Thursday, January 13, 2022
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The time has come to “unveil” the two biggest two developments in agricultural law and taxation for 2021. As I have been pointing out in the previous articles in this series, 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 that is well-trained in the special rules that apply to agriculture.
This is the fifth and final installment in my list of the “Top Ten” agricultural law and tax developments of 2021. The list is comprised of 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 Second and First most important agricultural law and tax developments of 2021 – it’s the topic of today’s post.
2. Developments Involving “Waters of the United States” (WOTUS).
Background. The scope of the federal government’s regulatory authority over wet areas on private land, streams and rivers under the Clean Water Act (CWA) has been controversial for more than 40 years. Many court opinions have been filed attempting to define the scope of the government’s jurisdiction. On two occasions, the U.S. Supreme Court attempted to clarify the 1986 regulatory definition of a WOTUS, but in the process of rejecting the regulatory definitions of a WOTUS developed by the Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (COE), the Court didn’t provide clear direction for the lower courts. See Solid Waste Agency of Northern Cook County v. United States Army Corps of Engineers, 531 U.S. 159 (2001); Rapanos v. United States, 547 U.S. 175 (2006). The lower courts have also had immense difficulties in applying the standards set forth by the U.S. Supreme Court.
Particularly with its Rapanos decision, the Court failed to clarify the meaning of the CWA phrase “waters of the United States” and the scope of federal regulation of isolated wetlands. The Court did not render a majority opinion in Rapanos, instead issuing a total of five separate opinions. The plurality opinion, written by Justice Scalia and joined by Justices Thomas, Alito and Chief Justice Roberts, would have construed the phrase “waters of the United States” to include only those relatively permanent, standing or continuously flowing bodies of water that are ordinarily described as “streams,” “oceans,” and “lakes.” In addition, the plurality opinion also held that a wetland may not be considered “adjacent to” remote “waters of the United States” based merely on a hydrological connection. Thus, in the plurality’s view, only those wetlands with a continuous surface connection to bodies that are “waters of the United States” in their own right, so that there is no clear demarcation between the two, are “adjacent” to such waters and covered by permit requirement of Section 404 of the CWA.
Justice Kennedy authored a concurring opinion, but on much narrower grounds. In Justice Kennedy’s view, the lower court correctly recognized that a water or wetland constitutes “navigable waters” under the CWA if it possesses a significant nexus to waters that are navigable in fact or that could reasonably be so made. But, in Justice Kennedy’s view, the lower court failed to consider all of the factors necessary to determine that the lands in question had, or did not have, the requisite nexus. Without more specific regulations comporting with the Court’s 2001 SWANCC opinion, Justice Kennedy stated that the COE needed to establish a significant nexus on a case-by-case basis when seeking to regulate wetlands based on adjacency to non-navigable tributaries, in order to avoid unreasonable application of the CWA. In Justice Kennedy’s view, the record in the cases contained evidence pointing to a possible significant nexus, but neither the COE nor the lower court established a significant nexus. As a result, Justice Kennedy concurred that the lower court opinions should be vacated, and the cases remanded for further proceedings.
Justice Kennedy’s opinion was neither a clear victory for the landowners in the cases or the COE. While he rejected the plurality’s narrow reading of the phrase “waters of the United States,” he also rejected the government’s broad interpretation of the phrase. While the “significant nexus” test of the Court’s 2001 SWANCC opinion required regulated parcels to be “inseparably bound up with the ‘waters’ of the United States,” Justice Kennedy would require the nexus to “be assessed in terms of the statute’s goals and purposes” in accordance with the Court’s 1985 opinion in United States v. Riverside Bayview Homes. 474 U.S. 121 (1985).
The “Clean Water Rule.” The Obama Administration attempted take advantage of the lack of clear guidance on the scope of federally jurisdictional wetland by issuing an expansive WOTUS rule. The EPA/COE regulation was deeply opposed by the farming/ranching and rural landowning communities, and triggered many legal challenges. The courts were, in general, highly critical of the regulation, invalidating it in 28 states by 2019. The CWR became a primary target of the Trump Administration.
The “NWPR Rule.” The Trump Administration essentially rescinded the Obama-era rule and replaced it with its own rule – the “Navigable Waters Protection Rule” (NWPR). 85 Fed. Reg. 22, 250 (Apr. 21, 2020). The NWPR redefined the Obama-era WOTUS rule to include only: “traditional navigable waters; perennial and intermittent tributaries that contribute surface water flow to such waters; certain lakes, ponds, and impoundments of jurisdictional waters; and wetlands adjacent to other jurisdictional waters. In short, the NWPR narrowed the definition of the statutory phrase “waters of the United States” to comport with Justice Scalia’s approach in Rapanos. Thus, the NWPR excluded from CWA jurisdiction wetlands that have no “continuous surface connection” to jurisdictional waters. The rule much more closely followed the Supreme Court’s guidance issued in 2001 and 2006 that did the Obama-era rule, but it was challenged by environmental groups. Indeed, the NWPR has been challenged in 15 cases filed in 11 federal district courts.
2021 developments. In early 2021, the U.S. Court of Appeals for the Tenth Circuit reversed a Colorado trial court that had entered a preliminary injunction barring the NWPR from taking effect in Colorado as applied to the discharge permit requirement of Section 404 of the CWA. The result of the appellate court’s decision is that the NWPR became effective in every state. Colorado v. United States Environmental Protection Agency, 989 F.3d 874 (10th Cir. 2021).
A primary aspect of the litigation involving the NWPR is whether it should apply retroactively or whether it is limited in its application on a prospective basis. For example, in United States v. Lucero, 989 F.2d 1088 (9th Cir. 2021), the defendant, in 2014, operated a business that charged construction companies for the dumping of soil and debris on dry lands near San Francisco Bay. The Environmental Protection Agency (EPA) later claimed that the dry land was a “wetland” subject to the dredge and fill permit requirements of Section 404 of the Clean Water Act (CWA). As a result, the defendant was charged with (and later convicted of) violating the CWA without any evidence in the record that the defendant knew or had reason to know that the dry land was a wetland subject to the CWA.
On further review, the appellate court noted that the CWA prohibits the “knowing” discharge of a pollutant into covered waters without a permit. At trial, the jury instructions did not state that the defendant had to make a “knowing” violation of the CWA to be found guilty of a discharge violation. Accordingly, the appellate court reversed on this point. However, the appellate court ruled against the defendant on his claim that the regulation defining “waters of the United States” was unconstitutionally vague, and that the 2020 Navigable Waters Protection Rule should apply retroactively to his case.
The NWPR was also held to apply prospectively only in United States v. Acquest Transit, LLC, No. 09-cv-555, 2021 U.S. Dist. LEXIS 40143 (W.D. N.Y. Mar. 3, 2021) and United States v. Mashni, No. 2:18-cv-2288-DCN, 2021 U.S. Dist. LEXIS 123345 (S.D. S.C. Jul. 1, 2021).
Most recently, a federal district court in South Carolina remanded the NWPR to the EPA. South Carolina Coastal Conservation League, et al. v. Regan, No. 2:20-cv-016787-BHH, 2021 U.S. Dist. LEXIS 132031 (D. S.C. Jul. 15, 2021). The NWPR was being challenged on the scope issue. Even though the NWPR was remanded, the court left the rule intact. That fit with the strategy of present Administration. If the court had invalidated the NWPR, then the Administration would have had to defend the Obama-era rule in court. By not vacating the NWPR allows the current administration to proceed in trying to write a new rule without bothering to defend the Obama-era rule in court.
In Pasqua Yaqui Tribe v. United States Environmental Protection Agency, No. CV-20-TUC-RM, 2021 U.S. Dist. LEXIS 163921 (D. Ariz. Aug. 30, 2021). the court vacated the NWPR. The court’s order did not specify the scope of the vacatur, but the EPA and the COE soon announced that neither agency would implement the NWPR on a nationwide basis, and will rely on the pre-2015 regulatory definition of a WOTUS until a new rule is developed. This all means that projects that have already received a CWA permit based on the NWPR can continue to rely on the permit until it expires. If a project has received an approved jurisdictional determination based on the NWPR may rely on it for five years from the date of issuance regardless of whether the project has already received a CWA permit based on the jurisdictional determination. For projects that have received a preliminary jurisdictional determination after the date of the court’s opinion may continue to rely on it.
New proposed rule. On December 7, 2021, the EPA and the COE published a proposed rule redefining a WOTUS in accordance with the pre-2015 definition of the term. 86 FR 69372 (Dec. 7, 2021). Under the proposed rule, EPA states its intention to define a WOTUS in accordance with the 1986 regulations as further defined by the courts since that time. In addition, the proposed rule would base the existence of a WOTUS on the “significant nexus” standard set forth in prior Supreme Court decisions. As such, a WOTUS would include traditional navigable waters; territorial seas and adjacent wetlands; most impoundments of a WOTUS and wetlands adjacent to impoundments or tributaries that meet either the relatively permanent standard or the significant nexus standard; all waters that are currently used or were used in the past or may be susceptible to use in interstate or foreign commerce, including all waters that are subject to the ebb and flow of the tide. The proposed rule defines “interstate waters” as “all rivers, lakes, and other waters that flow across, or form a part of State boundaries” regardless of whether those waters are also traditionally navigable. A “tributary” is also defined as being a WOTUS if it fits in the “other waters” category via a significant nexus with covered waters or if it is relatively permanent. The EPA and COE further define the “relatively permanent standard” as “waters that are relatively permanent, standing or continuously flowing and waters with a continuous surface connection to such waters.” The “significant nexus standard” is defined as “waters that either alone or in combination with similarly situated waters in the region, significantly affect the chemical, physical, or biological integrity of traditional navigable waters, interstate waters, or the territorial seas (the "foundational waters").” The comment period on the proposed rule expires on February 7, 2022.
Related WOTUS issue. During 2021 another significant case with WOTUS-related issues continued to wind its way through the court system. In Sackett v. Environmental Protection Agency, 8 F.4th 1075 (9th Cir. 2021), the plaintiffs bought a .63-acre lot in 2004 on which they intended to build a home. The lot is near numerous wetlands the water from which flows from a tributary to a creek, and eventually runs into a lake approximately 100 yards from the lot. The lake is 19 miles long and is a WOTUS subject to the CWA which bars the discharge of a pollutant, including rocks and sand into it. The plaintiffs began construction of their home, and the EPA issued a compliance order notifying the plaintiffs that their lot contained wetlands due to adjacency to the lake and that continuing to backfill sand and gravel on the lot would trigger penalties of $40,000 per day. The plaintiff sued and the EPA claimed that its administrative orders weren’t subject to judicial review. Ultimately the U.S. Supreme Court unanimously rejected the EPA’s argument and remanded the case to the trial court for further proceedings. The EPA withdrew the initial compliance order and issued an amended compliance order which the trial court held was not arbitrary or capricious. The plaintiffs appealed and the EPA declined to enforce the order, withdrew it and moved to dismiss the case. However, the EPA still maintained the lot was a jurisdictional wetland subject to the CWA and reserved the right to bring enforcement actions in the future. In 2019, the plaintiffs resisted the EPA’s motion and sought a ruling on the motion to bring finality to the matter. The EPA claimed that the case was moot, but the appellate court disagreed, noting that the withdrawal of the compliance order did not give the plaintiffs final and full relief. On the merits, the appellate court noted that the lot contained wetlands 30 feet from the tributary, and that under the “significant nexus” test of Rapanos v. United States, 547 U.S. 715 (2006), the lot was a regulable wetland under the CWA as being adjacent to a navigable water of the United States (the lake).
Note: On September 22, 2021, the plaintiffs filed a petition with the U.S. Supreme court asking the Court to review the case. The Supreme Court set January 14, 2022, as the conference date to determine whether it will accept the case for review and decision.
Update: On January 24, 2022, the U.S. Supreme Court granted certiorari. The Court will be deciding whether the Ninth Circuit used the proper test to decide whether the wetlands at issue are “waters of the United States” for purposes of the CWA. The Sacketts are asking the Court to use the four-justice plurality in Rapanos v. United States, 547 U.S. 175 (2006). Under that test, wetlands are only subject to the CWA when they have a continuous surface water connection to regulated waters.
1. The Failure of “Build Back Better” to Become Law.
Without doubt, the biggest development of 2021 was the failure of H.R. 5376, known as “Build Back Better” (BBB) to become law. The BBB would have also been the biggest development had it also become law. There are numerous provisions in the BBB that would have impacted farmers and ranchers significantly. While the bill did pass the U.S. House on November 19, the version that passed was a “slimmed-down” version that did not contain many of the more onerous (as viewed by agriculture) provisions that were originally included. The Senate failed to take up the legislation before the end of 2021.
The following are some of the more significant provisions that were originally included in H.R. 5376 that didn’t make it into the House passed version:
- Increase in corporate tax rate to 26.5 percent;
- Modifications to the “stepped-up” basis rule at death;
- Increase in top individual marginal rate to 39.6 percent;
- A phase-out or elimination of the 20 percent qualified business income deduction;
- Increase in top capital gain rate to 25%;
- Reduction in the federal estate/gift tax unified credit exemption equivalent;
- Change in the grantor trust rules;
- Change in the present interest annual exclusion rule;
- Increase in the top federal estate/gift tax marginal rate;
- Valuation discounting rules; and
- Increase in value reduction for land in decedent’s estate under Sec. 2032A
But, there remained certain provisions in H.R. 5376 of relevance to agricultural producers. Those include the following:
- An increase in the state and local tax deduction (SALT) from the present $10,000 amount to $80,000 (MFJ);
- A surcharge on high income earners;
- Expansion of the NIIT (3.8 percent) to trade or business income for taxpayers with taxable income exceeding $400,000 (single); $500,000 (MFJ), and application of the NIIT to trade or business income of estates/trusts;
- Limit on contributions to traditional or Roth IRAs for persons with combined IRA and defined contribution account balances exceeding $10 million and adjusted taxable income exceeds the $400,000/$500,000 thresholds; required distributions for accounts where owner has combined values exceeding $10 million; no “backdoor” Roths;
- Expansion of Medicare to cover dental, hearing and vision care;
- No oil and gas drilling on non-wilderness portion or ANWR; and
- Moratorium on offshore oil and gas leasing in Eastern Gulf of Mexico, Atlantic and Pacific federal waters.
Going forward into 2022, Democrats are expected to make efforts to advance their priorities in a filibuster-proof reconciliation bill containing the White House economic recovery “blueprint.” Disputes over the structure of several tax incentives remain at the center of bicameral talks aimed at clearing the way for the Senate to pass and the House to clear a revised version of H.R. 5376. The House appears to be focused on implementing H.R. 5376 and salvaging parts of it if the bill does not pass the Senate in the same form it passed the House. Democrats also are pushing to double the current IRS budget and are pitching the move as a revenue raiser by virtue of increased revenue from audits.
On the other side of the aisle, Republicans are pushing to make the point that temporary tax breaks followed by extensions would further fuel already high inflation and add to the deficit. Senate Republicans appear to be focused on keeping the corporate tax rate at 21 percent, the top individual rate at 37 percent and top capital gains rate at 20 percent.
As of today, there is no clear sign about how a deal will be cut on a fiscal 2022 omnibus spending deal before the February 18 expiration of the current stopgap spending law. There is no current ongoing negotiation with respect to H.R. 5376, Another issue for 2022 is what the Congress might do with respect to extending tax provisions that have currently expired. There are about two dozen provisions that expired at the end of 2021. Perhaps there will be a push for a separate extender bill for renewal of popular provisions such as a tax break for mortgage insurance premiums, the ($300/$600) above-the-line deduction for charitable deductions, and an increase to age 75 for the start of required minimum distributions from retirement plans.
So there you have it - five articles discussing the ten biggest developments in agricultural law and taxation for 2021. What else was the law concerned with involving agriculture in 2021 that didn’t make the “Top Ten” list? Next, I will start looking at those issues.