Friday, January 12, 2024

Top Ten Developments in Agricultural Law and Taxation in 2023 – (Part One)

Overview

With my two prior blog articles I started looking at some of the most significant developments in agricultural law and taxation during 2023.  With today’s article I begin the look at what I view as the ten most significant developments in 2023.  These make my Top Ten list because of their significance on a national level to farmers, ranchers, rural landowners and agribusiness in general.

Developments ten through eight of 2023 – that’s the topic of today’s post.

  1. Entire Commercial Wind Development Ordered Removed

United States v. Osage Wind, LLC, No. 4:14-cv-00704-CG-JFJ,

2023 U.S. Dist. LEXIS 226386 (N.D. Okla. Dec. 20, 2023)

In late 2023, a federal court ordered the removal of an entire commercial wind energy development (150-megawatt) in Oklahoma and set a trial for damages.  The litigation had been ongoing since 2011 and was the longest-running legal battle concerning wind energy in U.S. history.  The ruling follows a 2017 lower court decision concluding that construction of the development constituted “mining” and required a mining lease from a tribal mineral council which the developers failed to acquire.  United States v. Osage Wind, LLC, 871 F.3d 1078 (10th Cir. 2017).  The court’s ruling granted the United States, the Osage Nation and the Osage Minerals Council permanent injunctive relief via “ejectment of the wind turbine farm for continuing trespass.”

The wind energy development includes 84 towers spread across 8,400 acres of the Tallgrass Prairie involving leased surface rights, underground lines, overhead transmission lines, meteorological towers and access roads.  Removal costs are estimated at $300 million.  In 2017, the U.S. Circuit Court of Appeals for the Tenth Circuit held that the wind energy company’s extraction, sorting, crushing and use of minerals as part of its excavation work constituted mineral development that required a federally approved lease.  The company never received one.  The Osage Nation owns the rights to the subsurface minerals that it purchased from the Cherokee Nation in the late 1800s pursuant to the Osage Allotment Act of 1906.  The mineral rights include oil, natural gas and the rocks that were mined and crushed in the process of developing the project. 

In its decision to order removal of the towers, the court weighed several factors but ultimately concluded that the public interest in private entities abiding by the law and respecting government sovereignty and the decision of courts was paramount.  The court pointed out that the defendant’s continued refusal to obtain a lease constituted interference with the sovereignty of the Osage Nation and “is sufficient to constitute irreparable injury.” 

Note:  The lengthy litigation resulting in the court’s decision is representative of the increasing opposition in rural areas to wind energy production grounded in damage to the viewshed, landscape and wildlife.  During 2023, including the court’s opinion in this case, there were 51 restrictions or rejections of wind energy projects and 68 rejections of solar energy projects.  See, Renewable Rejection Database, https://robertbryce.com/renewable-rejection-database/

9.         Reporting Foreign Income

Bittner v. United States, 598 U.S. 85 (2023)

The Bank Secrecy Act of 1970 requires U.S. financial institutions to assist U.S. government agencies in detecting and preventing money laundering by, among other things, maintaining records of cash purchases of negotiable instruments, filing currency transaction reports for cash transactions exceeding $10,000 in a single business day, and reporting suspicious activities that might denote money laundering, tax evasion and other crimes.  The law also requires a U.S. citizen or resident with foreign accounts exceeding $10,000 to report those account to the IRS by filing FinCEN Form 114 (FBAR) by the due date for the federal tax return.  The failure to disclose foreign accounts properly or in a timely manner can result in substantial penalties. 

In this case, the plaintiff was a dual citizen of Romania and the United States.  He emigrated to the United States in 1982, became a U.S. citizen, and lived in the United States until 1990 when he moved back to Romania.  He had various Romania investments amounting to over $70 million.  He had 272 foreign accounts with high balances exceeding $10,000.  He was not aware of the FBAR filing requirement for his non-U.S. accounts until May of 2012.  The initial FBARs that he filed did not accurately report all of his accounts.  In 2013, amended FBARs were filed properly reporting all of his foreign accounts.  The IRS audited and, in 2017, computed the plaintiff’s civil penalties at $2,720,000 for a non-willful violation of failing to timely disclose his 272 foreign account for five years 2007-2011.

The plaintiff denied liability based on a reasonable cause exception.  He also claimed that the penalty under Section 5321 of the Bank Secrecy Act applied based on the failure to file an annual FBAR reporting the foreign accounts, and that the penalty was not to be computed on a per account basis. 

The trial court denied the plaintiff’s reasonable cause defense and held him liable for violations of the Bank Secrecy Act.  The trial court determined that the penalty should be computed on a per form basis and not on a per account basis.  Thus, the trial court computed the penalty at $50,000 ($10,000 per year for five years).  On appeal, the appellate court affirmed on the plaintiff’s liability (i.e., rejected the reasonable cause defense), but determined that the penalty was much higher because it was to be computed on a per account basis. 

On further review, the U.S. Supreme Court (in a 5-4 decision) determined that the penalty was to be computed on a per form basis and not a per account basis.  The Court’s holding effectively reduced the plaintiff’s potential penalty from $2.72 million to $50,000.  The majority relied on the text, IRS guidance, as well as the drafting history of this penalty provision in the Bank Secrecy Act.  The Court did not address the question of where the line is to be drawn between willful and non-willful conduct for FBAR purposes. 

Note:  The Supreme Court’s decision was a major taxpayer victory.  However, the point remains that foreign bank accounts with a balance of at least $10,000 at any point during the year must be reported.  This is an important point for U.S. citizen farmers and ranchers with farming interests in other countries. 

  1. New Corporate Reporting Requirements

            Corporate Transparency Act (CTA), P.L. 116-283

Overview.  The Corporate Transparency Act (CTA), P.L. 116-283, enacted on January 1, 2021 (as the result of a veto override), as part of the National Defense Authorization Act, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud and other illicit activities. In short, it’s an anti-money laundering initiative designed to catch those that are using shell corporations to avoid tax.  It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.  The effective date of the CTA is January 1, 2024.   

Who needs to report?  The CTA breaks down the reporting requirement of “beneficial ownership information” between “domestic reporting companies” and “foreign reporting companies.”  A domestic reporting company is a corporation, limited liability company (LLC), limited liability partnership (LLP) or any other entity that is created by filing of a document with a Secretary of State or any similar office under the law of a state or Indian Tribe.  A foreign reporting company is a corporation, LLC or other foreign entity that is formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or any similar office. 

Note:  Sole proprietorships that don’t use a single-member LLC are not considered to be a reporting company. 

Reporting companies typically include LLPs, LLLPs, business trusts, and most limited partnerships and other entities are generally created by a filing with a Secretary of State or similar office. 

Exemptions.  Exemptions from the reporting requirement apply for securities issuers, domestic governmental authorities, insurance companies, credit unions, accounting firms, tax-exempt entities, public utility companies, banks, and other entities that don’t fall into specified categories.  In total there are 23 exemptions including an exemption for businesses with 20 or more full-time U.S. employees, report at least $5 million on the latest filed tax return and have a physical presence in the U.S.   But, for example, otherwise exempt businesses (including farms and ranches) that have other businesses such as an equipment or land LLC or any other related entity will have to file a report detailing the required beneficial ownership information.  Having one large entity won’t exempt the other entities. 

What is a “Beneficial Owner”?  A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:

  • Exercises substantial control over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting company

Note:  Beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.

What must a beneficial owner do?  Beneficial owners must report to the Financial Crimes Enforcement Network (FinCEN).  FinCEN is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other international crimes.  Beneficial owners must report their name, date of birth, current residential or business street address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document.  Company applicants can only be the individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S.  A company applicant may also be the individual who is primarily responsible for directing or controlling the filing of the relevant document by someone else. This last point makes it critical for professional advisors to carefully define the scope ot engagement for advisory services with clients.

Note:  If an individual files their information directly with FinCEN, they may be issued a “FinCEN Identifier” directly, which can be provided on a BOI report instead of the required information.

Filing deadlines.  Reporting companies created or registered in 2024 have 90 days from being registered with the state to file initial reports disclosing the persons that own or control the business. NPRM (RIN 1506-AB62) (Sept 28, 2023). If a business was created or registered to do business before 2024, the business has until January 1 of 2025 to file the initial report.  Businesses formed after 2024 must file within 30 days of formation.  Reports must be updated within 30 days of a change to the beneficial ownership of the business, or 30 days from when the beneficial owner becomes aware of or has reason to know of inaccurate information that was previously filed. 

Note:  FinCEN estimates about 32.6 million BOI reports will be filed in 2024, and about 14.5 million such reports will be filed annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

Penalties.  The penalty for not filing is steep and can carry the possibility of imprisonment.  Specifically, noncompliance can result in escalating fines ranging from $500 per day up to $10,000 total and prison time of up to two years.    

State issues.  A state is required to notify filers upon initial formation/registration of the requirement to provide beneficial ownership information to the FinCEN.  In addition, states must provide filers with the appropriate reporting company Form.

How to report.  Businesses required to file a report are to do so electronically using FinCEN’s filing system obtaining on its BOI e-filing website which is accessible at https://boiefiling.fincen.gov

Note:  On December 22, 2023, FinCEN published a rule that governing access to and protection of beneficial ownership information. Beneficial ownership information reported to FinCEN is to be stored in a secure, non-public database using rigorous information security methods and controls typically used in the Federal government to protect non-classified yet sensitive information systems at the highest security level. FinCEN states that it will work closely with those authorized to access beneficial ownership information to ensure that they understand their roles and responsibilities in using the reported information only for authorized purposes and handling in a way that protects its security and confidentiality.

Conclusion

I will continue the trek through the “Top Ten” of 2023 in the next post.

January 12, 2024 in Business Planning, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, December 1, 2023

Funding a Buy-Sell Agreement with Corporate Owned Life Insurance – Will Corporate Value Be Enhanced?

Overview

In part one of this series (published back on July 3), I discussed buy-sell agreements in general and noted how beneficial they can be in the intergenerational transfer of a farm or ranch where keeping the business in the family is the key goal.  There I covered buy-sell agreements in general, the various types of agreements and common triggering events. 

With today’s article I dive deeper into other issues associated with buy-sell agreements -valuation rules and funding approaches.  A recent court opinion points out the importance of following the valuation procedures set forth in the buy-sell agreement.

Part two of a two-part series on buy-sell agreements – it’s the topic of today’s post.

Valuation 

While very few farming and ranching operations (and small businesses in general) are subject to the federal estate tax because of the current level of the exemption, some are.  For those that are, in addition to providing a market for closely held shares at a determinable price, the buy-sell agreement can serve as a mechanism for establishing the value of the interest for estate tax purposes – or otherwise establish value of the decedent’s interest at death.

General rule.  In general, the value of a closely held business (or other property) is determined without regard to any option, agreement, or other right to acquire or use the property at a price less than the FMV of the property, or any restriction on the right to sell or use the property.  I.R.C. §2703(a).

Exception – statutory requirements.  A buy-sell agreement can establish the value of a deceased owner’s interest if six basic requirements are satisfied.  Three of the requirements are statutory and three have been judicially created.  The statutory requirements are found at I.R.C. §2703(b). 

The statutory requirements specify that the buy-sell agreement must:

  • Be a bona fide business arrangement; I.R.C. §2703(b)(1)
  • Not be a device to transfer property to members of the decedent’s family for less than full and adequate consideration in money or money’s worth; I.R.C. §2703(b)(2) and
  • Contain terms that are comparable to other arrangements entered into by persons in arms’ length transactions.  I.R.C. §2703(b)(3)

A buy-sell agreement must satisfy each of the three statutory requirements if family members own 50 percent or more of the property subject to the restriction.  An agreement is deemed to satisfy all three of the statutory requirements if more than 50 percent of the value of the property subject to the restriction is owned directly or indirectly by individuals who are not members of the transferor’s family.  The interests owned by the nonfamily members must be subject to the same restrictions as the property owned by the transferor.  Treas. Reg. §25.2703-1(b)(3). 

Exception – caselaw requirements.  Judicial opinions have created three additional requirements that a buy-sell agreement must satisfy to be effective to establish the value of a decedent’s interest.  See, e.g., Estate of True v. Comr., 390 F.3d 1210 (10th Cir. 2004); St. Louis County Bank v. United States, 674 F.2d 1207 (8th Cir. 1982).  Based on these cases, the agreement must also: contain a purchase price that is fixed and determinable under the agreement; be legally binding during life and after death; and have been entered into for a bona fide business reason and not be a substitute for a testamentary disposition for full and adequate consideration. To establish the purchase price with certainty an appropriate valuation method must be established. An independent party valuation will not only satisfy the requirements of I.R.C. §2703 but also provide an estimate of the potential funding obligation and the liquidity expectations of the seller/estate. See Rev Rul. 59-60 as amplified by Rev. Rul. 83-120,1983-2 CB 170.

The courts have indicated that preserving a business with family control for purposes of continuity and management can serve as a bona fide business arrangement.  See St. Louis County Bank v. United States, 674 F.2d 1207 (8th Cir. 1982); Estate of Lauder v. Comr., T.C. Memo. 1992-736; Estate of Gloeckner v. Comr., 152 F.3d 208 (2nd Cir. 1998).  This includes planning for the future liquidity needs of the decedent’s estate.  Estate of Amlie v. Comr., T.C. Memo. 2006-76.  But an entity that consists only of marketable securities is not a bona fide business arrangement.  Holman v. Comr., 601 F.3d 763 (8th Cir. 2010).  The long-established position of the IRS is that, “It is always necessary to consider the relationship of the parties, the relative number of shares held by the decedent, and other material facts to determine whether the agreement represents a bona fide business arrangement or a device to pass the decedent’s shares to the natural objects of his bounty for less than an adequate and full consideration in money or money’s worth.”  Rev.Rul 59-60, 1959-1 CB 137. See also Estate of True v. Comr., T.C. Memo 2001-167, aff’d., 390 F.3d 1210 (2004); Estate of Blount v. Comr., T.C. Memo. 2004-116.  

Note:  The business reasons for executing the buy-sell agreement should be documented.   

The buy-sell agreement must not simply be a device to reduce estate tax value.  This requires more than expressing a desire to maintain family control of the business.  See, e.g., Estate of True v. Comr., 390 F.3d 1210 (10th Cir. 2004); Estate of Lauder v. Comr., T.C. Memo. 1992-736.  In addition, a buy-sell agreement must have terms that are comparable to other buy-sell agreements that are entered into at arms-length. This requirement is satisfied if the agreement is one that unrelated parties in the same line of business could have reached in an arms’ length transaction.  Treas. Reg. §25.2703-1(b)(4).  This fair bargain standard is typically based on expert opinion testimony. 

Funding Approaches

To be operational, the parties to the agreement must have funds available to buy the stock at the time the agreement is triggered.  It is possible to use accumulated earnings of the business to fund a redemption. But such a strategy may not be treated as a “reasonable need of the business” with the result that the business (if it is a C corporation) could be subject to the accumulated earnings tax. I.R.C. §531. However, corporate accumulations used to pay off a note given a stockholder for a redemption is a reasonable need of the business, as a debt retirement cost. But see Smoot Sand & Gravel Corp. v. Comr., 274 F.2d 495 (4th Cir. 1960), cert. denied, 362 U.S. 976 (1960).

The use of life insurance.  Typically, life insurance is purchased for each business owner to cover the total purchase price (or at least the down payment). However, the premiums on such policies are not deductible (see I.R.C. §264) and can create a substantial ongoing expense.

Corporate-owned.  One approach is for the corporation to buy a life insurance policy on the life of each stockholder, with the corporation as the policy owner, premium payor, and beneficiary of these policies. The corporation would then use the life insurance to finance the purchase if, at the end of the first option period, the corporation buys the deceased stockholder’s interest. Or the corporation could lend the insurance proceeds to the stockholders if, at the end of the corporate option period, it is decided that the surviving stockholders should be the buyers (or to the extent stock remained to be purchased after the corporation’s option expires). Investment payments would be deductible to the stockholders and income to the corporation.

Shareholder-owned.  An alternative approach is for each shareholder to buy, pay for, own, and be the beneficiary of a life insurance policy for each of the other shareholders. The surviving shareholders would then receive the proceeds when one shareholder dies, and, if a cross-purchase is indicated and appropriate, use the proceeds as the necessary funds to carry out the buy-sell agreement. The surviving shareholders could also lend the proceeds to the corporation if a redemption agreement is utilized, to enable the corporation to buy additional shares, or the surviving shareholders could make capital contributions which would have the effect of increasing each shareholder’s stock basis.

Note:  The cash value of a permanent life insurance policy may be withdrawn by loan or surrender of the policy, but the value may be a very small percentage of the death benefit, inadequate to finance the buy-out. Disability insurance may be used to finance a purchase occasioned by an owner’s disability, but it can be quite expensive, and cannot be applied toward the purchase of an interest of an owner who is retiring or used to prevent the sale of an interest in the business to a buyer outside the family unit.

Other Approaches

A combination of the above approaches could also be used for funding the wait-and-see buy-sell agreement. For example, the corporation could own cash value life insurance and the owners could own term insurance. Also, the parties could have a split-dollar arrangement whereby the corporation pays for the cash value portion of the premiums and the shareholders own the policy and pay for the term portion of the premiums, with the proceeds split between them.

Potential Problem of Life-Insurance Funding

One potential problem of a corporation being the beneficiary of a life insurance policy designed to fund the buy-out of a deceased shareholder is that the IRS could argue that the policy proceeds are included in the corporate value.  In Estate of Blount v. Comr., T.C. Memo. 2004-116, the issue was whether the insurance proceeds contractually deduction to the redemption of corporate shares being valued be treated as corporate property for valuation purposes.  The decedent owned 83 percent of the stock in a corporation at death.  There was a life insurance policy owned by the company that provided some $3.1 million to pay off the mandated buyout of the shares under a buy-sell agreement providing for a fixed value of the decedent shares. The buy-sell agreement value was held not to be controlling for estate tax purposes, mainly because the deceased owned 83 percent of the stock and could have changed the agreement at any time. Furthermore, the court determined that the buy-sell agreement was not similar to those involved in arm’s length transactions.

The 11th circuit reversed on the basis that the redemption obligation of the buy-sell agreement was a liability that offset the value of the death benefits used to fund the redemption. Estate of Blount v. Comr., 428 F.3d 1338 (11th Cir. 2005).  Thus, even if the death benefits were included in the corporate value, there was a corresponding offsetting liability that would be accounted for by a “reasonably competent business person interested in acquiring the company.”  Id. 

Note:  In a decision preceding the Tax Court’s decision in Blount, the Ninth Circuit court deducted the insurance proceeds from the value of the organization when they were offset by an obligation to pay those proceeds to the estate in a stock buyout.  Cartwright v. Comr., 183 F.3d 1034 (9th Cir. 1999).   

The issue in Blount and Cartwright resurfaced in Connelly v. United States, No. 4:19-cv-01410-SRC, 2021 U.S. Dist. LEXIS 179745 (E.D. Mo. Sept. 21, 2021). In Connelly, two brothers were the only shareholders of a closely-held family roofing and siding materials business.  They entered into a stock purchase agreement that required the company to buy back shares of the first brother to die.  The company then purchased about $3.5 million in life insurance coverage to ensure it had enough cash to redeem the stock.  The brother holding the majority of the company’s shares (77.18 percent) died on October 1, 2013.  The company received $3.5 million in insurance proceeds.  The surviving brother chose not to buy his shares, so the company used a portion of the proceeds to buy the deceased brother’s shares from his estate for $3 million pursuant to a Sale and Purchase Agreement.  Under the agreement the estate received $3 million, and the decedent’s son received a three-year option to buy company stock from the surviving brother.  If the surviving brother sold the company within 10 years, the brother and decedent’s son would split evenly any gains from the sale. 

The estate valued the decedent’s stock at $3 million and included that amount in the taxable estate.  Upon audit the IRS asserted that the fair market value of the decedent’s corporate stock should have factored-in the $3 million in life-insurance proceeds used to redeem the shares which, in turn, resulted in a higher value of the decedent’s stock than was reported.  The IRS assessed over $1 million in additional estate tax.  The estate paid the deficiency and filed a refund claim in federal district court. 

The district court noted that a stock-purchase agreement is respected when determining the fair market value of stock for estate tax purposes upon satisfying the requirements of I.R.C. §2703(b) (as noted above), and the additional judicially created requirements (also noted above).    The IRS expert claimed that the insurance proceeds should be included in the company’s value as a non-operating asset, and that allowing the redemption obligation to offset the insurance proceeds undervalued the company’s equity and the decedent’s equity interest in the company, and would create a windfall for a potential buyer that a willing seller would not accept.  The IRS expert concluded that the fair market value of the company was $6.86 million rather than $3.86 million.  The IRS also claimed that the stock purchase agreement failed to control the value of the company.  The estate claimed that the company sold the decedent’s shares at fair market value and that the shares had been properly valued.  Thus, according to the estate, the $3 million in life insurance proceeds were properly excluded from the decedent’s estate based on the appellate opinion in Blount.  The estate claimed that the stock purchase agreement provided a sufficient basis for the court to accept the estate’s valuation as the proper estate-tax value of the decedent’s shares.  On that point, the IRS claimed that the stock purchase agreement was not a bona fide business arrangement and, as such, didn’t control the value of the decedent’s stock.  The IRS position was that the stated estate planning objectives of the stock purchase of continued family ownership of the company were insufficient to make it a bona fide business arrangement, particularly because the brothers did not follow it by disregarding the agreement’s pricing mechanisms. 

The district court did not rule on the bona fide business arrangement issue because it determined that the estate had failed to show that the stock purchase agreement was not a device to transfer wealth to the decedent’s family members for less than full-and-adequate consideration.  The process that the surviving brother and the estate used in selecting the redemption price bolstered the court’s conclusion that the stock purchase agreement was a testamentary device.  They also did not obtain an outside appraisal or professional advice on setting the redemption price, thereby disregarding the appraisal requirement set forth in the agreement.  The district court also noted that the agreement didn’t provide for a minority interest discount for the surviving brother’s shares or a lack of control premium for the decedent’s shares with the result that the decedent’s shares were undervalued.  This also, according to the district court, demonstrated that the stock purchase agreement was a testamentary device to transfer wealth to the decedent’s family members for less than full-and-adequate consideration and was not comparable to similar agreements negotiated at arms’ length. 

On the issue of whether the life insurance proceeds should be included in corporate value, the court rejected the appellate court’s approach in Blount, finding it to be analytically flawed.  The court concluded that the appellate court in Blount had misread Treas. Reg. §20.2031-2(f)(2), and that the regulation specifically requires consideration to be given to non-operating assets including life insurance proceeds, “to the extent such nonoperating assets have not been taken into account in the determination of net worth.”  The district court concluded that the text of the regulation does not indicate that the presence of an offsetting liability means that the life insurance proceeds have already been “taken into account in the determination of a company’s net worth.”  The district court concluded that, “by its plain terms, the regulation means that the proceeds should be considered in the same manner as any other nonoperating asset in the calculation of the fair market value of a company’s stock…. And…a redemption obligation is not the same as an ordinary corporate liability.”  There is a difference, the court noted, between a redemption obligation that simply buys shares of stock, and one that also compensates for a shareholder’s past work.  One that only buys stock is not an ordinary corporate liability – it doesn’t change the value of the corporation as a whole before the shares are redeemed.  It involves a change in the ownership structure with a shareholder essentially “cashing out.”  The court noted that the parties had stipulated that the decedent’s shares were worth $3.1 million, aside from the life insurance proceeds.  The insurance proceeds were not offset by the company’s redemption obligation and, accordingly, the company’s fair market value and the decedent’s shares included all of the insurance proceeds, and the IRS position was upheld. 

On appeal the U.S Court of Appeals for the Eighth Circuit affirmed.  Connelly v. United States, 70 F.4th 412 (8th Cir. 2023).  The appellate court held that the stock purchase agreement requiring the redemption of a deceased shareholder’s shares did not affect the value of the shares for estate tax purposes under I.R.C. §2703 because it did not provide for a fixed price or a formula for arriving at one. Instead, the agreement merely laid out two mechanisms by which the brothers might agree on a price - mutual agreement or appraisal. As for the appraisal approach, there was nothing in the agreement that fixed or prescribed a formula or measure for determining the price that the appraisers would reach. Thus, neither mechanism constituted a fixed or determinable price for valuation purposes. The appellate court determined that the $3 million that the corporation actually paid for the deceased brothers shares constituted an amount determined after death that was derived by an agreement between the brothers and not by any formula in the buy-sell agreement.

As for the value of the corporation (and, hence, the deceased brother’s interest in the corporation), the appellate court determined that the life insurance proceeds were an asset that increased the shareholders’ equity and that an obligation to redeem shares is not a liability in the ordinary business sense.  Thus, the proper valuation of the corporation in accordance with I.R.C.  §§2042 and 2031 must include the life insurance proceeds without treating the obligation to redeem shares as an offsetting liability.  The court reasoned that in order for a willing buyer at the time of the brother’s death to own the stock outright, a willing buyer would account for control the life insurance proceeds and therefore would pay up to $6.86 million for the corporation, quote taking into account end quote the life insurance proceeds and then either extinguishing the agreement or redeeming the shares. Conversely, the appellate court determined that a hypothetical willing seller of the corporation would not find acceptable a price of $3.86 million with the knowledge that the company would be receiving $3 million in life insurance proceeds.

To illustrate its rationale, the appellate court explained explain that if it valued the corporation without accounting for the life insurance proceeds intended for redemption, then upon the brother’s death each share was worth $7,720 before redemption.  After redemption, the deceased brother’s interest is extinguished, with the surviving brother having full control of the corporation’s $3.86 million value.  The appellate court noted that this would essentially quadruple the value of the surviving brother’s shares, but that treating the life insurance as an offsetting liability would leave the stock value undisturbed (which was the estate’s position). The economic reality of the situation, the appellate court concluded, was that the life insurance proceeds was an asset that increased shareholders’ equity.  The buy-sell agreement thus had nothing to do with being a corporate liability. 

Note:  A separate insurance LLC could be used to fund a buy-sell agreement in light of Connelly.  The insurance LLC would collect the life insurance proceeds on the deceased owner.  The LLC’s value would not be increased by the death benefit because it is allocated to the other owners in accordance with the buy-sell agreement due to special allocations in a LLC taxed as a partnership.  See I.R.C. §704.  A formal appraisal would likely only be required if there is real estate or some other difficult to value asset that the LLC owns.  This does add a layer of complexity, but if there are more than two owners the additional complexity may be worth it.

Arguably, there is now a split on this issue between the 8th Circuit on one hand, and the 9th and 11th Circuits on the other (keep in mind the brothers in Connelly didn’t follow the buy-sell agreement).  Indeed, a petition for certiorari was filed with the U.S. Supreme Court on August 15, 2023.  Will the Supreme Court agree to hear Connelly?  Not very likely at all. 

Conclusion

A buy-sell agreement can be a very important part of a succession plan for a family farming/ranching business (or any small, family-owned business for that matter).  However, it’s critical that the agreement be drafted properly and followed by the business owners.

December 1, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Thursday, November 30, 2023

LLCs/LPs and S.E. Tax – Will Steve Cohen Now Settle?

Overview

As I have previously written on this blog, a big question in self-employment tax planning is whether an LLC member is a limited partner.  In those prior articles, it was noted that the IRS/Treasury hadn’t yet finalized a regulation that was initially proposed in 1997 to address the issue.  For businesses other than those providing professional services, characterization of an LLC member’s interest is determinative of whether the member has self-employment tax liability on amounts distributed to the member (other than guaranteed payments).  That means that proper structuring of the entity matters as does the drafting of the LLC operating agreement and the conduct of the members. 

Now, the U.S. Tax Court has issued a fully reported opinion confirming that state law classifications of a partner’s interest is not conclusive on the self-employment tax issue.  That is a key point because Steve Cohen, owner of the New York Mets, has filed a case with the Tax Court challenging the assessment of self-employment tax on about $350 million in distributions (other than guaranteed payments to limited partners in his investment (hedge fund) firm.  Is the Tax Court’s recent opinion a warning to Mr. Cohen that he should look to settle his case?  Perhaps.

Self-employment tax implications of LLCs – when is a member really a limited partner?   That’s the topic of today’s post.

Background - LLCs and Self-Employment Tax

Net earnings from self-employment includes the distributive share of income or loss from a trade or business carried on by a partnership.  I.R.C. §1402(a).  Thus, the default rule is that all partnership income is included, unless it is specifically excluded.  Whether LLC members can avoid self-employment tax on their income from the entity depends on their member characterization.  Are they general partners or limited partners?  Under I.R.C. §1402(a)(13), a limited partner does not have self-employment income except for any guaranteed payments paid for services rendered to the LLC.  So, what is a limited partner?  The test of whether an interest in an entity treated as a partnership for tax purposes is treated as a limited interest or a general interest, for the purpose of applying the self-employment tax is stated at Prop. Reg. §1.1402(a)-2(h), issued in 1997. 

Note:  Immediately after the Proposed Regulation was issued, the Congress passed a statute prohibiting the IRS from finalizing the Regulation within one year.  Nothing further has been forthcoming.  Although still in Proposed Regulation form, this regulation remains the best available authority. 

The Proposed Regulation establishes a three-part general rule, with two exceptions, that may permit limited partner treatment under certain conditions.  A third exception to limited partner treatment applies in the context of professional service businesses (e.g., law, accounting, health, engineering, etc.).  Under the general rule, a member is not treated as a limited partner if:  (1) the member has personal liability for the debts or claims against the LLC by reason of being a member; (2) the member has authority under the state’s LLC statute to enter into contracts on behalf of the LLC; or (3) the member participated in the LLC’s trade or business for more than 500 hours during the LLC’s tax year.  Prop. Treas. Reg. §1.1402(a)-2(h)(2). 

An exception applies only if the interest-holder owns a single class of interest (regardless of whether there are multiple classes outstanding) and failure of the 500-hour test is the sole reason for treatment of the interest as a general interest.  In addition, the interest held must meet certain threshold requirements:

  • There must be at least one member holding the same class of interest who meets all three of the requirements under the general rule, without application of any exceptions;
  • The share of that class of interest held by those members must be “substantial” (with respect to the class of interest at issue and not with respect to the entity as a whole), based on the facts and circumstances (a safe harbor of 20 percent, in aggregate, is provided at Treas. Reg. §1.1402(a)-2(h)(6)(v)); and
  • The interests held by those members must be “continuing” (an undefined term).

Another exception to the general rule applies only if the member owns at least two classes of interests and the same threshold requirements are satisfied.  This exception may permit a member to treat the distributive share attributable to at least one class as a limited interest if the three requirements of the general rule are met with respect to any class that the member holds.  In that case the distributive share attributable to that interest is not subject to self-employment tax.  But, the distributive share attributable to any interest held by a member that does not meet the three requirements of the general rule is subject to self-employment tax.  This all means that a portion of a member’s total distributive share may be subject to self-employment tax, and some may not be.

Note:  Under the general rule, it is likely that the entire distributive share of all members of a member-managed LLC will be subject to self-employment tax because state law likely gives all members the authority to contract.  Likewise, LLP statutes likely give management rights which means that the second requirement of the general rule cannot be satisfied.  As a result, neither exception to the general rule can be met because both exceptions require at least one member to satisfy all three requirements of the general rule. 

The Castigliola case.  In Castigliola, et al. v. Comr, T.C. Memo. 2017-62, a group of lawyers structured their law practice as member-managed Professional LLC (PLLC).  On the advice of a CPA, they tied each of their guaranteed payments to what reasonable compensation would be for a comparable attorney in the locale with similar experience.  They paid self-employment tax on those amounts.  However, the Schedule K-1 showed allocable income exceeding the member’s guaranteed payment.  Self-employment tax was not paid on the excess amounts.  The IRS disagreed with that characterization, asserting self-employment tax on all amounts allocated. 

The Tax Court (Judge Paris) agreed with the IRS.  Based on the Uniform Limited Partnership Act of 1916, the Revised Limited Partnership Act of 1976 and Mississippi law (the state in which the PLLC operated), the court determined that a limited partner is defined by limited liability and the inability to control the business.  The members couldn’t satisfy the second test.  Because of the member-managed structure, each member had management power of the PLLC business.  In addition, because there was no written operating agreement, the court had no other evidence of a limitation on a member’s management authority.  In addition, the evidence showed that the members actually did participate in management by determining their respective distributive shares, borrowing money, making employment-related decisions, supervising non-partner attorneys of the firm and signing checks.  The court also noted that to be a limited partnership, there must be at least one general partner and a limited partner, but the facts revealed that all members conducted themselves as general partners with identical rights and responsibilities.  In addition, before becoming a PLLC, the law firm was a general partnership.  After the change to the PLLC status, their management structure didn’t change. 

The court did not mention the proposed regulations, but even if they had been taken into account the outcome of the case would have been the same.  Member-managed LLCs are subject to self-employment tax because all members have management authority.  It’s that simple.  In addition, as noted below, there is an exception in the proposed regulations that would have come into play. 

Note:  As a side-note, the IRS had claimed that the attorney trust funds were taxable to the PLLC.  The court, however, disagreed because the lawyers were not entitled to the funds.

Structuring to Minimize Self-Employment Tax – The Manager-Managed LLC

There is an entity structure that can minimize self-employment tax.  An LLC can be structured as a manager-managed LLC with two membership classes.  With that approach, the income of a member holding a manager’s interest is subject to self-employment tax, but if non-managers that participate less than 500 hours in the LLC’s business hold at least 20 percent of the LLC interests, then any non-manager interests held by members that participate more than 500 hours in the LLC’s business are not subject to self-employment tax on the pass-through income attributable to their LLC interest. Prop. Treas. Reg. §1.1402(a)-2(h)(4).  They do, however, have self-employment tax on any guaranteed payments.

Service businesses.  The manager-managed structure does not achieve self-employment tax savings for personal service businesses, such as the one involved in Castigliola.  Prop. Treas. Reg. §1.1402(a)-2(h)(5) provides an exception for service partners in a service partnership.  Such partners cannot be a limited partner under Prop Treas. Reg. §1.1402(a)-2(h)(4) (or (2) or (3), for that matter).  Thus, for a professional services partnership (such as the law firm at issue in the case), structuring as a manager-managed LLC would have no beneficial impact on self-employment tax liability.     

Note:  If a member of a services partnership (e.g. LLC) is merely an investor that is not involved in the operations of the LLC as a business and is separately paid for services rendered, any distributive share is not subject to self-employment tax.  See, e.g., Hardy v. Comr., T.C. Memo. 2017-16.  But, if the distributive share is received from fees from the LLC’s business, the distributive share is subject to self-employment tax.  See, e.g., Renkemeyer, Campbell & Weaver, LLP, 136 T.C 137 (2011). 

Farming and ranching operations.  For LLCs that are not a “service partnership,” such as a farming operation, it is possible to structure the business as a manager-managed LLC with a member holding both manager and non-manager interests that can be bifurcated.  The result is that a member holding both manager and non-manager interests is not subject to self-employment tax on the non-manager interest but is subject to self-employment tax on the pass-through income and a guaranteed payment attributable to the manager interest.

Example.  Here's what it might look like for a farming operation:

A married couple operates a farming business as an LLC.  The wife works full-time off the farm and does not participate in the farming operation.  But she holds a 49 percent non-manager ownership interest in the LLC.  The husband conducts the farming operation full-time and also holds a 49 percent non-manager interest.  But, the husband, as the farmer, also holds a 2 percent manager interest.  The husband receives a guaranteed payment for his manager interest that equates to reasonable compensation for his services (labor and management) provided to the LLC.  The result is that the LLC’s income will be shared pro-rata according to the ownership percentages with the income attributable to the non-manager interests (98 percent) not subject to self-employment tax.  The two percent manager interest is subject to self-employment tax along with the guaranteed payment that the husband receives.  This produces a much better self-employment tax result than if the farming operation were structured as a member-managed LLC. 

Additional benefit.  There is another potential benefit of utilizing the manager-managed LLC structure.  Until the net investment income tax of I.R.C. §1411 is repealed, it applies to a taxpayer’s passive sources of income when adjusted gross income exceeds $250,000 on a joint return ($200,000 for a single return).  While a non-manager’s interest in a manager-managed LLC is typically considered passive with the income from the interest potentially subject to the 3.8 percent surtax, a spouse can take into account the material participation of a spouse who is the manager.  I.R.C. §469(h)(5).  Thus, the material participation of the manager-spouse converts the income attributable to the non-manager interest of the other spouse from passive to active income that will not be subject to the 3.8 percent surtax.

Note:  Returning to the example above, the result would be that self-employment tax is significantly reduced (it’s limited to 15.3 percent of the husband’s reasonable compensation (in the form of a guaranteed payment) and his two percent manager interest) and the net investment income surtax is avoided on the wife’s income.

Soroban Capital Partners LP

The Tax Court has now issued a fully reported opinion (meaning it is of national significance in all jurisdictions) taking Castigliola one step further and holding that creating a limited partner interest under state law is not necessarily enough to have a limited partner interest for self-employment tax purposes.  Soroban Capital Partners LP v. Comr., 161 T.C. No. 12 (2023).  The petitioner was a limited partnership that made guaranteed payments and distributed ordinary income to its limited partners. However, the petitioner excluded distributions of ordinary income to its limited partners from its computation of net earnings from self-employment.  Its basis for doing so was that the limited partners’ interest conformed to state law.  The IRS disagreed asserting that wasn’t enough and that the functions and roles of the limited partners also had to be analyzed for self-employment tax purposes. The Tax Court agreed with the IRS.

The Tax Court was faced with the definition of a “limited partner” for purpose of the exception from s.e. tax under I.R.C. §1402(a)(13).  The Tax Court noted that the proposed regulations provided a definition, that the Congress froze the finalization of the regulation for six months and has said very little about the issue since the freeze was lifted, and has not provided a definition.  The Tax Court noted that it had applied a “functional analysis” test in Renkemeyer, but that this was the first time the Tax Court was asked to determine the self-employment tax status of limited partner in a state law limited partnership (having passed on the issue in a 2020 case).  The Tax Court determined that the functional analysis test applied based largely on statutory construction of I.R.C. §1402(a)(13) which excludes from self-employment tax “the distributive share of any item of income or loss of a limited partner, as such.”  The Court concluded that the “as such” language meant that there wasn’t a blanket exclusion for a limited partner.  Instead, the statute only applies to a limited partner that is acting as a limited partner.  If a limited partner is anything more than merely an investor, self-employment tax applies to the partner’s distributive share. 

Note:  The court noted that the petitioner cited legislative history in an attempt to support its position, but that the legislative history actually supported the position of the IRS.  The Tax Court also noted that the petitioner put forth “myriad other arguments” none of which were persuasive.  The petitioner even cited language in the instructions for Form 1065 which it claimed defined a limited partner, but the Tax Court noted that the definition did not purport to define a limited partner. 

The Tax Court held that a functional inquiry into the roles and activities of the petitioner’s individual partners under I.R.C. §1402(a)(13) “involves factual determinations that are necessary to determine Soroban’s aggregate amount of net earnings from self-employment.”  Accordingly, the Tax Court denied the petitioner’s motion for summary judgment and set forth the rule going forward in evaluating the application of self-employment tax for limited partners in professional service businesses.

Conclusion

The manager-managed LLC provides a better result than the result produced by the member-managed LLC for LLCs that are not service partnerships.  For those that are, such as the PLLC in Castigliola, the S corporation is the business form to use to achieve a better tax result.  For an S corporation, “reasonable” compensation will need to be paid subject to S.E. tax, but the balance drawn from the entity can be received self-employment tax free.  But, for farming operations with land rental income, the manager-managed LLC can provide a better overall tax result than the use of an S corporation because of the ability to eliminate the net investment income tax.    

Of course, the self-employment tax and the net investment income tax are only two pieces of the puzzle to an overall business plan.  Other non-tax considerations may carry more weight in a particular situation.  But for some, this strategy can be quite beneficial.

The decision in Castigliola would appear to further bolster the manager-managed approach – an individual that is a “mere member” appears to now have an even stronger argument for limited partner treatment.  In addition, the court didn’t impose penalties on the PLLC because of reliance on an experienced professional for their filing position. 

Soroban Capital Partners LP lays down the rule that it’s not enough to simply hold a limited partnership interest under state law (in the context of a professional service business).  A limited partner must truly be acting as an investor and no more.   The case involves a limited partnership that performs professional services, so it's fairly easy for the IRS to assert s.e. tax.  The opinion really doesn't address whether you can be a passive investor with some services provided to the limited partnership and still have it exempt from s.e. tax.  It also doesn't address whether you can be both a general partner and a limited partner and avoid s.e. tax on the income distributive share attributable to the limited partner interest.  The answer to those last two questions, according to the analysis provided above, should be "yes" for farm and ranch clients.  

Will Steve Cohen now move to try to settle his case with the IRS?  Are the limited partners in his hedge fund business truly limited partner investors?  Doubtful.

Proper structuring of the LLC and careful drafting of the operating agreement is important. 

November 30, 2023 in Business Planning, Income Tax | Permalink | Comments (0)

Monday, November 20, 2023

Ethics and 2024 Summer Seminars!

Tax Ethics

On December 15, I'll be conducting a 2-hour tax ethics program.  It will be online-only attendance.  If you are in need of a couple of hours of ethics, this will be a good opportunity to meet the ethics requirement.  I'll be covering various ethical scenarios that tax professionals encounter.  The session will be a practical, hands-on application of the rules, including Circular 230.  If you have attended or are registered to attend a KSU Tax Institute, you get a break on the registration fee. 

For more information you can click here: https://www.washburnlaw.edu/employers/cle/taxethics.html 

Also, you may register here:  https://form.jotform.com/232963813182156

Summer Seminars

On June 12 and 13, Paul Neiffer and I will be holding a farm tax and farm estate/business planning conference at the Keeter Center on the campus of the College of the Ozarks, just a bit south of Branson, MO.  This conference is in-person only.  On August 5 and 6, we will be doing another conference in Jackson Hole, WY, at the Virginian Resort.  Hold the dates  and be watching for more information.  This conference will be both in-person and online.  Registration will open for the seminars in January.  There is a room block established at the Virginian.

Hope to see you online at the ethics seminar and at one of the summer conferences.

November 20, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Wednesday, November 1, 2023

Split-Interest Land Acquisitions – Is it For You? (Part 2)

Overview

Yesterday’s article looked at what a split-interest transaction is, how it works, and when it can be useful as part of an estate plan.  In particular, the focus of Part 1 was on removing after tax income from a family farming corporation and how it can work when farmland is purchased.

Today’s article looks at the relative advantages and disadvantages of the split-interest transaction, and what the rules are when property that is acquired in a split-interest transaction is sold.

Part 2 of split-interest transactions – it’s the topic of today’s post.

Advantages and Disadvantages

Advantages.  Because land is not depreciable, the most efficient form of acquisition is to use earnings exposed to a low tax rate.  A closely-held C corporation is a relatively efficient entity for creating after-tax dollars with the current tax rate at a flat 21 percent.  Even though C corporation after-tax dollars are used for the acquisition of most of the cost of land, the split-interest technique avoids the long-term negative aspect of having the farmland trapped inside the C corporation, and thus avoids the risk of double taxation of land appreciation. 

Even though corporate dollars are used to acquire the asset, the individual succeeds to full tax basis in the asset (reduced by any tax depreciation allowable to the corporation on the depreciable portion of the property).  The remainderman acquires basis in the real estate even though no economic outlay has occurred by that individual. 

Disadvantages.  The individual who buys the remainder interest must do so entirely from other sources of after-tax earnings.  The land produces no income to the remainderman during the period that the land is available for use by the corporation under the specified term certain.  Also, if the land is purchased on a contract or installment payment arrangement, each party must provide its contribution, either to the down payment or the contract. 

Note.  The party with the cash for the down payment may provide any portion or all of such down payment, with an adjustment for that party’s contribution to the contract.  The contract may provide for interest only payments by one party, until the other party’s contribution toward the purchase has been fully paid. 

Example.  Sow’s Ear, Inc. has been retaining equity of approximately $40,000 per year ($50,000 taxable income minus state and federal taxes) for a number of years.  Chuck, the corporate president would like to purchase additional land with the funds that the corporation has accumulated.   Chuck wants the corporation to buy the land with those available funds.  However, having the corporation purchase the land would trap up that land inside the corporation and potentially expose it to the double tax upon liquidation as well as eliminating capital gain rates if the corporation would have to sell the land. 

An alternative solution would be a split interest purchase.  Assume that the land could be purchased for $1 million, with $450,000 down and a contract at 5 percent for the balance, payable $52,988.26 annually for 15 years.  Chuck would like to farm for another 20 years via the corporation.  Assume that the monthly IRS purchased interest rate for a 20-year split-interest purchase requires the term interest holder to pay 58 percent of the total purchase price or $580,000.  Sow’s Ear, Inc. may pay $200,000 of the down payment.  It’s share of the remaining balance due is $380,000.  Chuck, as the remainder holder, is responsible for $420,000.  The balance due for the down payment may be made by either party.  If Sow’s Ear, Inc. borrows to satisfy the remaining down payment of $250,000, it will assume $130,000 of the note payable for the balance due ($580,000 less $200,000 cash less $250,000 remaining down payment).  Chuck will assume the remaining balance due of $420,000. 

Each party must pay interest that economically accrues on its share of the seller-financed debt, otherwise the below-market rate loan rules apply, which tie in with OID requirements.  The parties may determine the share of principal to be paid by each, as long as a total of $52,988.26 annually is paid to satisfy the requirements of the seller-financed note.  Because Chuck, as the remainderman, has no cash flow coming from the property for the next 20 years, he will have to obtain funds from sources other than rents from the property to fund his payments.  The deductibility of interest expense will be subject to the passive activity rules of I.R.C. §469.  The interest expense is a passive activity deduction, even though no rent is currently received by Chuck.  If Chuck has no passive income from other activities, the interest expense will create a passive loss carryover, to be available to offset net rental income after the term interest held by the corporation expires. 

Observation.  The split-interest technique is essentially limited to C corporations, because if two related individuals are involved the person acquiring the term interest is treated as having made a gift of the value of the term right to the purchaser of the reminder right.

 

Observation.  In times of low interest rates (i.e., low AFR factors that determine the percentage to be paid by each party), the corporate share will be smaller than occurs in periods when interest rates are higher.

Sale of Split-Interest Property

If a sale occurs during the split ownership of the property, the sale proceeds must be allocated between the corporate term holder and the individual remainderman based on the IRS interest rate and the remaining term certain periods as of the date of the sale.  After allocating the sale proceeds to each party, gain or loss is recognized by each party (the corporate term holder and the individual remainderman) by comparing the sale proceeds to the adjusted tax basis of the property.  The adjusted tax basis needs to reflect the nondeductible amortization adjustment occurring annually and the shift of this basis to the remainderman in accordance with I.R.C. §167(e)(3). 

Example.  Assume that RipTiller, Inc. and Dave Jr. (from the prior example) purchased another farm seven years ago for $200,000, with the corporation acquiring a 32-year term certain.  Assume that using interest rates in effect at that time, Dave Jr. was required to pay $25,000 and the corporation paid $175,000 toward the farm purchase price.  The corporate basis was further allocated as $20,000 attributable to depreciable tiling and $155,000 attributable to the land cost.  By the current year, the corporation would have depreciated about $9,000 of the $20,000 of tiling, leaving an adjusted basis of approximately $11,000.  The land basis of $155,000 would also have been reduced annually under straight-line amortization over the 32-year term certain.  Assume that about $4,800 per year of amortization occurred over the seven-year holding period of the corporation, resulting in a total reduction to the corporate basis of $33,600.  The amortization would be treated as land basis reductions to the corporation, and as land basis increases to Dave Jr.  Accordingly, at the time of the sale of the farm, the adjusted tax basis to each party is as follows:

Corporate Basis

                                                                                   Land               Tiling               Total

Basis at Purchase                                                     $155,000       $20,000             $175,000

            Deductible Depreciation                                                      ($9,000)           ($9,000)

            Statutory Amortization                               ($33,600)                                 ($33,600)

                 Adjusted Basis                                       $121,400         $11,000           $132,400

Dave Jr.’s Basis:

            At Purchase                                                     $25,000

            Statutory Increase for Amortization          $33,600

            Total Adjusted Tax Basis                               $58,600

If the farm is sold for $250,000, the term certain percentage and remainder percentage must be calculated for a term certain with 25 years remaining.  Assume that the current IRS mid-term annual AFR is 6.0 percent.  According to the IRS term certain table for 6.0 percent, the 25-year income right is to be allocated 76,7001 percent and the remainderman is to be allocated 23.2999 percent.  Accordingly, about $192,000 of the sale proceeds are allocable to the corporation and the remaining $58,000 is allocable to the individual.  The corporation would compare its $192,000 of approximate proceeds to its adjusted tax basis in the land and tiling of approximately $132,000.  In this example RipTiller, Inc. would report $60,000 of gain.  Dave Jr. would report a small capital loss ($58,000 allocated sale price vs. $58,600 adjusted tax basis). 

Observation.  Interest rates at the time of purchase compared to interest rates at the time of sale can have a major influence on the allocations under the split-interest rules.  In the example, if interest rates rise from the time of purchase to the time of sale, Dave Jr. would have a lower percentage of the sale price allocable to his remainder interest, and could incur a significant capital loss that was not immediately deductible.

Split-Interest Purchases with Unrelated Parties

The IRS has addressed the tax effects of split-interest purchases where the term holder and the remainder holder were unrelated.  In two Private Letter Rulings (200852013 (Sept. 24, 2008) and 200901008 (Oct. 1, 2008)) that appear to address the same set of facts, two unrelated buyers acquired several parcels of commercial real estate that included both depreciable buildings and land.    The first buyer acquired a 50-year term interest in the property, and the second buyer acquired a remainder interest in that same property.  The IRS determined that the buyer of the term interest was entitled to depreciate the commercial real estate (which the buyer of the term interest intended to use in its active conduct of renting commercial and residential property) ratably over the 50-year period of the term certain.  The portion of the taxpayer’s basis allocable to the buildings was held to be depreciable under the normal I.R.C. §168 MACRS recovery periods.  In addition, the IRS determined that the holding period for the buyer of the remainder interest began at the time of the purchase.

Observation.  A term certain remainder purchase arrangement of farmland (that is used in the taxpayer’s trade or business) where the two parties are unrelated could result in a term certain amortizable interest in the land. This is the case, according to the IRS, even though the farmland is not depreciable.  But see the Lomas case referenced in Part 1).  Examples of unrelated parties under I.R.C. §267 for these rules would include cousins and in-laws, such as a father-in-law, brother-in-law, or sister-in-law. 

Estate Tax Implications

For transactions that are between unrelated parties (as defined in I.R.C. §267), several federal estate tax advantages can be achieved.  If the “split” property is fairly valued (by a qualified appraiser), there is no gift upon creation of the split interest if IRS tables are used to value each party’s contribution.  Also, because the life estate interest ends upon the death of the life estate holder, there is no taxable transfer by that person that would trigger estate tax.  There is no inclusion in the life estate holder’s estate (and no interest subject to probate).  The property becomes fully vested in the remainder holder upon the life estate holder’s death.  As a result, there is no basis “step-up” to fair market value at the time of the life estate holder’s death in the hands of the remainder holder.  The basis of the property in the hands of the remainder holder is the cost of the remainder interest (the amount paid for the remainder interest).

Conclusion

Is a split-interest transaction for you? The answer, of course, is that it “depends.” For transactions involving individuals, the tax advantages (income tax as well as estate tax) are lost if the parties to the transaction are related.  Also, it’s important to make sure to the remainder holder provides consideration for the acquisition of the remainder interest (and not simply the life estate holder providing the financing to the holder of the remainder interest).  If that doesn’t happen, the IRS will likely claim that the life estate holder made a gift of a future interest that is subject to gift tax and can’t be offset by the present interest annual exclusion (currently $17,000 per year per donee).

Still uncertain is whether, for example, a split-interest purchase between unrelated parties (such as between a farm tenant that is looking to farm additional land and an investment firm). The IRS letter rulings seem to address this issue in a commercial context. Another issue in some states is that the strategy won’t work in some states if the investor is a corporation, limited liability company or trust that is disqualified from owning and/or operating agricultural land by statute.

For split-interest transactions involving a C corporation, if done correctly, the technique can be beneficial from a tax standpoint.

November 1, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Tuesday, October 31, 2023

Split Interest Land Acquisitions – Is it For You? (Part 1)

In General

A split-interest transaction involves one party acquiring a temporary interest in the asset (such as a term certain or life estate), with the other party acquiring a remainder interest.  The temporary interest may either refer to a specific term of years (i.e., a term certain such as 20 years), or may be defined by reference to one or more lives (i.e., a life estate).  The remainder holder then succeeds to full ownership of the asset after expiration of the term certain or life estate. 

A split-interest transaction is often used as an estate planning mechanism to reduce estate, gift as well as generation-skipping transfer taxes.  But there are related party rules that can apply which can impact value for estate and gift tax purposes. 

Another way that a split-interest transaction may work is as a mechanism for removing after-tax income from a family corporation.  In addition, if the farmland is being purchased, the split-interest arrangement allows most of the cost to be covered by the corporation, but without trapping the asset inside the corporation (where it would incur a future double tax if the corporation were to be liquidated).   

Split-interest land transactions – it’s the topic of today’s post.

Split-Interest Transactions

The Hansen case.  In Richard Hansen Land, Inc. v. Comr., T.C. Memo. 1993-248, the Tax Court affirmed that related parties, such as a corporation and its controlling shareholder, may enter into a split-interest acquisition of assets.  The case involved a corporation that acquired a 30-year term interest in farmland with the controlling shareholder acquiring the remainder interest.  Based on interest rates in effect at the time, the corporation was responsible for about 94 percent of the land cost and the controlling shareholder individually paid for six percent of the land cost.  Under the law in effect at the time, the court determined that the term interest holder’s ownership was amortizable.  The corporation was considered to have acquired a wasting asset in the form of its 30-year term interest. 

Tax implications.  The buyer of the term interest (including a life estate) may usually amortize the basis of the interest ratably over its expected life.  That might lead some taxpayers to believe that they could therefore take depreciation on otherwise non-depreciable property. For instance, this general rule would seem to allow a parent to buy a life estate in farmland from a seller (with the children buying the remainder) to amortize the amount paid over the parent’s lifetime.  If that is true, then that produces a better tax result than the more common approach of the parent buying the farmland and leaving it to the children at death.  Under that approach no depreciation or amortization would be allowed.  However, the Tax Court, in Lomas Santa Fe, Inc. v. Comr., 74 T.C. 662 (1980), held that an amortization deduction is not available when the underlying property is non-depreciable and has been split by its owner into two interests without any new investment.  Under the facts of the case, a landowner conveyed the land to his wholly owned corporation, subject to a 40-year retained term of years.  He allocated his basis for the land between the retained term of years and the transferred remainder and amortized the former over the 40-year period.  As noted above, the court denied the amortization deduction.

In another case involving similar facts, Gordon v. Comr., 85 T.C. 309 (1985), the taxpayer bought life interests in tax-exempt bonds with the remainder interests purchased by trusts that the taxpayer had created.  The taxpayer claimed amortization deductions for the amounts paid for his life interests.  The Tax Court denied the deductions on the basis that the substance of the transactions was that the taxpayer had purchased the bonds outright and then transferred the remainder interests to the trusts.   

Related party restriction.  For term interests or life estates acquired after July 28, 1989, no amortization is allowed if the remainder portion is held, directly or indirectly, by a related party.  I.R.C. §167(e)(3). 

Note:  I.R.C. §167(e) does not apply to a life or other terminable interest acquired by gift because I.R.C. §273 bars depreciation of such an interest regardless of who holds the remainder.  I.R.C. §167(e)(2)(A).   This provision is the Congressional reaction to the problem raised in the Lomas Santa Fe and Gordon cases.  Under the provision, “term interest” is defined to include a life interest in property, an interest for a term of years, or an income interest held in trust. I.R.C. §§167(e)(5)(A); 1001(e)(2). The term “related person” includes the taxpayer’s family (spouse, ancestors, lineal descendants, brothers and sisters) and other persons related as described in I.R.C. §267(b) or I.R.C. §267(e).  I.R.C. §167(e)(5)(B).  It also encompasses a corporation where more than half of the stock is owned, directly or indirectly by persons related to the taxpayer.  Also, even if the transaction isn’t between related parties, amortization deductions could still be denied based on substance over form grounds.  See, e.g., Kornfeld v. Comr., 137 F.3d 1231 (10th Cir. 1998), cert. den. 525 U.S. 872 (1998).

If the acquisition is non-amortizable because it involves related parties, the term holder’s basis in the property (i.e., the corporate tax basis, in the context of a family farm corporation transaction) is annually reduced by the amortization which would have been allowable, and the remainder holder’s tax basis (i.e., the shareholder’s tax basis) is increased annually by this same disallowed amortization. I.R.C. §167(e)(3).    Thus, in a split-interest corporation-shareholder arrangement, the corporation would have full use of the land for the specified term of years, and the individual shareholder, as remainderman, would then succeed to full ownership after the expiration of the term of years, with the individual having the full tax basis in the real estate (but less any depreciation to which the corporation was entitled during its term of ownership, such as for tiling, irrigation systems, buildings, etc.).

On the related party issue, the IRS has indicated in Private Letter Ruling 200852013 (Sept. 24, 2008) that if the two purchasers are related parties, the term certain holder could not claim any depreciation with respect to the land or with respect to the buildings on the land during the period of the life estate/term interest. 

A couple of points can be made about this conclusion:

  • The ruling is correct with respect to the land. That’s because I.R.C. §167(e)(1) contains a general rule denying any depreciation or amortization to a taxpayer for any term interest during the period in which the remainder interest is held, directly or indirectly, by a related person.
  • However, the ruling is incorrect with respect to the conclusion that no depreciation would be available for the buildings on the land. R.C. §167(e)(4)(B) states that if depreciation or amortization would be allowable to the term interest holder other than because of the related party prohibition, the principles of I.R.C. §167(d) apply to the term interest.  Under I.R.C. §167(d), a term holder is treated as the absolute owner of the property for purposes of depreciation.  Thus, this exception would allow the term holder to claim depreciation with respect to the buildings but not the land, in the case of a related party term certain-remainder acquisition.

Observation.  The IRS guidance on this issue is confusing and, as noted, incorrect as to the buildings on the land.  It is true that the value paid for the term interest is not depreciable.  However, the amount paid for the building and other depreciable property remains depreciable by the holder of the property.  Thus, the term interest holder claims the depreciation on the depreciable property during the term.  The remainderman takes over depreciation after the expiration of the term.  Basis allocated to the intangible (the split-interest) is a separate basis, which is not amortizable.  Likewise, the basis allocated to the split-interest may not be attributed over to the depreciable property to make it amortizable. 

Allocation procedure.  To identify the proper percentage allocation to the term certain holder and the remainderman, the monthly IRS-published AFR interest rate is used, along with the actuarial tables of IRS Pub. 1457 (the most recent revision is June 2023).  The relevant interest rate is contained in Table 5 of the IRS monthly AFR ruling.

Example.  RipTiller, Inc. is a family-owned C corporation farming operation.  The corporation is owned by Dave Sr. and Dave Jr.  The corporation has a build-up of cash and investments from the use of the lower corporate tax brackets over a number of years.  The family would like to buy additional land, but their tax advisors have discouraged any land purchases within the corporation because of the tax costs of double tax upon liquidation.  On the other hand, both Dave Sr. and Dave Jr. recognize that it is expensive from an individual standpoint to use extra salaries and rents from the corporation to individually purchase the land. 

The proposed solution is to have the corporation acquire a 30-year term interest in the parcel of land, with Dave Jr. buying the remainder interest.  Assuming that the AFR at the time of purchase is 4.6 percent, and assuming a 30-year term, the corporation will pay for 74.0553 percent of the land cost and Dave Jr. will be obligated for 25.9447 percent.  RipTiller, Inc. may not amortize its investment, but it is entitled to claim any depreciation allocable to depreciable assets involved with this land parcel.  Also, each year, 1/30th of the corporate tax basis in the term interest is decreased (i.e., the nondeductible amortization of the term interest reports as a Schedule M-1 addback, amortized for book and balance sheet purposes but not allowable as a deduction for tax purposes) and added to Dave Jr.’s deemed tax cost in the land.  As a result, at the end of the 30-year term, Dave Jr. will have full title to the real estate, and a tax cost equal to the full investment (although reduced by any depreciation claimed by the corporation attributable to depreciation allocations).      

Caution.  Related party split-interest purchases with individuals (e.g., father and son split-interest acquisition of farmland) should be avoided, due to the potentially harsh gift tax consequences of I.R.C. §2702 which treats the individual acquiring the term interest, typically the senior generation, as having made a gift of the value of the term ownership to the buyer of the remainder interest.  For this purpose, the related party definition is very broad and includes in-laws, nieces, nephews, uncles and aunts.  Similarly, any attempt to create an amortizable split-interest land acquisition, by structuring an arrangement between unrelated parties, must be carefully scrutinized in terms of analyzing the I.R.C. §267 related party rules and family attribution definitions.

Conclusion

In Part 2, I’ll take a deeper look at the relative advantages and disadvantages of of split-interest transactions with additional examples.

October 31, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Monday, October 30, 2023

Reporting of Beneficial Ownership Information; Employee Retention Credit; Exclusion of Gain on Sale of Land with Residence; and a Farm Lease

Introduction

As I try to catch up on my writing after being on the road for a lengthy time, I have several items that seem to be recurring themes in what I deal with. 

Another potpourri of random ag law and tax issues – it’s the topic of today’s post.

New Corporate Reporting Requirements

The Corporate Transparency Act (CTA), P.L. 116-283, enacted in 2021 as part of the National Defense Authorization Act, was passed to enhance transparency in entity structures and ownership to combat money laundering, tax fraud and other illicit activities. In short, it’s an anti-money laundering initiative designed to catch those that are using shell corporations to avoid tax.  It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market.  The effective date of the CTA is January 1, 2024.    

Who needs to report?  The CTA breaks down the reporting requirement of “beneficial ownership information” between “domestic reporting companies” and “foreign reporting companies.”  A domestic reporting company is a corporation, limited liability company (LLC), limited liability partnership (LLP) or any other entity that is created by filing of a document with a Secretary of State or any similar office under the law of a state or Indian Tribe.  A foreign reporting company is a corporation, LLC or other foreign entity that is formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or any similar office. 

Note:  Sole proprietorships that don’t use a single-member LLC are not considered to be a reporting company. 

Reporting companies typically include LLPs, LLLPs, business trusts, and most limited partnerships and other entities are generally created by a filing with a Secretary of State or similar office. 

Exemptions.  Exemptions from the reporting requirement apply for securities issuers, domestic governmental authorities, insurance companies, credit unions, certain large accounting firms, tax-exempt entities, public utility companies, banks, and other entities that don’t fall into specified categories.  In total there are 23 exemptions including an exemption for businesses with 20 or more full-time U.S. employees, report at least $5 million on the latest filed tax return and have a physical presence in the U.S.   But, for example, otherwise exempt businesses (including farms and ranches) that have other businesses such as an equipment or land LLC or any other related entity will have to file a report detailing the required beneficial ownership information.  Having one large entity won’t exempt the other entities. 

What is a “Beneficial Owner”?  A beneficial owner can fall into one of two categories defined as any individual who, directly or indirectly, either:

  • Exercises substantial control over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting company

Note:  Beneficial ownership is categorized as those with ownership interests reflected through capital and profit interests in the company.

What must a beneficial owner do?  Beneficial owners must report to the Financial Crimes Enforcement Network (FinCEN).  FinCEN is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other international crimes.  Beneficial owners must report their name, date of birth, current residential or business street address, and unique identifier number from a recognized issuing jurisdiction and a photo of that document.  Company applicants can only be the individual who directly files the document that creates the entity, or the document that first registers the entity to do business in the U.S.  A company applicant may also be the individual who is primarily responsible for directing or controlling the filing of the relevant document by someone else. This last point makes it critical for professional advisors to carefully define the scope ot engagement for advisory services with clients.

Note:  If an individual files their information directly with FinCEN, they may be issued a “FinCEN Identifier” directly, which can be provided on a BOI report instead of the required information.

Filing deadlines.  Reporting companies created or registered in 2024 have 90 days from being registered with the state to file initial reports disclosing the persons that own or control the business. NPRM (RIN 1506-AB62) (Sept 28, 2023). If a business was created or registered to do business before 2024, the business has until January 1 of 2025 to file the initial report.  Businesses formed after 2024 must file within 30 days of formation.  Reports must be updated within 30 days of a change to the beneficial ownership of the business, or 30 days from when the beneficial owner becomes aware of or has reason to know of inaccurate information that was previously filed. 

Note:  FinCEN estimates about 32.6 million BOI reports will be filed in 2024, and about 14.5 million such reports will be filed annually in 2025 and beyond. The total five-year average of expected BOI update reports is almost 12.9 million.

Penalties.  The penalty for not filing is steep and can carry the possibility of imprisonment.  Specifically, noncompliance can result in escalating fines ranging from $500 per day up to $10,000 total and prison time of up to two years.     

State issues.  A state is required to notify filers upon initial formation/registration of the requirement to provide beneficial ownership information to the FinCEN.  In addition, states must provide filers with the appropriate reporting company Form.

Withdrawing an ERC Claim

Over the past year or so many fraudulent Employee Retention Credit claims have been filed. You may have heard or seen the ads from firms aggressively pushing the ability to claim the ERC.    It’s gotten so bad that the IRS stopped processing claims for the fourth quarter of 2023.  Many farming operations likely didn’t qualify for the ERC because they didn’t experience at least a 20 percent reduction in gross receipts on an aggregated basis (an eligibility requirement for the ERC) but may have submitted a claim.

Now IRS has provided a path for those that want to withdraw their claim so as not to be hit with a tax deficiency notice and penalties. IR 2023-169 (Sept. 14, 2023).

A withdrawal is possible for those that filed a claim but haven’t received notice that the claim is under audit.  Just file Form 943 and write “withdrawn” on the left-hand margin.  Make sure to sign and date the Form before sending it to the IRS. If your claim is under audit provide the Form directly to the auditor.  If you received a refund but haven’t cashed it, write “VOID and ERC WITHDRAWAL” and send it back to the IRS. 

How Much Gain on Land Can Be Excluded Under Home Sale Rule?

When you sell your principal residence, you can exclude up to $500,000 of gain on a joint return ($250,000 on a single return) if you have owned the home and used it as your principal residence for at least two out of the last five years immediately preceding the sale.  I.R.C. §121.  But how much land can be included with the sale of the home and have gain excluded within that $500,000 limitation?  The Treasury Regulations provide guidance. 

For starters, the land must be adjacent to the principal residence and be used as a part of the residence. Treas Reg. §1.121-1(b)(3).  In addition, the taxpayer must own the land in the taxpayer’s name rather than in an entity that the taxpayer has an ownership interest in (unless the entity is an “eligible entity” defined under Treas. Reg. §301.7701-3(1)).  Land that’s been used in farming within the two-year period before the sale isn’t eligible because its use in farming means it’s not been used as part of the residence. 

Note:  Sale of the principal residence and sale of the adjacent land is treated as a single sale for purposes of the gain limitation amount.  That’s true even if the sale occurs in different years but within the two-year time constraint.  Treas. Reg. §1.121-1(b)(3)(ii)(c).  Also, when computing the maximum limitation for the gain exclusion, the sale of the principal residence is excluded before any gain for the sale of the vacant land. Treas. Reg. §1.121-1(b)(3)(ii). 

For land that is eligible to be included with the residence, how much can be included?  It depends.  Land that contains a garden for home use and land that is landscaped as a yard can be included.  Also, local zoning rules might be instructive.  This all means that it’s a fact-based analysis.  There is no bright-line rule.  IRS rulings and caselaw illustrate that point. 

Written Farm Lease Expires by its Terms; No Holdover Tenancy

A recent case from Kansas illustrates how necessary it is to pay attention to the terms of a written farm lease.  Under the facts of the case, the plaintiff entered into a written farm lease with a landowner on January 10, 2018.  The purpose of the lease was the maintenance and harvesting a hay crop on the leased ground.  By its terms, the lease terminated on December 31, 2018, and contained a provision specifying that the parties could mutually agree in writing to extend the lease.  However, the parties did not extend the lease and it expired as of December 31, 2018.

In 2019, the landowner sold the farm to a third-party buyer.  After the sale, but before the buyer took possession, the plaintiff had the hay field fertilized.  During the summer of 2019, the new landowner hired the defendant to cut and bale the hay, which the defendant ultimately completed late one night. However, early the next morning the plaintiff entered the property and took some of the hay after it was harvested and baled.  The new owner called law enforcement and the plaintiff was informed not to return to the property.  But the plaintiff returned to the property and took more hay.  The plaintiff was criminally charged for multiple offenses.  Ultimately, the plaintiff received a diversion in lieu of prosecution for the charges (against the new owner’s wishes) and was required to provide restitution and perform community service.

The plaintiff claimed that he was entitled to the hay bales because he had a verbal lease and tried to tender a rent check after removing the bales.  The landowner refused to cash the check and moved cattle onto the hay ground.  The plaintiff sued for breach of contract, breach of duty of good and fair dealing, and tortious interference with a contract or business relationship.  The trial court rejected all of the claims and dismissed the case as a matter of law on the basis that the plaintiff did not have a valid lease after 2018.  The trial court denied a motion to reconsider.  On appeal, the appellate court affirmed noting that the lease had not been extended in writing and a holdover tenancy did not exist.  As for monetary damages, the new landowner recovered $27,000 from the plaintiff.  Thoele v. Lee, 2023 Kan. App. Unpub. LEXIS 381 (Kan. Ct. App. Sept. 15, 2023).

October 30, 2023 in Business Planning, Contracts, Income Tax, Real Property, Regulatory Law | Permalink | Comments (0)

Saturday, July 8, 2023

Coeur d’ Alene, Idaho, Conference – Twin Track

Overview

On August 7-8 in beautiful Coeur d’ Alene, ID, Washburn Law School the second of its two summer conferences on farm income taxation as well as farm and ranch estate and business planning.  A bonus for the ID conference will be a two-day conference focusing on various ag legal topics.    The University of Idaho College of Law and College of Agricultural and Life Sciences along with the Idaho State Bar and the ag law section of the Idaho State Bar are co-sponsoring.  This conference represents the continuing effort of Washburn Law School in providing practical and detailed CLE to rural lawyers, CPAs and other tax professionals as well as getting law students into the underserved rural areas of the Great Plains and the West.  The conference can be attended online in addition to the conference location in Coeur d’ Alene at the North Idaho College. 

More information on the August Idaho Conference and some topics in ag law – it’s the topic of today’s post.

Idaho Conference

Over two days in adjoining conference rooms the focus will be on providing continuing education for tax professionals and lawyers that represent agricultural clients.  All sessions are focused on practice-relevant topic.  One of the two-day tracks will focus on agricultural taxation on Day 1 and farm/ranch estate and business planning on Day 2.  The other track will be two-days of various agricultural legal issues. 

Here's a bullet-point breakdown of the topics:

Tax Track (Day 1)

  • Caselaw and IRS Update
  • What is “Farm Income” for Farm Program Purposes?
  • Inventory Method – Options for Farmers
  • Machinery Trades
  • Easement and Rental Issues for Landowners
  • Protecting a Tax Practice From Scammers
  • Amending Partnership Returns
  • Corporate Provided Meals and Lodging
  • CRATs
  • IC-DISCS
  • When Cash Method Isn’t Available
  • Accounting for Hedging Transactions
  • Deducting a Purchased Growing Crop
  • Deducting Soil Fertility

Tax Track (Day 2)

  • Estate and Gift Tax Current Developments
  • Succession Plans that Work (and Some That Don’t)
  • The Use of SLATs in Estate Planning
  • Form 1041 and Distribution Deductions
  • Social Security as an Investment
  • Screening New Clients
  • Ethics for Estate Planners

Ag Law Track (Day 1)

  • Current Developments and Issues
  • Current Ag Economic Trends
  • Handling Adverse Decisions on Federal Grazing Allotments
  • Getting and Retaining Young Lawyers in Rural Areas
  • Private Property Rights and the Clean Water Act – the Aftermath of the Sackett Decision
  • Ethics

Ag Law Track (Day 2)

  • Foreign Ownership of Agricultural Land
  • Immigrant Labor in Ag
  • Animal Welfare and the Legal System
  • How/Why Farmers and Ranchers Use and Need Ag Lawyers and Tax Pros
  • Agricultural Leases

Both tracks will be running simultaneously, and both will be broadcast live online.  Also, you can register for either track.  There’s also a reception on the evening of the first day on August 7.  The reception is sponsored by the University of Idaho College of Law and the College of Agricultural and Life Sciences at the University of Idaho, as well as the Agricultural Law Section of the Idaho State Bar.

Speakers

The speakers for the tax and estate/business planning track are as follows: 

Day 1:  Roger McEowen, Paul Neiffer and a representative from the IRS Criminal Investigation Division.

Day 2:  Roger McEowen; Paul Neiffer; Allan Bosch; and Jonas Hemenway.

The speakers for the ag law track are as follows:

Day 1:  Roger McEowen; Cody Hendrix; Hayden Ballard; Damien Schiff; aand Joseph Pirtle.

Day 2:  Roger McEowen; Joel Anderson; Kristi Running; Aaron Golladay; Richard Seamon; and Kelly Stevenson

Who Should Attend

Anyone that represents farmers and ranchers in tax planning and preparation, financial planning, legal services and/or agribusiness would find the conference well worth the time.  Students attend at a much-reduced fee and should contact me personally or, if you are from Idaho, contract Prof. Rich Seamon (also one of the speakers) at the University of Idaho College of Law.  The networking at the conference will be a big benefit to students in connecting with practitioners from rural areas. 

As noted above, if you aren’t able to attend in-person, attendance is also possible online. 

Sponsorship

If your business would be interested in sponsoring the conference or an aspect of it, please contact me.  Sponsorship dollars help make a conference like this possible and play an important role in the training of new lawyers for rural areas to represent farmers and ranchers, tax practitioners in rural areas as well as legislators. 

For more information about the Idaho conferences and to register, click here: 

Farm Income Tax/Estate and Business Planning Track:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html

Ag Law Track:  https://www.washburnlaw.edu/employers/cle/idahoaglaw.html

July 8, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Monday, July 3, 2023

Buy-Sell Agreements – Part One

Overview

In today’s post, I look at the various types of buy-sell agreements, common triggering events and how they are funded.  In a later post, I will examine the impact of a buy-sell agreement on corporate valuation and discuss a recent federal appellate court decision that has opened the potential that a buy-sell agreement, if not adhered to during life, could result in enhanced estate value at death.

Buy-sell agreements – Part one of a two-part series.  It’s the topic of today’s post.

Buy-Sell Agreements in General

A buy-sell agreement is a frequently used mechanism by a closely-held farming or ranching business (as well as many non-farm businesses) to integrate the needs and capabilities of the business with the succession planning/transition objectives of the owners. A well-drafted buy sell agreement can be a very useful document to assist in the transitioning of a family business from one generation to the next. It can also be a useful device for assisting in balancing out inheritances among heirs by making sure the heirs interested in running the family business end up with control of the business and other heirs end up with non-control interests. In addition, utilized properly, a buy-sell agreement may also provide estate tax valuation discounts. 

A buy-sell agreement is typically a separate document, although some (or all) of its provisions may be incorporated in its bylaws, the partnership agreement, the LLC operating agreement and, on occasion, in an employment agreement with owner-employees.  For many small businesses, a well-drafted buy-sell agreement is perhaps just as important as a will or trust.  It can be the key to passing on the business to the next generation successfully. 

Types of Agreements

There are two basic types of buy-sell agreements – a cross-purchase agreement or a redemption agreement. 

Redemption.  A redemption agreement is also known as an “entity purchase” agreement.  It is a contract between the owners of the business and the business whereby each owner agrees to sell his interest to the business upon the occurrence of certain events. For redemption agreements, if I.R.C. §§302(b)-303 are not satisfied, the redemption is taxed as a dividend distribution (ordinary income without recovery of basis) to the extent of the stockholder’s allocable portion of current and accumulated earnings and profits, without regard to the stockholder’s basis in his shares. This can be a significant problem for post-mortem redemptions - the estate of a deceased shareholder would normally receive a basis in the shares equal to their value on the date of death or the alternate valuation date. Thus, dividend treatment can result in the recognition of the entire purchase price as ordinary income to a redeemed estate, whereas sale or exchange treatment results in recognition of no taxable gain whatsoever.

Cross-purchase.  This type of agreement is a contract between or among the owners (the business is not necessarily a party to the agreement) whereby each owner agrees to sell his shares to the other owners on the occurrence of specified events. With a cross-purchase agreements, unless the shareholder is a dealer in stock, any gain on the sale is a capital gain regardless of the character of the corporation’s underlying assets. I.R.C. §1221. For the estate that sells the stock shortly after the shareholder’s death, no gain is recognized if the agreement sets the sale price at the date of death value. I.R.C. §§1014; 2032. The purchasing shareholders increase their basis in their total holdings of corporate stock by the price paid for the shares purchased under the agreement, even if the shares are paid for with tax-free life insurance proceeds.

Other types.  Sometimes a “hybrid agreement” is utilized.  This type of agreement is a contract between the business and the owners whereby the owners agree to offer their shares first to the corporation and then to the other owners on the occurrence of certain events.  Under a “wait and see” type of buy-sell agreement, the identity of the purchaser is not disclosed until the actual time of purchase as triggered in the agreement. The corporation will have first shot at purchasing shares, then the remaining shareholders, then the corporation may be obligated to buy any remaining shares.

Note: If an S election is in place, the corporate income is taxed to the shareholders and can be withdrawn from the corporation to fund a cross-purchase agreement without triggering additional tax. If the triggering event is something other than death, a cross-purchase agreement is required to achieve an increased cost basis to the purchasing shareholder(s). A hybrid agreement requires the corporation to redeem only as much stock as will qualify for sale or exchange treatment under I.R.C. §303, and then requires the other shareholders to buy the balance of the available stock. This permits the corporation to finance part of the purchase price, to the extent required to pay estate taxes and expenses and assures sale or exchange treatment on the entire transaction. I.R.C. §303(b)(3).

A buy-sell agreement that imposes employment-related restrictions may create ordinary compensation income (without recovery of basis). I.R.C. §83. However, an agreement containing transfer restrictions that are sufficient to render the stock substantially non-vested (substantial risk of forfeiture) may prevent the current recognition of ordinary income.

Triggering Events

Common events that trigger the buy-sell agreement are death, disability, divorce, bankruptcy, termination of employment, resignation, or retirement.  Upon the occurrence of a trigger event, the purpose of the buy-sell agreement is to, among other things, prevent a departing shareholder from creating conflict over future policies of the business, eliminate the potential for the departed shareholder (or a surviving spouse) to benefit from the future success of the business and selling shares to “undesirable” parties to facilitate an inter-family transition of the business. 

Regardless of the event that triggers the buy-sell agreement, the departing shareholder (if the agreement is drafted properly) has certainty that his shares have a ready market.  This is important to shareholders in a closely-held farming (or other) business.  The issue (discussed in Part Two) is the valuation of the selling shareholder’s (or estate’s) shares.   Nevertheless, a buy-sell agreement can effectively provide a market for the ownership interests, limit transferability of those interests outside the immediate family and establish a procedure for buying a deceased owner’s interests which, in turn, can aid in establishing certainty as to the value of the shares for federal estate tax purposes. 

Conclusion

Part Two in this series will discuss valuation issues with a buy-sell agreement in the context of a small, closely-held business, focusing on the impact on corporate value when corporate-owned life insurance is used to buy out a deceased (or departing) shareholder.

July 3, 2023 in Business Planning | Permalink | Comments (0)

Sunday, June 11, 2023

Summer Seminars (Michigan and Idaho) and Miscellaneous Ag Law Topics

Overview

Later this week is the first of two summer conferences put on by Washburn Law School focusing on farm income taxation as well as farm and ranch estate and business planning.  This week’s conference will be in Petoskey, Michigan, which is near the northernmost part of the lower peninsula of Michigan.  Attendance can also be online.  For more information and registration click here:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html  On August 7-8, a twin-track conference will be held in Coeur d’Alene, Idaho. 

More information on the August Idaho Conference and some topics in ag law – it’s the topic of today’s post.

Idaho Conference

On August 7-8, Washburn Law School will be sponsoring the a twin-track ag tax and law conference at North Idaho College in Coeur d’ Alene, ID.  Over two days in adjoining conference rooms the focus will be on providing continuing education for tax professionals and lawyers that represent agricultural clients.  All sessions are focused on practice-relevant topic.  One of the two-day tracks will focus on agricultural taxation on Day 1 and farm/ranch estate and business planning on Day 2.  The other track will be two-days of various agricultural legal issues. 

Here's a bullet-point breakdown of the topics:

Tax Track (Day 1)

  • Caselaw and IRS Update
  • What is “Farm Income” for Farm Program Purposes?
  • Inventory Method – Options for Farmers
  • Machinery Trades
  • Solar Panel Tax Issues – Other Easement and Rental Issues
  • Protecting a Tax Practice From Scammers
  • Amending Partnership Returns
  • Corporate Provided Meals and Lodging
  • CRATs
  • IC-DISCS
  • When Cash Method Isn’t Available
  • Accounting for Hedging Transactions
  • Deducting a Purchased Growing Crop
  • Deducting Soil Fertility

Tax Track (Day 2)

  • Estate and Gift Tax Current Developments
  • Succession Plans that Work (and Some That Don’t)
  • The Use of SLATs in Estate Planning
  • Form 1041 and Distribution Deductions
  • Social Security as an Investment
  • Screening New Clients
  • Ethics for Estate Planners

Ag Law Track (Day 1)

  • Current Developments and Issues
  • Current Ag Economic Trends
  • Handling Adverse Decisions on Federal Grazing Allotments
  • Getting and Retaining Young Lawyers in Rural Areas
  • Private Property Rights and the Clean Water Act – the Aftermath of the Sackett Decision
  • Ethics

Ag Law Track (Day 2)

  • Foreign Ownership of Agricultural Land
  • Immigrant Labor in Ag
  • Animal Welfare and the Legal System
  • How/Why Farmers and Ranchers Use and Need Ag Lawyers and Tax Pros
  • Agricultural Leases

Both tracks will be running simultaneously, and both will be broadcast live online.  Also, you can register for either track.  There’s also a reception on the evening of the first day on August 7.  The reception is sponsored by the University of Idaho College of Law and the College of Life Sciences at the University of Idaho, as well as the Agricultural Law Section of the Idaho State Bar.

For more information about the Idaho conferences and to register, click here:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html and here:  https://www.washburnlaw.edu/employers/cle/idahoaglaw.html

Miscellaneous Agricultural Law Topics

Proper Tax Reporting of 4-H/FFA Projects

When a 4-H or FFA animal is sold after the fair, the net income should be reported on the other income line of the 1040.  It’s not subject to self-employment tax if the animal was raised primarily for educational purposes and not for profit and was raised under the rules of the sponsoring organization.  It’s also not earned income for “kiddie-tax” purposes.  But, if the animal was raised as part of an activity that the seller was engaged in on a regular basis for profit, the sale income should be reported on Schedule F.  That’s where the income should be reported if the 4-H or FFA member also has other farming activities.  By being reported on Schedule F, it will be subject to self-employment tax.

There are also other considerations.  For example, if the seller wants to start an IRA with the sale proceeds, the income must be earned.  Also, is it important for the seller to earn credits for Social Security purposes? 

The Importance of Checking Beneficiary Designations

U.S. Bank, N.A. v. Bittner, 986 N.W.2d 840 (Iowa 2023)

It’s critical to make sure you understand the beneficiary designations for your non-probate property and change them as needed over time as your life situation changes.  For example, in one recent case, an individual had over $3.5 million in his IRA when he died, survived by his wife and four children.  His will said the IRA funds were to be used to provide for his widow during her life and then pass to a family trust for the children.  When he executed his will, he also signed a new beneficiary designation form designating his wife as the primary beneficiary.  He executed a new will four years later and said the IRA would be included in the marital trust created under the will if no federal estate tax would be triggered, with the balance passing to the children upon his wife’s death.  He didn’t update his IRA beneficiary designation.

When he died, everyone except one son agreed that the widow got all of the IRA.  The son claimed it should go to the family trust.  Ultimately, the court said the IRA passed to the widow. 

It’s important to pay close attention to details when it comes to beneficiary designations and your overall estate plan.

Liability Release Forms – Do They Work?

Green v. Lajitas Capital Partners, LLC, No. 08-22-00175-CV, 2023 Tex. App. LEXIS 2860 (Tex. Ct. App. Apr. 28, 2023)

Will a liability release form hold up in court?  In a recent Texas case, a group paid to go on a sunset horseback trail ride at a Resort.  They signed liability release forms that waived any claims against the Resort.  After the ride was almost done and the riders were returning to the stable, the group rode next to a golf course.  An underground sprinkler went off, making a hissing sound that spooked the horses.  One rider fell off resulting in bruises and a fractured wrist.  She sued claiming the Resort was negligent and that the sprinklers were a dangerous condition that couldn’t be seen so the liability waiver didn’t apply.

The court disagreed, noting that the liability release form used bold capitalized letters in large font for the key provisions.  The rider had initialed those key provisions.  The court also said the form wasn’t too broad and didn’t’ only cover accidents caused by natural conditions. 

The outcome might not be the same in other states.  But, if a liability release form is clear, and each paragraph is initialed and the document is signed, you have a better chance that it will hold up in court.

Equity Theft

Tyler v. Hennepin County, No. 22-166, 2023 U.S. LEXIS 2201 (U.S. Sup. Ct. May 25, 2023)

The U.S. Supreme Court has ruled that if you lose your home through forfeiture for failure to pay property taxes, that you get to keep your equity.  The case involved a Minnesota county that followed the state’s forfeiture law when the homeowner failed to pay property tax, sold the property and kept the proceeds – including the owner’s equity remaining after the tax debt was satisfied.  The Supreme Court unanimously said the Minnesota law was unconstitutional. The same thing previously happened to the owner of an alpaca farm in Massachusetts, and a farm owner in Nebraska.  The Nebraska legislature later changed the rules for service of notice when applying for a tax deed, but states that still allow the government to retain the equity will have to change their laws.

Equity theft tends to bear more heavily on those that can least afford to hire legal assistance or qualify for legal aid.  Also, all states bar lenders and private companies from keeping the proceeds of a forfeiture sale, so equity forfeiture laws were inconsistent.  Now the Supreme Court has straightened the matter out. 

You won’t lose your equity if you lose your farm for failure to pay property tax.

The Climate, The Congress and Farmers

Farmers in the Netherlands are being told that because of the goal of “net-zero emissions” of greenhouse gases and other so-called “pollutants” by 2050, they will be phased out if they can’t adapt.  Could that happen in the U.S.?  The U.S. Congress is working on a Farm Bill, and last year’s “Inflation Reduction Act” funnels about $20 billion of climate funds into agriculture which could end up in policies that put similar pressures on American farmers.  Some estimates are that agricultural emissions will make up 30 percent of U.S. total greenhouse gas emissions by 2050.  But, fossil fuels are vital to fertilizers and pesticides, which improve crop production and reduce food prices. 

The political leader of Sri Lanka banned synthetic fertilizer and pesticide imports in 2021.  The next year, inflation was at 55 percent, the economy was in shambles, the government fell, and the leader fled the country.

Energy security, ag production and food security are all tied to cheap, reliable and efficient energy sources.  Using less energy will result in higher food prices, and that burden will fall more heavily on those least likely to be able to afford it. 

As the Farm Bill is written, the Congress should keep these things in mind.

Secure Act 2.0 Errors

In late 2019, the Congress passed the SECURE ACT which made significant changes to retirement plans and impacted retirement planning.  Guidance is still needed on some provisions of that law.  In 2022, SECURE ACT 2.0 became law, but it has at least three errors that need to be fixed. 

The SECURE ACT increased the required minimum distribution (RMD) age from 70 and ½ to age 72.  With SECURE ACT 2.0, the RMD increased to age 73 effective January 1, 2023.  It goes to age 75 starting in 2033.  But, for those born in 1959, there are currently two RMD ages in 2033 – it’s either 73 or 75 that year.  Which age is correct?  Congressional intent is likely 75, but te Congress needs to clearly specify. 

Another error involves Roth IRAs.  Starting in 2024, if you earn more than $145,000 (mfj) in 2023, you will have to do non-deductible catch-up contributions in Roth form.  But SECURE ACT 2.0 says that all catch-up contributions starting in 2024 will be disallowed.  This needs to be corrected.

There’s also an issue with SEPs and SIMPLE plans that are allowed to do ROTH contributions and how those contributions impact ROTH limitations. 

Congress needs to fix these issues this year.  If it does, it will likely be late in 2023.

Implications of SCOTUS Union Decision on Farming Businesses

Glacier Northwest, Inc. v. International Board of Teamsters Local Union No. 174, No. 21-1449, 2023 U.S. LEXIS 2299 (U.S. Sup. Ct. Jun. 1, 2023)

The Supreme Court recently issued a ruling that will make it easier for employers to sue labor unions for tort-type damages caused by a work stoppage.   The Court’s opinion has implications for ag employers. 

The Court ruled that an employer can sidestep federal administrative agency procedures of the National Labor Relations Board (NLRB) and go straight to court when striking workers damage the company’s property rather than merely cause economic harm.  The case involved a concrete company that sued the labor union representing its drivers for damages.  The workers filled mixer trucks with concrete ready to pour knowing they were going to walk away.  The company sued for damage to their property – something that’s not protected under federal labor law.  The Union claimed that the matter had to go through federal administrative channels (the NLRB) first. 

The Supreme Court said the case was more like an ordinary tort lawsuit than a federal labor dispute, so the company could go straight to court.  Walking away was inconsistent with accepting a perishable commodity. 

What’s the ag angle?  Where there are labor disputes in agriculture, they are often timed to damage perishable food products such as fruit and vegetables.  Based on the Court’s 8-1 opinion, merely timing a work stoppage during harvest might not be enough to be deemed economic damage, unless the Union has a contract.  But striking after a sorting line has begun would seem to be enough.

Digital Grain Contracts

The U.S. grain marketing infrastructure is quite efficient.  But there are changes that could improve on that existing efficiency.  Digital contracts are starting to replace paper grain contracts.  The benefits could be improved record-keeping, simplified transactions, reduced marketing costs and expanded market access. 

Grain traveling in barges down the Ohio and Mississippi Rivers is usually bought and sold many times between river and export terminals.  That means that each transaction requires a paper bill of lading that must be transferred when the barge was sold.  But now those bills of lading are being moved to an online platform.  Grain exporters are also using digital platforms. 

These changes to grain marketing could save farmers and merchandisers dollars and make the supply chain more efficient.  But a problem remains in how the various platforms are to be connected.  Verification issues also loom large.  How can a buyer verify that a purchased commodity meets the contract criteria?  That will require information to be shared up the supply chain.  And, of course, anytime transactions become digital, the digital network can be hacked.  In that situation, what are the safeguards that are in place and what’s the backup plan if the system goes down? 

Clearly, there have been advancements in digital grain trading, but there is still more work to be done.  In addition, not all farmers may be on board with a digital system. 

June 11, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Environmental Law, Estate Planning, Income Tax, Real Property | Permalink | Comments (0)

Thursday, April 20, 2023

Bibliography – First Quarter of 2023

The following is a listing by category of my blog articles for the first quarter of 2023.

Bankruptcy

Failure to Execute a Written Lease Leads to a Lawsuit; and Improper Use of SBA Loan Funds

https://lawprofessors.typepad.com/agriculturallaw/2023/02/failure-to-execute-a-written-lease-leads-to-a-lawsuit-and-improper-use-of-sba-loan-funds.html

Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith

https://lawprofessors.typepad.com/agriculturallaw/2023/02/chapter-12-bankruptcy-proposing-a-reorganization-plan-in-good-faith.html

Business Planning

Summer Seminars

https://lawprofessors.typepad.com/agriculturallaw/2023/03/summer-seminars.html

Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)

https://lawprofessors.typepad.com/agriculturallaw/2023/04/registration-now-open-for-summer-conference-no-1-petoskey-michigan-june-15-16.html

Civil Liabilities

Top Ag Law and Tax Developments of 2022 – Part 1

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ag-law-and-tax-developments-of-2022-part-1.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-8-and-7.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-2-and-1.html

Contracts

Top Ag Law and Developments of 2022 – Part 2

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ag-law-and-developments-of-2022-part-2.html

Failure to Execute a Written Lease Leads to a Lawsuit; and Improper Use of SBA Loan Funds

https://lawprofessors.typepad.com/agriculturallaw/2023/02/failure-to-execute-a-written-lease-leads-to-a-lawsuit-and-improper-use-of-sba-loan-funds.html

Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues

https://lawprofessors.typepad.com/agriculturallaw/2023/03/double-fractions-in-oil-and-gas-conveyances-and-leases-resulting-interpretive-issues.html

Environmental Law

Here Come the Feds: EPA Final Rule Defining Waters of the United States – Again

https://lawprofessors.typepad.com/agriculturallaw/2023/01/here-come-the-feds-epa-final-rule-defining-waters-of-the-united-states-again.html

Top Ag Law and Developments of 2022 – Part 2

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ag-law-and-developments-of-2022-part-2.html

Top Ag Law and Developments of 2022 – Part 3

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ag-law-and-tax-developments-of-2022-part-3.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-nos-10-and-9.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-6-and-5.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-4-and-3.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-2-and-1.html

Estate Planning

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

https://lawprofessors.typepad.com/agriculturallaw/2023/02/tax-court-opinion-charitable-deduction-case-involving-estate-planning-fraudster.html

Happenings in Agricultural Law and Tax

https://lawprofessors.typepad.com/agriculturallaw/2023/03/happenings-in-agricultural-law-and-tax.html

Summer Seminars

https://lawprofessors.typepad.com/agriculturallaw/2023/03/summer-seminars.html

RMD Rules Have Changed – Do You Have to Start Receiving Payments from Your Retirement Plan?

https://lawprofessors.typepad.com/agriculturallaw/2023/03/rmd-rules-have-changed-do-you-have-to-start-receiving-payments-from-your-retirement-plan.html

Common Law Marriage – It May Be More Involved Than What You Think

https://lawprofessors.typepad.com/agriculturallaw/2023/04/common-law-marriage-it-may-be-more-involved-than-what-you-think.html

The Marital Deduction, QTIP Trusts and Coordinated Estate Planning

https://lawprofessors.typepad.com/agriculturallaw/2023/04/the-marital-deduction-qtip-trusts-and-coordinated-estate-planning.html

Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)

https://lawprofessors.typepad.com/agriculturallaw/2023/04/registration-now-open-for-summer-conference-no-1-petoskey-michigan-june-15-16.html

Income Tax

Top Ag Law and Developments of 2022 – Part 3

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ag-law-and-tax-developments-of-2022-part-3.html

Top Ag Law and Developments of 2022 – Part 4

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-agricultural-law-and-tax-developments-of-2022-part-4.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-8-and-7.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-2-and-1.html

Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster

https://lawprofessors.typepad.com/agriculturallaw/2023/02/tax-court-opinion-charitable-deduction-case-involving-estate-planning-fraudster.html

Deducting Residual (Excess) Soil Fertility

https://lawprofessors.typepad.com/agriculturallaw/2023/02/deducting-residual-excess-soil-fertility.html

Deducting Residual (Excess) Soil Fertility – Does the Concept Apply to Pasture/Rangeland? (An Addendum)

https://lawprofessors.typepad.com/agriculturallaw/2023/02/deducting-residual-excess-soil-fertility-does-the-concept-apply-to-pasturerangeland-an-addendum.html

Happenings in Agricultural Law and Tax

https://lawprofessors.typepad.com/agriculturallaw/2023/03/happenings-in-agricultural-law-and-tax.html

Summer Seminars

https://lawprofessors.typepad.com/agriculturallaw/2023/03/summer-seminars.html

RMD Rules Have Changed – Do You Have to Start Receiving Payments from Your Retirement Plan?

https://lawprofessors.typepad.com/agriculturallaw/2023/03/rmd-rules-have-changed-do-you-have-to-start-receiving-payments-from-your-retirement-plan.html

Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)

https://lawprofessors.typepad.com/agriculturallaw/2023/04/registration-now-open-for-summer-conference-no-1-petoskey-michigan-june-15-16.html

Real Property

Equity “Theft” – Can I Lose the Equity in My Farm for Failure to Pay Property Taxes?

https://lawprofessors.typepad.com/agriculturallaw/2023/03/equity-theft-can-i-lose-my-farm-for-failure-to-pay-property-taxes.html

Happenings in Agricultural Law and Tax

https://lawprofessors.typepad.com/agriculturallaw/2023/03/happenings-in-agricultural-law-and-tax.html

Adverse Possession and a “Fence of Convenience”

https://lawprofessors.typepad.com/agriculturallaw/2023/03/adverse-possession-and-a-fence-of-convenience.html

Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues

https://lawprofessors.typepad.com/agriculturallaw/2023/03/double-fractions-in-oil-and-gas-conveyances-and-leases-resulting-interpretive-issues.html

Abandoned Rail Lines – Issues for Abutting Landowners

https://lawprofessors.typepad.com/agriculturallaw/2023/03/abandoned-rail-lines-issues-for-abutting-landowners.html

Regulatory Law

Top Ag Law and Developments of 2022 – Part 2

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ag-law-and-developments-of-2022-part-2.html

Top Ag Law and Developments of 2022 – Part 4

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-agricultural-law-and-tax-developments-of-2022-part-4.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-nos-10-and-9.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-8-and-7.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-6-and-5.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-4-and-3.html

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-2-and-1.html

Foreign Ownership of Agricultural Land

https://lawprofessors.typepad.com/agriculturallaw/2023/02/foreign-ownership-of-agricultural-land.html

Abandoned Rail Lines – Issues for Abutting Landowners

https://lawprofessors.typepad.com/agriculturallaw/2023/03/abandoned-rail-lines-issues-for-abutting-landowners.html

Secured Transactions

Priority Among Competing Security Interests

https://lawprofessors.typepad.com/agriculturallaw/2023/02/priority-among-competing-security-interests.html

Water Law

Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2023/01/top-ten-agricultural-law-and-tax-developments-of-2022-numbers-2-and-1.html

Happenings in Agricultural Law and Tax

https://lawprofessors.typepad.com/agriculturallaw/2023/03/happenings-in-agricultural-law-and-tax.html

April 20, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Tuesday, April 11, 2023

Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)

Overview

Again this summer, Washburn Law School will be conducting two summer seminars focused on farm and ranch income taxation and farm and ranch estate, business and succession planning.  The first of the two events will be in Petoskey, Michigan on June 15-16 at North Central Michigan College.  Registration is now open and can be accessed here:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html 

August Conferences in Idaho

The finishing touches are just about complete on the second two-day event this summer which will be at North Idaho College in Coeur d’Alene, Idaho on August 7-8.  Both events will also be simulcast live over the web. The Idaho event will feature a “conference within a conference.”  The standard two days will be devoted to farm/ranch income tax and farm/ranch estate and business planning topics.  But starting a bit later each day and ending slightly earlier, a second conference will be occurring simultaneously in a nearby meeting hall in the same building on the North Idaho College campus devoted to topics in agricultural law.  The them of this two-day conference will be on representing the ag client.  Many thanks to the Idaho Bar Association, the ag law section of the Idaho Bar, Prof. Rich Seamon and the University of Idaho College of law and others in helping put this conference together.  Details on this these two conferences in Coeur d’Alene will be posted here soon with registration information. 

June Michigan Conference

The itinerary for the Michigan event is below.  The Idaho tax/e.p./b.p. conference follows the same Day 1 itinerary as the Michigan event, but Day 2 in Idaho will have a few different topics and speakers. 

Here’s the itinerary for the Michigan conference.

Day 1 Itinerary

7:30-8:00 a.m. – Registration

8:00–8:05 a.m. - Welcome and Announcements

8:05–9:05 a.m. – Tax Update (Cases and Rulings) (McEowen) [60 minutes tax update CPE]

This opening session takes a look at the most significant tax cases and rulings from the courts and the IRS during the past year that have implications for farm and ranch clients, rural landowners, and agribusiness professionals. 

9:05–9:45 a.m. – The Definition of “Farm Income” for Farm Program Purposes (Neiffer) [40 minutes tax update CPE]

Many Farm Service Agency programs grant extra payments if AGI from farming is more than 75% of total AGI.  This session will review how FSA determine AGI and why it can be substantially different from IRS calculations.

9:45–10:05 a.m. – Morning Break

10:05–10:30 a.m. – Machinery Trades (McEowen) [25 minutes of tax law CPE]

This session examines the trade of farm machinery with no or low basis for new machinery and the resulting gain computation, combined with substantial depreciation claimed on the new machine. 

10:30–10:55 a.m. – Selected Topics - Inventory Method Options for Farmers; How Bonus Depreciation and Expense Method Depreciation Can Work Together for Farm Clients (Neiffer) [25 minutes of tax update CPE]

Tax Reform simplified many accounting methods for taxpayers including farmers.  We will review those change and why Section 179 can be more beneficial than bonus depreciation.

10:55–11:45 a.m. – Solar Panel Tax Issues; Other Rental Tax Issues (McEowen) [50 minutes of tax law CPE]

This discussion explores the tax issues associated with the placement of solar panels on farmland and also looks at other tax issues associated with rentals that farming operations often encounter.

11:45–12:45 p.m. – Luncheon

12:45 p.m.– 1:45 p.m. – Protecting a Tax Practice From Scammers (IRS CID) [60 minutes of tax law]

What steps can a tax practice take to protect itself from scams, including those from the dark web?   What is good office protocol?  What are the essential things that can be done and what are the signs to look for to detect scammers?

1:45 p.m.–2:25 p.m. – Selected Topics - Amending Partnership Returns; Corporate Provided Meals and Lodging; Charitable Remainder Trusts for Retiring Farmers (Neiffer) [40 minutes of tax law CPE]

This session will update the required method of amending partnership returns depending on whether the centralized partnership audit regime applies; a review of the change in corporate provided meals and why charitable remainder trusts can save taxes for a retiring farmer especially with increasing interest rates.

2:25-2:45 p.m. – Afternoon Break

2:45–3:10 p.m. – Easement Tax Issues (McEowen) [25 minutes of tax update CPE]

Rural landowners are finding easement tax issues to be more commonplace.  This brief session provides a review of the basic tax issues associated with easements, particularly income tax basis offset issues and the character of the easement payments.

3:10–4:00 p.m. – IC-DISC for Farmers; Disallowance of Cash Method for Farming Activities; Accounting for Hedging Transactions; When to Deduct a Purchased Growing Crop (Neiffer) [50 minutes of tax law CPE]

An IC-DISC can cut a farmer’s income taxes in half – we review when it might apply.  More farming activities include non-material participating taxpayers.  This can cause the entity to be on the accrual method.  The reporting of hedging activities is not always intuitive.  We review the requirement and the options and when can a farmer deduct purchased growing crop.

4:00–4:25 p.m. – Soil Fertility Deductions (McEowen) [25 minutes of tax law CPE]

When a farm is purchased an allocation of value can be made to depreciable items.  One of those items might be excess fertilizer supply.  The IRS has a specific procedure that must be followed for valuing the excess amount.  This session examines the IRS approach, the amount to be amortized, the timeframe for amortization and the possibility of recapture. 

4:25 p.m. - Adjournment

Day 2

Here’s the itinerary for Day 2 of the Michigan event (farm estate and business planning track):

7:30-8:00 a.m. — Registration

8:05-8:55a.m. — Current Developments in Estate and Gift Taxation (McEowen) [50 minutes tax update CPE]

This session provides an update of legislative, regulatory and court developments involving federal estate and gift tax including developments involving a decedent’s gross estate, asset valuation, gifts made during life, retirement plans and miscellaneous issues.

8:55-9:45 a.m. – “Top Ten” Strategies For a Successful Farm Business (Rhea and Dikeman) [50 minutes tax update CPE]

As we look toward the next 12 months, several items deserve increased attention for farm businesses. This presentation delivers a Top 10 list of forward-looking strategies to consider for success. Changes in cost, income, inflation, tax laws, and estate planning are some key topics discussed.  These will be on the mind of farms and ranches as they navigate the uncertain economic conditions and the impact of higher asset values, growing debt, and rising interest rates.  We will also demonstrate the performance distinctions of top 1/3 producers.

9:45-10:05 a.m. — Morning Break

10:05-10:55 a.m. – Taxes in Probate: Form 1041 and Distribution Deductions (McEowen) [50 minutes tax law CPE]

This session walks the practitioner through the completion of Form 1041, the assets included in the probate estate, possible income generating items for an estate, the handling of capital gain or loss, and estate accounting.  A discussion of e-filing and electronic signatures will also be included.  In addition, common issues associated with the death of a farmer will be addressed.

10:55 a.m.-11:45 a.m. – SLATs – Why It Might be the Best Option for Your Farmers (Neiffer) [50 minutes of tax law CPE]

This session reviews the various trust options available to farm families to transfer assets to the next generation in a tax efficient manner.  The session will then review why a Spousal Lifetime Access Trust (SLAT) might be the best option.

11:45-12:45 p.m. — Lunch

12:45 p.m.-1:35 p.m. – Why Social Security is an Investment, not a Tax (Neiffer) [50 minutes of tax law CPE]

Most farmers view social security as an unnecessary tax.  However, with optimal planning, social security maybe one of the best investments they ever make.  We review how benefits are calculated, why spousal benefits provide even more bang for their buck and some common claiming options.

1:35 p.m.-2:50 p.m. — Tax Strategies for the Farm and Ranch Client (Rhea and Dikeman) [75 minutes of tax law CPE]

This session highlights several changes were made by the Tax Cuts & Jobs Act of 2017; many sunset after 2025 and demand attention for optimal tax planning strategies the next 3 years.  We will also explain how rising inflation rates are at times helping reduce tax liability and when it does not.  Rising interest rates and inflated asset values are dramatically shifting costs of farm transitions to the detriment of young and beginning farmers.  Stepped-up basis is a big thing; we detail how this can be helpful to farm successors.  Unintended consequences of high income and options for tax management after year end are analyzed.

2:50 p.m. – 3:10 p.m. – Afternoon Break

3:10 p.m. – 3:25 p.m. – New Estate Planning Clients – Screening Clients and Gathering Information [15 minutes of tax law CPE]

This session takes a brief look at a suggested approach to handling potential new estate/business planning clients.  How to screen clients, identify potential problem clients, engagement letters and information gathering as preparatory to determining the appropriate path forward for the client.

3:25-4:25 p.m. – Ethics for Estate Planners (McEowen) [1 hour of tax ethics CPE]

What are the ethical issues facing practitioners working with clients on estate/business and tax planning matters?  How might the Circular 230 rules impact tax professionals in the estate and business planning context when income tax advice is involved?  This session looks at some of the common issues that can arise, applicable caselaw, and some of the more unusual situations that might arise that present difficult situations for the planner. 

4:25 p.m. — Conference Adjourns

Conclusion

The registration link for the Michigan event can be found here: 

As noted above, both days of the conference will be broadcast live online.  Also, if you business is interested in being a sponsor, please contact me.

April 11, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Wednesday, March 29, 2023

Summer Seminars

Overview

This summer Washburn Law School will be conducting two summer seminars focused on farm and ranch income taxation and farm and ranch estate, business and succession planning.  The first of the two events will be in Petoskey, Michigan on June 15-16 at North Central Michigan College.  Registration will open soon.  When the law school has that ready, the link will be available on my website:  www.washburnlaw.edu/waltr and I will share it here.  The second two-day event this summer will be at North Idaho College in Coeur d’Alene, Idaho on August 7-8.  Both events will also be simulcast live over the web. 

The itinerary for the Michigan event is below.  The Idaho event follows the same Day 1 itinerary as the Michigan event, but Day 2 in Idaho will have a few different topics and speakers on Day 2.  Also, at the Idaho conference there will also be a dual track running at the same time devoted solely to agricultural law topics.  The ag law track will start a bit later in the morning and end earlier than the estate and business planning conference.  It will be held at the same location in Coeur d’Alene and the luncheon each day will be for all attendees of each track.  Approximately 10 hours of CLE will be available for the ag law topics.  I will post more on that once the topics and speakers are completely filled-in for that day.

Day 1 Itinerary

Here's the itinerary for Day 1 at both the Michigan and Idaho locations (farm tax track):

7:30-8:00 a.m. – Registration

8:00–8:05 a.m. - Welcome and Announcements

8:05–9:05 a.m. – Tax Update (Cases and Rulings) (McEowen) [60 minutes tax update CPE]

This opening session takes a look at the most significant tax cases and rulings from the courts and the IRS during the past year that have implications for farm and ranch clients, rural landowners, and agribusiness professionals. 

9:05–9:45 a.m. – The Definition of “Farm Income” for Farm Program Purposes (Neiffer) [40 minutes tax update CPE]

Many Farm Service Agency programs grant extra payments if AGI from farming is more than 75% of total AGI.  This session will review how FSA determine AGI and why it can be substantially different from IRS calculations.

9:45–10:05 a.m. – Morning Break

10:05–10:30 a.m. – Machinery Trades (McEowen) [25 minutes of tax law CPE]

This session examines the trade of farm machinery with no or low basis for new machinery and the resulting gain computation, combined with substantial depreciation claimed on the new machine. 

10:30–10:55 a.m. – Selected Topics - Inventory Method Options for Farmers; How Bonus Depreciation and Expense Method Depreciation Can Work Together for Farm Clients (Neiffer) [25 minutes of tax update CPE]

Tax Reform simplified many accounting methods for taxpayers including farmers.  We will review those change and why Section 179 can be more beneficial than bonus depreciation.

10:55–11:45 a.m. – Solar Panel Tax Issues; Other Rental Tax Issues (McEowen) [50 minutes of tax law CPE]

This discussion explores the tax issues associated with the placement of solar panels on farmland and also looks at other tax issues associated with rentals that farming operations often encounter.

11:45–12:45 p.m. – Luncheon

12:45 p.m.– 1:45 p.m. – Protecting a Tax Practice From Scammers (IRS CID) [60 minutes of tax law]

What steps can a tax practice take to protect itself from scams, including those from the dark web?   What is good office protocol?  What are the essential things that can be done and what are the signs to look for to detect scammers?

1:45 p.m.–2:25 p.m. – Selected Topics - Amending Partnership Returns; Corporate Provided Meals and Lodging; Charitable Remainder Trusts for Retiring Farmers (Neiffer) [40 minutes of tax law CPE]

This session will update the required method of amending partnership returns depending on whether the centralized partnership audit regime applies; a review of the change in corporate provided meals and why charitable remainder trusts can save taxes for a retiring farmer especially with increasing interest rates.

2:25-2:45 p.m. – Afternoon Break

2:45–3:10 p.m. – Easement Tax Issues (McEowen) [25 minutes of tax update CPE]

 

Rural landowners are finding easement tax issues to be more commonplace.  This brief session provides a review of the basic tax issues associated with easements, particularly income tax basis offset issues and the character of the easement payments.

3:10–4:00 p.m. – IC-DISC for Farmers; Disallowance of Cash Method for Farming Activities; Accounting for Hedging Transactions; When to Deduct a Purchased Growing Crop (Neiffer) [50 minutes of tax law CPE]

An IC-DISC can cut a farmer’s income taxes in half – we review when it might apply.  More farming activities include non-material participating taxpayers.  This can cause the entity to be on the accrual method.  The reporting of hedging activities is not always intuitive.  We review the requirement and the options and when can a farmer deduct purchased growing crop.

4:00–4:25 p.m. – Soil Fertility Deductions (McEowen) [25 minutes of tax law CPE]

When a farm is purchased an allocation of value can be made to depreciable items.  One of those items might be excess fertilizer supply.  The IRS has a specific procedure that must be followed for valuing the excess amount.  This session examines the IRS approach, the amount to be amortized, the timeframe for amortization and the possibility of recapture. 

4:25 p.m. - Adjournment

Day 2 (farm estate and business planning track)

Here’s the itinerary for Day 2 of the Michigan event (farm estate and business planning track):

7:30-8:00 a.m. — Registration

8:05-8:55a.m. — Current Developments in Estate and Gift Taxation (McEowen) [50 minutes tax update CPE]

This session provides an update of legislative, regulatory and court developments involving federal estate and gift tax including developments involving a decedent’s gross estate, asset valuation, gifts made during life, retirement plans and miscellaneous issues.

8:55-9:45 a.m. – “Top Ten” Strategies For a Successful Farm Business (Rhea and Dikeman) [50 minutes tax update CPE]

As we look toward the next 12 months, several items deserve increased attention for farm businesses. This presentation delivers a Top 10 list of forward-looking strategies to consider for success. Changes in cost, income, inflation, tax laws, and estate planning are some key topics discussed.  These will be on the mind of farms and ranches as they navigate the uncertain economic conditions and the impact of higher asset values, growing debt, and rising interest rates.  We will also demonstrate the performance distinctions of top 1/3 producers.

9:45-10:05 a.m. — Morning Break

10:05-10:55 a.m. – Taxes in Probate: Form 1041 and Distribution Deductions (McEowen) [50 minutes tax law CPE]

This session walks the practitioner through the completion of Form 1041, the assets included in the probate estate, possible income generating items for an estate, the handling of capital gain or loss, and estate accounting.  A discussion of e-filing and electronic signatures will also be included.  In addition, common issues associated with the death of a farmer will be addressed.

10:55 a.m.-11:45 a.m. – SLATs – Why It Might be the Best Option for Your Farmers (Neiffer) [50 minutes of tax law CPE]

This session reviews the various trust options available to farm families to transfer assets to the next generation in a tax efficient manner.  The session will then review why a Spousal Lifetime Access Trust (SLAT) might be the best option.

11:45-12:45 p.m. — Lunch

12:45 p.m.-1:35 p.m. – Why Social Security is an Investment, not a Tax (Neiffer) [50 minutes of tax law CPE]

Most farmers view social security as an unnecessary tax.  However, with optimal planning, social security maybe one of the best investments they ever make.  We review how benefits are calculated, why spousal benefits provide even more bang for their buck and some common claiming options.

1:35 p.m.-2:50 p.m. — Tax Strategies for the Farm and Ranch Client (Rhea and Dikeman) [75 minutes of tax law CPE]

This session highlights several changes were made by the Tax Cuts & Jobs Act of 2017; many sunset after 2025 and demand attention for optimal tax planning strategies the next 3 years.  We will also explain how rising inflation rates are at times helping reduce tax liability and when it does not.  Rising interest rates and inflated asset values are dramatically shifting costs of farm transitions to the detriment of young and beginning farmers.  Stepped-up basis is a big thing; we detail how this can be helpful to farm successors.  Unintended consequences of high income and options for tax management after year end are analyzed.

2:50 p.m. – 3:10 p.m. – Afternoon Break

3:10 p.m. – 3:25 p.m. – New Estate Planning Clients – Screening Clients and Gathering Information [15 minutes of tax law CPE]

This session takes a brief look at a suggested approach to handling potential new estate/business planning clients.  How to screen clients, identify potential problem clients, engagement letters and information gathering as preparatory to determining the appropriate path forward for the client.

3:25-4:25 p.m. – Ethics for Estate Planners (McEowen) [1 hour of tax ethics CPE]

What are the ethical issues facing practitioners working with clients on estate/business and tax planning matters?  How might the Circular 230 rules impact tax professionals in the estate and business planning context when income tax advice is involved?  This session looks at some of the common issues that can arise, applicable caselaw, and some of the more unusual situations that might arise that present difficult situations for the planner. 

4:25 p.m. — Conference adjourns

 

Here’s the itinerary for Day 2 of the Idaho event (farm estate and business planning track):

7:30-8:00 a.m. — Registration  

8:05-8:55a.m. — Current Developments in Estate and Gift Taxation (McEowen) [50 minutes tax update CPE] 

This session provides an update of legislative, regulatory and court developments involving federal estate and gift tax including developments involving a decedent’s gross estate, asset valuation, gifts made during life, retirement plans and miscellaneous issues. 

8:55-9:45 a.m. – Who Wants the Farm; and Should They Get It? (Bosch) [50 minutes of tax law CPE]

9:45-10:05 a.m. — Morning Break  

10:05-10:55 a.m. – Taxes in Probate: Form 1041 and Distribution Deductions (McEowen) [50 minutes of tax law CPE] 

This session walks the practitioner through the completion of Form 1041, the assets included in the probate estate, possible income generating items for an estate, the handling of capital gain or loss, and estate accounting.  A discussion of e-filing and electronic signatures will also be included.  In addition, common issues associated with the death of a farmer will be addressed. 

10:55 a.m.-11:45 a.m. – SLATs – Why It Might be the Best Option for Your Farmers (Neiffer) [50 minutes of tax law CPE] 

This session reviews the various trust options available to farm families to transfer assets to the next generation in a tax efficient manner.  The session will then review why a Spousal Lifetime Access Trust (SLAT) might be the best option. 

11:45-12:45 p.m. — Lunch  

12:45 p.m.-1:35 p.m. – Why Social Security is an Investment, not a Tax (Neiffer) [50 minutes of tax law CPE] 

Most farmers view social security as an unnecessary tax.  However, with optimal planning, social security maybe one of the best investments they ever make.  We review how benefits are calculated, why spousal benefits provide even more bang for their buck and some common claiming options. 

1:35 p.m.-2:50 p.m. - Strategies and Considerations for Transferring Farm Ownership and Operations (Hemenway)

This session will explore various issues connected with the transfer of farm ownership to successive generations.  Topics will include timing the transfer of labor and management; preparing the next generation for farm ownership; planning for multiple inheritors; and considerations for long-term care and asset protection planning.

2:50 p.m. – 3:10 p.m. – Afternoon Break 

3:10 p.m. – 3:25 p.m. – New Estate Planning Clients – Screening Clients and Gathering Information (McEowen) [15 minutes of tax law CPE] 

This session takes a brief look at a suggested approach to handling potential new estate/business planning clients.  How to screen clients, identify potential problem clients, engagement letters and information gathering as preparatory to determining the appropriate path forward for the client. 

3:25-4:25 p.m. – Ethics for Estate Planners (McEowen) [1 hour of tax ethics CPE]

What are the ethical issues facing practitioners working with clients on estate/business and tax planning matters?  How might the Circular 230 rules impact tax professionals in the estate and business planning context when income tax advice is involved?  This session looks at some of the common issues that can arise, applicable caselaw, and some of the more unusual situations that might arise that present difficult situations for the planner. 

4:25 p.m. — Conference adjourns 

Conclusion

I look forward to either seeing you in-person at one of these events this summer or online.  At the end of Day 1 at the Idaho event, there will be a reception sponsored by the University of Idaho College of Law.  Also, many thanks to Teresa Baker at the Idaho Bar Association for her assistance in locating speakers as well as to Prof. Richard Seamon (Univ. of ID College of Law) and Kelly Stevenson (leader of the ag law section off the Idaho Bar) for helping identify topics as well as speakers. 

More details and registration links coming soon.

March 29, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Monday, January 30, 2023

Bibliography - July Through December 2022

Overview

 After the first half of 2022, I posted a blog article of a bibliography of my blog articles for the first half of 2022.  You can find that bibliography here:  Bibliography – January through June of 2022

https://lawprofessors.typepad.com/agriculturallaw/2022/09/bibliography-january-through-june-of-2022.html.

Bibliography of articles for that second half of 2022 – you can find it in today’s post.

Alphabetical Topical Listing of Articles (July 2022 – December 2022)

Bankruptcy

More Ag Law Developments – Potpourri of Topics

https://lawprofessors.typepad.com/agriculturallaw/2022/10/more-ag-law-developments-potpourri-of-topics.html

Business Planning

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/07/durango-conference-and-recent-developments-in-the-courts.html

Is a C Corporation a Good Entity Choice For the Farm or Ranch Business?

https://lawprofessors.typepad.com/agriculturallaw/2022/07/whats-the-best-entity-structure-for-the-farm-or-ranch-business.html

What is a “Reasonable Compensation”?

https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html

Federal Farm Programs: Organizational Structure Matters – Part Three

https://lawprofessors.typepad.com/agriculturallaw/2022/08/federal-farm-programs-organizational-structure-matters-part-three.html

LLCs and Self-Employment Tax – Part One

https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html

LLCs and Self-Employment Tax – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html

Civil Liabilities

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/07/durango-conference-and-recent-developments-in-the-courts.html

Dicamba Spray-Drift Issues and the Bader Farms Litigation

https://lawprofessors.typepad.com/agriculturallaw/2022/07/dicamba-spray-drift-issues-and-the-bader-farms-litigation.html

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html

More Ag Law Developments – Potpourri of Topics

https://lawprofessors.typepad.com/agriculturallaw/2022/10/more-ag-law-developments-potpourri-of-topics.html

Ag Law Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html

Contracts

Minnesota Farmer Protection Law Upheld

https://lawprofessors.typepad.com/agriculturallaw/2022/09/minnesota-farmer-protection-law-upheld.html

Criminal Liabilities

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/20Ag Law Summit

https://lawpr22/07/durango-conference-and-recent-developments-in-the-courts.html

Environmental Law

Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine

https://lawprofessors.typepad.com/agriculturallaw/2022/07/constitutional-limit-on-government-agency-power-the-major-questions-doctrine.html

More Ag Law Developments – Potpourri of Topics

https://lawprofessors.typepad.com/agriculturallaw/2022/10/more-ag-law-developments-potpourri-of-topics.html

Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland

https://lawprofessors.typepad.com/agriculturallaw/2022/10/court-says-coe-acted-arbitrarily-when-declining-jurisdiction-over-farmland.html

Ag Law Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html

Estate Planning

Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)

https://lawprofessors.typepad.com/agriculturallaw/2022/07/farmranch-tax-estate-and-business-planning-conference-august-1-2-durango-colorado-and-online.html

IRS Modifies Portability Election Rule

https://lawprofessors.typepad.com/agriculturallaw/2022/07/irs-modifies-portability-election-rule.html

Modifying an Irrevocable Trust – Decanting

https://lawprofessors.typepad.com/agriculturallaw/2022/09/modifying-an-irrevocable-trust-decanting.html

Farm and Ranch Estate Planning in 2022 (and 2023)

https://lawprofessors.typepad.com/agriculturallaw/2022/09/farm-and-ranch-estate-planning-in-2022-and-2023.html

Social Security Planning for Farmers and Ranchers

https://lawprofessors.typepad.com/agriculturallaw/2022/11/social-security-planning-for-farmers-and-ranchers.html

How NOT to Use a Charitable Remainder Trust

https://lawprofessors.typepad.com/agriculturallaw/2022/12/how-not-to-use-a-charitable-remainder-trust.html

Recent Cases Involving Decedents’ Estates

https://lawprofessors.typepad.com/agriculturallaw/2022/12/recent-cases-involving-decedents-estates.html

Medicaid Estate Recovery and Trusts

https://lawprofessors.typepad.com/agriculturallaw/2022/12/medicaid-estate-recovery-and-trusts.html

Income Tax

What is the Character of Land Sale Gain?

https://lawprofessors.typepad.com/agriculturallaw/2022/07/what-is-the-character-of-land-sale-gain.html

Deductible Start-Up Costs and Web-Based Businesses

https://lawprofessors.typepad.com/agriculturallaw/2022/07/deductible-start-up-costs-and-web-based-businesses.html

Using Farm Income Averaging to Deal With Economic Uncertainty and Resulting Income Fluctuations

https://lawprofessors.typepad.com/agriculturallaw/2022/07/using-farm-income-averaging-to-deal-with-economic-uncertainty-and-resulting-income-fluctuations.html

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

What is “Reasonable Compensation”?

https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html

LLCs and Self-Employment Tax – Part One

https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html

LLCs and Self-Employment Tax – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html

USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)

https://lawprofessors.typepad.com/agriculturallaw/2022/08/usdas-emergency-relief-program-update-on-gain-from-equipment-sales.html

Declaring Inflation Reduced and Being Forgiving – Recent Developments in Tax and Law

https://lawprofessors.typepad.com/agriculturallaw/2022/09/declaring-inflation-reduced-and-being-forgiving-recent-developments-in-tax-and-law.html

Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html

Extended Livestock Replacement Period Applies in Areas of Extended Drought – IRS Updated Drought Areas

https://lawprofessors.typepad.com/agriculturallaw/2022/09/extended-livestock-replacement-period-applies-in-areas-of-extended-drought-irs-updated-drought-areas.html

More Ag Law Developments – Potpourri of Topics

https://lawprofessors.typepad.com/agriculturallaw/2022/10/more-ag-law-developments-potpourri-of-topics.html

IRS Audits and Statutory Protection

https://lawprofessors.typepad.com/agriculturallaw/2022/10/irs-audits-and-statutory-protection.html

Handling Expenses of Crops with Pre-Productive Periods – The Uniform Capitalization Rules

https://lawprofessors.typepad.com/agriculturallaw/2022/10/handling-expenses-of-crops-with-pre-productive-periods-the-uniform-capitalization-rules.html

When Can Depreciation First Be Claimed?

https://lawprofessors.typepad.com/agriculturallaw/2022/10/for-depreciation-purposes-what-does-placed-in-service-mean.html

Tax Treatment of Crops and/or Livestock Sold Post-Death

https://lawprofessors.typepad.com/agriculturallaw/2022/11/tax-treatment-of-crops-andor-livestock-sold-post-death.html

Social Security Planning for Farmers and Ranchers

https://lawprofessors.typepad.com/agriculturallaw/2022/11/social-security-planning-for-farmers-and-ranchers.html

Are Crop Insurance Proceeds Deferrable for Tax Purposes?

https://lawprofessors.typepad.com/agriculturallaw/2022/11/are-crop-insurance-proceeds-deferrable-for-tax-purposes.html

Tax Issues Associated With Easement Payments – Part 1

https://lawprofessors.typepad.com/agriculturallaw/2022/11/tax-issues-associated-with-easement-payments-part-1.html

Tax Issues Associated With Easement Payments – Part 2

https://lawprofessors.typepad.com/agriculturallaw/2022/11/tax-issues-associated-with-easement-payments-part-2.html

How NOT to Use a Charitable Remainder Trust

https://lawprofessors.typepad.com/agriculturallaw/2022/12/how-not-to-use-a-charitable-remainder-trust.html

Does Using Old Tractors Mean You Aren’t a Farmer? And the Wind Energy Production Tax Credit – Is Subject to State Property Tax?

https://lawprofessors.typepad.com/agriculturallaw/2022/12/does-using-old-tractors-mean-you-arent-a-farmer-and-the-wind-energy-production-tax-credit-is-it-subject-to-state-prop.html

Insurance

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

Real Property

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

Ag Law Summit

https://lawprofessors.typepad.com/agriculturallaw/2022/08/ag-law-summit.html

Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html

More Ag Law Developments – Potpourri of Topics

https://lawprofessors.typepad.com/agriculturallaw/2022/10/more-ag-law-developments-potpourri-of-topics.html

Ag Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html

Regulatory Law

Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine

https://lawprofessors.typepad.com/agriculturallaw/2022/07/constitutional-limit-on-government-agency-power-the-major-questions-doctrine.html

The Complexities of Crop Insurance

https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html

Federal Farm Programs – Organizational Structure Matters – Part One

https://lawprofessors.typepad.com/agriculturallaw/2022/08/federal-farm-programs-organizational-structure-matters-part-one.html

Federal Farm Programs – Organizational Structure Matters – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2022/08/federal-farm-programs-organizational-structure-matters-part-two.html

Federal Farm Programs: Organizational Structure Matters – Part Three

https://lawprofessors.typepad.com/agriculturallaw/2022/08/federal-farm-programs-organizational-structure-matters-part-three.html

USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)

https://lawprofessors.typepad.com/agriculturallaw/2022/08/usdas-emergency-relief-program-update-on-gain-from-equipment-sales.html

Minnesota Farmer Protection Law Upheld

https://lawprofessors.typepad.com/agriculturallaw/2022/09/minnesota-farmer-protection-law-upheld.html

Ag Law and Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html

Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs?

https://lawprofessors.typepad.com/agriculturallaw/2022/10/animal-ag-facilities-and-free-speech-does-the-constitution-protect-saboteurs.html

Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland

https://lawprofessors.typepad.com/agriculturallaw/2022/10/court-says-coe-acted-arbitrarily-when-declining-jurisdiction-over-farmland.html

Ag Law Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html

Water Law

More Ag Law Developments – Potpourri of Topics

https://lawprofessors.typepad.com/agriculturallaw/2022/10/more-ag-law-developments-potpourri-of-topics.html

January 30, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Sunday, September 11, 2022

September 30 Ag Law Summit in Omaha (and Online)

Overview

On September 30, Washburn Law School with cooperating partner Creighton Law School will conduct the second annual Ag Law Summit.  The Summit will be held on the Creighton University campus in Omaha, Nebraska.  Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law.  The Summit will be held at Creighton University on September 30 and will also be broadcast live online.

The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them. 

The 2022 Ag Law Summit – it’s the topic of today’s post.

Agenda

Developments in agricultural law and taxation.  I will start off the day with a session surveying the major recent ag law and tax developments.  This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world.  There have been several major developments involving agricultural that have come through the U.S Supreme Court in recent months.  I will discuss those decisions and the implications for the future.  Several of them involve administrative law and could have a substantial impact on the ability of the federal government to micro-manage agricultural activities.  I will also get into the big tax developments of the past year, including the tax provisions included in the recent legislation that declares inflation to be reduced!

Death of a farm business owner.  After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies.  Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections.  The handling of tax attributes after death will be covered as will some non-tax planning matters when an LLC owner dies.  There are also entity-specific issues that arise when a business owner dies, and Prof. Morse will address those on an entity-by-entity basis.  The transition issue for farmers and ranchers is an important one for many.  This session will be a good one in laying out the major tax and non-tax considerations that need to be laid out up front to help the family achieve its goals post-death.

Governing documents for farm and ranch business entities.  After a morning break Dan Waters with Lamson Dugan & Murray in Omaha will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities.  What should be included in the operative agreements?  What is the proper wording?  What provisions should be included and what should be avoided?  This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.

Fence law issues.  After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands.  This is an issue that seems to come up over and over again in agriculture.  The problems are numerous and varied.  This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones. 

Farm economics.  Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday.  Darrell is an ag economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers.   What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers?  How will the war in Ukraine continue to impact agriculture in the U.S.?  This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending. 

Ethics.  I return to close out the day with a session of ethics focused on asset protection planning.  There’s a right way and a wrong way to do asset protection planning.  This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.

Online.  The Summit will be broadcast live online and will be interactive to allow you the ability to participate remotely. 

Reception

For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus. 

Conclusion

If your tax or legal practice involves ag clients, the Ag Law Summit is for you.  As noted, you can also attend online if you can’t be there in person.  If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial. 

I hope to see you in Omaha on September 30 or see that you are with us online.

You can learn more about the Summit and get registered at the following link:  https://www.washburnlaw.edu/employers/cle/aglawsummit.html

September 11, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Monday, September 5, 2022

Bibliography – January through June of 2022

Overview 

Periodically I post an article containing the links to all of my blog articles that have been recently published.  Today’s article is a bibliography of my articles from the beginning of 2022 through June.  Hopefully this will aid your research of agricultural law and tax topics.

A bibliography of articles for the first half of 2022 – it’s the content of today’s post.

Bankruptcy

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-8-and-7.html

Other Important Developments in Agricultural Law and Taxation

https://lawprofessors.typepad.com/agriculturallaw/2022/01/other-important-developments-in-agricultural-law-and-taxation.html

Recent Court Cases of Importance to Agricultural Producers and Rural Landowners

https://lawprofessors.typepad.com/agriculturallaw/2022/06/recent-court-cases-of-importance-to-agricultural-producers-and-rural-landowners.html

Business Planning

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/03/summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Should An IDGT Be Part of Your Estate Plan?

https://lawprofessors.typepad.com/agriculturallaw/2022/03/should-an-idgt-be-part-of-your-estate-plan.html

Farm Wealth Transfer and Business Succession – The GRAT

https://lawprofessors.typepad.com/agriculturallaw/2022/03/farm-wealth-transfer-and-business-succession-the-grat.html

Captive Insurance – Part One

https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html

Captive Insurance – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html

Captive Insurance – Part Three

https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html

Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere

https://lawprofessors.typepad.com/agriculturallaw/2022/04/pork-production-regulations-fake-meat-and-tax-proposals-on-the-road-to-nowhere.html

Farm Economic Issues and Implications

https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html

Intergenerational Transfer of the Farm/Ranch Business – The Buy-Sell Agreement

https://lawprofessors.typepad.com/agriculturallaw/2022/04/intergenerational-transfer-of-the-farmranch-business-the-buy-sell-agreement.html

IRS Audit Issue – S Corporation Reasonable Compensation

https://lawprofessors.typepad.com/agriculturallaw/2022/04/irs-audit-issue-s-corporation-reasonable-compensation.html

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/05/summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Wisconsin Seminar and…ERP (not Wyatt) and ELRP

https://lawprofessors.typepad.com/agriculturallaw/2022/06/wisconsin-seminar-anderp-not-wyatt-and-elrp.html

S Corporation Dissolution – Part 1

https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html

S Corporation Dissolution – Part Two; Divisive Reorganization Alternative

https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-two-divisive-reorganization-alternative.html

Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)

https://lawprofessors.typepad.com/agriculturallaw/2022/07/farmranch-tax-estate-and-business-planning-conference-august-1-2-durango-colorado-and-online.html

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/07/durango-conference-and-recent-developments-in-the-courts.html

Civil Liabilities

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-8-and-7.html

Agritourism

https://lawprofessors.typepad.com/agriculturallaw/2022/03/agritourism.html

Animal Ag Facilities and the Constitution

https://lawprofessors.typepad.com/agriculturallaw/2022/03/animal-ag-facilities-and-the-constitution.html

When Is an Agricultural Activity a Nuisance?

https://lawprofessors.typepad.com/agriculturallaw/2022/04/when-is-an-agricultural-activity-a-nuisance.html

Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues

https://lawprofessors.typepad.com/agriculturallaw/2022/06/ag-law-related-updates-dog-food-scam-oil-and-gas-issues.html

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/07/durango-conference-and-recent-developments-in-the-courts.html

Dicamba Spray-Drift Issues and the Bader Farms Litigation

https://lawprofessors.typepad.com/agriculturallaw/2022/07/dicamba-spray-drift-issues-and-the-bader-farms-litigation.html

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

 

Contracts

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-6-and-5.html

What to Consider Before Buying Farmland

https://lawprofessors.typepad.com/agriculturallaw/2022/02/what-to-consider-before-buying-farmland.html

Elements of a Hunting Use Agreement

https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html

Ag Law (and Medicaid Planning) Court Developments of Interest

https://lawprofessors.typepad.com/agriculturallaw/2022/05/ag-law-and-medicaid-planning-court-developments-of-interest.html

Cooperatives

The Agricultural Law and Tax Report

https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html

Criminal Liabilities

Animal Ag Facilities and the Constitution

https://lawprofessors.typepad.com/agriculturallaw/2022/03/animal-ag-facilities-and-the-constitution.html

Is Your Farm or Ranch Protected From a Warrantless Search?

https://lawprofessors.typepad.com/agriculturallaw/2022/04/is-your-farm-or-ranch-protected-from-a-warrantless-search.html

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/07/durango-conference-and-recent-developments-in-the-courts.html

Environmental Law

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-6-and-5.html

“Top Tan” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-2-and-1.html

The “Almost Top Ten” (Part 3) – New Regulatory Definition of “Habitat” under the ESA

https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-ten-new-regulatory-definition-of-habitat-under-the-esa.html

Ag Law and Tax Potpourri

https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html

Farm Economic Issues and Implications

https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html

Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine

https://lawprofessors.typepad.com/agriculturallaw/2022/07/constitutional-limit-on-government-agency-power-the-major-questions-doctrine.html

Estate Planning

Other Important Developments in Agricultural Law and Taxation

https://lawprofessors.typepad.com/agriculturallaw/2022/01/other-important-developments-in-agricultural-law-and-taxation.html

Other Important Developments in Agricultural Law and Taxation (Part 2)

https://lawprofessors.typepad.com/agriculturallaw/2022/01/other-important-developments-in-agricultural-law-and-taxation-part-2.html

The “Almost Top Ten” (Part 4) – Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-ten-part-4-tax-developments.html

The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]

https://lawprofessors.typepad.com/agriculturallaw/2022/02/the-almost-top-10-of-2021-part-7-medicaid-recovery-and-tax-deadlines.html

Nebraska Revises Inheritance Tax; and Substantiating Expenses

https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html

Tax Consequences When Farmland is Partitioned and Sold

https://lawprofessors.typepad.com/agriculturallaw/2022/02/tax-consequences-when-farmland-is-partitioned-and-sold.html

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/03/summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Should An IDGT Be Part of Your Estate Plan?

https://lawprofessors.typepad.com/agriculturallaw/2022/03/should-an-idgt-be-part-of-your-estate-plan.html

Farm Wealth Transfer and Business Succession – The GRAT

https://lawprofessors.typepad.com/agriculturallaw/2022/03/farm-wealth-transfer-and-business-succession-the-grat.html

Family Settlement Agreement – Is it a Good Idea?

https://lawprofessors.typepad.com/agriculturallaw/2022/03/family-settlement-agreement-is-it-a-good-idea.html

Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/03/registration-open-for-summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Captive Insurance – Part One

https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html

Captive Insurance – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html

Captive Insurance Part Three

https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html

Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere

https://lawprofessors.typepad.com/agriculturallaw/2022/04/pork-production-regulations-fake-meat-and-tax-proposals-on-the-road-to-nowhere.html

Farm Economic Issues and Implications

https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html

Proposed Estate Tax Rules Would Protect Against Decrease in Estate Tax Exemption

https://lawprofessors.typepad.com/agriculturallaw/2022/04/proposed-estate-tax-rules-would-protect-against-decrease-in-estate-tax-exemption.html

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/05/summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Ag Law (and Medicaid Planning) Court Developments of Interest

https://lawprofessors.typepad.com/agriculturallaw/2022/05/ag-law-and-medicaid-planning-court-developments-of-interest.html

Joint Tenancy and Income Tax Basis At Death

https://lawprofessors.typepad.com/agriculturallaw/2022/05/joint-tenancy-and-income-tax-basis-at-death.html

More Ag Law Court Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html

Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)

https://lawprofessors.typepad.com/agriculturallaw/2022/07/farmranch-tax-estate-and-business-planning-conference-august-1-2-durango-colorado-and-online.html

IRS Modifies Portability Election Rule

https://lawprofessors.typepad.com/agriculturallaw/2022/07/irs-modifies-portability-election-rule.html

Income Tax

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 10 and 9

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-10-and-9.html

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-8-and-7.html

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-2-and-1.html

The “Almost Top Ten” (Part 4) – Tax Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-ten-part-4-tax-developments.html

The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]

https://lawprofessors.typepad.com/agriculturallaw/2022/02/the-almost-top-10-of-2021-part-7-medicaid-recovery-and-tax-deadlines.html

Purchase and Sale Allocations Involving CRP Contracts

https://lawprofessors.typepad.com/agriculturallaw/2022/02/purchase-and-sale-allocations-involving-crp-contracts.html

Ag Law and Tax Potpourri

https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html

What’s the Character of the Gain From the Sale of Farm or Ranch Land?

https://lawprofessors.typepad.com/agriculturallaw/2022/02/whats-the-character-of-the-gain-from-the-sale-of-farm-or-ranch-land.html

Proper Tax Reporting of Breeding Fees for Farmers

https://lawprofessors.typepad.com/agriculturallaw/2022/02/proper-tax-reporting-of-breeding-fees-for-farmers.html

Nebraska Revises Inheritance Tax; and Substantiating Expenses

https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html

Tax Consequences When Farmland is Partitioned and Sold

https://lawprofessors.typepad.com/agriculturallaw/2022/02/tax-consequences-when-farmland-is-partitioned-and-sold.html

Expense Method Depreciation and Leasing- A Potential Trap

https://lawprofessors.typepad.com/agriculturallaw/2022/02/expense-method-depreciation-and-leasing-a-potential-trap.html

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/03/summer-2022-farm-income-taxestate-and-business-planning-conferences.html

income Tax Deferral of Crop Insurance Proceeds

https://lawprofessors.typepad.com/agriculturallaw/2022/03/income-tax-deferral-of-crop-insurance-proceeds.html

What if Tax Rates Rise?

https://lawprofessors.typepad.com/agriculturallaw/2022/03/what-if-tax-rates-rise.html

Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/03/registration-open-for-summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Captive Insurance – Part One

https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html

Captive Insurance – Part Two

https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html

Captive Insurance – Part Three

https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html

Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere

https://lawprofessors.typepad.com/agriculturallaw/2022/04/pork-production-regulations-fake-meat-and-tax-proposals-on-the-road-to-nowhere.html

Farm Economic Issues and Implications

https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html

IRS Audit Issue – S Corporation Reasonable Compensation

https://lawprofessors.typepad.com/agriculturallaw/2022/04/irs-audit-issue-s-corporation-reasonable-compensation.html

Missed Tax Deadline & Equitable Tolling

https://lawprofessors.typepad.com/agriculturallaw/2022/04/missed-tax-deadline-equitable-tolling.html

Summer 2022 Farm Income Tax/Estate and Business Planning Conferences

https://lawprofessors.typepad.com/agriculturallaw/2022/05/summer-2022-farm-income-taxestate-and-business-planning-conferences.html

Joint Tenancy and Income Tax Basis At Death

https://lawprofessors.typepad.com/agriculturallaw/2022/05/joint-tenancy-and-income-tax-basis-at-death.html

Tax Court Caselaw Update

https://lawprofessors.typepad.com/agriculturallaw/2022/05/tax-court-caselaw-update.html

Deducting Soil and Water Conservation Expenses

https://lawprofessors.typepad.com/agriculturallaw/2022/05/deducting-soil-and-water-conservation-expenses.html

Correcting Depreciation Errors (Including Bonus Elections and Computations)

https://lawprofessors.typepad.com/agriculturallaw/2022/05/correcting-depreciation-errors-including-bonus-elections-and-computations.html

When Can Business Deductions First Be Claimed?

https://lawprofessors.typepad.com/agriculturallaw/2022/05/when-can-business-deductions-first-be-claimed.html

Recent Court Decisions Involving Taxes and Real Estate

https://lawprofessors.typepad.com/agriculturallaw/2022/05/recent-court-decisions-involving-taxes-and-real-estate.html

Wisconsin Seminar and…ERP (not Wyatt) and ELRP

https://lawprofessors.typepad.com/agriculturallaw/2022/06/wisconsin-seminar-anderp-not-wyatt-and-elrp.html

Tax Issues with Customer Loyalty Reward Programs

https://lawprofessors.typepad.com/agriculturallaw/2022/06/tax-issues-with-customer-loyalty-reward-programs.html

S Corporation Dissolution – Part 1

https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html

S Corporation Dissolution – Part Two; Divisive Reorganization Alternative

https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-two-divisive-reorganization-alternative.html

Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)

https://lawprofessors.typepad.com/agriculturallaw/2022/07/farmranch-tax-estate-and-business-planning-conference-august-1-2-durango-colorado-and-online.html

What is the Character of Land Sale Gain?

https://lawprofessors.typepad.com/agriculturallaw/2022/07/what-is-the-character-of-land-sale-gain.html

Deductible Start-Up Costs and Web-Based Businesses

https://lawprofessors.typepad.com/agriculturallaw/2022/07/deductible-start-up-costs-and-web-based-businesses.html

Using Farm Income Averaging to Deal with Economic Uncertainty and Resulting Income Fluctuations

https://lawprofessors.typepad.com/agriculturallaw/2022/07/using-farm-income-averaging-to-deal-with-economic-uncertainty-and-resulting-income-fluctuations.html

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

Insurance

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

Real Property

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-4-and-3.html

Ag Law and Tax Potpourri

https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html

What to Consider Before Buying Farmland

https://lawprofessors.typepad.com/agriculturallaw/2022/02/what-to-consider-before-buying-farmland.html

Elements of a Hunting Use Agreement

https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html

Animal Ag Facilities and the Constitution

https://lawprofessors.typepad.com/agriculturallaw/2022/03/animal-ag-facilities-and-the-constitution.html

Recent Court Decisions Involving Taxes and Real Estate

https://lawprofessors.typepad.com/agriculturallaw/2022/05/recent-court-decisions-involving-taxes-and-real-estate.html

Recent Court Cases of Importance to Agricultural Producers and Rural Landowners

https://lawprofessors.typepad.com/agriculturallaw/2022/06/recent-court-cases-of-importance-to-agricultural-producers-and-rural-landowners.html

More Ag Law Court Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html

Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues

https://lawprofessors.typepad.com/agriculturallaw/2022/06/ag-law-related-updates-dog-food-scam-oil-and-gas-issues.html

Tax Deal Struck? – and Recent Ag-Related Cases

https://lawprofessors.typepad.com/agriculturallaw/2022/07/tax-deal-struck-and-recent-ag-related-cases.html

Regulatory Law

The “Almost Top 10” of 2021 (Part 5)

https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-10-of-2021-part-5.html

The “Almost Top 10” of 2021 (Part 6)

https://lawprofessors.typepad.com/agriculturallaw/2022/02/the-almost-top-10-of-2021-part-6.html

Ag Law and Tax Potpourri

https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html

Animal Ag Facilities and the Constitution

https://lawprofessors.typepad.com/agriculturallaw/2022/03/animal-ag-facilities-and-the-constitution.html

Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere

https://lawprofessors.typepad.com/agriculturallaw/2022/04/pork-production-regulations-fake-meat-and-tax-proposals-on-the-road-to-nowhere.html

Farm Economic Issues and Implications

https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html

Ag Law (and Medicaid Planning) Court Developments of Interest

https://lawprofessors.typepad.com/agriculturallaw/2022/05/ag-law-and-medicaid-planning-court-developments-of-interest.html

Wisconsin Seminar and…ERP (not Wyatt) and ELRP

https://lawprofessors.typepad.com/agriculturallaw/2022/06/wisconsin-seminar-anderp-not-wyatt-and-elrp.html

More Ag Law Court Developments

https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html

Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues

https://lawprofessors.typepad.com/agriculturallaw/2022/06/ag-law-related-updates-dog-food-scam-oil-and-gas-issues.html

Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine

https://lawprofessors.typepad.com/agriculturallaw/2022/07/constitutional-limit-on-government-agency-power-the-major-questions-doctrine.html

The Complexities of Crop Insurance

https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html

Secured Transactions

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-6-and-5.html

Water Law

“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3

https://lawprofessors.typepad.com/agriculturallaw/2022/01/top-ten-agricultural-law-and-tax-developments-of-2021-numbers-4-and-3.html

Durango Conference and Recent Developments in the Courts

https://lawprofessors.typepad.com/agriculturallaw/2022/07/durango-conference-and-recent-developments-in-the-courts.html

September 5, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Sunday, August 21, 2022

LLCs and Self-Employment Tax – Part Two

Overview

In Part One of this two-part series, the discussion focused on how the determination is made of whether an LLC member is a limited partner.  There it was noted that the IRS/Treasury hadn’t yet finalized a regulation that was initially proposed in 1997 to address the issue.  The characterization of an LLC member’s interest is determinative of whether the member has self-employment tax liability on amounts distributed to the member (other than guaranteed payments). 

In today’s Part Two of this series, I dig into the self-employment tax issue further.  Proper structuring of the entity matters as does the drafting of the LLC operating agreement and the conduct of the members. 

Self-employment tax implications of LLCs – when is a member really a limited partner?   That’s the topic of today’s post.

LLCs and Self-Employment Tax

Net earnings from self-employment includes the distributive share of income or loss from a trade or business carried on by a partnership.  I.R.C. §1402(a).  Thus, the default rule is that all partnership income is included, unless it is specifically excepted.  Whether LLC members can avoid self-employment tax on their income from the entity depends on their member characterization.  Are they general partners or limited partners?  Under I.R.C. §1402(a)(13), a limited partner does not have self-employment income except for any guaranteed payments paid for services rendered to the LLC.  So, what is a limited partner?  The test of whether an interest in an entity treated as a partnership for tax purposes is treated as a limited interest or a general interest, for the purpose of applying the self-employment tax is stated at Prop. Reg. §1.1402(a)-2(h), issued in 1997. 

Note:  Immediately after the Proposed Regulation was issued, the Congress passed a statute prohibiting the IRS from finalizing the Regulation within one year.  Nothing further has been forthcoming.  Although still in Proposed Regulation form, this regulation remains the best available authority. 

The Proposed Regulation establishes a three-part general rule, with two exceptions, that may permit limited partner treatment under certain conditions.  A third exception to limited partner treatment applies in the context of professional service businesses (e.g., law, accounting, health, engineering, etc.).  Under the general rule, a member is not treated as a limited partner if:  (1) the member has personal liability for the debts or claims against the LLC by reason of being a member; (2) the member has authority under the state’s LLC statute to enter into contracts on behalf of the LLC; or (3) the member participated in the LLC’s trade or business for more than 500 hours during the LLC’s tax year.  Prop. Treas. Reg. §1.1402(a)-2(h)(2). 

An exception applies only if the interest-holder owns a single class of interest (regardless of whether there are multiple classes outstanding) and failure of the 500-hour test is the sole reason for treatment of the interest as a general interest.  In addition, the interest held must meet certain threshold requirements:

  • There must be at least one member holding the same class of interest who meets all three of the requirements under the general rule, without application of any exceptions;
  • The share of that class of interest held by those members must be “substantial” (with respect to the class of interest at issue and not with respect to the entity as a whole), based on the facts and circumstances (a safe harbor of 20 percent, in aggregate, is provided at Treas. Reg. 1.1402(a)-2(h)(6)(v)); and
  • The interests held by those members must be “continuing” (an undefined term).

Another exception to the general rule applies only if the member owns at least two classes of interests and the same threshold requirements are satisfied.  This exception may permit a member to treat the distributive share attributable to at least one class as a limited interest if the three requirements of the general rule are met with respect to any class that the member holds.  In that case the distributive share attributable to that interest is not subject to self-employment tax.  But, the distributive share attributable to any interest held by a member that does not meet the three requirements of the general rule is subject to self-employment tax.  This all means that a portion of a member’s total distributive share may be subject to self-employment tax, and some may not be.

Note:  Under the general rule, it is likely that the entire distributive share of all members of a member-managed LLC will be subject to self-employment tax because state law likely gives all members the authority to contract.  Likewise, LLP statutes likely give management rights which means that the second requirement of the general rule cannot be satisfied.  As a result, neither exception to the general rule can be met because both exceptions require at least one member to satisfy all three requirements of the general rule. 

The Castigliola case.  In Castigliola, et al. v. Comr, T.C. Memo. 2017-62, a group of lawyers structured their law practice as member-managed Professional LLC (PLLC).  On the advice of a CPA, they tied each of their guaranteed payments to what reasonable compensation would be for a comparable attorney in the locale with similar experience.  They paid self-employment tax on those amounts.  However, the Schedule K-1 showed allocable income exceeding the member’s guaranteed payment.  Self-employment tax was not paid on the excess amounts.  The IRS disagreed with that characterization, asserting self-employment tax on all amounts allocated. 

The Tax Court agreed with the IRS.  Based on the Uniform Limited Partnership Act of 1916, the Revised Limited Partnership Act of 1976 and Mississippi law (the state in which the PLLC operated), the court determined that a limited partner is defined by limited liability and the inability to control the business.  The members couldn’t satisfy the second test.  Because of the member-managed structure, each member had management power of the PLLC business.  In addition, because there was no written operating agreement, the court had no other evidence of a limitation on a member’s management authority.  In addition, the evidence showed that the members actually did participate in management by determining their respective distributive shares, borrowing money, making employment-related decisions, supervising non-partner attorneys of the firm and signing checks.  The court also noted that to be a limited partnership, there must be at least one general partner and a limited partner, but the facts revealed that all members conducted themselves as general partners with identical rights and responsibilities.  In addition, before becoming a PLLC, the law firm was a general partnership.  After the change to the PLLC status, their management structure didn’t change. 

The court did not mention the proposed regulations, but even if they had been taken into account the outcome of the case would have been the same.  Member-managed LLCs are subject to self-employment tax because all members have management authority.  It’s that simple.  In addition, as noted below, there is an exception in the proposed regulations that would have come into play. 

Note:  As a side-note, the IRS had claimed that the attorney trust funds were taxable to the PLLC.  The court, however, disagreed because the lawyers were not entitled to the funds.

Structuring to Minimize Self-Employment Tax – The Manager-Managed LLC

There is an entity structure that can minimize self-employment tax.  An LLC can be structured as a manager-managed LLC with two membership classes.  With that approach, the income of a member holding a manager’s interest is subject to self-employment tax, but if non-managers that participate less than 500 hours in the LLC’s business hold at least 20 percent of the LLC interests, then any non-manager interests held by members that participate more than 500 hours in the LLC’s business are not subject to self-employment tax on the pass-through income attributable to their LLC interest. Prop. Treas. Reg. §1.1402(a)-2(h)(4).  They do, however, have self-employment tax on any guaranteed payments.

Service businesses.  The manager-managed structure does not achieve self-employment tax savings for personal service businesses, such as the one involved in Castigliola.  Prop. Treas. Reg. §1.1402(a)-2(h)(5) provides an exception for service partners in a service partnership.  Such partners cannot be a limited partner under Prop Treas. Reg. §1.1402(a)-2(h)(4) (or (2) or (3), for that matter).  Thus, for a professional services partnership (such as the law firm at issue in the case), structuring as a manager-managed LLC would have no beneficial impact on self-employment tax liability.     

Note:  If a member of a services partnership (e.g. LLC) is merely an investor that is not involved in the operations of the LLC as a business and is separately paid for services rendered, any distributive share is not subject to self-employment tax.  See, e.g., Hardy v. Comr., T.C. Memo. 2017-16.  But, if the distributive share is received from fees from the LLC’s business, the distributive share is subject to self-employment tax.  See, e.g., Renkemeyer, Campbell & Weaver, LLP, 136 T.C 137 (2011). 

Farming and ranching operations.  For LLCs that are not a “service partnership,” such as a farming operation, it is possible to structure the business as a manager-managed LLC with a member holding both manager and non-manager interests that can be bifurcated.  The result is that a member holding both manager and non-manager interests is not subject to self-employment tax on the non-manager interest but is subject to self-employment tax on the pass-through income and a guaranteed payment attributable to the manager interest.

Example.  Here's what it might look like for a farming operation:

A married couple operates a farming business as an LLC.  The wife works full-time off the farm and does not participate in the farming operation.  But she holds a 49 percent non-manager ownership interest in the LLC.  The husband conducts the farming operation full-time and also holds a 49 percent non-manager interest.  But, the husband, as the farmer, also holds a 2 percent manager interest.  The husband receives a guaranteed payment for his manager interest that equates to reasonable compensation for his services (labor and management) provided to the LLC.  The result is that the LLC’s income will be shared pro-rata according to the ownership percentages with the income attributable to the non-manager interests (98 percent) not subject to self-employment tax.  The two percent manager interest is subject to self-employment tax along with the guaranteed payment that the husband receives.  This produces a much better self-employment tax result than if the farming operation were structured as a member-managed LLC. 

Additional benefit.  There is another potential benefit of utilizing the manager-managed LLC structure.  Until the net investment income tax of I.R.C. §1411 is repealed, it applies to a taxpayer’s passive sources of income when adjusted gross income exceeds $250,000 on a joint return ($200,000 for a single return).  While a non-manager’s interest in a manager-managed LLC is typically considered passive with the income from the interest potentially subject to the 3.8 percent surtax, a spouse can take into account the material participation of a spouse who is the manager.  I.R.C. §469(h)(5).  Thus, the material participation of the manager-spouse converts the income attributable to the non-manager interest of the other spouse from passive to active income that will not be subject to the 3.8 percent surtax.

Note:  Returning to the example above, the result would be that self-employment tax is significantly reduced (it’s limited to 15.3 percent of the husband’s reasonable compensation (in the form of a guaranteed payment) and his two percent manager interest) and the net investment income surtax is avoided on the wife’s income.

Conclusion

The manager-managed LLC provides a better result than the result produced by the member-managed LLC for LLCs that are not service partnerships.  For those that are, such as the PLLC in Castigliola, the S corporation is the business form to use to achieve a better tax result.  For an S corporation, “reasonable” compensation will need to be paid subject to S.E. tax, but the balance drawn from the entity can be received self-employment tax free.  But, for farming operations with land rental income, the manager-managed LLC can provide a better overall tax result than the use of an S corporation because of the ability to eliminate the net investment income tax.    

Of course, the self-employment tax and the net investment income tax are only two pieces of the puzzle to an overall business plan.  Other non-tax considerations may carry more weight in a particular situation.  But for some, this strategy can be quite beneficial.

The decision in Castigliola would appear to further bolster the manager-managed approach – an individual that is a “mere member” appears to now have an even stronger argument for limited partner treatment.  In addition, the court didn’t impose penalties on the PLLC because of reliance on an experienced professional for their filing position. 

Proper structuring of the LLC and careful drafting of the operating agreement is important

August 21, 2022 in Business Planning, Income Tax | Permalink | Comments (0)

Saturday, August 20, 2022

Ag Law Summit

Overview

Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law.  The Summit will be held at Creighton University on September 30, and will also be broadcast live online.

The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them. 

The 2022 Ag Law Summit – it’s the topic of today’s post.

Agenda

Survey of ag law and tax.  I will start off the day with a session surveying the major recent ag law and tax developments.  This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world. 

Tax issues upon death of a farmer.  After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies.  Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections.

Farm succession planning drafting language.  After a morning break Dan Waters, and estate planning attorney in Omaha, NE, will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities.  What should be included in the operative agreements?  What is the proper wording?  What provisions should be included and what should be avoided?  This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.

Fences and boundaries.  After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands.  This is an issue that seems to come up over and over again in agriculture.  The problems are numerous and varied.  This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones. 

The current farm economy and future projections.  Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday.  Darrell is an economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers.   What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers?  This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending. 

Ethics.  I return to close out the day with a session of ethics focused on asset protection planning.  There’s a right way and a wrong way to do asset protection planning.  This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.

Reception

For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus. 

Conclusion

If your tax or legal practice involves ag clients, the Ag Law Summit is for you.  As noted, you can also attend online if you can’t be there in person.  If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial. 

I hope to see you in Omaha on September 30 or see that you are with us online.

You can learn more about the Summit and get registered at the following link:  https://www.washburnlaw.edu/employers/cle/aglawsummit.html

August 20, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Thursday, August 18, 2022

LLCs and Self-Employment Tax – Part One

Overview

Farmers and ranchers often desire to avoid the payment of self-employment tax.  Indeed, avoidance of self-employment tax sometimes seems to be a prerequisite for being engaged in a farming or ranching activity.  One way to structure the business to minimize self-employment tax might be as a limited liability company (LLC). For an LLC member that truly has a limited partnership interest, self-employment tax savings can be achieved.  But truly being a limited partner is the key.  The definition of a “limited partner” as an LLC member for self-employment tax purposes has been unclear and confusing for some time. 

In today’s Part One of a two-part series, I take a look at how the courts (and IRS) view a limited partner in the context of an LLC.  The analysis derives from the passive loss rules and from a proposed regulation issued in the late 1990s. 

LLCs and self-employment tax – Part One of a two-part series – it’s the topic of today’s post.

Background

In its 2017-2018 Priority Guidance Plan, the IRS stated that it planned to finalize regulations under I.R.C. §469(h)(2) – the passive loss rules.  That provision creates a per se rule of non-material participation for limited partner interests in a limited partnership unless the Treasury specifies differently in regulations.  Those regulations were initially issued in temporary form and became proposed regulations in 2012. 2012-9, IRB 434

Passive Loss Rules 

The passive loss rules of I.R.C. §469 can have a substantial impact on farmers and ranchers as well as investors in farm and ranch land.  The effect of the rules is that deductions from passive trade or business activities, to the extent the deductions exceed income from all passive activities, may not be deducted against other income.

The proper characterization of the loss depends on whether the taxpayer is materially participating in the business.  I.R.C. §469(h).  But, I.R.C. §469(h)(2) creates a per-se rule of non-material participation for limited partner interests in a limited partnership unless the Treasury specifies differently in regulations.  The statute was written before practically all state LLC statutes were enacted and before the advent of LLPs, and the Treasury has never issued regulations to detail how the statue is to apply to these new types of business forms.

Material participation tests.  The key question presented in the cases was whether the taxpayer satisfied the material participation test.  As mentioned above, a passive activity is a trade or business in which the taxpayer does not materially participate.  Material participation is defined as “regular, continuous, and substantial involvement in the business operation.” I.R.C. §469(h)(1).   The regulations provide seven tests for material participation in an activity. Temp. Treas. Reg. §1.469-5T(a)(1)-(7). 

The tests are exclusive and provide that an individual generally will be treated as materially participating in an activity during a year if:

  • The individual participates more than 500 hours during the tax year;
  • The individual’s participation in the activity for the tax year constitutes substantially all of the participation in the activity of all individuals (including individuals who are not owners of interests in the activity) for the tax year;
  • The individual participates in the activity for more than 100 hours during the tax year, and the individual’s participation in the activity for the tax year is not less than the participation in the activity of anyone else (including non-owners) for the tax year;
  • The activity is a significant participation activity and the individual’s aggregate participation in all significant participation activities during the tax year exceeds 500 hours;
  • The individual materially participated in the activity for any five taxable years during the ten taxable years that immediately precede the tax year at issue;
  • The activity is a personal service activity, and the individual materially participated in the activity for any three taxable years preceding the tax year at issue; or
  • Based on all the facts and circumstances, the individual participates in the activity on a regular, continuous, and substantial basis during the tax year

As noted, if the taxpayer is a limited partner of a limited partnership, the taxpayer is presumed to not materially participate in the partnership’s activity, “except as provided in the regulations.”  I.R.C. §469(h)(2). The regulations provide an exception to the general presumption of non-material participation of limited partners in a limited partnership if the taxpayer meets any of one of three specific material participation tests that are included in the seven-part test for material participation under Treas. Reg. 1.469-5T(a)(1)-(7).  Those three tests are:

  • The 500-hour test;
  • The five out of 10-year test; and
  • The test involving material participation in a personal service activity for any three years preceding the tax year at issue.

Thus, the standard of “material participation” for a limited partner is different than that for a general partner, and the question presented in the cases was whether the more rigorous standard for material participation for limited partners in a limited partnership under I.R.C. §469(h)(2) applied to the taxpayers (who held membership interests in LLCs and LLPs) with the result that their interests were per-se presumptively passive.

Relevant Court Opinions

Courts have concluded, in certain instances, that the holder of a limited liability company (LLC) interest is not treated as holding an interest in a limited partnership as a limited partner for purposes of applying the I.R.C. §469 material participation tests. 

For example, in Garnett v. Comr. 132 T.C. 368 (2009), the taxpayers were a married couple that owned interests in various LLCs and partnerships organized under Iowa law, as well as certain tenancy-in-common interests that were all engaged in agricultural production activities.  They held direct ownership interests in one LLP and LLC and indirect interests in several other LLPs and LLCs.  Their ownership interests were denoted as “limited partners” in the LLP and “limited liability company members” in the LLC – which did have a designated manager.  The interests that they held in the two tenancies-in-common were also treated similarly.  For tax years 2000-2002, the taxpayers ran up large losses and treated them as ordinary losses.

The IRS claimed that an LLC member is always treated as a limited partner because of limited liability under state law and because the Code specifies that a limited partnership interest never counts as an interest with respect to which the taxpayer materially participates. I.R.C. §469(h)(2).   Thus, the IRS characterized the losses as passive, basing their position on the regulation which, for purposes of I.R.C. §469, treats a partnership interest as a limited partnership interest if “the liability of the holder of such interest for obligations of the partnership is limited, under the law of the State in which the partnership is organized, to a determinable fixed amount.” Temp. Treas. Reg. §1.469-5T(e)(3)(i)(B).   On the other hand, the taxpayers argued that the Code and regulations did not apply to them because none of the entities that they had interests in were limited partnerships and because, in any event, they were general partners rather than limited partners.  The taxpayers also pointed out that the Federal District Court for Oregon had previously ruled that, under the Oregon LLC Act, I.R.C. §469(h)(2) did not apply to LLC members.  Gregg v. United States, 186 F. Supp. 2d 1123 (D. Ore. 2000).

The Tax Court first noted that I.R.C. §469(h)(2) was enacted at a time when LLCs and LLPs were either new or nonexistent business entities and, as such, did not refer to those entities.  The court also pointed out that the regulations did not refer explicitly to LLPs or LLCs.  Accordingly, the court rejected the IRS argument that a limitation on liability automatically qualifies an interest as a limited partnership interest under I.R.C. §469(h)(2).  On the contrary, the court held that the correct analysis involved a determination of whether an interest in a limited partnership (or LLC) is, based on the particular facts, actually a limited partnership interest.  That makes a state’s LLC statute particularly important.  Does it grant LLC and LLP members power and authority beyond those that limited partners have traditionally been allowed.?  The IRS conceded that the statute at issue in the case did just that.  Other distinguishing features were also present.  The court noted that limited partnerships have two classes of partners, one of which runs the business (general partners) and the other one which typically involves passive investors (limited partners).  The limited partners enjoy limited liability, but that protection can be lost by participating in the business.  By comparison, an LLP is essentially a general partnership in which the general partners have limited liability even if they participate in management.  Likewise, the court noted that LLC members can participate in management and retain limited liability.

Note:  The court made a key point that it was not invalidating the temporary regulations but was simply declining to write a regulation for the Treasury that applied to interests in LLCs and LLPs.  Importantly, the court refused to give deference to the Treasury’s litigating position in absence of such a regulation.

In Thompson v. United States, 87 Fed. Cl. 728 (2009), the taxpayer held a 99 percent interest in an LLC that was formed under the Texas LLC statute.  He held the other one percent interest indirectly through an S corporation.  The LLC’s articles of organization designated the taxpayer as the manager.  The LLC did not make an election to be taxed as a corporation and, thus, defaulted to partnership tax status.  The LLC, which provided charter air services, incurred losses in 2002 and 2003 of $1,225,869 and $939,878 respectively which flowed through to the taxpayer.  The IRS disallowed most of the losses on the basis that the taxpayer did not meet the more rigorous test for material participation that applied to limited partners in limited partnerships.  The taxpayer paid the additional tax of $863,124 and filed a refund claim for the same amount.  The IRS denied the refund claim and the taxpayer sued for the refund, plus interest.  Both the taxpayer and the IRS moved for summary judgment.

The IRS stood by its position that the more rigorous material participation test applied because the taxpayer enjoyed limited liability by owning the interests in the LLC just like he would if he held limited partnership interests.  Thus, according to the IRS, the taxpayer’s interest was identical to a limited partnership interest and the regulation applied triggering the passive loss rules.

The court disagreed with the IRS.  While both parties agreed that the statute and regulations trigger application of the passive loss rules to limited partnership interests, the taxpayer pointed out that he didn’t hold an interest in a limited partnership.  The court noted that the language of Treas. Reg. § 1.469-5T(e)(3) explicitly required that the taxpayer hold an interest in an entity that is a partnership under state law, and that the Treasury had never developed a regulation to apply to LLCs.  It was clear that the taxpayer’s entity was organized under Texas law as an LLC.  In addition, the court pointed out that the taxpayer was a manager of the LLC, and IRS had even conceded at trial that the taxpayer would be deemed to be a general partner if the LLC were a general partnership.  The court noted that the position of the IRS that an LLC taxed as a partnership triggers application of the Treas. Reg. §1.469-5T(e)(3)(ii) was “entirely self-serving and inconsistent.”  The court also stated that it was irrelevant whether the taxpayer was a manager of the LLC or not – by virtue of the LLC statute, the taxpayer could participate in the business and not lose the feature of limited liability.

Hegarty v. Comr., T.C. Sum. Op. 2009-153, is a Tax Court summary opinion where the Tax Court reiterated its position that the reliance by IRS on I.R.C. § 469(h)(2) to treat members of LLCs as automatically limited partners for passive loss purposes is misplaced.  Instead, the general tests for material participation apply and the petitioners in the case (a married couple) were determined to have materially participated in their charter fishing activity for the tax year at issue.  They participated more than 100 hours and their participation was not less than the participation of any other individual during the tax year.

In Newell v. Comr., T.C. Memo. 2010-23, the taxpayer’s primary business activity was managing various real estate investments.  He spent more than one-half of his time and more than 750 hours annually in real property trade or business activities.  During the years at issue, the taxpayer was the sole owner of an S corporation that manufactured and installed carpentry items, and his participation is that business qualified as a significant participation activity for purposes of the passive loss rules.  He also owned 33 percent of the member interests in a California-law LLC engaged in the business of owning and operating a golf course, restaurant and country club.  The LLC was treated taxwise as a partnership.  It was undisputed that the taxpayer was the managing member of the LLC.  For tax years 2001-2003, IRS claimed that the losses the taxpayer incurred from both the S corporation and the LLC were passive losses that were not currently deductible.  While the parties agreed that the taxpayer’s participation in both the S corporation and the LLC satisfied the significant participation activity test under the passive loss rules, IRS again asserted its position that I.R.C. §469(h)(2) required that the taxpayer’s interest in the LLC be treated as a passive limited partnership interest, even though IRS conceded that the taxpayer held the managing member interest in the LLC.

The Tax Court rejected the IRS’ argument, noting again that the general partner exception of Treas. Reg. §1.469-5T(e)(3)(ii) was not confined to the situation where a limited partner also holds a general partnership interest.  Under the exception, an individual who is a general partner is not restricted from claiming that the individual materially participated in the partnership.  Here, it was compelling that the taxpayer held the managing member interest in the LLC.  As such, the taxpayer’s losses were properly deducted.

In Chambers v. Comr., T.C. Sum. Op. 2012-91, the taxpayer owned rental property with his spouse that produced a loss. The taxpayer was also a managing member of an LLC that owned rental properties.  The LLC also owned rental property, and produced losses with one-third of the losses allocated to the taxpayer.  The taxpayer was also employed by the U.S. Navy.  He deducted his rental losses in full on the basis that he was a real estate professional.  In order to satisfy the “more than 50 percent test,” he combined his hours spent on his personally-owned rental activity with his management activity for the LLC.  The IRS invoked I.R.C. §469(h) to disallow the taxpayer’s LLC managerial hours, but the court disagreed.  The court held that the taxpayer’s LLC interest was not defacto passive.  Thus, his hours spent in LLC managerial activities counted toward his total “real estate” hours.  However, he still failed to meet more than 50 percent test.  In addition, the court noted that the fallback test of active participation allowing $25,000 of rental real estate losses was not available because the taxpayer’s AGI exceeded $150,000 for the year in issue.

Conclusion

Whether a member of an LLC is a limited partner or not boils down to the particular provisions of a state’s LLC statute and whether there are sufficient factors under the state statute that distinguish an LLC from a limited partnership.  That will be the case until IRS issues regulations dealing specifically with LLCs and similar entities.

As noted above, in late 2011, the Treasury Department proposed regulations defining “limited partner” for purposes of the passive loss rules. Notice of Proposed Rulemaking REG-109369-10 (Nov. 28, 2011).  The proposed definition would make it easier for LLC members and some limited partners to satisfy the material participation requirements for passive loss purposes, consistent with the court opinions that IRS has recently lost on the issue.  Specifically, the proposed regulations require that two conditions have to be satisfied for an individual to be classified as a limited partner under I.R.C. §469(h)(2): (1) the entity must be classified as a partnership for federal income tax purposes; and (2) the holder of the interest must not have management rights at any time during the entity’s tax year under local law and the entity’s governing agreement.  Thus, LLC members of member-managed LLCs would be able to use all seven of the material participation tests, as would limited partners that have at least some rights to participate in managerial control or management of a partnership.

In Part Two, I will dig deeper into the self-employment tax issue.

August 18, 2022 in Business Planning, Income Tax | Permalink | Comments (0)

Friday, August 12, 2022

Federal Farm Programs: Organizational Structure Matters – Part Three

Overview

In this final part of a three-part series on federal farm programs, the focus is on the “active personal management,” issues associated with maintaining good records, and planning implications for farms seeking to maximize payments.

Organizing the farm business with federal farm program payments in mind – it’s the topic of today’s post.

The Active Personal Management Requirement 

Three-part test for "active engagement."  Under 7 C.F.R. Part 1400, a person must be “actively engaged” in farming to receive farm program payments.  To satisfy the “actively engaged in farming” test, three conditions must be met. 

  • The individual's or entity's share of profits or losses from the farming operation must be commensurate with the individual's or entity's contribution to the operation. 
  • The individual's or entity's contributions must be “at risk.”
  • An individual must make a significant contribution of land, capital or equipment (the “left-hand” requirement) and active personal labor or active personal management (i.e., the “right-hand” requirement).

For a general partnership, each member is treated separately for purposes of the active engagement test. Thus, each partner with an ownership interest must contribute active personal labor and/or active personal management to the farming operation on a regular basis.  It is also important that the contribution be identifiable and documentable, as well as separate and distinct from the contributions made by any other partner. Any partner that fails to meet the active engagement requirement criteria is not eligible to participate in the federal farm programs. 

Note:  The payment of a guaranteed payment (i.e., “salary”) to a partner for providing active labor or management can bar the recipient partner from qualifying for payments.  A guaranteed payment for services could mean that the partner does not satisfy the requirement of having made a qualified contribution of active labor or management and may disqualify the partner for a payment. 

As noted above, a corporation is treated as a “person” for payment limitation purposes that is eligible for a single payment limit if each member with an ownership interest in the corporation makes a significant contribution of active personal labor or active personal management.  In the context of a corporation, it does not matter if a member is compensated for contributions of active personal labor or management.  But, it is still required that management or labor be performed on regularly, be identified and be documented.  A shareholder’s contribution of labor or management must also be separate and distinct from the contributions of other shareholders or members. In addition, the contribution of all corporate members must be significant and commensurate with contributions to the farming operation.

If any member of the corporation fails to meet the labor or management contribution requirements, any program payment or benefit to the corporation will be reduced by an amount commensurate with the ownership share of that member. An exception applies if (a) at least 50% of the entity’s stock or units is held by members that are “actively engaged in providing labor or management” and (b) the total annual farm program payments received collectively by the stockholders or members of the entity are less than one payment limitation.

Note:  A corporation can pay a salary to owners. 

Some farming operations are placed in trust for estate planning and business succession planning purposes.  For purposes of the farm programs, a revocable trust is treated as the grantor.  An irrevocable trust must satisfy the same requirements as does a decedent’s estate.  In addition, the interest of the beneficiaries of an irrevocable trust that provide active labor or management must be at least half of the trust’s income interest. 

Note:  While a revocable trust need not obtain an employer identification number (EIN), an irrevocable trust must do so.  Additionally, trusts must provide a tax identification number and in some cases this will come up with FSA in the context of a joint revocable trust where both spouses, as income beneficiaries are seeking program benefits.

A decedent’s estate can meet the active engagement test for two program years after the year of the decedent’s death if the estate makes a significant contribution of land, capital equipment (or a combination thereof).  The executor or the heirs collectively must make a significant contribution of active personal labor or active personal management (or a combination thereof) to the farming business.  The estate must also satisfy the profit (or loss) sharing rule and at-risk rule must also be satisfied.  If the estate remains open for more than two program years post-death, the FSA must be satisfied that the estate remains open for reasons other than to receive program payments. 

One spouse’s satisfaction of the active engagement test requirement allows the other spouse to meet the test.  If the non-participating spouse meets the ownership requirement with respect to land capital or equipment.

If a child under age 18 as of June 1 of a program year receives payments, the payment are attributed to the child’s parent (or a person appointed by a court).  A child under age 18 that is farming on their own is not subject to this rule (if certain other requirements are satisfied). 

As for the requirement that a capital contribution be made, the contributed capital must come from a fund or account that is separate and distinct from any other person or entity that has an interest in the farming operation.  The source of the capital can be via either a direct contribution of cash or the funds may be borrowed (carefully).  For contributions that derive from borrowed funds, the funds must not be a result of any loan that is made to or guaranteed by or co-signed by or secured by any other person, legal entity or joint operation that has an interest in the farming operation and the other person (or entity) must not have such an interest. 

Note:  Cross-collateralization clauses are frequently encountered in the ag borrowing context.  John Deere in particular has a rather egregious clause (from a farm borrower’s perspective) as does the Small Business Administration.  Those clauses will likely not be waived.  Similarly, security and guarantee clauses will likely not be waived.  A solution might be to put both the farm operating entity and the farmland into a general partnership (with each partner in an entity that limits liability). 

What is "management“?  Active personal management” is defined as significant contributions of management activities that are performed on a regular, continuous and substantial basis to the farming operation – basically the I.R.C. §1402 test for self-employment tax purposes.  In addition, the management activities must represent at least 25 percent of the total management time that is necessary for the success of the farming operation on an annual basis, or represent at least 500 hours of specific management activities annually.    

Multiple “person” determinations?  The rules also restrict the number of persons that may qualify for payment by making a significant contribution of active personal management.  For this purpose, the limit is one person unless the farming operation is large or complex.  A "large" farming operation is one that has crops on more than 2,500 acres (planted or prevented from being planted).  If the acreage limitation is satisfied, an additional person may qualify upon making a significant contribution of active personal management.  If the farming operation satisfies another test of being “complex,” an additional payment limit may be available.  This all means that, for large and complex, farming operations, a total of three payment limits may be obtained.  The determination of whether a farming operation is "complex" is  made by the State FSA Committee.  

Special rules.  Special rules apply to tenant-operated farms and family-owned operations with multiple owners.  In some situations, a person meeting specified requirements is considered to be actively engaged in farming in any event.  For example, a crop-share or livestock-share landlord who provides capital, equipment or land as well as personal labor, or active personal management meets the test.  But, a cash rent landlord does not meet the test nor does a crop share landlord is if the rent amount is guaranteed.   Also, if one spouse meets the active engagement test, the other spouse is deemed to meet the test.   

Exemption for family operations.  The active personal management test applies to non-family general partnerships and joint operations that seek to qualify more than one farm manager based solely on providing management or a combination of management and labor (another rule).  However, it does not apply to farming operations where all of the partners, stockholders or persons with an ownership interest in the farming operation (or any entity that is a member of the farming operation) are “family members.”  For this purpose, “family member” means a person to whom another member in the farming operation is related as a lineal ancestor, lineal descendant, sibling, spouse or otherwise by marriage.  Legally adopted children and step-children count as “family members.” 

The rule also doesn’t come into play where only one person attempts to qualify under the rule or when combined with a contribution of labor.  The rule also doesn't apply to farming operations that are operated by individuals or entities other than general partnerships or joint ventures. 

Record-Keeping Requirements 

When multiple payments are sought for a farming operation under the active management rule, the operation must maintain contemporaneous records or logs for all persons that make any contribution of management.  Those records must include, at a minimum, the location where the management activity was performed, and the amount of time put into the activity and its duration.  In addition, every legal entity that receives farm program payments must report to the local FSA committee the name and social security number of each person who owns, either directly or indirectly, any interest in the entity.  Also, the entity must inform its members of the payment limitation rules.

The FSA Handbook (5-PL, Amendment 3) specifies that the farming operation must maintain contemporaneous records or logs for all persons that make management contributions. The records must provide: (1) the location (either on-site or remote) where the management activity was performed; (2) the time spent on the activity and the timeframe in which it occurred; and (3) a description of the activity.  FSA Handbook, Paragraph 222A.  It is important that the records be maintained and be timely made available to the FSA for their review upon request.  FSA Handbook, Paragraph 222B.  The FSA provides a Form (CCC-902 MR) to track and maintain all of the necessary information.  Note that these are the present references to the applicable FSA Handbook Paragraphs and Form.  Those paragraph references and Form numbers can change.  FSA modifies its handbook frequently; Forms are modified and numbers often are changed.  Practitioners and their farm clients must be diligent in monitoring the changes.  

Two things happen if the necessary records aren’t maintained – (1) the person’s contribution of active personal management for payment eligibility purposes will be disregarded; and (2) the person’s payment eligibility status will be re-determined for that particular program year. 

Planning Implications

The “substantive change” rule.  In general, any structural change of the farming or ranching business that increases the number of payment limits must be bona fida and substantive and not a “scheme or device.”  See, e.g., Val Farms v. Espy, 29 F.3d 1570 (10th Cir. 1994).  In addition, reliance on the advice of local or state USDA officials concerning the payment limitation rules is at the farmer or rancher's own risk.  But the substantive change rule does not apply to spouses.  Thus, for example, a spouse of a partner that is providing active management to a farm partnership can be added to the partnership and automatically qualify as a partnership member for FSA purposes.  However, a “substantive change occurs when a “family member” is added to a partnership unless the family member also provides management or labor.

Note:  As s farming operation grows and want to add substantially more acres, consideration may need to be given to the creation of an additional entity. One approach might be to put all of the farming entities into a general partnership with the “farmer” as the general partner. 

"Scheme or device."  The USDA is adept at alleging that a farming operation has engaged in a "scheme or device" that have the purpose or effect of evading the payment limitation rules.  But this potential problem can be avoided if multiple payments are not sought, such as by having one manager for each entity engaged in farming.   Of course, this is not a concern if all of the members of a multi-person partnership are family members.  If non-family members are part of the farming operation, perhaps they can farm individually or with other non-family members that can provide labor to the farming business.  That might be a safe approach. 

"Combination" rule.  There is also a “combination” rule that can apply when the farming business is restructured. If the rule applies, it will result in the denial of separate “person” status to “persons” who would otherwise be eligible for a separate limit.  

Entity type based on size.  From an FSA entity planning standpoint, the type of entity structure utilized to maximize payment limits will depend on the size/income of the operation. 

For smaller producers, entity choice for FSA purposes is largely irrelevant.  Given that the limitation is $125,000 and that payments are made either based on price or revenue (according to various formulas), current economic conditions in agriculture indicate that most Midwestern farms would have to farm somewhere between 3,000 and 4,000 acres before the $125,000 payment limit would be reached.  Thus, for smaller producers, the payment limit is not likely to apply and the manner in which the farming business is structured is not a factor. 

For larger operations, the general partnership or joint venture form is likely to be ideal for FSA purposes.  If creditor protection or limited liability is desired, the partnership could be made up of single-member LLCs.  For further tax benefits, the general partnership’s partners could consist of manager-managed LLCs with bifurcated interests.

Conclusion

Farm program payment limitation planning is a complicated mix of regulatory and administrative rules and tax/entity planning.  It’s not an area that a producer should engage in without counsel if maximizing payments in conjunction with an estate/business plan is the goal.  Unfortunately, few practitioners are adept at navigating both the tax planning rules and the FSA regulatory web.  This makes it important that professionals advising farm clients on farm business organization and the associated tax rules work as a team to produce the best result for clients.  

August 12, 2022 in Business Planning, Regulatory Law | Permalink | Comments (0)