Monday, April 9, 2018
In late March, the Congress passed, and the President signed, the Consolidated Appropriations Act of 2018, H.R. 1625. This 2,232-page Omnibus spending bill, which establishes $1.3 trillion of government spending for fiscal year 2018, contains several ag-related provisions. I looked at one of those a couple of weeks ago – the modification to I.R.C. §199A that was included in the Tax Cuts and Jobs Act (TCJA) enacted last December and which became effective for tax years after 2017. I.R.C. §199A, known as the qualified business income (QBI) deduction, created a 20 percent deduction for sole proprietorships and pass-through businesses. However, the provision created a tax advantage for sellers of agricultural products sold to agricultural cooperatives. Before the modification, those sales generated a tax deduction from gross sales for the seller. But if those same ag goods were sold to a company that was not an agricultural cooperative, the deduction could only be taken from net business income. That tax advantage for sales to cooperatives was deemed to be a drafting error and was modified by a provision that provides greater equity between sales to agricultural cooperatives and non-cooperatives.
The modification to I.R.C. §199A received a lot of attention. However, there were a couple of other provisions in the Omnibus bill that are also ag-related. Today’s blog post examines those other two provisions.
Animal Waste Air Reporting Exemption For Farms
Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation. In 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for Confined Animal Feeding Operations (CAFOs) under EPCRAs public disclosure rule. Various environmental groups challenged the exemption on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the retained reporting requirement for CAFOs was also impermissible. The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but did determine that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, No. 09-1017, 2017 U.S. App. LEXIS 6174 (D.C. Cir. Apr. 11, 2017).
The court’s order potentially subjected almost 50,000 farms to the additional reporting requirement. As such, the court delayed enforcement of its ruling by issuing multiple stays, giving the EPA additional time to write a new rule. The EPA issued interim guidance on October 25, 2017. The court issued its most recent stay in the matter on February 1, 2018, with the expiration scheduled for May 1. However, Division S, Title XI, Section 1102 of the Omnibus bill, entitled the Fair Agricultural Reporting Method Act (FARM Act), modifies 42 U.S.C. §9603 to include the EPA exemption for farms that have animal waste air releases. Specifically, 42 U.S.C. §9603(e) is modified to specify that “air emissions from animal waste (including decomposing animal waste) at a farm” are exempt from the CERCLA Sec. 103 notice and reporting requirements. “Animal waste” is defined to mean “feces, urine, or other excrement, digestive emission, urea, or similar substances emitted by animals (including any form of livestock, poultry, or fish). The term animal waste “includes animal waste that is mixed or commingled with bedding, compost, feed, soil or any other material typically found with such waste.” A “farm” is defined as a site or area (including associated structures) that is used for “the production of a crop; or the raising or selling of animals (including any form of livestock, poultry or fish); and under normal conditions, produces during a farm year any agricultural products with a total value equal to not less than $1,000.”
ELD Rule Involving Agricultural Commodities Defunded
The Omnibus bill also addresses an Obama-era regulation involving truckers that is of particular importance to the livestock industry. On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) was set to go into effect. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule was issued in late 2015. The new rule would require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18, 2017. The devices connect to the vehicle's engine and automatically record driving hours. There are numerous exceptions to the ELD final rule.
While the mandate was set to go into effect December 18, 2017, the Federal Motor Carrier Safety Administration (FMCSA) granted a 90-day waiver for all vehicles carrying agricultural commodities. That 90-day delay was later extended. Other general exceptions to the final rule exist for vehicles built before 2000; vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)); drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)); and drivers who maintain HOS logs for no more than eight days during any 30-day period.
Under the Omnibus legislation, the ELD rule was defunded through the end of the government's current fiscal year - September 30, 2018. Under Division L, Title I, Section 132, specifies that, “None of the funds appropriated or otherwise made available to the Department of Transportation by this Act or any other Act may be obligated or expended to implement, administer, or enforce the requirements of 5 section 31137 of title 49, United States Code, or any regulation issued by the Secretary pursuant to such section, with respect to the use of electronic logging devices by operators of commercial motor vehicles, as defined in section 31132(1) of such title, transporting livestock as defined in section 602 of the Emergency Livestock Feed Assistance Act of 1988 (7 U.S.C. 1471) or insects.”
The Omnibus bill is a conglomeration of many provisions, most of which don’t have a direct impact on agricultural producers or agribusinesses. However, there were a few provisions included of importance to agriculture. While very few people, if any, have read and understand all of the provisions in the 2,232-page bill, it is important for those in the agricultural industry to have an understanding of the provisions that apply to them.
Thursday, April 5, 2018
When the Congress eventually gets around to debating the next Farm Bill, I suspect that crop insurance will comprise a significant part of the discussion. In certain parts of the country in recent years, crop insurance comprised the largest portion of farm income. Given that one of those areas, Kansas, is represented in the Senate by the chair of the Senate Ag Committee, that practically guarantees that crop insurance will get plenty of attention by the politicians during the Farm Bill debate.
The Federal Crop Insurance Corporation (FCIC) was created in 1938 to carry out the fledgling crop insurance program. That program was basically an experimental one until the Congress passed the Federal Crop Insurance Act (FCIA) of 1980. Changes were made to the crop insurance program on multiple occasions and, in 1994, the program underwent a major overhaul with the Federal Crop Insurance Reform Act of 1994 which made it mandatory for farmers to participate in the program to qualify for various federal farm program benefits.
With the 1996 Farm bill, the mandatory participation in crop insurance was repealed, so to speak. However, if a farmer received other farm program benefits the farmer had to buy crop insurance for the crop year or waive eligibility for disaster benefits for that year. In addition, the Risk Management Agency (RMA) was also created in 1996 as a part of the United States Department of Agriculture (USDA). The RMA administers the FCIC programs and other risk management programs in conjunction with private sector entities to develop insurance products for farmers.
In recent months, the courts have decided numerous cases involving crop insurance. In today’s post, I take a look at three of them. Each of them involves unique issues.
RMA and Freedom of Information Act (FOIA) Requests
In Bush v. United States Department of Agriculture, No. 16-CV-4128-CJW, 2017 U.S. Dist. LEXIS 131381 (N.D. Iowa Aug. 17, 2017), the RMA pursuant to the FOIA. The plaintiff was seeking the disclosure of soybean and corn yield within four townships in Cherokee County, Iowa. The RMA provided a no records in response to the plaintiff’s request explaining that it did not have the information available by section for townships within a county. The court determined that the purpose of the FOIA is to give the public greater access to governmental records. However, there are exceptions to this rule. The court determined that summary judgment for an agency is appropriate when the agency shows that it made a good faith effort to conduct a search for the requested records, using methods which can reasonably be expected to produce the information requested. However, the agency does not have to search every record system. In addition, the court pointed out that the FOIA neither requires an agency to answer questions disguised as FOIA requests or to create documents or opinions in response to an individual’s request for information.
The court concluded that the evidence illustrated that RMA did not maintain records matching the description of the plaintiff’s requests. Although it did collect some information from the records of insurance companies which would contain some of the information the plaintiff sought, it did not maintain records containing the precise information requested. As a result, the RMA was not required to provide information that it did not have to the plaintiff, and the court granted RMA’s motion for summary judgment.
Actual Production History
In Ausmus v. Perdue, No. 16-cv-01984-RBJ, 2017 U.S. Dist. LEXIS 169305 (D. Colo. Oct. 13, 2017), the plaintiffs, farmers who produce winter what in Baca County, Colorado, sought judicial review of an adverse decision of the RMA which was subsequently affirmed by the National Appeals Division (NAD). Section 11009 of the 2014 Farm Bill amended subparagraph 1508(g)(4)(C) of the FCIA to add an APH Yield Exclusion to give crop producers the opportunity to exclude uncharacteristically bad crop years from the RMA’s calculation of how much crop insurance coverage they are entitled to. The plaintiffs wished to insure their 2015 winter wheat crop. Believing that they were eligible to invoke the APH Yield Exclusion, they gave their crop insurance agents letters electing to exclude all eligible crop years for purposes of calculating their coverage. After receiving the letters from the plaintiff and other crop producers, crop insurance providers contacted the RMA requesting guidance on how to handle the APH Yield Exclusion elections concerning the 2015 winter wheat crop. The RMA informed insurance providers that it had authorized the APH Yield exclusion for most crops for 2015, but it did not authorize the APH Yield Exclusion for winter wheat. As a result, the Agency directed insurance providers to deny winter wheat producers’ requests for the APH Yield Exclusion.
The plaintiffs challenged the directive as an adverse decision appealable to NAD. A NAD Hearing Officer conducted a hearing and issued a determination that NAD did not have jurisdiction over the matter and did not reach the merits. The plaintiffs then requested NAD Director Review of the Hearing Officer’s Determination pursuant to 7 C.F.R. § 11.9. The NAD Director reversed the Hearing Officer’s determination as to jurisdiction, but also held that the RMA has discretion to determine the appropriate time to implement the APH Yield Exclusion with regard to 2015 winter wheat. This decision effectively affirmed the RMA’s decision not to authorize the APH Yield exclusion. The plaintiffs appealed, and the trial court determined that, absent clear direction by Congress to the contrary, a law takes effect on the date of its enactment. The court noted that there was no statutory indication that it would take effect other than on the date of its enactment. The court viewed Congress’ silence as an expression that it meant the APH Yield Exclusion to be immediately available to producers on the date the Farm Bill was signed into law. Consequently, the court reversed the NAD Director’s decision and remanded this case for the proper application of the APH Yield Exclusion.
In POCO, L.L.C. v. Farmers Crop Ins. All., Inc., No. 16-35310, 2017 U.S. App. LEXIS 20853 (9th Cir. Oct. 23, 2017), the defendant was a federal crop insurer and the plaintiff was a farming operation that raised potatoes and onions. The plaintiff claimed that it purchased a federal crop insurance policy from the defendant and tendered an insurance claim to the defendant in 2004. The defendant denied the claim and the plaintiff demanded arbitration. The arbitrator found for the plaintiff, requiring the defendant to pay $1,454,450 plus interest on the claim. The defendant appealed the arbitrator’s award, but the trial court affirmed the award for the plaintiff. While the claim was in dispute the USDA was, unbeknownst to the plaintiff, conducting a criminal investigation of the plaintiff for an alleged scheme to profit from the filing of false federal crop insurance claims. Ultimately, the plaintiff and its principal were indicted based on their acceptance of the arbitration award which the government claimed constituted a criminal act. At the subsequent trial, the court dismissed all of the counts with prejudice.
The plaintiff had also sued the defendant for breach of contract, negligent misrepresentation, and violation of the Washington Consumer Protection Act (WCPA). The plaintiff claimed that the defendant had acted as the USDA’s agent and, as a result, the arbitration award was simply a ruse to entrap the plaintiff. The plaintiff claimed that if it had known about the criminal investigation that it could have required the USDA’s direct involvement in the arbitration process and be assured that no criminal charges were pending. The plaintiff also claimed that USDA's direct involvement would have allowed it to get a court order that the plaintiff had a right to recover on its claims. The trial court granted summary judgment for the defendant holding that a private insurance company has no authority to bind the federal government from pursuing a criminal prosecution, absent involvement from a party with the requisite authority. The trial court ruled that it was unreasonable as a matter of law for a settlement agreement between private parties which clearly defines the subject matter of the agreement, to preclude criminal prosecution by the government. The plaintiff appealed.
The Mutual Release in the parties’ contract provided that the defendant, “for itself and for its insurance companies, and related companies” releases the plaintiff from liability for claims arising out of the plaintiff’s claim for indemnity under the 2003 crop insurance policies issued by the defendant. The plaintiff argued that “its insurance companies” included the Federal Crop Insurance Company and, therefore, the federal government. However, the appellate court held that the phrase could not reasonably be interpreted to bind the federal government and prevent the Department of Justice from pursing a criminal prosecution against the plaintiff for events related to the 2003 policies. Furthermore, the limited scope of the release could not be reasonably read to encompass the criminal charges filed against the plaintiff, which dealt with inflating crop baseline prices to increase eventual payouts on numerous insurance policies. Thus, the appellate court affirmed the trial court’s grant of summary judgment on the breach of contract claim. The plaintiff also alleged misrepresentation of a material fact. The appellate court determined, however, that the plaintiff failed to demonstrate a genuine factual dispute as to whether the defendant knew that the plaintiff was under a criminal investigation. The plaintiff’s evidence in support of that proposition stemmed from a 2004 insurance policy, rather than the 2003 insurance policy at issue in this case.
Consequently, the appellate court agreed with the trial court that, as a matter of law, the plaintiff could not have reasonably relied on the purported misrepresentation. Therefore, the trial court’s grant of summary judgment on the plaintiff’s misrepresentation claim was granted. Finally, the plaintiff’s WCPA claim failed because there was no misrepresentation, deception or unfairness. The terms of the contract were not deceptive and the plaintiff did not make a showing that there was a genuine dispute over whether the defendant knew about the criminal investigation.
These cases are just three of those that have been recently decided by the federal courts involving crop insurance. Crop insurance is important, but it is imperative to follow the rules. Because those rules are often complex and difficult to understand, it is important for a farmer to have competent legal counsel to provide guidance through the issues.
Monday, March 12, 2018
Since the enactment of the Tariff Act of 1789 (signed by President Washington) along with the Collection Act also enacted on the same day, the U.S. has been engaged in protecting trade. Those two 1789 laws were not only designed to protect trade. They were also enacted with the purpose of raising revenue for the federal government. As the soon-to-be first Secretary of the Treasury, Alexander Hamilton took the position that tariffs would encourage industry in the newly-formed country and pointed out that other countries subsidized their industries and that tariffs would protect U.S. businesses from the negative impacts of those subsidies. Later on, the Tariff Act of 1816 addressed concerns about other countries “dumping” their goods in the U.S. at less than fair value to damage U.S. domestic production.
This history points out that the federal government has imposed tariffs practically from the founding of the country. Presently, massive trade deficits with various countries (particularly Mexico and China) and currency manipulation (by China) have posed a serious problem that a pragmatic President is determined to solve.
But, what are the potential implications of the Trump Administration’s recent trade measures on agriculture? Are the recently announced tariffs part of a bigger overall picture? Are they a bargaining chip in negotiating improvements to existing trade deals? These are all important questions.
For today’s post, I have asked Prof. Amy Deen Westbrook, the Kurt M. Sager Memorial Distinguished Professor of International and Commercial Law at Washburn University School of Law, for her thoughts on the matter. She graciously accepted my invitation and is today’s guest blogger. As you will see, Prof. Westbrook is another example of the fine legal instruction that is provided at Washburn Law. I will sum things up in the conclusion at the end.
Multiple Moving Parts – Trade Deals and Tariffs
Renegotiation of NAFTA. Fulfilling one of President Trump’s campaign promises, the Administration launched a renegotiation process of the North American Free Trade Agreement (NAFTA) last August. The United States is seeking a more favorable deal, and has threatened to withdraw from NAFTA if it cannot come to a satisfactory arrangement with Mexico and Canada.
U.S. NAFTA negotiating priorities center on increased minimum regional content requirement for autos to qualify for NAFTA treatment, access to U.S. government procurement opportunities, revised dispute resolution options, an automatic five-year sunset provision for NAFTA, and more advantageous agriculture provisions. In particular, the United States has requested that Canada dismantle its system of tariffs and quotas in the dairy sector. The United States is also seeking authorization for stronger protections for seasonal U.S. produce against Mexican imports.
U.S. agricultural demands reflect the current NAFTA agricultural trade deficit. Although the deficit largely results from the weaker Mexican and Canadian currencies, it also reflects the increasing volume of imports of fruits and vegetables into the United States, particularly counter-seasonal imports of products like tomatoes, peppers and asparagus from Mexico.
Note: Negotiators from all three NAFTA parties wrapped up their seventh round of talks in early March of 2018 in Mexico City, and anticipate an eighth round in Washington, D.C. beginning in April. However, it is unclear when, or even if, a revised agreement will be ironed out.
Use of trade remedies against U.S. trading partners. The Trump Administration has various remedies at its disposal with respect to trade disputes. Recently, for example, the Trump Administration has imposed several different measures on foreign imports. U.S. law, the World Trade Organization (WTO) agreement, and other international obligations provide the United States with an array of remedies to protect U.S. producers from trade practices by other countries. As noted below, the Administration has utilized each of these remedies to-date.
Dumping, subsidies, and other unfair trade practices. In response to a petition by or on behalf of a U.S. industry, U.S. trade regulators can levy anti-dumping duties on foreign goods sold in the United States at unfairly low prices if the sale of those goods materially injures, or threatens to injure, or even retards the establishment of, the domestic industry. Similarly, "countervailing duties" may be levied on foreign goods sold in the United States at unfairly low prices as a result of an impermissible subsidy by the exporting nation. The United States currently has 164 antidumping and countervailing duty orders in effect for steel alone, with another 20 in the pipeline.
Section 301. Section 301 of the Trade Act of 1974 empowers the U.S. Trade Representative (USTR) to impose duties or suspend concessions against a foreign country that takes actions that are unjustifiable, unreasonable or discriminatory and burden or restrict U.S. commerce. In 2017, the United States launched a Section 301 investigation into Chinese practices relating to forced technology transfer, unfair licensing and other intellectual property policies.
Section 201. In addition to remedies for unfair trade practices, the United States can also impose protections for domestic industries against fair trade practices by our trade partners. On January 22, 2018, President Trump approved the imposition of safeguards under Section 201 of the Trade Act of 1974 against foreign solar panels and washing machines. Section 201 relief, which was last granted by the United States 16 years ago, provides temporary protection to a U.S. industry that is being injured by a surge of foreign imports. The measures are intended to last for a couple of years, and in fact the U.S. plan for solar panels is to start tariffs at 30% and let them gradually fall to 15% over four years.
Section 232. Perhaps more significant, at least to the financial markets, than the anti-dumping, anti-subsidy, Section 301 or Section 201 actions, however, was the announcement in early March of 2018 that the U.S. would take measures under Section 232 of the Trade Expansion Act of 1962. An almost-never-used provision, Section 232 enables the President to restrict foreign trade in the interests of national security. In April of 2017, President Trump requested the Secretary of Commerce to review the impact of imported steel and aluminum under Section 232. The Department of Commerce produced its reports in January of 2018, and made them public in February. Unlike the last time the Administration considered Section 232 measures with respect to steel (in 2001), this time the Department of Commerce recommended tariffs be imposed on foreign imports in order to safeguard national security. Upon receipt of the report, the President had 90 days to decide whether to impose measures. On March 8, the President imposed “flexible,” global tariffs (25 percent on steel and 10 percent on aluminum). It is important to note that the President announced the tariffs in the middle of the NAFTA negotiations.
Note: The Section 232 measures have resulted in substantial diplomacy and lobbying by U.S. industries that will be directly affected by the Section 232 measures - such as the auto industry. U.S. industries indirectly affected by the measures, such as agriculture, have also voiced concern, as have U.S. foreign trading partners.
The Section 232 tariffs are seen largely as a measure against China. The United States is the world’s top steel importer. China is the world’s largest producer of both steel and aluminum. Although China accounts for just a fraction of U.S. steel imports, the United States believes that China has flooded the global market for steel and is dragging down prices as a result. In addition, Canada (the largest U.S. source of foreign steel and aluminum) and Mexico (the fourth largest U.S. source of foreign steel and 11th largest aluminum source) are currently exempted from the tariffs, contingent upon successful completion of the NAFTA negotiations. President Trump has also indicated that Australia may be exempted (by virtue of a pending security agreement) and the USTR met in early March of 2018 with representatives of the European Union and Japan about the possibility of exclusion from the tariffs.
Normally, Section 232 tariffs take effect 15 days after the President’s official announcement. That means that right now, and over the next few days, negotiations could occur with a number of U.S. trading partners as they argue for exemptions. The negotiations may be made more dramatic by the fact that the Administration has pledged to block a certain volume of foreign steel from the market, meaning that each time a country is exempted from the tariffs, tariffs presumably must rise on the remaining/non-exempted countries.
Foreign Reactions To The Tariffs – Including Agricultural Impacts
U.S. Secretary of Agriculture Sonny Perdue has expressed concern that U.S. trading partners impacted by the U.S. trade measures, particularly the steel tariffs, will retaliate against U.S. agricultural exports. As expected, foreign reactions to the U.S. measures have not been positive. The European Union (EU) announced a list of $3.5 billion of U.S. products against which it will impose 25% retaliatory tariffs if the U.S. imposes the steel and aluminum measures on the EU. The EU list targeted Harley Davidson motorcycles, jeans, and bourbon, as well as orange juice, corn, cranberries, peanut butter and a variety of other agricultural products. The EU’s announcement echoes its reaction to U.S. Section 201 safeguard measures for steel in 2002, which the EU ultimately successfully challenged at the WTO, resulting in the U.S. removal of the measures before the EU retaliated.
China has also reacted negatively to the Administration's announcement of new U.S. measures. On February 4, 2018 (two weeks after the Section 201 measures on solar panels and washing machines were announced). China announced that it would launch anti-dumping and anti-subsidy investigations of U.S. sorghum exports. U.S. grain sorghum exports to China have increased since 2013, and China currently accounts for approximately 80 percent of U.S. grain sorghum exports.
In addition, on February 7, 2018, Chinese agricultural producers met to study the possibility of launching anti-dumping or anti-subsidy investigations into U.S. exports of soybeans. U.S. soybean exports are particularly vulnerable to Chinese measures. The 30 million tons of soybeans China purchases from the United States represent a third of U.S. production, and make China the largest market for U.S. soybeans. With Brazilian (and, to a lesser extent, Argentinian) beans in plentiful, and relatively cheap, supply, there is concern that China could curb U.S. imports and replace them with South American soybeans (at least for 6-7 months). Other concerns center on U.S. beef exports to China, which restarted only last year after a ban imposed in 2003 because of concerns over bovine spongiform encephalopathy.
The WTO and Other Legal Actions
China, the EU, Japan and South Korea sought consultations with the United States at the WTO following the U.S. imposition of the Section 201 measures against solar panels and washing machines. Canada also sought an injunction against the imposition of the Section 201 safeguards, but its request was rejected by the U.S. Court of International Trade on March 6, 2018.
However, it is unclear whether U.S. trading partners will challenge the Section 232 national security safeguards at the WTO. The EU is reported to be considering a WTO challenge, pending the outcome of its request for an exemption from the Section 232 tariffs. The WTO agreement includes an exception from members’ trade obligations for actions necessary for the protection of a member’s essential security interests. However, key terms such as “necessary” and “essential security interests” are undefined. Countries are reluctant to use and even more reluctant to second-guess their trading partners’ use of the exception for essential security interests. Sovereign countries generally do not want to infringe on the national-security-based policy decisions of other sovereign countries. In addition, there has been a tacit recognition that if the exception is indiscriminately invoked, it has the potential to undermine the entire WTO system. If anything can be an essential security interest, then any country can use the exception at anytime.
Currency manipulation, trade deficits, unfair trade practices, theft and misuse of intellectual property rights, and related issues are not problems that are unique to a particular political party or political ideology. They are American problems that threaten the financial stability of the U.S. and the production of U.S. products and commodities. The open borders trade agenda for at least the past 25 years has negatively impacted U.S. families. For example, just from 2000-2010 (post-NAFTA) the U.S. lost 55,000 factories and 6,000,000 manufacturing jobs across numerous sectors, U.S. wages stagnated, and the associated ingenuity was lost. These are problems that President Trump has identified that need to be fixed in a pragmatic way. These are also problems that hit at the core of the United States as a country – as President Washington identified over 200 years ago.
Should the agricultural industry be concerned? Of course. However, there is a significant chance that the potential for tariffs and other sanctions on other countries is part of an overall attempt to renegotiate existing trade deals for the benefit of America, including agriculture.
Tuesday, January 9, 2018
In response to attempts by activist groups opposed to animal agriculture, legislatures in several states have enacted laws designed to protect specified livestock facilities from certain types of interference. Some of the laws have been challenged on free speech and equal protection grounds with a few courts issuing opinions that have largely found the laws constitutional suspect. However, last week’s opinion by the U.S. Court of Appeals for the Ninth Circuit construing the Idaho provision provides a roadmap for lawmakers to follow when crafting similar statutes to protect livestock facilities that will survive constitutional scrutiny.
I asked my research assistant, Washburn law student Melissa Miller, to dig into the Ninth Circuit’s opinion for me so that I could wrap her insight from that case into a broader piece for today’s post. Today’s post includes some of her thoughts.
General Statutory Construct
The basic idea of state legislatures that have attempted to provide a level of protection to livestock facilities is to bar access to an animal production facility under false pretenses. At their core, the laws attempt to prohibit a person having the intent to harm a livestock production facility from gaining access to the facility (such as via employment) to then commit illegal acts on the premises. See, e.g., Iowa Code §717A.3A. (a legal challenge to the Iowa law was filed in late 2017). Laws that bar lying and trespass coupled with the intent to do physical harm to an animal production facility likely are not constitutionally deficient. Laws that go beyond those confines may be.
Recent Court Opinions
Recently, a challenge to the North Carolina statutory provision was dismissed for lack of standing. The plaintiffs in the case, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act (Act). The Act creates a civil cause of action for a North Carolina employer against an employee who “captures or removes” documents from the employer’s premises or records images or sound on the employer’s premises and uses the documents or recordings to breach the employee’s duty of loyalty to the employer. The plaintiffs claimed that the Act unconstitutionally stifled their ability to investigate North Carolina employers for illegal or unethical conduct and restricted the flow of information those investigations provide. The court dismissed the case for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017).
The Utah law, however, was deemed unconstitutional. At issue was Utah Code §76-6-112 (Act) which criminalizes the entering of a private agricultural livestock facility under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility. Anti-livestock activist groups sued on behalf of the citizen-activist claiming that the Act amounted to an unconstitutional restriction on speech in violation of the First Amendment. While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist.” For those reasons, the court determined that the Act was unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017).
A Wyoming law experienced a similar fate. In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" included numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection of resource data. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016).
The Idaho Statute and the Courts
In 2012, an animal rights activist went undercover to get a job at an Idaho dairy farm then secretly filmed ongoing animal abuse there. The video was then given to Mercy for Animals, an animal rights group, that publicly released portions of the video, drawing national attention. The dairy farm owner responded to the video by firing the employees who were caught on camera, instituting operational protocols, and conducting an animal welfare audit at the farm. Following the release of the video, the Idaho Legislature responded by enacting the Interference with Agricultural Production Law, Idaho Code § 18-7042. The legislation broadly criminalizes making misrepresentations to access an agricultural production facility as well as making audio and video recordings of the facility without the owner’s consent. Specifically, Idaho Code Sec. 18-7042(1)(d)) criminalizes "interference with agricultural production" when a person knowingly enters an ag production facility without permission or without a court order or without otherwise having the right to do so by statute (in other words, the person is on the premises illegally), and makes a video or audio recording of how the ag operation is conducted.
In March of 2014, The Animal League Defense Fund (ALDF) sued challenging the constitutionality of the law. The complaint alleged that the purpose and effect of the statute “are to stifle political debate about modern agriculture by criminalizing all employment-based undercover investigations and criminalizing investigative journalism, whistleblowing by employees, or other expository efforts that entail images or sounds” in violation of the First and Fourteenth Amendments. The district court determined that four subsections of the statute—§18-7042(1)(a)-(d)—were unconstitutional on First Amendment and Equal Protection Grounds.
On appeal, the Ninth Circuit partially reversed parts of the trial court’s ruling, thereby upholding parts of the law. Animal Legal Defense Fund v. Wasden, No. 15-35960, 2018 U.S. App. LEXIS 241 (9th Cir. Jan. 4, 2018). The appellate court analyzed the statute, subsection-by-subsection.
Subsection (a). Subsection (a) criminalizes entry into an agricultural production facility “by force, threat, misrepresentation or trespass.” The ALDF challenged only the misrepresentation prong of this subsection as unconstitutional and the appellate court agreed that it was unconstitutional, affirming the trial court. The appellate court determined that, unlike lying to obtain records or gain employment (which are associated with a material benefit to the speaker), lying to gain entry merely allowed the speaker to cross the threshold of another’s property, including property that is generally open to the public. Thus, the appellate court determined that the provision was overbroad and could potentially criminalize behavior that, by itself, was innocent, and was targeted at speech and investigative journalists. The court stated that it saw no reason why the state could not narrow the subsection by requiring specific intent or by limiting criminal liability to statements that cause particular harm. The court also held that an easy solution to the First Amendment issue would be to simply strike the word “misrepresentation.”
Subsection (b). Subsection (b) criminalizes obtaining records of an agricultural production facility by misrepresentation. Unlike the trial court, the appellate court upheld this subsection on the basis that it protects against a legally cognizable harm associated with a false statement. The court determined that unlike false statements made to enter property, false statements made to actually acquire agricultural production facility records inflict a property harm upon the owner, and may also bestow a material gain on the acquirer.
Subsection (c). The appellate court also reversed the trial court’s finding of unconstitutionality with respect to subsection (c). This subsection criminalizes knowingly obtaining employment with an agricultural production facility by misrepresentation with the intent to cause economic or other injury to the facility’s operations, property or personnel. The appellate court determined that subsection (c) properly followed U.S. Supreme Court guidance as to what constitutes a lie made for material gain. This was particularly the case, the appellate court noted, because subsection (c) limits criminal liability to only those who gain employment by misrepresentation and who have the intent to cause economic or other injury which further limits the scope of the subsection.
Subsection (d). This subsection bars a person from entering a private agricultural production facility and, without express consent from the facility owner, making audio or video recordings of the “conduct of an agricultural production facility’s operations.” The appellate court determined that because the recording process is itself expressive and is inextricably intertwined with the resulting recording, the creation of audiovisual recordings is speech entitled to First Amendment protection as purely expressive activity. In addition, the appellate court concluded that the subsection was both under-inclusive and over-inclusive. It was under-inclusive by prohibiting audio or video recordings but saying nothing about photographs. It was over-inclusive and suppressed more speech than necessary to further Idaho’s stated goals of protecting property and privacy. Accordingly, the appellate court agreed with the trial court that subsection (d) was unconstitutionally defective.
The Ninth Circuit’s opinion provides a roadmap for state lawmakers to follow to provide at least a minimal level of protection to animal production facilities from those that would intend to do them economic harm. Barring entry to a facility by force, threat or trespass is allowed. Likewise, the acquisition of economic data by misrepresentation can be prohibited. Similarly, criminalizing the obtaining of employment by false pretenses coupled with the intent to cause harm to the animal production facility is not constitutionally deficient. However, provisions that criminalize audiovisual recordings likely will not stand. That conclusion shouldn’t trouble animal production facilities – if they are operating properly there is nothing to hide.
Wednesday, January 3, 2018
This week we are looking at the biggest developments in agricultural law and taxation for 2017. On Monday, I discussed those developments that were important but just not quite significant enough based on their national significance to make the top ten. Today I start a two-day series on the top ten developments of 2017 with a discussion of developments 10 through six. On Friday, developments five through one will be covered. To make my list, the development from the courts, IRS and federal agencies must have a major impact nationally on agricultural producers, agribusiness and rural landowners in general.
Without further delay, here we go - the top developments for 2017 (numbers 10 through six).
- 10 – South Dakota Enacts Unconstitutional Tax Legislation. In 2017, the South Dakota Supreme Court gave the South Dakota legislature and Governor what it wanted – a ruling that a recently enacted South Dakota law was unconstitutional. South Dakota’s 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. The legislature deliberately 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. See, e.g., National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967) and Quill Corporation v. North Dakota, 504 U.S. 298 (1992). 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, the impact would be largely borne by small businesses, including home-based business and small agricultural businesses all across the country. It would also raise serious questions about how strong the principle of federalism remains. State v. Wayfair, Inc., et al., 901 N.W.2d 754 (S.D. Sup. Ct. 2017), pet. for cert. filed, Oct. 2, 2017.
- 9 - Amendment to Bankruptcy Law Gives Expands Non-Priority Treatment of Governmental Claims. H.R. 2266, signed into law on October 26, 2017, contains the Family Farmer Bankruptcy Act (Act). The Act adds 11 U.S.C. §1232 which specifies that, “Any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation”… is to be treated as an unsecured claim that arises before the bankruptcy petition was filed that is not entitled to priority under 11 U.S.C. §507 and is deemed to be provided for under a plan, and discharged in accordance with 11 U.S.C. §1228. The provision amends 11 U.S.C. §1222(a)(2)(A) to effectively override Hall v. United States, 132 Sup. Ct. 1882 (2012) where the U.S. Supreme Court held that tax triggered by the post-petition sale of farm assets was not discharged under 11 U.S.C. §1222(a)(2)(A). The Court held that because a Chapter 12 bankruptcy estate cannot incur taxes by virtue of 11 U.S.C. §1399, taxes were not “incurred by the estate” under 11 U.S.C. §503(b) which barred post-petition taxes from being treated as non-priority. The provision is effective for all pending Chapter 12 cases with unconfirmed plans and all new Chapter 12 cases as of October 26, 2017. H.R. 2266, Division B, Sec. 1005, signed into law on October 26, 2017.
- 8 – “Hobby Loss” Tax Developments. 2017 saw two significant developments concerning farm and ranching activities that the IRS believes are not conducting with a business purpose and are, thus, subject to the limitation on deductibility of losses. Early in 2017, the IRS issued interim guidance on a pilot program for Schedule F expenses for small business/self-employed taxpayer examinations. It set the program to begin on April 1, 2017 and run for one year. The focus will be on “hobby” farmers, and will involve the examination of 50 tax returns from tax year 2015. The program could be an indication that the IRS is looking to increase the audit rate of returns with a Schedule F, and it may be more likely to impact the relatively smaller farming operations. The interim guidance points out that the IRS believes that compliance issues may exist with respect to the deduction of expenses on the wrong form, or expenses that actually belonged to another taxpayer, or that should be subject to the hobby loss rules of I.R.C. §183. Indeed, the IRS notes that a filter for the project will be designed to identify those taxpayers who have W-2s with large income and who also file a Schedule F “and may not have time to farm.” In addition, the guidance informs IRS personnel that the examined returns could have start-up costs or be a hobby activity which would lead to non-deductible losses. The interim guidance also directs examiners to look for deductions that “appear to be excessive for the income reported.” The implication is that such expenses won’t be deemed to be ordinary and necessary business expenses. How that might impact the practice of pre-paying farm expenses remains to be seen. The guidance also instructs examiners to pick through gas, oil, fuel, repairs, etc., to determine the “business and non-business parts” of the expense without any mention of the $2,500 safe harbor of the repair regulations. The interim guidance would appear to be targeted toward taxpayers that either farm or crop share some acres where the income ends up on Schedule F, but where other non-farm sources of income predominate (e.g., W-2 income, income from leases for hunting, bed and breakfast, conservation reserve program payments, organic farming, etc.). In those situations, it is likely that the Schedule F expenses will exceed the Schedule F income. That’s particularly the case when depreciation is claimed on items associated with the “farm” - a small tractor, all-terrain vehicle, pickup truck, etc. That’s the typical hobby loss scenario that IRS is apparently looking for.
The second development on the hobby loss issue was a Tax Court opinion issued by Judge Paris in late 2017. The case involved a diversified ranching operation that, for the tax years at issue, had about $15 million in losses and gross income of $7 million. For those years, the petitioner’s primary expense was depreciation. The IRS claimed that the ranching activity was not engaged in for profit and the expenses were deductible only to the extent of income. The Tax Court determined that all of the petitioner’s activities were economically intertwined and constituted a single ranching activity. On the profit issue, the court determined that none of the factors in the Treasury Regulations §1.183-2(b) favored the IRS. Accordingly, the petitioner’s ranching activity was held to be conducted for-profit and the losses were fully deductible. The court specifically rejected the IRS argument that a profit motive could not be present when millions of dollars of losses were generated. That’s a very important holding for agriculture. Depreciation is often the largest deduction on a farm or ranch operation’s return. Welch, et al. v. Comr., T.C. Memo. 2017-229.
- 7 - Beneficial Use Doctrine Established Water Right That Feds Had Taken. In late 2017, the U.S. Court of Federal Claims issued a very significant opinion involving vested water rights in the Western United States. The court ruled that the federal government had taken the vested water rights of the plaintiff, a New Mexico cattle ranching operation, which required compensation under the Fifth Amendment. The court determined that the plaintiff had property rights by virtue of having “made continuous beneficial use of stock water sources” predating federal ownership. Those water rights pre-dated 1905, and the U.S. Forest Service (USFS) had allowed that usage from 1910 to 1989. The court also agreed with the plaintiff’s claim the water was “physically taken” when the United States Forest Service (USFS) blocked the plaintiff’s livestock from accessing the water that had long been used by the plaintiff and its predecessors to graze cattle so as to preserve endangered species.
More specifically, the plaintiff held all “cattle, water rights, range rights, access rights, and range improvements on the base property, as well as the appurtenant federally-administered grazing allotment known as the Sacramento Allotment” in New Mexico. The plaintiff obtained a permit in 1989 from the USFS to graze cattle on an allotment of USFS land which allowed for the grazing of 553 cows for a 10-year period. At the time the permit was obtained, certain areas of the allotment were fenced off, but the USFS allowed the plaintiff’s cattle access to water inside the fenced areas. However, in 1996, the USFS notified the plaintiff that cattle were not permitted to graze inside the fenced areas, but then later allowed temporary grazing due to existing drought conditions. In 1998, the USFS barred the plaintiff from grazing cattle inside the fenced areas, but then reissued the permit in 1999 allowing 553 cattle to graze the allotment for 10 years subject to cancellation or modification as necessary. The permit also stated that “livestock use” was not permitted inside the fenced area. In 2001, the USFS denied the plaintiff’s request to pipe water from the fenced area for cattle watering and, in 2002, the USFS ordered the plaintiff to remove cattle that were grazing within the fenced area. Again in 2006, the plaintiff sought to pipe water from a part of the fenced area, but was denied. A U.S. Fish and Wildlife Service Biological Opinion in 2004 recommended the permanent exclusion of livestock from the allotment, and the plaintiff sued for a taking of its water rights which required just compensation. While the parties were able to identify and develop some alternative sources of water, that did not solve the plaintiff’s water claims and the plaintiff sued.
The court determined that the plaintiff’s claim was not barred by the six-year statute of limitations because the plaintiff’s claim accrued in 1998 when the USFS took the first “official” action barring the grazing of cattle in the fenced area. The court also determined that under state (NM) law, the right to the beneficial use of water is a property interest that is a distinct and severable interest from the right to use land, with the extent of the right dependent on the beneficial use. The court held that the “federal appropriation of water does not, per se constitute a taking….Instead, a plaintiff must show that any water taken could have been put to beneficial use.” The court noted that NM law recognizes two types of appropriative water rights – common law rights in existence through 1907 and those based on state statutory law from 1907 forward. The plaintiff provided a Declaration of Ownership that had been filed with the New Mexico State Engineer between 1999 and 2003 for each of the areas that had been fenced-in. Those Declarations allow a holder of a pre-1907 water right to specify the use to which the water is applied, the date of first appropriation and where the water is located. Once certified, the Declaration of Ownership is prima facie evidence of ownership. The court also noted that witnesses testified that before 1907, the plaintiff’s predecessor’s in interest grazed cattle on the allotment and made beneficial use of the water in the fenced areas. Thus, the court held that the plaintiff had carried its burden to establish a vested water right. The plaintiff’s livestock watering also constituted a “diversion” required by state law. Thus, the USFS action constituted a taking of the plaintiff’s water right. Importantly, the court noted that a permanent physical occupation does not require in every instance that the occupation be exclusive, or continuous and uninterrupted. The key, the court noted, was that the effects of the government’s action was so complete to deprive the plaintiff of all or most of its interest. The court directed the parties to try to determine whether alternative water sources could be made available to the plaintiff to allow the ranching operation to continue on a viable basis. If not, the court will later determine the value of the water rights taken for just compensation purposes. Sacramento Grazing Association v. United States, No. 04-786 L. 2017 U.S. Claims LEXIS 1381 (Fed. Cl. Nov. 3, 2017).
- 6 – Department of Labor Overtime Rules Struck Down. In 2017, a federal court in Texas invalidated particular Department of Labor (DOL) rules under the Fair Labor Standards Act (FLSA). The invalidation will have a significant impact on agricultural employers. The FLSA exempts certain agricultural employers and employees from its rules. However, 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. But, 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.” In addition, exempt are “executive” workers whose primary duties are supervisory and the worker supervises 2 or more employees. Also exempt are workers that fall in the “administrative” category who provide non-manual work related to the management of the business, and 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. 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 Obama Administration’s 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. 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).
On Aug. 31, 2017, the court entered summary judgment for the plaintiffs in the case thereby invalidating the regulations. 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 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 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. The case is Nevada v. United States Department of Labor, No. 4:16-cv-731, 2017 U.S. Dist. LEXIS 140522 (E.D. Tex. Aug. 31, 2017).
Those are the "bottom five" of the "top 10" developments of 2017. On Friday I will reveal what I believe to be the top five developments.
Monday, January 1, 2018
This week I will be writing about what I view as the most significant developments in agricultural law and agricultural taxation during 2017. There were many important happenings in the courts, the IRS and with administrative agencies that have an impact on farm and ranch operations, rural landowners and agribusinesses. What I am writing about this week are those developments that will have the biggest impact nationally. Certainly, there were significant state developments, but they typically will not have the national impact of those that result from federal courts, the IRS and federal agencies.
It's tough to get it down to the ten biggest developments of the year, and I do spend considerable time sorting through the cases and rulings get to the final cut. Today’s post examines those developments that I felt were close to the top ten, but didn’t quite make the list. Later this week we will look at those that I feel were worthy of the top ten. Again, the measuring stick is the impact that the development has on the U.S. ag sector as a whole.
Almost, But Not Quite
Those developments that were the last ones on the chopping block before the final “top ten” are always the most difficult to determine. But, as I see it, here they are (in no particular order):
- Withdrawal of Proposed I.R.C. §2704 Regulations. In the fall of 2016, the Treasury Department issued proposed regulations (REG-16113-02) involving valuation issues under I.R.C. §2704. The proposed regulations would have established serious limitations on the ability to establish valuation discounts (e.g., minority interest and lack of marketability) for estate, gift and generation-skipping transfer tax purposes via estate and business planning techniques. In early December of 2016, a public hearing was held concerning the proposed regulations. However, the proposed regulations were not finalized before President Trump took office. In early October of 2017, the Treasury Department announced that it was pulling several tax regulations identified as burdensome under President Trump’s Executive Order 13789, including the proposed I.R.C. §2704 regulations. Second Report to the President on Identifying and Reducing Tax Regulatory Burdens (Oct. 4, 2017).
Note: While it is possible that the regulations could be reintroduced in the future with revisions, it is not likely that the present version will ultimately be finalized under the current Administration.
- IRS Says There Is No Exception From Filing a Partnership Return. The IRS Chief Counsel’s Office, in response to a question raised by an IRS Senior Technician Reviewer, has stated that Rev. Prov. 84-35, 1984-2 C.B. 488, does not provide an automatic exemption from the requirement to file Form 1065 (U.S. Return of Partnership Income) for partnerships with 10 or fewer partners. Instead, the IRS noted that such partnerships can be deemed to meet a reasonable cause test and are not liable for the I.R.C. §6698 penalty. IRS explained that I.R.C. §6031 requires partnerships to file Form 1065 each tax year and that failing to file is subject to penalties under I.R.C. §6698 unless the failure to file if due to reasonable cause. Neither I.R.C. §6031 nor I.R.C. §6698 contain an automatic exception to the general filing requirement of I.R.C. §6031(a) for a partnership as defined in I.R.C. §761(a). IRS noted that it cannot determine whether a partnership meets the reasonable cause criteria or qualifies for relief under Rev. Proc. 84-35 unless the partnership files Form 1065 or some other document. Reasonable cause under Rev. Proc. 84-35 is determined on a case-by-case basis and I.R.M. Section 220.127.116.11.3.1 sets forth the procedures for applying the guidance of Rev. Proc. 84-35. C.C.A. 201733013 (Jul. 12, 2017); see also Roger A. McEowen, The Small Partnership 'Exception,' Tax Notes, April 17, 2017, pp. 357-361.
- “Qualified Farmer” Definition Not Satisfied; 100 Percent Deductibility of Conservation Easement Not Allowed. A “qualified farmer” can receive a 100 percent deduction for the contribution of a permanent easement to a qualified organization in accordance with I.R.C. §170(b)(1)(E). However, to be a “qualified farmer,” the taxpayer must have gross income from the trade or business of farming that exceeds 50 percent of total gross income for the tax year. In a 2017, the U.S. Tax Court decided a case where the petitioners claimed that the proceeds from the sale of the property and the proceeds from the sale of the development rights constituted income from the trade or business of farming that got them over the 50 percent threshold. The IRS disagreed, and limited the charitable deduction to 50 percent of each petitioner’s contribution base with respect to the conservation easement. The court agreed with the IRS. The court noted that the income from the sale of the conservation easement and the sale of the land did not meet the definition of income from farming as set forth in I.R.C. §2032A(e)(5) by virtue of I.R.C. §170(b)(1)(E)(v). The court noted that the statute was clear and that neither income from the sale of land nor income from the sale of development rights was included in the list of income from farming. While the court pointed out that there was no question that the petitioners were farmers and continued to be after the conveyance of the easement, they were not “qualified farmers” for purposes of I.R.C. §170(b)(1)(E)(iv)(I). Rutkoske v. Comr., 149 T.C. No. 6 (2017).
- Corporate-Provided Meals In Leased Facility Fully Deductible. While the facts of the case have nothing to do with agriculture, the issues involved are the same ones that the IRS has been aggressively auditing with respect to farming and ranching operations – namely, that the 100 percent deduction for meals provided to corporate employees for the employer’s convenience cannot be achieved if the premises where the meals are provided is not corporate-owned. In a case involving an NHL hockey team, the corporate owner contracted with visiting city hotels where the players stayed while on road trips to provide the players and team personnel pre-game meals. The petitioner deducted the full cost of the meals, and the IRS limited the deduction in accordance with the 50 percent limitation of I.R.C. §274(n)(1). The court noted that the 50 percent limitation is inapplicable if the meals qualify as a de minimis fringe benefit and are provided in a nondiscriminatory manner. The court determined that the nondiscriminatory requirement was satisfied because all of the staff that traveled with the team were entitled to use the meal rooms. The court also determined that the de minimis rule was satisfied if the eating facility (meal rooms) was owned or leased by the petitioner, operated by the petitioner, located on or near the petitioner’s business premises, and the meals were furnished during or immediately before or after the workday. In addition, the court determined that the rules can be satisfied via contract with a third party to operate an eating facility for the petitioner’s employees. As for the business purpose requirement, the court noted that the hotels where the team stayed at while traveling for road games constituted a significant portion of the employees’ responsibilities and where the team conducted a significant portion of its business. Thus, the cost of the meals qualified as a fully deductible de minimis fringe benefit. Jacobs v. Comr., 148 T.C. No. 24 (2017).
Note: The petitioner’s victory in the case was short-lived. The tax bill enacted into law on December 22, 2017, changes the provision allowing 100 percent deductibility of employer-provided meals to 50 percent effective Jan. 1, 2018, through 2025. After 2025, no deduction is allowed.
- Settlement Reached In EPA Data-Gathering CAFO Case. In 2008, the Government Accounting Office (GAO) issued a report stating that the Environmental Protection Agency (EPA) had inconsistent and inaccurate information about confined animal feeding operations (CAFOs), and recommended that EPA compile a national inventory of CAFO’s with NPDES permits. Also, as a result of a settlement reached with environmental activist groups, the EPA agreed to propose a rule requiring all CAFOs to submit information to the EPA as to whether an operation had an NPDES permit. The information required to be submitted had to provide contact information of the owner, the location of the CAFO production area, and whether a permit had been applied for. Upon objection by industry groups, the proposed rule was withdrawn and EPA decided to collect the information from federal, state and local government sources. Subsequent litigation determined that farm groups had standing to challenge the EPA’s conduct and that the EPA action had made it much easier for activist groups to identify and target particular confined animal feeding operations (CAFOs). On March 27, 2017, the court approved a settlement agreement ending the litigation between the parties. Under the terms of the settlement, only the city, county, zip code and permit status of an operation will be released. EPA is also required to conduct training on FOIA, personal information and the Privacy Act. The underlying case is American Farm Bureau Federation v. United States Environmental Protection Agency, 836 F.3d 963 (8th Cir. 2016).
- Developments Involving State Trespass Laws Designed to Protect Livestock Facilities.
- Challenge to North Carolina law dismissed for lack of standing. The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act (Act). The Act creates a civil cause of action for a NC employer against an employee who “captures or removes” documents from the employer’s premises or records images or sound on the employer’s premises and uses the documents or recordings to breach the employee’s duty of loyalty to the employer. The plaintiffs claimed that the Act stifled their ability to investigate NC employers for illegal or unethical conduct and restricted the flow of information those investigations provide in violation of the First and Fourteenth Amendments of the U.S. Constitution and various provisions of the NC Constitution. The court dismissed the case for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017).
- Utah law deemed unconstitutional. Utah law (Code §76-6-112) (hereinafter Act) criminalizes entering private agricultural livestock facilities under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility. Anti-livestock activist groups sued on behalf of the citizen-activist claiming that the Act amounted to an unconstitutional restriction on speech in violation of the First Amendment. While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist”. For those reasons, the court determined that the act was unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017).
- Wyoming law struck down. In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" includes numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech under the First Amendment in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection or resource data. Western Watersheds Project v. Michael, 869 F.3d 1189 (10th Cir. 2017), rev’g., 196 F. Supp. 3d 1231 (D. Wyo. 2016).
- Challenge to North Carolina law dismissed for lack of standing. The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act (Act). The Act creates a civil cause of action for a NC employer against an employee who “captures or removes” documents from the employer’s premises or records images or sound on the employer’s premises and uses the documents or recordings to breach the employee’s duty of loyalty to the employer. The plaintiffs claimed that the Act stifled their ability to investigate NC employers for illegal or unethical conduct and restricted the flow of information those investigations provide in violation of the First and Fourteenth Amendments of the U.S. Constitution and various provisions of the NC Constitution. The court dismissed the case for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017).
- GIPSA Interim Final Rule on Marketing of Livestock and Poultry Delayed and Withdrawn.In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) interim final rules that provide the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The interim final rules concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. Under the proposed regulations, "likelihood of competitive injury" is defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It includes, but is not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) is stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically note that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also note that a PSA violation can occur without a finding of harm or likely harm to competition, but as noted above, that is contrary to numerous court opinions that have decided the issue. On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017. However, on October 18, 2017, GIPSA officially withdrew the proposed rule. Related to, but not part of, the GIPSA Interim Final Rule, a poultry grower ranking system proposed rule was not formally withdrawn.
- Syngenta Settlement. In late 2017, Syngenta publicly announced that it was settling farmers’ claims surrounding the alleged early release of Viptera and Duracade genetically modified corn. While there are numerous cases and aspects of the litigation involving Syngenta, the settlement involves what is known as the “MIR 162 Corn Litigation” and a Minnesota state court class action. The public announcement of the settlement indicated that Syngenta would pay $1.5 billion.
- IRS To Finalize Regulations on the Tax Status of LLC and LLP Members. In its 2017-2018 Priority Guidance Plan, the IRS states that it plans to finalize regulations under I.R.C. §469(h)(2) – the passive loss rules that were initially proposes in 2011. That provision creates a per se rule of non-material participation for limited partner interests in a limited partnership unless the Treasury specifies differently in regulations. Those regulations were initially issued in temporary form and became proposed regulations in 2011. Is the IRS preparing to take a move to finalize regulations taking the position that they the Tax Court refused to sanction? Only time will tell, but the issue is important for LLC and LLP members. The issue boils down to the particular provisions of a state’s LLC statute and whether there are sufficient factors under the state statute that distinguish an LLC from a limited partnership. That will be the case until IRS issues regulations dealing specifically with LLCs and similar entities. The proposed definition would make it easier for LLC members and some limited partners to satisfy the material participation requirements for passive loss purposes, consistent with the court opinions that IRS has recently lost on the issue. Specifically, the proposed regulations require that two conditions have to be satisfied for an individual to be classified as a limited partner under I.R.C. §469(h)(2): (1) the entity must be classified as a partnership for federal income tax purposes; and (2) the holder of the interest must not have management rights at any time during the entity’s tax year under local law and the entity’s governing agreement. Thus, LLC members of member-managed LLCs would be able to use all seven of the material participation tests, as would limited partners that have at least some rights to participate in managerial control or management of a partnership.
- Fourth Circuit Develops New Test for Joint Employment Under the FLSA. The Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C. §§ 201 et seq.) as originally enacted, was intended to raise the wages and shorten the working hours of the nation's workers. The FLSA is very complex, and not all of it is pertinent to agriculture and agricultural processing, but the aspect of it that concerns “joint employment” is of major relevance to agriculture. Most courts that have considered the issue have utilized an “economic realities” or “control” test to determine if one company’s workers are attributable to another employer for purposes of the FLSA. But, in a 2017 case, the U.S. Court of Appeals for the Fourth Circuit, created a new test for joint employment under the FLSA that appears to expand the definition of “joint employment” and may create a split of authority in the Circuit Courts of Appeal on the issue. The court held that the test under the FLSA for joint employment involved two steps. The first step involved a determination as to whether two or more persons or entities share or agree to allocate responsibility for, whether formally or informally, directly or indirectly, the essential terms and conditions of a worker’s employment. The second step involves a determination of whether the combined influence of the parties over the essential terms and conditions of the employment made the worker an employee rather than an independent contractor. If, under this standard, the multiple employers were not completely disassociated, a joint employment situation existed. The court also said that it was immaterial that the subcontractor and general contractor engaged in a traditional business relationship. In other words, the fact that general contractors and subcontractor typically structure their business relationship in this manner didn’t matter. The Salinas court then went on to reason that separate employment exists only where the employers are “acting entirely independent of each other and are completely disassociated with respect to” the employees. The court’s “complete disassociation” test appears that it could result in a greater likelihood that joint employment will result in the FLSA context than would be the case under the “economic realities” or “control” test. While the control issue is part of the “complete disassociation” test, joint determination in hiring or firing, the duration of the relationship between the employers, where the work is performed and responsibility over work functions are key factors that are also to be considered. Salinas v. Commercial Interiors, Inc., 848 F.3d 125 (4th Cir. 2017), rev’g, No. JFM-12-1973, 2014 U.S. Dist. LEXIS 160956 (D. Md. Nov. 17, 2014).
- Electronic Logs For Truckers. On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) was set to go into effect. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule, which was issued in late 2015, could have a significant impact on the livestock industry and livestock haulers. The new rule will require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18. The devices connect to the vehicle's engine and automatically record driving hours. The Obama Administration pushed for the change to electronic logs purportedly out of safety concerns. The Trump Administration has instructed the FMCSA (and state law enforcement officials) to delay the December 18 enforcement of the final rule by delaying out-of-service orders for ELD violations until April 1, 2018, and not count ELD violations against a carrier’s Compliance, Accountability, Safety Score. Thus, from December 18, 2017 to April 1, 2018, any truck drivers who are caught without an electronic logging device will be cited and allowed to continue driving, as long as they are in compliance with hours-of-service rules. In addition, the FMCSA has granted a 90-day waiver for all vehicles carrying agricultural commodities. Other general exceptions to the final rule exist for vehicles built before 2000, vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)), drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)), and drivers who maintain HOS logs for no more than eight days during any 30-day period. One rule that is of particular concern is an HOS requirement that restricts drive time to 11 hours. This rule change occurred in 2003 and restricts truck drivers to 11 hours of driving within a 14-hour period. Ten hours of rest is required. That is a tough rule as applied to long-haul cattle transports. Unloading and reloading cattle can be detrimental to the health of livestock.
- Dicamba Spray-Drift Issues. Spray-drift issues with respect to dicamba and the use of XtendiMax with VaporGrip (Monsanto) and Engenia (BASF) herbicides for use with Xtend Soybeans and Cotton were on the rise in 2017. , 2017Usage of dicamba has increased recently in an attempt to control weeds in fields planted with crops that are engineered to withstand it. But, Missouri (effective July 7) and Arkansas (as of June 2017) took action to ban dicamba products because of drift-related damage issues. In addition, numerous lawsuits have been filed by farmers against Monsanto, BASF and/or DuPont alleging that companies violated the law by releasing their genetically modified seeds without an accompanying herbicide and that the companies could have reasonably foreseen that seed purchasers would illegally apply off-label, older dicamba formulations, resulting in drift damage. Other lawsuits involve claims that the new herbicide products are unreasonably dangerous and have caused harm even when applicators followed all instructions provided by law. In December of 2017, the Arkansas Plant Board voted to not recommend imposing a cut-off date of April 15 for dicamba applications. Further consideration of the issue will occur in early 2018.
Tuesday, December 12, 2017
There are several provisions in federal law that regulate the transport of livestock, other animals, poultry, fish, and insects. Those rules generally concern animal health and safety, and driver safety. The rules also apply to the transport of agricultural livestock. However, in some instances, exceptions exist that apply to agriculture.
On December 18, 2017, the U.S. Department of Transportation (USDOT) Final Rule on Electronic Logging Devices (ELD) and Hours of Service (HOS) is set to go into effect. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule, which was issued in late 2015, could have a significant impact on the livestock industry and livestock haulers. The new rule will require truck drivers to use electronic logging devices instead of paper logs to track their driving hours starting December 18. The devices connect to the vehicle's engine and automatically record driving hours.
The Obama Administration pushed for the change to electronic logs purportedly out of safety concerns. But, what will be the impact of the new final rule on the livestock industry? The federal government has a long history of regulating the transport of livestock in interstate commerce. Today’s post examines provides a brief history of the federal regulation of transporting animals in interstate commerce and the implications for agriculture of finalizing the USDOT ELD and HOS rule.
Animal Welfare Act
As originally enacted in 1966, the Animal Welfare Act (7 U.S.C. §§ 2131 et seq.) addressed the problem of an increase in the theft of pets and their sale for research. The legislation was subsequently expanded to cover the mistreatment of animals in transportation and animal fighting ventures by any live bird, dog or other mammal except man. The rules do not bar hunting with animals.
The major provisions of the legislation include licensing of those who handle pets, those who handle animals who might be used for research and ultimate dealers, exhibitors and auction operators. The purchase of dogs and cats for research purposes is prohibited except from authorized operators. The Act covers warm blooded animals used for research and experimentation. Humane standards are imposed for the handling, care and transportation of animals covered by the Act. Health certificates are required. A five-day waiting period applies before dogs and cats can be sold by dealers and exhibitors. Animals must be marked or otherwise identified.
”28 Hour Law”
The precursor to the present “28 Hour Law” was passed in 1873 to prevent cruelty to animals in interstate commerce by common carrier. The Act was repealed in 1906 and replaced with the “28 Hour Law.” 15 U.S.C. § 1825(a).
The Act, sometimes referred to as the “Food and Rest Law,” prohibits some carriers from transporting animals beyond certain time limits. For example, common carriers engaged in interstate commerce must unload animals for rest, water and feeding into properly equipped pens every 28 hours for at least five consecutive hours. The Act applies to cattle, sheep, swine and other animals. The original application of the law was with respect to trains, but the USDA revised existing regulations in 2006 to also apply to trucks. However, the Act does not apply to the transport of animals by airplane. Thus, the Act applies to transport by rail, boat or truck.
Upon request, the 28-hour time limit may be extended to 36 hours. Similarly, if the time period was exceeded because the unloading of animals was prevented “by storm or other accidental or unavoidable causes which cannot be anticipated or avoided by the exercise of due diligence and foresight,” the 28-hour time limit does not apply.
A special rule exists for sheep. Sheep do not have to be unloaded when the 28-hour time period expires at night. In that event, the sheep can be continued for 36 hours without written consent. A similar exception applicable to all animals is that no unloading is required if the animals have proper food, water, space and an opportunity to rest. However, that is not usually the case with railroads and with other kinds of carriers.
Monitoring Driver Hours – The FMCSA Final Rule
In the 1930s, the federal government established hours of service (HOS) rules for truck drivers. Under the rules, truckers are required to maintain logbooks to record on-duty as well as off-duty hours. It’s those rules that are set to change. As noted above, the Federal Motor Carrier Safety Administration (FMCSA) issued a final rule in 2015 requiring most motor carriers and interstate truck drivers to start using electronic logs to ensure drivers are complying with hours-of-service rules. 80 Fed. Reg. 78292 (Dec.16, 2015). The final rule is set to go into effect on December 18, 2017. It is estimated that the new rule will apply to more than three million truckers. Presently, there are more than 200 ELDs that are self-certified and have been registered with the USDOT.
The FMCSA claims that the goal of the ELD mandate is to make roadways safer by providing the government with a greater ability to more closely track driver hours. For fiscal year 2017, the FMCSA notes an increase of over 11 percent in citations for falsifying driver logs and a 14.8 percent increase in the number of truck drivers put out of service for falsifying logs. During that same timeframe, false log violations accounted for 16.2 percent of the 186,596 out-of-service orders issued to truck drivers. The FMCSA asserts that these statistics are justification for the ELD and HOS final rule.
The Owner-Operator Independent Drivers Association (OOIDA) challenged the final rule based on a violation of privacy rights (Fourth Amendment), but the U.S. Court of Appeals for the Seventh Circuit rejected the argument. Owner-Operator Independent Drivers Association, Inc., et al. v. United States Department of Transportation, et al., 840 F.3d 879 (7th Cir. 2016), cert. den., 137 S. Ct. 2246 (2017). The court determined that the ELD mandate constituted a reasonable administrative inspection under the Fourth Amendment involving a pervasively regulated industry, and was not arbitrary or capricious. The U.S. Supreme Court declined to hear the case, and a subsequent effort to override or delay the ELD rule legislatively failed.
The Trump Administration has instructed the FMCSA (and state law enforcement officials) to delay the December 18 enforcement of the final rule by delaying out-of-service orders for ELD violations until April 1, 2018, and not count ELD violations against a carrier’s Compliance, Accountability, Safety Score. Thus, from December 18, 2017 to April 1, 2018, any truck drivers who are caught without an electronic logging device will be cited and allowed to continue driving, as long as they are in compliance with hours-of-service rules.
Impact on agriculture. The agricultural industry has raised concern over how the ELD rule will impact its stakeholders. Data indicate that the livestock sector has consistently been one of the safest of the commercial hauling sectors. The Large Truck Crash Causation Study, conducted by the Federal Motor Carrier Safety Administration (FMCSA) and the National Highway Traffic Safety Institute, showed that of 1,123 accidents involving trucks hauling cargo, only five involved the transportation of livestock. Another report, the Transportation Institute’s Trucks Involved in Fatal Accidents Fact-book 2005, shows that livestock transporters accounted for just 0.7 percent of fatal accidents.
Exceptions. There are numerous exceptions to the ELD final rule. While the mandate is set to go into effect December 18, 2017, the FMCSA has granted a 90-day waiver for all vehicles carrying agricultural commodities. Other general exceptions to the final rule exist for vehicles built before 2000, vehicles that operate under the farm exemption (a “MAP 21” covered farm vehicle; 49 C.F.R. §395.1(s)), drivers coming within the 100/150 air-mile radius short haul log exemption (49 CFR §395.1(k)), and drivers who maintain HOS logs for no more than eight days during any 30-day period.
Several ag groups have also petitioned the FMCSA for a limited exemption from ELDs for agricultural trucks. There still remains a chance (slim as it may be) that an exemption for ag could be slipped into the tax bill that House and Senate conferees are presently marking up, or in an appropriations bill to continue the funding of the federal government.
One rule that is of particular concern is an HOS requirement that restricts drive time to 11 hours. This rule change occurred in 2003 and restricts truck drivers to 11 hours of driving within a 14-hour period. Ten hours of rest is required. That is a tough rule as applied to long-haul cattle transports. Unloading and reloading cattle can be detrimental to the health of livestock. An exemption from that restriction seems to be in order.
The federal government has long been involved in the regulation of the interstate transport of livestock and drivers. The FMCSA final rule is generally opposed by the transportation industry as well as the ag industry. Fortunately, some exemptions exist to relieve the burden on livestock transporters. Nevertheless, the finalization of the rule and eventual implementation merits attention.
Wednesday, November 22, 2017
For certain types of agricultural employment, federal labor laws are relevant. Exemptions exist that cover the vast majority of smaller operations, but there can come a point at which either the number of employees hired or the type of agricultural production involved will trigger the federal rules.
A recent case from Indiana illustrates the application of federal law, and why the classification of the type of employment matters. What is often involved is the line between “agricultural” employment, “secondary agriculture” or a job in an ag setting that is more properly designated as “commercial” employment.
The Indiana Case
Facts. In Kidd v. Wallace Pork Sys., No. 3:16-CV-210-MGG, 2017 U.S. Dist. LEXIS 163174 (N.D. Ind. Oct. 2, 2017).The defendant operated a hog farm and a feed mill. The plaintiffs were employed at the feed mill between 2013 and 2016, during which time they often worked more than forty hours per week and were never paid overtime. From the time of the feed mill’s inception until summer 2016 the defendant used its own employees to produce animal feed at the feed mill while simultaneously contracting with Bi-County Pork, Inc. to purchase feed produced by Bi-County’s own staff at its independent neighboring facilities using inputs provided solely by the defendant. Bi-County only produced feed for the defendant and the defendant purchased all the feed Bi-County produced. All of the defendant’s feed is either fed to animals that the defendant owns or raises or is sold to third-parties.
Before the plaintiffs began working for the defendant at the feed mill, at least one other feed mill employee (other than the plaintiffs) complained about not receiving overtime pay. The complaint prompted an investigation by the United States Department of Labor (DOL) into the applicability of the Fair Labor Standard Act’s (FLSA) overtime exemption for secondary agricultural labor at the feed mill. The DOL concluded that the feed mill’s operations warranted a secondary agricultural designation exempting feed mill employees from overtime pay because the primary use of the feed produced there was feeding the defendant’s hogs. The DOL also concluded that the defendant used 55 percent of the feed it produced itself and sold the remaining 45 percent. The DOL also pointed out that although the feed mill qualified as secondary agriculture at that time and date, the success with outside suppliers and clients might change that designation in the future.
The court’s analysis. The plaintiffs both sued alleging that the defendant’s failure to pay them overtime constituted violations of state (IN) minimum wage and wage payment statutes as well as the FLSA. The cases were subsequently removed to federal court based upon original jurisdiction arising from their claims under the federal FLSA. Through discovery actions, the defendant reported that about 75 percent of their total feed output was sold to third parties with 75-80 percent of that total feed output being produced by Bi-County. Under 29 U.S.C. § 213(b)(12), the overtime provisions of the FLSA do not apply “to any employee employed in agriculture.” The FLSA distinctly identifies two branches of agriculture: primary agriculture and secondary agriculture. The parties agreed that the work that the plaintiffs performed at the feed mill only qualified for the agricultural exemption from overtime pay if it constituted secondary agriculture. The federal court concluded that in order to defer to the DOL’s report it must first assess whether the totality of the circumstances especially with respect to the portion of the defendant’s income streams, during the time of the plaintiffs’ employment, changes significantly enough from the time covered by the DOL’s investigation to warrant reclassifying work at the feed mill from secondary agriculture to manufacturing. The court held that because the defendant failed to produce data specifying the total feed production and sales from the feed mill and Bi-County separately during the relevant period of the plaintiffs’ employment, a genuine issue of fact existed as to what proportion of the feed mill’s feed output was sold to third parties. As a result, the court concluded that neither party was entitled to summary judgement as a matter of law.
Employment matters in agriculture sometimes trigger the application of federal law (as well as certain state law requirements). The Indiana case is an example of how contemporary agricultural production activities might trigger their application.
To the readers of this blog, enjoy Thanksgiving with your families. As Abraham Lincoln stated in his Proclamation of Thanksgiving on October 3, 1863, take time to reflect and give thanks for the provision of the “blessings of fruitful fields and healthful skies.” The next post will be on November 28.
Friday, November 10, 2017
Amidst all of the news recently about tax proposals in the Congress and the attention that has garnered, there is another important date that is creeping up on many livestock producers. Unless an extension is granted, on November 15, a reporting rule administered by the federal Environmental Protection Agency (EPA) will be triggered that will apply to certain livestock operations. The reporting applies to certain “releases” of “hazardous” substances and the requirement that the government be notified.
The federal government has been involved in regulating air emissions for over 50 years. The first serious effort at the national level concerning air quality was passage of the 1963 Clean Air Act (CAA) amendments. This legislation authorized the then Department of Health, Education and Welfare (now Department of Health and Human Services) to intervene directly when air pollution threatened the public “health or welfare” and the state was unable to control the problem.
The 1970 CAA amendments represented a major step forward at the federal level in terms of regulating the activities contributing to air pollution. This legislation created air quality control regions and made the individual states responsible for sustaining air quality in those regions. The states could regulate existing sources of pollution with less restrictive requirements. See, e.g., State, ex rel. Cooper v. Tennessee Valley Authority, et al., 615 F.3d 291 (4th Cir. 2010).
Additional federal Specifically, under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the Environmental Protection Agency (EPA) has discretion to take remedial actions or order further monitoring or investigation of the situation.
On January 21, 2005, the EPA announced the Air Quality Compliance Consent Agreement to facilitate the development of scientifically credible methodologies for estimating emissions from animal feeding operations (AFOs). A key part of the agreement is a two-year benchmark study of the air emissions from livestock and poultry operations. The study was designed to gather data relative to the thresholds of the CAA, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and the Emergency Planning and Community Right-to-Know Act (EPCRA), and set national air policies so that excessive levels could be regulated. Under both CERCLA and EPCRA, the federal government is to be notified when large quantities of hazardous materials are released into the environment. Once notified, the EPA has discretion to take remedial actions or order further monitoring or investigation of the situation.
In mid-2007, the U.S. Court of Appeals for the D.C. Circuit upheld the EPA’s ability to enter into the consent agreements with participating AFOs. Association of Irritated Residents v. EPA, 494 F.3d 1027 (D.C. Cir. 2007). Community and environmental groups had challenged the consent agreements as rules disguised as enforcement actions, that the EPA had not followed proper procedures for rulemaking and that EPA had exceeded its statutory authority by entering into the agreements. The court disagreed, holding that the consent agreements did not constitute rules, but were enforcement actions within EPA’s statutory authority that the court could not review.
In early 2009, EPA, pursuant to the EPCRA, issued a final regulation regarding the reporting of emissions from confined AFO’s – termed a “CAFO.” The rule applies to facilities that confine more than 1,000 beef cattle, 700 mature dairy cows, 1,000 veal calves, 2,500 swine (each weighing 55 pounds or more), 10,000 swine (each weighing less than 55 pounds), 500 horses and 10,000 sheep. The rule requires these facilities to report ammonia and hydrogen sulfide emissions to state and local emergency response officials if the facility emits 100 pounds or more of either substance during a 24-hour period.
2008 Regulations and Court Case
In late 2008, the EPA issued a final regulation exempting farms from the reporting/notification requirement of CERCLA (Sec. 103) for air releases from animal waste on the basis that a federal response would most often be impractical and unlikely. However, the EPA retained the reporting/notification requirement for CAFOs under the EPCRA’s public disclosure rule. Various environmental activist groups challenged the exemption in the final regulation on the basis that the EPA acted outside of its delegated authority to create the exemption. Agricultural groups claimed that the carve-out for CAFOs was also impermissible, but for a different reason.
The environmental groups claimed that emissions of ammonia and hydrogen sulfide (both hazardous substances under CERCLA) should be reported as part of furthering the overall regulatory objective. The court noted that there was no clear way to best measure the release of ammonia and hydrogen sulfide, but noted that continuous releases are subject to annual notice requirements. The court held that the EPA’s final regulation should be vacated as an unreasonable interpretation of the de minimis exception in the statute. As such, the challenge brought by the agriculture groups to the CAFO carve out was mooted and dismissed. Waterkeeper Alliance, et al. v. Environmental Protection Agency, No. 09-1017, 2017 U.S. App. LEXIS 6174 (D.C. Cir. Apr. 11, 2017).
The court set a deadline for the beginning of the reporting of releases, but the EPA sought an extension. In response, the court extended the date by which farms must begin reporting releases of ammonia and hydrogen to November 15, 2017. The reporting requirement will have direct application to larger livestock operations with air emissions that house beef cattle, dairy cattle, horses, hogs and poultry. It is estimated that approximately 60,000 to 100,000 livestock and poultry operations will be subject to the reporting requirement.
EPA Interim Guidance
On October 26, 2017, the EPA issued interim guidance designed to educate livestock operations about the upcoming reporting requirements for emissions from animal waste.
Under the guidance, the EPA notes that the reportable quantity for each of ammonia and hydrogen sulfide is triggered at a release into the air of 100 pounds or more within a 24-hour period. That level would be reached by a facility with approximately 330-head (for a confinement facility) according to a calculator used by the University of Nebraska-Lincoln which is based on emissions produced by the commingling of solid manure and urine. If that level of emission occurs for either substance, the owner (or operator) of the “facility” must inform the U.S. Coast Guard National Response Center (NRC) of any individual release by calling (800) 424-8802. Unless changed at the last minute, this reporting must be done by November 15, 2017. In addition, a written report must also be filed with the regional EPA office within 30 days of the NRC reporting.
If releases will be “continuous and stable,” “continuous release reporting” is available by filing an “initial continuous release notification” to the NRC and the regional office of the EPA. Once that is done, reporting is only required annually unless the facility’s air emissions change significantly. However, unless an extension is granted, the initial “continuous release” notification is to be filed on or before November 15, 2017.
While air emissions occurring from the crop application of manure or federally registered pesticides are not subject to reporting, spills and accidents that involve manure (other fertilizers) and pesticides must be reported if they are over applicable thresholds.
The EPA Guidance also indicates that reporting does not apply under the EPCRA to air emissions from substances that are used in “routine agricultural operations.” Those substances, according to the EPA don’t meet the definition of “hazardous.” “Routine agricultural operations,” EPA states, includes “regular and routine” operations at farms AFOs, nurseries and other horticultural and aquacultural operations. That would include, EPA notes, on-farm manure storage used as fertilizer, paint for maintaining farm equipment, fuel used to operate farm machinery or heat farm buildings, and chemicals for growing and breeding fish. It would also appear to include livestock ranches where cattle are grazed on grass. A similar conclusion could be reached as to the term “facility” – a “facility” under CERCLA should not include a cow/calf grass operation where the livestock graze on grass. However, at the present time, the EPA has not provided any official guidance concerning the issue.
There doesn’t appear to be any harm in reporting when it is not clearly required. In other words, while the land application of livestock manure would appear to fall under the “fertilizer” exemption and not be included in the definition of “facility” a producer could still report such emissions. While grass operations could also report to be on the side of caution, the reportable emission level (if it were to apply to a grass operation) will be triggered at a higher head count of livestock because commingled solid waste and urine will not be present.
Recently, the EPA filed a motion with the court to push the November 15 deadline back. Also, on November 9, 2017, the National Pork Producers Council and the U.S. Poultry and Egg Association filed an amicus brief in support of the EPA’s motion. They are asking the court to give the EPA more time to “provide farmers more specific and final guidance before they must estimate and report emissions.” In addition, the EPA notes that getting additional time will allow to finalize a reporting system.
Whenever the reporting requirement becomes effective, either November 15 or sometime later if the court grants an extension, it will be important for livestock producers to comply. For now, livestock producers should study the EPA interim guidance. That guidance is available here: https://www.epa.gov/epcra/cercla-and-epcra-reporting-requirements-air-releases-hazardous-substances-animal-waste-farms#Resources. If reportable quantities of emissions will occur, the compliance deadline and proper reporting in a timely manner is very important so that applicable fines are avoided. It is also suggested the livestock producers look for guidance from their state and national livestock associations.
Monday, September 25, 2017
The federal government’s jurisdiction over “wetlands” continues to be a contentious issue. In 2015, the U.S. Environmental Protection Agency (EPA) and the United States Army Corps of Engineers (Corps) jointly published a regulation (known as the “Clean Water Rule”) in an attempt to “clarify” the scope of federal jurisdiction over “waters of the United States.” 80 Fed. Reg. 37053 (Jun. 29, 2015). The rule was immediately contested in court, its implementation stayed, and the U.S. Circuit Court of Appeals determined that it had jurisdiction to hear the challenge to the rule. Murray Energy Corp. v. United States Department of Defense, 817 F.3d 261 (6th Cir. 2016). In early, 2017, the Trump Administration indicated its intent to review, revise or rescind the rule. 82 Fed. Reg. 12532 (Mar. 6, 2017).
Various exemptions can potentially apply to exclude “wetlands” from the federal government’s jurisdiction under the Clean Water Act (CWA). One of those is for “prior converted cropland.” That exemption stems from the “Swampbuster” provisions of the 1985 Farm Bill that were later adopted by the EPA and the Corps.
How does the exception apply? When does it not apply? What’s the history behind the exception? What have the courts had to say about it? Is there a better way for the federal government to regulate prior converted cropland than the present manner? A recent Illinois federal court decision involved the prior converted cropland exemption from CWA jurisdiction. It didn’t turn out well for the landowner, however.
The prior converted cropland exemption from CWA, that’s today’s topic.
The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “swampbuster.” Swampbuster was introduced into the Congress in January of 1985. Later, in 1985, the Swampbuster provisions were introduced into the House Agriculture Committee as an amendment to Title XII resource conservation, to deny federal farm program benefits to persons planting agricultural commodities for harvest on converted wetlands. 16 U.S.C. § 3821(a)-(b) (2008). The USDA defines “converted wetland” as a wetland that has been drained, dredged, filled, leveled, or otherwise manipulated (including…the removal of woody vegetation or any activity that results in impairing or reducing the flow and circulation of water) for the purpose of or to have the effect of making possible the production of an agricultural commodity without further application of the manipulations described herein if: (i) such production would not have been possible but for such action, and (ii) before such action such land was wetland, farmed wetland, or farmed-wetland pasture and was neither highly erodible land nor highly erodible cropland. 7 C.F.R. § 12.2(a) (2008).
The report of the conference committee a week before the 1985 Farm Bill was signed into law stated that wetland conversion was considered to be “commenced” when a person had obligated funds or begun actual modification of a wetland.
The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules. The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion. Added were farmed wetlands, abandoned cropland, active pursuit requirements, FWS concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill). This is the genesis of the “prior converted cropland” exemption.
The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b). Prior converted wetlands can be farmed, but they revert to protected status once abandoned. Abandonment occurs after five years of inactivity and can happen in one year if there is intent to abandon. A prior converted wetland is a wetland that was totally drained before December 23, 1985. If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original scope and effect of the drainage of the affected land can be maintained.
Clean Water Act
In 1993, the COE and EPA adopted new regulations clarifying the application of the permit requirement of §404 of the CWA to land designated as wetland. Section 404 of the CWA makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” without obtaining a permit from the Secretary of the Army acting through the Corps. The regulations specifically exempt prior converted wetlands from the definition of “navigable waters” for CWA purposes. 58 Fed. Reg. 45,008-48,083 (1993); 33 C.F.R. §328.3(a)(8). Thus, prior converted cropland is not subject to the permit requirements of § 404 of the CWA. Indeed, the Corps stated clearly that the only method for prior converted cropland to return to the Corps’ jurisdiction under the regulation was for the cropland to be “abandoned” – cropland production ceases with the land reverting to a wetland.
In early 2009, the Corps prepared an Issue Paper announcing for the first time that prior converted cropland that is shifted to non-agricultural use becomes subject to regulation by the Corps. See Issue Paper Regarding "Normal Circumstances" (ECF No. 18-22). The paper was the Corps’ response to five pending applications for jurisdictional determinations involving the transformation of prior converted cropland to limestone quarries. The paper concluded that the transformation would be considered an "atypical situation" within the meaning of the Corps’ Wetlands Manual and, thus, subject to regulation. The paper further found that active management, such as continuous pumping to keep out wetland conditions, was not a "normal condition" within the meaning of 33 C.F.R. § 328.3(b). However, no APA notice-and-comment period occurred (as required by the Administrative Procedure Act (APA) – Pub. L. 79-404, 69 Stat. 237, enacted Jun. 11, 1946)) before the Corps issued the memorandum. Even so, the Corps implemented and enforced the rules nationwide. The rules were challenged and in New Hope Power Company, et al. v. United States Army Corps of Engineers, 746 F. Supp.2d 1272 (S.D. Fla. Sept. 2010), the court held that the Corps had improperly extended its jurisdiction over the prior converted croplands that were converted to non-agricultural use and where dry lands were maintained using continuous pumping. Under the Corp’s new rule, wetland determinations were being made based on what a property’s characteristic would be if pumping ceased. The court noted that the rules effectively changed the regulatory definition of prior converted cropland without the new definition being subjected to notice and comment requirements. Accordingly, the court invalidated the Corp’s new rule.
Facts. In Orchard Hill Building Co. v. United States Army Corps of Engineers, No. 15-cv-06344, 2017 U.S. Dist. LEXIS 151673 (N.D. Ill. Sept. 19, 2017), the plaintiff was a developer that obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995. The local town then passed a zoning ordinance allowing development of the property. The tract was divided into three sections - 25 acres were to be developed into 168 townhomes; 61 acres to be developed into 169 single-family homes; and 14 acres in between the other acreages to function as a stormwater detention area. The townhomes and water detention area was to be developed first and then the single-family housing. Construction of the townhomes began in 1996, and the single-family housing development was about to begin when the defendant designated about 13 acres of the undeveloped property as “wetlands” and asserted regulatory jurisdiction under the CWA.
Administrative process. The defendant claimed jurisdiction on the basis that the “wetland” drained via a storm sewer pipe to a creek that was a tributary to a river that was a navigable water of the U.S. The plaintiff administratively appealed the defendant’s jurisdictional determination to the Division Engineer who agreed that the District Engineer failed to properly interpret and apply applicable the U.S. Supreme Court decision in Rapanos v. United States, 547 U.S. 715 (2006). On reconsideration, the District Engineer issued a second approved jurisdictional determination in 2010 concluding that the tract had a significant nexus to the navigable river. The plaintiff appealed, but the Division Engineer dismissed the appeal as being without merit. In 2011, the plaintiff sought reconsideration of the defendant’s appeal decision because of a 1993 prior converted cropland designation that excluded a part of the 100-acres from CWA jurisdiction. Upon reconsideration, the District Engineer issued a third jurisdictional determination in 2012 affirming its prior determination noting that farming activities had ceased by the fall of 1996 and wetland conditions had returned. The plaintiff appealed on the basis that the “significant nexus” determination was not supported by evidence. The Division Engineer agreed and remanded the matter to the District Engineer for supportive documentation and to follow the defendant’s 2008 administrative guidance. The District Engineer issued a new jurisdictional determination with supportive evidence, including an 11-page document that had previously not been in the administrative record. This determination, issued in 2013, constituted a final agency determination, from which the plaintiff sought judicial review.
Court opinion. In court, the plaintiff claimed that the defendant didn’t follow its own regulations, disregarded the instructions of the Division Engineer, and violated the Administrative Procedures Act (APA) by supplementing the record with the 11-page document. However, the court noted that existing regulations allowed the Division Engineer, on remand, to instruct the District Engineer to supplement the administrative record on remand and that the limitation on supplementing the administrative record only applied to the Division Engineer. The court also determined that the supplemental information did not violate the Division Engineer’s remand order, and that the supplemental information had been properly included in the administrative record and was part of the basis for the 2013 reviewable final agency determination. The court also upheld the defendant’s nexus determination because it sufficiently documented a physical, chemical and biological impact of the navigable river.
The court also determined that the prior converted cropland exemption did not apply because farming activities had been abandoned for at least five years and wetland characteristics returned. The court noted that the defendant and the EPA had jointly adopted a rule in 1993 adopting the Natural Resources Conservation Service (NRCS) exemption for prior converted cropland. While the joint regulation did not refer to the abandonment exception, the defendant and EPA did explain in the Federal Register that they would use the NRCS abandonment provisions such that prior converted cropland that is abandoned and exhibits wetland characteristics are jurisdictional wetlands under the CWA. The court noted that prior caselaw had held that the CWA’s exemption of “prior converted croplands” included the abandonment provision (see, e.g., Huntress v. United States Department of Justice, No. 12-CV-1146S, 2013 U.S. Dist. LEXIS 73805 (W.D. N.Y. May 24, 2013); United States v. Righter, No. 1:08-CV-0670, 2010 U.S. Dist. LEXIS 64686 (M.D. Pa. Jun. 30, 2010)), and that it would apply the same rationale in this case. The court noted that the specific 13-acre parcel at issue in the case had not been farmed since 1996, and that conversion to a non-ag use did not remove the abandonment provision. The plaintiff also claimed that the wetlands at issue were “artificial” wetlands (created by adjacent development) under 7 C.F.R. §12.2(a) that were not subject to the defendant’s jurisdiction. However, the court noted that the defendant never adopted the “artificial wetland” exemption of the NRCS and, therefore, such a classification was inapplicable. The court granted the defendant’s cross motion for summary judgment.
A good case can be made that agricultural wetlands should be removed from Corps jurisdiction. The Corps appears to lack the experience and the local staff needed to ably administer the regulation of continuously cropped, partially drained farmed wetlands. The Corps regulates all wetlands in the same way irrespective of whether the wetland is agricultural, previously manipulated or something else. In addition, the Corps will not allow drainage with compensatory mitigation without the applicant sequentially proving that drainage cannot be avoided or minimized. Also, while the USDA and the Corps use the same wetland definition, the Corps refuses to rely upon USDA wetland determinations. This needlessly confounds agricultural property owners in the management, use and marketing of properties containing NRCS-certified farmed wetland and prior converted crop land. Conversely, an NRCS-certified prior converted cropland determination increases the value of a property.
In situations where a property owner has installed drainage features, and is responsible for a share of the maintenance costs of common drains built by a drainage district, a clear vested right has been established. A change in land use does not erase that vested right. Viewed in that light, the Corps’ refusal to accept a USDA prior converted cropland determination could constitute a regulatory taking.
Perhaps a better approach would be to vest sole regulatory authority over prior converted cropland with the USDA. With 30 years of experience and an office in practically every rural county, it would seem to make more sense that regulatory authority of prior converted wetlands rest solely with the USDA.
With a change in Administration in the White House and new direction at the top of the EPA and the Corps, perhaps there will be a change in the way the federal government views wetlands, and the prior converted cropland exception. These issues are very important to agriculture producers and rural landowners that own the estimated 53 million acres of prior converted cropland scattered across the U.S.
Tuesday, September 5, 2017
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?
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.
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
Tuesday, August 22, 2017
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.
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)
Monday, July 31, 2017
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
Tuesday, June 27, 2017
The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state government. However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.” The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” The clause has two prohibitions: (1) all takings must be for public use, and (2) even takings that are for public use must be accompanied by compensation.
Whether a taking has occurred is not an issue when the government physically takes the property, with the only issue being whether the taking is compensable and the amount of compensation due to the landowner. However, for non-physical takings, the issue is murkier. At what point does government regulation of private property amount to a compensable taking? The Supreme Court has addressed this issue on numerous occasions, and most recently dealt with a key issue that is the starting point in these matters – how to define the actual property that the landowner claims that the government has taken. This definitional issue is important to landowners because the way a tract is defined can either restrict the government’s regulation of the tract or expand it.
Regulatory (Non-Physical) Takings
A non-physical taking may involve the governmental condemnation of air space rights, water rights, subjacent or lateral support rights, or the regulation of property use through environmental restrictions. How is the existence of a regulatory taking determined? There are several approaches that the Supreme Court has utilized.
Multi-factor balancing test. In a key case decided in 1978, the U.S. Supreme Court set forth a multi-factored balancing test for determining when governmental regulation of private property effects a taking requiring compensation. In Penn Central Transportation Co. et al. v. New York City, 438 U.S. 104 (1978), the Court held that a landowner cannot establish a “taking” simply by being denied the ability to exploit a property interest believed to be available for development. Instead, the Court ruled that in deciding whether particular governmental action effects a taking, the character, nature and extent of the interference with property rights as a whole are the proper focus rather than discrete segments of the owner’s property rights. In 2005, the Court confirmed the multi-factor test and noted that the touchstone for deciding when a regulation is a taking is whether the restriction on property usage is functionally equivalent to a physical taking of the property. Lingle, et al. v. Chevron U.S.A., Inc., 544 U.S. 528 (2005).
Total regulatory taking. In Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), the landowner purchased two residential lots with an intent to build single-family homes. Two years later, the state legislature passed a law prohibiting the erection of any permanent habitable structures on the Lucas property. The law's purpose was to prevent beachfront erosion and to protect the property as a storm barrier, a plant and wildlife habitat, a tourist attraction, and a “natural health environment” which aided the physical and mental well-being of South Carolina's citizens. The law effectively rendered the Lucas property valueless. Lucas sued the Coastal Council claiming that, although the act may be a valid exercise of the state's police power, it deprived him of the use of his property and thus, resulted in a taking without just compensation. The Coastal Council argued that the state had the authority to prevent harmful uses of land without having to compensate the owner for the restriction.
The Supreme Court ruled for Lucas and opined that the state's interest in the regulation was irrelevant since the trial court determined that Lucas was deprived of any economically viable alternative use of his land. The Lucas case has two important implications for environmental regulation of agricultural activities. First, the Lucas court focused solely on the economic viability of the land and made no recognition of potential noneconomic objectives of land ownership. However, in the agricultural sector land ownership is typically associated with many noneconomic objectives and serves important sociological and psychological functions. Under the Lucas approach, these noneconomic objectives are not recognized. Second, under the Lucas rationale, environmental regulations do not invoke automatic compensation unless the regulations deprive the property owner of all beneficial use.
Under the Lucas approach, an important legal issue is whether compensation is required when the landowner has economic use remaining on other portions of the property that are not subject to regulation.
Unconstitutional conditions. In Nollan v. California Coastal Commission,483 U.S. 825 (1987), the plaintiff owned a small, dilapidated beach house and wanted to tear it down and replace it with a larger home. However, the defendant was concerned about preserving the public's viewing access over the plaintiff's land from the public highway to the waterfront. Rather than preventing the construction outright, the defendant conditioned the plaintiff's right to build on the land upon the plaintiff giving the defendant a permanent, lateral beachfront easement over the plaintiff's land for the benefit of the public. Thus, the issue was whether the state could force the plaintiffs to choose between their construction permit and their lateral easement. The Court, held that this particular bargain was impermissible because the condition imposed (surrender of the easement) lacked a “nexus” with, or was unrelated to the legitimate interest used by the state to justify its actions - preserving the view. The Court later ruled similarly in Dolan v. Tigard, 512 U.S. 374 (1994). These cases hold that the government may not require a person to give up the constitutional right to receive just compensation when property is taken for a public use in exchange for a discretionary benefit that has little or no relationship to the property. The rule of the cases does not apply to situations involving impact fees and other permit conditions that do not involve physical invasions, but it would apply to monetary exactions where none of the plaintiff’s property is actually taken. See, e.g., Koontz v. St. Johns River Water Management District, 133 S. Ct. 2586 (2013).
Defining The Property At Issue
An important first question in non-physical takings cases is the definition of the boundaries of the subject property. How the property is defined will often determine whether a taking has occurred. For instance, if the government designates a portion of a farm field as a wetland that can no longer be farmed without civil and criminal penalties applying, is the property interest at issue that is subject to a takings analysis the wetland or the entire field? If it is defined as the wetland, then the regulatory designation would result in a severe burden on the landowner with a high likelihood that a compensable taking has occurred. If it is the entire field, then the overall burden on the landowner is much less.
On June 23, the Court decided Murr v. Wisconsin, No. 15-214, 2017 U.S. LEXIS 4046 (U.S. Sup. Ct. Jun. 23, 2017). In Murr, siblings owned two adjacent parcels of waterfront property. A zoning regulation that became effective in 1976, long before the siblings came into ownership of the tracts, designated the tracts as “substandard” – neither tract could be developed individually. But, a grandfather clause in the zoning law said that the tracts could be separately developed if they were owned by different owners and not owned (under a merger clause) in common by a group of owners (such as the siblings). The merger provision also prevented the siblings from selling one of the tracts without selling the other tract. That was the problem. They wanted to sell one of the tracts, and sued for a regulatory taking. The state trial court granted summary judgment to the state on the basis that the siblings still had options available for the use and enjoyment of their property and had not been deprived of all economic value of their property. Indeed, they could either develop or sell the two lots together. The court looked at the subject property as one single lot rather than two separate lots. The case was affirmed on appeal with the appellate court noting that the siblings bought the second tract a year after the first tract and being charged with the knowledge of the merger clause in the zoning law. The state (WI) Supreme Court denied review.
The U.S. Supreme Court affirmed in a 5-3 opinion authored by Justice Kennedy. The Court reasoned that the definition of the subject property, just like the takings analysis itself, is determined by a multi-factor analysis. That multi-factor test, according to Justice Kennedy, involves state law (including lot lines), reasonable expectations about ownership of the subject property, the land’s physical characteristics and the prospective value of the land with attention paid to the effect of the burdened land on the value of other holdings. As applied in Murr, the Court determined that the two tracts should be treated as a single tract for purposes of the takings analysis. That was primarily because state law treated the parcels as one as a result of the merger provision, the two tracts were contiguous, and the fact that they were oddly shaped with rough terrain and bordered a river made land-use regulations foreseeable.
The Court determined that a taking had not occurred. The dissent was critical of the new test for determining what constitutes the subject property in a takings case, arguing that the test was “stacked” in the government’s favor.
The definition of property for purposes of takings analysis is the key starting point in non-physical takings cases. In addition, for rural landowners, “property” may also include more than just the surface estate. See, e.g., The Edwards Aquifer Authority, et al. v. Day, et al., 369 S.W.3d 814 (Tex. Sup. Ct. 2012). How do the “Kennedy Conditions” apply in situations where the surface estate is regulated, but the sub-surface estate is not (or vice versa)? In one case, the plaintiffs owned oil and gas rights in west central Michigan. In 1987, the director of the State Department of Natural Resources prohibited exploration for or development of oil and gas on the bulk of the plaintiff's property. The state appellate court focused solely on the landowner's use of the mineral interests involved to hold that the plaintiff's property had been taken. Even though a non-mineral interest land use possibility remained, the court held that the landowners were denied all economically viable use of the mineral interest. The court found it immaterial that all but one of the plaintiffs had extensive landholdings outside of the protected area. Miller Brothers v. Michigan Department of Natural Resources, 203 Mich. App. 674, 513 N.W.2d 217 (1994)
The new test of Murr will make regulatory takings cases more complex and legal outcomes more unpredictable. The “Kennedy Conditions” could work in favor of a landowner, but are more likely to do just the opposite. It was also Justice Kennedy’s concurring opinion in Rapanos, et ux., et al. v. United States Army Corps of Engineers, 126 S. Ct. 2208 (2006) that has created tremendous confusion for the lower courts and injected a high degree of uncertainty into the law with respect to the federal government’s jurisdiction over isolated wetlands under the Clean Water Act.
Kennedy’s opinion in Murr again appears to be judicial micro-management, making meaningful the comment of Justice Thomas in the dissent about the need to take a “fresh look” at takings cases and whether the Court’s current analytical approach squares with the Constitution’s “original public meaning.”
Thursday, June 15, 2017
Tuesday’s post started the discussion of how farm program payment limitation rules can impact the estate and business planning for a farmer. That post discussed the basics of the provisions under the 2014 Farm Bill, and discussed PLC and ARC, the overall payment limit, the AGI limitation and the attribution rule.
Today, we dig deeper and examine the “active personal management” rule, recordkeeping requirements and how the rules impact the planning process.
Keep in mind, this is an overview of a very technical subject. Make sure to find counsel that deals with farm programs so that you can properly integrate payment limitation planning into the overall estate and business plan. I am often asked for recommendations of practitioners that have a good grasp of the payment limitation rule that can work with their tax counsel to put an effective plan together. One person I would suggest that may also know others that I am not aware of is Bill Bridgforth in Pine Bluff, Arkansas. He's a good friend that is easy to work with and has a great deal of experience with the payment limitation rules.
Active Personal Management
Three-part test for "active engagement." Under 7 C.F.R. Part 1400, a person must be “actively engaged” in farming to receive farm program payments. To satisfy the “actively engaged in farming” test, three conditions must be met. First, the individual's or entity's share of profits or losses from the farming operation must be commensurate with the individual's or entity's contribution to the operation. Second, the individual's or entity's contributions must be “at risk.” Third, an individual must make a significant contribution of land, capital or equipment, and active personal labor or active personal management.
What is "management“? Active personal management” is defined as significant contributions of management activities that are performed on a regular, continuous and substantial basis to the farming operation – basically the I.R.C. §1402 test for self-employment tax purposes. In addition, the management activities must represent at least 25 percent of the total management time that is necessary for the success of the farming operation on an annual basis, or represent at least 500 hours of specific management activities annually. That is a more defined test for active management than was contained under the previous Farm Bill, which required that the management be “critical to the overall profitability of the farming operation.”
How many "person" determinations can be achieved? The rules also restrict the number of persons that may qualify for payment by making a significant contribution of active personal management. For this purpose, the limit is one person unless the farming operation is large or complex. A "large" farming operation is one that has crops on more than 2,500 acres (planted or prevented from being planted). If the acreage limitation is satisfied, an additional person may qualify upon making a significant contribution of active personal management. If the farming operation satisfies another test of being “complex,” an additional payment limit may be available. This all means that, for large and complex, farming operations, a total of three payment limits may be obtained. Who decides whether a farming operation is "complex"? That determination is made by the State FSA Committee. These rules establish a more restrictive test than was in place before the 2014 Farm Bill became effective. The prior rules did not limit the number of persons that could qualify for farm program payments via the significant contribution of active personal management route. Now, the maximum potential limit is three.
Special rules. Special rules apply to tenant-operated farms and family-owned operations with multiple owners. In some situations, a person meeting specified requirements is considered to be actively engaged in farming in any event. For example, a crop-share or livestock-share landlord who provides capital, equipment or land as well as personal labor, or active personal management meets the test. But, neither a cash rent landlord nor a crop share landlord is actively engaged in farming if the rent amount is guaranteed. Also, if one spouse meets the active engagement test, the other spouse is deemed to meet the test.
Exemption for family operations. The active personal management test applies to non-family general partnerships and joint operations that seek to qualify more than one farm manager based solely on providing management or a combination of management and labor (another rule). However, it does not apply to farming operations where all of the partners, stockholders or persons with an ownership interest in the farming operation (or any entity that is a member of the farming operation) are “family members.” For this purpose, “family member” means a person to whom another member in the farming operation is related as a lineal ancestor, lineal descendant, sibling, spouse or otherwise by marriage. Legally adopted children and step-children count as “family members.”
The rule also doesn’t come into play where only one person attempts to qualify under the rule or when combined with a contribution of labor. The rule also doesn't apply to farming operations that are operated by individuals or entities other than general partnerships or joint ventures.
When multiple payments are sought for a farming operation under the active management rule, the operation must maintain contemporaneous records or logs for all persons that make any contribution of management. Those records must include, at a minimum, the location where the management activity was performed, and the amount of time put into the activity and its duration. In addition, every legal entity that receives farm program payments must report to the local FSA committee the name and social security number of each person who owns, either directly or indirectly, any interest in the entity. Also, the entity must inform its members of the payment limitation rules.
The FSA Handbook (5-PL, Amendment 3) specifies that the farming operation must maintain contemporaneous records or logs for all persons that make management contributions. The records must provide: (1) the location (either on-site or remote) where the management activity was performed; (2) the time spent on the activity and the timeframe in which it occurred; and (3) a description of the activity. FSA Handbook, Paragraph 222A. It is important that the records be maintained and be timely made available to the FSA for their review upon request. FSA Handbook, Paragraph 222B. Fortunately, the FSA provides a Form (CCC-902 MR) to track and maintain all of the necessary information. Note that these are the present references to the applicable FSA Handbook Paragraphs and Form. Those paragraph references and Form number can change. FSA modifies its handbook frequently and Forms are modified and numbers often are changed. Practitioners and their farm clients must be diligent in monitoring the changes.
Two things happen if the necessary records aren’t maintained – (1) the person’s contribution of active personal management for payment eligibility purposes will be disregarded; and (2) the person’s payment eligibility status will be re-determined for that particular program year.
The “substantive change” rule. In general, any structural change of the farming or ranching business that increases the number of payment limits must be bona fida and substantive and not a “scheme or device.” See, e.g., Val Farms v. Espy, 29 F.3d 1570 (10th Cir. 1994). In addition, reliance on the advice of local or state USDA officials concerning the payment limitation rules is at the farmer or rancher's own risk. But, the substantive change rule does not apply to spouses. Thus, for example, a spouse of a partner that is providing active management to a farm partnership can be added to the partnership and automatically qualify as a partnership member for FSA purposes. However, a “substantive change occurs when a “family member” is added to a partnership unless the family member also provides management or labor.
"Scheme or device." The USDA is adept at alleging that a farming operation has engaged in a "scheme or device" that have the purpose or effect of evading the payment limitation rules. But, this potential problem can be avoided if multiple payments are not sought, such as by having one manager for each entity engaged in farming. Of course, this is not a concern if all of the members of a multi-person partnership are family members. If non-family members are part of the farming operation, perhaps they can farm individually or with other non-family members that can provide labor to the farming business. That might be a safe approach.
"Combination" rule. There is also a “combination” rule that can apply when the farming business is restructured. If the rule applies, it will result in the denial of separate “person” status to “persons” who would otherwise be eligible for a separate limit.
Entity type based on size. From an FSA entity planning standpoint, the type of entity structure utilized to maximize payment limits will depend on the size/income of the operation.
For smaller producers, entity choice for FSA purposes is largely irrelevant. Given that the limitation is $125,000 and that payments are made either based on price or revenue (according to various formulas), current economic conditions in agriculture indicate that most Midwestern farms would have to farm somewhere between 3,000 and 4,000 acres before the $125,000 payment limit would be reached. Thus, for smaller producers, the payment limit is not likely to apply and the manner in which the farming business is structured is not a factor.
For larger operations, the general partnership or joint venture form is likely to be ideal for FSA purposes. If creditor protection or limited liability is desired, the partnership could be made up of single-member LLCs. For further tax benefits, the general partnership’s partners could consist of manager-manager LLCs with bifurcated interests.
Farm program payment limitation planning is a complicated mix of regulatory and administrative rules and tax/entity planning. It’s not an area that a producer should engage in without counsel if maximizing payments in conjunction with an estate/business plan is the goal. Unfortunately, only a few practitioners are adept at navigating both the tax planning rules and the FSA regulatory web.
Tuesday, June 13, 2017
A unique aspect of estate planning for farmers and ranchers is the need to incorporate (for many of these clients) farm program payment limitation planning into the mix. The way the farming or ranching business is structured can impact eligibility for farm program benefits.
So, what are the essential farm program rules that impact the planning/structuring process? That’s our focus this week. Today is part one of the two-part series
2014 Farm Bill
Primary programs. Under the 2014 Farm Bill, the total amount of payments received, directly and indirectly, by a person or legal entity (except joint ventures or general partnerships) for Price Loss Coverage (PLC) Agricultural Risk Coverage (ARC), marketing loan gains, and loan deficiency payments (other than for peanuts), may not exceed $125,000 per crop year. A person or legal entity that receives payments for peanuts has a separate $125,000 payment limitation ($250,000 for married persons). Cotton transition payments are limited to $40,000 per year. For the livestock disaster programs, a total $125,000 annual limitation applies for payments under the Livestock Indemnity Program, the Livestock Forage Program, and the Emergency Assistance for Livestock, Honey Bees and Farm-Raised Fish program. A separate $125,000 annual limitation applies to payments under the Tree Assistance Program.
Beginning in 2014, farmers were given a one-time opportunity to elect PLC or ARC for the 2014-2018 crop years. If an election was not made, PLC applied beginning in 2015 with no payment available for 2014. If ARC was elected, all producers with respect to a farm had to sign the election form. If PLC was elected, the owners of the farm had an option to update their yields to 90 percent of their average yields from 2008-2012. All farm owners also could elect to reallocate their base acres based on the actual plantings for 2009-2012.
PLC and ARC. The PLC option works in tandem with a crop insurance Supplemental Coverage Option (SCO). It is a risk management tool that is designed to address significant, multiple-year price declines. It compliments crop insurance, which is not designed to cover multiple-year price declines. A farmer that chooses the PLC option will receive a payment (consistent with payment limitations) when the effective price of a covered commodity is less than the target (“reference”) price for that commodity established in the statute (e.g., the target price for corn is $3.70/bu). The effective price is the higher of the mid-season price or the national average loan rate for the covered commodity. Thus, the PLC payment rate is the reference price less the effective price, and the PLC payment amount is the payment rate times the payment acres. Putting it another way, the PLC payment is equal to 85 percent of the base acres of the covered commodity times the difference between the target price and the effective price times the program payment yield for the covered commodity. SCO provides additional county-level insurance coverage not to exceed the difference between 86 percent and the coverage level in the individual insurance policy. Because SCO is a form of crop insurance, payment limits do not apply. But, a farmer selecting the PLC option must pay an additional premium for SCO coverage (but, the cost of the additional premium is 65 percent taxpayer subsidized).
ARC is a risk management tool that addresses revenue losses. Under the ARC, payments are issued when the actual county crop revenue of a covered commodity is less than the ARC county guarantee for the covered commodity and are based on county data, not farm data. A producer electing ARC must unanimously select whether to receive county-wide coverage on a commodity-by-commodity basis or choose individual coverage that applies to all of the commodities on the farm. Payment acres are 85 percent of base acres for county coverage, and 65 percent for individual farm coverage. Under ARC, a producer must incur at least a 14 percent loss (defined as 86 percent of benchmark revenue) for coverage to kick-in. The ARC county guarantee equals 86 percent of the previous five-year average national farm price, excluding the years with the highest and lowest price (the ARC guarantee price), times the five-year average county yield, excluding the years with the highest and lowest yield (the ARC county guarantee yield). This guarantee revenue is based on five-year Olympic production and average crop price excluding the high and low years. Both the guarantee and actual revenue are computed using base acres, not planted acres. The payment is equal to 85 percent of the base acres (this is for county-elected ARC) of the covered commodity times the difference between the county guarantee and the actual county crop revenue for the covered commodity, not to exceed 10 percent of the benchmark county revenue (the ARC guarantee price times the ARC county guarantee yield). In other words, if revenue is less than 76 percent of the previous five-year average national farm price, then the maximum 10 percent of benchmark revenue is paid, subject to the payment limit of $125,000 per person.
For 2014 and 2015 crops, ARC was more likely to result in a payment to a producer because of the higher Olympic average. But, it is now less likely to make a payment in for 2016-2018 crops due to low crop prices. If prices remain low, PLC will result in a payment. The choice for any given producer will be different (there is no “one size fits all” with respect to the election) and ARC may be desired with respect to one crop and PLC may be best for another crop, for example. In general, the bigger margin between expected prices and reference prices, the more likely it is that a producer would choose ARC. However, the ARC and PLC was an irrevocable election and whatever the producer elected in 2014 will apply through the 2018 crop year. The only way to make a new election is by having acres come out of CRP that are then put back into production.
Payments for PLC and ARC are issued after the end of the respective crop year, but not before Oct. 1. Thus, the 2016 crop payment will not be made until after October 1, 2017. That means that no payments will be received in 2016, other than for ACRE or other related payments that are normally paid after the crop year. In 2017, producers enrolled in the PLC who also participate in the federal crop insurance program may choose whether to purchase SCO.
From a practical/procedural standpoint, because a payment (if any) will not be issued until at or near the end of the producer’s marketing year, lenders could have a more difficult time determining a producer’s cash flow for crop loans.
Monetary limit. As previously noted, the Farm Bill established a payment limit of $125,000 per person or legal entity (excluding general partnerships and joint ventures). This is the general rule. Peanut growers are allowed an additional $125,000 payment limitation, and the spouse of a farmer is entitled to an additional $125,000 payment limit if the spouse is enrolled at the local Farm Service Agency (FSA) office. The limit applies to all PLC, ARC, marketing loan gains, and loan deficiency payments.
The payment limit is applied at both the entity level (for entities that limit liability) and then the individual level (up to four levels of ownership). Thus, general partnerships and joint ventures have no payment limits. Instead, the payment limit is calculated at the individual level. However, an entity that limits the liability of its shareholders/members is limited to one payment limitation. That means that the single payment limit is then split equally between the shareholders/members.
AGI limitation. To be eligible for a payment limit, an adjusted gross income (AGI) limitation must not be exceeded. That limitation is $900,000, and applies to commodity programs, conservation programs and disaster programs. The AGI limitation is an average of the three prior years, with a one-year delay. In other words, farm program payments received in 2017 are based off of the average of AGI for 2013, 2014 and 2015. While FSA had not treated the I.R.C. §179 deduction as allowed against AGI for S corporations and LLC’s taxed as partnerships, but did allow it for C corporations and individuals, beginning with 2017 crop year the deduction will be allowed against AGI for all entities.
The AGI limitation, which does not apply for crop insurance purposes, applies to both the entity and the owners of the entity, as illustrated in the following example:
Example. Assume that FarmCo receives $100,000 of farm program payments in 2015. FarmCo’s AGI is $850,000. Thus, FarmCo is entitled to a full payment limitation. But, if one of FarmCo’s owners has AGI that exceeds the $900,000 threshold, a portion of FarmCo’s payment limit will be disallowed in proportion to that shareholder’s percentage ownership. So, if the shareholder with income exceeding the $900,000 threshold owns 25 percent of FarmCo, FarmCo’s $100,000 of farm program payment benefits will be reduced by $25,000.
Attribution Rule. Under a rule of direct attribution, individuals and entities are credited with both the amount of payments received directly and also the amount received indirectly by holding an interest in an entity receiving payment. In general, payments to a legal entity are attributed to the persons who have a direct or indirect interest in the legal entity. But, payments made to a joint venture or general partnership are determined by multiplying the maximum payment amount by the number of persons and entities holding ownership interests in the joint venture or general partnership. That means that joint ventures and partnerships are not subject to the attribution rules.
Program payments to legal entities are tracked through four levels of ownership. If another legal entity owns any part of the ownership interest at the fourth level, then the payments to the entity receiving payments will be reduced by the amount of the indirect interest. Thus, the entity has a limitation, and then each member has a limitation. The measuring date for purposes of direct attribution is June 1.
As applied to marketing cooperatives, the attribution rules apply to the producers as persons, and not to the cooperative association of producers. Also, children under age 18 are treated the same as the parents. It is also assumed that if one parent has filled their payment limit, payments made to a child could be attributed to the parent that has not filled their payment limit. For payments made to a revocable trust, they are attributed to the trust’s grantor. As applied to irrevocable trusts and estates, the Ag Secretary is directed to administer the rules so as to ensure "equitable treatment" of the beneficiaries.
In the next post, I will take a look at the payment limitation rules. That will include a discussion of the “active personal management” test, recordkeeping requirements and entity planning implications. Farm program payment limitation planning certainly complicates estate and business planning for farmers.
Wednesday, June 7, 2017
In early 2014, the 2014 Farm Bill passed the Congress and was signed into law. The legislation contains a projected $956 billion in spending over the next 10 years (much of which is attributable to spending on Food Stamps and related programs) which is approximately 50 percent more than the 2008 Farm Bill. The Farm Bill also contained numerous other provisions such as repealing direct payments immediately, repealing seven other current commodity programs and making adjustments to payment limitations, program eligibility rules and the income limitation rule.
The Farm Bill also removed both the farm and non-farm AGI limitations of the 2008 Farm Bill and replaces them with a $900,000 AGI limitation applicable to any individual or entity. The $900,000 AGI limitation applies to both commodity and conservation programs. While the Farm Service Agency initially did not take into account any I.R.C. §179 deduction for an S corporation or a partnership, but did for a C corporation or an individual, their position has now changed so that issue is no longer on the table
However, the Farm Bill did not include a provision that was contained in the initial House version that would have barred a state, absent legitimate public safety concerns, from enacting legislation designed to regulate the production of out-of-state agricultural goods and livestock that are sold in that state.
So, can a state regulate the manner in which agricultural goods are produced in another state? That’s the focus of today’s post.
The House Farm Bill provision was in response to a 2008 California (CA) ballot initiative (Proposition 2) that required all California egg producers to produce eggs from laying hens in cages that allowed the hens to “lie down, stand up, fully extend its limbs, and turn around freely.” Because of the additional cost placed on CA egg producers which made their eggs non-competitive with eggs produced in other states not subject to such restrictions, CA passed a law in 2010 (A.B. 1437) making it a crime to sell shelled eggs in CA (regardless of whether the eggs were produced in CA) that came from a laying hen that was confined in a cage not allowing the hen to “lie down, stand up, fully extend its limbs, and turn around freely.” The law was purportedly based on consumer health concerns, but it had the effect of regulating egg production in all states. The law applied to the sale of eggs for human consumption in CA occurring on or after January 1, 2015.
Legal challenge. In 2014, the Missouri (MO) Attorney General (and officials from other states) sued CA officials over the law. They sought declaratory and injunctive relief, costs and fees, associated with blocking enforcement of the CA law. The claim was that the law would increase size of egg-laying hen enclosures and decrease flock densities for egg producers in other states desiring to sell eggs in CA. The lead plaintiff (MO) noted that CA consumers bought one-third of all eggs produced in MO in 2013 and that the CA requirement would substantially increase the cost of MO egg production if egg producers continue to sell eggs in CA, which will also make eggs too expensive to sell in other states. The plaintiff also noted that if MO producers choose to not participate in CA market, other markets will have surplus eggs and egg prices will fall which could force some producers out of business; suit claims that CA provision was an unconstitutional violation of the Commerce Clause by "conditioning the flow of goods across its state lines on the method of their production." In the alternative, the suit alleged federal preemption via 21 U.S.C. Sec. 1052(b) – the Federal Egg Products Inspection Act.
The trial court held that the plaintiff lacked standing for failure to articulate an interest separate and apart from the interests of private parties, and that the claim involving the egg price-effect on consumers was remote and speculative. Missouri v. Harris, No. 2:14-cv-00341-KJM-KJN, 2014 U.S. Dist. LEXIS 76305 (E.D. Ca. Jun. 2, 2014). The trial court also determined that the CA law was not discriminatory. On further review, the appellate court affirmed, but remanded for dismissal without prejudice. Missouri v. Harris, 842 F.3d 658 (9th Cir. 2016). Last week, the U.S. Supreme Court declined to hear the case. Missouri v. Becerra, No. 16-1015, 2017 U.S. LEXIS 3405 (U.S. Sup. Ct. May 30, 2017).
Legal ‘standing.” There is no doubt that “Parens patriae” standing (a federal court doctrine) is difficult to obtain in a case asserting economic loss. The states have to show injury to the citizens of their respective states as a whole, rather than injury to a small group of their citizens (egg producers and egg consumers). While the states did claim that their residents would be paying higher prices for eggs, the trial court and the appellate court both determined that the claim was speculative at this stage of the litigation. Certainly, any time a regulation is imposed that requires a change in production activities (here, requiring the replacement of “battery” cages with alternative structures that meet the CA specifications) higher costs will be imposed on egg producers. To the extent those costs can be passed-on to egg consumers, they will. The more market power any individual egg producer has will determine how much, if any, of that cost gets passed-on.
Related to the egg production matter were developments involving animal rights groups and foie gras, a delicacy that is a product of enlarged livers of ducks and geese that have been force-fed corn. While a federal court, in 2013, refused the groups’ attempt to force USDA to regulate the delicacy as an adulterated food product, the Ninth Circuit upheld a CA ban on foie gras. In 2014, the U.S. Supreme Court declined to hear the case, leaving the CA ban in place. Association Des Eleveurs De Canards Et D’Oies Du Quebec, et al. v. Harris, 729 F.3d 937 (9th Cir. 2013), cert. den., 135 S. Ct. 398 (2014). Importantly, the California ban only applies to products produced by force feeding a bird to enlarge its liver. It does not ban the sale of duck breasts, down jackets, or other non-liver products from force-fed birds.
After the Ninth Circuit upheld the CA ban, the plaintiffs amended their complaint to include a challenge to the ban on preemption grounds. In early 2015, the district court struck down the CA law on the basis that the CA ban was preempted by the Poultry Products Inspection Act, the federal law that regulates the sale and distribution of poultry products. The court pointed out that the plaintiffs had suffered economic injury. Association Des Eleveurs De Canards Et D'oies Du Quebec, et al. v. Harris, No. 2:12-cv-5735-SVW-RZ (C.D. Cal. Jan. 7, 2015).
Egg Law Litigation Current Status.
Presently no court has decided the merits of the case. But, if standing can be established, do the states challenging the CA law have a legitimate claim? The Ninth Circuit’s dismissal of the case was “without prejudice.” Koster v. Harris, 847 F.3d 646 (9th Cir. 2017). That means that if standing can eventually be established, the case can be brought again.
State Regulation of Interstate Commerce - U.S. Supreme Court Precedent
The U.S. Supreme Court has long held that one state cannot regulate economic conduct in another state in a manner that is clearly excessive in relation to the benefits to the regulating state, even if the law is facially neutral. See, e.g., Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520 (1959). In Bibb, various interstate motor carriers challenged an Illinois statute that required the use of certain type of mud-flap on trucks and trailers that operated on Illinois highways. They claimed that the statute violated the Constitution’s Commerce Clause because it placed an “undue” burden on them that outweighed any safety benefit the state might receive in return. In essence, the statute required that the mud-flap had to contour with the rear wheels, with the inside surface “being relatively parallel to the top 90 degrees of the rear 180 degrees of the whole surface.” In addition, the mud-flap surface had to extend down to within 10 inches of the ground on a fully-loaded truck. Furthermore, the mud-flap had to be wide enough to cover the width of the tire, be installed within six inches from the tire surface on a loaded truck and have a flange on its outer edge that did not exceed two inches. Basically, these detailed requirements made conventional mud-flaps that were legal in at least 45 states at the time illegal in Illinois.
The trial court held that the Illinois statute “unduly and unreasonably burdened and obstructed interstate commerce” in violation of the Commerce Clause and enjoined the state from enforcing it. On direct appeal to the U.S. Supreme Court, the Court unanimously affirmed. While safety measures carry a “strong presumption of validity” the Court determined that the enhanced safety resulting from the statutory requirement did not outweigh the national interest in “keeping interstate commerce free from interferences that seriously impede it.”
So how does Bibb apply to the CA egg law? If standing is ever established (and the proper plaintiff may, indeed, be actual egg producers rather than respective states), the burden will be on the plaintiff(s) to show that the CA law imposes an undue and unreasonable burden on interstate commerce in relation to the benefit that CA derives on behalf of its citizens (e.g., health and safety). Thus, the citizens of CA can, via their elected representatives, determine the law and regulations for the economic activity of other states to an extent. The limits of that extent have not yet been established in the egg case, but it seems that the egg case is a clearer illustration of a state trying to regulate economic activity in other states instead of protecting the health and/or safety of its own citizens than the state statute involved in Bibb.
Friday, March 31, 2017
Recent wildfires in Kansas, Oklahoma and Texas have resulted in thousands of livestock deaths and millions of dollars of losses to the agricultural sector in those states. Last week, one of the blog posts was devoted to casualty losses and involuntary conversions. Today, I tackle another related subject – the USDA Livestock Indemnity Program (LIP) and how to report LIP payments.
2014 Farm Bill – The LIP Program
The LIP program, administered by USDA’s Farm Service Agency (FSA), was created under the 2014 Farm Bill to provide benefits to livestock producers for livestock deaths that exceed normal mortality caused by adverse weather, among other things. The amount of a LIP payment is set at 75 percent of the market value of the livestock at issue on the day before the date of death, as the Secretary determines. Eligible livestock include beef bulls and cows, buffalo, beefalo and dairy cows and bulls. Non-adult beef cattle, beefalo and buffalo are also eligible livestock. The livestock must have died within 60 calendar days from the ending date of the “applicable adverse weather event” and in the calendar year for which benefits are requested. To be eligible, the livestock must also have been used in a farming (ranching) operation as of the date of death. Contract growers of livestock are also eligible for LIP payments. However, ineligible for LIP payments are wild animals, pets, or animals that are used for recreational purposes (i.e., hunting dogs, etc.).
As previously noted, LIP payments are set at 75 percent of the market value of the livestock as of the day before their death. That market value is tied to a “national payment rate” for each eligible livestock category as published by the USDA. For contract growers, the LIP national payment rate is based on 75 percent of the average income loss sustained by the contract grower with respect to the livestock that died. Any LIP payment that a contract grower is set to receive will be reduced by the amount of monetary compensation that the grower received from the grower’s contractor for the loss of income sustained from the death of the livestock grown under contract.
As for FSA payment limitations, a $125,000 annual payment limitation applies for combined payments under the LIP, Livestock Forage Program, and the Emergency Assistance for Livestock, Honey Bees and Farm-Raised Fish program. In addition, to the payment limitation, and eligible farmer or rancher is one that has average adjusted gross income (AGI) over a three-year period that is less than or equal to $900,000. For 2017, the applicable three-year period is 2013-2015. For a particular producer, that could mean that tax planning strategies to keep average AGI at or under $900,000 need to be implemented. That could include the use of deferral strategies, income averaging and amending returns to make or revoke an I.R.C. §179 election.
An eligible producer can submit a notice of loss and an application for LIP payments to the local FSA office. The notice of loss must be submitted within the earlier of 30 days of when the loss occurred (or became apparent) or 30 days after then end of the calendar year in which the livestock loss occurred. For contract growers, a copy of the grower contract must be provided. For all producers, it is important to submit evident of the loss supporting the claim for payment. Photographs, veterinarian records, purchase records, loan documentation, tax records, and similar data can be helpful in documenting losses. Of course, the weather event triggering the livestock losses must also be documented. In addition, certification of livestock deaths can be made by third parties on Form CCC-854, if certain conditions can be satisfied
Given that the wildfires occurred in the early part of 2017, it is likely that any LIP payments will also be received in 2017. That’s not always the case. Sometimes LIP payments are not paid until the calendar year after the year in which the loss was sustained. For example, livestock losses in South Dakota a few years ago occurred late in the year, but payments weren’t received until the following year. In any event, for LIP payments that are paid out, the FSA will issue a 1099G for the full amount of the payment.
Death of breeding livestock. While the 1099G simply reports the gross amount of any LIP payment to a producer for the year, there may be situations where a portion of the payment is compensation for the death loss of breeding livestock. If the producer would have sold the breeding livestock, the sale would have triggered I.R.C. §1231 gain that would have been reported on Form 4797. That raises a question as to whether it is possible to allocate the portion of the disaster proceeds allocable to breeding livestock from Schedule F to Form 4797. This is an issue that many producers that have sustained livestock losses will have. While it is true that gains and losses from the sale of breeding livestock sales are reported on Form 4797, the IRS will look for Form 1099-G amounts paid for livestock losses to show up on Schedule F – most likely on line 4a.
Income inclusion and deferral. The general rule is that any benefits associated indemnity payments (or feed assistance) are reported in income in the tax year that they are received. That would mean, for example, that payments received in 2017 for livestock losses occurring in 2017 will get reported on the 2017 return. Likewise, payments for livestock losses occurring in 2016 that were received in 2017 would also be reported in 2017.
The receipt and inclusion in income of LIP payments could also put a livestock producer in a higher income tax bracket for 2017. In that instance, there might be other tax rules that can be used to defer the income associated with the livestock losses. Under I.R.C. §451(e), the proceeds of livestock that are sold on account of weather-related conditions can be deferred for one year. Under another provision, I.R.C. §1033(e), the income from livestock sales where the livestock are held for draft, dairy or breeding purposes that are involuntarily converted due to weather can be deferred if the livestock are replaced with like-kind livestock within four years. The provision applies to the excess amount of livestock sold over sales that would occur in the course of normal business practices.
While I.R.C. §451(e) requires that a sale or exchange of the livestock must have occurred, that is not the case with the receipt of indemnity payments for livestock losses. So, that rule doesn’t provide any deferral possibility. The involuntary conversion rule of I.R.C. §1033(3) is structured differently. It doesn’t require a sale or exchange of the livestock, but allows a deferral opportunity until the animals acquired to replace the (excess) ones lost in the weather-related event Thus, only the general involuntary conversion rule of I.R.C. §1033(a) applies rather than the special one for livestock when a producer receives indemnity (or insurance) payments due to livestock deaths. Thus, for LIP payments received in 2017, they will have to be reported unless the recipient acquires replacement livestock within the next two years – by the end of 2019. Any associated gain would then be deferred until the replacement livestock are sold. At that time, any gain associated gain would be reported and the gain in the replacement animals attributable to breeding stock would be reported on Form 4797.
Livestock losses due to weather-related events can be difficult to sustain. LIP payments can help ease the burden. Having the farming or ranching operation structured properly to receive the maximum benefits possible is helpful, as is understanding the tax rules and opportunities for reporting the payments.
Wednesday, March 15, 2017
How a farming operation is structured influences eligibility for federal farm program payment limitations and the amount of payments that can be received. The rules can become complex in their application, but a basic point should not be missed – each “separate person” is entitled to a payment limit. But, what does that mean? How is that term defined? How does the structure of the farming operation impact separate person status?
Those are all important questions when it comes to payment limitation planning, and a recent case from Montana illustrates why proper structuring matters in the realm of payment limitation planning. That’s the focus of today’s post.
Payment Limitation Basics
Monetary limits. For payment limitation and eligibility purposes, a "person" is separately entitled to receive payments up to the applicable limit. Under the 2014 Farm Bill, the total amount of payments received, directly and indirectly, by a person or legal entity (except joint ventures or general partnerships) for Price Loss Coverage (PLC) Agricultural Risk Coverage (ARC), marketing loan gains, and loan deficiency payments (other than for peanuts), may not exceed $125,000 per crop year. A person or legal entity that receives payments for peanuts has a separate $125,000 payment limitation ($250,000 for married persons). Cotton transition payments are limited to $40,000 per year. For the livestock disaster programs, a total $125,000 annual limitation applies for payments under the Livestock Indemnity Program, the Livestock Forage Program, and the Emergency Assistance for Livestock, Honey Bees and Farm-Raised Fish program. A separate $125,000 annual limitation applies to payments under the Tree Assistance Program.
What (or who) is a “person”? "Persons" may be individuals, corporations, limited liability companies, and certain other business organizations (such as trusts, estates, charitable organizations, and states and their agencies), but general partnerships, joint ventures, and similar “joint operations” may not be "persons." Notice the difference. Individuals, along with entities that limit liability, can be a separate person entitled to a payment limit. But, other business structures that don’t limit liability are not a separate person for payment limitation purposes. Let me restate that a different way to drive the key point home - C corporations, S corporations and Limited Liability Companies (i.e., any type of entity that limits liability) all have one payment limitation. The Farm Service Agency (FSA) then implements the direct attribution rule down to the shareholders/members to the fourth level for each of the respective entities. Thus, the entity has a limitation, and then each member has a limitation. If benefits are sought in the name of an entity and there are four shareholders or members of the entity, for example, there is a single payment limit.
However, general partnerships, joint ventures, cooperative marketing associations, and other entities that don’t limit liability are not eligible for "person" status.
Note: The definition of “person” is contained at 7 C.F.R. §1400.3
As a general rule, for farming operations other than those that are small, general partnerships and joint ventures are more advantageous for payment limitation and eligibility purposes than corporations, limited liability companies, and limited partnerships. Why? While a corporation, limited liability company, or limited partnership will be only one "person" irrespective of the number of its shareholders or members, each of the partnership's or joint venture’s members may be a separate "person" (unless there is a “combination” of “persons” under one of the so-called “combination rules”). Therefore, more "persons" are potentially available to a farming operation conducted by an entity that doesn’t limit liability than farming is a farming operation conducted by an entity that does limit liability. But, of course, with no limitation on liability comes joint and several liability. Farmers will generally not be comfortable with that, but it can be addressed by having the general partnership farming operation consist of single-member limited liability companies (or other types of limited liability structures) in lieu of individuals.
“Separate and distinct” requirement. Each “separate person" must have a "separate and distinct" economic investment in the farming operation. That is measured by a three-part test.
* Each separate person must have a separate and distinct interest in the land or the crop involved;
* Each separate person must exercise separate responsibility for the separate interest; and
* Each separate person must maintain funds or accounts separate from that of any other individual or entity for that interest.
Note: General partnerships and joint ventures may satisfy these requirements on behalf of their members.
Farmers and farm families sometimes jointly purchase inputs or exchange equipment or services. That is permissible under the rules, but farming operations that are separate have to stay that way – separate and distinct. Thus, it is important to make sure that transactions are done at arm’s-length and a paper trail is created that clearly shows that separate farming operations are, indeed, separate and that each one meets all of the applicable requirements. Care should be taken to avoid a USDA argument that there is a commingling of funds between farming operations. Promptly paying for joint purchases is a good idea, as is making sure any equipment exchanges are equivalent. The idea is to avoid the appearance that one farming operation is responsible for what another farming operation is doing.
In addition, to be a “separate person,” that “person” must “[m]aintain funds or accounts separate from that of any other individual or entity for such interest [in the land or crop involved].” This requirement is a prohibition against commingling of funds. It is not a bar on “financing.” The rules on financing are probably a topic for another blog post. In general, financing restrictions are in the payment limitation and payment eligibility rules as part of the definitions of “capital,” “equipment,” and “land” and apply to “actively engaged in farming” determinations, not “person” determinations.
In a recent case involving a Montana farming operation, Harmon v. United States Department of Agriculture, No. 14-35228, 2016 U.S. App. LEXIS 23105 (9th Cir. Dec. 22, 2016), the plaintiff received federal farm program payments from 2005 through 2008. The USDA determined that the plaintiff was not a separate “person” from his LLC which also received farm program payments for the same years. As a result, the USDA required the plaintiff to refund to the government the payments that he had received. The plaintiff exhausted his administrative remedies with the USDA to no avail, and the trial court upheld the USDA’s determination on summary judgment.
On appeal, the appellate court affirmed. The court noted that the plaintiff was required to show that he was “actively engaged in farming” and that he was a “separate person” from the LLC because the definition of “person” applied to all of part 1400 of the Code of Federal Regulations (C.F.R.) which contains the “separate person” rules and, consequently, the USDA’s interpretation of its own regulation defining “person” for payment limitation purposes that is set forth in 7 C.F.R. §1400.3 was consistent with the regulation and not plainly erroneous. The court also determined that substantial evidence supported the conclusion that the plaintiff was not a separate person from his LLC due to many unexplained transfers or loans between the plaintiff and the LLC without accompanying documentation. That suggested a commingling of funds, as did the making of operating loans back and forth between the plaintiff and the LLC. As such, the appellate court believed it was not possible to determine the true assets and liabilities of either the plaintiff or the LLC.
The appellate court also believed that the plaintiff had not made a good faith effort to comply with the per-person payment limitations, was not a separate person from the LLC and was entitled to only one payment limit instead of two. Also, the finality rule which makes a determination by a state or county FSA final and binding 90 days from the date an application for benefits was filed did not bar the FSA from evaluating the plaintiff’s program eligibility because the determination was based on misrepresentations that the plaintiff should have known were erroneous. On the application, the plaintiff had represented that he provided all of the capital and labor on his farm and didn’t receive any operating loans from related entities. In addition, while the decision of the Director of the USDA National Appeals Division did not meet the 30-day deadline, it was not void because the statute at issue (7 U.S.C. §6998(b)(2)) contains no remedy for failure to comply.
A key problem with the Montana farming operation was its structure. The LLC was a “person” under the rules, so the individual had to meet the tests for being a “separate person” from the LLC. He couldn’t do that with the result that only a single payment limitation applied. A better approach would have been to set the farming operation up as a general partnership. The general partnership would not have qualified as a “separate person,” but the individual farmer could have as a single-member LLC. That still would have resulted in one payment limitation, but additional family members could have been added as members with each having their own single-member LLC. That structure might also help address problems with commingling of funds with the operating entity.
In any event a professional that understands the rules can help to create a structure that can result in compliance with the rules and keep the farming operation from becoming tangled in needless litigation. That’s particularly the case for medium and larger-sized farming operations where the payment limit is in play.
Monday, March 13, 2017
The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “Swampbuster.” It was originally presented as only impacting truly aquatic areas and allowing drainage to continue where substantial investments had been made. The concept was met with virtually no congressional opposition, and provided that any person who in any crop year produced an agricultural commodity on converted wetlands would be ineligible for federal agricultural subsidies with regard to that commodity.
But, the Swampbuster rules have become a “quagmire” of a bureaucratic mess for many farmers and their legal counsel over the years. Today’s post takes a brief look at the issues involved in the hope that farmers and lawyers representing them can find a bit of guidance.
The original intent of Swampbuster was to deny federal farm program benefits to persons planting agricultural commodities for harvest on converted wetlands. 16 U.S.C. § 3821(a)-(b). Committee reports indicated that the Congress did not intend the Swampbuster provisions to authorize the USDA to regulate the use of private land and wanted producers to remain eligible for farm program benefits if the production of agricultural commodities occurred on converted wetlands where the impact of such conversion on wetland functional values was slight. A wetland conversion was deemed to have “commenced” when a person had obligated funds or begun actual modification of a wetland.
The legislation charged the Soil Conservation Service (SCS) with creating an official wetland inventory with a particular tract being classified as a wetland if it had (1) the presence of hydric soil; (2) wetland hydrology (soil inundation for at least seven days or saturated for at least 14 days during the growing season); and (3) the prevalence of hydrophytic plants under undisturbed conditions. In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology. All three must be present, just having hydrophytic vegetation, for example, is not enough. See B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).
The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules. The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion. Added were farmed wetlands, abandoned cropland, active pursuit requirements, Fish and Wildlife Service concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill). If the drainage work was not completed by December 23, 1985, a request could be made of the USDA on or before September 19, 1988, to make a commencement determination. In addition, drainage districts must satisfy several requirements under the “commenced conversion” rules. A project drainage plan setting forth planned drainage must be officially adopted. Also, the district must have begun installation of drainage measures or legally committed substantial funds toward the conversion by contracting for installation or supplies.
On-Site Wetland Identification Criteria
The USDA Natural Resource Conservation Service (USDA-NRCS) on-site wetland identification criteria are contained in 7 C.F.R. §12.31. Those rules lay out the procedures that USDA is to use to determine whether a tract contains wetlands. But, the implementation of the procedures has also led to litigation. For example, in Boucher v. United States Department of Agriculture, 149 F. Supp. 3d 1045 (S.D. Ind. 2016), the court determined that the NRCS followed regulatory procedures found in 7 C.F.R. §12.31(b)(2)(ii) for determining wetland status on the land that was being farmed by comparing the land to comparable tracts that were not being farmed. The court also noted that existing regulations do not require site visits during the growing season and “normal circumstances” of the land does not refer to normal climate conditions but instead refers to soil and hydrologic conditions normally present without regard to the removal of vegetation. The court also determined that the ten-year timeframe between the preliminary determination and the final determination did not deprive the plaintiff of due process rights. As a result, the court granted the government’s motion for summary judgment.
Likewise, in Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016), the court determined that the defendant’s method for determining hydrology by using aerial photographs taken when the tract was under normal environmental conditions was proper, given that the tract was drier than normal during the defendant’s site visit and because the plaintiffs had tilled the tract such that it was not in its normal condition at the time of the site visit. The plaintiffs’ claim that the defendant had relied on “color tone” differences in the photographs to identify the tract as a wetland was dismissed because the defendant had actually identified some of the specifically authorized wetland signatures rather than just relying on changes in color tone. The court also rejected the plaintiffs’ claim that the defendant had relied on a comparison site too distant from the tract at issue that wasn’t within the local area as the regulations required. The comparison site chosen was 40 miles away but was within the same Major Land Resource Area. As such, the comparison site satisfied the regulatory criteria contained in 7 C.F.R. §12.31(b)(2) to find a similar tract in its natural vegetative state. Accordingly, the defendant’s use of the comparison site was not arbitrary, capricious or contrary to the law. Earlier this year, the U.S. Supreme Court declined to hear the case.
The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics. Drains affecting these areas can be maintained, but the “scope and effect” of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b). Prior converted wetlands can be farmed, but they revert to protected status once abandoned. A prior converted wetland is a wetland that was totally drained to make it more suitable for farming before December 23, 1985. 16 U.S.C. §3801(a)(6). If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original drainage can be maintained.
Drainage activities on land designated as “farmed wetlands” have led to litigation. In Gunn v. United States, 118 F.3d 1233 (8th Cir. 1997), cert. den., 522 U.S. 1111 (1998), the Eighth Circuit Court of Appeals held that conversion from wetland to farmland of the land in question did not begin before 1985 even though the land had been cropped for 85 consecutive years after the county drainage district installed a tile main to drain the land for crop production in 1906. Because wetland traits occurred over time in wet years as the drainage system became incapable of draining the land, a portion of the farm was classified as “farmed wetland” and a 1992 replacement of the 1906 tile main with an open ditch was held to be an illegal improvement in the drainage beyond that which existed on December 23, 1985. The court reached this conclusion even though drainage district assessments had been paid on the land for decades.
Unfortunately, the Gunn court did not precisely address the issue of the original “scope and effect” of the 1906 drainage activities. Under USDA regulations, farmed wetland can be used as it was before December 23, 1985, and a hydrologic manipulation can be maintained to the same “scope and effect” as before December 23, 1985. The USDA is responsible for determining the scope and effect of original manipulation on all farmed wetlands. Arguably, if the 1906 drainage allowed crop production to occur on all of the land at issue at that time, then the effect of the 1906 drainage on the wetland was to convert it to crop production, and that status could be maintained by additional drainage activities after December 23, 1985. However, for farmed wetlands, the government has interpreted the “scope and effect” regulation such that the depth or scope of drainage ditches, culverts or other drainage devices be preserved at their December 23, 1985, level regardless of the effect any post-December 23, 1985, drainage work actually had on the land involved. In 1999, the U.S. Court of Appeals for the Eighth Circuit invalidated the government’s interpretation of the “scope and effect” regulation. Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999). The court held that a proper interpretation should focus on the status quo of the manipulated wetlands rather than the drainage device utilized in post-December 23, 1985, drainage activities.
Changes in the Rules
In 1990, the Congress tightened the Swampbuster rules by adding a new provision which provided that “any person who in any crop year subsequent to November 28, 1990, converts a wetland by draining, dredging, filling, leveling, or any other means for the purpose, or to have the effect, of making the production of an agricultural commodity possible on such converted wetlands shall be ineligible for USDA farm benefits. 16 U.S.C. § 3821(b)-(c). The rules were also changed to add a stronger penalty for wetland conversions. While converting a wetland before Nov. 28, 1990, resulted in only a proportional loss of benefits, conversion after that date results in the loss of all USDA benefits on all land the farmer controls until the wetland is restored or the loss is mitigated. 16 U.S.C. § 3821(c) (2008). After the 1990 Swampbuster rule change, the USDA took the position that activities that made ag production “possible” on converted wetland meant that any activity that made such land more farmable was prohibited. The USDA’s regulatory position was upheld by Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008). but rejected by Koshman v. Vilsack, 865 F. Supp.2d 1083 (E.D. Cal. 2012).
Under the 1996 Farm Bill, a farmed wetland located in a cropped field can be drained without sacrificing farm program benefit eligibility if another wetland is created elsewhere. Thus, through “mitigation,” a farmed wetland can be moved to an out-of-the-way location. In addition, the 1996 legislation provides a good faith exemption to producers who inadvertently drain a wetland. If the wetland is restored within one year of drainage, no penalty applies. The legislation also revises the concept of “abandonment.” Cropland with a certified wetland delineation, such as “prior converted” or “farmed wetland” is to maintain that status, as long as the land is used for agricultural production. In accordance with an approved plan, a landowner may allow an area to revert to wetland status and then convert it back to its previous status without violating Swampbuster.
While the Congressional intent behind the Swampbuster rules was a good one, the actual implementation has created difficult problems for farmers and ranchers. Will a new Administration and new heads of federal agencies bring more common sense to the application of that original intent of the Congress? Only time will tell.