Tuesday, September 19, 2017

South Dakota Attempts To Change Internet Sales Taxation – What Might Be The Impact On Small Businesses?


The South Dakota Supreme Court has given the South Dakota legislature and Governor what it wanted – a ruling that a recently enacted South Dakota law was unconstitutional.  Confused?  It is strange.  But South Dakota’s insatiable thirst for additional revenue led it to enact a law imposing sales tax on businesses that have no physical presence in the state.  That’s something that the U.S. Supreme Court first said 50 years ago that a state cannot do.  Accordingly, the South Dakota Supreme Court struck the law down as an unconstitutional violation of the Commerce Clause.   

So why did the South Dakota legislature deliberately enact a law that it knew was unconstitutional?  South Dakota is a state without a state income tax, and wants to grab sales tax from (primarily internet) sales to South Dakota residents by businesses without any physical presence in the state. They also enacted the law so that it would be challenged as unconstitutional in order to set up a case in hopes that the U.S. Supreme Court would review it and reverse its longstanding position on the issue.  However, if that happens or the Congress takes action to allow states to impose sales (and/or use) tax on businesses with no physical presence in the state, that would not be good news for small businesses, including home-based business and small agricultural businesses.  It would also raise serious questions about how strong the principle of federalism remains.

U.S. Supreme Court Precedent

In 1967, the U.S. Supreme Court determined that the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States” in holding that Illinois could not subject a mail order seller located in Missouri to use tax where the seller had no physical presence in Illinois.  National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967).  In holding the law unconstitutional, the Court reasoned that subjecting the seller’s interstate business to local “variations in rates of tax…and record-keeping requirements” would violate the purpose of the Commerce Clause “to ensure a national economy free from…unjustifiable local entanglements.” 

Twenty-five years later, the Court reaffirmed the limitations of the Commerce Clause on state regulatory authority in Quill Corporation v. North Dakota, 504, U.S. 298 (1992).  In Quill, the Court held that a mail order house with no physical presence in North Dakota was not subject to North Dakota use tax for “property purchased for storage, use, or consumption within the State.”  The Court followed closely its holding in National Bellas Hess, Inc. because doing so “encourage[d] settled expectations and …foster[ed] investment by businesses and individuals.”   As applied to internet sales, Quill (which predated the internet) does not exempt all internet sales from state sales taxes – just sales by sellers who don’t have a physical presence in a particular state.  National retailers have a presence in many states.

More recently, in 2015, the Court examined a Colorado “tattletale” law that required out-of-state sellers with no physical presence in the state “to notify…customers of their use tax liability and to report” sales information back to Colorado.  Direct Marketing Association v. Brohl, 135 S. Ct. 1124 (2013).  The trial court enjoined enforcement of the law on Commerce Clause grounds.  On appeal, the Tenth Circuit held that it couldn’t hear the challenge to the law because the Tax Injunction Act (28 U.S.C. §1341) divested it of jurisdiction and the matter belonged in state court and, ultimately, the U.S. Supreme Court.  The Tenth Circuit remanded the case for dismissal of the Commerce Clause claims and dissolution of the permanent injunction.  The U.S. Supreme Court reversed and remanded the decision of the Tenth Circuit on the jurisdiction issue and, on remand, the Tenth Circuit, invalidated the Colorado law on Commerce Clause grounds.  Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir. 2016). 

In the U.S. Supreme Court’s reversal and remand of the Tenth Circuit’s decision in Direct Marketing Association, Justice Kennedy wrote a concurring opinion that essentially invited the legal system to find an appropriate case that would allow the Court to reexamine the Quill and National Bellas Hess holdings.  Hence, the South Dakota legislation. 

South Dakota Legislation and Litigation

S.B. 106 was introduced in the 2016 legislative session of the South Dakota legislature.  It requires the collection of sales taxes from certain remote sellers – those with “gross revenue” from sales in South Dakota of over $100,000 per calendar year or with 200 or more “separate transactions” in the state within the same timeframe.  Interestingly, S.B. 106 authorized the state to bring a declaratory judgment action in circuit court against any person believed to be subject to the law.  The law also authorized a motion to dismiss or a motion for summary judgment in the court action, and provided that the filing of such an action “operates as an injunction during the pendency of the” suit that would bar South Dakota from enforcing the law. 

S.B. 106 was signed into law on March 22, 2016, and the state Department of Revenue soon thereafter began issuing notices to sellers that it thought were in violation of the law.  Several out-of-state sellers that received notices did not register for sale tax licenses as the law required.  Consequently, the state brought a declaratory judgment action against the sellers in circuit court, and sought a judicial declaration that the S.B. 106 requirements were valid and applied to the sellers.  The state also sought an order enjoining enforcement of S.B. 106 while the action was pending in court, and an injunction that required the sellers to register for licenses to collect and remit sales tax. 

The sellers tried to remove the case to federal court based on federal question jurisdiction, but the federal court rejected that approach and remanded the case to the South Dakota Supreme Court.  South Dakota v. Wayfair, Inc., 229 F. Supp. 3d 1026 (D. S.D. Jan. 17, 2017).  On remand, the South Dakota Supreme Court invalidated S.B. 106 on Commerce Clause based on the U.S. Supreme Court precedent referenced above.  State v. Wayfair, Inc., et al., No. 28160, 2017 S.D. LEXIS 111 (S.D. Sup. Ct. Sept. 13, 2017).  The state of South Dakota announced shortly after the South Dakota Supreme Court’s decision that it would file a petition for certiorari with the U.S. Supreme Court by mid-October.

Taxing Out-of-State Sellers

The Congress, in recent years, has made attempts to allow states to apply sales/use tax to out-of-state (primarily internet-based) sales.  In 2013, the Senate passed the Marketplace Fairness Act in an attempt to override the U.S. Supreme Court’s Quill decision.  The legislation went nowhere in the House.  The bill would have required that retail sellers identify and collect sales taxes for the thousands of jurisdictions in which their customers purchase products.  That would have been a nightmare for businesses, particularly smaller and home-based ones.   

In 2016, draft legislation (Online Sales Simplification Act of 2016) was released that again would have allowed states to subject out-of-state businesses with no physical presence in a state to sales and/or use taxes (sales and use taxes are often complementary).  See, e.g., South Dakota Codified Laws 10-46-2).  The bill was an improvement on the 2013 Marketplace Fairness Act because it based taxation on the rules that apply to the tax base of the seller’s home state.  Thus, the actual rate of tax would be required to be set by the seller’s home state.  But, it still mandates that states impose a tax in situations where they have chosen not to do so. 

The South Dakota development is just the most recent attempt to give states the power to tax out-of-state businesses that sell products in the non-home jurisdiction.  Apparently, South Dakota reasoned that if the Congress couldn’t get the job done, it would take the matter into its own hands in an attempt to generate more revenue.

What could be wrong with states taxing businesses that don’t have a physical presence in their state?  For starters, a law that requires a business that is located only in Kansas, for example, to collect and remit taxes to any other state is synonymous with regulation without representation.  The whole notion is incompatible with the principles of federalism that bar states from taxing (whether income, property or sales tax, for instance) non-resident individuals or businesses (with few, minor exceptions).  In addition, such taxes are not just a tax on the individuals in a particular state that buy products from an out-of-state seller.  Those out-of-state sellers would have to calculate, charge and remit the taxes on behalf of a political jurisdiction (state and local government) that they have no connection with.  In essence, a state that imposes such a taxing regime would be able to generate revenue from taxpayers who use none of the services provided by the taxing jurisdiction. 

Another problem with allowing states to tax out-of-state businesses with no physical presence in the state is where the line will ultimately be drawn.  If the Congress or the Supreme Court allows states to tax the sales of out-of-state businesses, they likely won’t stop there.  Will they then go after a portion of business income of the out-of-state business via income tax?  That seems plausible.  However, the Interstate Income Act of 1959 (15 U.S.C. §381-384), requires that a business have some sort of connection with a state before its income can be taxed (at least with respect to the solicitation of orders for tangible personal property).  The law was enacted to overturn the U.S. Supreme Court’s decision in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959).  However, the law may not apply to bar a state from taxing receipts, as opposed to income. 

From a practical standpoint, the burden of compliance and associated costs would fall disproportionately on small businesses.  In the United States, there are over 10,000 sales/use tax jurisdictions.  Tracking all of those various taxing schemes and staying current would be incredibly time consuming.  In addition, the accounting for the collection and remission of sales/use tax would be nightmarish.  All of this would fall disproportionately heavy upon smaller businesses and home-based internet businesses. 


It will be interesting to see if the U.S. Supreme Court decides to grant certiorari in the South Dakota case.  If so, will the Court distance itself from 50 years of jurisprudence on the Commerce Clause analysis at issue?  If so, what will the Congress do?  Many states are desperate for revenue and don’t seem able to control spending.  But, will the Constitution remain as a bar to states getting revenue from taxpayers that can’t vote the politicians out of office that enact the taxes?    These are all important questions.       

September 19, 2017 in Income Tax | Permalink | Comments (0)

Friday, September 15, 2017

Alternatives to Like-Kind Exchanges of Farmland


Farmers who sell farmland (or other real estate) have the option to defer gain under I.R.C. §1031.  Most farmers will reinvest sold farmland into other farmland or real estate.  But, with the talk in Washington, D.C. appearing to get serious about discussion among federal legislators and the Administration about limiting the scope and effect of tax-deferred exchanges, there will be interest in alternative strategies to avoid gain on the transfer of farming or ranching real estate that is commonly characterized by a low tax basis. 

What other options are available?  Possibilities include the Real Estate Investment Trust (REIT), the Umbrella Partnership REIT, and the Delaware Statutory Trust (DST).

REITs in General

REITs were initially authorized by the REIT Act title of the Cigar Excise Tax Extension Act of 1960.  Pub. L. 86-779, Sept. 14, 1960.  The purpose of a REIT is to provide a real estate investment structure similar to what mutual funds provide for investment in stocks.  A REIT allows investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other types of assets

A REIT is a company that owns, and usually operates, income-producing real estate.  Sometimes a REIT finances real estate.  The definition of a REIT contained in I.R.C. §856 illustrates that a REIT is any corporation, trust or association that essentially acts as an investment agent specializing in real estate and real estate mortgages.  Consequently, REITs own many types of commercial real estate as well as agricultural land.  In addition, some REITs engage in financing real estate.

Basic Tax Rules

A REIT must annually distribute at least 90 percent of its taxable income to shareholders in the form of dividends. I.R.C. §857(a)(1). Thus, a REIT is a strong income vehicle for its shareholders.  A REIT is also entitled to deduct dividends paid to shareholders.  As a result, a REIT often avoids incurring all or a part of its federal income tax liability.  In order to achieve the result of reducing or eliminating corporate income tax, a REIT must elect REIT tax treatment by filing Form 1120-REIT (and satisfying certain other requirements).  I.R.C. §856(c)(1);  Treas. Reg. §1.856-2(b).

The key characteristics of a REIT can be summarized as follows:

  • Be structured as a corporation, trust, or association;
  • Be managed by one or more directors or trustees;
  • Issue transferable shares or transferable certificates of interest;
  • Be taxable as a domestic corporation;
  • Not be a financial institution or a domestic corporation;
  • Have the shares or certificates owned by 100 persons or more (no attribution rules apply); R.C. §856(h). This rule does not apply in the REIT’s first tax year.  I.R.C. §856(h)(2).
  • Have 95 percent of its gross income derived from dividends, interest and property income; R.C. §856(c)(2).
  • Pay dividends of at least 90 percent of the REIT’s taxable income (excluding net capital gain);
  • Have no more than 50 percent of the shares held by five or fewer individuals during the last half of each tax year;
  • Have no more than 50 percent of the shares held by five or fewer individuals (attribution rules apply) during the last half of each taxable year;
  • Have at least 75 percent of its total assets invested in real estate, cash and cash items, and government securities;
  • Derive at least 75 percent of its gross income from “rents” from real property, “interest” from loans secured by real property or interests in real property, gain from the sale of investment real property, REIT dividends, income from “foreclosure” property,” “qualified temporary investment income,” and other specified sources;
  • Maintains the statutorily required records; and
  • Have no more than 25 percent of its assets invested in taxable REIT subsidiaries.

Timber gain is included under I.R.C. §631(a) as a category of statutorily recognized qualified real estate income of a REIT if the cutting is provided by a taxable REIT subsidiary, and also includes gain recognized under I.R.C. §631(b).  The otherwise applicable one-year holding period does not apply.  Also, for sales to a qualified organization for conservation purposes, the holding period is two years under I.R.C. §857(b)(6)(D), which provides a safe harbor from prohibited transaction treatment for certain timber property sales. 

REITs are potentially subject to tax at corporate rates on undistributed REIT taxable income, undistributed net capital gain, income from foreclosure property, the income “shortfall” in failing to meet the 75 percent or 95 percent tests, income from prohibited transactions and income from redetermined rents.  From taxable income is deducted an amount for dividends paid and specified other items.  Shareholders are taxed on REIT dividends received to the extent of the REIT’s earnings and profits.  In addition, REIT dividends of capital gain are taxable to the shareholders in the year received as long-term capital gain, regardless of holding period.  I.R.C. §857(b)(3)(B).


In General

An UPREIT is an “Umbrella Partnership REIT”.  In the UPREIT format, instead of the REIT owning property directly, all of the REIT’s assets are indirectly owned through an umbrella partnership (the “operating partnership”) of the REIT and the REIT directly owns only interests in the operating partnership (“Unit”). 


Typically, the REIT contributes cash to the operating partnership in exchange for Units and the real estate owners (farmers) contribute properties to the operating partnership in exchange for Units that are convertible into REIT shares at the option of the Unit-holder at a rate of one Unit per one REIT share.

Since the contributors are transferring their property to a partnership, these contributions are generally tax-free under I.R.C. §721 at the time of the contribution.  However, the contributors will recognize any built-in gain in the future upon exercising their right to convert their Units into REIT shares. 

If there is debt on the property contributed and the amount of debt allocated to the taxpayer decreases, gain may result from the transaction.  Usually the UPREIT will allocate the same amount of debt back to the taxpayer as was transferred into the UPREIT.

A “lockout” period is usually negotiated as part of the deal structure.  This lockout period prevents the UPREIT from selling the contributed property for a certain term.  Without this lockout period, the UPREIT could sell the property contributed which would result in the gain being recognized by the taxpayer under I.R.C. §704(c).  If the UPREIT sells the property during the lockout period, the UPREIT will usually provide an indemnity payment to the taxpayer.  The UPREIT is allowed to dispose of the property in a tax-free exchange.

The UPREIT provides diversification to the taxpayer by allowing a farmer to pool his farmland with the farmland of other farmers or other real estate investments.  Several public and private REITS have been formed over the last several years and the use of an UPREIT has allowed taxpayers with large farm real estate holdings to diversify their holdings and provide more liquidity without incurring an immediate tax liability.

Delaware Statutory Trusts (DST)

In Rev. Rul. 2004-86, I.R.B. 2004-33, the IRS allowed for the creation of a Delaware Statutory Trust to hold real estate.  These trusts are structured as “securities” which allows the taxpayer to purchase interests in the trusts, which holds title to property.  Investment in the real estate is shared amongst many investors.

The property sponsors, who are Trustees of the DSTs, are national real estate developers who purchase the property and structure it as a securities DST.  There is a written offering document that provides very detailed information on tenants/leases, area demographics, financial projections, etc.  The annualized income offered by the DST is usually in the 5-7% range depending on investment opportunities

There are drawbacks to the DST as follows:

  • The pre-packaged trust structure and property management make this is an extremely passive investment to the taxpayer.
  • The holding period for these DSTs are normally in the 2-10-year period, therefore, the taxpayer will need to “roll-over” their investment at a later time and this roll-over period will be out of their control.
  • Investment returns are usually capped at the 5-7% range. An individual taxpayer who reinvests into other farmland or real estate may be able to generate a greater return on their own.

The positives of a DST are as follows:

  • Exit strategies are good for the investor. When the transfer of ownership occurs, the banks are usually not involved.
  • Good diversification options during the 45-day identification period.
  • There can be offerings to 100 or more investors, with the minimum investment amounts in a more reasonable range of $100,000 to $250,000.
  • No need to set up individual single member limited liability companies. The DST itself shields investors from any liability.


When tax legislation moves through the Congress it will move quickly.  It’s not likely that tax-deferred exchanges will remain fully available, especially if full expensing of assets is allowed or expense method depreciation remains at its present high level.  If the tax-deferred exchange rules are modified with respect to real estate, then the REIT, UPREIT and DST will continue to gain in popularity.   

September 15, 2017 in Income Tax | Permalink | Comments (0)

Wednesday, September 13, 2017

New Partnership Audit Rules


Under the Balanced Budget Act of 2015 (BBA), P.L. 114-74, section 1101(a), 129 Stat. 584 (2015), as amended by P.L. 114-113, new partnership audit rules take effect for tax returns filed for tax years beginning on or after January 1, 2018 (although a taxpayer can elect to have the BBA provisions apply to any partnership return filed after the date of enactment, November 2, 2015).

The new rules, make it easier for the IRS to audit large partnerships by making a determination of taxes at the partnership level, ensuring that a partner's return is consistent with the partnership return.  They also allow for the designation of a partnership representative.  In essence, the rules allow the IRS to audit partnerships, make a tax adjustment in the year in which the audit is done, and have the general partner have the income flow through to the partners.

The IRS had been pushing for the change to a centralized partnership audit regime for some time.  In general, the new process will result in the assessment and collection of tax at the partnership level and could result in more partnership audits.

One reason the new rules matter and should be paid attention to is that they could require the modification/amendment of partnership operating agreements. 

Today’s post takes a brief look at the new partnership audit rules and their impact. 

What is Changing?

1982 rules.  The current partnership audit rules date back to 1982 and the Tax Equity and Fiscal Responsibility Act (TEFRA).  Under those rules, for partnerships with 10 or fewer partners, the IRS generally applies the audit procedures for individual taxpayers, auditing the partnership and each partner separately.  For partnerships with 11 to 100 partners, the IRS conducts a single administrative proceeding to resolve audit issues regarding partnership items that are more appropriately determined at the partnership level than at the partner level. Once the audit is completed and the resulting adjustments are determined, the IRS recalculates the tax liability of each partner in the partnership for the particular audit year. 

For partnerships with 100 or more partners that elect to be treated as Electing Large Partnerships (ELPs) for reporting and audit purposes, partnership adjustments generally flow through to the partners for the year in which the adjustment takes effect, rather than the year under audit.  As a result, the current-year partners’ share of current-year partnership items of income, gains, losses, deductions, or credits are adjusted to reflect partnership adjustments relating to a prior-year audit that take effect in the current year.  The adjustments generally do not affect prior-year returns of any partners (except in the case of changes to any partner’s distributive share).

BBA provision.  Under the BBA provision, the current TEFRA and ELP rules are repealed, and the partnership audit rules are streamlined into a single set of rules for auditing partnerships and their partners at the partnership level.  Similar to the current TEFRA rule excluding small partnerships, the BBA provision allows partnerships with 100 or fewer qualifying partners to opt out of the new rules, in which case the partnership and partners would be audited under the general rules applicable to individual taxpayers.

The new rules allow a partnership to pay a computed tax at the end of any partnership examination rather than a tax being assessed at the partnership level.  This tax will be assessed to the partnership in the year that the audit is completed (the adjustment year), rather than the year of the examination (the reviewed year).  The tax will be computed at the highest income tax rate applicable to corporations and individuals (currently the individual rate, at 39.6%). I.R.C. §6221(a).

The partnership is permitted to issue adjusted Schedules K-1 to the partners of the reviewed year.  The recomputed tax for the reviewed year is paid in the adjustment year.  The partners take the adjustment into account on their individual returns in the adjustment year (not the reviewed year).  I.R.C. §6226(b)(1).

In addition, rather than amending the partnership tax return, partnerships will have the option of initiating an adjustment for a reviewed year.  The adjustment could be taken into account at the partnership level or the partnership could issue adjusted information return to each partner of the reviewed year.

A “partnership representative” replaces the former “tax matters partner.”  The representative has more authority to act on the partnership’s behalf without involving the partners.  The “partnership representative,” a person (or entity) must have a “substantial presence” in the United States.  If it is an entity, the partnership must identify and appoint an individual to act on the entity’s behalf.  While the representative doesn’t have to be a partner of the partnership, they do have the sole authority to settle any disputes with the IRS and agree to a final adjustment.  The representative also can make the election to shift the tax liability to the partners, and extend the statute of limitations on assessment.   But, under the proposed regulations, the representative doesn’t have to communicate with the partners or get consent from the partners before the representative acts on behalf of the partnership.  Also, if the partnership does not have a representative designation in effect, the IRS can pick who the representative will be.

A “small partnership” can elect out of the new rules.  A “small partnership” is one that is required to furnish 100 or fewer Schedules K-1 for the year.  In addition, the partnership must have partners that are individuals, corporations or estates.  If a partnership fits within the definition and desires to be excluded from the BBA provisions, it must make an election on a timely filed return and include the name and identification number of each partner. If the election is made, the partnership will not be subject to the BBA audit provisions and the IRS will apply the audit procedures for individual taxpayers.   There are more specifics on the election in the regulations, but a drawback of the election might be that a small partnership electing out of the BBA audit provisions could be at a higher audit risk. IRS has seemingly indicated that this could be the case.

Proposed regulations.   Proposed regulations were issued in January to replace the 1982 unified audit rules and implement the new rules, but never were published in the Federal Register because of the regulatory freeze that the White House imposed.  They were reissued in June.  REG-136118-15. 

Needed Action?

So, what do partnerships need to do in light of the new audit rules?  One consideration might be to amend an existing partnership agreement to establish a procedure to be used when the IRS determines that the partnership has a deficiency and partners might be able to do something to reduce the tax burden.  I am thinking here of situations where individual partners might have information or could take steps might be helpful to the partnership in dealing with the IRS audit of the partnership and reducing the ultimate tax burden of an additional assessment.  Related to that, partnership agreements commonly include notice and consent procedures for various aspect of partnership business, so it may be beneficial to add in notice and consent language that specifically pertains to IRS audit matters under the new rules.  As a caveat, however, it’s not likely that a court would determine that the IRS is bound by such language.  But, the language might provide more clarity and guidance for the partnership and its partners.


The new audit rules that take effect on January 1, 2018, change the landscape for partnership audits.  In some respects, the audit process will be simpler and more streamlined.  In addition, the vast majority of farming and ranching partnerships will be able to elect out of the new rules.  But, the election must be affirmatively made, and the proposed regulations provide detail on making the election.  In any event, now is the time for partnership agreements to be amended where necessary to take into account the coming new rules. 

September 13, 2017 in Business Planning, Income Tax | Permalink | Comments (0)

Monday, September 11, 2017

Right-To-Farm Laws


Every state has enacted a right-to-farm law that is designed to protect existing agricultural operations by giving farmers and ranchers who meet the legal requirements a defense in nuisance suits that are brought against them. 

These laws have become more important in recent years because of increasing rural/urban land use conflicts.  Today’s post takes a look at right-to-farm laws – the type of farming operations they are designed to protect and how they work

What Is “Farming”?

The general idea of a particular state's right-to-farm law is that it is unfair for a person to move to an agricultural area knowing the conditions which might be present and then ask a court to declare a neighboring farm a nuisance.  Thus, the basic purpose of a right-to-farm law is to create a legal and economic climate in which farm operations can be continued.  Right-to-farm laws can be an important protection for agricultural operations, but, to be protected, an agricultural operation must satisfy the law's requirements.

To be granted the protection of a statute, the activity at issue must be a farming activity.  While the laws commonly apply to traditional farming activities, sometimes state provisions take a more expansive definition of “farming” to cover more than just row crop and livestock operations.  For example, the Washington statute applies to “forest practices” which has been held to not be limited to logging activity, but include the growing of trees.  Alpental Community Club, Inc. v. Seattle Gymnastics Society, 86 P.3d 784 (Wash Ct. App. 2004). Similarly, in Hood River County v. Mazzara, 89 P.3d 1195 (Or. Ct. App. 2004), the court held that state statutes protecting farms against nuisance actions barred a lawsuit against a farmer for noise from barking dogs because the court determined that the use of dogs to protect livestock constituted a farming practice.  Also, in Vicwood Meridian Partnership, et al. v. Skagit Sand and Gravel, 98 P. 3d 1277 (Wash. Ct. App. 2004), the court held that an indoor composting facility for a mushroom farm qualified as a “farm” under state right-to-farm law.  The compost was produced for use in growing mushrooms and the composting activity was held to be an agricultural activity.

Types of Statutes

Right-to-farm laws are of three basic types: (1) nuisance related; (2) restrictions on local regulations of agricultural operations; and (3) zoning related.  While these categories provide a method for identifying and discussing the major features of right-to-farm laws, any particular state's right-to-farm law may contain elements of each category.

The most common type of right-to-farm law is nuisance related.  This type of statute requires that an agricultural operation will be protected only if it has been in existence for a specified period of time (usually at least one year) before the change in the surrounding area that gives rise to a nuisance claim.  These types of statute essentially codify the “coming to the nuisance defense,” but do not protect agricultural operations which were a nuisance from the beginning or which are negligently or improperly run.  For example, if any state or federal permits are required to properly conduct the agricultural operation, they must be acquired as a prerequisite for protection under the statute.

A second type of right-to-farm statute is designed to prevent local and county governments from enacting regulations or ordinances that impose restrictions on normal agricultural practices.  This type of statute is usually contained in the state's agricultural districting law.  Under this type of a statute, agricultural operations are required to be located within a designated agricultural district in order to be protected from nuisance suits. However, agricultural activities, even though they may be located in an agricultural district, must be conducted in accordance with federal, state and local law or rules in order to take advantage of the statute's protections.  Some courts have held that state law pre-empts local governments from making siting decision for confined animal feeding operations.  See, e.g. Worth County Friends of Agriculture v. Worth County, 688 N.W.2d 257 (Iowa 2004); Adams v. State of Wisconsin Livestock Facilities String Review Bd., No. 2009AP608, 2012 Wisc. LEXIS 381 (Wisc. Sup. Ct. Jul. 11, 2012).

A third type of right-to-farm statute exempts (at least in part) agricultural uses from county zoning ordinances.  The major legal issue involving this type of statute is whether a particular activity is an agricultural use or a commercial activity.  In general, “agricultural use” is defined broadly.  For example, the Illinois Court of Appeals has interpreted the Illinois statute such that the use of seven acres to board 19 show horses constitutes an agricultural use, Tuftee v. Kane Co., 76 Ill. App. 3d 128, 394 N.E.2d 896 (1979).  The same conclusion was reached with respect to a poultry hatchery on a three-acre tract, Lake County v. Cushman, 40 Ill. App. 3d 1045, 353 N.E.2d 399 (1976). and a 60-acre tract used for the temporary storage of sewage sludge for spreading on land as fertilizer. Soil Enrichment Materials Corp. v. Zoning Board of Appeals of Grundy County, 15 Ill. App. 3d 432, 305 N.E.2d 521 (1973).  The court has also held that the “rearing and raising of hogs, in any quantity, constitutes an agricultural purpose” under the statute. Knox County v. The Highlands, L.L.C., 302 Ill. App. 3d 342, 705 N.E.2d 128 (1998), aff’d, 723 N.E.2d 256 (Ill. 1999).  However, the same court has held that the right-to-farm statute does not prevent the application of county zoning laws to a mobile home placed on agricultural land. People v. Husler, 34 Ill. App. 3d 977, 342 N.E.2d 401 (1975). The Iowa statute, even though essentially identical to the Illinois statute, has not been interpreted as broadly.

In some states, agricultural activities receive nuisance-type protection through zoning laws wholly separate from the protections of a right-to-farm statute.  For instance, the Iowa Supreme Court, in a case predating the Iowa right-to-farm statute, held that the use of a four-acre tract as the site for two 40,000 capacity chick-growing houses was not “agricultural” but was “commercial” and not exempt from county zoning. Farmegg Products, Inc. v. Humboldt County, 190 N.W.2d 454 (Iowa 1971).   In 1995, the Iowa Supreme Court followed its earlier analysis, but held that the proposed construction of a hog confinement facility was associated with an existing farming operation and was exempt from county zoning. Thompson v. Hancock County, 539 N.W.2d 181 (Iowa 1995).  However, in 1996, the court overturned its previous decisions concerning the agricultural use exemption from county zoning.  Kuehl v. Cass County, 555 N.W.2d 686 (Iowa 1996).   The 1996 case, involved a hog confinement facility in contract production with a Pennsylvania company.  The court determined that the facility was exempt from county zoning even though the proposed facility was separate from any traditional farming operation carried on by the hog farmers.  As such, the case reflects an acknowledgement of the changes in present-day agricultural business structures.

What’s Not Protected

Subsequent changes.  While right-to-farm laws try to assure the continuation of farming operations, they do not protect subsequent changes in a farming operation that constitute a nuisance after local development occurs nearby.  For example, in Davis, et al. v. Taylor, et al., 132 P.3d 783 (Wash. Ct. App. 2006), the state’s right-to-farm law was held to be inapplicable where the increased noise caused by a farmer’s use of propane cannons and cherry guns to scare birds from a cherry orchard began after homeowners built their house and an adjoining residential neighborhood was well-established.  The orchard had previously been quiet and pastoral, and the farmer’s use of cherry guns and propane cannons was held to be a nuisance.  Similarly, in Trickett v. Ochs, 838 A.2d 66 (Vt. 2003), the Vermont right-to-farm statute was inapplicable where the nature of an apple farming operation changed after the plaintiffs moved into a nearby home.  However, some states may allow increased agricultural activity on property that is used for agricultural use without substantial interruption if the agricultural use began before the plaintiff began using the neighboring land.  See, e.g., Wis. Stat. §823.08.


Nuisances.  Right-to-farm laws don’t protect nuisances.  In other words, a farmer has the right to continue farming without being sued for being a nuisance (if the statutory requirements are satisfied), but if the farming operation constitutes a nuisance after conditions have changed around the operation, the statute may not protect the farming operation.  For instance, in Flansburgh v. Coffey, 370 N.W.2d 127 (Neb. 1985), the plaintiffs purchased a 1.67-acre home site from the defendant in 1980.  After the plaintiffs moved to the location, the defendant allowed his tenant to construct a 400-head hog facility within 100 feet of the plaintiff's land.  The plaintiffs filed a nuisance action, and the defendants raised the Nebraska right-to-farm law as a defense.  The court held that the right-to-farm law did not bar an action for a change in operations when a nuisance is present.  If a nuisance cannot be established, a right-to-farm law can operate to bar an action when the agricultural activity on land changes in nature.  For instance, in Dalzell, et al. v. Country View Family Farms, LLC, No. 1:09-cv-1567-WTL-MJD, 2012 U.S. Dist. LEXIS 130773 (S.D. Ind. Sept. 13, 2012), the land near the plaintiffs changed hands. The prior owner had conducted a row-crop operation on the property.  The new owner continued to raise row crops, but then got approval for a 2800-head sow confinement facility.  The defendant claimed the state (IN) right-to-farm law as a defense and sought summary judgment.  The court held that state law only allows nuisance claims when “significant change” occurs and that transition from row crops to a hog confinement facility did not meet the test because both are agricultural uses.  The court noted that an exception existed if the plaintiffs could prove that the hog confinement operation was being operated in a negligent manner which causes a nuisance, but the plaintiffs failed to prove that the alleged negligence was the proximate cause of the claimed nuisance.  Thus, the exception did not apply and the defendant’s motion for summary judgment was granted.  The court’s decision was affirmed on appeal. Dalzell, et al. v. Country View Family Farms, LLC, et al., No. 12-3339, 2013 U.S. App. LEXIS 13621 (7th Cir. Jul. 3, 2013).   Similarly, in Parker v. Obert’s Legacy Dairy, LLC, No. 26A05-1209-PL-450, 2013 Ind. App. LEXIS 203 (Ind. Ct. App. Apr. 30, 2013), the defendant had expanded an existing dairy operation from 100 cows to 760 cows by building a new milking parlor and free-stall barn on a tract adjacent to the farmstead where the plaintiff’s family had farmed since the early 1800s.  The plaintiff sued for nuisance and the defendant asserted the state (IN) right-to-farm statute as a defense.  The court determined that the statute barred the suit.  Importantly, the court determined that the expansion of the farm did not necessarily result in the loss of the statute’s protection.  The expanded farm remained covered under the same Confined Animal Feeding Operation permit as the original farm.  In addition, the conversion of a crop field to a dairy facility was protected by the statute because both uses simply involved different forms of agriculture.  The court noted that the statute protected one farmer from suit by another farmer for nuisance if the claim involves odor and loss of property value.  But, it is important to note that not all state statutes will protect a farmer from nuisance suits brought by other farmers. 


The increasing interactions between non-farmers farmers in rural areas makes understanding the importance and operation of right-to-farm laws important.  Do you know how your state provisions operate?

September 11, 2017 in Civil Liabilities | Permalink | Comments (0)

Thursday, September 7, 2017

Commodity Credit Corporation Loans and Elections


The Commodity Credit Corporation (CCC) is the USDA’s financing institution with programs administered by the Farm Service Agency (FSA).  Among other things, the CCC makes commodity and farm storage facility loans to farmers where the farmers’ crops are pledged as collateral. These loans are part of the price and income support system of the federal farm programs. 

How is the loan reported for tax purposes?  What happens when the loan is paid back?  What are the particular IRS rules that apply?  These questions are the focus of today’s post.

Tax Reporting Options

When a farmer seals grain (places it in storage and pledges it as collateral to secure a CCC loan), the farmer retains the ability to forfeit the grain in the future if the loan value exceeds commodity prices.  Because most CCC loans are nonrecourse, upon maturity, if the loan plus interest is not paid, the forfeiting of the commodity to the CCC as full payment for the loan effectively establishes a minimum price.  Why?  Because the farmer can forfeit the grain if prices drop below the loan value, and still retain the ability to market the grain later if the commodity price increases.  The forfeiting of the loan to the CCC as full payment is known as “redemption.”  Once redemption occurs, the farmer can then sell the grain, feed it to livestock or store it. 

How are CCC loan proceeds handled for tax purposes?  There are two possible methods.

Loan method.  By presumption, every farmer treats CCC loans as loans for tax purposes.  Thus, for a farmer on the cash method of accounting, there is no taxable income from the loan until the year in which the commodity is sold or the crop is forfeited to CCC in full satisfaction of the loan.  If grain is forfeited to the CCC in satisfaction of the loan, the taxpayer will receive a Form 1099-A from the USDA.  The amount of the loan forfeited is reported on line 5b of Schedule F with the same amount entered as taxable income on line 5c. 

Farmers using the loan method (and their tax preparers) should recognize that the loan method can create a high income with no cash flow in the year the grain is sold.  That’s because the loan amount was received in the prior year. 

Income method.  CCC loans may, by election (and without IRS permission), be treated as income in the year the proceeds of the loan are received. I.R.C. §77.  The election can be made at any time (I.R.C. §77(a)), but the IRS has ruled that, if a farmer elects to treat CCC loans as income, it applies to all loans originating that year.  Priv. Ltr. Rul. 8819004 (Jan. 22, 1988).  Actually, the CCC loan is not income.  Rather, the amount reported as income is the cash proceeds of the CCC loan which then serves as the grain’s income tax basis.  I.R.C. §1016(a)(8).  The amount of the income is entered on line 5a of Schedule F.  The election constitutes an adoption of an accounting method and is binding for future years.  Treas. Reg. §1.77-1.  An election statement reporting the details of the loan must be attached to the farmer’s return for the year the election is made.  See IRS Pub. 225 and the Instructions to Schedule F.  Also, the election to treat CCC loans as income applies to all commodities for that taxpayer.  Treas. Reg. § 1.77-1. 

In addition, a taxpayer reporting CCC loans as income can switch automatically to treating CCC loans as loans. Rev. Proc. 2002-9, I.R.B. 2002-3, Section 1.01(1).  Loans taken out previously continue to be treated as if the election to report loans as income was still in effect.  Under the IRS guidance, the change is made on a “cut-off” basis.  In other words, when a taxpayer changes CCC loan reporting methods, the new method applies to current year and subsequent loans.  That means that a farmer could be reporting on both methods until prior loans are satisfied.  In addition, even if a farmer had made the election to report the CCC loan as income within the past five years, the farmer is still eligible to switch to the loan method.  The IRS, in Rev. Proc. 2015-13, Appendix Sec. 2.01(2), waives that five-year prohibition. But, Form 3115 must be attached to the return noting that the change is being made under the automatic consent procedures of Rev. Proc. 2015-14.  Also, a copy of Form 3115 must be sent to the IRS in Washington, D.C.

Tax Planning Issues 

It is important to understand the tax ramifications of making or not making the election to treat CCC loans as income.  For example, assume a farmer is participating in a three-year farmer loan reserve program.  If a year of high prices occurs and all of the grain under the three-year loan reserve program is sold, the result is a spike in the taxpayer's income for that year.  That is because the grain is income in the year that it is disposed of if an election has not been made to treat the loan as income.  In order avoid that result, the farmer is permitted to treat the loans as income. This means the farmer will report the crop into income in the year it was placed under loan.  This has the favorable result of evening out year-to-year income by offsetting the income from the crop with the expenses of raising the crop.  When the crop is eventually sold, there will be taxable income only to the extent that the sale price exceeds the loan amount.

However, there is an advantage in not paying tax any sooner than required and, therefore, farmers (particularly those in higher brackets) may not want to treat CCC loans as income.  The preference may be to roll the income as far as possible without paying tax on it.  Thus, it is an important consideration for tax planning purposes to consider whether to treat CCC loans as income or as loans.  The point is that a choice is available.          

As a summary of the income tax treatment of various dispositions of CCC loans and commodities, consider the following:

  • If the loan is paid by forfeiting the commodity to the CCC, no income is reported if an election has been made to treat the loan as income upon receipt. The farmer’s basis in the grain offsets the loan liability.  But, there could be either a gain or loss on the farmer’s Schedule F if the farmer’s liability on the loan is more or less than the farmer’s basis in the grain.  However, if no election is made, the amount of the loan is reported as income upon forfeiture (redemption).
  • If the commodity is redeemed by paying off the loan with cash, the farmer has a basis in the commodity equal to the loan amount if an election has been made to treat the loan as income. If no election was made, the farmer has a zero basis in the commodity.
  • If the redeemed commodity is sold, the farmer has income (or loss) equal to the sale price of the commodity less the amount of the loan (which is the basis in the commodity), if an election to treat the loan as income was made. If not, the farmer has income equal to the selling price of the commodity.
  • If the redeemed commodity is fed to livestock, the farmer has a feed deduction equal to the amount of the loan (which is the basis in the feed), if an election has been made to treat the loan as income. If no election was made, the farmer does not get a feed deduction. 
  • Regardless of whether the CCC loan is treated as a loan or as income, interest that the farmer pays to the CCC on the loan is deductible in the year it is paid for a cash-basis farmer.

What if the CCC Loan Is Redeemed in the Same Year It Is Taken Out?

As noted above, normally the repayment of a CCC loan has no tax impact.  That’s the case regardless of whether or not the taxpayer has made an election to treat the loans as income.  But if a farmer has elected to treat CCC loans as income, the courts are divided as to the outcome if the loans are redeemed in the same year they are taken out.  The Fifth Circuit Court of Appeals has held that no income is realized from the loan on a crop redeemed in the same year. Thompson v. Comm’r, 322 F.2d 122 (5th Cir. 1963), aff'g and rev'g, 38 T.C. 153 (1962).  On the other hand, the Ninth Circuit Court of Appeals has taken the position that the loan triggers income even though it is redeemed in the same year. United States v. Isaak, 400 F.2d 869 (9th Cir. 1968).

What About Market Gains on CCC Loans?

Similar rules to those discussed above apply to market gains triggered under the CCC nonrecourse marketing assistance loan program.  The amount that a farmer has to repay for a loan that is secured by an eligible commodity is tied to the lower of the loan rate or the world market price for the commodity on the loan repayment date.  If repayment occurs when the world price is lower than the loan rate, the farmer has “market gain” on the difference.  For repayment in cash, the gain is reported on a CCC-1099-G.  But, if a CCC certificate is used to repay the loan, there is no Form 1099 reporting.  In addition, the farmer’s tax treatment of the market gain is tied to how the farmer treats CCC loans for tax purposes.  For farmers that treat CCC loans as loans, the market gain is reported on line 4a of Schedule F and taxable income is reported on line 4b.  If the farmer made an election treat CCC loans as income, the market gain is not taxable income.  Instead, it reduces the basis in the commodity and defers income until the sale of the grain occurs. 


CCC loans are another illustration of how agricultural tax is different from tax for non-farmers.  It’s a unique aspect of tax law that is particular to farmers.  This is another area of the law that makes having a practitioner that specializes in ag tax of great value.

September 7, 2017 in Income Tax | Permalink | Comments (0)

Tuesday, September 5, 2017

Department of Labor Overtime Rules Struck Down – What’s the Impact on Ag?


The Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. §§201, et seq.) as originally enacted, was intended to alleviate some of the more harmful effects of the Great Depression.  In particular, the Act was intended to raise the wages and shorten the working hours of the nation's workers.  Since 1938, the FLSA has been amended frequently and extensively.  While the FLSA is very complex, not all of it is pertinent to agriculture and agricultural processing.

One aspect of the FLSA that does apply to agriculture are the wage requirements of the law, both in terms of the minimum wage that must be paid to ag employment and overtime wages.  With respect to overtime wages, the Department of Labor (DOL) proposed a significant expansion of overtime eligibility effective December 1, 2016.  A court enjoined nationwide enforcement of the expanded rules before they took effect, and just recently the court invalidated the rules.

As a result of the DOL rules being invalidated, what is the future of the DOL’s attempt to increase compensation to covered workers?  What’s the impact on agricultural businesses and their employees?

Wage Requirements 

Minimum wage.  The FLSA requires that agricultural employers who use 500 “man-days” or more of “agricultural labor” in any calendar quarter of a particular year must pay the agricultural minimum wage to certain agricultural employees in the following calendar year.  Man-days are those days during which an employee performs any agricultural labor for not less than one hour.  The man-days of all agricultural employees count in the 500 man-days test, except those generated by members of an incorporated employer's immediate family.  29 U.S.C. § 203(e)(3).  Five hundred man-days is roughly equivalent to seven workers working five and one-half days per week for thirteen weeks (5.5 x 7 x 13 = 501 man-days). Under the FLSA, “agriculture” is defined to include “among other things (1) the cultivation and tillage of the soil, dairying, the production, cultivation, growing and harvesting of any agricultural or horticultural commodities; (2) the raising of livestock, bees, fur-bearing animals, or poultry; and (3) any practices (including any forestry or lumbering operations) performed by a farmer or on a farm as an incident to or in conjunction with such farming operations, including preparation for market, delivery to storage or to market or to carriers for transportation to market.”  29 U.S.C. § 203(f). For related entities, where not all of the entities involve an agricultural trade or business, the question is whether the business operations are so intertwined that they constitute a single agricultural enterprise exempt from the overtime rules.  See, e.g., Ares v. Manuel Diaz Farms, Inc., 318 F.3d 1054 (11th Cir. 2003).

The minimum wage must be paid to all agricultural employees except: (1) members of the employer's immediate family, unless the farm is incorporated; (2) local hand-harvest, piece-rate workers who come to the farm from their permanent residences each day, but only if such workers were employed less than 13 weeks in agriculture in the preceding year; (3) children, age 16 and under, whose parents are migrant workers, and who are employed as hand-harvest piece-rate workers on the same farm as their parents, provided that they receive the same piece-rate as other workers; and (4) employees engaged in range production of livestock. 29 U.S.C. § 213(a)(6).  A higher monthly wage rate applies to a “ranch hand” who does not work in a remote location and works regular hours.  See, e.g., Mencia v. Allred, 808 F.3d 463 (10th Cir. 2015).  Where the agricultural  minimum  wage  must  be  paid  to   piece-rate employees, the rate of pay for piece-rate work must be sufficient to allow a worker reasonably to generate that rate of hourly income. When the minimum wage must be paid, the FLSA allows the employer to include, as part of the compensation paid, the reasonable cost of meals, housing and other perquisites actually provided, if they are customarily furnished by the employer to the employees. Also, the costs of employee travel, visa cost and immigration costs that are incurred for the employer’s benefit cannot be shifted to the employee if that would result in the employee’s net gain from the employment being less than the FLSA minimum wage.  See, e.g., Arriaga v. Florida Pacific Farms, L.L.C., 305 F.3d 1228 (11th Cir. 2002).

Overtime.  The FLSA requires payment of an enhanced rate of at least one and one-half times an employee’s regular rate for work over 40 hours in a week.  However, an exemption denies persons employed in agriculture the benefit of mandatory overtime payment. 29 U.S.C. § 213(b)(12). The agricultural exemption is broad, defining “agriculture” to include “farming in all its branches [including] the raising of livestock, bees, fur-bearing animals, or poultry,…and the production, cultivation, growing, and harvesting of...horticultural commodities and any practices performed by a farmer or on a farm as an incident to or in conjunction with farming operations.”  The 500 man-days test is irrelevant in this context. In addition, there are specific FLSA hour exemptions for certain employment that is not within the FLSA definition of agriculture.

Thus, an agricultural worker is not entitled to be paid overtime wages, but they must be paid for hours that they work.  There are also certain workers that are exempt from being paid for hours worked that exceed 40 hours in a week.  Included in this category are those “executive” workers whose primary duties are supervisory and the worker supervises 2 or more employees.  Also included are workers that fall in the “administrative” category who provide non-manual work related to the management of the business.  Also exempt are those workers defined as “professional” whose job is education-based and requires advanced knowledge.  Many larger farming and ranching operations have employees that will fit in at least one of these three categories.

DOL Proposal

For ag employees that are exempt from the overtime wage payment rate because they occupy an “executive” position, they must be paid a minimum amount of wages per week.  Until December 1, 2016, the minimum amount was $455/week ($23,660 annually).  Under the DOL proposal, however, the minimum weekly amount was to increase to $913 ($47,476 annually).  Thus, an exempt “executive” employee that is paid a weekly wage exceeding $913 is not entitled to be paid for any hours worked exceeding 40 in a week.  But, if the $913 weekly amount was not met, then the employee would generally be entitled to overtime pay for the hours exceeding 40 in a week.  Thus, the proposal would require farm businesses to track hours for those employees it historically has not tracked hours for – executive employees such as managers and those performing administrative tasks.  But, remember, if the employee is an agricultural worker performing agricultural work, the employee need not be paid for the hours in excess of 40 in a week at the overtime rate.  The proposal also imposes harsh penalties for noncompliance.

Nationwide injunction. Before the new rules went into effect, many states and private businesses sued to block them.  The various lawsuits were consolidated into a single case, and in November of 2016, the court issued a temporary nationwide injunction blocking enforcement of the overtime regulations.  Nevada v. United States Department of Labor, 218 F. Supp. 3d 520 (E.D. Tex. 2016). 

Summary judgment ruling.  On Aug. 31, 2017, the court entered summary judgment for the plaintiffs in the case thereby invalidating the regulations.  Nevada v. United States Department of Labor, No. 4:16-cv-731, 2017 U.S. Dist. LEXIS 140522 (E.D. Tex. Aug. 31, 2017).  In its ruling, the court focused on the congressional intent behind the overtime exemptions for “white-collar” workers as well as the authority of the DOL to define and implement those exemptions.  The court determined that the Congress clearly intended to exempt overtime wages for work that involved “bona fide executive, administrative, or professional capacity duties.”  Consequently, the DOL did not have regulatory authority to use a “salary-level test that will effectively eliminate the duties test” that the Congress clearly established.  The court also concluded that the DOL did not have any authority to categorically exclude workers who perform exempt duties based on salary level alone, which is what the court said that the DOL rules did.  The court noted that the rules more than doubled the required salary threshold and, as a result, “would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level.”  The court went on to state that the overtime rules make “overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.”  The court noted that his was contrary to the clear intent of the Congress and, as a result, the rules were invalid. 

The Future of the FLSA Overtime Rules

The DOL overtime rules were a product of the Obama Administration.  With the Trump Administration now in place, a question is raised as to what the future holds with respect to the overtime rules of the FLSA.  Will the DOL appeal the trial court’s ruling?  That’s doubtful in my view.  The current DOL Secretary has stated that the Obama Administration exceeded its FLSA authority in developing the (now invalidated) rules.  But, that doesn’t necessarily mean that the waters are calm on the issue.  While the court’s injunction order was being appealed, the Trump Administration’s DOL did defend the DOL’s authority to include a salary test in the overtime regulations.  They simply believed that the Obama Administration’s DOL had set the thresholds too high. 

In addition, the DOL put out a request for information (RFI) on July 21 noting that it would be opening a 60-day comment period on the white-collar exemptions. https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-15666.pdf  That comment period began on July 26 and continues through September 24.  One of the issues that the DOL solicited comment on was whether the present threshold of $23,660 (annually) needed changed, perhaps by indexing it to inflation.  The DOL was also asking comment on whether salary thresholds should be tied to the size of a business, and whether the salary threshold should be tied to where a business is located, and the type of industry the business is involved in.  In addition, the DOL sought input from commentators on whether the overtime rule had a negative impact on small businesses, and whether the sole focus of the overtime rules should be on job duties of an employee (the current approach) in lieu of a salary threshold.


The court’s ruling invalidating the overtime rules is an important victory for many agricultural (and other) businesses.  It alleviates an increased burden to maintain records for employees in executive positions (e.g., managers and administrators), and the associated penalties for non-compliance.  However, the future of the FLSA overtime rules is not clear at the present time.  It remains to be seen the course that the Trump Administration’s DOL and, perhaps, the Congress, will take.

This issue and many other key issues in agricultural law and taxation are addressed in my treatise in my textbook on agricultural law, Principles of Agricultural Law, just out with its 41st Release.  You can find out more information about the book here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

September 5, 2017 in Regulatory Law | Permalink | Comments (0)

Friday, September 1, 2017

Selling Collateralized Ag Products – The “Farm Products” Rule


When a farmer sells farm products such as crops and livestock in the normal course of the farming business, those products often are also serving as collateral for a lender’s security interest.  So what are the rights of the buyer in that instance?  Does the buyer take the goods subject to a pre-existing security interest created by the farmer-seller?  That’s an important question for both farmer-sellers and buyers of farm products to know the answer to.  Fortunately, there is a special rule that governs in such situations – the farm products rule.

The Farm Products Rule

Original rule.  There is a long history behind the farm products rule.  Prior to a change in the law that was contained in the 1985 Farm Bill, the majority rule was that a buyer in the ordinary course of business (BIOC) from a seller engaged in farming operations did not take free of a perfected security interest unless evidence existed of a course of past dealing between the secured party and the debtor from which it could be concluded that the secured party gave authority to the debtor to sell the collateral. UCC § 9-307(1).  Thus, a farmer's sale of secured farm products did not cut off the creditor's right to follow farm products into the hands of buyers, such as grain elevators.  This meant that when a farmer failed to settle with secured parties, buyers of farm products sometimes had to pay twice unless the buyer could show that the secured party gave the debtor authority to sell the collateral

Under the farm products rule, farm products were not considered “inventory” to a farmer.  Instead, “farm products” were defined as crops, livestock (including, apparently, fowl) or supplies used or produced in farming operations and products of crops or livestock in their unmanufactured states if they were in the possession of a debtor engaged in the raising, fattening, or grazing of livestock or other farming operations.  The holder of the perfected security interest could recover farm products subject to the interest from a bona fide purchaser purchasing watermelons from a roadside stand, steers in carload lots, or a load of corn, if the purchase was from a seller engaged in farming operations.  However, crops, livestock, or the products of crops or livestock if in the possession of one not engaged in farming cease to be farm products and are inventory.  Similarly, if farm products pass to one engaged in marketing for sale or a manufacturer or processor, they become inventory.

As can be surmised, the farm products rule was highly protective of secured parties.  Purchasers of farm products had to be cautious in all transactions and were given strong incentive to always check the record for filed financing statements, and to have checks made payable jointly to the seller and the lender.  However, creditors secured by farm products still needed to have a properly perfected security interest in the crops or livestock and include a specific provision in the security agreement specifying whether the debtor could sell the collateral.  If sales were allowed, the lender needed to state clearly how payment was to be made, whether checks were to be sent directly to the lender, whether the debtor and lender were to be joint payees, or, whether a specified percentage of the proceeds was to be remitted directly to the lender.  In any event, the provisions on sale and payment of proceeds had to be consistently enforced.

From the mid-1970s until the mid-1980s, several states amended the UCC farm products rule to allow, in various circumstances, purchasers of farm products from a person engaged in farming operations to take free of a perfected security interest.  By the end of 1985, about 40% of the states had modified the general rule discussed above. 

New rule.  Effective December 23, 1986, the 1985 Farm Bill “federalized” the states' farm product rules.  This gave the states two options - adopt a prescribed central filing system or follow an “actual notice” rule.  Thus, under the federal rule, if a BIOC buys a farm product that has been “produced in a state” from a seller engaged in farming, the BIOC takes the farm product free of any security interest created by the seller unless:

  • Within one year before the sale of the farm products, the buyer has received written notice of the security interest from the secured party (the direct notice exception);
  • The buyer has failed to pay for the farm products; or
  • In states which have established a central filing system (all states now have adopted central filing), the buyer has received notice from the Secretary of State of an effective filing of a financing statement (EFS) or notice of the security interest in the farm products and has not obtained a waiver or release of the security interest from the secured party (the central filing exception).

To comply with the direct notice exception, a secured creditor had to send the farm products purchaser a written notice listing (1) the secured creditor’s name and address; (2) the debtor’s name and address; (3) the debtor’s social security number or taxpayer identification number; (4) a description of the farm products covered by the security interest and a description of the property; and (5) any payment obligations conditioning the release of the security interest.  The description of the farm products had to include the amount of the farm products subject to the security interest, the crop year, and the counties in which the farm products are located or produced.

Under central filing, the secured creditor must file a financing statement containing the same information as required in the written notice under the direct notice exception, except the secured creditor need not include crop year or payment obligation information.  Also, notwithstanding errors contained in the financing statement, a financing statement in a central filing state remains effective so long as the errors “are not seriously misleading.”  However, the general rule is that there is no “substantial compliance” rule with respect to the direct notice exception.  A secured creditor must comply strictly with the requirements of the direct notice exception.  See, e.g., State Bank of Cherry v. CGB Enterprises, Inc., 984 N.E.2d 449 (Ill. 2013), aff’g., 964 N.E.2d 604 (Ill. Ct. App. 2012).  However, the Kansas Supreme Court has applied a substantial compliance rule to the direct notice exception.  First National Bank & Trust v. Miami County Cooperative Assoc., 257 Kan. 989, 897 P.2d 144 (1995).

Key question.  Under the farm products rule, a question arises as to whether a buyer in a direct notice state that buys farm products that were produced in a central filing state is subject to a filing in an EFS central notice state.  7 U.S.C. §1631 says the answer to that question is “yes” but does not define what “produced in” means.  Is the phrase restricted in meaning only to production activities or does it also include marketing of the farm products?  One court has held that “produced in” means “the location where farm products are furnished or made available for commerce.”  The court believed that “such an interpretation allowed lenders to discern where they must file notice of their security interests and ensures a practical means for buyers to discover otherwise unknown security interests in farm products.”  Great Plains National Bank v. Mount, 280 P.3d 670 (Colo. Ct. App. 2012). 

2002 Farm Bill

The 2002 Farm Bill made several changes in the federal farm products rule.  Under the legislation, a financing statement is effective if it is signed, authorized or otherwise authenticated by the debtor.  A financing statement securing farm products needs to describe the farm products and specify each county or parish in which the farm products are produced or located.  Also, the required information on the security agreement must include a description of the farm products subject to the security interest created by the debtor, including the amount of such products where applicable, crop year, and the name of each county or parish in which the farm products are produced or located.           

Revised Article 9

Secured transactions under Article 9 of the Uniform Commercial Code (UCC) involve personal property and fixtures including loans on crops, livestock, inventories, consumer goods and accounts receivable.  Effective in 2001, Article 9 was revised such that “farm products” means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are:

  • Crops grown, growing or to be grown, including crops produced on trees, vines and bushes; and aquatic goods produced in aquacultural operations;
  • Livestock, born or unborn, including aquatic goods produced in aquacultural operations;
  • Supplies used or produced in a farming operation; or
  • Products of crops or livestock in their unmanufactured states.

“Farming operation” means raising, cultivating, propagating, fattening, grazing or any other farming, livestock or acquacultural operation.  As such, the revised definition of “farm products” eliminates the provision explicitly requiring the collateral to be in the possession of a person engaged in a farming operation.


In difficult financial times, understanding the rights of creditors of agricultural products is important.  The specific rules surrounding the sale of farm products are important to understand.

September 1, 2017 in Secured Transactions | Permalink | Comments (0)

Wednesday, August 30, 2017

Farmers Renting Equipment – Does It Trigger A Self-Employment Tax Liability?


Most farmers don’t like to pay self-employment tax, and utilize planning strategies to achieve that end.  Such a strategy might include entity structuring, tailoring lease arrangements to avoid involvement in the activity under the lease, and equipment rentals, just to name a few. 

But, what about those equipment rentals?  This can be a big issue for many farmers, including those that have recently retired.  Must self-employment tax be paid on the income from equipment rents?  The answer, as it is with many tax questions, depends on the facts of each situation.

That’s the focus of today’s post – self-employment tax on the rental of farm equipment.

The Basics

The statute.  In addition to income tax, a tax of 15.3 percent is imposed on the self-employment income of every individual.  Self-employment income is defined as “net earnings from self-employment.”  The term “net earnings from self-employment” is defined as gross income derived by an individual from a trade or business that the individual conducts. I.R.C. §1402.  For individuals, the 15.3 percent is a tax on net earnings up to a wage base (for 2017) of $127,200.  It’s technically not on 100 percent of net earnings up to that wage base for an individual, but 92.35 percent.  That’s because the self-employment tax is also a deductible expense.  In addition, there is a small part of the self-employment tax that continues to apply beyond the $127,200 level. 

In general, income derived from real estate rents (and personal property leased with real estate) is not subject to self-employment tax unless the arrangement involves an agreement between a landowner or tenant and another party providing for the production of an agricultural commodity and the landowner or tenant materially participates.  I.R.C. §§1402(a)(1) and 1402(a)(1)(A).  For rental situations not involving the production of agricultural commodities where the taxpayer materially participates, rental income is subject to self-employment tax only if the activity constitutes a trade or business “carried on by such individual.”  See, e.g., Rudman v. Comr., 118 T.C. 354 (2002).  Similarly, an individual rendering services is subject to self-employment tax if the activity rises to the level of a trade or business.

This all means that real estate rentals are not subject to self-employment tax, nor is rental income from a lease of personal property (such as equipment) that is tied together with a lease of real estate.  But, when personal property is leased by itself, if it constitutes a business activity the rental income would be subject to self-employment tax.  See, e.g., Stevenson v. Comr., T.C. Memo. 1989-357. 

The reporting.  Income from a rental activity is normally passive and is reported on Schedule E (Form 1040).  From there it flows to page one of Form 1040 and is reported on the line for “Other Income.”  Self-employment tax would not apply (but the additional 3.8 percent “passive tax” of I.R.C. §1411 could apply if the taxpayer has income over the applicable threshold).  However, as noted at the top of Schedule E, Part 1, taxpayer are directed to report the income and expense from a personal property rental activity on Schedule C (or Schedule C-EZ).  Schedule C is for reporting of business income, and the IRS instructions for completing Schedule E (at page E-4) say that Schedule C (or Schedule C-EZ) is to be used to report the income and expense associated with the rental of personal property if the taxpayer is in the business of renting personal property. 

Trade or Business

Clearly, the key to the property reporting of personal property rental income is whether the taxpayer is engaged in the trade or business of renting personal property.  The answer to that question, according to the U.S. Supreme Court, turns on the facts of each situation, with the key being whether the taxpayer’s activity is engaged in regularly and continuously with the intent to profit from the activity.  Comr. v. Groetzinger, 480 U.S. 23 (1987).  But, a one-time job of installing windows over a month’s time wasn’t regular or continuous enough to be a trade or business, according to the Tax Court.  Batok v. Comr., T.C. Memo. 1992-727. 

As noted above, for a personal property rental activity that doesn’t amount to a trade or business, the income should be reported on the “Other Income” line of page 1 of the Form 1040 (presently line 21).  Associated rental deductions are reported on the line for total deductions which is near the bottom of page 1 of the Form 1040.  A notation of “PPR” is to be entered on the dotted line next to the amount, indicating that the amount is for personal property rentals.     

Planning Strategy

The income from the leasing of personal property such as machinery and equipment will trigger self-employment tax liability if the leasing activity rises to the level of a trade or business.  But, by tying the rental of personal property to land, I.R.C. §1402(a)(1) causes the rental income to not be subject to self-employment tax.  Alternatively, a personal property rental activity could be conducted via an S corporation or limited partnership.  If that is done, the income from the rental activity would flow through to the owner without self-employment tax.  However, with an S corporation, reasonable compensation would need to be paid.  For a limited partnership that conducts such an activity, any personal services that a general partner provides would generate self-employment income. 


Many farmers lease farm equipment, particularly if they have retired from farming and still own the equipment.  In that situation, it is often desirable not to incur self-employment tax on the equipment rental.  To achieve that result, the rental activity should not rise to the level of a trade or business, or the equipment should be leased with real estate.  Alternatively, the leasing should be done through an S corporation or a partnership. 

August 30, 2017 in Business Planning, Income Tax | Permalink | Comments (0)

Monday, August 28, 2017

Forming a Farming/Ranching Corporation Tax-Free


Incorporation of an existing farming or ranching operation can be accomplished tax-free.  A tax-free incorporation is usually desirable because farm and ranch property typically has a fair market value substantially in excess of basis.  But, how is it done?  What are the basics?  What if liabilities are transferred to a corporation when it is formed?  Are there special rules concerning debt assumption?  What’s the IRS assignment of income theory all about? 

Tax-free incorporation – that’s our topic today.

Basic Principles

Three conditions – no election needed.  For property conveyed to the corporation, neither gain nor loss is recognized to the transferor(s) on the exchange (I.R.C. §357(a)) if three conditions are met.  I.R.C. §351.  First, the transfer must be solely in exchange for corporate stock.  Second, the transferor (or transferors as a group) must be “in control” of the corporation immediately after the exchange.  This requires that the transferors of property end up with at least 80 percent of the combined voting power of all classes of voting stock and at least 80 percent of the total number of shares of all classes of stock.  Third, the transfer must be for a “business purpose.”

Because of the 80 percent control test, if it is desirable to have a tax-free incorporation, there can be no substantial stock gifting occurring simultaneously with, or near the time of, incorporation. Also, care should be taken to avoid shareholder agreements that require stock to be sold upon transfer of property to a corporation.  See, e.g., Priv. Ltr. Rul. 9405007 (Oct. 19, 1993).

Income tax basis and holding period.  The income tax basis of stock received by the transferors is the basis of the property transferred to the corporation, less boot received, plus gain recognized, if any.  I.R.C. §362.  If the corporation takes over a liability of the transferor, such as a mortgage, the amount of the liability reduces the basis of the stock or securities received.  I.R.C. §358.  The basis reduction can’t go below zero in the event the corporation assumes liabilities that exceed the basis of the assets transferred to the corporation.  See, e.g., Wiebusch v. Comr., 59 T.C. 777 (1973), aff’d., 487 F.2d 515 (1973). 

But, there is no basis reduction for a liability that generates a deduction when it is paid.  Debt securities are automatically treated as boot on the transfer unless they are issued in a separate transaction for cash.  The holding period of the transferor’s stock is pegged to the holding period of the assets that were transferred to the corporation.  I.R.C. §1223(1).  However, inventory and other non-capital assets do not qualify for “tacking-on” of the holding period.  Thus, to get long-term gain treatment when the stock that is received on incorporation is sold, the stock seller will have to have held the stock for at least 12 months.  See Rev. Rul. 62-140, 1962-2 C.B. 181.

The corporation's income tax basis for property received in the exchange is the transferor's basis plus the amount of gain, if any, recognized to the transferor.  Also, the holding period of the transferred property carries over from the transferor to the corporation.  I.R.C. §1223(2).  Depreciable property received by the corporation at the time of incorporation is not eligible for “fast” methods of depreciation (for non-recovery property), expense method depreciation or a shift in ACRS or MACRS status.  In other words, ACRS or MACRS property continues to be ACRS or MACRS property.

Transferring liabilities.  If the sum of the liabilities assumed or taken subject to by the corporation exceeds the aggregate basis of assets transferred, a taxable gain is incurred as to the excess. I.R.C. §357(c). The test is applied to each transferor individually, with the computation accomplished by aggregating the adjusted tax basis of all assets and measuring that result against all of the liabilities of that particular transferor.  The gain is capital gain if the asset is a capital asset or ordinary gain if the asset is not a capital asset.  I.R.C. §357(c)(1). 

But, some liabilities don’t count for purposes of the computation – specifically, those that give rise to a deduction when they are paid.  So, for example, accrued expenses of a transferor that is on the cash method of accounting would not be considered to be “liabilities” for purposes of the computation.  I.R.C. §357(c)(3).

Can taxable gain that would otherwise be incurred upon incorporating (when liabilities exceed basis) be avoided by giving the corporation a personal promissory note for the difference and claiming a basis in the note equivalent to the note's face value?  The IRS has said “no,” determining that this technique will not work because the note has a zero basis.  Rev. Rul. 68-629, 1968-2 C.B. 154.   The Tax Court agrees.  Alderman v. Comr., 55 T.C. 662 (1971); Christopher v. Comr., T.C. Memo. 1984-394.

However, an appellate court, in reversing the Tax Court in a different case eighteen years later, held that a shareholder's personal note, while having a zero basis in the shareholder's hands, had a basis equivalent to its face amount in the corporation's hands.  Lessinger v. United States, 872 F.2d 519 (2d Cir. 1989), rev'g, 85 T.C. 824 (1985).  The Tax Court was reversed again in a 1998 case. Peracchi v. Comm'r, 143 F.3d 487 (9th Cir. 1998), rev'g, T.C. Memo. 1996-191. In this case, the taxpayer contributed two parcels of real estate to the taxpayer's closely-held corporation.  The transferred properties were encumbered with liabilities that together exceeded the taxpayer's total basis of the properties by more than $500,000.  In order to avoid immediate gain recognition as to the amount of excess liabilities over basis, the taxpayer also executed a promissory note, promising to pay the corporation $1,060,000 over a term of ten years at eleven percent interest.  The taxpayer remained personally liable on the encumbrances even though the corporation took the properties subject to the debt.  The taxpayer did not make any payments on the note until after being audited, which was approximately three years after the note was executed.  The IRS argued that the note was not genuine indebtedness and should be treated as an enforceable gift.  In the alternative, the IRS argued that even if the note were genuine, its basis was zero because the taxpayer incurred no cost in issuing the note to the corporation.  As such, the IRS argued, the note did not increase the taxpayer's basis in the contributed property.

The court held that the taxpayer had a basis of $1,060,000 (face value) in the note.  As such, the aggregate liabilities of the property contributed to the corporation did not exceed aggregate basis, and no gain was triggered.  The court reasoned that the IRS's position ignored the possibility that the corporation could go bankrupt, an event that would suddenly make the note highly significant.  The court also noted that the taxpayer and the corporation were separated by the corporate form, which was significant in the matter of C corporate organization and reorganization. Contributing the note placed a million dollar “nut” within the corporate “shell,” according to the court, thereby exposing the taxpayer to the “nutcracker” of corporate creditors in the event the corporation went bankrupt.  Without the note, the court reasoned, no matter how deeply the corporation went into debt, creditors could not reach the taxpayer's personal assets.  With the note on the books, however, creditors could reach into the taxpayer's pocket by enforcing the note as an unliquidated asset of the corporation.  The court noted that, by increasing the taxpayer's personal exposure, the contribution of a valid, unconditional promissory note had substantial economic effect reflecting true economic investment in the enterprise.  The court also noted that, under the IRS's theory, if the corporation sold the note to a third party for its fair market value, the corporation would have a carryover basis of zero and would have to recognize $1,060,000 in phantom gain on the exchange even if the note did not appreciate in value at all.  The court reasoned that this simply could not be the correct result.  In addition, the court noted that the taxpayer was creditworthy and likely to have funds to pay the note.  The note bore a market rate of interest related to the taxpayer's credit worthiness and had a fixed term.  In addition, nothing suggested that the corporation could not borrow against the note to raise cash.  The court also pointed out that the note was fully transferable and enforceable by third parties.  The court also acknowledged that its assumptions would fall apart if the shareholder was not creditworthy, but the IRS stipulated that the shareholder's net worth far exceeded the value of the note. 

The court was careful to state that the court's rationale was limited to C corporations.  Thus, the opinion will not apply in the S corporation setting for shareholders attempting to create basis to permit loss passthrough.  Likewise, a partner in a partnership cannot create basis in a partnership interest by contributing a note.  Rev. Rul. 80-235, 1980-2 C.B. 229. 

            What if the transferor remains personally liable?  A similar technique designed to avoid gain recognition upon incorporation of a farming or ranching operation (where liabilities exceed basis) is for the transferors to remain personally liable on the debt assumed by the corporation, with no loan proceeds disbursed directly to the transferors. However, gain recognition is not avoided unless the corporation does not assume the indebtedness.  Seggerman Farms, Inc. v. Comm’r, 308 F.3d 803 (7th Cir. 2002), aff’g, T.C. Memo. 2001-99.  But, nonrecourse debts of a transferor, under I.R.C. §357(d), are presumed to be transferred to the corporation unless the transferor holds other assets subject to the debt that are not transferred to the corporation and the transferor remains subject to the debt.  The same rule applies to recourse liabilities. 

            What if gain is triggered?  If liabilities exceed basis, the gain is “phantom” income.  That’s because the taxpayer hasn’t generated any cash to pay the tax on the gain that is triggered by transferring assets to the corporation with less basis than debt.  In addition, for farm/ranch incorporations, the gain is likely to be ordinary in nature (determined as if the transferred assets were sold – I.R.C. §357(c)(1)).  The one favorable factor if gain is recognized upon incorporation is that the basis of the transferred assets is increased by the amount of the gain.  I.R.C. §358(a)(1(B)(ii)).  

Business purpose.  As noted above, one of the three requirements that must be satisfied to accomplish a tax-free incorporation is that the transfer must be for a business purpose.  If the corporate assumption of liabilities has as a purpose the avoidance of federal income tax or lacks a bona fide business purpose, the assumed liabilities are treated as boot paid to the transferor.  I.R.C. §357(b); 351(b).  If the liabilities are created shortly before incorporation and are then transferred to the corporation, the IRS will raise questions.  See, e.g., Weaver v. Comr., 32 T.C. 411 (1959); Thompson v. Campbell, 353 F.2d 787 (5th Cir. 1965); Harrison v. Comr., T.C. Memo. 1981-211.

Assignment of Income

In general, formation of a farm or ranch corporation in the regular course of business not involving substantial tax avoidance motives or a manifest desire to artificially shift income tax liability should not result in income recognition.  However, the IRS has several theories available to challenge transfers carried out in the presence of obvious tax avoidance motives or a manifest desire to shift income tax liability artificially.  See, e.g., I.R.C. §482.  For instance, the “assignment of income” doctrine may override an otherwise tax-free exchange and cause the proceeds from the sale of transferred assets to be taxed to the transferor.  See, e.g., Weinberg v. Comr., 44 T.C. 233 (1965); Slota v. Comr., T.C. Sum. Op. 2010-152.  The IRS utilization of this theory should be watched in situations where the transferor has, via incorporation, shifted income to the corporation but claimed associated deductions on the transferor’s personal return.  However, the theory does not apply to the transfer of cash method accounts receivable.  See, e.g., Hempt Bros., Inc. v. United States, 354 F. Supp. 1172 (M.D. Pa. 1973), aff’d, 490 F.2d 1172 (3d Cir. 1974); Rev. Rul. 80-198, 1980-2 C.B. 113. 

Distortion of Income

The IRS also has, under I.R.C. §482, broad powers to reallocate income, deductions, credits or allowances as necessary “in order to prevent the evasion of taxes or clearly to reflect...income.”  See, e.g., Rooney v. United States, 305 F.2d 681 (9th Cir. 1962).  However, if all of the farm income and expense that is incurred before incorporation stays with the transferor and is reported on the transferor’s return accordingly, an IRS challenge to a tax-free incorporation is not likely.  See, e.g., Heaton v. United States, 573 F. Supp. 12 (E.D. Wash. 1983).  One thing to avoid is the incurring of a substantial net operating loss shortly before incorporation.


A corporation can be formed tax-free.  But, certain requirements must be satisfied and the transferred assets must have more basis than liabilities.  In addition, stock should not be issued for basis, unless there is only one transferor or, for all transferors, the income tax basis of transferred assets bears a uniform relationship to the fair market value of the transferred property. 

Carefully following the rules can lead to a happy tax result.  Unfortunately, the opposite is also true. 

August 28, 2017 in Business Planning, Income Tax | Permalink | Comments (0)

Thursday, August 24, 2017

What Problems Does The Migratory Bird Treaty Act Pose For Farmers, Ranchers and Rural Landowners?


The Migratory Bird Treaty Act (MBTA) 16 U.S.C. § 703 et seq. (2008). protects migratory birds that are not necessarily endangered and, thereby, protected under the Endangered Species Act.  The MBTA is important to agricultural producers and rural landowners because it has been broadly interpreted such that routine daily activities can become subject to the MBTA and create criminal liability at the hands of the U.S. government.      

The Scope of the MBTA

What does “take” mean?  The MBTA makes it unlawful at any time, by any means or in any manner, to “take” any migratory bird.  “Take is defined to mean “pursue, hunt, shoot, wound, kill, trap, capture or collect any migratory bird. 16 U.S.C. §§ 703-712 (2008); 50 C.F.R. §10.12.  Practically all bird species in the United States are covered due to regulations developed by the U.S. Fish and Wildlife Service (FWS) that apply the MBTA to species that don’t even migrate internationally or even at all.  50 C.F.R. §10.13.   

The Act is not limited to covering only hunting, trapping and poaching activities, but extends to commercial activities that kill migratory birds absent an MBTA permit.  The Act prohibits taking or killing of migratory birds (including a nest or egg) at any time, by any means or in any manner.  That could include such conduct as operating oil and gas production facilities, aerogenerators, cell towers as well as commercial forestry and common agricultural activities.  16 U.S.C. §703. However, the courts are split on whether the MBTA applies strictly to truly migratory bird deaths that are not inadvertent (see, e.g., United States v. Citgo Petroleum Corporation, 801 F.3d 477 (5th Cir. 2015)) or deaths of a broader classification of birds that are killed only inadvertently. 

Type of crime.  Violation of the MBTA is a misdemeanor punishable by fine up to $500 and imprisonment up to six months. 16 U.S.C. § 707(a) (2008), as amended by 18 U.S.C. §§3559; 3571.  Anyone who knowingly takes a migratory bird and intends to, offers to, or actually sells or barters a migratory bird is guilty of a felony, with fines up to $2,000, jail up to two years, or both.

Strict liability?  The MBTA is a strict liability statute, and has been applied to impose liability on farmers who inadvertently poison migratory birds by use of pesticides.  While the MBTA is a strict liability statute, constitutional due process requirements must still be satisfied before liability can be imposed.  In other words, there still must be an affirmative act that causes the migratory bird deaths.  For example, in United States v. Apollo Energies, Inc., et al., 611 F.3d 679 (10th Cir. 2010), oil drilling operators were not liable for deaths of migratory birds under the MBTA to the extent that the operators did not have adequate notice or a reasonable belief that their conduct violated the MBTA.  Likewise, in United States v. Rollins, 706 F. Supp. 742 (D. Idaho 1989), a farmer was prosecuted for violating the MBTA when he used a mixture of granular pesticides on an alfalfa field. The chemicals poisoned a flock of geese and killed several of them.  The trial court held that even though the farmer had not applied the pesticide in a negligent manner and could not control the fact that the geese would land and eat the granules, liability under the MBTA was based on whether the farmer knew that the land was a known feeding area for geese.  The trial court concluded that “a reasonable person would have been placed on notice that alfalfa grown on Westlake Island in the Snake River would attract and be consumed by migratory birds.”  The trial court was reversed on appeal on the grounds that the MBTA was too vague to give the farmer adequate notice that his conduct would likely lead to the killing of the protected birds since the farmer's past experience with the pesticide and the geese was that it did not kill them.  But, in United States v. Van Fossan, 899 F.2d 636 (7th Cir. 1990), the court confirmed the notion that the MBTA is a strict liability statute and approved its application to a defendant who used pesticides to poison birds, even though the defendant did not know that his use of the pesticide would kill migratory birds protected under the Act.

“Baiting” of birds.  The MBTA also prohibits the taking of migratory game birds by the aid of “baiting”.  However, it is permissible to take migratory game birds, including waterfowl, on or over standing crops, flooded harvested croplands, grain crops that have been properly shocked on the field where grown, or grains found scattered solely as the result of normal agricultural planting or harvesting.  See 50 C.F.R. §§ 20.11(g); 20.21(i)(2008).  The FWS has promulgated regulations defining “normal agricultural planting” and “harvesting,” and in Falk v. United States Fish and Wildlife Service, 452 F.3d 951 (8th Cir. 2006), the court held that FWS determinations that harvesting corn after December 1 and aerial seeding of winter wheat in standing corn were not “normal planting” and that the landowners were barred from hunting next to the neighbors’ baited fields were a reasonable interpretation of the MBTA.

Some states also have statutes that prohibit the baiting of wildlife for hunting purposes unless the alleged baiting was the result of commonly accepted agricultural practices.  For instance, in State v. Hansen, 805 N.W.2d 915 (Minn. Ct. App. 2011), the defendant’s conviction for using bait to hunt deer was reversed.  The court held that the state statute violated due process because it was vague as applied to the defendant’s pumpkin patch operation.  The law did not distinguish between normally accepted agricultural practices and the unlawful baiting of deer.

In addition, the Act permits the taking of all migratory game birds, except waterfowl, on or over any lands where shelled, shucked, or unshucked corn, wheat or other grain, salt, or other feed has been distributed or scattered as the result of bona fide agricultural operations or procedures.  In United States v. Adams, 383 Fed. Appx. 481 (5th Cir. 2010), a farmer was convicted of violating the Act for hunting doves on a field that he had recently planted to wheat.  For purposes of the “baiting” provision of the Act, the trial court judge determined that intent was not an element of the offense for which the farmer was convicted and did not allow the farmer to introduce evidence concerning the procedures commonly used to plant winter wheat in northeast Louisiana.  On appeal, the Fifth Circuit Court of Appeals reversed the trial court, holding instead that the government was required to prove that the farmer’s intentions were not in good faith and that the farmer’s acts were merely a sham to attract migratory birds to hunt.  Accordingly, the court reversed the farmer’s conviction and rendered acquittal based on the court’s determination that the farmer was entitled to have the lower court consider the evidence of his good faith in growing the wheat, and because there was no evidence from which a jury could find that the farmer’s planting was not the result of a “bona fide agricultural operation or procedure.”  In another case, United States v. Andrus, 383 Fed. Appx. 481 (5th Cir. 2010), the court determined that the use of a stripper header to harvest milo was not a "normal agricultural practice" with the result that the defendant's sentence for taking migratory birds by aid of bait in violation of the MTBA was upheld.  The defendant's testimony that he could not reasonably have been expected to know that the field he was hunting in was baited because he was not a farmer was not credible.  The court noted that the defendant failed to inspect the field and that unharvested milo was clearly present near the defendant's duck blinds and decoys.

Migratory bird facilities.  The MBTA regulations specify that “no migratory bird preservation facility shall receive or have in custody any migratory game birds unless such birds are tagged.  See, e.g., 50 C.F.R. § 20.36.  The requirement has been held to apply to an individual.  See, e.g., United States v. Gilkerson, 556 F.3d 854 (8th Cir. 2009).


Supposedly, the FWS (the enforcing agency of the MBTA) is only interested in enforcing the MBTA on activities that “chronically” kill protected birds, and then only after notice has been given to the alleged offending party.  80 Fed. Reg. 30034 (May 26, 2015).  But, that might be of little assurance to farmers, ranchers, rural landowners and others whose fate could be left up to FWS discretion and the interpretation of the MBTA by the courts where interpretations can differ by jurisdiction. 

August 24, 2017 in Criminal Liabilities, Environmental Law | Permalink | Comments (0)

Tuesday, August 22, 2017

The Business of Agriculture – Upcoming CLE Symposium


On September 18, Washburn School of Law will be having its second annual CLE conference in conjunction with the Agricultural Economics Department at Kansas St. University.  The conference, hosted by the Kansas Farm Bureau (KFB) in Manhattan, KS, will explore the legal, economic, tax and regulatory issue confronting agriculture.  This year, the conference will also be simulcast over the web.

That’s my focus today – the September 18 conference in Manhattan, for practitioners, agribusiness professionals, agricultural producers, students and others. 

Symposium Topics

Financial situation.  Midwest agriculture has faced another difficult year financially.  After greetings by Kansas Farm Bureau General Counsel Terry Holdren, Dr. Allen Featherstone, the chair of the ag econ department at KSU will lead off the day with a thorough discussion on the farm financial situation.  While his focus will largely be on Kansas, he will also take a look at nationwide trends.  What are the numbers for 2017?  Where is the sector headed for 2018? 

Regulation and the environment.  Ryan Flickner, Senior Director, Advocacy Division, at the KFB will then follow up with a discussion on Kansas regulations and environmental laws of key importance to Kansas producers and agribusinesses. 

Tax – part one.  I will have a session on the tax and legal issues associated with the wildfire in southwest Kansas earlier this year – handling and reporting losses, government payments, gifts and related issues.  I will also delve into the big problem in certain parts of Kansas this year with wheat streak mosaic and dicamba spray drift.

Weather.  Mary Knapp, the state climatologist for Kansas, will provide her insights on how weather can be understood as an aid to manage on-farm risks.  Mary’s discussions are always informative and interesting. 

Crop Insurance.  Dr. Art Barnaby, with KSU’s ag econ department, certainly one of the nation’s leading experts on crop insurance, will address the specific situations where crop insurance does not cover crop loss.  Does that include losses caused by wheat streak mosaic?  What about losses from dicamba drift?

Washburn’s Rural Law Program.  Prof. Shawn Leisinger, the Executive Director of the Centers for Excellence at the law school (among his other titles) will tell attendees and viewers what the law school is doing (and planning to do) with respect to repopulating rural Kansas with well-trained lawyers to represent the families and businesses of agriculture.  He will also explain the law school’s vision concerning agricultural law and the keen focus that the law school has on agricultural legal issues.

Succession Planning.  Dr. Gregg Hadley with the KSU ag econ department will discuss the interpersonal issues associated with transitioning the farm business from one generation to the next.  While the technical tax and legal issues are important, so are the personal family relationships and how the members of the family interact with each other.

Tax – part two.  I will return with a second session on tax issues.  This time my focus will be on hot-button issues at both the state and national level.  What are the big tax issues for agriculture at the present time?  There’s always a lot to talk about for this session.

Water.  Prof. Burke Griggs, another member of our “ag law team” at the law school, will share his expertise on water law with a discussion on interstate water disputes, the role of government in managing scarce water supplies, and what the relationship is between the two.   What are the implications for Kansas and beyond?

Producer panel.  We will close out the day with a panel consisting of ag producers from across the state.  They will discuss how they use tax and legal professionals as well as agribusiness professionals in the conduct of their day-to-day business transactions.


The Symposium is a collaborative effort of Washburn law, the ag econ department at KSU and the KFB.  For lawyers, CPAs and other tax professionals, application has been sought for continuing education credit.  The symposium promises to be a great day to interact with others involved in agriculture, build relationships and connections and learn a bit in the process.

We hope to see you either in-person or online.  For more information on the symposium and how to register, check out the following link:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

August 22, 2017 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Friday, August 18, 2017

Federal Tax Claims in Decedent’s Estates – What’s the Liability and Priority?

Upon a decedent’s death, any liabilities for deficiencies on the decedent’s tax returns do not disappear.  Someone must pay those taxes.  In addition, creditors’ claims against the estate must be paid.  If one of the creditors is the IRS, there is a federal tax lien that will come in to play.  In that situation, the question becomes the priority of the lien.  Does the IRS beat out other creditors?  What if the estate administrator is entitled to get paid under state law?   

Tax liability for deficiencies associated with a decedent’s estate and the IRS as an estate creditor – what are the related issues?  That’s the topic of today’s post.

Executor/Transferee Liability

The decedent’s estate, in essence, is liable for the decedent’s tax deficiency at the time of death. Individuals receiving assets from a decedent take the assets subject to the claims of the decedent’s creditors — including the government. Asset transferees (the recipients of those assets) are liable for taxes due from the decedent to the extent of the assets that they receive.  In addition, a trust can be liable as a transferee of a transfer under I.R.C. §6901 to the extent provided in state law.  See, e.g., Frank Sawyer Trust of May 1992 v. Comr.,, T.C. Memo. 2014-59. 

The courts have addressed transferee/executor liability issues in several recent cases.  For instance, in United States v. Mangiardi, No. 9:13-cv-80256, 2013 U.S. Dist. LEXIS 102012 (S.D. Fla. Jul. 22, 2013), the court held that the IRS could collect estate tax more than 12 years after taxes were assessed.  The decedent died in 2000.  At the time of death, his revocable trust was worth approximately $4.58 million and an IRA worth $3.86 million. The estate tax was approximately $2.48 million. Four years of extensions were granted due to a market value decline of publicly traded securities. The estate paid estate taxes of $250,000, and the trust had insufficient assets to pay the balance. The IRS sought payment of tax from the transferee of an IRA under I.R.C. §6324. The court held that the IRS was not bound by the 4-year assessment period of I.R.C.§§6501 and 6901(c) and could proceed under I.R.C. §6324 (10-year provision).  The court determined that the 10-year provision was extended by the 4-year extension period previously granted to the estate, and IRA transferee liability was derivative of the estate's liability. The court held that it was immaterial that the transferee may not have known of the unpaid estate tax. The amounts withdrawn from the IRA to pay the estate tax liability were also subject to income tax in the transferee's hands.

In another recent case, United States v. Tyler, No. 12-2034, 2013 U.S. App. LEXIS 11722 (3d Cir. Jun. 11, 2013), a married couple owned real estate as tenants by the entirety (a special form of marital ownership recognized in some states).  The husband owed the IRS $436,849 in income taxes. He transferred his interest in the real estate to his wife for $1, and the IRS then placed a lien on the real estate.  He died with no distributable assets and there were no other assets with which to pay the tax lien.  His surviving wife died within a year of her his death and the property passed to their son, the defendant in the case.  The son was named as a co-executor of his mother’s estate. The IRS claimed that the tax lien applied to the real estate before legal title passed to the surviving spouse.  Thus, the IRS asserted, the executors had to satisfy the lien out of the assets of her estate. The executors conveyed the real estate to the co-executor son for $1 after receiving letters from the IRS asserting the lien. The son then later sold the real estate and invested the proceeds in the stock market, subsequently losing his investment. The IRS brought a collection action for 50 percent of the sale proceeds of the real estate from the executors. The trial court ruled for the IRS and the appellate court affirmed. Under the federal claims statute, the executor has personal liability for the decedent’s debts and obligations.  The rule is that the fiduciary who disposes of the assets of an estate before paying a governmental claim is liable to the extent of payments for unpaid governmental claims if the fiduciary distributes the estate assets, the distribution renders the estate insolvent, and the distribution takes place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

United States. v. Whisenhunt, No. 3:12-CV-0614-B, 2014 U.S. Dist. LEXIS 38969 (N.D. Tex. Mar. 25, 2014), is another case that points out that an executor has personal liability for unpaid federal estate tax when the estate assets are distributed before the estate tax is paid in full. The court determined that the executor was personally liable for $526,507 in delinquent federal estate tax and penalties, which was the amount of the distribution at the time of the decedent's death.

Federal Estate Tax Lien

Another recent case illustrates additional peril for estate executors.  In In re Estate of Simmons, No. 1:15-cv-01097-TWP-MPB, 2017 U.S. Dist. LEXIS 120487 (S.D. Ind. Jul. 31, 2017), the decedent died in 2014.  He and his wife had one son in 1991 and then divorced in 1998.  The decedent remarried, and the second wife was the surviving spouse at the time of the decedent’s death.  The primary asset of the estate was the decedent’s home.  The claims against the estate amounted to $1.8 million, including those of the decedent’s first wife, two of the decedent’s former employees for unpaid wages and benefits of approximately $800,000, and two noteholders for which the decedent had defaulted on the notes.  Those amounted to about $250,000 in total.  The state of Indiana also filed a tax lien, and the IRS lien was just shy of $600,000.  However, the state court determined that the estate was insolvent.  The estate only contained assets of $266,873.  A state court order required that the estate assets be sold and be distributed in accordance with the priority stated in Indiana law.  The state court order indicated that the IRS lien was in a seventh priority position. 

On the motion of the IRS, the case was removed to federal district court.  The federal district court determined that the IRS had a first priority lien and ordered that the net proceeds of from the sale of the residence ($245,766) go to the IRS.  Neither the surviving spouse nor the executor were pleased with this conclusion.  The surviving spouse expended substantial funds to get the home ready to be sold, and the executor (and the attorney for the estate) was entitled to be paid in accordance with state law.  That’s the normal course of events – administrative expenses and fees generally have priority over other creditors, including the IRS. 

However, there is another principal that can come into play.  The Supremacy Clause of the Constitution (Article VI, Clause 2) says that state law is subject to federal preemption if there is a federal law on point that would override state law.  That’s where the federal priority statute for governmental claims comes into play. 31 U.S.C. §3713. Under this provision, a federal governmental claim has first priority when a decedent’s estate has insufficient funds/assets to pay all of the decedent’s debts.  However, courts have generally held that administrative expenses (e.g., fees of the executor and attorney for the estate) are not actually the decedent’s “expenses” with the result that they take priority over governmental claims.  But, the In re Estate of Simmons court said that when the IRS files a federal tax lien I.R.C. §6321 comes into play.  Under that statute, the federal government has a blanket priority lien on the assets of the estate.  The limited exceptions of I.R.C. §6323 don’t apply to claims involving administrative expenses.   


The federal court’s determination would seem to have a chilling effect on person’s assuming administrative tasks, including legal counsel for estate’s that have insufficient funds to pay all outstanding taxes, and it’s not the first time a court has reached the same conclusion.  See, e.g., Estate of Friedman v. Cadle Co., 3:08CV488(RNC), 2009 U.S. Dist. LEXIS 130505 (D. Conn. Sept. 8, 2009).  But, the In re Estate of Simmons court did note that the Internal Revenue Manual, at Section says that the IRS has discretion to not assert its priority position so that reasonable administrative expenses can be paid to the persons entitled to them.  In In re Estate of Simmons, the IRS stated that it intended to pay the executor’s unreimbursed expenses.  That was enough for the court to go ahead and give the IRS priority on its lien. 

The discretion of the IRS to allow the payment of reasonable administrative expenses is not terribly reassuring.  It’s also troubling that it’s solely up to the IRS to determine what is “reasonable.”  From a practitioner’s standpoint, when considering the representation of an estate with sizable outstanding unpaid federal taxes, it’s probably a good idea to first conduct a search for federal tax liens.  Also, there probably is also a duty to advise the executor of the potential impact of a federal tax lien. 

Executors (and their counsel) already have a mess on their hands in large estates where Form 706 must be filed and the new basis consistency reporting rules are triggered.  Those rules already provide a disincentive to serve as an executor.  The federal tax lien statute may create another reason not to handle certain estates.

August 18, 2017 in Estate Planning | Permalink | Comments (0)

Wednesday, August 16, 2017

Easements on Agricultural Land – Classification and Legal Issues


Easements are common in agriculture.  An easement does not give the holder of the easement a right of possession, but a right to use or to take something from someone else's land.  To the holder of the easement, the easement is a right or interest in land, but to the owner of the real estate subject to the easement, the easement is an encumbrance upon that person's estate.  Easements may take several forms and are common in agricultural settings.  Sometimes, the terminology used to describe an easement can be confusing. 

In today’s post, I take a look at the various types of easements that are common in agriculture and some of the common issues that they present.

Easements in Gross and Appurtenant Easements

An easement may be either an easement in gross or an appurtenant easement. An easement “in gross” serves the holder only personally instead of in connection with such person's ownership or use of any specific parcel of land.  An easement in gross is a non-assignable personal right that terminates upon the death, liquidation or bankruptcy of its holder. 

An easement that is “appurtenant” is one whose benefits serve a particular parcel of land.  An appurtenant easement becomes a right in that particular parcel of land and passes with title to that land upon a subsequent conveyance.  Examples of appurtenant easements include walkways, driveways and utility lines that cross a particular parcel and lead to an adjoining or nearby tract. 

Determining whether an easement is one in gross or is appurtenant depends upon the circumstances of each particular situation. Courts generally prefer appurtenant easements. The particular classification matters when the question is whether the easement in question is assignable or whether it passes with the title to the land to which it may be appurtenant.

Affirmative and Negative Easements

An easement is either an affirmative easement or a negative easement.  Most easements are affirmative and entitle the holder to do certain things upon the land subject to the easement.  A negative easement gives its holder a right to require the owner of the land subject to the easement to do or not to do specified things with respect to that land.  Thus, negative easements are synonymous with covenantal land restrictions and are similar to certain “natural rights” that are incidents of land ownership.  These include riparian rights, lateral and subjacent support rights, and the right to be free from nuisances.  However, most American courts reject the English “ancient lights” doctrine and refuse to recognize a negative easement for light, air and view.  See, e.g., Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. 114 So.2d 357 (Fla. App. 1959).  However, if a property owner's interference with a neighboring owner's light, air or view is done maliciously, the court may enjoin such activity as a nuisance.  See, e.g., Coty v. Ramsey Associates, Inc., 149 Vt. 451, 546 A.2d 196 (1988).

Profits and licenses.  A concept related to an easement is that of a profit.  For example, O, owner of Blackacre, could grant to A a right to enter Blackacre to cut and remove timber.  A is said to have a profit in Blackacre - a right of severance which will result in A's acquiring possession to the severed thing. Easement and profit rights generally include the right to improve the burdened land, perhaps only to a gravel road, but perhaps to erect and maintain more substantial structures, such as bridges, pipelines, and even buildings that facilitate use of the easement or profit.  Sometimes a question arises as to whether a point is reached at which structures become so substantial that the rights become those of occupation and possession instead of just use.  In answering this question, courts look at the circumstances as a whole instead of the labels the parties use.  In general, the existence of permanent, substantial structures is viewed as an estate rather than an easement or profit.

A license is a term that covers a wide range of permissive land uses which, unless permitted, would be trespasses.  For example, a hunter who is on the premises with permission is a licensee.  The distinction between a license and an easement or profit is that a license can be terminated at any time by the person who created the license.  For example, permission to hunt may be denied.  Conversely, easements and profits exist for a fixed period of time or perpetually and are rights in land.  A license is only a privilege.  Likewise, easements and profits are interests in land while licenses are not, and licenses may be granted orally, but because easements and profits are interests in land, they are subject to the statute of frauds and must be in writing.

Implied Easements

An easement may also be implied from prior use or necessity, or arise by prescription.  An implied easement may arise from prior use if there has been a conveyance of a physical part of the grantor's land (hence, the grantor retains part, usually adjoining the part conveyed), and before the conveyance there was a usage on the land that, had the two parts then been severed, could have been the subject of an easement appurtenant to one and servient upon the other, and this usage is, more or less, “necessary” to the use of the part to which it would be appurtenant, and “apparent.”  An easement implied from necessity involves a conveyance of a physical part only of the grantor's land, and after severance of the tract into two parcels, it is “necessary” to pass over one of them to reach any public street or road from the other.  No pre-existing use needs to be present.  Instead, the severance creates a land-locked parcel unless its owner is given implied access over the other parcel.

Prescriptive Easements (Adverse Possession) 

Acquiring an easement by prescription is analogous to acquiring property by adverse possession.  If an individual possesses someone else's land in an open and notorious fashion with an intent to take it away from them, such person (known as an adverse possessor) becomes the true property owner after the statutory time period (anywhere from 10 to 21 years) has expired.  For an easement by prescription to arise, the use of the land subject to the easement must be open and notorious, adverse, under a claim of right, continuous and uninterrupted for the statutory period.

For example, assume that A owns Blackacre, and that B owns adjacent Whiteacre.  A drives across a portion of Whiteacre to reach A's garage on Blackacre.  A does this five days a week for 22 years.  B then puts up a barbed wire fence in A's path.  If A can show an adverse use of Whiteacre and that A's use was continuous for the full statutory period, and that A's use was visible and notorious or was made with B's acquiescence, A will have a prescriptive easement over Whiteacre.  However, acquiescence does not mean permission.  If A receives permission from B to cross Whiteacre, the prescriptive period never begins to run and no prescriptive easement will arise.  See, e.g., Rafanelli v. Dale, 924 P.2d 242 (Mont. 1996)

Adverse possession (prescriptive easement) statutes vary by jurisdiction in terms of the requirements a person claiming title by adverse possession must satisfy and the length of time property must be adversely possessed.  Once title is successfully obtained by adverse possession, the party obtaining title can bring a court action to quiet title.  A quiet title action ensures that the land records properly reflect the true owner of the property.

Termination of Easements

An easement may be terminated in several ways. 

Merger.  Merger, also referred to as unity of ownership, terminates an existing easement.  For example, assume that A owns Blackacre and B owns adjoining Whiteacre.  B grants A an easement across Whiteacre so that A can acquire access to Blackacre.  Two years later, A buys Whiteacre in fee simple.  Because A now owns both tracts of real estate, the easement is terminated. 

Release.  An easement may also be terminated by a release.  If the easement was for a duration of more than one year, the release must be in writing to be effective and comply with all of the formalities of a deed.

Abandonment.  An easement may also be terminated by abandonment.  Mere intent to abandon is not effective to terminate the easement.  Instead, abandonment can only occur if the holder of the easement demonstrates by physical action an intent to permanently abandon the easement.  Mere words are insufficient to cause an abandonment of the easement.  For example, assume that an easement holder builds a barn in such a manner that access to the easement is blocked.  This action would be sufficient to constitute abandonment of the easement.

Estoppel.  An easement may also be terminated by estoppel where there is reasonable reliance by the owner of the servient tenement who changes position based on assertions or conduct of the easement holder.  For example, assume that A tells B that A is releasing the easement over B's property.  As a result, A doesn't use the easement for a long time.  B then builds a machine shed over A's easement.  In this situation, the easement would be terminated by estoppel and A could not reassert the existence of the easement after the machine shed has been built.

Prescription.  An easement may also be terminated by prescription where the owner of the servient tenement possesses and enjoys the servient tenement in a way that would indicate to the public that no easement right existed.


Easements are common in agriculture and can arise in numerous ways.  An understanding of what they are, how they can arise, how they can be terminated, and the associated legal issues can be useful.

August 16, 2017 in Real Property | Permalink | Comments (0)

Monday, August 14, 2017

Substantiating Charitable Contributions


While IRS audit activity data shows that less than one percent of returns were audited in fiscal year 2015, there are some areas that receive more attention than others.  One of the areas of “low-hanging” fruit for IRS examining agents involves charitable contribution deductions.  Numerous cases illustrate that properly substantiating contributions is critical, and that many taxpayers aren’t following the rules.   In one recent case, the taxpayer was denied a $33 million charitable deduction because the taxpayer failed to properly substantiate the deduction.  RERI Holdings I, LLC v. Comr., 149 T.C. No. 1 (2017).   How does that happen when so much value is at stake?

So, what documentation is required to properly substantiate charitable contributions?  It depends on the type of the contribution and the amount that is given.  Substantiation rules for charitable contributions – that’s the topic of today’s post:

Cash Gifts

Charitable donations with cash have the most simplistic substantiation rules.   For a single donation that is less than $250, a bank record or written receipt from the charity showing the charity’s name, amount and the date of the donation is sufficient.  For single cash gifts of $250 and greater, the taxpayer must have an acknowledgement from the charity.  That acknowledgement must include the amount of cash and a description of any other property that the taxpayer gave to the charity.  It also must indicate whether the charity provided any goods or services in return for the donation.  If non-cash goods or services were provided along with the cash gift, the acknowledgement must provide a description of them and a good faith estimate of their value.  In addition, a statement must be included that only the contribution in excess of that estimated value is deductible.  This also applies if the donor receives something (other than merely de minimis items) in return for a donation exceeding $75.  However, if only intangible religious benefits were the only thing that the charity provided, a statement to that effect can be made instead of valuing the benefits.

There is an important point concerning the charity’s acknowledgement.  The taxpayer must receive it by the earlier of the date the donor’s return for the year of the donation is filed, or the extended due date of that return.  There has been recent litigation on this point, and the outcome hasn’t been taxpayer-favorable.  So, it’s critical that charities get the acknowledgements out shortly after the yearend.

The $250 threshold is applied to each contribution separately.  Treas. Reg. §1.170A-13(f)(1).  Thus, for donors that make multiple cash gifts to the same charitable organization (such as a church, for example) that total $250 or more in a single year, where each gift is less than $250, written acknowledgement is not required unless the smaller gifts are parts of a series of related contributions made to avoid the substantiation requirements

A good approach for charities to take, particularly churches, is to track all donations on a weekly basis by each donor.  That information can be easily laid out in a spreadsheet, with a listing of the various funds (e.g., benevolence, building, etc.) being donated to.  That information can then be transferred to the acknowledgement form for each donor that contains the required language and the appropriate signature of the person on behalf of the charity.  This can all be taken care of shortly after yearend and provided to the donor well before the donor’s return is filed.

Payroll Deduction

For charitable donations of less than $250 that are made via a payroll deduction, a paystub, Form W-2, or other employer statement showing the amount withheld, plus an acknowledgment from the charity is sufficient documentation to support the deduction.  For payroll deduction gifts of $250 or more, the acknowledgement from the charity must contain the necessary details that the charity did not provide goods or services in return for the donation.  Again, the $250 threshold is applied by treating each payroll deduction as a separate contribution.  Treas. Reg. §1.170A-13(f)(11).


For taxpayers that provide volunteer services to qualified charities and incur out-of-pocket expenses, canceled checks, receipts or some other record that shows the date the expense was incurred and the amount along with a description and the reason for incurring the expense is sufficient.  If the amount of expense incurred reaches the $250 level, the taxpayer should still keep sufficient records, but the charity will also need to provide a proper acknowledgement.

Non-Cash Contributions

Publicly traded stock.  For small non-cash contributions (less than $250 in value), substantiation is sufficient if the taxpayer has a receipt with the charity’s name on it along with the date of the gift, the location and a description of the donation.  In lieu of a receipt, the taxpayer should maintain sufficient records that contain the same information.  A key point is to clearly show how the value of the property was determined, including a copy of an appraisal if one was obtained.  If the gift involved a partial interest in property, additional information will be necessary.

For non-cash contributions of publicly traded stock that are between $250 and $500, the taxpayer will need a written acknowledgement from the charity along with maintaining written records.  While IRS Publication 526 says that written records are to be maintained in all cases, the governing regulation says that written records are only required if the charity doesn’t provide a receipt.  Treas. Reg. §1.170A-13(b)(1).

If the contribution is valued in excess of $500 but not over $5,000, an acknowledgement from the charity and written records are required, and Form 8283, Section A must be completed and filed with the IRS.  That’s the same result for higher-valued gifts.  For gifts of securities that are worth over $500, additional rules must be complied with.

Non-publicly traded stock.  The rules for the donation of non-publicly traded stock are the same as for gifts of publicly traded stock, except that Form 8283, Section A must be completed and filed with the IRS.  If the gift exceeds $10,000 in value, the donor must obtain a qualified appraisal before the due date of the return.  If the value of the gift exceeds $500,000, the written qualified appraisal must be attached to the return.


Several prominent cases in recent years have involved the donation of valuable artwork.  Again, the substantiation rules are tied to the value of the donated artwork.  For gifts under $500, the substantiation rules basically require the maintenance of written records and an acknowledgement from the charity.  Once that level is exceeded, Form 8283 must be completed and filed with the return.  Once the $5,000 level is reached, Section B of Form 8283 must be completed and a qualified appraisal must be obtained before the due date of the return.   For donated artwork valued at $20,000 or more the appraisal must be attached to the return and the taxpayer must keep a clear photo of the artwork.

Vehicles, Boats and Airplanes

Again, special rules apply to vehicles, boats and airplanes that are donated to charity.  The maintenance of good records is again essential.  In addition, Form 1098-C must be completed and an acknowledgement must be obtained from the charity.  For gifts of such property, up to $5,000 in value, Form 8283, Section A must be completed.  For higher-valued donations, Section B of Form 8283 must be completed.  If the charity either gives the donated property to a “needy individual” or sells it to such a person at a significantly discounted price, a qualified appraisal must be obtained.  Other rules must be complied with if the charity uses the donated property or makes a material improvement to it.

Other Non-Cash Donations

Other property, such as patents and intellectual property can also be donated to charity.  If that happens additional special substantiation rules apply.  The rules are particularly technical.

The RERI Holdings I, LLC Case

So, what went wrong in RERI Holdings I, LLC?  A partnership paid just shy of $3 million in 2002 to acquire a remainder interest in particular property.  The acquisition came along with certain covenants that were designed to maintain the property’s value.  In addition, if the covenants were breached the remainder interest holder would get immediate possession of the property without any damages being paid by the holder of the term interest.  About 18 months later, the partnership assigned the remainder interest to a University and claimed a deduction of over $33 million.  The partnership completed and filed Form 8283 with its return, but it left blank the space on the Form where it was to provide its cost or adjusted basis in the property – the partnership either simply forgot or didn’t want to alert the IRS that it had likely overvalued the amount of the donation.  But, that was a fatal mistake. The omission of that basis information violated Treas. Reg. §1.170A-13(c)(4)(ii)(E).  No deduction was allowed.


Substantiating charitable contributions properly is essential.  It is one area that the IRS audits more closely than other areas.  Because the deduction can be particularly valuable, the substantiation rules must be carefully complied with. 

August 14, 2017 in Income Tax | Permalink | Comments (0)

Thursday, August 10, 2017

When Is A Farmer Not A “Qualified Farmer” For Conservation Easement Donation Purposes?


Last fall, I devoted a blog post to the definition of a “farmer” for various provisions of the Code.  In that post, I pointed out how many variations there are to the definition and how important it is to understand those nuances and how they apply. 

Earlier this week, the U.S. Tax Court in Rutkoske, et al. . Comr., 149 T.C. No. 6 (2017), decided a case involving the definition of a “qualified farmer” for purposes of the 100 percent conservation easement deduction of I.R.C. §170(b)(1)(E)(iv)(I).  Unfortunately, neither of two brothers that were undoubtedly farmers, were a “qualified farmer” under the rule.  The case is important for not only illustrating how important it is to understand Code definitions, but also for the tax planning that might have been utilized to reach the desired outcome.

Qualified Conservation Contribution Rules

Under I.R.C. §170, a taxpayer can claim a charitable deduction for a qualified conservation contribution to a qualified charity.  The amount of the deduction is generally limited to 50 percent of the taxpayer’s contribution base (adjusted gross income (AGI) computed without regard to any net operating loss for the year, less the amount of any other charitable contributions for the year).  I.R.C. §170(b)(1)(G).  Any amount that can’t be deducted because of the limitation can be carried forward to each of the next five years, subject to the same 50 percent limitation in each carryforward year.  I.R.C. §170(d)(1). 

However, for a taxpayer that is a “qualified farmer” for the tax year of the contribution, the limit is 100 percent of the taxpayer’s contribution base, with a 15-year carryforward provision applying.  A “qualified farmer or rancher” is a taxpayer whose gross income from the trade or business of “farming” exceeds 50 percent of the taxpayer’s gross income (all income from whatever source derived, except as otherwise provided) for the tax year.  I.R.C. §170(b)(1)(E)(v); IRS Notice 2007-50, 2007-1 C.B. 1430, Q&A No. 4.  However, income from farming does not include income derived from hunting and fishing activities (IRS Notice 2007-50, 2007-1, Q&A No. 8) or income from the sale of a conservation easement.  IRS Notice 2007-50, 2007-1, Q&A No. 6.  But, the income from hunting, fishing and sale of a conservation easement is included in the taxpayer’s gross income.  IRS Notice 2007-50, 2007-1 C.B. 1430, Q&A Nos. 6 and 8.  Income from timber sales is included in both computations.  IRS Notice 2007-50, 2007-1 C.B. 1430, Q&A No. 7. 

“Farming” for this purpose is the I.R.C. §2032A(e)(5) definition.  There, the term is defined as meaning:  “…cultivating the soil or raising or harvesting any agricultural or horticultural commodity…on a farm; handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant or operator of the farm regularly produces more than half of the commodity so treated; and … planting, cultivating, caring for, or cutting of trees, or the preparation…of trees for market.”  I.R.C. §§2032A(e)(5)(A)-(C)(ii).   

The contributed property need not be actually used or available for use in crop or livestock production to allow the donor to claim a deduction for the full value, but the property must be subject to a restriction that it remain available for use in either crop or livestock production.  I.R.C. §170(b)(1)(E)(iv)(II).  That means the entire property, including any improvements.  IRS Notice 2007-50, 2007-1 C.B. 1430, Q&A No. 11.  See also Treas. Reg. §1.170A-14(f), Example 5.

Facts of Rutkoske

The Rutkoske case involved a limited liability company (LLC) that owned various tracts of land that it leased to a farming general partnership.  Two brothers owned the LLC equally and also had ownership interests in the farming general partnership along with other farming entities.  The complex structure was established for the purported reason of maximizing farm program payment limitations. 

In 2009, the LLC conveyed a conservation easement on a 355-acre tract to a land conservancy on the East Coast.  There was no question that the conservancy was a qualified charity under I.R.C. §501(c)(3) that could receive the conveyance and allow the donors a charitable deduction.  The conveyance placed development restrictions on the property in exchange for $1,504,960.  A simultaneous appraisal valued the property without the easement restriction at $4,970,000 and at $2,130,00 with the development restrictions.  The claimed conservation contribution deduction was $1,335,040, which the brothers split evenly between them on their individual returns in accordance with I.R.C. §§702(a)(4); 702(b) and I.R.C. §703(a) and Treas. Reg. §1.703-1(a)(2)(iv).  The LLC then sold its interest in the tract to a third party for $1,995,040.  The charitable contribution deduction of $1,335,040 was computed by taking the difference between the pre and post-easement restriction value of the property ($2,840,000) and subtracting the payment received for the conveyance ($1,504,960).  The brothers claimed the deduction at 100 percent of their contribution base.  The IRS disagreed, claiming that the deduction was limited to only 50 percent of their contribution base (i.e., their adjusted gross income).   

Each brother, on their respective 2009 returns, each claimed a charitable contribution deduction attributable to the easement of $667,520 along with their respective shares of long-term capital gain from the sale of the LLC’s interest in the tract to the third party – approximately $900,000 each.  Each brother had a small amount of wage income along with a miniscule amount of interest income along with about a $200,000 loss from partnerships and S corporations. They claimed that their respective share of sale proceeds from the sale of the tract to the third party, and the proceeds from the sale of the development rights constituted farm income within the definition of I.R.C. §2032A(e)(5).  Accordingly, their farm income exceeded the 50 percent mark entitling each of them to a 100 percent of contribution base deduction for the conservation easement donation.  Their argument was a novel one – farming requires investment in physical capital such as land and, as an “integral asset” to the farming operation the sale proceeds of the 355-acre tract counted as farm income.   The IRS disagreed based on a strict reading of I.R.C. §2032A(e)(5) as applied to I.R.C. §170(b)(1)(E)(v). 

Tax Court Decision

The Tax Court upheld the IRS determination.  Neither brother was a qualified farmer, although each one was (as the Tax Court noted) unquestionably a farmer.  The Tax Court held that the income from the sale of the property wasn’t farm income.  The Tax Court reached the same conclusion as to the income from the sale of the development rights.  The income from those sales weren’t specifically enumerated in I.R.C. §2032A(e)(5) and didn’t fit within the same category of activities enumerated in that provision.  In addition, the Tax Court said that I.R.C. §170(b)(1)(E) was “narrowly tailored” to provide a tax benefit to a qualified farmer which had a specific definition that they wouldn’t broaden.  In any event, the Tax Court also determined that the LLC structure doomed the brothers because the character of the deduction flowed through to them from the LLC and the LLC was not in the business of farming.  Instead, the Tax Court noted, the LLC was engaged in the business of leasing land.  But, on this point, the Tax Court is arguably incorrect (and didn’t need to make the statement; it was unnecessary as to the outcome of the case).  As the Tax Court noted, the contribution itself was properly claimed by each brother at the individual level on their respective returns.  Each brother did use the 355-acre tract in their farming business.  Partnerships don’t pay tax and should be viewed under the aggregate theory.  Indeed, the IRS stated in 2007 that when a qualified conservation contribution is made by a pass-through entity (such as a partnership or S corporation) the determination of whether an individual who is a partner or shareholder is a qualified farmer for the tax year of the contribution is made at the partner or shareholder level.  Notice 2007-50, 2007-1 C.B. 1430, Q&A No. 5.  The Tax Court made no reference to the 2007 IRS statement.     

Planning Implications

According to the Tax Court, a pass-through entity that owns land on which a conservation easement is conveyed to a charity must be engaged in the trade or business of agriculture. That incorrect conclusion is problematic, even though it was not determinative of the outcome of the case.  Also, when a pass-through entity is involved, the computation of the taxpayer’s true gross income must include all of the pass-through income, from farming activities and non-farming activities.  It’s not just simply AGI as reported on the return.  In Rutkoske, it does not appear that the Tax Court took that into account (even though it wouldn’t have made a difference in the outcome of the case). 

From purely a tax planning standpoint, assuming the LLC was engaged in the trade or business of farming (as the Tax Court apparently requires), the land sale income would have still presented a problem for the brothers in reaching the 50 percent gross income threshold.  To deal with that problem, structuring both the conveyance of the conservation easement and the LLC’s sale of its remaining interest as an installment sale with the reporting of the gain in the tax year after the tax year of the contribution would have allowed the brothers to meet the 50 percent test.     

Also, from a broader, more general perspective, the 100 percent of contribution base limit can work against a qualified farm taxpayer.  For instance, if a qualified farmer’s contribution exceeds the qualified farmer’s AGI, the result is that some of the tax savings as a result of the charitable contribution will lose some of their power.  That's because they will be realized at the lower tax brackets (presently 10 percent and 15 percent (federal)).  In addition, the charitable contribution can have the impact of eliminating all of the taxpayer’s taxable income.  For those taxpayers that also have other Schedule A itemized deductions, they won't produce any tax benefit.  Neither will the personal exemptions.  The statute does not provide any way for the "qualified farmer" taxpayer to use the 50 percent of contribution base limit when the taxpayer is a qualified farmer.  This all means that, in certain situations, it might be better from a tax standpoint, for a qualified farmer to make a qualified contribution in a year when the 50 percent test cannot be satisfied.    


The Rutkoske decision illustrates a significant limitation for farmers – it is very difficult to get a 100 percent of AGI deduction (as a “qualified farmer”) when property is disposed of at a gain in the same year in which a conservation easement is donated unless an installment sale is structured.  In addition, entity structuring for USDA farm program payment limitation purposes, under the Tax Court's rationale, can work to eliminate the deduction in its entirety.  Attorneys familiar with USDA farm program payment limitation rules are often not well-versed in farm taxation, and that can be the case even if they anticipate that a client might make a conservation easement donation.

August 10, 2017 in Income Tax | Permalink | Comments (0)

Tuesday, August 8, 2017

The Use of a Buy-Sell Agreement For Transitioning a Business


Buy-sell agreements can be very important to assuring a smooth transition of the business from one generation to the next.  Typically funded by life insurance to make them operational, the type of buy-sell utilized and the drafting of the buy-sell are fundamentally associated with their ability to accomplish client objectives.

Type of Buy-Sell Agreements

Buy-sell agreements are generally of three types:

  1. Redemption agreements (a.k.a. entity purchase).  This type of agreement is a contract between the owners of the business and the business whereby each owner agrees to sell his interest to the business upon the occurrence of certain events.
  1. Cross-purchase agreements.  This type of agreement is a contract between or among the owners (the business is not necessarily a party to the agreement) whereby each owner agrees to sell his shares to the other owners on the occurrence of specified events.
  2. Hybrid agreements.  This type of agreement is a contract between the business and the owners whereby the owners agree to offer their shares first to the corporation and then to the other owners on the occurrence of certain events.

Income Tax Consequences For C Corporation Buy-Outs

For redemption agreements, if I.R.C. §§302(b)-303 are not satisfied, the redemption is taxed as a dividend distribution (ordinary income without recovery of basis) to the extent of the stockholder’s allocable portion of current and accumulated earnings and profits, without regard to the stockholder’s basis in his shares.  This can be a significant problem for post-mortem redemptions - the estate of a deceased shareholder would normally receive a basis in the shares equal to their value on the date of death or the alternate valuation date. Thus, dividend treatment can result in the recognition of the entire purchase price as ordinary income to a redeemed estate, whereas sale or exchange treatment results in recognition of no taxable gain whatsoever.

For cross-purchase agreements, unless the shareholder is a dealer in stock, any gain on the sale is a capital gain regardless of the character of the corporation’s underlying assets.  I.R.C. §1221.  For the estate that sells the stock shortly after the shareholder’s death, no gain is recognized if the agreement sets the sale price at the date of death value.  I.R.C. §§1014; 2032.  The purchasing shareholders increase their basis in their total holdings of corporate stock by the price paid for the shares purchased under the agreement, even if the shares are paid for with tax-free life insurance proceeds.

A hybrid agreement requires the corporation to redeem only as much stock as will qualify for sale or exchange treatment under I.R.C. §303, and then requires the other shareholders to buy the balance of the available stock. This permits the corporation to finance part of the purchase price, to the extent required to pay estate taxes and expenses, and assures sale or exchange treatment on the entire transaction.  I.R.C. §303(b)(3).

Under a “wait and see” type of buy-sell agreement, the identity of the purchaser is not disclosed until the actual time of purchase as triggered in the agreement. The corporation will have first shot at purchasing shares, then the remaining shareholders, then the corporation may be obligated to buy any remaining shares.

Alternative Approaches

The corporation could buy a life insurance policy on the life of each stockholder, with the corporation as the policy owner, premium payer, and beneficiary of these policies. The corporation could then use the life insurance to finance the purchase if, at the end of the first option period, the corporation buys the deceased stockholder’s interest. The corporation could lend the insurance proceeds to the stockholders if, at the end of the corporate option period, it is decided that the surviving stockholders should be the buyers (or to the extent stock remained to be purchased after the corporation’s option expires). Investment payments would be deductible to the stockholders and income to the corporation.

An alternative approach is for each shareholder to buy, pay for, own, and be the beneficiary of a life insurance policy for each of the other shareholders. The surviving shareholders would then receive the proceeds when one shareholder dies, and, if a cross-purchase is indicated and appropriate, use the proceeds as the necessary funds to carry out the buy-sell agreement. The surviving shareholders could also lend the proceeds to the corporation if an entity purchase agreement is utilized, to enable the corporation to buy additional shares, or the surviving shareholders could make capital contributions which would have the effect of increasing each shareholder’s stock basis.

A combination of the above approaches could also be used for funding the wait-and-see buy-sell agreement. For example, the corporation could own cash value life insurance and the owners could own term insurance. Also, the parties could have a split-dollar arrangement whereby the corporation pays for the cash value portion of the premiums and the shareholders own the policy and pay for the term portion of the premiums, with the proceeds split between them.

A buy-sell agreement that imposes employment-related restrictions may create ordinary compensation income (without recovery of basis).  I.R.C. §83.  However, an agreement containing transfer restrictions that are sufficient to render the stock substantially non-vested (substantial risk of forfeiture) may prevent the current recognition of ordinary income.

Advantages and Disadvantages Of Buy-Sell Agreements

Pros.  A well-drafted buy-sell agreement is designed to prevent the sale (or other transfer) of business interests outside the family unit.  In general, a buy-sell agreement is a relatively simple agreement.  It is a contract between family members. There are few formalities to follow under state law, and no filing or registration fees.  It also creates a ready market for an owner’s interest, easing the liquidity problems created by the ownership of a block of closely-held business interests at the owner’s death.  In addition, if the buy-sell is drafted properly, it can help establish the value of the business interests if drafted properly.

Cons.  On the downside, a hybrid or redemption type of buy-sell agreement may not yield favorable tax consequences upon the purchase of business interests in accordance with the agreement.  This is typically not a problem with a cross-purchase agreement.  The basic problem is that a corporate distribution in a redemption of stock is taxed as a dividend (i.e., taxed as ordinary income to the extent of earnings and profits, without recovery of basis), unless it meets the technical requirements of I.R.C. §302(b) or §303. 

As discussed further below, the parties to the agreement must have funds available to buy the stock at the time the agreement is triggered. Typically, life insurance is purchased for each business owner to cover the total purchase price (or at least the down payment). However, the premiums on such policies are not deductible (see I.R.C. §264) and can create a substantial ongoing expense.

Estate Planning Implications

The purchase of a deceased shareholder’s stock can deprive the estate of the advantage of certain post-mortem estate planning techniques such as special use valuation and installment payment of federal estate tax under.  As for the installment payment provision, the sale of all or a substantial part of the shares during the deferral period accelerates the deferred taxes.  I.R.C. §6166 (g)(1)(B).  Thus, it may be a good strategy to plan a series of redemptions or purchases in amounts equal to the taxes that must be paid in each of the fifteen years of the deferral period.

If a buy-sell is not planned well, the agreement can cause a gift of stock to a trust for the surviving spouse not to qualify for the estate tax marital deduction.  In Estate of Rinaldi v. United States, 38 Fed. Cl. 341 (1997), aff’d., 178 F.3d 1308 (Fed. Cir. 1998), cert. den., 526 U.S. 1006 (1999), a purchase option was created in the decedent’s will for a son that was named as trustee of a QTIP trust for the decedent’s surviving spouse.  The court determined that the marital deduction was not available because the son could purchase the stock at book value by ceasing active management in the company.  That result would have been the same had the option been included in an independent buy-sell agreement.


Life insurance is often the preferred means of funding the testamentary purchases of stock pursuant to a buy-sell agreement because the death benefit is financed by a series of smaller premium payments, and because the proceeds are received by the beneficiary without income tax liability.  See I.R.C. §101.  But, there can be traps associated with life insurance funding.  For instance, proceeds received by a C corporation can increase the corporation’s AMT liability by increasing its adjusted current earnings (even if the proceeds are to be used to redeem the stockholder’s shares).  See IRC §56(g).  Also, life insurance may be sufficient to fund the buyout of a deceased owner’s interest, but may be insufficient to fund the lifetime redemption occasioned by the owner’s disability or retirement.

Other observations.  The cash value of a permanent life insurance policy may be withdrawn by loan or surrender of the policy, but the value may be a very small percentage of the death benefit, inadequate to finance the buy-out. Disability insurance may be used to finance a purchase occasioned by an owner’s disability, but it can be quite expensive, and cannot be applied toward the purchase of an interest of an owner who is retiring or used to prevent the sale of an interest in the business to a buyer outside the family unit.

It is possible to use accumulated earnings of the business to fund a redemption. But, such a strategy may not be treated as a “reasonable need of the business” with the result that the business (if it is a C corporation) could be subject to the accumulated earnings tax.  I.R.C. §531.  However, corporate accumulations used to pay off a note given a stockholder for a redemption is a reasonable need of the business, as a debt retirement cost.  But see Smoot Sand & Gravel Corp. v. Comr., 274 F.2d 495 (4th Cir. 1960), cert. denied, 362 U.S. 976 (1960).


A well-drafted buy sell agreement can be a very useful document to assist in the transitioning of a family business from one generation to the next.  It can also be a useful device for assisting in balancing out inheritances among heirs by making sure the heirs interested in running the family business end up with control of the business and other heirs end up with non-control interests.  A buy-sell agreement - a critical part of a family business succession plan.  Does your family business need one?

August 8, 2017 in Business Planning | Permalink | Comments (0)

Friday, August 4, 2017

Deferred Payment Contracts


My blog post of July 27 concerning the failure of a grain elevator struck a chord by pointing out a difference between grain stored in the elevator under a warehouse receipt or scale ticket, and grain that is sold to the elevator on contract.  I received numerous comments from readers that hadn’t realized that difference.  Many of those were also asking about the proper structuring of a deferred payment contract.

That’s the focus of today’s blog – the proper structuring of deferred payment contracts. 

General Rule

A cash-basis taxpayer accounts for income in the tax year that it is either actually or constructively received.  The constructive receipt doctrine is the primary tool that the IRS uses to challenge deferral arrangements.  Under the regulations (Treas. Reg. §1.451-2(a)), a taxpayer is deemed to have constructively received income when any of the following occurs.

  • The income has been credited to the taxpayer’s account.
  • The income has been set apart for the taxpayer.
  • The income has been made available for the taxpayer to draw upon it, or it could have been drawn upon if notice of intent had been given, unless the taxpayer’s control of the receipt of the income is subject to substantial limitations or restrictions.

However, income received under a deferred payment contract is taxed under the installment payment rules.  IRC §§453(b)(2); 453(l)(2)(A). 

Basic Deferral Arrangements

The most likely way for a farmer to avoid an IRS challenge of a deferral arrangement is for the farmer to enter into a sales contract with a buyer that calls for payment in the next tax year.  This type of contract simply involves the buyer’s unsecured obligation to purchase the agricultural commodities from the seller on a particular date.  Under this type of deferral contract, the price of the goods is set at the specified time for delivery, but payment is deferred until the next year.   If the contract is bona fide and entered into at arm’s length, the farm seller has no right to demand payment until the following year, and the contract (as well as the sale proceeds) is non-assignable, nontransferable and nonnegotiable, the deferral will not be challenged by the IRS.

The following criteria for a deferred payment contract should be met in order to successfully defer income to the following year.

  • The seller should obtain a written contract that under local law binds both the buyer and the seller. A note should not be used;
  • The contract should state clearly that under no circumstances would the seller be entitled to the sales proceeds until a specific date (i.e., a date in a future tax year). The earliest date depends on the farmer’s tax yearend.
  • The contract should be signed before the seller has the right to receive any proceeds, which is normally before delivery. That means that the contract should have been executed before the first crop delivery.    If the contract was not executed until after the crop proceeds were delivered, IRS can argue that the farmer actually had the right to the income, but later chose not to take possession of it until the next calendar year.  An oral agreement to the contrary can be difficult to prove.
  • The buyer should not credit the seller’s account for any goods the seller may want to purchase from the buyer during the year of the deferred payment contract (such as seed and/or fertilizer). Instead, such transactions should be treated separately when billed and paid. 
  • The contract should state that the taxpayer has no right to assign or transfer the contract for cash or other property.
  • The contract should include a clause that prohibits the seller from using the contract as collateral for any loans or receiving any loans from the buyer before the payment date;
  • The buyer should avoid sales through an agent in which the agent merely retains the proceeds. Receipt by an agent usually is construed as receipt by the seller for tax purposes.
  • Price-later contracts (where the price is set in a later year) should state that in no event can payment be received prior to the designated date, even if a price is established earlier.
  • The contract may provide for interest. Interest on an installment sale is reported as ordinary income in the same manner as any other interest income. If the contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as imputed interest or as interest under the original issue discount rules, even if there is a loss. Unstated interest is computed by using the applicable federal rate (AFR) for the month in which the contract is made.

Is There a Way To Provide Security? 

As noted in that July 27 post, after an agricultural commodity is delivered to the buyer but before payment is made, the seller is an unsecured creditor of the buyer.  In an attempt to provide greater security for the transaction, a farmer-seller may use letters of credit or an escrow arrangement.  This could lead to a successful challenge by the IRS on the basis that the letters of credit or the escrow can be assigned, with the result that deferral is not accomplished. 

Although the general rule is that funds placed in escrow as security for payment are not constructively received in the year of sale, it is critical for a farmer-seller to clearly indicate that the buyer is being looked to for payment and that the escrow account serves only as security for this payment.  In addition, any third-party guarantee or standby letter of credit should be nonnegotiable and set up so that it can only be drawn upon in the event of default.  If the escrow account is set up properly, the funds held in escrow, and the accrued interest on those funds, is taxable as income in the year that it provides an economic benefit to the taxpayer. 

Planning Point

For deferred sales that are structured properly and achieve income tax deferral, installment reporting is automatic unless the taxpayer makes an election not to use it.  An installment sale is a sale of property with the taxpayer receiving at least one payment after the tax year of the sale. Thus, if a farmer sells and delivers grain in one year and defers payment until the next year, that transaction constitutes an installment sale.  If desired, the farmer can elect out of the installment-sale method and report the income in the year of sale and delivery. 

The election  must be made by the due date, including extensions, of the tax return for the year of sale and not the year in which payment is to be received.  The election is made by recognizing the entire gain on the taxpayer’s applicable form (i.e., Schedule D or Form 4797), rather than reporting the installment sale on Form 6252, Installment Sale Income.

Because of the all-or-nothing feature (on a per-contract basis) of electing out of installment reporting, it may be advisable for farm taxpayers to utilize multiple deferred payment sales contracts in order to better manage income from year to year.  The election out is made by simply reporting the taxable sale in the year of disposition.  But, when the election out of the installment method is made by reporting the income in the year of the sale, the seller must be careful to make sure that the gain recognized is also not recognized in the following year.  A way to make sure that is done is to record a receivable for the amount of the accelerated sales, with the entry reversed after yearend.

Generally, if the taxpayer elects out of the installment method, the amount realized at the time of sale is the proceeds received on the sale date and the fair market value of the installment obligation (future payments). If the installment obligation is a fixed amount, the full principal amount of the future obligation is realized at the time of the acquisition.

What About An Untimely Death?

If a seller dies before receiving all of the payments under an installment obligation, the installment payments are treated as income in respect of a decedent (IRD).  I.R.C. §691(a)(4).  Therefore, the beneficiary does not get a stepped-up basis at the seller’s death.  The beneficiary of the payments includes the gain on the beneficiary’s return subject to tax at the rate applicable to the beneficiary.  The character of the payments is tied to the seller.  For example, if the payments were long-term capital gain to the seller, they are long-term capital gain to the beneficiary. 

Grain farmers often carry a large inventory that may include grain delivered under a valid deferred payment agreement.  Grain included as inventory but more properly classified as an installment sale may not qualify for stepped-up basis if the farmer dies after delivering the grain but prior to receiving all payments.

The only way to avoid possible IRD treatment on installment payments appears to be for the seller to elect out of installment sale treatment.  IRD includes sales proceeds “to which the decedent had a contingent claim at the time of his death.” Treas. Reg. §1.691(a)-1(b)(3). The courts have held that the appropriate inquiry regarding installment payments is whether the transaction gave the decedent at the time of death the right to receive the payments.  See, e.g., Estate of Bickmeyer v. Comm’r, 84 TC 170 (1985).   This means that the decedent holds a contingent claim at the time of death that does not require additional action by the decedent.  In that situation, the installment payments are IRD.

IRS Guide

Chapter 9 of the IRS Farmers Audit Technique Guide (ATG) provides a summary of income deferral and constructive receipt rules.  The ATG provides a procedural analysis for examining agents to use in evaluating deferred payment arrangements. The ATG is available  https://www.irs.gov/businesses/small-businesses-self-employed/farmers-atg.


Agricultural producers typically have income streams that are less consistent from year to year than do nonfarm salaried individuals.  Because of this, agricultural producers often try to structure transactions to smooth out income across tax years and for other tax-related purposes.  One technique used to accomplish these goals involves the use of deferral arrangements. But, it’s important to make sure they are structured properly to produce the desired tax results. 

August 4, 2017 in Income Tax | Permalink | Comments (0)

Wednesday, August 2, 2017

Prospects for Tax Legislation


We are now into August and we don’t really have a good fix on where tax legislation might be headed, if anywhere.  A little over a year ago, a House committee set forth a “Blueprint” for tax reform, and there have been some comments from legislators here and there that have discussed various aspects of what might end up as a part of an overall bill.  But, it still remains to be seen where the Congress might be headed with tax reform. 

Today’s post takes a look at what some of this tax talk has been, where it might be headed, how the process might unfold and the expiring/expired provisions that might be on the immediate “to do” list.

The Political Process and Realities

Of course, any tax legislation must work its way through the political process.  While the Republicans control both the House and Senate, the margin of their Senate majority is razor-thin in that they only hold 52 seats.  That’s problematic in the Senate because of a Senate rule that requires a 60-vote supermajority.  However, if tax legislation happens as part of the budget reconciliation process only a simple majority is necessary.  That would make any tax legislation “filibuster proof.”  But, it would come at a price – it would have to “sunset” in 10 years unless it is deemed to be revenue neutral.      

So, what is the reality of getting 60 votes to pass a straight-up tax bill?  My view is that it’s next to none – at least for any type of comprehensive reform.  60 votes might be obtained for provisions that “nibble on the corners,” but I just don’t see any type of significant reform garnering 60 votes at this time – or at any time in the near future.

Tax Reform in General

Individual taxes.  In 2016, the Republicans in the House produced a tax plan that would decrease individual tax rates and also reduce the number of brackets.  The top rate would be cut to 33 percent on the individual income tax, and the capital gain rate would also be reduced for all taxpayers regardless of their ordinary income tax bracket.  The top capital gain rate would be 16.5 percent.  The House proposal is slightly different from what the President has proposed, so there would have to be some sort of compromise reached.  That’s true for both individual rates and capital gain rates.  Both the House and the President would also repeal the 3.8 percent net investment income tax.  But, that provision was recently proposed to remain in the Code as part of the on-going negotiations over what to do with Obamacare. 

It also appears on the individual income tax side of things that the personal exemption would rise under the House GOP proposal and the President’s proposal.  However, negotiations will need to occur concerning differences over whether the personal exemption should be eliminated, the level of the child tax credit, and what itemized deductions would be retained or eliminated.  But, at this point in time, it looks as if the mortgage interest deduction and the deduction for gifts to charity will be retained under their existing rules.  As for the alternative minimum tax (AMT), there appears to be general agreement on the Republican side that it should be eliminated.  This is something that Senator Grassley has pushed for some time. 

Transfer taxes.  There seems to be a consensus that the federal estate tax should be eliminated.  That’s not a big deal for most people given that the current level of the exclusion eliminates federal estate tax on a gross estate of up to $5.49 million.  However, the big question for far more people is whether the rule allowing an heir to receive an income tax basis in inherited property equal to the fair market value of the property at the time of the decedent’s death will be retained.  That’s a big deal.  If the rule is eliminated, what will replace it?  Will there be a capital gains tax when property is gifted or inherited, which would create a basis step-up” rule.  Will there be an exemption up to a certain amount?  Will the federal gift tax be retained?  These are all important questions for which there really aren’t clear answers to right now. 

Payroll tax.  Under current rules, owners of their own businesses and those receiving flow-through income from an entity pay a 15.3 percent maximum tax (FICA and Medicare) on the first $127,200 of income.  Above $127,200, the rate is either 2.9 percent or 3.8 percent.  With adjustments, that $127,200 could easily exceed $200,000 in another 10 years or so.  One proposal that’s been discussed is to have at least a portion of all flow-through income be subjected to these payroll taxes with no income threshold.  In addition, it may no longer be limited to the taxpayer’s active business income. 

Corporate and business-related tax.  This is one area that I believe something will get done.  The President would like to cut the corporate tax rate to 15 percent to make the U.S. rate more in-line with the major countries around the world.  The GOP House plan is a bit different – a “destination-based cash flow tax” at a flat 20 percent.  That’s basically a value-added tax (VAT) with a deduction allowance for wages that are paid.  In addition, business interest would be deductible against business income, with any excess being allowed to be carried forward.  Costs associated with imported goods wouldn’t be deductible under such a plan, but costs for exporting goods could be deducted.  In addition, this type of a VAT tax would eliminate the corporate AMT, and would also allow a net operating loss to be carried forward indefinitely (but not back) with an inflation adjustment.  The current domestic production activities deduction would be eliminated.   

Also, being discussed is the immediate deduction of the cost of business assets.  If that occurs, that would eliminate the need for like-kind exchanges (except for land exchanges).  It would also eliminate the need for expense method depreciation.  But, would the sale of these business assets generate ordinary income, or would it be capital gain?  What about the sales of breeding stock?  Will that generate ordinary income?  Questions also remain over the handling of pre-productive costs, deferred payment contracts, pre-paid feed expense, business interest expense and the treatment of state income and personal real estate taxes. 

Extender Bill

An extender bill should address certain specific items, including:

  • The definition of “specified plant” for purposes of the provision that allows bonus depreciation to be claimed for fruit/nut plants at the time of planting/grafting instead of waiting until the plant become productive.
  • The provision that allows the exclusion from gross income discharge of debt associated with a principal residence. The current provision expired at the end of 2016.  The same can be said the provision that allows mortgage insurance premiums to be treated as qualified residence interest, and the above-the-line deduction for qualified tuition and related expenses.  Both of these provisions also expired at the end of 2016.


At the present time, it appears that tax reform is in line behind the repeal of Obamacare.  It may finally be dawning on the Republicans in Congress that the President won’t accept their inability (so far) to take action on that front.  That reality delays tax reform.  So, it may be September or October until tax reform really begins to take serious shape.  This process can be frustrating to watch, but it is the present reality.

Clients will begin (if they haven’t already) asking questions about tax policy and where things might be headed.  Hopefully today’s post will provide some guidance that can assist in advising clients on what is being considered and what, if anything, they can do from a planning standpoint. 

August 2, 2017 in Income Tax | Permalink | Comments (0)

Monday, July 31, 2017

Agricultural Law in a Nutshell


Today's post is a deviation from my normal posting on an aspect of agricultural law and tax that you can use in your practice or business.  That’s because I have a new book that is now available that you might find useful as a handbook or desk reference.  Thanks to West Academic Publishing, my new book “Agricultural Law in a Nutshell,” is now available.  Today’s post promotes the new book and provides you with the link to get more information on how to obtain you copy.


The Nutshell is taken from my larger textbook/casebook on agricultural law that is used in classrooms across the country.  Ten of those 15 chapters are contained in the Nutshell, including some of the most requested chapters from my larger book – contracts, civil liabilities and real property.  Also included are chapters on environmental law, water law and cooperatives.  Bankruptcy, secured transactions, and regulatory law round out the content, along with an introductory chapter.  Not included in this Nutshell are the income tax, as well as the estate and business planning topics.   Those remain in my larger book, and are updated twice annually along with the other chapters found there. 


The Nutshell is designed as a concise summary of the most important issues facing agricultural producers, agribusinesses and their professional advisors.  Farmers, ranchers, agribusinesses, legal advisors and students will find it helpful.  It’s soft cover and easy to carry.

Rural Law Program

The Nutshell is another aspect of Washburn Law School’s Rural Law Program.  This summer, the Program placed numerous students as interns with law firms in western Kansas.  The feedback has been tremendous and some lawyers have already requested to be on the list to get a student for next summer.  Students at Washburn Law can take numerous classes dealing with agricultural issues.  We are also looking forward to our upcoming Symposium with Kansas State University examining the business of agriculture and the legal and economic issues that are the major ones at this time.  That conference is set for Sept. 18, and a future post will address the aspects of that upcoming event.


You can find out more information about the Nutshell by clicking here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/agriculturallawnutshell/index.html

July 31, 2017 in Bankruptcy, Civil Liabilities, Contracts, Cooperatives, Environmental Law, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Thursday, July 27, 2017

What Are A Farmer’s Rights When a Grain Elevator Fails?


Low commodity prices over the past couple of years for many commodities, particularly in the Midwest and the Great Plains, have resulted in financial stress for many farmers.  For example, 2015 farm income in Kansas was the lowest since 1985.  Prices have dropped and are volatile and subject to economic conditions around the world.  In addition, the cost of production has continued to rise.  All of this have an impact on a farmer’s ability to repay debt.  That repayment capacity has dropped dramatically over the past two-three years.  All of this makes marketing important as well as the proper utilization of crop revenue insurance.  Ultimately, continued low prices will also have an impact on land values and, in some areas, that impact is already being noticed. 

An associated concern is the strain placed on grain elevators.  If an elevator fails, what’s the impact on farmers that have deposited grain and on the agricultural community?  What are the rights that a farmer has when an elevator fails?  How much can be recovered, and when can it be recovered?  Are there any legal remedies?  These issues are the focus of today’s post.

Stored Grain

A farmer that has stored grain at an elevator that files bankruptcy is not a creditor of the elevator.  That’s because the grain in storage is the farmer’s property.  The farmer’s ownership of the grain is evidenced by a warehouse receipt or a scale ticket.  Both of those serve as prima facie evidence of the farmer’s ownership of the stored grain.  So, the farmer’s relationship with the elevator is not a creditor/debtor relationship, but a bailee/bailor one.  Uniform Commercial Code (U.C.C.) §7-102(a)(1).  In addition, that relationship is not impacted just because the elevator will return to the farmer grain of like quality rather than the identical grain that the farmer delivered to the elevator.  See 54 A.L.R. 1166 (1928). 

Under the UCC, commingled grain that is stored in an elevator is owned in common by the persons storing the grain.  U.C.C. §7-207(b); see also, United States v. Luther, 225 F.2d 499 (10th Cir. 1955), cert. den., 350 U.S. 947 (1956); In re Bucyrus Grain, Co., Inc., 78 B.R. 296 (Bankr. D. Kan. 1987).  So, if there isn’t a grain shortage when an elevator fails, a farmer with grain stored at the elevator can get his grain in accordance with his warehouse receipt or scale ticket.  The bankruptcy trustee can’t retain farmer-stored grain in the bankruptcy estate if there isn’t a shortage.  The trustee only succeeds to the rights the that bankrupt elevator had and, as noted above, stored grain is not the elevator’s property.  Under the Bankruptcy Code, the bankruptcy trustee, after notice and hearing, can dispose of property which an entity other than the bankruptcy estate has an interest in.  11 U.S.C. §725.  This all means that once a farmer establishes ownership to the grain and pays the associated storage costs, the farmer is entitled to his grain. 

But, what if there isn’t enough grain in the elevator to cover all of the claims of farmers that have warehouse receipts or scale tickets.  If that is the case at the time the elevator files bankruptcy, the farmers holding those indicia of ownership share pro rata in the remaining grain.  In this situation, what typically happens is that the bankruptcy trustee will sell all of the grain that is in storage and make a pro rata distribution of the proceeds of sale along with any bond money that the elevator’s bonding company might have.  If, after the pro rata distribution, a famer has not been made whole, the famer becomes a general, unsecured creditor of the elevator to the extent of the shortfall. 

Farmer Priority in Bankruptcy

In the shortfall situation, there is a bit of relief that the Bankruptcy Code provides.  Under 11 U.S.C. §507(a)(6), an unsecured claim of a farmer (grain producer) in an amount of up to $6,325 against a grain storage facility (e.g., grain elevator) has priority.  The priority is a sixth priority claim.  It’s after domestic support obligations, administrative expenses, certain types of other specified unsecured claims, “allowed” unsecured claims, and unsecured claims for contributions to an employee benefit plan, but before certain unsecured claims of individuals and governmental units.  For purposes of the priority provision, a “grain producer” is someone (“an entity”) that engages in the growing of wheat, corn flaxseed, grain sorghum, barley, oats, rye, soybeans, other dry edible beans, and rice.  11 U.S.C. §557(b)(1). “Grain storage facility” means a site or physical structure used to store grain for producers or to store grain acquired from producers for resale.  11 U.S.C. §557(b)(2). 

While the $6,325 provision is likely to be of limited assistance, the Bankruptcy Court for the District of Kansas, affirmed by the Kansas Federal District Court, has held that the priority provision also gives priority status ahead of secured creditors with respect to grain owned by farmers that the elevator stores.  In re Esbon Grain Co., 55 B.R. 308 (Bankr. D. Kan. 1985), aff’d., First National Bank v. Nugent, 72 B.R. 528 (D. Kan. 1987).  That means that the financier of the elevator cannot participate in the pro rata distribution of the elevator’s remaining grain to the farmers that stored grain in the elevator at the time the elevator filed bankruptcy.  The court reached its decision based on a Kansas statutory provision that gives grain depositors priority over a warehouse owner and the owner’s creditors in the grain stored in the elevator.  Kan. Stat. Ann. §34-2,107.  A different court in a different state could reach a different conclusion. 

There is also another bankruptcy priority provision that can aid a farmer with grain stored in an elevator that fails.  11 U.S.C. §503(b)(9) includes as an administrative expense, entitled to first-tier priority, “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”  If a farmer can qualify for this provision, it is much stronger that the sixth-priority claim under 11 U.S.C. §507(a)(6).  That’s because it is an administrative expense under the definition of 11 U.S.C. §507(a)(1) which makes it a first-tier priority.  It also is not subject to the limit of $6,325 noted above that applies to sixth-priority claims. 

There is also an expedited procedure for determining ownership of the grain that is stored at an elevator at the time the elevator files bankruptcy.  11 U.S.C. §557(c). 

Grain Sold on Contract

One of the perils of grain contracting is the financial instability of the buyer.  For grain that has been sold on contract to an elevator that then files bankruptcy before the delivery date specified in the contract, the farmer-seller can refuse to deliver the grain if the elevator is insolvent.  The only exception to that rule is if the elevator can make cash payment.  U.C.C. §2-702.  If delivery has already been made as specified in the contract (whether under a forward, deferred payment or deferred pricing contract) and then the elevator files bankruptcy, the farmer-seller is an unsecured creditor and also is ineligible to participate in state indemnity/insurance funds or elevator bonding protection.  See e.g., Iowa Code §203D; In re Woods Farmers Co-op Elevator Co., 107 B.R. 678 (Bankr. N.D. 1989).  While ownership of grain stored under a warehouse receipt or scale ticket remains with the farmer, delivery of grain that is sold under a contract causes title to the grain to pass to the elevator.  As noted, that makes the outcome different. 

Legal Remedy?

As noted in my blogpost of July 19, co-op directors are subject to fiduciary duties of obedience, loyalty and care.  If a breach of any of those duties can be tied to the elevator’s failure, that might provide a legal remedy for disaffected farmers.  However, that could be a difficult connection to make, and take time and money to establish it. 


Tough economic times can lead to numerous legal issues.  The failure of a grain elevator can cause large problems for farmers and for the local community it serves.  A farmer that knows their rights and where they stand if an elevator fails, can be in a better position than are those farmers that aren’t as well informed.

July 27, 2017 in Bankruptcy, Secured Transactions | Permalink | Comments (0)