The Lawletter Vol 38 No 4

Jim Witt, Senior Attorney, National Legal Research Group

            On Tuesday, October 23, 2012, the Court of Appeals of New York, in a 4‑3 decision, ruled that lap dances do not qualify for the same sales tax exemption as do other "dramatic or musical arts performances," such as a Madonna concert or a Broadway show.   677 New Loudon Corp. v. State Tax Appeals Tribunal, 979 N.E.2d 1121 (N.Y. 2012).

            The court's ruling stemmed from a 2005 audit of the Nite Moves strip club in Latham, New York.  After an investigation, the New York Tax Appeals Tribunal demanded $124,921, based on unpaid sales taxes on cover charges and "performance fees," which were construed to mean fees for private dances.  The petitioner/appellant, the operator of an adult "juice bar," contended that the admission charges and private dance performance fees that it collected from patrons were exempt from state sales and use taxes.  The court of appeals agreed with the appellate division's ruling that the petitioner had failed to meet its burden of proof that a tax exemption applied to those charges.

            The portion of the sales tax in question imposes a sales tax on "'[a]ny admission charge' in excess of 10% for the use of 'any place of amusement in the state.'"  Id. at 1122 (quoting N.Y. Tax Law § 1105(f)(1)).  The legislature defined places of amusement that are subject to this tax to include "[a]ny place where any facilities for entertainment, amusement, or sports are provided."  Id. (quoting N.Y. Tax Law § 1101(d)(10)).  As the court of appeals observed, the tax therefore applies to a vast array of entertainment, including attendances at sporting events such as baseball, basketball or football games; collegiate athletic events; stock car races; carnivals and fairs; amusement parks; rodeos; zoos; horse shows; arcades; variety shows; magic performances; ice shows; aquatic events; and animal acts.  Plainly, no specific type of recreation is singled out for taxation.

            The court went on to explain that the legislature had created the exemption from taxation for admission charges to "dramatic or musical arts performances," N.Y. Tax Law § 1105(f)(1), for the purpose of promoting cultural and artistic performances in local communities.  The petitioner argued that performances regarded as "adult entertainment" qualified for the exemption because exotic stage and couch dances were musical arts performances.  The court, pointing out that it was the petitioner/taxpayer's burden to prove the applicability of any exemption from taxation, ruled that a determination by the Tax Appeals Tribunal could not be overturned unless "erroneous, arbitrary or capricious."  979 N.E.2d at 1123 (quoting Grace v. N.Y. State Tax Comm'n, 332 N.E.2d 886 (N.Y. 1975)).  The court found that given the fact that the performances in question were carried out in "private rooms," the petitioner had failed to prove that the performances qualified as choreographed dance routines presented in a stage performance. 

            The court further concluded that it was not arbitrary, capricious, or an error of law for the Tax Appeals Tribunal to have discredited the petitioner's expert witness's opinion that the private performances qualified for the exemption because they were the same as the routines presented on the main stage.  The evidence showed that the witness had neither seen nor had personal knowledge of what occurred in the private areas.  As the court stated:

[S]urely it was not irrational for the Tax Tribunal to conclude that a club presenting performances by women gyrating on a pole to music, however artistic or athletic their practiced moves are, was also not a qualifying performance entitled to exempt status.

The Lawletter Vol 38 No 2

Brad Pettit, Senior Attorney, National Legal Research Group

The Internal Revenue Code ("I.R.C.") provides that

[e]xcept in the case of a rollover contribution described in [§ 408](d)(3) . . . , no contribution [to a qualified individual retirement account or a retirement plan] will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).

26 U.S.C. § 408(a)(1) (emphasis added).  A key requirement for a "rollover contribution" is that "the entire amount received" by an individual upon a payment or distribution from a retirement account or plan must be "paid into" an individual retirement account, an individual retirement annuity, or an eligible retirement plan for the benefit of the individual "not later than the 60th day after the day on which" the payment or distribution is received.  Id. § 408(d)(3)(A).

Since we live in an imperfect world, mistakes can be made when an individual seeks to achieve a timely tax-free rollover of money or securities from one tax-favored retirement account or plan into another.  Accordingly, the I.R.C. provides that "[t]he Secretary [of the Treasury] may waive the 60‑day [rollover] requirement under subparagraphs (A) and (D) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement."  Id. § 408(d)(3)(I) (emphasis added).  In an administrative ruling, the Internal Revenue Service ("IRS") stated that "a taxpayer must apply for a hardship exception to the 60‑day rollover requirement using the same procedure as that outlined in Rev. Proc. 2003‑4 for letter rulings, accompanied by the user fee set forth in Rev. Proc. 2003‑8."  Rev. Proc. 2003‑16, § 3.01, 2003‑1 C.B. 359 [after clicking on this hyperlink, scroll down to page 359].

In determining whether to grant a waiver, the Service will consider all relevant facts and circumstances, including:  (1) errors committed by a financial institution, other than as described in Section 3.03 below; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.

Id. § 3.02.  According to the IRS, there is an automatic waiver of a defect in an attempt to carry out a tax-free rollover into an IRA, and no formal application for a discretionary waiver is necessary

if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60‑day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60‑day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60‑day rollover period.

Id. § 3.03.  But the IRS cautions that "[a]utomatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60‑day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover."  Id.

March 26, 2013

Brad Pettit, Senior Attorney, National Legal Research Group

The Uniform Trust Code ("U.T.C.") provides that a "court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement."  U.T.C. § 415 (Thomson Reuters, Westlaw current through 2011 annual meetings of the Nat'l Conf. of Comm'r on Unif. State Laws & A.L.I.) (emphasis added).  More specifically, the U.T.C. states that "[t]o achieve the settlor's tax objectives, [a] court may modify the terms of a trust in a manner that is not contrary to the settlor's probable intention[, and a] court may provide that the modification has retroactive effect."  Id. § 416 (emphasis added).  The comment to section 416 seeks to explain the subtle distinctions between a court's discretionary power (1) under section 415 to approve the reformation of an irrevocable trust to conform to the settlor's intention by correcting a mistake of fact or law, and (2) under section 416 to modify an irrevocable trust in order to achieve the settlor's tax objectives:

"Modification" under this section is to be distinguished from the "reformation" authorized by Section 415. Reformation under Section 415 is available when the terms of a trust fail to reflect the donor's original, particularized intention. The mistaken terms are then reformed to conform to this specific intent. The modification authorized here allows the terms of the trust to be changed to meet the settlor's tax‑saving objective as long as the resulting terms, particularly the dispositive provisions, are not inconsistent with the settlor's probable intent. The modification allowed by this subsection is similar in concept to the cy pres doctrine for charitable trusts (see Section 413), and the deviation doctrine for unanticipated circumstances (see Section 412).

Id. § 416 cmt.

The Lawletter Vol 37 No 12

Jim Witt, Senior Attorney, National Legal Research Group

With the proliferation of will substitutes (vehicles such as revocable trusts, IRAs, and pensions, used to pass assets to beneficiaries at the owner's death but outside the will), a problem can arise with possible duplication between the will substitute and the will. Such a problem was litigated in the Court of Appeals of South Carolina case, Estate of Gill ex rel. Grant v. Clemson University Foundation, 725 S.E.2d 516 (S.C. Ct. App. 2012).

In Estate of Gill, the testatrix bequeathed $100,000 to Clemson University to establish the "Scholarship." The income earned by the fund (but none of the principal) was to be used to provide scholarships for "academically deserving football players." Almost one year after executing the will, the testatrix established an IRA with Morgan Stanley. She specifically designated the Scholarship as the beneficiary of $100,000 in the IRA. The Estate contended that her intent had been to provide a funding mechanism for the Scholarship under the will, not for Clemson to receive two separate $100,000 gifts. Clemson contended that it was entitled to both the $100,000 from the IRA and the $100,000 bequest under the will.

The Estate brought suit for a declaratory judgment, and a special referee found that because the will was unambiguous as to the $100,000 bequest to establish the Scholarship, the bequest was not ambiguous and extrinsic evidence could not be considered. The referee therefore ruled that Clemson was entitled to both the $100,000 Scholarship bequest and $100,000 from the IRA as a nontestamentary asset passing outside the will.

The Lawletter Vol 37 No 11

Matt McDavitt, Senior Attorney, National Legal Research Group

The situation occasionally arises wherein one or more parties interested in a decedent's estate or trust challenge the right of certain other beneficiaries to take via the will or trust on the ground that these other beneficiaries were allegedly recently adopted through adult adoption for the express purpose of creating a beneficial interest in the estate or trust.  Two recent opinions reveal the factors reviewing courts examine to resolve such claims, which, if proven true, would amount to fraudulent interference with a gift or inheritance.

In Otto v. Gore, 45 A.3d 120 (Del. Super. Ct. 2012), for instance, a woman with three children from her former marriage adopted her 65-year-old ex-husband as her fourth "child."  This adult adoption potentially created an interest in the ex-husband in a family trust created by the woman's parents, a trust granting shares to the settlors' "grandchildren."  The court observed, however, that an ambiguity existed in the trust instrument because, while the descriptor "children" was defined as including adopted children, no such definition was included regarding "grandchildren," so extrinsic evidence was properly examined to determine whether the settlors intended adult adoptees to take.  To find this intent regarding the adoption of grandchildren, the court referenced a letter sent by the settlors to their drafting attorney, which the court interpreted as indicating settlor intent that the class of grandchildren was to include solely minors who had a parent-child relationship with their parents.

The Otto court concluded that the adult adoption at issue had been effectuated specifically to create an interest in the trust and that, as this intention would have thwarted the settlors' intent to benefit only minor grandchildren in a true parent-child relationship, equity would intervene to prevent the ex-husband's taking under the trust, despite the fact that the adoption complied with state law.

A contrary result was reached in In re Estate of Fenton, 901 A.2d 455 (N.J. Super. Ct. App. Div. 2006).  Whereas the court in Otto examined the timing and impact of the adult adoption to determine whether an ulterior motive demanded that equity prevent that adoption from creating a beneficial interest in the subject trust, the court in Fenton refused to speculate regarding the motives of the adoptive child and/or parent, instead relying on the adoptive mother's own statements in court indicating that she had effectuated the adoption of her 37-year-old second cousin in order to create a close family.

The Fenton court noted that the adoption was valid under the applicable state law and that the adoption statutes do not demand inquiry as to the purpose of the adoption.  The adult adoption in Fenton created $30,000 in annual income in the adoptee for life.  The court noted that the plaintiffs had failed to offer evidence of an ulterior motive, aside from the circumstantial evidence that the adoption created a substantial interest in the trust, although evidence was developed indicating that the adoptive mother had, prior to the adoption, specifically written to the trustee to see if the adoption would create an interest in her new daughter.

November 6, 2012

Brad Pettit, Senior Attorney, National Legal Research Group

The volatility of stock, bond, and real estate markets, as evidenced by the technology stock and real estate "bubbles" during the last two decades, makes it incumbent upon trust professionals to make sure that they comply with current legal standards for managing and investing trust assets.  The Uniform Trust Code provides generally that a trustee must act "prudently" when administering a trust:

§ 804. Prudent Administration.

A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

Unif. Trust Code § 804 (U.L.A. 2000 & Westlaw current through 2011 annual meetings of the Nat'l Conference of Comm'rs on Uniform State Laws and A.L.I.).

The Uniform Prudent Investor Act expressly states that "[a] trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying."  Unif. Prudent Investor Act § 3 (U.L.A. 1994 & Westlaw current through 2011 annual meetings of the Nat'l Conference of Comm'rs on Uniform State Laws and A.L.I.) (emphasis added); see also P.G. Guthrie, Annotation, Duty of Trustee to Diversify Investments, and Liability for Failure to Do So, 24 A.L.R.3d 730 (1969 & Westlaw databases updated weekly).  The Restatement of Trusts similarly provides that "[i]n making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so."  Restatement (Third) of Trusts ["Restatement"] § 90(b) (2007 & Westlaw current through Apr. 2012).

The Comment to § 3 of the Uniform Prudent Investor Act provides two examples of situations in which a trustee's general duty to diversify investments may be less than absolute:

The Lawletter Vol 37 No 8

Jim Witt, Senior Attorney, National Legal Research Group

Perhaps the most obvious legal question that arises when a couple break their engagement is whether the formerly prospective bride, assuming that she has received an engagement ring, is obligated to return it to the formerly prospective groom.  A recent South Carolina appellate case, Campbell v. Robinson, 726 S.E.2d 221 (S.C. Ct. App. 2012), arose out of the broken engagement of Matthew Campbell and Ashley Robinson.  Campbell shows that depending upon the couple's level of rancor, the broken engagement and the question as to ownership of the ring can lead to additional legal issues.

In the Campbell case, Campbell proposed and presented a ring to Robinson in December 2005.  In a spring 2006 phone conversation, they agreed to postpone the wedding. The engagement was later canceled, and a dispute ensued over ownership of the ring.  Campbell filed suit against Robinson, demanding a jury trial and seeking (1) declaratory judgment that he owned the ring and was entitled to the ring's return or its equivalent value; (2) damages for the ring's wrongful retention; and (3) monetary restitution for the benefit Robinson had received while possessing the ring.  Robinson counterclaimed, based on Campbell's breach of promise to marry, arguing that she was entitled to damages for her prenuptial expenditures, mental anguish, and injury to health.

Robinson testified that the engagement had been terminated solely by Campbell's action and that after the engagement was canceled, she asked Campbell twice whether she should return the ring.  She asserted that Campbell had told her that she could keep it.  Campbell, in his testimony, denied ending the engagement by himself and contended that the cancellation had been mutual.  He also denied telling Robinson that she could keep the ring.  He further contended that Robinson had refused to give him the ring after he asked for its return.

The trial court held that (1) South Carolina has not abolished actions for breach of promise to marry, and (2) South Carolina courts hinge postengagement entitlement to the engagement ring upon who was "at fault" for the engagement's cancellation.  Therefore, the trial court ruled that Campbell would be entitled to the return of the ring if Robinson was at fault in terminating the engagement.  If Campbell was at fault, however, Robinson would be entitled to keep the ring, and if Campbell breached the promise to marry, Robinson could recover damages.  The trial court rejected Campbell's argument that he could recover damages on his claims.  The jury found that Campbell was responsible for the termination of the engagement and therefore could not regain possession of the ring.  The jury also found that Robinson was not entitled to any damages for Campbell's breach of promise to marry.

The court of appeals first dealt with the question of whether South Carolina courts recognize a cause of action for breach of promise to marry.  The court acknowledged that certain heart-balm actions had been abolished in South Carolina, Russo v. Sutton, 422 S.E.2d 750 (S.C. 1992) (the Supreme Court of South Carolina abolished the heart-balm action for alienation of affection), but observed that promise-to-marry actions have not been expressly abolished.  Therefore, the court concluded that Robinson had set forth a valid cause of action for breach of contract to marry.