Monday, January 9, 2023
Today’s blog article continues the series that began earlier this week reviewing the top ag law and tax developments of 2022. I am working my way through those developments that were significant, but not quite of national significance to make the “Top Ten” of 2022.
More ag law and tax developments of 2022 – it’s the topic of today’s post.
Tax Court has Equitable Jurisdiction to Review CDP Determination
Boechler, P.C. v. Commissioner, 142 S. Ct. 1493 (2022)
The petitioner, a two-person North Dakota law firm, was assessed an “intentional disregard” penalty. The IRS notified them of an intent to levy. They requested and received a CDP (Collection Due Process) hearing, in which appeals sustained the proposed levy. I.R.C. §6330(d)(1) requires a Tax Court petition to be filed within 30 days, but the firm filed one day late. The Tax Court dismissed the petition for lack of jurisdiction. The Eighth Circuit affirmed on the ground that the statutory requirement for filing was jurisdictional and thus could not be waived. In a unanimous decision, the U.S. Supreme Court ruled that the 30-day period was not a jurisdictional requirement largely due to lack of clarity in I.R.C. §6330(d)(1). Moreover, the Supreme Court reasoned that its decision preserved the possibility for a court to apply equitable tolling to benefit taxpayers in this context, who often acted without counsel. While the application of equitable tolling would depend on further proceedings, the law firm will get the chance to make its case.
Comment: Although the Supreme Court’s decision does not create greater clarity, it may avoid some injustice. Eighth Circuit Judge Kelly wrote a concurring opinion in which he stated that a jurisdictional approach is a “drastic” measure that may impose a disproportionate burden on low-income taxpayers. This concurring opinion may have been what convinced the U.S. Supreme Court to hear the case.
Additional Note: In late 2022, the Tax Court addressed the issue of the right to judicial review of an IRS deficiency proceeding in accordance with I.R.C. §6213(a). In Hallmark Research Collective v. Comr., 159 T.C. No. 6 (2022), the petition was electronically filed one day late. The Tax Court held that the statute was clear in specifying that the IRS must issue a deficiency notice and that the taxpayer must respond by filing a Tax Court petition within a 90-day time limit. As such, the 90-day time limit is a prerequisite of jurisdiction. The court concluded that deficiency proceedings are based in statute and cannot be equitably tolled.
COE Improperly Declined Jurisdiction
Hoosier Environmental Council, et al. v. Natural Prairie Indiana Farmland Holdings, LLC, et al., 564 F. Supp. 3d 683 (N.D. Ind. 2021)
Note: I’m reaching back into 2021 to grab this case. I didn’t see it until early in 2022, and it should have been on last year’s list. But, nevertheless, I want to include it as a significant development for 2022 albeit it was a 2021 federal court decision from Indiana.
This case involved the issue of the U.S. Army Corps of Engineers (COE) deciding not to regulate a wet area on a farm and whether the decision not to exercise jurisdiction was done properly. The court’s decision is instructive on the procedure for determining the existence of a wetland, what “prior converted cropland is” and how the agency should properly decline to regulate
The defendant acquired farmland to build and operate a concentrated animal feeding operation (CAFO) with over 4,350 dairy cows. The COE inspected the property and concluded that much of the land was not subject to the Clean Water Act (CWA). The plaintiffs, two environmental groups, sued alleging that the defendant violated the CWA and that the COE’s administrative jurisdictional determination violated the Administrative Procedures Act (APA). The land at issue was drained in the early 1900's via the creation of several large ditches and drainage canals to move surface water into the Kankakee River 9.5 miles downstream. The CAFO was constructed on what had been a lakebed over a century ago, and two of the drainage ditches are on the defendant’s land.
Note: The lake was totally drained in the early 1990s to make farmland. Vested with that is the right to maintain the drain. See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999). It is immaterial what the size of the lake was or whether it was where a marsh was at some time in the past. The land at issue was completely transformed to farmland long before the defendant acquired the land at issue.
The primary issue before the court was whether the COE’s determination that the land was prior converted wetland (and therefore not subject to COE regulation) was arbitrary and capricious. The court examined the record to determine if the COE followed its own guidance for delineating wetlands. The court noted that the administrative record lacked any description of the prior drainage system (the series of medial and lateral ditches transecting the property before defendant’s alterations), the defendant’s new drainage system, how these systems were designed to function, and whether they were effective in removing wetland hydrology from the area.
Note: While the plaintiffs made much ado about the COE’s lack of consideration of the hydrology of the land before the farm’s alterations, that is largely an irrelevant point. Famers are entitled to maintain the “wetland and farming regime” on the land and may engage in whatever drainage activities necessary to keep that historic farming activity and production. The land in question had been converted to farmland many decades earlier and had been constantly maintained in that status.
The court examined aerial photographs, noting that there was an absence of data identified in the COE’s “Midwest Supplement” to assess the relevant drainage factors, including how the existing and current drainage systems were designed to function, whether they were effective in removing wetland hydrology from the area, and when any conversion occurred. The absence of these sources, coupled with an absence of any meaningful discussion of the hydrology of the site before the defendant’s alterations, led the court to believe that the COE failed to follow the procedures outlined in its own guidance in deciding the land was prior converted cropland. The COE also reviewed 14 aerial photographs that spanned from 1938 to 2017. Those photos showed the presence of row cropping and offered no evidence of potential wetlands. Relying on aerial photographs, the COE expert’s determination, and a determination of the Natural Resources Conservation Service to conclude that wetlands did not exist, was certainly appropriate.
Note: In addition, the court’s analysis on this point seems suspect. The COE did not need to find and document all three factors. The hydrology had been materially altered to enable consistent row crop farming. In that situation wetland hydrology is not present, and the area in question is not a wetland. As a result, other levees, systems, or dams do not alter area hydrology because there is no wetland hydrology present to alter. The court referred to the COE’s 1987 Manual for its conclusion that the COE didn’t follow its own procedures. However, the 1987 Manual was established to evaluate recent alterations to undisturbed wetland. The court incorrectly applied this standard to materially hydrologically altered wetland where the alteration had occurred a century earlier. As such, the land in issue was prior converted wetland. The court incorrectly applied the standards of the 1987 Manual to the facts before it involving alterations that occurred over 100 years ago.
The court also determined that there was no indication in the record that the aerial photographs were used to assess hydrology characteristics of the defendant’s land before alterations were made, how the drainage systems were designed to function, and how effectively and efficiently they could convert land from wetland to upland. Further, the court noted there was also no explanation why the COE skipped these steps. The COE took the position that its review of aerial photographs was sufficient to determine the land’s normal circumstances. The court disagreed, determining that the evidence did not support the COE’s claim that its decision was based on identified relevant factors. Instead, the court concluded that the COE made impermissible post hoc justifications. If reliance on its own manuals was not warranted in this situation, the court stated, the COE needed to provide a rationale. As such, the court determined that the evidence did not support the COE’s argument that its decision was rationally based on the relevant wetland hydrological factors before concluding the land was prior converted cropland. Absent that rationale, the COE’s determination of wetland status of the defendant’s farmland was arbitrary and capricious.
Note: The COE followed its correct procedure in this case contained in the Midwest Supplement and also accepted a prior USDA determination as to the land’s status for federal farm program purposes. The ditches and drains that were legally installed successfully removed wetland hydrology. The COE did not deviate from its own regulatory guidance and procedures, but the court assumed that it did. There was no need for the COE to find and document all three wetland characteristic factors. The elimination of wetland hydrology eliminates the possibility that the land was a wetland.
Concerning the lateral ditch, the plaintiffs claimed that the record did not support the COE’s conclusion that the lateral ditches were irrigation canals that drained uplands and lacked relatively permanent flow. The plaintiffs pointed to a lack of administrative record and the claimed failure of the COE to follow the relevant factors that it lists in its Approved Jurisdictional Determination Form. The court also held that the COE’s finding of non-jurisdiction over the lateral ditches was arbitrary and capricious.
The court remanded the case to the COE to conduct a more thorough investigation of the defendant’s tract.
Note: For farmers, the case is a frustrating one. At issue was land that had been farmed for over 80 years and the right to continue to farm consistent with the historic drainage of the property was caught up in bureaucratic red tape. The court’s expansive view of standing and lack of understanding of the actual science behind the hydrology and geographic facts of the case created a problem for a dairy operation that should have never happened. What was involved in the case were shallow ditches dug into prior converted wetland. That is an activity that the Clean Water Act does not regulate.
I will continue my journey through the top developments in ag law and tax in a subsequent post.