Monday, December 30, 2019
The “Almost Top Ten” Ag Law and Ag Tax Developments of 2019
It’s the time of year again where I sift through the legal and tax developments impacting agriculture from the past year, and rank them in terms of their importance to farmers, ranchers, agribusinesses, rural landowners and the ag sector in general.
As usual, 2019 contained many legal developments of importance. There were relatively fewer major tax developments in 2019 compared to prior years, but the issues ebb and flow from year-to-year. It’s also difficult to pair things down to ten significant developments. There are other developments that are also significant. So, today’s post is devoted to those developments that were left on the cutting table and didn’t quite make the “Top Ten” for 2019.
The “almost top ten of 2019” – that’s the topic of today’s post.
Chapter 12 Debt Limit Increase
To be eligible for Chapter 12 bankruptcy, a debtor must be a “family farmer” or a “family fisherman” with “regular annual income.” 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; have more than 50 percent of their debt be debt from a farming operation that the debtor owns or operates; and, the aggregate debt must not exceed a threshold amount. That threshold amount has only adjusted for inflation since enactment of Chapter 12 in 1986, even though farms have increased in size and capital needs faster than the rate of inflation. When enacted, 86 percent of farmers were estimated to qualify for Chapter 12. That percentage had declined over time due to the debt limit only periodically increasing with inflation and stood at $4,411,400 as of the beginning of 2019. Thus, fewer farmers were able to use Chapter 12 to deprioritize taxes associated with the sale of farm assets used in the farming operation and ultimately put together a reorganization plan that will allow the farmer to stay on the farm to continue production activities, make restructured loan payments and have some debt written off. However, as of August 23, 2019, the debt limit for a family farmer filing Chapter 12 was increased to $10,000,000 for plans filed on or after that date. H.R. 2336, Family Farmer Relief Act of 2019, signed into law on Aug. 23, 2019 as Pub. L. No. 116-51.
Which Government Agency Sues a Farmer For a WOTUS Violation?
In 2019, a federal trial court allowed the U.S. Department of Justice (DOJ) to sue a farmer for an alleged CWA dredge and bill permit violation without a specific recommendation from the Environmental Protection Agency (EPA). The farmer was alleged to have discharged “pollutants” into a “waters of the United States” (WOTUS) as a result of tractor tillage activities on his farmland containing or near to wetlands contiguous to a creek that flowed into a WOTUS. Staff of the U.S. Army Corps of Engineers (COE) saw the tilled ground and investigated. The COE staff then conferred with the EPA and referred the matter to the U.S. Department of Justice (DOJ). The DOJ sued (during the Obama Administration) for enforcement of a CWA §404 permit “by the authority of the Attorney General, and at the request of the Secretary of the Army acting through the United States Corps of Engineers.” The DOJ alleged that the equipment "constituted a 'point source'" pollutant under the CWA and "resulted in the placement of dredged spoil, biological materials, rock, sand, cellar dirt or other earthen material constituting “pollutants” (within the meaning of 33 U.S.C. § 1362(6)) into waters of the United States. The DOJ alleged that the defendant impacted water plants, changed the river bottom and/or replaced Waters of the United States with dry land, and "resulted in the 'discharge of any pollutant' within the meaning of 33 U.S.C. § 1311(a)." The farmer moved for summary judgment on the basis that the CWA authorizes only the EPA Administrator to file a CWA §404 enforcement action and that the court, therefore, lacked jurisdiction. The court disagreed and determined that the defendant could be sued by the U.S. Department of Justice upon the mere recommendation of the COE and without a specific recommendation from the EPA alleging a CWA violation, and in a situation where the CWA did not determine any CWA jurisdiction and only the COE did. This finding was despite a 1979 Attorney General opinion No. 197 determining that the EPA and not the COE has the ultimate authority to construe what is a navigable WOTUS. Ultimately, the parties negotiated a settlement costing the farmer over $5 million. United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 75309 (E.D. Cal. May 3, 2019). United States v. Lapant, No. 2:16-CV-01498-KJM-DB, 2019 U.S. Dist. LEXIS 93590 (E.D. Cal. Jun. 3, 2019).
USDA’s Swampbuster “Incompetence”
How does the USDA determine if a tract of farmland contains a wet area that is subject to the Swampbuster rules? That’s a question of key importance to farmers. That process was at issue in a 2019 case, and the court painted a rather bleak and embarrassing picture of the USDA bureaucrats. In fact, the USDA-NRCS was brutalized (rightly so) by the appellate court’s decision for its lack of candor and incompetence. I will skip the details here (I covered the case in a blog post earlier in 2019), but the appellate court dealt harshly with the USDA. The USDA uses comparison sites to determine if a particular site is a wetland subject to Swampbuster rules. In this case, the USDA claimed that 7 C.F.R. § 12.31(b)(2)(ii) allowed them to select a comparison site that was "on the same hydric soil map unit" as the subject property, rather than on whether the comparison site had the same hydrologic features as the subject tract(s). The appellate court rejected this approach as arbitrary and capricious, noting that the NRCS failed to try an "indicator-based wetland hydrology" approach or to use any of their other tools when picking a comparison site. In addition, the appellate court noted a COE manual specifies that, “[a] hydrologist may be needed to help select and carry out the proper analysis" in situations where potential lack of hydrology is an issue such as in this case. However, the NRCS did not send a hydrologist to personally examine the plaintiff’s property, claiming instead that a comparison site was not even necessary. Based on 7 C.F.R. §12.32(a)(2), the USDA claimed, the removal of woody hydrophytic vegetation from hydric soils to permit the production of an agricultural commodity is all that is needed to declare the area "converted wetland." The appellate court concluded that this understanding of the statue was much too narrow and went against all the other applicable regulatory and statutory provisions by completely forgoing the basis of hydrology that the provisions are grounded in. Accordingly, the appellate court reasoned that because hydrology is the basis for a change in wetland determination, the removal of trees is merely a factor to determine the presence of a wetland, but is not a determining factor. In addition, the appellate court pointed out that the NRCS never indicated that the removal of trees changed the hydrology of the property during the agency appeal process – a point that the USDA ignored during the administrative appeal process. The court’s decision is a step in the right direction for agriculture. Boucher v. United States Department of Agriculture, 934 F.3d 530(7th Cir. 2019).
No More EPA “Finger on the Scales”
During 2019, a federal trial court ruled that the EPA has the authority to bar persons currently receiving grant money from the EPA to serve on EPA scientific advisory committees. That’s an important development for the regulated community, including farmers and ranchers. The court’s opinion ended an Obama-era EPA policy of allowing EPA advisory committee members to be in present receipt of EPA grants. At issue in the case was a directive of the Trump-EPA regarding membership in its federal advisory committees. The directive specified “that no member of an EPA federal advisory committee be currently in receipt of EPA grants.” The directive reversed an Obama-era rule that allowed scientists in receipt of EPA grants to sit on advisory panels. That rule was resulting in biased advisory committees stacked with committee members that opposed coal and favored an expansive “Waters of the United States” rule among other matters. In defending its policy change, the EPA explained that “while receipt of grant funds from the EPA may not constitute a financial conflict of interest, receipt of that funding could raise independence concerns depending on the nature of the research conducted and the issues addressed by the committee.” Thus, the change was necessary “to ensure integrity and confidence in its advisory committees.” The trial court found the EPA’s explanation to be within the zone of reasonableness. Based on these findings, the trial court held that the EPA action was rational, considered the relevant factors and was within the authority delegated to the agency. The court granted the EPA’s motion to dismiss the case. Physicians for Social Responsibility v. Wheeler, 359 F. Supp. 3d 27 (D. D.C. 2019).
Coming-To-The-Nuisance By Staying Put?
Nuisance lawsuits filed against farming operations are often triggered by offensive odors that migrate to neighboring rural residential landowners. In these situations courts consider numerous factors in determining whether any particular farm or ranch operation is a nuisance. Factors that are of primary importance are priority of location and reasonableness of the operation. Together, these two factors have led courts to develop a “coming to the nuisance” defense. This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances. But, what if the ag nuisance comes to you? Is the ag operation similarly protected in that situation? An interesting Indiana court case in 2019 dealt with the issue. In the case, the defendants were three individuals, their farming operation and a hog supplier. Basically, a senior member of the family retired to a farm home on the premises and other family members established a large-scale confined animal feeding operation (CAFO) on another part of the farm nearby. The odor issue got bad enough that the retired farmer sued. However, the court determined that the CAFO was operated properly, had all of the necessary permits, and was within the zoning laws. The court noted that the plaintiff alleged no distinct, investment-backed expectations that the CAFO had frustrated. The court upheld the state right-to-farm law and also determined that a “taking” had not occurred because the plaintiff had not sold his home and moved away from the place where he grew up and lived all of his life. Himsel v. Himsel, No. 18A-PL-645, 2019 Ind. App. LEXIS 181 (Ind. Ct. App. Apr. 22, 2019).
Obamacare Individual Mandate Unconstitutional
In his decision in 2012 upholding Obamacare as constitutional, Chief Justice Roberts hinged the constitutionality of the law on the individual mandate (contained in I.R.C. §5000A) being a tax and, therefore, within the taxing authority of the Congress. Thus, if the tax is eliminated or the rate of the penalty tax taken to zero is the law unconstitutional? That’s a possibility now that the tax rate on the penalty is zero for tax years beginning after 2018. In late 2018, a federal district court noted that the payment was distinct from the individual mandate and determined that the individual mandate was no longer constitutional as of January 1, 2019 because it would no longer trigger any tax. In addition, because the individual mandate was the linchpin of the entire law, the court determined that the provision could not be severed from the balance of the law. As a result, the court reasoned, as of January 1, 2019, Obamacare no longer had any constitutional basis. Texas v. United States, 340 F.3d 579 (N.D. Tex. 2018). In 2019, the appellate court affirmed. Texas v. United States, No. 19-10011, 2019 U.S. App. LEXIS 37567 (5th Cir. Dec .18, 2019). The appellate court determined that the individual mandate was unconstitutional because it could no longer be read as a tax, and there was no other constitutional provision that justified that exercise of congressional power. Watch for this case to end up back before the Supreme Court. The case is of monumental importance not only on the health insurance issue. Obamacare contained many taxes that would be invalidated if the law were finally determined to be unconstitutional.
These were the developments that didn’t quite make the “Top 10” of 2019. In Wednesday’s post, I will start the trek through the Top 10 of 2019.