Thursday, November 29, 2018
The tax law is structured to tax income less the cost of producing the income. Over time, assets wear out or cease to be useful with their cost, in effect, being consumed during their period of usefulness in the farming or ranching business. In recognition of this cost, the tax law allows an annual deduction for depreciation. In addition, in some instances the total allowable depreciation for the asset can be claimed entirely in the first year that the taxpayer places the asset in service.
In general, depreciation is allowable on all tangible and intangible property with a limited useful life of more than one year that is used in the trade or business of farming or ranching or held for the production of income. Property that is depreciable includes business machinery and equipment, buildings, patents, purchased livestock and property held for rental. Property that is generally not depreciable includes inventories or stock in trade, a building used only as a residence and an automobile used only for pleasure. Land is not depreciable because it doesn’t have a determinable useful life.
Farmers and ranchers do encounter some unique situations that raise the question of whether an allowance for depreciation is available. Assets that are sufficiently similar to land may be non-depreciable because they don’t have a determinable useful life.
Non-depreciable farm assets due to the lack of a determinable useful life – that’s the topic of today’s post.
Agricultural operations can have several unique assets that aren’t depreciable because they don’t have a determinable useful life.
Grazing preferences. In general, grazing preferences are not be depreciable or amortizable. In Uecker v. Comr., 81 T.C. 783 (1983), aff’d, 766 F.2d 909 (5th Cir. 1985), the court held that grazing privileges had an indeterminant life because the taxpayers had preferential application and renewal privileges under state and federal law. They weren’t depreciable under I.R.C. §178 because of the taxpayers' ability to renew them indefinitely.
The same result was reached in Shufflebarger v. Comr., 24 T.C. No. 90 (1955). Under the facts of the case, the taxpayers acquired a portion of a summer allotment of grazing privileges in a national forest. They amortized the cost of acquiring the grazing privileges deducted it. The IRS disallowed the deduction on the basis that the rights had an indefinite duration. The Tax Court agreed. The same result was reached in Central Arizona Ranching Company v. Comr., T.C. Memo. 1964-217, a case involving state and federal land leases. Also, in Priv. Ltr. Rul. 8327003 (Mar. 17, 1983), the IRS determined that a taxpayer’s interest in a state grazing rights lease did not qualify as real property for purposes of a tax deferred exchange under I.R.C. §1031, but it was not subject to depreciation or amortization deductions under I.R.C. 167. The IRS noted that the terms of the lease were of indefinite duration.
But, a change in the facts could lead to a different conclusion if those facts reveal that the life of the grazing privilege has a certain end point, such as when the rights are dependent on the supply of a natural resource that will eventually be depleted.
Earthen irrigation ditches and levees. In Rev. Rul. 69-606, 1969-2 C.B. 33, the IRS ruled that the cost allocated to earthen watering tanks or "ponds" that were constructed by a prior owner on land that the buyer leased to ranchers was not recoverable through depreciation because it didn’t have a determinable useful life. The IRS also ruled that the buyer couldn’t recover the allocated cost as a soil and water conservation expense. The Tax Court concluded similarly in Wolfsen Land & Cattle Co. v. Comr., 72 T.C. 1(1979). In that case, the taxpayer bought a ranch that had an extensive irrigation system on over 17,000 acres. The Tax Court upheld the IRS determination that the system was not depreciable because it had an indeterminant useful life. The Tax Court noted that the evidence revealed that consistently repairing the system would result in the system lasting indefinitely.
However, some cases have held dams and ponds to be depreciable if a definite useful life can be demonstrated. For example, In Rudolph Investment Corp. v. Comr., T.C. Memo. 1972-129, earthen water tanks and dams were determined to have a ten-year useful life. In Rev. Rul. 75-151, 1975-1 C.B. 88, the IRS pointed out that the question of whether dams, ponds, canals and similar structures are depreciable depends on a factual determination that the asset is actually exhausting and that such exhaustion is susceptible of measurement. But, for farmers and ranchers, a current deduction under I.R.C. §175 is available for expenditures incurred for earthen terraces and dams which are non-depreciable. Of course, the qualifications for I.R.C. §175 must be satisfied.
Permanent Pastures. Permanent pasture is generally defined as land that is used to grow grasses or other forage naturally or through cultivation and is not included in a crop rotation for five years or longer. Permanent pastures have been held to be depreciable. For example, in Johnson v. Westover, 55-1 USTC ¶9,421 (S.D. Cal. 1955), the taxpayer purchased a ranch that included 200 acres of permanent pasture that had been planted with various grasses about five years earlier. The court determined, based on the evidence, that the pasture should be replanted at the end of 10 years to maintain its economic usefulness. At the time of purchase, the evidence showed that the pasture had a remaining life of five years.
Government Allotments or Quotas. Many farmers participate in federal farm programs. Particularly under prior farm bills, farmers were required to participate in acreage allotments. An acreage allotment is a particular farm’s share, based on its historic production, of the national acreage needed to produce sufficient supplies of a particular crop. In essence, an allotment represents the federal government’s attempt to micro-manage production of certain types of crops. These allotments have been held to not be depreciable due to a lack of a determinable useful life. For example, in Wenzel v. Comr., T.C. Memo. 1991-166, the Tax Court addressed the peanut base acreage allotment as part of the federal farm programs was depreciable. The Tax Court noted that wule the program had been controversial for some time, it continued to be reauthorized by subsequent farm bills. Thus, the Tax Court determined that the peanut program was a stable program that would continue unless the Congress took action to terminate it. Because the actions of Congress were completely unpredictable, the Tax Court held that the peanut program base acreage allotment was indeterminant and the associated cost to the taxpayer was not depreciable. Later, in C.C.A. 200429001 (Jul. 16, 2004), the IRS noted that three additional farm bills had become law since the Tax Court’s ruling in Wenzel and the peanut program continued. That lead the IRS to conclude that the duration of the peanut program could not be determined with reasonable certainty or accuracy. Consequently, the IRS determined, the peanut base acreage allotment did not have a determinable useful life and could not be depreciated.
But a transferable right to receive a premium price for a fixed quantity of milk in accordance with a regional milk marketing order has been held to be amortizable (e.g., the cost could be spread over the useful life – 15 years) when it has a statutory expiration date and is not expected to be renewed. For example, in Van de Steeg v. Comr., 60 T.C. 17 (1973), aff’d., 510 F2d 961 (9th Cir. 1975), the taxpayers were dairy farmers who marketed their milk production subject to a Federal Milk Marketing Order. On several occasions they purchased an intangible asset (referred to as a "class I milk base") which they used in their dairy business. They claimed depreciation for the milk base and IRS disallowed the deduction on the basis that the asset had an indeterminable useful life – it depended on the will of the Congress whether or not to extend the program. The Tax Court (affirmed by the Ninth Circuit) held that the program that created the class I milk base always contained an express termination date and the existence of two extensions did not change the fact that a termination date always existed, even though the date had changed. While the IRS disagrees with the Van de Steeg opinion, it did announce that it would follow it. Rev. Rul. 75-466, 1975-2 C.B. 74.
Drilling Costs for Wells. Drilling costs for wells are not depreciable, but parts of wells, such as piping and casings are. See, e.g., Rev. Rul. 56-599, 1956-2 C.B. 122. However, there is language in a Treasury Regulation that indicates that wells might be depreciable. See, e.g., Treas. Reg. §1.175-2(b)(1). In addition, the fact that the IRS has previously ruled that water wells were eligible for the investment tax credit (when it was available), bolsters the argument that water wells are depreciable. To be eligible for the investment tax credit, the property at issue had to be depreciable property. See, e.g., Rev. Rul. 72-222, 1972-1 C.B. 17; Rev. Rul. 81-120, 1981-1 C.B. 20.
Landscaping and Land Modification Costs. If a farmer or rancher incurs costs associated with landscaping or modifying the land (dirt moving) to construct a building that will be used in the farming business, the costs are likely depreciable. Support for this position can be found in Rev. Rul. 74-265, 1974-1 C.B. 56. Under the facts of the ruling, the taxpayer constructed and operated a garden-type apartment complex on several acres. The surrounding area was landscaped according to an architect's plan to conform it to the general design of the apartment complex. The expenditures for landscaping included the cost of top soil, seeding, clearing and grading, and planting of perennial shrubbery and ornamental trees around the perimeter of the tract of land and immediately adjacent to the buildings. The replacement of the apartment buildings after the expiration of their useful lives would destroy the immediately adjacent landscaping, consisting of perennial shrubbery and ornamental trees. The IRS ruled that the perennial shrubbery and ornamental trees immediately adjacent to the apartment buildings were depreciable because the replacement of the buildings would destroy the landscaping. That meant that the land preparatory costs could be recovered through depreciation deductions over the established useful life of the apartment buildings.
Logging Roads, Bridges and Culverts. Logging roads, bridges and culverts are depreciable if the taxpayer can establish that the roads have a determinable life. In one instance, the IRS ruled that a road did have a determinable useful life that could be determined by the amount of time it took to harvest trees that were reachable by the road. Rev. Rul. 88-99, 1988-2 C.B. 33. Under the facts of the ruling, the taxpayer built roads in order to harvest timber, to transport the logs cut from the timber to its facilities for processing, and to carry out general management activities. The taxpayer wanted to depreciate two of the roads. One road was to be maintained so that the taxpayer could use it for an indefinite period of time to manage and harvest timber. The IRS ruled that the roadbed could not be depreciated, but that the associated surface, bridges and culverts could be because they each had determinable useful lives. The other road was to be abandoned after four years, and the useful lives of all parts of the road (roadbed, surface, bridges, culverts, etc.) would terminate when the timber harvest and reforestation work was completed that the road was associated with. Thus, this road could be depreciated.
In a Tax Court case, the taxpayers were allowed to depreciate paved lots that were used in a cattle operation. Eldridge v. Comr., T.C. Memo. 1995-384. The court based its determination on the fact that the taxpayers maintained the horse barn and associated paved areas primarily for use in their cattle-raising activity. The horses housed in the barn were used by the taxpayers to move cattle from one pasture to another, and the Tax Court determined that the horse barn was maintained primarily for use in the cattle-raising activity which was engaged in for profit.
There are many unique items on a farm or ranch that present tricky issues with respect to depreciation because they don’t clearly have a determinable useful life. But, if a determinable useful life can be determined, a deduction for depreciation is available if the asset is used in the taxpayer’s trade or business or for the production of income.
Tuesday, November 27, 2018
Easements are a commonly encountered in agricultural settings. An easement does not give the holder of the easement a right of possession, but a right to use or to take something from someone else's land. To the holder of the easement, the easement is a right or interest in land, but to the owner of the real estate subject to the easement, the easement is an encumbrance upon that person's estate.
Easements may take several forms. Most easements are affirmative that entitle the holder to do certain things upon the land subject to the easement. A negative easement gives its holder a right to require the owner of the land subject to the easement to do or not to do specified things with respect to that land. For example, a negative easement could be a right-of-way, a riparian right, a right to lateral and subjacent support (see, e.g., Ohio Rev. Code. §§723.49-.50), a surface water flowage easement, a manure easement, a soil retention easement or an easement to be free from nuisances, just to name a few.
But, does the law recognize a negative easement for light, air or view? It’s an interesting question, and the issue comes up in ag settings more often than would be suspected. It’s also the topic of today’s post – whether the law recognizes a negative easement for light, air or view.
General rule. Negative easements are synonymous with covenantal land restrictions and are similar to certain “natural rights” that are incidents of land ownership. However, most American courts reject the English “ancient lights” doctrine. That means that American courts typically refuse to recognize a negative easement for light, air and view. This was the result, for example, in Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc., 114 So.2d 357 (Fla. App. 1959). In the case, a hotel’s additional floors added to the top of the existing building cast a shadow over an adjacent hotel’s beach frontage. The complaining hotel asserted that the other hotel couldn’t add the additional floors to its building because the adjacent hotel had a negative easement over the other hotel’s property for light, air and view. The court rejected the claim on the basis that American law does not recognize a negative easement for light, air or view.
Exception. However, if light, air or view is obstructed out of spite or malice, an American court might determine that a negative easement exists. In other words, if a property owner's interference with a neighboring owner's light, air or view is done maliciously, the court may enjoin the activity as a nuisance. For example, in Coty v. Ramsey Associates, Inc., 149 Vt. 451, 546 A.2d 196 (1988), the court enjoined the defendant's “spite farm” on the basis that it constituted a nuisance. There was no question that the hog “farm” at issue was created purely out of maliciousness against an adjoining landowner. Thus, the court held that the adjoining landowner that had been harmed held a negative easement over the hog “farm” for light, air and view. In addition to the actual damages that the hog farm created, the court imposed substantial punitive damages. The conduct of the hog farm owner was incredibly egregious.
In Rattigan v. Wile, 445 Mass. 850, 841 N.E.2d 680 (2006), the parties were adjoining property owners. The defendant had outbid the plaintiff for the tract that the defendant purchased. That fact upset the plaintiff and the plaintiff then successfully challenged the defendant’s building permit. The result was that the defendant could not build on his tract as desired without being in violation of applicable zoning bylaws. The defendant retaliated against the plaintiff by flying his helicopter near the plaintiff’s property and otherwise harassing the plaintiff. The plaintiff sued, and the court entered an injunction against the defendant that also barred the defendant from putting portable toilets on the property line between the parties. The defendant appealed, claiming (in essence) that the plaintiff did not have any negative easement for light, air or view over the defendant’s property. However, the appellate court affirmed the trial court’s order of injunctive relief on the basis that the defendant’s conduct constituted a nuisance. The appellate court also determined that the proper measure of damages was the loss of rental value ($318,000 plus some additional out-of-pocket costs) attributable to the plaintiff’s property. The appellate court, however, modified the trial court’s permanent injunction so as to not limit the defendant’s legitimate uses of his property.
The issue of maliciousness or “spite” often arises with respect to fences. In 1887, Massachusetts enacted one of the earliest “spite fence” statutes in the United States which declared such a fence to be a private nuisance. Mass. Gen. Laws Ch. 348, §1 (1887); presently codified as Mass. Ann. Laws Ch. 49, §21. A “spite” fence is one that is an overly tall structure that is constructed with no legitimate purpose other than to obstruct an adjoining landowner’s light, air or view. For example, in Rice v. Cook, 115 A.3d 86 (Maine 2015), the parties disagreed over the boundary to their adjoining tracts. Neither party knew where the actual boundary was until a survey was completed in 2008, but the survey result upset the defendant and he erected what the court deemed to be a “spite fence” under Maine law which specifies that “[a]ny fence or other structure in the nature of a fence, unnecessarily exceeding 6 feet in height, maliciously kept and maintained for the purpose of annoying the owners or occupants of adjoining property, shall be deemed a private nuisance.” Me. Rev. Stat. Ann. Tit. 17, §2801. The court noted that the evidence clearly demonstrated that the defendant built the fence with the intent to annoy the plaintiff and interfere with the plaintiffs’ use of their property.
A row of trees can also be a “spite fence.” Unless there is some good reason to plant tall trees on a property line with the knowledge that the trees will block a neighbor’s view, the trees could be deemed to be a malicious spite fence and the trees ordered removed. For example, in Wilson v. Handley, 97 Cal. App. 4th 1301 (2002), the plaintiff built a second story addition to her log cabin. The defendant, a neighbor, then planted a row of evergreen trees parallel with the property line. When the trees became mature in the future, they would block the plaintiff’s mountain view from the second story addition. Because the evidence disclosed that the trees were planted to purposely block the view, they were deemed to be a “spite fence” and a private nuisance in violation of California law. Under California law, any fence or other structure in the nature of a fence (such as trees) that exceeds 10 feet in height and is maliciously erected or maintained for the purpose of annoying the owner or occupant of adjoining property is a private nuisance. See, Cal. Civ. Code §6-10 841.4. See also Vanderpol v. Starr, 194 Cal. App. 4th 385 (2011).
The California case is interesting for the fact that the court determined a “spite fence” existed even though the trees at issue would not obscure the view until some future date, if at all. The court noted that some varieties of trees can grow quickly Normally there can be no claim for an “anticipatory nuisance.” In other words, the law does not recognize an action for a nuisance until the nuisance actually occurs. For example, in Blackwell v. Lucas, No. 2017-CA-01492-COA, 2018 Miss. App. LEXIS 582 (Miss. Ct. App. Nov. 20, 2018), the defendants planted some plants and shrubs in the front yard of their home. Their neighbors, the plaintiffs, sued on the basis that the plants and shrubs caused them “mental pain and suffering.” Their complaint sought damages and preliminary and permanent injunctive relief requiring the removal of the plants and shrubs or to restrict their growth and height so that the plaintiffs’ view of the ocean and surrounding areas was not blocked. The defendants motioned to dismiss the case on the basis that the complaint failed to allege a violation of any legally cognizable right. The trial court dismissed the case.
On appeal, the appellate court noted that the plaintiffs’ only allegation of harm was that, if allowed to grow, the plants and shrubs would obstruct their view across the defendants’ property at some undetermined future date. The plaintiffs claimed that this potential future “harm” gave them a viable cause of action for a “spite fence” or nuisance. The appellate court stated that the plaintiffs had no common law or statutory right to an unobstructed view across their neighbors’ property. Nor did they have a right to dictate the type or placement of the defendants’ shrubs. In support of their claim, the plaintiffs cited the only reported Mississippi case concerning a “spite fence.” In that case, the court ordered the removal of a fourteen-foot-high "spite fence." That court relied on a treatise that defined a "spite fence" as "a structure of no beneficial use to the erecting owner or occupant of the premises but erected or maintained by him solely for the purpose of annoying the owner or occupier of adjoining property.” In this case, however, the appellate court pointed out that because the prior opinion was a 5-5 decision there remained no precedent for a “spite fence” claim under Mississippi law. Moreover, the appellate court declined to recognize a new cause of action for a “spite fence” in a case that did not even involve a traditional fence. The appellate court also pointed out that the plaintiffs’ complaint failed to state a claim for the additional reason that it failed to allege that the “plants and shrubs” actually obstructed their view. The complaint merely asserted that, if allowed to grow, the shrubbery would obstruct their view at some unspecified point in the future. Thus, the appellate court held that the plaintiffs’ complaint failed to state a claim upon which relief could be granted and affirmed the trial court’s decision.
American law generally does not recognize a negative easement for light, air or view. But, if the facts of a situation reveal that light, air or view has been obstructed with the intent to cause harm to an adjoining landowner, then a legal right may be impacted. The obstruction can take the form of a traditional fence, trees and shrubs, or the deliberately improper operation of a farm. If whatever is done, is done with malicious intent, a negative easement may be found to exist.
Wednesday, November 21, 2018
An issue for all motorists, but one of particular interest to motorists using rural roadways is the length of time that a train can block a crossing. In rural areas, there may be few (if any) options for detouring around a blocked crossing.
Many states (and some towns and municipalities) have statutes the denote the maximum length of time that a train can block a crossing. But, can state law regulate the length of time a train blocks a crossing? Is the issue a matter of federal law? That’s the topic of today’s post – train blockage of crossings and how state and federal law deals with the issue.
Many states have statutes that specify the maximum length of time that a train can block a public roadway grade crossing. The state laws vary, but a general rule of thumb is that a blockage cannot exist for more than 20 minutes. There are numerous exceptions, of course, that concern such things as emergencies and when the blockage is a result of something beyond the control of the railroad. In addition, in states that don’t have a state law addressing the issue, there may be restrictions at the local level – cities, towns, villages and municipalities.
Here's a sample of a few state rules on the issue:
In Arizona, if an engineer, conductor or other employee of a railroad permits a locomotive or railcars to be or remain on a crossing of a public highway or over the railway in a manner that obstructs travel over the crossing for longer than 15 minutes is guilty of a class 2 misdemeanor. Ariz. Rev. Stat. §40-852. An exception is provided for an “unavoidable accident.” See also Terranova v. Southern Pacific Transportation Company, 158 Ariz. 125, 761 P.2d 1029 (1988).
Under Iowa law, a ten-minute maximum is the rule. Iowa Code §327G.32. Exceptions are provided when a blockage longer than ten minutes is required for the railroad to comply with signals affecting the safety of the movement of the train; when the train is disabled; or when it is necessary to comply with governmental safety regulations including but not limited to speed ordinances and speed regulations. Interestingly, a railroad employee is not subject to penalty under the provision if they were acting on orders of a supervisor or the railroad in general. In that case, the penalty for violating the law applies to the railroad. The Iowa provision also says that a political subdivision of the state may pass an ordinance dealing with the matter if it for a public safety purpose.
The Indiana law is similar to the Iowa law. In Indiana, public travel cannot be blocked for more than 10 minutes by any train, railroad car, or engine. Indiana Code §8-6-7.5-1. There are exceptions from the 10-minute rule in situations where the train, railroad car or engine cannot be moved by reason of uncontrollable circumstances. In addition, a railroad cannot permit successive train movements to obstruct vehicular traffic at a highway grade crossing until all vehicular traffic that has already been delayed by a train has been allowed at least five minutes to clear. Violations of the law constitutes a “Class C infraction.” The penalty is generally imposed on the railroad corporation.
Nebraska, the home of Union Pacific Railroad, has a very detailed, lengthy statute dealing with the issue. A train obstruction of a public highway, street or alley in any unincorporated town or village in the state is prohibited beyond 10 minutes. Neb. Rev. Stat. §17-225. The penalty for violation is a fine of $10 to $100. In addition, any members of a train crew, yard crew, or engine crew cannot be held personally responsible for any violation if they were acting on orders by their employer. It is the railroad that bears the responsibility to comply with the law. Neb. Rev. Stat. §17-594. Nebraska law also states that at crossings, a train cannot be stored or parked in a manner that obstructs the motoring public’s view of an oncoming train. Neb. Rev. Stat. §74-1323. Violation of the Nebraska provision is coupled with a minimal penalty – Class IV misdemeanor with a maximum fine of $200 for each offense (every day constitutes a separate offense).
Does Federal or State Law Control?
An interesting question involves the extent to which the state laws on public roadway grade crossing blockage laws are valid. Railroads are subject to an interesting mix of federal and state law. Does federal law preempt state law on this issue? That was the question presented in a recent Kansas case.
In State of Kansas v. Burlington Northern Santa Fe Railway Company, No. 118,095, 2018 Kan. App. LEXIS 63 (Kan. Ct. App. Nov. 2, 2018). Burlington Northern Santa Fe Railway (BNSF) operates trains through Bazaar (an unincorporated community) in Chase County, Kansas. At issue were two railroad crossings where the main line and the side lines crossed county and town roads. The side line is used to change crews or let other trains by on the main line. Early one morning, the Chase County Sherriff received a call that a train was blocking both intersections. The Sherriff arrived on scene two hours later and spoke with a BNSF employee. This employee said that he was checking the train but did not state when the train would move. The Sherriff then called BNSF three times. The train remained stopped on both crossings for approximately four hours. The Sherriff issued two citations (one for each engine) under K.S.A. 66-273 for blocking the crossings for four hours and six minutes.
K.S.A. 66-273 prohibits railroad companies and corporations operating a railroad in Kansas from allowing trains to stand upon any public roadway near any incorporated or unincorporated city or town in excess of 10 minutes at any one time without leaving an opening on the roadway of at least 30 feet in width. BNSF moved to dismiss the citation, but the trial court rejected the motion. During the trial, many citizens presented evidence that they could not get to work that day and a service technician could not reach a home that did not have hot water and was having heating problems. BNSF presented train logs for one of the engines. These logs showed that one engine was only stopped in Bazaar for 8 minutes to change crews and was not in Bazaar at 9:54 a.m. The Sheriff later conceded that he might have mistaken the numbers on the engines for the citations. There were no train logs for the other engine. BNSF also stated there could be other alternatives from blocking the crossings but uncoupling the middle of the train would be time consuming and unsafe. The trial court ruled against BNSF and entered a fine of $4,200 plus court costs.
On appeal, BNSF claimed that the Interstate Commerce Commission Termination Act (ICCTA) and Federal Railroad Safety Act (FRSA) preempted Kansas law, and that the evidence presented was not sufficient to prove a violation of Kansas Law. The appellate court agreed, holding that the ICCTA, by its express terms contained in 49 U.S.C. 10501(b), preempted Kansas law. While the appellate court noted that the Kansas statute served an “admirable purpose,” it was too specific in that it applied only to railroad companies rather than the public at large. Also, the statute had more than a remote or incidental effect on railway transportation. As a result, the Kansas law infringed on the Surface Transportation Board’s exclusive jurisdiction to regulate the railways in the United States. The court noted that the Surface Transportation Board was created by the ICCTA and given exclusive jurisdiction over the construction, acquisition, operation, abandonment, or discontinuance of railroad tracks and facilities. In addition, the appellate court noted that the Congress expressly stated that the remedies with respect to regulation of rail transportation set forth in the ICCTA are exclusive and preempt other remedies provided under federal or state law The appellate court did not consider BNSF’s other arguments.
The Kansas case indicates that state law may have to be carefully tailored to apply broadly to roadway obstructions generally, and not have anything more than a slight impact on railway transportation. If those requirements are not satisfied, federal law may control.
Have a blessed Thanksgiving. I will not be posting on Friday this week. The next post will be on Tuesday Nov. 27.
Monday, November 19, 2018
Liability issues abound for farmers and ranchers. Many farmers have a comprehensive farm liability policy to cover potential liability events associated with the farming operation. But, a comprehensive farm liability policy is a hybrid policy that contains both homeowners and commercial insurance elements. That’s because the home is on a part of the same premises where the farm and ranch business is conducted. and live on the same property.
One of the unique aspects of farming and ranching is that it’s not uncommon for a farmer or rancher to conduct some other type of business activity on the farm or ranch premises. That other activity may or may not be related to the business of farming. It is these other activities (such as a road-side stand, corn maize or U-Pick operation) that can raise questions about whether there is insurance coverage for them under the farm’s comprehensive insurance policy. That’s because those policies often exclude “non-farm business pursuits” of the insured.
The scope and application of non-business pursuits of the insured as applied in the context of farming/ranching operations – that’s the focus of today’s post.
The issue is often straightforward for farming operations that don’t conduct a separate business on the premises. The comprehensive liability policy should cover the risks associated with the farming business because of it being tailored to the activities that the insured conducts as part of the farming operation. But, for those that have a smaller farming operation or a hobby farm, the insurance coverage issue can be a big one. Often the insurance coverage for these activities is provided by means of a traditional homeowner’s policy. But, that can mean situations of non-coverage can arise as additional activities occur.
Excluded activities. Homeowner policies exclude business or farming activities. Thus, any activity that is deemed to be “business” or “farming” is excluded from liability or property coverage. That means that liability coverage would need to be broadened by adding an endorsement (subject to the carrier’s guidelines) to the policy that details all of the business or farming activities that are occurring on the premises. Alternatively, a traditional homeowner policy might be able to be modified by adding a “farm liability” endorsement. This additional endorsement would be appropriate when there are farm “hobby” activities on the premises. This endorsement will essentially blend the personal and business coverages by making no distinction between the two general types of activities.
What should be covered? All dwellings on the premises should be covered including all buildings and appurtenant structures, equipment and coverage for livestock. Many homeowner policies will cover a limited amount of animals for personal use such as horses and cows and goats, but if the animal is part of a business activity, a homeowner policy won’t provide coverage. That would mean, for example, that the typical homeowner policy won’t cover liability situations arising from boarding horses whether a fee is charged or not. If a fee is charged, the activity is an excluded business pursuit. If a fee is not charged, coverage may not be available because the horses owned by someone other than the insured.
Hanover American Insurance Company v. White, No. CIV-14-0726-HE, (W.D. Okla. Aug. 3, 2015), is a good illustration of the application of the “business pursuits of the insured.” The insured’s primary business was an aviation-related rental and repair business. He also co-owned an oilfield service company. The premises where the oilfield service company business was conducted was comprised of 150 acres. It was not adjacent to either of the insured’s other properties. The property was fenced, and the insured kept a bull and about 50 head of cattle on the property. The bull was purchased for the purpose of breeding the cows and produce calves. Some of the resulting calf crop was sold and the balance used for team roping. An employee of the oilfield service company cared for the cattle and bought supplies for them by charging the cost to the company’s account.
The bull escaped its enclosure and attacked another person who died as a result of the injuries. The decedent’s estate sued the insured. The insured was covered by a homeowner policy on his residence and a dwelling policy for a dwelling on another property the insured owned. Both policies contained identical language that excluded bodily injury “[a]rising out of or in connection with a ‘business’ engaged in by an ‘insured.’” Both policies also defined “business” to “include…trade, profession or occupation.”
The insurance companies claimed that they had no duty to defend or indemnify the insured. Both companies claimed that the liability event fell within the “business exclusion” of the companies’ respective policies. The insured claimed he wasn’t engaged in a cattle business, but merely a hobby activity and had coverage under the policies. The court disagreed with the insured on the basis that the evidence showed that he engaged in the cattle activity with the intent (at least in part) to make a profit. The court also pointed out that the insured treated the cattle activity as a Schedule F business on his tax returns. That meant that the resulting losses from the cattle activity offset the income of the insured’s wife. Thus, the court was persuaded that the cattle activity was not purely a hobby. It was a business activity not covered by his insurance policies.
In Western National Assurance Company v. Robel, No. 35394-0-III, 2018 Wash. App. LEXIS 2387 (Wash. Ct. App. Oct. 23, 2018), the defendants owned a farm and orchard. The orchard was listed in the area brochure as one of the “U-Pick” orchards. The orchard also sold pre-picked cherries. The plaintiff called the defendants to ensure that they were open before visiting. The plaintiff and her friend arrived at the orchard, and each of them were given a basket to strap on and were directed to the orchard where the 10-foot tall, three-legged ladders were located. While picking cherries on a ladder, the plaintiff ‘s basket filled and caused her to become top-heavy. She lost her balance and fell off the ladder. As a result of the fall, the plaintiff broke her hand and foot, and injured her neck, back and shoulder. The defendants were not at the orchard that day. The plaintiff sued alleging that the defendants, doing business as an orchard, failed to maintain the orchard in a safe manner and failed to properly instruct her on use of the ladder.
The defendants’ insurance company with whom they held a homeowners’ policy defended the suit which was dismissed by the trial court for improper service. The appellate court reversed as to the dismissal and the insurance company brought a declaratory judgment action claiming that the homeowners’ policy did not provide liability coverage for the defendant’s orchard business due to an exclusion for business pursuits of the insured. The trial court agreed and denied coverage under the policy for the plaintiff’s injuries. The appellate court affirmed, finding that the accident arose from a separate business pursuit of the insured that was within the policy exclusion. The appellate court determined that it was immaterial that the defendants did not make much profit from the U-Pick business as a part of their overall farming operation. What mattered, the appellate court determined, was that the defendants sold produce to the public that were invited as business guests to the premises. In addition, the appellate court determined that the use of a ladder was within the scope of the U-Pick business.
The non-farm “business pursuits” exclusion is an important exclusion that rural landowners need to be aware of. It’s a particular issue for smaller, hobby-type operations and those growing or organic or specialty or niche crops. Clearly, each rural/farming enterprise is different. That means that a good comprehensive farm liability policy should be customized to fit each particular situation. Start with the basic coverage and then add on coverage based on your own unique set of facts. Also, give careful thought to the amount of coverage needed. The insurance agent is a key person in making sure that coverage is provided for the needs of the insured. In farm settings, it’s almost always recommended that the insurance agent visit the premises to ensure that the agent has a full understanding of your needs.
Thursday, November 15, 2018
Upon death, the typical process is for someone to be appointed to handle the administration of the decedent’s estate. Once the administrator is appointed, a court-governed process is set in motion that includes providing notice to known and unknown creditors of the estate by means of publishing notice and providing actual notice to known creditors or those that could reasonable be determined to be creditors. Once notice is provided, the creditors have only a few months (usually less than six) to present their claims against the estate for payment.
Does that same timeline on presenting claims apply to the IRS? The ability of the IRS to collect on an unpaid tax claim against a decedent’s estate – that’s the topic of today ‘s post.
As an example, Kansas law specifies that “[E]very petitioner who files a petition for administration or probate of a will shall give notice thereof to creditors, pursuant to an order of the court, and within 10 days after such filing. K.S.A. 59-709(a). The notice is to be “to all persons concerned” and shall state the filing date of the petition for administration or probate of a will. The notice must be published three consecutive weeks and is to be actually be given to “known or reasonably ascertainable creditors” (those discovered by searching reasonably available public records) before expiration of the four-month period for filing claims. K.S.A. 59-709(b). Mere conjectural claims are not entitled to actual notice. Impracticable and extended searches for creditors are not required. If proper notice is not given, the personal representative and the heirs may be liable.
Timeframe For Filing Claims
As noted above, under Kansas law, the creditors have a four-month period to file their claims. That four-month timeframe runs from the time that notice is first published to creditors. However, with respect to the IRS, it has a 10-year collection period that runs from the date it assesses tax. I.R.C. §6502(a)(1). This provision says that the IRS can collect the unpaid tax by either levy or by a court proceeding begun within 10 years after the tax is assessed.
The ability of the IRS to collect unpaid tax from a decedent’s estate and the application of the 10-year statute was at issue in a recent case. In United States v. Estate of Chicorel, No. 17-2321, 2018 U.S. App. LEXIS 30069 (6th Cir. Oct. 25, 2018), the IRS was seeking to collect on an income tax assessment that it had made more than 10 years earlier. Under the facts of the case, the IRS assessed tax of $140,903.52 on September 12, 2005 for the 2002 tax year. The tax didn’t get paid before the decedent died in the fall of 2006. In early 2007, the decedent’s nephew was appointed the estate's personal representative, and he published a notice to creditors (in accordance with Michigan law) of the four-month deadline for presenting claims. However, he did not mail the notice to the IRS even though he knew of the unpaid tax liability. In early 2009, the IRS filed a proof of claim in the ongoing probate proceeding. The nephew didn’t respond, and the IRS filed a collections proceeding in early 2016 attempting to reduce the 2005 tax assessment to judgment. The estate claimed that the claim was filed too late, but the trial court held that the filing in 2009 of the proof of claim was a “court proceeding” as required by I.R.C. §6502(a)(1). Thus, because it was filed within 10 years from the date the tax was assessed, the IRS could collect the tax outside the 10-year window.
On appeal, the appellate court affirmed. The appellate court noted that whether a proof of claim is a "proceeding in court" is a question of federal law that turns on the nature, function, and effect of the proof of claim under state law. See United States v. Silverman, 621 F.2d 961 (9th Cir. 1980); United States v. Saxe, 261 F.2d 316 (1st Cir. 1958). That meant that the appellate court had to look at how Michigan treated the filing of a proof of claim in a probate proceeding and whether it qualified as a “court proceeding” under I.R.C. §6502(a). The appellate court noted that the nature, function, and effect of a proof of claim in Michigan had significant legal consequences for the creditor, the estate, and for Michigan law generally. Because of this, the appellate court held that the filing of the proof of claim qualified as a proceeding in court under I.R.C. §6502(a). The appellate court noted that the Michigan probate code specifies that "[f]or purposes of a statute of limitations, the proper presentation of a claim . . . is equivalent to commencement of a proceeding on the claim." Mich. Comp. Laws. §700.3802(3). Thus, the filing of the proof of claim not only tolled the statute of limitations, it constituted a “proceeding” that required the decedent’s estate to take action – either providing notice that the claim is disallowed or allowed. The filing of the proof of claim started a process whereby the claim would eventually be dealt with one way or the other. The appellate court also noted that the executor failed to give actual notice to the IRS to present its claim because it was a known creditor of the estate. That failure excused the IRS from filing the claim within the four-month window after notice was first published and extended that deadline to three years from the date of the decedent’s death. Thus, the IRS had timely filed its proof of claim.
The appellate court also determined that the filing of the proof of claim was timely under I.R.C. §6502(a). That statute, the court held, is satisfied once the government started any timely proceeding in court. Because that requirement was satisfied, the IRS has an unlimited amount of time to enforce the assessed tax. The appellate court noted that I.R.C. §6502(a) focuses on the ability of the IRS to collect assessments. While it does not permit the IRS to let an assessed tax lie dormant and then attempt to collect the tax way at some far off future date, once a timely collection action has been filed, the IRS can collect the tax beyond the 10-year timeframe. See United States v. Weintraub, 613 F.2d 612 (6th Cir. 1979). The appellate court noted that the IRS filed its proof of claim in 2009 which was well within the 10-year limitations period for the 2005 assessment. That filing constituted a “proceeding in court” under I.R.C. §6502(a) in satisfaction of that provision’s 10-year requirement. There was no further time bar on the ability of the IRS to collect. The is not requirement that a “judgment” be reached in the proceeding within that 10-year time frame, and the ability of the IRS to collect did not expire until the tax liability is satisfied or becomes unenforceable.
While in just about every situation a creditor must present its claim against a decedent’s estate within a short time-frame post-death, the rules governing the ability of the IRS to collect on an unpaid tax liability from a decedent’s estate are different. Once the IRS timely files its claim in the probate proceeding, it remains a creditor until the tax is paid. It also may not be barred by state law statute of limitations if it doesn’t timely file a claim against an estate. See, Board of Comm'rs of Jackson County v. United States, 308 US 343 (1939); United States v. Summerlin, 310 US 414 (1940) .
Is the executor personally liable for the tax? Perhaps. But, I.R.C. §6905(a) does provide a procedure for the executor to escape personal liability if doing so would not impact the liability of the decedent’s estate.
Just another one of the quirks about tax law and the IRS. It’s helpful to know. As Benjamin Franklin stated in 1789, “In this world nothing can be said to be certain, except death and taxes.”
Tuesday, November 13, 2018
My recent post on like-kind exchanges and the definition of real estate received a lot of attention, positive comments and questions. Several of those questions involved the issue of whether real estate that is held in a trust can qualify for like-kind exchange treatment. It’s an important question, particularly because the Tax Cuts and Job Act makes like-kind exchange treatment only applicable to real estate trades after 2017.
Whether real estate held in trust can qualify for like-kind exchange treatment – that’s the topic of today’s post.
Real Property – What Is It?
As noted above, real estate remains eligible property for a like-kind exchange under I.R.C. §1031. Often, state law determines whether an item of property is real property. For instance, in Oregon Lumber Co. v. Comr., 20 T.C. 192 (1953), the court held that the right to cut timber was not an interest in real property under state (Oregon) law. Thus, the exchange of land for the right to cut timber on national forest land was not a like-kind exchange under I.R.C. §1031. Also, in Priv. Ltr. Rul. 200424001 (Dec. 8, 2003), the IRS determined that components of a railroad track that are assembled and attached to the land and are real estate under state law are not like-kind to unassembled and unattached components because the latter is considered personal property under state law. But, where a water right under state law (Kansas) constitutes a perpetual interest in real property, the trade of the water right for a fee simple interest in farmland does qualify for like-kind exchange treatment. Priv. Ltr. Rul. 200404044 (Oct. 23, 2003). In addition, an agricultural conservation easement, if it is an interest in real property under state law, can be exchanged for like-kind real estate and qualify for deferral of tax under I.R.C. §1031. Priv. Ltr. Rul. 9851039 (Sept. 15, 1998); Priv. Ltr. Rul. 200201007 (Oct. 2, 2001).
But, state law doesn’t always determine the outcome. Sometimes state law may treat a particular interest as a real property interest, but the interest may be a “chose in action” (rights associated with personal property) for Federal income tax purposes. Thus, rights under a sales contract that are exchanged for real property may not qualify as a like-kind exchange. See, e.g., Coupe v. Comr., 52 T.C. 394 (1969).
The Treasury Regulations specify that a land lease of 30 years or more is the equivalent of an interest in real property. Treas. Reg. §1.1031(a)-1(c). In addition, real property involved in an exchange must be located in the United States (the 50 states and D.C.) to qualify for non-recognition treatment. I.R.C. §1031(h); but also see I.R.C. §932 and Priv. Ltr. Rul. 200040017 (Jun. 30, 2000).
What About Trusts?
Trusts are a popular part of many farm and ranch (and other) estate plans. If farmland or ranchland is contained in a trust, is it still eligible to be exchanged for other real property and have the gain (or loss) on the transaction deferred under I.R.C. §1031? If so, that means that placing land in a trust for estate planning (or other) reasons doesn’t eliminate the favorable tax consequences of I.R.C. §1031.
1992 IRS ruling. There is some guidance on the issue of whether real estate contained in a trust is eligible for I.R.C. §1031 treatment. In 1992, the IRS issued a Revenue Ruling taking the position that an interest in an Illinois Land Trust was real property that could be exchanged for like-kind real estate. Rev. Rul. 92-105, 1992-2 C.B. 204. While a beneficiary’s interest in a land trust was deemed to be personal property under state (IL) law, that characterization didn’t control the outcome. The IRS looked at the facts of the particular situation and noted that the trustee was only acting at the discretion of the taxpayer (beneficiary). The trustee merely held title and could only potentially transfer that title. Thus, the trust was an agency relationship between the trustee and beneficiary involving the holding and transferring of the title to the real estate contained in the trust. The taxpayer/beneficiary retained the right to manage and control the trustee, and remained the direct owner of the property for tax purposes. It was the beneficiary that remained obligated to pay the taxes and other liabilities associated with the trust property, and it was the beneficiary that had the exclusive right to the trust property’s earnings and profits. Based on those facts, the IRS determined that the beneficiary’s interest in the trust was an interest in real property that could be exchanged for other real property and qualify for deferral of gain (or loss) via I.R.C. §1031.
The trust and the relationship of the parties in the 1992 ruling was not determined to be a partnership. If the IRS had determined that a partnership was involved, that would have meant that the beneficiary’s interest in the real estate in the trust would not have qualified for like-kind exchange treatment – partnership interests are not eligible. Important to that point, only one beneficiary was involved under the facts of the ruling. With multiple beneficiaries, it may be easier for the IRS to asset that a partnership exists and deny I.R.C. §1031 eligibility.
Based on Rev. Rul. 92-105, if a trust (or similar arrangement created under state law) is merely an investment vehicle, it can qualify as like-kind to real property under I.R.C. §1031. That’s certainly the case for a trust if the trustee has title to the real property in the trust; the beneficiary has the exclusive right to direct or control the trustee in dealing with title to the property; and the beneficiary has the exclusive control of the property’s management as well as the obligation to pay any taxes and other liabilities that relate to the property. When those factors are present, an exchange transaction actually involves the exchange of the underlying trust property rather than an exchange of a certificate of trust beneficial interest, and the gain or loss on the transaction can be eligible for deferral under I.R.C. §1031.
2004 IRS ruling. Twelve years after Rev. Rul. 92-105, the IRS issued another revenue ruling on the issue. Rev. Rul. 2004-86, 2004-2 C.B. 191 involved a Delaware Statutory Trust (DST). A DST is a form of business trust. Under the facts of the ruling, the trustee’s powers were limited to only collecting and distributing income. As such, the DST was merely an investment trust and its interests could be exchanged for real property in an I.R.C. §1031 transaction. However, with more retained powers in the trustee, the IRS said that the trust would be a business trust rather than an investment trust and would not qualify for like-kind treatment. Consequently, Rev. Rul. 2004-86 is quite limited. But, if all of the interests in the trust are of a single class that represent undivided beneficial interests of the trust and the trustee cannot vary the trust’s investments, the trust will be an investment trust and its assets can be exchanged for real property with any gain qualifying for deferral under I.R.C. §1031. On the other hand, if the trustee has greater discretion with respect to the trust property, those additional powers could cause disqualification from I.R.C. §1031 treatment. Those additional powers could include, for instance, the power to dispose of the real property in the trust and acquire new property, the power to renegotiate leases on the trust property, or approve more than minor modifications or improvements to the property. If those powers are present, the IRS could take the position that the trust constitutes a business entity not eligible for I.R.C. §1031 treatment.
An additional important aspect of the 2004 Rev. Rul. is that the IRS at least impliedly classified the DST as a grantor trust. Thus, real estate contained in a grantor trust could be exchanged for interests in a grantor trust containing real property and the transaction would qualify for deferral treatment under I.R.C. §1031. That has important estate planning implications. A revocable living trust is a grantor trust. Such trusts are a part of many estate plans. Irrevocable trusts are also a popular estate planning tool. An irrevocable trust can be a grantor trust if the grantor retains, for example, the “power to control beneficial enjoyment.” I.R.C. §674.
For real property contained in trust, if the trustee’s powers are limited, the real property can be exchanged for other real property and qualify for gain (or loss) deferral under I.R.C. §1031. Land contained in a grantor trust is deemed to be owned by the individual grantor and remains eligible for I.R.C. §1031 treatment. For land contained in a non-grantor trust, the language of the trust is critical. For non-grantor trusts, the trust language must place sufficient limitations on the trustee’s powers to allow the trust beneficiary to receive like-kind exchange treatment under I.R.C. §1031.
Friday, November 9, 2018
Legal developments impacting rural landowners, producers and agribusinesses continue to occur. The same can be said for tax developments that impact practitioners and their client base. It’s a never-ending stream.
In today’s post, I examine just a few of the recent developments from the courts of relevance.
Debtor Can Convert Chapter 12 Case to Chapter 11
Can a Chapter 12 bankruptcy case be converted to Chapter 11? That was the issue in In re Cardwell, No. 17-50307-rlj12, 2018 Bankr. LEXIS 3089 (Bankr. N.D. Tex. Oct. 3, 2018). The debtor, an elderly widowed woman, owned three tracts of farmland that she leased out for farming purposes. The tracts served as collateral for loans taken out by her children and grandchildren. The debtor sued a bank and the spouse of a granddaughter for “improprieties on the loans and liens.” The debtor filed Chapter 12, but the bank moved to dismiss the case on the basis that the debtor was not a ‘family farmer.” The debtor then moved to convert the case to Chapter 11. The bank objected, claiming that a Chapter 12 case cannot be converted to a Chapter 11.
While the court noted that there is some authority for that proposition, the court also noted that there is no explicit statutory language that bars a Chapter 12 from being converted to a Chapter 11 and that the courts are split on the issue. Ultimately, the court concluded that 11 U.S.C. §1208(e) allowed for conversion if the proceeding was in good faith and conversion would not be inequitable or prejudicial to creditors. The court also noted that if it dismissed the debtor’s Chapter 12 case, the debtor could simply refile the matter as a Chapter 11 case. The court saw no point in requiring that procedural step as there was no explicit statutory language requiring dismissal and refiling. The court also noted that upon conversion the automatic stay would remain in place, and that the debtor would actually have a more difficult time getting her reorganization plan confirmed as part of a Chapter 11 case as compared to a Chapter 12 case.
Federal Law Preempts Kansas Train Roadway Blockage Law
Burlington Northern Santa Fe Railway (BNSF) operates trains through the town of Bazaar in Chase County, Kansas. At issue State of Kansas v. Burlington Northern Santa Fe Railway Company, No. 118,095, 2018 Kan. App. LEXIS 63 (Kan. Ct. App. Nov. 2, 2018), were two railroad crossings where the main line and the side tracks crossed county and town roads. The side track is used to change crews or let other trains by on the main line. Early one morning, the Chase County Sheriff received a call that a train was blocking both intersections. The Sheriff arrived on scene two hours later and spoke with a BNSF employee. This employee said that he was checking the train but did not state when the train would move. The Sheriff then called BNSF three times. The train remained stopped on both crossings for approximately four hours. The Sheriff issued two citations (one for each engine) under K.S.A. 66-273 for blocking the crossings for four hours and six minutes. K.S.A. 66-273 prohibits railroad companies and corporations operating a railroad in Kansas from allowing trains to stand upon any public roadway near any incorporated or unincorporated city or town in excess of 10 minutes at any one time without leaving an opening on the roadway of at least 30 feet in width. BNSF moved to dismiss the citation, but the trial court rejected the motion.
During the trial, many citizens presented evidence that they could not get to work that day, and a service technician could not reach a home that did not have hot water and was having heating problems. BNSF presented train logs for one of the engines. These logs showed that one engine was stopped in Bazaar for only 8 minutes to change crews and was not in Bazaar at 9:54 a.m. The Sheriff later conceded that he might have been mistaken about the numbers on the engines for the citations. There were no train logs for the other engine. BNSF also stated there could be other alternatives from blocking the crossings but uncoupling the middle of the train would be time consuming and unsafe.
The trial court ruled against BNSF and entered a fine of $4,200 plus court costs. On appeal, BNSF claimed that the Interstate Commerce Commission Termination Act (ICCTA) and Federal Railroad Safety Act (FRSA) preempted Kansas law, and that the evidence presented was not sufficient to prove a violation of Kansas law. The appellate court agreed, holding that the ICCTA, by its express terms contained in 49 U.S.C. 10501(b), preempted Kansas law. While the appellate court noted that the Kansas statute served an “admirable purpose,” it was too specific in that it applied only to railroad companies rather than the public at large. Also, the statute had more than a remote or incidental effect on railway transportation. As a result, the Kansas law infringed on the Surface Transportation Board’s exclusive jurisdiction to regulate the railways in the United States. The appellate court noted that the Surface Transportation Board was created by the ICCTA and given exclusive jurisdiction over the construction, acquisition, operation, abandonment, or discontinuance of railroad tracks and facilities. In addition, the appellate court noted that the Congress expressly stated that the remedies with respect to regulation of rail transportation set forth in the ICCTA are exclusive and preempt other remedies provided under federal or state law. The appellate court did not consider BNSF’s other arguments.
Groundwater Is Not a “Point Source” of Pollution Under the CWA
The defendant in Tennessee Clean Water Network v. Tennessee Valley Authority, No. 17-6155, 2018 U.S. App. LEXIS 27237 (6th Cir. Sept. 24, 2018), is a utility that burns coal to produce energy. It also produces coal ash as a byproduct. The coal ash is discharged into man-made ponds. The plaintiffs, environmental activist groups, claimed that the chemicals from the coal ash in the ponds leaked into surrounding groundwater where it was then carried to a nearby lake that was subject to regulation under the Clean Water Act (CWA). The plaintiffs claimed that the contamination of the lake without a discharge permit violated the CWA and the Resource Conservation and Recovery Act (RCRA).
The trial court had dismissed the RCRA claim, but the appellate court reversed that determination and remanded the case on that issue. On the CWA claim, the trial court ruled as a matter of law that the CWA applies to discharges of pollutants from a point source through hydrologically connected groundwater to navigable waters where the connection is "direct, immediate, and can generally be traced." The trial court held that the defendant’s facility was a point source because it "channel[s] the flow of pollutants . . . by forming a discrete, unlined concentration of coal ash," and that the Complex is also a point source because it is "a series of discernible, confined, and discrete ponds that receive wastewater, treat that wastewater, and ultimately convey it to the Cumberland River." The trial court also determined that the defendant’s facility and the ponds were hydrologically connected to the Cumberland River by groundwater. As for the defendant’s facility, the trial court held that "[f]aced with an impoundment that has leaked in the past and no evidence of any reason that it would have stopped leaking, the Court has no choice but to conclude that the [defendant’s facility] has continued to and will continue to leak coal ash waste into the Cumberland River, through rainwater vertically penetrating the Site, groundwater laterally penetrating the Site, or both." The trial court determined that the physical properties of the terrain made the area “prone to the continued development of ever newer sinkholes or other karst features." Thus, based on the contaminants flowing from the ponds, the court found defendant to be in violation of the CWA. The trial court also determined that the leakage was in violation of the defendant “removed-substances” and “sanitary-sewer” overflow provisions. The trial court ordered the defendant to "fully excavate" the coal ash in the ponds (13.8 million cubic yards in total) and relocate it to a lined facility.
On further review, the appellate court reversed. The appellate court held that the CWA does not apply to point source pollution that reaches surface water by means of groundwater movement. The appellate court rejected the plaintiffs’ assertion that mere groundwater is equivalent to a discernable point source through which pollutants travel to a CWA-regulated body of water. The appellate court noted that, to constitute a “conveyance” of groundwater governed by the CWA, the conveyance must be discernible, confined and discrete. While groundwater may constitute a conveyance, the appellate court reasoned that it is neither discernible, confined, nor discrete. Rather, the court noted that groundwater is a “diffuse” medium that “travels in all directions, guided only by the general pull of gravity.” In addition, the appellate court noted that the CWA regulates only “the discharge of pollutants ‘to navigable waters from any point source.’” In so holding, the court rejected the holdings in Hawai’i Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018) and Upstate Forever, et al. v. Kinder Morgan Energy Partners, LP, et al., 887 F.3d 637 (4th Cir. 2018).
Cash Gifts to Pastor Constituted Taxable Income
In Felton v. Comr., T.C. Memo. 2018-168, the petitioner was the pastor of a church and the head of various church related ministries in the U.S. and abroad, got behind on his tax filings and IRS audited years 2008 and 2009. While most issues were resolved, the IRS took the position that cash and checks that parishioners put in blue envelopes were taxable income to the petitioner rather than gifts. The amounts the petitioner received in blue envelopes were $258,001 in 2008 and $234,826 in 2009. There was no question that the church was run in a businesslike manner. While the church board served in a mere advisory role, the petitioner did follow church bylaws and never overrode the board on business matters. As for contributions to the church, donated funds were allocated based on an envelope system with white envelopes used for tithes and offerings for the church. The white envelopes also included a line marked “pastoral” which would be given directly to the petitioner. The amounts in white envelopes were tracked and annual giving statements provided for those amounts.
The petitioner reported as income the amounts provided in white envelopes that were designated as “pastoral.” Amount in gold envelopes were used for special programs and retreats, and were included in a donor’s annual giving statement. Amounts in blue envelopes (which were given out when asked for) were treated as pastoral gifts and the amounts given in blue envelopes were not included in the donor’s annual giving statement and the donor did not receive any tax deduction for the gifted amounts. Likewise, the petitioner did not include the amounts given in blue envelopes in income. The IRS took the position that the amounts given by means of the blue envelopes were taxable income to the petitioner. The Tax Court agreed, noting that the petitioner was not retiring or disabled. The court also noted that the petitioner received a non-taxable parsonage allowance of $78,000 and received only $40,000 in white envelope donations. The court also upheld the imposition of a penalty because the petitioner, who self-prepared his returns, made no attempt to determine the proper tax reporting of the donations.
The developments keep rolling in. There will be more to write about in a subsequent post.
Wednesday, November 7, 2018
Section 404 of the Clean Water Act (CWA) makes illegal the discharging of dredge or fill material into the “navigable waters of the United States” (WOTUS) without obtaining a permit from the Secretary of the Army acting through the Corps of Engineers (COE). 33 U.S.C. §§1311(a); 1362(6),(12). The definition of what a WOTUS has been confusing and controversial in recent years. How is a wetland that could be a WOTUS delineated? What force do definitions contained in a COE manual have? What about supplements?
How the government defines a “WOTUS” – that’s the focus of today’s post.
The regulatory definition of a “wetland” has changed over the years. In its 1987 Manual for delineating wetlands, before the COE may assert jurisdiction over property, it must find the area satisfies the three wetland criteria of hydric soil, predominance of hydrophytic vegetation, and wetland hydrology (soil saturation/inundation). Wetland hydrology under the 1987 Manual requires either the appropriate inundation during the growing season or the presence of a primary indicator. Table 5 of the 1987 Manual indicates a nontidal area is not considered to evidence wetland hydrology unless the soil is seasonally inundated or saturated for 12.5 percent to 25 percent of the growing season. A “growing season” is defined as a season in which soil temperature at 19.7 inches below the surface is above 41 degrees Fahrenheit.
The 1987 Manual lists six field hydrologic indicators, in order of decreasing reliability, as evidence that inundation and/or soil saturation has occurred: (1) visual observation of inundation; (2) visual observation of soil saturation; (3) watermarks; (4) drift lines; (5) sediment deposits; and (6) drainage patterns within wetlands.
In 1989, the COE adopted a new manual. The 1989 Manual superseded the 1987 Manual. The delineation procedures contained in the 1989 manual were less stringent. Thus, it became more likely that the COE could determine that a particular tract contained a regulable wetland. This change in delineation techniques caught the attention of the Congress which barred the use of the 1989 Manual via the 1992 Budget Act. Pub. L. No. 102-104, 105 Stat. 510 (Aug. 17, 1991). Specifically, the 1992 Budget Act prohibited the use of funds to delineate wetlands under the 1989 Manual "or any subsequent manual not adopted in accordance with the requirements for notice and public comment of the rulemaking process of the Administrative Procedure Act." The 1992 Budget Act also required the Corps to use the 1987 Manual to delineate any wetlands in ongoing enforcement actions or permit application reviews. In the 1993 Budget Act, the Congress again addressed the issue by stating that, “None of the funds in this Act shall be used to identify or delineate any land as a "water of the United States" under the Federal Manual for Identifying and Delineating Jurisdictional Wetlands that was adopted in January 1989 or any subsequent manual adopted without notice and public comment. Furthermore, the Corps of Engineers will continue to use the Corps of Engineers 1987 Manual, as it has since August 17, 1991, until a final wetlands delineation manual is adopted.” Thus, it was clear that Congress mandated that the COE continue to use the 1987 Manual to delineate wetlands unless and until the COE utilized the formal rulemaking process to change the delineation procedure.
While the Congress mandated the use of the 1987 Manual to delineate wetlands, it also appropriated funds to the U.S. Environmental Protection Agency (EPA) to contract with the National Academy of Sciences for a review and analysis of wetland regulation at the federal level. See Department of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act of 1993, Pub. L. 102-389, 106 Stat. 1571 (Oct. 6, 1992); H.R. Rep. No. 102-710, at 51 (1992); H.R. Conf. Rep. No. 102-902 at 41. This resulted in a report being published in 1995 containing a suggestion that the 1987 Manual either eliminate the requirement of a “growing season” approach to wetland hydrology or move to a region-specific set of criteria for delineating wetlands. Consequently, the COE began issuing regional “supplements” to the 1987 Manual that provided criteria for wetland delineation that varied across the country. For instance, in the COE’s 2007 Alaska Supplement, the COE eliminated the measure of soil temperature contained in the 1987 Manual and replaced it with “vegetation green-up, growth, and maintenance as an indicator of biological activity occurring both above and below ground.” The 2007 Supplement was updated in 2008.
The 1987 Manual and the budget bills and COE region-specific Supplements were the issue of a recent case. In Tin Cup, LLC v. United States Army Corps of Engineers, No. 17-35889, 2018 U.S. App. LEXIS 27085 (9th Cir. Sept. 21, 2018), the plaintiff was a closely-held family pipe fabrication company in Alaska that sought to relocate its business for expansion purposes. The plaintiff found a suitable location (a 455-acre tract in North Pole) where it would need to lay gravel and construct buildings as well as a railroad spur. Because gravel is contained within the regulatory definition of “pollutant” under the CWA and because the tract was purportedly a “wetland,” the plaintiff had to obtain a discharge permit so that it could place gravel fill on the property before starting construction.
The plaintiff received a permit in 2004 and, pursuant to that permit, cleared about 130 acres from the site. In 2008, the plaintiff submitted another permit application to place gravel fill on the site. The COE issued a new jurisdictional determination in 2010, concluding that wetlands were present on 351 acres, including about 200 acres of permafrost – frozen soil. The COE granted the plaintiff a discharge permit to place gravel fill on 118 acres, but included mitigation conditions that the plaintiff objected to. The plaintiff sued on the basis that the COE’s delineation of permafrost as a wetland was improper and, thus, a discharge permit was not necessary.
The COE delineated the permafrost on the tract as wetland based on its 2008 Alaska Supplement. U.S. Army Corps of Engineers, Regional Supplement to the Corps of Engineers Wetland Delineation Manual: Alaska Region (Version 2.0) (Sept. 2007). However, the COE’s 1987 Manual specifically excludes permafrost from the definition of a wetland. The plaintiff argued that the Congress had instructed the COE to continue to use the wetland delineation standards in the 1987 Manual until the COE adopted a “final wetland delineation manual” as set forth in the 1992 and 1993 Budget Acts, as noted above. Thus, because permafrost does not have the required “growing season” (it never reached 41 degrees Fahrenheit at a soil depth of 19.7 inches) it cannot be a wetland. The plaintiff pointed out that by virtue of the issuance of regional supplements to the 1987 Manual, the COE had expanded its jurisdiction over private property by modifying the definition of a “wetland.” Key to the plaintiff’s argument was the point that the Supplement was not a new manual that had been developed in accordance with the formal rulemaking process (e.g., notice, comment, and public hearing). It also was never submitted to the Congress and the Government Accountability Office which, the plaintiff noted, the Congressional Review Act requires before any federal governmental agency rule can become effective. 5 U.S.C. Ch. 8, Pub. L. No. 104-121, §201.
The trial court ruled against the plaintiff, holding that the COE could rely on the 2008 Supplement when delineating a wetland and determining its jurisdiction. The trial court determined that the Budget Acts have no force beyond the funds that they appropriate. That meant that the COE could delineate wetlands in accordance in whatever manner it determined – the 1987 Manual or any subsequent Manual or supplemental guidance that it issued.
On appeal, the appellate court affirmed, holding that the 1993 Budget Act did not require the COE to continue using the 1987 Manual to delineate wetlands. The appellate court stated that there is a “very strong presumption” that if an appropriations act changes substantive law, it does so only for the fiscal year for which the bill is passed” unless there is a clear statement of futurity. Because the 1993 Budget Act contained no such statement, the Court held that the requirement for use of the definition of a growing season in accordance with the 1987 Manual expired at the end of the 1993 fiscal year.
One of the appellate judges, while concurring with the decision that the lower court did not err in granting summary judgment to the COE, disagreed that the 1993 Budget Act didn’t apply beyond the 1993 fiscal year. This judge noted that the Congress, in the 1993 Budget Act, specifically directed the COE to continue to use the 1987 Manual “until” it adopted a final wetlands delineation manual. According to this judge, that was a sufficient Congressional directive of futurity that made the directive applicable beyond the Federal Government’s 1993 fiscal year.
The definition of a “wetland” and “WOTUS” is confusing and controversial. The Ninth Circuit’s holding that the COE can conclude that frozen soil is a navigable water will not diminish that controversy. The issue of the application of congressional budget act provisions is also one that there is not agreement upon within the federal appellate courts. Perhaps the U.S. Supreme Court will hear the case.
As for me, I am going to read my copy of Alice in Wonderland. It might make more sense than concluding that gravel is pollution and frozen dirt is water and when the Congress says not to do something, you can.
Monday, November 5, 2018
During the farm debt crisis of the 1980s, Chapter 12 bankruptcy was enacted to provide a means for “family farmers” to receive debt relief in the context of more favorable bankruptcy reorganization rules than would otherwise apply. Now that the farm sector has been going through several down economic years, the use of Chapter 12 has increased again.
Requirements must be satisfied to qualify for Chapter 12 relief. Once that occurs, the farmer- debtor can take advantage of numerous favorable provisions. One of those is the “tools-of-the-trade” exemption. A farm debtor can keep assets exempt from creditors that are needed continue the farming operation.
The tools-of-the-trade exemption in the context of Chapter 12 bankruptcy. That’s the topic of today’s post.
Chapter 12 Eligibility
To be eligible for Chapter 12 bankruptcy, a debtor must be a “family farmer” or a “family fisherman” with “regular annual income.” The term “farming operation” includes farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state. 11 U.S.C. §101(21). A “family farmer” is defined as an individual or individual and spouse who earned more than 50 percent of their gross income from farming either for the taxable year preceding the year of filing or during the second and third tax years preceding filing, and whose aggregate debts do not exceed $4,153,150 (as of April, 2016). In addition, more than 80 percent of the debt must be debt from a farming operation that the debtor owns or operates.
The U.S. legal system has a long history of allowing debtors to hold specified items of property exempt from creditors (unless the exemption is waived). This, in effect, gives debtors a “head start” in becoming reestablished after suffering economic reverses. Typically, one of the largest and most important exemptions is for the homestead.
Initially even the exempt property is included in the debtor's estate in bankruptcy but the exempt assets are soon returned to the debtor. Only nonexempt property is used to pay the creditors.
In agricultural bankruptcies, one of the more important exemptions listed above is for “tools-of-the-trade.” 11 U.S.C. §522(f) permits the avoidance of non-possessory, non-PMSIs in “implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor” when the security interest impairs an exemption to which the debtor would have been entitled but for the security interest.
Conceivably, many farm assets could qualify as a tool-of-the-trade. For example, some courts have held that livestock held for breeding purposes (In re Heape, 886 F.2d 280 (10th Cir. 1989). large items of farm equipment (In re LaFond, 791 F.2d 623 (8th Cir. 1986), and draft horses (In re Stewart, 110 B.R. 11 (Bankr. D. Idaho 1989) are tools of the debtor's trade. Generally, courts focus on the functional use of an asset in the debtor's business in determining whether the asset is a tool of the debtor's trade.
The debtor must be actively engaged in a farming business to exempt farm assets as tools of the trade. For example, in In re Johnson, 230 B.R. 608 (Bankr. 8th Cir. 1999), the debtor owned a 73-acre rural residence, but had not farmed in past two years and was employed full-time off of the farm. The court held that the farm machinery was not tools of debtor’s trade because the debtor not actively engaged in farming. In any event, to be considered as an exempt tool of the debtor’s trade, the debtor must have a reasonable prospect of continuing in or returning to the farming business. For instance, in In re Henke, 294 B.R. 105 (Bankr. D. N.D. 2003), farm equipment was not exempt as a tool of the trade where the debtor had no reasonable prospect of returning to the farming business.
A recent Kansas Chapter 12 case is a good illustration of how courts analyze the applicability of the tools-of-the-trade exemption. In In re Rudolph, No. 18-40423, 2018 Bankr. LEXIS 3328 (Bankr. D. Kan. Oct. 30, 2018), the debtors (a married couple) significantly reduced the scale of their farming operation before filing Chapter 12. Upon filing Chapter 12, the debtors claimed the Kansas exemption for tools of the trade contained in Kan. Stat. Ann. §60-2304(e). The debtors’ lender (a bank) objected to the exemption on the basis that the debtors had so significantly reduced their farming operations that they were no longer “farmers” as their primary occupation, or that the debtors were only entitled to a percentage of the exemption.
The husband debtor had farmed since 1948 and his wife began working exclusively on the farm in 2007. The bank agreed that if the husband was entitled to the exemption his wife was also. The debtors’ homestead consisted of 17 acres, and the debtors used a portion of it to raise a forage crop for livestock and another portion was used as a hay meadow for livestock grazing. The husband debtor was also the beneficiary of three tracts of land held in trusts established by his parents consisting of almost 500 acres that were a mixture of row crop, hay meadow, pasture and CRP ground. The debtor, via the trust instrument, was responsible for managing those properties.
The bank financed the debtors’ farming operations and when the loans matured in late 2017 the bank sought payment. The debtors’ proposed to pay the loan by retiring from row crop farming and generating funds from the sale of certain farm equipment. At the time of filing, the debtors were no longer row crop farming but were continuing to care for cattle on the trust properties and were managing the CRP acres. Some of the trust properties were rented out, with the debtors maintaining fences and providing nutrients and care for the tenants’ cattle. The debtors also planted fall crops to feed to their own cattle and horses. The debtors inspected the trust lands twice weekly and controlled weeds on the CRP ground and maintained brush control. Their proposed reorganization plan estimated their monthly net farm income as $978.98 and they projected their annual gross farm income to be $21,364 with $20,800 consisting of farm rental income. The debtors testified to the value of the items of personal property that they were claiming as tools of the trade, and the total claimed value did not exceed the statutorily allowed amount.
The court noted that the debtors retained only those farming assets that were necessary to the continuation of their reduced-scale farming operation and turned over other assets to the bank. The debtors also proposed to retain four non-exempt tractors by paying the bank their value in ten semi-annual installments, with interest. The court noted that eligibility for the exemption was to be determined as of the date of filing. As the court pointed out, that’s different than a debtor being eligible for Chapter 12 – which is based on debt and income in the year preceding filing (or the second and third years back). The court also pointed out that the only issues for consideration as to eligibility for the exemption was whether the debtors were engaged in the farming business, and whether the claimed exempt items were regularly and reasonably necessary in carrying on that business.
While the court pointed out that the debtors were no longer engaged in planting and harvesting crops, as of the date the Chapter 12 petition was filed, the court determined that the debtors were engaged in ranching and other farming activities such as cattle grazing, harvesting hay and planting forage crops to feed cattle and horses. The court noted that the debtors also maintained the farmland in the trusts and managed the 3-5 acres of CRP ground. The court specifically determined that while the debtors did not have most of their income come from farming, the tools of the trade exemption does not require that farming be the exclusive or sole means generating income. The court also concluded that the exemption does not require the tools to be used on land the debtor farms for himself (crop/livestock share leases are permissible as is managing CRP ground) or produce something for sale.
The court also rejected the bank’s argument that the debtors couldn’t claim the exemption because they had quit farming as of the time they filed for Chapter 12 as contrary to the evidence. The evidence showed that the debtors had at least temporarily retired from crop farming, but not from ranching and caring for agricultural land as indicated by the retention of some equipment essential to continuing the ranching and ag land maintenance activities. In addition, the debtors’ proposed budget that showed only social security benefits and retirement benefits along with land rent was consistent with the debtors’ testimony that they were reducing their farming activities. The court determined that the debtors were still engaged in the trade or business of farming as of the petition date and were entitled to claim the tools-of-the-trade exemption. However, the court determined that five of the claimed horses were not eligible for the exemption as nonessential to the continuation of the debtors’ farming activities. The court also stated that the bank’s objection to the valuation of the exempt assets would be determined in a separate proceeding unless the parties came to an agreement.
Presently, times are difficult for many agricultural producers. However, Chapter 12 bankruptcy has several very helpful provisions to ease the pain of restructuring the family farming business so that it can continue. The tools-of-the-trade exemption is one of those provisions that can be of assistance.
Thursday, November 1, 2018
Because such items as livestock, feed, seed or pesticides are goods, sales and other transactions involving them result in the creation of warranties. These warranties can be either express or implied. Express warranties are stated as part of the sales agreement and become part of the basis of the bargain, but implied warranties are read into the sales agreement by the law, absent specific language or circumstances excluding them.
Contract warranties create legal rights and liabilities between the parties to the transaction. That means knowing whether and how they can be disclaimed can be important.
Disclaiming implied warranties – that’s the topic of today’s post.
Methods for Disclaiming
The Uniform Commercial Code (UCC) specifically provides three ways in which all implied warranties can be excluded. First, unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is,” “with all faults” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty. For example, in Rayle Tech, Inc. v. DEKALB Swine Breeders, Inc. 133 F.3d 1405 (11th Cir. 1998), the court held that a swine breeder who purchased diseased pigs could not sue the seller for fraud where the seller clearly disclaimed any liability for disease in the sales contract, despite a salesman’s assurances to the contrary. However, in Snelten v. Schmidt Implement Co. 269 Ill. App.3d 988, 647 N.E.2d 1071 (1995), the court held that an implement dealer that sold a tractor to a farmer limited the scope of its “as is” disclaimer by making other representations to the buyer.
The second manner in which an implied warranty can be excluded is when the buyer, before entering into the contract, examines the goods or a sample or a model as fully as desired or refuses to examine the goods. In this instance, there is no implied warranty with regard to defects which an examination should have revealed to the buyer.
The third way an implied warranty can be excluded is by course of dealing, course of performance or usage of trade. UCC § 2-316(3)(C). The seller’s relationship with the buyer, industry practice or usage of trade can exclude an implied warranty. For example, if the parties have previously engaged in contracts for the sale of livestock or feed with all previous contracts containing a disclaimer provision, or the industry practice is to limit liability, implied warranties may be excluded.
Federal Statutory Law
At the federal level, the Magnuson-Moss Warranty Federal Trade Commission Improvement Act (15 U.S.C. §§ 2301-2312) precludes the disclaimer or modification of any implied warranty created by state law when a consumer product supplier makes any written warranty with respect to a product. The implied warranties can only be limited to the duration of the express warranties, unless the express warranties are designed as a “Full Warranty,” in which case the implied warranties cannot be limited even in their duration. Thus, the only way for a consumer product supplier to avoid extending implied warranties is to not provide any express warranties. Also laws in some states prohibit sellers in consumer transactions from excluding, modifying or limiting implied warranties of merchantability or fitness. For example, in Kansas, a supplier in a consumer transaction is prohibited from disclaiming or limiting UCC implied warranties of merchantability and fitness for a particular purpose. See, e.g., Kan. Stat. Ann. §§ 50-623 to 50-644. Any such limitation is usually considered void unless the buyer knew of the defect before purchasing and this knowledge became part of the basis of the sale. The only exceptions are for sales of livestock for agricultural purposes and sales of seed for planting.
In seed sale transactions, the Federal Seed Act (FSA) allows the seed sellers to use disclaimers, limited warranties, or non-warranty clauses in invoices, advertising or labeling. However, the FSA does not permit such limitation on warranties to be used as a defense in any criminal prosecution or other civil proceeding based on the FSA. 7 U.S.C. § 1574 (1995). As a result, seed purchasers may be faced with label disclaimers limiting liability to the price of the seed. Courts are split on the validity of such disclaimers with most courts invalidating them only if liability results from the seller’s own negligence or intentional violation of the law.
In order to disclaim or modify an implied warranty of merchantability, the seller’s “language must mention merchantability and in case of a writing must be conspicuous....” UCC § 2-316(2). For example, in Day v. Tri-State Delta Chemicals, Inc., 165 F. Supp. 2d 830 (E.D. Ark. 2001), the court determined that there had been no breach of an implied warranty in a transaction involving cotton seed purchased on credit where the credit agreement carried a limitation of warranty denying any representation as to the seed’s fitness.
Oral disclaimers of implied warranties of merchantability must use the word “merchantability,” and in written disclaimers, the disclaiming language must be conspicuous within the written document. See, e.g., R.J. Meyers Company v. Reinke Manufacturing Co., 885 N.W.2d 429 (Iowa Ct. App. 2016). A disclaimer of an implied warranty of fitness for a particular purpose must be in writing.
Transactions involving the sales of goods often occur without any issue. However, it is helpful to know what the rules concerning the disclaimer of implied warranties are in case an issue concerning the purchased goods arises and the goods don’t live up to the buyer’s expectations.