State Tax Highlights

NEWS

Oral Arguments set in South Dakota v. Wayfair, Inc.

The U.S. Supreme Court is scheduled to hear oral arguments in South Dakota v. Wayfair, Inc. on April 17th, setting up the long-awaited debate on whether remote sellers that lack a physical presence in a state can be compelled to collect the state's sales and use tax. Wayfair and a group of online companies are challenging South Dakota's law that imposes the tax on remote sellers that have $100,000 in sales into the state or more than 200 transactions. The state is arguing that Quill Corp. v. North Dakota, the 1992 case that established the physical-presence test, should be abrogated. See earlier issues of State Tax Highlights for a more detailed discussion of the case.

U.S. SUPREME COURT UPDATE

No cases to report.

FEDERAL CASES OF INTEREST

Individual Mandate Debt Not Entitled to Priority

The U.S. Bankruptcy Court for the Eastern District of Louisiana held that an Internal Revenue Service (IRS) claim against the debtor for a shared responsibility payment for his failure to maintain health insurance was not entitled to priority status. The court found that the individual mandate in the Affordable Care Act (ACA) was not a tax, but a penalty, and was not entitled to priority status.

The facts show that on June 8, 2017 the debtor filed for relief under Chapter 13 of the Bankruptcy Code and scheduled a priority claim in his bankruptcy petition to the IRS in the amount of $5,800.00 based on his estimate of the amounts he owed the IRS for his 2015 and 2016 taxes. The debtor subsequently amended his bankruptcy schedules to reflect a priority amount of $5,100.10. The IRS filed a number of claims in this matter, but in its final amended proof of claim listed the additional $695.00 as an "excise tax," which the ITS said was the debtor's shared responsibility payment liability arising under Internal Revenue Code § 5000A for failure to maintain health insurance in 2016.

Section 507 of the Bankruptcy Code, which sets out the framework for determining whether a claim is entitled to priority status provides in pertinent part that a governmental unit's allowed unsecured claim has priority, only to the extent that the claim is for an excise tax on a transaction occurring before the date of filing of the petition within a certain time frame.
The court noted that a statute's characterization of an obligation as a "tax" is not controlling for purposes of establishing priority under the Bankruptcy Code. Instead, the court must look to the substance of the statute to determine whether the obligation bears the characteristics of a tax. The court said that in order to determine whether the individual mandate of the ACA is a "tax" or a "penalty," the court must decide whether the primary, or dominant, purpose of the individual mandate or the "shared responsibility payment" is to support the government or to punish or discourage certain conduct.

The court applied the principles stated in prior case to the current case and said it was apparent that the ACA individual mandate is a penalty designed to deter citizens from living without health insurance. Under the ACA, if an individual does not maintain health insurance, the "only consequence is that he must make an additional payment to the IRS when he pays his taxes" and failure to make the ACA individual mandate payment does not result in any of the typical consequences that result from non-payment of taxes. Instead, an individual who fails to make the ACA individual mandate payment is penalized by having the exaction deducted out of future tax returns. The court also noted that Congress itself labeled the ACA individual mandate a "penalty" and not a tax and the relevant statute, 26 U.S.C. § 5000A, refers to the ACA individual mandate as a "penalty" eighteen times. The court said that Congress's primary, or dominant, purpose of imposing the individual mandate of the ACA was not to support or fund the government fiscally, but to discourage Americans from living without health insurance coverage. Therefore, it was not an exaction imposed "for the purpose of supporting the Government," and so it is not a "tax" within the meaning of § 507(a)(8). Because the individual mandate is a penalty, and not a "tax" within the meaning of 507(a)(8), the IRS's $695.00 claim was not entitled to priority status. In re: John D. Chesteen Jr., U.S. Bankruptcy Court Eastern District of Louisiana, No. 17-11472. 2/9/18

Property Transfer Not Fraudulent Conveyance

The U.S. District Court for the Western District of Washington at Seattle has found that one individual's transfer of property to another in exchange for a release of the transferee's interest in another property was not a fraudulent conveyance. As a result, the federal tax liens against the transferor were not valid against the transferee because the liens were not recorded at the time of the transfer.

The taxpayer has not paid taxes since 2001 and in 2010 the United States made it first assessment against him for the unpaid taxes, penalties and interest. After the assessments began but before federal tax liens were recorded, the taxpayer conveyed his interest in property he owned to Hamad who subsequently transferred it to his wholly-owned company, an LLC. The United States contended that its assessments give it a priority interest in the property transferred because the transfer is voidable under the Uniform Fraudulent Transfer Act, RCW 19.40.011(a) and/or that the transferee did not pay adequate and full consideration for the property and therefore did not qualify for the protections offered by 26 U.S.C. § 6323(a).

The facts showed that the taxpayer and Hamad have known each other for over twenty years, meeting when Hamad was an employee of U.S. Bank where the taxpayer sought a loan to purchase property. In 2001, Hamad started developing real estate, buying land, designing and constructing buildings, and renting them out, and the taxpayer, who is an iron worker, taught Hamad to weld. The two worked together on a number of projects through the years. In the mid-1990s, the taxpayer purchased the property at issue here and another parcel that contained a single-family residence and a dilapidated four-car garage. In July 2006, the City in which the second property was located issued a final demolition order regarding the garage structure, but the taxpayer did not have the funds to comply and was facing daily penalties. He offered to sell to Hamad the third of the property on which the garage stood for one-third of the assessed value of the land with the understanding that the defendant would fund the demolition of the existing garage and construct a new garage with a workshop on top. Their agreement involved the creation of a trust, but in 2007 the sale was finalized and the Hamad went forward with plans to demolish the garage and build a new facility. During the delay in finalizing the sale, however, the taxpayer encumbered the property with a mortgage, which violated an express provision of the sale agreement and the taxpayer assured Hamad that he would pay off the mortgage. The taxpayer, however, stopped making the mortgage payments and a trustee's sale was scheduled. During this time frame, the United States began making assessment against the taxpayer for unpaid taxes. The court said it was not clear when the taxpayer learned of the assessments or whether Mr. Hamad ever knew of the assessments. It was clear, however, that Mr. Hamad was aware that the taxpayer thought taxes were illegal.
When the taxpayer finally acknowledged that he would not be able to pay the mortgage, he offered to sell Hamad the property at issue here in exchange for a release from all liability related to the other property and a purchase and sale agreement was drafted by then taxpayer's lawyer. At the time of the transfer, Hamad had invested approximately $255,000 into the purchase and development of the property he had purchased. The tax assessment on the 4010 Property was approximately $280,000, but there is no indication that the assessor had evaluated the inside of the 90+ year old building. The building was in bad shape and Hamad began to make some basic repairs and upgrades. The Court found that the fair market value of the property at the time of transfer was $245,000, calculated by averaging the valuation estimated using the cost and income approaches.

On June 18, 2012, Hamad transferred the property to Riverton Holding by quit claim deed and then discovered that the United States had placed a tax lien on the property. He unsuccessfully sought to have the tax lien on the property removed in April 2013. At all points during his business transactions with the taxpayer, the court found that Hamad acted at arms-length and in good faith.
The Washington Uniform Fraudulent Transfer Act (UFTA) allows a creditor to void a transfer of assets if the debtor made the transfer with intent to defraud a creditor or without receiving a reasonably equivalent value in exchange for the transfer and the debtor was believed to incur debts beyond his ability to pay. The court found that the United States had not met its burden of showing that the taxpayer transferred the subject property to Hamad with actual intent to hinder, delay, or defraud the United States' efforts to collect back taxes. The court determined that Hamad's version of events was both credible and consistent with the contemporaneous records and said it was more probable than not that the taxpayer's offer to transfer the property to Hamad was an effort to resolve the dispute between the two of them than any sudden impulse to avoid tax payments.

The court found that even if, as the taxpayer now claims, he transferred the property to Hamad in order to avoid paying taxes, the transfer is not voidable because Hamad has shown that he took the property in good faith and for a reasonably equivalent value, which in this case includes securing or satisfying an antecedent debt. The court rejected the argument presented by the United States that Hamad did not have a claim for damages arising from the taxpayer's unilateral encumbrance of their shared property, finding that at the time both parties believed that Hamad had a valid claim against the taxpayer and there was no indication that the taxpayer would have contested liability. The court said that the evidence showed that Hamad's losses were approximately $255,000, a debt he was willing to release in exchange for a property with a fair market value of $245,000. The court determined that the transfer was in good faith and for a reasonably equivalent value. Under the federal statute, the United States obtains a lien on all property belonging to a delinquent taxpayer at the time the assessment of tax liability is made. The court noted that the lien is not valid against a purchaser, however, unless and until the lien is recorded and in this case the lien was not recorded under after the property had been transferred to Hamad. The court found that Hamad was entitled to protection as a purchaser. Schmidt, William P. et al. v. United States, U.S. District Court for the Western District of Washington at Seattle, No. 2:16-cv-00985. 2/8/18

IRS to Provide Documents for Court's Review

The U.S. District Court for the District of Maryland refused to hold that the IRS's search in response to a couple's Freedom of Information Act (FOIA) request was inadequate. The court did find, however, that the IRS didn't show that withheld documents were exempt from disclosure and ordered the IRS to provide a Vaughn index and the withheld documents for in camera review.

The facts show that since 2006 the taxpayers have been the subject of the Internal Revenue Service (IRS) examinations regarding their federal income tax returns for tax years 2006 through 2012. On March 9, 2016, they filed FOIA requests, seeking the production of agency records including their file and any other record relating to any civil or criminal fraud investigations and the entire case history for all examinations for tax period 2006 through 2013. The FOIA requests were received and processed on March 10, 2016 and the taxpayers were notified that their requests would be processed as a single request because the taxpayers were married and their requests were almost identical. They were informed that the IRS had located 2,885 pages of responsive records and would provide them in "PDF" format. Of these 2,885 responsive records, the agency redacted 21 pages and withheld 120 pages under claimed FOIA exemptions. The taxpayers requested that the IRS produce a Vaughn Index, which the IRS did not do. The taxpayers filed an administrative appeal on June 14, 2016, again requesting a Vaughn index from the IRS, which the IRS again denied. The taxpayer then filed suit arguing that the IRS unlawfully withheld responsive agency records to which they were entitled. Months later, the IRS determined that they had not performed an adequate search in response to some of the taxpayers' requests and they subsequently provided additional documents to the taxpayers, but still did not provide a Vaughn index. Ultimately, the IRS located 6,568 additional pages of potentially responsive attachments not previously identified, more than a year after Plaintiffs' FOIA request and months of ongoing litigation and redacted 412 pages and withheld 3,474 pages.

The court noted an agency's decision to withhold records under a FOIA exemption is not entitled to deference, and the court must conduct a de novo review of the administrative record with a strong presumption in favor of disclosure and the Government bears the burden of providing that documents withheld in full are not "reasonably segregable." The taxpayers argued that summary judgment should be granted in their favor because the IRS has failed to demonstrate that it performed a reasonable search and has not established that exemptions apply to withheld or redacted documents. The IRS argued that summary judgment is appropriate in its favor because the record evidence indisputably demonstrates adequate search and appropriate claimed exemptions. The court said in making its determination it reviews the record evidence to determine the reasonableness of the IRS's search for responsive records, and that any redacted or withheld records fall under one of FOIA's disclosure exemptions.

The court determined the searches were reasonable, but understood the taxpayers' frustration with the fact that 7,000 additional responsive documents were not previously identified during the administrative process. But the court noted that the IRS has continued to search and disclose documents in an attempt to comply with the FOIA request. The court also noted, however, that on the IRS's proffered record, it is almost impossible to determine the significance of the remaining claimed deficiencies in the IRS production. This is because the court cannot ascertain whether any of the "missing" documents to which the taxpayers point are part of the withheld records under claimed exemptions. The court then addressed each of the IRS's claimed categories of exemptions from disclosing documents and found that the IRS failed to sustain its burden of demonstrating the propriety of withholding documents under the claimed exemptions. As a result, the court said it must conduct an in camera review of the withheld documents. The Court also ordered the IRS to produce a Vaughn index and underlying withheld documents for in camera review on or before March 2, 2018.
The court ordered that the documents be submitted electronically via disk and individually hyperlinked to their entries in the Vaughn index so as to expedite the Court's review. Ayyad, Abelrahman et ux. v. IRS, U.S. District Court for the District of Maryland, No. 8:16-cv-03032. 2/2/18

Suit Against Jackson Hewitt Allowed to Proceed

The U.S. District Court for the Central District of California has cleared the way for an individual's suit alleging Jackson Hewitt Inc. manipulated his returns to fraudulently obtain tax refunds to proceed. The court found the individual sufficiently pleaded claims of direct fraud, vicarious liability, wrongful disclosure, and negligence.

The plaintiff claims that he and potential other class members were defrauded by the tax preparation firm who he alleges guaranteed 100% accurate tax returns, but didn't deliver on their promise. The defendants operated a franchise location, under a franchise agreement with Jackson Hewitt, Inc. and Tax Services of America, Inc. On October 19, 2017, the Court granted Jackson Hewitt's Motion to Dismiss the plaintiff's First Amended Complaint with leave to amend because he failed to parse out allegations against each defendant specifically, and did not satisfy Rule 9(b)'s heightened pleading standard. The plaintiff subsequently filed an amended complaint and Jackson Hewitt filed a motion to dismiss. In general, the plaintiff alleged that Jackson Hewitt is directly liable for fraudulent statements it made to consumers like him regarding the accuracy of its tax preparation services and is vicariously liable for fraud and other derivative claims for its franchisee's actions in preparing fraudulent tax returns, given Jackson Hewitt's level of control over its franchisees. The plaintiff's claims related to the fraudulent preparation and submission of his 2014, 2015 and 2016 tax returns, which he claims included additional expenses that were claimed without his approval and after his authorization to file a prior non-fraudulent tax return, resulting in an unwarranted, fraudulent tax refund and his enrollment in an "Assisted Refund" program that charged him additional fees without his approval.

The plaintiff now proposes two putative nationwide classes, with each also having a California subclass. The first proposed class, entitled the "Manipulated Return" class, includes: "All persons in the United States and its territories who had their tax returns prepared by Jackson Hewitt, including any of its franchisees, whose tax returns were submitted to the relevant government entities in a different form than approved by the taxpayer." The "Undisclosed Fees" class includes: "All persons in the United States and its territories who had their tax returns prepared by Jackson Hewitt and/or any of its franchisees and who did not enroll in but were charged fees as part of the 'Assisted Refund' program.'"
The plaintiff alleges Jackson Hewitt is directly liable for fraud because they reviewed and approved tax returns, which they knew were fraudulent and they wrote a letter to the plaintiff telling him that the return he authorized for filing was sent to the IRS processing center, when, in fact, Jackson Hewitt sent a different return to the IRS.

The court cited case law for the proposition that to comply with Rule 9(b), allegations of fraud must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong. On the other hand, the plaintiff may not simply lump all defendants together, without any differentiation as to each defendant's alleged role in the fraudulent scheme. Jackson Hewitt argued that the second complaint fell into the same trap the court prohibited in its previous Order, lumping all defendants together instead of parsing out the allegations as to each defendant. The court noted, however, that the plaintiff went farther than the generalized allegations from the First Amended Complaint, now alleging that Jackson Hewitt knew of the fraudulent scheme because on each occasion, the specific preparer prepared two versions of his return, using the software and electronic systems controlled by Jackson Hewitt. He further alleged that even though a tax return for him with markedly different information had been submitted for the same tax year just days before, Jackson Hewitt approved of the submission of this return and caused it to be transmitted to the IRS, again using its software. The court found that these were direct allegations establishing Jackson Hewitt's alleged involvement in the fraudulent scheme, and explaining its role. The court found that while the plaintiff may not currently know the inner workings of Jackson Hewitt's software and review systems, the circumstances surrounding the submission of his returns are pleaded with particularity, and lead it to reasonably infer a fraudulent intent at this stage.

With regard to the fraud allegations, the plaintiff points to Jackson Hewitt's affirmative statements touting 100% accurate returns and the company's "preparer's pledge" to handle customer's tax returns like their own. The plaintiff argued all of these advertisements lured consumers to believe that Jackson Hewitt was looking out for them. Jackson Hewitt contends that this claim should fail because the plaintiff never alleges that he relied on the statements, and does not allege that Jackson Hewitt knew the statements were false when made. The court pointed out that the plaintiff is required to plead justifiable reliance on Jackson Hewitt's representations, and he does so by alleging that the representations were material because they induced Plaintiff and class members to entrust preparation and submission of their tax returns to Defendants and that class members acted in justifiable reliance on Defendants' misrepresentations and omissions by permitting Defendants to prepare and file their tax returns. The court noted that the plaintiff alleged that Jackson Hewitt received thousands of complaints that tax returns prepared were inaccurate at least in part because of the manipulation of tax returns described in the case and the court found that the plaintiff's advertisement theory was sufficient at this stage. The court said that whether the plaintiff will be able to prove his theory was a question for a different day.

The Court previously held that the plaintiff had not met his burden to plead the level of control required to establish the vicarious liability of a franchisor. The plaintiff in his amended complaint now alleges additional controls over the processing, and submission of tax returns which directly relates to the fraudulent conduct of which he complains. The court distinguished the current allegations from those in Patterson v. Domino's Pizza, LLC, a California case that held the Domino's franchisee could not be held vicariously liable for the sexual harassment of a franchisee employee who was harassed by another franchisee employee. The court said that the difference between Patterson and this case is that the plaintiff alleged that Jackson Hewitt controlled the instrumentality that caused his harm, the hiring and training of tax preparers, who then fraudulently prepared his returns and opened a bank account in his name without consent. The court said the control alleged by the plaintiff directly affects the consumer in a way the control in Patterson did not and while Jackson
Hewitt may be able to prove that it lacked sufficient control to warrant vicarious liability, at this juncture the court said it was limited to the plaintiff's allegations. The court also found that the plaintiff may plead equitable claims in the alternative and had standing for an injunction. The court rejected the plaintiff's RICO claims and dismissed them without leave to amend. Finally, the court denied Jackson Hewitt's motion to strike the plaintiff's class allegations, while indicating that it foresaw problems at the class certification stage in light of the individual modes of proof that will be required. Lomeli, Luis v. Jackson Hewitt Inc. et al., U.S. District Court for the Central District of California, No. 2:17-cv-02899. 2/20/18

DECISION HIGHLIGHTS

Sales and Use Tax Decisions

Fraternal Benefit Societies Not Exempt From Tax

The Nebraska Supreme Court has ruled that fraternal benefit societies are not exempted from sales and use tax under Nebraska law.

The state statute defines a fraternal benefit society to include any incorporated society, order, or supreme lodge conducted solely for the benefit of its members and not for profit, operated on a lodge system with ritualistic form of work, having a representative form of government.
The plaintiff in this matter requested an exemption from sales and use tax and requested a refund of more than $2 million in taxes previously paid. The Department of Revenue (DOR) denied the request which was affirmed by the Commissioner after a hearing. On appeal, the district court affirmed DOR's holding and the plaintiff filed this appeal. It is undisputed that the plaintiff is a Nebraska fraternal benefit society, but the issue is whether the plaintiff is exempt from paying the state's sales and use taxes.

There are two state statutes at issue in this case. The "funds" of a fraternal benefit society are exempt from taxation pursuant to § 44-1095 which, for the period relevant in this matter, provided: "Every [fraternal benefit society] shall be a charitable and benevolent institution, and all of its funds shall be exempt from all and every state, county, district, municipal, and school tax other than taxes on real estate and office equipment." Certain nonprofit organizations, including those created exclusively for religious purposes, private education institutions, hospitals and health clinics and certified organizations providing community-based services for persons with disabilities are exempt from the sales and use tax pursuant to § 77-2704.12. Fraternal benefit societies are not listed among the nonprofit organizations enumerated in the statute.

The court said that the appeal involved statutory interpretation, and the court must determine and give effect to the purpose and intent of the legislature as ascertained from the entire language of the statute considered in its plain, ordinary, and popular sense. The court also noted that exemptions from taxation are strictly construed and the burden is on the applicant to show entitlement to the exemption. The court found that Section 77-2704.12(1) did not exempt the organization from sales and use tax, holding that there was nothing in the plain language of the section that exempts fraternal benefit societies from sales and use taxes, and the district court correctly concluded that the organization was not exempt under this statute.
The court further held that Section 44-1095 did not exempt the organization from the sales and use tax, rejecting the plaintiff's argument that the section created an entity-based exemption that necessarily includes sales and use taxes and that the use of the term "funds" in that section should be construed broadly to exempt fraternal benefit societies from using its funds to pay any tax. The court said both of these theories were inconsistent with the plain language of the statute and contrary to settled principles of statutory interpretation.

The plaintiff also argued that it was denied due process before the Tax Commissioner. The plaintiff argued it was not provided adequate notice of the legal grounds on which DOR would rely. The court found the record showed that the plaintiff had been provided ample notice of DOR's legal theories and reasoning well in advance of the hearing and there was no due process violation. The court found no merit to the remaining assignments of error and therefore affirmed the judgment of the district court. Woodmen of the World Life Ins. Soc'y v. Dep't of Revenue, Nebraska Supreme Court, Docket No. S-17-319. 2/16/18

Personal Income Tax Decisions

Couple's Assessment Overturned

The Oregon Tax Court has overturned the assessment of individual income tax on a married couple, finding that the taxpayers were not Oregon residents in 2011. The court held that the taxpayers proved that they intended to make a permanent move to Washington in 2009 to run a newly acquired business, despite owning a house in Oregon.

The taxpayers moved to the state in 1995 and purchased a home there. According to the husband's testimony, his job opportunities in the state diminished in 1998 and became more sporadic and interspersed with long periods of unemployment. In 2000, he took a job in California, where he worked for approximately eight months. In 2002, the taxpayers purchased a franchise telecom business in Oregon but the business yielded very little income over the next seven years and they borrowed from their savings account to cover expenses. In 2009, in an attempt to recoup their lost savings, they purchased a business in Washington state and moved to an apartment in the state. They still owned a business in Oregon and it became a holding company for the Washington business. The taxpayers soon discovered that the Washington business had significant issues that the prior owners had not disclosed prior to the sale. They recovered some monies still held in escrow but did not have the financial ability to file suit against the sellers as recommended by their attorneys.

The husband testified that after the 2008 recession, the value of their home in Oregon dropped below the mortgage balance and the taxpayers felt it unwise to sell it at that time. They did not lease the home because they said it had significant deferred maintenance issues and, throughout their time in Washington, they visited the Oregon home on weekends to get away from their business struggles and to maintain the property.

In 2010 and 2011, the taxpayers renewed their Oregon driver's licenses and the husband testified that he was unaware that he was required to obtain a Washington license. They also maintained their voter's registration in Oregon, and in 2012 the husband voted in Oregon. They testified that they did not change their personal bank account while in Washington because their account was in a multi-state bank, but they opened bank accounts in Washington for their business there. They were members of a civic organization in Oregon, but after 2009 limited their participation to events in Washington. Their attendance at their church in Oregon became sporadic after their move to Washington. They joined two business organizations in Washington and two of their children came to Washington to assist with the business.

In November of 2011, the business filed a Chapter 11 bankruptcy, but the case was dismissed on procedural grounds. They reassessed the company's status and concluded that, because the business's activity was improving, they would hold off on refiling for bankruptcy. By 2012 they were tired of renting and began looking for a house in Washington to purchase. They eventually found a house, but were unable to secure a loan due to their financial condition.
By 2013 the taxpayer's home in Oregon had increased in value but they decided to retain it in the event that they were unable to resolve their issues with the Washington business. After 5 ½ years of losses the company closed on October 31, 2014 and both the company and the taxpayers filed for bankruptcy and the taxpayers returned to Oregon with the intent to remain.

The issue before the court was whether the taxpayers were domiciled in Oregon during the 2011 tax year. The state statute defines a resident for income tax purposes as an individual who is domiciled in the state. The court said that domicile is a common law concept composed of a fixed habitation or abode in a particular place and an intention to remain there permanently or indefinitely. The state's Administrative Rule (OAR) 150-316-0025(1)(a) defines domicile as "the place an individual considers to be the individual's true, fixed, permanent home" and as "the place a person intends to return to after an absence." Although an individual can have more than one residence, he or she can only have one domicile. Once a domicile is established in a particular location, it will remain there until a taxpayer can demonstrate a residence in another place, the taxpayer intended to abandon the old domicile and the taxpayer intended to acquire a new domicile. A change in domicile is a question of fact that the taxpayer has the burden of proving by a preponderance of the evidence.

The court said it was undisputed that the taxpayers established a residence, and domicile, in Oregon prior to 2009. They moved to a new residence in Washington in the spring of 2009, and reestablished Oregon residency in December 2014. The taxpayers argued that they intended to abandon Oregon as their domicile in 2009 and acquire Washington as their new domicile. The Oregon Department of Revenue (DOR) argued that the taxpayers continued ownership of their home in the state and their use of that address and a state post office box for some of their mail. DOR also pointed to the fact that they renewed the state driver's license and the husband voted in the state to show that they did not intend to abandon their Oregon domicile.

The court found that while the taxpayers maintained lingering connections to Oregon after they moved to Washington, it noted that it had previously held that lingering connections to
one state does not prevent the court from concluding that a taxpayer effected a change in domicile. The court said that intent of the taxpayers is best viewed under the circumstances as they were experiencing them. They court said that the taxpayers put significant investment into their Washington-based business and continued to invest, even to their ultimate peril, until they had exhausted themselves physically and financially. They began their Washington-based business in 2009 and were swept up immediately in a torrent of crisis which demanded their full attention. The court said that it was understandable that they did not establish significant social connections to Washington under those conditions. And the court said it was understandable that the taxpayers did not attend to relatively minor matters, including updating their voter registrations, driver's licenses, or bank account during that time. The court also noted that the taxpayers demonstrated significant efforts to purchase property in Washington but were unable to do so, due to their business and financial situation. The court was persuaded that the taxpayers intended to make a permanent move to Washington in 2009 to run their business, saying it was hard to imagine the taxpayers spending so much time and money, and nearly risking all of their assets, and not planning to stay. The court found that their retention of a home in the state, which at first was due to economic conditions, and later as a fall back provision should their business fail, was not sufficient to find intent to keep their Oregon domicile. Bentley v. Dep't of Revenue, Oregon Tax Court, Docket No. TC-MD 170094R.

Unreimbursed Employee Business Expense Deductions Denied

The Oregon Tax Court found that a taxpayer failed to provide the necessary documentation to substantiate deductions requested and denied the taxpayer's petition for unreimbursed employee business expense and theft loss deductions in tax years 2011, 2012 and 2013.

The taxpayer was employed as a senior project manager for a company that built large solar power plants. The company was headquartered in Oregon, but with an operation in New Jersey where the taxpayer resided. As senior project manager, the taxpayer ran the construction side of the operation, which involved dealing with utility companies and managing more than 60 employees. A letter sent by the CEO of the company stated that the taxpayer's duties required a moderate amount of travel and he received a salary above the industry standard. The taxpayer was responsible for his own recordkeeping associated with his travel and if his expenses exceeded $30,000 he could receive reimbursement. In 2012, he went to work for a competitor and moved to Connecticut, selling his travel trailer and buying a motor home. The new company owned a warehouse and gave the taxpayer a space for his motor home. The taxpayer testified that he was director of construction, and performed essentially the same job as for his former employer. The taxpayer provided no business records showing his work locations during the tax years at issue; instead, he relied solely on testimony. The taxpayer testified that, prior to 2011, the first company had several projects in Oregon and that he performed some work in Oregon in 2011 and 2012, but none in 2013. He testified that, in 2011 and 2012, he had a team of electricians and laborers at the office in Portland.

The taxpayer testified that, for nine to 10 months in 2011, he worked on 25 ALDI stores located in New Jersey, and other sites in New Jersey, two sites in Pennsylvania, and numerous sites in New York, including a large solar array at the headquarters in Syracuse. He testified that he drove to sites in a company car and purchased fuel, but did not save receipts.
He later clarified that he used his personal car for business in 2011 and only had a company car at the end of the year. He testified that, in 2012 or 2013, he had jobs for the second company in Connecticut, Hawaii, and several smaller projects in New York. Plaintiff testified that he had to be finished with those jobs by January 1, 2014. He testified that he lived in Oregon at the beginning of 2011 and then moved to New Jersey. He acknowledged that he probably did not "normally work" in Oregon in 2011, although he lived in Portland. He testified that he worked out of New Jersey and Connecticut and none of his jobs lasted more than one year.

Plaintiff claimed deductions for unreimbursed employee business expenses for the years at issue. For 2011 the expenses were claimed for business mileage and meals and entertainment, but the taxpayer was unable to detail the claimed expenses for 2012 and 2013. Plaintiff testified that he did not keep a daily mileage log and said that his credit card statements were his true business records. He gave his monthly statements with check marks to his accountant and provided copies of each year to the court. His business expenses items were identified under the categories on his credit card statements of "Other Store/Retail"; "Food Store"; "Dining"; "Recreation"; "Gas Station"; "Airline"; "Other Travel/Transportation"; "Auto Rental"; "Hotels"; and "Services." The taxpayer testified that he paid for his travel to Hawaii from June through August and then negotiated with the company to have the employer paid for airfare and hotels.

For the 2011 tax year, then taxpayer claimed a theft loss and according to New Jersey police reports, the taxpayer was the victim of a burglary with numerous items taken from his motor home and a nearly storage trailer. He reported to the police a list of items stolen, including a television, a DVD player, a gaming console, a hard drive, a guitar, watches, silver coins, jewelry, a bicycle, and tools that he said were used to repair his motor home and bicycle and placed a total cost basis of $23,380 for the stolen items. He said the values listed were his best estimate of fair market value. He further testified that he never submitted a claim on his homeowner's insurance because it did not cover theft and said he did not have insurance on his travel trailer, nor did he have insurance on his tools because he is an employee, not a contractor.

The state Department of Revenue (DOR) denied the taxpayer's unreimbursed employee business expense deduction because he failed to provide a mileage log to support his vehicle expenses. DOR argued that the credit card statements were insufficient substantiation because they did not describe the items purchased, and the business purpose of the expenses could not be determined. The theft loss deduction was disallowed on the basis that taxpayers may deduct the lesser of their adjusted cost basis or the fair market value of the stolen item and the taxpayer did not provide the necessary information. The auditor sampled some of the items reported and found that the prices were the current costs.

IRC section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Generally, if a claimed business expense is deductible, but the taxpayer is unable to substantiate it fully, the court is permitted to make an approximation of the allowable amount, but the estimate must have a reasonable evidentiary basis. Taxpayers must substantiate each element of a claimed expense by adequate records and the IRC provides that to meet this requirement a taxpayer must
maintain an account book, diary, log, statement of expense, trip sheets, or similar record and documentary evidence to substantiate what is on the log. The court said that based on the taxpayer's testimony and the categories in his credit card statements, the court inferred the deductions were associated with vehicle, traveling, entertainment, and miscellaneous expenses. Generally, the taxpayer's cost of commuting to his or her place of business or employment is a personal expense that is not deductible and the court noted that the taxpayer did not provide evidence from which the court could determine whether any of his daily transportation expenses fall within the exceptions to this rule. The court said that even if it concluded that the taxpayer incurred deductible vehicle expenses, he did not provide adequate substantiation of the amount of such expenses. He did not keep a daily transportation log, nor did he attempt to substantiate his travel through other records and his credit card statements showing purchases at gas stations were insufficient to establish the elements required for strict substantiation. With regard to his deduction for traveling expenses, the court said that the only evidence the taxpayer provided for those expenses was his credit card statements and his testimony. The IRC provides that to deduct traveling expenses a taxpayer must show that the expenses were incurred in connection with a trade or business, were incurred while away from home, and were reasonable and necessary. The court said that while the taxpayer testified that he is an Oregon resident and maintained a home in the state, the facts showed that the taxpayer's tax home was in New Jersey for tax years 2011 and 2012. In 2013 his tax home was in Connecticut. In order to deduct traveling expenses including lodging, meals, airfare, and rental cars, the taxpayer must establish that he was away from home on a business trip requiring sleep or rest and the expenses claimed must be reasonable and necessary. In 2011 and 2012, most of taxpayer's work was performed at sites located in New Jersey, with some in New York and Pennsylvania and the court found the evidence presented was insufficient to support any deduction for traveling expenses in 2011 and 2012. The court said that to the extent the taxpayer traveled to more distant locations, he did not present evidence concerning the business purpose of any of those trips. With regard to certain miscellaneous expenses claimed, the court found that the taxpayer failed to prove by a preponderance of evidence that any of those charges were for ordinary and necessary business expenses.

With regard to the theft loss claimed in 2011, the court said it has been willing to consider other competent evidence demonstrating the fair market value or adjusted basis of property.
The only evidence the taxpayer provided concerning the fair market values of the stolen items was a police report in which he listed the items and their estimated values and these estimates were based on his research on Craigslist or other websites. The court said he also failed to provide any receipts or similar documents establishing his cost basis in any of the stolen items. Even though the court was persuaded that the taxpayer suffered a theft loss, the court was unable to determine the amount of the loss based on the evidence presented. Boothroyd v. Dep't of Revenue, Oregon Tax Court, Docket No. TC-MD 170206N. 2/9/18

Corporate Income and Business Tax Decisions

Penalty for Failing to File Timely Withholding Statements Upheld

The Minnesota Tax Court affirmed a call center's penalty for failing to timely file employee annual withholding statements. The court determined that the taxpayer could have sought a filing extension, instead of ignoring its filing obligation.

State law requires that an employer provide its employees a written statement of taxes withheld during the year by January 31 of the following year. The statute also provides that the employer files this statement with the Department of Revenue (DOR) by February 28th of the following year, and the penalty for failure to comply is $50 per failure for a maximum of $25,000 per year. The taxpayer, which is an LLC located in the state, failed to file the required 2015 informational returns by the February 28, 2016 deadline. In June 2016, DOR sent a demand letter to the taxpayer reminding it of the obligation to file, but the taxpayer did not respond to the demand. As a result, on July 11, 2016, the Commissioner assessed the taxpayer a penalty of $50 for each of the its 570 employees to the statutory maximum of $25,000. The taxpayer failed to file an appeal the penalty, but in September 2016 requested an abatement of the penalty. State law allows the Commissioner to abate, reduce, or refund a penalty imposed as a result of the late filing of a return for reasonable cause, but in this case the Commissioner denied the taxpayer's request for abatement, on the grounds that the taxpayer failed to respond to DOR's notices of demand and a prior abatement had been given to the taxpayer for the tax year 2014. The taxpayer filed this appeal arguing that the company was under an unemployment audit at the time the statement was due and determined that the employees' W-2s were in error and were not filed until corrected.

The court noted that the record suggested that the taxpayer may not have timely filed duplicate withholding statements with DOR because it believed them to be incorrect, and decided to wait to file them only after they were amended. The court said that rather than ignore its filing obligation, the taxpayer could have sought an extension of the filing deadline.
The court found that despite the fact that the taxpayer may blame its failure to timely file on others, including an employee or an outside accounting firm, it bears the ultimate responsibility for fulfilling that duty and held for the Commissioner. PerformTel LLC v. Comm'r of Revenue, Minnesota Tax Court, Docket No. 9012-R. 2/8/18

Property Tax Decisions

Valuation of Agricultural Land Used for Cattle Production Remanded

The Nebraska Supreme Court overturned the valuation of agricultural land used for cattle production and remanded the case to the Tax Equalization and Review Commission (TERC), The court found that the taxpayer showed that the property should not have been assessed as irrigated cropland for the 2012 tax year due to the poor quality of the soil and held the assessor's valuation of the property was excessive.

The taxpayer owns 10 contiguous parcels of property totaling 1,093.93 acres of agricultural land exclusively used for cattle production and grazing. About 756 acres of the property is irrigated native grass upon which the taxpayer grazes cattle, and in 2006, he improved this portion of his land with center pivot irrigation systems to enhance livestock grazing. The taxpayer does not cultivate row crops on the subject property. In 2012, the Assessor increased the total assessed value of Cain's property nearly 250% from the prior year, without improvements being made to the property during that time. This sharp increase was largely due to the assessor's decision to change the classification of irrigated grassland for purposes of valuation. From 2006 to 2012, the assessor had used the Department of Revenue (DOR) formula to adjust the value of irrigated native grassland. In 2012, the assessor reclassified irrigated grassland by uniformly classifying all irrigated land as irrigated cropland, whether the land is used for "cultivated row crops, small grains, seeded hay, forage crops, or grasses."1
The taxpayer protested and because he had not been provided timely notice of the increased assessments, he was not afforded an evidentiary hearing for his protests before the county Board of Equalization (BOE). He filed a direct petition to the TERC to determine the actual value of each parcel and a divided panel of TERC, after a hearing on the matter, affirmed the assessor's increased valuations for 2012. The taxpayer filed an appeal and the court in Cain v. Custer Cty. Bd. of Equal. (Cain I), found plain error and reversed, and remanded, finding that
the TERC's decision erroneously increased the taxpayer's burden of proof in a proceeding under § 77-1507.01. The court remanded the case with instructions for the TERC to reconsider the matter on the record using the preponderance of the evidence standard applicable to initial protests before a county board of equalization. Upon remand the matter
was assigned to another commissioner because the former commissioner had resigned in the interim. The taxpayer moved for a new hearing on the merits and an opportunity to present supplemental evidence and argue the case under the preponderance of the evidence standard and filed a notice of constitutional issues in which he requested the TERC to vacate the assessor's valuations of his property and determine that the statutes he challenged were unconstitutional. The TERC denied both requests, determining that it had no authority to do anything other than follow this court's instructions on remand. The two commissioners assigned to the matter reviewed the full record and, without an additional hearing, considered the taxpayer's protests. TERC issued a new order which reversed in part the assessor's determination with respect to three parcels of the taxpayer's land, because, due to clerical errors, these parcels had been incorrectly assessed as including water wells. For the remaining seven parcels, TERC accepted the assessor's reasoning and affirmed the 2012 valuations of the taxpayer's property. The taxpayer filed this appeal.

The court first addressed the question of whether the taxpayer's due process rights had been violated by not permitting him to argue how the preponderance of the evidence standard of proof applied to the adduced evidence. The court said that due process does not guarantee an individual any particular form of state procedure, but, instead, the requirements of due process are satisfied if a person has reasonable notice and an opportunity to be heard appropriate to the nature of the proceeding and the character of the rights which might be affected by it. The court said that it has previously stated that an owner is not deprived of his property without due process of law by means of taxation if he has an opportunity to question its validity or the amount of such tax or assessment at some stage of the proceedings, either before that amount is finally determined or in a subsequent proceeding for its collection. The taxpayer argued that because, after remand, only one of the commissioners assigned to decide his protests was present at the evidentiary hearing, the TERC failed to decide the matter by a quorum, as required under the state statute and this procedure violated his due process. The court said that the taxpayer asserts only the right to make a legal argument pertaining to an already existing record and it has not recognized oral argument as a freestanding procedural due process right. The court found that, by asserting only the right to make a legal argument to the decision maker regarding the controlling standard of evidence and by failing to request relief in the form of a new evidentiary hearing before the TERC, the taxpayer waived the due process rights.

The court then turned to the issue of the valuation of the property and noted that the state legislature had made agricultural and horticultural land a separate and distinct class of property for purposes of property taxation that is valued at 75 percent of its value. Agricultural land is divided into categories such as irrigated cropland, dry cropland, and grassland and these categories are further divided into subclasses based on soil classification.
In initial protests before the TERC, the valuation by the assessor is presumed to be correct, and the burden of proof rests upon the taxpayer to rebut this presumption and to prove that an assessment is excessive.

In 2012, the assessor designated the non-irrigated portions of the taxpayer's property as grassland and valued the land depending on soil capability. The Assessor classified the irrigated portions of the property as irrigated cropland, valued at a higher value

At the evidentiary hearing, the taxpayer adduced evidence that the assessor inequitably classified the irrigated portions of his land, because the valuations did not take into consideration that his property was not comparable to irrigated cropland in terms of soil type, topography, and land use. The taxpayer irrigated only native grasses and his property had three wells and seven irrigation pivots. He testified he used irrigation conservatively to avoid erosion. Both the taxpayer and his expert witness testified the best and most productive use of his property was for cattle grazing and not for row crop production, because the soil was mostly Valentine sand and the land containing Valentine sand is fragile with little fertility. They testified that the land has slopes, is highly erodible, and overall is not suitable for farming. In completing his appraisal report, expert witness considered each of the three appraisal methods, the sales comparison approach, the income approach, and the cost approach, and determined a value estimate based upon the Uniform Standards of Professional Appraisal Practice. The expert said that the uniqueness of the taxpayer's irrigated grassland made it difficult to find comparable sales, but he found comparable sales in 2010 outside the county where the property owner had installed pivot irrigation but used the land for livestock grazing. He determined that those properties sold for about one-quarter to one-third of the selling price for average-to-high-quality irrigated cropland. The court determined that the TERC erred in disregarding the taxpayer's testimony that, in his opinion, the subject property had an actual value of approximately $711.77 per acre, finding that this testimony constituted competent evidence under the rule that an owner who is familiar with his property and knows its worth is permitted to testify as to its value. The court also determined that the TERC erred in disregarding the testimony of taxpayer's expert witness, whose expertise as a real estate appraiser was demonstrated by the evidence. His appraisal report, which was received into evidence, indicated that the expert utilized all three mass appraisal methods and that those methods support his estimated value. His appraisal was therefore competent evidence which was entitled to weight in determining the actual value of the subject property.

The court held that the record showed the TERC used an erroneous evidentiary standard in determining the taxpayer's protests, finding that the presumption of validity afforded to the assessor's valuation disappears once competent evidence to the contrary is presented.
The court found that the opinions of the taxpayer and his expert witness that the actual value of the subject property was approximately 60 percent lower than the 2012 valuation determined by the assessor constituted competent evidence which caused the presumption of validity afforded to the assessor's valuation to disappear. Therefore, the court said the reasonableness of the assessor's valuation was a question of fact based upon all the evidence presented, and the taxpayer had the burden of showing such valuation to be unreasonable. The court said that most of the testimony of the taxpayer and his expert about the unique qualities and value of his land was unrefuted, except for the assessor's competing position that all irrigated property must be valued as irrigated cropland. The court found that the taxpayer proved by the greater weight of the evidence that his irrigated grassland property was not comparable to the vast majority of the high-quality farming land within market area 1 and was more comparable to valuations placed on other similar property in market areas 2 and 3, as well as his own non-irrigated property. As a result, the court found TERC erred by failing to find that the taxpayer carried his burden to prove by a preponderance of the evidence that the Assessor's value of his irrigated grassland property for the 2012 tax year was grossly excessive and the result of arbitrary or unreasonable action. Cain v. Custer Cnty. Bd. of Equalization, Nebraska Supreme Court, 298 Neb. 834; No. S-17-370. 2/2/18

County's Motion to Dismiss Denied

The Minnesota Supreme Court held that the Minnesota Tax Court did not abuse its discretion in denying a county motion to dismiss. The court held that the evidence presented by the taxpayer challenging the fair market value of its parking ramp overcame the statutory presumption and the court affirmed the tax court's decision despite the court's error in considering the county's evidence to decide the motion.

At issue in this case is the fair market value of a parking ramp located next to the medical center in downtown Minneapolis. The taxpayer has protested the 2014 and 2015 assessment by the county to the tax court. The tax court issued a combined order that denied the county's motion to dismiss, and ordered a judgment in favor of the taxpayer. The court denied the county's motion "because when viewing all of the evidence, and thereby considering the County's appraisal report, there is substantial evidence that the market value of the subject property was less than its assessed value." Court Park Co. v. County of Hennepin, 27-CV-15-07133, 2017 WL 1750326, at *4 (Minn. T.C. May 3, 2017). The county filed an appeal and the court said the question here is on what evidence the tax court may rely to decide whether a taxpayer has overcome the presumptive validity of the county's assessment, a legal determination that the court reviews de novo. The County argued that the burden is on the taxpayer to present "substantial evidence" to overcome the presumptive validity of its assessment, and thus the tax court may consider only the taxpayer's evidence to decide a motion to dismiss under Rule 41.02. The taxpayer argued that Rule 41.02 authorizes the tax court to consider all of the evidence presented before and after the motion to dismiss is brought.

The court said that the pertinent state statutes, when read together, created a presumption of validity for the county's assessment and to rebut that presumption the taxpayer must offer substantial evidence, that is credible evidence that the assessor's estimated market value is incorrect. The court said that it, therefore, follows that when determining whether the taxpayer has overcome the presumptive validity of the county's assessment, the tax court must consider only the taxpayer's evidence. The court found that in this case, when it relied on evidence presented by the county, after the taxpayer's case-in-chief, to conclude that the taxpayer had satisfied its burden, the tax court improperly shifted the burden of production from the taxpayer to the county. The court found, therefore, that the tax court erred when it considered the county's appraisal report to decide whether "substantial evidence" had been offered to overcome the presumptive validity of the assessments.

But the court said this did not end the inquiry. After using the county's own evidence to deny the county's motion, the court stated in a footnote that, in the alternative, even if it examined only evidence introduced during the taxpayer's case-in-chief, it would still deny the county's motion because there was insufficient evidence in the taxpayer's case-in-chief to discredit the taxpayer's expert witness. The court said that it viewed this statement by the tax court to be an alternative holding, not dictum as the county contends. The alternative holding is based on the testimony and report of the taxpayer's expert. The tax court, in the alternative holding set out in the footnote, determined that the sales comparison approach used by the taxpayer's witness, based on evidence of transactions involving five properties he considered comparable, was enough for the taxpayer to survive a motion to dismiss. The court said that the tax court rejected the taxpayer's witness only after considering the county's expert witness testimony and report, but ultimate concluded that the evidence presented was sufficiently credible evidence that the assessor's estimated market value was incorrect. Court Park Co. et al. v. Cnty. of Hennepin, Minnesota Supreme Court, A17-0962. 2/14/18

Conservation Group Eligible for Charitable Organization Exemption

The Nebraska Supreme Court held that a conservation group was eligible for a charitable organization property tax exemption. The court found that the property owned by the taxpayer is owned by a charitable organization and is used exclusively for educational, religious, charitable, or cemetery purposes and was not owned or used for financial gain or profit by the owner or the user.

The taxpayer is a nonprofit corporation dedicated to conserving and protecting the natural habitat for whooping cranes, sandhill cranes, and other migratory birds along the Platte River in the central part of the state. For the last decade, the county's Board of Equalization (BOE) granted a charitable tax exemption under § 77-202(1)(d) to various properties owned by the taxpayer. In December 2014, the taxpayer sought a property tax exemption for six additional parcels of land, consisting of 829.68 acres of land with a property tax liability of approximately $22,000 for 2015, the tax year in question. The BOE denied the request for the property tax exemption, with no explanation as to why it granted tax exemption to some of the taxpayer's properties, but not to the properties at issue here. The taxpayer filed an appeal to the state Tax Equalization and Review Commission (TERC). A hearing was held, during which the taxpayer presented evidence about its educational efforts, contributions to the scientific community, and other benefits to the public. The taxpayer presented evidence showing that its conservation efforts benefit the thousands of people who visit its property each year to observe the crane migration, learn about the prairie, and interact with nature. It provides free public tours during crane season, and the property is open year-round at no charge to the public. Students, researchers, and scientists from all across the country visit the taxpayer's facility to perform scientific research and the taxpayer also performs research and has published numerous articles that are available to the public. The evidence also showed that a portion of the subject properties was leased to a farming operation for cattle grazing, for which the taxpayer received $9,300. The CEO of the taxpayer testified that the cattle grazing was part of the taxpayer's habitat management program. TERC affirmed BOE's decision to deny tax exemption, concluding that although the taxpayer provides educational, scientific, and recreational benefits to the public, state courts have limited charitable exemptions to traditional charitable enterprises providing relief to the poor and distressed. TERC concluded that the policy question of whether to expand the definition to include conservation efforts must be left to the legislature. TERC found that the taxpayer was not a charitable organization because § 77-202(1)(d) has never been applied to conservation groups or activities. The taxpayer filed this appeal.

The state Constitution authorizes the legislature to exempt from taxes property owned and used exclusively for educational, religious, charitable, or cemetery purposes, when such property is not owned or used for financial gain or profit to either the owner or user and, pursuant to this authority, the legislature enacted a statute that exempts certain property from the tax. The taxpayer applied for exemption as a charitable organization and did not argue here that it qualifies as an educational, religious, or cemetery organization. In concluding that the Crane Trust was not a charitable organization, TERC noted in concluding that the taxpayer was not a charitable organization that the state supreme court has never held that a conservation group may fit within the definition of "charitable organization" under § 77-202.
Section 77-202(1)(d) provides that a "charitable organization means an organization operated exclusively for the purpose of the mental, social, or physical benefit of the public or an indefinite number of persons." TERC acknowledged that the taxpayer's conservation efforts provided mental, social, and physical benefits to the public, but concluded that the properties were not operated exclusively for those purposes.

The court concluded that TERC's finding that the taxpayer did not operate exclusively for the public's benefit is not supported by the evidence, saying that the term "exclusively" means the primary or dominant use of the property. It found that the taxpayer presented considerable evidence of its efforts to provide educational, scientific, and recreational benefits to the general public, which showed that the taxpayer's efforts to protect the natural habitat for migratory birds ensures that the public can continue to enjoy and learn about that habitat and birds and wildlife thereon. The court also found that the evidence showed that the taxpayer was engaged in numerous endeavors to educate the public about the habitat, the wildlife on the habitat, and conservation in general and noted that the property is open for and subject to scientific study. The court rejected TERC's finding that the legislature did not intend for conservation groups to be considered a "charitable organization." The court said a tax exemption for charitable use is allowed because those exemptions benefit the public generally and the organization performs services which the state is relieved pro tanto from performing.
It noted that the legislature had previously declared that it was the policy of the state to conserve species of wildlife for human enjoyment and other purposes and concluded that the legislature intended for conservation groups to be considered "charitable organizations" if they otherwise meet that definition.

The court said that in addition to showing that the properties at issue here are owned by a charitable organization, the taxpayer must also show that the properties are used exclusively for educational, religious, charitable, or cemetery purposes and found that the status as a charitable organization and the use of the properties are closely related. It concluded, for the same reasons it found that the taxpayer was a charitable organization, that the properties were used exclusively for charitable purposes.

The court also found that the taxpayer showed that the properties were not owned or used for financial gain or profit to either the owner or user, rejecting BOE's argument that the taxpayer failed this criteria because of its lease agreement for cattle raising. The court held that the fact that income is generated as a result of an exempt use of the property does not make the property taxable. Property is not used for financial gain or profit to either the owner or user if no part of the income from the property is distributed to the owners, users, members, directors, or officers, or to private individuals, and the court found that the evidence in the case showed that the lease money was not distributed to its owners, users, members, directors, officers, or anyone else, and that the cost of managing the properties far exceeded the amount of lease money. Platte River Whooping Crane Maint. Trust Inc. v. Hall Cnty., Nebraska Supreme Court, Docket No. S-17-389. 2/9/18

Other Taxes and Procedural Issues

No cases to report.

The State Tax Highlights is a publication of the Federation of Tax Administrators for its members. If you have any comments on this publication, please send them to Linda Tanton at [email protected].