Monday, January 27, 2020

Ag Law and Tax in the Courts – Bankruptcy Debt Discharge; Aerial Application of Chemicals; Start-Up Expenses and Lying as Protected Speech


A couple of weeks ago I did a post on some recent developments in the courts involving ag law and ag tax.  Since that time, there have been additional important court developments.  Before getting deep into tax season, it may be a good idea to provide a summary of a few of these cases.

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

Bankruptcy Discharge and Fraud

In re Kurtz, 604 B.R. 349 (Bankr. D. Neb. 2019)

A major feature of bankruptcy in the United States is the ability to discharge at least some debt.  This makes possible the “fresh start” for debtors. But, some debtors and debts are not eligible for discharge.  Of the several categories of debts that aren’t eligible for discharge, one category is reserved for debts associated with the debtor’s fraudulent conduct.  In this case, the creditor was a landlord and the debtor was the farm tenant who put up hay and other crops on the landlord’s land. The parties did not have a written lease agreement, but the landlord assumed the lease was a 50-50 crop share agreement where the parties would split the expenses and the sale proceeds equally. The record was unclear as to what the tenant understood the relationship to be, but he did make statements to others that it was a cash rent lease. The tenant did not pay the landlord after the first two cuttings of hay because he incurred expenses while cutting. After the third cutting was bailed the landlord contacted the tenant about payment. The tenant told the landlord that he could have the proceeds from the third cutting of hay and that the tenant was finished farming for the landlord. The tenant paid a third party to stack the hay. When the landlord attempted to sell the hay he discovered that the tenant had already given the hay to a third party to settle a debt. Both parties submitted expenses related to the hay crop that year.

The landlord filed a complaint in the tenant’s bankruptcy case alleging fraud and misrepresentation seeking that the debt to the landlord not be discharged. The bankruptcy court agreed, determining that the landlord proved that the tenant’s obligation of $5,916.50 was exempt from discharge because of the debtor’s false representation. The bankruptcy court determined that the full debt owed to the landlord was $22,292.84 based on the oral lease, but that the only part of that amount derived from fraud was the amount related to the third cutting of hay - $5,370.50 plus $546 for stacking. The balance of the unpaid debt arose from a general misunderstanding that wasn’t settled before the debtor put up the first two hay cuttings. The only blatant dishonesty, the bankruptcy court determined, concerned the third cutting.  

Aerial Application of Ag Chemicals Not Inherently Dangerous

Keller Farms, Inc. v. Stewart, No. 1:16 CV 265 ACL, 2018 U.S. Dist. LEXIS 210209 (E.D. Mo. Dec. 13, 2018), aff’d. sub. nom., Keller Farms, Inc. v. McGarity Flying Service, LLC, No. 18-3755, 2019 U.S. App. LEXIS 36664 (8th Cir. Dec. 11, 2019)

This case involves a dispute involving alleged damage to the plaintiffs’ trees caused by chemicals that allegedly drifted during aerial application. The plaintiffs attempted to hold liable both the aerial applicator and the landowner that hired the applicator. The plaintiffs claimed the landowner was vicariously liable (liable because of the relationship with the applicator) for the applicator’s actions because aerial spraying of burndown chemicals is an "inherently dangerous activity." The trial court granted the defendants’ motion for Judgment as a Matter of Law on the plaintiff's trespass claim, but the remaining issues were left for the jury to resolve. The jury returned a verdict in favor of the defendants on the negligence and negligence per se claims. The plaintiffs filed a motion for a new trial, arguing the verdict was against the weight of the evidence; that the trial court erred in excluding evidence; and that the trial court erred in granting the defendants’ Motion for Judgment as a Matter of Law. The trial court, however, denied the plaintiff’s motion for a new trial.

On appeal, the appellate court affirmed. The appellate court determined that the jury’s verdict was not against the weight of the evidence, and that the aerial application of herbicides was commonplace and not inherently dangerous. In addition, the appellate court noted that the defendants’ evidence was that the herbicides did not actually drift onto the plaintiffs’ property and that the applicator complied with all label requirements and sprayed during optimal conditions. The appellate court also determined that the trial court had ruled properly on evidentiary matters and that the plaintiff had not proven the alleged monetary damages to the trees properly. The appellate court also upheld the trial court’s denial of the plaintiff’s motion for a new trial.

The Line Between Nondeductible Start-Up Expenses and Deductible Business Expenses

Primus v. Comr., T.C. Sum. Op. 2020-2

The petitioner lived in New York and bought a property in Quebec containing 200 maple trees with a significant number of them being mature, maple syrup-producing trees. The tract contained other types of trees and pasture ground and hay fields and a small amount of ground suitable for growing crops. There were also various improvements on the tract. Before collecting sap and producing syrup, the petitioner thinned underbrush and later installed a pipeline to collect sap. Sap production began in 2017. When the petitioner bought the property in 2012, the cleared the areas of the tract where he planned to plant blueberry bushes. He ordered 2,000 blueberry bushes in 2014 and planted them in 2015. He reported a substantial amount of farming-related expenses in 2012 and 2013, with most of the expenses attributable to costs of repairs to improvements on the property. The petitioner deducted expenses attributable to preparatory costs for the production of selling maple syrup and blueberries as trade or business expenses under I.R.C. §162 (or as I.R.C. §212 expenses for income-producing property).

The IRS denied the deductions, asserting that they were nondeductible start-up expenses under I.R.C. §195 on the basis that the petitioner had not yet begun the business of producing maple syrup and blueberries. The Tax Court upheld the IRS position. The Tax Court noted that expenses are not deductible as trade or business expenses until the business is actually functioning and performing the activities for which it was organized. Here, the petitioner had not actually started selling blueberries or sap in either 2012 or 2013.  That meant that the expenses incurred in 2012 and 2013 were incurred to prepare the farm to produce sap and plant blueberries, and were nondeductible startup expenses. The thinning activities, while a generally acceptable industry practice, did not establish that the business had progressed beyond the startup phase. In addition, during the years at issue, the petitioner had not collected sap, installed any infrastructure needed to convert sap into syrup, or bought any blueberry bushes. 

Lying With Purpose of Harming Livestock Facility is Protected Speech

Animal Legal Defense Fund v. Schmidt, No. 18-2657-KHV, 2020 U.S. Dist. LEXIS 10202 (D. Kan. Jan. 22, 2020)

The plaintiffs are a consortium of activist groups regularly conduct undercover investigations of livestock production facilities. Some of the plaintiffs gain access to farms through employment without disclosing the real purpose for which they seek employment (and lie about their ill motives if asked) and wear body cameras while working. For those hired into managerial and/or supervisory positions, they gain the ability to close off parts of the facility to avoid detection when filming and videoing. The film and photos obtained are circulated through the media and with the intent of encouraging public officials, including law enforcement, to take action against the facilities. The employee making the clandestine video or taking pictures, is on notice that the facility owner forbids such conduct via posted notices at the facility. The other plaintiffs utilize the data collected to cast the facilities in a negative public light, but do no “investigation.”

In 1990, Kansas enacted the Kansas Farm Animal and Field Crop and Research Facilities Protect Act (Act). K.S.A. §§ 47-1825 et seq.  The Act makes it a crime to commit certain acts without the facility owner’s consent where the plaintiff commits the act with the intent to damage an animal facility. Included among the prohibited acts are damaging or destroying an animal facility or an animal or other property at an animal facility; exercising control over an animal facility, an animal from an animal facility or animal facility property with the intent to deprive the owner of it; entering an animal facility that is not open to the public to take photographs or recordings; and remaining at an animal facility against the owner's wishes. K.S.A. § 47-1827(a)-(d). In addition, K.S.A. § 47-1828 provides a private right of action for "[a]ny person who has been damaged by reason of a violation of K.S.A. § 47-1827 against the person who caused the damage." For purposes of the Act, a facility owner’s consent is not effective if it is induced by force, fraud, deception duress or threat. K.S.A. § 47-1826(e). The plaintiff challenged the constitutionality of the Act, and filed a motion for summary judgment. The defendant also motioned for summary judgment on the basis that the plaintiffs lacked standing or, in the alternative, the Act barred trespass rather than speech.

On the standing issue, the trial court held that the plaintiffs lacked standing to challenge the portions of the Act governing physical damage to an animal facility (for lack of expressed intent to cause harm) and the private right of action provision, However, the trial court determined that the plaintiffs did have standing to challenge the exercise of control provision, entering a facility to take photographs, etc., and remaining at a facility against the owner’s wishes to take pictures, etc. The plaintiffs that did no investigations but received the information from the investigations also were deemed to have standing on the same grounds. On the merits, the trial court determined that the Act regulates speech by limiting what the plaintiffs could say and by barring pictures/videos. The trial court determined that the provisions of the Act at issue were content-based and restricted speech based on viewpoint – barring only that speech that would harm an animal facility. The trial court determined that barring lying is only constitutionally protected when it is associated with a legally recognizable harm, and the Act is unconstitutional to the extent it bars false speech intended to damage livestock facilities. Because the provisions of the Act at issue restrict content-based speech, its constitutionality is measured under a strict scrutiny standard. As such, a compelling state interest in protecting legally recognizable rights must exist. The trial court concluded that even if privacy and property rights involved a compelling state interest, the Act must be narrowly tailored to protect those rights. By focusing only on those intending to harm owners of a livestock facility, the Act did not bar all violations of property and privacy rights. The trial court also determined that the Governor was a proper defendant. 

The status of the litigation presently rests with the Kansas Attorney General and the Governor to determine the next step(s) to be taken.


There is never a dull moment in agricultural law and taxation.  I will provide more updates like this is in future posts.

January 27, 2020 in Bankruptcy, Civil Liabilities, Criminal Liabilities, Income Tax | Permalink | Comments (0)

Thursday, January 23, 2020

Substantiation – The Key To Tax Deductions


The IRS has specific rules for claiming deductions on a tax return.  Those rules differ depending on the type of deduction claimed and the Code section at issue.  In all circumstances, substantiation of the claimed deduction is critical.  How that substantiation must occur is what differs depending on the type of deduction being claimed.  Is it a business expense?  Is it a charitable deduction?  Is some other type unique expense for which a deduction can be legitimately claimed?  It’s important to know the rules that apply.

Substantiating deductible expenses – it’s the topic of today’s post.

Charitable Deductions

Regulations - TD 9836. Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions (Jul. 27, 2018).  In 2008, the Treasury issued proposed regulations governing the tax reporting of charitable contributions.  In 2018, the Treasury finalized those regulations with only slight modification.  Under the final regulations, a donor must maintain records of charitable contributions. For cash contributions, the donor must retain a canceled check, or other reliable written record showing the donee’s name, date of contribution and amount. While some charitable organizations provide a blank form for donors to complete, the Preamble to the final regulations specify that a blank form is insufficient to satisfy record keeping requirements for tax purposes to substantiate the donation. For contributions over $250, the donee organization must provide a contemporaneous written acknowledgment of the gift. I.R.C. §170(f)(8). In addition, the final regulations state that a donor may be required to complete and submit a Form 8283, depending on the type of gift and the amount. The Preamble to the final regulations provides that the Form 8283 itself does not meet the contemporaneous written acknowledgment requirement. Rather, a separate written acknowledgment is required.

The final regulations note that appraisals are required for non-money contributions over $5,000, and state that an appraiser can meet the requisite education and experience requirements by successfully completing professional or college-level coursework. But mere attendance is not sufficient, and evidence of successful completion is required. For contributions exceeding $500,000 in value, the appraisal must be attached to the donor’s income tax return. Under the final regulations, the appraisal is not attached just to the return of the contribution year but must also be attached to any return involving a carryover year (due to the limitation on the charitable contribution deduction). 

Conservation easement donations.  The rules for claiming a charitable deduction for a contributed permanent conservation easement to a qualified land trust are also particular.  I have written about those requirements in previous posts, and there continue to be cases that point out just how particular those rules are. 

Recent cases.

 Loube v. Comr., T.C. Memo. 2020-3In this case a married couple was denied a charitable deduction for gifts of property.  The couple bought a house on .38 acres with the purpose of demolishing the house and building a new residence on the tract. To further that purpose, they entered into an agreement with a charity to perform the deconstruction of the existing house and donate personal property in the home to the charity. An appraiser determined that the cost to reproduce the house would be $674,000. After subtracting labor costs and other fees, as well as profit for a construction company and the cost of new material cost and depreciation, the resulting fair market value for the deconstructed house was determined to be $297,000.

On their 2013 return, the couple claimed a $297,000 non-cash charitable contribution deduction for the donation of the improvements to the charity. On the appraiser summary attached to the return, the petitioners identified the donated property as “other” and noted that the “house improvements” were in “excellent” condition. However, the appraisal form did not indicate the date of the donation or the petitioners’ cost basis in the improvements. In addition, the appraiser did not sign the appraisal form.

The IRS denied the deduction on the basis that the appraisal did not appraise each donated item separately. The Tax Court upheld the IRS position and also noted that the petitioners did not strictly comply with Treas. Reg. §1.170A-13 which specifically required the petitioners to provide sufficient information to evaluate their reported contributions. The Tax Court held that basis was an important factor that needed evidentiary support. The Tax Court also noted that the petitioners failed to denote the contribution date or provide a reasonable cause explanation for their inability to provide basis information. 

TOT Property Holdings, LLC v. Comr., Docket No. 005600-17 (U.S. Tax Ct. Dec. 13, 2019).  The petitioner engaged in a syndicated easement transaction whereby it made a $6.9 million charitable contribution for an easement on 637 acres of a 652-acre parcel donated to a land conservancy. The IRS denied a charitable deduction due to the easement deed not satisfying the perpetuity requirement and imposed a 40 percent gross valuation misstatement and negligence penalties. The Tax Court agreed, determined that the actual value of the easement donation was less than 10 percent of what was originally reported on the petitioner’s return. In the process, the Tax Court gave more credibility to the approach of the appraiser for the IRS. 

Presley v. Comr., No. 18-90008, 2019 U.S. App. LEXIS 32018 (10th Cir. Oct. 25, 2019, aff’g., T.C. Memo. 2018-171. The petitioner claimed a charitable deduction in 2010 for over $107,000 attributable to land improvements to property that a charity owned. The improvements occurred over several years and were made by the petitioner’s LLC. The petitioner did not claim any charitable deductions in the years that the improvements were made. The IRS denied the deduction and the Tax Court agreed. The petitioner conceded that the did not own the improvements, and the Tax Court noted that the petitioner could not claim the deduction in 2010 because the improvements were paid for in years preceding 2010. In addition, the Tax Court noted that even if the improvements had been paid for in 2010, the amounts that the LLC paid for were not directly connected with or solely attributable to the rendering of services by the LLC to the charity as Treas. Reg. §1.170A-1(g) requires. In addition, the Tax Court determined that the petitioner did not satisfy the substantiation requirements and did not include Form 8283 and did not have an appraisal of the improvements made as required when a charitable deduction exceeding $5,000 is claimed. 

Business-related deductions. 

Gebman v. Comr., T.C. Memo. 2020-1.  In this case, the petitioners (a married couple) claimed a large net operating loss (NOL), but failed to file with the return a concise statement detailing the amount of the NOL claimed and all material facts relating to the NOL including a schedule showing how the NOL deduction was computed. The IRS rejected the NOL deduction and the Tax Court agreed. The Tax Court noted that the petitioners bore the burden to substantiate the claimed deduction and that the petitioners had provided no detailed information supporting the NOL. The Tax Court also noted that the petitioners bore the burden of proof to establish both the existence of the NOLs for prior years and the NOL amounts that can be carried forward to the years at issue. The petitioners did not satisfy these requirements either. The only “proof” the petitioners had was submitted copies of tax returns on which they reported the losses. The Tax Court declined to hold that submitted copies of returns was sufficient substantiation. 

Taylor II v. Comr., T.C. Memo. 2019-102.  The petitioner claimed a casualty loss on the 2008 return (before the rules deducting casualty losses changed to what they are now) for damage from a hurricane. An insurance company paid over $2.3 million in claims, and the claimed deduction was $888,345. The petitioner reported a basis in the property of $6.5 million, insurance reimbursement of $2.3 million and a pre-casualty fair market value of $15,442,059 and a post-casualty fair market value of $12,250,000. The pre-casualty FMV was based on the 2009 listing price of the property reduced for time spent on the market. No testimony was provided as to post-casualty FMV. The Tax Court (Judge Paris) noted that to compute a casualty loss deduction, the pre and post-FMV values of the impacted property must be computed and the property basis must be established. The Tax Court noted that decline in value can alternatively be established via the regulations under I.R.C. §165 if the taxpayer has repaired the property damage resulting from the casualty, the taxpayer may use the cost of repairs to prove the loss of value to the property from the casualty. In that instance, the taxpayer must show that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty. The Tax Court noted that the record did not establish that the valuations were based on competent appraisals, and didn’t indicate how the petitioner’s CPAs determined the pre or post-casualty FMV of the property, even though the pre-casualty FMV was consistent with the value reported to the insurance company. The Tax Court concluded that the appraisals were not reliable measures of the taxpayer's casualty loss and didn’t rely on them. In addition, the taxpayer received insurance payments that exceed the cost of repairs. That meant that a casualty loss deduction couldn’t be claimed based on the regulations. The Tax Court disallowed any casualty loss deduction. 

Draper v. Comr., T.C. Memo. 2019-95. The petitioner operated a property development business through his C corporation, but failed to properly document the business purpose of some of the claimed expenses. The Tax Court, agreeing with the IRS, denied business expense deductions for numerous meals, entertainment and travel expenses. The Tax Court allowed current deductions for marketing and promotional expenses , but noted that some expenses involved the cost of bidding on a contract which were not currently deductible. In addition, the Tax Court determined that assets sold did not qualify for capital gain treatment, and that deductions claimed in one year that were recovered in another year (such as a refund of state income tax) had to be included in income in the received. 

Baca v. Comr., T.C. Memo. 2019-78.  The petitioner’s job required him to move and operate oil fracking equipment away from his home residence. He deducted the associated travel costs and the IRS disallowed the deductions. The Tax Court agreed with the IRS because the petitioner’s tax home had shifted due to the indefinite work position. The petitioner also owned multiple businesses for which deductions were claimed. The Tax Court also upheld the denial of the business-related deductions due to lack of documentation. Auto-related expenses were also denied due to a lack of a log or diary and the necessary detail for vehicle expense substantiation. Also disallowed was the petitioner’s expense method depreciation deduction for tools on the petitioner’s 2012 return because they were purchased and placed in service in 2011. The Tax Court also denied other expenses due to a lack of documentation or failure to show a business relationship to the expense including a deduction for contract labor because the petitioners could not show how much the worker was paid. 

Dasent v. Commissioner, T.C. Memo. 2018-202.  The petitioners, a married couple claimed various business expenses on Schedule C. They self-prepared their return for 2014, the year in issue. Their Schedule C reported no gross receipts and total expenses of $28,173. They also claimed unreimbursed employee expenses of $23,931 on Schedule A. The IRS denied the Schedule C and Schedule A deductions and also took the position that the petitioners failed to report $25,622 of IRA distributions (and the associated penalty for early withdrawal). The IRS also determined that the petitioners failed to report $123,168 of cancelled debt income. The IRS also imposed a penalty for underpayment of tax associated with the substantial understatement of tax. The Tax Court determined that the wife failed to provide sufficient evidence that she was engaged in a business with a profit motive. The Tax Court also concluded that the wife failed to substantiate any of the business expenses associated with the wife’s business and provided no means for the court to estimate those expenses under the Cohan rule. In addition, the court noted that the Cohan rule has no application to I.R.C. §274(d) expenses (e.g., travel and entertainment expenses, gifts and listed property which are subject to strict substantiation requirements). While the petitioners claimed that they should not be subject to the 10 percent penalty for early withdrawal from their IRA because the withdrawn funds were used to pay for their daughter’s college tuition, The Tax Court, however, upheld the penalty because the petitioners failed to establish that the withdrawn funds were actually used to pay the daughter’s tuition. The Tax Court also upheld the imposition of a 20 percent penalty for substantial understatement of tax. On that issue, the Tax Court noted that the petitioners were college-educated and used a tax software (TurboTax), that software was not the same as relying on professional tax advice. 

Hagos v. Comr., T.C. Memo. 2018-166.  The petitioner claimed deductions for uniforms, shirts, shoes, mileage and other expenses associated with his job as a driver for a ride sharing company. While the IRS allowed some deductions, many were disallowed due to lack of substantiation and the lack of supporting records. 

Wax v. Comr., T.C. Memo. 2018-63.  The petitioners, a married couple, claimed various deductions on behalf of their children as well as auto expenses and meal and entertainment expenses. However, the court held that they failed to meet the strict substantiation requirements of I.R.C. §274(d). They failed to show that the expenses for the children were bona fide or reasonable compensation relating to the value of the services provided. Expenses also failed to be separated between business-related and personal.


The cases are many and varied that point out just how important it is to properly substantiate deductions.  The substantiation rules differ depending on the type of deduction being claimed.  Good recordkeeping is essential and the failure to do so can make a return “low-hanging fruit” for the IRS to easily pluck. 

January 23, 2020 in Income Tax | Permalink | Comments (0)

Tuesday, January 21, 2020

Does the Penalty Relief for a “Small Partnership” Still Apply?


Every partnership (defined as a joint venture or any other unincorporated organization) that conducts a business is required to file a return for each tax year that reports the items of gross income and allowable deductions. I.R.C. §§761(a); 6031(a).  If a partnership return is not timely filed (including extensions) or is timely filed but is inadequate, a monthly penalty is triggered that equals $210 times the number of partners during any part of the tax year for each month (or fraction thereof) for which the failure continues.  This is for returns that are to be filed in 2021.  However, the penalty amount is capped at 12 months.  Such an entity is also subject to rules enacted under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.  These rules established unified procedures for the IRS examination of partnerships, rather than a separate examination of each partner.

An exception from the penalty for failing to file a partnership return could apply for many small business partnerships and farming operations.  But this relief is tied to a provision that is no longer in the Code as of January 1, 2018.  So, does the relief still apply when the law it was tied to is gone?  The IRS answered this question last week.

The “small partnership” exception from the penalty for late filing the partnership return – it’s the topic of today’s post.

Exception for Failure to File Partnership Return

The penalty for failure to file is assessed against the partnership.  While there is not a statutory exception to the penalty, it is not assessed if it can be shown that the failure to file was due to reasonable cause. I.R.C. §6689(a). The taxpayer bears the burden to show reasonable cause based on the facts and circumstances of each situation.  On the reasonable cause issue, the IRS, in Rev. Proc. 84-35, 1984-1 C.B. 509, established an exception from the penalty for failing to file a partnership return for a “small partnership.”  Under the Rev. Proc., an entity that satisfies the requirements to be a small partnership will be considered to meet the reasonable cause test and will not be subject to the penalty imposed by I.R.C. §6698 for the failure to file a complete or timely partnership return.  However, the Rev. Proc. noted that each partner of the small partnership must fully report their shares of the income, deductions and credits of the partnership on their timely filed income tax returns.

So, what is a small partnership?  Under Rev. Proc. 84-35 (and I.R.C. §6231(a)(1)(B)), a “small partnership” must satisfy six requirements:

  • The partnership must be a domestic partnership;
  • The partnership must have 10 or fewer partners;
  • All of the partners must be natural persons (other than a nonresident alien), an estate of a deceased partner, or C corporations;
  • Each partner’s share of each partnership item must be the same as the partner’s share of every other item;
  • All of the partners must have timely filed their income tax returns; and
  • All of the partners must establish that they reported their share of the income, deductions and credits of the partnership on their timely filed income tax returns if the IRS requests.      

The Actual Relief of the Small Partnership Exception

Typically, the small partnership exception is limited in usefulness to those situations where the partners are unaware of the partnership return filing requirement or are unaware that they have a partnership for tax purposes, and the IRS asserts the penalty for failing to file a partnership return.  In those situations, the partnership can use the exception to show reasonable cause for the failure to file a partnership return.  But, even if the exception is deemed to apply, the IRS can require that the individual partners prove that they have properly reported all tax items on their individual returns. 

In addition, if the small partnership exception applies, it does not mean that the small partnership is not a partnership for tax purposes.  It only means that the small partnership is not subject to the penalty for failure to file a partnership return and the TEFRA audit procedures.

Why does the “small partnership exception” only apply for TEFRA audit procedures and not the entire Internal Revenue Code?  It’s because the statutory definition of “small partnership” contained in I.R.C. §6231(a)(1)(B) applies only in the context of “this subchapter.”  “This subchapter” means Subchapter C of Chapter 63 of the I.R.C.  Chapter 63 is entitled, “Assessment.”  Thus, the exception for a small partnership only means that that IRS can determine the treatment of a partnership item at the partner level, rather than being required to determine the treatment at the partnership level.  The subchapter does not contain any exception from a filing requirement.  By contrast, the rules for the filing of a partnership return (a “partnership” is defined in I.R.C. §761, which is contained in Chapter 1) are found in Chapter 61, subchapter A – specifically I.R.C. §6031.  Because a “partnership” is defined in I.R.C. §761 for purposes of filing a return rather than under I.R.C. §6231, and the requirement to file is contained in I.R.C. §6031, the small partnership exception has no application for purposes of filing a partnership return.  Thus, Rev. Proc. 84-35 states that if specific criteria are satisfied, there is no penalty for failure to file a timely or complete partnership return.  There is no blanket exception from filing a partnership return.  A requirement to meet this exception includes the partner timely reporting the share of partnership income, deductions and credits on the partner’s tax return. Those amounts can’t be determined without the partnership computing them, using accounting methods determined by the partnership and perhaps the partnership making elections such as I.R.C. §179

The small partnership exception does not apply outside of TEFRA. Any suggestion otherwise is simply a misreading of the Internal Revenue Code.

Repeal by the Bipartisan Budget Act of 2015

The statutory definition of a “small partnership” contained in I.R.C. §6231(a)(1)(B) effective for tax years beginning on or after January 1, 2018.  The Bipartisan Budget Act of 2015 (BBA) repealed the TEFRA audit rules entirely and replaced it with a new system for auditing partnerships. 

So, that repeal wipes out the penalty relief that was tied to it, right?  Not so fast says the IRS.  In Program Manager Technical Advice 2020-01 (Nov. 19, 2019), the IRS noted that the Congress enacted the late-filing partnership return penalty of I.R.C. §6698 in 1978 (pre-TEFRA), and that it “apply automatically to a small partnership that meets certain criteria.”  The Conference Report accompanying the provision indicated an exception for a “small partnership” “so long as each partner fully reports his share of the income, deductions and credits of the partnership.”  H.R. Rep. No. 95-1800, at 221 (1978).  In Rev. Proc. 81-11, 1981-1 C.B. 651, the IRS provided a set of criteria under which partnerships with 10 or fewer partners would not be subject to the penalty of I.R.C. §6698.  It was later superseded by Rev. Proc. 84-35 after the TEFRA rules came out in 1982.

However, the IRS noted in Program Manager Technical Advice 2020-01 (Nov. 19, 2019), that the definition of a “small partnership” was not changed.  TEFRA made no change to I.R.C. §6698.  Thus, the IRS concluded, the BBA had no impact on the “application of the exception to the partnership failure to file penalty.  Rather, the BBA simply restored pre-TEFRA law which already contained the penalty relief for a small partnership.  Here’s how the IRS put it:  “…it is irrelevant that there does not exist any current section 6231(a)(1)(B) that is generally effective and applicable to partnerships seeking relief under Revenue Procedure 84-35.  Moreover, the legislative history of section 6698, which is the basis for the relief provided in Revenue Procedure, is still relevant, and the scope of the section 6698 penalty for failure to file a partnership return has not been affected by the repeal of the TEFRA provisions.  Thus, Revenue Procedure 84-35 is not obsolete and continues to apply.”  The IRS concluded by stating that it may develop procedures consistent with Rev. Proc. 84-35 to ensure that any partnership claiming relief is, in fact, entitled to the relief. 

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

Applying the Small Partnership Exception – Practitioner Problems

So how does the small partnership exception work in practice? Typically, the IRS will have asserted the I.R.C. §6698 penalty for the failure to file a partnership return.  The penalty can be assessed before the partnership has an opportunity to assert reasonable cause or after the IRS has considered and rejected the taxpayer’s claim.  When that happens, the partnership must request reconsideration of the penalty and establish that the small partnership exception applies so that reasonable cause exists to excuse the failure to file a partnership return.

Throughout this process, the burden is on the taxpayer. That’s a key point.  In most instances, the partners will likely decide that it is simply easier to file a partnership return instead of potentially getting the partnership into a situation where the partnership (and the partners) have to satisfy an IRS request to establish that all of the partners have fully reported their shares of income, deductions and credits on their own timely filed returns. As a result, the best approach for practitioners to follow is to simply file a partnership return so as to avoid the possibility that IRS would assert the $210/partner/month penalty and issue an assessment notice.  IRS has the ability to identify the non-filed partnership return from the TIN matching process.  One thing that is for sure is that clients do not appreciate getting an IRS assessment notice.

The Actual Relief of the Small Partnership Exception

Typically, the small partnership exception is limited in usefulness to those situations where the partners are unaware of the partnership return filing requirement or are unaware that they have a partnership for tax purposes, and the IRS asserts the penalty for failing to file a partnership return.  In those situations, the partnership can use the exception to show reasonable cause for the failure to file a partnership return.  But, even if the exception is deemed to apply, the IRS can require that the individual partners prove that they have properly reported all tax items on their individual returns. 


The best position is to simply not be late in filing partnership returns.  But, if it happens, the penalty relief of Rev. Proc. 84-35 still applies if the requirements are satisfied. 

January 21, 2020 in Income Tax | Permalink | Comments (0)

Friday, January 17, 2020

Principles of Agricultural Law


Principles2020springedition400x533The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 46th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; laywers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous as one recent bankruptcy case points out.  See, e.g., In re Kurtz, 604 B.R. 549 (Bankr. D. Neb. 2019).  What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed?

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  For instance, in one recent Kansas case, the lender failed to get the debtor’s name exactly correct on the filed financing statement.  The result was that the lender’s interest in the collateral (a combine and header) securing the loan was discharged in bankruptcy.   In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019). 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation. 

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is part and parcel of the business organization question. 

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   


The academic semesters at K-State and Washburn Law are about to begin for me.  It is always encouraging to me to see students getting interested in the subject matter and starting to understand the relevance of the class discussions to reality.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. 

If you are interested in obtaining a copy, you can visit the link here:

January 17, 2020 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Wednesday, January 15, 2020

Ag Law in the Courts – Feedlots; Dicamba Drift; and Inadvertent Disinheritance


It’s been over two months since I last did a post surveying court action of interest to farmers and ranchers.  I owe readers a couple of those types of posts to catch up.  It’s not that the courts have been quiet.  They haven’t.  I have just been writing about other things – including top legal and tax developments of 2019.  So, for today’s post I take a look at a few recent developments in the courts – this time two court opinions each from Iowa and Missouri.  The issues involve livestock feeding facilities, Dicamba drift and disinheritance.

Ag law in the courts – that’s the topic of today’s post.

Time Limit for Suing a Livestock Facility on Nuisance Claims

Dvorak v. Oak Grove Cattle, L.L.C., No. 18-1624, 2019 Iowa App. LEXIS 743 (Iowa Ct. App. Aug. 7, 2019).

The plaintiffs owned property adjacent to the defendant’s cattle feedlot. The feedlot began operating in 2006 and was investigated in 2009 and 2013 by the Iowa Department of Natural Resources (IDNR) due to manure run-off issues. The IDNR required that the defendants take remedial action. In 2016 the plaintiffs sued for negligence, trespass, and nuisance. The plaintiffs claimed, "from approximately 2009 to the present there have been multiple occasions when manure from [the defendant’s] cattle lot has entered upon, and traversed over, [the plaintiffs’] property." The defendant countered with a claim for defamation, arguing that the plaintiffs made false statements about the feedlot and published it to third parties. The defendant moved for summary judgment arguing that the nuisance cause of action was barred by the five-year statute of limitations. The trial court granted the motion for summary judgment on the basis that the plaintiffs were claiming that the feedlot was a permanent nuisance from its inception in 2006.  Thus, the nuisance suit should have been brought within five years of that time, according to the defendant.  The plaintiffs did not make separate nuisance claims for each instance of runoff which would make their claims an intermittent nuisance.

On further review, the appellate court reversed and remanded. The only issue on appeal concerned the statute of limitations. The parties agreed that a five-year statute of limitations applied.  But, did it start to run from the time the feedlot was established, or upon each occurrence of manure runoff?  In other words, was the manure runoff a permanent nuisance or a continuing nuisance?  If the manure runoff constituted a permanent nuisance, the statute of limitations began to run in 2006 and would have expired in 2011. Conversely, If the manure runoff amounted to an intermittent nuisance, the statute of limitations would start upon each occurrence. The appellate court determined that the defendant failed to meet the burden of proof that the runoff was a permanent nuisance in order to sustain the motion for summary judgment. Permanence of a nuisance, the appellate court held, goes to the injury itself and the defendant did not show that the damage to the plaintiffs’ property could not be cleaned up or abated. Instead, the defendant relied upon the contention that the runoff from the feed lot was not temporary. The appellate court determined that he feedlot itself is a permanent nuisance but the runoff itself is a temporary nuisance. Thus, the plaintiffs’ suit was not time barred. 

CAFO Permit Properly Granted 

K Tre Holdings, LP v. Missouri Department of Natural Resources, No. SD35512, 2019 Mo. App. LEXIS 1146 (Ct. App. Jul. 26, 2019)

In early 2016, a farm applied for a "General Operating Permit" to operate a Class 1C poultry Confined Feeding Operation “CAFO” in southwest Missouri.  Later that year, the farm was issued a “State No-Discharge" CAFO operating permit. The plaintiff challenged the issuance before the Administrative Hearing Commission (ACH), and the ACH determined that the CAFO permit was issued in accordance with the applicable state law and regulations. In late 2017, the defendant (state Dept. of Natural Resources) affirmed. The plaintiff sued and that state appellate court affirmed. The appellate court noted that the farm provided a 2014 google map image with labels and setback distances marked. Other maps were also presented during the agency hearings and submitted as evidence. The appellate court determined that the defendant’s decision was supported by sufficient evidence. The maps provided the necessary information to determine whether the setback distance requirements had been satisfied. The appellate court also determined that the farm did not have to provide a copy of proposed building plans to obtain a building permit, and that the plaintiff could not challenge the ACH appointment of commissioners. 

Some Dicamba Drift Claims Proceed

Bader Farms, Inc. v. Monsanto Co., No. MDL No. 1:18md2820-SNLJ, 2019 U.S. Dist. LEXIS 114302 (E.D. Mo. Jul. 10, 2019)

Dicamba drift issues have been in the news and the courts over the past couple of years.  In this case, the plaintiff claimed that his peach orchard was destroyed after the defendants (Monsanto and BASF) conspired to develop and market dicamba-tolerant seeds and dicamba-based herbicides. The plaintiff claimed that the damage to the peaches occurred when dicamba drifted to his peach orchard after being applied to neighboring fields. The plaintiff claimed that the defendants released the dicamba-tolerant seed with no corresponding dicamba herbicide that could be safely applied. As a result, farmers illegally sprayed an old formulation of dicamba herbicide that was unapproved for in-crop, over-the-top, use and was "volatile"  - meaning that it was highly likely to drift. While many cases had previously been filed on the dicamba drift issue, the plaintiff did not join the other litigation because it focused on damages to soybean crops.

Monsanto moved to dismiss the plaintiff’s claims that were based on failure to warn; negligent training; violation of the Missouri Crop Protection Act; civil conspiracy; and joint liability for punitive damages. BASF moved to dismiss those same claims except those for failure to warn. Monsanto argued that the failure to warn claims were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), but the plaintiff claimed that no warning would have prevented the damage to the peaches. The trial court determined that the plaintiff had adequately plead the claim and denied the motion to dismiss this claim. Both Monsanto and BASF moved to dismiss the negligent training claim, but the trial court refused to do so. However, the trial court did dismiss the claims based on the Missouri Crop Protection Act, noting that civil actions under this act are limited to “field crops” which did not include peaches. The trial court did not dismiss the civil conspiracy claim based on concerted action by agreement, but did dismiss the aiding and abetting portion of the claim because that cause of action is not recognized under Missouri tort law. The parties agreed to a separate jury determination of punitive damages for each defendant.

The saga continues. 

Inadvertent Disinheritance – Words Means Things

In re Trust Under the Will of Daubendiek, 929 N.W.2d 723 (Iowa Ct. App. 2019)

This case has an unfortunate (and, I believe, incorrect result).  It points out that sometimes courts are willing to strictly apply the law even in light of a potentially absurd result.  It also points out that lawyers drafting wills and trusts have to carefully consider the words that they use and how those words might be applied years later.  

Here, the testator created a will in 1942 which contained a trust. The trust had nine beneficiaries and specified that in the event of a named beneficiary’s death, the beneficiary’s interest would pass to the beneficiary’s “lawful bodily issue.” The testator died in 1948, and in 1956 one of the named beneficiaries (a grandson of the testator) adopted a child. The grandson died in 2016, and the adopted child (great-grandson of the testator) sought court confirmation that he and his descendants were the “lawful bodily issue” of the beneficiary for purposes of the trust. The trial court disagreed and granted summary judgment for the trustee, effectively disinheriting the great-grandson.

On further review, the appellate court affirmed. While the appellate court noted that Iowa law presumes that a testator intends to treat an adopted child in the same manner as a natural born child, this presumption does not apply when an intent to exclude the adopted child is shown in the will. The appellate court held that intent to exclude was present by the testator’s repeated use of “lawful bodily issue” after denoting every named trust beneficiary to describe who received that share of the trust upon a particular beneficiary’s death. The appellate court cited a 1983 Iowa Supreme Court opinion where that Court said that a similar phrase, “heirs of the body,” did not include adopted children. The appellate court concluded that there was no reasonable interpretation of the will/trust that allowed for an adopted child who is not a beneficiary’s “lawful bodily issue” to receive a share of the trust.

An expert on wills and trusts (and my law school professor on the same subject) testified that lawyers often use “legalisms” without the client providing express direction for such terminology.  As such, in his view, the phraseology of the will was ambiguous and created a genuine issue of material fact.  That would have bearing on the issue of the testator’s intent – the “polestar” or directing principle of construing a will.  But, the court refused to consider the professor’s point as being a legal argument concerning a legal issue – an opinion as to a legal standard.  As such, the court said it would not be considered.  But with that said, the court did consider it and still concluded that the will was clear and the great-grandson was to be disinherited. 

I take issue with the appellate court’s opinion.   The court read "lawful bodily issue" in a way that disinherited the great grandson without the testator specifically saying that is what he wanted to do.  Normally, disinheriting someone requires the testator’s clearly expressed intention.  Did the attorney in 1942 explain what the phrase “lawful bodily issue” meant to the testator and the effect that it possibly could have 74 years later?  Highly unlikely.  At a minimum the phrase created an ambiguity.   Also, the appellate court made no mention of the fact that under Iowa law, a legally adopted child is treated as blood relation (“lawful bodily issue”) of the adoptive parent(s) for purposes of intestacy. Thus, had the grandson involved died intestate, Iowa law would have treated the great grandchild as “lawful bodily issue.” The appellate court did not address this potentially absurd result of its opinion – making disinheritance of a great grandson dependent on whether the great grandson’s father died without a will.

Words mean things – sometimes unintended things. 


I will do another post on more developments in the courts soon. 

January 15, 2020 in Civil Liabilities, Estate Planning | Permalink | Comments (0)

Monday, January 13, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 2 and 1)


Over the last several posts, I have been commenting on the most important developments legal and tax developments in 2019 on farmers, ranchers, agribusiness and rural landowners.  Today I am down to the two biggest developments. 

The “top two” of the “top ten” – it’s the topic of today’s post.

Number 2:     Year-End Tax and Retirement Legislation

In late December, the Congress passed Omnibus spending bills containing multiple parts that impact retirement provisions and disaster relief tax rules.  The legislation also contains certain tax extender provisions and repeals of some of the taxes contained in Obamacare.  The President signed “The Further Consolidated Appropriations Act” (H.R. 1865, PL 116-94) and “The Consolidated Appropriations Act, 2020” (H.R. 1158, PL 116-93) into law on December 20.  Contained in the Omnibus legislation is the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” (“Disaster Act”) which provides relief for taxpayers affected by disasters in 2018 through Jan. 19, 2020.  Also included in the Omnibus legislation is the “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act).

Here are the parts of the various bills that impact agriculture:

Retirement Provisions

The Act passed the house on May 23, but the Senate never took it up.  Nevertheless, the SECURE Act provisions did get included in the Omnibus legislation largely unmodified.  The legislation represents the first major retirement legislation since the Pension Protection Act of 2006.

There are many important changes that the SECURE Act makes to retirement planning.  The following are what are likely to be the most important to farm and ranch families:Here are the key highlights of the SECURE Act:

  • An increase in the required minimum distribution (RMD) age for distributions from a traditional IRA from the year in which an individual turns 70.5 to the year the individual turns 72. This provision matches the existing rules for 401(k)s and Roth IRAs. The provision is applicable to persons that did not reach age 70.5 by the end of 2019. SECURE Act §114(a), amending I.R.C. §401(a)(9(C)(i)(I).    
  • A repeal of the rule barring contributions to a traditional IRA by persons age 70.5 and up. There was no such rule that barred post-age 70.5 contributions to a Roth IRA.  SECURE Act §107(a), repealing I.R.C. §219(d)(1).
  • The amount of a taxpayer’s qualified charitable distributions (QCDs) from an IRA direct to a qualified charity that are not includible in gross income for a tax year is reduced(but not below zero) by the excess of the total amount of IRA deductions allowed to the taxpayer for all tax years ending on or after the date the taxpayer attains age 70.5, over the total amount of reductions for all tax years preceding the current tax year.  SECURE Act §107(b), amending I.R.C. §408(d)(8)(A).  In other words, the amount of a QCD is reduced by the amount of any deduction attributable to a contribution to a traditional IRA made after age 70.5. The provision is effective for contributions made for tax years beginning after 2019 and for distributions for tax years beginning after 2019. 
  • Part-time employees are allowed to contribute to a 401(k) plan. SECURE Act §112(a)(1), amending I.R.C. §412(k)(2)(D).  
  • The legislation provides a small employer pension plan start-up credit maximum set at the greater of $500, or the lesser of $250 for each employee of the eligible employer who is non-highly-compensated and who is eligible to participate in the plan or $5,000. Secure Act §104(a), amending I.R.C. §45E(b)(1). 
  • The new law expands the ability to run multiple employer plans and make the process easier overall by allowing small employers to band together to set up and offer 401(k) plans with less fiduciary liability concern and less cost than presently exists. This provision is effective for plan years beginning after 2020.  SECURE Act §101, amending I.R.C. §413(e) and various portions of ERISA.

Note:  Under prior law, plans of different businesses could be combined into one plan, but if one employer in the multi-employer plan failed to meet its requirements to qualify for the plan, then the entire plan could be disqualified.  The SECURE Act also no longer requires that members of a multi-employer plan have common interests in addition to participating in the retirement plan.


  • The legislation adds a new exemption from the 10 percent penalty of I.R.C. §72(t) for early withdrawals from a retirement account. Under the provision, a parent is allowed to withdraw up to $5,000 of funds penalty-free from a 401(k), IRA or other qualified retirement plan within a year of a child’s birth or the finalization of a child’s adoption.  The provision is applicable for distributions made after 2019.  SECURE Act §113, amending various I.R.C. sections. 
  • Under prior law, funds contained in IRAs (and qualified plans) that a non-spouse inherited IRA could be withdrawn over the beneficiary’s life expectancy. Now, so-called “stretch” IRAs are eliminated by virtue of requiring non-spouse IRA beneficiaries (except for a minor child of the IRA owner, disable person, chronically ill individual, or anyone who is not more than 10 years younger than the IRA owner) to withdraw funds from inherited accounts within 10 years. Estimates are that this provision will generate at least $15 billion in additional tax revenue in the first 10 years.  The provision is effective January 1, 2020.  SECURE Act, §401(a)(1), amending I.R.C. §401(a)(9)(E) and (H)(ii).  

Note:  The provision applies to all qualified plans such as 401(k), 403(b) and 457(b) plans.  It also applies to ESOPs, cash balance plans, 401(a) plans (defined contribution) as well as lump-sum distributions from defined benefit plans, and IRAs. However, it does not apply to a spousal rollover. When the owner dies, their spouse may roll over their spouse’s IRA into their own IRA.


The Congress allowed numerous tax provisions to expire at the end of 2017 and 2018.  Other parts of the Omnibus legislation address some of the expired provisions, restoring them retroactively and extending them through 2020.  Here’s a list of the more significant ones for farmers and ranchers:

  • The provision excluding from income qualified principal residence debt that has been forgiven (up to $2 million; $1 million for married taxpayers filing separately) is restored for 2018 and 2019 and extended through 2020. R.C. §108(a)(1)(E as amended by §101(a) of the Disaster Act.  The provision also applies to qualified principal residence debt discharged via a binding written agreement entered into before 2021.  Disaster Act §101(b) amending I.R.C. §108(h)(2)
  • The deduction for mortgage insurance premiums is retroactively reinstated and extended through 2020. This provision is extended through 2020 for amounts paid or incurred after Dec. 31, 2017.  Disaster Act §102 amending I.R.C. §163(h)(3)(E)(iv)(l).   
  • The medical expense deduction floor is set at 7.5 percent for 2019 and 2020. Disaster Act §103, amending I.R.C. §213(f).
  • The legislation restores the qualified tuition (and related expenses) deduction for 2018 and 2019 and extends it through 2020. Disaster Act §104, amending I.R.C. §222(e).
  • The biodiesel fuel tax credit is extended through 2020. Disaster Act §121(a), amending I.R.C. §40A(g)
  • The tax credit for nonbusiness energy property (e.g., windows, doors, skylights, roofs, etc.) for personal residences is extended for tax years beginning after 2017 and before 2021. Disaster Act §123, amending I.R.C. §25C(g)(2). 
  • The tax credit for electricity producer from certain “renewable” resources is extended for qualified facilities constructed before January 1, 2021. Disaster Act §127(a), amending various subsections of I.R.C. §45(d).  For wind facilities the construction of which begins in calendar year 2020, the applicable credit is reduced by 40 percent. Disaster Act §127(c)(2)(A), amending I.R.C. §45(b)(5). 
  • The tax credit for manufacturers of energy-efficient residential homes is extended for homes acquired before January 1, 2021. Disaster Act §129, amending I.R.C. §45L(g). 
  • The TCJA changed the rules for deducting losses associated with casualties and disasters. The Disaster Act modifies those TCJA rules and provides that taxpayers impacted by a qualified disaster beginning January 1, 2018, and ending 60 days after the date of enactment, can make tax-favored withdrawals from retirement plans.  In addition, the modification provides for an automatic 60-day filing extension of all tax deadlines for those taxpayers affected by federally declared disasters that are declared after December 20, 2019. Disaster Act §205, amending I.R.C. §7508A,
  • The modification to the “kiddie-tax” contained in the Tax Cuts and Jobs Act (TCJA) is repealed effective January 1, 2020, but an election can be made to have the new rules apply to the 2018 and 2019 tax years. This means that children’s unearned income will be taxed at their parents’ highest marginal tax rate rather than the rates applicable to trusts and estates, and the taxable income of a child attributable to earned income will be taxed under the rates for single individuals.  SECURE Act §501(a), amending I.R.C. §1(j)(4).   

Number 1:     QBI Final Regulations and QBI Ag Co-Op Proposed Regulations

In the fall of 2018, the Treasury issued proposed regulations under I.R.C. §199A that was created by the Tax Cuts and Jobs Act (TCJA) enacted in late 2017.  REG-107892-18 (Aug. 8, 2018).    The proposed regulations were intended to provide taxpayers guidance on planning for and utilizing the new 20 percent pass-through deduction (known as the QBID) available for businesses other than C corporations for tax years beginning after 2017 and ending before 2026.   While some aspects of the proposed regulations are favorable to agriculture, other aspects created additional confusion, and some issues were not addressed at all (such as the application to agricultural cooperatives).  In early 2019, the Treasury issued final regulations and cleared up some of the confusion.  Here are the main summary points of the final regulations:

  • Common ownership and aggregation. The proposed provided a favorable aggregation provision that allows a farming operation with multiple businesses (e.g., row-crop; livestock; etc.) to aggregate the businesses for purposes of the QBID.  This was, perhaps, the best feature of the proposed regulations with respect to agricultural businesses because it allows a higher income farming or ranching business to make an election to aggregate their common controlled entities into a single entity for purposes of the QBID.  This is particularly the case with respect to cash rental entities with incomes over the QBID threshold.  Common ownership is required to allow the aggregation of entities to maximize the QBID for taxpayers that are over the applicable income threshold.  Treas. Reg. §1.199A-4(b).  “Common ownership” requires that each entity has at least 50 percent common ownership.   the final regulations provide that siblings are included as related parties via I.R.C. §§267(b) and 707(b).  Including siblings in the definition of common ownership for QBID purposes will be helpful upon the death of the senior generation of a farming or ranching operation.
  • Passive lease income. One of the big issues for farmers and ranchers operating as sole proprietorships or as a pass-through entity is whether land rental income constitutes QBI.  The proposed regulations confirmed that real estate leasing activities can qualify for the QBID without regard to whether the lessor participates significantly in the activity.  That’s particularly the case if the rental is between “commonly controlled” entities.  But, the proposed regulations could also have meant that the income a landlord receives from leasing land to an unrelated party (or parties) under a cash lease or non-material participation share lease may not qualify for the QBID.  If that latter situation were correct it could mean that the landlord must pay self-employment tax on the lease income associated with a lease to an unrelated party (or parties) to qualify the lease income for the QBID.  Thus, clarification was needed on the issue of whether the rental of property, regardless of the lease terms will be treated as a trade or business for aggregation purposes as well as in situations when aggregation is not involved.  That clarification is critical because cash rental income may be treated differently from crop-share income depending on the particular Code section involved.  See, e.g., §1301.   

            The final regulations did not provide any further details on the QBI definition of trade or  business.  That means that each individual set of facts will be key with the relevant factors  including the type of rental property (commercial or residential); the number of properties  that are rented; the owner’s (or agent’s) daily involvement; the type and significance of    any ancillary services; the terms of the lease (net lease; lease requiring landlord expenses;     short-term; long-term; etc.).  Certainly, the filing of Form 1099 will help to support the    conclusion that a particular activity constitutes a trade or business.  But, tenants-in-common that don’t file an entity return create the implication that they are not engaged in a trade or business activity. 

            The final regulations clarify (unfortunately) that rental to a C corporation cannot create a  deemed trade or business.  That’s a tough outcome as applied to many farm and ranch businesses and will require some thoughtful discussions with tax/legal counsel about restructuring rental agreements and entity set-ups.  Before the issuance of the final regulations, it was believed that land rent paid to a C corporation could still qualify as a trade or business if the landlord could establish responsibility (regularity and continuity) under the lease. Landlord responsibility for mowing drainage strips (or at least being responsible for ensuring that they are mowed) and keeping drainage maintained (i.e., tile lines), paying taxes and insurance and approving cropping plans, were believed to be enough to qualify the landlord as being engaged in a trade or business.  That appears to no longer be the case.

  • Commodity trading. The concern under the proposed regulations a person who acquired a commodity (such as wheat or corn for a hog farm), and transported it to the ultimate buyer might improperly be considered to be dealing in commodities. This would have resulted in the income from the activity treated under a less favorable QBI with none of the commodity income eligible for the QBID for a high-income taxpayer.  This is also an important issue for private grain elevators.  A private grain elevator generates income from the storage and warehousing of grain.  It also generates income from the buying and selling of grain.  Is the private elevator’s buying and selling of grain “commodity dealing” for purposes of I.R.C. §199A?  If it is, then a significant portion of the elevator’s income will not qualify for the QBID.  The final regulations clarify that the brokering of agricultural commodities is not treated under the less favorable QBI provision applicable for higher income taxpayers. 

I.R.C. §199A has special rules for patrons of ag cooperatives.  These rules stem from the fact that farmers often do business with agricultural (or horticultural) cooperative. A farmer patron could have QBI that is not tied to patronage with a cooperative and QBI that is tied to patronage with a cooperative.  The Treasury issued proposed regulations in June of 2019 on the ag cooperative QBI matter.  Here are the highlights of the 2019 proposed regulations:

*          Under Prop. Treas. Reg. §1.199A-7(c), patronage dividends or similar payments may be  included in the patron’s QBI to the extent that these payments: (i) are related to the patron’s  trade or business; (ii) are qualified items of income, gain, deduction, or loss at the  cooperative’s trade or business level; and (iii) are not income from a specified service trade  or business (SSTB) (as defined in I.R.C. §199A(d)(2)) at the cooperative level.  But, they  are only included in the patron’s income if the cooperative provides the required  information to the patron concerning the payments.  Prop. Treas. Reg. §199A-7(c)(2).   

*          The amount of a patron’s deduction that can be passed through to the patron is limited to the portion of the patron’s deduction that is allowed with respect to qualified production   activities income to which the qualified payments (patronage dividends and per unit  retains) made to the patron are attributable.  I.R.C. §199A(g)(2)(E).  In other words, the distribution     must be of tax items that are allocable to the cooperative’s trade or business on behalf of or with a patron.  The cooperative makes this determination in accordance with Treas. Reg. §1.199A-3(b). This is, essentially, the domestic production activities deduction computation of former I.R.C. §199, except that account is taken for non-patronage income not being part of the computation. 

*          The farmer-patron must reduce the “patron’s QBID” by a formula that is the lesser of 9 percent of QBI that relates to I.R.C. §199A(b)(7)(A)-(B).

*          An optional safe harbor allocation method exists for patrons under the applicable threshold  of I.R.C. §199A(e)(2) ($160,700 single/$321,400 MFJ for 2019) to determine the reduction.  Under the safe harbor, a patron must allocate the aggregate business expenses and W-2 wages ratably between qualified payments and other gross receipts to determine QBI.  Prop. Treas. Reg. §1.199A-7(f)(2)(ii).  Thus, the amount of deductions apportioned     to determine QBI allocable to qualified payments must be equal to the proportion of the total deductions that the amount of qualified payments bears to total gross receipts used to determine QBI. The same proportion applies to determine the amount of W-2 wages  allocable to the portion of the trade or business that received qualified payments.    

Note.  The proposed regulations attempting to illustrate the calculation only mention gross receipts from grain sales.  There is no mention of gross receipts from farm equipment, for example (including I.R.C. §1245 gains from the trade-in of farm equipment).  Based on the language of Prop. Treas. Reg. §1.199A-7(f)(2)(ii), gross receipts from the sale of equipment and machinery should be included in the calculation and the farmer would have to allocate gross receipts from equipment sales between patronage and non-patronage income.  Indeed, in prior years, depreciation may have been allocated between patronage and non-patronage income.  Likewise, the example doesn’t address how government payments received upon sale of grain are to be allocated. 


That concludes the top ten list for 2019.  Looking back at the Top Ten list, a couple of observations can be made.  Clearly, the make-up of the U.S. Supreme Court is highly important to agriculture.  Also, the Presidential Administration shapes policy within the regulatory agencies that regulate agricultural and landowner activity, as well as tax policy.  Agriculture, on the whole, benefited from favorable U.S. Supreme Court opinions, regulatory developments and tax policy in 2019.

What will 2020 bring? 

January 13, 2020 in Cooperatives, Income Tax | Permalink | Comments (0)

Thursday, January 9, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 4 and 3)


Today’s post continues the walk through the top legal and tax developments in 2019 impacting agriculture.  As can be gathered from the most recent several posts, the legal and tax systems have a major impact on agriculture and agricultural producers.  Agricultural law and taxation is very dynamic and the rules are often different as applied to a “farmer” than when they are applied to a non-farmer. 

In today’s post, I examine the fourth and third most important developments to impact agriculture in 2019.

  1. Regulatory Changes to the Endangered Species Act (ESA)

The ESA establishes a regulatory framework for the protection and recovery of endangered and threatened species of plants, fish and wildlife. 16 U.S.C. § 1531, et seq.  The ESA has the potential to restrict substantially agricultural activities because many of the protections provided for threatened and endangered species under the ESA extend to individual members of the species when they are on private land where many endangered species have some habitat.

In late July of 2018, the U.S. Fish and Wildlife Service (USFWS) and the National Marine Fisheries Service (NMFS) issued three proposed rules designed to modify certain aspects of the ESA. Public comment on the proposed rules was accepted until September 24, 2018.  On August 12, 2019, the agencies announced the finalization of the regulations.

The regulatory modifications to the ESA stem from early 2017 when President Trump signed an executive order (Exec. Order 13777, “Enforcing the Regulatory Reform Agenda”) requiring federal agencies to revoke two regulations for every new rule issued.  The order also required federal agencies to control the costs of all new rules within their budget. In addition, the order barred federal agencies from imposing any new costs in finalizing or repealing a rule for the remainder of 2017 unless that cost were offset by the repeal of two existing regulations.  Exceptions were included for emergencies and national security.  Beginning in 2018, the order required the director of the White House Office of Management and Budget to give each agency a budget for how much it can increase regulatory costs or cut regulatory costs.  The order was touted as the “most significant administrative action in the world of regulatory reform since President Reagan created the Office of Information and Regulatory Affairs (OIRA) in 1981."

The ESA has long been considered critical to species protection, but it has also been one of the most contentious environmental laws largely because of its impact on the usage of private as well as public land.  The judicial and legal costs of enforcing the ESA are quite high, as both environmental and industry groups have historically brought litigation to protect their interests on account of the ESA.  As for private land, about half of ESA listed species have at least 80 percent of their habitat on private lands.  This has given concern to landowners that the presence of a listed species on their land will result in land use restrictions, loss in value, and possible involvement in third-party lawsuits.  

When a species is listed as endangered or threatened, the Secretary must consider whether to designate critical habitat for the species.   “Critical habitat” is the specific area within the geographical range occupied by the species at the time of listing that is essential to the conservation of the species. Critical habitat may also include specific areas outside the geographical area occupied by the species at the time it is listed if the USFWS determines that such areas are essential for conservation of the species. However, critical habitat need not include the entire geographical range which the species could potentially occupy.  16 U.S.C. § 1532(5).   In making a critical habitat determination, the USFWS must consider economic impacts and other relevant impacts, as well as best scientific data. See, e.g., New Mexico Cattle Growers Association. v. United States Fish and Wildlife Service, 248 F.3d 1277 (10th Cir. 2001).   The USFWS may exclude any area from critical habitat if the benefits of the exclusion outweigh the benefits of specifying the area as critical habitat, unless the USFWS determines on the basis of best scientific and commercial data available that the failure to designate an area as critical habitat will result in the extinction of the species.

The Final Rules

In general.  The final rules are entitled, “Endangered and Threatened Wildlife and Plants; Revision of the Regulations for Listing Species and Designating Critical Habitat.”  83 Fed. Reg. 35,193 (Aug. 12, 2019).  The final rules will be codified at 50 C.F.R. pt. 424 and clarify the procedures and criteria that are used to add or remove species from the endangered and threatened species lists and how their critical habitat is designated.  The new rules also eliminate the rule that, by default, extended many prohibitions on endangered species to those species that only had threatened stats.  In addition, the final rules further define the procedures for interagency cooperation. 

The listing process.  The final rules modify the ESA listing process.  The final rule allows for economic impacts of the potential listing, delisting or reclassifying of a species to be accounted for.  The findings of anticipated economic impact must be publicly disclosed.  In addition, the Secretary must evaluate areas that are occupied by the species, and unoccupied  areas will only be considered “essential” where a critical habitat designation that is limited only to the geographical areas that a species occupies would be inadequate to ensure conservation of the species.  In addition, for an unoccupied area to be designated as critical habitat, the Secretary must determine that there is a reasonable certainty that the area will contribute to the conservation of the species and that the area contains one or more physical or biological features essential to the conservation of the species.  Also, a “threatened” listing for a species is to be evaluated in accordance with whether the species is likely to become endangered in the “foreseeable future” (as long as a threat is probable). 

The final rules also require any critical habitat for a listed species designation to first take into account all areas that a species occupies at the time of listing before considering whether any unoccupied areas are necessary for the survival or recovery of the species. On that point, a determination must be made that “there is a reasonable likelihood that the area will contribute to the conservation of the species” before designating any unoccupied area as critical habitat.  This is consistent with the U.S. Supreme Court opinion in Weyerhaeuser Co. v. United States Fish & Wildlife Service, 139 S. Ct. 361(2018), where the Court held that an endangered species cannot be protected under the ESA in areas where it cannot survive. 

The “blanket rule.”  The ESA statutory protections, including the prohibition on an “unauthorized take” of a species apply only to endangered species. However, the USFWS has automatically extended those protections to all species listed as threatened through a broad regulation known as the “blanket 4(d) rule.” The final rules remove these automatically provided protections to threatened species that are given to endangered species.  As a result, the USFWS will be required to develop additional regulations for threatened species on a case-by-case basis to extend the protections given endangered species.    

Agency cooperation.  The final rules also provide alternative mechanisms intended to improve the efficiency of ESA consultations conducted by the USFWS and federal agencies. The revisions include a process for expedited consultation in which a federal agency and the USFWS may enter into upon mutual agreement. A 60-day limit is included for completion of informal consultations with the option to extend the consultation to no more than 120 days.

The final regulations are an attempt to inject additional common-sense into the application of the ESA and align it to a greater extent to its original purpose.  Another intended impact is a decreased burden on farmers and ranchers.  Only time will tell if that is actually accomplished. 

  1. Irrigation Return Flows and the Clean Water Act

The CWA bars the discharge of any pollutants into the nation's waters without a permit. The CWA recognizes two sources of pollution. Point source pollution is pollution which comes from a clearly discernable discharge point, such as a pipe, a ditch, or a concentrated animal feeding operation. Point source pollution is the concern of the federal government.  Nonpoint source pollution, while not specifically defined under the CWA, is pollution that comes from a diffused point of discharge, such as fertilizer runoff from an open field. Control of nonpoint source pollution is to be handled by the states through enforcement of state water quality standards and area-wide waste management plans.

Importantly, in 1977, the Congress amended the CWA to exempt return flows from irrigated agriculture as a point source pollutant. Thus, irrigation return flows from agriculture are not considered point sources if those “...discharges [are] composed entirely of return flows from irrigated agriculture.”   See, e.g., 33 U.S.C. §1342(l)(1); 40 C.F.R. §122.3.  See also Hiebenthal v. Meduri Farms, 242 F. Supp. 2d 885 (D. Or. 2002).  This statutory exemption was elaborated in a 1994 New York case, Concerned Area Residents for the Environment v. Southview Farm, 34 F.3d 114 (2d Cir. 1994). In that case, the court noted that when the Congress exempted discharges composed “entirely” of return flows from irrigated agriculture from the CWA discharge permit requirements, it did not intend to differentiate among return flows based on their content.  Rather, the court noted, the word “entirely” was intended to limit the exception to only those flows which do not contain additional discharges from activities unrelated to crop production. 

2019 Case

In Pacific Coast Federation of Fishermen’s Associations v. Glaser, 937 F.3d 1191 (9th Cir. 2019), the plaintiffs (various fishing activist groups) filed a CWA citizen suit action claiming that the defendant’s (U.S. Bureau of Reclamation) Grasslands Bypass Project in the San Joaquin Valley of California was discharging polluted water (water containing naturally-occurring selenium from soil) into a WOTUS via a subsurface tile system under farmland in California’s Central Valley without a CWA permit.  The plaintiffs directly challenged the exemption of tile drainage systems from CWA regulation via “return flows from irrigated water” on the basis that groundwater discharged from drainage tile systems is separate from any irrigation occurring on farms and is, therefore, not exempt.  After the lower court initially refused to grant the government’s motion to dismiss, it later did dismiss the case noting that the parties agreed that the only reason the project existed was to enable the growing of crops requiring irrigation, and that the drainage of contaminated water only occurred due to irrigated agriculture.  The lower court noted that the plaintiffs failed to plead sufficient facts to support a claim that some discharges were unrelated to agricultural crop production.  Later, the plaintiffs retooled their complaint to claim that not all of the irrigated water that was discharged through the tile systems came from crop production. Rather, the plaintiffs claimed that some of the discharges that flowed into groundwater were from former farmlands that now contained solar panels.  It was this “seepage” from the non-farmland that the plaintiffs claimed was discharged in the farm field tile system and caused the system to contain pollutants that didn’t come exclusively from agricultural crop irrigation.  The lower court found the tile system to be within the exemption for “return flows from irrigation,” noting that “entirely” meant “majority” because (in the court’s view) a literal interpretation of the amended statutory language would produce an “absurd result.”  

The appellate court reversed.  The appellate court held that discharges that include irrigation return flows from activities “unrelated” to crop production are not exempt from the CWA permit requirement.  To the appellate court, “entirely” meant just that – “entirely.”  It didn’t mean “majority” as the lower court had determined. 

What’s the impact of the appellate court’s decision?  After all, shouldn’t the appellate court be praised for construing a statute in accordance with what the law actually says?  What was the concern of the lower court of a literal interpretation of the statute?  For starters, think of the burden of proof issue.  Does the appellate court’s decision mean that a plaintiff must prove that some discharges come from non-agricultural irrigation activities, or does it mean that upon an allegation that irrigation return flows are not “entirely” from agricultural crop production that the farmer must prove that they all are?  If the latter is correct, that is a next-to-impossible burden for a farmer.  Such things as runoff from public roadways and neighboring farm fields can and do often seep into a farmer’s tile drainage system. If that happens, at least in the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington), a farmer’s discharges will require a CWA permit.  This is the “absurd result” that the lower court was trying to avoid by construing “entirely” as “majority.” 

The appellate court remanded the case to the lower court for further review based on the appellate court’s decision.  However, the point remains that the appellate court determined that the exception for return flows from agriculture only applies when all of the discharges involved comes from agricultural sources.  That’s why the case is important to any farmer that irrigates crops.


In the next post, I will address the two most significant developments of 2019.  What do you think they might be?

January 9, 2020 in Environmental Law | Permalink | Comments (0)

Tuesday, January 7, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers Six and Five)


Today I continue the survey of the top ag law and tax developments of 2019.  Up for commentary today are the sixth and fifth most important developments.  Both of them deal with the federal government’s regulation of water and its impact on farming and ranching operations 

The sixth and fifth most important developments in ag law and tax in 2019 – they are the topics of today’s blog post.

  1. SCOTUS Rules on Administrative Agency Deference

A significant amount of governmental regulation of agricultural activities is conducted by and through administrative agencies that promulgate regulations and make decisions.  The rules for and scope of regulations is determined by unelected bureaucrats and often has the force of law.  In addition, much of administrative law involves the administrative agency that developed the regulation at issue serving as judge and jury over disputed matters involving those same regulations.  This raises fundamental questions of fairness. 

In theory, governmental administrative agencies cannot exceed the authority provided by the legislative body.  Ultimately, the courts serve as the check on the exercise of authority.  But, how?  Under what standard do the courts review administrative agency decisions?  It’s an issue that was addressed by the U.S. Supreme Court (SCOTUS) in 2019, and it didn’t turn out the way that many in agriculture had hoped.

Courts generally consider only whether the administrative agency acted rationally and within its statutory authority.  In general, when dealing with administrative appeals from a federal agency such as the USDA, the court generally defers to the agency’s interpretation of its regulations as contained in the agency’s interpretive manuals.  In 1997, the U.S. Supreme Court reiterated the principle of agency deference.  Auer v. Robbins, 519 U.S. 452 (1997).  This so-called “Auer deference” involves a court deferring (or give “controlling weight”) to agency interpretations of its own ambiguous regulations.  Another type of deference, known as “Chevron deference” involves a court deferring to an agency interpretation of ambiguous statutes that the agency administers.  Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). However, the Court, in 2013 criticized the Court’s 1997 decision and suggested that it might be time to reconsider principles of agency deference.  Decker v. Northwest Environmental Defense Center, 133 S. Ct. 1326 (2013).  

In 2019, the U.S. Supreme Court again addressed the issue of deference in Kisor v. Wilkie, 139 S. Ct. (2019)The facts of the case didn’t involve agriculture.  That’s not the important part.  What is important is that the Court again reaffirmed (5-4, thanks to Chief Justice Roberts) Auer deference.  However, the Court did appear to place some limitations on Auer deference for future cases.  I say “appear” because the Court created a new multi-part test for review of agency action that could prove difficult for lower courts to apply and relatively easy for administrative agencies to skirt.  According to the Court, a court that reviews agency action is to review the regulatory language at issue to determine whether the regulation is ambiguous.  If it is, the court is to then apply Auer deference in determining whether the agency reached a reasonable conclusion resulting from the agency’s careful consideration and expertise after giving affected parties reasonable notice of the agency’s interpretation.  From agriculture’s perspective, it was hoped that the Court would jettison Auer deference.  That would have been the approach of Justice Gorsuch who would have eliminated the binding agency deference of Auer.  

So, the battle between agriculture and administrative agencies will continue on numerous fronts, and the arguments over the reasonableness of agency interpretations will continue with the courts largely deferring to agency determinations.  While there might be a dent in Auer deference, it still is a very functional defense to agency action.

  1. Waters of the United States (WOTUS) Definition

The final WOTUS rule was published on October 22, 2019.  84 Fed. Reg. 56626 (Oct. 22, 2019).  The rule became effective on December 23, 2019, and repeals the Obama Administration’s 2015 WOTUS rule that had established a broader set of standards for determining federal jurisdiction over waters subject to regulation under the CWA.  The 2019 final rule restores the regulatory definitions and guidance that were used to make jurisdictional determinations before the implementation of the 2015 WOTUS rule.  The 2015 rule was heavily litigated and resulted in various court decisions that enjoined the rule in 28 states and kept it in force the other states.  The repeal of the 2015 WOTUS rule restores the regulatory definition of a WOTUS that was in force before the effective date of the 2015 rule.  That regulatory definition was based on Justice Kennedy’s concurring opinion in Rapanos v. United States, 547 U.S. 715 (2006).  Thus, jurisdictional determinations will be made on a case-by-case basis using guidance developed following the Rapanos decision, as they were before the 2015 WOTUS rule.

The Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE) listed four reasons for their action in repealing the 2015 rule: 1) the 2015 rule misinterpreted and misapplied the “significant nexus” standard developed by Justice Kennedy’s concurring, and controlling, opinion in Rapanos v. United States, 547 U.S. 715 (2006), despite identifying that standard as its touchstone. This error expanded federal jurisdiction beyond what Congress intended; 2) the 2015 rule encroached State authority, violating the Clean Water Act’s express policy to “recognize, preserve, and protect the primary responsibilities and rights of States to prevent, reduce, and eliminate pollution” and “to plan the develop and use … of land and water resources.” 33 U.S.C. 1251(b); 3) the 2015 rule raised serious constitutional questions in the absence of an express Congressional directive to push the envelope of the federal government’s regulatory power; and 4) the 2015 rule had been remanded by the Southern District of Texas for procedural deficiencies under the Administrative Procedure Act.

The repeal of the 2015 rule establishes a path to the development of a new and less stringent jurisdictional rule. Indeed, on December 11, 2018, the EPA and the COE proposed a new WOTUS definition.  That new definition was published in the Federal Register on Feb. 14, 2019.  84 Fed. Reg. 4154 (Feb. 14, 2019).  The proposed definition was subject to a 60-day public comment period that closed on April 15, 2019.  The publication of the new definition was in line with President Trump’s Executive Order of February 28, 2017, that the EPA and the Corps clarify the scope of waters that are federally regulated under the Clean Water Act (CWA). 

Here’s a synopsis of the 2019 proposed rule:

  • Groundwater that drains through a farm field tile system is not a point source pollutant subject to federal control under the CWA’s National Pollution Discharge Elimination System (NPDES).  Also excluded from the WOTUS definition are ephemeral streams (those only temporarily containing water) and diffuse surface runoff that doesn’t enter a WOTUS at a particular discharge point. 
  • Ditches are excluded from the definition of a WOTUS unless the ditch is connected to a tributary of a WOTUS. A tributary is defined as “…a river, stream or similar naturally occurring surface water channel that contributes ‘perennial or intermittent’ flow to a traditional navigable water or territorial sea in a typical year…either directly or indirectly through other jurisdictional waters such as tributaries, impoundments, and adjacent wetlands…”.  Dry channels are not tributaries.     
  • Prior converted (PC) wetland is also not a WOTUS. A prior converted wetland is a wetland that was totally drained before December 23, 1985.  However, farmed wetland can still be subject to regulation by the USDA.  A “farmed wetland” is a wetland that was manipulated before December 23, 1985, but still exhibits wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded.  See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).   
  • Areas that are artificially irrigated are not a WOTUS. This is an important exception for rice and cranberry farmers.  Likewise, excluded are artificial lakes and ponds (a waterbody that doesn’t have a natural outflow) that are constructed in upland areas.  This would include such structures as farm ponds, stock watering ponds, water storage reservoirs, settling basins and log cleaning ponds.  If there is no perennial or intermittent flow being contributed by the lake or pond, then the lake or pond is not jurisdictional (at least at the federal level). 
  • Other water-filled depressions (such as those created by mining or construction activity when fill, sand or gravel is excavated) are excluded from the definition of a WOTUS if they are in uplands. They are not excluded if they are created in a wetland area to begin with.
  • “[A] mere hydrological connection from a non-navigable, isolated, intrastate lake or pond…may be insufficient to establish jurisdiction under the proposed rule.” “…[E]cological connections between physically separated lakes and ponds and otherwise jurisdictional waters” are not under federal control.  


In the next post, I move on to commenting on the fourth and third most important developments from 2019.  Stay tuned.

January 7, 2020 in Environmental Law | Permalink | Comments (0)

Friday, January 3, 2020

Top Ten Agricultural Law and Tax Developments of 2019 (Numbers 8 and 7)


Today, I continue the journey through the most significant legal and tax developments of 2019 to impact the ag sector.  The eighth and seventh biggest developments are in today’s commentary. 

  1. SCOTUS Agrees To Hear Case Involving Groundwater Discharges into a WOTUS

Under the Clean Water Act (CWA), a National Pollution Discharge Elimination System (NPDES) permit is required to discharge a “pollutant” from a point source into the “navigable waters of the United States” (WOTUS).  Clearly, a discharge directly into a WOTUS is covered.  But, is an NPDES permit necessary if the discharge is directly into groundwater which then finds its way to a WOTUS?  Are indirect discharges from groundwater into a WOTUS covered?   If so, does that mean that farmland drainage tile is subject to the CWA and an NPDES discharge permit is required?  The federal government has never formally taken that position, but if that’s the case it’s a huge issue for agriculture. 

In 2018, three different U.S. Circuit Courts of Appeal decided cases on the discharge from groundwater issue. 

  • In Hawai’i Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), the defendant owned and operated four wells at the Lahaina Wastewater Reclamation Facility (LWRF). Although constructed initially to serve as a backup disposal method for water reclamation, the wells became the defendant’s primary means of effluent disposal into groundwater and, ultimately, the Pacific Ocean.  The defendant injected approximately 3 to 5 million gallons of treated wastewater per day into the groundwater via its wells.  The wastewater seeped into the Pacific Ocean. The U.S. Court of Appeals for the Ninth Circuit held that the wells were point sources requiring NDES permits despite the defendant’s claim that NPDES permits were not required because the wells discharged only indirectly into the Pacific Ocean via groundwater.


    • In Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018), the plaintiffs claimed that the defendant violated the CWA by discharging “pollutants” into the navigable waters of the United States without a required discharge permit via an underground ruptured gasoline pipeline owned by the defendant’s subsidiary. The plaintiff claimed that a discharge permit was needed because the CWA defines “point source pollutant” (which requires a discharge permit) as “any discernible, confined and discrete conveyance, included but not limited to any…well…from which pollutants are or may be discharged.”  The U.S. Court of Appeals for the Fourth Circuit determined that a pollutant can first move through groundwater before reaching navigable waters and still constitute a “discharge of a pollutant” under the CWA that requires a federal discharge permit. The discharge, the court concluded, need not be channeled by a point source until reaching navigable waters that are subject to the CWA.  It is sufficient, the appellate court reasoned, that the discharge of pollutants from a point source through groundwater have a direct hydrological connection to navigable waters of the United States.
    • In Tennessee Clean Water Network v. Tennessee Valley Authority, 905 F.3d 436 (6th Cir. 2018), the U.S. Court of Appeals for the Sixth Circuit held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined nor discrete. Rather, the court noted that groundwater is a “diffuse medium” that “seeps in all directions, guided only by the general pull of gravity. Thus, it [groundwater] is neither confined nor discrete.” In addition, the appellate court noted that the CWA only regulates pollutants “…that are added to navigable waters from any point source.” In so holding, the court rejected the holdings of the Ninth and Fourth Circuits from earlier in 2018.

After the Ninth Circuit issued its opinion, the EPA, on February 20, 2018, requested comment on whether pollutant discharges from point sources that reach jurisdictional surface waters via groundwater may be subject to Clean Water Act (“CWA”) regulation. Specifically, the EPA sought comment on whether the EPA should consider clarification or revision of previous EPA statements regarding the Agency’s mandate to regulate discharges to surface waters via groundwater under the CWA.  In particular, the EPA sought comment on whether it is consistent with the CWA to require a CWA permit for indirect discharges into jurisdictional surface waters via groundwater. The EPA also sought comment on whether some or all of such discharges are addressed adequately through other federal authorities, existing state statutory or regulatory programs or through other existing federal regulations and permit programs.

After receiving over 50,000 comments, on April 15, 2019, the EPA issued an interpretive statement concluding that the releases of pollutants to groundwater are categorically excluded from the NPDES regardless of whether the groundwater is hydrologically connected to surface water.  The EPA reasoned that the Congress explicitly left regulation of groundwater discharges to the states and that the EPA had other statutory authorities through which to regulate groundwater other than the NPDES.  The EPA, in its statement, noted that its interpretation would apply in areas not within the jurisdiction of the U.S. Circuit Courts of Appeal for the Ninth and Fourth Circuits. 

In 2019, the U.S. Supreme Court agreed to hear the Ninth Circuit opinion.  Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted, County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019)Boiled down to its essence, the case turns on the meaning of “from.”  As noted above, an NPDES permit is required for point source pollutants – those that originate “from” a point source that are discharged into a navigable water.  But what if the pollutant originates from a point source, travels through groundwater, and then later reaches a WOTUS?  Does the permit requirement turn on a direct discharge into a WOTUS, or simply a discharge that originated at a point source that ultimately ends up in a WOTUS?  Clearly, the wells at issue in the case are point sources – on that point all agree.  But, what about discharges from the wells that aren’t directly into a WOTUS?  Are indirect discharges into a WOTUS via groundwater (which is otherwise exempt from the NPDES) subject to the permit requirement?

The case is very important to agriculture because of the ways that a pollutant can be discharged from an initial point and ultimately reach a WOTUS.  For example, the application of manure or commercial fertilizer to a farm field either via surface application or via injection could result in eventual runoff of excess via the surface or groundwater into a WOTUS.  No farmer can guarantee that 100 percent of a manure or fertilizer application is used by the crop to which it is applied and that there are no traces of the unused application remaining in the soil.  Likewise, while organic matter decays and returns to the soil, it contains nutrients that can be conveyed via stormwater into surface water.  The CWA recognizes this and contains an NPDES exemption for agricultural stormwater discharges. But, if the Supreme Court decides in favor of the environmental group, the exemption would be removed, subjecting farmers (and others) to onerous CWA penalties unless a discharge permit were obtained - at a cost estimated to exceed $250,000 (not to mention time delays).

What about farm field tile drainage systems?  Seemingly, such systems would make it easier for “pollutants” to enter a WOTUS.  Such drainage systems are prevalent in the Midwest and other places, including California’s Central Valley.  Should the law discourage agricultural drainage activities?  Thus, a ruling upholding the environmental group’s position would dramatically change agricultural production.  In addition, while large operations would be better positioned to absorb the increased cost of production activities, many mid and small-sized operations would not be able to adjust based simply on the economics involved.   The Court is expected to issue its ruling in 2020.

  1. Regulatory Takings

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state governments.  However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.”  The Fifth Amendment states in part “...nor shall private property be taken for public use without just compensation.” 

Whether a taking has occurred is not an issue when the government physically takes the property, with the only issue being whether the taking is compensable and the amount of compensation due to the landowner.  However, for non-physical (regulatory) takings, the issue is murkier.  At what point does government regulation of private property amount to a compensable taking?  Also, if the taking is by a state or local government, must the landowner “exhaust” state court remedies before seeking compensation for a regulatory taking?  If so, it could result in a landowner having no real access to the federal court system on a constitutional taking claim.  It’s an issue that the SCOTUS addressed in 2019. 

For a landowner that has sustained a state/local regulatory (or physical) taking, can compensation be sought initially in federal court or must legal procedures be first pursued in state court with federal courts only available if compensation is denied at the state level?  The U.S. Supreme Court answered this question in 1985.  In Williamson Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), the Court held that if a state provides an adequate procedure for seeking just compensation, there is no Fifth Amendment violation until the landowner has used the state procedure and has been denied just compensation.  However, 28 U.S.C. §1738, would then be applied with the resulting effect that the failure to receive compensation at the state level generally meant that there was no recourse in the federal courts because of the preclusive effect of the landowner having already litigated the same issue(s) in the state courts.  See, e.g., San Remo Hotel L.P., v. City and County of San Francisco, 545 U.S. 323 (2005).  This “catch-22” was what the Court examined in 2019.

In Knick v. Township of Scott, 139 S. Ct. 2162 (2019), the plaintiff owned a 90-acre farm in Pennsylvania on which she grazed horse and other animals.  The farm includes a small graveyard where ancestors of the plaintiff’s neighbors were buried.  Such “backyard burials” are permissible in Pennsylvania.  In late 2012, the defendant passed an ordinance requiring that “[a]ll cemeteries…be kept open and accessible to the general public during daylight hours.”  The ordinance defined a “cemetery” as “[a] place or area of ground, whether contained on private or public property which has been set apart for or otherwise utilized as a burial place for deceased human beings.”  In 2013, the defendant notified the plaintiff of her ordinance violation.  The plaintiff sued in state court for declaratory and injunctive relief on the basis that the ordinance amounted to a taking of her property, but she did not seek compensation via an inverse condemnation action.

While the case was pending, the defendant agreed to not enforce the ordinance.  As a result, the trial court refused to rule on the plaintiff’s action.  Without any ongoing enforcement of the ordinance, the plaintiff couldn’t show irreparable harm.  Without irreparable harm, the court noted, the plaintiff couldn’t establish what was necessary for the equitable relief she was seeking.  Frustrated at the result in state court, the plaintiff filed a takings claim in federal court.  However, the federal trial court dismissed the case because she hadn’t sought compensation at the state level.  Knick v. Scott Township, No. 3:14-CV-2223st, 2015 U.S. Dist. LEXIS 146861 (M.D. Pa. Oct. 29, 2015).  The appellate court affirmed, citing the Williamson case.  Knick v. Township of Scott, 862 F.3d 310 (3d Cir. 2017). 

In a 5-4 decision, Chief Justice Roberts (joined by Justices Alito, Gorsuch, Kavanaugh and Thomas), writing for the majority, reversed.  He pointed out that there is a distinction between the substance of a right and the remedy for the violation of that right.  It’s the takings clause of the Fifth Amendment that establishes that the government can only take (either physically or via regulation) private property by paying for it. The government’s infringement on private property is what triggers possible compensation.  The Constitutional violation has occurred and a state court decision that makes the landowner financially whole simply remedies that violation.  It doesn’t redefine the property right.  Thus, the majority opinion reasoned, laws confer legal rights and when those rights are violated there must be legal recourse.  See, e.g., Marbury v. Madison, 5 U.S. 137 (1803).  As the majority noted, “a government violates the Takings Clause when it takes property without compensation, and…a property owner may bring a Fifth Amendment claim [in federal court]… at that time.”

The Court’s decision is a significant win for farmers, ranchers, and other rural landowners that are impacted by state and local regulations impacting land use.  A Fifth Amendment right to compensation accrues at the time the taking occurs. 


Next week, I will continue working my way towards the most significant development in ag law and tax.  Stay tuned.


January 3, 2020 in Environmental Law, Regulatory Law | Permalink | Comments (0)

Wednesday, January 1, 2020

Top Ten Agricultural Law and Tax Developments from 2019 (Numbers 10 and 9)


2019 contained many legal and tax developments that were of importance to agricultural producers, rural landowners, agribusinesses and others tied to the business of agriculture.  The legal and tax systems impact agriculture in many ways.  From environmental and water issues to income tax and estate/business planning issues, to bankruptcy and contract issues, to financing and liability issues as well as others, there are many ways that legal and tax issues impact agriculture.    

On Monday’s post, I highlighted what I viewed as significant developments but not significant enough to make my “Top 10” list for 2019.  In today’s post, I start the journey through the ten biggest legal and tax developments of 2019 in terms of their impact (or potential impact) on the agricultural sector.

The “Top Ten” of 2019 – developments 10 and nine.  It’s the topic of today’s post.

  1. The Relevance of Roundup Jury Verdicts

2019 saw more juries render verdicts in cases involving alleged damages by Roundup.  The jury verdicts have been in the multi-millions of dollars.  Presently, over 11,000 cases involving Roundup have been filed and are awaiting trial and adjudication.  The basic claim in each case is that the use of Roundup caused some sort of physical injury to the plaintiff.  In many of the cases, the claim is that physical injury occurred after usage (usually over a long period of time) of Roundup.  While the temptation may be great to dismiss the recent verdicts as the result of raw emotion and passion by juries that don’t have much, if any, relation to agriculture, that temptation should be resisted.  It is true that juries tend to react based on emotion to a greater degree than do judges (indeed, the judge in the 2018 case significantly reduced the jury verdict), but that doesn’t mean that there aren’t some “take-home” implications for farming and ranching operations at this early stage of the litigation.

Farming and ranching operations should at least begin to think about the possible implications of the Roundup litigation. 

  • What about lease agreements? Farmers and ranchers that lease out farmland and pasture may want to reexamine the lease terms. Consideration should be given as to whether the lease should incorporate language that specifies that the tenant assumes the risk of claims arising from the use of Roundup or products containing glyphosate.  Relatedly, perhaps language should be included that either involves the tenant waiving potential legal claims against the landlord or provides for the landlord to be indemnified by the tenant for any and all glyphosate-related claims.  Should language be included specifying that the tenant has the sole discretion to select chemicals to be used on the farm and that any such chemicals shall be used in accordance with label directions and any applicable regulatory guidance?  How should the economics of the lease be adjusted to reflect this type of lease language?  The tenant is giving up some rights and will want compensation for the loss of those rights.  If the lease isn’t in writing, perhaps this is a good time to reduce it to writing. 
  • Is the comprehensive liability policy for the farm/ranch sufficient to cover glyphosate-related claims? Many farm comprehensive general liability policies contain “pollution exclusion” clauses.  Do those clauses exclude coverage for glyphosate-related claims?  How is “pollution” defined under the policy?  Does it include pesticides and herbicides and associated claims?  Does it cover loss to livestock that consume corn and/or soybeans that were grown with the usage of chemicals containing glyphosate?  Can a rider be obtained to provide coverage, if necessary?  These are all important questions to ask the insurance agent and an ag lawyer trained in reading farm comprehensive liability policies. 
  • If the farm employs workers, should that arrangement be modified from employer/employee to independent contractor status? If employee status remains and an employee sues the employer for alleged glyphosate-related damages, what can be done?  Will enrolling the farm in the state workers’ compensation program provide sufficient liability protection for the farming/ranching operation?      

What About Food Products?

To date, the cases have all involved the use of Roundup directly over a long period of time.  At some point will there be cases where consumers of food products claim they were harmed by the presence of glyphosate in the food they ate?  If those cases arise, given the use of production contracts in agriculture and the possibility of tracing back to the farm from which the grain in the allegedly contaminated food product was grown, does the farmer have liability?  If you think this is far-fetched, remember that there is presently a member of the U.S. House that is proposing the regulation (if not elimination) of cows with flatulence.  Relatedly, there are certain segments of the population that are opposed to the manner in which modern, conventional agriculture is conducted.  These persons/groups would not hesitate in trying to pin liability all the way back down the chain to the farmer. 

The Roundup litigation shouldn’t be ignored.  It may be time to start thinking through possible implications and modifying certain aspects of the way the typical farm or ranch does business in order to provide the greatest liability protection possible. 

  1. Ag Antitrust – The Ability of a Farmer To Sue For Anticompetitive Conduct

The markets for the major ag products in the U.S. are highly concentrated.  This raises economic and legal questions as to whether the conduct that such concentration makes possible improperly denies farmers a proper share of the retail food dollar and simultaneously increase prices to consumers.  In other words, does the conduct associated with market concentration at these various levels negatively impact commodity prices, and result in producers receiving less of the retail food dollar while consumers simultaneously pay more for food?  If so, what can a farmer or rancher do about it?  Does antitrust law provide a remedy? Does it matter that a farmer/rancher is not a directly injured party?  In 2019, the U.S. Supreme Court decided a case involving the Apple Co. and IPhone users that involves some of these concepts.  The Court’s decision has implications for agriculture. 

In 1977, the U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that a plaintiff cannot claim damages when the plaintiff is not the party that was directly injured.  In other words, even if an antitrust violation can be established that results, for example, in ag product prices being lower than a competitive market would produce, Illinois Brick bars the farmer/rancher from suing for damages due to lack of standing because they haven’t been directly injured – there is a processor in-between.

Note:   Since 1977, most states have enacted laws or have judicial opinions that reject the Illinois Brick decision (which are not preempted by federal law – see California v. ARC America, 490 U.S. 93 (1989)).  In these states, indirect purchasers can seek recovery under state antitrust laws. 

In Apple Inc. v. Pepper, et al., 139 S. Ct. 1514 (2019), IPhone users sued Apple Inc. over its operations of the App Store.  The trial court held that the consumers in the case were indirect purchasers that lacked standing due to Illinois Brick.  The Ninth Circuit reversed (Pepper v. Apple Inc., 846 F.3d 313 (9th Cir. 2017)) and the U.S. Supreme Court agreed to hear the case (Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018)On May 13, the Supreme Court affirmed the Ninth Circuit decision by a 5 to 4 vote.  Thus, the plaintiffs could pursue their claims against Apple for allegedly monopolizing access to apps for Apple’s iPhones and imposing monopoly prices.  Apple had constructed its arrangement with the app developers so that formally the developers set the prices charged to buyers and Apple took a 30 percent commission from that price before remitting the remainder to the developer.  Thus, as a formal contract matter, Apple was only the agent of the developer although the customers could only deal with Apple to get apps.  The majority took the view that Apple was a retailer of apps with an alleged monopoly over the supply.  In this view the formal contract relationship between the developer and Apple was irrelevant to the question of whether the buyers were the first victim to Apple’s alleged monopoly. 

Thus, the court was unanimous that the Illinois Brick rule should remain.  However, the decision appears to reject the use of formal contracts to determine who is the first buyer.  This is consistent with historic practice in antitrust where courts have looked to the substance and not the form of the conduct.  However, to determine who is the first seller, the majority focused on transactional characteristics that seem very formal. But it repeatedly characterized Apple as a classic retailer that selected the goods it would sell, and generally controlled the marketing of the goods.  In contrast, there are real “agents” who function as independent contractors to deliver goods for others and remit the payments.  The decision does not make this distinction explicitly but its repeated characterization of Apple as a retailer suggests that the majority was taking a realistic, functional view of the relationship. A more nuanced analysis of this point would have been very helpful.

Peter Carstensen, antitrust expert and Professor Emeritus of the Wisconsin School of Law commented to me that because the decision leaves the Illinois Brick rule in place, it fails to give farmers any direct expansion of their right to damages under federal law.  Of greater significance for agriculture where the concern is exploitation of monopsony or oligopsony power, Prof. Carstensen noted that the majority opinion is clear that both downstream customers and upstream suppliers (e.g., farmers) can sue the buyer/seller engaged in anticompetitive conduct causing harm.  This is helpful with respect to poultry and (potentially) hog cases brought on behalf of farmers providing growing services. It confirms their independent right to claim damages.  This declaration is also relevant to the continuing disputes over the interpretation of the Packers and Stockyards Act (PSA) condemnation of unfair and discriminatory conduct. 7 U.S.C. §§182 et seq. The courts have imposed an interpretation that holds that the PSA is an antitrust statute which requires competitive injury before there can be a violation.  In addition, the decisions have required that there be an adverse effect on consumers and not just producers.  Prof. Carstensen noted that the Pepper decision re-emphasizes the well-established antitrust principle that both upstream and downstream harms are independent antitrust injuries.  In future PSA cases proof of harm to producers should establish “harm to competition.” 

Another implicit but important underlying assumption of the case is that Illinois Brick applies to exploitive conduct (i.e., either excessive prices imposed on buyers, or under payment to sellers).  The implication is that this rule has no bearing on cases involving exclusion or predation where the illegal conduct harms the victims but does not create a direct gain to the wrongdoer.  Unlike the exploitation cases, the predatory wrongdoer is not sitting on a “pot of money” resulting from its illegal deeds; rather it has expended resources to exclude rivals or entrench its market position in some way.  In such cases the measure of harm is the loss to the victim and not the gain to the wrongdoer.  This is important because usually the harm results from some market manipulation or exclusionary practice in which the wrongdoer causes the harms without directly dealing with the victim. Where farmers are victims of such exclusionary practices even if the harm is inflicted indirectly, they would still have standing to seek damages as well as injunctions in federal court.

On the whole, Prof. Carstensen concluded that the Supreme Court reaffirmed the Illinois Brick rule.  However, it employs a functional analysis to identify the first buyer (seller).  This may improve slightly the chances of farmers getting damages in federal court when buyers engaged in unlawful exploitation have used agents or other specious means to avoid direct dealings.  But the rule remains a major barrier to getting damages for farmers harmed indirectly by exploitive practices by downstream buyers.  Where the farmers’ harm stems from exclusionary or predatory conduct, the decision reinforces the position that the rule does not apply to such damages.  But, it also provides a further correction to the misinterpretations of competitive harm invoked in PSA cases.  The Court’s opinion is a helpful one for agriculture.


In Friday’s post, I will continue the trek through the Top Ten of 2019. 

January 1, 2020 in Civil Liabilities, Regulatory Law | Permalink | Comments (0)

Monday, December 30, 2019

The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019


It’s the time of year again where I sift through the legal and tax developments impacting agriculture from the past year, and rank them in terms of their importance to farmers, ranchers, agribusinesses, rural landowners and the ag sector in general. 

As usual, 2019 contained many legal developments of importance.  There were relatively fewer major tax developments in 2019 compared to prior years, but the issues ebb and flow from year-to-year.  It’s also difficult to pair things down to ten significant developments.  There are other developments that are also significant.  So, today’s post is devoted to those developments that were left on the cutting table and didn’t quite make the “Top Ten” for 2019.

The “almost top ten of 2019” – that’s the topic of today’s post.

Chapter 12 Debt Limit Increase

To be eligible for Chapter 12 bankruptcy, a debtor must be a “family farmer” or a “family fisherman” with “regular annual income.”  A “family farmer” is defined as an individual or individual and spouse who earned more than 50 percent of their gross income from farming either for the taxable year preceding the year of filing or during the second and third tax years preceding filing; have more than 50 percent of their debt be debt from a farming operation that the debtor owns or operates; and, the aggregate debt must not exceed a threshold amount. That threshold amount has only adjusted for inflation since enactment of Chapter 12 in 1986, even though farms have increased in size and capital needs faster than the rate of inflation.  When enacted, 86 percent of farmers were estimated to qualify for Chapter 12.  That percentage had declined over time due to the debt limit only periodically increasing with inflation and stood at $4,411,400 as of the beginning of 2019.  Thus, fewer farmers were able to use Chapter 12 to deprioritize taxes associated with the sale of farm assets used in the farming operation and ultimately put together a reorganization plan that will allow the farmer to stay on the farm to continue production activities, make restructured loan payments and have some debt written off.  However, as of August 23, 2019, the debt limit for a family farmer filing Chapter 12 was increased to $10,000,000 for plans filed on or after that date.  H.R. 2336, Family Farmer Relief Act of 2019, signed into law on Aug. 23, 2019 as Pub. L. No. 116-51.

Which Government Agency Sues a Farmer For a WOTUS Violation?

In 2019, a federal trial court allowed the U.S. Department of Justice (DOJ) to sue a farmer for an alleged CWA dredge and bill permit violation without a specific recommendation from the Environmental Protection Agency (EPA).  The farmer was alleged to have discharged “pollutants” into a “waters of the United States” (WOTUS) as a result of tractor tillage activities on his farmland containing or near to wetlands contiguous to a creek that flowed into a WOTUS.  Staff of the U.S. Army Corps of Engineers (COE) saw the tilled ground and investigated.  The COE staff then conferred with the EPA and referred the matter to the U.S. Department of Justice (DOJ).  The DOJ sued (during the Obama Administration) for enforcement of a CWA §404 permit “by the authority of the Attorney General, and at the request of the Secretary of the Army acting through the United States Corps of Engineers.”  The DOJ alleged that the equipment "constituted a 'point source'" pollutant under the CWA and "resulted in the placement of dredged spoil, biological materials, rock, sand, cellar dirt or other earthen material constituting “pollutants” (within the meaning of 33 U.S.C. § 1362(6)) into waters of the United States. The DOJ alleged that the defendant impacted water plants, changed the river bottom and/or replaced Waters of the United States with dry land, and "resulted in the 'discharge of any pollutant' within the meaning of 33 U.S.C. § 1311(a)."  The farmer moved for summary judgment on the basis that the CWA authorizes only the EPA Administrator to file a CWA §404 enforcement action and that the court, therefore, lacked jurisdiction.  The court disagreed and determined that the defendant could be sued by the U.S. Department of Justice upon the mere recommendation of the COE and without a specific recommendation from the EPA alleging a CWA violation, and in a situation where the CWA did not determine any CWA jurisdiction and only the COE did.  This finding was despite a 1979 Attorney General opinion No. 197 determining that the EPA and not the COE has the ultimate authority to construe what is a navigable WOTUS.  Ultimately, the parties negotiated a settlement costing the farmer over $5 million.  United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 75309 (E.D. Cal. May 3, 2019)United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 93590 (E.D. Cal. Jun. 3, 2019).

USDA’s Swampbuster “Incompetence”

How does the USDA determine if a tract of farmland contains a wet area that is subject to the Swampbuster rules?  That’s a question of key importance to farmers.  That process was at issue in a 2019 case, and the court painted a rather bleak and embarrassing picture of the USDA bureaucrats.  In fact, the USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence.  I will skip the details here (I covered the case in a blog post earlier in 2019), but the appellate court dealt harshly with the USDA.  The USDA uses comparison sites to determine if a particular site is a wetland subject to Swampbuster rules.  In this case, 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 had 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 court’s decision is a step in the right direction for agriculture.  Boucher v. United States Department of Agriculture, 934 F.3d 530(7th Cir. 2019). 

No More EPA “Finger on the Scales”

During 2019, a federal trial court ruled that the EPA has the authority to bar persons currently receiving grant money from the EPA to serve on EPA scientific advisory committees.  That’s an important development for the regulated community, including farmers and ranchers.  The court’s opinion ended an Obama-era EPA policy of allowing EPA advisory committee members to be in present receipt of EPA grants.  At issue in the case was a directive of the Trump-EPA regarding membership in its federal advisory committees.  The directive specified “that no member of an EPA federal advisory committee be currently in receipt of EPA grants.” The directive reversed an Obama-era rule that allowed scientists in receipt of EPA grants to sit on advisory panels.  That rule was resulting in biased advisory committees stacked with committee members that opposed coal and favored an expansive “Waters of the United States” rule among other matters.  In defending its policy change, the EPA explained that “while receipt of grant funds from the EPA may not constitute a financial conflict of interest, receipt of that funding could raise independence concerns depending on the nature of the research conducted and the issues addressed by the committee.” Thus, the change was necessary “to ensure integrity and confidence in its advisory committees.” The trial court found the EPA’s explanation to be within the zone of reasonableness. Based on these findings, the trial court held that the EPA action was rational, considered the relevant factors and was within the authority delegated to the agency.  The court granted the EPA’s motion to dismiss the case. Physicians for Social Responsibility v. Wheeler, 359 F. Supp. 3d 27 (D. D.C. 2019).

Coming-To-The-Nuisance By Staying Put?

Nuisance lawsuits filed against farming operations are often triggered by offensive odors that migrate to neighboring rural residential landowners.  In these situations courts consider numerous factors in determining whether any particular farm or ranch operation is a nuisance.    Factors that are of primary importance are priority of location and reasonableness of the operation.  Together, these two factors have led courts to develop a “coming to the nuisance” defense.  This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances.  But, what if the ag nuisance comes to you?  Is the ag operation similarly protected in that situation?  An interesting Indiana court case in 2019 dealt with the issue.  In the case, the defendants were three individuals, their farming operation and a hog supplier.  Basically, a senior member of the family retired to a farm home on the premises and other family members established a large-scale confined animal feeding operation (CAFO) on another part of the farm nearby.  The odor issue got bad enough that the retired farmer sued.  However, the court determined that the CAFO was operated properly, had all of the necessary permits, and was within the zoning laws.  The court noted that the plaintiff alleged no distinct, investment-backed expectations that the CAFO had frustrated.  The court upheld the state right-to-farm law and also determined that a “taking” had not occurred because the plaintiff had not sold his home and moved away from the place where he grew up and lived all of his life.  Himsel v. Himsel, No. 18A-PL-645, 2019 Ind. App. LEXIS 181 (Ind. Ct. App. Apr. 22, 2019).

Obamacare Individual Mandate Unconstitutional

In his decision in 2012 upholding Obamacare as constitutional, Chief Justice Roberts hinged the constitutionality of the law on the individual mandate (contained in I.R.C. §5000A) being a tax and, therefore, within the taxing authority of the Congress.  Thus, if the tax is eliminated or the rate of the penalty tax taken to zero is the law unconstitutional?  That’s a possibility now that the tax rate on the penalty is zero for tax years beginning after 2018.  In late 2018, a federal district court noted that the payment was distinct from the individual mandate and determined that the individual mandate was no longer constitutional as of January 1, 2019 because it would no longer trigger any tax. In addition, because the individual mandate was the linchpin of the entire law, the court determined that the provision could not be severed from the balance of the law. As a result, the court reasoned, as of January 1, 2019, Obamacare no longer had any constitutional basis.  Texas v. United States, 340 F.3d 579 (N.D. Tex. 2018).  In 2019, the appellate court affirmed.  Texas v. United States, No. 19-10011, 2019 U.S. App. LEXIS 37567 (5th Cir. Dec .18, 2019).  The appellate court determined that the individual mandate was unconstitutional because it could no longer be read as a tax, and there was no other constitutional provision that justified that exercise of congressional power.  Watch for this case to end up back before the Supreme Court.  The case is of monumental importance not only on the health insurance issue.  Obamacare contained many taxes that would be invalidated if the law were finally determined to be unconstitutional. 


These were the developments that didn’t quite make the “Top 10” of 2019.  In Wednesday’s post, I will start the trek through the Top 10 of 2019.

December 30, 2019 in Bankruptcy, Environmental Law, Income Tax, Regulatory Law | Permalink | Comments (0)

Tuesday, December 24, 2019

Year-End Legislation Contains Tax Extenders, Repealers and Modifications to Retirement Provisions


Last week, the Congress passed Omnibus spending bills containing multiple parts that impact retirement provisions and disaster relief tax rules.  The legislation also contains certain tax extender provisions and repeals of some of the taxes contained in Obamacare.  The President signed “The Further Consolidated Appropriations Act” (H.R. 1865, PL 116-94) and “The Consolidated Appropriations Act, 2020” (H.R. 1158, PL 116-93) into law on December 20.  Contained in the Omnibus legislation is the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” (“Disaster Act”) which provides relief for taxpayers affected by disasters in 2018 through Jan. 19, 2020.  Also included in the Omnibus legislation is the “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act).

New tax and retirement-related provisions – it’s the topic of today’s post.

Repealed Provisions

Obamacare.  The Omnibus legislation repeals the following taxes contained in Obamacare:

  • Effective January 1, 2014, §9010 of Obamacare imposed an annual flat fee on covered entities engaged in the business of providing health insurance with respect to certain health risks.  That tax is repealed effective for tax years beginning after 2020. Further Consolidated Appropriations Act of 2020, Div. N, Sec. 502. 
  • Obamacare added I.R.C. §4191(a) to impose an excise tax of 2.3 percent on the sale of a taxable medical device by the manufacturer, producer, or importer of the device for sales occurring after 2012. The new law repeals the excise tax for sales occurring after Dec. 31, 2019.  Further Consolidated Appropriations Act of 2020, N, Sec. 501.
  • Obamacare added I.R.C. §4980I to add a nondeductible excise tax on insurers when the aggregate value of employer-sponsored health insurance coverage for an employee, former employee, surviving spouse or other primary insured individual exceeded a threshold amount. This tax, referred to as a tax on “Cadillac” plans, is repealed for tax years beginning after 2019. Further Consolidated Appropriations Act of 2020, N Sec. 503.

Note:  The PCORI taxes on insured and self-insured plans, set to expire in 2019, were extended 10 years.

Retirement Provisions

The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) passed the house on May 23, but the Senate never took it up.  Nevertheless, the SECURE Act provisions did get included in the Omnibus legislation largely unmodified.  The legislation represents the first major retirement legislation since the Pension Protection Act of 2006.

Here are the key highlights of the SECURE Act:

  • An increase in the required minimum distribution (RMD) age for distributions from a traditional IRA from the year in which an individual turns 70.5 to the year the individual turns 72. This provision matches the existing rules for 401(k)s and Roth IRAs. The provision is applicable to persons that did not reach age 70.5 by the end of 2019. SECURE Act §114(a), amending I.R.C. §401(a)(9(C)(i)(I).    

Note:  Proposed Senate legislation would set the RMD at age 75.  There have also been some discussions among staffers of tax committees of exempting smaller IRA account balances from the RMD rule.  

  • The amount of a taxpayer’s qualified charitable distributions from an IRA direct to a qualified charity that are not includible in gross income for a tax year is reduced(but not below zero) by the excess of the total amount of IRA deductions allowed to the taxpayer for all tax years ending on or after the date the taxpayer attains age 70.5, over the total amount of reductions for all tax years preceding the current tax year.  SECURE Act §107(b), amending I.R.C. §408(d)(8)(A).  The provision is effective for contributions made for tax years beginning after 2019 and for distributions for tax years beginning after 2019. 
  • A repeal of the rule barring contributions to a traditional IRA by persons age 70.5 and up. There was no such rule that barred post-age 70.5 contributions to a Roth IRA.  SECURE Act §107(a), repealing I.R.C. §219(d)(1).
  • Part-time employees are allowed to contribute to a 401(k) plan. SECURE Act §112(a)(1), amending I.R.C. §412(k)(2)(D).  
  • The legislation provides a small employer pension plan start-up credit maximum set at the greater of $500, or the lesser of $250 for each employee of the eligible employer who is non-highly-compensated and who is eligible to participate in the plan or $5,000. Secure Act §104(a), amending I.R.C. §45E(b)(1). 
  • The new law expands the ability to run multiple employer plans and make the process easier overall by allowing small employers to band together to set up and offer 401(k) plans with less fiduciary liability concern and less cost than presently exists. This provision is effective for plan years beginning after 2020.  SECURE Act §101, amending I.R.C. §413(e) and various portions of ERISA.
  • The legislation adds a new exemption from the 10 percent penalty of I.R.C. §72(t) for early withdrawals from a retirement account. Under the provision, a parent is allowed to withdraw up to $5,000 of funds penalty-free from a 401(k), IRA or other qualified retirement plan within a year of a child’s birth or the finalization of a child’s adoption.  The provision is applicable for distributions made after 2019.  SECURE Act §113, amending various I.R.C. sections. 
  • Under prior law, funds contained in IRAs (and qualified plans) that a non-spouse inherited IRA could be withdrawn over the beneficiary’s life expectancy. Now, so-called “stretch” IRAs are eliminated by virtue of requiring non-spouse IRA beneficiaries (except for a minor child of the IRA owner, chronically ill individual, or anyone who is not more than 10 years younger than the IRA owner) to withdraw funds from inherited accounts within 10 years. Estimates are that this provision will generate at least $15 billion in additional tax revenue in the first 10 years.  The provision is effective January 1, 2020.  SECURE Act, §401(a)(1), amending I.R.C. §401(a)(9)(E) and (H)(ii).  

Example:  Harold left his IRA to his 27-year-old grandson, Samuel.  Under prior law, Samuel could, based on his life expectancy, take distributions over 55 years.  If the amount in the IRA at the time of Harold’s death was $1 million, Samuel’s first-year distribution would be $18,182 ($1,000,000/55).  Depending on Samuel’s other income, the IRA income could be taxed at a rather low tax bracket rate or a high tax bracket rate.  The amount remaining in Samuel’s inherited IRA would continue to grow over Samuel’s lifetime.  Under the CAA, however, Samuel must take all distributions from the inherited IRA within 10 years of Harold’s death.  As a result, Samuel will likely be placed into a much higher tax bracket.  Harold could avoid this result, for example, by leaving the IRA to the Rural Law Program at Washburn University School of Law. 

The provision does make sense from a policy standpoint given that the U.S. Supreme Court has held that inherited IRAs are not retirement accounts.  Clark v. Rameker, 134 S. Ct. 2242 (U.S. 2014).  However, the potential for a higher tax burden placed on the beneficiary will require additional estate planning and strategic Roth conversions during the account owner’s lifetime.  Drafters of trust instruments should review existing trusts for clients that contain “pass-through” trusts to ensure conformity with the new rule.  For trusts that don’t conform to the new rules, access to funds by heirs of IRA beneficiaries could be restricted and tax obligations could be large.

The provision applies to all qualified plans such as 401(k), 403(b) and 457(b) plans.  It also applies to ESOPs, cash balance plans, 401(a) plans (defined contribution) as well as lump-sum distributions from defined benefit plans, and IRAs. However, it does not apply to a spousal rollover. When the owner dies, their spouse may roll over their spouse’s IRA into their own IRA.


The Congress allowed numerous tax provisions to expire at the end of 2017 and 2018.  The CAA addresses some of the expired provisions, restoring them retroactively and extending them through 2020.  Here’s a list of the more significant ones:

  • The provision excluding from income qualified principal residence debt that has been forgiven (up to $2 million; $1 million for married taxpayers filing separately) is restored for 2018 and 2019 and extended through 2020. R.C. §108(a)(1)(E as amended by §101(a) of the Disaster Act.  The provision also applies to qualified principal residence debt discharged via a binding written agreement entered into before 2021.  Disaster Act §101(b) amending I.R.C. §108(h)(2)
  • The deduction for mortgage insurance premiums is retroactively reinstated and extended through 2020. This provision is extended through 2020 for amounts paid or incurred after Dec. 31, 2017.  Disaster Act §102 amending I.R.C. §163(h)(3)(E)(iv)(l).   
  • The medical expense deduction floor is set at 7.5 percent for 2019 and 2020. Disaster Act §103, amending I.R.C. §213(f).
  • The tax code provision providing for a 3-year depreciation recovery period for race horses two years old or younger is extended for such horses placed in service before 2021. Disaster Act §114, amending I.R.C. §168(e)(3)(A)(i). 
  • The legislation restores the qualified tuition (and related expenses) deduction for 2018 and 2019 and extends it through 2020. Disaster Act §104, amending I.R.C. §222(e).
  • The work opportunity tax credit that employers can claim for hiring individuals from specific groups is extended through 2020. R.C. §51(c)(4), as amended by §143 of the Disaster Act. 
  • The employer tax credit for paid family and medical leave is extended through 2020. Disaster Act §142, amending I.R.C. §45S(i). 
  • The biodiesel fuel tax credit is extended through 2020. Disaster Act §121(a), amending I.R.C. §40A(g)
  • The tax credit for nonbusiness energy property (e.g., windows, doors, skylights, roofs, etc.) for personal residences is extended for tax years beginning after 2017 and before 2021. Disaster Act §123, amending I.R.C. §25C(g)(2). 
  • The tax credit for electricity produced from certain “renewable” resources is extended for qualified facilities constructed before January 1, 2021. Disaster Act §127(a), amending various subsections of I.R.C. §45(d).  For wind facilities the construction of which begins in calendar year 2020, the applicable credit is reduced by 40 percent. Disaster Act §127(c)(2)(A), amending I.R.C. §45(b)(5). 
  • The tax credit for manufacturers of energy-efficient residential homes is extended for homes acquired before January 1, 2021. Disaster Act §129, amending I.R.C. §45L(g). 

Other Provisions

The TCJA changed the rules for deducting losses associated with casualties and disasters.  The Disaster Act modifies those TCJA rules and provides that taxpayers impacted by a qualified disaster beginning January 1, 2018, and ending 60 days after the date of enactment, can make tax-favored withdrawals from retirement plans.  In addition, the modification provides for an automatic 60-day filing extension of all tax deadlines for those taxpayers affected by federally declared disasters that are declared after December 20, 2019. Disaster Act §205, amending I.R.C. §7508A,

The Disaster Act also modifies the contribution limits with respect to donations by businesses and individuals giving to provide relief to those affected by disasters.

The modification to the “kiddie-tax” contained in the Tax Cuts and Jobs Act (TCJA) is repealed effective January 1, 2020, but an election can be made to have the new rules apply to the 2018 and 2019 tax years.  This means that children’s unearned income will be taxed at their parents’ highest marginal tax rate rather than the rates applicable to trusts and estates, and the taxable income of a child attributable to earned income will be taxed under the rates for single individuals.  SECURE Act §501(a), amending I.R.C. §1(j)(4).   

What Wasn’t Addressed

There were several provisions in the TCJA that needed technical corrections.  Not the least of those was the need to clarify that qualified improvement property is 15-year property.  However, the nothing in the Omnibus legislation addresses this issue.  The Omnibus legislation also does not increase or repeal the $10,000 limit on deductions for state and local taxes for individuals.


The changes included in the various parts of the Omnibus legislation are significant, particularly with respect to the retirement provisions.  Most certainly, Roth IRAs will be an even more popular tax and retirement planning tool. 

A very merry Christmas to all!

December 24, 2019 in Estate Planning, Income Tax | Permalink | Comments (0)

Friday, December 20, 2019

2020 National Summer Ag Income Tax/Estate and Business Planning Seminar


Each summer for almost 15 years, I have conducted a national summer seminar at a choice location somewhere in the United States.  During some summers, there has been more than a single event.  But, with each event, the goal is to take agricultural tax, estate planning and business planning education and information out to practitioners in-person.  Over the years, I have met many practitioners that do a great job of representing agricultural producers and agribusinesses with difficult tax and estate/business/succession planning situations.  Because, ag tax and ag law is unique, the detailed work in preparing for those unique issues is always present.

The 2020 summer national ag tax and estate/business planning seminar – it’s the topic of today’s post.

Deadwood, South Dakota - July 20-21, 2020

Hold the date for the 2020 summer CLE/CPE seminar.  This coming summer’s event will be in Deadwood, South Dakota on July 20 and 21.  The event is sponsored by the Washburn University School of Law.  The Kansas State University Department of Agricultural Economics will be a co-sponsor.  The location is The Lodge at Deadwood.  The Lodge is relatively new, opening in 2009.  It is located just west of Deadwood on a bluff that overlooks the town.  You can learn more about The Lodge here:  The Lodge has great conference facilities and also contains the Deadwood Grille featuring Western dining.  For families with children, The Lodge contains an indoor water playland.  There is also transportation from The Lodge to Main street in Deadwood where the shops and local attractions are located.  Deadwood is in the Black Hills area of western South Dakota.  Nearby is Mt. Rushmore, Crazy Horse, Custer State Park and Rapid City.  The closest flight connection is via Rapid City.  To the west is Devil’s Tower in Wyoming.  The Deadwood area is a beautiful area, and the weather in late July should be fabulous. 

Featured Speakers

On Day 1, July 20, joining me on the program will be Paul Neiffer.  Paul has been doing the summer seminars with me for several years now and is affiliated with CliftonLarsonAllen, LLP.  We enjoy working together to provide the best in ag tax education that you can find.  Also, confirmed as a Day 1 speaker is the honorable Judge Elizabeth Paris of the U.S. Tax Court.  She will provide an informative session on litigating a case before the U.S. Tax Court and the special rules and procedures of the court.  Judge Paris has decided several important ag cases during her tenure on the court, and is a great speaker.  You won’t want to miss her session.

I will lead off Day 2 with coverage of the most recent ag-related cases and rulings impacted farm and ranch estate and business planning.  Also joining me on Day 2 will be Prof. Jeffrey Jackson, a colleague of mine at Washburn University School of Law.  He will present a session on gun trusts for holding firearms and the unique issues that passing firearms at death can present.  Prof. Jackson will discuss what a gun trust is and how it works, what it cannot do, and client counseling with respect to passage of firearms by gift or at death.

Also making a presentation on Day 2 will be Marc Vianello.  Marc is a CPA and the managing member of Vianello Forensic Consulting, LLC.  He is an experienced financial professional with and intensive 30-year history as a forensic accountant and expert witness regarding damages in highly complex litigation, including breach of contract, intellectual property (patent, Lanham, trade secret, copyright), business valuation, franchise, agriculture, Qui Tam and class action, personal injury, employment, casualties, financial crimes, and all other types of income and valuation damages. Marc also has an extensive background regarding the computation of estate and gift tax discounts for lack of marketability.  Marc’s presentation will focus on how practitioners can utilize forensic accounting techniques and expert testimony to bolster a client’s position against the IRS on audit as well as in court.

The Day 1 and Day 2 speakers and agenda aren’t fully completed yet, but the ones mentioned above are confirmed.  An ethics session may also be added.    


The two-day event will be broadcast live over the web.  The webcast will be handled by Glen McBeth, Instructional Technology at the Washburn Law School Law Library.  Glen has broadcast the last few summer seminars and does a tremendous job producing a high-quality webcast. 

Room Block

A room block at The Lodge will be established and you will be able to reserve your room as soon as the seminar brochure is finalized and registration is opened.  The room block will begin the weekend before the seminar begins so that you can arrive early and enjoy the weekend in Deadwood and the Black Hills area prior to the event if you’d like. 

Alumni Event

Washburn’s law school will also be holding an alumni event at The Lodge that corresponds with the summer seminar.  Presently, the plan is to have a social event for law school alumni and registrants of the summer seminar on Sunday evening, July 19.  That event will be followed the next day with a CLE seminar focusing on law and technology.  That CLE event will also be at The Lodge and will run simultaneously with Day 1 of the two-day summer seminar on July 20.  The summer seminar will continue on July 21.


If your business is interested in sponsoring a breakfast, break or lunch, and having vending space at the conference, please let me know.  It’s a great event to interact with practitioners that represent the legal and tax needs of farmers and ranchers from across the country that are involved in many aspects of agriculture.


Please hold the date for the July 20-21 conference and, for law school alumni (as well as registrants for the two-day event), the additional alumni reception and associated CLE event.  It looks to be an outstanding opportunity for specialized training in ag tax and estate/business planning. 

December 20, 2019 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Wednesday, December 18, 2019

Changing Water Right Usage


Monday’s post featured commentary by Prof. Burke Griggs at Washburn University School of Law concerning a battle over the application of the prior appropriation doctrine in central Kansas.  Another matter involving water usage in Kansas concerns a couple of west-central Kansas towns that need water and agricultural (and other interests) in another county that don’t want to give it up.  This battle concerns the change of an existing water right.  Again, I have asked Prof. Griggs to provide the bulk of today’s commentary.

Changing the use of an existing water right – it’s the topic of today’s post.

Water Right Usage – What’s the Issue?

Monday’s post explained the prior appropriation method – the first-in-time, first-in-right system for allocating water rights.  The system allows the holder of a water right to change the place of use of the water associated with the right; change the type of water use; and also change the point of diversion of the water.  The ability of a water right holder to do these things is important.  In Kansas, for example, some parts of the state do not have any water available for allocation under newly issued permits.  In those areas, the ability to acquire a water right (say, for example, by purchasing the tract the water right is associated with) and changing the point of diversion, place of use or type of usage is critical.  While possible, those changes can only be made by filing an application with the Division of Water Resources (DWR) and paying a filing fee. 

The Hays/Russell Water Quandary

Prof. Griggs provides the following commentary on a water issue in Kansas involving the cities of Hays and Russell in west-central Kansas:

The City of Hays is a great location for railroads, as the Kansas Pacific Railroad realized in the late 1860’s. The City of Russell lies above a great location for oil and gas production.  Russell County is the home of the first fracked oil and gas well. But both cities are running short on water.  In 1995, Hays purchased the R9 Ranch (Ranch) in southwestern Edwards County along with its 30 irrigation water rights, which total approximately 7,726 acre-feet of annual use.  An acre-foot is the volume of water needed to cover an acre of land to the depth of one-foot.  

In 2015, the Cities of Hays and Russell (Cities) together applied to change these water rights to municipal use. Under typical circumstances, the DWR would evaluate the change applications by its standard statutory and regulatory procedure, accounting for the usual changes in consumptive uses and making provisions to protect existing water rights from the effects of the proposed changes.  Kan. Stat. Ann. 82a-708b; Kan. Admin. Regs. 5-5-1 et seq.  However, because the water rights under review exceed 2,000 acre-feet and are to be moved more than 35 miles, the change also engaged the Kansas Water Transfer Act (KWTA), which places an additional layer of review upon the change applications. Kan. Stat. Ann. 82a-1501 et seq.   Thus, in early 2016, the Cities also submitted an application to transfer water from the Ranch to the Cities pursuant to the KWTA.

The Cities’ application attracted opposition by irrigation interests in Edwards County, including Groundwater Management District 5 (GMD5), which is concerned by the export of groundwater out of the area. On March 28, 2019, the DWR contingently approved the change applications to municipal use for 6,757 acre-feet, a reduction based on the higher level of consumptive use for municipal rights.  See, e.g., In the Matter of the City of Hays’ and City of Russell’s Applications, Master Order, March 28, 2019, at 8-10, 43-45available at  The order also allows for the quantification of water usage on a ten-year rolling average of 48,000 acre-feet, more than the reduction required by the consumptive use determination. Id. At 17-18, 43-45.  The order is one of “contingent approval” because the change will not be final until the Cities fulfill the requirements of the KWTA.

Opponents of the change filed petitions for administrative review, alleging, among other things, that the approvals were unreasonable by allowing too much water to leave Edwards County, and that the Cities’ operation of the changed rights would impair existing irrigation rights.  See requests for administrative review available at  In Kansas, the Secretary of Agriculture has the authority to review decisions by the chief engineer regarding changes in water rights.  Kan. Stat. Ann. 82a-1901(a).  Kansas is the only state in the union in which the water rights agency is statutorily subservient to the department of agriculture.  The Secretary of Agriculture did not exercise administrative review (due to past associations with the irrigators filing the petitions for review), instead deferring to the procedure set forth in the KWTA.  Having exhausted its administrative remedies, the largest private irrigation group in the area, Water PACK, filed a petition for judicial review to contest the changes.  Water Protection Association of Central Kansas v. Barfield, No. 2019-CV-5 (Edwards Co., Kansas), filed May 29, 2019, available at  The Cities moved to intervene in June, and the matter is currently pending before the Edwards County District Court.

If Water PACK’s suit against the DWR does not succeed in overturning the DWR’s approvals of the water rights changes pursuant to the KWTA, then the Cities will proceed to hearings to satisfy the requirements of the KWTA. Briefly summarized here, the KWTA requires the applicant to demonstrate, before a three-person panel (the chief engineer of the DWR, the director of the Kansas Water Office, and the secretary of the Kansas Department of Health and Environment) that the benefits of approving the transfer outweigh the benefits of not approving the transfer. Kan. Stat. Ann. 82a-1501a, 1502(a).   Assuming the changes in the Cities’ water rights survive judicial review, the KWTA proceeding should not present significant obstacles to the Cities.


As noted in Monday’s post, the prior appropriation system has some economic shortcomings.  However, the provisions in Kansas law allowing for changing a diversion point, type of use or place of use is an attempt to address those economic issues.  The present matter involving Hays and Russell, Kansas, also points out that state and local politics can become entangled in water disputes.  The “water wars” rage on.

December 18, 2019 in Water Law | Permalink | Comments (0)

Monday, December 16, 2019

The Politics of Prior Appropriation – Is a Senior Right Really Senior?


Water is of critical importance to agriculture.  It’s vitally necessary to grow crops and raise livestock.  Of course, too much water can be a problem.  That was the case in parts of the Midwest and Plains throughout 2019.  But, most often water issues center around a water shortage and how the law in a particular state appropriates water in times of scarcity. 

Sometimes the manner in which state law allocates water to holders of water rights for agricultural purposes conflicts with other federal laws and public policy goals involving environmental and wildlife concerns.  One such conflict has been going on in Kansas for some time.  The conflict illustrates the policy concerns over the strict application of state water law. 

The prior appropriation doctrine and associated water rights and concerns – it’s the topic of today’s blog post.

Prior Appropriation System

One way that the legal system allocates water is with the prior appropriation system.  The prior appropriation system is based on a recognition that water is more scarce, and establishes rights to water based on when water is first put to a beneficial use.  The doctrine grants to the individual first placing available water to a beneficial use, the right to continue to use the water against subsequent claimants.  Thus, the doctrine is referred to as a “first in time, first in right” system of water allocation. The oldest water right on a stream is supplied with the available water to the point at which its state-granted right is met, and then the next oldest right is supplied with the available water and so on until the available supply is exhausted.  For a particular landowner to determine whether such person has a prior right as against another person, it is necessary to trace back to the date at which a landowner's predecessor in interest first put water to a beneficial use.  The senior appropriator, in the event of dry conditions, has the right to use as much water as desired up to the established right of the claimant to the exclusion of all junior appropriators.  This is the key feature of the prior appropriation system.

Water rights in a majority of the prior appropriation states are acquired and evidenced by a permit system that largely confirms the original doctrine of prior appropriation.  The right to divert and make consumptive use of water from a watercourse under the prior appropriation system is typically acquired by making a claim, under applicable procedure, and by diverting the water to beneficial use.  The “beneficial use” concept is basic; a non-useful appropriation is of no effect.  What constitutes a beneficial use depends upon the facts of each particular case.

Sometimes the right of a senior appropriator under a prior appropriation system to shut junior appropriators off in time of shortage conflicts with other policy interests.  Some of the so-called “Western water wars” have centered around this issue.  One such battle is occurring in Kansas at the present time and involves impairment of the Quivira National Wildlife Refuge (Refuge) near Great Bend, Kansas.    I have asked my colleague at the law school (and water law expert), Prof. Burke Griggs, for his commentary on the matter.  He has advised the National Audubon Society and Audubon of Kansas regarding the impairment of the Refuge.

Here is Prof. Griggs’ explanation of the Kansas conflict and thoughts on the matter:

The Kansas Issue – Quivira National Wildlife Refuge Priority Right

The Refuge, a wetland of international importance for whooping cranes and other endangered species, is located near Great Bend in the Arkansas River Basin.  The Refuge holds a water right obtained under the Kansas Water Appropriation Act (KWAA) with a 1957 priority, enabling the Refuge to divert about 14,500 acre-feet annually from Rattlesnake Creek (a small tributary of the Arkansas River) to supply salt marshes and other wetlands on the Refuge. The advent of large-scale groundwater pumping (related to agricultural and oil and gas production) in the 1960’s and 1970’s did not immediately affect the Refuge, but by the late 1980’s it had become clear that pumping was reducing the groundwater baseflows upon which Rattlesnake Creek and the Refuge depend. For decades the U.S. Fish & Wildlife Service (Service), which holds the Refuge’s senior water right, sought to compromise with junior irrigators. After three decades of little progress, the Service in 2013 filed a water right impairment complaint with the chief engineer of the Kansas Division of Water Resources (DWR)—the first formal step in requesting the “administration,” or curtailment, of junior rights in the Rattlesnake Creek sub-basin. In 2016, DWR issued its impairment report, which found that junior rights within the Big Bend Groundwater Management District No. 5 (GMD5) were impairing the Service’s water right. The scale of the impairment is substantial: pumping causes between 40,000 to 50,000 acre-feet of stream depletions annually from junior groundwater pumping, reducing between 3,000 and 5,000 acre-feet of stream flows to the Refuge, even as much as 9,000 acre-feet. Wildlife groups have been complaining of the Refuge’s water shortages for years.

Since the DWR’s finding of impairment in 2016, the DWR and GMD5 have been engaged in unsuccessful negotiations about how to resolve it. To avoid the clear but draconian remedy of administering junior groundwater rights in the Rattlesnake Creek sub-basin according to their priorities (i.e., in accordance with state law), GMD5 has proposed several versions of a Local Enhanced Management Area (LEMA) since 2017 in accordance with Kan. Stat. Ann. 82a-1041. These proposals have offered to repurpose irrigation wells as “augmentation” wells pumping local groundwater supplies into Rattlesnake Creek just upstream of the Refuge, and to remove end-guns from center-pivot irrigation systems. But according to its impairment report, the DWR found that it will be necessary to reduce pumping by 15 percent, or approximately 24,000 acre-feet, in the 135,000 acres closest to the Refuge, together with augmentation wells; or, without such wells, a 30 percent reduction in pumping.  

The Service has also been skeptical of GMD5’s LEMA plans for failing to address fundamental problems of water shortage and water quality. After the DWR formally rejected GMD5’s last LEMA proposal, negotiations between the DWR and GMD5 reached a stalemate. During the summer of 2019, GMD5 sought administrative review of the DWR’s decision.  The Kansas Secretary of Agriculture granted the petition in hopes of extending negotiations.  After those negotiations produced no real results, DWR prepared to administer water rights for the 2020 irrigation season. It sent letters to holders of junior groundwater rights that the DWR had previously determined were impairing the Refuge’s right, notifying them that the chief engineer would likely administer those rights during 2020.  For a week or so in October 2019, it appeared that Kansas water law might mean what the KWAA states, that “first in time is first in right.”  See, e.g., K.S.A. §82a-707(c). 

Apparently, following Kansas water law was intolerable.  The fall of 2019 witnessed an extraordinary intervention by groundwater interests, agency heads, and other politicians to prevent the priority administration of water rights that the DWR had planned for 2020. Multiple agribusiness entities wrote the chief engineer, requesting that the administration of rights be delayed, to reach a “collaborative solution” in 2019-20—one that has somehow eluded the parties since the 1980’s.  Representative Roger Marshall (R-KS) repeatedly contacted the KDA-DWR offices seeking the same. In October, Senator Jerry Moran (R-KS) obtained a promise from Ms. Aurelia Skipwith (the nominee to be the Director of the Service and the current Deputy Assistant Secretary for Fish, Wildlife, and Parks at the Department of Interior) that the Service would not file a request to secure water for the 2020 irrigation season, and would cooperate with DWR and GMD5 to achieve a voluntary solution.  In other words, the Service would not protect its own water right for the coming year.  Apparently, the Service has reverted to its pre-2016 position. It looks forward to working with KDA, “the congressional delegation, and all water users to develop concrete milestones and lasting solutions.”  Barring other developments, it seems likely that the largest senior water right in the Rattlesnake Creek sub-basin will suffer continued impairment in 2020, while junior groundwater pumpers continue to irrigate at their full capacity.   That essentially flips the prior appropriation doctrine on it’s head – “First in time, last in right.”

Questions raised.  The “Showdown at Rattlesnake Creek” raises multiple questions—most especially, the extent to which water officials can avoid and abdicate their statutory duties to protect the Refuge under federal law and the Refuge’s water right under both federal and state law. Can the Service avoid the sustainability mandate in the National Wildlife Refuge System Improvement Act?  16 U.S.C. § 668dd(a)(4)(B).   By not filing a request to secure water to protect its state-law water right, might the Service be risking violations of the Migratory Bird Treaty Act and the Endangered Species Act?  See, e.g., 16 U.S.C. §§ 703, 1539.  If the Service does not defend its existing state law appropriation water right, might it be entitled to a federal reserved water right to satisfy the purposes of the Refuge?   See, e.g., Winters v. United States, 207 U.S. 564 (1908); Potlatch Corp. v. United States, 12 P.3d 1256 (2000).

Does an augmentation plan to repurpose irrigation wells and pump groundwater into Rattlesnake Creek require review under the National Environmental Policy Act?  See, e.g., Middle Rio Grande Conservancy Dist. v. Norton, 794 F.3d 1220 (10th Cir. 2002); Industrial Safety Equipment Association v. Environmental Protection Agency, 656 F.Supp. 852, 855 (D.D.C. 1987), aff’d, 837 F.2d 1115 (D.C. Cir. 1988).  Based on its conciliatory actions to GMD5 and its irrigators, the Service does not appear to be interested in these federal questions, preferring to frame the conflict as one of state law only. State officials are similarly reticent, having issued repeated statements that they would not administer water rights in the basin to protect the Refuge—despite the clear priority of its right, its obvious and documented impairment, and the chief engineer’s non-discretionary duties to protect senior water rights. 2020 will prove to be an interesting year at the Refuge, especially if things turn dry.


I thank Prof. Griggs for his commentary today.  Is there a solution to the issue at the Refuge?  There hasn’t been one for decades.  It appears to me that government officials have realized what I have been pointing out about the prior appropriation system.  That is, from an economic standpoint, a senior appropriator can be expected to put water to a beneficial use until the marginal return equals the cost of the water. Junior appropriators, or those unable to obtain rights, could have high potential returns but (under the strict application of the prior appropriation doctrine) be prevented from putting water to a beneficial use. As such, the prior appropriation system does not allocate water where the return is highest so long as water rights are not transferable. Unfortunately, in many prior appropriation states, barriers to transfer of water rights are as great as in riparian states. This is the case even though a prior appropriation water right is not as closely linked to land ownership as is a riparian right, and a prior appropriation right may be separately conveyed.

In some states, especially the more arid western states, a water right is a right to use the water and is not a right to own the water. The water right is attached to the land on which the water is used, and can be severed from that land. The prior appropriation system also does not deal with return flow problems caused by differing rates of consumptive use between different appropriators.  For example, agricultural irrigation is approximately an 80 percent non-consumptive use in the wet and tile-drain states of the corn belt from Ohio through Iowa. This means that about 80 percent of water appropriated for irrigation eventually returns to its source. However, in Kansas and the remainder of the High Plains states, the non-consumptive use of water for agricultural irrigation ranges from five to 20 percent.  This is similar to industrial uses of water that are typically more consumptive in nature, although the use of water for cooling typically involves low rates of consumption.

The issue with the Refuge involves water law and economics, agricultural usage and wildlife protection.  Not easy issues to resolve.

December 16, 2019 in Water Law | Permalink | Comments (0)

Friday, December 13, 2019

Is a Tenancy-in-Common Interest Eligible for Like-Kind Exchange Treatment?


The Tax Cuts and Jobs Act (TCJA) changed the like-kind exchange rules of I.R.C. §1031 such that only real estate can be exchanged in a tax-deferred manner.  Personal property trades no longer qualify for tax-deferred treatment if entered into after 2017.  But what if the real estate is not owned 100 percent outright by the taxpayer?  What if the taxpayer owns a fractional interest in real estate either for convenience or as part of a business entity?  In that situation, can the fractional interest be traded for other real estate with any gain on the transaction deferred under I.R.C. §1031?  Or, instead, is it possible that owning property in that manner could constitute a partnership with the result that the taxpayer’s “partnership” interest wouldn’t qualify for like-kind exchange treatment?

Fractional interests in real estate and qualification for gain deferral under I.R.C. §1031 – it’s the topic of today’s blog post. 

Like-Kind Exchange Basics

A like-kind exchange of real estate is a popular method to dispose of appreciated real estate without incurring tax currently.  I.R.C. §1031.  A tract of real estate can be traded for other real estate that the taxpayer will hold for business or investment purposes.  The rules are liberal enough that the exchange of the properties need not be simultaneous – the taxpayer has up to 45 days to identify the replacement property after the transfer of the relinquished property and must receive the replacement property within the earlier of 180 days after the transfer or by the extended due date of the return for the year of the transfer. 

Eligibility of Undivided Fractional Interests

In prior posts, I have looked at the issue of what constitutes “real estate” for purposes of the like-kind exchange rules of I.R.C. §1031.  In those posts, implied in the analysis was outright, full ownership of the taxpayer’s interest in the real estate that the taxpayer sought to exchange on a deferred basis.  But, what if the interest in real estate is a fractional interest such as a tenancy in common?  A tenancy-in-common is an arrangement where two or more people share ownership rights in real estate or a tract of land that can be commercial, residential or farmland/ranchland.  When two or more people own property as tenants-in-common, all areas of the property are owned equally by the group – they each own a physically undivided interest in the entire property.  In addition, the co-tenants may have a different share of ownership interests.  Also, each tenant-in-common is entitled to share with the other tenant the possession of the whole parcel and has the associated rights to a proportionate share of rents or profits from the property, to transfer the interest, and to demand a partition of the property.   When a tenant in common dies, the decedent’s interests in the property becomes part of the decedent’s estate and passes in accordance with the decedent’s will or trust, or state law if the decedent did not have a will or trust. 

A significant question is whether a tenancy-in-common ownership arrangement constitutes a partnership for tax purposes.  The question is important because the like-kind exchange rules don’t apply to exchanges of partnership interests – a partnership interest is not like-kind to a fee simple interest in real estate.  I.R.C. §1031(a)(2)(D).  Presumably, the exclusion of partnership interests also applies to multi-member LLC interests where the LLC is taxed as a partnership.   Under Treas. Reg. §1.761-1(a) and Treas. Reg. §301.7701-1 through 301.7701-3, a partnership for federal tax purposes does not include mere co-ownership of property where the owners’ activities are limited to keeping the property maintained, repaired, rented or leased.  However, the regulations point out that a partnership for federal tax purposes is broader in scope than the common law meaning of “partnership” and may include groups not classified by state law as partnerships.  

In 1997, the IRS issued a private letter ruling noting that, in some situations, a tenancy in common arrangement resulting in multiple owners holding an undivided fractional interest in real estate could result in a partnership such that the exchange of the owners’ interests would not qualify for like-kind exchange treatment.  Priv. Ltr. Rul. 974017 (Jul. 10, 1997).  The issuance of the ruling created a stir and the IRS, in 2000, indicate that it would further study the issue.  Rev. Proc. 2000-46, 2000-2 C.B. 438.  Later, in 2002, the IRS issued Rev. Proc. 2002-22, 2002-1 C.B. 733 setting forth 15 conditions (factors) indicating that an undivided co-ownership in rental real estate would not result in the creation of a federal tax partnership.  In essence, the factors point to the tenant-in-common owners not going beyond mere co-ownership of property to the point of engaging in business together.  The factors (e.g., “guidelines”) aren’t intended to be substantive rules and are not intended to be used for audit purposes. 

The factors (guidelines; conditions) set forth in Rev. Proc. 2002-22 are as follows:

  • Each co-owner must hold title as a tenant-in-common under local law;
  • The number of co-owners must be limited to no more than 35 persons;
  • The co-owners must not file a partnership or corporate tax return; conduct business under a common name; or execute an agreement identifying any or all of the co-owners as partners, shareholders or members of a business entity;
  • The co-owners may enter into a limited co-ownership agreement that may run with the land. These agreements may provide that a co-owner must offer its interest for sale to another co-owner at fair market value before exercising any right to partition;
  • The co-owners must unanimously approve the hiring of any manager; the sale or other disposition of the property; any leases of the property; or the creation or modification of a blanket lien;
  • Each co-owner must have the right to transfer, partition and encumber the co-owner’s undivided interest without the agreement of any person;
  • Upon the sale of the property, the net proceeds (after payment of liabilities) must be distributed to the co-owners;
  • Each co-owner must proportionally share in all revenues and costs generated by the property and all costs associated with the property pro-rata;
  • Each co-owner must share in all debt secured by blanket liens on the property;
  • A co-owner may issue an option to purchase its TIC interest, as long as the exercise price reflects the fair market value;
  • The activities of the co-owners must be limited to those customarily performed in connection with the maintenance and repair of rental real property;
  • The co-owners may enter into management or brokerage agreements, which must be renewable no less frequently than annually;
  • All leases must be bona fide leases for federal tax purposes. Rent must reflect the fair market value of the property;
  • The lender may not be a related person.; and
  • The amount of any payments to a “sponsor” must reflect the fair market value of the acquired co-ownership interest and may not depend on the income or profits derived from the property.

Private Letter Rulings

As noted above, one of the factors of Rev. Proc. 2002-22 is that a co-owner’s activities must be limited to those customarily performed in connection with the maintenance and repair of rental property and that the income from performing such activities is not unrelated business taxable income.   All of the activities of the co-owners and their affiliates concerning the property are taken into account, including the sponsor’s efforts to sell the tenancy-in-common interests in the property.  But, the activities of a co-owner or related person with respect to the property is ignored if the co-owner owns a tenancy-in-common interest for less than six months.  In Priv. Ltr. Rul. 200327003 (Mar. 7, 2003), however, the IRS determined that an undivided fractional interest in real estate qualified for like-kind exchange treatment and was not an interest in a business entity.  This ruling helped alleviate concerns about the imputation of activities of a sponsor.

In Priv. Ltr. Rul. 200513010 (Dec. 6, 2004), the IRS provided a good roadmap for real estate investors (and others) to follow when structuring fractional ownership arrangements.  The ruling was favorable to the taxpayer and detailed how to structure partition rights; co-owner purchase options; manager substation rights; and how a management company can properly operate without the arrangement being deemed to be a partnership. 

PMTA 2010-005 (Mar. 15, 2010) involved a situation where tenants-in-common had taken action to deal with a master tenant’s bankruptcy.  They appointed interim agents and there were temporary non-pro-rata contributions from some of the tenants-in-common.  The IRS concluded that the owners would not be treated as partners in a partnership for federal tax purposes. 

In 2016, the IRS issued additional guidance on a tenancy-in-common arrangement.  Priv. Ltr. Rul. 201622008 (Feb. 23, 2016).  The facts involved in the private ruling involved a co-ownership agreement between a landlord and a tenant and a management agreement that would become effective after the parties entered into a lease for the property at issue, and a call/put option for the lessee to buy a portion of the property.  The landlord owned a commercial office building via a single member limited liability company (LLC).  The tenant was to enter into a triple net lease with the LLC set at fair market value with the rental amount not tied to the income or profits derived from the property.  The transaction was incredibly complex, but the IRS determined that if the landlord/LLC  were to exercise the option and sell a tenancy-in-common interest to the tenant, the relations would not be considered to be a partnership, with the result that each a co-owner could sell his undivided interest in the property in a I.R.C. §1031 exchange because the conditions of Rev. Proc. 2002-22 had been satisfied. 

Accounting and Management

To avoid having a tenancy-in-common ownership arrangement be characterized as a partnership with the interests not eligible for like-kind exchange treatment, proper recordkeeping, accounting and management of the arrangement is essential.  Care should be taken not to account for the arrangement or manage it in the manner of a business entity.  Certainly, a partnership or corporate income tax return should not be filed, even though doing so might simplify reporting expenses and revenues of the arrangement.  


A co-tenancy that is established for investment purposes (and not for trade or business purposes can elect to be excluded form partnership treatment.  I.R.C. §761(a)(1).  But, qualifying for the election can be difficult.  See Treas. Reg. 1.761-2.  The co-tenants must have chosen to be treated as a partnership pursuant to state partnership law and they must have limited involvement in the operation of the property (which might be the case with bare land ownership).  There also must be limited to no restrictions on the rights of co-owners to individually sell their interests, and there should not be any provision in the partnership agreement requiring a vote of a majority to transfer the asset.  In addition, each owner must be allocated a constant pro rata share of income and loss based on their share of ownership.  If these requirements can be satisfied, the election can be made by attaching a statement to the partnership return that is filed by the filing deadline for the partnership return for the year in which the partnership wants the election to be in place.  Whether a partnership agreement can be amended to satisfy the requirement so that an election can be made is an open question. 


Many tenancy-in-common arrangements exist in agriculture and elsewhere.  Avoiding partnership status so that a like-kind exchange can be achieved can be important in certain situations.  Knowing the IRS boundaries is beneficial. 

December 13, 2019 in Income Tax, Real Property | Permalink | Comments (0)

Tuesday, December 10, 2019

Tax Issues Associated With Restructuring Credit Lines


Last week the U.S. Tax Court held that MoneyGram is not a bank, which meant that it could not claim ordinary loss deductions associated with the write-off of a substantial amount of partially or wholly worthless asset-backed securities.  MoneyGram International, Inc. v. Comr., 153 T.C. No. 9 (2019).  Buried in the court’s opinion is a discussion of the “original issue discount” (OID) rules.  That discussion triggered a thought about farmers and their lines of credit. 

As 2019 comes to a close, some farmers and ranchers will have unpaid lines of credit remaining and may be asked or required by a lender to roll the existing credit line balance into the 2020 line of credit.  They may also be asked to pay some of the interest charge down.  If either of those events happens, what are the tax consequences?  It’s an important question that is often overlooked when making a determination of what to do with an existing line of credit.

The tax consequences of restructuring credit lines – that’s the topic of today’s blog post.

In General

For a loan that has fixed interest payable in one year or less, the interest is not deductible when there is a rollover of a remaining line of credit at year-end into the next year.  I.R.C. §1273(a)(2); Battelstein v. Internal Revenue Service , 631 F.2d 1182 (5th Cir. 1980), cert. den., 451 U.S. 938 (1981); Wilkerson v. Comr., 655 F.2d 980 (9th Cir. 1981), rev’g., 70 T.C. 240 (1978; IRS News Release 83-93 (Jul. 6, 1983). The result is the same if the taxpayer borrows funds from the same lender for the purpose of satisfying the interest obligation to that lender.  For a cash basis taxpayer to deduct interest, the payment must be in cash or a cash equivalent.  I.R.C. §163. The delivery of a promissory note isn't a cash equivalent but merely a promise to pay.   In Battelstein, the taxpayers were land developers embroiled in a bankruptcy proceeding. A lender agreed to loan the taxpayers more than three million dollars to cover the purchase of a tract of land. The lender also agreed to make future advances of the interest costs on the loan as the interest cost came due.  Indeed, the taxpayers never paid interest except by means of the advances. Each quarter, the lender would notify the taxpayer of the amount of interest currently due. The taxpayer would then send the lender a check in the same amount, and, on its receipt, the lender would send the taxpayer a check for the identical amount. The taxpayers deducted the interest amount as “paid” during the tax year, but the IRS and the appellate court disagreed.  There was no current payment of interest as I.R.C. §163(a) requires.   

Thus, where a lender withholds interest from the loan proceeds, the borrower generally is considered to have paid with a note.  That is not payment in cash or with a cash equivalent and does not give rise to a deduction.

So, what’s the point of this to a farmer or rancher that is dealing with credit issues?  The “take-home” lesson is that a taxpayer can’t deduct interest if funds are borrowed from the same lender that provided the original loan.  That’s true even if unrestricted control is maintained over the loan proceeds.  However, an interest deduction should be available if the taxpayer can show that the newly-borrowed funds weren't, in substance, the same funds used to pay the loan. To do that, of course, the taxpayer would have to establish that the taxpayer had sufficient other funds to pay the interest.  Likewise, a deduction is permitted when interest is paid with funds borrowed from another lender.  See, e.g., Davison v. Comr., 141 F.3d 403 (2d Cir. 1998), aff’g., 107 T.C. 35 (1996).  But, in reality, borrowing funds from another lender might be quite difficult for a financially troubled borrower. 

What’s the Issue With “Original Issue Discount”?

Original issue discount (OID) is a form of interest.  In U.S. financial markets, “commercial paper” refers to unsecured promissory notes issued by corporations with a fixed maturity of no more than 270 days.  Commercial paper is always issued at a discount to the face amount of the obligation. The discount is OID, and it represents unstated interest that the investor receives upon selling the instrument or when it is received as the face amount at maturity.  Thus, a debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity.  OID is the difference between the stated redemption price at maturity and the issue price.  All debt instruments that pay no interest before maturity are presumed to be issued at a discount.

The general rule is that OID is taxed as ordinary income.  I.R.C. §1271(a)(4).  OID accrues over the term of the debt instrument, whether or not the taxpayer receives any payments from the issuer.  But, the OID rules generally do not apply to short-term obligations (those with a fixed maturity date of one year or less from date of issue).  See IRS Publication 550.  The one-year restriction is key.  So, if a farmer rolls over a 2019 loan into the line of credit for 2020, the OID rules may be triggered if the old loan does not become payable until more than a year after the original loan was taken out.  I.R.C. §§1272(a)(1); (a)(2)(C); 1273(a)(1).  In that event, the interest amount is spread over the loan’s term resulting in a portion of the interest being deductible in the year that the loan is rolled over. 

Consider the following example:

Kay O’Pectate borrowed $200,000 from Usurious State Bank on June 1, 2019 at 6 percent simple interest.  Interest and principle were due on December 1, 2019.  However, due to poor crop and livestock markets, Kay and the bank on December 1 agreed to defer the payments on the loan for another year – until December 1, 2020.  During that timeframe, interest would continue to accrue at 6 percent.  Because no payment is due on the renegotiated loan until after June 1, 2020, the OID rules apply.  Thus, under the loan that has been rolled over, the “issue price” is $200,000, and the “stated redemption price at maturity” is the $200,000 as of December 1, 2019, plus the half-year interest to that date of $6,000, plus the interest expected to December 1, 2020 of $12,000 for a total of $218,000.  Because the total amount due on December 1, 2020, exceeds the issue price of $200,000, there is OID of $18,000.  I.R.C. §1273(a)(1).  Thus, Kay could deduct, in 2019, the $6,000 of interest as OID through December 1 of 2019, plus one month of OID for December of 2019 (1/12 of $12,000) for a total interest deduction in 2019 of $7,000.  The balance of the OID, $11,000, would be deductible in 2020. 

The rollover caused the interest deduction to be spread out over 2019 and 2020.  That may or may not be advantageous to Kay.  The answer to that question depends on numerous factors particular to Kay.  The point is, however, that Kay should understand the consequences of rolling over her loan into the next year. 

Payment Allocation

For tax purposes, the OID rules require that payment be allocated first to OID, to the extent that OID has accrued as of the date the payment is due, and then to the payment of principal.  Treas. Reg. §1.1275-2(a).  So, if a farmer (or non-farm taxpayer for the matter) pays down principal late in the year, but leaves an amount of interest to be rolled over into the next year, the OID rules still apply. 


When working with a lender concerning credit lines, rarely does a discussion of the tax treatment of interest occur.  Note the problem of borrowing funds from the same lender to pay interest on an existing loan, and take into consideration the OID rules on a roll-over.  Always talk with your tax practitioner about how to maximize the tax benefit of restructuring loans and deducting interest.    

December 10, 2019 in Income Tax | Permalink | Comments (0)

Thursday, December 5, 2019

“Slip Slidin’ Away” – The Right of Lateral and Subjacent Support


I have published articles on this blog on prior occasions concerning easements.  In those posts, I have noted that an easement can either be affirmative (entitling the holder to do certain things upon the land subject to the easement) or negative (entitling the holder to require the owner of the land subject to the easement to either do or not do certain things with respect to the burdened land).  Negative easements are synonymous with covenantal land restrictions and are similar to certain “natural rights” that are incidents of land ownership.

One of those natural rights that is an incident of land ownership (or may come along with an easement) is the right of lateral and subjacent support.  It’s such an important right, that some states have statutes concerning it.  See, e.g., Ohio Rev. Code Ann. §§723.49-50; Idaho Code §55-310. For example, California law states that, “each coterminous owner [owners having the same or coincident boundaries] is entitled to the lateral and subjacent support which his land receives from the adjoining land…”  Cal. Civ. Code §832

The right of lateral and subjacent support is not a right that many persons are familiar with, but it is an important right to all landowners.

Lateral and subjacent support rights – it’s the topic of today’s post.

The Basics of Lateral and Subjacent Support

Lateral support.  An owner of a tract of land has the right to have the surface of the tract be supported by the land lying beneath it.  “Lateral support” exists when the adjoining lands are side-by-side. It is the right of the land to be naturally upheld by its neighboring land(s) and supported against subsidence, i.e. slippage, cave-in or landslide.  Lateral support is a common law right – it’s a right incident to the land itself.  In addition, as noted above, some states have statutory provisions governing lateral support rights.

The right of lateral support raises questions when a landowner engages in construction and/or excavation activities.  In practice, a landowner’s right of lateral support of adjoining property is subject to the right of the adjoining owner to excavate and improve his property.  But, the neighbor’s excavation/improvement activity must be conducted in a reasonable manner.  This is conceptually similar to nuisance law – a landowner can do whatever they want on their property so long as they don’t unreasonably interfere with a neighbor’s right to do what they want on their property (that’s an oversimplification, buy you get the point).  If lateral support rights are alleged to have been violated, it’s a negligence-type tort. 

So how are these mutual rights balanced?  First, it’s a good idea (and required by statute in some states) to notify potentially affected neighbors (those beyond simply the owners of coterminous lands) of the excavation project in a manner that gives them sufficient time to protect their existing structures if those structures could be impacted.  State law might require the excavating party to protect neighboring land and buildings from damage. 

Subjacent support.  A subjacent support right is the right of surface land to be supported by the land beneath it against subsidence. Subsidence is the sinking or lowering of the earth's strata caused by the removal of a substance (e.g., soil, coal, water, or some other mineral or natural resource).  Subsidence usually appears as a sinkhole, trough, or fissure.  In essence, a surface landowner has a common law right to have the surface remain in its natural state without subsidence caused by an adjacent owner as well as subsidence that the subsurface owner might create. See, e.g.,  XI Properties, Inc. v. RaceTrac Petroleum, Inc., 151 S.W.3d 443 (Tenn. 2004).  Over the past two centuries, federal and state courts have developed legal principles to deal with subsidence and a surface owner's right of subjacent support, particularly as surface and subsurface estates have been severed (such as with oil and gas development).  The basic principle is that a property owner is owed lateral and subjacent support, from an adjoining landowner; has a right to be free from unreasonable nuisances; and other similar rights that the law may require.  See, e.g., Cecola v. Ruley, 12 S.W.3d 848 (Tex. Ct. App. 2000). 

Reasonable Use

The right of lateral and subjacent support is subject to an adjacent owner’s reasonable use of their property.  For example, in Finley v. Teeter Stone, Inc, 251 Md. 428 (Md. 1968), the conducting of quarrying operations was held to be a legitimate and reasonable use of land, and there was no suggestion that quarrying was unreasonable or inappropriate under the circumstances. Consequently, the adjacent landowners were not entitled to recover damages to their farmland from sinkholes on their land created by the quarrying activity because the landowners failed to claim or prove that there was any negligence in excavating or that the quarry operation was an unreasonable use.

As for severed estates, while both a surface owner and a subsurface owner (they could be the same or different parties depending on whether the surface estate has been severed from the subsurface estate) have the right (in accordance with either state common or statutory law) to access and divert/remove water (or minerals) beneath the surface of the property that is connected with legitimate use of the land, that right cannot be exercised in an unreasonable manner that causes injury to the similar right of an adjacent owner. The rule is that in situations where the ownership of the surface of the land has been severed from the ownership of the minerals under it, the owner of the surface has an absolute right to the necessary support of the land.  However, it is possible for that right to be altered by contract or conveyance (if the deed language waiving the right is clear and unequivocal). See, e.g., Jensen v. Sheker, 231 Iowa 240 (1941); Breeding v. Koch Carbon, Inc., 726 F. Supp. 645 (W.D. Va. 1989). 

Damages – Rights and Remedies

For claims asserting damages from lateral and subjacent support, the cause of action arises upon the subsidence of the land, not its excavation. In other words, a lawsuit may be brought only once the subsidence occurs, and for each separate occurrence.  The suit can be filed by the owner of the damaged property and any disaffected tenant against the party (or parties) responsible for the damage.  It also may be possible to head-off potential subsidence filing an action that seeks an injunction if it can be shown that the suspect activity would likely create irreparable damage.   

If a landowner is negatively impacted by subsidence of the surface of their property, the landowner is entitled to proven damages from the party that caused the subsidence.  See, e.g., Platts v. Sacramento Northern Railway, 205 Cal. App. 3d 1025 (Cal. Ct. App. 1988).   It doesn’t matter whether the subsidence was the result of negligent conduct (e.g., failing to conduct mining or excavation activities, for example, in a lawfully reasonable and proper manner).  Once damages are established, the responsible party is liable – at least according to the California Court of Appeals.  Id. 

While the right of lateral and subjacent support is not dependent upon the activities that a landowner conducts on the surface of their property, the owner of the surface has a responsibility to refrain from conduct that would contribute to subsidence.  Id.  For example, the owner of the surface has a duty to support buildings and other structures which were in existence at the time of the creation of the interest in the subjacent stratum.  A person who withdraws the necessary lateral and subjacent support of land in another’s possession or the support that substitutes the naturally necessary support will be liable for a subsidence of the land to the other that was dependent upon the support withdrawn.  See, e.g., Western Indiana Coal Company v. Brown, 36 Ind. App. 44 (Ind. Ct. App. 1905).   For example, in the early 1900s case of Collins v. Gleason Coal Co., 140 Iowa 114 (Iowa 1908), the plaintiff was the owner of the surface of the land and the defendant was the owner of the coal beneath the same land.  The plaintiff farmed the surface, and also had a house, outbuildings and trees on the property.  The defendant’s coal mining operations damaged the plaintiff’s property.  The court held that each party was entitled to use their respective property interests (the plaintiff’s surface estate and the defendant’s subsurface estate) in a manner that did not interfere or deprive the rights, benefits, profits and enjoyment of the other party’s property interest.  The surface owner was entitled, the court determined, to have an enforceable support right that was the basis for recovering damages.


The right of lateral and subjacent support, while not well known by landowners, is a well-recognized property right.  It’s just another one of those issues that can arise from time-to-time for a farmer, rancher, rural landowner, and any other owner of real estate.  “You know the nearer the destination, the more you’re slip slidin’ away.”

December 5, 2019 in Real Property | Permalink | Comments (0)

Tuesday, November 26, 2019

Are Windbreaks Depreciable?


On many farms and ranches, windbreaks are used to minimize soil erosion and protect buildings and structures.  But, is a windbreak depreciable, or must its cost be capitalized and added to the basis of the land?  A depreciation deduction provides an immediate tax break, but adding the cost of a windbreak to the land basis is only beneficial upon eventual sale of the land. 

Depreciating or capitalizing windbreaks – it’s the topic of today’s post.

Depreciation Basics

Depreciation applies to property that is either tangible personal property (or is a certain type of real property) that is used in the taxpayer’s trade or business or for the production of income and has a determinable useful life of more than a year.  The depreciation rules have changed over the years, with the present system known as the Modified Cost Recovery System (MACRS).  MACRS is eight-class system that allows the cost of an asset to be depreciated or recovered over a period shorter than the asset's useful life.  All depreciable property fits into one of the eight depreciation classes with its cost recovered over 3, 5, 7, 10, 15, 20, 27 1/2 or 39 years.  Property gets assigned to these eight classes either by Congressional legislation or by the IRS.  For example, breeding hogs are classified as three-year property.  The five and seven-year categories apply generally to farm machinery and equipment. Single-purpose ag and horticultural structures along with trees and vines that produce nuts and fruits are also classified as ten-year property.  The 15-year category includes land improvements, including irrigation systems (at least the below-ground part such as wells) and some landscaping costs. 

What About Earthen Improvements?

Earthen improvements are generally not depreciable unless the taxpayer can establish that the earthen improvement is physically deteriorating and that, without maintenance, the improvement would become worthless.  See, e.g., Ekberg v. United States, No 711 W.D., 1959 U.S. Dist. LEXIS 4467 (D. S.D. Dec. 31, 1959).  In addition, expenses for maintaining such improvements should be deductible as repairs.  Common items on a farm that are included in the “land improvement” category include silage bunkers, concrete ditches, waterways, pond outlets and wells used for irrigation and livestock watering.  Relatedly, a permanent pasture (natural or seeded grassland that remains unplowed for many years) has been held to be depreciable.  See, e.g., Johnson v. Westover, No. 16527-WM, 1959 U.S. Dist. LEXIS 4249 (S.D. Cal. Mar. 19, 1955).  The court determined, based on the evidence, that the pasture should be replanted at the end of 10 years to maintain its economic usefulness.  At the time of purchase, the evidence showed that the pasture had a remaining life of five years.

But, what about a windbreak on a farm or a ranch?  Isn’t a windbreak an earthen improvement that is used in a farmer or rancher’s business?  As noted above, they are panted to reduce moisture evaporation and soil erosion.  Clearly, trees and vines that produce nuts and fruits are depreciable as ten-year property.  However, there is no specific MACRS category for trees (and bushes) planted as a windbreak that don’t also produce nuts and fruits.  In Everson v. United States, 108 F.3d 234 (9th Cir. 1997), the court ruled that the windbreak trees and bushes (Russian olive trees and Caragana bushes) that were planted in rows perpendicular to the wind by a prior owner of a 3,700-acre wheat farm were, in essence, part of the land and not depreciable because land does not have a determinable useful life – it doesn’t wear out (in theory).  See also, Blair v. Comr., 29 T.C. 1205 (1958).  The taxpayer couldn’t establish that the windbreak had a limited life or was associated with a depreciable asset.  In addition, the court noted that windbreaks are specifically listed in the definition of non-depreciable soil and water conservation expenses eligible for a deduction under I.R.C. §175.  If windbreaks were held to be depreciable, the court reasoned, the specific inclusion of windbreaks in I.R.C. §175(c) as a non-depreciable land improvement eligible for a deduction as a soil and water conservation expense would be rendered meaningless.  Thus, because the prior owner of the farm that incurred the cost of planting the windbreak could have deducted the cost of establishing the windbreak under I.R.C. §175, the taxpayer could not allocate part of the purchase price of the ranch to the windbreak and claim a depreciation deduction. 

More on Soil and Water Conservation Expense Deductibility

Soil and water conservation expenses that qualify under I.R.C. §175 must be paid or incurred for soil or water conservation purposes with respect to land used in farming, or for the prevention of erosion on farmland and be consistent with a soil conservation plan or an endangered species recovery plan. I.R.C. §§175(a); (c)(3)(A)(i).  Qualified expenses include various types of earth moving on farmland using in the business of farming (to produce crops, fruits or other ag products or the sustenance of livestock).  I.R.C. §175(c)(2)Expenses for leveling, conditioning, grading, terracing and contour furrowing are all eligible as are costs associated with the control and protection of diversion channels, drainage ditches, irrigation ditches, earthen dams, water courses, outlets and ponds.  Even the cost of eradicating brush and, as noted above, the planting of windbreaks is eligible.  I.R.C. §175(c)(1)Also included are drainage district assessments (and soil and water conservation district assessments) if such assessments would have been a deductible expense if the taxpayer had paid them directly.  I.R.C. §175 (c)(1)(B).


The IRS position is that windbreaks are inextricably associated with the land.  As such, the cost of a windbreak is to be added to the basis in the land.  In addition, a windbreak is specifically listed under I.R.C. §175 as a non-depreciable item the cost of which is eligible for deduction as a soil and water conservation expense.  An “organic” land improvement can be depreciated, however, when the taxpayer can prove that it wears out, or when it is associated with a depreciable asset in such a way that the land improvement is no longer useful to the taxpayer once the asset with which it is associated has completed its useful life.  For example, in Rudolph Investment Corp. v. Comr., T.C. Memo. 1972-129, the court allowed the taxpayer to depreciate earthen dams and earthen water storage tanks located on ranchland.  The taxpayer was able to establish that, as the result of erosion processes, the dams and storage tanks became filled-in over a period of approximately ten years, so that at the end of the ten-year period they ceased to have any ranch value.  In Everson, the taxpayer couldn’t establish a comparable situation for the windbreak.

November 26, 2019 in Income Tax | Permalink | Comments (0)

Thursday, November 21, 2019

Co-Tenancy or Joint Tenancy – Does it Really Matter?


For many farmers and ranchers, the land is the most significant asset that is owned, at least in terms of value.  Land value often predominates in a farmer or rancher’s estate.  How the land is titled is important.  Holding title in the proper form facilitates estate planning in accordance with expressed goals and can ease the tax burden upon death or upon subsequent transfer of the property by the heir or heirs.  Conversely, failing to title property appropriately can undermine estate planning expectations, create family disharmony and result in a higher tax burden.

The distinction between co-tenancy and joint tenancy and why it matters – it’s the topic of today’s post.


A tenant in common holds an undivided interest in property that does not terminate upon the tenant predeceasing surviving co-tenants.  Upon the death of a tenant in common, that person’s interest passes under that person’s will (or in accordance with state law if there is no will (or trust)) to heirs of the deceased cotenant.  For federal estate and state inheritance/estate tax purposes, only the portion of the property owned by the deceased tenant in common is subject to tax. 

Joint Tenancy

The distinguishing characteristic of joint tenancy is the right of survivorship, with the surviving joint tenant or tenants taking all upon the death of a fellow joint tenant regardless of the terms of the deceased joint tenant’s will.  In other words, when a joint tenant dies, the deceased joint tenant’s share in the property passes to the surviving joint tenant (or surviving joint tenants).  It does not pass to the heir of the deceased joint tenant (tenants).  Upon the death of the last of the joint tenants to die, the joint tenancy is extinguished.    

In addition, upon a conveyance of real property, transfer to two or more persons generally creates a tenancy in common unless it is clear in the deed or other conveyancing document that a joint tenancy is intended.  A joint tenancy is created by specific language in the conveyancing instrument.  That specific language, often referred to as “magic words of conveyance,” clearly denotes the survivorship feature of a joint tenancy.  In addition, unless the conveyancing instrument is clear in its intent to create a joint tenancy, the legal presumption is against joint tenancy and that a tenancy-in-common was created.  For example, assume that O conveys Blackacre to “A and B, husband and wife.”  The result of that language is that A and B own Blackacre as tenants in common.  To own Blackacre as joint tenants O needed to convey Blackacre as required by state law to create a joint tenancy.  The language for creating a joint tenancy is typically to “A and B as joint tenants with rights of survivorship” or to “A and B as joint tenants with right of survivorship and not as tenants in common.”

Except for husband-wife joint tenancies, the survivorship feature may generate an unacceptable property disposition pattern upon death.  However, on the death of the first of the joint tenants to die, probate may be simplified or eliminated with title obtained by the surviving joint tenant perfected by showing non-liability for taxes and by proving the death of the decedent by affidavit or death certificate.  This is possible in most (but not all) states.

When it cannot be determined that two (or more) joint tenants have died other than at the same time an interesting problem may arise.  Most states have enacted a simultaneous death statute to handle just such a situation.  Such statutes typically provide that the jointly held property is to be divided into as many equal shares as there were joint tenants and that the share allocable to each joint tenant is to be distributed as if such joint tenant had survived all of the other joint tenants.

A major estate planning limitation of the joint tenancy form of property ownership is that the survivorship right of joint tenancy precludes the use of the life estate-remainder arrangement for the non-marital portion of the estate to reduce the death tax burden upon the survivor’s death.  The entire property, therefore, will pass to the survivor and may be taxed again in the survivor’s estate.  In addition, another problem with joint tenancy is that each joint tenant has a right to sever the joint tenancy relationship unilaterally (except for tenancies by the entirety).  As a result, a joint tenant furnishing consideration for acquisition of the property in effect grants to the other tenant a revocable interest that could be partitioned and severed at any time.  Consequently, each co-owner has the power to amend or destroy the other’s estate plan.

Joint tenancy is not a cure-all for tax planning but, depending upon the circumstances, it may be a convenient means of owning and passing property.  For total estates of each of the husband and wife under $22.8 million (for 2019), there is no federal estate tax liability.  Therefore, joint ownership may serve a useful purpose as a will substitute in the first estate for estates that are not potentially subject to federal estate tax.  However, since it is not known which joint tenant will die first, the estate of the surviving joint tenant will be subject to probate as an intestate estate (where death occurs without a will), unless the survivor prepares a will or otherwise disposes of the property.  For combined spousal estates exceeding $22.8 million (for 2019) in value, joint tenancy ownership may expose a portion of the total estate of the surviving joint tenant to additional taxes, causing an otherwise unnecessary reduction of the estate assets passing to the heirs or other beneficiaries.

Recent Case

A recent case from Texas illustrates the difference between tenancy-in-common and joint tenancy.  It also illustrates how misunderstandings about how property is titled can create family problems.  In, Wagenschein v. Ehlinger, 581 S.W.3d 851 (Tex. Ct. App. 2019), a married couple had seven children.  The parents also owned a tract of land.  Upon the last of the parents to die, each child held an undivided one-seventh interest as tenants in common in the tract.  In 1989, the heirs sold the land and but executed a deed reserving a royalty interest.  The deed reservation read as follows:  “THERE IS HEREBY RESERVED AND EXCEPTED from this conveyance for Grantors and the survivor of Grantors, a reservation until the survivor's death, of an undivided one-half (1/2) of the royalty interest in all the oil, gas and other minerals that are in and under the property and that may be produced from it. Grantors and Grantors' successors will not participate in the making of any oil, gas and mineral lease covering the property, but will be entitled to one-half (1/2) of any bonus paid for any such lease and one-half (1/2) of any royalty, rental or shut-in gas well royalty paid under any such lease. The reservation contained in this paragraph will continue until the death of the last survivor of the seven (7) individuals referred to as Grantors in this deed.” 

An oil and gas company drilled a producing well in 2010 and began paying royalties to the heirs. As each heir died, the credited their royalty interest to the surviving heirs of each deceased heir.  That had the effect of increasing the respective royalty payments of the surviving heirs.  There were no problems until 2015.  In 2015, a child of a deceased heir sued claiming that the deed crediting the royalty reservation to “Grantors and Grantors’ successors created a “tenancy in common” and not a “joint tenancy”.  If the deed created a tenancy in common, the children of the deceased heirs, rather than the surviving heirs, would inherit their parents’ royalty interests.  The trial court disagreed, noting that while the deed used “successor”, it only did so once and clearly and unambiguously reserved the royalty interest to the heirs and the “survivor[s]” of the heirs, rather than their “successors”, “heirs” or “beneficiaries.”  As such, the trial court concluded that the deed unambiguously created a joint tenancy with the right of survivorship, rather than an a tenancy in common that the children of the deceased heirs could inherit.   Thus, as each heir died, their interest in the tract passed to the surviving siblings, not their children.  On appeal, the appellate court affirmed. 


Properly titling property is important for various reasons – not the least of which is to fulfill expectations on property passage.  In the Texas case, confusion over how property was titled resulted in a family lawsuit.  Regardless of how the case would have been decided, some in the family would not be pleased.   

November 21, 2019 in Estate Planning, Real Property | Permalink | Comments (0)