments attempting to rebut the presumption but failed to persuade the Court. The Court explained that the government’s long-established ability to obtain a patent does not indicate that Congress meant to allow it to participate in proceedings under the AIA. The Court also found no issue with limiting the government’s ability to challenge the validity of patents to only a defense in court because the government’s liability is also limited (to a patent owner’s “reasonable and entire compensation”). Nongovernmental defendants, in contrast, face injunctions, jury trials, and treble damages. Return Mail, Inc. v. United States Postal, 139 S. Ct. 1853 (2019).
• Trademark: Ban on the registration of “immoral or scandalous” trademarks is unconstitutional. The U.S. Supreme Court also recently held that the ban on the registration of “immoral or scandalous” trademarks violates the 1st Amendment. Erik Brunetti sued the government to challenge the ban after his application to register the trademark FUCT was denied. This decision comes two years after the Court invalidated the ban on the registration of “disparaging” trademarks in Matal v. Tam. Mirroring the Tam decision, the Court found the ban on “immoral or scandalous” marks also unconstitutional because it discriminated on the basis of viewpoint. The “immoral or scandalous” ban allowed the registration of trademarks that agreed with society’s sense of morality and banned the registration of marks that did not. The government suggested limiting the statute to remove the viewpoint bias and save the statute. The proposal was to limit the ban to “marks that are offensive or shocking because of their mode of expression, independent of any views that they may express.” The Court rejected the proposal. While the Court can interpret ambiguous language to avoid constitutional issues, it cannot rewrite a law to make it constitutional, as the government requested. Iancu v. Brunetti, No. 18-302, 2019 WL 2570622 (U.S. 6/24/2019).
Tony Zeuli Merchant & Gould
Joe Dubis Merchant & Gould
Matt Metcalfe Merchant & Gould
PROBATE & TRUST LAW
JUDICIAL LAW
• Capacity and undue influence. Appellant lived with his mother and father and provided care for a number of years. Following the death of appellant’s father in 2013, appellant hired an attorney to draft an employment agreement between himself and his mother. The agreement stated that appellant would receive $25 per hour for 24-hour-per-day care, from 2007 through the date of his mother’s death. Appellant’s mother signed the agreement in January 2015 and died a year later in January 2016.
Appellant’s sister was appointed personal representative of appellant’s mother’s estate. Pursuant to a will and trust executed by appellant’s mother in 1991, each of her four children were to receive an equal share of her assets. Appellant filed a claim for $1,829,700 against the Estate based on the employment agreement. The personal representative denied appellant’s claim. At the time of her death, appellant’s mother’s assets totaled less than $1,800,000, and therefore, allowance of the claim would have effectively undone her estate plan.
After a bench trial, the district court found that appellant’s mother lacked capacity to contract at the time she signed the employment agreement and that the agreement had been the product of undue influence. The court of appeals noted that capacity and undue influence are questions of fact and that a district court’s determinations will be overturned only if they are clearly erroneous. The court of appeals affirmed the district court’s finding of incapacity by noting that medical records indicated that appellant’s mother had capacity issues going back to 2013 and that there was testimony that at the time the agreement was signed she could not read a newspaper. Similarly, the court of appeals affirmed the district court finding of undue influence, noting that appellant served has his mother’s attorney-in-fact, denied her access to other people, and orchestrated the drafting and signing of the employment agreement. The court of appeals specifically cited a communication from appellant to his attorney in which he stated:
Next time I will awaken [my mother] in advance of your arrival. I will get her out of the easy chair and to the kitchen table where all can be marshaled on a flat surface and the document will be closer to the limits of her vision and less a handicap to her signature to [be] engaged with a swipe of a blue ballpoint pen. I have a crosscut shredder for the existing [e]mployment [a]greement. I need a document that will stand up to scrutiny by opposing forces right down to the last colon. I will scrub the document for any other weakness.
The court of appeals affirmed the district court decision in total. In re the Estate of: Irene B. Horton, Deceased, No. A18-1477, 2019 WL 3000756 (Minn. Ct. App. 7/1/2019).
Casey D. Marshall Bassford Remele
TAX LAW
JUDICIAL LAW
• Constitutional law: States’ power to tax trust limited. In a unanimous decision announced by Justice Sotomayor, the Supreme Court held that North Carolina is not permitted to tax the income of a trust based solely on the trust beneficiary’s presence in the state. The Court, applying tax due process principles articulated in the 1945 case International Shoe v. Washington, 326 US 310 (1945) (this is a different International Shoe case from the one assigned in most first-year Civil Procedure classes). The Court held that a beneficiary’s mere presence in a state is insufficient to establish the requisite “minimum connection” between the taxpayer and the state when that beneficiary has no right to demand distributions and had no guarantee of a distribution. The Court did not hold that a beneficiary’s in-state presence would never establish jurisdiction to tax. Rather, where a beneficiary has sufficient right to control, possess, enjoy, or receive trust assets, a state might satisfy the “minimum connection.” The Court emphasized the narrow nature of its ruling and seemed to locate the decision in trust law and steered clear of adding to its due process jurisprudence as that jurisprudence relates to challenges to state tax regimes. N. Carolina Dep't of Revenue v. The Kimberley Rice Kaestner 1992 Family Tr., 139 S. Ct. 2213 (6/21/2019).
• Record insufficient; parties granted additional time to support respective positions. In a dispute centered on whether gains realized by a taxpayer are subject to Minnesota corporate income tax, the Minnesota Tax Court denied the parties’ cross motions for summary judgment. The court concluded that the record was insufficient to support the parties’ joint stipulation and to resolve the motions. The court, however, granted the parties additional time in which to attempt to properly support their positions. The appellant, YAM Special Holdings, Inc., operates GoDaddy.com, which provides internet domain names and web hosting services. In 2011, YAM sold a portion of its interest for approximately $2 billion. YAM reported the gain to the Minnesota Department of Revenue, but YAM denies that the transaction is subject to Minnesota tax. YAM argues, instead, that the income is exempt from taxation in Minnesota because the gain is “nonbusiness income” and therefore cannot be apportioned to Minnesota because, as Minnesota statute provides, the income was “derived from a capital transaction that solely serves an investment function.” The Department of Revenue argued that the transactions at issue were not “nonbusiness income” and therefore that the proceeds are subject to Minnesota tax. In its Memorandum, the court sets out several examples of disputed issues of material fact that prevent the court from granting the parties’ motions. The parties have 120 days to renew their motions. YAM Special Holdings, Inc. v. Comm'r, No. 9122-R, 2019 WL 2519414 (Minn. Tax 6/12/2019) (citing Minn. Stat. §290.17, subd. 6 (2018)).
• Enbridge Energy; commissioner ordered to increase value of EELP’s pipeline. In an opinion spanning over 50 pages and addressing a dispute spanning multiple years, the Minnesota Tax Court ordered the commissioner to increase the system unit-value of Enbridge Energy’s pipeline operating system, as of 1/2/2015, to $7,347,862,000 (from $7,129,548,100) and to increase the 2015 Minnesota apportionable value to $1,628,329,000 (from $1,556,965,700). Similarly, the commissioner was ordered to increase the 2016 value to $8,144,171,700 (from $7,950,754,500) and to increase the 2016 Minnesota apportionable value to $1,734,982,000 (from $1,684,893,200). For both tax years, the commissioner must also reapportion the value accordingly among the affected counties. Enbridge Energy, Ltd. P'ship, v. Comm'r, No. 8858-R, 2019 WL 2853133 (Minn. Tax 6/25/2019).
• Consolidated property tax refund claims denied as untimely. A New Hope taxpayer communicated by telephone with the Department of Revenue in approximately 1996 and was told she did not qualify for any property tax refund. About 20 years later, the taxpayer learned that the information she received may have been incorrect. The taxpayer corresponded further with the department, and she was informed that she had missed the statutory filing deadline for most of the property tax refund claims she hoped to receive. The taxpayer then filed 19 property tax refund claims. The taxpayer argued that she was not treated fairly by the Department and therefore should be entitled to the refunds. The commissioner denied the claims as untimely, and the taxpayer appealed. The tax court noted that a court may not extend a statutory time limit specified by the Legislature, but construed the self-represented taxpayer’s argument as one of equitable estoppel: in other words, the court interpreted the taxpayer as arguing that “the Department’s allegedly erroneous 1996 advice equitably estops the Commissioner from enforcing the statutory deadlines.” Since equitable estoppel against a government agency requires a showing of malfeasance (not just negligence or mere inadvertence), the equitable estoppel claim failed. Crediting the taxpayer’s recollection of the erroneous advice, as the court must do for purposes of summary judgment, the erroneous advice was not sufficiently wrongful to satisfy the equitable estoppel standard, and the commissioner was entitled to summary judgment. Carol N. Halonen, v. Comm'r, No. 9274-R, 2019 WL 2932260 (Minn. Tax 7/2/2019).
• Self-employment tax: Author’s brand is her business. In a case sure to reverberate with YouTube stars everywhere, the tax court held that a successful author's brand was part of her trade or business and, as a result, all of the income from her publishing contracts was derived from her trade or business of being a writer and was subject to self-employment tax. Karin Slaughter is a popular American crime novelist. She has sold over 35 million copies of her 37+ novels, which are published in upwards of 30 languages. In the tax years at issue, Slaughter earned substantial royalty income pursuant to several publishing contracts. Like many authors, Slaughter did not spend all her time writing, but also spent time and money on building her personal brand. Slaughter’s contracts with publishing companies reflected this duality: The publishers contract for the rights to print, publish, distribute, sell, and license the works and manuscripts written, but they also secure the right to use her name and likeness in advertising, promotion, and publicity for the contracted works. The contracts also contain various noncompete clauses and an exclusive option for the respective publishers to negotiate the contract for petitioner's next works. Slaughter hired a CPA to help her prepare her taxes. The CPA concluded that any amount paid to petitioner for the use of her name and likeness was “investment income,” i.e., payment for an intangible asset beyond that of her trade or business as an author, and therefore not subject to employment tax. The Service took the position that all of Slaughter’s income was subject to self-employment tax. After summarizing the parties’ positions, the court concluded that Slaughter's brand was part of her trade or business. The court reasoned that "trade or business" is to be construed broadly. Examining all of the facts, it found that her trade or business included her brand since she was engaged in developing her brand with continuity and regularity for the primary purpose of income and profit. Slaughter, however, was not liable for accuracy-related penalties. Slaughter v. Comm'r, 117 T.C.M. (CCH) 1323 (T.C. 2019).
• Individual income tax: No limitations period where taxpayer fraudulently understates income. The tax court affirmed the commissioner’s deficiency finding and upheld significant penalties where a dentist fraudulently understated his taxable income by $366,185 in one tax year and $380,124 in another. The taxpayer, a dentist working in Queens (New York), did not maintain separate records for his personal and business banking accounts. The taxpayer claimed he did not know much about business, and that he instead relied on his bookkeeper (who had no training in tax or accounting) and his CPA (to whom he did not provide accurate records) to file his returns. The taxpayer also claimed that he did not think he was making much money in the tax years at issue. The tax court found this and other aspects of the taxpayer’s testimony incredible. The court pointed to the taxpayer’s deliberate steps to conceal assets and income, including transferring title of the building in which the dental practice was operated to a shell corporation once he understood he was being investigated. The taxpayer also frequently wrote large checks to himself on his bank account, held those checks for a few days, and then used a check-cashing service to convert the checks to cash. An employee testified as to her understanding that the purpose in doing this was to artificially reduce the bank account balance that would be visible to his creditors. The tax court recited these and numerous other steps the taxpayer took to conceal income.
Section 6501(a) generally requires the IRS to assess a tax within three years after the filing of a return. The period of limitations is extended to six years where the taxpayer omits from gross income an amount “in excess of 25 percent of the amount of gross income stated in the return.” Sec. 6501(e)(1)(A)(i). Because the notices of deficiency in this case were issued more than seven years after the period of limitations began to run, the taxpayer argued the Service was barred from pursuing the notices. However, where a taxpayer has filed “a false or fraudulent return with the intent to evade tax,” there is no period of limitations, and the tax “may be assessed… at any time.” IRC 6501(c)(1).
The Service has the burden of establishing fraud for civil fraud penalty, which must be proven by clear and convincing evidence. IRC 7454(a); Rule 142(b). Two elements are required: (1) an underpayment and (2) at least some portion of the underpayment for each year was due to fraud. The court focused its analysis on the second element since the taxpayer conceded the underpayment.
Fraud, for these purposes, means intentional wrongdoing designed to evade tax believed to be owing. Because fraud can rarely be proven by direct evidence, the factfinder is permitted to rely on circumstantial evidence to establish fraud. The court discussed the “badges of fraud” that are often referenced to establish fraudulent intent. These “badges” include but are not limited to: (1) understating income, (2) keeping inadequate records, (3) giving implausible or inconsistent explanations of behavior, (4) concealing income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) supplying incomplete or misleading information to a tax return preparer, (8) providing testimony that lacks credibility, (9) filing false documents (including false tax returns), (10) failing to file tax returns, and (11) dealing in cash.
In this case, the court noted that while three of the badges were inapposite—i.e., the taxpayer did not engage in illegal activities, did not himself deal extensively in cash, and did not fail to file returns—the court concluded that “the other eight badges of fraud overwhelmingly demonstrate that Dr. Kohan acted with fraudulent intent for both tax years at issue.” The taxpayer (and his spouse) were liable for the tax deficiencies they had conceded and Dr. Kohan was liable for section 6663 civil fraud penalties for both years. Shahram Kohan and Yonina Kohan v. Comm’r, T.C.M. (RIA) 2019-085 (T.C. 2019).
ADMINISTRATIVE ACTION
• Guidance published on private college and university “endowment tax.” Treasury released long-awaited guidance intended to clarify the impact of the so-called endowment tax included in the Tax Cuts and Jobs Act of 2017. The law imposes a 1.4 percent excise tax on net investment income at certain private colleges and universities. Colleges with fewer than 500 tuition-paying students and assets of at least $500,000 per student are not required to pay the excise tax. Note that those assets which are used directly in carrying out the institution’s exempt purpose are not included in the $500,000 per student calculation—the tax is designed to impact only colleges and universities with significant assets held in endowments. Estimates vary, but commentators suggest only about 30 of the nation’s private college and universities will be subject to the tax. (Grinnell College in Iowa is likely to be impacted, but it is unlikely that any Minnesota private college or university will be subject to the tax.) New information in the guidance provides information on how to calculate the number of students an institution has, and how to determine whether a particular item of income is net investment income. For example, the guidance provides that, using the federal rules governing private foundations, student loan interest and rental income would be included as taxable investment income for colleges and universities under the endowment tax. This suggests that rental income that colleges receive from students in residence halls is not currently included in income related to a school’s educational missions. These are proposed, not final, regulations, and the comment period will expire 90 days from the July 3 publication date. 84 FR 31795, Guidance on the Determination of the Section 4968 Excise Tax Applicable to Certain Private Colleges and Universities (REG-106877-18).
• Private letter ruling: Tax-exempt status not permitted for organization serving private interests. Organizations that are organized and operated exclusively for charitable, religious, or educational purposes are permitted to be exempt from federal income taxation under Sec. 501(c)(3). However, if any of an organization's earnings inure to the benefit of any private shareholder or individual, the organization is not entitled to the exemption. Reg. §1.501(c)(3)-1(a)(1) (explaining exempt organizations must be operated exclusively for exempt purposes). To qualify for the exemption, then, the organization must serve a public rather than a private interest and must not be operated for the benefit of designated individuals. In this private letter ruling, the IRS denied exempt status under Code Sec. 501(c)(3) to an organization created to host a fundraiser to offset the living expenses of five siblings whose parents died within one year of each other. In the PLR, the IRS determined that the purpose of the organization was to benefit five designated individuals, rather than the general public. Since the organization was operated to serve private rather than public purposes, its application for exempt status was denied. PLR 2019-23026.
Morgan Holcomb Mitchell Hamline School of Law