Thursday, July 28, 2016
Prison Sentences Upheld For Egg Company Executives Even Though Government Conceded They Had No Knowledge of Salmonella Contamination.
The defendant was an executive (in the capacity of a trustee of the trust that owned the company) of a large-scale egg production company in Iowa, and his son was the Chief Operating Officer of the company. They both pled guilty as “responsible corporate officers” to misdemeanor violations of 21 U.S.C. §331(a) (Food, Drug and Cosmetic Act (FDCA)) for unknowingly introducing eggs that had been adulterated with salmonella into interstate commerce from the beginning of 2010 until approximately August of 2010. They each were fined $100,000 and sentenced to three months in prison. They appealed their sentences as unconstitutional on the basis that they had no knowledge that the eggs at issue were contaminated at the time they were shipped. They also claimed that their sentences violated Due Process and the Eighth Amendment insomuch as the sentences were not proportional to their “crimes.” They also claimed that incarceration for a misdemeanor offense would violate substantive due process.
Trial Court Decision
The trial court determined that the poultry facilities were in poor condition, had not been appropriately cleaned, had the presence of rats and other rodents and frogs and, as a result, the defendant and his son either “knew or should have known” that additional salmonella testing was needed and that remedial and preventative measures were necessary to reduce the presence of salmonella.
Appellate Court Affirms, But Not Unanimously
A split panel of the appellate court agreed, finding that the evidence showed that the defendant and son were liable for negligently failing to prevent the salmonella outbreak and that FDCA provision at issue did not have a knowledge requirement. The majority of the appellate court panel also did not find a due process violation. The defendant and son claimed that because they did not personally commit wrongful acts, due process is violated when prison terms are imposed for vicarious liability felonies where the sentence of imprisonment is only for misdemeanors. However, the court held that vicarious liability was not involved, and that the FDCA provision holds a corporate officer accountable for failure to prevent or remedy “the conditions which gave rise to the charges against him.” Thus, the majority on the appellate court panel determined, the defendant and son were liable for negligently failing to prevent the salmonella outbreak. The court determined that the lack of criminal intent does not violate the Due Process Clause for a “public welfare offense” where the penalty is relatively small (the court believed it was), the defendant’s reputation was not “gravely” damaged (the majority believed that it was not) and congressional intent supported the penalty (the court believed it did). The court also determined that there was no Eighth Amendment violation because “helpless” consumers of eggs were involved. The court also found no procedural or substantive due process violation with respect to the sentences because the court believed that the facts showed that the defendant and son “had reason to suspect contamination” and should have taken action to address the problem at that time (even though law didn’t require it).
One judge wrote a stinging dissent. This judge pointed out that the government stipulated at trial that its investigation did not identify any corporate personnel (including the defendant and son) who had any knowledge that eggs sold during the relevant timeframe were contaminated with salmonella. The dissent also noted that the government conceded that there was no legal requirement for the defendant or corporation to comply with stricter regulations during the timeframe in issue. As such, the convictions imposed and related sentences were based on wholly nonculpable conduct and there was no legal precedent supporting imprisonment in such a situation. The dissent noted that the corporation “immediately, and at great expense, voluntarily recalled hundreds of millions of shell eggs produced” at its facilities when first alerted to the problem. As such, according to the dissent, due process was violated and the sentences were unconstitutional.
Historically, the key case involving this area of the law was decided by the U.S. Supreme Court in 1975. In that case, United States v. Park, 421, U.S. 658 (1975), the Court allowed the Food and Drug Administration (FDA) to pierce the corporate veil to hold the chief executive officer of the food company strictly liable for unsanitary conditions at the company warehouse on the basis that the FDCA is a “public welfare” statute. The Court’s decision freed-up federal prosecutors to go after jail sentences for the executives of food companies that have FDCA violations just by virtue of having an executive title. Historically, however, federal prosecutors reserved the heavy hammer for only those executives who had notice of problems at their facility or facilities. Under the current Administration, the prosecutorial position has changed to go after executives of food companies that were merely negligent or just on the basis of the strict liability nature of the FDCA. For instance, in a recent case involving a peanut company executive that knew about the shipping of salmonella-contaminated peanuts, federal prosecutors sought a life sentence, but got 20 years for the executive.
In the Iowa case, even though the FDCA provision is a strict liability provision, two of the judges thought that culpable intent should have to be proven in some fashion, and they believed the plaintiffs were negligent. That could mean that there’s a good shot that the plaintiffs might ask the Supreme Court to take another look. We’ll have to see.
The case is United States v. Decoster, No. 15-1890, 2016 U.S. App. LEXIS 12423 (8th Cir. Jul. 6, 2016).
Tuesday, July 26, 2016
In Attempt To Deny Oil and Gas-Related Deductions, IRS Reads Language Into the Code That Isn’t There – Tax Court Not Biting
Section 167(h) of the I.R.C. says that a taxpayer can write-off (over 24 months) “geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas.” I.R.C. §167(h)(1) retains that language and then adds that the expenses must be incurred in the United States and that the write-off period begins when the expense was incurred. Nowhere in the statute is it required that the taxpayer actually own the oil and gas interests with which the expenses are associated. But, in a recent Tax Court case, the IRS argued that the statutory phrase “geological and geophysical expenses” is a “term of art” referring only to expenses incurred by taxpayers that own mineral interests who incur the expenses in connection with the taxpayer's oil and gas exploration or development. That position, if true, would deny deductions of expenses that a taxpayer incurs associated with the oil and gas exploration done on behalf of another taxpayer that actually owns the minerals. Think survey costs here.
Under the facts of the case, the taxpayer didn’t own any oil or gas interests, but did conduct marine surveys of the outer continental shelf of the Gulf of Mexico in an attempt to detect where oil and gas deposits were located. The taxpayer gathered the data, and then licensed its use to customers on a non-exclusive basis. Those customers then used the data identifying deposits to drill for oil and gas. The taxpayer deducted the cost associated with the surveys under I.R.C. §167(h) as geological and geophysical expenses incurred in connection with the exploration for, or development of, oil and gas. The IRS disallowed the deduction because the plaintiff did not own the oil and gas interests, but the Tax Court allowed the deduction. The Tax Court determined that the deduction under I.R.C. §167(h) is not limited to taxpayers that own the oil and gas interests being surveyed because all that I.R.C. §167(h) requires is that the expenses were incurred in connection with the exploration for, or development of, oil and gas. The Tax Court noted that the Congress could have put an ownership requirement in the Code if it wanted to, but didn’t. Indeed, the committee reports behind the provision indicate rather clearly that the taxpayer might not ever choose to own the property. Also, the provision allows a uniform method of writing off the costs, even if the project is abandoned. But, in that event, the taxpayer would no longer get an I.R.C. §165 loss.
So, the taxpayer was entitled to the two-year write off provision for the survey costs. It’s nice to see the Tax Court hold the IRS to the language of the Code – at least this time. CGG Americas, Inc. v. Comr., 147 T.C. No. 2 (2016).
Friday, July 22, 2016
The U.S. House Ways and Means Committee has released a “Blueprint for Pro-Growth Tax Reform” that has some possible implications for agriculture. The Blueprint reveals a flat tax rate of 25 percent on business income, with a 20 percent corporate rate applicable to C corporations. It also appears that the idea is to combine income from business activities with individual income. The non-business individual income would have a graduated rate schedule, with three brackets: 12%, 25% and 33%. The Blueprint also states that net interest expense would no longer be deductible. That could be a sticking point for agriculture because farmland is used directly in producing income. Also, with a flat business rate, farm income averaging would no longer have any relevance.
Under the Blueprint, depreciable assets, whether new or used, would be deductible in the year purchased. As a consequence, I.R.C. §1031 exchanges for depreciable assets, but not land, would be irrelevant. That would also be true for the repair and capitalization regulations that practitioners have started dealing with over the past couple of years. Also, the pre-productive period capitalization rules of I.R.C. §263A would likely no longer apply, except maybe for nurseries that buy products that are not seedlings and grow them to a larger stock. So, I.R.C. §263A would continue for inventory accounting, but would be rendered moot for self-constructed assets. That means that a taxpayer operating an orchard or vineyard would benefit, in that all costs would be fully deductible.
It’s an interesting Blueprint with some unique ideas, particularly the separate treatment of business income from individual income. It’s an evolving process. If business income is taxed separate from individual income, a great deal of the complexity of the individual tax return could be eliminated including, for example, the passive loss rules of I.R.C. §469 and (perhaps) the at-risk rules of I.R.C. §465.
At the present time, it looks like the Blueprint idea would become a legislative proposal if the House stays in Republican control after the November election, regardless of who occupies the White House. Expect the House to take the lead on this issue. In any event, agricultural interests need to stay tuned-in.
The Blueprint can be found here: http://waysandmeans.house.gov/taxreform/
Wednesday, July 20, 2016
A couple of recent cases indicate that simply because a pesticide is registered doesn't mean that the pesticide might be misbranded. Generally, the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) provides that once the Environmental Protection Agency (EPA) registers a pesticide and approves its label, state label-based claims are preempted. However, that doesn't mean that the pesticide might be mislabeled. In one recent case, the court (among other things) determined that the plaintiffs’ “warning-based” claims couched in negligence and strict liability failure to warn were not preempted by FIFRA. The court noted that state-law labeling claims are not preempted if they don’t impose any requirement that is different or beyond what federal law requires, and that the plaintiffs’ claims in the case were consistent with FIFRA’s labeling requirements. That was the case, the court noted, because the plaintiffs’ claim was that the defendant’s existing label (the one used from 1995-2004) was misbranded in that it mispresented the safety of the pesticide and was an inadequate warning. The case is Sheppard v. Monsanto Co., NO. 16-00043 JMS-RLP, 2016 U.S. Dist. LEXIS 84348 (D. Haw. Jun. 29, 2016).
In a California case decided a few days later, the plaintiff claimed that she that she developed cancer as a result of the use of the defendant’s pesticide glyphosate (commonly known as “Roundup”) for agricultural and non-agricultural purposes. She sued the defendant on the basis that the defendant failed to warn of the “carcinogenic nature of glyphosate” and was injured as a result. The plaintiff also sued under theories of strict liability, negligence and breach of implied and express warranties. The EPA had, before plaintiff’s use of pesticide, approved the product and the product label and had found that glyphosate is not carcinogenic to humans. The defendant claimed that the plaintiff’s claims were preempted by FIFRA. However, the court determined that a registered pesticide can still be found to be misbranded and in violation of FIFRA. Misbranding, the court pointed out, means that the label contains insufficient directions, warnings or cautionary statements to be “adequate to protect health.” It wasn't enough that the EPA had "unoficially" determined that glyphosate was not carcinogenic. Such determination did not involve any final action of the EPA that had the force of law addressing the issue of misbranding. As such, the court determined, because FIFRA does not deem a registration of a pesticide to be conclusive as to whether a pesticide is misbranded (7 U.S.C. §136(a)(f)(2)), and because the defendant did not provide sufficient evidence to establish that glyphosate was not misbranded, state requirements that a pesticide not be misbranded were not preempted by FIFRA. The case is Mendoza v. Monsanto Company, No. 1:16-cv-00406-DAD-SMS, 2016 U.S. Dist. LEXIS 89003 (E.D. Cal. Jul. 8, 2016).
Monday, July 18, 2016
A recent case from North Carolina points out that some thoughtful planning of a trust's situs can make a significant tax difference. The reason is that state tax rates differ, and some states don't have an income tax. So, for those clients that have the right set of facts, tax savings can be achieved by having the trust's situs located in the low or no-tax state. The North Carolina Court of Appeals, in the recent case, said a trust didn't have sufficient minimum contacts with North Carolina to subject the trust to tax in North Carolina. The court noted that the trust did not have any physical presence in the state during the tax years at issue, contained no North Carolina property or investments, had no trust records that were created or kept in North Carolina, and the place of trust administration was not in North Carolina. Simply basing the imposition of state tax on a beneficiary’s domicile, by itself, did not establish sufficient minimum contacts with the state to satisfy the Due Process Clause and allow North Carolina to tax a non-North Carolina trust.
So, careful selection of a trustee, the location of trust personal property and trust records could end up saving tax of 5 percent to 10 percent on trust income in many instances. Over time, that can add up. The case is Kaestner v. North Carolina Department of Revenue, No. COA15-896, 2016 N.C. App. LEXIS 715 (N.C. Ct. App. Jul. 5, 2016). For more details on the facts of the case, see http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/annotations/estateplanning/index.html