Monday, August 24, 2020

Court Developments in Agricultural Law and Taxation


The cases and rulings involving agriculture keep on coming.  In today’s post, I pick out just a few involving some rather common issues.

Ag law in the courts – it’s the topic of today’s post.

Railroad Responsible For Faulty Railroad Fence 

Leslie v. BNSF Railway. Co., No. Civ. 1:16-cv-1208-JCH-JHR, 2019 U.S. Dist. LEXIS 154460 (D. N.M. Sept. 10, 2019)

Railroads are responsible for building and maintaining railroad fences.  But, the nuances of each state’s fence law involving railroads can cause some interesting arguments.  In a New Mexico case last year, the court was faced with addressing a previously unanswered application of the state fence law as applied to a railroad.   

The plaintiffs collided with a cow on a public highway.  The defendant was responsible for building and maintaining the adjacent fence along a ranch that it had a right-of-way through. The plaintiffs alleged that the railroad company negligently maintained the fence, which allowed a cow to escape onto the highway. The defendant claimed that it did not own the cow that escaped, and that the plaintiff’s theory for recovery hinged on the defendant first being found liable in an action against the owner of the livestock. The defendant removed the action from New Mexico state court to federal court and sought a judgment with respect to both of the plaintiffs’ negligence claims.

 The court interpreted the New Mexico legislature’s intent of whether the plaintiffs were a protected class under the state’s fence law and determined that the plaintiff failed to establish a negligence per se claim requiring railroads to build fence lines. The purpose of the railroad fencing portion of the fence law, the court determined, was to protect owners of livestock rather than the motoring public.  The plaintiffs’ second claim was that the defendant was per se negligent by permitting the cow to wander upon the road. The statute at issue stated that it was unlawful for “any person” to “negligently permit” livestock to wander upon any unfenced highway. The defendant argued that the term “permit” required that the negligence of the owner of the livestock must be established before liability would attach. Although the court determined that the phrase “any person” had not been construed to mean persons other than owners of livestock, it concluded that the New Mexico legislature had limited the application of similar statutes and failed to do so in this instance. According to the court, the failure to limit the statute by the state legislature meant the statute was intended to be interpreted broadly in order to protect a broader class of people.  The court held that the plaintiffs had established themselves as members of the class sought to be protected by the fence law and that the defendant had permitted the cow to wander on the road. Upon further consideration, the plaintiff must establish whether the defendant had negligently permitted the cow to wander upon the road.

Paying Principal Amount Within Redemption Period is Insufficient to Redeem Property

Sibley State Bank v. Zylstra, No. 19-0126, 2020 Iowa App. LEXIS 830 (Iowa Ct. App. Aug. 19, 2020)

When farmland is foreclosed upon, the owner is given a period of time to redeem the property by paying the price the property brought at the foreclosure sale plus costs.  But details matter.  In this case, the plaintiff purchased one of two parcels of land at a foreclosure action and another business purchased the other parcel. Under state (Iowa) law, the buyers took the property subject to the prior owner’s one-year right of redemption from the date of the sale. The prior owner assigned its redemption rights to the defendant 364 days after the foreclosure sale. The next day (the final day of the redemption period) the defendant tendered a check to the county court clerk for the principal amount of the two foreclosure bids and received a receipt from the clerk showing a “balance due” of zero.

Two days later, the plaintiff applied for a hearing on the redemption issue to refund the defendant’s check and sought a finding that no redemption had occurred because the amount tendered by the defendant did not include interest and fees. The defendant claimed that the court clerk would not tell him the exact amount that was necessary to redeem both properties upon his asking. The defendant further claimed that the clerk withheld the amount from him, and that he had acted in good faith in trying to redeem the properties by paying the full principal amount (well over $1 million). The trial court found that the defendant failed to inquire with either the bank or the bank’s attorney what the amount due for redemption would be. Additionally, the trial court held that the county clerk had no duty to the defendant to determine the redemption amount. On appeal, the defendant claimed that the trial court erred in not granting him equitable relief, and that he paid a sufficient amount to redeem at least one of the properties. The appellate court affirmed, holding that the mistake in calculating the payoff amount was the defendant’s sole fault. Further, the appellate court noted the defendant could have taken advantage of a safe harbor provision, as the redemption period was about to expire, but failed to do so. As for the defendant’s claim of partial redemption for having tendered an amount exceeding the redemption price of either property, the appellate court held that in order to redeem one tract required the defendant to specify which parcel was being redeemed. The appellate court held that an insufficient payment for redemption of two properties alone cannot result in an after-the-fact redemption of one of the properties.

A Prescriptive Easement May Be Created Over a Ditch or Waterway

Five Forks Hunting Club, LLC v. Nixon Family Partnership, No. CV-18-301, 2019 Ark. App. LEXIS 397 (Ark. Ct. App. Sept. 11, 2019)

Easement issues are frequently encountered with respect to agricultural properties.  But, is an access easement restricted to land, or can it apply to water access?  That was the issue involved in this case.

Here, the parties owned adjoining tracts that they used for duck hunting.  The plaintiff sought a declaratory judgment against the defendant, claiming that the plaintiff had the right to control the use of a ditch that the defendant had been using to gain access to the plaintiff’s land. The plaintiff had built a bridge to block the defendant’s path to their property, and in years past had obstructed the defendant’s path on separate occasions. The plaintiff claimed that the defendant merely had permissive use of the ditch, but the defendant sought a prescriptive easement over the ditch and a road that ran parallel to the ditch. The defendant would use the road to gain access to the land during dry periods and travel by boat in the ditch during times where the road was underwater. The trial court held that the defendant was able to establish an easement by prescription over the ditch by establishing that a preponderance of the evidence showed that the use of the ditch was adverse to the plaintiff and under a claim of right for the seven-year statutory period. On appeal, the appellate court noted that under Arkansas law, any vehicle needed for the operation of the easement could be driven across the servient estate. A boat could be used to access the easement therefore a prescriptive easement could be created over a ditch or waterway. The plaintiff also argued on appeal that the defendant failed to prove the necessary elements of a prescriptive easement. The plaintiff argued that the use of the ditch was not continuous or uninterrupted for the required statutory period because the ditch was not always flooded. The appellate court, however, held that mere temporary absences of a claimant do not interrupt the “continuous” requirement for a prescriptive easement. Also, the plaintiff’s attempts to obstruct the defendant’s use of the ditch occurred after the defendant had met the statutory requirement for establishing a prescriptive easement. Finally, the appellate court noted that the trial court’s decision to not limit the prescriptive easement for the ditch to a shorter route was not in error as it created no additional burden to the plaintiff landowner.

Lack of Proof for Ag Sales Tax Exemption 

Arkansas Dept. of Rev. Legal Counsel Op. No. 20200527 (Jul. 21, 2020)

In many states, personal property used in farming is exempt from sales tax.  That is the case, for example, in Arkansas.  But, it is important to be able to certify that the buyer is engaged in the trade or business of farming and that the item(s) purchased will be used in farming.  Under many state provisions, to be exempt the item(s) purchased must be used directly in farm production activities.  Indirect uses, such as an all-terrain vehicle used to spray weeds on the farm, don’t qualify.

Under the Arkansas procedure, a farmer provides a “Farm Exemption Certificate” to a seller so that the seller knows whether the sale of an item is exempt from sales tax because the buyer was engaged in farming and the item purchased would be used directly and exclusively in farming.  Here, the question was whether livestock shade systems and mower covers qualified for the exemption.  Based on the facts presented, it was determined that the taxpayer (seller) did not provide sufficient facts concerning any specific sale or transaction for a determination of exemption to be made.  However, the seller could rely on the buyer’s Certificate and could accept a certification or other information from the buyer to establish that the sale was exempt.  Alternatively, the taxpayer could accept a certification or other information that the buyer provided to establish that the sale was exempt.  Such, other information could include the buyer certifying in writing on a copy of the invoice or sales ticket that the taxpayer would retain stating that the buyer was a farmer and that the items would be used exclusively and directly in farming as a business. 

More Problems with Donated Permanent Conservation Easements

Belair Woods, LLC v. Comr., T.C. Memo. 2020-112 ; Cottonwood Place, LLC, et al. v. Comr., T.C. Memo. 2020-115

The Tax Court continues to render decisions involving claimed charitable deductions for the donation of “permanent” conservation easements.  At the National Farm Income Tax/Estate and Business Planning Conference last month in Deadwood, SD, U.S. Tax Court Judge Elizabeth Paris stated that many cases remain in the Tax Court’s pipeline yet to decide.  That vast majority of the decision so far have been decided in favor of the IRS.  Don’t expect that trend to change. 

I.R.C. §170(h)(5)(A) requires that an easement donated to a qualified organization to be “protected in perpetuity.”  Treas. Reg. §1.170A-14(g)(6) requires that the easement grant must, upon extinguishment, result in the charity receiving a proportionate part of the proceeds when the property subject to the easement is sold.  In Belair Woods, however, the deed language did not provide the charity with a proportionate part of the gross sales proceeds.  Instead, it specified that the charity would receive the extinguishment proceeds reduced by any increase in value related to improvements that the donor had placed on the property.  The deed language also required a reduction in the proceeds going to the charity by an amount paid to satisfy any and all prior claims regardless of whether a claim arose from the donor’s conduct. 

The Tax Court strictly construed the regulation and denied a charitable deduction for the donation because the grantee was not in all cases absolutely entitled to a proportionate share of the proceeds upon extinguishment sale of the property.  As such, the contribution was not protected in perpetuity.  The Tax Court noted that the improvements were part of the donation rather than the donation being restricted just to the underlying land.  The rights to construct improvements were restricted in meaningful ways by the easement, and also enhanced the property’s value.   The petitioner also claimed that the IRS had accepted deed terms comparable to the petitioner’s deed via a stipulation in a case involving a different petitioner and, as such, should be estopped from disallowing the petitioner’s deduction.  The Tax Court determined that the petitioner had failed to satisfy its burden in establishing that judicial estoppel should apply because the IRS position in the other case was merely a tactical stipulation and the case was settled. 

In Cottonwood Place, LLC, the petitioner donated a conservation easement on land to a land trust (qualified charity), reserving the right to construct limited improvements in the area subject to the easement.  The Tax Court determined that no charitable deduction was allowed because the deed language didn’t entitle the charity to a proportionate share of any easement extinguishment proceeds if a court were to extinguish the easement and order the property sold.  Thus, the language violated Treas. Reg. §1.170A-14(g)(6).  The Tax Court noted that the deed language specified that the charity’s share of such proceeds would be reduced by the value of improvements added to the property after the easement donation.  The Tax Court rejected the petitioner’s substantial compliance argument. 


As you can see, issues involving agricultural land and agricultural producers are prevalent.  Good legal and tax counsel is a must.  That’s what we are training at Washburn Law School in the Rural Law Program.  This week we welcome new students to the program from state across the country!

Civil Liabilities, Income Tax, Real Property | Permalink


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