Litigation Archives - Page 70 of 107 - The National Law Forum

Massachusetts' Highest Court Upholds State's Endangered Species Regulations

In a long-awaited ruling, the Massachusetts Supreme Judicial Court affirmed the legality of the “priority habitat” regulations created by the Division of Fisheries and Wildlife (DFW) of the Massachusetts Department of Environmental Protection under the Massachusetts Endangered Species Act (MESA). In Pepin v. Division of Fisheries and Wildlife, SJC No. 11332 (February 18, 2014), the petitioners challenged the DFW’s establishment of “priority habitat” regulations “for which MESA makes make no express provision.”

MESA does expressly authorize DFW to designate certain areas as “significant habitats” of endangered or threatened species. Land designated a “significant habitat,” entitles an owner to (i) advance written notice that the land is being considered for designation as a significant habitat, (ii) a public hearing before any decision on the proposed designation is made, and (iii) an opportunity to appeal and seek compensation under the “takings” clause of the U.S. Constitution. Arguably to avoid paying just compensation, the DFW has never designated land “significant habitat.”

Instead, the DFW promulgated regulations establishing a second type of protected habitat denoted “priority habitat,” to protect species that are either endangered or threatened, or that fall into a third category of “species of special concern.” Delineations are “based on the best scientific evidence available.” A sixty-day public comment period follows the reevaluation of the priority habitat map every four years and a final map is posted on the DFW’s web site. The DFW reviews projects in a “priority habitat” on a case-by-case basis to determine whether it would result in either (i) a “no” take, (ii) a “conditional” no take, or (iii) a take. Even if DFW finds the project would be a “conditional” no take or a “take,” the project may proceed under DFW-imposed conditions or a “conservation and management permit.”

Here, the petitioners’ property consists of two building lots, totaling approximately 36 acres. In 2006, the property was delineated a priority habitat for a species of special concern (eastern box turtle). Challenging the validity of the “priority habitat” regulations, the petitioners maintained that MESA’s creation of the “significant habitat” designation with critical procedural protections meant that all landowners were entitled to the same protections whenever property development is restricted under MESA. Citing the broad authority granted by MESA, the Court rejected this view and instead found that that statute “extends to the formulation of the priority habitat concept as a means of implementing MESA’s prohibition on takes.” The Court refused to “substitute [its] judgment as to the need for a regulation, or the propriety of the means chosen to implement the statutory goals, for that of the agency, …[where] the regulation … [was] rationally related to those goals.” The petitioners could not overcome the presumption of validity accorded “duly promulgated regulations of an administrative agency….”

The Court also ruled that in deciding the petitioners’ challenge to the application of the priority habitat mapping guidelines to their property, a Division of Administrative Law Appeals (DALA) magistrate judge properly ruled in favor of the DFW even without a hearing because the petitioners failed to meet their burden of demonstrating that the DFW improperly delineated their property as priority habitat.

Article By:

Brian C. Levey

Marc J. Goldstein

Of:

Beveridge & Diamond PC

U.S. Supreme Court Upholds Michigan’s Law Prohibiting Use of Race in College Admissions

On Tuesday, April 22, 2014, the U.S. Supreme Court issued an opinion that upholds a Michigan law prohibiting the use of race as a factor in admissions to public collegesand universities. In Schuette v. BAMN, Case No. 12-682 (argued Oct. 15, 2013) the high court reversed a Sixth Circuit Court of Appeals ruling that overturned the voter-enacted state constitutional amendment referred to as “Proposal 2” or Article I Section 26. Although the court’s 6-2 opinion stated “this case is not about the constitutionality, or the merits, of race-conscious admissions policies in higher education,” the decision is likely to influence other states to adopt similar constitutional bans on affirmative action in state-funded higher education.

Since 2003, Michigan has provided a venue for legal challenges to affirmative actionprograms in education. In that year, the U.S. Supreme Court reviewed the constitutionality of race-based admission policies of both the University of Michigan’s undergraduate college and its graduate law school. The outcomes of these cases were mixed. In Gratz v. Bollinger, 539 U.S. 234 (2003) the court struck down the undergraduate admission policy as a violation of the Equal Protection Clause of the U.S. Constitution’s 14th Amendment. In contrast, the court ruled in Grutter v. Bollinger, 539 U.S. 306 (2003) that the school’s more limited admissions policy for its law school was constitutionally permissible. Following those decisions, a number of states, including Texas, California, Oklahoma, Florida and Washington, have adopted constitutional amendments or other laws that prohibit affirmative action in school admissions and public employment.

In 2006, Michigan voters approved the following amendment to the state constitution by a margin of 58-42 percent: “The University of Michigan, Michigan State University, Wayne State University, and any other public college or university, community college, or school district shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.” In a 8-7 decision issued in November 2012, the 6th Circuit Court of Appeals held this language as unconstitutional because Proposal 2 placed “special burdens on minority interests” by targeting a program that “inures primarily to the benefit of the minority.”

In Justice Kennedy’s opinion, joined by Chief Justice Roberts and Justice Alito, the court considered whether authority existed to overturn a constitutional amendment adopted by a state’s ballot initiative. In order to do so, and based on the appellate court’s strong reliance on Washington v. Seattle School Dist. No. 1, 458 U.S. 457 (1982) the court would be able to overturn a ballot initiative that made it “more difficult for certain racial minorities than for other groups” to “achieve legislation that is in their interest.” This expansive reading, Justice Kennedy reasoned, could not conform to principles of equal protection because courts should not be required to declare which political policies serve the interests of a group defined in racial terms. Justice Kennedy cautioned: “…in a society in which those [racial] lines are becoming more blurred, the attempt to define race-based categories also raises serious questions of its own. Government action that classifies individuals on the basis of race is inherently suspect and carries the danger of perpetuating the very racial divisions the polity seeks to transcend.”

This significant decision upholds states’ rights to enact constitutional amendments by voter ballot initiatives. The broader implications of the Schuette decision are unclear. However, the outcome confirms public universities and government employers have a vested and ongoing interest in the changing shape of affirmative action policies.

Article By:

Of:

Barnes & Thornburg LLP

Why October 1, 2014 Is An Important Date For Management Persons Of Nevada Entities

Two years ago, the Nevada Supreme Court in an en band decision held that a state district court may exercise jurisdiction over the nonresident officers and directors of a Nevada corporation with its principal place of business in Spain. Consipio Holding, BV v. Carlberg, 282 P.3d 751 (Nev. 2012). The Supreme Court reasoned

When officers or directors directly harm a Nevada corporation, they are harming a Nevada citizen. By purposefully directing harm towards a Nevada citizen, officers and directors establish contacts with Nevada and “affirmatively direct [] conduct” toward Nevada.

At the time, Nevada, unlike Delaware, had no implied consent statute. Thus, the Nevada Supreme Court’s holding was based on Nevada’s long-arm statute, NRS 14.065(1).

In the ensuing session, the Nevada legislature decided to address the issue as well by enacting an implied consent statute:

Every nonresident of this State who, on or after October 1, 2013, accepts election or appointment, including reelection or reappointment, as a management person of an entity, or who, on or after October 1, 2014, serves in such capacity, and every resident of this State who accepts election or appointment or serves in such capacity and thereafter removes residence from this State shall be deemed, by the acceptance or by the service, to have consented to the appointment of the registered agent of the entity as an agent upon whom service of process may be made in all civil actions or proceedings brought in this State by, on behalf of or against the entity in which the management person is a necessary or proper party, or in any action or proceeding against the management person for a violation of a duty in such capacity, whether or not the person continues to serve as the management person at the time the action or proceeding is commenced. The acceptance or the service by the management person shall be deemed to be signification of the consent of the management person that any process so served has the same legal force and validity as if served upon the management person within this State.

NRS 75.160(1). Under the statute, an “entity” means a corporation, whether or not for profit; limited-liability company; limited partnership; or a business trust. NRS 78.160(10)(b). A “management person” means a director, officer, manager, managing member, general partner or trustee of an entity. NRS 75.160(10)(c).

Apparently, the Nevada legislature did not consult with Professor Eric Chiappinelli who last year published an article arguing that Delaware’s implied consent statute was unconstitutional. The Myth of Director Consent: After Shaffer, Beyond Nicastro, 37 Del. J. Corp. L. 783 (2013).

Why does the statute refer to October 1? Pursuant to NRS 218D.330(1), each law and joint resolution passed by the Legislature becomes effective on October 1 following its passage, unless the law or joint resolution specifically prescribes a different effective date.

Article By:

Keith Paul Bishop

Allen Matkins Leck Gamble Mallory & Natsis LLP

Only one week until the Trademark Infringement & Litigation Summit – April 28-29, San Francisco

The National Law Review is pleased to bring you information about the upcoming Trademark Infringement & Litigation Summit hosted by IQPC.

When

Monday April 28 & Tuesday April 29, 2014

Where

San Francisco, California, USA

Trademark law may not be changing, but its application certainly has and will continue to do so. Brands are increasingly global, which opens up new possibilities for companies… but also new trademark issues and potential pitfalls. The online experience adds to this global focus and changes the interaction between brands and consumers dramatically.

IQPC’s Trademark Infringement & Litigation Summit will address the topics that you grapple with on a daily basis, including:

How business and infringement concerns guide strategic registration and vigilance
Methods of enforcing your mark, including a “soft approach,” ICANN dispute resolution, cancellation and opposition
Litigation and enforcement management
Evolving company domain name strategy

Perhaps the biggest benefit of attending, however, is the practical, frank conversation about the legal and business choices involved in protecting and maintaining your brand. Attend the Trademark Infringement & Litigation Summit to work through these issues with your colleagues.

Do not miss your opportunity to network and engage with top in-house and outside counsel working in the area. Register today!

NOTE: IQPC plans on making CLE credits available for the state of California (number of credits pending). In addition, IQPC processes requests for CLE Credits in other states, subject to the rules, regulations and restrictions dictated by each individual state. For any questions pertaining to CLE Credits please contact: amanda.nasner@iqpc.com.

"Rails to Trails" or "Rails to Trespass": Supreme Court Speaks on the Abandonment of Certain Railroad Rights of Way

Last month, the Supreme Court of the United States (please, there is no such thing as the “United States Supreme Court”) decided a very interesting case about easements. “Easements?”, you ask. Yes, easements. We use them almost every day. Well, every weekend, perhaps. Greenways. Rails to trails. Beach access. You name it. Also, the case is interesting because it holds the Federal Government to a much older (1940-old, which is old) argument it made about easements, and which contradicts the Government’s argument in this recent case.

We’re talking today about Marvin M. Brandt Revocable Trust v. United States, No. 12-1173 (March 10, 2014).

Facts.

In 1875, to encourage settlement of the West and to entice railroads to develop, Congress passed the General Railroad Right-of-Way Act, which granted to “any railroad” a “right of way through the public lands of the United States” to the “extent of 100 feet on each side of the central line” provided the railroad either (1) actually constructed its railroad or (2) filed a proposed map of its rail corridor. From that day forward, after the right of way is obtained, “all such lands over which such right of way shall pass shall be disposed of subject to the right of way”.

In 1908, pursuant to the Act, the Laramie[,] Hahn’s Peak & Pacific Railway Company obtained a 66-mile, 200-foot wide right of way through southern Wyoming. By 1911, the Railway had completed construction of its railroad over the Act-granted right of way.

In 1976, the United States patented an 83-acre parcel to the Brandt family, conveying fee simple title but reserving and excepting certain rights-of-way and easements “to the United States”. For purposes of our discussion today, we’ll focus on the reservation and exception that the land was patented “subject to those rights for railroad purposes as have been granted to the Laramie[,] Hahn’s Peak & Pacific Railway Company.” That right of way stretched for nearly 1/2-mile across the Brandt parcel, covering 10 of the 83 acres. As noted by the Court, “[t]he patent did not specify what would occur if the railroad abandoned this right of way”.

The rail line owning the right of way changed hands a number of times, ending with the Wyoming and Colorado Railroad. In 1996, the Railroad notified the Surface Transportation Board of its intention to abandon the right of way.

The Lawsuit.

In 2006, the United States filed this lawsuit seeking a judicial declaration that the right of way had been abandoned and an order quieting title to the right of way in the United States. All property owners along the right of way settled or defaulted but for the Brandts, which took issue with the attempt to quiet title in the United States.

The Brandts contend that the “stretch of the right of way crossing [the Brandt] family’s land was a mere easement that was extinguished upon abandonment by the railroad, so that, under common law property rules, [the Brandts] enjoyed full title to the land without the burden of the easement”.

The United States “countered that it had all along retained a reversionary interest in the railroad right of way—that is, a future estate that would be restored to the United States if the railroad abandoned or forfeited its interest”. In this sense, the United States is arguing that the 1875 Act created something more than an easement, the latter working as the Brandts indicate. It is this “implied reversionary interest” in the United States that underlies the dispute.

The trial court granted summary judgment to the United States, and the appellate court affirmed. The Supreme Court granted certiorari, and reversed. In an 8-1 decision, the Court determined the Brandts held title to their 83 acres free and clear of the abandoned easement. The other landowners are SOL.

The Majority.

The Majority’s decision sits on two pillars: (1) the common law nature of easements and (2) an earlier argument from the United States’, on which the United States succeeded, that supports the Brandts’ position and contradicts the United States’ position in this lawsuit.

First, the common law nature of easements. Citing myriad secondary sources, the Court notes that an easement is a “nonpossessory right to enter and use land in the possession of another”, which “disappears” if the beneficiary “abandons” at which point “the landowner resumes his full and unencumbered interest in the land”. Thus, the railroad’s decision to abandon and ruling that it had abandoned “resume[d]” in the Brandts their patented interest in the property.

Second, the United States’ inconsistency. In what appears to be a point of order first raised before the Supreme Court — there is no mention of this at either the trial court or the appellate court level — the Court notes that the United States argued successfully in 1940, adopted by the Court “in full”, that the 1875 Act “clearly grants only an easement, and not a fee”. See Great Northern Railway Co. v. United States, 315 U.S. 262 (1942). Thus, the United States cannot now argue that the 1875 Act creates something more than an easement, with an implied reversionary interest in the United States after abandonment. Of course, if you’re the United States, there is likely nary an argument you haven’t made before.

The Dissent.

The dissent takes the position that railroad rights of way have always been treated differently than ordinary easements, and rightfully so, as sui generis property rights not governed by the common law regime. In the context of railroad rights of way, the dissent points out, “traditional property terms like ‘fee’ and ‘easement’ do not neatly track common-law definitions” as the rights of way have characteristics of both easements and fee. The dissent insists that precedent, including the decision in Great Northern Railway, is clear that railroad rights of way were granted by the 1875 Act “with an implied possibility of reverter in the United States”.

And then the dissent gets real, which is our jam: “By changing course today [from prior precedent regarding railroad rights of way and implied reversionary interests in the United States], the Court undermines the legality of thousands of miles of former rights of way that the public now enjoys as means of transportation and recreation.” Yep, those trails, which had been rails, could likely fail.

rails to trails
“Trespass your way around Town by bike, jog, or stroll.”

Article By:

Michael C. Thelen

Of:

Womble Carlyle Sandridge & Rice, PLLC

U.S. Tax Court Rejects Internal Revenue Service's (IRS) Restrictive View of Trust Material Participation

The U.S. Tax Court recently issued a taxpayer favorable opinion regarding how a trust materially participates in its activities. The court’s holding will make it easier for trusts to currently deduct expenses against non-passive income and to exclude income from the reach of the new 3.8% net investment income tax.

In Frank Aragona Trust v. Comm’r, the court held that in determining whether a trust materially participates in its activities, the activities of the trustees, including their activities as employees of the businesses owned by the trust, should be considered. The court’s opinion directly conflicts with recent IRS guidance that only a trustee’s time spent acting in a fiduciary capacity counts toward the trust’s material participation – a standard that would be very difficult for most trusts to meet. See Technical Advice Memorandum 201317010.

In Frank Aragona Trust, a Michigan trust owned rental real estate activities and engaged in holding and developing real estate. The trust conducted some of its activities directly, and others through its wholly-owned business, Holiday Enterprises, LLC. The trust had six trustees, three of whom worked full-time for Holiday Enterprises. The IRS argued that the participation of the trustee-employees should be disregarded. The court disagreed and concluded that the participation of the trustee-employees should be counted and further, that the participation of the trust’s six trustees was sufficient to meet the material participation standard. The court based its decision, in part, on the fact that Michigan law requires trustees to “administer the trust solely in the interest of the trust beneficiaries” even when they are participating through a business wholly-owned by the trust. This decision provides helpful authority for trusts, their trustees and their advisors in navigating the complex passive activity loss and net investment income tax rules.

However, the decision in Frank Aragona Trust does not answer all of the outstanding questions regarding material participation of trusts. In recently finalized regulations implementing the net investment income tax, the Treasury Department and the IRS requested public comments on rules regarding material participation of trusts, which indicates that the IRS may finally undertake a formal project to provide long-awaited guidance on this issue.

Article By:

Michala P. Irons

Randal J. Kaltenmark

William M. Pope

Douglas S. Robson

Howard J. Rubin

Of:

Barnes & Thornburg LLP

Supreme Court Inks Uniform Standing Test for Lanham Act False Advertising Claims

Key Takeaways

The US Supreme Court created a uniform test for standing for false advertising claims under Section 43(a) of the Lanham Act, resolving a three-way circuit split.
The new standing test requires the plaintiff to allege and prove that it suffered an injury to a commercial interest in sales or business reputation, and that such injury was proximately caused by the defendant’s alleged misrepresentations.
The Court closed the courthouse doors to consumer class action suits under Section 43(a), pointing to the commercial interest requirement.
The decision may prompt speculation regarding uncertainty as to standing for other claims under Section 43(a), including claims for infringement of unregistered trademarks.

Discussion of the Case

In a decision issued March 25, 2014, Lexmark International, Inc. v. Static Control Components, Inc., the US Supreme Court rejected three conflicting tests for standing for false advertising claims under Section 43(a) of the Lanham Act, creating a new test in the process. Specifically, plaintiffs must now “plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant’s misrepresentations.”

Plaintiff Lexmark International, Inc. (Lexmark) sells laser printers and corresponding ink cartridges. The ink cartridges contain a microchip that deactivates them after they run out of ink, which is intended to stop “remanufacturers” from refurbishing and selling the ink cartridges in competition with Lexmark. Defendant Static Control Components, Inc. (Static Control), while not a direct competitor of Lexmark, sells component parts to remanufacturers, including a replacement microchip that allows the remanufacturers to once again refurbish and sell ink cartridges in competition with Lexmark. In response, Lexmark sent letters to the remanufacturers, advising that it was illegal to sell the refurbished ink cartridges and, in particular, that it was illegal to use Static Control’s products to refurbish the ink cartridges.

Lexmark sued Static Control for copyright infringement based on its creation and sale of the microchips. Static Control counterclaimed for false advertising based on, among other things, the letters to the remanufacturers. The US District Court for the Eastern District of Kentucky dismissed Static Control’s counterclaim for lack of “prudential standing,” and the US Court of Appeals for the Sixth Circuit reversed.

The Supreme Court granted certiorari and ultimately held that Static Control satisfied the Court’s new test for standing under Section 43(a) of the Lanham Act. In so holding, the Court swept aside what it called the “misleading” concept of “prudential standing,” which has been applied by courts as an additional hurdle to alleging standing beyond the broad “case or controversy” requirement (i.e., an injury in fact that is fairly traceable to the conduct complained of) of Article III of the US Constitution. The Court held that standing simply flows from traditional statutory interpretation principles. In particular, courts need only look to the at-issue statute to determine (1) whether the plaintiff’s alleged injury falls within the “zone of interest” protected by the statute, and if so, (2) whether such injury was proximately caused by the defendant’s alleged misrepresentations.

The Court’s new standing analysis falls somewhere in the middle of the three rejected tests: one, which conferred standing only on direct competitors of the defendant; the second, which used a multifactor analysis borrowed from antitrust law; and the third, which conferred standing on any plaintiff that demonstrated a “reasonable interest to be protected against” and a “reasonable basis for believing” that such interest was likely to be harmed.

Turning to the interpretation of the “zone of interest” protected by the Lanham Act, the Court looked to the statute’s clear statement of intent in Section 45 regarding protection against “unfair competition.” Citing to a law review article from 1929, the Court found that unfair competition “was generally understood to be concerned with injuries to business reputation and present and future sales.” Thus, the Court concluded that the “zone of interest” of Section 43(a) was limited to injuries to a commercial interest in reputation or sales. The Court then slammed the courthouse doors on consumer class actions under Section 43(a), pointing out that this “zone of interest” excluded a suit based on a “consumer who is hoodwinked into purchasing a disappointing product.”

On the facts at hand, the Court held that Static Control had sufficiently alleged lost sales and damage to its business reputation, easily satisfying the “zone of interest” requirement. Further, the Court found that Static Control’s allegations sufficiently pled that those injuries were proximately caused by Lexmark’s representations that Static Control’s business was illegal. Accordingly, the Court held that Static Control had standing and was thus “entitled to a chance to prove its case.”

While this decision provides some welcome certainty for false advertising litigants, ending the three-way circuit split regarding Section 43(a) false advertising standing, it also opens the door to speculation regarding standing for other “unfair competition” claims under Section 43(a) (e.g., infringement of unregistered trademarks). Specifically, the Court’s holding and analysis were not expressly limited to Section 43(a)(1)(b), which relates to false advertising, but instead apply to all of Section 43(a). It is thus unclear whether, for example, some increased level of “proximate harm” will be required for trademark claims under Section 43(a). Then again, the Court’s formulation of what constitutes proximate harm under Section 43(a)—when “deception of consumers causes them to withhold trade from the plaintiff”—seems to fit nicely with the “likelihood of consumer confusion” standard applied in trademark cases.

Article By:

Roger P. Furey

Doron S. Goldstein

Michael R. Justus

Of:

Katten Muchin Rosenman LLP

Illinois Trust Taxation Deemed Unconstitutional

In Linn v. Department of Revenue, the Illinois Fourth District Appellate Court reviewed the state’s statutory framework for taxing trusts. Linn v. Department of Revenue, 2013 Il App (4th) 121055. On constitutional grounds, the court limited Illinois’ power to impose taxes under its “once subject to tax, forever subject to tax” regime.

This case creates planning opportunities to minimize Illinois income taxes. However, it should be noted that the Linn case applies to trusts that pay Illinois income tax on trust dividends, interest, capital gains or other income retained by the trust and not distributed to a beneficiary. This case does not apply to income distributed to an Illinois beneficiary; that income clearly can be taxed by Illinois.

Illinois Trusts

Illinois trusts are subject to a 5 percent income tax plus a 1.5 percent personal property replacement tax. A nonresident trust is subject to taxation only on income generated within Illinois or apportioned to the state. Resident trusts, on the other hand, are subject to tax on all income, regardless of the source of that income. For an individual, state income taxation on a resident basis generally requires domicile or residence within the taxing state. With respect to a trust, one or more of the grantor, trustees and beneficiaries may have contacts with a state sufficient to uphold as constitutional a tax on all of the trust income.

Illinois defines a resident trust based solely on the domicile of the grantor. 35 ILCS 5/1501(a)(20). A resident trust means:

A trust created by a will of a decedent who at death was domiciled in Illinois or
An irrevocable trust, the grantor of which was domiciled in Illinois at the time the trust became irrevocable. For purposes of the statute, a trust is irrevocable when it’s no longer treated as a grantor trust under Sections 671 through 678 of the Internal Revenue Code.

The Illinois statute would forever tax the income generated by the trust property, regardless of the trust’s continuing connection to Illinois. One can analogize the Illinois statute to a hypothetical statute providing that any person born in Illinois to resident parents is deemed an Illinois resident and subject to Illinois taxation no matter where that person eventually resides or earns income. Many lawyers believe that the Illinois statute is unconstitutional.

Linn

Linn involved a trust established in 1961 by A.N. Pritzker, an Illinois resident. The trust was initially administered under Illinois law by trustees who lived in Illinois. In 2002, the trustee exercised a power granted in the trust instrument to distribute the trust property to a new trust (the Texas Trust). Although the Texas Trust generally provided for administration under Texas law, certain provisions of the trust instrument continued to be interpreted under Illinois law. The Texas Trust was subsequently modified by a Texas court to eliminate all references to Illinois law, and the trustee filed the Texas Trust’s 2006 Illinois tax return as a nonresident. At that time:

No current trust beneficiary resided in Illinois;
No trustee or other trust officeholder resided in Illinois;
All trust assets were located outside Illinois; and
Illinois law wasn’t referred to in the modified trust instrument

The Illinois Department of Revenue (the IDR) asserted that the trust was a resident trust for 2006 and that, as such, the trust pay Illinois income tax on all income. The trustee countered that the imposition of Illinois tax under these circumstances was unconstitutional as a violation of the due process clause and the commerce clause. The court held the statute was unconstitutional based on due process grounds (not reaching the commerce clause arguments), and stated that the following are the requirements for a statute to sustain a due process challenge: (1) a minimum connection must exist between the state and the person, property or transaction it seeks to tax during the period in issue and (2) the income attributed to the state for tax purposes must be rationally related to values with the taxing state. Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992).

This was the first case in Illinois on this issue so the court cited cases from other jurisdictions, including Chase Manhattan Bank v. Gavin, 733 A. 2d 782 (Conn. 1999), McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964), Blue v. Department of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990) and Mercantile-Safe Deposit & Trust Co. v. Murphy, 242 N.Y.S.2d 26 (N.Y. App. Div. 1963). Gavin, which upheld the application of the Connecticut income tax on the undistributed income of a lifetime trust created by a Connecticut grantor, was cited at length by the court. A critical fact in that case was that the beneficiary resided within the state for the year in question and the court assumed that the beneficiary would receive all trust property shortly. In Linn, the court noted, there were no Illinois beneficiaries. Relying on Blue and Mercantile, the court found that a grantor’s residence within a state isn’t itself enough to satisfy due process.

The IDR argued that significant connections with Illinois existed, maintaining that the trust owed its existence to Illinois law and listing legal benefits Illinois provides to the trustees and beneficiaries. The IDR cited some cases that involved trusts created by a will (i.e.,testamentary trusts). The Illinois court disagreed with the testamentary trust cases the IDR relied on, finding that a lifetime trust’s connections with a state are more attenuated than in the case of a testamentary trust. Further, the court found that the Texas Trust wasn’t created under Illinois law, but rather by a power granted to the trustees under the original trust instrument. The court proceeded to dismiss the trust’s historical connections to Illinois and focused on contemporaneous connections, finding that “what happened historically with the trust in Illinois courts and under Illinois law has no bearing on the 2006 tax year.” Linn at ¶30. For 2006, the court concluded that the trust received the benefits and protections of Texas law, not Illinois law.

Steps to Consider

The IDR did not appeal the Linn decision to the Illinois Supreme Court. We anticipate that additional cases will test and define the boundaries of the Linn decision. Of course, Illinois might change its statute. For the time being, however, the Linn decision is binding authority for trustees of trusts that can eliminate all contact with Illinois.

Trustees of resident trusts with limited contacts to Illinois (in particular, those trusts without trustees, assets or non-contingent beneficiaries in Illinois) should consider the following issues.

Review state taxation: The trustee should review connections to Illinois and consider whether actions could be taken to fall within theLinn holding. Contacts with other states and those states’ rules for taxing trusts should also be reviewed.
File Illinois return with no tax due: Pending guidance from the IDR, the trustee could consider filing an IL Form 1041, referencing theLinn case and reporting no tax due. For each tax year, a tax return must be filed in order to commence the running of the statute of limitations. An Illinois appellate court decision that supports the taxpayer’s position will ordinarily provide a basis for the abatement of tax penalties. 86 Ill. Admin Code Section 700.400(e)(8). However, if the facts are not exactly like those in Linn, a penalty cold be imposed on the trustee. A safer method for trusts when the facts are not the same as in Linn would be to file and pay the Illinois tax in full but then file a claim for refund. This should eliminate penalties but likely will result in a dispute with the IDR.
Amend prior tax returns: The trustee could consider filing amended tax returns for prior years and claim a refund. A trustee that has timely filed prior year tax returns may file an amended tax return at any time prior to the third anniversary of the due date of the tax return, including extensions. For example, the 2010 tax year return may be amended at any time prior to October 15, 2014.

Other Considerations

Given the holding in Linn and uncertainty regarding trust tax law, trusts that offer flexibility and can adapt to changing circumstances may have a distinct advantage.

Officeholders: Carefully consider the residency of trustees and other trust officeholders (such as investment advisers) and provisions regarding the appointment and removal of those officeholders.
Decanting provision: Consider providing the trustee with broad authority to distribute trust property in further trust.
Lifetime trusts: While the legal basis for the continued income taxation of a testamentary trust may also be questionable, testamentary trusts can be avoided by creating lifetime trusts.
Situs and administration: Consider establishing and administering the trust in a state that doesn’t assess an income tax against trust income.
Governing law: Consider including trust provisions that allow the trustee to elect the laws of another state to govern the trust.
Discretionary dispositive provisions: Consider including discretionary rather than mandatory trust distribution provisions, as some states may tax a trust based on the residence of beneficiaries with non-contingent trust interests.
Division provisions: Consider including provisions authorizing a trustee to divide a trust without altering trust dispositive provisions. This type of provision may allow a trustee to divide a trust into separate trusts and isolate the elements of a trust attracting state taxation. For example, a trust may simply be divided into two separate trusts, one trust for the benefit of a child and his descendants that live in Illinois and a second trust that might not be subject to Illinois taxation, for a child and his descendants that don’t live in Illinois.

Article By:

James H. Cundiff

L. Timothy Halleron

Of:

McDermott Will & Emery

Register today for IQPC's Trademark Infringement & Litigation Summit

The National Law Review is pleased to bring you information about the upcoming Trademark Infringement & Litigation Summit hosted by IQPC.

When

Monday April 28 & Tuesday April 29, 2014

Where

San Francisco, California, USA

IQPC’s Trademark Infringement & Litigation Summit will address the topics that you grapple with on a daily basis, including:

How business and infringement concerns guide strategic registration and vigilance
Methods of enforcing your mark, including a “soft approach,” ICANN dispute resolution, cancellation and opposition
Litigation and enforcement management
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Retirement Plan Fee Litigation Finds Its Way to North Carolina

Over the last few years, we have seen a significant increase in litigation involving the fees paid by retirement plans. However, until recently, no major litigation had occurred in North Carolina. On March 12, 2014, one of these cases was filed against Winston-Salem-based Novant Health, a large hospital system in the southeast. This case and other recent litigation should serve as a reminder to retirement plan fiduciaries of the need to monitor their plans’ service provider arrangements.

The complaint against Novant Health alleges that Novant’s retirement plan paid unreasonable fees to the plan’s recordkeeper and to an investment advisor. The plaintiffs argue that the fees paid by the plan were unreasonable because, among other things, plan expenses increased more than 10-fold in one year without a corresponding increase in services. The plaintiffs also claim that the fiduciaries breached their duties by failing to leverage the size of the plan to negotiate lower fees and by selecting retail mutual fund share classes when cheaper, “institutional” share classes were available.

While this case is still a long way from being decided, it should serve as a pointed reminder to plan sponsors and other plan fiduciaries that they need to routinely monitor the reasonableness of plan fees and expenses.

If the plan document so provides, a plan can pay its own administrative expenses, but only if the appropriate fiduciary determines that those expenses are reasonable. Before entering into a service provider relationship, the fiduciary must first make a determination that the services are necessary and the fees are reasonable. The fiduciary then must monitor the arrangement over time to ensure that it remains reasonable.

The following fiduciary risk-management practices are worth considering for any plan committee or other fiduciary involved in the selection or monitoring of service providers:

Regularly identify all service providers that directly or indirectly receive fees from the plan.
Make sure each service provider has provided the plan fiduciaries with fee disclosures required by ERISA.
Regularly calculate the amounts that each service provider directly or indirectly receives from the plan.
Understand what services are provided to the plan for the fees paid. If one vendor provides both services to the plan and non-plan services, make sure that the plan is not subsidizing any non-plan services.
Periodically confirm whether the service provider’s pricing is competitive. This is particularly important as the size of the plan grows because the fiduciary will be expected to leverage the plan’s size to reduce fees. Depending on the circumstances, it might be best to conduct a formal request for proposals from time to time.
If an advisor questions whether a fee arrangement is reasonable, take prompt action to investigate the issue and determine whether the arrangement is reasonable.
Make sure that participant communications accurately reflect how plan expenses are paid.
Document, document, document! Document the decision-making process used to select a service provider, and document the fiduciary’s monitoring and review process.

These practices will assist the fiduciary in meeting its fiduciary duties and, perhaps more importantly, demonstrate fiduciary prudence to any inquiring party.

Article By:

Kelsey H. Mayo

David L. Woodard

Of:

Poyner Spruill LLP

Category: Litigation

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