Friday, December 3, 2021
I always find it amazing how often legal issues present themselves for farmers and ranchers. In 30 years of being involved in issues involving agricultural law and taxation, I have never had a shortage of client issues to deal with or matters to write or speak about. It literally has been non-stop.
As usual, the courts continue to issue opinions involving farmers and ranchers and tax matters of importance to an even broader set of taxpayers. In today’s post, I highlight just a few of the recent ones.
Recent court opinions involving agricultural law and taxation – it’s the topic of today’s post.
Farmer’s Marijuana and Firearm Conviction Upheld
United States v. Lundy, No. 20-6323, 2021 U.S. App. LEXIS 33551 (6th Cir. Nov. 9, 2021)
After receiving a complaint that the defendant was growing cannabis on his property, state police officers investigated the property and found a large crop of cannabis plants, growing equipment, hundreds of pounds of processed cannabis with levels of THC meeting the standard for a controlled substance. The defendant had a past criminal history and unauthorized firearms were also found in his possession. The defendant had also been denied an application for a hemp license the previous year due to his criminal history involving marijuana and drug paraphernalia.
While being interviewed by police, the defendant emphasized that the marijuana on the property was for personal use and not for sale, though he admitted to giving marijuana away. He claimed that the firearms were for protecting his farm from nuisance animals and self-protection. Also at this interview, the defendant offered to smoke marijuana with the police officer conducting the interview. The defendant was arrested, charged with possession of a firearm by a user of controlled substances and ultimately sentenced to 46 months imprisonment.
The defendant appealed his conviction, claiming that the government failed to prove that he knew he was prohibited from possessing a firearm, and that the government failed to prove that he knew he was possessing and manufacturing marijuana. To sustain a conviction, the government bears the burden to prove that the defendant took drugs with regularity, over an extended period of time, and contemporaneously with his purchase or possession of a firearm. The defendant claimed that because he thought he was using hemp, the government failed to prove that he knew he used a controlled substance. In refuting the defendant’s claim, the government presented evidence of the defendant’s substance use, including prior testimony by the defendant about his use of marijuana throughout his entire adult life, testimony that he smokes pounds of marijuana a year, findings from the search of his property, testimony that the marijuana found was for personal use, the man’s offer to smoke marijuana with the police officer, and urine and hair samples that tested positive for high levels of THC. The court upheld the defendant’s conviction on the basis that there was overwhelming evidence that the defendant used marijuana with regularity and at the same time as his possession of firearms.
Note: Lundy clearly went, as the songwriter in the 1970s put it, “one toke over the line…”.
Rerouting of Irrigation Ditches Not a Taking
Ministerio Roca Solida_ Inc. v. United States, No. 16-826L, 2021 U.S. Claims LEXIS 2277 (Fed. Cl. Oct. 25, 2021)
The federal government has the right of eminent domain. In other words, it can take your property if it wants to. But, under the Constitution, a taking must be for a public purpose and the government must pay “just compensation” for what it takes.
In this case, a ministry owned a forty-acre parcel of land, which included a church camp, located within the boundaries of a national refuge. The refuge is home to many native plants and animals, including certain endemic species of fish that the United States Fish and Wildlife Service (USFWS) committed to protecting beginning in 1995. The USFWS’s protection plan included filling in irrigation ditches to return spring waters back to their historic paths. As a result of this plan, the ministry’s church camp was washed away in a series of floods caused by heavy rainfall. Camp buildings, access ways, and other improvements were swept away. The ministry alleged that construction of the spring water restoration channel caused the destructive flooding and constituted a total physical taking of its property, for which it was entitled to just compensation. Repairs were estimated at a cost of over $200.000.
While it is well-established that government-induced flooding of property can constitute a compensable taking for purposes of the Fifth Amendment, the court found that the ministry did not meet its burden of proving that the government’s construction of the restoration channel caused the flooding that occurred. The refuge had a long history of flooding, which was demonstrated by historical satellite images and expert testimony. Additionally, the Federal Emergency Management Agency had designated the ministry’s property as a high-risk flood zone, and informed it of floodplain ordinances requiring that buildings in flood zones be elevated or flood-proofed and anchored. Upon receiving this information, the ministry took no actions to bring itself into compliance with the ordinances. Consequently, the weight of the evidence showed that the flooding of the church camp would have occurred regardless of whether the restoration channel was built.
Farmers Detrimentally Relied on Crop Supply Salesman to Check Crops
Dettenhaim Farms, Inc. v. Greenpoint Ag, LLC, et al., No. 54,162-CA, 2021 La. App. LEXIS 1729 (La. Ct. App. Nov. 17, 2021)
The plaintiff corporation is a tenant farmer. Over a period of at least 25 years, a close friend would check the corporation’s crops for stinkbugs. The friend became employed by the defendant and continued checking the plaintiff’s crops for stinkbugs. Eventually, confusion over the corporation’s credit account arose and the defendant’s location manager told the friend that he should tell the plaintiff’s owner and his father that they probably needed to find somewhere else to do business. The manager also told the friend that the friend might not need to go back to the plaintiff’s fields. The friend never communicated this to farmers, and neither did anyone with the defendant. The manager did have a phone conversation with the farmers and thought they knew what he meant, but never told the farmers that the friend would no longer be checking their fields. In late summer, the farmers discovered that their soybean fields had not been checked and that, by then, stinkbugs had caused major damage to the crop.
Upon harvest, yield was dramatically reduced. The plaintiff sued the defendants after harvest for lost profit and also alleged that a different crop consultant could have been found if the friend and/or the defendants had given timely notice that crop consulting services had stopped. The plaintiff’s petition was later amended to add an allegation that the reduced soybean yield caused a premature sale of a cattle herd in order to compensate for the lack of revenue from the sale of harvested crops. The trial court heard testimony from various experts as to economic loss, and concluded that the plaintiff justifiably relied to its detriment on the defendants to advise concerning the products to use on the plaintiff’s fields and when to apply them. That justifiable reliance, the trial court concluded, caused the plaintiff to change position to its detriment. The trial court also determined that the defendants owed a duty to the plaintiff and failed to conform to that duty resulting in substantial crop damage which could have been avoided if the defendants had inspected the crops.
As to damages, the trial court accepted the methodology of a CPA that examined yield on nearby farms and concluded that the plaintiff sustained damages of $246,334, The trial court rejected the defendants’ argument that the plaintiff failed to mitigate damages by waiting at least two weeks to spray for stinkbugs after discovering the infestation. At the time of discovery of the stinkbug problem, the trial court determined, the crop damage had already occurred and the second wave of bugs didn’t arrive until two weeks later. However, the trial court, rejected the plaintiff’s claim that it was forced to sell 600 head of cattle to pay down debt because of the lost crop revenue. The trial court also rejected an emotional distress claim.
On appeal, the appellate court upheld the trial court’s finding of causation of damages to the soybean crop by the defendants. On the damages issue, the appellate court reduced the award to $148,946 based on the best historical yields over a five-year span rather than the yield from nearby field in 2016 (the year of the crop loss) based on the standard for calculating damages set forth in Aultman v. Rinicker, 416 So. 2d 641 (La. Ct. App. 1982). The appellate court also determined that, based on the evidence, the plaintiff failed to mitigate damages and, as a result, reduced the damage award further to $134,051.
No Deduction For Excess Rent – Bad Valuation
Plentywood Drug, Inc., et al. v. Comr., T.C. Memo. 2021-45
The petitioner, a drug store in a rural town in northeast Montana, claimed rent deduction for the main floor of the building it rented. The petitioner estimated the value of the main floor at $25 per square foot. Upon audit, the IRS rejected the petitioner’s valuation and pegged the value at $7.17 per square foot. The Tax Court rejected both valuations and determined that the rental value was $15.90 per square foot. As a result, the petitioner couldn’t claim approximately $40,000 in deductions attributable to “excess” rent. In addition, the rents paid exceeding the $15.90 per square foot threshold were non-deductible constructive dividends to the building owners. The Tax Court also rejected the IRS imposition of penalties under I.R.C. §6662. The Tax Court noted that real estate data are not publicly available in Montana which complicates efforts to appraise property values and reasonable rents.
EIP Not Exempt From Garnishment
United States v. Ruiz, No. EP-19-CR-03035(1)-DCG, 2021 U.S. Dist. LEXIS 217327 (W.D. Tex. Nov. 10, 2021)
The plaintiff was sentenced to five years in prison with five years of supervised release and ordered to pay restitution in early 2021. As of August of 2021, the plaintiff still owed the full amount. The government moved to garnish his bank account containing $3,982.23. The plaintiff claimed that $1,700 contained in the bank account was from a stimulus payment (“Economic Impact Payment”) paid under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and was exempt from garnishment as an unemployment benefit to provide relief from “economic challenges” faced as a result of the virus. The court noted that the statutory language providing for the payment classified it as a “recovery rebate” taking the form of a tax credit, and did not refer to it as an “unemployment” benefit. It was not conditioned on the lack of employment. The court held that the payment was also not properly classified as unemployment insurance, but was separate and distinct from unemployment insurance. Accordingly, the payment was not protected from garnishment under 18 U.S.C. §3613(a)(1) and 26 U.S.C. §6334.