Friday, September 28, 2018
I just finished a series of tax seminars in various states. The attendees were engaged in the discussions and had great questions. It’s always good to interact with practitioners and listen to what they are dealing with and what the current audit issues are with respect to farm and ranch clients. I have four events remaining before I start the fall tour of tax school beginning in late October.
In today’s post, I list the tax seminars upcoming this fall.
Kansas Tax Schools
Here’s the 2018 list of fall tax schools of Kansas State University. I teach on the second day at each location. The first day at the Garden City, Colby and Hays are taught by Paul Neiffer and Andy Morehead. The schools at Wichita and Salina are taught on Day 1 by Andy Morehead and Bill Parrish. The schools at Topeka, Overland Park and Pittsburg are taught on Day 1 by Bill Parrish and Felecia Dixson. The Kansas Department of Revenue makes a presentation on Day 1 at each location.
Here’s the list of tax schools in Kansas:
- 70th Annual Kansas Income Tax Institute
10/30-31/2018: Clarion Inn (Garden City, Kansas)
- 70th Annual Kansas Income Tax Institute
10/31-11/1/2018: Comfort Inn and Convention Center (Colby, Kansas)
- 70th Annual Kansas Income Tax Institute
11/1-2/2018: Fort Hays State University Memorial Union Ballroom (Hays, Kansas)
- 70th Annual Kansas Income Tax Institute
11/5-6/2018: Ramada Convention Center (Topeka, Kansas)
- 70th Annual Kansas Income Tax Institute
11/12-13/2018: Sedgwick County Extension Office (Wichita, Kansas)
- 70th Annual Kansas Income Tax Institute
11/13-14/2018: Tony's Pizza Events Center (formerly Bicentennial Center) (Salina, Kansas)
- 70th Annual Kansas Income Tax Institute
11/19-20/2018: DoubleTree by Hilton (Overland Park, Kansas)
- 70th Annual Kansas Income Tax Institute
12/12-13/2018: Pittsburg State University Overman Student Center (Pittsburg, Kansas)
Registration for the KSU tax schools is available here: https://www.agmanager.info/events/kansas-income-tax-institute. The Pittsburg school is also available online. In addition, Prof. Lori McMillan, my colleague at Washburn Law School, will join me in presenting a two-hour tax ethics seminar/webinar on December 14.
North Dakota Tax Schools
I will also be speaking on the second day at two tax schools in North Dakota. Here’s the list of the North Dakota tax schools:
- North Dakota Tax Practitioners' Institute
11/27-28/2018: Ramkota (Bismarck, North Dakota)
- North Dakota Tax Practitioners' Institute
11/29-30/2018: Holiday Inn (Fargo, North Dakota)
Registration information for the North Dakota schools is available here:
On November 8 and 9, Paul Neiffer and I will be doing a two-day tax school in Sioux Falls, SD for the American Society of Tax Professionals. I will also provide an ethics session after Day 1.
Here are the details for the Sioux Falls seminar:
- 11/8-11/9/2018: American Society of Tax Professionals, Ramada Inn & Suites (Sioux Falls, South Dakota) (8am – 4:30 p.m., contact: 1-877-674-1996).
The 2018 Bloethe Tax School in Des Moines, Iowa is set for December 5-7. I will kick-off that event on December 5 with a 4-hour afternoon seminar on the new tax law. Here are the registration details for the school:
I hope to see you at one of the schools this fall. There is certainly a great deal to talk about at these events. The new law is keeping all of us busy.
Wednesday, September 26, 2018
As a result of the Tax Cuts and Jobs Act (TCJA), the exemption equivalent of the unified credit for federal estate and gift tax purposes is presently $11.18 million. That’s the amount for decedent’s dying in 2018 and gifts made in 2018. There is also a present interest annual exclusion that covers the first $15,000 of gifts made to a donee in 2018. In other words, the first $15,000 is not subject to gift tax and then additional amounts gifted to that donee by the donor start using the donor’s unified credit applicable exclusion amount. In addition, the TCJA retained the unlimited marital deduction and income tax basis “step-up.”
The amount of the exemption means that very few people will encounter issues with federal estate or gift tax. Indeed, for the vast majority of people, estate planning involves income tax basis planning rather than planning to avoid estate or gift tax. Some states tax estates at death and one state retains a gift tax, and in these states the exemption is often much lower than the federal exemption. So, for individuals in these states estate and gift tax planning can remain important for state tax purposes.
What is much more important for most people, however, is income tax basis planning. That’s because property that is included in a decedent’s estate at death receives an income tax basis equal to the property’s fair market value as of the date of death. I.R.C. §1014. As a result of this rule, much of estate planning involves techniques to cause inclusion of property in a decedent’s estate at death. Even though the property will be subjected to federal estate tax, the value will be excluded from tax by virtue of the credit.
A great deal of property (such as farmland and personal residences) is owned in joint tenancy at death. How much of jointly held property is included in a joint tenant’s estate at death? That is a very important issue in the present estate planning environment. Specifically, what is the rule involving spousal joint tenancies?
The income tax basis rules at death for spousal joint tenancies – that’s the topic of today’s post.
A distinguishing characteristic of joint tenancy is the right of survivorship. That means that the surviving joint tenant or tenants become the full owners of the jointly held property upon the death of a fellow joint tenant regardless of the terms of the deceased joint tenant’s will. It’s important to note that upon a conveyance of real property, transfer to two or more persons generally creates a tenancy in common unless it is clear in the deed or other conveyancing document that a joint tenancy is intended. For example, if Blackacre is conveyed to “Michael and Kelsey, husband and wife,” Michael and Kelsey own Blackacre as tenants in common. To own Blackacre as joint tenants, Blackacre needed to be conveyed to them as required by state law. The typical language for creating a joint tenancy is to “Michael and Kelsey, husband and wife, as joint tenants with right of survivorship and not as tenants in common.”
Estate Tax Treatment. For joint tenancies involving persons other than husbands and wives, property is taxed in the estate of the first to die except to the extent the surviving owner(s) prove contribution for its acquisition. I.R.C. § 2040(a). This is the “consideration furnished” rule. While property held jointly may not be included in the “probate estate” for probate purposes, the value of that property is potentially subjected to federal estate tax and state inheritance or state estate tax to the extent the decedent provided the consideration for its acquisition. As a result, property could be taxed fully at the death of the first joint tenant to die (if that person provided funds for acquisition) and again at the death of the survivor. Whatever portion is taxed in the estate of the first to die also receives a new income tax basis based on the fair market value of that portion at the date of death.
Consider the following example (from my text, Principles of Agricultural Law):
Bob and Bessie Black, brother and sister, purchased a 1,000-acre Montana ranch in 1970 for $1,000,000. Bob provided $750,000 of the purchase price and Bessie the remaining $250,000. At all times since 1960, they have owned the ranch in joint tenancy with right of survivorship. Bob died in 2011 when the ranch had a fair market value of $2,500,000. Seventy-five percent of the date of death value, $1,875,000 will be included in Bob’s estate.
Bessie, as the surviving joint tenant will now own the entire ranch. Her income tax basis in the ranch upon Bob’s death is computed as follows:
$1,875,000 (Value included in Bob’s estate)
+ 250,000 (Bessie’s contribution toward purchase price)
Thus, if Bessie were to sell the ranch soon after Bob’s death for $2,500,000, she would incur a federal capital gain tax of $75,000, computed as follows:
$2,500,000 (Sale price)
- 2,125,000 (Bessie’s income tax basis)
$375,000 Taxable gain
x.20 (Capital gain tax rate)
For joint tenancies involving only a husband and wife, the property is treated at the first death as belonging 50 percent to each spouse for federal estate tax purposes. I.R.C. § 2040(b). This is known as the “fractional share” rule. Thus, only one-half of the value is taxed at the death of the first spouse to die and only one-half receives a new income tax basis.
Special rule. In 1992, the Sixth Circuit Court of Appeals applied the consideration furnished rule to a husband-wife joint tenancy in farmland with the result that the entire value of the jointly-held property was included in the gross estate of the husband, the first spouse to die. Gallenstein v. United States, 975 F.2d 286 (6th Cir. 1992). The full value was subject to federal estate tax but was covered by the 100 percent federal estate tax marital deduction, eliminating federal estate tax. In addition, the entire property received a new income tax basis which was the objective of the surviving spouse. The court reached this result because of statutory changes to the applicable Internal Revenue Code sections that were made in the late 1970s. To take advantage of those changes, the court determined, it was critical that the jointly held property at issue was acquired before 1977. Under the facts of the case, the farmland was purchased in 1955 for $38,500 exclusively with the husband’s funds. The surviving wife sold the farmland in 1988 for $3,663,650 after her husband’s death in late 1987. The entire gain on sale was eliminated because of the full basis step-up.
In 1996 and 1997, the federal district court for Maryland reached a similar conclusion. Anderson v. United States, 96-2 U.S. Tax Cas. (CCH) ¶60,235 (D. Md. 1996); Wilburn v. United States, 97-2 U.S. Tax Cas. (CCH) ¶50,881 (D. Md. 1997). Also, in 1997, the Fourth Circuit Court of Appeals followed the Sixth Circuit’s 1992 decision as did a federal district court in Florida. Patten v. United States, 116 F.3d 1029 (4th Cir. 1997), aff’g, 96-1 U.S. Tax Cas. (CCH) ¶ 60,231 (W.D. Va. 1996); Baszto v. United States, 98-1 U.S.Tax Cas. (CCH) ¶60,305 (M.D. Fla. 1997).
In 1998, the Tax Court agreed with the prior federal court opinions. Under the Tax Court’s reasoning, the fractional share rule cannot be applied to joint interests created before 1977. Hahn v. Comm’r, 110 T.C. No. 14 (1998). This is a key point. If the jointly held assets had declined in value, such that death of the first spouse would result in a lower basis, the fractional share rule would result in a more advantageous result for the survivor in the event of sale if the survivor could not prove contribution at the death of the first to die. In late 2001, the IRS acquiesced in the Tax Court’s opinion.
So what does all of this mean? It means that for pre-1977 marital joint tenancies where one spouse provided all of the funds to acquire the property and that spouse dies, the full value of the property will be included in the decedent’s gross estate. The value of the property will be subject to estate tax, but with an exemption of $11.18 million and the marital deduction, it’s not likely that federal estate tax would be due. In addition, and perhaps more importantly, the surviving spouse receives an income tax basis equal to the date of death value. That could be dramatically higher than the original cost basis. If the surviving spouse sells the property, capital gain could be potentially eliminated.
In agriculture, many situations still remain involved pre-1977 marital joint tenancies. Be on the look-out for this planning opportunity. It’s a “biggie” in the present era of a large federal estate tax unified credit exemption for federal estate (and gift) tax purposes.
Monday, September 24, 2018
The Tax Cuts and Jobs Act (TCJA) significantly increased the federal estate and gift tax exemption to $11.18 million for deaths in or gifts made in 2018. That effectively makes federal estate and gift tax a non-issue for practically all farming and ranching operations, with or without planning. However, business succession planning remains as important as ever. Last month, I wrote about one possible strategy, the intentionally defective grantor trust. Today, I discuss another possible succession planning concept – the grantor-retained annuity trust (GRAT). It’s another technique that can allow the grantor to “freeze” the value of the transferred assets while simultaneously providing the grantor with a cash flow stream for a specified time-period.
Transferring interests in a farming business (and other investment wealth) to successive generations by virtue of a GRAT – that’s the topic of today’s post.
GRAT - Defined
A GRAT is an irrevocable trust to which assets (those that are likely to appreciate in value (such as real estate) at a rate exceeding the rate applied to the annual annuity payment the GRAT will make) are transferred and the grantor receives the right to a fixed annuity payment for a term of years, with the remainder beneficiaries receiving any remaining assets at the end of the GRAT term. The fixed payment is typically a percentage of the asset’s initial fair market value computed so as to not trigger gift tax. The term of the annuity is fixed in the instrument and is either tied to the annuitant’s life, a specified term of years or a term that is the shorter of the two. The annuity payment can be structured to remain the same each year or it can increase up to 120 percent annually. However, once the annuity is established, additional property cannot be added to the GRAT.
A GRAT can accomplish two important estate planning objectives. The GRAT technique “freezes” the value of the senior family member’s highly appreciated assets at today’s value, and it provides the senior family member with an annuity payment for a term of years. Thus, the GRAT can deliver benefits without potential transfer tax disadvantages. Clearly, the lower the interest rate, the more attractive a GRAT is.
A GRAT must make at least one annuity payment every 12-month period that is paid to an annuitant from either the GRAT’s income or principal. There is a 105-day window within which the GRAT can satisfy the annual annuity payment requirement. The window runs from the GRAT creation date, which is based on state law. Notes cannot be used to fund annuity payments, and the trustee cannot prepay the annuity amount or make payments to any person other than the annuitant during the qualified interest term.
A GRAT is subject to a fixed amount requirement that takes the form of either a fixed dollar amount or a fixed percentage of the initial fair market value of the property transferred to the trust. There is also a formula adjustment requirement that is tied to the fixed value of the trust assets as finally determined for gift tax purposes. The provision must require adjustment of the annuity amount.
From a financial accounting standpoint, the GRAT is a separate legal entity. The GRAT’s bank account is established using the grantor’s social security number as the I.D. number. Annual accounting is required, including a balance sheet and an income statement.
Tax Consequences of Creating, Funding, Administering and Terminating a GRAT
For income tax purposes, the GRAT is treated as a grantor trust because, by definition, the retained interest exceeds five percent of the value of the trust at the time the trust is created. I.R.C. §673. Thus, there is no gain or loss to the grantor on the transfer of property to the GRAT in exchange for the annuity. There can be issues, however, if there is debt on the property transferred to the GRAT that exceeds the property’s basis. Also, when a partnership interest is contributed there can be an issue with partnership “negative basis” (i.e., the partner’s share of partnership liabilities exceeds the partner’s share of the tax basis in the partnership assets).
Because the trust is a grantor trust, the grantor is taxed on trust income, including interest, dividends, rents and royalties, as well as pass-through income from business entity ownership. The grantor also can claim the GRAT’s deductions. However, the grantor is not taxed on annuity payments, and transactions between the GRAT and the grantor are ignored for income tax purposes. A significant tax benefit of a GRAT is that the sale of the asset between the grantor and the GRAT does not trigger any taxable gain or loss. The transaction is treated as a tax-free installment sale of the asset. Also, the GRAT is permitted to hold “S” corporation stock as the trust is a permitted S corporation shareholder, and the GRAT assets grow without the burden of income taxes.
For gift tax purposes, the value of the gift equals the value of the property transferred to the GRAT less the value of the grantor’s retained annuity interest. In essence, the transferred assets are treated as a gift of the present value of the remainder interest in the property. That allows asset appreciation to be shifted (net of the assumed interest rate that is used to compute present value) from the grantor’s generation to the next generation.
If the GRAT underperforms (i.e., the GRAT assets fail to appreciate at a higher rate than the interest rate of the annuity payment), the GRAT can sell its assets back to the grantor with no income tax consequences (assuming the GRAT is a wholly-owned grantor trust. Rev. Rul. 85-13, 1985-1 C.B. 184. Then, the repurchased property can be placed in a new GRAT with a lower annuity payment. The original GRAT would then pay out its remaining cash and collapse.
It is possible to “zero-out” the gift value so there is no taxable gift. An interest rate formula determined by I.R.C. §7520 is used to calculate the value of the remainder interest. If the income and appreciation of the trust assets exceed the I.R.C. §7520 rate, assets remain at the end of the GRAT term that will pass to the GRAT beneficiaries. The basic idea is to transfer wealth to the subsequent generation with little or no gift tax consequences.
The grantor’s payment of taxes is not treated as a gift to the trust remainder beneficiaries. Rev. Rul. 2004-64, 2004-27 I.R.B. 7. Also, if the trustee reimburses (or has the power to reimburse) the grantor for the grantor’s payment of income tax, the reimbursement (or the discretion to reimburse) does not cause inclusion of the trust assets in the grantor’s estate. But, it’s important that the trustee is an independent trustee.
Death of Grantor During GRAT Term
If the grantor dies before the end of the GRAT term, a portion (or all) of the GRAT is included in the grantor’s gross estate. The amount included in the grantor’s estate is the lesser of the fair market value of the GRAT’s assets as of the grantor’s date of death or the amount of principal needed to pay the GRAT annuity into perpetuity (which is determined by dividing the GRAT annuity by the I.R.C. §7520 rate in effect during the month of the grantor’s death). Rev. Rul. 82-105, 1982-1 C.B. 133.
Example: Bubba died in June 2018 with $700,000 of assets held in a 10-year GRAT. At the time the GRAT was created in June of 2010 with a contribution of $1.5 million, the annuity was calculated to be $183,098.70 per year (based on an interest rate of 3.8 percent and a zeroed-out gift). The amount included in Bubba’s gross estate would be the lesser of $700,000 (the FMV of the GRAT assets at the time of death) or $5,385,255.88 (the value of the GRAT annuity paid into perpetuity ($183,098.70/.034)). Thus, the amount included in Bubba’s estate would be $700,000.
To minimize the risk of assets being included in the grantor’s estate, shorter GRAT terms are generally selected for older individuals. There is no restriction in the law as to how long a GRAT term must be. For example, Kerr v. Comr., 113 T.C. 449 (1999), aff’d., 292 F.3d 490 (5th Cir. 2002) involved a GRAT with a term of 366 days, and there is no indication in the court’s opinion that the term was challenged. In Priv. Ltr. Rul. 9239015 (Jun. 25, 1992), the IRS blessed a GRAT with a two-year term. See also Walton v. Comr., 115 T.C. 589 (2000).
GRAT Advantages and Disadvantages
To summarize the above discussion the following is a brief listing of advantages and disadvantages of a GRAT.
Advantages: 1) there is a reduced gift tax cost as compared to a direct gift; 2) the GRAT receives grantor trust status; 3) the grantor can borrow funds from the GRAT and the GRAT can borrow money from third parties (however, the grantor must report as income the amount borrowed - Tech. Adv. Memo. 200010010 (Nov. 23, 1999)); and 4) the GRAT term can safely be as short as two years.
Disadvantages: 1) upon formation, some of the grantor’s applicable exclusion might be utilized; 2) the grantor must survive the GRAT term to avoid having any part of the GRAT assets being included in the grantor’s gross estate; 3) notes or other forms of indebtedness cannot be used to satisfy the required annuity payments; and 4) grantor continues to pay income taxes on all of the GRAT’s income that is earned during the GRAT term.
The GRAT is another way to pass interests in the farming or ranching operation to the next generation. While it’s not a technique for everyone, it can be helpful for those with substantial estates. Also, keep in mind that the present level of the federal estate and gift tax exclusion amount of $11.18 million is scheduled to “sunset” after 2025. After that, under present law, the exclusion will drop to $5 million with an inflation adjustment. Also, if the political landscape changes to a significant enough degree the exemption could fall sooner and to a greater degree.
Thursday, September 20, 2018
Land ownership includes two separate estates in land – the surface estate and the mineral estate. The mineral estate can be severed from the surface estate with the result that ownership of the separate estates is in different parties. In some states, the mineral estate is dominant. That means that the mineral estate owner can freely use the surface estate to the extent reasonably necessary for the exploration, development and production of the minerals beneath the surface.
The “accommodation doctrine” is a court-made doctrine relating to the mineral owner's right to use the surface estate to drill for and produce minerals. ... The doctrine requires a balancing of the interests of the surface and mineral owner. How that balancing works was at issue in a recent case.
The accommodation doctrine – that’s the topic of today’s post.
The Accommodation Doctrine
If the owner of the mineral estate has only a single method for developing the minerals, many courts will allow that method to be utilized without consideration of its impact on the activities of the surface estate owner. See., e.g., Merriman v. XTO Energy, Inc., 407 S.W.3d 244 (Tex. 2013). But, under the accommodation doctrine, if alternative means of development are reasonably available that would not disrupt existing activities on the surface those alternative means must be utilized. For example, in Getty Oil co. v. Jones, 470 S.W.2d 618 (Tex. 1971), a surface estate owner claimed that the mineral estate owner did not accommodate existing surface use.
To prevail on that claim, the Texas Supreme Court, determined that the surface owner must prove that the mineral estate owner’s use precluded or substantially impaired the existing surface use, that the surface estate owner had no reasonable alternative method for continuing the existing surface use, and that the mineral estate owner has reasonable development alternatives that would not disrupt the surface use. A question left unanswered in the 1971 decision was whether the accommodation doctrine applied beyond subsurface mineral use to the exercise of groundwater rights. But, in 2016, the court said that the doctrine said the doctrine applied to groundwater. Coyote Lake Ranch, LLC v. City of Lubbock, No. 14-0572, 2016 Tex. LEXIS 415 (Tex. Sup. Ct. May 27, 2016).
Harrison v. Rosetta Res. Operating, LP, No. 08-15-00318-CV 2018 Tex. App. LEXIS 6208 (Tex Ct. App. Aug. 8, 2018), involved a water-use dispute between an oil and gas lessee and the surface owner. The plaintiff owned the surface of a 320-acre tract. The surface estate had been severed from the mineral estate, with the minerals being owned by the State of Texas. In October 2009, the plaintiff executed an oil and gas lease on behalf of the State with Eagle Oil & Gas Co. Eagle began its drilling operations, but before completing its first well it assigned the lease to Comstock Oil & Gas, L.P., subject to an agreement to indemnify Eagle against claims arising from its operations to that point. Within a few months, the plaintiff and several other plaintiffs sued Eagle for negligently destroying the plaintiff’s irrigation ditch as well as damage resulting from road construction, among other claims. Comstock defended Eagle in the lawsuit and settled a few months later. According to the settlement agreement, Comstock would make repairs to a water well on the plaintiff’s land and purchase 120,000 barrels of water from the plaintiff at a rate of fifty cents per barrel. A plastic-lined “frac pit” was also built on the property to store water produced from the well, although the pit was not a requirement of the settlement agreement. Comstock complied with the agreement and purchased the required amounts of water from the plaintiff at the agreed price. Comstock completed two oil wells on the property that year and began constructing a third well the following year. Before completing the third well, however, Comstock assigned the least to Rosetta Resources Operating, LP, the defendant in this case, who continued construction of the third well and began construction of several more. Unlike Comstock, the defendant did not purchase its water from the plaintiff, choosing instead to pump in water from an adjacent property, a neighbor of the plaintiff.
After learning that the defendant was importing his neighbor’s water, the plaintiff filed suit in his individual capacity and as trustee against the defendant for breach of contract, claiming an employee of the defendant had orally agreed to continue the same arrangement the plaintiff had enjoyed with Comstock. He also sought to permanently enjoin the defendant from using his neighbor’s water and sought cancellation of the State’s oil and gas lease. The defendant filed three motions for summary judgment that collectively challenged all of the plaintiff’s claims. In response, the plaintiff filed an amended petition asserting that the defendant had violated the “accommodation doctrine” by not purchasing his water, thus rendering his well and frac pit useless and unnecessarily causing damage to his property. The trial court granted the defendant’s motions for summary judgment in their entirety. The plaintiff appealed.
The appellate court determined that the plaintiff’s accommodation doctrine arguments appeared to rest on his proposition that because a frac pit was built on his land for use by the former lessee, it unified the use of the land with the oil and gas operations, and when the defendant chose not buy his water it substantially interfered with his existing use of the land as a source of water for drilling operations. Thus, the substantial interference complained of was that the frac pit was no longer profitable because the defendant is not using it to supply water for its operations. The appellate court held that categorizing a refusal to buy goods produced from the land as interference with the land for purposes of the accommodation doctrine would stretch the doctrine beyond recognition. Therefore, because the defendant’s use did not impair the plaintiff’s existing surface use in any way, except in the sense that not buying the water had precluded the plaintiff from realizing potential revenue from selling its water to the defendant, the inconvenience to the surface estate was not evidence that the owner had no reasonable alternative to maintain the existing use. Lastly, the court determined that if it were to hold for the plaintiff on these facts they would, in effect, be holding that all mineral lessees must use and purchase water from the surface owner under the accommodation doctrine if his water is available for use. Accordingly, the appellate court affirmed.
The accommodation doctrine is not designed to substitute for common sense reasonableness when the dominant estate owner has two clear options for doing something that involve the same cost. If one option is more disruptive to the surface owner, inherent limits of reasonable use dictate use of the less disruptive option. The recent Texas case is just another illustration of how courts wrestle with the application of the doctrine.
Tuesday, September 18, 2018
When farmland is purchased, depreciation can be claimed on depreciable assets associated with the farmland starting with the first tax year in which possession of the land is taken. The amount claimed is tied to the portion of the total cost of the farmland that can be allocated to any depreciable asset, such as fencing, field drainage tile, grain storage facilities, farm buildings, and irrigation equipment, just to name a few of the more common depreciable items.
In certain parts of the Midwest, above average soil fertility is also eligible for expense deductions. The concept is known as “residual soil fertility” and it can be available to farmland buyers that didn’t farm the acquired property within the immediately prior crop year.
Deductions associated with residual soil fertility, that’s the topic of today’s post.
I.R.C. §180 allows a taxpayer engaged in the trade or business of farming to annually elect (by deducting the expense on the return) the cost of fertilizer, lime, potash, or other materials which enrich, neutralize or condition land used in farming. If these fertilization costs are not expensed, they are required to be capitalized with expense deductions being amortized over a presumed useful life (similar to field drainage tile and/or fencing). This means that residual soil fertility is a capital asset in the hands of an operating farmer, crop-share landlord or cash rent landlord when farmland is acquired, with the cost amortized over the useful life of the asset. That useful life is typically three to four years. The general 15-year amortization rules don’t apply. Instead, the IRS position is that fertilizer costs should be amortized based on the percentage of use or benefit each year. That likely means that straight-line amortization probably does not apply. An agronomist or other soil scientist may be able to provide sufficient information so that the property annual expense allocation can be determined See, e.g., IRS Pub. 225, Chapter 4.
For farmland inherited from a decedent, the date of the decedent’s death is the measurement date for determining whether residual soil fertility exists. If it does, the cost can be amortized by the decedent’s estate and/or the beneficiaries of the estate that receive the farmland.
In 1995, the IRS published a Market Segment Specialization Program (MSSP) addressing residual soil fertility. IRS MSSP, Guideline on Grain Farmers (Training 3149-133, Jul. 1995). In the MSSP, the IRS notes that a deduction for residual fertilizer supply will be denied unless the taxpayer can establish (1) beneficial ownership of the residual fertilizer supply; (2) the presence and extent of the residual fertilizer; and (3) that the residual fertilizer supply is actually being exhausted. In addition, the MSSP instructs IRS examining agents to make sure that the values assigned to depreciable farm assets is reasonable. See also, Tech. Adv. Memo. 9211007 (Dec. 3, 1991).
So, how can a taxpayer establish the presence and extent of residual fertilizer supply and that it is actually being exhausted? For starters, if farmland has an actual excess soil fertility base it will normally bring a price premium upon sale. That’s the same rationale that applies when farmland with good fences, field drainage tile and grain storage facilities is purchased – a price premium applies to factor in the existence of those assets. As for residual fertilizer supply, the excess amount can be measured by grid sampling. A buyer can anticipate that grid sampling will cost of approximately $4-$8 per acre. Agronomists and agricultural soil testing labs follow certain guidelines and procedures that they use to determine average (base) soil fertility for various soil types. Once grid soil samples are obtained, the fertility levels of those samples are compared to the base fertility guideline levels for particular soil types to establish the amount of “excess” fertility on a tract of acquired farm real estate.
The key is to obtain data for the established base soil fertility for the type of soil on the purchased farmland from comparable tracts and comparable soil types. By establishing the base soil fertility, the actual sampling on the purchased property will reveal whether excess residual fertilizer is present. That soil sampling should occur on or before the buyer takes possession of the farmland. For farmland that is inherited, the sampling should occur before the buyer applies any new fertilization.
While the IRS does not require it, perhaps the best way to document the deduction for excess soil fertility is to provide for the allocation of value to the amount of above average soil fertility in the purchase contract for the farmland. In addition, a written summary of how the computation was made and the time period over which it would deplete due to crop production should be obtained from the agronomist or other expert involved. This will be beneficial for establishing the proper amortization period for the excess soil fertility, and will provide substantiation of the deduction upon any subsequent IRS (or state) audit. Depending on the soil type involved, the deduction could range from $50 per acre to over $700 per acre.
When farmland is acquired, an allocation of value can be made to depreciable items. In certain parts of the country, a depreciable item might be residual fertilizer supply. If it can be established with appropriate data, a tax benefit is available. It’s important, however, to follow the IRS guidelines. Also, in some states, following the IRS guidance on deducting excess soil fertility may not be good enough. Yes, Minnesota, I am talking about you.
Friday, September 14, 2018
A great deal of farm personal property is out in the open. From time to time, machinery and equipment may sit outside, and farm tools and supplies may also be out in the open. Of course, grazing livestock may be outside along with other farm property. Farm real estate may contain farm ponds, stock water tanks and other potential hazards. All of this raises concerns about public access to the premises and possible theft of property and potential liability issues. Similarly, livestock confinement operations have their own unique concerns about who has access to the property.
Does the posting of the property as “No Trespassing” have any legal consequence? It might. That’s the topic of today’s post.
Benefits of Posting
Criminal trespass. One potential benefit of posting property “No Trespassing” is that, in some states, what is otherwise a civil trespass can be converted to a criminal trespass. A criminal trespass gets the state involved in prosecuting the trespasser, and it might be viewed as having a greater disincentive to trespass than would a civil trespass. A civil trespass is prosecuted by the landowner personally against the alleged trespasser.
Search warrant. Another possible benefit of posting property “No Trespassing” is that it may cause a search warrant to be obtained before the property can be search for potential criminal conduct. Under the Fourth Amendment to the Constitution, unreasonable searches and seizures are prohibited absent a search warrant that is judicially-approved and supported by probable cause.
The search warrant issue and the posting of “No Trespassing” signs was the subject of a recent case from Vermont. In State v. Dupuis, 2018 VT 86 (Vt. Sup. Ct. 2018), a fish and game warden entered the defendant’s property via an adjoining property. The warden found a blind with a salt block and apples nearby. A rather precarious path through tough timber was used by the warden to avoid detection. The defendant was charged with baiting and taking big game by illegal means. At trial, the defendant and many others testified that there are “no trespassing” and “keep out” signs all around the property and on the gate to the public road. The warden stated that he did not see any of these signs. The defendant motioned to exclude the evidence because the warden never obtained a search warrant. The defendant claimed that he had a reasonable expectation of privacy throughout his property particularly because of the “No Trespassing” signs.
The trial court reasoned that the warden’s access to the property was abnormal and did not diminish the defendant’s intent to exclude people from coming onto the property. The trial court granted the defendant’s motion to suppress evidence obtained by the warden during the warrantless search. On appeal, the state Supreme Court affirmed. The State claimed that the defendant did not properly exclude the public and, therefore, did not have an expectation of privacy relating to the regulation of hunting. However, the Supreme Court held that when a landowner objectively demonstrates an intent to maintain privacy of open fields, a search warrant is required. Game wardens must obtain a search warrant, the court determined, whenever a warden seeks to enter property and gather evidence. The defendant’s posting of “No Trespassing” signs created an expectation of privacy. Accordingly, the evidenced obtained in the warrantless search was properly suppressed.
The Vermont case points out that posting property as “No Trespassing” can, indeed, have its benefits. Also, it’s important to check state law requirements for the type, size, placement and content of signs. State rules vary and they must be complied with to properly post your property. Just another thing to think about in the world of agricultural law.
Wednesday, September 12, 2018
The vast majority of agricultural businesses depend on financing to buy crop inputs, machinery, equipment, livestock and land. For financed purchased items other than land, the lender will obtain in interest in collateral to secure the loan. That is done by the parties executing a security agreement and the lender filing a financing statement as a public record of the transaction. Often the lender will also obtain an interest in the “proceeds” of the collateral. A state’s version of Article 9 of the Uniform Commercial Code governs the matter.
But, just what are “proceeds” of crops and livestock? It’s an interesting question that sometimes arises in ag financing situations? It’s the topic of today’s post.
“Proceeds” – The Basics
The security interest created by a security agreement is a relatively durable lien. The collateral may change form as the production process unfolds. Fertilizer and seed become growing crops, animals are fattened and sold, and equipment is replaced. The lien follows the changing collateral and, in the end, may attach to the proceeds from the sales of products (at least up to ten days after the debtor receives the proceeds). In other words, a security interest in proceeds is automatically perfected if the interest in the original collateral was perfected. However, a security interest in proceeds ceases to be automatically perfected ten days after the debtor receives the proceeds.
Proceeds are generally defined as whatever is received upon the sale, trade-in or other disposition of the collateral covered by the security agreement. Revised UCC § 9-102(a)(64)(A). “Proceeds” also includes whatever is distributed or collected on account of collateral. That does not necessarily require a disposition. See, e.g., Western Farm Service v. Olsen, 90 P.3d 1053 (Wash. 2004), rev’g, 59 P.3d 93 (Wash. Ct. App. 2003). But, “proceeds” does not include a deposit account unless monies from the disposition of collateral are deposited into the account. See, e.g., Community Trust Bank v. First National Bank, 924 So. 2d 488 (La. Ct. App. 2006).
“Proceeds” in Ag Settings
In agricultural settings, “proceeds” of crops or livestock can take several forms. These can include federal farm program deficiency payments, storage payments, diversion payments, disaster relief payments, insurance payments for destroyed crops, Conservation Reserve Program payments and dairy herd termination program payments, among other things. This is significant in agriculture because of the magnitude of the payments. In fact, in debt enforcement or liquidation settings, the federal payments are often the primary or only form of money remaining for creditors to reach.
Crops fed to livestock. If both a farmer's crops and livestock are items of collateral for the same lender, the lender does not usually object to use of the crops as feed. The lender's filed financing statement describing the crop and animals would give sufficient notice of the continuing lien and preserve an interest in the disappearing feed. However, where one lender has a lien on the crops that are fed and another has a lien on the animals that eat the crops as feed, a so-called “split line” of credit, the outcome is not completely clear. If rules as to commingling apply, a perfected security interest in the feed which loses its identity by becoming part of the animal ranks equally with other perfected security interests in the animals according to the ratio that the cost of the assets to which each interest originally attached bears to the total cost of the resulting animal. However, the Nebraska Supreme Court determined in a 1988 decision that the commingling of feed rule does not apply to feed where there is no evidence that the feed was fed to livestock. Beatrice National Bank v. Southeast Nebraska Cooperative, 230 Neb. 671, 432 N.W.2d 842 (1988). But, when feed that is collateral for one lender is fed to livestock that is collateral for another lender, the courts are split on the outcome. In a Colorado case, the court held that the feeding of grain to cattle that was pledged as collateral under a security agreement terminated the creditor's security interest in the grain. First National Bank of Brush v. Bostron 39 Colo. App. 107, 564 P.2d 964 (1977). But, in a later Wisconsin decision where the debtor raised cattle that were owned by third party investors, the court determined that the creditor's security interest in the crops that were fed to the cattle continued in cattle proceeds under either Article 9 or because the feeding was considered to be a sale of the crops to the investors. In re Pelton 171 B.R. 641 (Bankr. W.D. Wis. 1994)
“Proceeds” and bankruptcy. The “identifiable proceeds” problem may also be a concern to a creditor in the event the debtor files bankruptcy. In Pitcock v. First Bank of Muleshoe, 208 B.R. 862 (Bankr. N.D. Tex. 1997), the debtor borrowed money from a bank to plant crops and granted the bank a security interest in all crops and equipment. The debtor grew crops, but instead of harvesting the crops and selling the grain, the debtor pastured cattle “on the gain” on leased land. The debtor received a rental payment based upon the amount of weight the cattle gained from consuming the crops that served as collateral for the loan from the creditor. The debtor received the rent checks and used all of the proceeds for business and living expenses. Shortly after the loan became due, the debtor filed bankruptcy and the creditor filed a claim for the unpaid loan. The creditor argued that its security agreement extended to the pasture rents. The court held, however, that because the crops were not in existence when the debtor filed bankruptcy, no collateral remained to secure the bank's loan. As such, the bank's claim was unsecured.
What about milk? A recent case dealt with the issue of the rights to the sale proceeds of milk. In, In re Velde, No. 18-11651-A-11 2018 Bankr. LEXIS 2621 (Bankr. E.D. Cal. Aug. 23, 2018), the plaintiff owned three dairies including one that delivered the milk it produced to a processor, Columbia River Processing. The plaintiff gave multiple creditors a consensual lien against the milk-delivering dairy’s, crops, milk, milk checks, equipment and other personal property at a time when the aggregate amount due the creditors was about $78 million. Custom Feed Services, LLC; Western Ag Improvements, Inc.; Cold Springs Veterinary Services, Inc.; and Scott Harvesting, LLC (collectively known as ASL holders) provided goods and/or services to the plaintiff’s milk-delivering dairy. The plaintiff then filed Chapter 11 bankruptcy.
Each of the ASL creditors claimed a non-possessory chattel lien under Oregon Rev. Stat. § 87.226, encumbering the dairy’s crops and livestock, as well as the sale proceeds of the sales of the crops and livestock. The amount due ASL Holders on the date of bankruptcy filing was almost $1.1 million. The ASL Holders served notice of their liens on Columbia River. Columbia River owed the dairy approximately $1.2 million for milk delivered to it. Uncertain as to whether the plaintiff, the Consensual Lienholders or the ASL Holders were entitled to those funds, Columbia River Processing impounded and held the milk proceeds. The plaintiff sued the Consensual Lienholders and the ASL Holders to determine the nature, extent and validity of the agricultural service liens.
Oregon's non-possessory lien statutes specifies that persons who provide services and suppliers who provide materials a lien against chattels improved by the services and materials. Agricultural Services Liens extend to crops and animals, their "proceeds," and, in limited instances, to the offspring of those animals. The court determined that the text and context of the statute revealed a legislative intent that the agricultural services lien reach only crops and animals, the proceeds of crops or animals generated by their sale or similar disposition and, in limited instances, the products of crops or animals, unborn regency of animals that are in utero on the date a notice of lien is filed and, in the case of stud or artificial insemination services, offspring. The court also pointed out that in common parlance, “milk” is neither a product nor a proceed, and §87.226 narrowly tailored the circumstances in which agricultural service liens attach to products (i.e., unborn progeny and offspring of stud/artificial insemination services). Because this was not one of those circumstances, the court held that “proceeds” did not attach to milk, or the funds generated by its sale, produced by a cow encumbered by an Agricultural Service Lien. As such, the milk held by Columbia River was not subject to the lien of ASL lienholders.
What are proceeds of crops and livestock? It depends! Ag financing situations can get complex quickly. This is certainly another one of those situations where a good ag lawyer comes in very handy. Farming and ranching is complex in many respects, not the least of which is agricultural financing.
Monday, September 10, 2018
Partition and sale of land is a legal remedy available if co-owners of land cannot agree on whether to buy out one or more of the co-owners or sell the property and split the proceeds. It is often the result of a poorly planned farm or ranch estate where the last of the parents to die leaves the farm or ranch land equally to all of the kids and not all of them want to farm or they simply can’t get along. Because they each own an undivided interest in the entire property, they each have the right of partition and sell to parcel out their interest. But, that rarely is the result because they aren’t able to establish that the tract can be split exactly equally between them in terms of soil type and slope, productivity, timber, road access, water, etc. So, a court will order the entire property sold and the proceeds of sale split equally.
The court-ordered sale is most likely an unhappy result, and it can be avoided with appropriate planning in advance. But, what tax consequences result from a partition and resulting sale? That’s the focus of today’s post.
A partition of property involving related parties comes within the exception to the “related party” rule under the like-kind exchange provision. This occurs in situations where the IRS is satisfied that avoidance of federal income tax is not a principal purpose of the transaction. Therefore, transactions involving an exchange of undivided interests in different properties that result in each taxpayer holding either the entire interest in a single property or a larger undivided interest in any of the properties come within the exception to the related party rule. But, as noted, this is only true when avoidance of federal income tax is not a principal purpose of the transaction.
As for the income tax consequences on the sale of property in a partition proceeding to one of two co-owners, such a sale does not trigger gain for the purchasing co-owner as to that co-owner’s interest in the property.
Is a Partition an Exchange?
If the transaction is not an “exchange,” it does not need to be reported to the IRS, and the related party rules are not involved. If the property that is “exchanged” is dissimilar, then the matter is different. Gain or loss is realized (and recognized) from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or extent. Treas. Reg. §1.1001-1(a). In the partition setting, that would mean that items of significance include whether debt is involved, whether the tracts are contiguous, and the extent to which they differ.
IRS ruling. In 1954, the IRS ruled that the conversion of a joint tenancy in capital stock of a corporation into tenancy in common ownership (to eliminate the survivorship feature) was a non-taxable transaction for federal income tax purposes. Rev. Rul. 56-437, 1956-2 C.B. 301. Arguably, however, the ruling addressed a transaction distinguishable from a partition of property insomuch as the taxpayers in the ruling owned an undivided interest in the stock before conversion to tenancy in common and owned the same undivided interest after conversion.
Partition as a Severance
A partition transaction, by parties of jointly owned property, is not a sale or exchange or other disposition. It is merely a severance of joint ownership. For example, assume that three brothers each hold an undivided interest as tenants-in-common in three separate tracts of land. None of the tracts are subject to mortgages. They agree to partition the ownership interests, with each brother exchanging his undivided interest in the three separate parcels for a 100 percent ownership of one parcel. None of them assume any liabilities of any of the others or receive money or other property as a result of the exchange. Each continues to hold the single parcel for business or investment purposes. As a result, any gain or loss realized on the partition is not recognized and is, therefore, not includible in gross income. Rev. Rul. 73-476, 1973-2 C.B. 301. However, in a subsequent letter ruling issued almost 20 years later, the IRS stated that the 1973 Revenue Ruling on this set of facts held that gain or loss is “realized” on a partition. It did not address explicitly the question of whether the gain or loss was “recognized” although the conclusion was that the gain was not reportable as income. Priv. Ltr. Rul. 200303023 (Oct. 1, 2002).
To change the facts a bit, assume that two unrelated widows each own an undivided one-half interest in two separate tracts of farmland. They transfer their interests such that each of them now becomes the sole owner of a separate parcel. Widow A’s tract is subject to a mortgage and she receives a promissory note from Widow B of one-half the amount of the outstanding mortgage. Based on these facts, it appears that Widow A must recognize gain to the extent of the FMV of the note she received in the transaction because the note is considered unlike property. Rev. Rul. 79-44, 1979-2 C.B. 265.
Based on the rulings, while they are not entirely consistent, gain or loss on a partition is not recognized (although it may be realized) unless a debt security is received, or property is received that differs materially in kind or extent from the partitioned property. The key issue in partition actions then is a factual one. Does the property received in the partition differ “materially in kind or extent” from the partitioned property or is debt involved?
It may also be important whether the partition involves a single contiguous tract of land or multiple contiguous tracts of land. However, in two other private rulings, the taxpayer owned a one-third interest in a single parcel of property with two siblings as tenants-in-common. Priv. Ltr. Ruls. 200411022 (Dec. 10, 2003) and 200411023 (Dec. 10, 2003). The parties agreed to partition the property into three separate, equal-valued parcels with each person owning one parcel in fee. The property was not subject to any indebtedness. The IRS ruled that the partition of common interests in a single property into fee interests in separate portions of the property did not cause realization of taxable gain or deductible loss. Rev. Rul. 56-437, 1956-2 C.B. 507.
So, is there any difference taxwise between a partition with undivided interests that are transformed into the same degree of ownership in a different parcel and an ordinary partition of jointly owned property? Apparently, the IRS doesn’t think so. In one IRS ruling, the taxpayers proposed to divide real property into two parcels by partition, and the IRS ruled that gain or loss would not be recognized. Ltr. Rul. 9327069, February 12, 1993. Likewise, in another ruling, a partition of contiguous properties was not considered to be a sale or exchange. Ltr. Rul. 9633028 (May 20, 1996). The tracts were treated as one parcel.
The partition of the ownership interests of co-owners holding undivided interests in real estate is often an unfortunate aspect of poor planning in farm and ranch estates. That problem can be solved with appropriate planning. The tax consequences of a partition don’t appear to present a problem if the partition amounts to simply a rearrangement of ownership interests among the co-owners.
Thursday, September 6, 2018
One of the reasons for the formation of a corporation is to achieve liability protection. Liability of corporate shareholders is limited to the extent of their individual investment in the corporation. In a farm and ranch setting, while a corporation may not actually be utilized as the operating entity, it is commonly used to hold operating assets as a means of shielding the shareholders from personal liability against creditor claims arising from operations.
But, creditor protection is not absolute. In certain circumstances the corporate “veil” can be “pierced” with the result that a shareholder can be held personally liable for corporate liabilities.
Corporate veil-piercing – that’s the topic of today’s post.
Factors for “Piercing”
Corporate “veil piercing” is generally a matter of state law. A state’s corporate code sets forth the rules for properly forming a corporation and the ongoing conduct of the corporate business. It is critical for a corporation and its shareholders to follow those rules. For instance, shareholder limited liability can be lost if the corporation is not validly organized in accordance with state law. In addition, to maintain limited liability the corporation must comply with certain corporate formalities such as conducting an annual meeting, filing an annual report with a designated state office, and electing directors and officers. If these corporate formalities are not complied with, limited liability for shareholders is sacrificed.
Also, a reasonable amount of equity or risk capital must be committed to the corporation. Shareholder limited liability is lost if the corporation is inadequately capitalized. Courts will “pierce the corporate veil” unless a reasonable amount of equity capital is committed to the business to serve as a cushion to absorb the liability shocks of the business. See, e.g., Dewitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir. 1976).
Illustrative Cases on Veil Piercing
The following cases are a small sample that show the various ways in which corporate veil piercing can arise:
- In Juniper Investment Co v. United States, 338 F2d 356 (Cl. Ct. 1964), a personal holding company’s separate existence was disregarded because it acted as the alter ego of the shareholders.
- Listing corporate assets as those of the shareholder on the shareholder’s personal loan application resulted in the court finding that the corporation was merely created for the taxpayer to avoid tax and was not a separate entity from the shareholder in Wenz v. Comr., T.C. Memo. 1995-277.
- In Foxworthy, Inc. v. Comr., T.C. Memo. 2009-203, the court held that the corporation at issue was the taxpayer’s alter ego that couldn’t be disregarded for tax purposes. The court pointed out that the taxpayer was neither an owner, director or corporate employee. Even so, the taxpayer had complete control over the corporation and used the corporation to buy the taxpayer’s personal resident and maintain it. The court noted that the corporation had no real business purposes and was used in an attempt to convert personal living expenses into deductible business expenses.
- Veil piercing was the result where a corporation’s funds and a shareholder’s funds were comingled and the shareholder controlled and managed the corporation’s accounts as his own. Pollack v. Comr., T.C. Memo. 1982-638.
- In Pappas v. Comr., T.C. Memo. 2002-127, the corporate veil was pierced because there was no real distinction between the taxpayer and the corporation. The taxpayer used corporate funds for personal expenses, the corporation didn’t file federal or state tax returns. In addition, corporate formalities were ignored, and the corporation did not have a separate office apart from the taxpayer’s home address. Also, the taxpayer was the only corporate employee and corporate records were not maintained.
In Woodruff Construction, L.L.C. v. Clark, No. 17-1422, 2018 Iowa App. LEXIS 765 (Iowa Ct. App. Aug. 15, 2018), the defendant formed a corporation and filed articles of incorporation in 1997. The corporation was reincorporated in 2001 after an administrative dissolution. The corporation was engaged in the business of biosolids management. The defendant was the sole owner and director of the corporation along with being the corporation’s secretary and treasurer. The plaintiff contracted with a small town to be the general contractor during the construction of a wastewater treatment facility for the town. In early 2010, the plaintiff contracted with the defendant for lagoon sludge removal. The defendant began work, but then ceased work after determining that project would cost more to complete that what the contract was bid for.
In 2012, the plaintiff sued for breach of contract and obtained a judgment of $410,066.83 plus interest in 2014. The corporation failed to pay the judgment and the plaintiff sued in 2015 to pierce the corporate veil and recover the judgment personally from the defendant. The trial court refused to pierce the corporate veil and also denied a request to impose a constructive trust and equitable lien on the corporate assets. The plaintiff appealed the denial of piercing the corporate veil.
The appellate court determined that the plaintiff had failed to establish that the corporation was undercapitalized – it had assets and was profitable. The plaintiff also did not show that the corporation was undercapitalized at the time it entered into the contract with the plaintiff. There also was no evidence showing that the corporation changed the nature of its work or engaged in an inadequately-capitalized expansion of the business. It was also unclear, the appellate court noted, that the capital transfers from the corporation to the defendant rendered the initial adequate capitalization irrelevant. Thus, the plaintiff failed to establish that the corporation was undercapitalized to an extent that merited piercing the corporate veil.
However, the appellate court noted that the evidence illustrated that the defendant commingled personal funds with corporate funds. The defendant used corporate funds for personal purposes, and also failed to maintain separate books and records that sufficiently distinguished them from the defendant personally. In addition, the appellate court noted that the corporation did not follow corporate formalities. The corporation had been dissolved administratively by the Secretary of State in 1998 due to the failure to file a biennial report, but the corporation continued operations during the time it was dissolved as if the corporation were active. When the new corporation began in 2001, no bylaws, corporate minute book or shareholder ledger were produced. In addition, the new corporation (operating under the same name as the old corporation) was administratively dissolved three times for failure to submit the biennial report (the corporation used the statutory procedure to apply for reinstatement each time). The appellate court determined that the corporation was not considered by the defendant to be a separate entity from himself. Accordingly, the appellate court reversed the trial court and allowed the corporate veil to be pierced and the defendant to be held personally responsible for the judgment.
To obtain creditor protection that the limited liability feature of a corporation can provide, it’s critical to follow corporate formalities and respect the corporation as an entity distinct from the shareholder. Failure to do so can result in personal liability for corporate debts and obligations. With machinery, equipment, livestock and unique features on farm and ranch land, achieving liability protection for farmers and ranchers is a big deal. Respecting the corporate entity is key to achieving that protection. Good legal counsel can make sure these requirements are satisfied.
Tuesday, September 4, 2018
On occasion I get a question about whether it is permissible to pick up roadkill. Often, the question is in relation to big game such as deer or bear or moose. But, other times the question may involve various types of furbearing animals such as coyotes, racoons or badgers. I don’t get too many roadkill questions involving small game. That’s probably because when small game is killed on the road, it is either not wanted or the party hitting it simply assumes that there is no question that it can be possessed.
There are many collisions involving wildlife and automobiles every year. One estimate by a major insurance company projects that one out of every 169 motorists in the U.S. will hit a deer during 2018. That’s a projected increase of three percent over 2017, with an estimated 1.3 million deer being hit.
If a wild animal is hit by a vehicle, the meat from the animal is the same as that from animal meat obtained by hunting – assuming that the animal is not diseased. So, in that instance, harvesting roadkill is a way to get free food – either for personal consumption or to donate to charity.
What are the rules and regulations governing roadkill? That’s the topic of today’s post.
Many states have rules on the books concerning roadkill. Often, the approach is for the state statutes and the regulatory body (often the state Department of Game and Fish (or something comparable)) to distinguish between "big game," "furbearing animals" and "small game." This appears to be the approach of Kansas and a few other states. Often a salvage tag (e.g., “permit”) is needed to pick up big game and turkey roadkill. This is the approach utilized in Iowa and some other states. If a salvage tag is possessed, a hunting license is not required. For furbearing animals such as opossums and coyotes that are roadkill, the typical state approach is that these animals can only be possessed during the furbearing season with a valid fur harvester license. As for small game, the typical state approach is that these roadkill animals can be possessed with a valid hunting license in-season. But variations exist from state-to-state.
An approach of several states is to allow the collection of roadkill with a valid permit. That appears to be the approach in Colorado, Georgia, Idaho, Illinois, Indiana, Maryland, New Hampshire, North Dakota, New York, Ohio, Pennsylvania and Tennessee. Other states require the party hitting wildlife and collecting the roadkill to report the incident and collection within 24 hours. Other states may limit roadkill harvesting to licensed fur dealers. In these states (and some others), the general public doesn’t have a right to collect roadkill. In Texas, roadkill-eating is not allowed (although a legislative attempt to remove the ban was attempted in 2014). South Dakota has legislatively attempted to make roadkill public property. Wyoming requires a tag be received from the game warden for possessing big game roadkill. Oregon allows drivers to get permits to recover, possess, use or transport roadkill.
Other states (such as Alabama) may limit roadkill harvesting to non-protected animals and game animals, and then only during open season. The Alaska approach is to only allow roadkill to be distributed via volunteer organizations. A special rule for black bear roadkill exists in Georgia. Illinois, in certain situations requires licenses and a habitat stamp. Massachusetts requires that roadkill be submitted for state inspection, and New Jersey limits salvaging roadkill to deer for persons with a proper permit.
In all states, federally-protected species cannot be possessed. If a question exists about the protected status of roadkill, the safest approach is to leave it alone. Criminal penalties can apply for mere possession of federally protected animals and birds. Similarly, if a vehicle does significant enough damage to wildlife that the animal’s carcass cannot be properly identified to determine if the season is open for that particular animal (in those states that tie roadkill possession to doing so in-season) the recommended conduct is to not possess the roadkill.
In the states that have considered roadkill legislation in recent years, proponents often claim that allowing licensed hunters to take (subject to legal limits) a fur-bearing animal from the roadside would be a cost-saving measure for the state. The logic is that fewer state employees would be required to clean-up dead animal carcasses. Opponents of roadkill bills tend to focus their arguments on safety-related concerns – that having persons stopped alongside the roadway to collect dead animals would constitute a safety hazard for other drivers. That’s an interesting argument inasmuch as those making this claim would also appear to be asserting that a dead animal on a roadway at night is not a safety hazard. Others simply appear to argue that collecting roadkill for human consumption is disgusting.
There is significant variation among state approaches with respect to possession of roadkill. That means that for persons interested in picking up roadkill, researching applicable state law and governing regulations in advance would be a good idea. For roadkill that is gleaned from a roadway that is used for human consumption, care should be taken in preparation and cooking. The present younger generation typically doesn’t have much experience dining on racoon (they tend to be greasy), opossum shanks and gravy, as well as squirrel. But, prepared properly, some view them as a delicacy.
To date, the USDA hasn’t issued guidelines on the proper preparation of roadkill or where roadkill fits in its food pyramid (that was revised in recent years). That’s sounds like a good project for some USDA Undersecretary for Food Safety to occupy their time with.