COMMERCIAL AND CONSUMER LAW
• An additional focus? The Equal Credit Opportunity Act (ECOA), 15 U.S.C. §1691 et seq., implemented by Regulation B, 12 CFR Part 1002, was enacted to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, age (if the applicant had the ability to contract), the fact all or part of the applicant’s income derived from a public assistance program, or the applicant had in good faith exercised any right under the Consumer Credit Protection Act (15 U.S.C. § 1601 et seq.). Regulation B prohibits creditor practices that discriminate on the basis of any of these factors. Regulation B §1002.1(b), §1002.4(a).
At the time, married women often experienced difficulty obtaining credit on their own, even though creditworthy. Regulation B §1002.7 specifically dealt with this, and in particular provided in subsection (d) that generally a creditor could not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualified under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. This rule broke the practice of many creditors of automatically requiring a creditworthy spouse to obtain the other spouse’s signature so both would be liable for the debt. In short, the rule was intended to protect the applicant for the credit, “applicant” being originally defined in Regulation B § 1002.2(e) as meaning “any person who requests or who has received an extension of credit.”
In Frontenac Bank v. Hughes, Inc., 404 S.W.3d 272 (Mo. App. E.D. 2012), transfer den. 1/29/2013, the Missouri Court of Appeals, following an earlier Missouri Supreme Court case (Boone National Savings and Loan Assoc. v. Crouch, 475 S.W.3d 371 (Mo. 2001)), decided that the individual wife guarantor on a commercial loan by the bank to the company, which company was independently creditworthy, and which loan was also guaranteed by the husband, was protected under Regulation B, and therefore ruled her guarantee was obtained in violation of ECOA’s provision against discrimination on the basis of marital status and accordingly was invalid and unenforceable. The court ruled that ECOA, as later interpreted in Regulation B, explicitly extended to guarantors.
Other courts interpreting the original definition and the purpose of §1002.7(d) have disagreed. See, e.g., Arvest Bank v. Uppalapati, No. 11-03175-CV-5-0GK, 2013 U.S. Dist. LEXIS 1937 (W.D. Mo. 2013); and Moran Foods, Inc. v. Mid-Atlantic Market Dev. Co., 476 F.3d 436 (7th Cir. 2007). Indeed, the definition of “applicant” in Regulation B §1002(e) has been amended to add: “For purposes of §1002.7(d), the term includes guarantors, sureties, endorsers, and similar parties.”
Thus, in the end there is a question of the validity of this amendment to Regulation B. Much deference is due to the federal interpretation of the law pursuant to Ford Motor Credit Co. v. Milhollin, 444 U.S. 555 (1980). But where the interpretation goes beyond the statute (15 U.S.C. §1691a(b) defines “applicant” as any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit”), as this one arguably does, there is a real risk of invalidity. Compare 15 U.S.C. §1691b(a) “The [Agency] shall prescribe regulations to carry out the purposes of this subchapter, [which] may contain… such classifications, differentiation, or other provision, and may provide for such adjustments and exceptions for any class of transactions as in the judgment of the [Agency] are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate or substantiate compliance therewith”, with Champion Bank v. Reg’l Dev. LLC, 2000 U.S. Dist. LEXIS 40468 (E.D. Mo. 2009) and Moran Foods, Inc. v. Mid-Atlantic Market Dev. Co., 476 F.3d 436 (7th Cir. 2007) (there is no way to confuse an applicant with a guarantor).
Retired G.L. Cross Research Professor,
University of Oklahoma
EMPLOYMENT & LABOR LAW
• Unemployment compensation; “materiality” no defense to misrepresentation. An employee who misrepresented her educational background in applying for a job was not entitled to unemployment compensation benefits. Reversing the court of appeals, the state Supreme Court held that the appellate court’s determination that the misrepresentation was not “material” because the employer did not have a specific educational requirement was incorrect because it is “incompatible” with the express language of the “misconduct” provision of the statute. Wilson v. Mortg. Res. Ctr., Inc., 2016 Minn. App. LEXIS 825 (Minn. App. 12/28/2016) (unpublished).
• Defamation; qualified immunity rejected. A claim of qualified immunity was inapplicable as a matter of law in a defamation case brought by a discharged psychiatrist against the administrator of the state hospital that fired him. The court of appeals, on remand from the Supreme Court, which granted absolute immunity to the deputy commissioner of the Department of Human Services, held that the “exaggerated” language and size of the email sent by the administrator could constitute common law malice to overcome an immunity defense, leaving genuine issues for determination by a jury. Harlow v. State of Minnesota, Dept. of Human Services, 2016 Minn. App. LEXIS 1127 (Minn. App. 12/27/2016) (unpublished).
• Deficient performance by a house cleaner justified denial of benefits. The appellate court reasoned that the dismissal was for “misconduct” in her work. Hobbs v. Polishing Touch, Inc., 2016 Minn. App. LEXIS 1136 (Minn. App. 12/27/2016) (unpublished).
• Unemployment compensation; “misconduct” rulings. The court of appeals upheld a pair of “misconduct” disqualifications of unemployment compensation claimants. Drug crimes committed by an employee constituted disqualifying “misconduct.” The decision by an unemployment law judge (ULJ) was supported by substantial evidence. Henkel v. City of Mountain Iron, 2016 Minn. App. LEXIS 1146 (Minn. App. 12/27/2016) (unpublished).
• Unemployment compensation; set-off for Social Security. A claimant was unsuccessful in constitutionally challenging a set-off of benefits due to receipt of old-age Social Security benefits. The appellate court held that the ‘plain language’ of Minn. Stat. §268.085 requires a 50% set-off, which does not violate equal protection. Horan v. Dep’t. of Empl. & Econ. Dev., 2016 Minn. App. LEXIS 1161 (Minn. App. 12/27/2016) (unpublished).
• Unemployment compensation; “medical leave” accommodation. An employee was entitled to benefits after she quit her job because she was not allowed to take time off to care for her ailing mother. The court of appeals overturned a ULJ denial of benefits, following remand from the appellate court, on grounds that the employee was entitled to an “accommodation” under the “medical leave” provision of the law, Minn. Stat. §268.095 subd. 1 (7). Quade v. City of Minneapolis, 2016 Minn. App. LEXIS 1141 (Minn. App. 12/27/2016) (unpublished).
As the Minnesota Supreme Court ponders a quartet of workers’ compensation cases argued late last year (See Notes & Trends, January 2017), a new report by a federal agency reflects that the number of work-related fatalities in Minnesota rose to a near-decade high. The study, issued by the Bureau of Labor Statistics, identifies 75 workplace deaths in 2015, the most recently available year. This was the highest toll since 79 deaths in 2006.
The majority of the 2015 decedents (60) were men, more than half were older than 55, and nearly half were self-employed. Agriculture, mining, and natural resources accounted for the most fatalities, 24, while nine occurred in construction work. Despite the rise in deaths, Minnesota—with 2.7 fatalities per 100,000 workers—is below the national average of 3.4.
Hellmuth & Johnson, PLLC
• EPA revises the hazardous waste generator regulatory program under RCRA. The United States Environmental Protection Agency finalized revisions to the Resource Conservation and Recovery Act (RCRA) hazardous waste generator regulatory program by issuing the Hazardous Waste Generator Improvements Rule. The revisions in the rule reorganize the regulations to make them easier to use and understand. The rule also addresses gaps to widen the scope of the regulations. EPA expects the rule to require generators to change several of their current waste management practices. In total, the rule contains over 60 revisions and new provisions, which reorganize and consolidate most of the program into 50 C.F.R. Part 262.
Entities affected by this rule include “practically every industrial sector, including printing, petroleum refining, chemical manufacturing, plastics and resin manufacturing, pharmaceutical manufacturing, paint and coatings, iron and steelmaking, secondary smelting and refining, metal manufacturing, electroplating, circuit board manufacturing, and automobile manufacturing.” The new rule goes into effect on 5/30/2017.
• EPA promulgates significant new use rules for certain chemical substances. In a rule effective on 1/17/2017, EPA has issued significant new use rules (SNURs) under the Toxic Substances Control Act (TSCA) for 57 chemical substances. These substances were the subject of premanufacture notices (PMNs), and 34 of them are subject to TSCA section 5(e) consent orders. EPA requires manufacturers, importers, and processers of these substances to provide notice at least 90 days prior to any activity designated as a significant new use. This period is required so that EPA can review the notice and take any actions required before the new use may commence.
• Supreme Court to hear case important to asbestos-related litigation. In response to a request supported by a manufacturers association, the United States Supreme Court agreed on 1/13/2017 to hear an appeal by a railway company on whether a state court has authority to hear a lawsuit regarding an alleged exposure to toxins. BNSF Ry. Co. v. Tyrrell, No 16-405. At issue in the case is whether the Montana Supreme Court erroneously ignored the Supreme Court’s ruling in Daimler AG v. Bauman, 134 S. Ct. 746 (2014) when it allowed personal jurisdiction in a location with little or no connection to the lawsuit. See Daimler AG v. Bauman, 134 S. Ct. at 751 (holding that a corporation must be “essentially at home” in the forum state); Tyrell v. BNSF Ry. Co., 373 P.3d 1 (Mont. 2016). The defendant in the case is not incorporated in Montana, nor does it have its principal place of business there. In addition, the plaintiffs never worked in Montana, and the alleged exposures to toxins did not occur there. The only connection to the state is the fact that the defendant operates its business there.
Montana apparently has become the target of forum-shopping because its Supreme Court has interpreted the statute of limitations for claims under the Federal Employers’ Liability Act (42 U.S.C.A. §56) in a more liberal way than other courts. The outcome of the case could be important in asbestos-related litigation, as well as other claims brought under the Act.
Parkway Law LLC
• Certiorari granted; does 28 U.S.C. §1400(b) incorporate the definition of “residence” found in 28 U.S.C. §1391(c)? The United States Supreme Court granted certiorari to consider whether 28 U.S.C. §1400(b)—the patent venue statute—incorporates the definition of “residence” found in 28 U.S.C. §1391(c). In Re TC Heartland LLC, 821 F.3d 1338 (Fed. Cir.), cert. granted sub nom, TC Heartland Group LLC v. Kraft Food Group Brands LLC, ___ S. Ct. ___ (2016).
• Recusal denied; law firm disqualified; potential local rules change. In a decision that is likely to reverberate throughout the District of Minnesota for years to come, Chief Judge Tunheim refused to permit a large Twin Cities law firm that employs Judge Nelson’s husband to appear as co-counsel for the defendant in long-running litigation, where that firm’s appearance would necessitate Judge Nelson’s recusal. Chief Judge Tunheim found that when “mid-litigation substitution of counsel would trigger a judge’s recusal,” he was required to “weigh the party’s interest in the counsel of choice against the strong public interest against judge-shopping or possibly choosing counsel only to disqualify a particular judge.” While declining to determine whether the defendant had engaged in judge-shopping, Chief Judge Tunheim focused primarily on the impact the law firm’s appearance would have on “efficiency and fairness” of the litigation, and barred the law firm from representing the defendant.
The plaintiff also asked that Chief Judge Tunheim adopt a “standard procedure” for addressing mid-litigation retention of counsel where that retention would trigger automatic recusal, which would require court approval before a firm would be permitted to appear and would impose a rebuttable presumption that the appearance was for the purpose of causing recusal. While Chief Judge Tunheim declined to adopt a formal procedure, he did state his intention to refer the proposal to the District’s Federal Practice Committee. In Re RFC and Rescap Liquidating Trust Lit. (Residential Funding Co. v. Impac Funding Corp.), 2016 WL 7177706 (D. Minn. 12/8/2016).
• Permissive intervention; 28 U.S.C. §1442(a) removal; remand. Where two related employment cases were filed in the Minnesota courts, the United States sought to intervene in those cases for purposes of delaying discovery to protect the integrity of a federal criminal case, the state court denied the request for intervention, and the United States subsequently removed the cases pursuant to 28 U.S.C. §1442(a), Chief Judge Tunheim granted the plaintiffs’ motions to remand, finding that removal was improper because the state court action was not an action “against or directed to” the United States, and because the government had not asserted a “colorable federal defense.” However, the court denied the plaintiffs’ requests for costs and attorney’s fees, finding that the government’s argument for removal was “objectively reasonable.” Guggenberger v. Starkey Labs., Inc., 2016 WL 7479542 (D. Minn. 12/29/2016).
• Fed. R. Civ. P. 12(c); incomplete service; motion for judgment on the pleadings was premature. Chief Judge Tunheim denied one defendant’s rule 12(c) motion for judgment on the pleadings which was brought prior to service on all defendants, declining to exercise his “discretion” to hear the motion prior to the closing of the pleadings. East Coast Test Prep LLC v. Allnurses.com, Inc., 2016 WL 7383309 (D. Minn. 12/20/2016).
• Dueling untimely motions to amend denied. Overruling objections to an order by Magistrate Judge Thorson denying an untimely motion to amend invalidity contentions in patent litigation, Judge Nelson found that the defendants had failed to establish the diligence required to establish the “good cause” required to support late amendments to invalidity contentions. Solutran, Inc. v. U.S. Bancorp, 2016 WL 7377099 (D. Minn. 12/20/2016).
Three weeks later, Judge Nelson overruled objections to an order by Magistrate Judge Thorson denying the plaintiff’s “similarly tardy” motion to amend its complaint, agreeing with the magistrate judge that the plaintiff had not acted diligently and could not establish the “good cause” necessary to support its amendment. Solutran, Inc. v. U.S. Bancorp, 2017 WL 89558 (D. Minn. 1/10/2017).
• “Doe” defendants; relation back; Fed. R. Civ. P. 15(c)(1)(c); new decisions. Overruling objections to an order by Magistrate Judge Brisbois, Judge Doty joined the long list of judges in the District of Minnesota who have held that proposed amendments identifying former “Doe” defendants do not relate back under Fed. R. Civ. P. 15(c)(1)(C). Bass v. Anoka County, 2016 WL 7422639 (D. Minn. Dec. 22, 2016).
Adopting a report and recommendation by Magistrate Judge Leung, Judge Davis also held that a proposed amendment identifying a “Doe” defendant did not relate back. Loeffler v. City of Anoka, 2017 WL 123424 (D. Minn. 1/12/2017).
• Motion to enforce settlement agreement granted. Judge Davis granted the defendant’s motion to enforce a settlement agreement, finding that there had been a “meeting of the minds on the material terms of the agreement,” and that the plaintiff’s “change of heart” did not alter the fact that an agreement had been reached. Ayala v. Aerotek, Inc., 2017 WL 29659 (D. Minn. 1/3/2017).
• Consolidation; reconsideration; request for 28 U.S.C. §1292(b) certification denied. Judge Montgomery denied the defendant’s letter request for reconsideration or certification for interlocutory appeal of her order consolidating related cases for trial, finding that she had “wide discretion” in ordering consolidation, and that the consolidation issue did not “warrant further protraction” of the litigation, nor was it an “extraordinary” case where an interlocutory appeal was warranted. Doe YZ v. Shattuck-St. Mary’s School, 2016 WL 7042070 (12/2/2016).
• Cost judgment modified; stay of cost judgment denied. Judge Montgomery granted the plaintiffs’ request to reduce the clerk’s cost judgment, but then denied their request to stay enforcement of the cost judgment pending their appeal, determining that the request was “threadbare, made without legal authority and without specificity,” and that the plaintiffs had “not proffered a reason why the bond requirement should be waived.” Heglund v. City of Grand Rapids, 2016 WL 7042065 (D. Minn. 12/2/2016).
Law Office of Josh Jacobson
• Telecommunications Act default judgment damages. Judge Schiltz recently awarded $11,000 in damages to a plaintiff following a default judgment in a Telecommunications Act action. J & J Sports sued Dalton Brady Outlaw-Soderlind and Cerresso Fort under 47 U.S.C. §553 (unauthorized reception of cable service) for unlawfully intercepting and exhibiting a pay-per-view boxing match. The court awarded J & J Sports both statutory damages and enhanced damages. In awarding statutory damages, which are designed to be compensatory, the court awarded J & J Sports the $2,200 it would have received in licensing fees. In awarding enhanced damages, which are designed to be punitive and are awarded for willful conduct with a reckless disregard for statutory requirements, the court noted that courts generally multiply the statutory damages by three to six times depending on various factors, including: whether the individual is a repeat offender, whether the event was advertised and promoted, whether a cover was charged, and the number of people coming. Here, the court set the multiplier at four, finding that defendants were repeat offenders who charged patrons a $15-$20 cover, though the multiplier was mitigated by the event occurring in a church basement and part of the funds being used for a local youth boxing program. Thus, the court awarded $2,200 in statutory damages and $8,800 in enhanced damages. The court also awarded attorney’s fees and costs to be determined. J & J Sports Prods., Inc. v. Outlaw-Soderlind, Civil No. 14-4951 PJS/HB, Dkt. No. 49 (D. Minn., 11/16/2016).
• Patent and trademark default judgment damages. Judge Nelson recently awarded Hydreon Corp. $200,000 in damages following a default judgment in a patent- and trademark-infringement action. Hydreon sued JC Brothers, Inc., for patent and trademark infringement with respect to JC Brothers’ sale of Hydreon’s Fake TV® product. Fake TV® is a small, energy-efficient device used as a burglary deterrent by making it appear that people are home watching television when the home is unoccupied. JC Brothers did not answer. The clerk of court entered default and Hydreon moved for default judgment. In evaluating patent damages, the court noted that it was not cost-effective to engage an expert to calculate a reasonable royalty and that the average electronics royalty is between 3.2-6.8%. In evaluating trademark damages, the court held that statutory damages between $1,000 and $200,000 are proper for each counterfeit mark per type of goods sold, though the maximum amount can be increased to $2 million where the counterfeiting is found to be willful. Here, the court stated that there is no question that defendant’s conduct was willful. Thus, the court awarded $200,000 in damages, the maximum amount of non-willful damages which is reasonable under the circumstances of the willfulness showing. The court also granted a permanent injunction enjoining defendant from conduct related to sales of Fake TV®, and ordered an accounting of attorney’s fees. Hydreon Corp. v. JC Bros., Inc., Civil No. 15-1917 SRN/JSM, 2016 U.S. Dist. LEXIS 160545 (D. Minn., 11/18/2016).
Tony Zeuli & Joe Dubis
Merchant & Gould
• Mortgage foreclosure; waiver of redemption period. A borrower gave a mortgage on commercial property to a lender to secure a $7.5 million loan. The borrower subsequently defaulted, and the borrower and lender entered into a pre-negotiation agreement, which established terms in which the parties would discuss a possible resolution of the default. The pre-negotiation agreement contained a provision where the borrower waived its right of redemption. The negotiations did not yield a resolution and the lender commenced a foreclosure by advertisement. The notice of sale stated that the redemption period was six months. The lender was the high bidder at the sheriff’s sale. Within six months of the sheriff’s sale, the borrower attempted to obtain redemption figures, which the lender refused to provide claiming that a
redemption had been waived. The borrower sought and received a court order ruling that the redemption waiver clause is unenforceable, and that the borrower was allowed to redeem. The borrower then submitted redemption funds to the sheriff, who issued a certificate of redemption. The lender appealed.
The court of appeals acknowledged that there was no specific provision in Chapter 580, the foreclosure by advertisement chapter, speaking directly on whether the statutory right of redemption could be waived in post-default negotiations. However, the court of appeals held that no ambiguity arises from that silence because Chapter 580 generally provides that a mortgagor may redeem property within six months of the sheriff’s sale. The court of appeals also noted that the Legislature included certain specific exceptions to the six-month right of redemption, but a waiver by agreement was not a listed exception. Therefore, there is an implied exclusion of other exceptions. The court of appeals reasoned that the lender’s argument is essentially asking the court to create an exception to the mortgagor’s statutory right to a six-month redemption period. The court of appeals then distinguished between foreign case law that held the equitable right to redeem before a sheriff’s sale versus a statutory right to redeem after the sheriff’s sale. While the Minnesota Supreme Court has held that the equitable right to redemption before a sheriff’s sale may be waived, it has not authorized the waiver of a statutory right to redeem after the sheriff’s sale. U.S. Bank National Association v. RPB Realty, LLC, ___N.W.2d ___, 2016 WL 7438711 (Minn. Ct. App 2016).
• Truth in Lending Act; rescission of purchase money mortgage. Borrowers sued a lender under the Truth in Lending Act (TILA) for failing to provide two copies of their alleged right of rescission at the closing of the mortgage loan. The borrowers attached a copy of the loan agreement to their complaint. The lender brought a motion for judgment on the pleadings, attaching copies of the deed to the borrower and the mortgage. The district court dismissed the complaint based on the fact that the three-day right to cancel under TILA does not apply to purchase money mortgage transactions, and because the documents made it clear that the mortgage in question was a purchase money mortgage. The 8th Circuit Court of Appeals agreed with the district court that, based on the deed and mortgage, there is no doubt that the mortgage was a purchase money mortgage and the TILA right to rescind did not apply. The 8th Circuit cited authority that stated that on a motion for judgment on the pleadings, the court may consider some materials that are part of the public record or that do not contradict the complaint, and materials that are necessarily embraced by the pleadings. In this case, the borrowers did not dispute that the mortgage was created to finance the acquisition of the dwelling secured by it. Moreover, the mortgage was granted and recorded at the same time as the deed to the borrowers from third parties, and the mortgage describes the property where the borrowers currently reside. Therefore, the 8th Circuit affirmed the district court and held that the deed clearly showed that the borrowers acquired the property through that same conveyance. The 8th Circuit also noted that the deed was notarized and properly recorded in the public real estate records, resulting in authentication and a hearsay exception. Dunn v. Bank of America, ___ F.3d ___, 2017 WL 31453 (8th Cir. 2017).
Beisel & Dunlevy PA
• Indian tribe a “person” for purposes of Anti-Injunction Act. The Anti–Injunction Act prohibits federal courts from entertaining suits “for the purpose of restraining the assessment or collection of any tax.” 26 U.S.C. §7421(a). Although there are a handful of exceptions to the Act, it is otherwise a strict bar. An Indian tribe, tribal corporation, and tribe member sought injunctive and declaratory relief from the imposition of various taxes on tobacco products that the tribal corporation manufactured. The plaintiffs were successful in the district court. The 9th Circuit, however, vacated the district court’s decision and held that the Anti-Injunction Act deprived the district court of jurisdiction. The 9th Circuit held first a tribe is a “person” for purposes of the Anti-Injunction Act. Engaging in an exercise of statutory construction, the court reasoned that “person” is broadly construed, and includes “trust, estate, partnership, association, company or corporation.” This broad construction properly includes tribes. The court then rejected the argument that the tribe fell within one of the limited exceptions to the Anti-Injunction Act. Confederated Tribes & Bands of Yakama Indian Nation v. Alcohol & Tobacco Tax & Trade Bureau, 843 F.3d 810 (9th Cir. 2016).
• Expense for keeping aircraft on standby not properly substantiated. Most business expenses are deductible, but travel-related business expenses are subject to substantiation requirements set forth in Section 274(d). A California-based law firm deducted as travel expenses the costs it claimed it incurred in keeping aircraft on standby. Although taxpayers have successfully claimed similar deductions, e.g., Palo Alto Town & Country Village v. Comm’r, 565 F.2d 1388 (9th Cir. 1977), the law firm in this case failed adequately to substantiate the claimed deduction and portions of the deduction were disallowed. The court upheld accuracy-related penalties. Engstrom, Lispcomb & Lack v. Comm’r, No. 15-70591 (9th Cir. 12/28/2016).
• Federal income tax: Taxpayer seeking charitable deduction of $64 million not entitled to summary judgment. Holding that contemporaneous written documentation for charitable contributions is a strict requirement in our self-assessment, self-reporting system, the tax court denied a taxpayer’s motion for summary judgment where the taxpayer could not establish compliance with the substantiation requirements of Section 170.
Taxpayers who wish to claim deductions for charitable contributions face certain reporting and substantiation requirements. For example, charitable contributions of $250 or more must be substantiated with a “contemporaneous written acknowledgement” from the donee organization. IRC 170(f)(8)(A). That acknowledgment must include the amount of cash and a description of any property other than cash contributed; whether the donee organization provided any goods or services in consideration for the contribution; and a description and good faith estimate of the value of any goods or services received. 170(f)(8)(B). In this dispute, the taxpayer had purchased a building in Manhattan for $10 million; the taxpayer planned to demolish the building but before demolition, the building was placed on the National Register of Historic places. Shortly thereafter, the taxpayer granted a historic preservation deed of easement to the Trust for Architectural Easements, a qualified organization under Section 170(h)(3). The Trust sent the taxpayer a letter of acknowledgement, but the letter did not state whether the Trust had provided any goods or services to the taxpayer, and did not state whether the Trust had otherwise given the LLC anything of value in exchange. The taxpayer secured an appraisal concluding that as of the relevant date prior to the easement, the property had a fair market value of $69,230,000.
The Court noted that the appraisal opined that the property had risen in value more than 600% in two and a half years. The same appraisal concluded that following the easement granting, the property’s value declined to $4,740,000; this resulted in a devaluation, and purported deduction, of $64,490,000, which the taxpayer claimed on its return. Although there was no dispute that the donee failed to provide the requisite contemporaneous written acknowledgement, the taxpayer argued that the deduction should nonetheless be allowed under another provision of Section 170. In particular, Section 170(f)(8)(D) provides that the substantiation requirements of subparagraph (A) do not apply to a contribution “if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe.” 170(f)(8)(D).
The taxpayer was not dissuaded by the fact that the Secretary has not promulgated specific regulations pursuant to subparagraph (D) because the taxpayer argued that the subparagraph is self-executing and the absence of regulation does not prohibit the taxpayer from pointing to other filings that substantially comply with the requirements of subparagraph (B). The court disagreed. In this reviewed decision, the court held that 170(f)(8)(D) sets forth a discretionary delegation of ruIemaking authority, and is not self-executing in the absence of the regulations to which the statute refers and further that the general rule set forth in subparagraph (A), requiring a contemporaneous written acknowledgement meeting the requirements of subparagraph (B), is fully applicable to this taxpayer. In sum: Since $64 million is greater than $250, and since there was no contemporaneous written acknowledgement, the taxpayer was not entitled to summary judgment. 15 West 17th St. LLC v. Comm’r, 147 TC. No. 19 (T.C. 12/22/2016). Judge Holmes concurred to lament the “tax law’s wandering away from the general principles of administrative law.” Judges Foley, Colvin, Vasquez, Gustafson, Paris, Morrison either dissented or agreed with dissents of colleagues.
• Disallowance of casualty-loss deduction upheld. Not even a year after moving into their new house, a taxpaying couple found themselves with a flooded basement. The couple made about $30,000 worth of repairs, planned to make some future repairs, and then claimed a casualty-loss deduction on their taxes. The code permits a deduction for “casualty losses”—and flooded basements meet the criteria (so long as the losses are not covered by insurance or otherwise). The amount of deduction is calculated by comparing “the fair market value of the property immediately before and immediately after the casualty” and making two further adjustments to the permitted amount. The amounts must be determined by reference to “competent appraisals.” Treas. Reg. Sec. 1.165-7(a)(2)(i).
The taxpaying couple obtained an appraisal valuing the property at $400,000 the day before the flooding. They obtained an appraisal valuing their home at $298,00 just after the property was damaged and before it was repaired. Based on these appraisals, the couple deducted $82,247 from their income on their federal return, which in turn impacted their Minnesota return. (The amount deducted reflected the claimed loss, less 10% of the taxpayers’ AGI, less $100.) Following audit, the commissioner disallowed the majority of the deduction, and permitted only $7,658 as a deduction. The dispute centered on whether the appraisals relied upon by the taxpayers satisfied the requirement for “competent.” The court determined that the appraisals did not meet the requirements for two reasons: first, the appraisal improperly included costs of future improvements to the property. The appraisal was flawed because it improperly took into account temporary buyer resistance to purchasing the home. Although it may be proper to reduce a value if there is evidence of permanent buyer resistance, the court was not persuaded that the basement-flooding led to such a level of resistance. The court also rejected the taxpayer’s procedural argument that summary judgment was improper. Finding no genuine issues of material fact in dispute, the court held summary judgment was proper. Mandel v. Comm’r, A16-0725, ___ N.W.2d __ (Minn. 12/14/2016).
• Pro se appellant failed to establish she was a non-domiciliary resident. The sole issue at trial was the appellant’s residency status for 61 specific days of 2008. Under Minnesota law, a taxpayer must provide contemporaneous records to establish physical presence of the person on particular dates throughout the year. Although the appellant successfully overcame the commissioner’s prima facie validity, she failed to prove that she spent more than 50 days of the at-issue 61 outside of Minnesota. The court reviewed a combination of printed calendars, credit cards, SunPass Transponder Records (used to pay tolls in Florida), and witness testimony and determined that the appellant failed to establish she spent more than 50 of the identified days in question outside of Minnesota. Carl v. Comm’r, 2016 WL 7109139 (Minn. T.C. 12/2/2016).
• Tax court reviews discounted cash flow method approaches. Upon remand by the Minnesota Supreme Court, the tax court reconsidered the income approach of valuation to help reach the fair market value of the subject property. The income approach determines value based on the present value of future rights to income generated by the property. To reach a figure, anticipated rents are capitalized less expenses of the property at market rates. In the original case, the court determined that while the discounted cash flow (DCF) method was an appropriate approach to determining value, it could not rely on the petitioner’s expert’s particular application of the method. Upon remand, both parties submitted DCF calculations. After reviewing the experts’ calculations and the underlying assumptions, the tax court determined the weight for the income approach was 70% while the weight for the sales comparison approach was 30%. This ultimately resulted in an increase in value to the subject property for each of the years at issue. KCP Hasting, LLC v. Cnty. Of Dakota, 2016 WL 7638310 (Minn. T.C. 12/29/2016).
n Conformity bill unanimously passed Minnesota House. As the 2017 session of the Minnesota House began, the members passed HF2 (as amended) with a vote of 130-0. If signed into law, the bill will bring Minnesota’s Code into conformity with changes made to the federal tax code in 2015. Among other changes, the conformity bill would impact the deductibility of education classroom expense up to $250; qualified higher education tuition and related expenses; mortgage insurance premiums; various charitable contributions, including tax-free IRA distribution up to $100,000 to certain public charities for those over age 70 ½; and discharges of indebtedness on principal residences. The bill would also provide an increase in the working family credit; changes to the business equipment depreciation schedule; 100 percent exclusion of the gain on sale of qualified small business stock held for more than five years; and more generous depreciation rules for leasehold and restaurant improvements.
Mitchell Hamline School of Law