Monday, January 2, 2017

The Most Important Agricultural Law and Tax Developments of 2016

Overview

This week we will be taking a look at what I view as the most significant developments in agricultural law and agricultural taxation during 2016.  There were many important happenings in the courts, the IRS and with administrative agencies that have an impact on farm and ranch operations, rural landowners and agribusinesses.  What I am writing about this week are those developments that will have the biggest impact nationally.  Certainly, there were significant state developments, but they typically will not have the national impact of those that result from federal courts, the IRS and federal agencies. 

It’s tough to get it down to the ten biggest developments of the year, and I do spend considerable time going sorting through the cases and rulings get to the final cut.  Today we take a quick look at those developments that I felt were close to the top ten, but didn’t quite make the list.  Later this week we will look at those that I feel were worthy of the top ten.  Again, the measuring stick is the impact that the development has on the ag sector as a whole. 

Almost, But Not Quite

Those developments that were the last ones on the chopping block before the final “top ten” are always the most difficult to determine.  But, as I see it, here they are (in no particular order):

  • HRA Relief for Small Businesses. Late in 2016, the President signed into law H.R. 6, the 21st Century Cures Act.  Section 18001 of the legislation repeals the restrictions included in Obamacare that hindered the ability of small businesses (including farming operations) to use health reimbursement arrangements (HRAs).  The provision allows   a "small employer" (defined as one with less than 50 full-time employees who does not offer a group health plan to any employees) to offer a health reimbursement arrangement (HRA) that the employer funds to reimburse employees for qualified medical expenses, including health insurance premiums. If various technical rules are satisfied, the basic effect of the provision is that, effective for plan years beginning after December 31, 2016, such HRAs will no longer be a violation of Obamacare's market "reforms" that would subject the employer to a penalty of $100/day per affected person). It appears that the relief also applies to any plan year beginning before 2017, but that is less clear.  Of course, all of this becomes moot if Obamacare is repealed in its entirety in 2017. 
  • More Obamacare litigation.  In a somewhat related development, in May the U.S. District Court for the District of Columbia ruled in United States House of Representatives v. Burwell, No. 14-1967 (RMC), 2016 U.S. Dist. LEXIS 62646 (D. D.C. May, 12, 2016), that the Obama Administration did not have the power under the Constitution to spend taxpayer dollars on "cost sharing reduction payments" to insurers without a congressional appropriation.  The Obama Administration had argued that congressional approval was unnecessary because the funds were guaranteed by the same section of Obamacare that provides for the premium assistance tax credit that is designed to help offset the higher cost of health insurance as a result of the law.  However, the court rejected that argument and enjoined the use of unappropriated funds due insurers under the law.  The court ruled that the section at issue only appropriated funds for tax credits and that the insurer payments required a separate congressional appropriation.   The court stayed its opinion pending appeal.  A decision on appeal is expected in early 2017, but would, of course, be mooted by a repeal of Obamacare.
  • Veterinary Feed Directive Rule. The Food and Drug Administration revised existing regulations involving the animal use of antibiotics that are also provided to humans.  The new rules arose out of a belief of bacterial resistance in humans to antibiotics even though there is no scientific proof that antibiotic resistant bacterial infections in humans are related to antibiotic use in livestock. As a result, at the beginning of 2017, veterinarians will be required to provide a “directive” to livestock owners seeking to use or obtain animal feed products containing medically important antimicrobials as additives. A “directive” is the functional equivalent of receiving a veterinarian’s prescription to use antibiotics that are injected in animals.  21 C.F.R. Part 558.
  • Final Drone Rules.  The Federal Aviation Administration (FAA) issued a Final Rule on UASs (“drones”) on June 21, 2016. The Final Rule largely follows the Notice of Proposed Rulemaking issued in early 2015 (80 Fed. Reg. 9544 (Feb. 23, 2015)) and allows for greater commercial operation of drones in the National Airspace System. At its core, the Final Rule allows for increased routine commercial operation of drones which prior regulations required commercial users of drones to make application to the FAA for permission to use drones - applications the FAA would review on a case-by-case basis. The Final Rule (FAA-2015-0150 at 10 (2016)) adds Part 107 to Title 14 of the Code of Federal Regulations and applies to unmanned “aircraft” that weigh less than 55 pounds (that are not model aircraft and weigh more than 0.5 pounds). The Final Rule became effective on August 29, 2016.
  • County Bans on GMO Crops Struck Down.  A federal appellate court struck down county ordinances in Hawaii that banned the cultivation and testing of genetically modified (engineered) organisms.  The court decisions note that either the state (HI) had regulated the matter sufficiently to remove the ability of counties to enact their own rules, or that federal law preempted the county rules. Shaka Movement v. County of Maui, 842 F.3d 688 (9th Cir. 2016) and Syngenta Seeds, Inc. v. County of Kauai, No. 14-16833, 2016 U.S. App. LEXIS 20689 (9th Cir. Nov. 18, 2016).
  • Insecticide-Coated Seeds Exempt from EPA Regulation Under FIFRA.  A federal court held that an existing exemption for registered pesticides applied to exempt insecticide-coated seeds from separate regulation under the Federal Insecticide, Rodenticide Act which would require their separate registration before usage.  Anderson v. McCarthy, No. C16-00068, WHA, 2016 U.S. Dist. LEXIS 162124 (N.D. Cal. Nov. 21, 2016).
  • Appellate Court to Decide Fate of EPA’s “Waters of the United States” Final Rule.  The U.S. Court of Appeals for the Sixth Circuit ruled that it had jurisdiction to hear a challenge to the EPA’s final rule involving the scope and effect of the rule defining what waters the federal government can regulate under the Clean Water Act.  Murray Energy Corp. v. United States Department of Defense, 817 F.3d 261 (6th Cir. 2016).
  • California Proposition Involving Egg Production Safe From Challenge.  California enacted legislation making it a crime to sell shelled eggs in the state (regardless of where they were produced) that came from a laying hen that was confined in a cage not allowing the hen to “lie down, stand up, fully extend its limbs, and turn around freely.”  The law was challenged by other states as an unconstitutional violation of the Commerce Clause by “conditioning the flow of goods across its state lines on the method of their production” and as being preempted by the Federal Egg Products Inspection Act.  The trial court determined that the plaintiffs lacked standing and the appellate court affirmed.  Missouri v. Harris, 842 F.3d 658 (9th Cir. 2016).
  • NRCS Properly Determined Wetland Status of Farmland.  The Natural Resource Conservation Service (NRCS) determined that a 0.8-acre area of a farm field was a prairie pothole that was a wetland that could not be farmed without the plaintiffs losing farm program eligibility.  The NRCS made its determination based on “color tone” differences in photographs, wetland signatures and a comparison site that was 40 miles away.  The court upheld the NRCS determination as satisfying regulatory criteria for identifying a wetland and was not arbitrary, capricious or contrary to the law.  Certiorari has been filed with the U.S. Supreme Court asking the court to clear up a conflict between the circuit courts of appeal on the level of deference to be given federal government agency interpretive manuals.  Foster v. Vilsack, 820 F.3d 330 (8th Cir. 2016).
  • Family Limited Partnerships (FLPs) and the “Business Purpose” Requirement. In 2016, there were two cases involving FLPs and the retained interest section of the Code.  That follows one case late in 2015 which was the first one in over two years.  In Estate of Holliday v. Comr., T.C. Memo. 2016-51, the court held that the transfers of marketable securities to an FLP two years before the transferor’s death was not a bona fide sale, with the result that the decedent (transferor) was held to have retained an interest under I.R.C. §2036(a) and the FLP interest was included in the estate at no discount.  Transferring marketable securities to an FLP always seems to trigger issues with the IRS.  In Estate of Beyer v. Comr., T.C. Memo. 2016-183, the court upheld the assessment of gift and estate tax (and gift tax penalties) with respect to transfers to an FLP because the court determined that every benefit allegedly springing from the FLP could have been accomplished by trusts and other arrangements.  There needs to be a separate non-tax business purpose to the FLP structure.  A deeper dive into the court opinions also points out that the application of the “business purpose” requirement with respect to I.R.C. §2036 is very subjective.  It’s important to treat the FLP as a business entity, not put personal assets in the FLP, or at least pay rent for their use, and follow all formalities of state law. 

Conclusion

These are the developments that were important, but just not big enough in terms of their overall impact on the ag sector to make the list of the “top ten.”  The next post will take a look at developments ten through six. 

https://lawprofessors.typepad.com/agriculturallaw/2017/01/the-most-important-agricultural-law-and-tax-developments-of-2016.html

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