Wednesday, April 15, 2020
In recent articles on this blog, I have taken a look at the various parts of recently enacted legislation as a consequence of the economic trauma the federal and state governments have imposed on businesses and individuals as a recent of the virus. Today, I step away from virus related developments and focus on recent court opinions of relevance to agricultural law and taxation.
Ag law and tax in the courts – it’s the topic of today’s post.
Valuation Discounting – Assignee Interests
Streightoff v. Comr., T.C. Memo. 2018-178, aff’d., No. 19-60244, 2020 U.S. App. LEXIS 10070 (5th Cir. Mar. 31, 2020).
Limited partnerships (and their variant – the family limited partnership), emerged as an important estate and business planning tool in the early 1990s. They can be useful for farming and ranching operations of relatively higher net worth as a vehicle to transfer interests in the farming or ranching business to a succeeding generation at a discounted value. That discounted value is often achieved by working the transferor into a minority position before death and the creation of multiple types of partnership interests, and also holding those partnership interests in different types of entities. Discounted value can also be achieved (under the laws of some states) by transferring an assignee interest rather than the actual interest in the partnership. Assignee interests are, in essence, limited partnership interests with economic participation equal to that of limited partnership interests but typically without the same rights. They typically do not carry the right to vote, inspect partnership books or transfer their interests. Thus, the claim is, they should be valued less than a general partnership interest and even less than a limited partnership interest for both federal gift tax as well as estate tax purposes - if they are established and transferred properly. That was the issue in a recent case.
In Streightoff, the decedent had created a limited partnership under Texas law before death. The decedent held a one percent general partner interest and an 88.99 percent limited partner interest. Eight of the decedent’s family members owned the balance of the limited partner interests. The partnership didn’t conduct any meetings and held cash, equities, bonds and mutual funds. The decedent had the power to approve the sale of partnership interests and had a right of first refusal on all sales. The partnership agreement described persons who acquired partnership interests as “assignees.”
A few years before death, the decedent purported to create an “assignee” interest in his revocable trust with respect to his 88.99 percent limited partnership interest. The decedent’s estate tax return reported the decedent’s limited partnership interest as an “assignee” of the revocable trust and claimed a 37.2 percent discount for lack of marketability discount and lack of control. The estate based the level of the discount on the notion that the trust only held an assignee interest consistent with the partnership agreement which stated that, “A transferee who was not admitted as a substituted limited partner would hold the right to allocations and distributions with respect to the transferred interest, but would have no right to information or accounting or to inspect the books or records of the partnership and would not have any of the rights of a general or limited partner (including the right to vote on partnership matters)."
The IRS reduced the extent of the discount and asserted a deficiency of about $500,000. While the estate claimed that the lack of marketability discount should be 27.5 percent based on a possible holding period until 2075, the Tax Court determined that the decedent’s assignee interest was essentially the same thing as a limited partnership interest. Accordingly, the Tax Court settled on an 18 percent discount for lack of marketability. No discount for lack of control was allowed because the Tax Court found that the partnership interest was significant and carried with it the power to remove the general partner. The appellate court affirmed on appeal, concluding that the Tax Court properly determined that the assignment was essentially a transfer of the decedent’s partnership interest. The “assignment” clearly conveyed more than an assignee interest.
Petition to Quiet Title Over Disputed Boundary Denied
If an individual possesses someone else's land in an open and notorious fashion with an intent to take it away from them, such person (known as an adverse possessor) can become the true property owner after the statutory time period has expired via a quiet title action. Adverse possession statutes vary by jurisdiction in terms of the requirements a person claiming title by adverse possession must satisfy and the length of time property must be adversely possessed. A boundary between two properties can also be established by acquiescence. This theory applies when neither of the adjacent owners knows the location of the true boundary. Instead, the parties treat a particular marker or line as the boundary for a prescribed period of time. Both parties simply agree (acquiesce) to treat that particular line or marker as the boundary. Both of these concepts were involved in a recent Iowa case.
The parties had been adjoining rural landowners since 1988. When the defendant bought his tract, a survey was conducted. That survey was relied on in litigation between the parties concerning a dispute over logged timber on a five-acre parcel where ownership between the parties was not clear via the respective deeds. A few years later the plaintiff sued to quiet title to the disputed area claiming that the true boundary was the existing fence line based on either the theory of adverse possession or boundary by acquiescence.
The trial court determined that the plaintiff had failed to establish the requirements for either theory, and refused to quiet title in the plaintiff. On appeal, the appellate court agreed. Based on the evidence, the appellate court determined that the plaintiff failed to establish exclusive use of the disputed area for the statutory period and did not substantially maintain or improve the area. Thus not all of the elements of adverse possession were satisfied. In addition, the plaintiff did not bring the quiet title action for six years after the initial dispute over timber. The appellate court also determined that the defendant did not treat the fence line as the boundary. Thus, no boundary by acquiescence was established because both parties did not assume the fence line was the boundary.
Court Addresses Direct and Indirect Discharges Under CWA – Awaiting Supreme Court Guidance
The plaintiff claimed that the defendant had violated the Clean Water Act (CWA) by allowing a hatchery that the defendant owned and operated to discharge pollutants into a river in violation of the hatchery’s National Pollutant Discharge Elimination System (NPDES) permit. The plaintiff claimed that the defendant was making both direct and indirect discharges in violation of its NPDES permit. The direct discharge claims were based on current and anticipated future discharges directly from the hatchery into the river. The indirect discharge claims stemmed from past releases of phosphorus by the hatchery that became sediment at the bottom of the river. Those discharges continued to leach phosphorus into the water.
The trial court dismissed the direct discharge claims and directed the parties to submit additional arguments with respect to the indirect discharge claims. The direct discharge claims were dismissed because in late 2019, the EPA released a new NPDES permit for the hatchery which ultimately may allow the discharges that the plaintiffs claim violate the CWA. Because the anticipated 2020 permit may moot some or all of the plaintiffs’ direct discharge claims, the court dismissed those claims. As for the indirect discharge claims, the court noted that the plaintiffs’ arguments that the defendants have violated the CWA by allowing pollutants to enter a water of the United States through a conduit is similar to an issue that is presently before the United States Supreme Court. See Hawaii Wildlife Fund v. County of Maui, 881 F.3d 754 (9th Cir. 2018), pet. for cert. granted, County of Maui v. Hawaii Wildlife Fund, 139 S. Ct. 1164 (2019). Because how the Supreme Court rules on the indirect discharge claim could impact the court’s decision in this case, the court requested that the parties file additional briefing on whether the Maui case should influence the court’s decision.
Alimony Payments Not Deductible
Biddle v. Comr., T.C. Memo. 2020-39
In divorce situations, it’s fairly common for one ex-spouse to become legally obligated to make payments to the other ex-spouse. Before 2018, the ex-spouse making alimony payments could deduct them for federal income tax purposes. To be deductible alimony, a payment could not be classified as fixed or deemed to be child support under a set of complex rules, as evidenced in a recent Tax Court case.
Under the facts of the case, the petitioner and his wife were married for 14 years and had four children together before divorcing in 2010. The divorce decree included provisions for “child support” and “alimony.” The decree ordered the petitioner to pay monthly child support of $1,795.63 per month until each child reached age 18, died, married, entered military school or became self-sufficient. The decree also ordered the petitioner to pay “permanent periodic alimony” of $1,592.50 for at least five years until either the youngest child reached age 18, the ex-wife or petitioner died, the ex-wife remarried at the five-year point or later, or the wife became self-supporting. The decree also specified that if the husband received a pay raise that half of the net increase would increase the alimony payment. The decree was later modified to reduce the monthly child support amount because the petitioner took custody of an additional child. No change was made to the alimony payment.
On petitioner’s 2015 return, he claimed a $28,000 alimony deduction. The IRS disallowed the deduction as nondeductible child support because of one of the contingencies terminating payment was petitioner’s youngest child turning 18. The Tax Court upheld the IRS position. The Tax Court noted that under I.R.C. §71(c)(2)(A), the payments would count as child support until the child turned 18. Here, the decree clearly stated that the designated alimony payments would terminate on the contingency that the petitioner’s youngest child turn 18. That was a contingency relating to a child that qualifies a payment as nondeductible child support. This is the result, the court noted, even though the decree designated separate amounts for child support and alimony. The parties’ intent also was immaterial.
Even though the focus of much present thought and discussion is on the virus and the economic wreckage that (primarily) state governmental policies are causing, the courts continue to crank out important cases. Make sure you are still paying attention to what is going on.