Normally, a typed (nonholographic) will must be signed by at least two persons who witnessed the testator’s signature of the will or the testator’s acknowledgment of the document as the testator’s will. The law requiring these formalities was amended in 2008 through the changes to Probate Code § 6110(c)(2) to provide an exception allowing a will to be valid, “if the proponent of the will establishes by clear and convincing evidence that, at the time the testator signed the will, the testator intended the will to constitute the testator’s will.” There has been little caselaw interpreting this language as of yet, but the recent decision in Estate of Berger is the third and provides the most thorough analysis of any reported case on this subject.

In Estate of Berger, the testator typed and signed a letter addressed to her fiancé dated August 16, 2002. This document named the fiancé as her “sole beneficiary.”[1] The testator contemporaneously emailed the fiancé (who was on vacation in Spain) of the “will,” its contents, and the location of a copy. Further emails complained about the lack of any response. This document was never mentioned again apart from these several emails over several days. Their relationship continued for six months before terminating without marriage, lasting for less than a year in total. All contact ceased thereafter. The testator died in 2020 without ever designating the (ex)fiancé as a beneficiary for her retirement account.

Within the year before her death, the testator became more religiously active and expressed her intent to bequeath her estate to her church. However, this was never “memorialized.”[2] The testator’s pastor discovered and disclosed the letter amongst the testator’s personal effects sparking the dispute between the testator’s sister (the sole intestate heir) and the ex-fiancé. The question was whether that letter was intended to be the will. The trial court decided it was not.

The appellate court rejected the ex-fiancé’s analytical limitation to the letter’s “four corners”: “In this particular context, an unbroken line of precedent squarely establishes that extrinsic evidence is always admissible on the question of the drafter’s intent.”[3] The trial court’s use of extrinsic evidence imposed a substantial evidence review standard for Estate of Berger. Normally, this would all but doom the ex-fiancé’s position. Proving error under substantial evidence review is “difficult” normally, “particularly onerous” when the ruling was against the proponent, “[a]nd the bar for obtaining reversal is even higher where, as here, the party’s burden below required her to produce clear and convincing proof—that is, proof that establishes the fact at issue to a high probability or so clearly as to leave no substantial doubt.”[4] Nevertheless, “[t]his is one of those rare cases where this very heavy burden has been met.”

Estate of Berger used the following factors to find “as a matter of law” that the letter was intended “to have testamentary effect.”:[5]

• The letter’s contents:
  • Naming the ex-fiancé as the “sole beneficiary.”
  • Granting the ex-fiancé “full discretion” of disposing of all property.
  • Listing the most important assets.
  • Contemplating competing inheritance claims.
• The letter’s formality:
  • Existence on the testator’s work stationary.
  • Full recital of testator’s name, address, and social security number.
  • Addressed to “whom it may concern.”
  • Recitation of the testator’s “sound mind and excellent health.”
  • Recitation of the signing’s date and location.
  • Testator’s signature.
• Surrounding circumstances:
  • The letter was written shortly before “having major surgery” (gender reassignment).
  • The letter was contemporaneously referred to as a “will” in an email by the testator.
  • Sending a copy to the beneficiary and keeping the original in a safe place “likely to be found.”

The arguments against probating the letter as a will principally relied on an intuitive perception of what people would normally do in similar circumstances—common sense. Berger may have feared that the probate court attempted to impose social norms beyond the law. For example, “the [probate] court cited the ‘questions’ it had about Melanie and Maria’s ‘relationship’ as well as the possibility that Melanie may have ‘forgotten’ about the will. These concerns are irrelevant to the pertinent question of intent.” [6]  Whether the testator and the beneficiary “were, in the probate court’s eyes, a conventional or unconventional engaged couple more generally is wholly irrelevant.” [7]

The resulting principles promulgated by Berger are quite broad. Testamentary intent is relevant only “at the time she drafted the will.”[8] Silence thereafter is irrelevant. Although the probate court reasoned that the testator forgot about the letter, a forgotten will is still valid. The wisdom of the will’s terms of “leaving all of her possessions to someone she started dating six months earlier is irrelevant to whether she intended the document she drafted to be a will.” Subsequently failing to change the beneficiary of the retirement account lacked any bearing on the question. Claims regarding competency and undue influence “are irrelevant to the question of whether the document was intended as a will, which is the only question before us. Whether it is enforceable as a will is a distinct and separate issue not presently before us.”[9]

            Estate of Berger is a reminder that a testator’s intent is paramount, but only as expressed in the will the testator wrote the will. This case effectively lowers the threshold for what constitutes a probatable will. It also serves as a warning. A routinely updated estate plan should be considered, even when without a prior estate plan, creditors (whether private or governmental entities), vulnerable dependents (human or animal), or any desire to bequeath property to anyone other than intestate heirs (such as charities). A well-written will or trust instrument minimizes the chances of fraud and gives peace of mind to all involved. In some circumstances it may also serve to prevent an ex-lover from appearing after seventeen years of absence to enforce an unwitnessed will seemingly forgotten in the bottom of a desk drawer.

If you have questions or concerns about how these news reports may affect you or your estate planning, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

[1] In full:

“’I, Melanie Perry Berger, with sound mind and excellent health, name Maria L. [Coronado], [lists Maria’s then-current address], as my sole beneficiary in the event of my death. She will take ownership of all my personal possessions and property located at [address of Melanie’s house in Pasadena]. She will make the sole determinations as to what she will keep, and what personal belongings that may, or may not, be distributed to any inquiring family members. She will also receive, and have full discretion of:

1. My [Pasadena] home located at [listing address].
2. My retirement Thrift Savings.
3. My 1984 Mercedes Benz 300 CD, license [listing number].
4. My Washington Mutual checking account [listing number].
5. Any and all wages paid to my account, post mortem.

It should be noted that I would prefer to have some of the above Thrift assets set aside for the education of [Maria’s] three daughters, [naming each]. This is, however, only a suggestion, and Maria … shall have the final decision on these matters.’

The letter closes with ‘Sign[ed] and dated 8-16-02 in Pasadena, California,’ and beneath it, Melanie’s signature.” Est. of Berger, 309 Cal.Rptr.3d 194, 200 (2023).

[2] Est. of Berger, 309 Cal.Rptr.3d 194, 200 (2023).

[3] Est. of Berger, 309 Cal.Rptr.3d 194, 204 (2023)(emphasis in original).

[4] Est. of Berger, 309 Cal.Rptr.3d 194, 206 (2023)(omitting internal brackets and quotation marks).

[5] Est. of Berger, 309 Cal.Rptr.3d 194, 206 (2023).

[6] Est. of Berger, 309 Cal.Rptr.3d 194, 207-208 (2023).

[7] Est. of Berger, 309 Cal.Rptr.3d 194, 207 (2023).

[8] Est. of Berger, 309 Cal.Rptr.3d 194, 208 (2023)(emphasis in original).

[9] Est. of Berger, 309 Cal.Rptr.3d 194, 209 (2023)(emphasis in original).

A supplemental (or special) needs trust is a means to assist a beneficiary with a disability while preserving the beneficiary’s eligibility for public benefits. As of now there is “little legal interpretation of and commentary on special needs trusts.” A California case, McGee v. State Department of Health Care Services, attempted to remedy this deficiency by granting an expansive definition to “special needs.” Although the Department of Health Care Services was the challenger to the trustee’s discretion, it did not appear on appeal.

The trial court interpreted “special needs” to include only “the beneficiary’s special needs as created by the limitations due to her condition,” with all expenses not attributable to this “very limited purpose” surcharged to the trustee. The pertinent portion of the trust instrument stated: “Special Needs include without limitation special equipment, programs of training, education and habilitation, travel needs, and recreation, which are related to and made reasonably necessary by this Beneficiary’s disabilities.” The term “special needs” is defined by the instrument as “the requisites for maintaining the Beneficiary’s good health, safety, and welfare when, in the discretion of the Trustee, such requisites are not being provided by any public agency.” McGee liberally interpreted the instrument.

“Health, safety, and welfare address more than just expenses arising from the beneficiary’s disability, and many of those expenses would not be paid by a public agency,” according to the Court in McGee. McGee interpreted the phrase, “including without limitation” to be equivalent to “including but not limited to.” Furthermore, the trust instrument at issue in this case explained that it is not a support trust. Instead, it functions “to supplement public resources and benefits when such resources and benefits are unavailable or insufficient to provide for the Special Needs of the Beneficiary.” McGee quoted extensively from CEB’s Special Needs Trusts: Planning, Drafting, and Administration to establish that “special needs” include “the very broad range of everything else a human being needs in order to live, thrive, and realize his or her potential in life.” It is “actually quite general” encompassing “the entire universe of a person’s goods and services except for food and shelter (to be covered by SSI) and medical care (to be covered by Medi-Cal).”

McGee implicitly suggested that it might have overruled the trial court’s interpretation due to federal law, even if the special needs trust instrument clearly supported the trial court’s judgment. McGee was heavily influenced by a federal Third Circuit decision preempting a Pennsylvania statute that attempted to limit special needs trusts to the trial court’s definition.[1] Moreover, the Social Security Administration eligibility rules for special needs trust beneficiaries were found to be persuasive. In calculating eligibility, the eligibility rules exclude not “only trust assets and distributions that are related to the disability” but also “household goods and personal effects from the beneficiary’s countable resources regardless of their dollar limit.”

Even with this broad interpretation that the court adopted, the trustee’s discretion is not absolute. Administration must be executed “with reasonable care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument.” Specifically, distributions for more than one vehicle, “jewelry that one does not wear or does not hold for family significance,” collectibles, and “animals for investment purposes, such as a horse or dog for breeding, for resale, or investment” are usually “outside the scope of the trustee’s discretion.” Even then, expenditures for such items may be permissible if “they are in the beneficiary’s best interest.”

The trustee in McGee was surcharged $73,000 for expenditures ultimately approved on appeal. However, the trustee did not appeal those sanctions.

If you have questions or concerns about how these news reports may affect you or your estate planning, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

[1] Lewis v. Alexander, 685 F.3d 325 (3d Cir. 2012).

The California Supreme Court granted a broad interpretation to the term, “disclose” as it is used in Labor Code § 1102.5, California’s general whistleblower statute. In Garcia-Brower v. Kolla’s, Inc., the Supreme Court reversed the Court of Appeals, finding that § 1102.5’s protections are not limited to previously unknown information, contrary to prior caselaw. The Court was influenced by the federal whistleblower jurisprudence, finding that § 1102.5’s legislative intent is to protect employees, the general directive to “liberally construe the Labor Code” for employees’ protection, and (perhaps) the injustice suffered by the plaintiff. The employee, a bartender, was fired after complaining to her employer that her wages were late. In retaliation, the employer fired her, banned her from the bar, and threatened to report her to immigration authorities. For her safety, she was identified only as “A.C.R.”  Curiously, the defendant did not appear or participate in any stage of the litigation—meaning this case resulted in a default judgment. The Court appointed Mr. Christopher Hu of Horvitz & Levy, LLP to argue on behalf of the defendant pro bono.

In a different case, Young v RemX Specialty Staffing, the adjudicating court gave a narrower interpretation to a different term, “discharged.” The pertinent statute the court dealt with in this other case was Labor Code § 201.3(b), “‘[i]f an employee of a temporary services employer is assigned to work for a client and is discharged by the temporary services employer or leasing employer, wages are due and payable’ immediately.”[1] In Young v. RemX Specialty Staffing, Ms. Young was an employee of a temporary staffing company. Shortly after being assigned to a temporary position at a bank, Ms. Young’s assignment was terminated by her employer when she allegedly became “verbally abusive” with a representative of the bank.

Ms. Young then did not receive another work assignment from her employer. The Court of Appeals found that an “employment relationship” was a prerequisite to being “discharged” and an employee of a temporary services employer does not have an employment relationship with a client of the employer. In plain English, the Court of Appeals found that Ms. Young was not “discharged” by the bank on these facts. Ms. Young raised the “general directive” of liberally construing the relevant statutes in favor of the employee. Young demurred that “we may not impermissibly rewrite the statute in the guise of liberally construing it.”[2]

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[1] Young v. RemX Specialty Staffing, No. A165081, 2023 WL 3331378, at *4 (Cal. Ct. App. May 10, 2023)(quoting § 201.3(b)(4)).

[2] Young v. RemX Specialty Staffing, No. A165081, 2023 WL 3331378, at *5 (Cal. Ct. App. May 10, 2023)(cleaned up).

The IRS Inspector General (TIGTA) recently reviewed the IRS whistleblower program. IRS whistleblower awards are through either § 7623(a) or § 7623(b). The program collected nearly $3 billion through information provided by whistleblowers and awarded over $589 million to 988 whistleblowers from fiscal year (FY) 2017 to 2021. Section § 7623(b) claims must be for disputed proceeds (taxes, penalties, interest, etc.) over $2 million. Additionally, the subject of the claim must have a gross income of over $200,000 if the subject is an individual. However, awards are required for successful § 7623(b) claims. These awards range from 10% to 30% of the proceeds, depending on the significance of the whistleblower’s contribution. Information that does not meet the threshold requirements (§ 7623(a) claims) may be compensated at the discretion of the IRS. Whistleblower awards are subject to the sequestration rate for the fiscal year (5.7% for FY 2022).

The average processing time for § 7623(b) claims, from claim submission to payment, is 11 years, while for § 7623(a) claims, it is 9 years. Such durations are usually attributable to the length of the associated litigation. A single form submitted by a whistleblower may give rise to multiple claims. A total of 22,400 Forms 211 (the form used to submit information and make a claim) were received from FY 2018 to FY 2022. These were used to form 59,400 claims. Forms 211 are first reviewed by the “Initial Claim Evaluation” (ICE) for prima facie faults of the form.[1] After this initial filter, Subject Matter Experts review claims to determine whether to refer to examination or not.

Full information regarding FY 2022 was unavailable for the TIGTA report. Of the 46,802 claims from FY 2018 through FY 2021, 9% were referred to examination. Claims pertaining to IRS Criminal Investigation (often involving income from illegal sources) enjoyed a 55% referral rate. Only about 12% of the total claims from FY 2018 through FY 2021 were § 7623(b) claims. However, the § 7623(b) claims had significantly higher referral rates than § 7623(a). The rate for Small Business/Self-Employed (SB/SE) Division claims increased by nearly doubled to 13%, while the Large Business & International (LB&I) Division’s rate sextupled to 19%. A whistleblower should expect that the IRS would take half a year to decide whether the claim should be examined at all, prior to any action being taken. Most of the subsequent stages are subsumed in the general assessment and collection process. However, the whistleblower’s commission of the proceeds is received only after the government receives the proceeds plus two years for the statute of limitations. It is therefore possible that the 10-year limitation for collecting proceeds would elapse.

It is also possible that an audit triggered by a whistleblower would result in a refund for the subject of the whistleblower claim. The monetary figures of the Whistleblower Office tend to be erratic. For example, the FY 2018 assessments on whistleblower-prompted examinations totaled over $2.5 billion for the LB&I Division. Yet another net $2.5 billion was assessed in the following year, except that amount was in refunds rather than collections. This means that LB&I Division’s productivity per hour for auditors working on whistleblower examinations swung from $6,544 to -$7,907 in just a year.  TIGTA concluded, “if whistleblower-related examinations result in more taxpayer refunds than assessments, the IRS should attempt to analyze the data and the whistleblower issues in an effort to better select cases for examination.”

The Whistleblower Office is obligated by statute to keep the whistleblower informed of the claim’s progress. Specifically, the Whistleblower Office is required by law to mail a letter to the whistleblower to inform the whistleblower that the claim was referred for examination within 60 days of the referral. This was not accomplished in 35% of the cases sampled by TIGTA. Tax payments as a result of the claim must similarly be reported to the whistleblower within 60 days of the payment. This requirement’s failure rate is approximately 32%, according to TIGTA’s judgment sample. The whistleblower is also entitled to a letter explaining the status and stage of the claim after the whistleblower sends a written request. Such a request’s response time is not subject to a deadline. By administrative policy, the IRS answers only one request per year.

TIGTA found that the Whistleblower Office compiles insufficient data for its operations. For example, “the office does not capture the data needed to identify factors that make a whistleblower claim more productive than another potential examination.” The data systems of the IRS tracking taxpayer payments also “do not differentiate between payments related to a whistleblower claim and those not related to a whistleblower claim” or whether the payment was of taxes, interest or penalties. Whistleblowers are reliant on the Whistleblower Office’s manual research.

The Whistleblower Office must report annually to Congress. Concerned with the habitually late releases, the Government Accountability Office in 2015 recommended issuing this report by January 31 at the latest. The FY 2022 Annual Report has yet to be issued. FY 2022 ended on October 1, 2022.

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[1] Despite its function, it is within the SB/SE Division. The Whistleblower Program “retains procedural and policy

oversight of the ICE unit” and “[t]he SB/SE Division has operational responsibility for the ICE unit.” Report at 8.

The Inspector General for the IRS (TIGTA) reviewed the examination practices of the Large Business and International (LB&I) Division from fiscal year (FY) 2017 through 2021. LB&I’s examinations are divided between businesses and individual international taxpayers. About 67% of LB&I’s examinations were conducted on individual taxpayers totaling 63,420 audits. Of these, 90% of the taxpayers had a “total positive income” (TPI) of less than $200,000, and 3% of the taxpayers had a TPI of more than $1 million. TPI is defined as the income reported by taxpayers. Nonfilers are considered to have a TPI of $0. However, these audits are often faster than examinations of businesses. Examinations of individual returns had an average duration of 18 to 28 hours. For small businesses, the average audit duration was between 25 to 50 hours. For large businesses, the time was between 377 to 464 hours. The TIGTA was disappointed with the results of this concentration on individuals and recommended prioritizing business examinations for greater efficiency (more money retrieved per hour spent). The IRS agreed to reassess resource allocation.

This report also revealed a curious form of audit that comprised approximately 1% of all individual examinations, “Training Tax Returns.” These are defined as “[r]eturns selected for examination to supplement the training new examiners receive. They are selected based on the training module the new examiner has completed.” It is unclear what the precise status of a Training Tax Return audit is, but one can be audited by a trainee rather than an experienced agent.

The TIGTA also assessed IRS hiring practices, yielding insights into the current workforce. The number of full time equivalents (FTE) for all IRS enforcement decreased by 30% from 50,000 in FY 2010 to FY 2021. An additional $98 billion could have been collected during that time had the staffing level remained at the FY 2010 level. The Small Business/Self-Employed Division (SB/SE) is 20,000 employees strong yet is still 2,300 positions short of its authorized level. The LB&I Division has 4,600 employees and 450 vacant positions. The report indicates the speed of recruitment with an example. The IRS posted 448 job announcements (each may be for multiple positions) for LB&I and SB/SE enforcement between March and September 2022. During this half year, 95 employees for enforcement positions were onboarded. The report did not disclose whether this met the employee attrition rate.

The SB/SE Division’s plans for reallocating examination time to high earners are included in the report but have been redacted. A total of 89,838 examinations were closed by the SB/SE Division during FY 2021. This decreased to 82,368 audits in FY 2022. Categorizing by TPI level, there were 8,204 audits of taxpayers with a TPI greater than $1 million for FY 2021 and 7,507 examinations of such taxpayers in FY 2022. Judged by “[d]ollars recommended per hour of examination,” auditing taxpayers with a TPI of over $1 million is nearly 2.5x more efficient than auditing taxpayers with a TPI of less than $200,000.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

The Inspector General for the IRS (TIGTA) recently reported on the Accounts Management’s backlog. Accounts Management is primarily responsible for resolving taxpayer-initiated changes to their accounts and requests for information. Its objective is to close inventory within 45 calendar days of receipt. The actual average time for closing inventory was undisclosed, however, it takes the IRS an average of 30 calendar days just to scan taxpayer correspondence into the primary inventory management system. There are not any timeliness standards for screening correspondence. At the beginning of 2023, Accounts Management had a backlog of 6.2 million cases and 445,000 Forms 1040-X (amended tax returns).

TIGTA noted correspondence date discrepancies, inconsistent scanning priorities, and incorrectly routed cases, among other irregularities. For example, some correspondence screening occurred in employees’ personal residences rather than in the IRS mailroom. These issues were reportedly corrected. In addition, the IRS hired 214 mailing clerks to reduce the backlog. However, the IRS refuses to use mailing clerks to screen correspondence due to insufficient training for this purpose while simultaneously refusing to train them adequately. Beginning on February 28, 2022, 900 employees were reassigned from other IRS functions to form the Surge Team to assist in closing case inventories. No fewer than 189 Surge Team members failed to complete a single case and were tasked with answering phone calls instead (due to union restrictions). Those assigned to close Form 1040-X cases closed an average of 2.8 cases per hour compared to the 6.9 cases closed per hour by employees outside the Surge Team. The reassignments that made up the Surge Team caused a total of $398.7 million in revenue to be lost and $2.2 billion in revenue to be at least delayed and possibly lost.

“The IRS’s plan to automate efforts for Forms 1040-X is not occurring soon enough,” and manually entering data from Forms 1040-X annually incurs $322.2 million that could be saved through automation. TIGTA recommended temporarily prioritizing refund claims to minimize interest accruing on refund amounts and the IRS agreed. This report also explained that the IRS suffers from “programming limitations,” ultimately requiring manual refunds at a cost of $71 per manual refund.

Despite the time taken in responding to correspondence and amended returns, there is a high rate of improper payments. Specifically, the rates for improper payments are 32% for the Earned Income Tax Credit, 16% for the Additional Child Tax Credit, 36% for the American Opportunity Tax Credit, and 27% for the Net Premium Tax Credit. This means that about $26 billion out of the distributed $98 billion should not have been paid for these named credits alone.

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The statutory interpretation canon dictating that exemptions from taxation are strictly construed against the taxpayer is frequently used by the IRS in order to enforce their own interpretation of the tax code on all those subject to taxation. Bibeau v. Commissioner, T.C. Memo. 2023-66, recently demonstrated this canon’s interaction with another that would instead favor the taxpayer. Mr. Bibeau, an enrolled member of the Chippewa tribe, claimed federal income tax exemption for his legal practice. He reasoned that the tax violates a treaty between the federal government and the Chippewa tribe guaranteeing the Chippewa the “[t]he privilege of hunting, fishing, and gathering the wild rice, upon the lands, the rivers and the lakes included in the territory ceded.” The result could not be seriously doubted. Yet this case may be noteworthy for its battle of statutory canons. Exemptions from taxation are to be strictly construed in favor of the government, yet a treaty with a Native American tribe is to be liberally construed in favor of the tribe. With little analysis, the Tax Court held that the pro-tax statutory canon prevails because the other cannot “create favorable rules” for tribes or tribal members. Though Mr. Bibeau could not have prevailed under either interpretive rule the Tax Court assigned precedence to the pro-tax canon favoring the IRS and adding strength to its future cases in this area.

The Tax Court is not the only court to deal with conflicts between cannons of statutory interpretation. Recently in U.S. v. Paulson the 9^th Circuit wrestled with these rules as well. Paulson featured what is known as the series-qualifier canon and the rule of the last antecedent as the contestants with the battleground of IRC § 6324(a)(2):

If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees’ trust which meets the requirements of section 401(a)), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent’s death, of such property, shall be personally liable for such tax.

The Court in Paulson decided “whether the phrase ‘on the date of the decedent’s death’ modifies only the immediately preceding verb ‘has,’ or if it also modifies the more remote verb, ‘receives.’”[1] The difference determines the personal liability for the estate tax of a beneficiary who receives property after the decedent’s death.

As in the case of Bibeau one canon favored one party, and another favored the other. “The series-qualifier canon provides that when there is a straight-forward, parallel construction that involves all nouns or verbs in a series, a modifier at the end of the list normally applies to the entire series.”[2] While on the other hand “The rule of the last antecedent provides that a limiting clause or phrase should ordinarily be read as modifying only the noun or phrase that it immediately follows.”[3] The 9th Circuit sided with the rule of the last antecedent because there was not a comma between the word “has” and “on” in the language “who receives, or has on the date of the decedent’s death.” Paulson reasoned that the series-qualifier canon does not apply to a “limiting phrase” that “is not separated from both antecedents by a comma, and it does not follow an integrated clause that contains both antecedents,” especially when “the limiting phrase is set off by commas with the immediate antecedent” apart “from the rest of the sentence.”[4] The dissent doubted that Congress afforded such meaning to a missing comma, but the majority opinion did not find anything in the statutory context to defeat the rule of the last antecedent.

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[1] United States v. Paulson, No. 21-55197, 2023 WL 3489050, at *5 (9th Cir. May 17, 2023).

[2] United States v. Paulson, No. 21-55197, 2023 WL 3489050, at *7 (9th Cir. May 17, 2023)(cleaned up; Facebook, Inc. v. Duguid, 209 L. Ed. 2d 272 (Apr. 1, 2021)).

[3] United States v. Paulson, No. 21-55197, 2023 WL 3489050, at *7 (9th Cir. May 17, 2023)(omitting internal quotation marks and ellipsis; quoting Lockhart v. United States, 577 U.S. 347, 351 (2016)).

[4] United States v. Paulson, No. 21-55197, 2023 WL 3489050, at *7 (9th Cir. May 17, 2023)(emphasis in original).

Property taxation is a powerful tool for public finance. Apart from the more esoteric advantage of avoiding a deadweight economic loss, a property tax is secured by collateral. In theory, failure to pay even a dollar owed on a million-dollar tract of land’s property tax liability ultimately entitles the government to seize and sell the land in question. To minimize this inequity, the government’s share of the proceeds in any such sale is limited to the tax liability and the costs of executing the sale. The taxpayer (and any other party who holds a property interest in the property) is then due to receive the rest. In California, this is assured by section 4674 of the Revenue and Taxation Code. Thirty-five other states also guaranteed this right, but the Supreme Court expanded it to the remaining fourteen states without the need for those states to pass any laws themselves. In doing so, the Court acknowledged property rights that exist regardless of written law.

The facts of Tyler v. Hennepin County could scarcely have been more favorable to the taxpayer. Ms. Tyler is a 94-year-old grandmother who lives in an assisted living facility. In moving there, she left her condominium unoccupied. She accrued a property tax liability of $2,300 with a further $13,000 owed through interest and penalties. There was also a mortgage of $49,000. The county Ms. Tyler’s condo was located in, Hennepin County, Minnesota, took and sold the property for $40,000 in a tax default sale and kept all proceeds. Chief Justice John Roberts wrote for the Supreme Court, finding that the county’s actions violated the Federal Constitution’s Takings Clause. Hennepin County argued that the taxpayer lacked any equity and, therefore, any property interest in the condominium. The District Court and the 8th Circuit agreed, holding that state law regarding property rights steers the Takings Clause.

However, The Supreme Court reversed the decision of the lower courts, finding that Ms. Tyler still had a property interest for both for standing and a Takings Clause claim. Yet the Court took a different approach for each. For both, the county argued that all property interests in a property are forfeited upon defaulting on property taxes according to Minnesota law. In countering the standing argument, the Court noted that a tax sale under Minnesota law clears the property of all other encumbrances, yet the taxpayer remains personally liable for any private debt on the property. The Supreme Court found this personal liability in Minnesota case law, leading The Court to hold that Ms. Tyler would have financial harm and therefore standing because the proceeds could have reduced her debt. If taking property results in financial harm, this implies a right to that property to the person being harmed. Otherwise, it is possible to suffer legally cognizable harm through the deprivation of property one never had an interest in. According to Minnesota law, Ms. Tyler forfeited her property interest in the condominium once she defaulted. Once again that cannot be so as Minnesota law creates financial harm in the seizure by recognizing her personal liability for the debt that would have been partially satisfied but for the seizure. If this syllogism is enough to find constitutional standing, it should be enough to establish a Takings Clause claim. Interestingly The Court took a different course.

Instead of finding that Ms. Tyler has a Takings Clause claim for the same reason she has standing, the Court had an announcement: The Takings Clause recognizes property rights beyond the reach of state law. State law is an important source for discovering property rights protected by the Takings Clause, but it is complementary and therefore does not fully replace the common law.[1] Chief Justice Roberts drew a direct line from the Magna Carta to this case and was much persuaded by the fact that Minnesota’s practice was rare when the Constitution and the Fourteenth Amendment were ratified. The Court charted through centuries of statutes and found that “[t]he minority rule then remains the minority rule today.” In addition to tallying the stances of the states toward this issue, the Court measured the duration of these positions and found that states that took Minnesota’s view usually changed their minds after a generation of experimentation to conform with the majority. Tyler then applied prior Supreme Court precedent, requiring the opportunity for the taxpayer to receive the excess amount in tax sales and was further swayed by the fact that Minnesota’s surplus retention policy is unique to its property tax. Private foreclosures in Minnesota on the other hand must remit the surplus to the debtor, and tax sales resulting from taxes other than the property tax must also return the excess to the taxpayer. Minnesota’s remaining argument that property tax delinquency amounts to property abandonment was swiftly dismissed for lack of any legal support.

The Supreme Court rejected the 8th Circuit’s reasoning that Ms. Tyler could redeem and sell her condominium to the same effect as the Takings Clause. Stating, “requiring a taxpayer to sell her house to avoid a taking is not the same as providing her an opportunity to recover the excess value of her house once the State has sold it.”

Justice Gorsuch wrote separately to address the question of the Excessive Fines Clause, and Justice Jackson joined the concurrence. Chief Justice Roberts refrained from deciding on the application of the Excessive Fines Clause. However, the concurring opinion felt behooved to correct the district court’s analysis of the issue. Instead of the district court’s primary purpose test, Justice Gorsuch quoted precedent to observe that the Excessive Fines Clause applies to any law that “cannot fairly be said solely to serve a remedial purpose.”

Although a victory for Ms. Tyler, Tyler v. Hennepin County is also a victory for mortgagors and other lienholders in tax default sales. While the Supreme Court recognized that Ms. Tyler’s creditors may still hold Ms. Tyler personally liable for the debt, this right is significantly less valuable than the option of seizing collateral. From that perspective, the lienholders also suffered financial harm and could have challenged Hennepin County. However, a bank seeking recovery from a 91-year-old woman by suing a county to claim proceeds owed to it from a tax default sale, effectively forcing the government to foreclose on the debtor for the bank’s benefit, might have different results.  

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

[1] In Tyler’s words, “’traditional property law principles’ plus historical practice and this Court’s precedents.”

There was an oddity in the sports world that lasted for generations. Professional athletes profited from their status through sponsorships for their name, image, and likeness (NIL), yet these NIL opportunities were closed to collegiate athletes. The National Collegiate Athletic Association (NCAA) opened opportunities to their athletes within some limitations beginning in 2021. As with all things in life, this generated ripples in the tax world. Organizations known as “NIL collectives” have arisen to facilitate NIL contracts for student-athletes. There are over 250 NIL collectives, and about a third of these have been established as nonprofit organizations and received § 501(c)(3) recognition from the IRS. Such a status requires operating for one or more charitable causes, often termed exempt purposes. An entities tax exemption is jeopardized when they operate for any substantial nonexempt purpose. A chief counsel memorandum recently released by the IRS concluded that NIL collectives operate for a substantial nonexempt purpose “in many cases.”

Citing eight cases and five revenue rulings in addition to the statutory and regulatory authority, the IRS detailed the basis of its reasoning and reviewed the requirements for tax exemption. A § 501(c)(3) entity must meet the operational test and satisfy the private benefit doctrine. The operational test softens the statutory mandate of operating “exclusively” for one or more exempt purposes to require only operating “primarily” for one or more exempt purposes. The private benefit doctrine requires the tax exempt entity to prove “that it is not operated for the benefit of private interests.”  The IRS found that the avowed purpose of a nonprofit NIL was to benefit a private interest, specifically the interests of the student-athletes. It may seem obvious but still important to note for the purposes of this analysis that student-athletes are not “a recognized charitable class.” Nevertheless, the IRS hypothesized that the interests of student-athletes could be transformed from a private interest to a public interest through “a finding that NIL collectives select student-athletes for participation based on need, such that their activities could be considered conducted for the relief of the poor or distressed, and that payments are reasonably calculated to meet that need.”

According to Sports Illustrated, certain leaders within the NIL collective community have prophesized IRS retaliation against nonprofit NIL collectives since the beginning of the phenomenon. NIL collectives who resisted benefactor pressure to claim tax exemption may now watch as the others scramble in damage control. This is an internal memorandum that cannot be used as precedent as a case or a revenue ruling would be able to be used. However, it clearly discloses the position of the IRS and its interest in this matter, leading many to believe that further IRS action may be imminent.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

In Fuentes v. Empire Nissan, Inc., it appears that Nissan attempted to test the limits of the use of small print in contracts.[1] The plaintiff was a discharged employee who sued in a superior court, arguing that the arbitration agreement in the contract that they had signed with Nissan was unconscionable. At first, the California Court of Appeals seemed sympathetic, remarking on the contract: “The longest paragraph squeezed something like 900 words into about three vertical inches.” The California Court of Appeal was so struck by the document in question that it uploaded the contract photocopy as an appendix to the opinion from the court record to demonstrate its lamentable quality. It is reproduced at the end of this article as well (without shrinking).

According to the dissenting opinion: “The arbitration agreement speaks for itself. The print is so fine it is unreadable without magnification. See if you can read it without giving up.” However, in order to prevail on a theory of unconscionability both procedural unconscionability and substantive unconscionability must be present. The Court of Appeals in Fuentes held: “Font size and readability thus are logically pertinent to procedural unconscionability and not to substantive unconscionability.” To hold otherwise, Fuentes claimed, would be to count font size twice, something the court was unwilling to do. Substantively fair or unfair contracts can be any size.

The court was alarmed by an analysis that could result in reducing “the unconscionability doctrine into a one-element defense where the sole issue would be whether there is procedural unconscionability.” Yet Fuentes noted in the same paragraph that “there is procedural unconscionability whenever one party has superior bargaining power and presents a contract of adhesion on a take-it-or-leave-it basis. That describes innumerable contracts, especially in the online world, where the standard contract is take-it-or-leave-it.” If so, unconscionability is already a single-element defense in most cases. Despite characterizing the contract’s defects as matters of procedural unconscionability, Fuentes concluded: “Given that there is no substantive unconscionability, we need not and do not address procedural unconscionability.”

Fuentes explicitly disagreed with a prior appellate case, Davis v. TWC Dealer Grp., Inc., 41 Cal. App. 5th 662 (2019), “which invalidated a substantially similar arbitration agreement.” Indeed, Davis held that excessively small print was a facet of substantive unconscionability. Davis did not provide analysis for this point, but it did cite OTO, L.L.C. v. Kho which stated: “Unconscionable terms… may include fine-print terms.”[2] Fuentes found that Kho judged a substantially similar arbitration agreement.

Although the Court in Fuentes enforced the arbitration agreement, it seems doubtful that a contract drafter would be flattered by an appellate court remarking on their work of art: “Is it strange that a contract can be enforced when it is nearly impossible to read? Contract law enforces contracts you cannot read at all, if you are blind, or illiterate, or the contract language is foreign to you.” In contrast, the dissenting opinion theorized that the font was so small that the terms were “unknowable.” As the employer who formed the contract terms would know them, there would be a lack of mutuality—a cause for substantive unconscionability. The dissent did not mention the majority opinion’s suggestion of a magnifying glass.

According to Fuentes, a contract can be binding even with font requiring “a strong magnifying glass.” Neither the majority opinion nor the dissenting opinion addressed the possibility of a font size so small it is not perceived as writing or detected at all. A person with healthy vision may be able to read text with a strong magnifying glass, while others may require a microscope. Fuentes leaves a split within the California Court of Appeals regarding the effects of excessively small print on the analysis of substantive unconscionability.

If you have questions or concerns about how these news reports may affect you or your business, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.

Fuentes Contract

[1] Fuentes v. Empire Nissan, Inc., No. B314490, 2023 WL 3029968 (Cal. Ct. App. Apr. 21, 2023).

[2] OTO, L.L.C. v. Kho, 8 Cal. 5th 111, 130 (2019).