Sunday, June 16, 2024

Rural Practice Digest - Substack

Overview

I have started a new Substack that contains the “Rural Practice Digest.”  You can access it at mceowenaglawandtax.substack.com.  While I will post other content from time-to-time that is available without a paid subscription, the Digest is for paid subscribers.  The inaugural edition is 22 pages in length and covers a wide array of legal and tax topics of importance to agricultural producers, agribusinesses, rural landowners and those that represent them.

Contents

Volume 1, Edition 1 sets the style for future editions - a lead article and then a series of annotations of court opinions, IRS developments and administrative agency regulatory decisions.  The lead article for Volume 1 concerns losses related to cooperatives.  The USDA is projecting that farm income will be down significantly this year.  That means losses will be incurred by some and some of those will involve losses associated with interests in cooperatives.  The treatment of losses on interests in cooperatives is unique and that’s what I focus on in the article.

The remaining 19-pages of the Digest focus on various other aspect of the law that impacts farmers and ranchers. Here’s an overview of the annotation topics that you will find in Volume 1:

  • Chapter 12 Bankruptcy
  • Partnership Election – BBA
  • Valuation Rules and Options
  • S Corporation Losses
  • Nuisance
  • Fair Credit Reporting Act
  • Irrigation Return Flow Exemption and the CWA
  • What is a WOTUS?
  • EPA Regulation Threatens AI
  • Trustee Liability for Taxes
  • Farm Bill
  • Tax Reimbursement Clauses in IDGTs
  • QTIP Marital Trusts and Gift Tax
  • FBAR Penalties
  • Conservation Easements
  • Hobby Losses
  • Sustainable Aviation Fuel
  • IRS Procedures and Announcements
  • Timeliness of Tax Court Petition
  • BBA Election
  • SCOTUS Opinion on Fees to Develop Property
  • Quiet Title Act
  • Animal I.D.
  • “Ag Gag” Update
  • What is a “Misleading” Financing Statement
  • Recent State Court Opinions
  • Upcoming Seminars

Substack Contents

In addition to the Rural Practice Digest, I plan on adding video content, practitioner forms and other content designed to aid those representing agricultural clients in legal and tax matters, and others simply interested in keeping up on what’s happening in the world of agricultural law and taxation.

Conclusion

Thank you in advance for your subscription.  I trust that you will find the Digest to be an aid to your practice.  Your comments are welcome.  mceowenaglawandtax.substack.com

June 16, 2024 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)

Sunday, June 9, 2024

From the Desk…and Email…and Phone… (Ag Law Style)

Overview

Today’s post is a summary of just a snippet of the items that have come across my desk in recent days.  It’s been a particularly busy time.  The semester has ended at the two universities I teach at, exams are graded and now the seminar season heats up in earnest for the rest of the year.  This week it’s Branson for a two-day farm tax and farm estate/business planning seminar.  Then it’s back to the law school to do the anchor leg of the law school’s annual June CLE.  Next week it’s a national probate seminar and a fence law CLE.  The following week involves battling the IRS on a Tax Court case and the line between currently deductible expenses and those that must be capitalized.  Oh, and I’ll soon start a new subscription publication.  The first edition of the first volume is about ready.  So stay tuned.

For now, today’s post is on miscellaneous ag law topics.

Aerial Crop Dusting

Most cases involving injury to property or to individuals are based in negligence.  That means that someone breached a duty that was owed to someone else that caused damage to them or injured their property.  But there are some situations where a strict liability rule applies.  One of those involves the aerial application of chemicals to crops.  It is perhaps the most frequent application of the doctrine to agriculture. It’s based on the notion that crop dusting is an inherently dangerous activity. In addition, some states may have regulations applicable to aerial crop dusting.  For example, in Arkansas, violation of aerial crop spraying regulations constitutes evidence of negligence, and the negligence of crop sprayers can be imputed to landowners. 

If you utilize crop dusting as part of your farming operation, it’s best from a liability standpoint to hire the work done.  In that event, if chemical drift occurs and damages a neighbor’s crops, trees or foliage, you won’t be liable if you didn’t control or were otherwise involved in how the spraying was to be done.  Especially if all applicable regulations are followed.

Right of First Refusal

A right of first refusal allows the holder the right to buy property on the same terms offered to another bona fide purchaser.  Once notified, the holder can either choose to buy the property on the same terms offered to a third party or decline and allow the owner to sell to the third party.  A right of first refusal can be useful in ag land transactions when there is a desire to ensure that a party has a chance to acquire the property. 

A right of first refusal can be useful in certain settings involving the sale of agricultural land.  Perhaps a longstanding tenant would like to be given a chance to acquire the leased land.  Or maybe a certain family member should be given the chance to buy into the family farming operation.  But it is critical that the property actually be offered to the holder of the right before it is sold to someone else.  If that doesn’t happen the owner can be sued for monetary damages and the third party that had either actual or constructive notice of the right of first refusal can be sued for specific performance.

When a right of first refusal is involved, it’s a good idea to record it on the land records to put the public and any potential buyer on notice.  Also, investigate changes concerning the property – such as to whom lease payments are being made.  The holder must stay vigilant to protect their right.

Ag Leases and Taxes

Leasing farmland is critical to many farmers and farming operations.  What’s the best way to structure an ag lease from a tax standpoint?  Tenants and landlords are often good at understanding the economics of a farm lease and utilize the best type of lease to fit their situation.  A farm lease can be structured to appropriately balance the risk and return between the landlord and tenant. 

There are also many income tax issues associated with leasing farmland.  For the tenant farmer, the lease income is income from a farming business.  That means it’s subject to self-employment tax.  It also means that the tenant can take advantage of the tax provisions that are available for persons that are engaged in the trade or business of farming. 

Whether the landlord gets those same tax advantages depends on whether the landlord is materially participating.  If so, the landlord has self-employment income, but is eligible to exclude at least a portion of USDA cost-share payments from income. The landlord can also deduct soil and water conservation expenses, as well as fertilizer and lime costs.  A landlord engaged in farming can also elect farm income averaging, can receive federal farm program benefits, and can have a special use valuation election made in the estate at death to help save federal estate tax. 

The right type of lease can be very beneficial. 

Corporate Loans

Lending corporate cash to shareholders of a closely-held corporation can be an effective way to give the shareholders use of the funds without the double-tax consequences of dividends.  But an advance or loan to a shareholder must be a bona fide loan to avoid being a constructive dividend.  In addition, the loan must have adequate interest. If it doesn’t meet these criteria, it will be taxed as a dividend distribution.  In addition, it’s not enough for you to simply declare that you intended the withdrawal to be a loan.  There must be additional reliable evidence that the transaction is a debt.  So, what does the IRS look for to determine if a loan is really a loan?

If you have unlimited control of the corporation, there’s a greater potential for a disguised dividend, and if the corporation hasn’t been paying dividends despite having the money to do so, that’s another strike.  Did you record the advances on the corporate books and records as loans and execute notes with interest charged, a fixed maturity date and security given?  Were there attempts to repay the advances in a bona fide manner?  The control issue is a big one for farming and ranching corporations, and few farm corporations pay dividends.  This makes it critical to carefully build up evidence supporting loan characterization. 

NewH-2A Rule

The H-2A temporary ag worker program helps employers who anticipate a lack of available domestic workers.  Under the program foreign workers are brought to the U.S. to perform temporary or seasonal ag work including, but not limited to, labor for planting, cultivating, or harvesting.  Recently, the Department of Labor published a Final Rule designed to enhance protections for workers under the H-2A program. 

Effective June 28, a new Department of Labor final rule will take effect.  The rule is termed, “Improving Protections for Workers in Temporary Agricultural Employment in the United States.”   The rule will impact the temporary farmworker program.  The rule’s purpose is to increase wage transparency, clarify when an employee can be terminated for cause, and prevent employer retaliation among temporary seasonal ag workers. There are also expanded transportation safety requirements, new employer disclosure requirements and new rules for worker self-advocacy.   

The rule is lengthy and complex, but here’s a few points of particular importance:

  • New restrictions on an employers’ ability to terminate workers;
  • Workers employed under the H-2A program have the right to payment for three-fourths of the hours offered in the work contract, even if the work ends early; housing and transportation until the worker leaves; payment for outbound transportation; and, if the worker is a U.S. worker, to be contacted for employment in the next year, unless they are terminated for cause.
  • An employer may only terminate a worker “for cause” when the employer demonstrates the worker has failed to comply with employer policies or rules or to satisfactorily perform job duties after issuing progressive discipline, unless the worker has engaged in egregious misconduct. The rule establishes five conditions that must be satisfied to ensure disciplinary and/or termination processes are justified and reasonable.
  • For vehicles that are required by Department of Transportation regulations to be manufactured with seat belts, the employer must retain and maintain those seat belts in good working order and prohibit the operation of a vehicle unless each worker is wearing a seat belt.

Only applications for H-2A employer certifications submitted to the Department of Labor on or after August 29 will be subject to the new rule. 

You can expect legal challenges to the rule.  But, in the meantime, if you use temporary foreign workers on your farm, you should start creating and implementing policies and procedures to comply with the new rule as well as updating your existing H-2A applications.

The rule is published at 89 Fed. Reg. 33898.

Conclusion

The topics in ag law and tax are diverse.  There’s never a dull moment. 

June 9, 2024 in Business Planning, Civil Liabilities, Contracts, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, May 21, 2024

An Electronic Identification Mandate for the Cattle Industry

Overview

The United States entered the World Trade Organization (WTO) at its formation on January 1, 1995.  The express purpose of the WTO is to increase imports and exports around the world.  At the time of the WTO’s formation, recommendations were made for nations to adopt animal identification (animal I.D.) procedures to track disease in animals as a means to facilitate trade.  In the U.S., efforts concerning animal I.D. began in 1999, but accelerated in 2002

As a result of a Canadian cow infected with bovine spongiform encephalopathy (BSE) the USDA, in 2003, the USDA’s Animal and Plant Health Inspection Service (APHIS) proposed the National Animal Identification System (NAIS) which contained mandatory registration of premises and exclusive use of electronic identification devices (EID eartags) on all classes of cattle, from birth to slaughter, by cattle farmers and ranchers (producers).  The NAIS led to voluntary premises identification. 80 percent of hog farms voluntarily participated as did 95 percent of poultry operations.  However, the NAIS proved to be unpopular with cattle producers.  Only 18 percent of cattle operations voluntarily participated in the NAIS.  As a result, the Congress stopped the funding of the program and a 2010 USDA Factsheet acknowledged that the “vast majority of participants were highly critical of the program [NAIS].”  The USDA then promised it would take a new approach that “offers more flexibility, lower cost options, and is less burdensome.”

The new approach to animal identification in the cattle industry – it’s the topic of today’s post.

Animal I.D. – What is it?

Animal I.D. refers to keeping records on individual farm animals or groups of farm animals so that they can be easily tracked from their birth through the marketing chain. Historically, animal I.D. was used to indicate ownership and prevent theft, but the reasons for identifying and tracking animals have evolved to include rapid response to animal health and/or food safety concerns. As such, traceability is limited specifically to movements from the animal’s point of birth to its slaughter and processing location.

2010 Development

On February 5, 2010, the USDA announced that it was abandoning the NAIS and proposing a new plan known as Animal Disease Traceability (ADT) that was to be designed to be a state-administered program allowing states (and Indian Tribes) to choose their own degree of animal identification and traceability of livestock populations within their borders.   But a state program would be subject to a USDA requirement that all animals moving in interstate commerce have a form of ID that allows traceability back to their originating state or tribal nation.

Note:  The USDA Secretary of Agriculture has the authority to regulate interstate movement of farm-raised livestock.  See 7 U.S.C. §8305

2013 Final Rule

This new approach was published in a 2013 final rule requiring adult cattle shipped interstate (across state lines) to be affixed with an official animal I.D. device.  The device must contain an official identification number on a metal ear clip, plastic numeric eartag, EID eartag, or group lot identification.  Backtags could be used under certain circumstances and registered brands and tattoos could also be used when agreed to by the shipping and receiving states. Cattle shipped interstate must also be accompanied by an interstate certificate of veterinary inspection or other documentation.

Note:  The USDA’s Animal and Plant Health Inspection Service (APHIS) expressly stated that the 2013 rule “is designed to allow producers to use tags that do not require any electronic or special equipment to read the official eartags.” 78 Fed. Reg. 2,058.

Note:   The requirement for the use of group lot identification number (GIN) is that cattle and bison managed as one group throughout the preharvest production chain are not required to be individually identified. Instead, the GIN is recorded on documents accompanying the animals as they move interstate. See 89 Fed. Reg. 39,548. As such, the new rule favors vertically integrated cattle and bison production systems as they can avoid the cost of individual animal identification..

The stated purpose of the 2013 rulemaking was to improve USDA’s ability to trace livestock in the event that disease is found, which the agency states will “minimize[e] not only the spread of disease but also the trade impacts an outbreak may have.” 78 Fed. Reg., at 2,063.

While the USDA promised flexibility to cattle producers (which prioritized flexibility early on) with the 2013 rule, the USDA made it clear that it would not end APHIS’ quest to expand its animal I.D. mandate. In fact, although the agency did not disclose it would be eliminating the option for producers to choose either low-cost non-EID eartags or high-cost EID eartags, the agency did disclose its future intention to substantially expand the classes of cattle required to bear  official identification eartags. The agency stated that it viewed the inclusion of feeder cattle as an “essential component” of an “effective traceability system in the long term.” 78 Fed. Reg. 2,047. Indeed, the agency contemplated it would conduct a “separate future rulemaking” to include feeder cattle. Id.

Note:  In April of 2019, the USDA produced a Fact Sheet followed by the issuance of a Notice specifying that radio frequency identification (RFID) was going to be the only option going forward.  The Notice was challenged in court on the grounds that the USDA lacked the legal authority to mandate RFID use and issued the plan without allowing time for public comment in violation of the Administrative Procedure Act and without publishing it in the Federal RegisterRanchers Cattlemen Action Legal Fund United Stocgrowers of America v. United States Department of Agriculture, filed Oct. 3, 2019 (D. Wyo). The lawsuit also accused the agency of violating the Federal Advisory Committee Act (FACA), which requires federal agencies to follow certain protocols around establishing and utilizing advisory committees.  Within three weeks of the lawsuit being filed, the USDA shelved the plan and asked the court to dismiss the case, which the court did.

2024 New Final Rule

On May 9, 2024, the USDA published a new final rule eliminating the flexibility, lower cost options, and less burdensome requirements promised in the 2013 final rule. Under the new final rule, effective November 5, 2024, adult cattle and bison shipped interstate must bear an EID eartag (though cattle and bison bearing an official animal identification device pursuant to the 2013 final rule may retain that device throughout its lifetime).  This new rule effectively eliminates the flexibility given producers under the 2013 final rule to use lower-cost eartags that don’t require premises registration.   

The purported purpose of the mandatory use of EID eartags is to improve APHIS’ “ability to trace the cattle and bison that are currently required to have official identification and that meet this requirement with eartags [meaning the new rule would have no impact on cattle shipped interstate when using brands or tattoos when agreed to by both the shipping and receiving states].” 89 Fed. Reg., 39,542.  This traceability is (according to APHIS) for disease traceability purposes. 

The new rule also places additional emphasis on trade noting that one of its goals is that by making the overall “process of tracing infected and exposed animals more efficient,” EID eartags “would be critical to reopening export markets.” 89 Fed. Reg. 39,544.

Scope and classes of cattle. The new rule will not increase the number of cattle subject to the EID eartag mandate beyond the number of cattle already covered under the 2013 rule. The new rule states that 11 million cattle will be impacted by the EID mandate, an estimate APHIS based on the number of official identification eartags that have been used in previous years, and which represents only 11-12% of the U.S. cattle and bison inventory. See 89 Fed. Reg. 39,558.   

The new rule does not change the type or class of animals subject to the EID eartag mandate from those covered under the 2013 rule. The classes of cattle subject to the new mandate continue to include “all sexually intact cattle and bison 18 months of age or over; all female dairy cattle of any age and all male dairy cattle born after March 11, 2013; cattle and bison of any age used for rodeo or recreational events; and cattle and bison of any age used for shows or exhibitions.” 89 Fed. Reg. 39,545. Cattle and bison are exempted from official identification requirements under both the 2013 final rule and the new rule if they are going directly to slaughter. See id.

Cost to producers.  APHIS claimed that the cost of purchasing EID eartags was the only additional cost associated with the new mandate and estimated the cost for producers would be approximately $26.1 million dollars, representing an average cost of $30.39 per cattle or bison operation each year. See 89 Fed. Reg. 39,561. This estimated cost for the new rule falls within the cost range the agency estimated in the 2013 rule. See 78 Fed. Reg. 2,058.

However, when responding to comments received for the 2013 rule that at least one study estimated that the cost of a NAIS-type system would range as high as $1.9 billion, APHIS expressly stated that it did not dispute the cost factors used in the study based on its belief that the management practices associated with those cost factors were not needed to comply with the 2013 rule. See Id

Shortcomings Acknowledged by APHIS. APHIS asserts its testing of the 2013 rule’s efficacy finds that “States on average can trace animals [at least to the State where an animal was either shipped from or the State where the animal was officially identified] in less than 1 hour[.]” 89 Fed. Reg. 39541.

Despite this touted success, APHIS has acknowledged at least four shortcomings associated with the 2013 rule, but only one of which is addressed in the new rule:

  • APHIS acknowledges that 70 percent of cattle would need to be traceable for it to be fully prepared for a possible incursion of a foreign animal disease. See 89 Fed. Reg. 38542. As stated above, the new rule does not require any more cattle to be officially identified than are required under current regulations.
  • APHIS acknowledges in the 2013 rule that the digitization of interstate certificates of veterinary inspections (ICVIs), which must accompany cattle and bison shipped interstate, “is important to increase administrative efficiencies and to support timely traceability.” 78 Fed. Reg. 2,055. Yet, the agency did not require the digitization of such records in the 2013 rule and does not require it in the new rule.
  • APHIS acknowledges that eartags on the animal and accompanying ICVIs and other paper documentation work in tandem, and both are essential to the process of animal disease traceability. The agency claims that if both these interdependent tools are in electronic form, there is a “significant advantage over non-EID tags and paper record systems.”

Note:  The mandate only applies to producers, not the veterinary community.  This would appear to  jeopardize the ability of APHIS to achieve a significant advantage in tracing back diseased cattle.  The justification given for not requiring the digitization of ICVIs is that they “may sometimes be impracticable for the regulated community,” without specifying the reason such a mandate would be impracticable. 

  • APHIS acknowledges that while it is requiring producers to purchase and affix EID tags to their cattle and bison, it is not requiring anyone in the industry to purchase or even use the electronic equipment needed to read and record the EID tags (e.g., electronic readers and data management systems). See 89 Fed. Reg., 39,557. In other words, while APHIS is imposing its EID mandate on producers’ cattle and bison, whether the data in those EID tags are ever transferred electronically to a digital data management system remains purely discretionary. This calls into question the agency’s stated purpose for the EID mandate itself – to reduce or eliminate errors associated with transcribing numbers on visual tags to a database and to more “rapidly and accurately read and record tag numbers and retrieve traceability information.” 89 Fed. Reg., 39,543.   

Note:  The significance of this is that the agency, as stated above, is contemplating including feeder cattle in a future rule.  When combined with the new rule’s EID eartag mandate, it would essentially resurrect a NAIS-type system.  This could reasonably be anticipated to result in a substantial cost increase to producers, including equipment and labor costs because feeder cattle are not currently required to bear any official animal identification under the 2013 rule. Given that approximately 25 million steers and heifers are slaughtered each year, including feeder cattle (i.e., lighter weight steers and heifers intended for eventual slaughter), a future rulemaking would likely increase the number of cattle subject to the EID mandate from 11 million to 36 million.  

Actions to Overturn

Senator Mike Rounds, (R-SD) has introduced S. 4282, A bill to prohibit the Secretary of Agriculture from implementing any rule or regulation requiring the mandatory use of electronic identification eartags on cattle and bison, to reverse the new rule.

On May 9, 2024 Congresswoman Harriet Hageman (R-WY) issued a public statement stating,  “In the coming weeks, I will introduce a joint resolution of disapproval pursuant to the Congressional Review Act (CRA) to overturn this harmful rule.” 

Note:  The CRA is located at 5 U.S.C. §§801-808.

In addition, Senators Rounds and Tester (D-MT), are also pushing the U.S. Senate to pass a resolution of disapproval which could lead to the invalidation of the 2024 final rule under the CRA.

Legal Issues/Challenges

An animal I.D. program raises the possibility of potential legal liability if disease can be traced back to a particular farm or producer.  If a farmer is deemed to be a “merchant,” goods that are not merchantable cannot be placed in commerce.  A diseased animal is not merchantable.  The courts are split on whether a farmer is a merchant.  Importantly, some states (such as Kansas) have statutorily exempted livestock producers from liability under for breach of the warranty of merchantability as well as the warranty of fitness for a particular purpose.   The exemptions exist primarily in the major livestock producing states.  The states with exemptions vary widely in their statutory approach to the exemption.

It is also possible that a strict liability claim could be brought against a livestock seller for selling an unreasonably dangerous defective product.  However, a primary question is whether livestock are “products” for this purpose. 

Perhaps greater potential liability would lie in a negligence claim.  Under a negligence theory, the plaintiff would have to show that the producer owed the plaintiff a duty that was breached and the breach of the duty caused the plaintiff’s injury.  Any increased transparency of an animal I.D. system could make it easier for a plaintiff to prevail on a negligence (as well as a warranty or strict liability) claim. 

An additional concern involves the privacy of information that would be collected under a mandatory animal I.D. program and whether that information could be generally available to the public pursuant to a Freedom of Information Act (FOIA) request. 7 U.S.C. §552. The FOIA entitles the public to obtain records that federal agencies hold.  While the FOIA applies to “agency records” maintained by “agencies” within the executive branch of the federal government, an exemption prevents the disclosure of confidential information that could harm an individual.  7 U.S.C. §552(b).  Also exempt is public access to various types of business-related information as well as commercial or financial information or any other confidential information, the release of which could harm the provider.  The extent of that exemption would likely be tested in court.

Conclusion

The new rule appears to be a corrective step in APHIS’ incremental march toward the fulfillment of its implied objective to ultimately increase the number of cattle and bison subject to its EID mandate. The only measurable effect of the new rule is to eliminate the flexibility, lower costs, and less burdensome requirements promised in the 2013 rule. Neither the number of cattle or classes of cattle subject to official identification requirements will change.

The new rule does not address the shortcomings identified with the 2013 rule and appears only to ensure cattle and bison shipped interstate will bear an electronic device, but without an accompanying mandate that those devices be read or recorded electronically, thus calling into question the potential efficacy of the new mandate.

What is really needed for effective disease traceability is the digitization of the accompanying ICVI which is associated with the tag number on the cow.  The 2024 rule doesn’t require this. 

Further, because the new rule incentivizes vertical integration with its lower-cost and less burdensome GIN method, the rule will likely facilitate the ongoing consolidation and concentration of the U.S. cattle industry.    

Another problem with the rule is that it has a disparate impact on producers based on their geographic location.  If a producer lives in a state with packing plants, the producer’s animals need not cross state lines and would not be subject to the animal I.D. rule.  However, producers in a state without a packing plant would be subject to the rule.  This could lead to a constitutional challenge based on disparate impact. 

Yet another question is where the chips used in RFID come from.  Currently, approximately eight companies are certified as manufacturers of EID tags.  It is not known where these companies are getting the chips.  The possibility exists that the chips are coming from China.  If that is the case, the use of the chips provides the possibility that China would gain the ability to discern the location of livestock herds in the U.S. and present the U.S. with a national security issue. 

The United States used to bar imports from countries with BSE or foot and mouth disease.  It seems that a much more effective (and acceptable) approach would be to put that ban back in place instead of imposing a mandatory animal I.D. program. 

So, what’s the big deal with animal I.D.?  Why does the USDA care so much about this?  Why do the meatpackers not oppose animal I.D.?  The USDA is promoting the rule as having a minimal impact on producers.  That’s likely by design with additional mandates to come in the future. 

Finally, given the USDA’s recent push for “Climate Smart Agriculture” and its attempts to entice producers via tax credits to adopt certain “climate friendly” practices, it’s certainly plausible to conclude that USDA’s end goal is to monitor greenhouse gas emissions from farms and ranches across the U.S. by requiring associated information to be on the EID tag.  If that’s correct, mandatory animal I.D. may actually be the beginning of the end of freedom for the American cattle rancher.

May 21, 2024 in Regulatory Law | Permalink | Comments (0)

Monday, May 6, 2024

Musings in Agricultural Law and Taxation – of Conservation Easements; IDGTs and Takings

Overview

The ag law and tax world continues to go without rest.  It’s amazing how frequently the law intersects with agriculture and rural landowners.  It really is “where the action is” in the law.  From the U.S. Supreme Court all the way to local jurisdictions, the current developments just keep on rolling.

More recent developments in ag law and tax – it’s the topic of today’s post.

An Easement is Not Worth More than the Underlying Property

Oconee Landing Property, LLC, et al. v. Comr., T.C. Memo. 2024-25

In the latest round of the continuing saga involving donated conservation easement tax fraud, the Tax Court uncovered another abusive tax shelter.  IRS guidelines make it clear that a conservation easement’s value is the value of the forfeited development rights based on the land’s highest and best use.  To qualify as a highest and best use, a use must satisfy four criteria: (1) the land must be able to accommodate the size and shape of the ideal improvement; (2) a property use must be either currently allowable or most probably allowable under applicable laws and regulations; (3) a property must be able to generate sufficient income to support the use for which it was designed; and (4) the selected use must yield the highest value among the possible uses. 

Note:  A tract’s highest and best use is merely a factor in determining fair market value. It doesn’t override the standard IRS valuation approach – that being the price at which a willing buyer and a willing seller would arrive at.  See, e.g., Treas. Reg. §1.170A-1(c)(2).  See also Boltar LLC v. Comr., 136 T.C. 326 (2011).

In this case, the taxpayer donated 355 acres of undeveloped land to a land trust.  The 355-acre tract was part of a larger tract that was a nationally recognized golf resort with associated developments.  When the larger tract wouldn’t sell, the taxpayer became interested in the possibility of granting a conservation easement on the 355 acres.  Ultimately, the taxpayer valued the 355 acres at about $60,000 per acre and claimed a charitable deduction for the entire amount - $20.67 million.  The IRS disallowed the deduction due to lack of donative intent – the entire scheme involved a pre-determined agreement to secure inflated appraisals so that investors would be able to deduct more than their respective investments. 

Note:  The amount of the deduction that can be claimed is subject to a limitation based on a percentage of the taxpayer’s contribution base.  I.R.C. §170(b)(1)(H).  However, if the donor is a “qualified farmer or rancher” and the donated property is used in agricultural or livestock production, the deduction may be up to 100 percent of the donor’s contribution base.  I.R.C. §170(b)(1)(E)(iv).  For corporate farms and ranches, see I.R.C. §170(b)(2)(B) and for the definition of a “qualified farmer or rancher” see I.R.C. §170(b)(1)(E)(v) and Rutkoske v. Comr., 149 T.C. 133 (2017). 

While the Tax Court determined that the donated easement had value, it agreed with the IRS that the value of the tract was approximately $5 million.  However, the lack of a qualified appraisal as the regulations require be attached to the return wiped out any associated deduction.  Simply setting a target value for the appraiser to hit coupled with the taxpayer’s knowledge that the value was overstated is not a qualified appraisal. 

Note:  Form 8283, Section B, as an appraisal summary must be fully completed and attached to the return for noncash donations greater than $5,000. 

In addition, the Tax Court pointed out that the 355-acre tract had been transferred to a developer (a partnership) who then donated the easement.  That meant that the donation was of ordinary income property which limited any deduction to the basis in the property.  Because there was no evidence offered as to the basis of the property, the deduction was zero.  I.R.C. §170(e)(1)(A).

For good measure, the Tax Court tacked on a gross overstatement penalty of 40 percent.  In determining the penalty, the Tax Court agreed with the IRS position that the highest and best use of the tract was as a “speculative hold for mixed-use development” and the easement was worth less than $5 million.  The Tax Court also tacked on a 20 percent penalty on the portion of the underpayment that wasn’t associated with the erroneous valuation. 

Note:  The rules associated with donated conservation easements are technical and must be precisely complied with.  While large tax savings can be achieved by donating a permanent conservation easement (especially for farmers and ranchers), carefully following all of the rules is critical.  Predetermining a valuation is a big “no-no.” 

IRS Changes Position on Gift Tax Treatment of IDGT Tax Reimbursement Clauses

C.C.A. 202352018 (Nov. 28, 2023) 

An Intentionally Defective Grantor Trust, or IDGT, is a tool used in estate planning to keep assets out of the grantor’s estate at death, while the grantor is responsible for paying income tax on the trust’s earnings.  Those tax payments are not gifts by the grantor to the beneficiaries.  If that tax burden proves to be too much it has been possible to give an independent trustee discretion to distribute funds from the trust to the grantor for making those tax payments.  The IRS said in 2016 that also wouldn’t trigger any gift or income tax consequences for the grantor.  Priv. Ltr. Rul. 201647001 (Aug. 8, 2016).  But now IRS says that a reimbursement clause in an IDGT does trigger gift tax when the trustee distributes trust funds to the grantor.  IRS now deems such a clause to result in a change in the beneficial interests in the trust rather than constituting merely being administrative in nature. 

Note:  While the IRS did not address the issue, it would seem that if state law authorizes the trustee to reimburse the grantor, as long as the trust doesn’t prohibit reimbursement, no gift tax should be triggered.  

“Takings” Cases at the U.S. Supreme Court

Devillier v. Texas, 144 S. Ct. 938 (2024) 

Sheetz v. El Dorado County, 144 S. Ct. 893 (2024) 

Devillier – Is the Fifth Amendment “self-executing”?  The family involved in Devillier has farmed the same land for a century.  There was no problem with flooding until the State renovated a highway and changed the surface water drainage.  In essence, the renovation turned the highway into a dam and when tropical storms occurred, the water no longer drained into the Gulf of Mexico.  Instead, the farm was left flooded for days, destroying crops and killing cattle.  The family sued the State of Texas to get paid for the Taking.

Note:  Constitutional rights don’t usually come with a built-in cause of action that allows for private enforcement in courts – in other words, “self-executing.”  They’re generally invoked defensively under some other source of law or offensively under an independent cause of action. 

The family claimed that the Takings Clause is an exception based on its express language – “nor shall private property be taken for public use, without just compensation.”  The case was removed to federal court and the family won at the trial court.  However, the appellate court dismissed the case on the basis that the Congress hadn’t passed a law saying a private citizen could sue the state for a constitutional taking.  In other words, the federal appellate court determined that the Fifth Amendment’s Takings Clause isn’t “self-executing.” 

The U.S. Supreme Court agreed to hear the case with the question being what the procedural vehicle is that a property owner uses to vindicate their right to compensation against a state.  The U.S. Supreme Court unanimously reversed the lower court, although it did not hold that the Fifth Amendment is “self-executing.”  Texas does provide an inverse condemnation cause of action under state law to recover lost value by a Taking. The Supreme Court noted that Texas had assured the Court that it would not oppose the complaint being amended so that the case could be pursued in federal court based on Texas state law. 

Sheetz - traffic impact mitigation fee and government extortion.  Sheetz claimed that a local ordinance requiring all similarly situated developers pay a traffic impact mitigation fee posed the same threat of government extortion as those struck down in Nollan v. California Coastal Commission, 483 U.S. 825 (1987), Dolan v. City of Tigard, 512 U.S. 374 (1995), and Koontz v. St. Johns River Water Management District, 570 U.S. 595 (2013). Those cases, taken together, hold that if the government requires a landowner to give up property in exchange for a land-use permit, the government must show that the condition is closely related and roughly proportional to the effects of the proposed land use. 

In this case, Sheetz claimed that test meant that the county had to make a case-by-case determination that the $24,000 fee was necessary to offset the impact of congestion attributable to his building project - a manufactured home on a lot that he owns in California.  He paid the fee, but then filed suit to challenge its constitutionality under the Fifth Amendment.   The U.S. Supreme Court unanimously ruled in his favor.  The Court determined that nothing in the Takings Clause indicates that it doesn’t apply to fees imposed by state legislatures. 

May 6, 2024 in Estate Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, April 30, 2024

Summer Seminars – Branson and Jackson Hole

Registration for both of the national summer seminars that Paul Neiffer and I will be doing is now open.  The Branson (College of the Ozarks) seminar is in-person only, but the Jackson Hole event is offered both in-person and online.  For those attending the Jackson Hole seminar in-person, a room block is established at the Virginian Resort at a reduced rate.

The topics that we will cover are the same at both locations (although the material for Jackson Hole will be updated and current through mid-July).

Here’s a list of the topics we will be covering:

  • Federal Tax Update
  • Farm Bill Update
  • Beneficial Ownership Information (BOI) Reporting
  • Depreciation Planning
  • Tax Planning Considering the Possible Sunset of TCJA
  • How Famers Might Benefit from the Clean Fuel Production Tax Credit
  • Conservation Easements
  • Federal Estate and Gift Tax Update
  • SECURE Act 2.0
  • Split Interest Land Transactions
  • Manager-Managed LLCs
  • Types of Trusts
  • Monetized Installment Sales
  • Charitable Remainder Trusts or Cash Balance Plans
  • Special Use Valuation
  • Buy-Sell Agreements (planning in light of the Connelly decision)

Registration

For more information about the Branson event, and registration, click here:   https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html

For more information about the Jackson Hole event, and registration, click here:   https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html

April 30, 2024 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, April 28, 2024

What’s Going on with Swampbuster?

Overview

There have been several significant recent developments involving the Swampbuster program with potential long-term impact for farming operations that participate in the federal farm programs.  The issues involve how the government delineates wetlands for Swampbuster purposes, requests for reconsideration of determinations of wetland status, certifications and the constitutionality of the Swampbuster program as a whole.

Swampbuster significant developments – that’s the topic of today’s post.

Background

The conservation-compliance provisions of the 1985 Farm Bill introduced the concept of “Swampbuster.” Swampbuster was introduced into the Congress in January of 1985 at the urging of the National Wildlife Federation and the National Audubon Society. It was originally presented as only impacting truly aquatic areas and allowing drainage to continue where substantial investments had been made. Thus, there was virtually no opposition to Swampbuster.

Swampbuster – Wetland Delineation Rules

How does the USDA determine if a tract of farmland contains a wet area that is subject to regulation?  The legislation creating Swampbuster charged the soil conservation service (SCS) with creating an official wetland inventory with a particular tract being classified as a wetland if it had (1) the presence of hydric soil; (2) wetland hydrology (soil inundation for at least seven days or saturated for at least 14 days during the growing season); and (3) the prevalence of hydrophytic plants under undisturbed conditions. In other words, to be a wetland, a tract must have hydric soils, hydrophytic vegetation and wetland hydrology.  The presence of hydrophytic vegetation, by itself, is insufficient to meet the wetland hydrology requirement and the statute clearly requires the presence of all three characteristics. B&D Land & Livestock Co. v. Schafer, 584 F. Supp. 2d 1182 (N.D. Iowa 2008).  

Interim Rules

Under the June 1986 interim rules, wetland was assumed to be truly wet ground that had never been farmed. In addition, “obligation of funds” (such as assessments paid to drainage districts) qualified as commenced conversions, and the Fish and Wildlife Service (FWS) had no involvement in ASCS or SCS decisions. In September of 1986, a proposal to exempt from Swampbuster all lands within drainage districts was approved by the chiefs of the ASCS, SCS, FmHA, FCIC and the Secretary of Agriculture. However, the USDA proposal failed in the face of strong opposition from the FWS and the EPA.

Final Rules

The final Swampbuster rules were issued in 1987 and greatly differed from the interim rules. The final Swampbuster rules eliminated the right to claim prior investment as a commenced conversion. Added were farmed wetlands, abandoned cropland, active pursuit requirements, FWS concurrence, a complicated “commenced determination” application procedure, and special treatment for prairie potholes. Under the “commenced conversion” rules, an individual producer or a drainage district is exempt from Swampbuster restrictions if drainage work began before December 23, 1985 (the effective date of the 1985 Farm Bill). If the drainage work was not completed by December 23, 1985, a request could be made of the ASCS on or before September 19, 1988, to make a commencement determination. Drainage districts must satisfy several requirements under the “commenced conversion” rules. A project drainage plan setting forth planned drainage must be officially adopted. In addition, the district must have begun installation of drainage measures or legally committed substantial funds toward the conversion by contracting for installation or supplies.

The final rules defined “farmed wetlands” as playa, potholes, and other seasonally flooded wetlands that were manipulated before December 23, 1985, but still exhibited wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded. 7 C.F.R. § 12.33(b).  Prior converted wetlands can be farmed, but they revert to protected status once abandoned. Abandonment occurs after five years of inactivity and can happen in one year if there is intent to abandon.  A prior converted wetland is a wetland that was totally drained before December 23, 1985. Under 16 U.S.C. §3801(a)(6), a “converted wetland” is defined as a wetland that is manipulated for the purpose or with the effect of making the production of an agricultural commodity possible if such production would not have been possible but for such action.   See, e.g., Clark v. United States Department of Agriculture, 537 F.3d 934 (8th Cir. 2008).  If a wetland was drained before December 23, 1985, but wetland characteristics remain, it is a “farmed wetland” and only the original drainage can be maintained.

Identifying a Wetland – The Boucher Saga

The process that the USDA uses to determine the presence of wet areas on a farm that are subject to the Swampbuster rules (known as the “on-site” wetland identification criteria) are contained in 7 C.F.R. §12.31.   The application of the rules was at issue in a case involving an Indiana farm family’s longstanding battle with the USDA. 

Facts and administrative appeals.  The facts of the litigation reveal that the plaintiff (and her now-deceased husband) owned the farm at issue since the early 1980s. The farmland has been continuously used for livestock and grain production for over 150 years. The tenants that farm the land participated in federal farm programs. In 1987, the plaintiffs were notified that the farm might contain wetlands due to the presence of hydric soils.  This was despite a national wetland inventory that was taken in 1989 that failed to identify any wetland on the farm.  In 1991, the USDA made a non-certified determination of potential wetlands, prior converted wetlands and converted wetlands on the property. In 1994, the plaintiff’s husband noticed that passersby were dumping garbage on a portion of the property. To deter the garbage-dumping, the plaintiff’s husband cleaned up the garbage, cleared brush, and removed five trees initially and four more trees several years later.  The trees were upland-type trees that were unlikely to be found in wetlands, and the tree removal impacted a tiny fraction of an acre.  The USDA informed the landowners that the tree removal might have triggered a wetland/Swampbuster violation and that the land had been impermissibly drained via field tile (which it had not). 

Because the land at issue was farmed, the USDA’s Natural Resources Conservation Service (NRCS) used an offsite comparison field to compare with the tract at issue for a determination of the presence of wetland.  The comparison site chosen was an unfarmed depression that was unquestionably a wetland.  In 2002, an attempt was made to place the farm in the Conservation Reserve Program, which triggered a field visit by the NRCS. However, a potential wetland violation had been reported and NRCS was tasked with making a determination of whether a wet area had been converted to wetland after November 28, 1990. The landowners requested a certified wetland determination, and in late 2002 the NRCS made a “routine wetland determination” that found all three criteria for a wetland (hydric soil, hydrophytic vegetation and hydrology) were present by virtue of comparison to adjacent property because the tract in issue was being farmed. The landowners were notified in early 2003 of a preliminary technical determination that 2.8 acres were converted wetlands and 1.6 acres were wetlands.  The NRCS demanded that the landowners plant 300 trees per acre on the 2.8 acres of “converted wetland.”

The landowners requested a reconsideration and a site visit. Two separate site visits were scheduled and later cancelled due to bad weather. The landowners also timely notified NRCS that they were appealing the preliminary wetland determination and requested a field visit, asserting that NRCS had made a technical error. A field visit occurred in the spring of 2003 and a written appeal was filed of the preliminary wetland determination and a review by the state conservationist was requested. The appeal claimed that the field visit was inadequate.  The husband met with the State Conservationist in the fall of 2003.  No site visit occurred, and a certified final wetland determination was never made.  The landowners believed that the matter was resolved.

The husband died, and nine years later a new tenant submitted a “highly erodible land conservation and wetland conservation certification” to the FSA. Permission was requested from the USDA to remove an old barn and house from a field to allow farming of that ground. In late 2012, the NRCS discovered that a final wetland determination had never been made and a field visit was scheduled for January of 2013 shortly after several inches of rain melted a foot of snow on the property.  At the field visit, the NRCS noted that there were puddles in several fields.  The NRCS used the same comparison field that had been used in 2002, and also determined that underground drainage tile must have been present (it was not).   

Based on the January 2013 field visit, the NRCS made a final technical determination that one field did not contain wetlands, another field had 1.3 acres of wetlands, another field had 0.7 acres of converted wetlands and yet another field had 1.9 acres of converted wetlands. The plaintiff (the surviving spouse) appealed the final technical determination to the USDA’s National Appeals Division (NAD).   At the NAD, the plaintiff asserted that either tile had been installed before the effective date of the Swampbuster rules in late 1985 or that tiling wasn’t present (a tiling company later established that no tiling had been installed on any of the tracts); that none of the tracts showed water inundation or saturation; that none of the tracts were in a depression; and that the trees that were removed over two decades earlier were not hydrophytic, were not dispositive indicators of wetland, and that improper comparison sites were used.  The NRCS claimed that the tree removal altered the hydrology of the site.  The USDA-NAD affirmed the certified final technical determination.  The plaintiff appealed, but the NAD Director affirmed.  The plaintiff then sought judicial review.    

Trial court decision.  The trial court affirmed the NAD Director’s decision and granted summary judgment to the government.   Boucher v. United States Department of Agriculture, No. 1:13-cv-01585-TWP-DKL, 2016 U.S. Dist. LEXIS 23643 (S.D. Ind. Feb. 26, 2016). The court based its decision on the following:

  • The removal of trees and vegetation had the “effect of making possible the production of an agricultural commodity” where the trees once stood and, thus, the NRCS determination was not arbitrary or capricious with respect to the converted wetland determination.
  • The NRCS followed regulatory procedures found in 7 C.F.R. §12.31(b)(2)(ii) for determining wetland status on the land that was being farmed by comparing the land to comparable tracts that were not being farmed.
  • Existing regulations did not require site visits during the growing season.
  • “Normal circumstances” of the land does not refer to normal climate conditions but instead refers to soil and hydrologic conditions normally present without regard to the removal of vegetation.
  • The ten-year timeframe between the preliminary determination and the final determination did not deprive the plaintiff of due process rights.

Appellate Decision

The appellate court reversed the trial court decision and remanded the case for entry of judgment in the plaintiff’s favor and award her “all appropriate relief.”  Boucher v. United States Dep’t of Agric., No. 16-1654, 2019 U.S. App. LEXIS 23695 (7th Cir. Aug. 8, 2019).  On the comparison site issue (the USDA’s utilization of the on-site wetland identification criteria rules), the USDA claimed that 7 C.F.R. § 12.31(b)(2)(ii) allowed them to select a comparison site that was "on the same hydric soil map unit" as the subject property, rather than on whether the comparison site has the same hydrologic features as the subject tract(s).  The appellate court rejected this approach as arbitrary and capricious, noting that the NRCS failed to try an "indicator-based wetland hydrology" approach or to use any of their other tools when picking a comparison site. In addition, the appellate court noted a COE manual specifies that, “[a] hydrologist may be needed to help select and carry out the proper analysis" in situations where potential lack of hydrology is an issue such as in this case.   However, the NRCS did not send a hydrologist to personally examine the plaintiff’s property, claiming instead that a comparison site was not even necessary.  Based on 7 C.F.R. §12.32(a)(2), the USDA claimed, the removal of woody hydrophytic vegetation from hydric soils to permit the production of an agricultural commodity is all that is needed to declare the area "converted wetland."

The appellate court concluded that this understanding of the statue was much too narrow and went against all the other applicable regulatory and statutory provisions by completely forgoing the basis of hydrology that the provisions are grounded in.   Accordingly, the appellate court reasoned that because hydrology is the basis for a change in wetland determination, the removal of trees is merely a factor to determine the presence of a wetland, but is not a determining factor.  In addition, the appellate court pointed out that the NRCS never indicated that the removal of trees changed the hydrology of the property during the agency appeal process – a point that the USDA ignored during the administrative appeal process.   The appellate court rather poignantly stated, “Rather than grappling with this evidence, the hearing officer used transparently circular logic, asserting that the Agency experts had appropriately found hydric soils, hydrophytic vegetation, and wetland hydrology…”.

Observation:  The USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  Those same agency characteristics were also illustrated in the Eighth Circuit decision of Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).  Perhaps much of the USDA/NRCS conduct relates to the bureaucratic unilateral decision in 1987 to change the rules to include farmed wetland under the jurisdiction of Swampbuster.   That decision has led to abuse of the NAD process and delays that have cost farmers untold millions. 

Certification Requests - the “Grassley” Amendment

In 1990, the Congress amended the Swampbuster Act to provide a review provision specifying that a prior wetland certification “shall remain valid and in effect…until such time as the person affected by the certification requests review of the certification by the Secretary.”  16 U.S.C. §3822(a)(4).  This became known as the “Grassley Amendment” named after Senator Charles Grassley of Iowa.  The purpose of the amendment was to prevent farmers from being subjected to multiple certifications based on new methods the NRCS had begun using to make wetland determinations.  Under the rule, a farmer could request a recertification upon demand. 

However, based on the statutory amendment, the USDA developed a regulation, known as the “Review Regulation,” providing procedural requirements a farmer must follow to make an effective review request.  The regulation said a request to review a certification could be made only if a natural event had altered the topography or hydrology of the land or if NRCS believed that the existing certification was erroneous.  7 C.F.R. §12.30(c)(6). 

The Foster Case

Facts and trial court decision.  In Foster v. United States Department of Agriculture, 609 F.Supp.3d 769 (D. S.D. 2022), the plaintiff owned farmland containing a .8-acre portion that USDA certified as a “wetland” in 2011 under the Swampbuster provisions of 16 U.S.C. §§3801, 3821-3824.  The wetland was about 8.5 inches deep at certain times during the year, particularly in the spring after snow melted and didn’t drain anywhere.  The wetland resulted from a tree belt that had been planted in 1936 to prevent soil erosion.  Snow accumulated around the tree belt in the winter and melted in the spring with the water collecting in a low spot in of the field before soaking into the ground or evaporating.  In about one-half of the crop years, the puddle would dry out in time for planting.  In other years it had to be drained to plant crops.  The certification meant that the puddle could not be drained so that it and the surrounding land could not be farmed without the loss of federal farm program benefits. 

In 2008, Foster requested a review of a certification and USDA granted the request simply on the basis of the statute which plainly states that a review of a certification is available upon request.    The request was granted even though the regulation was in place at that time.  The area was recertified as a wetland in 2011.  This was despite Foster having dug two test holes to monitor water levels in the disputed area – one of which was immediately next to the trees.  The data Foster collected showed that the trees slowed the drying of the soil in the hole next to the trees.  The USDA/NRCS refused the data, claiming that Foster didn’t have the expertise to interpret the data.  As a result, Foster installed two weather stations and hired an engineering firm to “officially” conclude that the tree belt was slowing the drying of the soil. 

Foster challenged the 2011 recertification, but the trial court affirmed the determination as not arbitrary and capricious (the judicial deference standard given administrative agency decisions).  The U.S. Court of Appeals for the Eighth Circuit affirmed, and the U.S. Supreme Court declined to review the case.  Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016), cert. den., 137 S. Ct. 620 (2017). 

Note:  Before Foster’s request for review of the 2011 certification, another South Dakota farmer with a similar set of facts successfully had NRCS remove a wetland label on a .3-acre portion of a field.  Like Foster’s situation, the .3-acre portion was impacted by snow caught in a tree belt.  Thus, after the court decisions, the question remained as to whether a farmer has a legal obligation to present evidence of changed conditions.  The statute contains no such requirement.  In 2008, the recertification request was granted with no obligation on Foster’s part to provide evidence of changed conditions.  The evidence provided was not requested.  Also, published NRCS infiltration rates for the soil type of the depression indicated that the ponding would be gone in less than two weeks (the required inundation period for a wetland finding). 

In 2017, Foster again sought a review of the certification under 16 U.S.C. §3822(a)(4) which, as noted, provides for review of a final certification upon request by the person affected by the certification.  The USDA/NRCS didn’t respond on the basis that Foster didn’t provide new information that the NRCS hadn’t previously considered.  Foster filed for review again in 2020 along with professionally prepared engineering reports from two firms that concluded that the area in question ponded due to the tree belt and was an artificial wetland not subject to Swampbuster. 

The USDA denied review in 2020 citing its own regulation of 7 C.F.R. §12.30(c)(6) which required the plaintiff to show how a natural event changed the topography or hydrology of the wetland that caused the certification to no longer be a reliable indicator of site conditions.  The plaintiff claimed that new evidence existed that would refute the 2011 certification, and also claimed that 16 U.S.C. §3822(a)(4) provided no restriction on the ability to get a review and, as a result, 7 C.F.R. §12.30(c)(6) violated the due process clause by restricting reviews and was arbitrary and capricious under the Administrative Procedure Act.   

The trial court held that 7 C.F.R. §12.30(c)(6) merely restricted when an agency must review a final certification.  The trial court also determined that 7 C.F.R. §12.30(c)(6) did not violate the due process clause as the plaintiff did not show any independent source of authority providing him with a right to certification review on request. The USDA’s denials of review were found not to be arbitrary or capricious and that the plaintiff failed to provide any evidence that the natural conditions of the site had changed, which would require a review of the certification.  The plaintiff also claimed that the Swampbuster provisions were unconstitutional under the Commerce Clause and the Tenth Amendment.  

The trial court rejected the plaintiff’s claims and determined that the statute of limitations on challenging the certification had run.  The trial court also held that the USDA was entitled to summary judgment on the plaintiff’s claim that Swampbuster was unconstitutional, holding that the provisions were within the power of the Congress under the spending clause of Article I, Section 8 of the Constitution.  The trial court also ruled that Swampbuster did not infringe upon state sovereignty by requiring states to implement a federal program, statute or regulation. The trial court further rejected the plaintiff’s claim that a part of Swampbuster violated the Congressional Review Act, finding that the provision at issue was precluded from judicial review.  The court dismissed all the plaintiff’s claims against the USDA and denied the ability for the area to be reviewed again. 

The appellate court.  Foster filed an appeal with the U.S. Court of Appeals for the Eighth Circuit on August 16, 2022, and the appellate court issued its opinion on May 12, 2023. Foster v. United States Department of Agriculture, 68 F.4th 372 (8th Cir. 2023). The appellate court affirmed.  The court stated that NRCS noted the engineer’s report and asked the engineering firm to identify any evidence that the NRCS had not fully considered the tree belt at the time of the 2011 recertification decision.  The appellate court stated, “Neither Foster nor the engineering firm ever responded to the request.”  The court went on to state that the NRCS reviewed the engineering report, compared it to the record, and declined the review request for noncompliance with the regulation.

Note:  The court’s statement that the NRCS requested additional evidence is false.  The NRCS letter of May 14, 2020, to Foster by State Conservationist Jeffrey Zimprich merely stated that, “Based on the evidence you provided, I am unable to determine that any of the conditions mentioned above for a redetermination apply.”  There was no request for additional information that was made to either Foster or the engineering firms.

The appellate court concluded that the regulation was not inconsistent with the Swampbuster Act.  There was simply nothing that could be gleaned from the Grassley Amendment as guidance to what constitutes a proper review request.  As such the statute was ambiguous and the administrative procedural requirements were permissible.  The Grassley Amendment was merely so that farmers had a way to contest new NRCS wetland delineations for Swampbuster purposes.  It did not preclude USDA/NRCS from developing procedural requirements to challenge a certification.    

The appellate court also affirmed the trial court’s finding with respect to the Congressional Review Act for lack of authority to review the claim.  The appellate court also affirmed the trial court’s finding that the NRCS refusal to consider the request was not arbitrary and capricious.

Note:  In the concluding paragraph of the appellate court’s opinion, the appellate court stated that, “the NRCS requested Foster’s engineering firm to identify evidence showing the NRCS had failed to consider the tree belt on the Site when it made its prior certification.  The record shows no indication that Foster or his engineering firm responded to this request.”  Unfortunately, the appellate court offers no support for this assertion and there is no record of such a request ever having been made.  What the appellate court bases this statement on is not known.

Note:  As of late April 2024, NRCS field offices are not authorized to give out wetland determinations. 

The Grassley Amendment is clear that can rely on a wetland determination until a new determination is requested.  The point of the amendment is to bar NRCS from unilaterally changing a determination once made.  A farmer may request a redetermination.  While it is reasonable to require that new information bearing on a site’s wetland status be provided when a redetermination is requested, Foster provided that information in the form of professional engineering reports.  Here, NRCS failed to understand the professional reports submitted with the review request and also did not make a clear request for additional information/clarification.  Indeed, no request at all was made for additional information.  Clearly, the .8-acre depression was the result of snowpack caused by a tree belt and NRCS’ own data showed that the ponding of the depression would be gone in less than two weeks.  A regulation that allows a farmer to receive a redetermination upon NRCS admitting it made an error (one of the two possibilities for a review to be granted) makes it highly unlikely that a review would be granted.

Note:  On August 10, 2023, Foster filed a petition for certiorari with the U.S. Supreme Court.  Presently, the Court has not ruled on the petition.  That could mean that the Court is holding the case until it decides two cases involving the amount of deference to be given federal administrative agencies.  Those two cases will likely be decided in June of 2024. 

More Certification Problems

In early 2024, a federal trial court vacated a 2020 NRCS final rule specifying that ag wetlands the agency designated between 1990 and 1996 would be considered “certified” if the maps that created them at the time were “legible.”  National Wildlife Federation v. Lohr, No. 19-cv-2416 (TSC), 2024 U.S. Dist. LEXIS 29975 (D. D.C. Feb. 22, 2024).  From 1996-2013, a pre-1996 delineation map was considered “certified” based on the map’s accuracy and wouldn’t have to be recertified.  Then NRCS changed the certification process because it was trying to clear a backlog of requests for certified wetland determinations.  So, under the 2020 final rule, any map delineating wetlands between 1990 and 1996 that was “legible” was deemed “certified.”  The court determined that the final rule violated the Administrative Procedure Act because the rule amounted to a change in agency policy and did not constitute “reasoned decision making.”  It was not simply a clarification in agency policy.  While the NRCS claimed that the 2020 final rule was intended to “clear up state-level confusion” the court disagreed and determined the final rule was not entitled to deference

Constitutional Challenge

With a case filed on April 16, 2024, an Iowa farming operation is challenging the constitutionality of the Swampbuster program.  CTM Holdings, LLC v. United States Department of Agriculture, No. 6:24-cv-02016 (N.D. Iowa) (filed Apr. 16, 2024).  The plaintiff is a family farming operation that owns a 72-acre tract at issue in the case.  On the tract, the NRCS determined that nine acres are “wetland” based on a 2010 determination that was made for a prior owner which the plaintiff’s request for a redetermination was denied and which could not be appealed.  The suit seeks to set aside the Swampbuster regulations that led the agency to that conclusion on the basis that the regulations impose unconstitutional conditions and are in excess of the agency’s statutory authority. 

The plaintiff asserts several claims:

  • The Swambuster regulations violate the Congress’ power under the Commerce Clause because the 9-acre wetland is purely intrastate.
  • The Swampbuster regulations impose unconstitutional conditions by conditioning a government benefit on the waiver of a constitutional right.
  • The Swampbuster regulations amount to an unconstitutional “taking” of the plaintiff’s private property – a “per se” physical taking by appropriating a permanent conservation easement without paying for it.
  • The Swampbuster regulations exceed the agency’s statutory authority by adding “woody vegetation” to the statutory definition of “converted wetland.”
  • The Swampbuster regulations exceed the agency’s statutory authority violate the Grassley Amendment by including regulatory requirements for a farmer to receive a certification review of a wetland when the statute requires none.

On the claims, it will be extremely difficult for the plaintiff to prevail on its “unconstitutional conditions” and “takings” claims.  A farmer need not participate in the farm programs (although the economics often dictate that non-participation is not a consideration), but once participation occurs the rules of the various programs must be complied with.  But the Commerce Clause and conduct in excess of statutory authority claims could have “legs.”

As for the Commerce Clause claims, expect the government to respond that Swampbuster is constitutional via the Constitution’s Spending Clause, (contained in Article I, Section 8, Clause 1 of the Constitution) and that overrides a Commerce Clause challenge.  For instance, in United States v. Dierckman, 201 F.3d 915 (7th Cir. 2000), a farmer challenged the government’s determination of the presence of wetlands on his farm that, if farmed, would result in farm program benefit ineligibility.  The farmer alleged, among other things, that the Swampbuster rules constituted a taking. The U.S. Court of Appeals for the Seventh Circuit disagreed, finding that the 1985 Farm Bill was not an exercise of direct regulatory power which requires a connection to interstate commerce under the commerce clause, but merely established rules conditioning the receipt of federal farm program benefits on wetland preservation. As such, the court reasoned, the Swampbuster provisions in the 1985 Farm Bill constituted indirect regulation invoking the Congress’ spending power and are, therefore, not limited by the commerce clause in requiring a connection to interstate commerce.

Dierckman was a Seventh Circuit opinion.  While the U.S. Supreme Court has not addressed the constitutionality of the Swampbuster program, it has ruled unconstitutional a processing and floor tax imposed on cotton processors under the Agricultural Adjustment Act of 1933.  United States v. Butler, 297 U.S. 1 (1936).  The government claimed the Act was valid because the Spending Clause permitted the Congress to appropriate funds for the “general welfare”  which in the case involved a Congressional effort to aid farmers during the Great Depression.  The Court didn’t have to address that question because it determined that the power to regulate agriculture had been reserved to the states.

Since the Butler decision, Spending Clause jurisprudence has not really focused on the constitutionality of congressional spending.  Instead, the focus has been on whether the conditions imposed on the receipt of federal taxpayer dollars achieve ends that are within the constitutionally enumerated powers of the Congress.  See, e.g., South Dakota v. Dole, 483 U.S. 203 (1987)( conditioning receipt of federal highway funds on a state’s adoption of a twenty-one-year-old drinking age was sufficiently related to the funding program; the dissent noted, “If the spending power is to be limited only by Congress’ notion of the general welfare, the reality...is that the Spending Clause gives ‘power to the Congress...to become a parliament of the whole people, subject to no restrictions save such as are self-imposed.’ This...was not the Framers’ plan and it is not the meaning of the Spending Clause.”).  In other words, the question is whether the conditions imposed on the receipt of funds are related to the program being funded and whether there are no other constitutional provisions that would be violated by the conditional grant of the funds.        

Conclusion

Much has been happening in the Swampbuster world recently.  The future of the current litigation should help provide more guidance on the issues that have been troublesome for awhile.

April 28, 2024 in Regulatory Law | Permalink | Comments (0)

Monday, April 22, 2024

Branson Summer Seminar on Farm Income Tax and Estate/Business Planning

Overview

On June 12-13, I will be conducting a farm income tax and farm estate and business planning seminar at the Keeter Center on the campus of College of the Ozarks near Branson, MO.  This is a live, in-person presentation only.  No online option is available.  My partner in presentation is Paul Neiffer.  Paul and I have done these summer events for a number of years and are teaming up again this summer to provide you with high quality training on the tax issues you deal with for your farm and ranch clients.

Topics

Here’s a list of the topics that Paul and I will be digging into:

  • Federal Tax Update
  • Farm Bill Update
  • Beneficial Ownership Information (BOI) Reporting
  • Depreciation Planning
  • Tax Planning Considering the Possible Sunset of TCJA
  • How Famers Might Benefit from the Clean Fuel Production Tax Credit
  • Conservation Easements
  • Federal Estate and Gift Tax Update
  • SECURE Act 2.0
  • Split Interest Land Transactions
  • Manager-Managed LLCs
  • Types of Trusts
  • Monetized Installment Sales
  • Charitable Remainder Trusts or Cash Balance Plans
  • Special Use Valuation
  • Buy-Sell Agreements (planning in light of the Connelly decision)

Registration

The link for registration is below and can be found on my website – www.washburnlaw.edu/waltr and the seminar is sponsored by McEowen, P.L.C.  You may mail a check with your registration or register and pay at the door.  Early registration is eligible for a lower rate.  Certification is pending with the National Association of State Boards of Accountancy (NASBA) to qualify for 16 hours of CPE credit and corresponding CLE credit (for attorneys). 

Here is the specific link for the event:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html

Jackson Hole

Paul and I will present the same (but updated) seminar in Jackson Hole, Wyoming, on August 5 and 6.  That event will also be broadcasted live online.

We hope to see you there!

April 22, 2024 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, April 14, 2024

Rights of Co-Tenants (and Adverse Possession of Minerals)

Overview

An issue to consider when setting up an estate plan is whether it is beneficial to leave assets in co-equal ownership to the children.  In a farm setting, the issue can come up when the parents have traditional bypass, credit shelter trust arrangements set up, as well as in the less complex estates where farmland is left outright in co-equal ownership to the children. But a drawback of co-equal ownership is the right of partition of a co-owner. That’s a particularly acute problem when parents have both on-farm and off-farm heirs.

Another issue that can come up involves the rights of a co-owner with a minority ownership percentage to terminate a lease or capitalize on mineral interests without the consent of co-owners.  That was indeed what was involved in a recent case, and it’s the topic of today’s post.

O’Malley v. Adams

228 N.E.3d 379 (Ill. Ct. App. 2023)

This case presented the interesting issues of whether a tenant in common that owns at least one-half interest in mineral rights can drill for oil and gas without the permission of the cotenants, and whether the mineral interest can be adversely possessed. 

Here, the “Prather Trust” and the “O’Malley Trust,” because of various estate planning strategies, ended up as cotenants of farmland.  The trustee of the O’Malley Trust held a 50 percent interest in the mineral estate in farmland and claimed it had acquired the Prather Trust’s 50 percent interest in the mineral estate by adverse possession.  The trial court issued summary judgment for the Prather Trust on the adverse possession issue.  Prather Trust filed counterclaim for an accounting, claiming that O’Malley trust had removed and sold oil and natural gas from the mineral estate without the Prather Trust’s knowledge or consent and that the title insurance company issued a title policy falsely declaring that the O’Malley Trust had merchantable title to 100 percent of the minerals in the mineral estate. The Title Company moved for summary judgment on the basis that removal and sale of minerals by a tenant without permission of cotenant is not a tort under Illinois law, but the court denied the motion.

The trustees of the “Prather Trust” sued the title insurance company for slander of title to the trust’s 50 percent interest in the mineral estate and for conversion of the trust’s share of proceeds from the sale of extracted minerals.  The title company sought summary judgment on the basis that removal and sale of minerals by a tenant in common, without consent of a co-tenant, is not a tort under Illinois law.  The trial court denied the title company’s motion and certified three questions of law to the Illinois Court of Appeals.  However, the title insurance company sought leave to appeal to the Illinois Supreme Court.  The appellate court denied leave to appeal, but then it was allowed by means of a supervisory order from the Illinois Supreme Court.  As a result, an interlocutory appeal allowed.

Three questions were certified to the Illinois Court of Appeals:  1)  Does Illinois law provide a tenant in common owning at least one-half of the mineral interest in land an unfettered right to drill for oil and gas without cotenant permission?; 2) Whether Illinois law (stat. 765 ILCS 520/2) impose a mandatory requirement that a co-tenant must always seek court permission before drilling for oil and gas?; and 3) whether Illinois case law preclude a nondrilling cotenant from bringing a conversion claim against a drilling cotenant when the drilling cotenant removes oil and gas from property without the nondrilling cotenant’s permission, and preclude a nondrilling cotenant from brining a slander of title claim against their cotenant after the cotenant’s decision to grant a lease to a third party to drill for oil and gas on the property?

The title insurance company claimed that a tenant in common owning at least 50 percent of the mineral interest in land can drill for, remove and sell the minerals from the mineral estate without permission of other cotenant(s), and that the only remedy of the nondrilling cotenant is an accounting.  As such, a 50 percent or more owner doesn’t have to follow the Oil and Gas Rights Act as a precondition to drilling and that failing to follow the procedure is not a tort.  Conversely, the Prather Trust claimed that permission of a cotenant(s) is required before removal and sale of minerals or a valid court order must be obtained, and that drilling cotenant is liable for trespass and conversion.

The appellate court answered the certified questions in the negative.  Illinois law does not provide a tenant in common owning at least one-half of the mineral interest in land an unfettered right to drill for oil and gas without cotenant permission.  As to whether Illinois law (stat. 765 ILCS 520/2) imposes a mandatory requirement that a cotenant must always seek court permission before drilling for oil and gas, the appellate court said court permission was only necessary when a cotenant objects.  The appellate court also determined that Illinois case law did not preclude a nondrilling cotenant from bringing a conversion claim against a drilling cotenant when the drilling cotenant removes oil and gas from property without the nondrilling cotenant’s permission.  Illinois law also does not preclude a nondrilling cotenant from brining a slander of title claim against their cotenant after the cotenant’s decision to grant a lease to a third party to drill for oil and gas on the property. 

Adverse Possession?

The appellate court did not address the adverse possession issue.  Perhaps it will be discussed as the case heads back to the trial court for further proceedings.  But let’s take a closer look at the issue of whether mineral interests can be adversely possessed.

Example – Kansas approach.  The Kansas statute on adverse possession is typical:

Kan. Stat. Ann. §60-503. Adverse possession. No action shall be maintained against any person for the recovery of real property who has been in open, exclusive and continuous possession of such real property, either under a claim knowingly adverse or under a belief of ownership, for a period of fifteen (15) years.

Other state adverse possession statutes may also include a requirement of “hostility” (e.g., without permission of the true owner).  Once the elements of the state statute are satisfied for the statutory period (15 years in Kansas), the adverse possessor can bring a quiet title action to acquire legal ownership of the disputed property. 

Does adverse possession apply to minerals?  The answer can be complicated.  The bifurcation of surface and mineral rights (oil, gas, coal and metals) raises a question of how adverse possession applies when the property at issue (mineral rights) is subsurface and cannot be seen or accessed from the surface, and can be owned by a party different than the surface owner.  Does acquiring title to the surface also mean that the subsurface minerals are adversely possessed?  The answer is “no” unless there has been exploration or exploitation of the minerals that satisfies the adverse possession statute.  Indeed, some states have statutes that bar acquiring title to minerals by adverse possession.  However, if the adverse possessor of the surface uses or occupies the subsurface minerals, a claim of ownership of the minerals might be possible via adverse possession. Actual possession of the minerals is the key.  As applied, that concept means that if the mineral estate has been severed from the surface estate such that the two estates are owned by different parties, the adverse possession of the surface estate doesn’t constitute adverse possession of the mineral estate absent actual possession (i.e., usage by drilling and production) of the minerals.  See, e.g., Natural Gas Pipeline Company of America v. Pool, 124 S.W.3d 188 (Tex. 2003).  This also means that a royalty interest cannot be adversely possessed because it is a no-possessory interest – there is no royalty until production occurs.  This is also the result with respect to a non-participating royalty interest and an overriding royalty interest. See, e.g., Connaghan v. Eighty-Eight Oil Company, 750 P.2d 1321 (Wyo. 1988).  But an operating working interest is a possessory interest that can be adversely possessed.  As for a non-operating working interest, the caselaw is either non-existent in jurisdictions or unclear as to whether adverse possession applies.

So, what can a mineral interest owner do to protect against a possible adverse possession claim?  Leasing the mineral rights to an active company would be a good approach as it would establish a visible use of the mineral rights that is ongoing. 

Conclusion

Co-ownership of farmland among the children after the parents are gone rarely works out well.  The recent Illinois case points out some of the issues that can arise.  Perhaps on remand the Illinois court will address the adverse possession issue with respect to minerals.

April 14, 2024 in Real Property | Permalink | Comments (0)

Sunday, April 7, 2024

Family Settlement Agreement for Farm Family Not Done Properly

Overview

A family settlement agreement is one possible method of resolving conflicts among family members concerning assets and finances, among other issues.  Done properly, a family settlement agreement can outline duties and responsibilities of family members and minimize or eliminate future family disputes.  It is also a legally binding and enforceable contract.  But, before a family settlement agreement is entered into, the family must carefully consider the purpose and scope of the agreement.  The problems that need to be addressed should lead to provisions drafted into the agreement designed to resolve those problems. 

A recent case from Iowa illustrates how not to go about executing a family settlement agreement – it’s the topic of today’s post.

Facts of the Case

In In re Estate of Schultz, No. 22-1671, 2024 Iowa App. LEXIS 217 (Iowa Ct. App. Mar. 6, 2024),   the decedent and her husband were longtime farmers.  He died in 2001 and the decedent died in 2019.  They divided the farmland between them equally in value and executed mirror-image wills in 1998, that left the surviving spouse a life estate in the deceased spouse’s half of the farm property with the remainder interest passing equally to their four children upon the surviving spouse’s death. 

Note:  At the time the wills were prepared in 1998, the total value of the couple’s farmland was approximately $11 million.  For deaths in 1998, the federal estate tax applicable exclusion was $625,000 with a top rate of 55 percent.  Accordingly, the marital deduction wills with the credit shelter and life estate portions in each will was the proper approach from a federal estate tax minimization standpoint at the time.

The couple’s only son farmed with his father and on his own after his father’s death.  In 2003, the son accompanied his mother to see her attorney.  She changed her will to divide her farmland into specific farms and distributed them among her four children:  four farms totaling 420 acres to the son; three farms totaling 151 acres to the three daughters to share equally; and one farm of 230 acres to be divided equally between all of the children along with her other property.  The 2003 will named the son and one daughter as executors of the estate, but only the son was aware of the 2003 amended will.  In addition, the decedent named the son and a different daughter as agents under a power of attorney.  While the daughter named as agent under the power was not told of the designation, the son told another sister that she no longer needed to help their mother with her finances and bills.  At about the same time, the decedent entered into a 16-year farm lease with the son with rent set at $70 per acre. 

The sisters discovered the existence of the amended will in 2014 and all of the children and their mother met with an attorney to have the 1998 will restored.  The attorney, after meeting with the mother privately, determined that she lacked testamentary capacity to change the 2003 will and suggested a family settlement agreement as an alternative.  The mother and the four children entered into a family settlement agreement that divided all of the mother’s property equally among them upon her death.  The decedent did not sign the agreement and two of the four siblings died before their mother (including the son).  Upon the decedent’s death, a surviving daughter (as executor) sought to probate the decedent’s will.  The attorney for the estate filed the family settlement agreement with the court the same day.  After the 16-year lease expired, the executor also began renting 607 acres of farmland for $100 per acre for three years.  She signed the lease as both tenant and landlord with her husband and son also signing as tenants.   

Trial Court Decision

The probate (trial) court admitted the will and family settlement agreement and the daughter distributed the decedent’s estate according to the terms of the family settlement agreement.  The trial court determined that the Family Settlement Agreement was valid and distributed the decedent’s estate in accordance with that agreement (25 percent to a surviving sister; 25 percent to the sister serving as executor; 12.5 percent each to two children of a predeceased sister; and 8.33 percent to the three children of the pre-deceased brother. The trial court also found that the decedent only changed her will in 2003 because of the son’s improper influence. 

The children of the predeceased brother objected, claiming that the family settlement agreement was invalid, and that the daughter improperly accounted for estate assets and had engaged in self-dealing.  The trial court determined that the executor had not engaged in self-dealing and directed the executor to either “amend” or “clarify” the accounting issue.

Appellate Court Has Different Views

On appeal, the appellate court reversed on the issue of the validity of the family settlement agreement.  The appellate court found that the family settlement agreement was not valid. The parties’ interests had not yet vested because the mother was still living at the time and two of her children predeceased her, and their children were not party to the family settlement agreement – a requirement of state law.  Iowa Code §633.273(1).  The siblings’ expectancy interest passed to their children, but they hadn’t signed the family settlement agreement at the time it was admitted to probate.  The appellate court remanded with directions for the trial court to hold further proceedings on the validity of the decedent’s 2003 will. 

The appellate court also determined that the accounting issue was not properly before the court.  However, the appellate court affirmed the trial court’s finding that the daughter that served as executor had not engaged in self-dealing.  The rental amount was appropriate, and improvements made on the farmland were legitimate.  The appellate court noted that state law requires court approval for self-dealing transactions (Iowa Code §633,155), but that the trial court retroactively approved the rental agreement and paying labor costs for the improvements.  

Conclusion

There were various problems with this entire situation.  The family was essentially trying to treat the family settlement agreement as a testamentary device.  Without the mother’s signature and satisfaction of the formalities for a will, that won’t work.  Also, state law was not followed in all respects to make the agreement valid.  The accounting and self-dealing issues were the result of sloppiness by the executor and, perhaps, the attorney for the estate. 

There’s a right way and a wrong way to do a family settlement agreement.  This case grades over into the wrong way.

April 7, 2024 in Estate Planning | Permalink | Comments (0)

Monday, April 1, 2024

Property Rights Edition – Irrigation Return Flows; PFAS; and the Quiet Title Act

Cranberry Bogs and the Clean Water Act

Courte Oreilles Lakes Association, Inc. v. Zawistowski, No. 3:24-cv-00128 (W.D. Wis. Filed Feb. 28, 2024)

The Clean Water Act regulates the discharge of pollutants from a fixed point into a water of the United States.  Not regulated is water runoff from irrigation activities on farms.  Historically, the EPA has interpreted this exemption to include runoff from irrigated dryland crops, rice farming and cranberry bogs.  This means a Clean Water Act permit is not required for these activities.     

But a recent case has been filed against a Wisconsin cranberry farm claiming that the discharges involved should not be exempt under the irrigation return flow provision.  The claim is that a channel and ditch are point sources of phosphorous and sediment discharges into the nearby lake when the bogs are drained.  Phosphorous and sediment are pollutants under the Clean Water Act, and the claim is that the water in the bogs is not used for irrigation, but to aid in the overall growing process and protect the cranberries from freezes and harvesting.

The case is in its early stages, but a ruling against the farm could have a big impact on the cranberry and rice industries nationwide.

PFAS and Rural Landowners

A PFAS is a widely used, long lasting chemical having components that break down slowly over time that have been used since the 1940s. It is found in water, air and soil all over the globe and are used for many commercial and industrial products.  Some studies have shown that exposure to PFAS may be linked to harmful health effects in humans and animals.  PFAS are a group of more than 15,000 chemicals that are associated with various cancers and other health problems. 

Note:  Presently, there is no known method for cleaning up PFAS contamination.   

The biggest potential problem for agriculture involving PFAS will likely be biosolids – the solid matter remaining at the end of a wastewater treatment process.  Biosolids are often land applied and there are benefits to doing so.  It recycles nutrients and fertilizers and creates cost savings on chemicals and fertilizers for farmers.  The uptake of PFAS by plants varies depending on PFAS concentration in soil and water, type of soil, amount of precipitation or irrigation, and the type of plant. 

Note:  The EPA treats PFAS as a hazardous substance under the Comprehensive Environmental Response Liability Act – that’s the Superfund law, and it can be a major concern for all rural landowners.  Indeed, in 2019, PFAS were discovered on farms in Maine and New Mexico resulting in the disposal of most of the livestock on the farms. 

In 2022, a Michigan 400-acre cattle farm (a Century Farm) was forced to shut down due to high levels of PFAS in the beef products from his cattle and in the soil at his farm.  The farm received biosolids from a municipal wastewater treatment plant to fertilize his crops which he later harvested and fed to his cattle.  Biosolids are a cost-effective fertilizer and are EPA-approved.  Unfortunately, the biosolids before they were sold to the cattle farm and, as a result of the PFAS investigation at the farm, beef products from the farm can no longer be marketed.  Normal screening is for pathogens and heavy metals (e.g., lead, arsenic and mercury), but most states don’t test biosolids for PFAS.  However, Michigan does conduct extensive PFAS investigations that includes testing municipal water systems and watersheds that have suspected contamination. 

The farm has sued an auto parts supplier (filed Aug 12, 2023, in Livingston County, MI) for the release of PFAS (hexavalent chromium) into the wastewater system that allegedly contaminated the biosolids.  The lawsuit seeks tens of millions of dollars in punitive damages to help cover the cost of remediating the farm’s soil and groundwater.

Note:  The State of Kansas does not currently test for PFAS in wastewater.  Sampling has occurred of a select number of mechanical wastewater plants for PFAS in the plants’ effluent since 2022, but the Kansas Department of Health and Environment has not sampled biosolids from those facilities. 

In early 2024, several Texas farmers filed suit against a major biosolid provider for manufacturing and distributing contaminated biosolid-based fertilizer that was applied to the plaintiffs’ farm fields resulting in damage to the land and personal health problems.  Farmer, et al. v. Synagro Technologies, Inc., No. C-03-CV-24-000598 (filed, Feb. 27, 2024, Baltimore Co. Maryland).  The claim is that the defendant either knew or should have known that it was putting a contaminated (defective) product in commerce.  The plaintiffs’ claims are couched in strict liability product defect, negligence and private nuisance.    

Some states have taken preemptive action.  For example, Maine has banned land application of biosolids and set up a fund for impacted farmers.  Other states are looking into providing compensation for disaffected farmers.

Quiet Title Act is not Jurisdictional – Implications for Property Rights

Wilkins v. United States, 143 S. Ct. 870 (2023)

Farmers and ranchers can sometimes find themselves in various legal battles with the Federal Government.  That’s particularly true in the U.S. West as it was in this case.  Here, the plaintiffs live along a dirt road in western Montana that provides access to a National Forest from a public highway. The prior owners of the land granted the federal government an easement in 1962 across the land by means of a road to provide government timber contractors access to the forest from the highway.  The deeds and an accompanying letter said the purpose of the road was for timber harvest.  For about 45 years, the government’s use of the easement didn’t interfere with the landowners’ property.  Then in 2006, the government posted a sign saying the road provided public access through private land.  The landowners sued in 2018 under the Quiet Title Act.  28 U.S.C. 2409a.  The Quiet Title Act allows a private landowner to sue the federal government for intrusion of the landowner’s private property if the lawsuit is brought within 12 years of the claim incurring – when the government expanded the scope of the easement.  In this case, the landowner’s sued just outside that 12-year window and the government claimed that, as a result, the court lacked jurisdiction to hear the case.

The trial court agreed and dismissed the case.  On appeal the U.S. Court of Appeals for the Ninth Circuit agreed.  Both of those lower courts held that the Quiet Title Act’s 12-year filing provision was jurisdictional and, as a result, the statute of limitations had run. 

The U.S. Supreme Court reversed, holding that the Quiet Title Act’s provision at issue (28 U.S.C. 2409a(g)) was a non-jurisdictional claims-processing rule that required certain claims-processing steps to be taken at certain times that must be completed before a lawsuit can be filed.  The Court, citing its decision in a tax case from North Dakota in 2022 said that a procedural requirement is only to be construed as jurisdictional when the Congress has clearly stated so in the statute at issue.  Boechler v. Comr., 596 U.S. 199 (2022).  Here, the Court determined that 28 U.S.C. §2409a(g) lacked such a clear congressional statement, and that nothing in the statute’s text or context gave the Court any reason to depart from the general rule of a time bar being non-jurisdictional.  Indeed, the Court held that the Quiet Title Act’s jurisdictional grant was in a separate section well separated from subsection 2409a(g) and that there was nothing there that conditioned the jurisdictional grant on the limitations period in subsection 2409a(g). 

Note:  Three dissenting Justices (including the Chief Justice) maintained that the general rule of a time bar being non-jurisdictional did not apply in this case because subsection 2409(a) is a condition on a waiver of sovereign immunity to be interpreted as a jurisdictional bar (time bar) to bringing a lawsuit.    

The Court’s decision means that the two landowners will get their chance in court to establish that the U.S Forest Service changed the terms of its easement to take some of their private property rights.  But there might also be broader implications that ultimately flow from the Court’s decision.  Clearly, property rights are a fundamental constitutional right.  Not so for the doctrine of sovereign immunity which isn’t found in the Constitution.  The Quiet Title Act is a tool for private property owners to seek redress for the government’s illegal appropriation of private property.  This is particularly important in the U.S. West.  There the federal government owns a high percentage of land that either surrounds or even cuts through private property.  Numerous federal agencies engage in activity that impacts private property rights.  Often it may be very difficult to determine when an intrusion occurs for purposes of a jurisdictional requirement under the Quiet Title Act. 

Wilkins could turn out to be a key case in the battle of property rights versus the federal government.

April 1, 2024 in Civil Liabilities, Environmental Law, Real Property, Regulatory Law, Water Law | Permalink | Comments (0)

Sunday, March 24, 2024

Bad Survey and Bad Name on Filed Financing Statement – Legal Issues Created

Overview

The legal system interacts with farmers, ranchers and rural landowners in numerous ways.  With today’s post, I take a look at a few of those. 

Court Sorts Out Damages Triggered by Erroneous Survey. 

Simmons v. Ryder, No. 364826

2024 Mich. App. LEXIS 1181 (Mich. Ct. App. Feb. 15, 2024)

Note:  What problems can occur if a survey is erroneous?  In this case the defendant acted based on his survey which turned out to be erroneous.  Read what happened.  What wasn’t part of the case is the liability of the surveyor business that made the erroneous survey.  The court’s opinion also provides guidance on how court’s determine damages in such cases.

The plaintiffs owned a residential tract adjacent to the defendant’s farmland.  The defendant’s survey denoted the boundary between the properties as being 31 feet onto what the plaintiff claimed was the boundary.  Based on the survey, the defendant cleared trees, shrubs and topsoil in the disputed area.

The plaintiffs sued for trespass and injury to their land and sought damages to restore the property.  The trial court awarded the plaintiff $1,995 of damages, the cost of replanting 21 arrowwood viburnum trees. The trial court also ordered than another survey be completed with the cost split between the parties. The trial court allowed the defendant to complete remedial excavation work, and also ruled that the plaintiffs were not entitled to damages for the installation of a fence.

The appellate court affirmed, concluding that the plaintiffs failed to provide evidence regarding the loss in their land value and their claimed amount of restorative costs.  In any event, the appellate court held that the damages awarded should not exceed the value of the property before the damage occurred.  The appellate court also upheld the trial court’s decision ordering the defendant to perform remediation work on the plaintiffs’ property.  The appellate court also upheld the trial court’s decision that the parties split the cost of the second survey which established that the initial survey was erroneous, and both parties were innocent with respect to the first survey.  It was the erroneous first survey that required the remedial work. 

Change in Name of Debtor Makes a UCC “Seriously Misleading”

In re Rancher’s Legacy Meat Co., 616 B.R. 532 (Bankr. D. Minn. 2020)

Note: The Uniform Commercial Code (UCC) has many intricate rules that must be followed closely.  Article 9 of the UCC governs financial transactions.  One rule requires that the debtor’s name on a filed financial statement must not be “seriously misleading.”  The rule is there to ensure that a party checking the public record will be assured of finding a filed financial statement when using the debtor’s correct legal name.  There are many cases on this issue and the case below is one of them. 

The debtor, a meat packing and processing company, was founded by two individuals, one of which was the creditor, operating under the name of Unger Meat Company (UMC). The creditor leased a building to the debtor for use as a processing plant and provided startup funds via two promissory notes. The creditor perfected a security interest in all the debtor’s equipment, inventory, and accounts receivable. UMC failed to show a profit and the creditor entered into an option agreement with a holding company to purchase UMC. Upon finalization of the sale, the holding company purchased the creditor’s shares in UMC and changed the name of the company to Rancher’s Legacy Meat Company.

Fourteen months after the name change, the creditor filed a UCC-3 Continuation Statement and listed the company’s name as UMC. After another three years had passed, the creditor filed an amended UCC-3 to change the debtor’s name to “Rancher’s Legacy.” The creditor sought collection on its notes and a few months later the debtor filed for Chapter 11 bankruptcy. The debtor argued that the appropriate procedure to re-perfect the creditor’s security interest was to file a new UCC-1 Financing Statement upon the debtor’s name change. The creditor argued that his filings appropriately re-perfected his security interest and therefore, he should be entitled to adequate protection payments. The bankruptcy court noted that Minnesota law provides that a financing statement becomes seriously misleading and ineffective when it fails to provide the debtor’s correct name. Additionally, when the financing statement is ineffective because of seriously misleading information, an amendment must be made within four months to perfect a security interest. The bankruptcy court held that the creditor’s security interest lapsed when four months had passed after the creditor’s financing statement became seriously misleading. Further, the bankruptcy court held that the creditor had the ability to re-perfect the security interest by filing a new UCC-1 Financing Statement. Although the security interest had lapsed, the language of the parties’ security agreement provided the creditor with the opportunity to file a second financing statement.

The creditor argued that his multiple filings were sufficient to giver proper notice to any other creditors under the UCC. The bankruptcy court disagreed and held that multiple filings can occasionally give proper notice, but not when the notice had become seriously misleading as in this case. The bankruptcy court pointed out that the validity of the financing statement depends primarily on its ability to give notice of the security interest to other creditors. Further, the bankruptcy court noted that the creditor’s argument for multiple filings failed because the original financing statement had lapsed four months after it became seriously misleading.  A continuation statement cannot revive a lapsed financing statement.  While the creditor argued that the subsequent filings of the continuation statements should have been enough to re-perfect the security interest, the bankruptcy court disagreed, pointing out that the UCC specifically provided that a continuation statement cannot substitute for a financing statement. As a result, the bankruptcy court declared that the creditor became an unsecured creditor at the time the security interests became unperfected. Because the creditor failed to re-perfect the security interest before the debtor filed for Chapter 11 bankruptcy, the debtor was not required to provide the creditor with adequate protection payments.

Conclusion

Bad survey and incorrect debtor’s name on a financing statement - carelessness led to legal issues.  These are “foot faults” that can (and should) be avoided.

March 24, 2024 in Bankruptcy, Civil Liabilities | Permalink | Comments (0)

Sunday, March 17, 2024

Kansas Prescribed Burning – Rules and Regulations

Overview

Prescribed burning of pastures is a critical component of rangeland management in the Great Plains. Burning is an effective, affordable means of reversing and controlling the negative effects of woody plant growth and its expansion that damages native grasslands. It also plays a role in limiting wildfire risk.  However, some landowners may be reluctant to engage in prescribed (controlled) burns out of a concern for liability and casualty risks associated with escaped fire and smoke. While some states in the Great Plains have “burn bans,” agricultural-related burns are typically not prohibited during such bans.

Regulations – The Kansas Approach

The states that comprise the Great Plains have regulations governing the conduct of prescribed burns. The regulations among the states have commonalities, but there are distinctions from state-to-state. Additionally, in some states, open burning bans can be imposed in the interest of public safety but exempt agricultural-related burns.

Kansas administrative regulations set forth the rules for conducting prescribed burns. K.A.R. §28-19-645 et seq. In general, open burning is prohibited unless an exception applies. K.A.R. §645.

One exception is for open burning of agricultural lands that is done in accordance with existing regulations. K.A.R. §28-19-647(a)(3). Under that exception, open burning of vegetation such as grass, woody species, crop residue, and other dry plant growth for the purpose of crop, range, pasture, wildlife or watershed management is exempt from the general prohibition on open burning. K.A.R. §28-19-648(a).

However, a prescribed burn of agricultural land must be conducted within certain guidelines. For instance, before a burn is started, the local fire control authority with jurisdiction in the area must be notified unless local government has specified that notification is not required. K.A.R. §28-19-648(a)(1). Also, the burn cannot create a traffic hazard. If wind conditions might result in smoke blowing toward a public roadway, notice must be given to the highway patrol, county sheriff, or local traffic officials before the burn is started. K.A.R. §28-19-648(a)(2). Likewise, a burn cannot create a visibility safety hazard for airplanes that use a nearby airport. K.A.R. §28-19-648(a)(3). If such a problem could potentially result, notice must be given to the airport officials before the burn begins. Id.

In all situations, the burn must be supervised until the fire is extinguished. K.A.R. §28-19-648(a)(4). Also, the Kansas burn regulations allow local jurisdictions to adopt more restrictive ordinance or resolutions governing prescribed burns of agricultural land. K.A.R. §28-19-648(b).

Kansas regulations also specify that the open burning of vegetation and wood waste, structures, or any other materials on any premises during the month of April is prohibited in the counties of Butler, Chase, Chautauqua, Cowley, Elk, Geary, Greenwood, Johnson, Lyon, Marion, Morris, Pottawatomie, Riley, Sedgwick, Wabaunsee, and Wyandotte counties. K.A.R. §28-19-645a(a).

However, certain activities are allowed in these counties during April such as the prescribed burning of agricultural land for the purposes of range or pasture management as well as the burning of Conservation Reserve Program (CRP) land that is conducted in accordance with the requirements for a prescribed burn of agricultural land. K.A.R. §28-19-645a(b)(1). Open burning during April is also allowed in these counties if it is carried out on a residential premise containing five or fewer dwelling units and incidental to the normal habitation of the dwelling units, unless prohibited by any local authority with jurisdiction over the premises. K.A.R. §28-19-645a(b)(2). Also, open burning is allowed for cooking or ceremonial purposes, on public or private lands regularly used for recreational purposes. Id.

Nonagricultural open burning activities must meet certain other requirements including a showing that the open burning is necessary, in the public interest, and not otherwise prohibit by any local government or fire authority. K.A.R. §28-19-647(b). These types of open burning activities must also be conducted pursuant to an approved written request to the Kansas Department of Health and Environment that details how the burn will be conducted, the parameters of the activity, and the location of public roadways within 1,000 feet as well as occupied dwelling within that same distance. K.A.R. §§28-19-647(d)(2)(E-F). The open burning of heavy oils, tires, tarpaper, and other heavy smoke-producing material is not permitted. K.A.R. §28-19-647(e)(2). A burn is not to be started at night (two hours before sunset until one hour after sunrise) and material is not to be added to a fire after two hours before sunset. A burn is not to be conducted during foggy conditions or when wind speed is less than five miles-per-hour or greater than 15 miles-per-hour. K.A.R. §§28-19-647(e)(3-5).

Legal Liability Principles

As noted above, Kansas regulations require that an agricultural prescribed burn is to be supervised until the fire is extinguished. But sometimes a fire will get out of control even after it is believed to be extinguished and burn an adjacent property resulting in property damage. How does the law sort out liability in such a situation?

Negligence. In general, as applied to agricultural burning activities, the law applies one of possible principles. One principle is that of negligence and the other is that of strict liability. The negligence system is a fault system. For a person to be deemed legally negligent, certain elements must exist. These elements can be thought of as links in a chain. Each condition must be present before a finding of negligence can be obtained. The is that of a legal duty giving rise to a standard of care. How is duty measured? To be liable for a negligent tort, the defendant's conduct must have fallen below that of a “reasonable and prudent person” under the circumstances. A reasonable and prudent person is what a jury has in mind when they measure an individual’s conduct in retrospect — after the fact, when the case is in court.

The conduct of a particular tortfeasor (the one causing the tort) who is not held out as a professional is compared with the mythical standard of conduct of the reasonable and prudent person in terms of judgment, knowledge, perception, experience, skill, physical, mental and emotional characteristics as well as age and sanity. For those held out as having the knowledge, skill, experience or education of a professional, the standard of care reflects those factors. For example, the standard applicable to a professional veterinarian in diagnosing or treating animals is what a reasonable and prudent veterinarian would have done under the circumstances, not what a reasonable and prudent person would do.

If a legal duty exists, it is necessary to determine whether the defendant’s conduct fell short of the conduct of a “reasonable and prudent person (or professional) under the circumstances.” This is called a breach and is the second element of a negligent tort case.

Once a legal duty and breach of that duty are shown to exist, a causal connection (the third element) must be established between the defendant’s act and (the fourth element) the plaintiff’s injuries (whether to person or property). In other words, the resulting harm to the plaintiff must have been a reasonably foreseeable result of the defendant’s conduct at the time the conduct occurred. Reasonable foreseeability is the essence of causality (also known as proximate cause). For example, assume that a Kansas rancher has followed all the rules to prepare for and conduct a prescribed pasture burn. After conducting the burn, the rancher banks the fire up and leaves it in what he thinks is a reasonably safe condition before heading to the house for lunch. Over lunch, the wind picks up and spreads the fire to an adjoining tract of real estate. If the burning of the neighbor’s property was not reasonably foreseeable, an action for negligence will likely not be successful; however, if the wind was at a high velocity before lunch and all adjoining property was extremely dry, it probably was foreseeable that the fire would escape and burn a neighboring landowner’s tract.

Note: For a plaintiff to prevail in a negligence-type tort case, the plaintiff bears the burden of proof to all of the elements by a preponderance of the evidence (just over 50 percent).

Intentional interference with real property. Another legal principle that can apply in open burning activities is intentional interference with real property. This principle is closely related to trespass. Trespass is the unlawful or unauthorized entry upon another person’s land that interferes with that person’s exclusive possession or ownership of the land. At its most basic level, an intentional trespass is the intrusion on another person's land without the owner's consent; however, many other types of physical invasions that cause injury to an owner's possessory rights abound in agriculture. These types of trespass include dynamite blasting, flooding with water or residue from oil and gas drilling operations, erection of an encroaching fence, unauthorized grazing of cattle, raising of crops and cutting timber on another’s land without authorization, and prescribed agricultural burning activities, among other things.

In general, the privilege of an owner or possessor of land to use the land and exploit its potential natural resources is only a qualified privilege. The owner or possessor must exercise reasonable care in conducting operations on the land to avoid injury to the possessory rights of neighboring landowners. For example, if a prescribed burn of a pasture results in heavy smoke passing onto an adjoining property accompanied with a long-term residual smoke odor, the party conducting the burn could be held legally responsible for damages under the theory of intentional interference with real property even if the burn was conducted in accordance with applicable state regulations. See, e.g., Ream v. Keen, 112 Ore. App. 197, 828 P.2d 1038 (1992), aff’d, 314 Ore. 370, 838 P.2d 1073 (Ore. 1992).

Strict liability. Some activities are deemed to be so dangerous that a showing of negligence is not required to obtain a recovery. Under a strict liability approach, the defendant is liable for injuries caused by the defendant's actions, even if the defendant was not negligent in any way or did not intend to injure the plaintiff. In general, those situations reserved for resolution under a strict liability approach involve those activities that are highly dangerous. When these activities are engaged in, the defendant must be prepared to pay for all resulting consequences, regardless of the legal fault.

Kansas liability rule for prescribed burning. A strict liability rule could apply to a prescribed burn of agricultural land if the activity were construed as an inherently (e.g., extremely) dangerous activity. In Kansas, however, farmers and ranchers have a right to set controlled fires on their property for agricultural purposes and will not be liable for damages resulting if the fire is set and managed with ordinary care and prudence, depending on the conditions present. See, e.g., Koger v. Ferrin, 23 Kan. App. 2d 47, 926 P.2d 680 (Kan. Ct. App. 1996). In Kansas, at least at the present time, the courts have determined that there is no compelling argument for imposing strict liability on a property owner for damages resulting from a prescribed burn of agricultural land. Id.

Note: The liability rule applied in Texas and Oklahoma is also negligence and not strict liability. In these states, carefully following applicable prescribed burning regulations goes a long way to defeating a lawsuit claiming that damages from a prescribed burn were the result of negligence.

Certainly, for prescribed burns of agricultural land in Kansas, the regulations applicable to nonagricultural burns establish a good roadmap for establishing that a burn was conducted in a nonnegligent manner. Following those requirements could prove valuable in protecting against a damage liability claim if the fire gets out of control and damages adjacent property.

Conclusion

Prescribed burning of agricultural land in Kansas and elsewhere in the Great Plains is an excellent range management tool. Practiced properly the ecological and economic benefits to the landowner can be substantial. But a burn must be conducted within the framework of existing regulations with an eye toward the legal rule governing any potential liability.

March 17, 2024 in Civil Liabilities, Regulatory Law | Permalink | Comments (0)

Tuesday, March 12, 2024

For Chapter 12 Bankruptcy Purposes, what is “Gross Income from Farming”?

Overview

One of the eligibility requirements for Chapter 12 bankruptcy is that more than 50 percent of an individual debtor’s gross income must come from farming in either the year before filing or in both the second and third tax years preceding filing. 11 U.S.C. §1325(b).   This provision seeks to disqualify tax shelter and recreational farms from Chapter 12 protection. 

A recent case from New York involved the question of whether income from horse breeding and training counts as “farm income” for purposes of Chapter 12.

What is “gross income from farming” for purposes of Chapter 12 (farm) bankruptcy – it’s the topic of today’s post.

Chapter 12 and Farm Income

The farm income test is to be applied at the time of bankruptcy filing. See, e.g., In re Nelson, 291 B.R. 861 (Bankr. D. Idaho 2003).  Gross income from farming has been held to include government program payments, proceeds of the sale of farm equipment, and income from rental of farm equipment where the lessor has some risk in the farm operation. See, e.g., In re Wilson, No. 05-65161, 2007 Bankr. LEXIS 359 (Bankr. D. Mont. Feb. 7, 2007).  However, income from the sale of farmland and income from custom farming, even if performed for the debtor's farm operation, is not included in gross income from farming. See, e.g., In re Ross, 270 B.R. 710 (Bankr. S.D. Ill. 2001). However, income from the sale of farmland may be included in gross income from farming if it is sufficiently connected to the farming activities, such as being sold to allow the debtor to continue farming.  See, e.g., In re Bircher, 241 B.R. 11 (Bankr. S.D. Iowa 1999).

Although income from cash leasing of farmland is not included in gross income from farming, a corporate farm debtor has been allowed to file in Chapter 12 even though a majority of the farmland would be cash leased. Generally, cash rent income is not income from a farming operation that counts toward the 50 percent test. See, e.g., In re Swanson, 289 B.R. 372 (Bankr. D. Ill. 2003). The basic test is whether the lessor is subject to the risks from farming under the lease.

For example, in In re Maynard, 295 B.R. 437 (Bankr. S.D. N.Y. 2003), the debtor operated a farm as an S corporation which leased the land from the debtor.  The debtor’s pre-petition farm income consisted entirely of the rent from the corporation.  The rents were held to be income from farming to the debtor because no rent was paid if the corporation lacked income, the debtor was actively involved in the farming operation, the rent came from farming operations, and the debtor continued to farm the property after bankruptcy. However, in a 1990 bankruptcy case from Iowa, In re Easton, 118 B.R. 676 (Bankr. N.D. Iowa 1990), an individual farm debtor was allowed to file a Chapter 12 bankruptcy where farmland was cash leased to the debtor’s son and the court found that the lease was part of the total family farm operation. 

Note:  Income from crop-share leases is generally considered to be gross income from farming unless the lessor has no participation in the operation of the farm.

What About Horse Boarding and Training?

As noted above, the basic test in determining whether income is sufficiently tied to a farming operation to constitute gross income from farming is whether the debtor’s income is subject to the risks of farming such as production and price risk.  That’s an important question when it comes to horse boarding and training.  The primary issue is whether the debtors income is derived from services or from farming/ranching activities. 

There are analogies with other similar activities.  Consider the following:

  • While the breeding of dogs has been held to constitute farming for purposes of Chapter 12 eligibility, the activity must be engaged in at the time the debtor files bankruptcy. Any post-petition change in the debtor’s business is immaterial.  See, e.g., In re Degutis, No. 20-11420-MSH, 2020 Bankr. LEXIS 3578 ((Bankr. D. Mass. Dec. 23, 2020).  
  • A cattle rancher’s income from hauling cattle for third parties was farm income where the hauling was found to be related to the debtor’s own operations, and, in another case, the income from the debtors' timber operation was farm income where the debtors sold their own timber, lived in a traditional farm setting, had traditional farm equipment, and were subject to the same risks inherent in an ordinary farming business. In re Glenn, 181 B.R. 105 (Bankr. E.D. Okla. 1995).

With respect to horse boarding and training, the general rule is that boarding and training of horses owned by others does not generate gross income from farming.  For example, in one case the debtor operated a business of boarding and training horses owned by others and for a flat fee.  The court held that the debtor was not engaged in farming and was ineligible for Chapter 12 relief because the debtor only provided services and income derived from fixed fees that were only indirectly tied to inherent risks of farming.  See, e.g., In re Jones, No. 10-65478-FRA12, 2011 Bankr. LEXIS 2982 (Bankr. D. Ore. Aug. 2, 2011).  But sometimes courts distinguish between breeding and raising horses from training and showing.  In In re Buchanan, No. 2:05-0114, 2006 U.S. Dist. LEXIS 50968 (M.D. Tenn. July 25, 2006), the court held that the debtor’s failure to file Schedule F associated with the debtors’ horse breeding operation did not negate other factors showing that debtors were engaged in a traditional farming operation.

Recent case.  In In re Leonaggeo, No. 23-35092 (CGM), 2023 Bankr. LEXIS 1355 (S.D. N.Y. May 24, 2023), The debtor filed a Chapter 12 case in early 2023 as a repeat filer.  The debtor’s previous case was dismissed for lack of regular income (the debtor’s income was only seasonal).  In the present case (which was filed to forestall foreclosure proceedings), two creditors motioned to either dismiss the case or have the automatic stay lifted on the basis that the debtor didn’t qualify for Chapter 12 for lack of having sufficient farm income.  The debtor’s income is derived from horse boarding, training, and rider instruction that the debtor and her husband had conducted for 50 years.  The debtor claimed the operation was subject to the same inherent risks and cyclical uncertainties that are associated with farming operations. 

The court noted a split of authority on whether horse breeding, boarding and training businesses were eligible for Chapter 12.  Some courts have determined that such activities are service-oriented business ineligible for Chapter 12.  See, e.g., In re Cluck, 101 B.R. 691 (Bankr. E.D. Okla. 1989); In re McKillips, 72 B.R. 565 (Bankr. N.D. Ill. 1987).  But, other courts have ruled otherwise where the debtors were also involved in the growing of feed and the raising of the horses to maturity for later sale as livestock.  See, e.g., In re Buchanan, No. 05-114, 2006 U.S. Dist. Tenn. Jul. 25, 2006).  In the present case, however, the court determined that the debtor was primarily providing a service.  Key to that determination was that the debtor did not raise crops or raise the horses to maturity to sell as livestock.  Thus, the Chapter 12 case was dismissed. 

Additionally, the court did not allow the debtor to convert the Chapter 12 case to Chapter 11, but the court determined that such a conversion was not allowed under 11 U.S.C. §1208, citing the legislative history of the provision did not suggest that the Congress intended to allow a Chapter 12 case to be converted to anything other than a Chapter 7 case.

Conclusion

The definition of “gross income from farming” is an important one in the context of Chapter 12 bankruptcy.  To meet the definition, the debtor’s income must be from a farming activity where the debtor is bearing the risks of production or the risks of price change.  Income from a service activity doesn’t meet the test.

March 12, 2024 in Bankruptcy | Permalink | Comments (0)

Sunday, March 10, 2024

Court Reigns in Unconstitutional Federal Power – Impacts BOI Reporting

Overview

The Corporate Transparency Act (CTA), P.L. 116-283, enacted in 2021 as part of the National Defense Authorization Act, contains new “beneficial ownership information” (BOI) reporting rules for many businesses.  The CTA was passed with the purported purpose of enhancing transparency in entity structures and ownership to combat money laundering, tax fraud and other illicit activities. In short, it’s an anti-money laundering initiative designed to catch those that are using shell corporations to avoid tax.  The BOI reporting requirement is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.  The effective date of the CTA is January 1, 2024.    

However, in early March, a federal trial court in Alabama, in a case involving a constitutional challenge to the CTA granted the challengers’ motion for summary judgment.  National Small Business United v. Yellen, No. 5:22-cv-1448-LCB, 2024 U.S. Dist. LEXIS 36205 (N.D. Ala. Mar. 1, 2024).  The court’s ruling puts BOI reporting on hold for the plaintiffs’ 65,000 members.

Background

Who needs to report?  The CTA breaks down the reporting requirement of “beneficial ownership information” between “domestic reporting companies” and “foreign reporting companies.”  A domestic reporting company is a corporation, limited liability company (LLC), limited liability partnership (LLP) or any other entity that is created by filing of a document with a Secretary of State or any similar office under the law of a state or Indian Tribe.  A foreign reporting company is a corporation, LLC or other foreign entity that is formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or any similar office. 

Note:  Sole proprietorships that don’t use a single-member LLC are not considered to be a reporting company. 

Reporting companies typically include LLPs, LLLPs, business trusts, and most limited partnerships and other entities are generally created by a filing with a Secretary of State or similar office. 

For entities created after 2023, businesses that are required to report ownership information (corporation, LLC, or similar entity as noted above) must also report the identity of “applicants.” 

Exemptions.  Exemptions from the reporting requirement apply for securities issuers, domestic governmental authorities, insurance companies, credit unions, accounting firms, tax-exempt entities, public utility companies, banks, and other entities that don’t fall into specified categories.  In total there are 23 exemptions including an exemption for businesses with 20 or more full-time U.S. employees, report at least $5 million on the latest filed tax return and have a physical presence in the U.S.   But, for example, otherwise exempt businesses (including farms and ranches) that have other businesses such as an equipment or land LLC or any other related entity will have to file a report detailing the required beneficial ownership information.  Having one large entity won’t exempt the other entities. 

What is a “Beneficial Owner”?  A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:

  • Exercises substantial control over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting company.

Note:  Beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.

What must a beneficial owner do?  Beneficial owners must report to the Financial Crimes Enforcement Network (FinCEN).  FinCEN is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other international crimes.  Beneficial owners must report their name, date of birth, current residential or business street address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document.  Company applicants can only be the individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S.  A company applicant may also be the individual who is primarily responsible for directing or controlling the filing of the relevant document by someone else. This last point makes it critical for professional advisors to carefully define the scope ot engagement for advisory services with clients.

Note:  If an individual files their information directly with FinCEN, they may be issued a “FinCEN Identifier” directly, which can be provided on a BOI report instead of the required information.

Filing deadlines.  Reporting companies created or registered in 2024 have 90 days from being registered with the state to file initial reports disclosing the persons that own or control the business. NPRM (RIN 1506-AB62) (Sept 28, 2023). If a business was created or registered to do business before 2024, the business has until January 1 of 2025 to file the initial report.  Businesses formed after 2024 must file within 30 days of formation.  Reports must be updated within 30 days of a change to the beneficial ownership of the business, or 30 days from when the beneficial owner becomes aware of or has reason to know of inaccurate information that was previously filed. 

Note:  FinCEN estimates about 32.6 million BOI reports will be filed in 2024, and about 14.5 million such reports will be filed annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

Penalties.  The penalty for not filing is steep and can carry the possibility of imprisonment.  Specifically, noncompliance can result in escalating fines ranging from $591 per day up to $10,000 total and prison time of up to two years.  Penalties may also apply for unauthorized disclosures.

State issues.  A state is required to notify filers upon initial formation/registration of the requirement to provide beneficial ownership information to the FinCEN.  In addition, states must provide filers with the appropriate reporting company Form.

Constitutional Challenge

The National Small Business United, an organization with over 65,000 members, filed a constitutional challenge against the CTA claiming that the CTA exceeded the Constitution’s limits on the power of the Congress to legislate and was not sufficiently connected to any specifically enumerated power that would make it either a necessary or proper means of achieving a policy goal of the Congress.  The court rejected the government’s defense of the CTA that it was constitutional under the plenary power of the Congress to conduct foreign affairs as well as under the Commerce Clause and the Congress’ taxing power. 

The court disagreed on all claims noting that the Supreme Court had ruled in 2011 that the foreign affairs power did not extend to the CTA because the CTA regulated only internal transactions.  Indeed, the court noted that informational reporting such as the BOI reporting, has historically been a matter reserved for the States. 

More importantly, the court rejected the government’s Commerce Clause defense.  With few exceptions, since the mid-1930s, the Commerce Clause has been interpreted to give almost absolute power to the Congress to regulate commerce among the states.  However, here the court noted that, “[t]he plain text of the CTA does not regulate the channels and instrumentalities of commerce, let alone commercial or economic activity.”  It was not sufficient to trigger federal regulatory authority via the Commerce Clause that a business that is registered with a State then uses the channels of commerce for its business activity, even if the business activity substantially affects interstate and foreign commerce.  The Congress has the power to regulate the business activity but cannot require additional reporting information of a business that is already registered to do business with a State.  The court noted that the Congress could have created a reporting rule that was constitutional by simply triggering the reporting requirement once a business engages in  commercial business activity, and pointed out that FinCEN’s customer due diligence rule from 2016 provides “nearly identical information” in a constitutional manner. 

The government’s taxing power argument also failed, the court determined, because the civil penalties for noncompliance with the rules were not a tax – they were fixed amounts with no income thresholds and did not vary.

What Now?

FinCEN is currently not enforcing the reporting rule against the plaintiff's members.  It is anticipated that the government will appeal.  Once the appellate opinion is issued, the losing side will almost certainly seek review by the U.S. Supreme Court.  It is also anticipated that a request will be made for a court to stay the enforcement of the BOI reporting rules entirely while the judicial process plays out.  Of course, the Congress could amend the BOI reporting rules in accordance with the directions of the trial court. 

This all means that covered businesses should prepare the necessary information to be filed, but not file it at the present time.  There is no need to provide the government with ownership data that it may, ultimately, not be entitled to. 

Conclusion

The U.S. Supreme Court will have the final say (judicially) on the matter.  Congress will likely not act until it has too.  So, the process could take some time which means the reporting rules will remain in “limbo” for the balance of 2024.   The trial court’s judgment may not ultimately be sustained, but it is refreshing to see a federal court reign in an exercise of federal power.

March 10, 2024 in Business Planning, Regulatory Law | Permalink | Comments (0)

Monday, March 4, 2024

Farm Bankruptcy; Sovereign Immunity; Farm Lease and Pipeline Damages

Introduction

Farmers and ranchers face numerous legal issues on a regular basis.  The variety is vast from contract issues to income tax, estate and business planning, to real estate-related issues.  Other issues come up with water, criminal matters, and environmental law.  Then there are frequent issues with federal and state administrative agencies. 

With today’s article I look at some recent cases that illustrate issues with farm bankruptcy, sovereign immunity, farm lease law and damages from an alleged leaking pipeline.

A potpourri of legal issues facing farmers and ranchers – it’s the topic of today’s post.

Farm Bankruptcy

This first case from Kansas demonstrates that a Chapter 12 bankruptcy debtor must have a legitimate basis for seeking a modification of the Chapter 12 reorganization plan.  A mere hope in getting financing is not a change in circumstances that would justify reimposing the automatic stay (stopping creditors from acting).  The farm debtor must be able to put a feasible plan together for paying debts.  Here, the plan had been approved, but then the farm debtor couldn’t make the payments. 

Debtors Lacked Reasonable Likelihood of Putting Re-Tooled Chapter 12 Plan Together

In re Sis, No. 21-10123, 2024 Bankr. LEXIS 124 (Bankr. D. Kan. Jan. 18, 2024)

The debtors Chapter 12 plan was confirmed in early 2022, but the debtors soon had trouble making plan payments. They managed to make an annual payment to a creditor (bank) but failed to do so the next year.  The Chapter 12 trustee filed a motion to dismiss the case in late 2023, and another creditor filed a motion for relief from the automatic stay.   The debtors sought to re-impose the automatic stay to get more time to modify their Chapter 12 plan and make payments to a creditor to avoid the bank foreclosing on their farm.    The bankruptcy court denied the debtors’ motion.  The court noted the debtors’ genuine efforts to secure financing and sell assets but determined that the debtors had little likelihood of success in modifying their reorganization plan in a manner allowing them to make plan payments.  The court also determined that the debtors had not endured a substantial change in circumstances to support modifying their Chapter 12 plan.  The debtors merely had a hope of obtaining financing was not a change in circumstances.  As a result, the court denied the debtors’ motion for a temporary restraining order because the debtors had not shown a substantial likelihood of prevailing on the merits or any extraordinary circumstances that would justify reimposition of the automatic stay. In late 2023, the court dismissed the debtors’ Chapter 12 case.  Therefore, the court the court directed the debtors to either voluntarily dismiss the adversary proceeding or provide reasons why it should not be dismissed.  The court noted that failure to file a voluntary dismissal or a statement showing cause, within fourteen days of the court’s order in this case would result in the court dismissal of the case. 

Suing the Government – Sovereign Immunity

Recently, the U.S. Supreme Court noted the exception to the general rule that the federal government can’t be sued for damages. 

Fair Credit Reporting Act Waives Sovereign Immunity 

United States Department of Agriculture Rural Development Housing Service v. Kirtz, No. 22-

846, 2024 U.S. LEXIS 589 (U.S. Feb. 8, 2024)

 The defendant received a loan from the plaintiff, a division of the U.S. Department of Agriculture, which was repaid in full by mid-2018.  However, the USDA repeatedly informed a consumer credit reporting company that the defendant’s account was past due.  As a result, thedefendant’s credit score was damaged and his ability to secure future loans at affordable rates was threatened.  The defendant notified the company of the error and the company, in turn, notified the USDA.  However, the USDA did not correct its records and the defendant sued for either a negligent or willful violation on the Fair Credit Reporting Act (FCRA).  The USDA moved to dismiss the case based on sovereign immunity.  The trial court dismissed the case, the appellate court reversed on the basis that the Congress had amended the FCRA to authorize suits for damages against “any person” who violates the FCRA and that “person” includes any governmental agency.  The Supreme Court agreed to hear the case to clear up contrary conclusions reached by the Third, Seventh and D.C. Circuits (holding that the FCRA authorizes suits against government agencies) and the Fourth and Ninth Circuits (holding that the FCRA bars consumer suits against federal agencies). 

The Supreme Court noted that a U.S. is generally immune from suits seeking money damages unless the Congress waived that immunity by making a clear legislative statement.  Here, the Court unanimously determined that the FCRA clearly waived sovereign immunity by applying its provisions to persons who furnish information to consumer reporting agencies, and that no separate provision addressing sovereign immunity was required.  The Court also noted that its holding would not make the States susceptible to consumer suits for money damages because the FCRA was enacted pursuant to the Commerce Clause and, as such, does not give the Congress the power to abrogate state sovereign immunity.  

Farm Lease Law

The law governing farm leases differs from state-to-state.  The following case from Kansas makes a couple of points.  First, if the lease is in writing, the written terms control.  Second, when leased land is sold, the buyer takes the land subject to the existing lease.  Those are two key points that will apply in every state. 

Interpretation of Farm Lease at Issue

Cure Land, LLC v. Ihrig, No. 125,709, 2023 Kan. App. Unpub. LEXIS 479 (Kan. Ct. App. Dec. 1, 2023)

The parties entered into a cash farm lease for the calendar year 2020.  The lease specified that the defendant (tenant) was allowed to harvest any wheat crop planted in the fall of 2020 (or in the fall thereafter if the lease was renewed) by the following summer.  The lease also stated that the crops planted during the term of the lease was to be planted on a rotational basis rather than in a continuous crop fashion unless adequate moisture was present, and the landlord consented.  The lease also stated that continuous cropping was normal on the irrigated ground.  The lease renewed for 2021 and notice to terminate was given on August 27, 2021.  The ownership of the leased ground then changed hands, and the tenant notified the new landlord of the tenant’s intent to plant wheat on the irrigated ground and harvest it in 2022.  The prior owned informed the defendant that planting wheat was not permitted in the fall of 2021, as did the new owner a few days later.  In October of 2021, the defendant harvested corn from the irrigated ground while it was still “high moisture corn,” a practice the tenant had not previously engaged in and planted wheat the next day.  The defendant paid the 2021 lease obligation through the end of 2021 and paid the balance on June 22, 2022.  The plaintiff (the new landlord) sued for breach of contract and unjust enrichment.  The trial court ruled in favor of the new landlord, finding that the lease did not permit the defendant to plant fall 2021 wheat. The trial court interpreted the lease provisions, considering the distinction between wheat ground and irrigated ground, and concluded that the defendant’s interpretation would result in an unintended windfall. Additionally, the court found that the purchaser of the leased land had the right to enforce its terms.  The appellate court affirmed. 

The Proof and Computation of Property Damage

When you incur damage to your property being able to prove those damages and the amount of the loss is critical.  A recent case involving a pipeline under an Oklahoma ranch illustrates these principles.

Cattle Ranch’s Lawsuit Against Energy Company for Pipeline Leak Revived

Lazy S Ranch Properties, LLC v. Valero Terminaling & Distribution Co., No. 23-7001, 2024 U.S. App. LEXIS 3397 (10th Cir. Feb. 13, 2024)

The plaintiff, an Oklahoma cattle ranch noticed a diesel fuel odor coming from a cave.  The ranch hired experts to test the soil, surface water and groundwater for possible hydrocarbon contamination.  The tests found trace amounts of refined petroleum products.  The plaintiff sued the defendant energy company in late 2019 alleging claims of negligence, negligence per se, trespass, unjust enrichment, private nuisance and public nuisance.  The defendant moved for summary judgment on the basis that its pipeline carrying gasoline and diesel fuel beneath the ranch was not leaking and that the plaintiff failed to show any injury from the de minimis presence of hydrocarbons. 

The trial court analyzed the plaintiff’s various tort claims together which required a minimum level of contamination to be present so as to establish injury for each claim.  Ultimately, the trial court granted summary judgment to the defendant.  On appeal, the appellate court held that the trial court’s combining of the plaintiff’s tort claims under legal injury confused the analysis because “what constitutes a legal injury will be different based on the elements of each tort.”  On the two nuisance-based claims, the appellate court noted the plaintiff owners’ testimony that they discontinued their use of the land, in part, due to an odor that induced headaches, stopped water sales, and barred others from recreational activities on the ranch.  The appellate court viewed this as sufficient evidence to warrant trial on whether the defendant had committed a nuisance.  On the negligence issue, the appellate court determined that the plaintiff had presented sufficient evidence to create a genuine issue of material fact concerning legal injury and causation on the private and public nuisance as well as the negligence per se claim.  However, the appellate court affirmed the trial court on the plaintiff’s constructive fraud and trespass claims citing a lack of evidence that the defendant had any intent to commit a trespass or knew that its pipeline was leaking or overlooked the leak or failed to tell the plaintiff about a leak in the pipeline. 

March 4, 2024 in Bankruptcy, Civil Liabilities, Contracts, Real Property | Permalink | Comments (0)

Monday, February 26, 2024

Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs? (An Update)

Overview

In response to attempts to shut down animal confinement operations by activist groups, legislatures in several states have enacted laws designed to protect these businesses by limiting access. A common approach is for the law to criminalize the use of deception to access a confined livestock facility or meatpacking plant with the intent to cause physical harm, economic harm or some other type of injury to the business. But the laws have generally been struck down on free speech and equal protection grounds.  Is there a way for states to provide legal protection to confinement livestock facilities? 

What can these facilities do to protect themselves?  I wrote about this issue last spring and since that time the U.S. Court of Appeals for the Eighth Circuit has issued a significant opinion.  That makes an update in order.

Laws designed to protect confined animal livestock facilities from those intended to do them harm – it’s the topic of today’s post.

General Statutory Construct

The basic idea of state legislatures that have attempted to provide a level of protection to livestock facilities is to bar access to an animal production facility under false pretenses.  At their core, the laws attempt to prohibit a person having the intent to harm a livestock production facility from gaining access to the facility (such as via employment) to then commit illegal acts on the premises.  See, e.g., Iowa Code §717A.3A.  Laws that bar lying and trespass coupled with the intent to do physical harm to an animal production facility should not be constitutionally deficient.  Laws that go beyond those confines may be. 

The Iowa provisions.  Iowa legislation is a common example of how states have attempted to address the issue.  The Iowa legislature has made two attempts at crafting a state law that would withstand a constitutional challenge.  The initial version, enacted in 2012, criminalized “agricultural production facility fraud” if a person willfully obtained access to such a facility by false pretenses (the “access” provision) or made a false statement or representation as part of an application or agreement to be employed at the facility (the “employment” provision).  The law also required the person to know that the statement was false when made and that it was made with an intent to commit a knowingly unauthorized act.  Iowa Code §717A.3A.  This initial statutory version was challenged and the employment provision was deemed unconstitutional.

The Iowa legislature then modified the law with a second version that described an agricultural production facility trespass as occurring when a person uses deception “on a matter that would reasonably result in a denial of access to an agricultural production facility that is not open to the public, and, through such deception, gains access to [the facility], with the intent to cause physical or economic harm or other injury to the [facility’s] operations, agricultural animals, crop, owner, personnel, equipment, building, premises, business interest, or customer [the “access” provision].”  Iowa Code §717.3B.  The revised law also criminalizes the use of deception “on a matter that would reasonably result in a denial of an opportunity to be employed  at [a facility] that is not open to the public, and, through such deception, is so employed, with the intent to cause physical or economic harm or other injury to the [facility’s] operations, agricultural animals, crop, owner, personnel, equipment, building, premises, business interest, or customer [the “employment” provision].

Note:  In other words, the Iowa provisions criminalize the use of lies to either gain access or employment at an ag production facility where the use is coupled with the intent to do harm. 

Recent Court Opinions

North Carolina.  In 2017, a challenge to the North Carolina statutory provision was dismissed for lack of standing. People for the Ethical Treatment of Animals v. Stein, 259 F. Supp. 3d 369 (M.D. N.C. 2017). The plaintiffs, numerous animal rights activist groups, brought a pre-enforcement challenge to the North Carolina Property Protection Act.  They claimed that the law unconstitutionally stifled their ability to investigate North Carolina employers for illegal or unethical conduct and restricted the flow of information those investigations provide.  As noted, the court dismissed the case for lack of standing. On appeal, however, the appellate court reversed.  PETA, Inc. v. Stein, 737 Fed. Appx. 122 (4th Cir. 2018).  The appellate court determined that the plaintiffs had standing to challenge the law through its “chilling effect” on their First Amendment rights to investigate and publicize actions on private property.  They also alleged a reasonable fear that the law would be enforced against them. 

On the merits, the trial court then held that the challenged provisions of the law were unconstitutional under the First Amendment as a violation of the plaintiffs’ free speech rights. There was a direct implication of speech, the court reasoned, because recordings and image capture constituted speech and the Act was unconstitutional under intermediate scrutiny.  People for the Ethical Treatment of Animals, Inc. v. Stein, 466 F. Supp. 3d 547 (M.D.  N.C. 2020).

On further review, the appellate court affirmed in part and reversed in part.  People for the Ethical Treatment of Animals, Inc. v. North Carolina Farm Bureau Federation, Inc., 60 F.4th 815 (4th Cir. 2023).  The appellate court determined that the First Amendment protects the right to surreptitiously record in an "employer's nonpublic areas as part of newsgathering" and that, therefore, the Act was unconstitutional when it was applied to bar the undercover activities that the plaintiff wanted to conduct on private property. 

Note:  The Attorney General of North Carolina sought the U.S. Supreme Court's review, but the Court declined.  North Carolina Farm Bureau Federation, Inc. v. People for the Ethical Treatment of Animals, Inc., 144 S. Ct. 325 (2023).  

Utah.  The Utah law was also deemed unconstitutional. Animal Legal Defense Fund v. Herbert, 263 F. Supp. 3d 1193 (D. Utah 2017). At issue was Utah Code §76-6-112 which criminalizes the entering of a private agricultural livestock facility under false pretenses or via trespass to photograph, audiotape or videotape practices inside the facility.  While the state claimed that lying, which the statute regulates, is not protected free speech, the court determined that only lying that causes “legally cognizable harm” falls outside First Amendment protection. The state also argued that the act of recording is not speech that is protected by the First Amendment. However, the court determined that the act of recording is protectable First Amendment speech. The court also concluded that the fact that the speech occurred on a private agricultural facility did not render it outside First Amendment protection. The court determined that both the lying and the recording provisions of the Act were content-based provisions subject to strict scrutiny. To survive strict scrutiny the state had to demonstrate that the restriction furthered a compelling state interest. The court determined that “the state has provided no evidence that animal and employee safety were the actual reasons for enacting the Act, nor that animal and employee safety are endangered by those targeted by the Act, nor that the Act would actually do anything to remedy those dangers to the extent that they exist.”  For those reasons, the court determined that the Act was unconstitutional. 

A Wyoming law experienced a similar fate. In 2015, two new Wyoming laws went into effect that imposed civil and criminal liability upon any person who "[c]rosses private land to access adjacent or proximate land where he collects resource data." Wyo. Stat. §§6-3-414(c); 40-27-101(c). The appellate court, reversing the trial court, determined that because of the broad definitions provided in the statutes, the phrase "collects resource data" included numerous activities on public lands (such as writing notes on habitat conditions, photographing wildlife, or taking water samples), so long as an individual also records the location from which the data was collected. Accordingly, the court held that the statutes regulated protected speech in spite of the fact that they also governed access to private property. While trespassing is not protected by the First Amendment, the court determined that the statutes targeted the “creation” of speech by penalizing the collection of resource data. 

Note:  The appellate court remanded the case to the trial court for a determination of the appropriate level of scrutiny and whether the statutes survived review.   Ultimately, the trial court granted the plaintiffs’ motion for summary judgment, finding that the statutes were content based and, as such failed to withstand constitutional strict scrutiny review on the basis that the laws were not narrowly tailored.  Western Watersheds Project v. Michael, 353 F. Supp. 3d 1176 (D. Wyo. 2018). 

Ninth Circuit.  In early 2018, the U.S. Circuit Court of Appeals for the Ninth Circuit issued a detailed opinion involving the Idaho statutory provision.  Animal Legal Defense Fund v. Wasden, 878 F.3d 1184 (9th Cir. 2018).  The Ninth Circuit’s opinion provides a roadmap for state lawmakers to follow to provide at least a minimal level of protection to animal production facilities from those that would intend to do them economic harm.  According to the Ninth Circuit, state legislation can bar entry to a facility by force, threat or trespass.  Likewise, the acquisition of economic data by misrepresentation can be prohibited.  Similarly, criminalizing the obtaining of employment by false pretenses coupled with the intent to cause harm to the animal production facility is not constitutionally deficient.  However, provisions that criminalize audiovisual recordings are suspect. 

The Iowa experience.  In 2021, the U.S. Court of Appeals for the Eighth Circuit construed the 2012 version of the Iowa law and upheld the portion of it providing for criminal penalties for gaining access to a covered facility by false pretenses.  Animal Legal Defense Fund v. Reynolds, 8 F.4th 781 (8th Cir. 2021).  This is the first time that any federal circuit court of appeals has upheld a provision that makes illegal the gaining of access to a covered facility by lying.   

Conversely, the court held that the employment provision of the law (knowingly making a false statement to obtain employment) violated the First Amendment because the law was not limited to false claims that were made to gain an offer of employment.  Instead, the provision provided for prosecution of persons who made false statements that were incapable of influencing an offer of employment.  A prohibition on immaterial falsehoods was not necessary to protect the State’s interest – such as false exaggerations made to impress the job interviewer.  The court determined that barring only false statements that were material to a hiring decision was a less restrictive means to achieve the State’s interest. 

Note.  The day before the Eighth Circuit issued its opinion concerning the Iowa law, it determined that plaintiffs challenging a comparable Arkansas law had standing the bring the case.  Animal Legal Defense Fund v. Vaught, 8 F.4th 714 (8th Cir. 2021).  The court later denied a petition for rehearing.   Animal Legal Defense Fund v. Vaught, No. 20-1538, 2021 U.S. App. LEXIS 27712 (8th Cir. Sept. 15, 2021). 

In late 2019, the plaintiffs in the Iowa case filed suit to enjoin the second version of the Iowa law – Iowa Code §717A.3B.  The trial court agreed and preliminary enjoined the revised law.  The plaintiffs then filed a motion for summary judgment in early 2020 and the state filed a cross motion for summary judgment, and the case was continued while the appellate court was considering the case involving the initial version of the Iowa law.  As noted above, the appellate court ultimately upheld the access provision but not the employment provision.  The trial court, in the current case upheld the plaintiffs’ motion for summary judgment, finding that the revised statutory language had been slightly modified, but was substantially similar to the initial version.  As such, the trial court determined that the revised statute discriminated based on content and viewpoint and was unconstitutional under a strict scrutiny analysis.  Animal Legal Defense Fund v. Reynolds, No. 4:19-cv-00124-SMR-HCA, 2022 U.S. Dist. LEXIS 48142 (S.D. Iowa Mar. 14, 2022). 

Iowa also has another law that bears on the issue.  Iowa Code § 727.8A makes it a crime for “a person committing a trespass as defined in section 716.7 to knowingly place or use a camera or electronic surveillance device that transmits or records images or data while the device is on the trespassed property.” 

Iowa Code §716.7 defines a trespass as follows:

  1. a. “Trespass” shall mean one or more of the following acts:

(1) Entering upon or in property without the express permission of the owner, lessee, or person in lawful possession with the intent to commit a public offense, to use, remove therefrom, alter, damage, harass, or place thereon or therein anything animate or inanimate,….

(2) Entering or remaining upon or in property without justification after being notified or requested to abstain from entering or to remove or vacate therefrom by the owner, lessee, or person in lawful possession, or the agent or employee of the owner, lessee, or person in lawful possession, or by any peace officer, magistrate, or public employee whose duty it is to supervise the use or maintenance of the property. A person has been notified or requested to abstain from entering or remaining upon or in property within the meaning of this subparagraph (2) if any of the following is applicable:

(a) The person has been notified to abstain from entering or remaining upon or in property personally, either orally or in writing, including by a valid court order under chapter 236.

(b) A printed or written notice forbidding such entry has been conspicuously posted or exhibited at the main entrance to the property or the forbidden part of the property.

(3) Entering upon or in property for the purpose or with the effect of unduly interfering with the lawful use of the property by others.

(4) Being upon or in property and wrongfully using, removing therefrom, altering, damaging, harassing, or placing thereon or therein anything animate or inanimate, without the implied or actual permission of the owner, lessee, or person in lawful possession.

Note:  An initial conviction for violation of Iowa Code § 727.8A is an aggravated misdemeanor and a second conviction is a class “D” felony.

In Animal Legal Defense Fund, et al. v. Reynolds, et al., 630 F. Supp.3d 1105 (S.D. Iowa. 2022), the plaintiffs (animal rights activist groups) claimed the statute violated their First Amendment rights by hindering them from gaining access to farms and dairies under false pretenses of seeking a job to be able to take pictures and/or videos without the property owner’s consent.  The defendants asserted that the case should be dismissed for lack of standing and lack of ripeness.

The trial court (the same Obama-appointed judge that ruled earlier in 2022 on another variant of the Iowa laws) held that the plaintiffs had standing because their organizational objectives would be hindered, and that an arrest is not required before a criminal statute can be challenged.  The trial court noted that the statute prohibited video recordings (which the court asserted was protected “speech”) while trespassing which the plaintiffs considered important to broadcasting their negative messages about animal agriculture to the public.  More specifically, the court determined that the statute singled out conduct (that the plaintiffs contemplated) by expanding the penalty for conduct already prohibited by law and was not limited to specific uses of a camera.  Accordingly, the court determined that the statute was an unconstitutional restriction on the free speech rights of trespassers apparently on the basis that regulating free speech on private property would create a “slippery slope” for not allowing people to record politicians or express views about the Government.   In addition, any recording, production, editing, and publication of the videos is protected speech.  The court granted summary judgment to the plaintiffs. 

The trial court’s view, made it practically impossible for farmers to protect their farming operations from those intending to inflict harm via protected “speech.” Is the trial court saying that there is a constitutional right to trespass?  If so, that is flatly contrary to the U.S. Supreme Court opinion of Cedar Point Nursery, et al. v. Hassid, et al., 141 S. Ct. 2063 (2021).   

Note:  Interestingly (and hypocritically) the Iowa federal district court’s website contains the following information: “To be admitted into the courthouse, you must present a government issued photo identification.  Please be aware the following items are NOT allowed in the courthouse: cell phones, cameras, other electronic devices (including Apple watches), recording devices,…”.

Note:  Iowa Code §716.7A, the Food Operation Trespass Law, remains in effect.  That law, effective on June 20, 2020, treats as an aggravated misdemeanor a first offense of entering or remaining on the property of a food operation without the consent of a person who has real or apparent authority to allow the person to enter or remain on the property.  A subsequent offense is a Class D felony.  This statutory provision was upheld as constitutional by an Iowa county district court judge in early 2022. 

In early 2024, the U.S. Court of Appeals for the Eighth Circuit reversed.  Animal Legal Defense Fund v. Reynolds, 89 F.4th 1071 (8th Cir. 2024).  The appellate court concluded that while false or deceptive speech is not per se unprotected, Iowa had the constitutional right to bar intentionally false speech that is used to cause a legal harm to someone else or their business.  The Iowa law, the appellate court concluded, focused on the intent to inflict a legally recognizable harm rather than on the content of what was being said.  Accordingly, both the trespass and employment provisions of the law constitutionally barred false statements that result in a harm the law would recognize.  It was the law’s reference to the content of the speech (i.e., false statements) that made the law constitutional.  The intent requirement did not distinguish among speakers based on their viewpoints.  The appellate court succinctly stated that the Iowa law filtered out trespassers who are “relatively innocuous,” and focuses the criminal law on conduct that inflicts greater harms on victims and society.  Thus, the Iowa law was not a viewpoint-based restriction on speech, but was a permissible restriction on intentionally false speech undertaken to accomplish a legally cognizable harm. 

Kansas and the Tenth Circuit.  In Animal Legal Defense Fund, et al. v. Kelly, 9 F.4th 1219 (10th Cir. 2021), pet. for cert. filed, (U.S. Sup. Ct. Nov. 17, 2021), the court construed the Kansas provision that makes it a crime to take pictures or record videos at a covered facility “without the effective consent of the owner and with the intent to damage the enterprise.”  The plaintiffs claimed that the law violated their First Amendment free speech rights.  The State claimed that what was being barred was conduct rather than speech and that, therefore, the First Amendment didn’t apply.  But, the court tied conduct together with speech to find a constitutional violation – it was necessary to lie to gain access to a covered facility and consent to film activities.  As such, the law regulated protected speech (lying with intent to cause harm to a business) and was unconstitutional.  The court determined that the State failed to prove that the law narrowly tailored to a compelling state interest in suppressing the “speech” involved.  The dissent pointed out (correctly and consistently with the Eighth Circuit) that “lies uttered to obtain consent to enter the premises of an agricultural facility are not protected speech.” The First Amendment does not protect a fraudulently obtained consent to enter someone else’s property. 

Note:  On April 25, 2022, the U.S. Supreme Court declined to hear the case.  Kelly v. Animal Legal Defense Fund, cert. den., 142 S. Ct. 2647 (2022). 

As a result of the Eighth Circuit’s opinion in Reynolds in early 2024, legislation was introduced into the Kansas Senate that would amend the Farm Animal and Field Crop Act and Research Facilities Protection Act.  Among other things, the legislation would criminalize the making of false statements on an employment application to gain access to an animal facility.  The legislation stalled in the Senate.  Identical legislation was introduced into the Kansas House. 

A Different Approach?

The appellate courts generally holding (except for the Eighth Circuit) that the right to free speech protects false factual statements that inflict real harm and serve no legitimate interest runs contrary to an established line of U.S. Supreme Court precedent, at least until the Court’s decision in United States v. Alvarez, 567 U.S. 709 (2012).  See, e.g., Bill Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731 (1983); Brown v. Hartlage, 456 U.S. 45 (1982); Herbert v. Lando, 441 U.S. 153 (1979); Garrison v. Louisiana, 379 U.S. 64 (1964).  The current split between the Eighth, Ninth and Tenth Circuits on the constitutionality of the Iowa, Idaho and Kansas laws with respect to the issue of gaining access to a covered facility by lying could warrant a Supreme Court review. 

Indiana trespass law.  Short of a Supreme Court review of a state statute is there another approach that a state might take to provide protection for agricultural livestock facilities?  The state of Indiana’s approach might be the answer.  In 2014, the Indiana legislature passed, and the Governor signed into law the “Indiana Trespass Law.”  Ind. Code 35-43-2-2.  Under the statute, “trespass” is defined as being on a property after being denied entry by the property owner, court order or by a posted sign (or purple paint).  If the trespass involves a dwelling (including an ag operation), the landowner need not deny entry for a trespass to be established.  The law also sets various thresholds for criminal violations. 

Note:  The Iowa Food Operation Trespass Law appears to be similar to the Indiana law.

The Indiana law appears to base property entry on the legal property interest of that of a license.  A license is a term that covers a wide range of permissive land uses which, unless permitted, would be trespasses.  For example, a hunter who is on the premises with permission is a licensee.  The hunter has a license for the limited purpose of hunting only.  If the hunter were to videotape any activity on the premises, that would constitute a trespass as exceeding the scope of the license.  An unlawful entry.  This would be the same result for a farm employee.  Video recording would be outside the scope of employment. By focusing on the property interest of a license and that of a trespass for unauthorized entry, a claim of a possible free speech violation is eliminated.

Hiring Practices

Considering activists that wish to harm animal agriculture, ag animal facilities should utilize common sense steps to minimize potential problems.  Of course, not mistreating animals should always be the standard.  Proper hiring practices are also very important.  A well drafted employment agreement should be used for workers hired to work in an ag animal facility to  help screen potential hires.  The agreement should specify in detail the job requirements and what is not permitted to occur on the premises and inside buildings.  The agreement should give the employer the right to search every employee for devices that could be used to record activities on the farm and in farm buildings.  Also, employee training should be provided and documented.  Also, it’s critical that employee conduct be closely monitored to ensure that employees are acting within the scope of their employment and that animals are being treated appropriately. 

Conclusion

It’s unfortunate that groups exist dedicated to damage and/or eliminate certain aspects of animal agriculture, and that they will use lies and deception to become employed and gain access.  It’s even more frustrating that many of the courts are willing to use the First Amendment as a shield to protect those intending to commit criminal activities to harm animal agriculture.  But, until state laws are drafted in a way that will be found constitutional, the only recourse for livestock operations is to adopt hiring and business practices that will minimize potential harm.

The Eighth Circuit’s decision in Reynolds is refreshing.  It is an important decision for agriculture in general and the confinement livestock industry in particular.  For example, in the Iowa situation, approximately one-third of the nation’s hog production occurs in Iowa. 

February 26, 2024 in Criminal Liabilities, Regulatory Law | Permalink | Comments (0)

Tuesday, February 20, 2024

Dicamba Update

Overview

My blog article of February 11 discussed the Arizona federal district court opinion vacating the registrations of three Dicamba products.  Since then, the EPA made an “existing stocks” ruling that will help some producers through the 2024 growing season.  That makes an update in order.

Updated Dicamba information – it’s the topic of today’s post.

Background

Farmers have used Dicamba for decades on broadleaf plants and, more recently, have used it to control weeds that have become glyphosate-tolerant.  However, until 2016 the use of Dicamba was used only as a pre-emergent herbicide.  It was then that the Environmental Protection Agency (EPA) registered certain low-volatility forms of Dicamba that had a low likelihood of drift problems for over-the-top usage on growing soybean and cotton crops resulting from Dicamba-resistant seeds.  The EPA was sued on the basis that the registration process violated the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) as well as the Endangered Species Act (ESA).  The case became moot by the expiration of the registration, but when the EPA again registered Dicamba for over-the-top use in 2018, a new case was filed.  In 2020, the U.S. Court of Appeals for the Ninth Circuit vacated the registrations for XtendiMax, Engenia and FeXapan.  National Family Farm Coalition v. United States Environmental Protection Agency, 960 F.3d 1120 (9th Cir. 2020).  The court determined that the EPA had failed to follow the procedural rules of the Administrative Procedure Act, the FIFRA and the ESA.  Those statutes require the EPA to provide public notice and a chance for the public to make comments and attend a hearing on the registration issue.  The court also said that the EPA failed to assess risks and costs for non-users of over-the-top Dicamba. 

The EPA again issued another registration for over-the-top Dicamba use for the 2020 and 2021 growing seasons and made further amendments in 2022 and 2023 along with approval for new uses.

2024 Court Decision

On February 6, 2024, a federal district court vacated the registrations of three Dicamba products (XtendiMax, Engenia, and Tavium) that EPA had approved for over-the-top applications.  Center for Biological Diversity v. United States Environmental Protection Agency, No. CV-20-00555-TUC-DCB, 2024 U.S. Dist. LEXIS 20307 (D. Ariz. Feb. 6, 2024).  The decision came at a time when many soybean and cotton farmers have already purchased seed and chemicals and will soon be planting the 2024 crop.  The court said the EPA didn’t follow the notice and comment provisions of the Federal Insecticide, Fungicide, Rodenticide Act (FIFRA) when it issued the registrations and also violated the Administrative Procedure Act (APA) (and the Endangered Species Act) by not allowing public input on whether over-the-top Dicamba has unreasonable adverse effects on the environment. 

The ruling canceled any benefits of planting Dicamba seeds, with the concern that there might not be enough supply of other traits to replace the Dicamba market share.  The immediate impact of the ruling was that it could force farmers to plant Dicamba trait soybeans or cotton without the correct chemical to utilize the gene, resulting in the likely use of alternatives.  Those alternatives could, in turn, magnify the known issues of the Dicamba chemical problems.   

Comment:  While the timing of the court’s decision was awful, the result is good overall in that it held the “feet” of the EPA to the “fire” of the administrative process.  It also raised the question of whether the EPA deliberately violated the public notice and comment procedures that are clearly established in the law.  It’s difficult to believe that the EPA lawyers, particularly after losing in the Ninth Circuit on virtually the same issue in 2020, didn’t know that failing to follow the procedural rules for approving the registrations would lead to the registrations being invalidated. 

EPA reaction.  On February 14, the EPA issued an order to allow existing stocks of XtendiMax, Engenia, and Tavium to be applied directly onto crops so long as the pesticides were “labeled, packaged, and released for shipment” before the court’s decision. The order will allow these products purchased before February 6 to be used this growing season.  The EPA order also provides instructions for how to dispose of unwanted or unused dicamba products.

The Future

What does the future hold for over-the-top Dicamba?  Of course, the EPA could appeal the court’s decision, but any appeal would be to the Ninth Circuit.  Going back to the same court on the same shortcomings as in the 2020 decision probably wouldn’t end well for the EPA.  Perhaps a better idea is for the EPA to re-register over-the-top use of Dicamba by actually following the law’s requirements for providing public notice and comment, and giving the public the opportunity to attend a hearing on the registration.  

February 20, 2024 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Monday, February 19, 2024

New Tax Legislation Proposed

Introduction

On January 31, the U.S. House overwhelmingly passed tax legislation containing provisions of importance to farmers and ranchers in particular and many taxpayers in general.  H.R. 7024, known as the “Tax Relief for American Families and Workers Act of 2024,” is scored at nearly $78 billion and contains some retroactive provisions.  Some of the key provisions modify the employee retention credit (ERC), widen eligibility for the child tax credit (CTC), reinstate expensing for research and experimental (R&E) costs; increase expense method depreciation; and reinstate bonus depreciation to 100 percent for 2023. 

The legislation is currently before the U.S. Senate where it appears to have bipartisan support, if not immediate space on the Senate calendar. 

Pending tax legislation – it’s the topic of today’s post.

Details

ERC.  The IRS has been making significant efforts to eliminate abuses of the ERC.  The Congress constructed the ERC poorly which made it ripe for promoters to scam businesses, including farm businesses into thinking that they were eligible for the credit or eligible for more than what was appropriate.  The bill prevents additional ERC claims as of January 31, 2024 – moving up the current April 15, 2025, deadline. 

Note:  To put the cost of the ERC in perspective, the Joint Committee on Taxation says sunsetting the ERC as of January 31, 2024, would save $77.1 billion in spending. 

The bill makes several changes relevant to the ERC with respect to a “COVID-ERTC promoter.”  That’s a person who “aids, assists, or advises on an affidavit, refund, claim, or other document related to the ERC” if the person charges fees based on the amount of the credit or meets a gross receipts test.

The bill also makes other changes to the ERC relevant to a “COVID-ERTC promoter” as follows:

  • Extends the statute of limitations for the IRS to audit ERC claims from the current five years from the date of the claim to six years for claims involving a COVID-ERTC promoter.
  • Increases the penalty for aiding and abetting the understatement of a tax liability to the greater of $200,000 ($10,000 in the case of a natural person) or 75 percent of the promoter’s gross income derived (or to be derived) from providing aid, assistance, or advice with respect to a return or claim for ERC refund or a document relating to the return or claim.
  • Requires a promoter to comply with due-diligence requirements (similar to the due-diligence requirements applying to paid tax return preparers) with respect to a taxpayer's eligibility for (or the amount of) an ERC.  Each failure to comply comes with a $1,000 penalty. 
  • Require a promoter to file return disclosures and provide lists of clients to the IRS on request similar to those that “material advisers” are required to provide with respect to listed transactions.

CTC

The bill makes the following changes to the CTC:

  • An increase in the maximum refundable amount per child to $1,800 in tax year 2023 from $1,600. That amount then increases to $1,900 in 2024 and $2,000 in 2025.  Inflation adjustments also apply for 2024 and 2025.   
  • For tax years 2023-2025, the CTC is to be computed by multiplying a taxpayer’s earned income exceeding $2,500 by 15 percent, with the resulting amount multiplied by the number of qualifying children.
  • For 2024 and 2025, a taxpayer would be able to use the taxpayer’s earned income from the prior tax year to compute the maximum child credit, but only if the taxpayer’s earned income in the prior year was higher than the current year.

R&E costs.  The bill would amend I.R.C. §174 to reverse (at least temporarily) the impact of the Tax Cuts and Jobs Act (TCJA) provision requiring amortization of domestic R&E costs.  That change under the TCJA requires amortization over a five-year period effective for tax years beginning after 2021. The bill would maintain current deductible through 2025.   

Business interest.   For tax years beginning before 2018, business interest (such as is paid on loans for farmland, machinery, buildings, operating lines, etc.) was fully deductible.  For tax years beginning after 2017 and before 2022, deductible business interest is limited to business income plus 30 percent of the taxpayer’s adjusted taxable income (ATI) for the tax year that is not less than zero.  The computation of ATI is determined without regard to any deduction allowable for depreciation, amortization, or depletion (i.e., earnings before interest, taxes, depreciation, and amortization (EBITDA)).

The bill specifies that, for taxable years beginning after December 31, 2021, and before January 1, 2024, ATI is computed with regard to deductions allowable for depreciation, amortization, or depletion (i.e., earnings before interest and taxes (EBIT)). However, ATI may be computed as EBITDA, if elected, for such taxable years. For taxable years beginning after December 31, 2023, and before January 1, 2026, ATI is computed as EBITDA. For taxable years beginning after December 31, 2025, ATI is computed as EBIT.

Note:  The limit is computed at the entity level with any disallowed amounts carried over to the succeeding year.

The otherwise existing rules would continue to apply.  That means that any disallowed amount is treated as paid or accrued in the succeeding tax year.  However, businesses entitled to use cash accounting (i.e., those with average annual gross receipts not exceeding $30 million for 2024) are not subject to the limitation.  Special rules apply to excess business interest of partnerships. In addition, a farming business may elect out of the limitation.  I.R.C. §163(j)(7)(C).

Bonus depreciation. The bill would retroactively extend I.R.C. §168 bonus depreciation for qualified property at 100 percent for property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft) and for specified plants planted or grafted after Dec. 31, 2022, and before Jan. 1, 2026.   Under current law, bonus depreciation was capped at 80 percent for 2023 and is 60 percent for 2024. 

Note:  The retroactive nature of this provision could cause numerous issues.  Many farm assets are 20-year or less MACRS property and have uniquely benefitted from bonus depreciation.  This is particularly true because the personal property trade provisions of the TCJA can cause large machinery purchases that exceed the I.R.C. §179 threshold which then causes taxpayers to utilize bonus depreciation.   

Sec. 179 expensing. The bill would also increase the I.R.C. §179 maximum deductible amount to $1.29 million for 2024 (up from $1.22 million), reduced by the amount by which the cost of the qualifying property exceeds $3.22 million (up from $3.05 million). Those amounts would be adjusted for inflation after 2024.

Other provisions.  The bill also includes an increase in the threshold for information reporting on Forms 1099-NEC, Nonemployee Compensation, and 1099-MISC from $600 to $1,000, effective for payments made after 2023. 

Conclusion

Will the bill pass the Senate?  Probably.  But that won’t likely occur before March 1.  Of course, that’s the date that many farmers use for filing returns.  As a result, for those that have already made decisions concerning depreciation, the CTC, and, perhaps, the deductibility of interest, amended returns will need to be filed.  Will IRS waive the penalties if farm returns (for those that didn’t pay estimated tax) are filed after March 1?  That may not be known until very late in February.  This all increases the chance for errors on returns.  In addition, IRS forms and tax preparation software will need to be revised which will create anxiety due to pending deadlines.  Retroactive tax legislation is rarely a good idea from a return preparation standpoint.

February 19, 2024 in Income Tax | Permalink | Comments (0)

Sunday, February 11, 2024

The Big Issues for 2024

Introduction

What are likely to be the most prominent issues in agricultural law and tax in 2024?  I have just finished looking back at 2023 as to what I viewed as the top issues of 2023, so it’s time to take a look forward to what might be the key issues in law and tax that will impact ag producers and the sector as a whole. 

Looking ahead at what might be the biggest issues in ag law and tax in 2024 – it’s the topic of today’s post.

Important “Takings” Case at the Supreme Court

DeVillier v. Texas, 63 F.4th 416 (5th Cir. 2023)

What are likely to be the big issues in ag law and tax in 2024?  One involves a case currently at the U.S. Supreme Court with the matter concerning the government’s taking of private property and the requirement under the Fifth Amendment that the government pay for what it takes.  The case involves a Texas farmer and was argued last month.

The family involved in a case has farmed the same land for a century.  There was no problem with flooding until the State renovated a highway and changed the surface water drainage.  In essence, the renovation turned the highway into a dam and when tropical storms occurred, the water no longer drained into the Gulf of Mexico.  Instead, the farm was left flooded for days, destroying crops and killing cattle.  In essence, the farm had been turned into a retention pond. 

The farmer sued the State to get paid for the taking.  Once the case got to federal court, the appellate court dismissed it, saying he couldn’t sue under the Fifth Amendment – only State officials can because Congress hadn’t passed a law saying a private citizen could sue the state.  But the appellate court’s opinion is out-of-step with other court opinions on the issue.  The Fifth Amendment contains a remedy when the government takes your property – you get paid for it. The Constitution matters.

The outcome will be an important one for agriculture. 

Taxing Wealth and the U.S. Supreme Court

Moore v. United States, 36 F.4th 930 (9th Cir. 2022)

This year the U.S. Supreme Court will decide a case on whether the Congress can tax a person’s wealth without a tax realization event such as a sale.  It’s a huge issue for agriculture. 

A case presently before the U.S. Supreme Court involves the question of whether the Congress can tax wealth without a tax realization event.  The taxpayers in the case owned 11 percent of a corporation in India that is more than 50 percent controlled by U.S. persons.  It doesn’t pay dividends but reinvests its earnings into its business of making tools for sale to farmers.  Under the 2017 tax law in the U.S., the company was subjected to a tax that year on its undistributed earnings and profits from 1986 to 2017 which became the obligation of the taxpayers to the extent of their ownership.  They got a $15,000 tax bill from the IRS. 

They sued because they hadn’t sold any stock or done anything to trigger the tax.  They lost and the Supreme Court heard arguments in early December.  If the law is upheld it’s estimated it will bring in $340 billion in revenues.  And it would open the door for the Congress to tax your unrealized gains that could wipe out the stepped-up basis rule at death.  That would be a tough result for many farming operations.

USDA’s “Climate Smart Projects”

Another big issue in 2024 will likely involve the USDA’s attempts to manipulate producers’ behavior by providing taxpayer funding for what it calls “Climate-Smart Agriculture.”  Presently, USDA has poured about $3 billion tax dollars into getting farmers to enroll in projects such as those designed to reduce methane emissions and sequester carbon.  It’s termed the USDA’s “Partnership for Climate Smart Commodities Projects,” and flows from the SEC’s plans that were announced in 2022 to force all publicly traded companies to submit an Environmental, Social, Governance” (ESG) report.  Five months later the USDA’s project was announced.  It’s not just farmers that are on the take.  So far, $90 million has been paid to agricultural giant Archer Daniels Midland; $95 million to the Iowa Soybean Association; and $40 million dollars to Farm Journal.  27 universities have also received various amounts (all in the millions of dollars each). 

But with the funding comes a loss of freedom.  Just ask a Dutch, Polish, Irish, French, German or Sri Lankan farmer how such an agenda has worked for them.  The USDA’s expressed goal is to get farmers and ranchers to calculate greenhouse gas emissions.  In the USDA’s words, “implementation and monitoring of climate smart practices.”  Indeed, USDA has worked with Colorado State University to develop a “planner tool” to be able to measure conservation practices on farms. Pilot projects focused on reducing methane emissions, improving soil quality and carbon sequestration.  Once the emissions from a farm become measurable, they will be regulated.  With regulation comes a loss of freedom and a further loss of smaller farming and ranching operations that are least likely to be able to bear the compliance cost. 

Consumers will also be harmed.  A new study published by the Economic Research Center at the Buckeye Institute finds that, as a result of the USDA’s climate agenda, a typical family of four will have to spend an extra $1,300 annually for food.  This is on top of the double-digit inflation consumers have faced since 2021.  The study also explains that the USDA’s climate agenda will result in much higher costs for diesel, propane, fertilizer and other ag production inputs.  The authors of the study note that, “Federal policymakers are pursuing expensive climate-control and emissions policies that have largely failed in Europe.”  The study can be accessed here:  https://www.buckeyeinstitute.org/library/docLib/2024-02-07-Net-Zero-Climate-Control-Policies-Will-Fail-the-Farm-policy-report.pdf

In 2024, will questions arise concerning the premise underlying the USDA’s efforts?  Also expect further questions to be raised about the funding.  The Ag Secretary says he can use the CCC to fund the climate agenda for agriculture.  Some in Congress don’t agree. 

But one thing’s for sure, the current political climate surrounding agriculture is seeking greater restrictions on farming practices.  That will assuredly increase the cost of farming and make it more difficult for smaller operations to survive.

Farm Bill Developments

An issue on the radar in ag law and tax in 2024 will be the continued discussions about a new Farm Bill.  The 2018 Farm Bill is set to expire at the end of September.  Cost will be an issue.  The CBO projects that continuing the current Farm Bill for ten years would cost more than $1.4 trillion with 84 percent of that going into nutrition programs.  Given increasing budget deficits, the debt ceiling and budget battles, the cost of the Farm Bill will be a big discussion point in 2024. 

Crop reference prices will be on the table as will whether nutrition spending should be meshed with farm income and ag conservation.  Other key issues will likely involve the amount of crop insurance premium subsidies, the amount of acreage in the CRP and eligibility for SNAP benefits. 

All of this depends on the political process.  Possibly, the Congress will view the Farm Bill as a way to compromise on a bill critical to rural economies.  Or the opposite could occur, and agreements reached only when they absolutely must be.  If that happens, that will cause uncertainty for markets, consumers, ag retailers and producers in general.

The Farm Bill debate will be an issue to monitor throughout 2024.

SCOTUS on Chevron Deference

Relentless, Inc. v. United States Department of Commerce, 62 F.4th 621 (1st Cir. 2023)

Loper Bright Enterprises v. Raimondo, 45 F.4th 359 (D.C. Cir. 2022)

A big issue in the world of ag law and tax in 2024 will involve the issue of government administrative agency deference. The U.S. Supreme Court is considering two cases involving the issue of how much deference should be given administrative agency rules such as those of the USDA or the EPA, for example. 

The two cases involve whether the National Marine Fisheries Service can require the herring industry to bear the costs of observers on fishing boats who monitor conservation and management practices.  The lower courts simply deferred to the determination of the fishery service that the industry should pay the costs.  That’s the typical outcome – you lose a dispute with the USDA, for example, and once you get to court the court simply defers to the agency unless the agency was completely out of bounds with its interpretation of the law.  If the agency’s interpretation was reasonable, the agency wins.  That’s the standard the Court established in 1984 in its Chevron decision. 

In 2022, the Supreme Court limited the deferential standard (it completely ignored Chevron in another 2022 case) when a question of national economic policy is involved, but now the court has an opportunity to lower the deferential standard on a broader scope.  If it does, farmers and ranchers may have better luck in disputes with government agencies and be able to more frequently overcome the presumption that the government is almost always right when Congress hasn’t written a clear statute.

Court Vacates Dicamba Registrations

Center for Biological Diversity v. United States Environmental Protection Agency, No. CV-20-00555-TUC-DCB, 2024 U.S. Dist. LEXIS 20307 (D. Ariz. Feb. 6, 2024)

Recently, a federal court vacated the registrations of three Dicamba products that EPA had approved for over-the-top applications.  The decision comes at a time when many soybean and cotton farmers have already purchased seed and chemicals and will soon be planting the 2024 crop. 

The court said the EPA didn’t follow the notice and comment provisions of the Federal Insecticide, Fungicide, Rodenticide Act (FIFRA) when it issued the registrations and also violated the Administrative Procedure Act (APA) (and the Endangered Species Act) by not allowing public input on whether over-the-top Dicamba has unreasonable adverse effects on the environment. 

In 2020 a federal appellate court vacated the registrations finding that the EPA failed to assess risks and costs for non-users of over-the-top Dicamba.  National Family Farm Coalition v. United States Environmental Protection Agency, 960 F.3d 1120 (9th Cir. 2020).  The EPA made amendments in 2022 and 2023 and approved new uses which the court has now said were approved improperly.

The ruling cancels any benefits of planting Dicamba seeds, and there may not be enough supply of other traits to replace the Dicamba market share.  If farmers are forced to plant Dicamba trait soybeans or cotton without the correct chemical to utilize the gene, they will likely use alternatives that will, in turn, magnify the known issues of the Dicamba chemical problems.   

Comment:  While the timing of the court’s decision is awful, the result is good overall in that it holds the “feet” of the EPA to the “fire” of the administrative process.  It also raises the question of whether the EPA deliberately violated the public notice and comment procedures that are clearly established in the law.  It’s difficult to believe that the EPA lawyers, particularly after losing in the Ninth Circuit on virtually the same issue in 2020, didn’t know that failing to follow the procedural rules for approving the registrations would lead to the registrations being invalidated. 

Perhaps the judge in the case will stay the ruling until the next crop year to reduce the potential for even more harm from a herbicide that should never have been allowed to be used. 

Certainly, this issue will be one that stays on the “front burner” for some time. 

Conclusion

That’s what I see as being the biggest issues in law and tax facing agriculture in 2024.  Only time will tell, but I suspect some of these will end up on my 2024 “Top Ten” list next January.

February 11, 2024 in Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, February 2, 2024

Top Ten Developments in Agricultural Law and Taxation in 2023 – (Part Seven): No. 1 - SCOTUS and the Definition of a “Water of the United States”

Overview

Today’s article is the seventh and final in a series concerning the Top Ten ag law and tax developments of 2023.  To recap, here’s the list of the top developments so far:

  • 10 - Court orders removal of wind farm.
  • 9 – Reporting Rules for Foreign Bank Accounts
  • 8 – New Business Information Reporting Requirements
  • 7 – “Renewable” Fuel Tax Scam
  • 6 – Limited Partners and Self-Employment Tax
  • 5 – COE Mismanagement of Missouri River Water Levels
  • 4 – The Employee Retention Credit
  • 3 – California’s Proposition 12 and the Dormant Commerce Clause
  • 2 – Foreign Ownership of Agricultural Land

That brings me to what I view as the most important development in ag law and tax in 2023. It’s an issue that has bedeviled agriculture, the Congress the courts and certain administrative agencies for decades – the definition of “Waters of the United States.”  In 2023, the U.S. Supreme Court decided a case involving the definition and, perhaps, narrowed the scope of the federal government’s control of land use under the Clean Water Act (CWA) wetland provisions.   The Court’s decision restores the original understanding of the wetland rules contained in the 1972 CWA amendments, and essentially restores the Trump-era National Water Protection Rule (NWPR).  The Court’s decision in Sackett v. Environmental Protection Agency is an important one for agricultural producers and landowners in general. 

Background

Sackett v. Environmental Protection Agency, 598 U.S. 651 (2023)

Background 

The scope of the federal government’s regulatory authority over wet areas on private land, streams and rivers under the Clean Water Act (CWA) has been controversial for more than 40 years.  As part of its interstate commerce power, the Congress has long regulated the navigable waters of the United States.  The improvement of navigable waters is the domain of the U.S. Army Corps of Engineers (COE) pursuant to the Rivers and Harbors Act of 1890 (and an 1899 amendment banning private deposits of refuse into navigable waters without a permit).  In 1972, under the CWA Amendments of that year, used the concept of “navigable waters” to address water pollution.  By attaching federal jurisdiction (vested in the Environmental Protection Agency (EPA)) over water pollution to the concept of navigation, that gave the federal government control upstream to cover not only waters that are navigable, but waters that can impact waters that are navigable.  This meant that the concept of pollution was integrated with that of navigation into a single definition that barred the discharge of a “pollutant” (which includes cellar dust) into the navigable waters of the United States.  The concept of preserving wetlands was not in mind when the Congress wrote the definition of “a discharge into a navigable water.”  Thus, the parameters of the definition became the task of the EPA and the COE.  Originally, those parameters were narrow in scope.  The COE regulatory position was that a discharge permit was require only if a discharge was into waters that were truly navigable, and that didn’t include wetlands as well as shallow or isolated wetlands.   

However, environmental activists sued, and many court opinions have been filed attempting to define the scope of the government’s jurisdiction. Ultimately, the courts sided with the environmentalists and the COE and EPA changed their rules to give themselves jurisdiction over streams, mud flats, prairie potholes, or ponds, “the use, degradation, or destruction of which could affect interstate commerce.”  The regulatory reach became so broad that in 1985 the EPA’s general counsel approved a regulatory guidance letter stating that a migrating bird flying across state lines that contemplated landing and did land in an isolated wetland was enough to confer jurisdiction!  While that interpretation was eventually negated by the courts, the matter led to several high-profile criminal cases leading to incarceration of individuals for polluting navigable waters as a result of depositing dirt on dry ground.

On two occasions, the U.S. Supreme Court attempted to clarify the 1986 regulatory definition of a WOTUS, but in the process of rejecting the regulatory definitions of a WOTUS developed by the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE), the Court didn’t provide clear direction for the lower courts.  See Solid Waste Agency of Northern Cook County v. United States Army Corps of Engineers, 531 U.S. 159 (2001); Rapanos v. United States, 547 U.S. 175 (2006).  The lower courts have also had immense difficulties in applying the standards set forth by the U.S. Supreme Court. 

The “Clean Water Rule” 

The Obama Administration attempted take advantage of the lack of clear guidance on the scope of federally jurisdictional wetland by issuing an expansive WOTUS rule.  The EPA/COE regulation was deeply opposed by the farming/ranching and rural landowning communities and triggered many legal challenges.   The courts were, in general, highly critical of the regulation, invalidating it in 28 states by 2019. The CWR became a primary target of the Trump Administration.

The “NWPR Rule” 

The Trump Administration essentially rescinded the Obama-era rule and replaced it with its own rule – the “Navigable Waters Protection Rule” (NWPR). 85 Fed. Reg. 22, 250 (Apr. 21, 2020).  The NWPR redefined the Obama-era WOTUS rule to include only: “traditional navigable waters; perennial and intermittent tributaries that contribute surface water flow to such waters; certain lakes, ponds, and impoundments of jurisdictional waters; and wetlands adjacent to other jurisdictional waters.  In short, the NWPR narrowed the definition of the statutory phrase “waters of the United States” to comport with Justice Scalia’s approach in Rapanos.  Thus, the NWPR excluded from CWA jurisdiction wetlands that have no “continuous surface connection” to jurisdictional waters.  The rule much more closely followed the Supreme Court’s guidance issued in 2001 and 2006 that did the Obama-era rule, but it was challenged by environmental groups.  Indeed, the NWPR was ultimately challenged in 15 cases filed in 11 federal district courts.  

Another Revised Rule 

On December 7, 2021, the EPA and the COE published a proposed rule redefining a WOTUS in accordance with the pre-2015 definition of the term. 86 FR 69372 (Dec. 7, 2021).  The proposed rule was finalized effective March 20, 2023, with the EPA clearly wanting to restore “significant nexus” via “adjacency” test for jurisdiction.   This represented a big change in the definition of “adjacency.”  It doesn’t mean simply “abutting.”  Instead, “adjacent” includes a “significant nexus” and a “significant nexus” can be established by “shallow hydrologic subsurface connections” to the “waters of the United States.  A “shallow subsurface connection,” the Final Rule states, may be found below the ordinary root zone (below 12 inches), where other wetland delineation factors may not be present.  Frankly, that means farm field drain tile.      

Note:  The “significant nexus” can be established via a connection to downstream waters by surface water, shallow subsurface water, and groundwater flows and through biological and chemical connections.  The Final Rule states that adjacency can be supported by a “pipe, non-jurisdictional ditch… or some other factors that connects the wetland directly to the jurisdictional water.”  This appears to be the basis for overturning the NWPR.  Consequently, the prairie pothole region is directly in the “bullseye” of the Final Rule.

Prior converted cropland.  The agencies say the final rule increases “clarity” on which waters are not jurisdictional – including prior converted cropland.  This doesn’t make much sense.  Supposedly, the agencies are “clarifying” that prior converted cropland, (which is not a water), is not a water, but it somehow could be a water if the agencies had not clarified it?  In addition, the burden is placed on the landowner to prove that prior converted cropland is actually prior converted cropland and therefore not a water.

Ditches and drainage devices.  The Final Rule is vague enough to give the government regulatory authority over non-navigable ponds, ditches, and potholes.

The Sackett Litigation

During 2021 another significant case with WOTUS-related issues continued to wind its way through the court system.  In Sackett v. Environmental Protection Agency, 8 F.4th 1075 (9th Cir. 2021), the plaintiffs bought a .63-acre lot in 2004 on which they intended to build a home. The lot is near numerous wetlands the water from which flows from a tributary to a creek, and eventually runs into a lake approximately 100 yards from the lot. The lake is 19 miles long and is a WOTUS subject to the CWA which bars the discharge of a pollutant, including rocks and sand into it. The plaintiffs began construction of their home, and the EPA issued a compliance order notifying the plaintiffs that their lot contained wetlands due to adjacency to the lake and that continuing to backfill sand and gravel on the lot would trigger penalties of $40,000 per day. The plaintiff sued and the EPA claimed that its administrative orders weren’t subject to judicial review. Ultimately the U.S. Supreme Court unanimously rejected the EPA’s argument and remanded the case to the trial court for further proceedings. The EPA withdrew the initial compliance order and issued an amended compliance order which the trial court held was not arbitrary or capricious. The plaintiffs appealed and the EPA declined to enforce the order, withdrew it and moved to dismiss the case. However, the EPA still maintained the lot was a jurisdictional wetland subject to the CWA and reserved the right to bring enforcement actions in the future. In 2019, the plaintiffs resisted the EPA’s motion and sought a ruling on the motion to bring finality to the matter. The EPA claimed that the case was moot, but the appellate court disagreed, noting that the withdrawal of the compliance order did not give the plaintiffs final and full relief. On the merits, the appellate court concluded that the lot contained wetlands 30 feet from the tributary, and that under the “significant nexus” test of Rapanos v. United States, 547 U.S. 715 (2006), the lot was a regulable wetland under the CWA as being adjacent to a navigable water of the United States (the lake).  On September 22, 2021, the plaintiffs filed a petition with the U.S. Supreme court asking the Court to review the case.  The Supreme Court agreed to hear the case and oral argument occurred in early October of 2022. 

Supreme Court opinion.  On May 25, 2023, the Court unanimously agreed that the Sackett’s lot was not a wetland subject to the CWA.  All of the Justices rejected the “significant nexus” test when determining EPA/COE regulatory authority over wetlands.  The majority (Alito, Roberts, Thomas, Gorsuch and Barrett), then paired back the expansive EPA regulatory authority under the CWA.  They replaced the “significant nexus” test with a new standard – the Scalia standard set forth in the plurality opinion of Rapanos in 2006.  They said that the term “waters” in the statute refers only to geological features that are “streams, oceans, rivers and lakes” and to adjacent wetlands that are indistinguishable from those bodies of water due to a continuous surface connection.  For the EPA/Corps to successfully assert jurisdiction, it must: 1) establish that the adjacent water body is a relatively permanent body of water connected to interstate navigable water; and 2) that the wet area has a continuous surface connection with that water making it difficult to determine where the water ends, and the wetland begins.  Justices Kavanaugh, Sotomayor, Kagan and Jackson disagreed on the basis that the majority's approach was too narrow. 

As for the 2023 WOTUS rule, the Supreme Court said it was "inconsistent with the text and structure of the CWA" and that EPA has "no statutory basis to impose a significant nexus test."  A redo is in order.  With the opinion, the Court restored the original position of the EPA in the 1970s – the CWA only applies to waters traditionally recognized as navigable – those subject to the tide; used for transportation, and natural river meanders.  Isolated wetlands were excluded where fill would not affect boats. 

What about agency deference?  Interestingly, there wasn’t a single mention of deference by any of the Justices (other than Justice Kavanaugh’s retort about the agencies being consistent about “adjacency”).  The Court in essence said that the scope of an agency’s authority is not the type of question that courts should defer to the agencies.  This sets the Court up for another case (Loper, Bright) that is coming next term on the issue of Chevron deference.

Water quality.  The Court’s decision will not likely have any discernable effect on water quality.  While the decision does set forth a narrower interpretation of “the waters of the United States” for purposes of the entire CWA, the matter of pollution control is a separate issue.  As noted above, navigation and pollution control are two separate issues which the Court’s opinion more clearly distinguishes.  Any negative impact on water quality is minimized (if not negated) because of the Supreme Court’s decision in a case from Hawaii in 2020.  In that case, the Court held that a “pollutant” that reaches navigable waters after traveling through groundwater requires a federal permit if the discharge into the navigable water is the “functional equivalent’ of a direct discharge from the actual point source into navigable waters.  Hawai’i Wildlife Fund, et al. v. County of Maui, 886 F.3d 737 (2018), vac’d and rem’d. by County of Maui v. Hawaii Wildlife Fund, et al., 140 S. Ct. 1462 (2020).  That is a broad interpretation of “discharge of pollutants” creating the distinct possibility that a contamination of federal jurisdictional waters could result from activities on land that is not subject to the CWA under the Sackett Court’s definition of a “wetland.” 

In addition, the Court’s decision in Sackett applies only to the federal CWA.  It has no application to existing state and local regulations.  Indeed, many of those rules were already in place before the CWA amendments of 1972, and many of them are significant. 

Implications for agriculture.  The Sackett opinion has significant ramifications for agriculture.  This really solidifies the National Water Protection Rule of 2019 as the correct approach.  That rule limited federal jurisdiction to traditional navigable waters and their tributaries.  Now streams and ditches and private waters that don’t have a continuous surface connection to navigable waters won’t be subject to the CWA.  It will make it more difficult for the EPA or COE to assert regulatory control over private land under the CWA.  This eliminates federal control under the CWA over private ponds, as well as ditches and streams where there is no continues flow into a WOTUS. 

Also, farmers that are in the farm programs are subject to the Swampbuster rules.  A “wetland” is defined differently under Swampbuster.  There are two separate definitions.  The one at issue in Sackett involves "waters of the United States" contained in 33 U.S.C. Sec. 1362(7) which a "navigable water" must be.  To have jurisdiction over those waters the Court is saying that the government must 1) establish that an adjacent water body is a relatively permanent body of water connected to interstate navigable water; and 2) such area has a continuous surface connection with that water making it difficult to determine where the water ends, and the wetland begins.  

Swampbuster involves the definition of a wetland contained in 16 U.S.C. 3801(27).  So, there are two different definitions of a "wetland" - one for CWA purposes - which ties into the "navigable waters of the United States" definition, and the other one for Swampbuster.  This all means that a farmer may not have a wetland that the EPA/COE can regulate under the CWA, but might have a wetland that can’t be farmed without losing farm program benefits. 

Conclusion

The Sackett decision is a victory for property rights without any likely discernable impact on water quality.  Ironically, if not for the EPA’s belligerence in insisting on its position against the Sacketts and forcing the couple into a lawsuit, the “significant nexus” test would remain. That test has now been unanimously rejected.  For once agriculture says, “thanks, EPA”!

February 2, 2024 in Environmental Law | Permalink | Comments (0)