Thursday, January 7, 2021

The “Top Ten” Agricultural Law and Ag Tax Developments of 2020 – Part One

Overview

After working through the “Almost Top Ten” agricultural law and tax developments of 2020, I have now reached what I consider to be the ten biggest developments of 2020 in terms of their significance to the agricultural sector as a whole.  Agricultural law and agricultural tax intersects with everyday life of farmers and ranchers in many ways.  Some of those areas of intersection of good, but some are quite troubling.  In any event, it points the need for being educated and having good legal and tax counsel that is well-trained in the special rules that apply agriculture.

Developments 10 through 8 of the “Top Ten” agricultural law and tax developments of 2020 – it’s the topic of today’s post.

No. 10 – Department of Justice Announces Investigation of Meatpackers

In May of 2020, President Trump asked the U.S. Department of Justice (DOJ) to investigate the pricing practices of the major meatpackers.  In addition, 11 state Attorneys General have asked the DOJ to do the same.  They pointed out in the DOJ request that the four largest beef processors control 80 percent of U.S. beef processing.  According to USDA data, boxed beef prices have recently more than doubled while live cattle prices dropped approximately 20 percent over the same timeframe.  The concern is that the meatpackers are engaged in price manipulation and other practices deemed unfair under federal law.

Questions about the practices of the meatpacking industry are not new – they have been raised for well over a century.  Indeed, a very significant federal law was enacted a century ago primarily because of the practices of the major meatpackers.  So, why is there still talk about investigations?  Is existing law ineffective?

Much of the matter is grounded in concerns about price manipulation by meatpackers.  Section 2020 of the Packers and Stockyards Act (PSA), 7 U.S.C. §§192(a) and (e) makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. This is a distinct concern in the livestock industry.

In June of 2010, the USDA issued proposed regulations providing guidance on the handling of antitrust-related issues under the PSA.  75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010).  Under the proposed regulations, "likelihood of competitive injury" was defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.”  It includes, but is not limited to, situations in which a packer swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers.  It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace."  According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace.  The scope of PSA §202(a) and (b) is stated to depend on the nature and circumstances of the challenged conduct. The regulations specifically note that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases.  The proposed regulations note that a PSA violation can occur without a finding of harm or likely harm to competition, but as noted above, that is contrary to numerous court opinions that have decided the issue.  The regulations eventually made it into the form of an Interim Final Rule but were later withdrawn.  82 FR 48594 (Oct. 18, 2017).

If the investigation is actually conducted, results could occur that would be very positive to livestock producers (and consumers) throughout the nation.

No. 9 – Conservation Easements

During 2020, the U.S. Tax Court and the appellate courts continued to issue numerous opinions involving the donation of permanent conservation easements to qualified organizations and the donor claiming an associated charitable deduction.  Presently, the U.S. Tax Court has over 100 cases on its docket involving donated conservation easements.  A donated conservation easement involves a legal agreement between a landowner and either a government agency or a land trust specifying that the donated land must be used in ways that preserve specified conservation/preservation goals. 

Very specific requirements contained in the Internal Revenue Code must be satisfied to secure a charitable deduction for the donor.  Those rules include a requirement that the donated easement be perpetual in nature and that any proceeds received upon judicial extinguishment of the easement be split between the donor and the donee in a prescribed manner.  The easement must also be valued very carefully and meet IRS guidelines.  In addition, syndicated easement transactions receive heightened scrutiny by the IRS.   A syndicated conservation easement transaction is one where the tax benefit is split among various investors.  It is a transaction that the IRS has identified as “abusive” when an appraisal is used to value the donated land that overvalues the land at issue and, thus, inflates the donor’s charitable deduction.

During 2020, the IRS offered a settlement program for persons and entities engaging in transactions that the IRS viewed as improper by allowed such taxpayers to avoid litigation by paying penalties and surrendering any tax benefits already received.  Relatedly, in 2020, the U.S. Senate started investigations into potential abuses involving conservation easements.  In August, the Senate published its findings, concluding the promoters of syndicated conservation easements and those participating in the transactions had avoided paying billions in taxes improperly.  The Senate report termed syndicated conservation easement transactions as an “abusive tax shelter,” and that allowing such deals to continue “could undermine the U.S. Tax system.”

The heightened IRS scrutiny of conservation easement transactions, coupled with the very high rate of success in court challenging the claimed charitable deductions makes it critical that attorneys, other tax advisors and appraisers follow every rule.  Deeds conveying the easement must be very carefully drafted.     The IRS has indicated that it will examine every transaction and litigate all cases where it deems an inappropriate charitable deduction has been claimed.

 No. 8 – Farm Records and FOIA

Telematch, Inc. v. United States Department of Agriculture., No. 19-2372, 2020 U.S. Dist. LEXIS 223112 (D.D.C. Nov. 27, 2020)

Farmers disclose a great deal of information and data to the USDA (federal government) to be able to participate in federal farm programs.  The information/data is often tied to the particular farmer and farm location, thus raising privacy concerns over what persons and/or entities have access to it.  Indeed, in recent years some animal activists opposed to large-scale confinement livestock production have committed acts of vandalism (and worse) against targeted facilities. 

Because the information about farmers, their operations, and the locations of fields and facilities is in the hands of the USDA it is generally subject to disclosure to the public.  In 1967, the Congress enacted the Freedom of Information Act (FOIA).  5 U.S.C. §552.  The FOIA requires the disclosure of federal government documents upon request.   The idea behind the law is to make federal agencies more transparent.  But can a FOIA request reach private information of farmers that is in the USDA’s hands?  Isn’t this personal information private?  It’s an important concern for farmers.  In 2020, a federal court issued an opinion that could prove to be very helpful toward easing the concerns of agricultural producers wanting to ensure that their private information is protected from public exposure. 

In Telematch, the plaintiff was in the business of collecting and analyzing agricultural data from various sources, including the federal government. The plaintiff submitted seven FOIA requests to the USDA for specific records. The records sought included farm, tract, and customer numbers created by the USDA. The USDA created these numbers to assign them to land enrolled in USDA programs and to identify program participants. The USDA denied the plaintiff’s FOIA requests either in part or fully on the basis that the records at issue were geospatial information exempt from disclosure as relating to specific farm locations and specific farmers, and on the basis that the information sought would result in an unwarranted invasion of personal privacy.

The plaintiff administratively appealed the FOIA requests, and then sued in federal court three months later after being unsatisfied with the USDA’s failure to adjudicate the appeal. The plaintiff alleged that the USDA violated the FOIA by withholding the customer, farm, and tract numbers. Additionally, the plaintiff alleged the USDA violated the FOIA by following an unlawful practice of systematically failing to adhere to FOIA deadlines. The plaintiff claimed that no substantial privacy interest was at stake, and the public interest in obtaining the requested information outweighed any privacy concerns.

As a starting point, the trial court noted that the FOIA mandates that an agency disclose records on request, unless the records fall within an exclusion. As to the farm and tract numbers, the trial court held that the USDA properly withheld the information as geospatial information. The trial court held that the farm and tract numbers are geospatial information, as they refer to specific physical locations.  Thus, USDA had properly not disclosed them to the plaintiff. 

The trial court also held that the USDA also properly withheld the customer numbers from disclosure.  Disclosing them, the trial court determined, would have been an invasion of personal privacy.  The court noted that while the customer numbers alone did not reveal information about landowners, they could be combined with other public data to identify individual farmers and reveal information about their farms and financial status. The plaintiff claimed that disclosing the customer, farm, and tract numbers would allow the public to monitor how the USDA was administering its farm programs.  Likewise, the plaintiff argued that the disclosure of the information would let the public determine whether the USDA was overpaying program participants and allow the public to determine whether farmers are complying with the USDA program.  However, the trial court concluded that neither of the plaintiff’s arguments warranted the disclosure of the numbered information because the plaintiff showed no evidence to support its claim of fraud and because the FOIA’s purpose is to shed light on what the government is doing rather than the conduct of USDA program participants. As a result, the court held that the USDA also properly withheld the customer numbers.

As for the plaintiff’s claim that the USDA systematically failed to adhere to FOIA deadlines, the court held that the plaintiff lacked standing for failing to establish the existence of an unlawful policy or practice. The court noted that the USDA responded to the FOIA requests according to then-existing USDA regulations. The regulations stated that FOIA requests served on USDA required prepayments for the request to commence. The plaintiff failed to prepay on some of the requests, and the USDA completed the remainder of the requests within FOIA deadlines. Finally, the court held that the USDA’s failure to adhere to statutory deadlines to process the plaintiff’s administrative appeals did not rise to the level of systematically ignoring FOIA requests.

An appeal was filed in the case on December 21, 2020.

Conclusion

The DOJ investigating meatpackers; tax issues with donated conservation easements; and the privacy of farm data – developments ten through eight.  Next time, I continue working my way toward the most significant ag law and ag tax development of 2020.

https://lawprofessors.typepad.com/agriculturallaw/2021/01/the-top-ten-agricultural-law-and-ag-tax-developments-of-2020-part-one.html

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