Current developments in Judicial Law, Legislation, and Executive Action together with a foretaste of Emergent Trends in law and the legal profession for the complete Minnesota lawyer.
• United States Supreme Court declines to apply Chevron while upholding Affordable Care Act. The United States Supreme Court declined to give Chevron deference to an IRS interpretation of the Affordable Care Act but ultimately reached the same conclusions as the IRS, thwarting statutory interpretation arguments aimed at undermining the Act.
The case turned on the meaning of several statutory provisions dealing with the availability of tax credits to help people pay for insurance purchased through government-organized insurance marketplaces called “health insurance exchanges.” Under the Act, states have the option of setting up their own exchanges or relying on exchanges created for them by the federal Department of Health and Human Services. Currently, people in more than 30 states rely on federal exchanges. The specific issue was whether people buying insurance through federal exchanges are eligible for the same tax subsidies as those buying from state exchanges. This question arose because although the Act states that tax credits “shall be allowed” for any “applicable taxpayer,” it also states that the amount of the credit depends on whether the taxpayer is insured through “an Exchange established by the State” (italics added). This language set up an argument that tax credits were only available for insurance purchased in a state-operated exchange. However, in an administrative rule, the IRS concluded that tax credits were available to people who obtained insurance through “an Exchange serving the individual market . . . regardless of whether the Exchange is established and operated by a State . . . or by HHS.”
The IRS rule was challenged by four Virginia residents who presented a somewhat novel standing argument. Virginia relies on a federal exchange, and so the IRS interpretation provides for tax credits to the same extent as if the exchange were operated by the state itself. While that might sound like a good thing, the plaintiffs argued that by making insurance more affordable, these tax credits actually injured them economically. They pointed out that under the Act, people are exempt from having to buy insurance if they can show that their insurance costs would total more than 8 percent of their income. Such would have been the case for these four Virginians but for the fact that the tax subsidies made the insurance more affordable. With the tax subsidy, the cost of insurance was just low enough that these four could not take advantage of the exemption. As a result, they were required either to buy insurance or pay a penalty with their income taxes.
Accordingly, the challengers sought to invalidate the IRS rule. They pointed to the Act’s “established by the state” language and argued that the IRS had exceeded its authority by promulgating a rule contrary to law. At the 4th Circuit, the court applied the familiar Chevron two-step analysis: it found that the statue was ambiguous and that the IRS’s interpretation was reasonable and therefore entitled to deference. In a separate case, the D.C. Circuit found the statute unambiguous and invalidated the IRS rule, setting up a circuit split for resolution by the Supreme Court.
Writing for the majority, Chief Justice Roberts declined to rely on the Chevron framework, for two reasons. First, he wrote, “The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep ‘economic and political significance’ that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so expressly.” Second, the Chief Justice wrote that it was “especially unlikely” that Congress would have left such an important question to the IRS, which, he noted, “has no expertise in crafting health insurance policy of this sort.”
Instead of using Chevron, the Chief Justice wrote, it was up to the Court to determine the correct reading of the statute. And, as it turned out, the correct reading of the statute was the IRS’s reading of the statute. Chief Justice Roberts agreed with the 4th Circuit that the provision in question was ambiguous when read in the context of the whole statute. He then rejected the challenger’s reading of the statute, mainly because of the harm that such a reading would inflict on the statutory scheme. Chief Justice Roberts noted that eliminating tax subsidies would “destabilize” insurance markets and undermine the overall purposes of the law. In support of this conclusion, Chief Justice pointedly quoted from the bitter dissent in the first Affordable Care Act case, where Justice Scalia had written, “Without the federal subsidies… the exchanges would not operate as Congress intended and may not operate at all.”
In sum, the Court found that the statute meant what the IRS believed it meant without deferring to the IRS for that interpretation. Some commentators have speculated that this roundabout analysis was chosen in order to prevent a future administration from directing the IRS to issue a revisionary interpretation of the statute. In any event, the most valuable aspect of the case for administrative practitioners is that it provides a bit more insight into the kinds of circumstances under which a court might be persuaded not to apply Chevron.
– Mehmet K. Konar-Steenberg
William Mitchell College of Law
Commercial and Consumer Law
• Fraud is avoided. Minnesota adopted the Uniform Fraudulent Transfer Act in 1987 at §513.14 et seq., and 42 other states, the District of Columbia, and the U.S. Virgin Islands also have enacted the act. While that act served well it did have certain deficiencies, such as no choice of law rule and no rules on the burden of proof or the standard of proof. In 2014 the Uniform Laws Commission, the drafters of the Uniform Fraudulent Transfer Act, prepared amendments to address these and other matters. Minnesota enacted the amendments in SF1816 in 2015. The Minnesota Act is effective on August 1, 2015, and:
- clarifies terminology, such as changing the name of the act to the Uniform Voidable Transaction Act, which is a more accurate description of what the act does;
- adds a clear choice of law rule to rectify inconsistent court decisions under the prior law;
- refines rules for determining a debtor’s insolvency;
- provides guidance as to the burden of proof of parties to a suit and clarifies what standard is to be used (the preponderance of the evidence);
- addresses electronic communications;
- specifies the treatment of “series organizations,” a new and increasingly utilized type of business entity; and
- refines several provisions relating to defenses available to a transferee or obligee.
An extensive article on the Uniform Act will appear in 70 Bus. Law___ in 2015 by the reporter for the act, Ken Kettering. The official comments to the Uniform Act are also a useful guide.
The Minnesota enactment follows the Uniform Act in all important respects, except it omits the statute of limitations, presumably due to the fact Minnesota never enacted the statute of limitations in the prior act.
Since the intent to hinder, delay, or defraud creditors is seldom susceptible of direct proof, the Uniform act has always contained rules on “badges of fraud.” Finn v. Alliance Bank, Nos. A12-1930, A12-2092 (Minn. Sup. Ct. 2015), involved an unraveled Ponzi scheme (where funds from later investors were used to pay prior investors). See Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Ins. Fund Ltd.), 343 B.R. 63 (S.D.N.Y. 2006) (under Bankruptcy Code §548); Perkins v. Haines, 661 F.3d 623 (11th Cir. 2011) (also under Bankruptcy Code §548), Donell v. Kowell, 553 F. 3d 762 (9th Cir. 2008) (under the Uniform Fraudulent Transfer Act).
These additional cases also discuss the so-called “Ponzi scheme presumption,” where the mere existence of the scheme is sufficient to establish actual intent to hinder, delay, or defraud (also that the scheme operator was engaged or was about to engage in a transaction for which the remaining assets of the debtor were unreasonably small in relation to the transaction).
In the Finn case, a receiver was appointed in a suit by two investors against First United Funding LLC. First United had acted as a conduit between borrowers and investor/lenders that bought participation interests in the loans made, but which participation interests ultimately exceeded the amounts of the underlying loans. The receiver sued to recover payments made to various investors as fraudulent transfers. Rather than using the badges of fraud set forth in the statute, the receiver instead alleged that the “Ponzi scheme presumption,” adopted by various courts, was applicable by which a creditor could prove certain elements of a fraudulent transfer claim simply by establishing that the debtor operated a Ponzi scheme and that the transfers attacked were made in furtherance of the scheme.
The Minnesota Supreme Court, faced with the receiver’s argument, stated that the uniform act neither mentions nor defines a “Ponzi scheme,” that the act does not contain a provision allowing a court to presume anything based on the mere existence of a Ponzi scheme, does not address “schemes” but rather focuses on individual transfers rather than a pattern of transactions that are part of a greater scheme, requires a creditor to prove the elements of a fraudulent transfer with respect to each transfer, and does not allow a court to presume fraudulent intent but uses a list of factors (the badges of fraud) that may be considered to determine whether a debtor made a transfer with the intent to defraud creditors and the fact that the debtor was involved in a Ponzi scheme was not among those factors. Accordingly, the Supreme Court stated there is no statutory justification for relieving a person of its burden of proving fraudulent intent using this type of presumption.
The court similarly rejected what it saw as the second component of the presumption that a debtor that operates a Ponzi scheme is insolvent at the time it transfers assets, and stated that a conclusive presumption that a Ponzi scheme equates with an insolvent condition from its inception may be incorrect both as a matter of law and as a matter of fact. As to the so-called third component of the Ponzi scheme presumption, that a debtor operating a Ponzi scheme cannot receive reasonably equivalent value for the interest or profits that it pays to investors, the Supreme Court concluded that adopting that view would unwarrantedly negate a transferee’s good faith defense to all actual fraud claims and conclusively establish a crucial element of a constructive fraud claim.
Some commentators on the Finn case assert that it is of limited precedent because it involved a relatively unique factual situation, an important point, if true, since other cases do employ a Ponzi scheme presumption and thus arguably the concept may remain applicable in more “normal” cases in Minnesota, notwithstanding the broad language used by the Court in its opinion. But the Finn case also interprets an act now amended, and the question remains as to the impact of those amendments. The amended act contains no express reference to the Ponzi scheme presumption.
Nonetheless, based on the addition to the prior act of provisions dealing with the burden and standard of proof in §§513.44(c), 513.45(c), and 513.48(g), one could arguably conclude the presumption is no longer viable. Moreover, the amended act in § 513.42(b) does state a presumption that a debtor that is generally not paying the debtor’s debts as they become due, other than as a result of a bona fide dispute, is presumed to be insolvent. Arguably this shows where a presumption is intended, the drafters knew how to employ it and provide a standard. Silence as to the Ponzi scheme presumption in the amended act nonetheless arguably speaks.
– Fred Miller
Lindquist & Vennum LLP
• Sentencing: Upward durational departure justified by concealment of murder victim’s body. Appellant was convicted of second-degree unintentional murder for the death of his friend following a court trial. He waived his right to a sentencing jury, and the court imposed a 420-month sentence, an upward durational departure of 168 months. The court of appeals affirmed, and the Supreme Court accepted review to determine whether the defendant’s concealment of the victim’s body can be used as an aggravating factor to justify an upward durational departure from the presumptive sentence for a homicide offense. The Supreme Court has previously determined that concealment of a body can be an aggravating factor, but its earlier decisions were unclear as to what circumstances, if any, would limit the use of concealment as an aggravating factor.
Held, concealment of a homicide victim’s body, in and of itself, may be an aggravating factor under the sentencing guidelines that support an upward durational sentencing departure. Concealment makes the offender’s conduct more serious than typical, because family and friends of a victim suffer additional trauma by not knowing whether their relative or friend is dead or alive, and concealment is contrary to the proper, respectful treatment due to the remains of a deceased person. Additionally, concealing a crime is part of the same behavioral incident as the underlying offense. The court notes that concealment of a victim’s body may not always demonstrate that the offense was committed in a particularly serious way, but concludes that, where the particular facts of concealment demonstrate that the offense was committed in a particularly serious way, an upward departure may be based on the concealment. State v. Mo Savoy Hicks, Sup. Ct. 6/3/15.
• Jury instructions: Error to instruct jury that third-degree burglary is committed if person entered building without consent and intended to commit or committed theft while inside. After a jury trial, appellant was convicted of first-degree felony murder and sentenced to life with the possibility of release. At trial, evidence was introduced that appellant participated in a burglary, during which B.J. was shot and killed. The district court instructed the jury on the first element of first-degree felony murder as follows: “First, the defendant or an accomplice was committing the crime of burglary. This element is satisfied if there is proof beyond a reasonable doubt that the defendant or an accomplice entered a building without the consent of the person in lawful possession and intended to commit or committed a theft while in the building.” Appellant argues that the district court misstated the “intent to steal” element of burglary, because the instruction did not inform the jury it could find him guilty of burglary only if he intended to steal at the time he entered the building.
A person commits third-degree burglary when that person “enters a building without consent and with intent to steal,” or “enters a building without consent and steals…while in the building.” Minn. Stat. §609.582, subd. 3. This language requires the offender to possess the intent to steal at the time of entry. The district court’s instructions effectively told the jury that it could find appellant guilty if he entered the apartment without an intent to steal, then formed an intent to steal while inside, but ultimately chose not to steal anything, which is inconsistent with the statutory language. However, because appellant failed to object to the instruction at trial and there is no reasonable likelihood that the error substantially affected the verdict, appellant’s conviction is affirmed. State v. Gregory Antoine Davis, Sup. Ct. 6/3/15.
• Jury instructions: Error to instruct jury as to order in which they should consider charges. At the conclusion of his trial for first-degree felony murder and unlawful possession of a firearm, the district court advised the jury that it “need not consider… the lesser offenses that are now being submitted.” The jury could have interpreted this instruction to mean that it should consider the most serious charge first, because, if it found appellant guilty of the most serious charge, it need not continue its deliberations. A district court may not suggest the order in which the jury should consider the charges, pursuant to State v. Prtine, 784 N.W.2d 303 (Minn. 2010). This error, however, was not objected to at trial, and is not plain, and appellant’s conviction for first-degree felony murder is affirmed. State v. Gregory Antoine Davis, Sup. Ct. 6/3/15.
• Procedure: Minn. R. Crim. P. 26.03, subd. 1(2), allows district court to conduct trial without defendant when defendant’s absence is without justification. During his trial for first-degree felony murder and unlawful possession of a firearm, appellant was on multiple occasions not present for the proceedings, because he either refused to leave the jail or did not want to be present to hear certain witnesses’ testimony or evidence. The district court informed appellant that his refusal to be present would be considered absence without justification, and, therefore, a voluntary waiver of his right to be present, allowing the trial to proceed without him. On appeal, appellant argues that the district court violated Minn. R. Crim. P. 26.03, subd. 1, by proceeding with trial while he was absent from the courtroom.
This procedural rule requires the presence of a defendant at arraignment, plea, and every stage of trial, but subdivision 1(2) allows a trial to proceed without the defendant’s presence if he is absent without justification after the trial starts, or, after warning, engages in conduct that justifies expulsion from the courtroom because it disrupts the trial. Appellant argues that subdivision 1(3)(2), which permits the court, in a felony case and on the defendant’s motion, to “excuse the defendant’s presence except at arraignment, plea, trial, and sentencing,” prevents a defendant’s waiver of presence under subdivision 1(2).
Held, the only reasonable interpretation of Minn. R. Crim. P. 26.03, subd. 1, is that a district court, even in a felony case, may proceed without the defendant present under the circumstances listed in subdivision 1(2). The district court properly applied subdivision 1(2) here. Appellant’s conviction is affirmed. State v. Gregory Antoine Davis, Sup. Ct. 6/3/15.
• Procedure: District court need not make express finding that there is strong possibility defendant would be found guilty of crime when accepting Norgaard guilty plea. Appellant pleaded guilty to felony domestic assault by strangulation by agreeing that the state’s evidence would likely persuade a jury to find him guilty, after stating that he could not remember the events of the night in question. At the plea hearing, the district court asked appellant, “Would you agree that if the fact finder, whether that was me or a jury, if we were in a trial and the prosecution called witnesses who would testify to what is in those police reports about what happened that night at your residence, that applying the presumption of innocence and burden of proof beyond a reasonable doubt, if all that information came out, that you would be convicted of that domestic assault by strangulation?,” to which appellant responded affirmatively. The district court subsequently accepted appellant’s guilty plea. The issue presented on appeal is whether the district court erred by accepting appellant’s Norgaard plea without making an express finding on the record that there is a strong probability that he would be found guilty of the crime to which he pleaded guilty.
Held, neither the rules of criminal procedure nor case law require the district court, in every Norgaard guilty plea, to make an express finding on the record that there is a strong probability that the defendant would be found guilty of the crime to which he is pleading guilty. The rules of criminal procedure require only that the defendant state the factual basis for his plea. Minn. R. Crim. P. 15.01, subd. 1(8). It does not require the district court to make an express finding concerning the adequacy of the factual basis of the plea, and cases interpreting the rule have not injected such a requirement into the rule. The court of appeals notes that a person pleading guilty has the opportunity to ask the district court to make such an express finding, by filing a motion to withdraw the plea under Minn. R. Crim. P. 15.05, subds. 1 and 2, or requesting such relief in a postconviction petition. Appellant did not make such a request. Appellant’s conviction is affirmed. State v. Kevin Trent Johnson, Ct. App. 6/29/15.
• Drugs: Laboratory identification test not needed to prove identity of commercially manufactured pharmaceutical drugs. Appellant, a deputy sheriff, duplicated a key to a pharmaceutical deposit box at the sheriff’s office, and was caught on camera taking discarded medicine from the box. He was convicted by a jury of unlawful possession of prescription drugs and misconduct by a public officer. Among other arguments raised on appeal, appellant claims the evidence was insufficient to prove the medications he removed from the depository box were prescription drugs, as the state alleged, because the state failed to identify the drugs via chemical testing.
Held, laboratory testing is not essential to identify the drugs beyond a reasonable doubt when reliable nonscientific evidence exists in a prosecution for unlawful possession of prescription drugs under Minn. Stat. §151.37, subd. 1, and, in this case, the verdict was supported by reliable nonscientific evidence. Rejecting appellant’s argument that scientific testing should always be required to identify drugs beyond a reasonable doubt, the court of appeals reiterates the following principles previously established by the appellate courts: (1) the factfinder must consider and weigh the reliability of the state’s chemical identity evidence in each case; (2) the factfinder can reject as unreliable a proffered method of scientific testing; (3) the factfinder may determine identity of a drug beyond a reasonable doubt based on reliable nonscientific evidence; and (4) when the court addresses a claim of insufficient chemical identity evidence, the court will uphold the jury’s chemical identity fact-findings unless the findings are clearly erroneous. State v. Ricky Harris Gruber, Ct. App. 6/8/15.
• Drugs: First-degree sale of a controlled substance under Minn. Stat. §152.021, subd. 1(3), proper only if sale was of one of the drugs listed in this subdivision. After a jury trial, appellant was convicted of first-degree sale of a controlled substance, under Minn. Stat. §152.021, subd. 1(3), for selling pills containing oxycodone. This subdivision establishes that a person commits a first-degree controlled substance crime if on multiple occasions within a defined period he unlawfully sells “mixtures of a total weight of 50 grams or more containing amphetamine, phencyclidine, or hallucinogen or, if the controlled substance is packaged in dosage units, equaling 200 or more dosage units.” The state argued that, because appellant sold 450 pills containing oxycodone, which is packaged in dosage units, he violated this subdivision.
The ultimate question is whether the phrase “equaling 200 or more dosage units” refers to any controlled substance or only those controlled substances listed in §152.021, subd. 1(3). Based on the legislative objective to include both a type and quantity of controlled substance to delineate severity in other subparts of §152.021, subd. 1, the court finds that the phrase “equaling 200 or more dosage units” refers only to those controlled substances in the immediately preceding list of substances, namely, “amphetamine, phencyclidine, or hallucinogen.” Because oxycodone is not a controlled substance listed among the specified drugs in §152.021, subd. 1(3), Appellant was improperly convicted of first-degree sale of a controlled substance. The court reduces the conviction to an offense of lesser degree, third-degree sale of a controlled substance, and remands for resentencing. State v. Dean Aaron Anderson, Ct. App. 6/8/15.
• Criminal sexual conduct: Clergy member’s knowledge that victim sought or received religious or spiritual advice, aid, or comfort not required to prove clergy sexual conduct. Appellant was convicted of third-degree criminal sexual conduct – clergy sexual conduct, as a result of sexually penetrating A.F., a member of the parish where appellant served as a priest, at a meeting at which A.F. sought spiritual counsel. At trial, the district court refused appellant’s proposed instruction that he must know that he was providing spiritual counsel at a meeting at which he sexually penetrated A.F., and attached a knowledge requirement to only one element of the clergy sexual conduct offense: the intent to sexually penetrate. The court of appeals reversed, based, in part, on its conclusion that it was error for the district court’s instruction to omit a requirement that the state prove appellant’s knowledge with respect to the “spiritual counsel” element of the offense.
Held, the clergy sexual conduct statute does not require the clergy member to know that the victim seeks or is receiving spiritual counsel. On its face, the “spiritual counsel” element of the clergy sexual conduct statute, Minn. Stat. §609.344, subd. 1(l), carries no knowledge requirement, nor does the structure of the statute suggest a mens rea requirement for this element. But clergy sexual conduct is not a strict liability offense, as it is well established that sexual penetration must be intentional. In addition, Minn. Stat. §609.344, subd. 1, states that “[a] person who engages in sexual penetration… is guilty… if any of the following circumstances exist,” and then provides the necessary circumstances, including a meeting involving spiritual counseling. The structure of this subdivision suggests that mens rea attaches to the act described in the primary clause (“sexual penetration”) and not to the “attendant circumstances” described later in the subdivision. Thus, it was not error for the district court to refuse to give appellant’s proposed jury instruction. The Court of Appeals is reversed. State v. Christopher Thomas Wenthe, Sup. Ct. 6/24/15.
• Evidence: Prior crimes evidence admissible if it tends to disprove the elements of self-defense in murder case. At his trial for unintentional second-degree murder and first-degree manslaughter, respondent claimed that he acted in self-defense when he punched D.A. outside of a bar, which ultimately led to D.A.’s death. The court allowed the state to introduce evidence of three previous assaults involving respondent. The jury found respondent guilty of both offenses. The court of appeals reversed and remanded, finding that the prior assaults evidence did not tend to disprove the elements of self-defense and it unfairly prejudiced respondent.
In considering whether respondent’s pattern of asserting self-defense after being the aggressor in an altercation is relevant for purposes of disproving the elements of self-defense, the Supreme Court points to State v. Robinson, 427 N.W.2d 217 (Minn. 1988), which held that evidence of other crimes, wrongs, or acts offered to establish a modus operandi of asserting self-defense was relevant. The Court concludes that respondent’s past conduct had a tendency to make more or less probable the fact that respondent had an actual and honest belief of danger of death or great bodily harm, one element of self-defense.
The Court also finds that evidence of two of three of the prior incidents was admitted for a proper purpose and its probative value outweighed its potential for unfair prejudice. These two prior incidents were markedly similar to the charged offense, such that they established a similar scheme or plan. It was error to admit evidence of the third, irrelevant prior incident, but this error did not significantly affect the jury’s finding that respondent did not act in self-defense when he punched D.A. The court of appeals is reversed. State v. Paul Joseph Welle, Sup. Ct. 6/24/15.
• 4th Amendment: Proper to seize cell phone where immediately apparent that text messages seen on phone might provide evidence of a crime. Appellant called police to report that M.H., a pregnant woman, was unconscious, cold, and not breathing. When police arrived, they noticed a number of injuries to M.H.’s body. M.H. was transported to the hospital, where she was pronounced dead. Appellant told police he received text messages from M.H. while out buying food for M.H. Appellant tried to show police the text messages, and handed the phone to an officer, so the officer could determine how long M.H. had been unresponsive. The officer noted that Appellant and M.H. had exchanged text messages consistent with appellant’s statement. Appellant’s phone was turned over to a detective, who looked in the phone only to retrieve phone numbers for M.H.’s family members, with appellant’s consent. The detective later obtained a search warrant for the phone, based on his conclusion that M.H.’s death was suspicious. After obtaining a warrant, data was recovered from appellant’s phone, including additional text messages and searches made over the internet from appellant’s phone. Appellant argues on appeal that this information should have been suppressed as the fruit of the illegal seizure of his cell phone.
Held, seizure of appellant’s cell phone was lawful based on the plain-view exception to the warrant requirement. Appellant does not dispute that law enforcement was lawfully in a position from which they could view his phone, and that police had a lawful right of access to the object. The issue is whether the incriminating nature of the object was immediately apparent. Here, the initial text messages shown to the police were openly displayed on the cell phone screen, and no further examination of the phone was necessary. The incriminating nature of the messages displayed on appellant’s phone was immediately apparent when considering the content of the messages, which described where appellant would be purchasing food for M.H., the timing of the messages, and the appearance and condition of M.H.’s body, against appellant’s statements and timeline. The messages, in essence, made it appear as though M.H. were alive when in fact she was already dead. As such, the phone was properly seized under the plain-view exception. State v. Roger Earl Holland, Sup. Ct. 6/24/15.
– Frederic Bruno
– Samantha Foertsch
EMPLOYMENT & LABOR LAW
• Age discrimination; insufficient evidence of motive or pretext. The discharge of a long-time 50-year-old employee was not based on age discrimination in the absence of evidence that the action was motivated by animus or that the reasons for the termination were pretextual. The 8th Circuit Court of Appeals upheld summary judgment by U.S. District Court Judge Joan Erickson in Minnesota, in favor of the employer, as well as sanctions on the claimant’s attorney for trying to take unauthorized depositions of other executives with the company. Wagner v. Gallop, Inc., 2015 WL 3634520 (8th Cir. 6/12/2015).
• ERISA; two year limitations law. The two-year statute of limitations to challenge denial of claims for benefits under the Employment Retirement & Income Security Act (ERISA) bars an action brought by an employee for health care benefits. The 8th Circuit, in a decision by Judge Diane Murphy of Minnesota, ruled that the two-year federal statute of limitations trumps a longer state law limitations period. Munro-Kienstra v. Carpenters’ Health and Welfare Trust Fund, 2015 WL 3756712 (8th Cir. 6/17/2015).
• Labor law; NLRB determination upheld. A ruling by the National Labor Relations Board of wrongful discharge due to protected action was upheld by the 8th Circuit in a decision written by Judge James Loken of Minnesota. There was substantial evidence supporting the board’s determination that the activity engaged in by the workers was “concerted” behavior protected under the National Labor Relations Act and was a “motivating factor” in the firings. Greater Omaha Packing Co., Inc. v. NLRB, 2015 WL 3824012 (8th Cir. 6/22/2015).
• Workers Compensation; exclusivity bars claim. The exclusivity provision of the Minnesota Worker’s Compensation Law, Minn. Stat. §176.10, bars a claim for intentional injury from any of the employee’s contact with poisonous biocides at work. The court of appeals ruled that there was no allegation of deliberate intent to injure in order to involve the “intentional – injury” exception. Thommes v. Honeywell Int’l., Inc., 2015 WL 3823129 (Minn. Ct. App. 6/22/2015) (unpublished).
• Unemployment Compensation; quitting worker loses claim. An employee who quit her job to accept a settlement from the employer was not entitled to unemployment benefits. The appellate court rejected the claim of discrimination by the Muslim woman and noted that the employee voluntarily agreed to a settlement in terminating her employment. Shah v. IMI’s MN, Inc., 2015 WL 3649083 (Minn. Ct. App. 6/15/2015) (unpublished).
• Unemployment compensation; “misconduct” upheld. The Minnesota Court of Appeals upheld a pair of disqualifying “misconduct” decisions for employees seeking employment compensation benefits.
An employee who arrived late to work falsified her time card was denied benefits on “misconduct” grounds. Ristow v. Mental Health Res. Inc., 2015 WL 3823201 (Minn. Ct. App. 6/22/2015) (unpublished).
Another worker who failed to tell his employer of a careless driving conviction also lost his bid for benefits. His claim that a lesser punishment was appropriate was “irrelevant” to the “misconduct” issue. Penny-Ruffin v. Powers, 2015 WL 3823123 (Minn. Ct. App. 6/22/2015) (unpublished).
• Principal termination; substantial compliance with education. A probationary principal in the St. Louis Park School System lost her challenge to non-renewal of her contract due to failure to comply with the statutory requirements for teacher evaluation. The Minnesota Court of Appeals held in a certiorari proceeding that there was substantial compliance with the requirements under Minn. Stat. §123B.147 subd. 3 that a teacher, which covers principals, be evaluated within the first 90 days of the teaching. Karetov v. Indep. School Dist. No. 283, 2015 WL 3649151 (Minn. Ct. App. 6/15/2015) (unpublished).
• Unemployment compensation; chemical dependency reversed. A dismissed server at a now-defunct restaurant in Shoreview was entitled to unemployment compensation benefits under the “chemical dependency” exception to the disqualifying “medical” provision of the unemployment laws. The court of appeals, reversing a decision of an Unemployment Law Judge (ULJ) with the Department of Employment & Economic Development (DEED), ruled that the terminated employee satisfied the requirements of Minn. Stat. §268.095, subd. 6(b)(9), in that her behavior was a “consequence of chemical dependency and she had not failed to remain free of chemical dependency.” Berglund v. Kozlak’s Royal Oak Restaurant, Inc., 2015 WL 3649090 (Minn. Ct. App. 6/15/2015) (unpublished).
The Obama administration used an early summer appearance by the president to announce a proposed initiative to expand overtime compensation requirements to lower salaried workers. He announced the long-awaited rule by the Department of Labor that would require salaried employees earning less than $970 per week to be eligible for overtime, more than double the current $475 weekly threshold. If ultimately adopted, the measure also would address future inflation and wage growth by unions by setting the salary threshold at the 40 percent of the average income level. The regulation would obviate the current rule banning 1-1/2 times overtime pay for some employees deemed managers, who may be making less per hour than employees they supervise.
The U.S. Supreme Court also will delve into overtime issues this fall. One of the cases on its docket for the 2015-16 term, beginning in the first week of October, is a case involving the recurring issue of whether employees must be compensated for time “doffing and donning” required workplace apparel. The High Court in Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, will consider an appeal from a decision by the 8th Circuit Court of Appeals last fall upholding a $5.8 million class action judgment for Iowa plant workers, 765 F.3d 791 (8th Cir. 2014). The Court will examine whether the case should have been certified for class action treatment, as well as the propriety of the damages awarded to the workers for time spent putting on and removing work clothes at the factory before and after their shifts, an issue that has been addressed by a number of tribunals, including a similar decision last term by the Supreme Court regarding a contention by warehouse workers that they should be paid for time spent going through post-shift security channels in Integrity Staffing Solutions, Inc., 135 S. Ct. 513 (2014).
– Marshall H. Tanick
Hellmuth & Johnson, PLLC
• Change of life insurance beneficiary designation. Wife was the beneficiary of husband’s $1 million life insurance policy that he had purchased during the marriage. In February 2012, husband contacted an attorney about preparing a joint petition to dissolve the parties’ 16-year marriage. In April 2012, before the joint petition was prepared, husband removed wife as the beneficiary of his policy and named his parents and his sister as beneficiaries. One month later, wife commenced a dissolution proceeding by having husband served with a summons and petition. Husband died in September 2012 before the marriage was dissolved and the district court dismissed the proceeding.
At some point earlier in the marriage, husband had executed a will that intentionally omitted wife as a beneficiary of his estate based on his belief that wife’s family would take care of her. After husband’s death, wife exercised her rights as a surviving spouse and sought homestead rights, a family allowance, household furnishings, and an elective share of husband’s augmented estate. Wife also brought an action against husband’s parents and sister, arguing that the change in beneficiary designations violated Minn. Stat. §518.58, subd. 1a., which prohibits transfers of marital assets in contemplation of divorce. After cross-motions for summary judgment, the district court ruled in favor of the beneficiaries, concluding that the life insurance policy was not a marital asset, that husband had not been under restraints at the time he changed the beneficiary designation, and that the policy was not an asset subject to division in the dissolution.
The court of appeals affirmed the district court, reasoning that no relief was available under Minn. Stat. §518.58, subd. 1a. because the statute has no application outside of proceedings for dissolution of marriage. The Supreme Court agreed with the court of appeals because the words “current dissolution” and reference to compensating the aggrieved party when “dividing the marital property” make it clear that relief under the statute may only be granted within a marriage dissolution proceeding. Nelson v. Nelson, ___ N.W.2d ___ (Minn. 2015).
• Duty to maximize unearned income. May a district court base its spousal maintenance decision on an obligee’s ability to rearrange her investments to generate more income? This was the focus of an unpublished split decision from the court of appeals.
The parties were married in 1990 and had two children, one of whom was emancipated. Husband was a dentist and had earned a substantial income. Wife was a homemaker. The parties stipulated that wife would receive 57 percent of the marital estate and husband would receive 43 percent of the marital estate. Wife’s share totaled about $2.2 million and consisted of the homestead and a portfolio of investments. They could not resolve wife’s spousal maintenance claim and the district court, following trial on that issue, denied her request because it found that wife could meet her needs by reallocating her portfolio from growth-oriented funds to income-oriented funds. This finding was based on testimony from husband’s financial expert that wife’s portfolio could be generating about 7 percent instead of the 1.7 percent return it had been generating in growth-oriented funds. Wife argued that any reallocation of the portfolio amounted to an impermissible invasion of assets. The district court rejected this argument and the majority of the court of appeals agreed, because only the income produced by the portfolio would be used to meet wife’s needs and the principal would not be depleted at all.
Judge Kirk disagreed with the majority for a variety of reasons, but was critical of the reallocation conclusion because he saw that as amounting to a requirement that wife deplete the principal of her property award. First, he pointed out that reallocating the portfolio would trigger tax consequences for wife to the tune of about $150,000. The majority was aware of this but held that ignoring the taxes was within the district court’s discretion, citing Maurer v. Maurer, 623 N.W.2d 604, 608 (Minn. 2001), for the proposition that “whether to consider the tax consequences of a property distribution lies within the district court’s discretion.” Judge Kirk also argued that reallocating investments forced wife to deplete the principal of the property award because the 7 percent rate of return figure accepted by the district court included capital gains.
Finally, Judge Kirk argued that “[c]onversion of one type of investment account into another also changes the nature of the asset, which is analogous to invading the principal or liquidating the investment.” He pointed out that at least one unpublished opinion, Schneider v. Nicholls, No. C5-91-832, 1991 WL 245229 (Minn. Ct. App. 11/26/1991), drew the same analogy: “Just as a court cannot order a spouse to invade her assets to meet her needs… neither can it require [a spouse] to change the nature of these assets in order to produce income to meet her needs.”
As of this writing, no petition for review has been filed. Curtis v. Curtis, No. A14-1841 (Minn. Ct. App. 6/22/2015).
– Jaime Driggs
Henson & Efron
• Denial of motion to remand effectively unreviewable. Relying on the Supreme Court’s decision in Caterpillar, Inc. v. Lewis, 519 U.S. 61 (1996), the 8th Circuit held that even if a district court had erred in denying the plaintiffs’ motion to remand, that error would not warrant a reversal following a decision on the merits. Quintero Community Ass’n Inc. v. FDIC, ___ F.3d ___ (8th Cir. 2015).
• Improperly identified Fed. R. Civ. P. 50 motions no bar to relief. Where the defendant’s counsel twice moved for a “directed verdict” before the case was submitted to the jury and filed a post-judgment motion for “judgment not withstanding [sic] the verdict,” the 8th Circuit held that the defendant had properly preserved issues for appellate review despite his counsel’s failure to identify any of the motions as motions for “judgment as a matter of law.” Estate of Snyder v. Julian, ___ F.3d ___ (8th Cir. 2015).
• Waiver of right to removal; “substantial action;” state court motion to dismiss for lack of prosecution. The 8th Circuit held that a defendant’s filing of a motion to dismiss for lack of prosecution in state court was not a “substantial action” that constituted a “clear and unequivocal waiver” of its right to subsequently remove the action to federal court. PR Group, LLC v. Windmill Int’l, Ltd., ___ F.3d ___ (8th Cir. 2015).
• Rooker-Feldman; Younger; trial court erred by abstaining. The 8th Circuit held that a district court had erred in dismissing plaintiffs’ declaratory judgment action under the Rooker-Feldman doctrine and engaging in Younger abstention, finding that Rooker-Feldman was a “narrow” doctrine, and that the plaintiffs’ claims did not fall within the scope of the doctrine because they were not asking the federal court to overturn a state court judgment. The 8th Circuit also found that Younger abstention was not warranted where no state court action was pending. Banks v. Slay, ___ F.3d ___ (8th Cir. 2015).
• Sanctions on appeal; “frivolous as filed” versus “frivolous as argued.” Affirming a district court’s imposition of Rule 11 sanctions against the plaintiff, the 8th Circuit rejected the defendant’s request for attorney’s fees on appeal, finding that the appeal was not frivolous “as filed,” but nevertheless found that portions of the appeal were “frivolous as argued” where the plaintiff “persisted in frivolously misrepresenting the district court’s rulings” and “flagrantly misrepresented governing law,” and awarded double costs on appeal as an “appropriate” sanction under Fed. R. App. P. 38. David M. Meyer and Nancy R. Meyer Trust v. U.S. Bank N.A., ___ F.3d ___ (8th Cir. 2015).
• Federal Rules of Civil Procedure trump Minnesota’s anti-SLAPP law. Adopting a report and recommendation by Magistrate Judge Keyes, Judge Ericksen recently held that certain procedures mandated by Minnesota’s anti-SLAPP law were inapplicable because they conflicted with the summary judgment process established by the Federal Rules of Civil Procedure. Unity Healthcare, Inc. v. County of Hennepin, 2015 WL 3935878 (D. Minn. 6/25/2015).
• First-filed rule; compelling circumstances exception. Finding “red flags” and evidence of a “race to the courthouse,” Judge Montgomery applied the comparatively rare “compelling circumstances” exception to the first-filed rule in refusing the defendant’s request to dismiss a second-filed action pending in the District of Minnesota. Daikin Applied Americas Inc. v. Kavlico Corp., 2015 WL 3654340 (D. Minn. 6/11/2015).
• Motion to amend denied; failure to comply with local rule 15.1(b). Granting several defendants’ motion to dismiss, Judge Frank denied plaintiffs’ conditional motion for leave to amend, finding that their failure to submit a proposed amended complaint as required by Local Rule 15.1(b) meant that the court “cannot determine whether any proposed amendment should be granted.” RAS Land Holdings LLC v. Litchfield Building Ctr., 2015 WL 3692543 (D. Minn. 6/12/2015).
• Request for videotaped inspection of foreign factory denied. Overruling the plaintiff’s objections to an order by Magistrate Judge Keyes, Chief Judge Tunheim denied the plaintiff’s request for an order compelling a videotaped inspection of the defendant’s Juarez, Mexico facility, suggesting that the inspection would amount to a “fishing expedition,” and that any inspection six years after the defendant manufactured its allegedly defective product would be of “minimal value.” Webb v. Ethicon Endo-Surgery, Inc., 2015 WL 4094006 (D. Minn. 7/7/2015).
• Motion for 28 U.S.C. §1292(b) certification denied. Denying one defendant’s motion for certification of a jurisdictional issue under 28 U.S.C. §1292(b), Judge Nelson criticized the defendant’s “unfortunately inaccurate account” of the procedural posture of the case and its “mischaracteriz[ation]” of the court’s prior order. Great Lakes Gas Transmission L.P. v. Essar Steel Minnesota, LLC, 2015 WL 3915687 (D. Minn. 6/25/2015).
– Josh Jacobson
Law Office of Josh Jacobson
• Minnesota Indian Family Preservation Act (MIFPA) proceeding; injunction denied. Unnamed parents brought a 14th amendment challenge to MIFPA’s tribal notice requirements. Noting (but not deciding) Younger abstention issues, the District Court of Minnesota refused to preliminarily enjoin the MIFPA proceedings. Although potential disclosure of the parents’ identities would be irreparable, statutory and judicial safeguards make unwanted disclosure unlikely, so there is no risk of irreparable harm. Doe v. Jesson, Civil No. 15-2639 (D. Minn. 7/2/2015).
• National Labor Relations Act (NLRA) and tribes; the split widens. In the Little River case, a divided 6th Circuit Court of Appeals panel held that the NLRA applies to tribes. Three weeks later, the Soaring Eagle panel applied the NLRA to a different tribe, but only because it felt bound by Little River. The bulk of the Soaring Eagle decision addressed the second panel’s opinion that Little River was wrongly decided and that the NLRA should not apply to tribes. The dueling 6th Circuit decisions widen the current circuit split. The D.C. and 9th Circuit Courts of Appeal apply the statute to tribes, but the 10th Circuit Court of Appeals has refused to do so. NLRB v. Little River Band of Ottawa Indians, 2015 WL 3556005 (6th Cir. 6/9/2015); Soaring Eagle Casino and Resort v. NLRB, 2015 WL 3981378 (6th Cir. 7/1/2015).
• Gaming contracts; tribes must be primary beneficiaries. In 1988, the tribe and city entered into a joint venture to operate a casino and memorialized that agreement in a federal consent decree. In 2011, the federal agency charged with Indian gaming oversight ordered the tribe to stop making payments to the city and the tribe sought Fed. R. Civ. P. 60(b)(6) relief from the consent judgment. Reversing the District Court’s denial (for a second time), the 8th Circuit remanded with direction to give “significant weight” to the congressional policy that tribes be the sole beneficiary of gaming operations. City of Duluth v. Fond du Lac Band of Lake Superior Chippewa, 785 F.3d 1207 (8th Cir. 2015).
• No tribal-court jurisdiction over state school district located on reservation. Fort Yates Public School District operates on the Standing Rock Sioux Tribal Reservation and is party to a joint powers agreement with the tribe to govern the school system. The mother of one student who was involved in a physical altercation with another student brought a tribal-court action against the school district. The school district sought a federal injunction to halt the tribal court from proceeding because it lacked jurisdiction over the school district. The 8th Circuit relied upon the general rule that tribal courts lack jurisdiction over nonmembers, and declined to apply that rule’s two exceptions as set forth in Montana v. United States, 450 U.S. 544, 565 (1981): (1) tribal court jurisdiction may exist when nonmembers enter into consensual relationships with a tribe; and (2) tribal jurisdiction exists when nonmember conduct threatens or has some direct effect on the political integrity, economic security, or the health or welfare of a tribe. The 8th Circuit held that the first Montana exception does not apply to agreements made by states or state actors, and because of a North Dakota statute that limits a school district’s ability to agree to jurisdiction by contract. The second Montana exception also did not apply here, per the 8th Circuit, because the underlying conduct clearly does not “imperil the subsistence” of the tribe, and tribal court jurisdiction is not “necessary to avert catastrophic consequences.”
The school district did not need to exhaust tribal-court remedies because, according to the 8th Circuit, the tribal court plainly lacked jurisdiction. Finally, although the tribal court’s sovereign immunity barred the claims against it, the matter was remanded for further proceedings as to the child’s mother, who is also a defendant in the federal matter. Fort Yates Pub. Sch. Dist. #4 v. Murphy ex rel. C.M.B., 786 F.3d 662 (8th Cir. 2015).
• Lacey Act does not bar Chippewa Indians from exercising treaty-reserved right to net fish on reservation lakes. Four Chippewa Indians (three Leech Lake Band members and one White Earth Band member) were indicted under the Lacey Act, which makes it unlawful to “sell… any fish… taken, possessed, transported, or sold in violation of… any Indian tribal law.” 16 U.S.C. §3372(a)(1). The indictments alleged that the tribal members had netted fish for commercial purposes within the boundaries of the Leech Lake Reservation in violation of the Leech Lake Conservation Code, and then sold the fish. The 8th Circuit affirmed the district court’s dismissal of the indictments on the ground that the prosecution violates fishing rights reserved under the 1837 Treaty between the United States and the Chippewa. United States v. Brown, 777 F.3d 1025 (8th Cir. 2015).
– Jessica Intermill
– Jessie Stomski Seim
Hogen Adams PLLC
• Patents: Licensee’s standing to sue. Judge Nelson recently denied defendants’ motion to dismiss for lack of standing to sue for patent infringement. Luminara sued Liown Electronics and other retailers for patent infringement of artificial flame technology licensed from Disney Enterprises. As a licensee bringing the lawsuit, Luminara was required to have both constitutional standing and prudential standing. Constitutional standing is based on a proprietary and exclusionary interest in the patent, while prudential standing is based on which parties must be included in the litigation. Luminara had obtained an exclusive license and all substantial rights to the patent and thus had standing to sue in its own name. In considering whether all substantial rights were conveyed, the court made a “totality” determination. First, the court found Luminara had a proprietary interest in the patent, as it had an exclusive license to make, use, and sell the products. Next, the court found that Luminara had the sole and exclusive right to enforce the patent. Finally, the court found Luminara had the right to sublicense and assign the patent. The fact that Disney retained the rights to practice the technology, terminate the license, receive royalties, and remain informed regarding sublicensing and enforcement did not affect the totality determination and did not require that Disney be a party. Therefore, Luminara alone had both constitutional and prudential standing to sue Liown and the retailers. Luminara Worldwide, LLC v. Liown Elecs. Co., 2015 U.S. Dist. LEXIS 57370 (D. Minn. 4/20/2015).
• Copyrights: Preempts state claims. A panel for the United States Court of Appeals for the 8th Circuit recently affirmed a ruling from the District Court for the Western District of Missouri properly dismissing a lawsuit for failure to state a claim, finding that all claims were preempted by the Copyright Act. Former professional wrestler Steve Ray sued ESPN, Inc. and its affiliates, alleging state-law claims of invasion of privacy, misappropriation of name, infringement of the right of publicity, and interference with prospective economic advantage for re-broadcasting Ray’s wrestling matches without obtaining his consent. The court found that filming of the wrestling matches constituted an original work of authorship falling within the subject matter of copyright protection. Furthermore, Ray’s likeness could not be separated from the copyrighted performances. As Ray’s state-law rights would be infringed by the mere reproduction of the performances, an act protected by the Copyright Act, the state-law claims were preempted. Ray v. ESPN, Inc., 2015 U.S. App. LEXIS 6653 (8th Cir. 4/22/2015).
• Trademarks: Likelihood of confusion. Judge Montgomery recently granted plaintiff’s motion for summary judgment and permanently enjoined defendants from continued infringement of ZEROREZ. Zerorez sued Distinctive Cleaning, Inc. for trademark infringement and trademark counterfeiting for use of such phrases as “Zero Res,” “Zero Rez,” and “ZERO REZ” in its online advertising. The court found a likelihood of customer confusion existed as a matter of law, as five of six factors favored Zerorez. First, Zerorez had a suggestive mark with commercial recognition. Second, Distinctive’s advertising phrases were similar to Zerorez’s mark. Third, the two companies competed in close geographic proximity. Additionally, Distinctive acted with intent to confuse the public, as Distinctive’s emails showed “Zero Rez generated LOTS of leads.” Finally, the court found actual confusion as Zerorez’s call center received multiple complaints about hiring Distinctive believing it was Zerorez. Despite the customers being expected to exert care before allowing a stranger into their homes, the court found a likelihood of confusion. The court then requested additional briefing on the issues of profits, damages, and attorney’s fees. Zerorez Franchising Sys. v. Distinctive Cleaning, Inc., 2015 U.S. Dist. LEXIS 58635 (D. Minn. 5/5/2015).
– Tony Zeuli
– Joe Dubis
Merchant & Gould
PROBATE AND TRUST LAW
• IRS will no longer automatically issue estate closing letters. Effective for estate tax returns filed on or after 6/1/2015, the IRS will only issue a closing letter upon request of the taxpayer. Requests should not be submitted until at least four months after filing the estate tax return. IRS sources indicate that this is a cost-saving measure made necessary by recent reductions to the IRS budget coupled with the increase in estate tax returns filed solely to elect portability. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes
• Final portability regulations issued. Final regulations relating to the portability of a deceased spouse’s unused exemption (DSUE) have been issued. Small estates with a gross value below the federal filing threshold may be granted a discretionary extension of time to elect portability. Such discretionary extension is not available under Reg. §301.9100-3 to estates that are required to file an estate tax return. The final regulations clarify certain rules relating to the application of portability to qualified domestic trust and the availability of DSUE to a non-citizen surviving spouse who subsequently becomes a U.S. citizen. The final regulations also address the impact of credits under IRC §§2012-2015 on computation of the DSUE amount and what constitutes a “complete and properly prepared” estate tax return for purposes of the portability election. See T.D. 9725, 80 Fed. Reg. 34, 279 (6/16/2015).
• Basis adjustments for intentional grantor trust added to IRS no-rulings list. The IRS will no longer make determinations regarding the application of a §1014 basis adjustment to assets in an intentionally defective grantor trust upon the death of the grantor. This no-rulings position applies to all requests received after 6/15/2015. Rev. Proc. 2015-37, 2015-26 IRB 1196 (6/15/2015).
• IRS to issue proposed valuation discount rules. The IRS is expected to issue proposed rules by early fall 2015 that could significantly impact valuation discounts customarily taken on transfers of family-owned entities. Some experts are advising clients hoping to take advantage of favorable valuation discounts to act now. Diane Freda, Discounts on Transfers of Family Entity Interests Threatened, Daily Tax Rep. (BNA) G-5 (7/13/2015).
– Robin R. Tutt
Lindquist & Vennum LLP
• Mortgages; bankruptcy; homestead. The Minnesota federal district court dismissed with prejudice an action for declaratory judgment and specific performance by a mortgagor seeking to void a mortgage and avoid paying the debt because she did not sign the note evidencing the loan debt, and because the note debt was discharged in her ex-husband’s bankruptcy. Plaintiff and her then-husband obtained a mortgage loan for jointly owned property while married, and provided a mortgage that was ultimately assigned to U.S. Bank. While the mortgage was executed by both the plaintiff and the husband, the note was executed by the husband alone. Upon divorce, the plaintiff was granted all marital right, title, interest, and equity in the mortgaged property, but she did not assume the note obligation.
The ex-husband subsequently filed for Chapter 7 bankruptcy protection in February 2013, six years after the divorce. Plaintiff had previously, in October 2013, filed a lawsuit on the same grounds as the current lawsuit. The defendants in the first lawsuit removed the lawsuit to federal district court and were granted their motion to dismiss, but the court also granted plaintiff leave to amend. The plaintiff filed a second lawsuit in state court, which was again removed. The federal district court, on a motion to dismiss, again dismissed the plaintiff’s claims, but with prejudice. The plaintiff argued that the lien is invalid, that her ex-husband’s bankruptcy invalidated the lien, and that failure to obtain her signature on the note disrupts her homestead rights, which should invalidate the lien.
The court summarily dismissed the plaintiff’s first argument on the basis that she had pled only speculative or conclusory allegations. The court next held that the ex-husband’s bankruptcy discharge has no effect on the mortgage lien. While the ex-husband’s personal liability upon the note is discharged, mortgagees retain their rights to collect their debt in rem via the mortgage lien, which passes through bankruptcy unaffected. While the lender may not pursue individuals for payment of the loan debt, it has a right to collect the amount owed by resorting to action against the property. Finally, the court rejected the plaintiff’s homestead argument under Minnesota Statutes section 507.02. The statute states that for married owners, “no conveyance of the homestead… shall be valid without the signature of both spouses.” The promissory note is a contract, not a conveyance of an interest in real estate. Therefore, the court held that both the half-interest conveyed to the plaintiff from the ex-husband and her original half-interest are subject to the mortgage. Duncan v. Bank of America, N.A., et al., No. 14-901, 2015 WL 3795778 (D. Minn. 2015).
• Mortgages; loan modification application; foreclosure sale. The Minnesota federal district court voided a foreclosure sale because the mortgagee failed to strictly comply with Minnesota Statutes chapter 580 and did not halt the sale after timely receiving an incomplete loan modification application prior to sale. Plaintiffs are owners of a Minnesota residence upon which they granted a mortgage in 2005 as security for a loan. In April 2013, the lender began the foreclosure process after the plaintiffs had been delinquent on payments since mid-2011. A sheriff’s sale set for June 2013 was postponed for five months after the plaintiffs exercised their rights under Minnesota Statutes section 580.07 in exchange for a shortened redemption period.
Two weeks before the November 2013 sheriff’s sale, the plaintiffs submitted a loan modification application, which was accepted, but had deficiencies. The lender requested additional materials, which were delivered two days before the sheriff’s sale. The sale proceeded and the lender recorded a certificate of sale indicating a five-week redemption period. The certificate was recorded twenty-six days after the sale. The plaintiffs filed a lawsuit in Minnesota state court that was later removed to federal court, seeking a declaration that the sheriff’s sale is void. The plaintiffs later moved for summary judgment, arguing that the lender failed to timely record the sheriff’s certificate and that the lender wrongfully failed to postpone the sheriff’s sale further once it received the plaintiffs’ loan modification application. The lender failed to record the sheriff’s certificate within ten days after the sale as required under Minnesota Statutes section 580.12, but argued that voiding the sale would be inequitable because its delay was to allow time to review the plaintiffs’ loan modification application.
The federal district court rejected the lender’s argument, relying on Jackson Mortgage Electronic Registration Systems, Inc., 770 N.W.2d 487 (Minn. 2009), and found that no fact dispute existed regarding the timeliness of recording. The court held that failure to strictly comply with Minnesota Statutes chapter 580 voids a foreclosure sale, no matter how minor the failure is, and without regard to equitable concerns. Additionally, the court rejected the lender’s argument that it did not have a duty to halt the foreclosure sale under Minnesota Statutes section 582.043, subd. 6(c) because the plaintiffs’ loan modification application was incomplete. The court recognized that the statute may invite “signature-only” applications. But, the court determined that such a scenario was not present in this case because “core documents” had been submitted. Mann v. Nationstar Mortgage, LLC, No. 14-99, 2015 WL 4094209 (D. Minn. 2015).
– Joseph P. Bottrell
Meagher & Geer, PLLP
• Income tax: Child did not qualify as qualifying child for credits and head of household status. In a recent case, the Minnesota Tax Court determined that the taxpayer was not entitled to claim a minor child as a dependent and, therefore, could not claim a head of household filing status, and also did not qualify for the Minnesota Working Family and K-12 Education credit. The taxpayer did not have a “qualifying child” under the IRC Code §152(c) during 2012. The taxpayer, his ex-wife, and the minor child lived together during all of 2012. Under IRC Code §152(c)(4)(B), the child is the “qualifying child” of the parent with the higher adjusted gross income. The record showed that the ex-wife, and not the taxpayer, had a higher adjusted gross income for 2012. Kallys Albert, SRI, v. Commissioner of Revenue, Docket No. 8716, 2015 WL 2329291 (Minn. T. Ct. 5/14/2015).
• Sales taxes: Installation and removal of holiday lighting and displays retail sales. The Minnesota Tax Court held that the installation and removal of exterior holiday lighting and displays was a retail sale and therefore subject to sales tax. The taxpayer argued that the sales tax does not apply because the installation and removal were services incidental to landscaping construction contracts under Minn. Stat. §297A.61, Subd. 3(g)(6)(vi) or were contracts for improvement of real property. The court, to the contrary, held that the nature of the taxpayer’s services were not “botanical,” and as such, are not of a “similar” nature to those services performed under a construction contract as contemplated under Minn. Stat. §297A.61, Subd. 3(g)(6)(vi). Robert W. Schlosser/Schlor Enterprises v. Commissioner of Revenue, Docket No. 8553, 2015 WL 3422003 (Minn. T. Ct. 5/21/2015).
• Sales and use tax: Materials used in industrial drying systems exempt in Minnesota. The Minnesota Tax Court held that the materials the taxpayer installed or otherwise used in the manufacture of its industrial drying systems were exempt from use tax since they were purchases for resale by the taxpayer in the normal course of business. The tax court rejected the commissioner’s claim that the materials were taxable because they were used in the erection of buildings or the alteration, repair, or improvement of real property under Minn. Stat. §297A.61, Subd. 4(d). Although “real property” is not defined in the sales and use tax law, read together, Minn. Stat. §272.03, Subd. 1 and Minn. Stat. § 297A.61, Subd. 10(b) , include in the definition of “real property” only those items that are of permanent benefit to the building, regardless of its use, and exclude from the definition of “real property” those items installed for use only in the business or production activity being conducted and not of permanent benefit to the building. The taxpayer’s drying systems were not used to improve “real property” because they are “attached to or installed in real property for use in the business or production activity conducted thereon,” within the meaning of the exclusion from real property under Minn. Stat. §272.03, Subd. 1(c)(i). Dahmes Stainless, Inc. v. Commissioner of Revenue, Docket No. 8288-R, 2015 WL 1542287 (Minn. T. Ct. 4/7/2015).
• Procedure: Taxpayer must appeal all orders in order for the tax court to have jurisdiction. The Minnesota Tax Court dismissed taxpayer’s appeal since the appeal can only cover permits specified in the order. The taxpayer was assessed in July 2013 for specified periods and again on August 13, 2013 for different periods. The taxpayer appealed both orders administratively to the DOR. On October 18, 2013, the DOR only denied one of the orders. The taxpayer, on October 30, 2013, appealed contending that the order gave the tax court jurisdiction for all the periods (July 2013 assessment and August 13, 2013 assessment). Even though both orders were jointly protested to the DOR, when the DOR denied only one order, specifying only a portion of the years, the remaining years were retained in administrative appeal and, therefore, the tax court lacked jurisdiction of those years. Todd O. Greseth v. Commissioner of Revenue, Docket No. 8658, 2015 WL 2329377 (Minn. T. Ct. 4/29/2015).
• Procedure: Appeal dismissed because of lack of postmark on the envelope. In a recent case, the Minnesota Tax Court dismissed the taxpayer’s appeal because it was filed two days after the 60-day period and the envelope in which the tax court received the notice of appeal bore no postmark. The Court took the position that the mailbox rule, under Minn. Stat. §271.06, Subd. 2(a) is only applicable if there is a postmark on the envelope since the statutory words read “the date of the United States postmark stamped on the envelope in which the notice of appeal… [is] mailed.” Minikahda Mobil LLC v. Commissioner of Revenue, Docket No. 8804, 2015 WL 2018571 (Minn. T. Ct. 4/24/2015).
• Real property taxes: Taxpayer’s appraisal barred for failure to disclose in discovery. The Minnesota Tax Court agreed with the county’s motion to bar the taxpayers’ appraisal from evidence that was not produced during discovery pursuant to Minnesota Rule 37.03(a) and Minnesota Rule of Evidence 705. The taxpayer did not identify the appraiser’s name nor the existence of the appraisal in the discovery period. The taxpayer appealed the 2011 assessment and procured their first appraisal in March 2011, which valued the property at $490,000, down from the assessed value of $668,000. Later the taxpayer procured a second appraisal in April 2012. The second appraisal valued the property as $245,000 but as of the assessment date of January 1, 2012. The county asked during the discovery period for any appraisals and the name of any appraisers that would be witnesses. The taxpayer did not disclose the second appraisal. Dennis L. and Monica Geyen v. the County of Washington, Docket No. 82 CV 12 2784, 2015 WL 3413257 (Minn. T. Ct. 5/27/2015).
• Real property taxes: Taxpayer’s real property appeal dismissed as untimely filed. The Minnesota Tax Court dismissed the taxpayer’s appeals of property taxes for taxes assessed 2008 through and including 2012 but not 2013. The taxpayer was a notorious tax protestor and the Hennepin County District Court had previously issued an order barring him from filing any further litigation unless represented by an attorney, and the chief judge of the court approved. Nonetheless, the taxpayer filed a real property petition challenging the taxes under various arguments for the assessment years 2007 through and including 2013. He also alleged a Section 1983 action against Hennepin County for unlawful and unconstitutional deprivation of their rights. The tax court held that the Hennepin County judge’s order barring the taxpayer from filing a lawsuit did not apply since it only applied to district court actions, not tax court actions. Further, the appeals of the assessments for years assessed 2007 through 2012 were untimely under Minn. Stat. §271.01, Subd. 1(c) as there were multiple years on one petition and they were not filed by April 30. The constitutional claim under 42 USC 1983 was dismissed since the tax court is an administrative agency of the executive branch and therefore it has limited jurisdiction, citing Minn. Stat. §271.01, Subd. 1. Lastly, the county’s motion for a protective order was denied. There was a lack of proof that a protective order was needed by the court from burdensome discovery by the taxpayer for the 2013 assessment taxes payable 2014. Ronald R. and Dee L. Johnson v. County of Hennepin, Docket No. 27-CV-14-07031, 2015 WL 2329349 (Minn. T. Ct. 5/12/2015).
• Sales and use tax: Credit card issuer not allowed bad debt deduction. The Minnesota Tax Court held that Citibank, as the issuer of private-labeled credit cards, could not receive sales and use tax refunds for defaulted credit card debt purchases made by customers from retailers. Citibank issued private-labeled credit cards to retailers such as Sears. Customers charged amounts on these private-labeled credit cards and Minnesota sales and use tax was paid upon the purchase. The sales tax was paid by Citibank to the retailer along with the total amount charged. The retailer filed Minnesota sales and use tax returns and paid the applicable sales tax to Minnesota for years 2006 through 2009. Later, the customers defaulted on their obligations to Citibank and Citibank wrote off these accounts as bad debts and applied for sales and use tax refunds under Minn. Stat. §297A.81. The basic question was whether Citibank was “the taxpayer” under Minn. Stat. §297A.81, and who is: (1) subject to sales and use tax; (2) liable for sales and use tax; (3) required to file a sales and use tax return; (4) required to withhold or collect sales and use taxes and remit them to the state; (5) required to obtain a sales tax permit; or (6) required to keep records of sales and use tax. Citibank argued that it was the “taxpayer” since it was a “person” who operated as a combination or unit under Minn. Stat. §297A.61, Subd. 2. The Court would have none of it and said the “taxpayer” is limited to a taxpayer that performs the required described obligations of collecting, remitting, and filing the return. That did not happen here. Citibank (South Dakota) N.A., and Citigroup, Inc. v. Commissioner of Revenue, Docket No. 8488-R, 2015 WL 3852970 (Minn. T. Ct. 6/4/2015).
• Corporate income tax: Taxpayer could not use multistate tax compact apportionment formula. The Minnesota Tax Court held that a taxpayer could not use the Multistate Tax Compact’s equally weighted 3-factor apportionment formula to apportion its income to Minnesota. The court rejected the taxpayer’s argument that although the state amended its version of the compact to eliminate Articles III and IV of the compact (relating to apportionment) in 1987, Minnesota was still obligated to allow taxpayers to use the Compact’s 3-factor apportionment formula during the tax years at issue until it formally repealed the compact in 2013. Kimberly-Clark Corporation & Subsidiaries v. Commissioner of Revenue, Docket No. 8670-R, 2015 WL 3843986 ( Minn. T. Ct. 6/19/2015).
• Income tax: Nonqualified ESOP distribution was taxable income and subject to six-year statute of limitations. The 8th Circuit affirmed the tax court, and held that an unreported distribution of a newly acquired LLC stock from taxpayer’s nonqualified ESOP to his IRA was a taxable distribution; and when not reported, was subject to the six-year statute of limitations under IRC Code §6501(e)(1). The taxpayer argued that the three-year statute should apply because the IRS obtained actual knowledge of the distribution within three years of the return, via an unrelated audit. The 8th Circuit said that this was an erroneous view of a prior statute of limitations and not the current law. Taxpayer’s reasonable belief that the distribution was tax-free was irrelevant on the application of the statute of limitations. Further, the nonqualified distribution was not adequately disclosed on any returns to constitute a “clue” for the IRS. Heckman v. Commissioner, 115 AFTR 2d ¶ 2015-817 (8th Cir. 2015).
• Real property taxes: multiple parcels of forestlands can be valued under the unit approach rather than as separate parcels. The Minnesota Tax Court held that Blandin Paper Company’s 4,680 parcels of timber covering 187,000 acres and lying in four counties and distributed among 78 taxing districts in those counties should be valued as an economic unit under the traditional sales and income approaches. The resulting value should then be apportioned to each of the 78 taxing districts. The counties valued the properties for assessment January 2, 2010, at approximately $190 million, which the court reduced to a unit value of $52 million. The counties valued the various parcels under the separate parcel approach at $189 million for the assessment January 2, 2011, and the court decreased to a unit value of $25 million. The counties argued that since the administration of the various parcels was performed on an individual parcel basis, the substantive standard for real property value would be individual parcel valuation rather than unit value. The court disagreed and found that the best and highest use of the property was for forest activities and should be valued as a whole. Blandin Paper Company v. County of Aitkin, et al, Docket Nos.: 01-CV-11-375, et al, 2015 WL 3767339 (Minn. T. Ct. 6/16/2015).
• Income taxes: Worker’s compensation award taxable income. The Court of Appeals for the 9th Circuit affirmed the lower court and concluded that firefighters, who retired with service?related disabilities, could not exclude from income under IRC Code §104(a)(1) amounts received under the Workman’s Compensation Acts as personal injuries or sickness. IRC Code §104(a)(1) excludes from gross income amounts received under workman’s compensation as compensation for personal injuries or illness. However, IRC Code §104(a)(1) does not apply to the full extent that the payments are determined by reference to the employee’s age or length of service or prior contributions, even if his retirement is occasioned by an occupational injury. See Regulation §1.104-1(b). Here, the 9th Circuit concluded that the portion of each of the taxpayers’ pensions that exceeded half his final salary was determined by reference to his length of service and, accordingly was not excludable under Regulation § 1.104-1(b). Campbell v. United States, 115 AFTR 2nd ¶2015-2075 (9th Cir. 2015).
• Income tax: No double deduction for settlement payments under a claim of right doctrine. The 11th Circuit, in a very complicated case, held among other things that the estate could not claim both an estate tax deduction under IRC Code §2053 and an income tax deduction for the same payments. The taxpayer sold his business, was then sued by investors, and died. His estate eventually paid $41 million in settlement payments to the investors. A double deduction was taken on the estate and income tax returns. The circuit court agreed with the IRS, in affirming the district court, that under the facts of this case, the estate could not claim both an estate tax deduction under IRC Code §2053 and an income tax deduction for the same payments. Batchelor-Robjohns, et al v. United States, 115 AFTR 2nd ¶ 2015-804 (11th Cir. 2015).
• Income tax: Same-sex marriage constitutional. The U.S. Supreme Court held that the 14th Amendment requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex, when a marriage was lawfully licensed and performed out-of-state. The court stated: “Here the marriage laws enforced by the respondents are in essence unequal: same-sex couples are denied all the benefits afforded to opposite-sex couples and are barred from exercising a fundamental right. The Equal Protection Clause, like the Due Process Clause, prohibits this unjustified infringement of the fundamental right to marry.” Obergefell v. Hodges, 2015-1 USTC ¶ 50,357 (U.S. 2015).
• Income tax: Unreported income by unpaid employee subject to taxation. In a recent case, the Minnesota Tax Court held that an uncompensated employee incurred taxation for unreported income distributions from their business. The taxpayer and the owner of the business were being investigated for failure to report income. The owner of the business was interviewed by an agent from the DOR and stated that the employee received substantial amounts of income used to pay personal expenses in 2006, 2007, and 2008. The owner of the business was subsequently convicted of criminal fraud. The employee argued that the unreported income was not taxable because she was not an employee of the business or the transfers were gifts from her boyfriend. The court dismissed both, saying that an accession to wealth has nothing to do with whether you are an employee or independent contractor and there was not a “detached and disinterested generosity” to substantiate a gift. Since amounts of the unreported income were based upon the unverified testimony of the sole owner of the business, who was not disinterested and inflated the unreported income of the employee, the court cautioned the DOR not to rely on uncorroborated evidence in assessing taxpayers. Accordingly, the court determined the proper amounts to be included in gross income and the DOR was directed to re-compute the tax, penalty, and interest on those amounts. Amy Pauly v. Commissioner of Revenue, Docket No. 08634-R 2015 WL 3916023 (Minn. T. Ct. 6/24/2015).
• Income taxes: Employment outside of state not enough to establish new domicile from Minnesota. The Minnesota Tax Court determined that the wife remained a domiciliary of Minnesota for the tax years 2009, 2010, and 2011 despite working in North Carolina, Massachusetts, Ohio, and Michigan. The determination of domicile was based on the fact of the presumption her domicile was Minnesota since the husband and her son remained in Minnesota. Further, the Woodbury residence was not sold or her furnishings moved out-of-state. When the taxpayer’s employment in the various states terminated, she always returned to Minnesota to her husband and son. The record also disclosed substantial days in Minnesota during the time period 2009 through 2011 of at least 100 days. A domiciliary questionnaire was answered by the taxpayer stating that she was a resident of Minnesota for the periods. Her federal return filings always listed the Woodbury address. Lastly, the wife’s testimony on the stand was inconsistent with her filing position and claim of residency. Further, she never registered to vote, registered a car, or became involved in any of the other states. Flora Ayeni v. Commissioner of Revenue, Docket No. 08697, 2015 WL 496152 (Minn. T. Ct. 2/2/2015).
• Income tax: Health care subsidies purchased on federal exchanges available to all states. The United States Supreme Court, by a 6-3 margin, determined that premium tax credits under IRC Code §36B, also known as health insurance subsidies, are not limited solely to taxpayers who live in states that have established their own health insurance exchange but are also available to taxpayers residing in states that have a federal exchange. The Court found that its conclusion was compelled by the overall context, structure, and purpose of the Affordable Care Act. King v. Burwell, 115 AFTR.2d ¶ 2015-841 (U.S. 2015).
Income taxes: Taxpayer allowed to change filing status from single to joint return. In a recent case the 8th Circuit, reversing the tax court, held that an individual was not precluded by IRC Code §6013(b)(2)(B) from amending his mistake in filing status to claim a credit and a refund. The taxpayer initially claimed head-of-household status, which was improper because he was living with his wife. Upon receiving a deficiency notice from the IRS, the taxpayer petitioned the tax court to change his status to married filing jointly so he could receive a credit and a refund. IRC Code §6013(b) prohibits joint returns after a taxpayer has filed a separate return, received a deficiency notice, and filed a petition. The tax court held that because head-of-household returns are separate returns, the taxpayer was prohibited from filing jointly, thereby leaving him as married filing separately. The 8th Circuit reversed, citing legislative history on the definition of a separate return, and noted that Congress enacted IRC Code §6013(b) to let taxpayers switch to a joint return after initially electing to file as married filing separately. Therefore, the 8th Circuit held that because the taxpayer did not file a separate return within the meaning of the statute, and he was not prohibited from amending his status to married filing jointly. Ibrahim v. Commissioner, Docket No. 14-2070 (8th Cir. 2015).
• Procedure: Appeal dismissed because of lack of postmark on the envelope. The Minnesota Tax Court dismissed an appeal as being untimely filed when the taxpayer used regular mail and it was received after the last day for appeal and the envelope bore no postmark. The Court held that the 60-day rule is jurisdictional and that a “postmark date” is specified in the statute and when the envelope does not bare a date, no evidence can be taken to show that the taxpayer deposited the appeal in the mail prior to the 60-day filing date. The court held that statutory time periods for appeal are strictly construed and mandated by the language of Minn. Stat. §271.06. The taxpayer argued that notwithstanding the lack of a postmark, there was evidence to show that he had put the appeal into the United States mails before the filing date based on the date of the Affidavit of Service on the Commissioner, the date on the cashier’s check for the filing fee, and the commissioner’s receiving of the notice of appeal on January 13, 2015, a day before the 60?day expired. Christopher J. Law and Kaitlin I. Brennan v. Commissioner of Revenue, Docket No. 8808-R, 2015, WL 4069308 (Minn. T. Ct. 7/1/2015).
• Sales and use tax: Season or installment plan tickets. Often the privilege of admission is sold on a seasonal basis. Sales may also be made on an installment basis, entitling the purchaser to pay over a period of time. Whether the privilege of admission is sold individually or on a seasonal or installment basis, the taxable event is when the sale of the privilege is made, regardless of when the venue is accessed or event is held. The sales tax must be reported and remitted as required under Minn. Stat. §289A.18, Subd. 4 and Minn. Stat. §289A.20, Subd. 4(a). For cash-basis retailers, the sales tax must be reported and remitted when payment is received. For accrual basis retailers, the total amount of sales tax must be reported and remitted when the sale is made regardless if the sale is paid for on the date of sale or on an installment basis. See Minnesota Revenue Notice 15-01 (6/15/2015).
• Cigarette, alcohol & miscellaneous taxes: Who is liable for tobacco excise tax. The commissioner issued a notice to clarify Minnesota’s tobacco excise tax statutes and when distributors are liable for the tax. In general, for sales beginning July 1, 2015: (a) for tobacco received by a distributor located in Minnesota, the distributor is liable for the tobacco excise tax; and (b) for tobacco sales from a distributor located outside Minnesota, the distributor is liable for the tobacco excise tax when selling to a retailer in Minnesota, but is not liable when selling to a distributor located in Minnesota. See Cigarette and Tobacco Tax Update, Minnesota Department of Revenue (May 28, 2015).
• Sales and use tax: Coupons, discounts, rewards and rebates. The commissioner revised a release that discusses the taxability of coupons, discounts, rewards, rebates, and other forms of payment to clarify the information about rewards and rebate programs. A “rewards program” is an incentive to encourage customer loyalty. The incentive can include points, checks, discounts, rebates, coupons, or any similar items in return for certain customer behavior. The facts and circumstances of the specific program determine how sales tax is applied. The retailer’s records must support the tax calculations. Retailer rewards programs are discounts—and therefore not taxable—when they give a “reward” for simply enrolling or buying certain products and services; and are refunded only in store credit. When a reward is a discount, the retailer must charge sales tax after the price reduction is made. A reward is a discount when it: is not purchased; is not provided in exchange for services; cannot be redeemed for cash; and is not reimbursed by a third party. Sales tax must be charged after the discount is applied in the following rewards programs: reward cards; punch cards; seller’s cash; and store credit card. Retailer rewards are taxable if they: require the customer to pay cash (or other consideration) for the reward; require the customer provide services in exchange for the reward; are reimbursed by a third party; or can be redeemed for cash. The reward’s value is subject to sales tax when the reward is used to purchase taxable goods or services. Sales tax is charged before the reward is applied in the following rewards programs: secret shoppers; hostess rewards; credit card points; and bundled rewards. When rebates are issued in the form of a check, they are treated the same as cash. When rebates are issued in the form of a voucher to be used on subsequent purchases with the same retailer or store who provided the rebate, the rebate is not treated as cash and reduces the selling price of the subsequent purchase. Motor vehicle rebates are not taxable. See Minnesota Sales Tax Fact Sheet 167 (6/1/2015).
• Sales and use tax: Hotels and lodging facilities. The commissioner revised a release discussing the application of the sales tax on hotels and lodging facilities to clarify the information about complimentary services versus package deals. Complimentary services (or items) are those given to the customer as a courtesy with no additional charge. Examples include: complimentary breakfast; free birthday dessert; free drink in response to a customer complaint; and shampoo, conditioner, and soap. When complimentary services are provided, hotels and lodging facilities must pay sales tax when they buy inputs to those services. This includes disposable items such as plates, napkins, silverware, etc. Hotels or lodging facilities providing complimentary items must pay sales tax on the purchase of those items. A package deal is when the customer purchases a group of related products or services for one specified price. Examples include: a “romance package” that might include a room, wine, dinner for two, and chocolate; free children’s meal; and two-for-one drinks. When a package deal is purchased, the customer pays sales tax on the entire cost of that package. Hotels and lodging facilities may purchase inputs for these deals exempt for resale. In this situation, disposable items can be purchased exempt because they are included in the taxable price that was paid by the customer. See Minnesota Sales Tax Fact Sheet 141 (6/1/2015).
• Estate tax administration: Taxpayer must request IRS closing letter. The IRS recently changed the process for obtaining estate tax closing letters, moving from automatically sending them to requiring that taxpayers request them. A closing letter on any estate tax return – Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return – filed on or after 6/1/2015 will be issued only upon request by the taxpayer. This is a new requirement. See the Frequently Asked Questions on Estate Taxes at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes#1
• Sales and use tax — items for use outside state. The commissioner revised a release discussing the application of the sales tax on items for use outside Minnesota. The release covers: items delivered outside Minnesota; items delivered into Minnesota and stored in a public warehouse; items picked up in Minnesota for business use outside Minnesota; advertising materials used outside Minnesota; direct mail; direct pay businesses; drop shipments; and local sales and use taxes. See Minnesota Sales Tax Fact Sheet 110 (6/1/2015).
• Sales and use tax: Nonprofit organizations and fundraising. The commissioner revised a release discussing the application of the sales tax on nonprofit organizations and fundraising to reflect that the annual fundraising exemption for youth and senior citizen groups increased to $20,000, starting on 1/1/2015 (the previous limit was $10,000). The release clarifies the definition of “fundraising events.” See Minnesota Sales Tax Fact Sheet 180 (6/1/2015).
• IRS procedures: Audit techniques guide provides roadmap for reviewing nonqualified deferred compensation plans. The IRS updated its Audit Techniques Guide (ATG) focusing on nonqualified deferred compensation (NQDC) plans. It provides auditors with a roadmap to some of the issues in this area and what to look for when reviewing such plans. Although intended to provide instruction to IRS examiners, the ATG provides insight to the issues that might trigger audit challenges on NQDC’s plans. See IRS’s Nonqualified Deferred Compensation Audit Techniques Guide (June 2015).
• Sales and use tax: Minnesota qualified data center exemption. The commissioner issued guidance on the sales and use tax exemption for qualified data centers. Companies that build or refurbish data centers may qualify for a sales tax exemption for 20 years on enterprise information technology equipment, software, and electricity used to operate the data centers. To receive the exemption, the taxpayer must own a qualifying data center and be certified by the Department of Employment and Economic Development (DEED). The taxpayer must pay sales tax when purchasing qualifying equipment and computer software and then apply for a refund. See Qualified Data Centers, Minnesota Department of Revenue (6/26/2015).
• Sales and use tax: Local government exemption. The commissioner revised a release explaining how the sales and use tax applies to local governments to reflect a 2015 law change that delays for one year (to 1/1/2017) the sales tax exemption for special districts; instrumentalities of a statutory or home rule charter city, county, or township; and any joint powers board or organization created under Minn. Stat. §471.59. See Minnesota Sales Tax Fact Sheet 176 (7/1/2015).
• Sales and use tax: Minnesota capital equipment exemption. The commissioner revised a number of Sales Tax Fact Sheets to reflect that starting 7/1/2015, the capital equipment refund is an up-front sales tax exemption. To purchase items eligible for the exemption, the purchaser must provide a fully completed exemption certificate, Form ST3. Before 7/1/2015, purchasers had to pay the tax and apply for the refund. If a purchaser pays sales tax on eligible purchases after 6/30/2015, the purchaser may still file a refund request for tax paid in error. See Minnesota Sales Tax Fact Sheet 109 (July 1, 2015); Minnesota Sales Tax Fact Sheet 145 (7/1/2015); Minnesota Sales Tax Fact Sheet 147 (7/1/2015); Minnesota Sales Tax Fact Sheet 152A (7/1/2015); Minnesota Sales Tax Fact Sheet 154 (7/1/2015); Minnesota Sales Tax Fact Sheet 155 (7/1/2015); Minnesota Sales Tax Fact Sheet 163 (7/1/2015); and Minnesota Sales Tax Fact Sheet 169 (7/1/2015).
Miscellaneous Minnesota tax legislation enacted in 2015:
- Nonresidents: Family credit. Laws 2015, H.F. 1 (Special Session) (codified as Chapter 3), effective for taxable years beginning after 12/31/2014, limited the working family credit to residents of Minnesota and part-year residents. Previously, any individual, including full-time non-residents, could claim the credit. The law also eliminates language providing that non-residents can allocate the credit based on the apportionment percentage computed under Minn. Stat. §290.06, Subd. 2c(e). The law also clarifies that the Temporary Assistance for Needy Families (TANF) appropriation for the working family credit expansion only applies to the 2000 expansion and not the 2014 expansion.
- Maintenance facilities equalization levy. Laws 2015, H.F. 1 (Special Session) (codified as Chapter 3), effective for tax years beginning in 2016 and later, provides that for purposes of the one-term maintenance facilities equalization levy, “adjusted net tax capacity” means the value described in Minn. Stat. §126C.01, Subd. 2(a) reduced by 50% of the value of class 2a agricultural land determined under that provision before the application of the growth limit under Minn. Stat. §127A.48, Subd. 7.
- Delay of sales tax exemption. Laws 2015, H.F. 1, (Special Session) (codified as Chapter 3), effective 6/14/2015, delays the date on which the sales tax exemption for government purchases will apply to special districts; instrumentalities of cities, counties or townships; and all joint powers boards and organizations created under Minn. Stat. §471.59 by one year, from January 1, 2016 to January 1, 2017.
- Delay of political contribution refund. Laws 2015, S.F. 888 (codified as Chapter 77), effective 8/1/2015, provides that the political contribution refund does not apply to contributions made after 6/30/2015 and before 7/1/2017.
- Horse racing. Laws 2015, S.F. 888 (codified as Chapter 77), effective 8/1/2015, provides that licensees must pay a tax of 1% of the handle for live races conducted at a class A facility for the Minnesota Breeder’s Fund (previously, the tax was 1% of the total amount bet on each racing day).
• Technical changes to LLC Act and Revised LLC Act. Laws 2015 H.F. 385 (codified as Chapter 39), effective 8/1/2015, makes technical changes to the Limited Liability Company Act (“Prior LLC Act”) and the Revised Uniform Limited Liability Company Act (”Revised LLC Act”). Among the changes enacted by the bill are provisions relating to the conversion of an LLC into a corporation, LLC, or other organization, including a $35 filing fee for filing articles of conversion; defining “personal liability” in the Prior LLC Act to mean liability that an LLC owner is subject to, as provided by statute, or organizational documents; and application of Prior LLC Act and Revised LLC Act to LLCs organized before and after certain dates.
• Federal legislation: Trade Preferences Extension Act. Congress passed and the President signed the Trade Preference Extension Act, which extends a number of trade agreements as well as trade adjustment assistance. The bill also amends the health coverage tax credit, expands information reporting by universities on Form 1098-T, “Tuition Statement,” and provides for related penalties, and lastly accelerates the corporate estimated tax payments for large corporations. See Trade Preference Extension Act of 2015 (H.R. 1295 and P.L. 114-27).
• State revenue forecast. Minnesota State Revenues are up $555 million above the forecast according to the July update from Minnesota Management and Budget. Most of the increase is due to increases in individual income taxes ($369 million) and corporate income taxes ($124 million). The update shows only revenues for the first six months of fiscal year 2015 and does not provide any updates on expenditures. The full budget forecast will be in November 2015. This $555 million increase in revenues is above the $865 million surplus that was left on the bottom line after the Special Session. It, therefore, looks the budget surplus will be well above $1 billion in the 2016 session. This is certainly a change from prior years of huge deficits. See Minnesota Management & Budge release, “State Revenues Exceed February Forecast” (7/10/2015).
– Jerry Geis
Briggs and Morgan, P.A.
TORTS & INSURANCE
• Employment law; penalties under Minn. Stat. §181.14. Defendant employees worked as sales professionals for plaintiff. Under plaintiff’s compensation policy, defendants earned a base commission rate subject to increase if the division’s “bottom line” reached certain benchmarks. Defendants later purchased the business from plaintiff pursuant to an asset purchase agreement that left open the issue of past commissions. After plaintiff filed suit for breach of the asset purchase agreement, defendants counterclaimed seeking unpaid compensation and penalties under Minn. Stat. §181.14. The district court held that the employees were due additional commissions but refused to award penalties.
The Minnesota Court of Appeals affirmed in part and reversed in part. The court affirmed the district court’s finding of fact that the employees had not been paid all commissions to which they were entitled under the compensation policy. But the court reversed the district court’s refusal to award penalties under Minn. Stat. §181.14. The court held that in determining whether an employee recovers a greater sum than the amount tendered under subd. 3, a court should compare only (1) the amount of wages and commissions that the employer tendered, and (2) the amount of wages and commissions the court found that an employee was actually due. In making this computation, a court cannot offset amounts due the employer as a result of unrelated judgments. Toyota-Lift of Minn., Inc. v. Am. Warehouse Sys., LLC, No. A14-1159 (Minn. Ct. App. 7/13/2015). http://mn.gov/lawlib/archive/ctappub/2015/opa141159-071315.pdf
– Jeff Mulder
Bassford Remele, A Professional Association