Sunday, January 2, 2022
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 10 and 9
Agricultural law and agricultural tax law intersect with everyday life of farmers and ranchers in many ways. Some of those areas of intersection are good, but some are quite troubling. In any event, it points to the need for being educated and having good legal and tax counsel who is well-trained in the special rules that apply to agriculture.
Each year for the past 25 years I have compiled what are, in my view, the most important developments in agricultural law (which includes taxation that impacts farmers and ranchers) to the sector as a whole. The developments primarily are focused on the impact to production agriculture, but the issues involved will also have effects that spillover to rural landowners and agribusinesses as well as consumers of agricultural products.
The Tenth and Ninth most important agricultural law and tax developments of 2021 – it’s the topic of today’s post.
10. No Expansion of Public Trust Doctrine in Iowa. The “public trust doctrine” derives from the seas being viewed as the common property of the public that cannot be privately used or owned. They are held in “public trust.” This concept from England ultimately became part of the U.S. common law and has its primary application to the access of the seashore and intertidal waters.
The U.S. Supreme Court’s first application of the public trust doctrine was in 1842 in Martin v. Lessee of Waddell, 41 U.S.367 (1842). In the case, the issue was who had the right to submerged land and oyster harvesting off the coast of New Jersey. The Court, largely based on the language in the charter granted by the King to a Duke to establish a colony and for policy and economic reasons, determined that the land area in issue belonged to the state of New Jersey for the benefit of the people of the state. The Court dealt with the issue again in 1892 in a case involving a railroad that had been granted a large amount of the Chicago harbor. Illinois Central Railroad Company v. Illinois, 146 U.S. 387 (1892). The Court determined that the government cannot alienate (interfere with) the public’s right to access land under waters that are navigable in fact except for situations where the land involved wouldn’t interfere with the public’s ability to access the water or impair navigation.
A long-standing battle in Iowa over the level of nitrates and phosphorous in an Iowa waterway and farm field runoff came to a head in Iowa Citizens for Community Improvement, et al. v. State, 962 N.W.2d 780 (Iowa 2021). For approximately the past decade activist groups and certain academics have sought more regulatory control over farming practices that they deem contribute to excessive nutrients in an Iowa river and higher drinking water prices in Des Moines and elsewhere. They have sought to remove from the state legislature the power to make these decisions and have also sought more federal control.
The plaintiffs, two social justice organizations, sued the State of Iowa and state officials and agencies associated with agriculture and the environment, claiming that the public trust doctrine required them to enact legislation and rules forcing farmers to adopt farming practices that would significantly reduce levels of nitrogen and phosphorous runoff into the Raccoon River. The plaintiffs claimed that such a requirement would improve members’ feelings by enhancing aesthetics and recreational uses of the river and by reducing members’ water bills (at least in the Des Moines area). They sought declaratory and injunctive relief.
In response, the State argued that the plaintiffs lacked standing to sue and that the issue was nonjusticiable (i.e., not capable of being decided by a court). After the trial court denied the defendants’ motion to dismiss, the defendants sought an interlocutory appeal (i.e., an appeal of the trial court’s ruling while other aspects of the case proceeded).
On review, the state Supreme Court first noted that the scope of the public trust doctrine in Iowa is narrow, and that the doctrine should not be overextended. The Supreme Court noted that for a party to have standing to sue, they must have a specific personal or legal interest in the litigation and be “injuriously affected.” For a party to be injuriously affected, the Supreme Court stated that the injury complained of must be likely to be redressed by the court’s favorable decision. On that point, the Supreme Court determined that it would be speculative that a favorable court decision would result in a more aesthetically pleasing river or lower water rates.
Further, the Supreme Court determined the injunctive relief was not appropriate and that what the plaintiffs were seeking could only be accomplished through legislation. The Supreme Court pointed out that the plaintiffs admitted that the defendants lacked authority to require limits for nitrogen and phosphorous from agricultural nonpoint sources – the matter was up to the legislature. As a result, the Supreme Court determined the plaintiffs’ claims must be dismissed due to lack of standing.
The plaintiffs also claimed that constitutional due process rights were at stake and the Court should address them. The Supreme Court disagreed, pointing out that the plaintiffs’ own arguments cut against the Court being able to address such a claim. Because the plaintiffs were asking the Court to broaden the application of the public trust doctrine, the plaintiffs were essentially asking the Court to inject itself into political matters where there would be a lack of judicially discoverable and manageable standards. As the Supreme Court pointed out, “different uses matter in different degrees to different people.” Publicly elected policy makers decide these matters. Not the courts.
Consequently, the Court determined that granting any meaningful relief to the plaintiffs would result in the judicial branch asserting superiority over the legislature. An impermissible outcome under the co-equal system of government.
The Iowa Supreme Court decision has significant implications for agriculture in terms of the manner in which public policy decisions are made (by elected politicians and not non-elected government bureaucrats and/or courts). The reach of the Court’s decision is likely to have application beyond Iowa. Courts in other states facing novel issues tend to look at how courts in other states have ruled on those novel but similar issues.
9. IRS Regulations on Farm Net Operating Losses (NOLs). During 2021, the IRS issued guidance in Rev. Proc. 2021-14, 2021-29 I.R.B on how farm taxpayers are to handle carryback elections related to farm NOLs in light of all of the legislative rule changes in recent years. Those changes involved the Tax Cuts and Jobs Act (TCJA) of 2017, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020, and the COVID-Related Tax Relief Act (CRTA) of late 2020. The TCJA limited the deductibility of an NOL arising in a tax year beginning after 2017 to 80 percent of taxable income (computed without the NOL deduction). Under the TCJA, no NOL carryback was allowed unless the NOL related to the taxpayer’s farming business. A farming NOL could be carried back two years, but a taxpayer could make an irrevocable election to waive the carryback. The 80 percent provision also applied to farm NOLs that were carried back for NOLs generated in years beginning after 2017. Under the TCJA, post-2017 NOLs do not expire.
The CARES Act suspended the 80 percent limitation for NOLs through the 2020 tax year. The suspension applies to all NOLs, farm or non-farm, arising in tax years beginning in 2018-2020. The CARES Act also removed the two-year carryback option for farm NOLs and replaced it with a five-year carryback for all NOLs arising in a tax year beginning after 2017 and before 2021. Under the carryback provision, an NOL could be carried back to each of the five tax years preceding the tax year of the loss (unless the taxpayer elected to waive the carryback).
The COVID-Related Tax Relief Act (CTRA) of 2020 amended the CARES Act to allow taxpayers to elect to disregard the CARES Act provisions for farming NOLs. This is commonly referred to as the “CTRA election.” Under the CTRA election, farmers who had elected the two-year carryback under the TCJA can elect to retain that carryback (limited to 80 percent of the pre-NOL taxable income of the carryback year) rather than claim the five-year carryback under the CARES Act. In addition, farmers who previously waived an election to carryback an NOL can revoke the waiver.
The CTRA also specifies that if a taxpayer with a farm NOL filed a federal income tax return before December 27, 2020, that disregards the CARES Act amendments to the TCJA, the taxpayer is treated as having made a “deemed election” unless the taxpayer amended the return to reflect the CARES Act amendments by the due date (including extensions of time) for filing the return for the first tax year ending after December 27, 2020. This means that the taxpayer is deemed to have elected to utilize the two-year carryback provision of the TCJA.
On June 30, 2021, the IRS issued Rev. Proc. 2021-14, 2021-29 I.R.B. to provide guidance for taxpayers with an NOL for a tax year beginning in 2018-2020, all or a portion of which consists of a farming loss. The guidance details how the taxpayer can elect to not apply certain NOL rules of the CARES Act, and how the CTRA election can be revoked. Rev. Proc. 2021-14 is effective June 30, 2021.
The Rev. Proc. specifies that a taxpayer with a farming NOL, other than a taxpayer making a deemed election, may make an “affirmative CTRA election” to disregard the CARES Act NOL amendments if the farming NOL arose in any tax year beginning in 2018-2020. An affirmative election allows the farm taxpayer to carryback a 2018-2020 farm NOL two years instead of five years. Certain procedural requirements had to be satisfied. In addition, it’s an all-or-nothing election the taxpayer must choose either the two-year farm NOL carryback provision for all loss years within 2018-2020, or not. For taxpayers who follow the Rev. Proc. and make an affirmative election, the Rev. Proc. specifies that the 80 percent limitation on NOLs will apply to determine the amount of an NOL deduction for tax years beginning in 2018-2020, to the extent the deduction is attributable to NOLs arising in tax years beginning after 2017. In addition, the CARES Act carryback provisions will not apply for NOLs arising in tax years beginning in 2018-2020.
The IRS also set forth the procedure for a taxpayer to follow to not be treated as having made a deemed election. For taxpayers that made a deemed election under the CARES Act, the election applies unless the taxpayer amends the return. For a taxpayer that elected not to have the two-year carryback period apply to a farming NOL incurred in a tax year beginning in 2018 or 2019, the Rev. Proc. specifies that the taxpayer may revoke the election if the taxpayer made the election before December 27, 2020, and makes the revocation on an amended return by the date that is three years after the due date, including extensions of time, for filing the return for the tax year the farming NOL was incurred. If the NOL is not fully absorbed in the five-year earlier carryback year, the balance carries forward to the fourth year back and subsequent years in the carryback period until it is fully absorbed. The taxpayer may also amend the returns for the years in the five-year carryback period, if needed, to utilize the benefits of I.R.C. §1301 (farm income averaging).
Note: What remains unclear after the issuance of Rev. Proc. 2021-14 is whether the affirmative CTRA election can be made to use the two-year carryback if a farmer had previously waived the five-year carryback. The Rev. Proc. is not clear on this point.
If a taxpayer has an NOL that is a mixture of farm and non-farm activities, the portion of the NOL that is attributable to the farming activity may be carried back either two or five years consistent with the guidance of the Rev. Proc. The non-farm portion of the NOL may not be carried back two years. Also, the election to waive the carryback period is all-or-nothing. It is not possible to separately waive a farm NOL carryback from a non-farm NOL.
The next article will detail the Eighth and Seventh most important ag law and tax developments of 2021. Stay tuned.