Saturday, January 14, 2023

Top Agricultural Law and Tax Developments of 2022 – Part 4


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.

State Law Allowing Warrantless Searches Unconstitutional

Rainwaters, et al. v. Tennessee Wildlife Resources Agency, No. 20-CV-6 (Benton Co. Ten. Dist. Ct. Mar. 22, 2022) 

The Fourth Amendment protects against illegal searches and seizures.  In general, government officials must secure a search warrant based on probable cause before searching an area unless the owner gives consent.  However, the Fourth Amendment’s protection accorded to “persons, houses, papers and effects,” does not extend to all open areas contiguous to a person’s home, but rather only to the home itself and its surrounding “curtilage” – the area immediately surrounding and associated with the defendant’s home. 

The scope and extent of curtilage is an important issue to farming and ranching operations.  Farming, hunting, recreational and other activity occurs on private land that is not located in the surrounding vicinity of the home.  Indeed, there may not even be a home on the tract.  Does that mean that government agents can conduct a warrantless search on such property?  The ability to do so has become much easier with the new technological developments. 

In addition to the Fourth Amendment protection, in recent years numerous states have enacted legislation designed to provide what is believed to be greater protection from warrantless searches to rural property owners.  Sometimes those laws find themselves at odds with other state laws that allow certain government officials access to property to perform “official” duties.  Other times, those state laws providing access by government officials without a warrant are challenged as unconstitutional.  That is indeed what happened in a Tennessee case in 2022.

In the case, the plaintiffs owned farmland on which they hunted or fished.  They marked fenced portions of their respective tracts where they hunted and also posted the tracts as “No Trespassing.”  Tennessee Wildlife Resources Agency (TWRA) officers entered onto both tracts on several occasions and took photos of the plaintiffs and their guests without permission or a warrant. Tennessee law (Tenn. Code Ann. §70-1-305(1) and (7)) allows TWRA officers to enter onto private property, except buildings, without a warrant “to perform executive duties.”  The TWRA officers installed U.S. Fish & Wildlife Service surveillance cameras on the plaintiffs’ property without first obtaining a warrant to gather information regarding potential violations of state hunting laws.  The plaintiffs challenged the constitutionality of the Tennessee law and sought injunctive and declaratory relief as well as nominal damages. The defendants moved for summary judgment arguing that the plaintiffs lacked standing and that there was no controversy to be adjudicated.

The trial court found the Tennessee law to be facially unconstitutional.  The trial court noted that the statute at issue reached to “any property, outside of buildings” which unconstitutionally allowed for warrantless searches of a home’s curtilage.  The trial court also determined that the officers’ information gathering intrusions were unconstitutional searches rather than reasonable regulations and restrictions, and that the statute was comparable to a constitutionally prohibited general warrant.  It was unreasonable for the TWRA officers to enter onto occupied, fenced, private property without first obtaining consent or a search warrant. The trial court also held the plaintiffs had standing to sue because they experienced multiple unauthorized entries onto their private property, and that declaratory relief was an adequate remedy.  The trial court awarded nominal damages of one dollar. 

Note:  The defendant appealed the trial court’s decision.  Expect more developments in this case in 2023 as well as additional developments in other states on the warrantless search issue.    

IRS Failure to Comply with the Administrative Procedure Act (APA)

Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022); Green Valley Investors, LLC v. Commissioner, 159 T.C. No. 5 (2022)

Several court decisions in 2022 invalidated IRS action for not following federal law in developing regulations that implement the tax code.  For instance, in Mann Construction, the plaintiff challenged IRS Notice 2007–83, which designated certain employee benefit plans featuring cash value life insurance policies as listed transactions.

Note:  A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. IRS identifies these transactions by notice, regulation, or other form of published guidance as a listed transaction.

Generally, the Code imposes a 20 percent accuracy-related penalty on a taxpayer who has a “reportable transaction” understatement.  The penalty is 30 percent if the taxpayer fails to make certain disclosure requirements that I.R.C. §6011 requires.  That Code section imposes a penalty on a person who fails to include information about a reportable transaction on a return.  A reportable transaction is one that is the same as or “substantially similar to” a tax avoidance transaction (a.k.a. a “listed transaction”) that the IRS has identified by a Notice, Regulation or some other form of published guidance.  Pursuant to IRC §6707A, a failure to report a listed transaction subjects the taxpayer to potential monetary penalties and criminal sanctions.

Note:  The minimum penalty for failure to report a listed transaction is $10,000 ($5,000 for a natural person).  The maximum penalty is $200,000 ($100,000 for a natural person). 

In Mann Construction, the plaintiff had put a cash value life policy plan into effect from the 2013 to 2017 tax years. In 2019, the IRS determined that the plan fit the description identified in Notice 2007–83 and imposed penalties on the plaintiff and its shareholders for failing to disclose their participation. The plaintiff paid the penalties and then sued for a refund alleging that the IRS failed to comply with the notice and comment requirements of the Administrative Procedure Act (APA).

Note:  Under the APA, a federal agency must undertake a Notice of Public Rulemaking when developing a legislative rule.  The Notice is published in the Federal Register and typically provides 60 days for public comment and 30 days for the agency to reply. 

The trial court ruled for the Government. However, the Sixth Circuit reversed, finding that the Notice was invalid because of the APA violation. The IRS argued that it was not required to comply, as the Notice was only an “interpretive rule” and not a “legislative rule.”  However, the Sixth Circuit concluded that the Notice fell on the legislative side. This rulemaking imposed new duties on taxpayers that Congress had not articulated. Congress had delegated the authority to the IRS to determine which transactions will be deemed “a tax avoidance transaction,” and the Notice attempted to do that. The mere fact that the statute permitted some interpretation of the term “tax avoidance transaction” did not remove the Notice from the legislative category. Moreover, Congress did not exempt this from the scope of the APA.

The IRS also argued that Treas. Reg. §1.6011-4(b) allowed the IRS to identify reportable and listed transactions “by notice, regulation, or other form of published guidance.” The Court responded that Congress, not the IRS, gets to amend APA requirements.

In Green Valley Investors, LLC, the petitioner claimed charitable contribution deductions for several syndicated conservation easement transactions.  Effective December 23, 2016, the IRS had identified all syndicated conservation easement transactions from January 1, 2010, forward (and substantially similar transactions) as “listed transactions.”  Notice 2017-10, 2017-4 I.R.B. 544. That designation imposed substantial reporting requirements not only on the participants in such transactions, but also on their material advisors, for as long as the statute of limitations with respect to the transaction remained open.   The IRS denied the deductions and imposed various reportable transaction penalties.  The petitioner challenged the IRS position on the basis that the IRS failed to comply with the notice-and-comment requirements of the APA.  U.S. Tax Court followed the rationale in Mann Construction in holding that Notice 2017-10 was also invalid because of a failure to satisfy the notice and comment requirements of the APA.  The Tax Court determined that Notice 2017-10 was a legislative rule because when the IRS identified syndicated conservation easement transactions as a listed transaction it was not merely providing its interpretation of the law or reminding taxpayers of pre-existing duties.  Instead, the Tax Court determined, the IRS was imposed new duties in the form of reporting and recordkeeping requirements on taxpayers and their material advisors.  These substantive new duties that exposed taxpayer to noncompliance penalties meant that the Notice was a legislative rule subject to the APA’s notice-and-comment requirement.

Note:  Also, in CIC Services, Inc. v. Internal Revenue Service, 2022 U.S. Dist. LEXIS 63545 (E.D. Tenn. Mar. 21, 2022), the court invalidated Notice 2016-66, casting doubt on enforcement against micro captive insurance.  Likewise, in GBX Assoc., LLC v. United States, 2022 U.S. Dist. LEXIS 206500 (N.D. Ohio Nov. 14, 2022), the federal district court followed Green Valley Investors, Inc. in invalidating Notice 2017-10, but it refused to apply a nationwide injunction to enforcement, binding only the parties and leaving this issue for further judicial development.

These cases invalidating IRS Notices for failure of the agency to follow the APA’s notice-and-comment requirements are important to farmers and ranchers.  USDA regulations often shade the line from an interpretive rule into one that is legislative.  The cases provide helpful guidance on where that line is located.


I will continue my journey through the top ag law and tax developments of 2022 in my next post.

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