Ag Law and Tax Potpourri

Overview

Periodically, I cover recent “happenings” in ag law and tax.  It’s been a while since a selected a few developments for summary on this blog.  So, today is the day.  A snippet of taxes, environmental law and property law

Recent developments in the courts of relevance to agricultural producers, rural landowners and taxpayers in general – it’s the topic of today’s post.

“Roberts Tax” is a “Tax” Entitled to Priority in Bankruptcy 

 In re Szczyporski, No. 2:20-cv-03133, 2021 U.S. Dist. LEXIS 61628 (E.D. Pa. Mar. 31, 2021).

As you likely recall, in 2012, Chief Justice Roberts of the U.S. Supreme Court badly twisted the law to salvage Obamacare by concluding that Obamacare’s requirement that certain persons buy government-mandated health insurance was constitutional because the mandate was a “tax” withing the taxing power of the Congress – even though Obamacare calls it a “penalty.” National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012).  The cost of that “shared responsibility payment” was offset by a credit under I.R.C. §36B.   I.R.C. §36B of the grants “premium tax credits” to subsidize certain purchases of health insurance made on “Exchanges.” The tax credit consists of “premium assistance amounts” for “coverage months.”  I.R.C. §36B(b)(1). An individual has a coverage month only when he is covered by an insurance plan “that was enrolled in through an Exchange established by the State.  I.R.C. §36B(c)(2)(A). The law ties the size of the premium assistance amount to the premiums for health plans which cover the individual “and which were enrolled in through an Exchange established by the State. I.R.C. §36B(b)(2)(A). The credit amount further depends on the cost of certain other insurance plans “offered through the same Exchange.  I.R.C. §36B(b)(3)(B)(i). 

The tax Code provision that Obamacare created clearly states that the credit is available to a taxpayer only if the taxpayer has enrolled in an insurance plan through “an Exchange established by the State.”  I.R.C. §36B(b)(2)(A).  When several persons living in a state that didn’t have a state exchange claimed they were exempt from the mandate to buy health insurance because of its cost absent the credit, Chief Justice Roberts again applied his contorted legal logic to conclude that “an Exchange established by the State” meant “an Exchange established by the State or Federal Government.”  King v. Burwell, 576 U.S. 473 (2015). In other words, he completely rewrote the law a second time to salvage it. 

Note.  Justice Scalia had enough of the nonsense of Chief Justice Roberts when he wrote in his dissent in King, “The Court holds that when the Patient Protection and Affordable Care Act says “Exchange established by the State” it means “Exchange established by the State or the Federal Government.” That is of course quite absurd, and the Court’s 21 pages of explanation make it no less so.”  He also stated, “Words no longer have meaning if an Exchange that is not established by a State is “established by the State” and “The Court’s next bit of interpretive jiggery-pokery involves other parts of the Act that purportedly presuppose the availability of tax credits on both federal and state Exchanges.” 

This all brings us to the current case.  In Szczyporski, the debtor was required to file an income tax return in 2018, but hadn’t obtained the government-mandate health insurance resulting in the IRS assessing the “Roberts Tax” for 2018. In 2019, the debtor filed Chapter 13 bankruptcy and the IRS filed a proof of claim for taxes in the amount of $18,027.08 which included the Roberts Tax of $927. The IRS listed the Roberts Tax as an excise tax and the balance of the tax claim as income taxes. The debtors objected on the basis that the Roberts Tax is a penalty that is not qualify for priority treatment under 11 U.S.C. §507(a)(8). The debtor’s Chapter 13 plan was confirmed in 2020, and the IRS filed a brief objecting to the debtor’s tax treatment of the Roberts Tax.

The bankruptcy court ruled that the Roberts Tax was a “tax” under the bankruptcy Code entitled to priority treatment. In re Szczyporski, 617 B.R. 529, 2020 Bankr. LEXIS 1725 (Bankr. E.D. Pa., Jun. 23, 2020).  On appeal, the federal district court affirmed, citing National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012). While that decision involved facts outside of the bankruptcy context, the Supreme Court concluded that the Roberts Tax was a “tax” because it was enacted according to the taxing power of the Congress. Thus, it was either an excise or income tax, both of which are entitled to priority in bankruptcy. Here, the district concluded it was an income tax.

Settlement Proceeds Are Taxable Income

Blum v. Comr., T.C. Memo. 2021-18 

A damage award that a taxpayer receives that is not attributable to physical injury or physical sickness is includible in gross income.  In many lawsuits, there is almost always some lost profit involved and recovery for lost profit is ordinary income.  See, e.g., Simko v. Comr., T.C. Memo. 1997-9.  For recoveries in connection with a business, if the taxpayer can prove that the damages received were for injury to capital, no income results except to the extent the damages exceed the income tax basis of the capital asset involved.  The recovery is, in general, a taxable event except to the extent the amount recovered represents a return of basis.  Recoveries representing a reimbursement for lost profit are taxable as ordinary income.

In Blum, the petitioner was involved in a personal injury lawsuit and received a payment of $125,000 to settle a malpractice suit against her attorneys.  She did not report the amount on her tax return for 2015 and the IRS determined a tax deficiency of $27,418, plus an accuracy-related penalty.  The IRS later conceded the penalty, but maintained that the amount received was not on account of personal physical injuries or personal sickness under I.R.C. §104(a)(2).  The Tax Court agreed with the IRS because the petitioner’s claims against the law firm did not involve any allegation that the firm’s conduct had caused her any physical injuries or sickness, but merely involved allegations that the firm had acted negligently in representing her against a hospital. 

EPA Properly Approved Missouri Water Quality Standards

Missouri Coalition for the Environment Foundation v. Wheeler, No. 2:19-CV-04215-NKL, 2021 U.S. Dist. LEXIS 102806 (W.D. Mo. Jun. 1, 2021)

In 2009, the state of Missouri proposed water quality standards for nutrient standards for nutrient pollutants in Missouri lakes.  The Environmental Protection Agency (EPA) originally rejected the proposed standards, but ultimately accepted a revised version of the standards in 2018.  The plaintiffs, a coalition of environmental groups, sued claiming that the water quality standards should be set aside on the basis that the EPA’s determination was arbitrary and capricious.  The court upheld the state standards, finding them to have been grounded upon a rational basis that they would adequately protect the designated uses of protected waterbodies.

Plaintiffs’ Use of Road on Defendant’s Property Deemed a Prescriptive Easement

Ramsey v. Keesee, 2021 Ky. App. Unpub. LEXIS 231 (Ky. Ct. App. Apr. 16, 2021)

The plaintiffs each owned property adjacent to the defendant’s eastern boundary line. A road ran along the boundary on the defendant’s property, which was the only local road that connected to a state highway. One of the plaintiffs began maintaining the road without the defendant’s consent. In response, the defendant closed the gate on the road with a lock on it to prevent the plaintiffs from using it. The plaintiffs sued and sought to remove the gate from the road. The trial court determined the plaintiffs had acquired a prescriptive easement over the road by actual, hostile, open and notorious, exclusive and continuous possession of the road for the statutory period of 15 years. As a result, the trial court held that the plaintiffs had the right to use the road for agricultural purposes and to maintain the road in a reasonable manner.

On appeal, the defendant argued that one of the plaintiff’s use of the road two or three times per week did not constitute open and notorious possession because it was insufficient to put the defendant on notice. The appellate court noted that under state common law, it is the legal owner’s actual or imputable knowledge of another’s possession of lands that affects the ownership. As a result, the appellate court held that the plaintiff’s use of the road put the defendant on constructive notice. The defendant then argued that one of the plaintiff’s use of the road was permissive as she had maintained the gates on the road. The plaintiff argued that he always believed the road at issue was an old county road and that he never sought permission to use the road. The appellate court determined that the gates on the road were never intended to prevent the plaintiffs from using the road, but were primarily for farm purposes. The defendant also claimed that the trial court erred in determining the use and location of the prescriptive easement as two of the plaintiffs had not maintained the road. The appellate court noted that maintenance of the road was not a necessary element to establish an easement by prescription. Lastly, the defendant argued that the plaintiffs’ nonuse of the north part of the road resulted in an abandonment of the prescriptive easement. The appellate court noted that mere non-use of an easement does prove that an easement has been abandoned, and held that the plaintiffs occasional use of the road rebutted the defendant’s abandonment claim.

Conclusion

The developments never cease.  There will be more as time goes on.