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In upholding the IRS’s disallowance of the charitable deduction, the court held the requirement to disclose cost basis information, when that information is reasonably ascertainable, is necessary to help the IRS effectively identify overvalued property. Belair did not exclude the information because it was not readily ascertainable. Instead, this was a conscious decision not to supply the required information. Therefore, Belair did not either, strictly or substantially, comply with the information requirements of Section 170.
II. Final Regulations Impose New Substantiation Reporting for Charitable Contributions.
In July 2018, the IRS issued final Section 170A regulations. These regulations relate to substantiation and reporting requirements for cash and non-cash charitable contributions. Although the final regulations follow the 2008 proposed regulations, there are some startling differences. For example, the final regulations state a fully completed Form 8283 signed by the donee does not satisfy the contemporaneous donee acknowledgment requirements of Section 170(f)(8)(B) because the form contains only some of the information required in a contemporaneous donee acknowledgement. Further, if an appraisal is required to be attached to a tax return for the contribution year, the final regulations state the same appraisal must be attached to the returns for all carryover years. Treas. Reg. § 1.170A-16(f)(3). An example is where there is a large non-cash charitable contribution that exceeds 30% of the donor’s AGI for the contribution year. This is a real trap for the unwary.
III. Charitable Contribution Fails Substantiation Test.
In Davis v. Comm., TC Memo 2018-56, Mr. Davis was the president and senior minister of a small church. Mr. Davis claimed charitable contribution deductions for certain non-cash contributions to the church. A donee acknowledgement letter was signed by Mr. Davis as senior minister and president, but the letter was not issued contemporaneously with his contributions. Also, the letter failed to report the date and location of the contributions and a description of the property donated.
IV. No S Corporation Basis Increase for Intercompany Loans.
In Meruelo v. Comm., TC Memo 2018-16, Mr. Meruelo owned 49% of an S corporation named Merco. In 2008, Merco incurred a loss of over $26 million, 49% of which was allocated to Mr. Meruelo. The IRS disallowed a substantial portion of the deduction because Mr. Meruelo did not have sufficient basis in his S corporation stock. Mr. Meruelo contended he should get basis credit for inter-company loans made between various affiliated entities under the back to back loan theory or under the incorporated pocketbook theory.
The court, however, stated for the back-to-back loan theory to prevail, the indebtedness of the S corporation must run directly to the shareholder. Therefore, any loans between the affiliates and Merco could not be recast as loans to the shareholders followed by loans from the shareholders to Merco. Here, there were no promissory notes or other evidence of indebtedness of loans to the shareholders nor was there any evidence Merco and the affiliates intended to create loans to or from Mr. Meruelo.
The court agreed with the IRS that the incorporated pocketbook theory did not apply because although Mr. Meruelo was a shareholder of Merco and Merco’s affiliates, there were other shareholders of those entities. In the past, courts have applied the incorporated pocketbook theory only where the taxpayer had a “habitual practice of having his wholly owned corporation pay money to third parties on his behalf” (Broz v. Commissioner, 137 T.C. 46, 62 (2011)) and where the S Corporation shareholder was the sole shareholder of the corporations involved.
V. No Basis Increase for Loan Guarantees even after a Loan is Called in Full.
In Phillips v. Comm., 121 AFTR 2d. 2018-1776 (11th Cir. 2018), Mrs. Phillips was a 50% owner of an S corporation that developed and sold real estate. In 2007, after the S Corporation defaulted on significant loans, the corporation’s creditors sued Mrs. Phillips and were awarded judgments in excess of $100 million. Mrs. Phillips took the position that once the loan obligations were reduced to judgments against her, she was entitled to increase her tax basis in her S corporation stock by the guaranteed debt. The Court of Appeals upheld the Tax Court’s ruling that under the economic outlay requirement, Mrs. Phillips would not be entitled to any basis increase for her loan guaranties until she actually made payment to the corporation’s lenders.
VI. S Corp Shareholder Not Entitled to Tax Basis for Third Party Loans.
In Hargis v. Comm., 121 AFTR 2d 2018-2206 (8th Cir. 2018), Mr. Hargis owned 100% of several S corporations that operated nursing homes. Mrs. Hargis owned 25% of several LLCs that owned real estate and equipment used in operating nursing homes. The LLCs leased those assets to certain nursing home operators, including Mr. Hargis’ operating companies. Mr. Hargis was a co-guarantor of third party loans to his S corporations. Some of Mr. Hargis’ profitable companies made inter-company loans to other unprofitable companies owned by him. Not surprisingly, the Court of Appeals upheld the Tax Court’s ruling that Mr. Hargis could not increase his tax basis in his S corporation stock by the amount of any co-guaranteed debt to the S corporations. The court also held Mr. Hargis could not increase the basis in his S corporation stock by the amount of the inter-company loans.
VII. S Corporation Shareholder Satisfies the Inconsistent Treatment Test.
In Rubin v. U.S., 122 AFTR 2d 2018-5979 (9th Cir. 2018), Mr. Rubin owned 100% of an S corporation named Focus. By 2000, Focus was in serious financial difficulty and placed in involuntary bankruptcy. The bankruptcy trustee filed Focus’ 2000 tax return. Mr. Rubin believed the trustee incorrectly reported almost $67 million of cancellation of debt income and failed to write off $23 million of bad debt expenses. Mr. Rubin initially filed his personal tax return consistently with that of the S corporation. However, he later filed an amended personal return and included a statement that described how his income flowed from Focus and how he disagreed with the tax return filed for Focus by the bankruptcy trustee. Mr. Rubin even attached a pro forma amended tax return for Focus for 2000 that reflected the different treatment of bad debt expenses and the cancellation of debt income. He also attached a pro forma Schedule K-1 showing the income he believed should have been reported to him.
The IRS rejected Mr. Rubin’s amended returns because he only identified how his amended returns were different from his original returns rather than how his amended returns were different from the corporate returns. Also, the IRS argued Mr. Rubin’s amended returns should be rejected because he failed to file Form 8082, Notice of Inconsistent Treatment.
According to the Court of Appeals, however, although Mr. Rubin failed to attach the Form 8082 to his return, the information submitted by Mr. Rubin with his amended returns was sufficient to apprise the IRS of how and why his amended returns differed from the S corporation returns filed by the bankruptcy trustee. Thus, the court held Mr. Rubin met the requirements of Section 6037(c).
VIII. Severity of Shareholder Dispute Did Not Deprive a Shareholder of his Economic Interest in the S Corporation.
In Enis v. Comm., TC Memo 2017-222, Mrs. Enis was a shareholder of an S corporation called NLS. Mr. Enis was also a partner in a consulting firm that agreed to provide consulting services for NLS in exchange for NLS’ agreeing to pay a monthly consulting fee and issue shares of NLS stock to the owners of the consulting firm. When NLS and the consulting firm initially began discussions, NLS provided the consulting firm with its financial statements. Those financial statements showed a liability owed to Dr. Ginsburg of almost $7 million arising from an initial loan made by Dr. Ginsberg to NLS. Over time the relationship between Dr. Ginsburg and the consulting firm shareholders deteriorated. Dr. Ginsburg refused to allow the NLS shareholders to enter the NLS premises and began withholding financial information from the NLS shareholders. Ultimately, NLS stopped paying the consulting fees. On their 2010 tax return, the Enises did not include their pro rata share of the S corporation income. In addition, the Enises claimed a theft loss deduction based on Dr. Ginsberg’s actions.
The Tax Court agreed with the IRS that Dr. Ginsberg’s actions did not deprive the Enises of the economic benefit of their NLS shares. Under the court’s previous decision in Kumar, TC Memo 2013–184, unless there is an express agreement between shareholders to transfer economic interest rights from one shareholder to another, mere disagreements between the shareholders, or a deterioration in their relationship, does not deprive one shareholder of his or her economic interest in the S corporation. Thus, the Enises were required to include their pro rata share of the S corporation income on their return regardless of Dr. Ginsberg’s actions.
IX. Husband and Wife Unable to Claim Single-Member LLC Status for an LLC Owned by Them.
In Argosy Technologies, LLC v. Comm., TC Memo 2018-35, the IRS asserted late filing penalties under Section 6698 against the LLC for the late filing of partnership tax returns for 2010 and 2011. Mr. and Mrs. Petito each owned 50% of the LLC. In response to the penalty assertions, Argosy claimed it was a single-member limited liability company that cannot be subject to partnership penalties. The court ruled, however, there was no question that this was a multimember LLC because, by the parties’ own admission, the LLC was owned by Mr. and Mrs. Petito. Moreover, that the Petitos filed Forms 1065 also indicated this was a multimember LLC.
X. Section 6672: the Reasonable Cause Exception and the Unencumbered Funds Trap.
In Spizz v. U.S., 120 AFTR 2d. 2017-6719, Mr. Todtman initially formed the law firm that eventually became Todtman, Nachamie, Spizz and Johns, P.C. Todtman, Nachamie and Spizz were the primary owners of the law firm. From 2009 through mid-September 2012, Todtman served as the president of the firm. In 2009, the firm’s outside accountant advised Mr. Todtman he had discovered the law firm was failing to pay its trust fund taxes. Mr. Todtman responded that the firm could not pay its taxes and its other bills, and therefore he had to make a hard choice. At that time, Mr. Spizz owned one-third of the firm’s stock and served as vice president. Before June 2010, Mr. Spizz discovered the firm had failed to pay its trust fund taxes that were being withheld. On this discovery, Mr. Spizz and Mr. Nachamie revoked Mr. Todtman’s management authority.
On April 2012, Mr. Spizz learned the firm had not paid its trust fund taxes for the fourth quarter of 2011 and the first quarter of 2012. Finally, in December 2013, Mr. Spizz discovered Mr. Nachamie had embezzled over $1 million from the firm’s trust account. The IRS assessed a trust fund tax penalty of $585,000 against Mr. Spizz and Mr. Todtman, jointly and severally, for periods beginning before June 2010, and assessed Mr. Spizz a trust fund penalty of $113,299 for the 2011 and 2012 periods. In the Tax Court proceeding, the court quickly concluded based on their respective significant management roles for the firm, Mr. Spizz and Mr. Todtman met the definition of responsible persons under Section 6672.
Next, the court addressed whether Mr. Todtman and Mr. Spizz willfully failed to pay trust fund taxes. Since the case was being decided in the District Court of New York, which is in the Second Circuit, the court noted the Second Circuit recognizes a reasonable cause defense to Section 6672 where a responsible person reasonably believes taxes were being paid. Winter v. U.S., 196 F.3d 339, 345 (2d Cir. 1999). However, the reasonable cause exception is not available if the taxpayer fails immediately to use available unencumbered funds to pay the IRS once the person becomes aware of the unpaid taxes.
It was clear Mr. Todtman willfully failed to remit trust fund taxes during 2009 and 2010 while he was controlling the firm. Spizz testified that, before June 2010, he was completely unaware of any unpaid trust fund taxes. When he became aware of these delinquencies in June 2010, the firm’s bank had a lien against all of the assets of the firm, and the firm’s operating account carried a negative balance of $20,000. However, apparently the firm’s bank account became negative only because the firm made disbursements on June 20, 2010 of over $80,000, the same day Mr. Spizz learned of the tax delinquencies. Therefore, Mr. Spizz was liable for all of the trust fund taxes for periods before June 10, 2010.
The court further held Mr. Spizz was responsible for all the post-June 2010 taxes as well. Once Mr. Spizz became aware of past delinquencies, it was his responsibility to assure that taxes were remitted for future periods, and failing to follow-up constitutes reckless disregard that meets the willfulness requirement. Thus, Mr. Spizz and Mr. Todtman were jointly and severally liable for the full amount of taxes for periods before June 2010, but only Mr. Spizz was liable for the unpaid trust fund taxes for periods after June 2010.
Also see Cherne v. U.S., 120 AFTR 2d 2017-6443, where the Ninth Circuit Court of Appeals held the taxpayer’s funds were not encumbered where the taxpayer was under no legal obligation “to use the funds for a purpose other than satisfying the preexisting employment tax liability,” since restrictions on assets imposed by a creditor do not qualify as legal obligations for purposes of this exception. Nakano v. United States, 742 F. 3d 1208, 1212 (9th Cir. 2014).
XI. More About the Unencumbered Funds Issue.
In Davis vs U.S., 121 AFTR 2d. 2018-935, the Court of Appeals upheld the District Court’s grant of summary judgment in favor of the IRS on the unencumbered funds issue. This opinion provides an excellent discussion of the majority and minority positions as to the unencumbered funds test.
Mr. Davis, a resident in the 10th Circuit, argued he did not willfully pay his secured lender ahead of the IRS because his secured lender had a contractually imposed security interest in all of his assets that was superior to any interest claimed by the IRS. Previously, Mr. Davis had transferred $1.3 million of funds to his primary lender that had a security interest in all of his company’s assets when he discovered his company had unpaid payroll tax obligations. The IRS assessed the trust fund recovery penalty against Mr. Davis for just under $1 million.
The court noted there is a split of authority as to whether contractually-imposed, voluntarily-assumed, restrictions on a company’s ability to direct funds constitutes an encumbrance that precludes a finding of willful nonpayment of payroll taxes. The majority rule a company’s voluntary decision to grant a security interest or other control over company funds to a lender does not create an encumbrance on those funds that excuses a failure to use the funds to pay tax delinquencies. It is only legally-imposed encumbrances (e.g. those created by statute or regulation) that excuse payment of tax obligations. See Honey v. U.S., 963 F.2d 1083 (8th Cir. 1992); U.S. v. Kim, 111 F.3d 1351 (7th Cir. 1997); Bell v. U.S., 355 F.3d 387 (6th Cir. 2004); Nakano v. U.S., 742 F.3d 1208 (9th Cir. 2014).
Having found Mr. Davis was both a responsible person and acted willfully in failing to use his company’s funds in 2009 to pay the company’s payroll taxes, the court held in favor of the IRS. As stated in Honey, “it is no excuse that, as a matter of sound business judgment, the money was paid to suppliers and for wages in order to keep the corporation operating as a going concern – the government cannot be made an unwilling partner in a floundering business.” 963 F.2d at 1093, quoting Collins v. U.S., 848 F.2d 740, 741–42 (6th Cir. 1988).
XII. Criminal Prosecution for Failure to Pay Employment Taxes.
Section 7202 provides it is a felony to fail to truthfully account for and pay over trust fund taxes. A conviction under Section 7202 can carry a prison sentence of up to five years. In U.S. v. Snyder, No. 1:17CR507, 2018 WL 4335632 (N.D. Ohio September 11, 2018), the court upheld the defendant’s criminal conviction for failing to pay withholding taxes under Section 7202. Mr. Snyder argued his failure to pay was not willful but instead was caused by the great recession and the existence of an IRS tax lien against the company’s assets. However, witnesses testified Mr. Snyder prioritized payments to his company’s creditors over the payments to the IRS. They also testified he would meet with certain employees each quarter to decide which payments would be made and which creditors would be paid.

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For 35 years, John has been litigating patents around the country for technology clients including Microsoft, SAP, ETAP, Nautilus, and Mentor Graphics.
Supreme Court and Courts of Appeals: John has argued more than a dozen appeals before the Court of Appeals for the Federal Circuit. He successfully argued before the Supreme Court of the United States in Nautilus, Inc. v. Biosig Instruments, Inc., No. 13-369, for rejection of the Federal Circuit’s “insolubly ambiguous” and “amenable to construction” test for enforcing the Patent Act’s mandate that patent claims “particularly point out and distinctly claim” the patent’s invention.
Court Trials: John has first-chair tried patent infringement suits, copyright infringement suits, trademark infringement suits, and product-configuration trade dress suits. Most recently, he and a team at Klarquist obtained an $8.42 Million jury verdict in a false advertising action.
PTAB Trials: John has been lead counsel in Patent Office trial proceedings.
Patent-Law Training and Advocacy: Since 2004, John has been the primary editor of an extensive summary of substantive defenses and related strategies in patent infringement suits, posted at www.patentdefenses.com. He speaks throughout the nation on patent law, district-court patent litigation, PTAB patent trials, and patent appellate practice. He emphasizes untraditional approaches to successfully defending against a patent infringement suit while improving the law and patent system in the process. To the same end, he has authored many Amici briefs in the U.S. Supreme Court and the Federal Circuit on behalf of scores of technology companies and associations.
John joined Klarquist in 1989 as an associate and became partner in 1991.
Power Analytics Corporation v. Operation Technology, Inc., Case Nos. 18-1428 (Fed. Cir.), 16-cv-01955 (C.D. Cal.), 16-cv-00177 (D. Del.): Won summary affirmance at the U.S. Court of Appeals for the Federal Circuit of the invalidation of 138 claims in four patents in the field of modeling electrical systems. The Court in the Central District of California found all claims invalid under the abstractness exclusion to patent eligibility under § 101 of the Patent Act.
E-System Design, Inc. v. Mentor Graphics Corp., Case No. 17-cv-682 (E.D. Tex.): Represented EDA company in which the Court in the Eastern District of Texas invalidated all claims against the client based on the more stringent “reasonable certainty” test for claim indefiniteness. This stricter standard was established by the Supreme Court in Nautilus Inc. v. Biosig Instruments Inc., where Klarquist had successfully represented Nautilus.
Biosig Instruments, Inc. v. Nautilus, Inc., Case No. 13-369 (S. Ct.): Argued before the United States Supreme Court to reject the Federal Circuit’s lenient standard for definiteness. The Supreme Court unanimously held that the standard for definiteness applied by the Federal Circuit was too liberal. And it articulated that patent claims are indefinite if “read in light of the specification delineating the patent, and the prosecution history, fail to inform, with reasonable certainty, those skilled in the art about the scope of the invention.” The asserted patent involved heart rate monitor technology.
Synopsys, Inc. v. Mentor Graphics, Inc., Case No. 12-cv-06467 (N.D. Cal.): Represented EDA company in competitor multi-patent litigation. Argued and won partial summary judgment of patent invalidity under Section 101.
Metasearch Systems, LLC v. Priceline.com, Travelocity.com, Expedia, Orbitz, & American Express, Case Nos. 12-cv-01188, 12-cv-01189, 12-cv-1190, 12-cv-01191, 12-cv-01223, 12-cv-01225 (D. Del.): Defended group of on-line travel companies against seven patents related to metasearching. Successfully argued Covered Business Method patent review trials instituted by the Patent Trial & Appeal Board, which found all claims unpatentable, resulting in dismissal of the lawsuit.
A Pty LTD v. eBay, et al., Case No. 15-cv-00155 (W.D. Tex.): Represented eBay on case involving email communication systems. The complaint was dismissed on a Rule 12 motion, as the Court found the asserted patent invalid as claiming unpatentable subject matter, under Section 101.
Grupo Bimbo S.A.B. de C.V., et al. v. Snak King Corp., et al., Case No. 13-cv-02147 (C.D. Cal.): Defended Snak King against large Mexican corporation asserting trademarks, trade dress, and patents related to rolled tortilla chips. After Snak King won claim construction on key patent claim terms and after Court held hearing on certain trademark issues, parties reached favorable settlement.
Realtime Data LLC d/b/a IXO v. SAP America, Inc., Sybase, Hewlett-Packard, & Dell, Case No. 15-cv-00469 (E.D. Tex.): Defending SAP and Hewlett-Packard in multi-patent case involving data compression.
Big Baboon Inc. v. Hewlett-Packard, et al., Case No. 09-cv-01198 (C.D. Cal.): Representing Hewlett-Packard in multi-defendant multi-patent case involving database systems for end-to-end B2B commerce. Litigation was stayed after Klarquist filed reexaminations on both patents.
Research Corporation Technologies v. Microsoft Corp., Case No. 01-cv-0658 (D. Ariz.): Defended Microsoft against six asserted patents regarding halftoning technology, including at trial.
Anascape Ltd. v. Microsoft Corp., et al., Case No. 06-cv-00158 (E.D. Tex.): Represented Microsoft in multi-patent litigation involving Xbox® game controllers, winning partial stay pending reexams and partial summary judgment of non-infringement and no willful infringement (see 2008 WL 7182476).
Sklar v. Microsoft Corp., Case No. 06-cv-00007 (E.D. Tex.): Defended Microsoft in case relating to Windows® operating system user interface features.
Network Commerce v. Microsoft Corp., Case Nos. 01-cv-01991 (W.D. Wash), 04-1445 (Fed. Cir.): Led defense team for Microsoft and won summary judgment of non-infringement regarding patents relating to online media distribution. Successfully defended the summary judgment win on appeal. See 422 F.3d 1353 (Fed. Cir. 2005).
John also has been lead counsel on more than a dozen Patent Office proceedings, including reexaminations, inter partes reviews, and covered business method patent reviews.


MARIE HUNSLEY, Appellant, v. KENNETH GIARD, ET AL, Respondents.
*425 Critchlow, Williams, Ryals & Schuster, by Rembert Ryals, for appellant.
Loney, Westland, Raekes, Rettig & Sonderman, by Diehl R. Rettig, for respondents.
This case concerns the right to recover for injuries, physical and mental, resulting from the negligent infliction of mental distress. The injuries for which recovery is sought resulted from an invasion of plaintiff's home by the defendants' car, but without immediate physical impact to her and outside of her immediate presence. The trial court entered judgment upon a jury verdict for the defendants. We reverse and order a new trial.
On a March day, the plaintiff was sitting in her living room reading the evening paper when she heard a "rather explosive sound." Her husband was in an adjoining room giving a piano lesson to one of his private students. She rushed to the area of the sound and discovered her next-door neighbor, the defendant driver, sitting in her Lincoln Continental in the middle of plaintiff's back porch utility room. The room was a shambles. Two walls had been knocked down, the windows were shattered, and many of the items stored in the room were damaged. When plaintiff stepped into the room the floor collapsed, causing her to bruise her legs.
Plaintiff's immediate reaction was concern for her longtime neighbor, the defendant driver. In her words, "I was quite worried about her because she had had some physical problems. I didn't know whether she had blacked out or had died at the wheel or something had happened to her."
The plaintiff said she was dismayed very much by the damage to the room and its contents. Shortly thereafter she thought about the tragedy which might have occurred had the car hit the room where her husband was giving a piano lesson.
Within an hour after the incident the plaintiff began to experience physical discomfort. "I began to feel this very *426 strange feeling as if my chest were going to explode and as if there wasn't room in my chest for everything. Even my breasts felt very heavy and my arm was beginning to be numb and the numbness eventually went into my hand my left arm and hand." Some years earlier plaintiff had had one lung and certain ribs removed in the aftermath of tuberculosis. She was concerned that she might have snapped what she described as the frail cartilage in the rib section. She felt fatigue for some days.
After experiencing continued pain and increased numbness in her arm, plaintiff called a physician who prescribed bed rest and heat. A week later two electrocardiograms were taken. The doctor who administered these tests did not testify at the trial. Five weeks later she consulted a cardiologist. The electrocardiogram revealed abnormalities which the cardiologist said could be related to a number of different stressful conditions, but he concluded that the heart damage "was probably related to the severe stress state overloading the heart" which occurred at the time of the incident. It was his diagnosis that plaintiff had suffered heart stress, as opposed to a heart attack, with probable microscopic scarring of the heart muscle. Subsequent electrocardiograms were normal, which the doctor testified to be not at all unusual.
The trial court denied defendants' motion to dismiss and sent the case to the jury. The following instruction was given on the question of liability.
If you find that the sole proximate cause of the stress which the plaintiff claims to have sustained was her fear for the safety of Mrs. Giard and/or her fear for the safety of her husband and/or the damage to her home, then your verdict shall be for the defendants. However, if you find that a proximate cause of this stress was the noise the plaintiff heard and/or the scene which confronted her when she observed the defendant's car after it collided with her home and/or from the fall the plaintiff sustained and the bruises, if any, resulting therefrom and if you further find that this stress proximately *427 caused injury to the plaintiff, then your verdict shall be for the plaintiff.
The jury returned a verdict for defendants.
Out of fairness to the late Judge Lawless, the trial court judge, we should acknowledge that the record reflects his complete awareness of the somewhat confused state of the law. He submitted the case to the jury on the theory that the injury when the floor gave way was adequate physical impact, seemingly required by case law.
Liability for negligently causing fright, mental disturbance, shock, or emotional distress, resulting in physical injury, without impact to the person, has been a divided, confused, and unsettled area of the law. No general agreement has yet been reached on the various issues involved. W. Prosser, Handbook of the Law of Torts § 54, at 327 (4th ed. 1971). Any attempt at a consistent exegesis of the authorities is likely to break down in embarrassed perplexity. Right to recover for emotional disturbance or its physical consequences, in the absence of impact or other actionable wrong, Annot., 64 A.L.R.2d 100, 103 (1959).
The following rules have evolved, nevertheless, as the courts have attempted to come to grips with the problem of defining the boundaries of liability for mental distress injuries.
1. A contemporaneous physical impact was required by the leading English case and a majority of the early American cases before allowing recovery for mental distress. J. Fleming, Law of Torts 149 (4th ed. 1971); see, e.g., Spade v. Lynn & Boston R.R., 168 Mass. 285, 47 N.E. 88 (1897).
2. Some jurisdictions followed the impact rule, but strained to find impact, such as our own case finding impact through a shock wave from an explosion. See, e.g., Kasey v. Suburban Gas Heat of Kennewick, Inc., 60 Wn.2d 468, 374 P.2d 549 (1962); Zelinsky v. Chimics, 196 Pa. Super. 312, 175 A.2d 351 (1961).
3. Intentional or willful acts, even those involving no physical impact and leading only to mental stress, usually *428 resulted in a cause of action. See, e.g., Gadbury v. Bleitz, 133 Wash. 134, 233 P. 299, 44 A.L.R. 425 (1925).
4. Mental distress which accompanied physical harm was often compensated as a parasitic damage. 1 T. Street, Foundations of Legal Liability 470 (1906); see, e.g., Redick v. Peterson, 99 Wash. 368, 169 P. 804 (1918).
5. Mental distress to a plaintiff caused by fear for his own safety expressed in our cases as an immediate physical invasion of plaintiff's person or security or a direct possibility thereof, was a ground for recovery in some jurisdictions. See, e.g., Murphy v. Tacoma, 60 Wn.2d 603, 374 P.2d 976 (1962).
6. Mental distress resulting from witnessing harm to another led to divided results. See, e.g., Dillon v. Legg, 68 Cal. 2d 728, 441 P.2d 912, 69 Cal. Rptr. 72 (1968); Jelley v. LaFlame, 108 N.H. 471, 238 A.2d 728 (1968).
7. Mental distress alone, without accompanying physical injury or physical consequences, or any other independent basis for tort liability, generally led to no recovery. W. Prosser, supra § 54, at 328.
See generally W. Prosser, supra § 54; Smith, Relation of Emotions to Injury and Disease: Legal Liability for Psychic Stimuli, 30 Va. L. Rev. 193 (1944).
Analysis of the English cases begins with the Privy Council decision in Victorian Rys. Comm'rs v. Coultas,  13 A.C. 222 (P.C.) (Austl.). There the husband and wife were riding in a buggy which approached a railroad crossing. The gatekeeper lifted the gate despite the imminent passage of a rapidly moving train which narrowly missed the buggy. The plaintiff wife fainted, resulting in physical symptoms of injury. In denying recovery, the court held: (1) that the damages were not a consequence which in the ordinary course of things would flow from the negligence (presumably foreseeability); (2) that the damages were too remote; (3) that there would be great difficulty of proof; (4) that it would open a wide field for imaginary claims; and (5) that there was no English precedent for *429 recovery. The court did not decide whether an actual impact was necessary.
as the relation between fright and injury to the nerve and brain structures of the body is a matter which depends entirely upon scientific and medical testimony, it is impossible for any Court to lay down, as a matter of law, that if negligence cause fright, and such fright, in its turn, so affects such structures as to cause injury to health, such injury cannot be "a consequence which, in the ordinary course of things would flow from the" negligence, unless such injury "accompany such negligence in point of time."
1. When there is a breach of the duty to take care, the damage may take the form of a shock without a direct physical impact. 2. Reasonable fear of immediate physical injury to the plaintiff himself resulting in a shock is actionable. 3. Reasonable fear of immediate physical injury to the plaintiff's family, or to his friends, or, doubtfully, to third parties, resulting in a shock is actionable. 4. The sight of an accident causing physical injury to *430 the plaintiff's family, or to his friends, or, doubtfully, to third parties, resulting in a shock is actionable. 5. Hearing the noise of an accident causing physical injury to human beings resulting in a shock is by itself not actionable. 6. The sight of physical injury caused otherwise than to a human being, e.g. to a corpse, to an animal or to property, resulting in a shock is not actionable. 7. A report by a third party that physical injury to a member of the plaintiff's family has been caused by the defendant's negligence, resulting in a shock, is not actionable, unless such intervening act by the third party was reasonable in the circumstances or to be expected.
(Footnotes omitted.) R. Percy, Charlesworth on Negligence § 41, at 26, 27.
Interestingly, there are statutes in some British Commonwealths dealing with the matter. New Zealand Law Reform Act 1944, section 2. New South Wales Law Reform (Misc. Provisions) Act 1944, part 3, section 4(1).
The American jurisdictions quickly developed conflicting lines of authorities. An early leading case denying liability was Mitchell v. Rochester Ry., 151 N.Y. 107, 45 N.E. 354 (1896). In Mitchell, recovery was denied to the plaintiff, a pregnant woman who, although not physically touched, was negligently caused to abort her child and suffered a consequent illness. Plaintiff was frightened by defendant's horse-drawn car which was being operated in such a reckless manner that, when finally restrained, the plaintiff was trapped between the heads of the horses. Three reasons were given by the court for dismissing plaintiff's complaint. First, since the plaintiff could not recover for mere fright, there could be no recovery of damages for the consequences resulting therefrom. Second, the court assumed that the miscarriage was not the natural and probable consequence of defendant's negligence, but rather was due to an unusual combination of circumstances not reasonably foreseeable and, therefore, too remote to justify recovery. Third, the court reasoned that recovery would be contrary to public policy because the type of injury could be feigned *431 without detection and would result in a flood of fictitious and speculative claims.
The Mitchell rule survived in New York until 1961 when it was overruled in Battalla v. State, 10 N.Y.2d 237, 176 N.E.2d 729 (1961).
That a physical personal injury may be produced through a strong emotion of the mind there can be no doubt. The fact that it is more difficult to produce such an injury through the operation of the mind than by direct physical means affords no sufficient ground for refusing compensation in an action at law when the injury is intentionally or negligently inflicted. It may be more difficult to prove the connection between the alleged cause and the injury, but if it be proved, and the injury be the proximate result of the cause, we can not say that a recovery should not be had.
For a history of the development of the law in the American jurisdictions and analysis of the problems encountered by the courts see Brody, Negligently Inflicted Psychic Injuries: A Return to Reason, 7 Vill. L. Rev. 232 (1961-62); Goodrich, Emotional Disturbance as Legal Damage, 20 Mich. L. Rev. 497 (1922); Harper & McNeely, A Re-examination of the Basis for Liability for Emotional Distress, 1938 Wis. L. Rev. 426; Lambert, Tort Liability for Psychic Injuries, 41 Boston U.L. Rev. 584 (1961); Magruder, Mental and Emotional Disturbance in the Law of Torts, 49 Harv. L. Rev. 1033 (1936); Throckmorton, Damages for Fright, 34 Harv. L. Rev. 260 (1921); Comment, Negligently Inflicted Mental Distress: The Case for an Independent Tort, 59 Ga. L.J. 1237 (1971); Note, 76 W. Va. L. Rev. 176 (1974).
From early in its history, this court has allowed recovery of damages for mental distress, even without physical impact or injury, when the defendant's act was willful or intentional. See Willson v. Northern Pac. R.R., 5 Wash. 621, *432 32 P. 468 (1893); Davis v. Tacoma R. & Power Co., 35 Wash. 203, 77 P. 209 (1904); McClure v. Campbell, 42 Wash. 252, 84 P. 825 (1906); Wright v. Beardsley, 46 Wash. 16, 89 P. 172 (1907); and Nordgren v. Lawrence, 74 Wash. 305, 133 P. 436 (1913).
Where the defendant's actions were negligent and there was no impact to the plaintiff, our cases initially adopted the then general rule of no liability for mental distress. See Corcoran v. Postal Telegraph-Cable Co., 80 Wash. 570, 142 P. 29 (1914); Kneass v. Cremation Soc'y, 103 Wash. 521, 175 P. 172, 10 A.L.R. 442 (1918); Barnes v. Bickle, 111 Wash. 133, 189 P. 998 (1920); Stiles v. Pantages Theatre Co., 152 Wash. 626, 279 P. 112 (1929).
A departure from the impact rule was first recognized in O'Meara v. Russell, 90 Wash. 557, 156 P. 550 (1916). In O'Meara, the defendant was blasting stumps near the plaintiff's home. In the process of blasting, a stump was dislodged and hurled through the air into plaintiff's house. The plaintiff was standing in the house at the time and saw the stump coming toward her, and saw it strike the house a few feet from her head. In an effort to protect herself and escape the threatened danger she sustained direct physical injury. Recovery was premised upon the fact that the defendant's act, which caused the fright, reasonably induced action which resulted in an external injury. In allowing recovery, the court relied heavily upon the existence of physical injuries.
In this case the injuries resulting from the fright were physical injuries. They were not psychological or mental. It seems, under these circumstances, where there is physical injury which results naturally, that the injured person is entitled to recover equally as though there had been a direct impact which caused the same injury.
O'Meara v. Russell, supra at 563.
This departure from the impact rule was further refined in Frazee v. Western Dairy Prods., 182 Wash. 578, 47 P.2d 1037 (1935). In Frazee, the pregnant plaintiff was sitting in her living room when she observed a runaway truck coming toward her house. Her young son was in the yard. She *433 testified to her alarm as to the safety of her son and the fear that the truck would strike her house and possibly set it on fire. The truck overturned in the yard but did not reach the house. Plaintiff ultimately suffered a miscarriage. Recovery was allowed because, like the O'Meara case, the facts constituted a threat of an immediate physical invasion of the plaintiff's personal security.
[G]enerally, in cases which do not involve malice or intent to do harm, there must be either an immediate physical invasion of the plaintiff's person or security, or a direct possibility of such an invasion in order that recovery may be had for mental anguish or distress of mind.
The rule is simply a rule of thumb. At times our cases have deviated from the rule "either in [their] reasoning or on the facts" in allowing recovery. Murphy v. Tacoma, supra at 621. In Schurk v. Christensen, 80 Wn.2d 652, 497 P.2d 937 (1972), we indicated our willingness, in the appropriate case, to reexamine the rule and its application.
In the main, the reasons advanced by the courts for denying recovery, i.e., lack of precedent, increased litigation, remoteness, and fear of fictitious and feigned claims, have now been generally discarded. See Lambert, Tort Liability for Psychic Injuries, 41 Boston U.L. Rev. 584 (1961); Throckmorton, Damages for Fright, 34 Harv. L. Rev. 260 (1934); Schurk v. Christensen, supra at 658 (Finley, J., dissenting). The old rationales are simply no longer viable. In light of this, we consider this to be the case to reexamine the question of liability for the negligent infliction of mental distress.
We emphasize that this case does not involve mental distress alone. Our decision necessarily is predicated upon the existence of physical symptoms evidencing and resulting from the emotional distress. We say that this is necessarily so because these are the facts of this case. Plaintiff *434 suffered physical heart damage as well as emotional distress. Whether there is liability for emotional distress unmanifested by any physical symptoms must be determined in another case.
It is apparent from a survey of this area of the law that the application of the various rules, their exceptions and aberrations, has led the courts to reach absurd results and created numerous artifical boundaries. See generally W. Prosser, supra § 54. Rather than add to the already existing confusion with the formulation of a new rule, we conclude that the wisest approach is to return to the traditional principles, theories, and standards of tort law. Thus we test the plaintiff's negligence claim against the established concepts of duty, breach, proximate cause, and damage or injury.
There is a duty if the court says there is a duty; the law, like the Constitution, is what we make it. Duty is only a word with which we state our conclusion that there is or is not to be liability; it necessarily begs the essential question. When we find a duty, breach and damage, everything has been said. The word serves a useful purpose in directing attention to the obligation to be imposed upon the defendant, rather than the causal sequence of events; beyond that it serves none. In the decision whether or not there is a duty, many factors interplay: the hand of history, our ideas of morals and justice, the convenience of administration of the rule, and our social ideas as to where the loss should fall. In the end the court will decide whether there is a duty on the basis of the mores of the community, "always keeping in mind the fact that we endeavor to make a rule in each case that *435 will be practical and in keeping with the general understanding of mankind."
(Footnotes omitted.) W. Prosser, Palsgraf Revisited, 52 Mich. L. Rev. 1, 15 (1953). See Green, The Duty Problem in Negligence Cases, 28 Colum. L. Rev. 1014 (1928), and 29 Colum. L. Rev. 255 (1929); Symmons, The Duty of Care in Negligence: Recently Expressed Policy Elements, 34 Modern L. Rev. 394 (1971).
Essentially we are balancing the interest of the injured party to compensation against the view that a negligent act should have some end to its legal consequences.
[2, 3] Balancing those interests and subject to the limitations hereafter set forth, we conclude that the plaintiff who suffers mental distress has a cause of action; that is to say, the defendant has a duty to avoid the negligent infliction of mental distress. It is not necessary that there be any physical impact or the threat of an immediate physical invasion of the plaintiff's personal security. Our experience tells us that mental distress is a fact of life. With adequate limitations, the courts can administer the adjudication of this tort just as it does the complex intricacies of products liability and medical malpractice.
What are the confines of the defendant's liability? The very concept of negligence provides the primary boundaries.
Negligence ... is conduct which falls below the standard established by law for the protection of others against unreasonable risk. It necessarily involves a foreseeable risk, a threatened danger of injury, and conduct unreasonable in proportion to the danger. If the defendant could not reasonably foresee any injury as the result of his act, or if his conduct was reasonable in the light of what he could anticipate, there is no negligence, and no liability.
(Footnote omitted.) W. Prosser, Handbook of the Law of Torts § 43, at 250 (4th ed. 1971). See Campbell, Duty, Fault and Legal Cause, 1938 Wis. L. Rev. 402.
[A] further limitation on the right of recovery, as in all negligence cases, is that the defendant's obligation to refrain from particular conduct is owed only to those who are foreseeably endangered by the conduct and only with respect to those risks or hazards whose likelihood made the conduct unreasonably dangerous.
Rodrigues v. State, 52 Hawaii 156, 174, 472 P.2d 509 (1970).
A further restriction on the issue of liability is the requirement that the mental and emotional suffering, to be compensable, must be manifested by objective symptomatology. Admittedly there is some artificiality in drawing this line, but we do so in view of the facts of this case.
Inherent in the formula is the principle that the plaintiff's mental distress must be the reaction of a normally constituted person, absent defendant's knowledge of some peculiar characteristic or condition of plaintiff. In other words, was plaintiff's reaction that of a reasonable man? Rodrigues v. State, supra. This principle goes to the standard of liability, not the extent of recovery once liability is established. Comment, Negligence and the Infliction of Emotional Harm: A Reappraisal of the Nervous Shock Cases, 35 U. Chi. L. Rev. 512, 519 (1968).
Fear, fright, or distress for the peril of another poses a troublesome problem, yet provides another safeguard against boundless liability. We decline to draw an absolute boundary around the class of persons whose peril may stimulate the mental distress. This usually will be a jury question bearing on the reasonable reaction to the event unless the court can conclude as a matter of law that the reaction was unreasonable. See Leong v. Takasaki, 55 Hawaii 398, 520 P.2d 758 (1974).
Turning to facts in this case, it is apparent that the defendant had a duty not to drive her automobile into the plaintiff's house. What was the foreseeable risk of that conduct? What was the threatened danger? Who would be foreseeably endangered by defendant's conduct? Was the *437 plaintiff's reaction that of a reasonable person, normally constituted? These are questions of fact for the jury to resolve.
The judgment is reversed and remanded for a new trial.


16-144-145 Requirements for frozen dessert mix processing, handling, transportation and pasteurization.
16-144-146 How may frozen dessert mix be transported without requiring repasteurization?
16-144-147 Can frozen dessert mix be transported in milk tank trucks or milk cans?
16-144-148 What temperature must frozen dessert mix be held at?
16-144-149 How long may frozen dessert mix be held after pasteurization?
16-144-150 What ingredients must be added to the mix before final pasteurization?
16-144-151 What ingredients may be added after final pasteurization or at the freezer?
16-144-001 Promulgation and purpose. [Statutory Authority: RCW 15.36.021 and 69.04.398(3). WSR 95-16-062, § 16-144-001, filed 7/26/95, effective 8/26/95; Order 1069, Promulgation, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-020 Processing of ice cream. [Order 1069, Regulation 2, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-030 Processing of other desserts—Frozen and French custards—Labeling—Optional ingredients. [Order 1069, Regulation 3, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-040 Ice milk—Labeling—Optional ingredients. [Order 1069, Regulation 4, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-050 Nonfat frozen dairy desserts—Labeling—Optional ingredients. [Order 1069, Regulation 5, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-060 Dietetic or dietary frozen dairy desserts—Labeling—Optional ingredients. [Order 1069, Regulation 6, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-070 Fruit sherbets—Labeling—Optional ingredients. [Order 1069, Regulation 7, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-080 Water ices—Labeling—Optional ingredients. [Order 1069, Regulation 8, filed 9/20/67, effective 11/1/67.] Repealed by WSR 96-18-106, filed 9/4/96, effective 10/5/96. Statutory Authority: Chapters 15.32 and 15.36 RCW.
16-144-090 Frozen yogurt. [Statutory Authority: Chapters 15.32 and 15.36 RCW. WSR 90-14-076, § 16-144-090, filed 7/2/90, effective 8/2/90.] Repealed by WSR 99-24-039, filed 11/24/99, effective 12/25/99. Statutory Authority: RCW 15.36.020.
16-144-100 Frozen lowfat yogurt. [Statutory Authority: Chapters 15.32 and 15.36 RCW. WSR 90-14-076, § 16-144-100, filed 7/2/90, effective 8/2/90.] Repealed by WSR 99-24-039, filed 11/24/99, effective 12/25/99. Statutory Authority: RCW 15.36.020.
16-144-110 Frozen nonfat yogurt. [Statutory Authority: Chapters 15.32 and 15.36 RCW. WSR 90-14-076, § 16-144-110, filed 7/2/90, effective 8/2/90.] Repealed by WSR 99-24-039, filed 11/24/99, effective 12/25/99. Statutory Authority: RCW 15.36.020.
16-144-120 Soft serve frozen yogurt mix. [Statutory Authority: Chapters 15.32 and 15.36 RCW. WSR 90-14-076, § 16-144-120, filed 7/2/90, effective 8/2/90.] Repealed by WSR 99-24-039, filed 11/24/99, effective 12/25/99. Statutory Authority: RCW 15.36.020.
16-144-130 Soft serve frozen lowfat yogurt mix. [Statutory Authority: Chapters 15.32 and 15.36 RCW. WSR 90-14-076, § 16-144-130, filed 7/2/90, effective 8/2/90.] Repealed by WSR 99-24-039, filed 11/24/99, effective 12/25/99. Statutory Authority: RCW 15.36.020.
16-144-140 Soft serve frozen nonfat yogurt mix. [Statutory Authority: Chapters 15.32 and 15.36 RCW. WSR 90-14-076, § 16-144-140, filed 7/2/90, effective 8/2/90.] Repealed by WSR 99-24-039, filed 11/24/99, effective 12/25/99. Statutory Authority: RCW 15.36.020.
Can frozen dessert mix be transported in milk tank trucks or milk cans?
No. Transport of mix in milk trucks or milk cans is not allowed. The risk of post pasteurization contamination is too great without final pasteurization at the plant where the mix is frozen and packaged.
What temperature must frozen dessert mix be held at?
Forty-five degrees Fahrenheit or less at all times.
How long may frozen dessert mix be held after pasteurization?
(1) Frozen dessert mix containers approved under WAC 16-144-146 must bear a pull date which establishes the last day it may be used. This pull date must meet the requirements for pull dating of perishable packaged food under chapters 69.04 RCW and 16-142 WAC.
(2) Pasteurized frozen dessert mix may be held for up to seventy-two hours in storage tanks before it must be repasteurized.
What ingredients must be added to the mix before final pasteurization?
(1) All dairy products including milk solids, whey, nonfat dry milk, condensed milk, cream, skim milk, and other milk products.
(3) Reconstituted or recombined dry mixes including cocoa and cocoa products which are mixed with water or other liquids.
(6) Emulsifiers or stabilizers which do not meet one of the requirements under WAC 16-144-151.


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