The Investors’ Control of Their Investment Advisers. Who Has the Final Word?

TAMAR FRANKEL

BU Law emerita professor Tamar Frankel discusses an emerging issue affecting financial advisers—when a client may exercise control over the actions of the adviser. Frankel relates the story of an investment adviser that did not follow the client’s orders to cease certain investments, at a cost of almost $5 million to the client. As Frankel explains, the Securities and Exchange Commission (SEC) got involved, resulting in the investment adviser’s settlement for a significant payment to the client and other conditions.

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In re: Somerset Regional Water Resources, LLC

Court: US Court of Appeals for the Third Circuit

Docket: 19-1874

Opinion Date: February 11, 2020

Judge: Bibas

Areas of Law: Bankruptcy, Tax Law

Mostoller owned the Debtor, a business that serviced oil and gas wells. The Debtor owed the Trust $3 million, secured by a blanket lien on most of the Debtor’s assets and a personal guarantee by Mostoller. The Debtor petitioned for Chapter 11 reorganization. To entice the Trust to lend more money, Mostoller agreed to assign his anticipated federal tax refund. The taxable income and losses of the Debtor, an S Corporation, passed through to Mostoller, who had paid millions of dollars in federal taxes on that income. He could file amended 2013 and 2014 tax returns to carry back the Debtor’s 2015 losses, which would offset his taxable income for those two years and trigger a refund. 26 U.S.C. 172(a), (b)(1)(A)(i). Mostoller pledged “any rights or interest in the 2015 Federal tax refund due to him individually, but attributable to the operating losses of the Debtor. The bankruptcy court approved the agreement The Debtor defaulted on the emergency loan and converted to a Chapter 7 liquidation. Mostoller first refused to file the tax returns. When the tax refund came, Mostoller tried to keep it. The district court and Third Circuit affirmed in favor of the Trust, rejecting Mostoller’s argument that he pledged his refund on taxes that he paid for 2015 alone, excluding any refund on his 2013 and 2014 taxes. That reading would make the collateral worthless, so the Trust would never have made the loan.

Jacobsen v. Commissioner of Internal Revenue

Court: US Court of Appeals for the Seventh Circuit

Docket: 18-3371

Opinion Date: February 13, 2020

Judge: ROVNER

Areas of Law: Tax Law

Jacobsen’s former wife, Lemmens, embezzled $400,000 from her employer, income that was not reported on the couple’s jointly filed income taxes. After Lemmens was convicted, the IRS audited the couple’s joint tax returns for 2010 and 2011 and proposed total net adjustments attributable to omitted embezzlement income of over $300,000, with corresponding deficiencies and accuracy-related penalties of over $150,000. Jacobsen sought relief under the tax code’s “innocent spouse” provision, 26 U.S.C. 6015(b), and equitable relief provision, section 6015(f). The Tax Court granted Jacobsen innocent spouse relief for 2010 but denied all relief for 2011. The Seventh Circuit affirmed. Jacobsen acknowledged that with the exception of his knowledge for 2011, the Tax Court correctly assessed the positive, negative, or neutral impact of each of the seven factors listed in Revenue Procedure 2013-34 and acknowledged that he had “reason to know” of the embezzlement income by the time he filed their 2011 tax return. He argued that the Tax Court erred when it concluded that he had actual knowledge of the unreported income for 2011. While the Tax Court could have easily decided that Jacobsen was entitled to equitable relief, nothing in the record indicates the Tax Court misapprehended the weight to be accorded Jacobsen’s knowledge or treated it as a decisive factor barring relief.

Herpel v. County of Riverside

Court: California Courts of Appeal

Docket: E070618(Fourth Appellate District)

Opinion Date: February 10, 2020

Judge: Raphael

Areas of Law: Government & Administrative Law, Native American Law, Tax Law, Zoning, Planning & Land Use

At issue before the Court of Appeal was whether Riverside County, California could impose a tax on possessory interests in federally owned land set aside for the Agua Caliente Band of Cahuilla Indians or its members. In 1971, Court held that it could, holding in part that federal law did not preempt the tax. The tax was also upheld that year by the Ninth Circuit. Since then, the United States Supreme Court articulated a new preemption framework in considering whether states may tax Indian interests, and the Department of the Interior promulgated new Indian leasing regulations, the preamble of which stated that state taxation was precluded. Nevertheless, the Court of Appeal concluded, as it did in 1971, this possessory interest tax was valid.

Inland Edinburgh Festival, LLC v. County of Hennepin

Court: Minnesota Supreme Court

Docket: A19-0567

Opinion Date: February 12, 2020

Judge: G. Barry Anderson

Areas of Law: Real Estate & Property Law, Tax Law

In this appeal from the tax court's conclusion that the market value of Relator's two parcels of improved real estate was higher than the initial assessment value determined by Hennepin County or the valuation opinion presented by the sole appraiser to testify at trial the Supreme Court reversed in part the tax court, holding that the tax court erred in its valuation determination under the sales comparison approach. Relator sought review of Hennepin County's assessed value of $8,384,300 for Relator's retail shopping center property as of January 2, 2015. After a trial, the tax court gave a final valuation determination for the property of $8,461,400. Relator appealed, arguing that the tax court's value determination was excessive. The Supreme Court affirmed in part and reversed in part, holding (1) the tax court did not err in its decision to afford no weight to Relator's expert's opinion on the income approach; but (2) the tax court erred in its valuation determination based on the sales-comparison approach.

Rockies Express Pipeline, LLC v. McClain

Court: Supreme Court of Ohio

Citation: 2020-Ohio-410

Opinion Date: February 11, 2020

Judge: Judith L. French

Areas of Law: Energy, Oil & Gas Law, Government & Administrative Law, Tax Law

The Supreme Court affirmed the decision of the Board of Tax Appeals (BTA) affirming a tax assessment against Rockies Express Pipeline, LLC (Rockies), holding that Rockies' gross receipts for tax year 2015 from the transportation of natural gas within the state of Ohio were not excluded from taxation under Ohio Rev. Code 5727.33(B)(1) as "receipts derived wholly from interstate business" and that such taxation does not violate the Commerce Clause. Rockies is an interstate pipeline that transports natural gas for others. For tax year 2015, the Ohio Tax Commissioner assessed Rockies on transactions in which natural gas entered and exited Rockies' pipeline within Ohio. Rockies petitioned the tax commissioner for reassessment, arguing that its receipts derived wholly from interstate business and were thus eligible for exclusion under section 5727.33(B)(1). The tax commissioner upheld the assessment. The BTA affirmed. The Supreme Court affirmed, holding (1) Rockies did not meet its burden of showing that its receipts fall under the exclusion in section 5727.33(B)(1) as "receipts derived wholly from interstate business"; and (2) imposing the tax under these circumstances does not violate the Commerce Clause because Rockies has substantial nexus with Ohio based on its physical presence within the State.

Black v. Cent. Puget Sound Reg'l Transit Auth.

Court: Washington Supreme Court

Docket: 97195-1

Opinion Date: February 13, 2020

Judge: Susan Owens

Areas of Law: Constitutional Law, Government & Administrative Law, Tax Law, Transportation Law

In 2015, the Washington legislature enacted RCW 81.104.160(1) (MVET statute) authorizing Sound Transit to use two separate depreciation schedules to calculate motor vehicle excise taxes (MVET). Under the statute, Sound Transit could pledge revenue from a 1996 depreciation schedule for MVETs to pay off bond contracts; Sound Transit could use a 2006 depreciation schedule for all other MVETs. Though each schedule is referenced, the MVET statute did not restate in full either schedule. Taylor Black and other taxpayers alleged the MVET statute violated article II, section 37 of the Washington Constitution, stating "no act shall ever be revised or amended by mere reference to its title, but the act revised or the section amended shall be set forth at full length." The Washington Supreme Court held the MVET statute is constitutional because (1) the statute was a complete act because it was readily ascertainable from its text alone when which depreciation schedule would apply; (2) the statute properly adopted both schedules by reference; and (3) the statute did not render a straightforward determination of the scope of rights or duties established by other existing statutes erroneous because it did not require a reader to conduct research to find unreferenced laws that were impacted by the MVET statute.