Monday, October 11, 2021

Caselaw Update


It’s been a while since I highlighted a few recent cases for the blog.  Today is that day.  Recently, the court have decided cases about a packing plant’s potential liability exposure to employee claims about the virus; a legal challenge to the beef checkoff; C corporation distributions; and whether a trade or business existed in a rather unique setting.

Caselaw update – it’s the topic of today’s post.

Meat-Packing Plant Employees Can’t Sue Over Virus Claims 

Fields v. Tyson Foods, Inc., No. 6:20-cv-00475, 2021 U.S. Dist. LEXIS 181083 (E.D. Tex. Sept. 22, 2021).

The plaintiffs were defendant’s employees. They sued for negligence and gross negligence, alleging that the defendant failed to take adequate safety measures, such as not providing personal protective equipment and not implementing social-distancing guidelines, which caused them to contract COVID-19. The plaintiffs argued that the defendant failed to satisfy a duty of care to keep its premises in a reasonably safe condition, and that it failed to exercise ordinary care to reduce or eliminate the risk of employees being exposed to COVID-19. The defendant filed a motion to dismiss for a failure to state a claim upon which relief can be granted. The defendant argued that the Poultry Products Inspection Act (PPIA) as promulgated by the Food Safety and Inspection Service (FSIS) of the Department of Agriculture contained an express-preemption clause that foreclosed the plaintiffs’ claims. Additionally, the defendant argued that the recently passed Pandemic Liability Protection Act (PLPA) provided the defendant retroactive protection against damages lawsuits that alleged exposure to COVID-19. The trial court agreed and noted that the PPIA’s express-preemption clause overrode state requirements that are different than the regulations. The trial court noted that although the plaintiffs argued that the defendant failed to impose adequate safety measures to reduce the spread of COVID-19 in its facility, the FSIS promulgated a number of regulations under the PPIA that directly addressed the spread of disease. The trial court held that the duty of care alleged by the plaintiffs’ negligence claim would require the defendant to utilize additional equipment, therefore the plaintiffs’ claims were preempted by federal law. The trial court next addressed the PLPA, which generally shields corporations from liability if an individual suffers injury or death as a result of exposure to COVID-19. The trial court noted that the plaintiffs needed to allege that the defendant either knowingly failed to warn them or remedy some condition at the facility that the defendant knew would expose the plaintiffs to COVID- 19, or that the defendant knowingly contravened government-promulgated COVID-19 guidance. Further, the plaintiffs must allege reliable scientific evidence that shows that the defendant’s conduct was the cause-in-fact of the plaintiffs’ contracting COVID-19. The trial court noted that the plaintiffs failed to provide any reliable scientific evidence that showed that the defendant was the cause-in-fact of the plaintiffs’ contracting COVID-19. Because the plaintiffs merely made conclusory statements that they contracted COVID-19 due to unsafe working conditions, without alleging how or when they contracted COVID-19, the trial court held the plaintiffs’ complaint failed to satisfy the PLPA. Upon granting the defendant’s motion to dismiss, the trial court noted that even if the plaintiffs amended their complaint to satisfy the causation prong, the PPIA preemption clause would still foreclose the plaintiffs’ claims. 

Lawsuit Challenging Changes to Beef Checkoff Continues

Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. United States Department of Agriculture, et al., NO. 20-2552 (RDM), 2021 U.S. DIST. LEXIS 187182 (D. D.C. Sept. 29, 2021).

The plaintiff, a cattle grower association, sued the United States Department of Agriculture (USDA) claiming that the USDA made substantive changes to the Beef Checkoff Program in violation of the Administrative Procedure Act (APA) by entering into memorandums of understanding (MOUs) with various state beef councils. The plaintiff asserted that such amendments should have been subject to public notice-and-comment rulemaking. The MOUs gave the USDA more oversight authority over how the state beef councils could use the funds received from the checkoff. In other litigation, the USDA has been claiming oversight authority (even though not exercised) over state beef councils to argue that the beef checkoff is government speech rather than private speech in order to defeat First Amendment claims. In the present litigation, the USDA motioned to dismiss the case for lack of standing. The court denied the USDA’s motion on the basis that the plaintiff, on the face of its claim, had established sufficient elements of associational standing – that at least one of the plaintiff’s members had suffered a diminished return on investment as a result of the MOUs. The court did not address the factual question of the plaintiff’s standing. The USDA’s had also asserted a defense of claim preclusion but the court postponed examining that issue until additional evidence was submitted allowing the court to fully address the issue of jurisdiction.

Lack of Documentation Leads to Receipt of Constructive Dividends

Combs v. Comr., No. 20-70262, 2021 U.S. App. LEXIS 28875 (9th Cir. Sept. 23, 2021), aff’g., T.C. Memo. 2019-96.

The petitioner was the sole shareholder of a C corporation in which he housed his motivational speaking business. The fees he earned were paid to the corporation. The corporation paid him a small salary which he instructed the corporation not to report as income to him. In addition, he also paid many personal expenses from a corporate account. The IRS claimed that the distributions from the corporation to the petitioner constituted dividends that the petitioner should have included in gross income. The Tax Court noted that if the corporation has sufficient earnings and profits that the distribution is a dividend to the shareholder receiving the distribution, but that if the distribution exceeds the corporation’s earnings and profits, the excess is generally a nontaxable return of capital to the extent of the shareholder’s basis in the corporation with any remaining amount taxed to the shareholder as gain from the sale or exchange of property. The Tax Court noted that the petitioner’s records did not distinguish personal living expenses from legitimate business expenses and did not provide any way for the court to estimate or determine if any of the expenses at issue were ordinary and necessary business expenses. Thus, the court upheld the IRS determination that the petitioner received and failed to report constructive dividends. The appellate court affirmed noting that there was ample evidence to support the Tax Court’s constructive dividend finding and that the petitioner had failed to rebut any of that evidence. 

Suing Ex-Wife Not a Trade or Business

Ray v. Comr., No. 20-6004, 2021 U.S. App. LEXIS 27614 (5th Cir. Sept. 14, 2021).

The petitioner divorced his wife in 1977 and then sued her in state court in 1998 over debts she owed associated with two real estate purchases and credit cards, as well as penalties she owed the petitioner for not providing him with financial statements in a timely manner. During the pendency of the lawsuit in 2020, he sued her two more times in state court and sued her attorneys in federal court. The federal litigation involved losses from trading agreements the petitioner entered into with her involving a futures and options trading method she created. Ultimately, she owed the petitioner about $384,000 for trading losses incurred with funds he deposited into a commodities brokerage account. The petitioner deducted $267,000 in legal fees on his 2014 return and the IRS rejected the deduction, tacking on an accuracy-related penalty. In 2019, the Tax Court disallowed the legal expenses under I.R.C. §162(a), but allowed a deduction for legal costs incurred that were associated with trading agreement losses as production of income expenses under I.R.C. §212(1). The Tax Court also upheld the accuracy-related penalties. On appeal the appellate court largely affirmed the Tax Court, find that the petitioner didn’t prove that his lawsuit to recover the trading agreement losses was related to his work with a trade or business. Also, the appellate court upheld the Tax Court finding that the petitioner didn’t have a profit motive in suing his ex-wife which was required for a deduction under I.R.C. §212(1). However, the appellate court held that the Tax Court erred in concluding that the petitioner lacked some justification for claiming deductions under I.R.C. §162(a) for legal fees relating to the trading agreement losses. As such, the appellate court remanded the penalty issue to the Tax Court. 


Expect challenges to the beef checkoff to continue.  Many livestock ranchers and farmers that also have cattle and pay the checkoff have been irritated about the use of their checkoff dollars and the conduct of state beef councils for many years.  Also, the constructive dividend issue is a big one.  Compensation arrangements for corporate officers/shareholders must be structured properly to avoid the constructive dividend issue.  The IRS does examine that issue.  In addition, the trade or business issue often arises in the context of agricultural activities – particularly when rental arrangements are involved.  Remember, under IRS rules a cash lease is not a farming trade or business – it’s a rental activity.  That can have implications in numerous settings.  But, I have never seen the argument come up before the Ray case in the context of suing an ex-spouse!  That’s an interesting twist.

Business Planning, Income Tax, Regulatory Law | Permalink


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