Wednesday, July 18, 2018
Next month, Washburn Law School and Kansas State University (KSU) will team up for its annual symposium on agricultural law and the business of agriculture. The event will be held in Manhattan at the Kansas Farm Bureau headquarters. The symposium will be the first day of three days of continuing education on matters involving agricultural law and economics. The other two days will be the annual Risk and Profit Conference conducted by the KSU Department of Agricultural Economics. That event will be on the KSU campus in Manhattan. The three days provide an excellent opportunity for lawyers, CPAs, farmers and ranchers, agribusiness professionals and rural landowners to obtain continuing education on matters regarding agricultural law and economics.
This year’s symposium on August 15 will feature discussion and analysis of the new tax law, the Tax Cuts and Jobs Act, and its impact on individuals and businesses engaged in agriculture; farm and ranch financial distress legal issues and the procedures involved in resolving debtor/creditor disputes, including the use of mediation and Chapter 12 bankruptcy; farm policy issues at the state and federal level (including a discussion of the status of the 2018 Farm Bill); the leasing of water rights; an update on significant legal (and tax) developments in agricultural law (both federal and state); and an hour of ethics that will test participant’s negotiation skills.
The symposium can also be attended online. For a complete description of the sessions and how to register for either in-person or online attendance, click here: http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html
Risk and Profit Conference
On August 16 and 17, the KSU Department of Agricultural Economics will conduct its annual Risk and Profit campus. The event will be held at the alumni center on the KSU campus, and will involve a day and a half of discussion of various topics related to the economics of the business of agriculture. One of the keynote speakers at the conference will be Ambassador Richard T. Crowder, an ag negotiator on a worldwide basis. The conference includes 22 breakout sessions on a wide range of topics, including two separate breakout sessions that I will be doing with Mark Dikeman of the KSU Farm Management Association on the new tax law. For a complete run down of the conference, click here: https://www.agmanager.info/risk-and-profit-conference
The two and one-half days of instruction is an opportunity is a great chance to gain insight into making your ag-related business more profitable from various aspects – legal, tax and economic. If you are a producer, agribusiness professional, or a professional in a service business (lawyer; tax professional; financial planner; or other related service business) you won’t want to miss these events in Manhattan. See you there, or online for Day 1.
July 18, 2018 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Friday, January 5, 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. On Wednesday I addressed developments 10 through 6. Today I discuss the top five developments of 2017 – the really big ones. These are the developments that I deem to be of the highest importance on a national scale to agricultural producers, agribusiness and rural landowners in general.
Today’s blog post – the top five developments in agricultural law and taxation in 2017.
- 5 – Federal Implied Reserved Water Rights Doctrine Applies to Groundwater. Water issues are big in the West, and the Federal Government owns about 28 percent of the land area of the United States, with approximately 50 percent of that amount concentrated in 11 Western states (excluding Alaska). Across the West, most water rights are granted under and governed by state law. Federal law touching on water rights has generally deferred to state law for over 140 years, and the federal government waives its sovereign immunity from state court proceedings involving water rights. However, the U.S. Supreme Court has long recognized that Native American tribes can be entitled to water rights under federal law, rights that supersede many of these state rights. These federal implied rights are based upon the belief that the United States, when establishing Indian reservations, “intended to deal fairly with the Indians by reserving for them the waters without which their lands would have been useless.” But, the federal government’s water rights are not limited to its trustee capacity for Native American Tribes, but also apply to national monuments, national forests, and other public lands. In 2017, the U.S. Court of Appeals for the Ninth Circuit became the first federal appellate case to reach a decision on this issue, and its reasoning follows multiple state court decisions across the West. The court first held that the United States clearly intended to reserve water under federal law when it created the Tribe’s reservation. The court noted that the underlying purpose of the reservation was to establish a tribal homeland supporting an agrarian society. That purpose would be entirely defeated, the court reasoned, without sufficient water supplies held under federal law. Thus, the Tribe was entitled to a reserved water right for the Agua Caliente Reservation. Next, the Ninth Circuit held that the Tribe’s reserved water right extended to groundwater. It was necessary for the Tribe to access groundwater in the Coachella Valley Basin because surface supplies were clearly inadequate—a reservation without an adequate supply of surface water must be able to access groundwater as well. Thus, the court held that the reservation and establishment of the Agua Caliente Reservation carried with it an implied federal reserved right to use water from the aquifer. The court also determined that the Tribe’s implied reserved water rights pre-empted state water rights, and the Tribe’s lack of groundwater pumping did not defeat those rights, because they are immune from abandonment. The court also determined that the proper inquiry was whether water was envisioned as necessary for the reservation’s purpose at the time the reservation was created. Thus, the Ninth Circuit held, the issue of the Tribe’s state law-based water rights did not affect the existence of its federal implied reserved water right. That right, the court held, always applies as a matter of federal pre-emption, regardless of how a state allocates groundwater rights. The court’s opinion is significant because groundwater has become the dominant supply of water across the West. The decision also has important implications for California, the number one agricultural state in the nation (in terms of cash receipts), which enacted the Sustainable Groundwater Management Act (SGMA) in 2014. Because the Ninth Circuit’s decision establishes strong (and largely non-negotiable) rights for tribes within California’s groundwater basins, it complicates the formidable task of achieving sustainable groundwater management. Across the West, the other implications of the decision likely depend upon what remains of basin-wide adjudications of water rights.
Note: On November 27, 2017, the U.S. Supreme Court denied certiorari in the first phase of the case, allowing the Ninth Circuit’s holding to stand. Coachella Valley Water District v. Agua Caliente Band of Cahuilla Indians, No. 17-40, Vide No. 17-42, 2017 U.S. LEXIS 7044 (U.S. Sup. Ct. Nov. 27, 2017).
- 4 - EPA Rule Exempting Farms From Air Release Reporting Vacated.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 large (commercial) farms (those that emit more than 100 pounds total of hydrogen sulfide or ammonia daily) from the CERCLA reporting/notification requirement for air releases from animal waste (by issuing an annual report of “continuous releases”) 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. Indeed, 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. 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. 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. Later, the court, granted a motion filed by the EPA and ag groups to delay the removal of the exemption until November 14, 2017. The EPA’s interim guidance on the new reporting requirements was issued on October 26, 2017, but the EPA again motioned for an extension of time to fully implement the regulations. The court granted the motion on November 22, 2017, staying the implementation of the new reporting regulations until January 22, 2018. 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. The reporting 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. The underlying action is Waterkeeper Alliance, et al. v. Environmental Protection Agency, 853 F.3d 527 (D.C. Cir. 2017).
- 3 – Clean Water Act “WOTUS” Developments. In 2015, the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) finalized a regulation (known as the “Clean Water Rule”) concerning “waters of the United States” (WOTUS) which expanded the parameters of waters (streams, rivers, ponds, ditches, puddles and other water bodies) that are subject to federal jurisdiction and regulation. The final regulation became effective in the late summer of 2015, but a federal court stayed its implementation later that year in October. In early 2016, the U.S. Court of Appeals for the Sixth Circuit held that federal law placed jurisdiction with the federal appellate courts rather than the federal district courts concerning any challenges to the WOTUS rule. In January of 2017, the U.S. Supreme Court agreed to review the Sixth Circuit’s decision. National Association of Manufacturers v. Department of Defense, et al., 137 S. Ct. 811 (2017). About a month later, President Trump issued an Executive Order directing the EPA and the COE to revisit the Clean Water Rule and change their interpretation of waters subject to federal jurisdiction such that it only applied to waters that were truly navigable – the approach taken by Justice Scalia in Rapanos v. United States, 547 U.S. 715 (2006). The EPA and Corps later indicated they would follow the President’s suggested approach, and would push the effective date of the revised Clean Water Rule to two years after its finalization and publication.
In addition, there were several important WOTUS cases decided/finalized in 2017:
- COE jurisdictional determination is final agency action; no WOTUS present. The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineers (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects. The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA). The plaintiff sought to challenge the COE determination, but the trial court ruled for the COE, holding that the plaintiff had three options: (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment. On further review, the U.S. Supreme Court unanimously reversed, holding that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court. The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct. Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, the court held that it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable. United States Army Corps of Engineers v. Hawkes Company, No. 15-290, 136 S. Ct. 1807 (2016). On remand, the trial court granted summary judgment for the plaintiff on the grounds that the plaintiff’s property did not constitute “waters of the United States” that the defendant had jurisdiction over. The court determined that the government did not establish a “significant nexus” under the Rapanos standard between the plaintiff’s property and the Red River 93 miles away that the defendant claimed were connected via ditches and seasonal tributaries. The court also determined that the Jurisdictional Determination was not based on the “significant nexus” standard of Rapanos and was arbitrary and capricious. The court entered an injunction that ordered the defendant to not assert jurisdiction over the plaintiff’s property. In doing so, the court determined that the defendant had an adequate chance to develop a record which negated a remand back to the defendant to address the evidentiary inadequacies. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-107 ADM/TNL, 2017 U.S. Dist. LEXIS 10680 (D. Min. Jan. 24, 2017).
- Prior Converted Cropland Exception to CWA Jurisdiction Inapplicable.The plaintiff, a developer, obtained title to a 100-acre tract on the southeast side of Chicago metro area in 1995. The defendant claimed federal jurisdiction over water on a portion of the property 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. After exhausting administrative appeals, the court 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 NRCS exemption for prior converted cropland. The court also that prior caselaw had held that the CWA’s exemption of “prior converted croplands” included the abandonment provision, 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. 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).
- Conviction Upheld for Clean Water Act Violations.The defendant, a disabled Vietnam Navy veteran, was charged with multiple counts of criminal violations of the (CWA) by virtue of the unauthorized knowing discharge of “pollutants” into the “waters of the United States” (WOTUS) (in violation of 33 U.S.C. §1251-1388) and depredation of U.S. property (18 U.S.C. §1361). The defendant was indicted for building illegal ponds (nine in total) in an existing stream on two parcels - one federal and one private (which the defendant did not own). The defendant did the work due to multiple fires in the area that had recently occurred and to create stock water ponds for his animals. The government claimed that the ponds resulted in the discharge of dredged and fill material into a tributary stream and adjacent wetlands and damaged both properties, even though there was no tributary from the ponds. Dredged material from the ponds had been used to create the berms and had been placed in and around the streams and wetlands. The trial court determined that the stream at issue was a WOTUS on the basis that the stream headwater and wetland complex provided critical support to trout in downstream rivers and fisheries, including the Boulder and Jefferson Rivers (60 miles away) – navigable waters of the U.S. The trial court jury, after a second trial and the introduction by the government of evidence that it allegedly manufactured, found the defendant guilty of two counts of illegal discharge of pollutants into WOTUS without a federal permit and one count of injury or depredation of U.S. property. On appeal, the appellate court affirmed. The appellate court held that U.S. Supreme Court Justice Kennedy’s opinion in Rapanos v. United States, 547 U.S. 715 (2006) was controlling and that the trial court jury instructions based on Justice Kennedy’s “significant nexus test contained in his opinion in Rapanos were proper. The appellate court also held that the definition of WOTUS was not too vague to be enforced. Thus, there was no due process violation. The defendant had fair warning that his conduct was criminal. United States v. Robertson, 875 F.3d 1281 (9th Cir. 2017).
- 2 – Rental and Employment Agreements Appropriately Structured; No Self-Employment Tax on Rental Income.The petitioners, a married couple, operated a farm in Texas. In late 1999, they built the first of eight poultry houses to raise broilers under a production contract with a large poultry integrator. The petitioners formed an S corporation in 2004, and set up oral employment agreements with the S corporation based on an appraisal for the farm which guided them as to the cost of their labor and management services. They also pegged their salaries at levels consistent with other growers. The wife provided bookkeeping services and the husband provided labor and management. In 2005, they assigned the balance of their contract to the S corporation. Thus, the corporation became the "grower" under the contract. In 2005, the petitioners entered into a lease agreement with the S corporation. Under the agreement, the petitioners rented their farm to the S corporation, under which the S corporation would pay rent of $1.3 million to the petitioners over a five-year period. The court noted that the rent amount was consistent with other growers under contract with the integrator. The petitioners reported rental income of $259,000 and $271,000 for 2008 and 2009 respectively, and the IRS determined that the amounts were subject to self-employment tax because the petitioners were engaged in an "arrangement" that required their material participation in the production of agricultural commodities on their farm. The Tax Court, in an opinion by Judge Paris, noted that the IRS agreed that the facts of the case were on all fours with McNamara v. Comr., T.C. Memo. 1999-333 where the Tax Court determined that the rental arrangement and the wife's employment were to be combined, which meant that the rental income was subject to self-employment tax. However, the Tax Court's decision in that case was reversed by the Eighth Circuit on appeal. McNamara v. Comr., 236 F.3d 410 (8th Cir. 2000). Judge Paris, in the current case, determined that the Eighth Circuit's rationale in McNamara was persuasive and that the "derived under an arrangement" language in I.R.C. §1402(a)(1) meant that a nexus had to be present between the rents the petitioners received and the "arrangement" that required their material participation. In other words, there must be a tie between the real property lease agreement and the employment agreement. The court noted the petitioners received rent payments that were consistent with the integrator's other growers for the use of similar premises. That fact was sufficient to establish that the rental agreement stood on its own as an appropriate measure as a return on the petitioners' investment in their facilities. Similarly, the employment agreement was appropriately structured as a part of the petitioners' conduct of a legitimate business. Importantly, the court noted that the IRS failed to brief the nexus issue, relying solely on its non-acquiescence to McNamara (A.O.D. 2003-003, I.R.B. 2003-42 (Oct. 22, 2003)) and relying on the court to broadly interpret "arrangement" to include all contracts related to the S corporation. The Tax Court refused to do so and, accordingly, the court held that the petitioner's rental income was not subject to self-employment tax. Martin v. Comr., 149 T.C. No. 12 (2017).
- No 1 – The Tax Bill ("To provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018"). The most significant development of 2017 with the widest impact on agricultural producers, agribusinesses and rural landowners is unquestionably the tax bill enacted into law on December 22, 2017. The new law establishes new tax brackets, essentially doubles the standard deduction, eliminates many itemized deductions, modifies many cost-recovery provisions and changes the corporate tax rate to a flat rate of 21 percent. The legislation also creates a new 20 percent deduction for qualified business income from a pass-through entity. Prior law was also modified concerning cash accounting, the tax rate applicable to commodity gifts made to a non-charitable donee above certain levels of unearned income, the rules surrounding net operating losses, interest deductibility, elimination of the corporate alternative minimum tax (AMT) and modification of the individual AMT, the child tax credit and various international tax provisions. The new law will create many planning questions and opportunities with the structure of perhaps many farm operations being modified to take advantage of the new provisions.
2017 was another active year on the agricultural law and taxation front. It was also the first year in many years where some rather significant federal regulations as applies to agriculture were either rolled back or eliminated. 2018 will be another very busy year. That is certainly to be the case especially on the tax side of things.
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.
Friday, December 22, 2017
Big Development for Water in the West - Federal Implied Reserved Water Rights Doctrine Applies to Groundwater
Water issues are big in the West. Couple that fact with the fact that the Federal Government owns about 28 percent of the land area of the United States, with approximately 50 percent of that amount is concentrated in 11 Western states (excluding Alaska). Recently, a federal appeals court held that that the federal implied reserved water rights doctrine categorically extends to groundwater. The court’s decision could have significant implications for the usage of water in the West – a very big issue for affected farmers and ranchers. It could also have an impact on water policy.
For today’s blog post, I asked Washburn Law School’s water law expert, Prof. Burke Griggs, to take a look at the recent case and project the important implications for agriculture and Western water policy in general. Here’s what Burke had to say:
Western Water Rights
Across the West, most water rights are granted under and governed by state law. Federal law touching on water rights has generally deferred to state law, most prominently in legislation such as the General Mining Law of 1872, the Desert Land Act of 1877, and the Reclamation Act of 1902. Since Winters v. United States, 207 U.S. 564 (1908), however, the Supreme Court has recognized that Native American tribes can be entitled to water rights under federal law, rights that supersede many of these state rights. Specifically, when the United States withdraws land from the public domain and reserves it for a particular federal purpose—as for a reservation intended to be the permanent home for a Native American tribe—then the federal government has impliedly reserved sufficient unappropriated water supplies required to effect the purpose of the reservation. These federal implied rights are based upon the belief that the United States, when establishing Indian reservations, “intended to deal fairly with the Indians by reserving for them the waters without which their lands would have been useless.” Arizona v. California, 373 U.S. 546, 600 (1963).
The Winters doctrine thus reserves water to the extent it is necessary to accomplish the purpose of the reservation, and it only reserves water if it is appurtenant, or connected to, the land that has been withdrawn and reserved. Once established, however, Winters rights vest on the date of the reservation, and are thus superior to the rights of future appropriators; and unlike most state-law granted water rights, they are also immune from abandonment. Because most western states follow the prior appropriation doctrine—first in time, first in right—Winters inserted a substantial exception into the operation of their water rights systems. This was due both to the seniority of tribal rights (which antedate most state law water rights, since most Indian reservations were established in the nineteenth century) and the size of the rights (which are large, because they must be sufficient to satisfy irrigation rights - the usual, agrarian purpose of the reservations). For example, the Winters right of the Kickapoo Tribe in Kansas dates from 1834—twenty years before Kansas became a territory pursuant to the Kansas-Nebraska Act of 1854, and twenty-seven years before it became a State.
Since the 1970’s, many western tribes have obtained recognition of their Winters rights, primarily through state law water-rights adjudications. The United States holds substantial water rights across the West, not only in its trustee capacity for Native American Tribes, but also for national monuments, national forests, and other public lands. But because the United States generally enjoys sovereign immunity from state court proceedings, Congress enacted the McCarran Amendment, 43 U.S.C. § 666, which waives that sovereign immunity so that the United States must participate in such state court adjudications. Because, pursuant to Winters, tribes frequently hold some of the most senior and largest water rights in the basins at issue, the extent of their Winters rights has figured prominently in these adjudications. In addition, because groundwater has become a major source of supply for irrigators and other water users across the West since Winters, these state-court adjudications have been forced to address the issue of whether Winters rights extended to groundwater.
For the most part, state courts have held that Winters rights do extend to groundwater. See, e.g., In re Gen. Adjudication of All Rights to Use Water in Gila River Sys. & Source, 989 P.2d 739 (Ariz. 1999). The logic behind such an extension should be uncontroversial, at least from a hydrological standpoint; surface and groundwater supplies are connected to one another. As the Arizona Supreme Court wrote in the Gila case, “some [Indian] reservations lack perennial streams and depend for present and future survival substantially or entirely upon pumping of underground water. We find it no more thinkable in the latter circumstance than in the former that the United States reserved land for habitation without reserving the water necessary to sustain life.” Id. at 746. State courts and federal district courts deciding the issue of whether Winters rights extend to groundwater have mostly held in the affirmative, or have refused to exclude groundwater from the scope of Winters. See, e.g., Tweedy v. Texas Co., 286 F. Supp. 383 (D. Mont. 1968) and Confederated Salish and Kootenai Tribes v. Stults, 59 P. 3d 1093 (Mont. 2002); see also United States v. Washington Dep’t of Ecology, 375 F. Supp. 2d 1050 (W.D. Wash. 2005). Wyoming has held otherwise. See In re the General Adjudication of All Rights to Use Water in the Big Horn River System, 753 P.2d 76 (Wyo. 1988), aff’d by an equally divided Court, Wyoming v. United States, 492 U.S. 406 (1989).
In Agua Caliente Band of Cahuilla Indians v. Coachella Valley Water District, 849 F.3d 1262 (9th Cir. 2017), the court held that the federal implied reserved water rights doctrine, first established in Winters, categorically extends to groundwater. The case is notable as the first federal appellate case to reach a decision on this issue, and its reasoning follows multiple state court decisions across the West. On November 27, 2017, the U.S. Supreme Court denied certiorari in the first phase of the case, allowing the Ninth Circuits holding to stand. Coachella Valley Water District v. Agua Caliente Band of Cahuilla Indians, No. 17-40, Vide No. 17-42, 2017 U.S. LEXIS 7044 (U.S. Sup. Ct. Nov. 27, 2017).
Background. The case arose as a declaratory judgment action (where the court determines the rights of the parties without ordering any action be taken or that damages be awarded) brought by the Agua Caliente Band of Cahuilla Indians (“Tribe”), seeking a declaration that the Tribe was entitled to federal water rights that supersede state law—including rights to groundwater that lie beneath the tribe’s reservation. The most important of these rights, as noted above, is the federal implied reserved water right first established in Winters.
The Agua Caliente case was brought outside of the context of a state-court adjudication. Indeed, in many respects, the case does not present the usual facts of a reserved water rights claim. The Tribe’s reservation in the Coachella Valley of California dates to 1876-77, and consists of approximately 31,000 acres interspersed in a checkerboard pattern amid several cities within Riverside County, including Palm Springs, Cathedral City, and Rancho Mirage. By placing the Tribe on the reservation, the United States sought to protect the Tribe and, in the words of the Commissioner of Indian Affairs in 1877, secure them “permanent homes, with land and water enough.” Unfortunately, the Coachella Valley receives less than six inches of precipitation annually, and the Whitewater River System—the only supply of surface water in the area— can only provide between 4,000 and 9,000 acre-feet of water every year, most of which flows during the winter months. Therefore, almost all of the water in the valley comes from the underlying aquifer—the Coachella Valley Groundwater Basin (“Basin,”) which supports nine cities, 400,000 people, and 66,000 acres of farmland. Given the size of this cumulative demand, it is no surprise that pumping vastly exceeds recharge in the basin by 240,000 acre-feet per year. By 2010, the aquifer had become over-drafted by 5.5 million acre-feet. The Tribe, however, does not pump groundwater from its reservation lands. Rather, it obtains most of its water supplies by purchasing groundwater from the defendant water agencies—the Coachella Valley Water District and the Desert Water Agency (“water agencies”). (The Tribe also holds a small surface-water right from the Whitewater River, pursuant to a 1938 state court decree.)
Trial court. Alarmed by the state of groundwater overdraft in the Basin, the Tribe brought its suit against the water agencies in 2013, seeking a declaration that the Tribe had Winters rights extending to the groundwater supplies in the Basin. In 2014, the United States, acting in its trustee capacity for the Tribe, successfully intervened in the case, and also alleged that the Tribe enjoyed Winters rights. In 2015, the district court held that the reserved rights doctrine applies to groundwater, and that the United States had reserved appurtenant groundwater for the Tribe when it established the Tribe’s reservation in the Coachella Valley. The water agencies perfected an interlocutory appeal whereby the appellate court (the U.S. Court of Appeals for the Ninth Circuit) would rule on the issue of Winters rights before the trial concluded.
Ninth Circuit. Given the diversity of state court decisions concerning whether Winters rights extend to groundwater, and the lack of a federal appellate decision on the issue, the appeal provided the first opportunity for a federal appeals court to rule on the issue. In a straightforward decision, the Ninth Circuit upheld the trial court’s decision extending Winters rights to groundwater. The court based its decision on three related holdings. First, it held that the United States clearly intended to reserve water under federal law when it created the Tribe’s reservation. The appellant water agencies argued that Winters and its progeny should not apply in this case, because the Tribe has been able to satisfy its water needs by purchase from them. Thus, according to the water agencies, the Tribe should be treated as any other private water user obtaining its water rights under state law. The Ninth Circuit disagreed, noting that the underlying purpose of the reservation was to establish a tribal homeland supporting an agrarian society. That purpose would be entirely defeated, the court reasoned, without sufficient water supplies held under federal law. Thus, the Tribe was entitled to a reserved water right for the Agua Caliente Reservation.
Next, the Ninth Circuit held that the Tribe’s Winters right extended to groundwater. In so holding, the court cited the Arizona Supreme Court’s holding in the Gila River case. It was necessary for the Tribe to access groundwater in the Coachella Valley Basin because surface supplies were clearly inadequate—a reservation without an adequate supply of surface water must be able to access groundwater as well. Thus, the court held that the reservation and establishment of the Agua Caliente Reservation carried with it an implied federal reserved right to use water from the aquifer.
Neither of the Ninth Circuit’s first two holdings seems controversial, given the logic and the scope of Winters and its progeny. However, the third and final holding addressed a more complicated issue: how the Tribe’s Winters right exists in relation to water rights recognized under California state water law. California (like Nebraska and Arizona, to name two) follows the reasonable use/correlative rights doctrine for groundwater. At the Ninth Circuit, the water agencies argued that the Tribe’s state law water rights rendered its claim for Winters rights unnecessary. Their argument was layered: 1) because the Tribe enjoys correlative water rights under California law; and 2) because the Tribe has not drilled for water under the Agua Caliente Reservation; and 3) because the Tribe held some (but not sufficient) surface water rights under state law pursuant to the 1938 state court adjudication of the Whitewater River, then the Tribe, according to the water agencies, did not need a federal reserved right to prevent the purposes of the reservation from being entirely defeated. The Ninth Circuit rebuffed the agencies’ argument. It determined that 1) the Tribe’s Winters rights pre-empted state water rights; 2) the Tribe’s lack of groundwater pumping did not defeat those Winters rights, because they are immune from abandonment; and 3) the proper inquiry was not one of current necessity, but whether water was envisioned as necessary for the reservation’s purpose at the time the reservation was created. Thus, the Ninth Circuit held, the issue of the Tribe’s state law-based water rights did not affect the existence of its Winters water right. In sum, the Ninth Circuit’s analysis produced a categorical holding: Winters always applies as a matter of federal pre-emption, regardless of how a state allocates groundwater rights.
Supreme Court Review?
The Ninth Circuit’s decision provoked substantial amicus participation on appeal to the Supreme Court. States as legally diverse as Minnesota and Nevada, as well as property-rights advocacy groups such as the Pacific Legal Foundation, submitted amicus briefs. Both the appellants and the amici supporting them made two general arguments in opposition to the Ninth Circuit’s holding: 1) that Winters should be limited to surface water supplies governed by state-law prior appropriation regimes (such as Montana, where Winters originated); and 2) that the Ninth Circuit’s holding will interfere with and even take long-established groundwater rights secured under state law. The Supreme Court’s denial of certiorari, like all of its denials, did not give its reasons.
The arguments involved Agua are important arguments to make, especially as groundwater has become the dominant supply of water across the West. However, the logic of Winters presents formidable obstacles to limiting its scope to surface water supplies only—especially in the Coachella Valley and other desert basins which lack substantial surface water supplies. The Court’s denial of certiorari has allowed the Ninth Circuit’s decision to stand.
The Ninth Circuit’s decision also has important implications for California, which enacted the Sustainable Groundwater Management Act (SGMA) in 2014, an ambitious act that requires local “groundwater sustainability agencies” to establish sustainable groundwater management plans during the next decade or so. Because the Ninth Circuit’s decision establishes strong (and largely non-negotiable) rights for tribes within California’s groundwater basins, it probably complicates the already formidable task of achieving the necessary goal of groundwater management at the level of sustainability.
Across the West, the other implications of the decision likely depend upon what remains the primary vehicle through which tribal rights are clearly established: basin-wide adjudications of water rights undertaken in state courts pursuant to the McCarran Amendment.
P.S. Absent anything of major significance in the ag law and tax world next week, this is the final post of 2017. However, that doesn’t mean that I will be sitting idly by. I will be continuing to prep two courses for the spring semester – one for the law school and one for Kansas State University. I will also be updating my treatise for the changes triggered by the new tax law and other relevant developments, and preparing materials for the Jan. 10 seminar/webinar on the new tax law. In addition, travel begins on Jan. 4 as I head for engagements in Illinois and Tennessee before the Jan. 10 event. Radio and TV interviews also continue as usual next week. The next post is scheduled for January 1 and will be Part 1 of the top ten ag law and tax developments of 2017.
To all of my readers, have a wonderful Christmas with your families! See you on January 1.
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, April 18, 2017
Private property and the ability to exclude others is very important to farmers and ranchers. Land is typically the largest asset in terms of value that an ag producer owns and much farm and ranch machinery and equipment is often outdoors frequently during planting and harvesting. Not to mention buildings and livestock. So, trespassing is a big issue for rural landowners.
One issue that has popped-up recently in South Dakota involves public access to farmland that has become flooded. What are the rules associated with the recreational use of water? That’s the focus of today’s post.
In the United States, the individual states own the beds of navigable streams or lakes that flow or exist within their borders, and hold them in trust for their citizens. Under this public ownership concept, states may license use of the beds or lease rights to minerals found there. The right of the public to recreate over the bed can be asserted either because there is a federal navigational servitude or because the state has an expanded definition of navigability which allows more public uses than exist under federal law.
Under state law, the public's right to use rivers or lakes for recreational purposes is typically limited to those waters where the state owns the bed. For non-navigable streams, the title to the bed is held by the adjacent upland owner. Consequently, ownership of the bed is related to the concept of navigability. In general, navigability for title purposes is determined by the “natural and ordinary condition” of the water.
Although a federal test for bed title controlled the rights that states received upon joining the Union, state title tests are still important. When the states received title to the beds, they had the power to keep or dispose of them. Before the Supreme Court decisions which required federal law to be used in determining bed ownership, there were many state court decisions. These tests are still in use today and many conflict with federal law. When they do, federal law controls for title purposes (under the definition of “navigability”), but state law has been incorporated into this to determine what rights the state retains and what rights were granted to adjacent landowners. For example, some states keep title to watercourse beds only where there is a title influence. Other states follow a rule of “navigability in fact” similar to the federal rule. In these jurisdictions, the state retains title to watercourse beds only if the watercourse is navigable in fact. The remaining states use other approaches.
In early 2014, the New Mexico attorney general issued a non-binding opinion taking the position that a private landowner cannot prevent persons from fishing in a public stream that flows across a landowner’s property if the stream is accessible without trespassing across privately owned adjacent lands. Att’y. Gen. Op. 14-04 (Apr. 1, 2014). That opinion was based on New Mexico being a prior appropriation state and, as a result, unappropriated water in streams belongs to the public and is subject to appropriation for beneficial use irrespective of whether the adjacent landowner owns the streambed. Thus, the public has an easement to use stream water for fishing purposes if they can access the stream without trespassing on private property.
There are several other ways states have power over the water within their boundaries. Under its police power, a state may regulate its waters, whether or not they are navigable under the federal test, in order to protect the public's health, safety, and general welfare. Some western states claim ownership of all the water in the state, and as the owner, they claim the power to regulate. Other states limit their control to those waters considered navigable under bed ownership tests. As a result, state laws on public use of watercourses are a complex mix of cases and legislation.
The South Dakota Situation
Under South Dakota law, “the owner of land in fee has the right to the surface and everything permanently situated beneath or above it.” S.D.C.L. §43-16-1. In addition, South Dakota law provides that (with some specifically delineated exceptions), “…no person may fish, hunt or trap upon any private land without permission from the owner or lessee of the land….”. S.D.C.L. §41-9-1. Numerous states have similar statutory provisions. South Dakota also claims to own all wildlife in the state, including wildlife on private land. But, hunters cannot hunt that wildlife without the landowner’s permission unless the landowner is participating with the South Dakota Department of Game, Fish and Parks (GFP) in the “walk-in” program. Under that program, and landowner can give permission to the public to hunt on the landowner’s property in exchange for a payment from the GFP. Many other states also claim to own the wildlife found in the state and offer some sort of “walk-in” program.
South Dakota law, just like the laws of many other states, also bars “road hunting” outside of the public right-of-way. Thus, by barring hunting over private land from a public roadway, the state is recognizing landowners have “air rights” over their private property.
But, what about fishing? In a March decision, the South Dakota Supreme Court ruled that all water in the state is held in the public trust for “beneficial use.” That doesn’t seem unreasonable – other state high courts have reached the same conclusion. But, the Court held that the “beneficial use” rule applies to flooded private land (non-meandered lakes). This became an issue in South Dakota due to excess rainfall in 1993 which caused the formation of large lakes on private land in the northeastern part of the state. Fishermen flocked to the expanded lakes and the SD GFP didn’t stop them. The matter boiled over into litigation resulting in the Court’s recent decision.
The South Dakota Case
In Duerre v. Hepler, No. 27885, 2017 S.D. LEXIS 29 (S.D. Sup. Ct. Mar. 15, 2017), landowners sued the SD GFP for declaratory and injunctive relief concerning the public’s right to use the waters and ice overlying the landowners’ private property for recreational purposes. As noted above, in 1993, excessive rainfall submerged portions of the landowners’ property. In accordance with instructions from the United States Surveyor General’s Office, commissioned surveyors surveyed bodies of water in SD in the late 1800s. Pursuant to those survey instructions, if a body of water was 40 acres or less or shallow or likely to dry up or be greatly reduced by evaporation, drainage or other causes, surveyors were not to draw meander lines around the body of water but include it as land available for settlement. The meander lines delineated the water body for the purpose of measuring the property that abuts the water. When originally surveyed, the lands presently in question were small sized sloughs that were not meandered. Thus, the landowners owned the lakebeds under them. The 1993 flooding resulted in the sloughs expanding in size to over 1,000 acres each. The public started using the sloughs in 2001 and established villages of ice shacks, etc. In the spring and fall, boats would launch in to the waters via county roads. After the landowners complained to the GFP about trash, noise and related issues, the GFP determined that the public could use the waters if they entered them without trespassing. That’s sounds exactly like the New Mexico Attorney General opinion in 2014.
In 2014, the landowners sued. The trial court certified a defendant class to include those individuals who used or intended to use the floodwaters for recreational purposes, appointing the Secretary of the GFP as the class representative. On cross motions for summary judgment, the trial court entered declaratory and injunctive relief against the defendants. The trial court held that the public had no right of entry onto the water or ice without a landowner’s permission, and entered a permanent injunction in favor of the landowners.
On appeal, the South Dakota Supreme Court upheld the trial court’s decision to certify the class and include non-residents users in the class. The Court also upheld the trial court’s determination that the landowners had established the elements necessary for class certification and that the GFP Secretary was the appropriate class representative. The Court also upheld the trial court’s grant of declaratory relief to the landowners, noting that prior caselaw had left the matter up to the legislature and the legislature had not yet enacted legislation dealing with the issue. The legislature had neither declared that the public must obtain permission from private landowners, nor declared that the public’s right to use waters of the State includes the right to use waters for recreational purposes.
The Court remanded the order of declaratory relief and modified it to direct the legislature to determine whether the public can enter or use any of the water or ice located on the landowners’ property for any recreational use. As for the injunctive relief, the Court modified the trial court’s order to state that the GFP was barred from facilitating public access to enter or use the bodies of water or ice on the landowners’ property for any recreational purpose.
In short, the SD Supreme Court found that neither the GFP nor the landowners have a superior property right, but that the issue is up to the legislature to determine if recreation is a “beneficial use.” The issue is not just an important one for landowners in South Dakota. State rules for determining access rights to private property are important in every state. It certainly seems like a reasonable solution could be reached in South Dakota to protect private property rights while simultaneously providing reasonable access for fishermen. Time will tell.
Friday, February 17, 2017
Last week I posted a summary of a recent Kansas county district court decision on remand that involved the prior appropriation doctrine. The summary contained the thoughts of my colleague at the Washburn University School of law, Prof. Burke Griggs That post discussed the Haskell County District Court’s recent decision in Garetson Bros. v. American Warrior et al., (Dist. Ct. No. 2012-CV-09), in which the court protected a senior vested water right from impairment by issuing a permanent injunction prohibiting two junior wells from pumping. From a purely judicial standpoint, the case is not complicated. It stands for the proposition that Kansas water law—specifically the prior appropriation doctrine—means what it says: first in time is first in right, and owners of senior wells impaired by junior water rights are entitled to injunctive protections, unqualified by mitigating economic factors.
Today, in part two of the discussion, Prof. Griggs discusses what could be the consequences of the court’s decision.
The Prior Appropriation Doctrine
Westerners supposedly love the prior appropriation doctrine: like frontier whiskey, it is clear and works quickly, even if its effects can be rather harsh. As the Colorado Court of Appeals pointed out long ago in Armstrong v. Larimer County Ditch Co. (27 P. 235, 237 (1891)), the seniors-take-all approach of the prior appropriation doctrine works better than the fair and balanced equities-based approach of eastern water law: it works better because there is not enough water to supply all rights in dry years, and sharing the shortage would make all water rights owners so short of water that no one could make productive use of their share. In the West, as Frank Trelease memorably wrote, “priority is equity.”
If only the issue were that simple. While the clarity of the prior appropriation doctrine shines through the legal decisions in the Garetson case (and especially the earlier and largely controlling opinion in Garetson Bros. v. Am. Warrior, Inc., 347 P.3d 687 (2015)), hydrological, administrative, and political considerations are increasingly clouding that doctrinal clarity.
Hydrological considerations. Garetson is a conflict between rival irrigators who access the non-renewable waters of the Ogallala Aquifer. But, there is also a conflict with groundwater that raises certain hard problems for the prior appropriation doctrine. When the chief engineer shuts off (or “administers”) junior water rights to a stream or river system, the effect of that administration is typically clear and immediate; water prevented from reaching a junior’s canal headgate flows down to supply a senior’s. The administration of rights in an alluvial groundwater system—where the wells are close to the river—has similarly prompt and predictable effects. The Ogallala is different: because its supplies are dispersed and non-renewable, it is not always easy to determine with precision how the groundwater pumping of junior rights in a water rights neighborhood affects or impairs the pumping of a senior right. The architects of the original 1945 Kansas Water Appropriation Act (“KWAA”) recognized this hydrological difference, but deliberately decided to extend the doctrine to groundwater—including the supplies of the Ogallala. The KWAA softened the standards for granting new rights to the Ogallala, but clearly maintained the priority rule for protecting existing rights. The 1957 revisions to the KWAA were focused on allowing the development of new Ogallala water rights, and the chief engineers did their statutory duty: because water was available for rights under these softer standards, more water rights were granted to the Ogallala than the aquifer could durably sustain. As a consequence, by 1970 or so, groundwater depletion was becoming a serious problem. The Kansas Division of Water Resources (“DWR”) responded to this hydrological problem by developing procedures (at K.A.R. 5-4-1 and 5-4-1a) which set forth the process by which DWR investigates and determines impairment complaints in a groundwater system. Despite these procedures, however, a hard hydrological fact of the Ogallala remains: in order to fully protect one groundwater right to the Ogallala, it may be necessary to shut down many junior rights, more rights than are administered in a typical surface water rights administration. This is the principal reason why so few impairment complaints have been filed over the Ogallala. Owners of senior water rights know their rights, but they also know that the administration of junior rights may affect many of their neighbors—as well as junior rights which they themselves own.
Administrative difficulties. The conflict between the legal clarity of the prior appropriation doctrine and the administrative difficulty of determining impairment in a groundwater-exclusive system is one of the central issues in the Garetson case. Although DWR was investigating the impairment of the Garetsons’ senior right, they decided to withdraw their impairment complaint, and took the matter to court directly. K.S.A. 82a-717a and 82a-716 clearly provide a court-based avenue for protecting senior rights, independent of DWR. Under that approach, the senior right holder can obtain injunctive relief upon a finding of impairment—which is just what the Garetsons obtained. However, it is important to note that the facts in Garetson are somewhat unusual. The court was able to use hydrological data along with data concerning pumping effects which DWR and the Kansas Geological Survey had produced during the time in which the Garetsons were pursuing the administrative avenue of resolving their impairment through K.A.R. 5-4-1a. Without such existing data—and the impairment reports which DWR produced in a very timely fashion in this case—the court would likely not have been able to issue its temporary and permanent injunctions so expeditiously.
Kansas water politics. Those who lose in court often seek redress in the legislature, and often do so for less money. The clarity of the court’s injunctions in Garetson has promoted a substantial legislative reaction. In 2016, the defendants (American Warrior) and Southwest Kansas Groundwater Management District #3 sponsored legislation which would have substantially weakened the ability of senior water rights holders to protect their rights through the independent court-based avenues of K.S.A. 82a-716 and 82a-717a. This legislation did not succeed, but the ongoing importance of Garetson prompted the Kansas Department of Agriculture (“KDA”), which exercises supervisory authority over DWR, to consider a legislative compromise between the administrative-based avenues of K.A.R. 5-4-1 and 5-4-1a and the above-mentioned court-based avenues. Together with major agricultural powers such as the Kansas Farm Bureau and the Kansas Livestock Association, they are sponsoring H.B. 2099. http://www.kslegislature.org/li/b2017_18/measures/documents/hb2099_00_0000.pdf
Distilled to its essence, the legislation eliminates the two-avenue approach in favor of a sequential one: the senior water rights holder claiming impairment must first seek administrative relief through DWR to protect his or her right; DWR must promptly act upon the impairment complaint; only then, after the administrative process is complete, can the senior holder pursue an injunction in court. But, this last step might not be necessary, provided that DWR deploys the impairment report in the service of water rights administration.
H.B. 2099 is a classic case of a wide-ranging legislative reaction to a single lawsuit. It raises at least three difficult questions. First of all, is the legislation legally necessary? Not really: Garetson was properly decided, and we have yet to see a snowballing effect wherein thousands of senior water rights owners begin to use the priority doctrine in an ominous way, threatening their junior neighbors. (Such threats would be perfectly legal, albeit impolite.) Second, should a conflict between water users—competing property owners—be completely transformed into a regulatory action in which the chief engineer’s impairment investigation and any consequent decisions about water rights administration are the central issues under judicial review? Perhaps. It is, after all, the chief engineer’s statutory duty to investigate impairment and to protect senior rights. That is why Kansas has an administrative system for water rights protection in the first place. But there is a third and troubling question: does the legislation diminish the courts’ undeniable powers to protect private property rights? Influential stakeholders may jealously guard their political clout, and use it in the legislature to obtain the ends they seek; but the courts are just as jealous and protective of their independent powers to resolve property disputes and to protect property rights, with or without the procedures prescribed by H.B. 2099. Moreover, the KWAA provides numerous protections for owners of senior rights, outside of K.S.A. 82a-716 and 82a-717a. Even if H.B. 2099 were to be enacted, the courts might cite those and other protections to circumvent it—including protections available under the Kansas Judicial Relief Act. They have done it before in construing the scope of the KWAA.
In sum, the Kansas water rights community is again facing a choice: whether to accept the consequences of prior appropriation in a groundwater context, or to attenuate those consequences by limiting the options of senior water rights holders to protect their private property rights. In this they are only human. As St. Augustine famously wrote, “please Lord, grant me chastity and continence, but not yet.”
Tuesday, February 7, 2017
Water has a significant influence on agriculture in the United States. Over time, different systems for allocating water have developed. Most of the United States west of the 100th Meridian utilizes the prior appropriation system for purposes of allocating water. The prior appropriation system is based on a recognition that water is more scarce, and establishes rights to water based on when water is first put to a beneficial use. The doctrine grants to the individual first placing available water to a beneficial use, the right to continue to use the water against subsequent claimants. Thus, the doctrine is referred to as a “first in time, first in right” system of water allocation. The oldest water right on a stream is supplied with the available water to the point at which its state-granted right is met, and then the next oldest right is supplied with the available water and so on until the available supply is exhausted. In order for a particular landowner to determine whether such person has a prior right as against another person, it is necessary to trace back to the date at which a landowner's predecessor in interest first put water to a beneficial use. The senior appropriator, in the event of dry conditions, has the right to use as much water as desired up to the established right of the claimant to the exclusion of all junior appropriators.
Water rights in a majority of the prior appropriation states are acquired and evidenced by a permit system that largely confirms the original doctrine of prior appropriation. The right to divert and make consumptive use of water from a watercourse under the prior appropriation system is typically acquired by making a claim, under applicable procedure, and by diverting the water to beneficial use. The “beneficial use” concept is basic; a non-useful appropriation is of no effect. What constitutes a beneficial use depends upon the facts of each particular case.
As applied to groundwater, the prior appropriation doctrine holds that the person who first puts groundwater to a beneficial use has a priority right over other persons subsequently desiring the same water. This doctrine is applied in many western states that also follow the prior appropriation doctrine with respect to surface water. In many of these states, appropriation rights are administered through a state-run permit system.
A water dispute testing the application of the prior appropriation doctrine to groundwater rights in western Kansas had a recent significant development. Today’s post explaining the case are the thoughts of Professor Burke Griggs of Washburn School of Law. Prof. Griggs is part of our Rural Law Program at the law school. Before joining the law school in 2016, Prof. Griggs represented the State of Kansas in federal and interstate water matters, and has advised Kansas' natural resources agencies on matters of natural resources law and policy. He has also been engaged in the private practice of law.
Facts of the Case
On February 1, 2017, the Haskell County Kansas District Court issued its latest decision in Garetson Bros. v. American Warrior et al., (Dist. Ct. No. 2012-CV-09). The case involves a longstanding dispute between rival groundwater pumpers in southwestern Kansas (just west of the 100th Meridian). Applying a fundamental principle of Kansas water law—first in time, first in right— the court protected the plaintiffs’ senior well and groundwater right from impairment by issuing a permanent injunction prohibiting the use of the defendants’ junior rights. Although the case stands for the simple proposition that the prior appropriation doctrine grants senior rights holders the right to enjoin junior groundwater diversions which are impairing their senior rights, the court’s application of the doctrine to groundwater rights which access the Ogallala Aquifer may well produce regulatory and political reactions that are anything but simple.
In terms of Kansas water law, the case is relatively straightforward. The Garetsons own a senior, vested (pre-1945) groundwater right, which depends on the same local source of groundwater supply as two neighboring and junior groundwater rights held by American Warrior, an oil and gas production company. In 2005, the Garetsons filed an impairment complaint with the Kansas Department of Agriculture’s Division of Water Resources (DWR), so that DWR could investigate and resolve the dispute according to K.A.R. § 5-4-1a, which sets forth a detailed procedure for addressing impairment complaints for water from Ogallala Aquifer water sources. For reasons not set forth in the decision, the Garetsons withdrew their complaint in 2007, but later in 2012 sued to obtain an injunction against American Warrior’s pumping, claiming a senior water right under the Kansas Water Appropriation Act (“KWAA”). In November of that year, the trial court appointed the DWR as a fact-finder pursuant to the limited reference procedure set forth at K.S.A. § 82a-725. The DWR filed its first report on April 1, 2013, which found that the Garetson well was being impaired by the two American Warrior wells. Based on the DWR’s uncontested finding of impairment, the Garetsons obtained a preliminary injunction shortly thereafter. After several rounds of motion pleading, the DWR issued its second report on March 27, 2014, also finding impairment, and the court issued a second temporary injunction on May 5 of that year, ordering the curtailment of pumping from the defendant’s two wells.
The Appellate Decision and Remand
The defendants timely filed an interlocutory appeal to reverse the temporary injunction. In 2015, the Kansas Court of Appeals affirmed the district court’s granting of the injunction and remanded the case back to Haskell County. Garetson Bros. v. Am. Warrior, Inc., 347 P.3d 687, 51 Kan. App. 2d 370 (2015), rev. den., No. 14-111975-A, 2016 Kan. LEXIS 50 (Kan. Sup. Ct. Jan. 25, 2016).
The resolution of the central issue on appeal effectively decided the issue on remand. The issue centers on the two distinct definitions of “impairment” under the KWAA. Within the context of reviewing new applications for water rights pursuant to K.S.A. §§82a-711 and 82a-711a, the DWR uses one definition: “impairment shall include the unreasonable raising and lowering of the static water level . . . at the [senior] water user’s point of diversion beyond a reasonable economic limit (emphasis added). However, when the DWR is called upon to protect senior water rights from impairment by already-existing junior water rights, that impairment standard does not include the “beyond a reasonable economic limit” qualifier. K.S.A. §§ 82a717a, 82a-716. Because this dispute concerned the latter situation, the Court of Appeals declined defendant-appellant’s efforts to apply the former definition of impairment, and upheld the injunction.
Remanded back to Haskell County, and before a different judge, the court held hearings in October of 2016. Central to the record in the case were the findings by both the Kansas Geological Survey and the DWR that groundwater levels were declining in the area, and that the defendants’ junior groundwater pumping was responsible for substantially impairing the plaintiffs’ senior right. With these principal conclusions established in the record, the court applied the standard test for permanent injunctions, and found that a permanent injunction should issue in this case. In making that finding, the trial court judge followed the “ordinary definition of impair” [pursuant to K.S.A. §§ 82a-716 and 82a-717] which the legislature intended should apply in situations such as this, where the senior right holder seeks injunctive relief to protect against diversions by junior water right holders, when the diversion “diminishes, weakens, or injures the prior right.” In deciding that an injunction against the defendant’s junior rights should issue, the court declined to adopt a remedy suggested by the DWR in its second report—that the junior water rights surrounding Garetson’s (including those owned by non-parties) could be allowed to operate on a limited and rotating basis. In declining to adopt that remedy, the court stressed that it “does not wish to draft an order that would micro-manage future use” by the junior rights.
The prior appropriation doctrine means what it says when it comes to protecting senior water rights to the Ogallala Aquifer - first in time is first in right. In addition, “impairment” means “impairment,” unqualified by economic reasonableness. Whether Kansas irrigators and the Kansas legislature can accept such clarity will be the subject of a subsequent post, where we will speculate on what type of legislative reaction the case might provoke.
Friday, January 6, 2017
Today we continue our look this week at the biggest developments in agricultural law and taxation during 2016. Out of all of the court rulings, IRS developments and regulatory issues, we are down to the top five developments in terms of their impact on ag producers, rural landowners and agribusinesses.
So, here are the top five (as I see them) in reverse order:
(5) Pasture Chiseling Activity Constituted Discharge of “Pollutant” That Violated the CWA. The plaintiff bought approximately 2,000 acres in northern California in 2012. Of that 2,000 acres, the plaintiff sold approximately 1,500 acres. The plaintiff retained an environmental consulting firm to provide a report and delineation map for the remaining acres and requested that appropriate buffers be mapped around all wetlands. The firm suggested that the plaintiff have the U.S. Army Corps of Engineers (COE) verify the delineations before conducting any grading activities. Before buying the 2,000 acres, the consulting firm had provided a delineation of the entire tract, noting that there were approximately 40 acres of pre-jurisdictional wetlands. The delineation on the remaining 450 acres of pasture after the sale noted the presence of intact vernal and seasonal swales on the property along with several intermittent and ephemeral drainages. A total of just over 16 acres of pre-jurisdictional waters of the United States were on the 450 acres – having the presence of hydric soils, hydrophytic vegetation and hydrology (1.07 acres of vernal pools; 4.02 acres of vernal swales; .82 acres of seasonal wetlands; 2.86 acres of seasonal swales and 7.40 acres of other waters of the United States). In preparation to plant wheat on the tract, the property was tilled at a depth of 4-6 inches to loosen the soil for plowing with care taken to avoid the areas delineated as wetlands. However, an officer with the (COE) drove past the tract and thought he saw ripping activity that required a permit. The COE sent a cease and desist letter and the plaintiff responded through legal counsel requesting documentation supporting the COE’s allegation and seeking clarification as to whether the COE’s letter was an enforcement action and pointing out that agricultural activities were exempted from the CWA permit requirement. The COE then provided a copy of a 1994 delineation and requested responses to numerous questions. The plaintiff did not respond. The COE then referred the matter to EPA for enforcement. The plaintiff sued the COE claiming a violation of his Fifth Amendment right to due process and his First Amendment right against retaliatory prosecution. The EPA refused the referral due to the pending lawsuit so the COE referred the matter to the U.S. Department of Justice (DOJ). The DOJ filed a counterclaim against the plaintiff for CWA violations.
The court granted the government’s motion on the due process claim because the cease and desist letter did not initiate any enforcement that triggered due process rights. The court also dismissed the plaintiff’s retaliatory prosecution claim. On the CWA claim brought by the defendant, the court determined that the plaintiff’s owner could be held liable as a responsible party. The court noted that the CWA is a strict liability statute and that the intent of the plaintiff’s owner was immaterial. The court then determined that the tillage of the soil causes it to be “redeposited” into delineated wetlands. The redeposit of soil, the court determined, constituted the discharge of a “pollutant” requiring a national pollution discharge elimination system (NPDES) permit. The court reached that conclusion because it found that the “waters” on the property were navigable waters under the CWA due to a hydrological connection to a creek that was a tributary of Sacramento River and also supported the federally listed vernal pool fairy shrimp and tadpole shrimp. Thus, a significant nexus with the Sacramento River was present. The court also determined that the farming equipment, a tractor with a ripper attachment constituted a point source pollutant under the CWA. The discharge was not exempt under the “established farming operation” exemption of 33 U.S.C. §1344(f)(1) because farming activities on the tract had not been established and ongoing, but had been grazed since 1988. Thus, the planting of wheat could not be considered a continuation of established and ongoing farming activities. Duarte Nursery, Inc. v. United States Army Corps of Engineers, No. 2:13-cv-02095-KJM-AC, 2016 U.S. Dist. LEXIS 76037 (E.D. Cal. Jun. 10, 2016).
(4) Prison Sentences Upheld For Egg Company Executives Even Though Government Conceded They Had No Knowledge of Salmonella Contamination. The defendant, an executive of a large-scale egg production company (trustee of the trust that owned the company), and his son (the Chief Operating Officer of the company) pled guilty as “responsible corporate officers” to misdemeanor violations of 21 U.S.C. §331(a) for introducing eggs that had been adulterated with salmonella into interstate commerce from the beginning of 2010 until approximately August of 2010. They each were fined $100,000 and sentenced to three months in prison. They appealed their sentences as unconstitutional on the basis that they had no knowledge that the eggs at issue were contaminated at the time they were shipped. They also claimed that their sentences violated Due Process and the Eighth Amendment insomuch as the sentences were not proportional to their “crimes.” They also claimed that incarceration for a misdemeanor offense would violate substantive due process.
The trial court determined that the poultry facilities were in poor condition, had not been appropriately cleaned, had the presence of rats and other rodents and frogs and, as a result, the defendant and his son either “knew or should have known” that additional salmonella testing was needed and that remedial and preventative measures were necessary to reduce the presence of salmonella. The appellate court agreed, finding that the evidence showed that the defendant and son were liable for negligently failing to prevent the salmonella outbreak and that 21 U.S.C. §331(a) did not have a knowledge requirement. The appellate court also did not find a due process violation. The defendant and son claimed that because they did not personally commit wrongful acts, and that due process is violated when prison terms are imposed for vicarious liability felonies where the sentence of imprisonment is only for misdemeanors. However, the court held that vicarious liability was not involved, and that 21 U.S.C. §331(a) holds a corporate officer accountable for failure to prevent or remedy “the conditions which gave rise to the charges against him.” Thus, the appellate court determined, the defendant and son were liable for negligently failing to prevent the salmonella outbreak. The court determined that the lack of criminal intent does not violate the Due Process Clause for a “public welfare offense” where the penalty is relatively small (the court believed it was), the defendant’s reputation was not “gravely” damaged (the court believed that it was not) and congressional intent supported the penalty (the court believed it did). The court also determined that there was no Eighth Amendment violation because “helpless” consumers of eggs were involved. The court also found no procedural or substantive due process violation with respect to the sentences because the court believed that the facts showed that the defendant and son “had reason to suspect contamination” and should have taken action to address the problem at that time (even though law didn’t require it).
The dissent pointed out that the government stipulated at trial that its investigation did not identify any corporate personnel (including the defendant and son) who had any knowledge that eggs sold during the relevant timeframe were contaminated with salmonella. The dissent also noted that the government conceded that there was no legal requirement for the defendant or corporation to comply with stricter regulations during the timeframe in issue. As such, the convictions imposed and related sentences were based on wholly nonculpable conduct and there was no legal precedent supporting imprisonment in such a situation. The dissent noted that the corporation “immediately, and at great expense, voluntarily recalled hundreds of millions of shell eggs produced” at its facilities when first alerted to the problem. As such, according to the dissent, due process was violated and the sentences were unconstitutional. United States v. Decoster, 828 F.3d 626 (8th Cir. 2016).
(3) The IRS and Self-Employment Tax. Two self-employment tax issues affecting farmers and ranchers have been in the forefront in recent years – the self-employment tax treatment of Conservation Reserve Program (CRP) payments and the self-employment tax implications of purchased livestock that had their purchase price deducted under the de minimis safe harbor of the capitalization and repair regulations. On the CRP issue, in 2014 the U.S. Court of Appeals ruled that CRP payments in the hands of a non-farmer are not subject to self-employment tax. The court, in Morehouse v. Comr., 769 F.3d 616 (8th Cir. 2014), rev’g, 140 T.C. 350 (2013), held the IRS to its historic position staked out in Rev. Rul. 60-32 that government payments attributable to idling farmland are not subject to self-employment tax when received by a person who is not a farmer. The court refused to give deference to an IRS announcement of proposed rulemaking involving the creation of a new Rev. Rul. that would obsolete the 1960 revenue ruling. The IRS never wrote the new rule, but continued to assert their new position on audit. The court essentially told the IRS to follow appropriate procedure and write a new rule reflecting their change of mind. In addition, the court determined that CRP payments are “rental payments” statutorily excluded from self-employment tax under I.R.C. §1402(a). Instead of following the court’s invitation to write a new rule, the IRS issued a non-acquiescence with the Eighth Circuit’s opinion. O.D. 2015-02, IRB 2015-41. IRS said that it would continue audits asserting their judicially rejected position, even inside the Eighth Circuit (AR, IA, MN, MO, NE, ND and SD).
In 2016, the IRS had the opportunity to show just how strong its opposition to the Morehouse decision is. A Nebraska non-farmer investor in real estate received a CP2000 Notice from the IRS, indicating CRP income had been omitted from their 2014 return. The CP2000 Notice assessed the income tax and SE Tax on the alleged omitted income. The CRP rental income was in fact included on the return, but it was included on Schedule E along with cash rents, where it was not subject to self-employment tax. The practitioner responded to the IRS Notice by explaining that the CRP rents were properly reported on Schedule E because the taxpayer was not a farmer. This put the matter squarely before the IRS to reject the taxpayer’s position based on the non-acquiescence. But, the IRS replied to the taxpayer’s response with a letter informing the taxpayer that the IRS inquiry was being closed with no change from the taxpayer’s initial position that reported the CRP rents for the non-farmer on Schedule E.
On the capitalization and repair issue, taxpayers can make a de minimis safe harbor election that allows amounts otherwise required to be capitalized to be claimed as an I.R.C. §162 ordinary and necessary business expense. This de minimis expensing election has a limit of $5,000 for taxpayers with an Applicable Financial Statement (AFS) and $2,500 for those without an AFS. Farmers will fall in the latter category. In both cases, the limit is applied either per the total on the invoice, or per item as substantiated by the invoice. One big issue for farmers and ranchers is how to report the income from the sale of purchased livestock that are held for productive use, such as breeding or dairy animals for which the de minimis safe harbor election was made allowing the full cost of the livestock to be deducted. It had been believed that because the repair regulations specify when the safe harbor is used, the sale amount is reported fully as ordinary income that is reported on Schedule F where it is subject to self-employment tax for a taxpayer who is sole proprietor farmer or a member of a farm partnership. In that event, the use of the safe harbor election would produce a worse tax result that would claiming I.R.C. §179 on the livestock.
An alternative interpretation of the repair regulations is that the self-employment tax treatment of the gain or loss on sale of assets for which the purchase price was deducted under the de minimis safe harbor is governed by Treas. Reg. §1.1402(a)-6(a). That regulation states that the sale of property is not subject to selfemployment tax unless at least one of two conditions are satisfied: (1) the property is stock in trade or other property of a kind which would properly be includible in inventory if on-hand at the close of the tax year; or (2) the property is held primarily for sale to customers in the ordinary course of a trade or business. Because purchased livestock held for dairy or breeding purposes do not satisfy the first condition, the question comes down to whether condition two is satisfied – are the livestock held primarily for sale to customers in the ordinary course of a trade or business? The answer to that question is highly fact-dependent. If the livestock whose purchase costs have been deducted under the de minimis rule are not held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business, the effect of the regulation is to report the gain on sale on Part II of Form 4797. This follows Treas. Reg. §1.1402(a)-6(a) which bars Sec. 1231 treatment (which would result in the sale being reported on Part I of Form 4797). In that event, the income received on sale would not be subject to self-employment tax.
In 2016, the IRS, in an unofficial communication, said that the alternative interpretation is the correct approach. However, the IRS was careful to point out that the alternative approach is based on the assumptions that the livestock were neither inventoriable nor held for sale, and that those assumptions are highly fact dependent on a case-by case basis. The IRS is considering adding clarifying language to the Farmers’ Tax Guide (IRS Pub. 225) and/or the Schedule F Instructions.
(2) TMDLs and the Regulation of Ag Runoff. Diffused surface runoff of agricultural fertilizer and other chemicals into water sources as well as irrigation return flows are classic examples of nonpoint source pollution that isn’t discharged from a particular, identifiable source. A primary source of nonpoint source pollution is agricultural runoff. As nonpoint source pollution, the Clean Water Act (CWA) leaves regulation of it up to the states rather than the federal government. The CWA sets-up a “states-first” approach to regulating water quality when it comes to nonpoint source pollution. Two key court opinions were issued in 2016 where the courts denied attempts by environmental groups to force the EPA to create additional federal regulations involving Total Maximum Daily Loads (TMDLs). The states are to establish total maximum daily TMDLs for watercourses that fail to meet water quality standards after the application of controls on point sources. A TMDL establishes the maximum amount of a pollutant that can be discharged or “loaded” into the water at issue from all combined sources on a daily basis and still permit that water to meet water quality standards. A TMDL must be set “at a level necessary to implement water quality standards.” The purpose of a TMDL is to limit the amount of pollutants in a watercourse on any particular date. Two federal court opinions in 2016 reaffirmed the principle that regulation of nonpoint source pollution is left to the states and not the federal government.
In Conservation Law Foundation v. United States Environmental Protection Agency, No. 15-165-ML, 2016 U.S. Dist. LEXIS 172117 (D. R.I. Dec. 13, 2016), the plaintiff claimed that the EPA’s approval of the state TMDL for a waterbody constituted a determination that particular stormwater discharges were contributing to the TMDL being exceeded and that federal permits were thus necessary. The court, however, determined that the EPA’s approval of the TMDL did not mean that EPA had concluded that stormwater discharges required permits. The court noted that there was nothing in the EPA’s approval of the TMDL indicating that the EPA had done its own fact finding or that EPA had independently determined that stormwater discharges contributed to a violation of state water quality standards. The regulations simply do not require an NPDES permit for stormwater discharges to waters of the United States for which a TMDL has been established. A permit is only required when, after a TMDL is established, the EPA makes a determination that further controls on stormwater are needed.
In the other case, Gulf Restoration Network v. Jackson, No. 12-677 Section: “A” (3), 2016 U.S. Dist. LEXIS 173459 (E.D. La. Dec. 15, 2016), numerous environmental groups sued the EPA to force them to impose limits on fertilizer runoff from farm fields. The groups claimed that many states hadn’t done enough to control nitrogen and phosphorous pollution from agricultural runoff, and that the EPA was required to mandate federal limits under the Administrative Procedure Act – in particular, 5 U.S.C. §553(e) via §303(c)(4) of the CWA. Initially, the groups told the EPA that they would sue if the EPA did not write the rules setting the limits as requested. The EPA essentially ignored the groups’ petition by declining to make a “necessity determination. The groups sued and the trial court determined that the EPA had to make the determination based on a 2007 U.S. Supreme Court decision involving the Clean Air Act (CAA). That decision was reversed on appeal on the basis that the EPA has discretion under §303(c)(4)(B) of the CWA to decide not to make a necessity determination as long as the EPA gave a “reasonable explanation” based on the statute why it chose not to make any determination. The appellate court noted that the CWA differed from the CAA on this point. On remand, the trial court noted upheld the EPA’s decision not to make a necessity determination. The court noted that the CWA gives the EPA “great discretion” when it comes to regulating nutrients, and that the Congressional policy was to leave regulation of diffused surface runoff up to the states. The court gave deference to the EPA’s “comprehensive strategy of bringing the states along without the use of federal rule making…”.
Also, in 2016 the U.S. Supreme Court declined to review a decision of the U.S. Court of Appeals for the Third Circuit which had determined in 2015 that the EPA had acted within its authority under 33 U.S.C. §1251(d) in developing a TMDL for the discharge of nonpoint sources pollutants into the Chesapeake Bay watershed. American Farm Bureau, et al. v. United States Environmental Protection Agency, et al., 792 F.3d 281 (3d Cir. 2015), cert. den., 136 S. Ct. 1246 (2016).
(1) The Election of Donald Trump as President and the Potential Impact on Agricultural and Tax Policy. Rural America voted overwhelmingly for President-elect Trump, and he will be the President largely because of the sea of red all across the country in the non-urban areas. So, what can farmers, ranchers and agribusinesses anticipate the big issues to be in the coming months and next few years and the policy responses? It’s probably reasonable to expect that same approach will be applied to regulations impacting agriculture. Those with minimal benefit and high cost could be eliminated or retooled such that they are cost effective. Overall, the pace of the generation of additional regulation will be slowed. Indeed, the President-elect has stated that for every new regulation, two existing regulations have to be eliminated.
Ag policy. As for trade, it is likely that trade agreements will be negotiated on a much more bi-lateral basis – the U.S. negotiating with one other country at a time rather than numerous countries. The President-elect is largely against government hand-outs and is big on economic efficiency. That bodes well for the oil and gas industry (and perhaps nuclear energy). But, what about less efficient forms of energy that are heavily reliant on taxpayer support? Numerous agricultural states are heavily into subsidized forms of energy with their state budgets littered with numerous tax “goodies” for “renewable” energy.” However, the President-elect won those states. So, does that mean that the federal subsidies for ethanol and biodiesel will continue. Probably. The Renewable Fuels Standard will be debated in 2017, but will anything significant happen? Doubtful. It will continue to be supported, but I expect it to be reviewed to make sure that it fits the market. Indeed, one of the reasons that bio-mass ethanol was reduced so dramatically in the EPA rules was that it couldn’t be produced in adequate supplies. What about the wind energy production tax credit? What about the various energy credits in the tax code? Time will tell, but agricultural interests should pay close attention.
The head of the Senate Ag Committee will be Sen. Roberts from Kansas. As chair, he will influence the tone of the debate of the next farm bill. I suspect that means that the farm bill will have provisions dealing with livestock disease and biosecurity issues. Also, I suspect that it will contain significant provisions crop insurance programs and reforms of existing programs. The House Ag Committee head will be Rep. Conaway from Texas. That could mean that cottonseed will become an eligible commodity for Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). It may also be safe to assume that for the significant Midwest crops (and maybe some additional crops) their reference prices will go up. Also, it now looks as if the I.R.C. §179 issue involving the income limitation for qualification for farm program payments (i.e., the discrepancy of the treatment between S corporations and C corporations) will be straightened out. Other federal agencies that impact agriculture (EPA, Interior, FDA, Energy, OSHA) can be expected to be more friendly to agriculture in a Trump Administration.
Tax policy. As for income taxes, it looks at this time that the Alternative Minimum Tax might be eliminated, as will the net investment income tax that is contained in Obamacare. Individual tax rates will likely drop, and it might be possible that depreciable assets will be fully deductible in the year of their purchase. Also, it looks like the corporate tax rate will be cut as will the rate applicable to pass-through income. As for transfer taxes, President-elect Trump has proposed a full repeal of the federal estate tax as well as the federal gift tax. Perhaps repeal will be effective January 1, 2017, or perhaps it will be put off until the beginning of 2018. Or, it could be phased-in over a certain period of time. Also, while it appears at the present time that any repeal would be “permanent,” that’s not necessarily a certainty. Similarly, it’s not known whether the current basis “step-up” rule would be retained if the estate tax is repealed. That’s particularly a big issue for farmers and ranchers. It will probably come down to a cost analysis as to whether step-up basis is allowed. The President-elect has already proposed a capital gains tax at death applicable to transfers that exceed $10 million (with certain exemptions for farms and other family businesses). Repeal of gift tax along with repeal of estate tax has important planning implications. There are numerous scenarios that could play out. Stay tuned, and be ready to modify existing plans based on what happens. Any repeal bill would require 60 votes in the Senate to avoid a filibuster unless repeal is done as part of a reconciliation bill. Also, without being part of a reconciliation bill, any repeal of the federal estate tax would have to “sunset” in ten years.
January 6, 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)
Wednesday, January 4, 2017
This week we are looking at the biggest developments in agricultural law and taxation for 2016. On Monday, we highlighted the important developments that just missed being in the top ten. Today we take a look at developments 10 through six. On Friday, we will look at the top five.
- Court Obscures Rational Basis Test To Eliminate Ag Exemption From Workers' Compensation Law. While this is a state Supreme Court decision, its implications are significant. Most, if not all, states have a statutory exemption from workers’ compensation for employers that are engaged in agriculture. The statutory exemption varies in scope from state to state and, of course, an employer that is otherwise exempt can choose to be covered by the statute and offer workers’ compensation benefits to employees. In this case, the plaintiffs claimed that their on-the-job injuries should be covered under the state (NM) workers' compensation law. One plaintiff tripped while picking chile and fractured her left wrist. The other plaintiff was injured while working in a dairy when he was head-butted by a cow and pushed up against a metal door causing him to fall face-first into a concrete floor and sustain neurological damage. The plaintiffs' claims for workers' compensation benefits were dismissed via the exclusion from the workers' compensation system for employers. On appeal, the appellate court reversed. Using rational basis review (the standard most deferential to the constitutionality of the provision at issue), the court interpreted Sec. 52-1-6(A) of the New Mexico Code as applying to the primary job duties of the employees (as opposed to the business of the employer and the predominant type of employees hired), and concluded the distinction was irrational and lacked any rational purpose. The appellate court noted that the purpose of the law was to provide "quick and efficient delivery" of medical benefits to injured and disabled workers. Thus, the court determined that the exclusion violated the constitutional equal protection guarantee. The court further believed that the exclusion for workers that cultivate and harvest (pick) crops, but the inclusion of workers that perform tasks associated with the processing of crops was a distinction without a difference. The appellate court made no mention that the highest court in numerous other states had upheld a similar exclusion for agriculture from an equal protection constitutional challenge. On further review, the state Supreme Court affirmed. The Court determined that there was nothing to distinguish farm and ranch laborers from other ag employees and that the government interest of cost savings, administrative convenience and similar interests unique to agriculture were not rationally related to a legitimate government interest. The court determined that the exclusion that it construed as applying to ag laborers was arbitrary discrimination. A dissenting judge pointed out that the legislature’s decision to allow employers of farm and ranch laborers to decide for themselves whether to be subject to workers’ compensation or opt out and face tort liability did not violate any constitutionally-protected right. The dissent noted that such ability to opt out was a legitimate statutory scheme that rationally controlled costs for New Mexico farms and ranches, and that 29 percent of state farms and ranches had elected to be covered by workers’ compensation. The dissent also noted that the majority’s opinion would have a detrimental economic impact on small, economically fragile farms in New Mexico by imposing an additional economic cost of $10.5 million annually (as projected by the state Workers’ Compensation Administration). On this point, the dissent further pointed out that the average cost of a claim was $16,876 while the average net farm income for the same year studied was $19,373. The dissent further concluded that the exemption for farming operations was legitimately related to insulating New Mexico farm and ranches from additional costs. In addition, the dissent reasoned that the majority misapplied the rational basis analysis to hold the act unconstitutional as many other state courts and the U.S. Supreme Court had held comparable state statutes to satisfy the rational basis test. The dissent pointed out forcefully that the exclusion applied to employers and that the choice to be covered or not resided with employers who predominately hired ag employees. As such there was no disparate treatment between ag laborers and other agricultural workers. Rodriguez, et al. v. Brand West Dairy, et al., 378 P.3d 13 (N.M. Sup. Ct. 2016), aff’g., 356 P.3d 546 (N.M. Ct. App. 2015).
- 9. COE Jurisdictional Determination Subject to Court Review. The plaintiff, a peat moss mining company, sought the approval of the Corps of Engineers (COE) to harvest a swamp (wetland) for peat moss to use in landscaping projects. The COE issued a jurisdictional determination that the swamp was a wetland subject to the permit requirements of the Clean Water Act (CWA). The plaintiff sought to challenge the COE determination, but the trial court ruled for the COE, holding that the plaintiff had three options: (1) abandon the project; (2) seek a federal permit costing over $270,000; or (3) proceed with the project and risk fines of up to $75,000 daily and/or criminal sanctions including imprisonment. On appeal, the court unanimously reversed, strongly criticizing the trial court's opinion. Based on Sackett v. Environmental Protection Agency, 132 S. Ct. 1367 (2012), the court held that COE Jurisdictional Determinations constitute final agency actions that are immediately appealable in court. The court noted that to hold elsewise would allow the COE to effectively kill the project without any determination of whether it's position as to jurisdiction over the wetland at issue was correct in light of Rapanos v. United States, 547 U.S. 715 (U.S. 2006). The court noted that the COE had deliberately left vague the "definitions used to make jurisdictional determinations" so as to expand its regulatory reach. While the COE claimed that the jurisdictional determination was merely advisory and that the plaintiff had adequate ways to contest the determination, the court determined that such alternatives were cost prohibitive and futile. The court stated that the COE's assertion that the jurisdictional determination (and the trial court's opinion) was merely advisory ignored reality and had a powerful coercive effect. The court held that the Fifth Circuit, which reached the opposition conclusion with respect to a COE Jurisdictional Determination in Belle Co., LLC v. United States Army Corps. of Engineers, 761 F.3d 383 (5th Cir. 2014), cert. den., 83 U.S.L.W. 3291 (U.S. Mar. 23, 2015), misapplied the Supreme Court's decision in Sackett. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, 782 F.3d 984 (8th Cir. 2015), rev'g., 963 F. Supp. 2d 868 (D. Minn. 2013). In a later decision, the court denied a petition to rehear the case en banc and by the panel. Hawkes Co., Inc., et al. v. United States Army Corps of Engineers, No. 13-3067, 2015 U.S. App. LEXIS 11697 (8th Cir. Jul. 7, 2015). In December of 2015, the U.S. Supreme Court agreed to hear the case and affirmed the Eighth Circuit on May 31, 2016. The Court, in a unanimous opinion, noted that the memorandum of agreement between the EPA and the Corps established that jurisdictional determinations are “final actions” that represent the Government’s position, are binding on the Government in any subsequent Federal action or litigation involving the position taken in the jurisdictional determination. When the landowners received an “approved determination” that meant that the Government had determined that jurisdictional waters were present on the property due to a “nexus” with the Red River of the North, located 120 miles away. As such, the landowners had the right to appeal in Court after exhausting administrative remedies and the Government’s position take in the jurisdictional determination was judicially reviewable. Not only did the jurisdictional determination constitute final agency action under the Administrative Procedure Act, it also determined rights or obligations from which legal consequences would flow. That made the determination judicially reviewable. United States Army Corps of Engineers v. Hawkes Company, 136 S. Ct. 1807 (2016).
- 8. Proposed Regulations Under I.R.C. §2704. In early August, the IRS issued new I.R.C. §2704 regulations that could seriously impact the ability to generate minority interest discounts for the transfer of family-owned entities. Prop. Reg. – 163113-02 (Aug. 2, 2016). The proposed regulations, if adopted in their present form, will impose significant restrictions on the availability of valuation discounts for gift and estate tax purposes in a family-controlled environment. Prop. Treas. Regs. §§25.2704-1; 25.2704-4; REG- 163113-02 (Aug. 2, 2016). They also redefine via regulation and thereby overturn decades of court decisions honoring the well-established willing-buyer/willing-seller approach to determining fair market value (FMV) of entity interests at death or via gift of closely-held entities, including farms and ranches. The proposed regulations would have a significant impact on estate, business and succession planning in the agricultural context for many agricultural producers across the country and will make it more difficult for family farm and ranch businesses to survive when a family business partner dies. Specifically, the proposed regulations treat transfer within three years of death as death-bed transfers, create new “disregarded restrictions” and move entirely away from examining only those restrictions that are more restrictive than state law. As such, the proposed regulations appear to exceed the authority granted to the Treasury by Congress to promulgate regulations under I.R.C. §2704 and should be withdrawn. A hearing on the regulations was held in early December.
- 7. Capitalization Required For Interest and Real Property Taxes Associated with Crops Having More Than Two-Year Preproductive Period. The petitioner (three partnerships) bought land that they planned to use for growing almonds. They financed the purchase by borrowing money and paying interest on the debt. They then began planting almond trees. They deducted the interest and property taxes on their returns. The IRS objected to the deduction on the basis that the interest and taxes were indirect costs of the “production of real property” (i.e., the almonds trees that were growing on the land. The Tax Court agreed with the IRS noting that I.R.C. §263A requires the capitalization of certain costs and that those costs include the interest paid to buy the land and the property taxes paid on the land attributable to growing crops and plants where the preproductive period of the crop or plant exceeds two years. I.R.C. §263A(f)(1) states that “interest is capitalized where (1) the interest is paid during the production period and (2) the interest is allocable to real property that the taxpayer produced and that has a long useful life, an estimated production period exceeding two years, or an estimated production period exceeding one year and a cost exceeding $1 million.” The corresponding regulation, the court noted, requires that the interest be capitalized under the avoided cost method. The court also noted that the definition of “real property produced by the taxpayer for the taxpayer’s use in a trade or business or in an activity conducted for profit” included “land” and “unsevered natural products of the land” and that “unsevered natural products of the land” general includes growing crops and plants where the preproductive period of the crop or plant exceeds two years. Because almond trees have a preproductive period exceeding two years in accordance with IRS Notice 2000-45, and because the land was “necessarily intertwined” with the growing of the almond trees, the interest and tax cost of the land is a necessary and indispensable part of the growing of the almond trees and must be capitalized. Wasco Real Properties I, LLC, et al. v. Comr., T.C. Memo. 2016-224.
6. No Recapture of Prepaid Expenses Deducted in Prior Year When Surviving Spouse Claims Same Deduction in Later Year. The decedent, a materially participating Nebraska farmer, bought farm inputs in 2010 and deducted their cost on his 2010 Schedule F. He died in the spring of 2011 before using the inputs to put the spring 2011 crop in the ground. Upon his death, the inputs were included in the decedent’s estate at their purchase price value and then passed to a testamentary trust for the benefit of his wife. The surviving spouse took over the farming operation, and in the spring of 2011, took a distribution of the inputs from the trust to plant the 2011 crops. For 2011, two Schedule Fs were filed. A Schedule F was filed for the decedent to report the crop sales deferred to 2011, and a Schedule F was filed for the wife to report the crops sold by her in 2011 and claim the expenses of producing the crop which included the amount of the inputs (at their date-of-death value which equaled their purchase price) that had been previously deducted as prepaid inputs by the husband on the couple’s joint 2010 return. The IRS denied the deduction on the basis that the farming expense deduction by the surviving spouse was inconsistent with the deduction for prepaid inputs taken in the prior year by the decedent and, as a result, the “tax benefit rule” applied. The court disagreed, noting that the basis step-up rule of I.R.C. §1014 allowed the deduction by the surviving spouse which was not inconsistent with the deduction for the same inputs in her deceased husband’s separate farming business. The court also noted that inherited property is not recognized as income by the recipient, which meant that another requisite for application of the tax benefit rule did not apply. Estate of Backemeyer v. Comr., 147 T.C. No. 17 (2016).
Those were developments ten through six, at least as I see it for 2016. On Friday, we will list the five biggest developments for 2016.
January 4, 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, January 2, 2017
This week we will be taking a look at what I view as the most significant developments in agricultural law and agricultural taxation during 2016. 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 going sorting through the cases and rulings get to the final cut. Today we take a quick look at 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 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):
- HRA Relief for Small Businesses. Late in 2016, the President signed into law H.R. 6, the 21st Century Cures Act. Section 18001 of the legislation repeals the restrictions included in Obamacare that hindered the ability of small businesses (including farming operations) to use health reimbursement arrangements (HRAs). The provision allows a "small employer" (defined as one with less than 50 full-time employees who does not offer a group health plan to any employees) to offer a health reimbursement arrangement (HRA) that the employer funds to reimburse employees for qualified medical expenses, including health insurance premiums. If various technical rules are satisfied, the basic effect of the provision is that, effective for plan years beginning after December 31, 2016, such HRAs will no longer be a violation of Obamacare's market "reforms" that would subject the employer to a penalty of $100/day per affected person). It appears that the relief also applies to any plan year beginning before 2017, but that is less clear. Of course, all of this becomes moot if Obamacare is repealed in its entirety in 2017.
- More Obamacare litigation. In a somewhat related development, in May the U.S. District Court for the District of Columbia ruled in United States House of Representatives v. Burwell, No. 14-1967 (RMC), 2016 U.S. Dist. LEXIS 62646 (D. D.C. May, 12, 2016), that the Obama Administration did not have the power under the Constitution to spend taxpayer dollars on "cost sharing reduction payments" to insurers without a congressional appropriation. The Obama Administration had argued that congressional approval was unnecessary because the funds were guaranteed by the same section of Obamacare that provides for the premium assistance tax credit that is designed to help offset the higher cost of health insurance as a result of the law. However, the court rejected that argument and enjoined the use of unappropriated funds due insurers under the law. The court ruled that the section at issue only appropriated funds for tax credits and that the insurer payments required a separate congressional appropriation. The court stayed its opinion pending appeal. A decision on appeal is expected in early 2017, but would, of course, be mooted by a repeal of Obamacare.
- Veterinary Feed Directive Rule. The Food and Drug Administration revised existing regulations involving the animal use of antibiotics that are also provided to humans. The new rules arose out of a belief of bacterial resistance in humans to antibiotics even though there is no scientific proof that antibiotic resistant bacterial infections in humans are related to antibiotic use in livestock. As a result, at the beginning of 2017, veterinarians will be required to provide a “directive” to livestock owners seeking to use or obtain animal feed products containing medically important antimicrobials as additives. A “directive” is the functional equivalent of receiving a veterinarian’s prescription to use antibiotics that are injected in animals. 21 C.F.R. Part 558.
- Final Drone Rules. The Federal Aviation Administration (FAA) issued a Final Rule on UASs (“drones”) on June 21, 2016. The Final Rule largely follows the Notice of Proposed Rulemaking issued in early 2015 (80 Fed. Reg. 9544 (Feb. 23, 2015)) and allows for greater commercial operation of drones in the National Airspace System. At its core, the Final Rule allows for increased routine commercial operation of drones which prior regulations required commercial users of drones to make application to the FAA for permission to use drones - applications the FAA would review on a case-by-case basis. The Final Rule (FAA-2015-0150 at 10 (2016)) adds Part 107 to Title 14 of the Code of Federal Regulations and applies to unmanned “aircraft” that weigh less than 55 pounds (that are not model aircraft and weigh more than 0.5 pounds). The Final Rule became effective on August 29, 2016.
- County Bans on GMO Crops Struck Down. A federal appellate court struck down county ordinances in Hawaii that banned the cultivation and testing of genetically modified (engineered) organisms. The court decisions note that either the state (HI) had regulated the matter sufficiently to remove the ability of counties to enact their own rules, or that federal law preempted the county rules. Shaka Movement v. County of Maui, 842 F.3d 688 (9th Cir. 2016) and Syngenta Seeds, Inc. v. County of Kauai, No. 14-16833, 2016 U.S. App. LEXIS 20689 (9th Cir. Nov. 18, 2016).
- Insecticide-Coated Seeds Exempt from EPA Regulation Under FIFRA. A federal court held that an existing exemption for registered pesticides applied to exempt insecticide-coated seeds from separate regulation under the Federal Insecticide, Rodenticide Act which would require their separate registration before usage. Anderson v. McCarthy, No. C16-00068, WHA, 2016 U.S. Dist. LEXIS 162124 (N.D. Cal. Nov. 21, 2016).
- Appellate Court to Decide Fate of EPA’s “Waters of the United States” Final Rule. The U.S. Court of Appeals for the Sixth Circuit ruled that it had jurisdiction to hear a challenge to the EPA’s final rule involving the scope and effect of the rule defining what waters the federal government can regulate under the Clean Water Act. Murray Energy Corp. v. United States Department of Defense, 817 F.3d 261 (6th Cir. 2016).
- California Proposition Involving Egg Production Safe From Challenge. California enacted legislation making it a crime to sell shelled eggs in the state (regardless of where they were produced) 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 challenged by other states as an unconstitutional violation of the Commerce Clause by “conditioning the flow of goods across its state lines on the method of their production” and as being preempted by the Federal Egg Products Inspection Act. The trial court determined that the plaintiffs lacked standing and the appellate court affirmed. Missouri v. Harris, 842 F.3d 658 (9th Cir. 2016).
- NRCS Properly Determined Wetland Status of Farmland. The Natural Resource Conservation Service (NRCS) determined that a 0.8-acre area of a farm field was a prairie pothole that was a wetland that could not be farmed without the plaintiffs losing farm program eligibility. The NRCS made its determination based on “color tone” differences in photographs, wetland signatures and a comparison site that was 40 miles away. The court upheld the NRCS determination as satisfying regulatory criteria for identifying a wetland and was not arbitrary, capricious or contrary to the law. Certiorari has been filed with the U.S. Supreme Court asking the court to clear up a conflict between the circuit courts of appeal on the level of deference to be given federal government agency interpretive manuals. Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016).
- Family Limited Partnerships (FLPs) and the “Business Purpose” Requirement. In 2016, there were two cases involving FLPs and the retained interest section of the Code. That follows one case late in 2015 which was the first one in over two years. In Estate of Holliday v. Comr., T.C. Memo. 2016-51, the court held that the transfers of marketable securities to an FLP two years before the transferor’s death was not a bona fide sale, with the result that the decedent (transferor) was held to have retained an interest under I.R.C. §2036(a) and the FLP interest was included in the estate at no discount. Transferring marketable securities to an FLP always seems to trigger issues with the IRS. In Estate of Beyer v. Comr., T.C. Memo. 2016-183, the court upheld the assessment of gift and estate tax (and gift tax penalties) with respect to transfers to an FLP because the court determined that every benefit allegedly springing from the FLP could have been accomplished by trusts and other arrangements. There needs to be a separate non-tax business purpose to the FLP structure. A deeper dive into the court opinions also points out that the application of the “business purpose” requirement with respect to I.R.C. §2036 is very subjective. It’s important to treat the FLP as a business entity, not put personal assets in the FLP, or at least pay rent for their use, and follow all formalities of state law.
These are the developments that were important, but just not big enough in terms of their overall impact on the ag sector to make the list of the “top ten.” The next post will take a look at developments ten through six.
January 2, 2017 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Friday, November 11, 2016
Water issues in agriculture are significant. The headline-grabbers are the stories involving the allocation of water due to drought. Last year, in California, we all heard about the impact of the drought on California farmers and ranchers. Similarly, water issues loom large in the Great Plains and the battle between water usage between Colorado eastern slope farmers and the Denver-area suburbanites has been well documented.
But water allocation issues are not the focus of today’s blogpost. There’s another water-related issue that’s important to rural landowners. It’s an issue that involves a tract’s boundary. That’s the focus of today’s blog post.
How is a Watercourse Boundary Defined?
Typically, the description of the boundary of a watercourse bed is defined by state law. Most states use the ordinary high water line of the boundary, but a few states use the low water line as the boundary. This difference in definition may be significant in terms of access along navigable streams. If the water level in a stream fluctuates, the bed below the ordinary high water line may be exposed. This means that the owner of upland property, if the property ends at the ordinary high water line, is separated from the stream by a strip of public land during times of low water. The public may be entitled to access over this. If the low water line is used, a strip of public land will not appear adjacent to the stream, and there may not be any public use of the bank allowed.
How Does the Watercourse Move?
Agricultural landowners owning land adjacent to a watercourse may be faced with a changing property line due to shifts in the size and location of the watercourse. The property boundary may be slowly eroded away or may change suddenly as the result of a flood or similar natural disaster. In general, the location of the new boundary depends upon whether the watercourse is navigable or non-navigable, and how fast the change has occurred.
An accretion occurs when soil is deposited in an area that was once under water, thereby creating new land. An accretion need not be continuous in the time sense. Alternatively, an avulsion is a change in a watercourse boundary that is not gradual or imperceptible. If a watercourse shifts bodily, taking a new course without removing piece by piece from its bank, it is said to shift by avulsion. Consequently, avulsion may be defined as a lateral movement discontinuous in the space sense. In the time sense, the actual avulsion is almost instantaneous. In one Nebraska case, for example, the creation of bridges and dams caused a river to split into two main channels creating a braided stream. The court determined that the doctrine of avulsion applied to determine the boundary between the properties. Anderson v. Cumpston, 258 Neb. 891 N.W.2d 817 (2000).
In general, slow changes (accretions) that occur through such things as erosion or any other similar process, results in a shift in the property boundary. Thus, a landowner whose property is being slowly eroded will have a constantly changing land area. If the change is rapid (avulsion), then the boundary lines do not shift, and ownership disputes should not arise as frequently.
The issue of whether a boundary had moved due to a gradual accretion was involved in a case decided by the U.S. Supreme Court in 2010. Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection, et al., 560 U.S. 702 (2010). Under the facts of the case, owners of Florida beachfront property sued local governments and the state on the basis that the governments’ beach restoration projects (which the state had approved) were unconstitutional takings of their property. The Florida Supreme Court determined that no takings had occurred, and the U.S. Supreme Court agreed. The projects involved placing sand along beaches seaward from the mean high-water line, which was the boundary between the state's submerged land and the owners' properties. The beachfront owners claimed that the state's ownership of the new dry land out to the sea deprived the owners of their rights to accretion and a water boundary, and that the state court's decision was a taking of the owners' properties. The U.S. Supreme Court disagreed with the beachfront owners because the change in the mean high-water line resulted from a relatively sudden avulsion, rather than a gradual accretion. As a result, the previous mean high-water line remained the boundary between the state and the beachfront owners. Thus, the newly exposed land belonged to the state. However, a plurality of the Court did note that the takings clause applies as fully to the taking of a landowner’s riparian rights as it does to the taking of an estate in land.
Boundary issues are not infrequent in agriculture. But, when a watercourse forms the boundary some rather unique issues can arise. The facts surrounding the movement of the watercourse will go a long way to determining the proper boundary. Understanding the basic rules is also very helpful.