Agricultural Law and Taxation Blog

WOTUS Update

Overview

On March 12, 2025, as part of a major effort of deregulation, the Environmental Protection Agency (EPA) and the Office of the Assistant Secretary of the Army (Corps of Engineers (COE)) took measures to clarify outstanding issues regarding the interpretation and implementation of "waters of the United States" (WOTUS) in light of the US Supreme Court's 2023 decision in Sackett v. United States, 598 U.S. 651 (2023). 

The new measures have important implications for farmers, ranchers and rural landowners in general.  The new EPA/COE clarifications concerning WOTUS – it’s the topic of today’s post.

The Sackett “Fallout”

The jurisdiction of wetlands under the Clean Water Act hinges on their connection to another jurisdictional waterbody—either a traditional navigable water or a relatively permanent water connected to a navigable water. The U.S. Supreme Court's Sackett decision clarified that wetlands must maintain a continuous surface connection to covered waters, aiming to provide greater clarity on wetland jurisdiction. However, prior guidance documents sparked debate by interpreting "continuous surface connection" to include connections via "discrete features," such as non-jurisdictional ditches, to jurisdictional waters.

While the Sackett ruling limited the types of features that qualify as WOTUS, many questions remained about how to apply the decision to specific cases. Additionally, ongoing litigation concerning the prior administration’s WOTUS rule has created a split throughout the U.S. 23 states and the District of Columbia are presently applying the 2023 WOTUS rule as amended after the Sackett decision. The states are California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, and Wisconsin. 27 states are following the pre-2015 WOTUS rules, which are consistent with the Sackett decision. These states are Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, West Virginia, and Wyoming.

EPA/COE Guidance

The latest guidance eliminates this ambiguity, requiring wetlands to be either “adjacent” to or directly abutting a jurisdictional water, like a river or tributary, and disqualifying non-jurisdictional intermediaries (such as a ditch) from forming a continuous surface connection. The guidance sets forth a two-part test for determining the jurisdiction of adjacent wetlands: (1) the wetland must be adjacent to a traditionally navigable or "relatively permanent" water connected to a navigable water, and (2) the wetland must possess a continuous surface connection to a jurisdictional water, making it difficult to distinguish the boundaries between them. This clarification removes the "discrete feature" standard previously used.

Note: This updated guidance supersedes all earlier versions and acknowledges that identifying a continuous surface connection may present field challenges due to "line-drawing problems." The agencies pledge to collaborate with stakeholders to address such challenges on a case-by-case basis and may issue further guidance in the future.

Listening Sessions

The EPA also has plans for the agencies to host listening sessions throughout March and April to gather public input and address remaining implementation challenges following the Sackett decision. These initiatives aim to support the development of (a) clear and robust legal standards for identifying jurisdictional features covered under the Clean Water Act, and (b) practical, transparent, and predictable approaches for applying WOTUS identification principles in the field.

Input is sought on the following issues:

• Relatively Permanent Waters: Feedback is sought on the characteristics—such as flow regime, duration, seasonality, and others—that should define "relatively permanent" waters.
• Continuous Surface Connection: Although the new guidance rejects discrete features as a basis for jurisdiction, questions remain about what constitutes "abutting" a jurisdictional water. Input is requested on whether wetlands behind natural berms or landforms qualify as "abutting" and whether artificial structures like pumps or flood controls might exclude wetlands from Clean Water Act jurisdiction.
• Jurisdictional Ditches: Public comments are invited on whether factors like flow regime, physical features, excavation locations, biological indicators (e.g., fish presence), or other traits make a ditch jurisdictional.

These sessions aim to refine the implementation of WOTUS regulations and ensure clarity and consistency across states and will be conducted both in person and via live streaming. Those wishing to present comments will be selected on a first-come, first-served basis and must limit their remarks to three minutes.  From the listening sessions information is to be collected to aid EPA/COE in drafting implementing regulations. 

Conclusion

The EPA's March 12 action is generally viewed by farmers, ranchers, and rural landowners as a positive development.  By narrowing federal oversight, the rule empowers local and state governments to manage water resources - a more practical and less burdensome approach that has the potential to lower costs for agricultural operations and other rural landowners.  One impact could be enhanced economic growth in rural communities.  Overall, the updates mark a significant shift in the regulatory landscape, with a focus on balancing environmental protection and property rights.

Agriculture’s Irrigation Return Flow Exemption

Overview

The Clean Water Act (CWA) imposes upon the federal government the responsibility for eliminating pollution from point sources by establishing federal restrictions on discharges of pollutants from these sources and enforcing them by means of a federal permit system. This federal permit system, known as the National Pollutant Discharge Elimination System (NPDES) is the chief mechanism for control of discharges.  No one may discharge a “pollutant” from a point source into the “navigable waters of the United States” without a permit from the EPA.  

The NPDES system only applies to discharges of pollutants into surface water.  Discharges of pollutants into groundwater are not subject to the NPDES permit requirement even if the groundwater is hydrologically connected to surface water.  Well… kind of.  

In 2020, the U.S. Supreme Court in County of Maui v. Hawaii Wildlife Fund, 590 U.S. 165 (2020), addressed the question of whether the CWA requires a permit when pollutants that originate from a non-point source can be traced to reach navigable waters through mechanisms such as groundwater transport. The Supreme Court ruled that such non-point discharges require a permit when they are the "functional equivalent of a direct discharge". This decision means that even if pollutants travel through groundwater before reaching navigable waters, they still fall under the CWA's jurisdiction if the discharge is functionally equivalent to a direct discharge.  Recently, the Maryland Court of Appeals decided a case involving spray irrigation which involved the application of the “Maui factors.” 

Under 1977 amendments to the CWA, agricultural irrigation return flows are not considered point sources and don’t require a discharge permit, what implications do the 2020 Supreme Court decision, and the recent Maryland appellate court decision have on the ag irrigation return flow exemption?

Agricultural irrigation return flow exemption and “Maui factors” – that’s the topic of today’s post.

The County of Maui Decision

In County of Maui, the County operated a wastewater reclamation facility on the island of Maui.  The facility collected "sewage from the surrounding area, partially treated it, and pumped the treated water through four wells hundreds of feet underground."   The effluent, which amounted to four million gallons each day, traveled a half mile or so through groundwater where, several environmental groups claimed, it was discharged into the Pacific Ocean.  The Supreme Court held that an NPDES permit was required "when there is a direct discharge from a point source into navigable waters or when there is the functional equivalent of a direct discharge."  The Supreme Court set forth a non-exhaustive list of seven factors to determine whether an indirect discharge falls under the jurisdiction of the Clean Water Act:

• Transit time;
• Distance traveled;
• The nature of the material through which the pollutant travels;
• The extent to which the pollutant is diluted or chemically changed as it travels;
• The amount of pollutant entering the navigable waters relative to the amount of the pollutant that leaves the point source;
• The manner by or area in which the pollutant enters the navigable waters;
• The degree to which the pollution (at that point) has maintained its specific identity.

Note: Time and distance will be the most important factors in most cases, but not necessarily every case.

The Supreme Court sent the case back to the Ninth Circuit for application of the factors.  The Ninth Circuit then sent the case back to the trial court for an application of the factors to the facts of the case.  Ultimately, the trial court concluded, based on the factors, that the County of Maui's wastewater discharges into groundwater, which then reached the Pacific Ocean, required a permit.  The Ninth Circuit affirmed.  Hawaii Wildlife Fund v. County of Maui, No. 12-00198 SOM-KJM, 2020 U.S. Dist. LEXIS 259725 (D. Haw. Oct. 7, 2020), aff’d., No. 21-15207, 2022 U.S. App. LEXIS 15089 (9th Cir. Jun. 1, 2022). 

The Maryland Case

In the recent Maryland case, the town of Trappe and the Trappe East Holdings Business Trust applied for a groundwater discharge permit from the Maryland Department of the Environment for a wastewater treatment facility that would dispose of treated effluent through spray irrigation onto crop fields.  The permit included effluent limitations, requirements for a nutrient management plan, and conditions to ensure complete uptake of nutrients by vegetation, resulting in zero net discharge to groundwater or surface waters.  The permit allowed the use of spray irrigation to discharge 100,000 gallons of treated wastewater per day onto Talbot County farm fields.

The Chesapeake Bay Foundation (CBF)and other parties challenged the permit, arguing it was the functional equivalent of a surface water discharge requiring an NPDES permit and that it did not ensure zero discharge of nutrients.  The CBF argued that this method would increase pollution from the development and change in land use, potentially harming local waterways.  The CBF claimed that the “Maui factors” established that the effluent discharged from the Facility required an NPDES permit because it would reach a creek in about 12 days after travelling approximately 1,159 feet, and that "dilution and 'changed condition' of nutrients in question is immaterial because the remaining [n]itrogen will enter surface waters despite the form it travels in." The Maryland Department of the Environment (MDE) argued that the spray irrigation method would result in "zero net discharge" of nitrogen and phosphorus pollution to local waterways, as the treated wastewater would be absorbed by the soil and vegetation.  The MDE also maintained that the permit met all regulatory requirements and that the spray irrigation system would not harm the environment.

The Talbot County Circuit Court dismissed CBF's challenge, upholding MDE's permit. The court reasoned that MDE's assumption of "zero net discharge" of nitrogen and phosphorus pollution to local waterways was valid and dismissed the case.  On appeal, the Maryland Court of appeals affirmed.  In re Chesapeake Bay Foundation, Inc., 264 Md. App. 107 (Md. Ct. App. Dec. 23, 2024).  The appellate court agreed with the MDE, concluding that the Department clearly considered the “Maui factors” and that the record supported the MDE’s findings and conclusions. The court found that the Department's determination that the discharge was not the functional equivalent of a direct discharge to surface waters was supported by substantial evidence because the MDE considered the “Maui factors” and provided a detailed factual basis for its conclusion. The court also found that the MDE’s determination that the nutrient management plan would ensure 100 percent uptake of nutrients, as state law required, was supported by substantial evidence. The MDE evaluated the plan under its own land application guidelines, considered related issues, and imposed monitoring and reporting requirements to ensure compliance.  As a result, an NPDES permit was not required. 

Impact on Agricultural Irrigation Activities

Both cases highlight the scrutiny given to agricultural practices and their impact on water quality. The County of Maui decision emphasizes that even indirect discharges of pollutants into navigable waters require permits, which could lead to stricter regulations for agricultural operations that use groundwater for irrigation.

Similarly, the Maryland case could result in more stringent controls on spray irrigation practices to prevent runoff pollution. This might include requirements for buffer zones, improved irrigation techniques, or the use of best management practices to minimize the environmental impact.

Overall, these legal decisions underscore the importance of sustainable agricultural practices and the need for farmers to stay informed about regulatory changes that could affect their operations. By adopting environmentally friendly practices, farmers can help protect water quality while ensuring the long-term viability of their agricultural activities.

Until the Supreme Court’s 2023 decision in Sackett v. United States Environmental Protection Agency, 598 U.S. 651 (2023) it was believed that the Supreme Court's opinion in the County of Maui case could have significant implications for the irrigation return flow exemption.  However, the Sackett decision's narrowing of the definition of WOTUS has narrowed the application of the County of Maui decision. By limiting the scope of waters protected under the CWA, the Sackett ruling may reduce the number of water bodies that require permits for indirect discharges of pollutants.

In any event, there is likely to remain a need for agricultural operations to carefully manage their runoff and consider the potential regulatory implications of various agricultural practices. In particular, farming operations might be prudent to consider whether any of the following should be implemented:

• Implementation of more efficient irrigation systems to minimize runoff and ensure that water is used more effectively. This could include drip irrigation, soil moisture sensors, and other technologies that reduce water waste.
• The establishment of buffer zones and vegetation around water bodies to help filter “pollutants” before they reach navigable waters.
• The adoption of nutrient management practices to help prevent excess fertilizers from entering water bodies, including the use of precision agriculture techniques that apply fertilizers more accurately and efficiently.
• In areas of the country where it is possible, the planting of cover crops to reduce soil erosion and runoff and improve soil health.

Conclusion

The agricultural irrigation return flow exemption remains an important exemption from the CWA discharge permit requirement.  The “Maui factors” apply but have been limited in application by the Supreme Court’s 2023 Sackett decision. 

Top 10 Agricultural Law and Tax Developments of 2024 (Part 3)

Overview

With this article I have reached what I view as the “Top 3” ag law and tax developments of 2024.  These are the most important in terms of their anticipated application to the agricultural sector as a whole. 

Number 3 - The Beneficial Ownership Information (BOI) Reporting Rule.  The BOI Reporting Rule is a regulation established under the Corporate Transparency Act (CTA) (which, in turn, was part of the Defense Reauthorization Act of 2020) with an effective date of January 1, 2024.  The idea behind the CTA is to enhance financial transparency and prevent illicit activities such as money laundering and fraud. The rule requires certain businesses (those that must register with the state) to report their beneficial owners—individuals who ultimately own (to a certain degree) or control a company—to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.  For covered entities (essentially) in existence before 2024, the reporting was required by January 1, 2025.  For entities created during, reporting is required within 90 days of registering with the state.  For covered entities created after 2024, necessary reports must be filed within 30 days of registering with the state. 

Here are the key aspects of the BOI Reporting Rule:

1. Who Must Report?
   • Most corporations, limited liability companies (LLCs), and other similar entities created or registered in the U.S.
   • Exemptions exist for certain regulated entities, such as publicly traded companies, banks, credit unions, and nonprofits.
2. Who is a Beneficial Owner?
   • Any individual who owns 25% or more of a company’s ownership interests.
   • Any individual who exerts substantial control over the company (e.g., senior officers, decision-makers).
3. What Information Must Be Reported?
   • Full legal name
   • Date of birth
   • Residential address
   • A unique identifying number (e.g., passport or driver’s license number)
4. Filing Deadlines
   • Existing entities (created before January 1, 2024) have until January 1, 2025, to file their initial report.
   • New entities (formed on or after January 1, 2024) must file within 90 days of formation.
   • Beginning January 1, 2025, new companies must report within 30 days of creation.
5. Penalties for Non-Compliance (as enacted, but adjusted for inflation)
   • Civil penalties of up to $500 per day for willful non-compliance.
   • Criminal penalties including fines up to $10,000 and imprisonment for up to 2 years.

In 2024, numerous court cases were filed challenging the constitutionality of the BOI reporting rules.  As of the end of 2024, a nationwide injunction was imposed barring enforcement of the BOI reporting rules. Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, 2024 U.S. App. LEXIS 32702 (5th Cir. Dec. 26, 2024).

Note: The BOI reporting rules will continue to be a big issue in 2025.  Numerous legal challenges have been filed challenging the legitimacy of the rules.  On February 10, 2025, legislation (H.R. 736) unanimously (408-0) passed the House that would delay the effective date of the CTA until January 1, 2026, for businesses in effect before 2024.  Companion legislation has been introduced in the Senate.

No. 2 - Administrative Agency Deference.  The broad delegation of deference to federal administrative agencies stems from Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), where the U.S. Supreme Court set forth the standard specifying that courts should defer to a federal agency’s interpretation of an ambiguous statute if the interpretation is reasonable.  What is “reasonable” is a very low “hurdle” for an agency to clear for any particular regulation to be upheld.  Indeed, though due process demands that every party have the opportunity to be heard in court and have their cases decided based on relevant law, under Chevron, agencies could have claims thrown out procedurally.

Chevron deference came to an end in 2024 with the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), which overruled its prior Chevron decision. The Court ruled that the APA requires courts to review regulations independently, rather than to defer to the agency’s interpretation if it is a permissible construction of the statute. However, the Supreme Court did not overturn all deference.  It only disregarded the high deference that Chevron granted. As a result of the Court’s Loper Bright decision, the deferential standard that applies to federal administrative agencies reverts to “Skidmore” deference which uses the lower standard of granting “respect” to agency decisions. Skidmore v. Swift & Co., 323 U.S. 134 (1944). When courts use Skidmore’s lower threshold, agencies win a lower percentage of the time.

Note: Skidmore’s lower deferential standard allows courts to utilize judicial review to protect afflicted parties’ due process rights by weighing an affected parties’ due process interest against the government’s interest in technocratic independence from the political and legal processes.

The Supreme Court decided another case in 2024 with further implications for administrative agency deference.  In Securities and Exchange Commission v. Jarkesy, 603 U.S. 799 (2024), the Court affirmed a defendant’s Seventh Amendment right to a trial by jury before a federal agency can take their property. The Securities and Exchange Commission (SEC) initiated an enforcement action against Jarkesy and his firm for violating anti-fraud provisions under federal securities laws.  An administrative law judge issued a final order levying a civil penalty of $300,000.  Jarkesy sought judicial review, and the Fifth Circuit vacated the order on the grounds that it violated the defendants’ right to a jury trial.  The Supreme Court affirmed.  The Court noted that the right to a jury trial in such matters is deeply rooted in U.S. history.  British practices of evading juries through adjudications in juryless tribunals formed part of the foundation for the Declaration of Independence.  The SEC penalties at issue, which involved monetary relief, were not merely designed to restore the status quo, as they were not required to be used to compensate victims.  Instead, they were used to punish the defendant.  As a result, the Court, agreeing with the lower appellate court, determined that the SEC penalties and associated procedures implicated Seventh Amendment rights.  However, the Jarkesy majority limited the scope of its decision to penalties levied based on violations that stem from common law.  Thus, if a fine arises from a violation that wasn’t historically handled by the judiciary, then a jury trial isn’t required. If an agency requests a penalty and cannot convince a jury that the penalty requested is reasonable, then the penalty was unreasonable for the violation. Jarkesy will impact how the SEC and other federal agencies enforce federal regulations because defendants are now less likely to face civil fines without a jury trial.  This, in turn, should protect defendants from unreasonable fines.

The Supreme Court issued yet another significant opinion in 2024 involving administrative agencies.  In Corner Post, Inc. v. Board of Governors, 144 S. Ct. 2440 (2024), the Court held that the statute of limitations for regulatory challenge begins upon injury from final agency action.  The plaintiff, a truck stop and convenience store, was formed in 2017 and opened its business in 2018.  The plaintiff sued in 2021 under the APA to challenge regulations promulgated by the Federal Reserve Board in 2011 in response to the Dodd-Frank Act that set the maximum interchange fees for debit cards.  The plaintiff was not directly regulated by the Federal Reserve, but it paid the fees when customers used debit cards to pay for goods and services.   The plaintiff sought to set aside these regulations on the ground that they set interchange fees higher than “reasonable and proportional to the cost incurred by the issuer”, as required by statute. The trial court dismissed the case on the ground that the claim was barred by a six-year statute of limitations.  In other words, the trial court determined that the statute of limitations began when the regulation was issued in 2011 and had expired before the plaintiff was formed.  On appeal, the Eighth Circuit affirmed.  The Supreme Court reversed, holding that the statute of limitations at issue does not begin to run until the plaintiff is injured by a final agency action which, in this case, was 2018.  Thus, the suit was timely.

Observation:  The Corner Post decision has significant implications for administrative law and marks a pivotal shift in how and when federal regulations can be contested, potentially reshaping the landscape of administrative law and regulatory practice in the United States.

No. 1 - The Fall 2024 Federal Election.   Certainly, the biggest development of 2024 in terms of its impact on agriculture is the election for a second term of Donald J. Trump along with Republican majorities in the House and Senate.  The Republicans kept the House with a slight 220-215 advantage, regained the Senate with a 53-47 majority, and retook the White House.  Had the Democrats swept, substantial tax increases were anticipated along the lines of a Senator Warren wealth tax or a Biden millionaire tax. That seems assured not to occur now, for the next four years.  Indeed, a Trump victory suggests that it is unlikely that significant new taxes will be imposed. Since the Republicans also won the House more tax cuts may be possible. 

Perhaps even more impactful is the anticipated blow to the administrative state.  When coupled with the Supreme Court’s 2024 decision in Loper Bright that reduced the deference given to federal administrative agencies and the creation of the Department of Government Efficiency, it is anticipated that the federal regulation of agricultural activities will soften, perhaps substantially.  In addition, the tax burden is anticipated to not increase, farm estates are not likely to be increasingly subjected to federal estate tax, and the inflationary effect of “green energy” regulations will be eliminated (which will reduce input costs for farmers and food prices for consumers) or at least substantially reduced. It is also likely that the threat of tariffs on foreign nations will be used to secure the nation’s borders and increase demand for and the production of domestically produced goods. 

Conclusion

Those are what I see as the biggest developments in agricultural law and taxation in 2024.  Some of the developments will certainly loom large in 2025 and other issues will surface.  2025 will certainly be interesting.

Top Ten Agricultural Law and Tax Developments of 2024 (Part 2)

Overview

This is the second installment of my annual “Top Ten” list of the biggest developments in agricultural law and taxation in 2024.  This time it’s numbers seven through four.

7.      Waters of the United States. In this case, the Environmental Protection Agency (EPA) claimed that the defendant discharged “pollutants” into a navigable water of the United States (a river that passes through the defendant’s ranch) and associated wetlands without a Clean Water Act discharge permit. The EPA and the U.S. Army Corps of Engineers (COE) notified the defendant that it was going to start investigating potential CWA violations. The defendant withdrew its initial consent to the investigation and filed a complaint and motion for preliminary injunction. The case was dismissed. The EPA then obtained an administrative warrant and inspected the ranch in 2021 and 2023 and filed a suit claiming that the ranch had violated the CWA by illegally discharging pollutants by constructing multiple road crossings in the Bruneau River (a navigable water) and associated wetlands which impeded the flow of water and polluted the river. The EPA also claimed that the defendant “disturbed the riverbed” by mining sand and gravel from the river, and that the defendant’s construction of a center pivot irrigation system cleared and leveled “nearly all of the Ranch’s wetlands.” The EPA sought a permanent injunction that would bar the ranch from further discharges and would require the ranch to restore the impacted parts of the river.

The ranch moved for dismissal for failure to state a claim. The court granted the defendant’s motion and dismissed the case. The court determined that the EPA failed to sufficiently specify in its complaint that the wetlands at issue had a continuous surface connection with the Bruneau River to be considered indistinguishable from it (the requirement needed to satisfy the “adjacency test” established in Sackett v. Environmental Protection Agency, 598 U.S. 651 (2023). It was not enough for the EPA to assert that it could clear up any confusion during discovery. The court noted that the EPA had to put forth sufficient allegations at the pleading stage to entitle it to discovery. As such, the EPA failed to state a claim upon which relief could be granted. However, the court gave the EPA an opportunity to amend its complaint within 30 days of the court’s order. United States v. Ace Black Ranches, LLP, No. 1:24-cv-00113- DCN, 2024 U.S. Dist. LEXIS 156797 (D. Idaho Aug. 29, 2024).

6.    Hobby Loss Regulations Under Review. In Schwarz v. Comr., T.C. Memo. 2024-55, the Tax Court held that the petitioners’ agricultural activity was a hobby with the result that several million dollars of losses were disallowed.  On August 7, 2024, the IRS entered its computation for entry of decision to which the Tax Court ordered the petitioners to file a response by September 11, 2024.  Instead, on September 11, the petitioners filed an objection to the computation for entry of decision to which the Tax Court ordered the IRS to respond by September 26.  On September 16, the petitioners filed a motion for reconsideration of the Tax Court’s findings which the Tax Court granted on September 17 and ordered the IRS to respond by October 1, which was later changed to November 1.  On September 26 the IRS filed its response to the petitioner’s objection to the computation for entry of decision. In an order entered on Nov. 5 in the Schwarz case the Tax Court granted the taxpayers’ motion for reconsideration of the factual findings in the case. The Tax Court has ordered the parties to file responses to the order arguing whether Treasury Regulations §§ 1.183-1(d)(1) and 1.183-2(b) are valid or not in light of the Supreme Court’s opinion in Loper Bright Enterprises, et al. v. Raimondo which repealed the Chevron Doctrine.

5.    When is Income “Realized”? The petitioners owned 11 percent of the common shares of KisanKraft, a corporation located in India. KisanKraft is a controlled foreign corporation (CFC) - more than 50 percent owned by U.S. persons – that makes tools for sale to farmers in India. KisanKraft did not pay dividends and reinvested all of its earnings in its business. Before the Tax Cuts and Jobs Act of 2017, CFCs were taxable only under subpart F of the Code, which generally permitted deferral of U.S. taxation of the active foreign business income of the company until that income was repatriated to the United States. However, the TCJA changed the international tax system into a territorial approach that taxes income only based on domestic sourced profits. The TCJA imposes a current-year tax in 2017 (known as a “mandatory repatriation tax” or MRT) under I.R.C. §965 on U.S. persons owning at least 10 percent of a CFC. The MRT is based on the amount of the previously accumulated and untaxed income of the CFC. The MRT ensures that the CFC’s undistributed and untaxed earnings and profits from 1986 to 2017 are effectively taxed to their owners – the U.S. shareholders like the petitioners – in 2017. If the CFC repatriates those earnings in the future, they are excluded from the taxpayer’s gross income. The MRT increased the petitioners’ 2017 tax liability by approximately $15,000 because of their pro rata share of corporate retained earnings of $508,000. They paid the tax and sued for a refund on the basis that there had been no tax realization event. They lost at both the trial court and the appellate court.

The Supreme Court issued a narrow decision only applicable to pass-through entities which did not address the issue of whether realization is a constitutional requirement for an income tax. The Court determined that the MRT taxed income that had been realized by KissanKraft which was then attributed to the shareholders.    The Court noted that Congress may either tax an entity or its shareholders/partners on undistributed income and whatever route the Congress chooses it’s a tax on income. The Court held that Eisner v. Macomber, 252 U.S. 189 (1920) did not address the question of attribution and was inapplicable to the present case, but the majority never addressed the key question at issue – whether the 16th Amendment includes a realization requirement.

The dissent (Justice Thomas, joined by Justice Gorsuch) pointed out the ridiculousness of the majority’s reasoning, noting that the “text and history of the 16th Amendment make it clear that it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’ And, the only way to draw such a distinction is with a realization requirement.” The dissent astutely pointed out that, “Even as the majority admits to reasoning from fiscal consequences, it apparently believes that a generous application of dicta will guard against unconstitutional taxes in the future. The majority’s analysis begins with a list of nonexistent taxes that the Court does not today bless, including a wealth tax. And, it concludes by offering a narrow interpretation of its own holding, hinting at limiting doctrines, prejudicing future taxes, cataloging the Government’s concessions and reserving other questions ‘for another day.’ Sensing that upholding the MRT cedes additional ground to Congress, the majority arms itself with dicta to tell Congress ‘no’ in the future. But, if the Court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference.” Moore, et ux. v. United States, No. 22-800, 2024 U.S. LEXIS 2711 (U.S. Sup. Ct. Jun. 20, 2024), aff’g., 36 F.4th 930 (9th Cir. 2022).

4.  Herbicide - EPA Draft Strategy. The Environmental Protection Administration (EPA) released a draft strategy designed to address the agency’s “failure” to meet it obligations under the Endangered Species Act (ESA) on a pesticide-by-pesticide and species-by-species basis and prepare for an increase in future herbicide registration reviews. In particular, the draft strategy identifies species “protections” earlier in the pesticide review process with respected to endangered and threatened species and sets forth mitigation procedures that farmers will need to utilize. The strategy focuses on conventional agricultural herbicides in the U.S. on the 264 million acres of farmland treated by such chemicals in 2022. The draft strategy is the result of an agreement the Center for Biological Diversity entered into with the EPA and focuses mitigation practices on the control of herbicide runoff and erosion as well as spray drift. Response to Public Comments Received on the Draft Herbicide Strategy, EPA Office of Pesticide Programs, Docket No. EPA HQ-OPP-2023-0365-1138 (Aug. 2024).

Many farmers will be impacted by the EPA’s strategy. More than 90 percent of species listed as endangered or threatened have at least some habitat on private land, with almost 70 percent of the endangered or threatened species having over 60 percent of their total habitat on nonfederal lands. Spray drift mitigations include windbreaks and hedgerows, the use of hooded sprayers, and reduction of application rate depending on the level of risk. Many farm clients will have challenges with the buffer zone requirements contained in EPA’s strategy. Potentially for every ground spray could require a 200-foot buffer and aerial applications could require up to a 500-foot buffer. This could result in significant acreage not being treated due to the possibility of down-wind spray drift. Advisors should consult with farm clients as to the potential financial impact on their farming operations and plan accordingly.

Conclusion

Next time it’s the big top three.  Stay tuned…

The “Top Ten” of 2024 (Part One)

Overview

With today’s article I start my annual trek through what I believe to be the “Top 10” ag law and tax developments of the previous year.  It’s always difficult to determine the ten “big ones.”  I start with a much larger list and slowly pair it down.  Some significant ones always get left on the cutting room floor.  But, what I am looking for are those developments that I think will have the biggest impact on the agricultural production sector as a whole.

With that in mind, the following is what I see as developments Nos. 10-8 in agricultural law and taxation for 2024. 

10.      States’ Water Compact Must Include Federal Government. Colorado, New Mexico, and Texas signed the Rio Grande Compact in 1938, and Congress approved it in 1939. The Compact equitably apportions the waters of the Rio Grande Basin. Under the Compact, Colorado committed to deliver a certain amount of water to the New Mexico state line. A minimum quality standard was also established. At the time of the Compact’s approval in 1939, there wasn’t as much groundwater pumping as there is now.  Beginning in the 1950s groundwater pumping increased.  Because of the interconnectedness of groundwater and surface water, the increase in groundwater pumping decreased the amount of surface water in the Rio Grande Basin that flowed to Texas. In 2014, Texas sued New Mexico for allowing the Rio Grande’s water reserves to be channeled away for its use which deprived Texas of its equal share in the river’s resources. In 2018, the Supreme Court said the federal government should be a party to the case because of its treaty obligation to deliver a quantity of Rio Grande River water to Mexico and because the water is delivered via a federal reclamation project administered by the Department of the Interior which, in turn, has an obligation to Indian tribes what also have an interest in the water. To resolve the dispute, Texas and New Mexico entered a proposed consent decree that introduced some additional metrics to account for changed circumstances in the Basin since 1939. The federal government objected that the settlement was inconsistent with the original compact and undermined the Compact’s plain language, which the states cannot do without congressional approval. The court agreed, sending the case back to a Special Master on the basis that Article I, Section 10, Clause 3 which states: “No State shall, without the Consent of Congress,… enter into any Agreement or Compact with another State”…. Thus, when the federal government has an interest in a water agreement among states, it must be a party to the agreement.  That’s a key point.  The Supreme Court did not rule that the Constitution requires the Congress to be involved in every state water law Compact, just that the facts of this case involved Congressional involvement. The case was sent back to the special master assigned to the matter (basically a person (in this instance a senior appellate judge from the U.S. Court of Appeals for the Eighth Circuit) who acts as a one-person jury. Texas v. New Mexico, 602 U.S. 943 (2024).

9.    Public Lands Rule.  The Bureau of Land Management (BLM) published a new “Public Lands Rule” in the Federal Register on May 9, 2024. 89 Fed. Reg. 40308.  The Rule is part of the Biden/Harris administration’s effort to conserve at least 30 percent of U.S. lands and waters by 2030 and is projected to apply to approximately 245 million acres of public lands – about one tenth of the U.S. land area Since then, multiple lawsuits were filed challenging the rule. In Alaska v. Haaland, No. 3:24-cv-00161 (D. Alaska, filed Jul. 24, 2024), the State of Alaska claims that the “vast majority” of the rule was not authorized by the Federal Land Policy Management Act and other federal and state laws and violated the “major questions doctrine” and failed to comply with the National Environmental Policy Act (NEPA). In American Farm Bureau Federation v. United States Department of the Interior, No. 2:24-cv- 00136 (D. Wyo., filed July 12, 2024), an additional claim is made that the Congressional Review Act bars the rule and that supposed “climate change” as a basis for the rule does not excuse unlawful rulemaking. In Utah v. Haaland, No. 2:24-cv- 00438, (D. Utah, filed Jun. 18, 2024), the states of Utah and Wyoming challenged the rule based on the BLM’s reliance on a categorical exclusion for NEPA compliance.  Later in 2024, the American Farm Bureau Federation and 10 other groups filed an action in federal court challenging the validity of the Rule. Bureaus of Land Management’s (BLM) Public Lands Rule (Rule). The Rule, published at 89 Fed. Reg. 40308 (May 9, 2024), prioritizes land conservation via restoration and mitigation by restricting grazing on public lands.  The Rule is being challenged as exceeding the BLM’s authority under the Federal Land Policy and Management Act in that the Rule sets aside land for conservation which is a power the Congress has reserved for itself and is vague in when land can or will be set aside for mitigation or restoration.  The case is American Farm Bureau Federation, et al. v. U.S. Department of the Interior, et al. No. 2:24-cv-00136 (D. Wyo. filed Jul. 12, 2024). 

           Note: Grazing issues will continue to be big in 2025.  Will a change in Administration mitigate these disputes on                         federal rangeland?  Only time will tell.

8.    Takings” Cases at the U.S. Supreme Court.  In 2024, the U.S. Supreme Court decided two cases involving “takings” under the Fifth Amendment where the implications of the Court’s decisions will be important to agriculture. 

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

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

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

The U.S. Supreme Court agreed to hear the case with the question being what the procedural vehicle is that a property owner uses to vindicate their right to compensation against a state.  The U.S. Supreme Court unanimously reversed the lower court, although it did not hold that the Fifth Amendment is “self-executing.”  Texas does provide an inverse condemnation cause of action under state law to recover lost value by a Taking. The Supreme Court noted that Texas had assured the Court that it would not oppose the complaint being amended so that the case could be pursued in federal court based on Texas state law.  Devillier v. Texas, 144 S. Ct. 938 (2024).

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

In this case, the landowner claimed that test meant that the county had to make a case-by-case determination that the $24,000 fee was necessary to offset the impact of congestion attributable to his building project - a manufactured home on a lot that he owns in California.  He paid the fee but then filed suit to challenge its constitutionality under the Fifth Amendment.   The U.S. Supreme Court unanimously ruled in his favor.  The Court determined that nothing in the Takings Clause indicates that it doesn’t apply to fees imposed by state legislatures.  Sheetz v. El Dorado County, 144 S. Ct. 893 (2024).

Conclusion

Property rights were at issue in each of these developments.  Next time I continue the journey through the list as I count down to the top development of 2024.

The “Not Quite” Top Ten

Overview

There were numerous big developments in agricultural law and taxation during 2024.  It’s always difficult to boil it down to the ten most important developments, so I start the journey of reviewing last year’s big developments by discussing a few that didn’t quite make the cut. 

The “Not Quite” Top Ten ag law and tax developments of 2024 – it’s the topic of today’s post.

USDA’s Push for “Climate Smart” Agricultural Practices 

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

But with the funding comes a loss of freedom. Recent examples exist with respect to the reaction of  Dutch, Polish, Irish, French, German or Sri Lankan farmers to the imposition of “climate change” policies. The USDA’s expressed goal is to get farmers and ranchers to calculate greenhouse gas emissions.  In the USDA’s words, “implementation and monitoring of climate smart practices” is the end goal.  Once monitored, the emissions will be regulated.  Indeed, USDA has worked with Colorado State University to develop a “planner tool” to be able to measure conservation practices on farms.  Once the emissions from a farm become measurable, they will be regulated.  With the increased regulation comes a loss of freedom and a further loss of smaller farming and ranching operations that are least likely to be able to bear the compliance cost. 

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

January 2025 Update.  On January 15, 2025, the USDA released an interim rule titled “Technical Guidelines for Climate-Smart Agriculture Crops Used as Biofuel Feedstocks.” This rule establishes a framework for quantifying, reporting, and verifying greenhouse gas (GHG) emissions associated with the production of biofuel feedstock crops in the United States. The primary objectives are to facilitate the integration of climate-smart agriculture (CSA) practices into clean transportation fuel programs and to create new market opportunities for biofuel feedstock producers while enhancing environmental benefits. The rule focuses on three major biofuel feedstock crops: corn, soybeans, and sorghum. The interim rule identifies specific CSA practices that can reduce GHG emissions or sequester carbon, including reduced tillage and no-till farming; cover cropping; and nutrient management practices, such as the use of nitrification inhibitors. With the interim rule, USDA has introduced the beta version of the Feedstock Carbon Intensity Calculator (FD-CIC) to assist in calculating farm scale carbon intensity in line with the standards set forth in the interim rule.  It's important to note that the interim rule does not impact the I.R.C. §45Z clean fuel production tax credit. The Treasury Department still needs to write regulations concerning how the FD-CIC will be used in the computation of the credit. 

Note: It will be interesting to see how USDA’s policies will change in 2025 under new leadership that is anticipated to be more focused on actual science and spending taxpayer dollars in a more efficient and targeted manner.  Several atmospheric gases, including carbon dioxide, methane, and water vapor, absorb light in the infrared region. These are collectively known as the “greenhouse gases” because absorbing infrared energy warms up the air.  This is known as the greenhouse effect.  Carbon dioxide, on a per-molecule basis, is six times as effective an absorber as water is. However, that’s offset by the fact that carbon dioxide is only about 0.04% of the atmosphere. This means that, overall, it’s much less important than water vapor in terms of its ability to warm the atmosphere.  While methane can trap at least 25 times more heat than carbon dioxide, it is the rarest of the greenhouse gases. But scientists point out that methane will never be a major contributor to “global warming” because of its narrow absorption bands, which perfectly match the absorption bands of water – in other words water completely masks the effects of methane.  This makes, for example, the regulation of methane production by cattle pointless in terms of “climate change.”  Indeed, scientific studies point out that 76 percent of methane production comes from wetlands. For a recent paper authored by physicists that bolsters the point that regulation of agricultural activities to reduce methane emissions is misguided, see https://co2coalition.org/wp-content/uploads/2025/01/Methane-and-Climate-Happer-van-Wijngaarden-2025-January-compressed.pdf

Per- and Polyfluoroalkyl Substances (PFAS) and Rural Landowners 

A PFAS is a widely used, long-lasting chemical having components that break down slowly over time that have been used since the 1940s. It is found in water, air and soil all over the globe and are used for many commercial and industrial products.  Some studies have shown that exposure to PFAS may be linked to harmful health effects in humans and animals.  PFAS are a group of more than 15,000 chemicals that are associated with various cancers and other health problems, and there is no known method for cleaning up PFAS contamination.  The biggest potential problem for agriculture involving PFAS will likely be biosolids – the solid matter remaining at the end of a wastewater treatment process.  Biosolids are often land-applied and there are benefits to doing so.  It recycles nutrients and fertilizers and creates cost savings on chemicals and fertilizers for farmers.  The uptake of PFAS by plants varies depending on PFAS concentration in soil and water, type of soil, amount of precipitation or irrigation, and the type of plant. 

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

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

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

EID Mandate for the Cattle Industry 

In April 2024, the U.S. Department of Agriculture (USDA) introduced a rule mandating the use of electronic identification (EID) ear tags for certain cattle and bison involved in interstate movements. This rule aims to enhance animal disease traceability, allowing for rapid detection and containment of disease outbreaks. The rule applies to:

• Sexually intact cattle and bison aged 18 months or older.
• All dairy cattle, regardless of age.
• Cattle and bison of any age used for rodeo, exhibition, or recreational events.

For interstate movement, these animals must have official identification that is both visually and electronically readable. Acceptable forms of identification include:

• EID ear tags (commonly known as 840 tags).
• Brands registered with a recognized brand inspection authority, accompanied by an official brand inspection certificate (when accepted by state veterinary officials in both the sending and receiving states).
• Tattoos acceptable to breed associations for registration, accompanied by the breed registration certificate (when accepted by state veterinary officials in both the sending and receiving states).
• Group/lot identification numbers if the animals are managed together as one group throughout the pre-harvest production chain.

\The rule does not apply to:

• Beef cattle under 18 months of age.
• Cattle moving directly to slaughter.
• Cattle not crossing state lines.

The rule became effective on November 5, 2024.  Animals tagged with non-electronic official identification prior to this date are not required to be re-tagged; their existing tags remain valid for their lifetime. The rule is highly controversial in the cattle industry and is being challenged in court.  Expect more developments on this issue in 2025. 

Conclusion

These issues were important ones in 2024 that will likely still be important in 2025.  Next time, I’ll start my trek through what I view as the “Top 10” ag law and tax developments of 2024.

Protecting Farm Assets and Your Legacy

Overview

Farming and ranching businesses operate on thin margins.  The way ag economists measure it   the operating margin for farming and ranching operations typically refers to the percentage of revenue remaining after covering operating expenses, excluding interest and taxes. It's an important measure of profitability and financial efficiency in agricultural businesses.  But by excluding interest and taxes, the true picture of the operating margin of a farm or ranch is distorted and overestimated.  Interest expense and taxes are a significant factor in determining the true health of an agricultural business.  That’s what much of agricultural law and taxation concerns – taking planning steps to ensure that economic margins are not any tighter than they need to be by avoiding unnecessary “leakage” of funds.

With today’s post, I take a brief look at some things to examine about your farming operation that are outside of the typical ag economic outlook for a farm’s profitability.  I am just scratching the surface on each of these.  Indeed, I teach professional-level continuing education classes on each of these.  And…there are many other legal and tax-related issues that relate to a farm’s bottom line that I don’t address in this brief article.

A few points on improving your operating margin – that’s the focus of today’s post.

Farm Liability Insurance Coverage

A key aspect of protecting your farming and ranching business from economic loss is to make sure that the assets are protected.  That’s where insurance comes into play.  What happens when you have a property loss or liability event on your farm that you think might be covered by your farm’s liability insurance policy?  What are the steps to take to document a claim, valuing the loss, determining the payout and appealing an adverse coverage determination? 

When you have a property loss or liability incident on your farm, the first step is to document the loss event.  Make written notes, take pictures and keep documents.  Also, notify law enforcement if any laws were broken and notify your insurance company with an explanation of how and when the damage occurred and what property was damaged.  Make sure to complete an accounting of the damaged property.  If you end up disagreeing with the carrier’s loss determination, the accounting will make it easier to challenge the payout amount. 

Also, make sure you know how the carrier will compute the amount to be paid.  Will you get replacement value or actual cash value?  A policy that provides for replacement value will serve you better in times of inflation.  Make sure you know whether there is any limit on the payout amount and whether you have to go through arbitration to challenge the carrier’s coverage determination.  Any complaints you have about the carrier can be submitted to the state’s insurance department.  Always provide all of the evidence you have that supports your position.

A property loss or liability event is never fun, but taking these steps can make the recovery process smoother.

Using a Budget to Increase Farm Profitability

While not strictly a legal or tax issue, another way to increase your farm’s profitability is to create a budget that’s monitored and managed throughout the year with adjustments made when needed.  A farm budget serves numerous purposes.  First, it forces you to put everything down on paper and view your farm as a complete operating business with many moving parts.  It also allows you to see how each part affects the others.  Change one of the parts and you’ll see the impact on other parts and on your overall farming operation. 

Once you create a budget, stick to it.  Put unexpected things into the budget and see how your farm’s profitability is affected.  Also, compare your budget to farming industry standard farming budgets.  Often Land Grant University ag colleges will have those and you can learn a lot by the comparison.  Is your bottom line consistent with other farmers in your area?  If not, look for inconsistencies.  Maybe you’re paying too much for inputs or using more water than others. 

You can also use a budget to set goals and establish averages over time that allow you to see whether you are on-track at mid-year, for example.  A budget can also help with optimizing your tax planning – the timing of purchases, the amount of depreciation to claim, whether to defer income or elect income averaging, for instance.

The most profitable farmers create a budget and manage unexpected issues that have the potential take them off track as they arise. 

Protecting the Farm With (and from) Technology

Farm security involves properly caring for animals, screening and training employees, and making sure property boundaries are in good shape.  But it also means defending against technology such as cameras, drones and virtual reality. 

News stories have documented how some activist groups are using drones to take overhead video of confinement livestock operations.  In one instance, activists gained access to hog barns and hid tiny cameras. During a subsequent nighttime raid, they used high speed digital cameras to record the inside of a barn.  The recordings became part of a virtual reality experience on social media to be used against animal agriculture. 

This type of conduct puts animals and the food chain at risk. These farms have strict biosecurity protocols to protect animals against cross-contamination, pathogens, bacteria and viruses.  In addition, the intrusions can damage existing structures.

So, what can be done for protection?  A careful hiring practice is the first line of defense.  Also, use technology such as cameras to your advantage.  In addition, make sure your plan includes standard techniques - check for doors left ajar, unfastened locks, disturbed equipment, hidden cameras and displaced dirt or gravel.

Do you have a security plan for your farm?  It’s often overlooked, particularly by those operations that don’t have livestock.  But it’s something that should be given consideration.

Common Estate Planning Mistakes

An estate planning mistake can be very costly.  I once was consulted to work on a plan for a farmer who had a net worth of about $25 million.  He didn’t have an estate plan.  He didn’t follow through with any of the guidance provided and died without any plan in place.  That ended up costing his family over $8 million in tax that didn’t need to be incurred with proper planning.  That certainly changed the future for his surviving wife and daughter. 

So, not doing anything to make an estate plan is a mistake.  But what are some other common errors to avoid?

Here are a few:

• Make sure title ownership of property complies with your overall estate planning goals and objectives. This includes the proper use of jointly held property, as well as IRAs and other documents that have beneficiary designations. 
• Know what the language in a deed means for purposes of passage of the property at death.
• It’s also probably not a good idea to leave everything outright to a surviving spouse when the family wealth is potentially subject to federal estate tax.
• “Fair” does not mean “equal.” In situations where there are both “on-farm” and “off-farm” heirs, the control of the family business should pass to the “on-farm” heirs, and the “off-farms” heirs should get an income interest that is roughly balanced in value to that of the “on-farm” heirs’ control interest.  Leaving the farm to all the kids equally is rarely a good idea in that situation.
• Don’t let tax issues drive the process.
• Make sure to preserve records and key documents in a secure place where the people that will need to find them know where they are. 
• Also, review the plan periodically. You don’t want to leave out that 6^th child born 25 years after your first one and 12 years after your fifth one.  Just sayin…

Conclusion

Protecting the bottom line of the farm or ranch involves issues beyond the typical economic analysis.  I’ve discussed just a few.

Last week was the start of my 2025 lecture tour across the country.  I had three events. At one of the events, I did two hours of water law, two hours of real estate issues and two hours of fence law.  It was a great group.  One attendee told me he had me in class 30 years ago.  Not sure how I feel about that.    In addition, I started an intensive course at the law school on farm income tax and farm estate/business planning.  That one runs for 3.5 hours each morning and continues each morning this week.  A good group of students are enrolled.

Horse Protection Act - New Regulations Take Effect Soon

Overview

The Horse Protection Act (HPA) of 1970. (15 U.S.C. §§ 1821 et seq.) was intended to end the inhumane practice by owners, trainers and exhibitors of deliberately making sore the feet of the Tennessee Walking Horse.  But starting February 1, 2025, new regulations take effect that will expand the HPA to all breeds of horse and all types of horse events, including 4-H events.

New regulations under the HPA – it’s the topic of today’s blog post.

Background

As noted, the HPA was intended to stop certain inhumane practices impacting Tennessee Walking Horses.  This type of horse is characterized by the high stepping of the forelegs. Trainers “sore” the horses either by applying chemicals or by placing a painful collar around the top of the hoof that causes the animal to step up in a pronounced fashion.  The HPA outlawed those procedures and made it an inhumane practice if it was done in interstate commerce.  The HPA was amended in 1976 to strengthen its enforcement provisions.  While the HPA does not prohibit the soring of horses, it does prohibit sored horses from being entered in horse shows, exhibitions, sales and auctions and moving in interstate commerce or substantially affecting commerce.  The HPA was also extended in 1976 to intrastate commerce. 

If a horse has the appearance of being scarred, the scar itself is enough to indicate that the horse has been sored, triggering the statute's application. Presently, violations of the HPA, if not settled by the USDA, are subject to civil penalties of up to $5,000 for each violation and an order disqualifying the violator from showing or exhibiting horses for a period of at least one year for the first violation and at least five years for any subsequent violation. 15 U.S.C. § 1825(b)(1). Civil penalties of up to $5,000 can be assessed for a violation of an order of disqualification. 15 U.S.C. §1825(c). Knowing violations are subject to criminal penalties, including fines of up to $3,000 and one year in prison for a first offense.” 15 U.S.C. § 1825(a)(1). Each subsequent violation may result in fines of up to $5,000 and imprisonment for up to two years. 15 U.S.C. §1825(a)(2).

Under the HPA, liability can extend to trainers for entering a sored horse in a show, and owners who “allow” sored horses to be entered. See, e.g., Derickson v. United States Department of Agriculture, 546 F.3d 335 (6th Cir. 2008).  Whether an owner is liable for the entry of a sored horse regardless of knowledge or fault is an unsettled issue in the courts.  The USDA’s position is that an owner is liable regardless of knowledge or fault for a sore horse.  Thus, the USDA interprets the Act in a manner that does not require them to prove that the owner is somehow responsible for the soring (either by direct authorization or otherwise).  However, the statute appears to differentiate between those who directly enter, show or exhibit horses and those who do not. See 15 U.S.C. § 1824(2)(B) and (2)(D).

In late 2003, the U.S. Court of Appeals for the Tenth Circuit adopted the USDA’s position that an owner is liable regardless of knowledge or fault for a sore horse.” McCloy v. United States Department of Agriculture, 351 F.3d 447 (10th Cir. 2003), cert. denied, 543 U.S. 810 (2004).

Effective February 1, 2025, significant revisions to the HPA took effect. 9 CFR Part 11, 89 Fed. Reg. 39194 (May 8, 2024).  The revised rules are the result of animal activists seeking more regulation of the Tennessee Walking Horse Industry and an expanded definition of “soring” to encompass as much of the horse industry as possible.  This despite the compliance rate with the HPA exceeding 90 percent. 

  The revisions aim to strengthen enforcement against soring and promote the humane treatment of horses across all breeds and disciplines.

The revisions make the following significant changes:

• Event management responsibilities:
• Advance notification: Event managers must notify the USDA’s Animal and Plant Health Inspection Service (APHIS) at least 30 days before their event, indicating whether they have appointed a USDA Horse Protection Inspector (HPI) or requested an APHIS Veterinary Medical Officer (VMO) to conduct inspections.
• Updates and reporting: Any event updates should be provided 15 days in advance. Additionally, managers must report any HPA violations to the regional director of APHIS within five days after the event concludes.
• Identification and recordkeeping.  A horse event manager must verify the identity of each horse entered at a show, exhibition, sale or auction, and maintain all horse show and exhibition records for 90 days and make those records available to inspectors.

• Inspection protocols:
• HPIs: The USDA will train and authorize HPIs, who will be licensed veterinarians or individuals with extensive equine experience. These inspectors will be responsible for conducting inspections at events. Event managers are liable for any HPA violations if they choose not to hire an inspector. HPIs are to have free and uninhibited access to records, barns, horse trailers, stables, stalls, arenas and all other show or exhibition grounds.
• Elimination of DQP program:
• The Designated Qualified Person (DQP) program and the role of Horse Industry Organizations (HIOs) in inspections will be discontinued. Only APHIS VMOs and HPIs will conduct inspections under the revised regulations.

• Equipment and substance restrictions:
• Ban on action devices and pads: The use of action devices and pads by Tennessee Walking Horses and racking horses during competition is prohibited. Weighted shoes and bands are still permitted.
• Prohibition of substances:
• All substances applied to the extremities above the hoof of Tennessee Walking Horses or racking horses during competition are banned, including lubricants, to prevent masking of soring.

• Scar rule modification:
• Inspection criteria: The revised Scar Rule provides a list of dermatologic conditions indicative of soring. Inspectors will use their judgment to determine if a horse exhibits signs of soring based on these conditions.
• Specific rules for horse owners:
• Anything that could make a horse sore, lame, or irritated are prohibited. Sore muscles from a focused training session or a small rub from an incorrectly fitted bell boot could be equated to intentional soring.
• Any substance that could make a horse sore or have an inflammatory reaction is prohibited, including therapeutic liniment
• No substances may be used on the limbs of a horse, including skin and hair conditioners or fly spray
•  Horse owners are not the only ones liable. Any participant with horses is subject to liability, including agents, haulers, trainers, vendors, supporters, and sponsors.
• Mandatory rest periods must be observed during shows, exhibitions, sales, and auctions.
• Any information requested must be provided to inspectors on demand.
• Horses’ legs must be blemish-free, including dermatologic conditions such as irritation, moisture, edema, swelling, redness, epidermal thickening, loss of hair, or other evidence of inflammation.
• Horse inspections may include, but are not limited to, “visual inspection of a horse and review of records, physical examination of a horse, including touching, rubbing, palpating, and observation of vital signs, and the use of any diagnostic device or instrument, and may require the removal of any shoe or any other equipment, substance, or paraphernalia from the horse when deemed necessary by the professional conducting such inspection.
• Horses can be detained by HPIs for 24 hours.
• Therapeutic treatments, including massage, chiropractic treatments, and PMF must be administered or overseen by qualified veterinarians
•  Complete veterinary records must be kept and maintained for horses receiving therapeutic treatment of any kind.
• Requirements for shipping and transporting horses.
• Any horse winning first place in a class is required to be re-inspected.
• Horses that receive a rub or blemish while competing are subject to HPA violations, even if the horse passed inspection prior to entering the ring.

Note: The 2025 revised rule extends the HPA’s prohibition against sored horses participating in shows, exhibitions, sales and auctions to events involving all horse breeds.  The reach of the revisions also extends to all shows involving horses, from local 4-H playdays to annual international competitions. Also, while the new rule dramatically increases the scope of the HPA the USDA has simultaneously reduced the number of possible inspectors by eliminating the use of third-party DQP program, thus creating a shortage of qualified inspectors.  This means that under the revised rule the APHIS is solely responsible for training and employing inspectors who must be licensed veterinarians or veterinary technicians. 

Conclusion

The new regulations effective February 1, 2025, will likely have a substantial impact on horse shows, including 4-H horse events.  The impact could possibly be even broader than horse shows.  Time will tell.

Year-End Musings…

Overview

As 2024 winds down (as I write this it’s after 6:00 p.m. central time) my thoughts turn to some common themes that never hurt to discuss.  The first thing is some tax planning reminders as we transition into a new year. 2025 is currently set to be the last year of the Trump tax cuts and if they aren’t extended or made permanent, then nearly all taxpayers will see a significant tax increase starting in 2026.  It will be interesting to see what the Congress does.  Also on my mind are options for handling long term care costs, powers of attorney, and the portability of a pre-deceased spouse’s unused exclusion amount.

Year-End Tax Planning

Before you turn the calendar to 2025, take a few moments to think through a few important tax planning matters for your farm or ranch.

What are some tax items to think about before 2024 ends?  Many farmers pre-pay expenses.  To obtain a valid prepaid expense, you must request a certain quantity of a product. If a supplier can’t provide that quantity, it isn’t a valid prepaid expense for the year.  You can’t simply go to the co-op and put down a deposit. 

Also remember that if you received Emergency Relief Program Payments this year, they can’t be deferred to 2025.  The payments are for damage that occurred in prior years so they have already been deferred.

If you sold more livestock than usual in 2024 due to weather-related conditions, consider deferring the income.  There are two possible deferability approaches.  One is a straight-up deferability provision, the other one uses the involuntary conversion rules. 

If you bought equipment late in 2024, consider whether it’s better to use bonus depreciation, expense method depreciation, or both.   The rules are different for each provision, so be careful.   As a general rule, if you financed the purchase, you would probably want to elect out of bonus depreciation so you can match up the yearly depreciation amounts with your loan payments.

And if you reside in Iowa, make sure you don’t expire before 2024 does – dying in Iowa gets cheaper in 2025.

Handling Long-Term Care Costs

Planning for long-term care costs should be an element of a complete estate plan for many farm and ranch families. Indeed, the very first law review article I published over 30 years ago was on this topic.  One way to address long-term care costs involves long-term care insurance.  That makes it important to consider the terms and conditions when exploring long-term care policies. 

What are some things to examine when exploring long-term care insurance?  One is the duration of benefits. Policies cover from one to five years.  Also, what triggers payment under the policy?  There will be terms and conditions attached to those triggers. Make sure you understand them

Long-term care policies also have a waiting period that can be anywhere from a few days to a year.  The longer the waiting period for benefits to payout, the lower the policy premiums. Also, consider the daily benefit amount.  Will the policy pay all of the daily long-term care costs or only a percentage?  Perhaps the policy can be tailored to pay only the portion of costs that income doesn’t

Also make sure the policy has an inflation adjustment provision and that you understand the type of inflation adjuster. 

If a policy can be obtained to cover at least the deficiency that income doesn’t cover, all of the family’s assets will be protected. That means you may not have to gift assets to protect them.

Many insurance agents and financial advisors can provide estimates for policies and help you determine the type of policy that might be best for you. 

Powers of Attorney

When doing estate planning make sure not to overlook power of attorney documents. These documents designate who may act on your behalf in making financial and health care decisions if you aren’t able to.  Powers are very important, especially for farmers and ranchers. 

There are generally two types of powers of attorney – financial and health care.  A financial power may be either a durable or a “springing” power.  A durable power authorizes your agent to act on your behalf as soon as the document is executed – it endures your subsequent incompetency.  A springing power only authorizes your agent to act once you have been declared incompetent. 

Also make sure you give thought to the powers that you want your agent to have.  Maybe limiting the agent’s authority to dealing with non-farm assets would be a good approach.  You could also have multiple agents and give one the power to handle farm assets and another the power to deal with non-farm assets.

Without a financial power, a guardian may have to be appointed.

A health care power designates someone else or perhaps your family members collectively to make medical decisions according to your desires as expressed in the power in the event you aren’t able to.

Both types of powers are a critical part of your estate plan.  They both can help avoid management and transition issues for your farming or ranching operation.  If you are going to create an estate plan or update an existing one in 2025, make sure not to forget to make powers of attorney part of your estate plan.

Portability of the DSUEA

In 2025, a decedent’s estate is exempt from federal estate tax up to $13.99 million.  Very few estates are of that size and leave an unused exemption amount behind.  But, since 2011, upon the death of the first spouse of a married couple any unused amount can be transferred to the surviving spouse by filing a federal estate tax return in the deceased spouse’s estate and electing to transfer the unused amount to the surviving spouse. 

When the first spouse of a married couple dies, if the taxable estate is less than $13.99 million (in 2025), any unused amount of the exclusion that offsets estate tax can, by election, be added to the surviving spouse’s exemption.  That’s important because the exemption from estate tax is presently set to fall to $5 million (adjusted for inflation) beginning in 2026.  So, having that extra exemption amount could save tax.  The election is made by filing Form 706 and following the requirements.

The rule has been that an election to transfer the unused exemption amount to the surviving spouse had to be made within two years of the first spouse’s death.  But a couple of years ago the IRS extended the timeframe for making the election to five years from the date of death of the first spouse.  That’s good news for many, including farmers and ranchers.

Thanks for reading the blog during 2024.  As some have noted, the detailed tax legal writings have switched primarily to my Substack at mceowenaglawandtax.substack.com.  For those of you who subscribe to my Substack, thank you. 

See you in 2025.

BOI Reporting - Stay Back in Place

The Fifth Circuit has vacated its decision of Monday, Dec. 23, which restores the nationwide preliminary injunction against enforcement of the beneficial ownership information reporting rules.  The merits panel of the Fifth Circuit stated in its order Thursday evening December 26 that its decision was necessary "to preserve the constitutional status quo while the merits panel considers the parties' weighty substantive arguments". The court also expedited the appeal to the "next available oral argument panel," which it appears could be the week of January 6, 2025, based upon the court's published schedule.

Stay tuned.  

BOI Reporting - Stay Lifted

Late today, the U.S. Court of Appeals for the Fifth Circuit lifted the preliminary injunction that had been imposed by a federal district court in Texas against the government’s enforcement of the BOI reporting rules. This means that as of now (early evening on 12/23/24) the reports must be filed by covered entities by Jan. 1, 2025. The appellate court cited the government’s authority to regulate commerce under the Commerce Clause as its basis for determining that the government was likely to prevail on the merits. But that’s the point. The reporting requirement is not triggered on a business engaging in commerce. It’s triggered upon registering with a state office regardless of whether any commerce has been conducted.

Nevertheless, Jan. 1 is not the key date to keep in mind - it’s now January 13, 2025. Here’s what the FINCEN has posted on its website:

“In light of a December 23, 2024, federal Court of Appeals decision, reporting companies, except as indicated below, are once again required to file beneficial ownership information with FinCEN. However, because the Department of the Treasury recognizes that reporting companies may need additional time to comply given the period when the preliminary injunction had been in effect, we have extended the reporting deadline as follows:

• Reporting companies that were created or registered prior to January 1, 2024, have until January 13, 2025, to file their initial beneficial ownership information reports with FinCEN. (These companies would otherwise have been required to report by January 1, 2025.)

• Reporting companies created or registered in the United States on or after September 4, 2024, that had a filing deadline between December 3, 2024, and December 23, 2024, have until January 13, 2025, to file their initial beneficial ownership information reports with FinCEN.

• Reporting companies created or registered in the United States on or after December 3, 2024, and on or before December 23, 2024, have an additional 21 days from their original filing deadline to file their initial beneficial ownership information reports with FinCEN.

• Reporting companies that qualify for disaster relief may have extended deadlines that fall beyond January 13, 2025. These companies should abide by whichever deadline falls later.

• Reporting companies that are created or registered in the United States on or after January 1, 2025, have 30 days to file their initial beneficial ownership information reports with FinCEN after receiving actual or public notice that their creation or registration is effective.”

The movement of the date to Jan. 13, 2025, will give the new Congress a chance to address the matter (which it should have taken care of in the year-end legislation). Of course, if an emergency writ is filed with the Supreme Court, the Supreme Court could address the matter before that. I suspect this issue is far from over.

Stay tuned…

Continuing Resolution – Farm Related Provisions; and Social Security Legislation

Overview

On December 21, the H.R. 6363, the “Further Continuing Appropriations and Other Extensions Act, 2024,” (Act) was signed into law.  The legislation extends federal funding at current levels through March 14, 2025, and includes provisions for $100 billion in disaster relief (some of which is for agricultural producers) and $10 billion in agricultural market assistance. However, cut from the Act was the removal of the debt limit for incoming President Trump’s first few years in office. Further debates over government spending and the debt ceiling are anticipated when Congress reconvenes in January. Also cut from an initial version of the Act was a provision that would have allowed year-round sales of E15.

The Congress also passed legislation dealing with a perceived inequity in the Social Security system.

Key Provisions Related to Agriculture

The Act contains several provisions of importance to agricultural producers:

Extension of the 2018 Farm Bill programs.  The Act ensures the continuation of various agricultural programs, including farm support initiatives, conservation efforts, and nutrition assistance, by extending the 2018 Farm Bill. This extension provides stability and certainty to farmers, ranchers, and land stewards, allowing them to plan and operate without the disruption that would have occurred if these programs had lapsed.

The extension maintains the existing funding structure of the 2018 Farm Bill. Historically, the Farm Bill's budget has been allocated as follows:

• Nutrition Assistance (e.g., SNAP): Approximately 76%
• Conservation Programs: Around 7%
• Commodity Programs: About 7%
• Crop Insurance: Roughly 9%
• Other Programs: Approximately 1%

These allocations are now extended through September 30, 2025.

Disaster aid.  The Act provides approximately $110 billion in aid, with specific allocations for the agricultural sector. This encompassed $21 billion designated for agricultural disaster assistance, including $2 billion specifically for livestock producers, with another $10 billion designated for economic aid to farmers, ensuring they have access to necessary credit and resources to continue operations amid challenges posed by natural disasters and economic pressures as a result of low commodity prices and high input costs.  

Note: The disaster funds cover losses from an array of natural disasters in 2023 and 2024 -- droughts, wildfires, hurricanes, floods, derechos, excessive heat, tornadoes, winter storms, freeze events and excessive moisture.  As such, the receipt of such disaster relief is not deferable because a payment received in 2025 relates to a prior tax year.

Social Security Fairness Act (SSFA)

Background.  On December 21, 2024, the U.S. Senate passed the SSFA with a vote of 76-20, following the House's approval on November 12, 2024, by a vote of 327-75.  The SSFA addresses two provisions that impact Social Security benefits for some recipients - the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).  Those are two rules that affect the amount of Social Security benefits that can be received for people that have worked in jobs that are not covered by Social Security, such as government positions. These provisions are designed to adjust Social Security benefits for people who receive a pension from government employment where Social Security taxes were not paid.

Windfall Elimination Provision (WEP).  The WEP reduces the amount of Social Security benefits you can receive if you have a pension from a job where you did not pay Social Security taxes (such as a federal, state, or local government job). Typically, Social Security benefits are calculated using a formula based on your average indexed monthly earnings (AIME), but the WEP modifies this formula for people who worked in non-Social Security-covered employment. Thus, the WEP reduces Social Security benefits based on your own work record. 

Note: Under normal circumstances, Social Security benefits are based on a person’s 35 highest-earning years. However, for those with a government pension from a job that didn’t pay into Social Security, the WEP reduces the amount of the person’s Social Security benefit by changing the formula that’s used to calculate the benefit. That can result in up to a $557 per month reduction in Social Security benefits (as of 2024) depending on the individual’s work history and how many years the individual worked in jobs covered by Social Security. The reduction is smaller if a person has more than 30 years of work in jobs where Social Security taxes were paid.

Government Pension Offset (GPO).  The GPO affects spousal or survivor Social Security benefits for people who receive a pension from government employment that does not pay into Social Security.  Thus, the GPO reduces the spousal or survivor benefit based on a spouse’s work record. 

Note: The GPO reduces the amount of Social Security spousal or survivor benefits a person can receive if they are also receiving a pension from a job where they did not pay Social Security taxes. The GPO works by reducing the spousal or survivor benefits by two-thirds of the amount of the person’s government pension. For example, assume that Sally is entitled to a $900 per month Social Security spousal benefit.  She also receives a $1,500 per month government pension.  The GPO would reduce her spousal benefit by $1,000 (two-thirds of $1,500). As a result, her spousal benefit would be reduced to $0.

Both provisions aim to reduce Social Security benefits for people who have a government pension from non-Social Security-covered work, acknowledging that they may not have contributed to the Social Security system for all their earnings.

The SSFA allows approximately three million public service retirees to receive full Social Security benefits and allegedly corrects disparities that disproportionately affected lower-income workers and women in public service. However, the Congressional Budget Office estimates the repeal will cost $196 billion over the next decade, adding to federal deficits, hastening the insolvency of Social Security and reducing benefits to everyone in future years.  The Committee for a Responsible Federal Budget estimates that the SSFA would make Social Security insolvent six months to a year earlier than current projections, and that a typical dual-income couple retiring in 2033 would see their benefits cut by an additional $25,000 over their lifetime.  For couples retiring after 2033, the estimate is that the SSFA could result in a benefit reduction of up to $400,000. 

Note:  Once the President signs the SSFA into law, the changes will apply to monthly insurance benefits payable after December 2023.

Conclusion

The Act funds the government temporarily and extends the Farm Bill.  The economic and disaster relief for farmers will be beneficial as farmers renegotiate existing operating loans with lenders.  However, the inability of the Congress to remove the debt ceiling could provide difficulties in the provision or extension of current tax law and the creation of new tax breaks designed to primarily benefit lower to middle income taxpayers.

The SSFA attempts to address a perceived inequity in Social Security benefits, but could end up reducing such benefits for all recipients in future years.

More Ag Law and Tax Musings – ERP and Equipment Gains; Elevator Failure; Hedging/Speculation; and Spring Ag Law Course

ERP and Equipment Gains

A few years ago, the USDA retooled the former Wildfire and Hurricane Indemnity Program and renamed it as the Emergency Relief Program or ERP.  The amount of farm income is key to maximizing ERP payments, and the question was how USDA would treat gain from equipment sales.  It’s still a big deal at the present time, as USDA’s FSA has dug its heels in on the issue.

ERP payments may be made to a producer with a crop eligible for crop insurance that is subject to a qualifying disaster and received a crop insurance or prevented planting payment in either 2020 or 2021.  Later, The USDA announced the deadline for commodity and specialty crop producers to apply for the ERP for 2022 natural disaster losses was Aug. 14, 2024. 

The ERP payment limit is generally $125,000.  But, if more than 75 percent of average AGI comes from farming activities, the normally applicable $900,000 AGI limit is dropped, and the payment limit goes to $900,000 for specialty crops and $250,000 for all other crops. 

Farm income for ERP purposes includes net Schedule F income, pass-through income from farming activities and wages from a farming entity. Also counting as farm income for ERP purposes is income from packing, storing, processing, transporting and shedding of farm products.  But USDA says that farm equipment sale gains only count if farm income exceeds two-thirds of overall AGI.  That will prevent many farmers from qualifying for increased payments.

The U.S. House version of the Farm Bill from early 2024, fixed the problem and treated equipment gains as farm income.  The proposal specified that the trade-in of farm equipment that is reported on Form 4797 counts as farm income for farm program purposes.  Hopefully, the change in administration will result in new leadership in USDA that understands the problem and will be amenable to changing the provision administratively rather than leaving it to Congress to solve the matter.

Rights When a Grain Elevator Fails

Occasionally, a grain elevator fails. In the late 1990s, many grain elevators failed when hedge-to-arrive contracts were abused a few years ago. The present economic situation in agriculture with low commodity prices is putting additional financial strain on elevators.  An important question is that when an elevator fails and files bankruptcy, what are the rights of farmers that have grain stored there? 

When a grain elevator files bankruptcy, a farmer with stored grain is not a creditor of the elevator. Instead, it’s a bailment relationship with commingled grain stored in the elevator owned in common by the farmers with grain in storage.  The warehouseman is severally liable to each owner of grain commingled in the elevator. Thus, if there isn’t a grain shortage when an elevator fails, a farmer with grain stored at the elevator can get his grain in accordance with his warehouse receipt or scale ticket. The bankruptcy trustee cannot retain farmer-stored grain in the bankruptcy estate if there isn’t a shortage.

When there is a shortage, only holders of duly negotiated receipts have an interest in the remaining grain. When an elevator fails, there usually is less grain stored in the elevator than there are claims for grain. In this situation, the holders of negotiated receipts and scale tickets share pro rata in the remaining grain. If, after the pro rata distribution, a farmer has not been made whole, the farmer becomes a general, unsecured creditor of the elevator to the extent of the shortfall.

Hedging/Speculation Tax Treatment

Farmers and ranchers face price and production risks.  One way to reduce risk is by using the commodity futures exchange markets to hedge the potential costs of commodity price volatility.  For tax purposes, where’s the line drawn between hedging and speculating? 

Hedging involves a transaction that is entered into in the normal course of the taxpayer’s trade or business with the primary purpose of reducing price risk in the commodities the farmer raises or grows.  Speculation is an investment strategy unrelated to reducing price risk in the farmer’s actual commodities.

Hedging transactions generate ordinary income and loss.  That means that the losses are fully deductible business expenses.  The downside is that the income is subject to self-employment tax.   Speculative transactions result in capital gain or loss.  While speculative gains aren’t ordinarily subject to self-employment tax and capital losses offset capital gains, any excess amount is deductible against ordinary income only to the extent of $3,000 per year.

Also, to get hedge tax treatment, make sure to use the “farm” bank account or the proper farming entity.  For example, the hog business entity should engage in hog futures transactions.

Spring 2025 Ag Law Course

During the Spring 2025 semester, I’ll be teaching an undergraduate course in agricultural law at Kansas State University.  It’s taught live from the K-State campus on Tuesday and Thursday mornings (8:05-9:20 a.m. (cst)) but it is also an online course with students enrolled from across the country.

If you are a student, you can sign up for the course for academic credit, but if you are a student at someplace other than KSU, you'll need to doublecheck with your advisor to make sure you get credit. I would also encourage farmers, ranchers, agribusiness professionals, rural landowners, and other interested persons to register for the course.

If you are interested, please either email me or Ag Econ Dept. Chair Allen Featherstone ([email protected]) and we'll see that you get registered.

I am looking forward to seeing you either in-person or online!

Here's the information about the course:

AGEC 516 - AGRICULTURAL LAW AND ECONOMICS

This course is designed for students who have an interest in farming, managing a farm, working in agribusiness, going to law school, or simply wanting to understand how the law impacts life daily. Being able to recognize potential legal issues to avoid potential problems is a key aspect of an overall strategy of risk management.

SPRING 2025

Prerequisite (if taking the course for credit): ECON 110 or AGEC 120 or AGEC 121 or ECON 120 and junior standing.

Course Components:

The course has three primary components, all involving “hands-on” applied learning:

• Business Transactions – this component addresses the basics of contracts and the common settings involving contracts and farmers; financial transactions; ag bankruptcy; and real estate/property issues.
• Income Tax; Estate Planning and Business Planning – this component examines tax rules unique to farmers as well as common estate and business planning issues and concerns for farmers and how to plan to keep the farm in the family for subsequent generations.
• Liabilities; Water and the Environment – civil and criminal law issues for farmers; water law; environmental law and regulatory issue for farmers including issues with the administration of USDA farm programs.

Schedule

The course meets on Tuesday and Thursday mornings for lectures and includes weekly quizzes; work problems, two examinations and a final.

Reviews

Many students and formers students over the years have commented on how useful and practical the course is or has been for the everyday matters that they deal with. Some have been inspired to go on to law school and are now practicing in rural areas across the country helping farmers and ranchers.

Questions? Prof. Roger A. McEowen: [email protected] or [email protected]

also: [email protected]

Boundaries and Surveys

Introduction

Boundary issues are not uncommon in rural settings.  What if a survey doesn’t match an existing fence line?  What controls?  How is the actual legal property boundary determined?  Can an existing fence that is not on the actual surveyed line between two tracts of farmland become the legal boundary?  How do disagreements get resolved? 

These are some of the common boundary questions and it’s the topic of today’s post – boundary issues in agriculture.

What is the Boundary?

Landowners generally consider existing fences to be the boundary between adjacent properties.  But the law may view things differently.  The actual boundary is an imaginary line that can be found by examining the deeds to the adjacent properties.  An existing fence line is merely evidence of where the boundary line between the properties is located.  It is immaterial whether the fence is a permanent fence or not. 

However, there may be situations where the fence line has become part of the property description over time as the land changed hands.  In that situation, the fence line may be considered to be the legal property boundary.  But, if a parcel is described by mapping out survey lines, an existing fence may not be on the surveyed boundary.  Instead, the adjacent owners may have treated that old fence as the boundary. When that happens, the old fence can be substituted for the actual legal boundary under the doctrine of practical location.  Once that fence has been used as the boundary for a set period of time defined by state law, it can become the legal boundary by filing a court action to quiet title.  In the ag setting, it’s often the case that boundaries are determined by usage rather than by survey.

Misplaced Fence as Legal Boundary

An existing fence may not be on the surveyed boundary, but there are ways it can become the legal boundary between separate tracts of farmland.  While the mere passage of time, by itself, does not cause a fence line to be substituted for the actual property boundary, the manner in which the adjacent property owners have used the property over time might.  This is true if the party claiming title to a disputed area knows that the existing fence line is not on the property boundary and uses the additional property between the true boundary and the fence line as their own. 

If the true boundary is not known, courts typically examine the intent of the party benefiting from the misplaced fence.  If the property is occupied by mere mistake, the boundary won’t change.  But, if one party possesses the property believing the land to be his up to the mistaken line and claims title to it, the boundary can shift if the true owner knows of the other party’s assertion of ownership and does nothing to prevent if for a period of time set by state law.  This is known as adverse possession.

A boundary that changes based on these facts is formalized by a “quiet title” action in court.

Settling Disagreements

What are some ways for resolving boundary disputes short of going to court?  For starters, check the land records to see if there is a recorded fence agreement.  While uncommon, if an agreement exists it will bind the adjacent landowners.  Another way to settle a dispute over an uncertain boundary is by the parties executing a memorandum of understanding designating the existing fence line as the boundary.  The memo can also be recorded in the land records.  Once recorded, it will bind the present and subsequent owners of the property and their successors.  

If a boundary remains in dispute because of conflicting surveys, any boundaries and markers set by the first survey control in a conflict with a subsequent survey.  This is true even if there were errors in the original survey. 

When a boundary dispute involves disagreement between surveys, consider how the use of the land has been affected by the original survey’s location of the boundary.  If the fence was erected along the old but erroneous survey line, and the parties have actively farmed to the fence line, the fence should not be moved.  If the fence does not follow either the original survey or the later survey, the true boundary line may need to be designated.

Conclusion

Boundary disputes are not uncommon when agricultural land is involved.  Hopefully this brief review provides some insight. 

Legislation in the Lame-Duck; Drones, Wills, Disease and Fencerows – Sunday Afternoon Thoughts

What Might Happen in the Lame-Duck?

Now that the election is over, what are the prospects for legislation during the “lame-duck” session given that there are (at the present time) only about 15 legislative days remaining?  I categorize the possibilities into three categories – legislation that “must pass” during the session; legislation that “may pass” during the session; and legislation that is “unlikely to pass.” 

• Must Pass
  • Disaster assistance – for hurricanes, wildfires, tornadoes and the rebuilding of infrastructure such as the Baltimore bridge that was damaged earlier this year.
  • Discretionary funding – this makes up about 30 percent of the federal budget and expires at the end of 2024. The deadline is December 20 to pass the legislation to avoid a government shut-down.
  • Extender legislation – this would be legislation to extend certain critical provisions such as the National Defense Authorization Act
  • Farm Bill – I would put the Farm Bill in this category, but my view is that it is still highly unlikely that the lame-duck session would pass a Farm Bill.
• May Pass
  • Water Resources Development Act – this legislation is for civil works projects for ports and harbors, inland waterways as well as flood and storm protection.
  • Artificial intelligence – legislation is needed to set additional boundaries on the usage of artificial intelligence.
  • Provisions concerning China – multiple bills have been introduced designed to deal with various national security threats of China.
• Unlikely to Pass
  • Farm Bill – I expect an extension again.
  • Expediting permitting for oil and gas projects – the election will clearly result in an ramp-up in oil and gas production in the U.S. and a de-emphasis on less efficient, less reliable, heavily taxpayer subsidized forms of energy production/generation.
  • Railway safety legislation
  • Debt limit – at some point, the Congress will increase the limit again.
  • Rescission legislation – this can be passed without the President’s signature and allows the Congress to revisit spending decisions. This could be done to block Ukraine’s use of Army Tactical Missile Systems (long-range U.S. manufactured missiles) on targets inside Russia.  Russia is now at war with the U.S. by virtue of Pres. Biden’s unilateral decision to approve Ukraine’s use of this type of missile system.  The introduction of this legislation would send a clear message to Pres. Biden and Ukraine’s President that the war lacks significant and bi-partisan support in the Congress.

Drones, Privacy and the U.S. Supreme Court

The use of drones in agriculture is increasing.  Some of the uses of drones include scouting crops and monitoring livestock.  But drones can also be used for questionable purposes. 

All states have drone laws outlining the permissible and impermissible use of drones.  The Texas law, like many other state drone laws, has surveillance provisions and no-fly provisions.  The law says that a drone can’t be used to capture an image of an individual or privately owned real property with the intent to conduct surveillance.  Publication of images captured in that manner is prohibited. Newsgathering is not an exempted use.  In addition, the law’s no-fly provision makes it unlawful to fly a drone over certain structures including a confined animal feeding operation.  It’s one of the strictest drone laws in the U.S.

Two media organizations challenged the law as unconstitutional on free speech grounds and the trial court agreed.  But the appellate court reversed.  Nat'l Press Photographers Association v. McCraw, 90 F.4th 770 (5th Cir. Tex. 2024).

In early October of 2024, the U.S. Supreme Court declined to take the case. No. 23-1105, 2024 U.S. LEXIS 4033 (U.S. Sup. Ct. Oct. 7, 2024).   This all means that the Fifth Circuit’s opinion upholding the Texas law is a key decision for agriculture.  This is particularly true because of the vulnerability of farming and ranching operations and agribusinesses that have property in the open to being surveilled by the government, as well as organizations that want to do them harm.  That last point is particularly true with respect to confinement animal operations.  The Fifth Circuit’s upholding of the Texas law’s constitutionality could encourage other states to enact similar legislation.

Challenging a Will Based on a Promise

Sometimes a decedent’s will is challenged by an heir claiming that the decedent was influenced by someone else that caused the decedent to change how their assets would be disposed of.  Or the will might be challenged based on a claim that the decedent wasn’t competent to execute the will.  But can a will be challenged based on the decedent’s promise? 

In a recent case, the plaintiff claimed that she deserved the decedent’s estate because the decedent had promised to give her his farm ground and had named her his agent under his medical and durable powers of attorney. The other persons that received the farm moved to dismiss the claim.  The court noted that an attorney drafted the will, and the decedent signed it with two witnesses present. Both the attorney and witnesses had attested that the decedent was of sound mind and understood the nature and extent of his property when he created and signed the will. There was no contrary testimony.  The court held that the plaintiff failed to establish that the decedent was not in his right mind or that he was subject to undue influence. Mere suspicions and thoughts were not enough to show a genuine issue of material fact regarding the validity of the decedent’s will. The court said that to show an issue of material fact the plaintiff should have presented actual evidence, such as testimony from the decedent’s caretakers.  Simply challenging the will based on an oral promise was not enough.

Liability for Spread of Animal Disease

If you have diseased livestock or diseased premises, what’s your liability for the spread of the disease?  In general, once you know that an animal of yours that is under your control is diseased, you must take reasonable steps to ensure that the animal does not come into contact with healthy, uninfected livestock of anyone else.  Several states require restraint of animals that are known to have an infectious or contagious disease from running at large or coming into contact with other animals. 

Absent a written lease that says differently, a landlord is generally not liable for damages to a tenant if the premises causes the tenant’s healthy animals to become diseased.  That means if a tenant has healthy animals and brings those animals onto the landlord's diseased or contaminated premises and the animals become diseased themselves, it will be difficult for the tenant to recover against the landlord. The tenant takes the premises “as is.”  If the tenant fails to ask whether the leasehold is disease or contamination free, the landlord has no duty to disclose that fact to the tenant.  Actual deceit on the landlord’s part is required.

For a tenant to get legal protection, a landlord would either have to admit liability or specify responsibility in writing for any disease-related damages associated with the leased premises.

Issues When Cleaning Out a Fencerow

The winter months are often the time to clean out fence rows.  But the cleanup process can generate legal issues that you might not have thought about. 

When you’re cleaning out a fence row issues can arise that you hadn’t thought about.  For example, what if there’s a tree in the fence line.  In that situation, each adjacent owner has an ownership interest in the tree.  But, if only the branches or roots extend past the property line and onto an adjoining neighbor’s property, the branches and roots don’t give the neighbor an ownership interest in the tree.  The tree is considered to be jointly owned, and you could be liable for damages if you cut it down and your neighbor objects.  But you can trim branches that hang over onto your property.  That’s an important point, for example, if you are dealing with a thorn tree that can puncture tires.

Always make sure to trim branches, bushes and vines on a property line with care.  Keep the neighbor’s rights in mind when doing the cleanup work.  Also, if a neighbor’s tree falls onto your property, it’s your responsibility to clean up the mess – but you can keep the resulting firewood.  The converse is also true.  It’s also not a trespass to be on your neighbor’s side of the fence when doing fence maintenance, such as cleaning out a fence row.

More Legal and Tax Issues for Farmers and Ranchers

Introduction

I have been on the road with seminars a lot recently and haven’t had time to write much for the blog.  I am off the road now for a few days and thought I’d take a moment to write about a few more legal and tax issues that farmers and ranchers must deal with on occasion.  And, now that the political season is over (for the moment) I will pen my thoughts on that and the implications for agriculture and the producers of food and fiber for my substack – mceowenaglawandtax.substack.com 

For today, however, I dive into water rights and conservation easements, the handling of long-term care costs, the definition of a tax home, negative easements and landlocked parcels.  Those are the topics of today’s post

Water Rights and Conservation Easements

Water is generally plentiful in the Eastern U.S., but not in the West.  So, if you grant a conservation easement on your farm to a land trust that requires water to fulfill its objectives, that can raise some legal issues in the more arid parts of the country. What are the big issues?  For starters, make sure you know what the precise water rights are.  Most title insurance policies and title opinions on real estate won’t tell you anything about water rights associated with the land.

If there are water rights on the donated land, you’ll need to determine if the rights are material to the easement’s conservation purpose.  If so, then determine what’s required to enforce those rights.  You’ll also need to restrict the use of the water rights consistent with the easement’s conservation purpose.  And you should make sure the water rights are maintained and used, and not abandoned.  If they aren’t enforced, you could lose the charitable deduction you claimed for donating the easement.  And it could cause other problems for the land trust. 

Needless to say, grants of permanent conservation easements on land with water rights require careful drafting of deed language.  Make sure you get good legal advice.  The value of the charitable deduction associated with the donation of a conservation easement is almost always claimed to be very large.  

Handling Long-Term Care Costs

Planning for long-term care costs should be an element of a complete estate plan for many farm and ranch families.  One way to address long-term care costs involves long-term care insurance.  That makes it important to consider the terms and conditions when exploring long-term care policies. So, what are some things to examine when exploring long-term care insurance?  One is the duration of benefits. Policies cover from one to five years.  Also, what triggers payment under the policy?  There will be terms and conditions attached to those triggers. Make sure you understand them

Long-term care policies also have a waiting period that can be anywhere from a few days to a year.  The longer the waiting period for benefits to pay out, the lower the policy premiums. Also, consider the daily benefit amount.  Will the policy pay all of the daily long-term care costs or only a percentage?  Perhaps the policy can be tailored to pay only the portion of costs that income doesn’t. In that event, all the family’s assets will be protected, and you may not have to gift assets to protect them.

Also make sure the policy has an inflation adjustment provision and that you understand the type of inflation adjuster. 

Many insurance agents and financial advisors can provide estimates for policies and help you determine the type of policy that might be best for you. 

Where’s Your Tax Home?

The tax Code allows an employee or independent contractor to deduct temporary travel expenses while away from home. The problem is that “home” does not necessarily mean what you might think. 

If you travel on business but are not “away from home” your travel expenses are nondeductible personal expenses.  So, what does “home” mean?  The IRS says that “home” is defined by being in the vicinity of your work. If you choose to live a great distance away for personal reasons, that means that the travel between the personal residence and the place of business is not business related. So, if you don’t relocate soon after you’re hired to work at a place of business that is far from your residence, you can’t deduct travel expenses to and from the new place of business. 

If you are hired for an “indefinite” assignment your tax home likely switches to the new place of business soon after the date you are hired.  If you don’t have a regular place of business and move from area to area for jobs, the IRS says you can’t be “away from home” because you don’t have a tax home, and you can’t deduct travel-related expenses.   

These “tax home” rules sometimes trip up farmers and ranchers that have non-farm jobs.  Make sure you keep the rules straight to know when you can deduct travel-related expenses.

Negative Easements for Light, Air and View

An easement can be either affirmative or negative.  Most easements are affirmative and entitle the holder to do certain things on the land subject to the easement.  But if your land is subject to a negative easement, you can’t do certain things.  Negative easements are the same as restrictive covenants on land.  Examples include riparian rights, lateral and subjacent support rights, and the right to be free from nuisances. However, most courts refuse to recognize a negative easement for light, air and view.  With one exception – malice.

For example, in a case involving two Miami beach hotels, the court allowed a proposed 14-story addition to one hotel that would block the sunlight on an adjoining hotel’s beachfront and cabana.  The law didn’t recognize a negative easement for light, air or view.  Fontainebleau Hotel Corporation v. Forty-Five Twenty-Five, Inc., 114 So. 2d 357 (Fl. Ct. App. 1959).  But a different court shut down a pig farm on a four-acre parcel in town next to a motel.  The pig farm wasn’t operated with any semblance of a real farming operation.  Coty v. Ramsey Associates, 149 Vt. 451, 546 A.2d 196 (1988).   Conditions were so bad that the court didn’t have much trouble determining that it had been created for “spite” and with malice and was a nuisance.  So, while the motel owner didn’t have a negative easement for light, air or view, the pig farm was shut down and was liable for damages because of the owner’s bad conduct.  

Accessing Landlocked Parcels

Sometimes agricultural land is landlocked with no access to a public roadway.  This can happen in several ways, but often arises when a portion of a tract is sold off, resulting in a landlocked parcel.  In that event, how does the new owner get access?  There are generally two possibilities.

The law may imply the existence of an easement from prior use if there has been a conveyance of a physical part of the grantor's land and before the conveyance there was a usage on the land that, had the two parts then been severed, could have been the subject of an easement that was required to use the adjacent parcel.

The law may also imply an easement based on necessity if the facts involve a conveyance of a physical part of the grantor's land, and after severance of the tract into two parcels, it is “necessary” to pass over one of them to reach a public road from the other.  No pre-existing use needs to be present.  Instead, the severance creates a land-locked parcel unless its owner is given implied access over the other parcel.

Ag land transactions should have any access easements specifically agreed upon in writing and recorded on the land records.  This can help avoid future disputes.

Discontinuing Building Border Wall Violates Environmental Law – Rancher’s Property Rights Upheld

Overview

The U.S. Federal District Court of the D.C. District has held that the failure of the Biden Administration to stop construction on the U.S./Mexico border wall and the termination of the Trump Administration “Remain in Mexico” policy is a violation of federal environmental law.  In so holding the court has confirmed that the government must consider the economic impact on the environment of discontinuing federal projects.  The court’s decision is critical for farmers, ranchers and other property owners along or near the border area.

NEPA

The National Environmental Policy Act (NEPA) of 1969 (42 U.S.C. §§ 4321-4370b) was one of the first modern environmental statutes and remains one of the most important.  The NEPA established the Council on Environmental Quality in the Office of the President which functions to assist and advise the President in preparing an annual environmental quality report to the Congress. Under NEPA, President Nixon created the Environmental Protection Agency (EPA) in 1970 as an independent agency within the executive branch to deal with environmental matters.  The creation of the EPA was Congress' response to nationwide pressure for the adoption of a national policy designed to protect the environment. The congressional declaration of national environmental policy is set forth at 42 U.S.C. § 4331.  

Perhaps NEPA's most significant feature is that it requires government agencies to file an environmental impact statement (EIS) before taking any action that would have a significant environmental impact. An EIS must address the environmental cost and benefit of the proposed project, the optimal location for a new facility in terms of limiting adverse effects on the environment, and the use of best available technology to minimize risks.  NEPA also requires the consideration of alternatives for a project or aspects thereof in terms of environmental impact.  For example, in Union Neighbors United, Inc. v. Jewell, 831 F.3d 564 (D.C. Cir. 2016), the court held that the U.S. Fish and Wildlife Service did not consider the benefit that implementing a cut in the blade speed of wind energy generators at an energy company’s commercial wind energy project would have on bats rather than simply implementing a shut-down at night.  This failure to consider any economically feasible alternative that would take fewer bats (a federally listed endangered species) meant that the EIS lacked a reasonable range of alternatives (as required by 42 U.S.C. §4332 (C)(iii)) and rendered the issuance of an incidental take permit under the Endangered Species Act arbitrary and capricious.  NEPA was not complied with.

To date, the courts have considered whether a NEPA violation occurs when a project is proposed to be undertaken.  There has been no consideration of whether a NEPA violation could occur when a federal project was being discontinued.  Does NEPA require an EIS in that situation?  If the concern of NEPA is on the environment, that question would clearly be answered in the affirmative.  The discontinuation of an existing project could have environmental impacts just the same as the proposal and operation of a project could.  That was the claim of a rancher in a recent case.

The Arizona Border Matter

In Massachusetts Coalition for Immigration Reform, et al. v. United States Department of Homeland Security, et al., No. 1:20-cv-03438, 2024 U.S. Dist. LEXIS 175303 (D. D.C. Sept. 27, 2024), a rancher whose property was on the Arizona/Mexico border, claimed that the Biden Administration violated NEPA because the federal government failed to analyze how stopping construction on the Trump Administration’s border wall and terminating the Trump policy of returning illegal immigrants to Mexico (“Remain in Mexico” policy) would impact the environment.  The court, determining that the plaintiff had standing, noted the plaintiff’s testimony that illegal immigrants trespassed onto his land, stole his water and trashed his property.  The court also found critical the testimony of federal border officials that the Biden Administration’s policy (or lack thereof) caused a massive increase in illegal immigration that overwhelmed resources and caused damage to the environment and the local ecology.  Some of the rancher’s cattle ate the trash left behind and died. 

The court determined that the federal government has a duty under NEPA to conduct an environmental analysis as a prerequisite to ending an existing federal project, especially one that created such great environmental harm and damage to private property.  The court rejected the government’s argument that ending the border wall construction project was not a major federal action and, thus, didn’t require a NEPA analysis.  The court also rejected the government’s claim that obtaining a construction waiver under the Illegal Immigration Reform and Immigration Responsibility Act absolved the government of its NEPA obligations.  The court specified that the only matter left for resolution is the appropriate remedy for the rancher that would make him whole and protect his property rights – a fundamental constitutional right.

Conclusion

The court’s decision involving the Arizona rancher is a victory for property rights and provides a construction of NEPA that ensures that the environmental impacts of federal government projects is taken into account when a project is proposed as well as when an existing project is discontinued. That is particularly key point when the purpose of the federal project at issue is to prevent activity that is in violation of federal law.

Accumulated Earnings; Starting in Farming; Ag Data and Selling the Farm and Residence

Overview

The legal and tax issues that farmers and ranchers can potentially face are practically innumerable.  Today I have pulled four more out of the hat to briefly discuss.  The first one is one that can occur if you have a C corporation and retain too much of the corporate earnings in the corporation.  The next one discusses the possibility of using the funds in a 401(k) as start-up capital for a farming business.  Will it work?  What might be a trigger for the IRS to examine?  Then I turn my attention to Ag Data.  With any technology there are pros and cons.  What might some of those be for Ag Data?  Finally, I briefly discuss how to best utilize the home-sale gain exclusion rule when selling a farm.

More food for thought on the topic of ag law and taxes – it’s the topic of today’s post.

Accumulated Earnings Tax

The accumulated earnings tax is a tax you may not have heard about.  But, if your farming business is in a C corporation or an S corporation that used to be a C corporation, it’s a tax you should be aware of. 

The accumulated earnings tax is a 20 percent penalty that is imposed when a corporation retains earnings over $250,000 that are beyond the reasonable needs of the business instead of paying dividends.  Not paying dividends avoids the shareholder-level tax on dividends. 

Whether a purpose exists to avoid the shareholder-level tax is a subjective determination based on the facts and circumstances.  Don’t unreasonably accumulate corporate earnings while not paying dividends.  Also, don’t use corporate earnings for investments unrelated to the farming business.  Corporate loans to a shareholder for personal purposes are a “no-no” as is the use of corporate funds for a shareholder’s personal benefit.

Make sure you document why you are retaining earnings.  Such reasons as needing cash to buy more farmland or insuring against business risks or buying out a senior member of the family business are fine.

But, again, make sure you record your reasons for the accumulations in your corporate annual meeting minutes and other corporate documents.  And remember, if the accumulated earnings tax applies, it’s in addition to what the corporate tax liability is.  It’s a pure penalty.

Using a 401(k) for Start-Up Capital

One of the drawbacks to starting in farming on a full-time basis is the lack of capital.  But you just might have a substantial asset that you could tap to create the necessary working capital. 

If you have a 401(k), you might be able to use the funds to start a farming business.  To do this, you will need to create a C corporation to establish a 401(k) plan and then roll over your current 401(k) at the old employer into the new 401 (k) plan.  The new plan will then buy shares in the corporation and become an owner.  The money put into the corporation will then become the working capital that the corporation can use to buy equipment and plant crops and so forth. 

There is no limit on how much stock the 401(k) can buy.  This means that unlike borrowing money from a 401(k) which is limited to $50,000 or cashing in the plan and paying taxes and a 10 percent penalty on the funds received, you can maximize the amount of capital you put into the farm business.

The IRS has noted some abuses with these transactions.  Some people have set up a corporation simply to buy a motor home for example.  If you do that and get audited, you can expect the IRS to disallow the purchase for tax purposes.  But if you use the cash to create a farming entity and will be actively farming, there should be no issue with using your 401(k) to fund it. Actively farming – that’s the key.

Ag Data and Proof of Damages

Farmers have several reasons to collect ag data about their farming practices.  One of those might be to prove damage to crops in court.  In one recent case, the management of a lake dam increased the lake level and made farm field tile in the area ineffective to drain significant rainfalls.  The result was that water ponded in the fields and significantly reduced crop yields.  But could the farmer prove his damages in terms of lost yield and revenue?

With harvesting data, the court was able to see exactly where the flooded areas of the fields were and how flooding specifically affected yields.  The data showed that flooding, and not soil type, was the reason for the lower yields in the flooded parts of the fields.  Drone photos were also used to confirm the yield data.  The court could see how the pictures of the fields matched the harvest data.  Comparison data from nearby fields that did not drain into the lake watershed was also used to show what the yield would have been without the elevated lake level. 

The court awarded the farmer almost $500,000 in damages for crop loss and field tile.  Ag data helped make the case and will be an important part of many ag tort cases in the future.  

The case is Houin v. Indiana Department of Natural Resources, 205 N.E.3d 196 (Marshall Co. Cir. Ct. 2021), aff'd. in part and rev'd in part, Indiana Department of Natural Resources v. Houin, 191 N.E.3d 241 (Ind. Ct. App. 2022).

Utilizing the Home Sale Exclusion When Selling the Farm

When selling the farm, how much land can be carved out and sold with the farm home to qualify for a special tax break? 

For married taxpayers that file jointly up to $500,000 of gain that is attributable to the sale of the taxpayer’s principal residence can be excluded from income. It’s one-half of that amount for a taxpayer that files as a single person.  But what if the farm sale also involves the residence?  How much (if any) of the farmland and outbuildings can be included with the residence to fill up that $500,000 amount?

Under current tax regulations, farmland can be treated as part of the principal residence if it is adjacent to land containing the home and is used as part of or along with the home. What is the practical application of those requirements?  The IRS rulings and court decisions indicate that the barnyard and areas used in connection with the home can be included as the “residence” portion of the sale.  Also, local zoning rules can come into play.  For many farm sales, an acre or two can likely be included with the home. 

Of course, each situation is dependent on the facts and the outcome depends on the particular situation.  But, if the facts support it, including at least some adjacent land with the principal residence can be a significant tax-saving technique.  It’s best to fill up that $500,000 amount if your facts allow you to do it.

Conclusion

It’s harvest season, so for those of you in harvest be careful and use common sense.  I have been on the road quite a bit recently – from North Dakota to Iowa to western Nebraska.  This week my travels take me to Idaho for an all-day tax seminar followed by a day of Steelhead fishing on the Salmon River.  Hopefully, I’ll get some good pictures to share with you.  Then it’s on to west Texas for two-days of tax lecturing.  Then a couple of events in Kansas before the fall KSU Tax Institutes begin.  I have also mixed in a couple of events for high school students – trying to plant seeds in the minds of young people of the need for well-trained rural attorneys.  I enjoy their questions and their enthusiasm and energy.  A tip of my hat to their teachers – I couldn’t do it.

Contracts, Estate Planning and Wetlands

Overview

Digital contracts are becoming more common for farmers and ranchers.  That means there are some unique legal issues that might arise.  The first part of today’s article takes a brief look at what those might be. 

An estate planning tool in light of the uncertainty of whether the Trump tax cuts (Tax Cuts and Jobs Act (TCJA)) is a spousal lifetime access trust (SLAT).  I provide a very brief explanation of what a SLAT is. 

A new court decision from a federal court in Idaho provides insight as to how the Sackett test concerning the definition of a wetland under the Clean Water Act is to be applied.  The case involved an Idaho farming operation.  I survey the court’s decision.

Digital contracts, SLATs and wetlands – the topics of today’s blog

Digital Contract Basics

There are certain core elements to every contract – offer, acceptance and consideration. And, in general, there must be a meeting of the minds as to the essence of the contract.  A question is how those elements are satisfied in the context of digital contracts. For starters, any offer should include definite terms.  Vague terms will be interpreted according to the parties’ past course of dealing, if any, or be construed against the drafter, or be filled in based on law and precedent.  Make sure you know what you are signing, whether paper or digital

In addition, an acceptance must mirror the offer.  Any change in the terms means “no deal” until the original offeror accepts the new terms.  So, be careful with a digital contract where you “click to accept” the contract’s terms.  Make sure you know what you’re accepting.

Another requirement is consideration – an amount of payment.  But with a digital contract what about a free trial use period?  For example, could you sue a free online service provider when the product doesn’t work as promised?  Doubtful because of no consideration.

And make sure to read a digital contract – it’s easy for the offer, acceptance and consideration to get buried in the fine print.  A “meeting of the minds” is essential.   

Spousal Lifetime Access Trusts

Future tax policy is uncertain right now and a big concern for some farmers and ranchers is what the federal estate tax exemption will be after 2025.  If the exemption level drops, one strategy that might be effective to lessen a future estate tax burden is a spousal lifetime access trust, or SLAT. 

A SLAT is an irrevocable trust designed to provide income to a beneficiary spouse while removing the trust’s assets from the grantor spouse’s taxable estate. As an irrevocable trust, it can’t be modified or revoked, and the assets can’t be returned to the donor spouse.  The trustee must ensure that the trust assets are used according to the trust’s terms, and that the beneficiary spouse gets the income from the trust for life. 

When the beneficiary spouse dies, the remaining trust assets pass to designated beneficiaries free of estate tax.

The technique could work well now while the estate tax exemption is high - allowing a significant amount of asset value to be transferred to the trust and offset by the exclusion.  The value would also not be included in the beneficiary spouse’s estate. 

If a SLAT can be funded with assets that will appreciate, the tax benefits can be maximized.  One downside, however, is that the ultimate beneficiaries won’t get a step-up in basis at the time of the beneficiary spouse’s death.

Waters of the United States

The U.S. Supreme’s Court’s decision in the Sackett case in May of 2023 changed the way a “wetland” is defined for purposes of the federal government’s jurisdiction under the Clean Water Act (CWA).  The most recent lower court decision involving the new definition as applied to a farmer involves a case out of Idaho.

In United States v. Ace Black Ranches, LLP, No. 1:24-cv-00113- DCN, 2024 U.S. Dist. LEXIS 156797 (D. Idaho Aug. 29, 2024), the Environmental Protection Agency (EPA) claimed that the defendant discharged “pollutants” into a navigable water of the United States (a river that passes through the defendant’s ranch) and associated wetlands without a Clean Water Act discharge permit. The EPA and the U.S. Army Corps of Engineers (COE) notified the defendant that it was going to start investigating potential CWA violations. The defendant withdrew its initial consent to the investigation and filed a complaint and motion for preliminary injunction. The case was dismissed. The EPA then obtained an administrative warrant and inspected the ranch in 2021 and 2023. The EPA then sued, claiming that the ranch had violated the CWA by illegally discharging pollutants by constructing multiple road crossings in the Bruneau River (a navigable water) and associated wetlands which impeded the flow of water and polluted the river. The EPA also claimed that the defendant “disturbed the riverbed” by mining sand and gravel from the river, and that the defendant’s construction of a center pivot irrigation system cleared and leveled “nearly all of the Ranch’s wetlands.” The EPA sought a permanent injunction that would bar the ranch from further discharges and would require the ranch to restore the impacted parts of the river.

The ranch moved for dismissal for failure to state a claim. The court granted the defendant’s motion and dismissed the case. The court determined that the EPA failed to sufficiently specify in its complaint that the wetlands at issue had a continuous surface connection with the Bruneau River to be considered indistinguishable from it (the requirement needed to satisfy the “adjacency test” established in Sackett v. Environmental Protection Agency, 598 U.S. 651 (2023)). It was not enough for the EPA to assert that it could clear up any confusion during discovery. The court noted that the EPA had to put forth sufficient allegations at the pleading stage to entitle it to discovery. As such, the EPA failed to state a claim upon which relief could be granted. However, the court gave the EPA an opportunity to amend its complaint within 30 days of the court’s order.

‘Til next time…